<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 4, 2000
REGISTRATION NO. 333-95093
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------
CABOT MICROELECTRONICS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3291 36-4324765
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
870 NORTH COMMONS DRIVE
AURORA, ILLINOIS 60504
(630) 375-6631
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MATTHEW NEVILLE
CABOT MICROELECTRONICS CORPORATION
CHIEF EXECUTIVE OFFICER
870 NORTH COMMONS DRIVE
AURORA, ILLINOIS 60504
(630) 375-6631
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
THOMAS W. CHRISTOPHER, ESQ. DUNCAN C. MCCURRACH, ESQ.
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON SULLIVAN & CROMWELL
ONE NEW YORK PLAZA 125 BROAD STREET
NEW YORK, NEW YORK 10004 NEW YORK, NEW YORK 10004
(212) 859-8000 (212) 558-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ----------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ----------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the registration statement for the same
offering. [ ] ----------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ] ----------
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED PRICE PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE(2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per
share................................ 4,600,000 $17.00 $78,200,000 $20,645
- ---------------------------------------------------------------------------------------------------------------------------------
Preferred Share Purchase Rights(3)..... 4,600,000 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total.................................. 9,200,000 -- $78,200,000 $20,645
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(2) The Registrant previously paid a fee of $19,800 in connection with the
initial filing of the Registration Statement and an additional fee of $845
in connection with the filing of Amendment No. 2.
(3) The rights will initially trade together with the common stock. The value
attributable to the rights, if any, is reflected in the market price of the
common stock.
------------------------
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE.
THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN
OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE
IS NOT PERMITTED.
SUBJECT TO COMPLETION. DATED APRIL 4, 2000.
4,000,000 Shares
[cabot microelectronics logo]
Common Stock
------------------------
This is an initial public offering of shares of common stock of Cabot
Microelectronics Corporation. All of the 4,000,000 shares of common stock are
being sold by Cabot Microelectronics. We expect that all or substantially all of
the net proceeds of this offering will be paid to Cabot Corporation, our parent
corporation, in the form of a dividend.
Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price per
share will be between $15.00 and $17.00. Our common stock has been approved for
listing on the Nasdaq National Market under the symbol "CCMP".
Upon completion of this offering, Cabot Corporation will directly own at
least 80% of our outstanding common stock and will continue to control us.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Initial public offering price............................. $ $
Underwriting discount..................................... $ $
Proceeds, before expenses, to Cabot Microelectronics...... $ $
</TABLE>
To the extent that the underwriters sell more than 4,000,000 shares of
common stock, the underwriters have the option to purchase up to an additional
600,000 shares from us at the initial public offering price less the
underwriting discount.
------------------------
The underwriters expect to deliver the shares on , 2000.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
ROBERTSON STEPHENS
------------------------
Prospectus dated , 2000.
<PAGE> 3
INSIDE FRONT COVER
OUTSIDE PORTION OF GATEFOLD:
[Graphical depiction of the role of our CMP products in the microchip
manufacturing process and the applications in which microchips are used.]
Our products are an increasingly important part of the microchip manufacturing
process.
Our products play an important part in the manufacture of advanced integrated
circuit (IC) devices, which have become critical components in a wide variety of
products and applications -- computers, wireless communications,
telecommunications switches, personal data assistants, internet servers and many
more.
While we do not make the electronic products shown above, our CMP slurries play
a key role in manufacturing the IC devices used in those products.
LEFT-HAND PAGE OF GATEFOLD:
[Graphical depiction of cross-sections of IC devices, as taken from a silicon
wafer, with, and without, the chemical mechanical planarization process.]
We supply sophisticated polishing slurries that play a critical role in our
customers' manufacturing processes. Our products enable:
-- IC manufacturers to make smaller, faster and more complex devices and
improve their production processes
-- Hard disk drive manufacturers to significantly increase the storage
capacity and improve the speed and reliability of information exchange
CHEMICAL MECHANICAL PLANARIZATION -
Our polishing slurries are used in a process known as chemical mechanical
planarization (CMP). Using our slurries, manufacturers planarize, or level and
smooth, many of the multiple layers that are built upon silicon wafers to
produce IC devices. CMP is also used to remove excess materials that are
deposited on layers. Hard disk drive manufacturers use a similar process to
smooth the surface of the coatings on hard disks before depositing magnetic
media.
RIGHT-HAND PAGE OF GATEFOLD:
[Graphical depiction of CMP polishing process and example of Epic polishing
pad.]
CMP SLURRY -
CMP slurries are liquid compounds composed of high-purity deionized water,
chemical additives and abrasive agents that chemically interact with the surface
material at an atomic level. Our Semi-Sperse(R) and Lustra(TM) slurries are
formulated specifically for the particular surface to be polished.
CMP POLISHING PAD -
While we have not yet commenced commercial production, our Epic(TM) pads have
been designed to be used in conjunction with a CMP slurry to optimize the
polishing process. These pads play a critical role in achieving planarity and in
providing highly consistent and reliable CMP process results.
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information about our company and common stock and our financial statements and
the notes to those statements appearing elsewhere in this prospectus.
The information in this prospectus assumes that the initial public offering
price will be $16.00 per share, the midpoint of the range disclosed on the cover
of this prospectus.
Unless otherwise indicated, all references in this prospectus to us are to
Cabot Microelectronics, to Cabot Corporation are to Cabot and its subsidiaries
other than us, and to years are to our fiscal years ended September 30 of the
year indicated.
Unless otherwise indicated, all references in this prospectus to the number
of outstanding shares of our common stock give effect to an increase in the
number of our authorized shares of common stock from 5,000 shares to 200,000,000
shares and an 18,989.744 to 1 stock split, both of which will be effected prior
to the completion of this offering.
Unless otherwise indicated, all information in this prospectus assumes the
underwriters' option to purchase additional shares in this offering will not be
exercised.
OUR BUSINESS
We are the leading supplier of slurries used in chemical mechanical
planarization, or CMP, a polishing process used in the manufacturing of
integrated circuit, or IC, devices. CMP is an increasingly important part of the
IC device manufacturing process because it helps manufacturers make smaller,
faster and more complex IC devices and improves their production efficiency. CMP
slurries are liquids containing abrasives and chemicals that facilitate and
enhance the CMP polishing process. We believe that our products account for
approximately 80% of all CMP slurry revenue from IC device manufacturers
worldwide.
For the fiscal year ended September 30, 1999, our sales increased 68% over
the prior year to approximately $98.7 million and our net income increased 190%
over the prior year to approximately $12.3 million. On a pro forma basis, for
the fiscal year ended September 30, 1999, our sales would have been
approximately $97.7 million and our net income would have been approximately
$7.9 million. For the three months ended December 31, 1999, our sales increased
68% over the same period in the prior year to approximately $35.0 million and
our net income increased 142% over the same period in the prior year to
approximately $5.7 million. On a pro forma basis, for the three months ended
December 31, 1999, our sales would have been approximately $34.8 million and our
net income would have been approximately $4.7 million. For a discussion of the
pro forma adjustments, see "Unaudited Pro Forma Combined Statements of Income".
Since the first significant commercial sales of CMP slurries to the
semiconductor industry in the early 1990s, use of CMP in the production of IC
devices has grown rapidly. We estimate that sales of CMP slurries have grown at
an average annual compound rate of 60% since 1997 and increased to a total of
approximately $120 million for 1999.
CMP is used in the production of a wide variety of IC devices, including
logic devices, such as microprocessors, and memory chips that store computer
data. The benefits of CMP become increasingly important to IC device
manufacturers as the size of the devices shrink and their complexity increases.
By reducing the size of IC devices, manufacturers increase their throughput, or
the number of IC devices that they manufacture in a given time period. CMP also
helps reduce the number of defective or substandard IC devices produced, which
increases the device yield. Improvements in throughput and yield reduce an IC
device manufacturer's total production costs. Based on existing technology, we
believe that CMP is required for the efficient manufacturing of today's advanced
IC devices.
We have developed several different types and generations of slurries for
polishing
3
<PAGE> 5
the insulating layers of IC devices, historically the most common use of CMP. We
developed and introduced in 1994 a CMP slurry for polishing the tungsten plugs
used to connect the multiple wiring layers of IC devices. In 1999, sales of CMP
slurries for polishing insulating layers represented approximately two-thirds of
our total sales and sales of CMP slurries for polishing tungsten plugs
represented almost all of the balance.
We have also begun selling new slurries for CMP polishing of the magnetic
heads and the coating on hard disks in hard disk drives. In addition, we
recently began limited production of CMP polishing pads for customer evaluation
and qualification.
INDUSTRY TRENDS
The rapid growth of the CMP slurry market has been driven in large part by
the significant growth and technological advances the semiconductor industry has
experienced over the past decade. IC devices have become critical components in
an increasingly wide variety of products and applications and the use of IC
devices in these products and applications has grown significantly in recent
years. According to industry sources, the worldwide semiconductor market as
measured by total sales grew at an average annual compound rate of 11% in the
period from 1988 through 1998. We believe that worldwide revenues from the sale
of CMP slurries to IC device manufacturers grew to approximately $120 million in
1999. Industry surveys project that annual worldwide revenues in this market
will grow to between approximately $300 and $400 million by 2003.
STRATEGY
Our objective is to maximize our profitability and stockholder value by
maintaining and leveraging our leading position in the CMP slurry market. We
will pursue the following strategies to achieve our objective:
- - remain the technology leader in CMP slurries;
- - build and maintain customer intimacy;
- - expand globally;
- - attract and retain top quality personnel;
- - maintain top quality products and supply; and
- - expand into new applications and products.
RELATIONSHIP WITH CABOT CORPORATION
We are a wholly owned subsidiary of Cabot Corporation, a global chemical
manufacturing company based in Boston, Massachusetts. Prior to the transfer to
us of the assets and liabilities relating to our business, our business was
operated as a division of Cabot. After this offering, we will continue to be
controlled by Cabot, which will own at least 80% of the outstanding shares of
our common stock. As our controlling stockholder, Cabot will be able to approve
or reject major corporate transactions without the support of any other
stockholder, including a merger, consolidation or sale of substantially all our
assets.
Cabot has indicated that, following this offering, it intends to divest its
remaining equity interest in us by means of a distribution to its stockholders
within six to twelve months after the date of a private letter ruling from the
IRS confirming that the spin-off is tax-free to Cabot. This transaction is
sometimes referred to in this prospectus as the spin-off. Cabot may not complete
its divestiture of its remaining equity interest in us in this time frame or at
all.
We have entered into agreements with Cabot governing various interim and
ongoing relationships between us and Cabot. For a further discussion of these
agreements, see "Relationships Between Our Company and Cabot Corporation".
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by us................... 4,000,000 shares
Common stock to be outstanding after this
offering................................... 22,989,744 shares or 23,589,744 shares if the
underwriters exercise their over-allotment option in
full. These shares do not include 3,500,000 shares
reserved for issuance pursuant to options that we may
issue in the future pursuant to our stock option
plan. In addition, these shares do not include
475,000 shares available for purchase under our
employee stock purchase plan.
Use of proceeds.............................. We expect that all or substantially all of the net
proceeds of this offering will be paid to Cabot in
the form of a dividend.
Proposed Nasdaq symbol....................... CCMP
</TABLE>
----------------------
We were incorporated in Delaware in October 1999. Our principal executive
offices are located at 870 North Commons Drive, Aurora, Illinois, 60504. Our
telephone number at that location is (630) 375-6631.
5
<PAGE> 7
SUMMARY AND PRO FORMA FINANCIAL DATA
The following table presents our summary and pro forma condensed combined
financial data and has been derived from our audited financial statements for
the fiscal years ended September 30, 1997, 1998 and 1999 and from our unaudited
financial statements for the three months ended December 31, 1998 and 1999, each
of which are included elsewhere in this prospectus, and from our unaudited
financial statements for the fiscal years ended September 30, 1995 and 1996. The
unaudited interim financial information for the three month periods ended
December 31, 1998 and 1999 has been prepared on the same basis as the annual
financial statements and includes all adjustments, consisting only of normal
recurring adjustments, which management considers necessary for the fair
presentation of that financial information. The unaudited results for interim
periods are not necessarily indicative of results to be expected for any other
interim period or the full year. The unaudited pro forma combined statement of
operations data give effect to our new fumed metal oxide supply agreement and
new dispersion services agreement with Cabot, each of which will become
effective upon completion of this offering, as if they had been in effect since
October 1, 1998 and do not purport to represent our results of operations for
any future period. Because we began to operate as a separate division of Cabot
in July 1995, the statement of operations data for 1995 include only three
months of activity. As adjusted balance sheet data give effect to the proceeds
from the sale of 4,000,000 shares of common stock in this offering, the
dividends to Cabot and the transfer of our business from Cabot to us. The data
below should be read in conjunction with "Selected Financial Data", "Unaudited
Pro Forma Combined Statements of Income", "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our combined financial
statements and the notes to our combined financial statements, each of which is
included elsewhere in this prospectus.
An income tax benefit was recorded in 1997 as a result of a tax credit for
research and development activities that exceeded our statutory taxes for that
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
THREE MONTHS --------------------------------------------------- ---------------------------
ENDED PRO PRO
SEPTEMBER 30, FORMA FORMA
1995 1996 1997 1998 1999 1999 1998 1999 1999
------------- ---- ---- ---- ---- ----- ---- ---- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF
OPERATIONS DATA:
Total revenue........ $5,003 $24,334 $35,211 $58,831 $98,690 $97,695 $20,875 $35,046 $34,804
Gross profit......... 1,978 10,987 15,290 29,176 50,799 45,223 10,839 18,858 17,554
Income (loss) before
income taxes....... 577 (1,513) 663 6,448 19,076 12,287 3,690 9,048 7,428
Net income (loss).... 355 (866) 708 4,237 12,280 7,910 2,377 5,748 4,719
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------
PRO FORMA
ACTUAL AS ADJUSTED
------ -----------
(in thousands)
<S> <C> <C>
COMBINED BALANCE SHEET DATA:
Cash........................................................ $ 103 $ 3,103
Working capital............................................. 25,293 27,280
Total assets................................................ 82,986 84,386
Current liabilities......................................... 7,402 8,415
Total liabilities........................................... 7,930 24,930
Division equity............................................. 75,056 59,456
Total liabilities and division equity....................... 82,986 84,386
</TABLE>
6
<PAGE> 8
RISK FACTORS
You should carefully consider the risks described below before you decide
to buy our common stock. If any of the following risks were to occur, our
business, financial condition or results of operations could suffer. In that
event, the trading price of our common stock could decline, and you may lose all
or part of your investment.
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about our company and our
industry. These forward-looking statements involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, as more fully
described below and elsewhere in this prospectus.
RISKS RELATING TO OUR BUSINESS
WE HAVE NEVER OPERATED AS A STAND-ALONE ENTITY AND OUR BUSINESS COULD SUFFER IF
WE FAIL TO DEVELOP THE SYSTEMS AND INFRASTRUCTURE NECESSARY TO SUPPORT OUR
BUSINESS AS A STAND-ALONE ENTITY
Following this offering, we will operate as a stand-alone entity and,
accordingly, must develop and implement the systems and infrastructure necessary
to support our current and future business. If we fail to develop these systems
and infrastructure, our business will suffer. We have been a part of Cabot since
we began developing CMP slurries in 1985. We were organized as a separate
division of Cabot in July 1995. Cabot has historically provided us with
operational, financial and other support. Although Cabot will provide us with
the various interim and ongoing services described in "Relationships Between Our
Company and Cabot Corporation", these arrangements will terminate upon the
spin-off. After the expiration of these various arrangements, we may not be able
to replace the interim and ongoing services on terms and conditions, including
costs, as favorable as those that we had as a division of Cabot or pursuant to
these arrangements. We also may not be able to develop the necessary systems and
infrastructure to operate as a stand-alone entity. Any failure to do so could
seriously harm our business, results of operations and financial condition.
BECAUSE OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR
RESULTS AS A SEPARATE COMPANY, YOU HAVE LIMITED FINANCIAL INFORMATION ON WHICH
TO EVALUATE OUR BUSINESS AND YOUR INVESTMENT DECISION
The historical financial information we have included in this prospectus
may not reflect what our results of operations, financial position and cash
flows would have been had we been a separate, stand-alone entity during the
periods presented and may not be indicative of what our results of operations,
financial position and cash flows will be in the future. As a result, you have
limited information on which to evaluate our business and your investment
decision. This is because:
- - as a division of Cabot, Cabot provided us with various services and allocated
expenses for these services to us in amounts that may not have been the same
as the expenses we would have incurred had we performed or acquired these
services ourselves;
- - we are changing our fumed metal oxide supply and dispersion services
arrangements with Cabot and the prices that we will pay under our new
agreements will be higher than the prices we paid in the past; and
- - the information does not reflect other events and changes that will occur as a
result of our separation from Cabot, including the establishment of our
capital structure, the incurrence of debt and changes in our expenses as a
result of new employee, tax and other structures and matters.
WE HAVE A NARROW PRODUCT RANGE AND OUR PRODUCTS MAY BECOME OBSOLETE, OR
TECHNOLOGICAL CHANGES MAY REDUCE OR LIMIT INCREASES IN CMP CONSUMPTION
Our business is substantially dependent on a single class of products, CMP
slurries, which accounted for almost all of our revenue in 1999. 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
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<PAGE> 9
technological changes and advances in the semiconductor industry and to adapt
and improve our products in response to evolving customer needs and industry
trends. Since its inception the semiconductor industry has experienced rapid
technological changes and advances in the design, manufacture, performance and
application of IC devices and these changes and advances are expected to
continue in the future. One or more developments in the semiconductor industry
may render our products obsolete or less important to the IC device
manufacturing process, including:
- - increased competition from new or existing producers of CMP slurries,
including the introduction of new or substitute products;
- - a shift toward recycling slurries;
- - the adoption of a new process to create the wiring in IC devices, known as
dual damascene, which may reduce the number of CMP steps required to produce
an IC device and which we expect will become predominant in IC device
manufacturing in the next five to ten years; and
- - advances in CMP technology that make it possible to perform CMP without a
slurry.
There may also be physical and other limits on the ability of IC device
manufacturers to continue to shrink the size and increase the density of IC
devices, which are trends currently driving the growth in CMP. Any of the
foregoing developments could cause a decline in the CMP slurry market in general
or seriously harm our business, financial condition and results of operations in
particular.
A SIGNIFICANT AMOUNT OF OUR BUSINESS COMES FROM A LIMITED NUMBER OF LARGE
CUSTOMERS AND OUR REVENUE AND PROFITS COULD DECREASE SIGNIFICANTLY IF WE LOST
ONE OR MORE OF THEM AS CUSTOMERS
Our customer base is concentrated among a limited number of large
customers. One or more of these principal customers may stop buying CMP slurries
from us or may substantially reduce the quantity of CMP slurries they purchase
from us. Any cancellation, deferral or significant reduction in CMP slurries
sold to these principal customers or a significant number of smaller customers
could seriously harm our business, financial condition and results of
operations.
For 1999, our five largest customers accounted for approximately 58% of our
revenue, with Intel accounting for approximately 22% of our revenue, Marketech
accounting for approximately 15% of our revenue, and Takasago accounting for
approximately 10% of our revenue. Marketech and Takasago are distributors. We
believe that in the same year sales of our products to our five largest end user
customers accounted for approximately 45% of our revenue. For the three months
ended December 31, 1999, our five largest customers accounted for approximately
53% of our revenue, with Intel accounting for approximately 14% of our revenue,
Marketech accounting for approximately 15% of our revenue, and Takasago
accounting for approximately 11% of our revenue. The decline in the percentage
of our total revenue attributable to sales to Intel resulted from, among other
things, Intel's decision to significantly reduce purchases of one type of CMP
slurry from us. See "Business -- Customers, Sales and Marketing" for more
information relating to our customers.
IF WE LOSE PENDING OR FUTURE INTELLECTUAL PROPERTY LAWSUITS RELATING TO OUR
BUSINESS, WE COULD BE LIABLE FOR SIGNIFICANT DAMAGES AND LEGAL EXPENSES AND
COULD BE ENJOINED FROM MANUFACTURING OUR SLURRY PRODUCTS
Cabot is currently the subject of two lawsuits against it involving
infringement claims relating to our business. If Cabot or we were to lose these
or future lawsuits, we could be liable for significant damages and legal
expenses and could be enjoined from manufacturing our slurry products. We derive
substantially all of our revenues from slurry products. Although Cabot is the
only named defendant in these lawsuits, we have agreed to indemnify Cabot for
any and all losses and expenses arising out of this litigation as well as any
other litigation arising out of our business.
In June 1998, Rodel, Inc. commenced a lawsuit against Cabot in the United
States District Court for the District of Delaware
8
<PAGE> 10
seeking injunctive relief and damages relating to allegations that Cabot is
infringing a United States patent owned by an affiliate of Rodel that relates to
polishing metal surfaces. In April 1999, Rodel commenced a second lawsuit
against Cabot in the same court seeking injunctive relief and damages relating
to allegations that Cabot is infringing two other United States patents owned by
an affiliate of Rodel. Rodel may claim that many of our products infringe its
patents. The defense of these claims may not be successful. If Rodel wins either
of these cases, we may have to pay damages and, in the future, may be prohibited
from producing any products found to infringe those patents or required to pay
Rodel royalty and licensing fees with respect to sales of those products. For a
further description of these lawsuits, see "Business -- Legal Proceedings".
In addition, we may be subject to future infringement claims by Rodel or
others with respect to our products and processes. These claims, even if they
are without merit, could be expensive and time consuming to defend and if we
were to lose any future infringement claims we could be subject to injunctions,
damages and/or royalty or licensing agreements. Royalty or licensing agreements,
if required as a result of any pending or future claims, may not be available to
us on acceptable terms or at all.
Moreover, we have agreed to indemnify one of our major customers for any
losses this customer may incur as a result of intellectual property claims
brought against it arising out of its purchase or use of our products. For a
further discussion of this obligation, see "Business -- Legal Proceedings".
ANY PROBLEM OR INTERRUPTION IN OUR SUPPLY FROM CABOT OF FUMED METAL OXIDES, OUR
MOST IMPORTANT RAW MATERIALS, COULD DELAY OUR SLURRY PRODUCTION AND ADVERSELY
AFFECT OUR SALES
Fumed metal oxides are the primary raw materials we use in many of our CMP
slurries. Our business would suffer from any problem or interruption in our
supply of fumed metal oxides.
Cabot is currently our exclusive supplier of fumed metal oxides. We have
entered into a fumed metal oxide supply agreement with Cabot, which will be
effective upon completion of this offering and under which Cabot will continue
to be our exclusive supplier of fumed metal oxides for our current slurry
products. We also expect that Cabot will be our primary supplier of fumed metal
oxides for products that we develop in the future. Our continued supply of fumed
metal oxides from Cabot is subject to a number of risks, including:
- - the destruction of one of Cabot's fumed metal oxides manufacturing facilities,
particularly its Tuscola facility, or its distribution infrastructure;
- - a work stoppage or strike by Cabot employees who manufacture fumed metal
oxides;
- - the failure of Cabot to provide fumed metal oxides of the requisite quality
for production of our various CMP slurries;
- - the failure of essential fumed metal oxides manufacturing equipment at a Cabot
plant;
- - the failure or shortage of supply of raw materials to Cabot; and
- - contractual amendments and disputes with Cabot, including those relating to
the fumed metal oxide supply agreement.
Any of these factors could interfere with our ability to produce our CMP
slurries in the quantities and of the quality required by our customers and in
accordance with their delivery schedules. It may also be difficult to secure
alternative sources of fumed metal oxides in the event Cabot encounters supply
problems.
In addition, if we change the supplier or type of fumed metal oxides that
we use to make our CMP slurries or are required to purchase them from a
different Cabot manufacturing facility, our customers might be forced to
requalify our CMP slurries for their manufacturing processes and products. The
requalification process would likely take a significant amount of time to
complete, during which our sales of CMP slurries to these customers could be
interrupted or reduced.
9
<PAGE> 11
For a further discussion of the qualification and requalification process for
CMP slurries, see "Business -- CMP slurries".
We have also specifically engineered our slurry chemistries with the fumed
metal oxides currently used in the production of our CMP products. A change in
the fumed metal oxides we use to make our slurry products could require us to
modify our chemistries. This modification may involve a significant amount of
time and cost to complete and therefore have an adverse effect on our business
and sales.
OUR BUSINESS COULD BE SERIOUSLY HARMED IF OUR EXISTING OR FUTURE COMPETITORS
DEVELOP SUPERIOR SLURRY PRODUCTS OR OFFER BETTER PRICING TERMS OR SERVICE, OR IF
ANY OF OUR MAJOR CUSTOMERS DEVELOP IN-HOUSE SLURRY MANUFACTURING CAPABILITY
Increased competition from current CMP slurry manufacturers, new entrants
to the CMP slurry market or a decision by any of our major customers to produce
slurry products in-house could seriously harm our business and results of
operations. We are aware of only four other manufacturers of CMP slurries
currently selling significant volumes to IC device manufacturers. Opportunities
exist for companies with sufficient financial or technological resources to
emerge as potential competitors by developing their own CMP slurry products.
Some of our major customers, and some potential customers, currently manufacture
slurries in-house and others have the financial and technological capability to
do so. The existence or threat of increased competition and in-house production
could limit or reduce the prices we are able to charge for our slurry products.
In addition, our competitors may have or obtain intellectual property rights
which may restrict our ability to market our existing products and/or to
innovate and develop new products.
OUR INABILITY TO ATTRACT AND RETAIN KEY MANAGEMENT PERSONNEL OR TECHNICAL
EMPLOYEES COULD CAUSE OUR BUSINESS TO SUFFER
If we fail to recruit and retain the necessary management personnel, our
business and our ability to maintain existing and obtain new customers, develop
new products and provide acceptable levels of customer service could suffer. The
success of our business is also heavily dependent on the leadership of our key
management personnel, all of whom are employees-at-will. We have no key man
insurance on any of our personnel. The loss of any number of our key management
personnel could harm our business and results of operations.
Our success also depends on our ability to recruit, retain and motivate
technical personnel for our research and development activities. Competition for
qualified personnel, particularly those with significant experience in the CMP
and IC device industries, is intense, and we may not be able to successfully
recruit, train or retain these employees. The loss of the services of any key
technical employee could harm our business generally as well as our ability to
research and develop new and existing products and to provide technical support
and service to our customers.
After indicating his desire to leave our company in January 2000, Chris Yu,
our former Director of Research and Technology, decided to resign from that
position but to remain with our company and focus on product development of CMP
slurries for copper-based applications and technology-based applications for
customers.
BECAUSE WE HAVE LIMITED EXPERIENCE IN MANUFACTURING AND SELLING CMP POLISHING
PADS AND SLURRIES FOR CMP POLISHING OF THE MAGNETIC HEADS AND THE COATING ON
HARD DISKS IN HARD DISK DRIVES, EXPANSION OF OUR BUSINESS INTO THESE AREAS AND
APPLICATIONS MAY NOT BE SUCCESSFUL
An element of our strategy is to leverage our current customer
relationships and technological expertise to expand our business into new
product areas and applications, including manufacturing CMP polishing pads and
slurries for CMP polishing of the magnetic heads and the coating on hard disks
in hard disk drives. We have had limited experience in developing and marketing
these products, particularly polishing pads, which involve technologies and
production processes that
10
<PAGE> 12
are new to us. For these reasons, the expansion of our business into these new
product areas or applications may not be successful. For a more detailed
discussion of the risks we might encounter in entering the market for polishing
pads, see "Business -- Polishing Pads".
BECAUSE WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY, OUR FAILURE TO ADEQUATELY
PROTECT IT COULD SERIOUSLY HARM OUR BUSINESS
Protection of intellectual property is particularly important in our
industry because CMP slurry manufacturers develop complex and technical formulas
for CMP slurries which are proprietary in nature and differentiate their
products from those of competitors. Our intellectual property is important to
our success and ability to compete. We attempt to protect our intellectual
property rights through a combination of patent, trademark, copyright and trade
secret laws, as well as employee and third-party nondisclosure and assignment
agreements. Our failure to obtain or maintain adequate protection of our
intellectual property rights for any reason could seriously harm our business.
Policing the unauthorized use of our intellectual property is difficult,
and the steps we have taken may not detect or prevent the misappropriation or
unauthorized use of our technologies. In addition, other parties may
independently develop or otherwise acquire the same or substantially equivalent
technologies to ours.
WE ARE SUBJECT TO SOME RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS
We currently have operations and a large customer base outside the United
States. For 1999, approximately 46% of our revenue was generated by sales to
customers outside the United States. For the three months ended December 31,
1999, approximately 50% of our revenue was generated by sales to customers
outside the United States. We encounter potential risks in doing business in
foreign countries, including:
- - the difficulty of enforcing agreements and collecting receivables through some
foreign legal systems;
- - foreign customers may have longer payment cycles than customers in the United
States;
- - tax rates in some foreign countries may exceed those of the United States and
foreign earnings may be subject to withholding requirements or the imposition
of tariffs, exchange controls or other restrictions;
- - general economic and political conditions in the countries where we operate
may have an adverse effect on our operations in those countries;
- - the difficulties associated with managing a large organization spread
throughout various countries; and
- - the potential difficulty in enforcing intellectual property rights in some
foreign countries.
As we continue to expand our business globally, our success will depend, in
part, on our ability to anticipate and effectively manage these and other risks.
EXCHANGE RATE FLUCTUATIONS COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS
As a result of our international operations, we expect to generate an
increasing portion of our revenue and incur a significant portion of our
expenses in currencies other than U.S. dollars. To the extent we are unable to
match revenue received in foreign currencies with costs paid in the same
currency, exchange rate fluctuations in any foreign currency could have a
negative impact on our financial condition or results of operations.
The financial condition and results of operations of some of our operating
entities are reported in various foreign currencies and then translated into
U.S. dollars at the applicable exchange rate for inclusion in our consolidated
financial statements. As a result, appreciation of the U.S. dollar against these
foreign currencies will have a negative impact on our reported revenue and
operating profits. For information about the impact of foreign currency
translation on our financial condition, see "Management's Discussion and
Analysis of Financial Condition and Re-
11
<PAGE> 13
sults of Operations -- Effect of Currency Exchange Rate and Exchange Rate Risk
Management" and "-- Market Risk and Sensitivity Analysis".
OUR ABILITY TO RAISE CAPITAL IN THE FUTURE MAY BE LIMITED AND THIS MAY LIMIT OUR
ABILITY TO EXPAND OUR BUSINESS AND IMPROVE OUR TECHNOLOGY
We plan to expand our business and continue to improve our technology. To
do so we may be required to raise additional funds in the future through public
or private equity or debt financing, strategic relationships or other
arrangements. Financing may not be available on acceptable terms, or at all, and
our failure to raise capital when needed could negatively impact our financial
condition or results of operations. Because we have agreed with Cabot that we
will not issue any securities if doing so would reduce Cabot's ownership of us
to less than 80.5% prior to the spin-off, our ability to raise capital through
further sales of equity securities is limited until the spin-off occurs.
Additional equity financing may be dilutive to the holders of our common stock
and debt financing, if available, may involve restrictive covenants. For a
discussion of our liquidity and capital resources, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".
RISKS RELATING TO OUR SEPARATION FROM CABOT
WE WILL BE CONTROLLED BY CABOT AS LONG AS IT OWNS A MAJORITY OF OUR COMMON STOCK
AND OUR OTHER STOCKHOLDERS WILL BE UNABLE TO AFFECT THE OUTCOME OF STOCKHOLDER
VOTING DURING THAT TIME
After the completion of this offering, Cabot will beneficially own
approximately 82.6% of our outstanding shares of common stock, or 80.5% if the
underwriters exercise their over-allotment option in full. Under the initial
public offering and distribution agreement, Cabot will have the right to
maintain an 80.5% ownership of our common stock until the spin-off. As long as
Cabot owns a majority of our outstanding common stock, Cabot will continue to be
able to elect our entire board of directors and generally to determine the
outcome of all corporate actions requiring stockholder approval. As a result,
Cabot will be in a position to continue to control all matters affecting our
company. For a discussion of these matters, see "Relationships between Our
Company and Cabot Corporation -- Cabot as Our Controlling Stockholder".
Cabot has indicated that it intends to divest its remaining equity interest
in us within six to twelve months after the date of a private letter ruling from
the IRS confirming that the spin-off is tax-free to Cabot. However, Cabot may
not complete a divestiture of its remaining equity interest in us in this time
frame or at all.
A NUMBER OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO
DIRECTORS OR EXECUTIVE OFFICERS OF CABOT OR OWN CABOT STOCK
Three members of our board of directors are directors or executive officers
of Cabot. Our directors who are also directors or executive officers of Cabot
will have obligations to both companies and may have conflicts of interest with
respect to matters involving or affecting us, such as acquisitions and other
corporate opportunities that may be suitable for both us and Cabot. In addition,
after this offering and the spin-off, a number of our directors and executive
officers will continue to own Cabot stock and options on Cabot stock they
acquired as employees of Cabot. This ownership could create, or appear to
create, potential conflicts of interest when these directors and officers are
faced with decisions that could have different implications for our company and
Cabot. While there will be provisions in our certificate of incorporation
designed to resolve these conflicts in a manner that is fair to both us and
Cabot, these conflicts may not ultimately be resolved in a fair manner to both
parties. See "Description of Capital Stock -- Corporate Opportunities".
WE MAY HAVE CONFLICTS WITH CABOT WITH RESPECT TO OUR PAST AND ONGOING
RELATIONSHIPS
We may have conflicts with Cabot after this offering that we cannot resolve
and, even
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<PAGE> 14
if we are able to do so, the resolution of these conflicts may not be as
favorable as if we were dealing with an unaffiliated party. Upon the completion
of this offering, Cabot will continue to be our exclusive supplier of fumed
metal oxides for our existing slurries under a fumed metal oxide supply
agreement between Cabot and our company. While we are not required to do so
under the terms of that agreement, we expect we also will purchase from Cabot
most of the fumed metal oxides we require for any new slurries we develop.
Furthermore, we currently have and, after this offering and the spin-off will
continue to have, contractual arrangements with Cabot requiring Cabot and its
affiliates to provide us with various interim, ongoing and other services. As a
result, conflicts of interest may arise between Cabot and us in a number of
areas relating to our past and ongoing relationships, including:
- - the terms of our fumed metal oxide supply agreement and other interim and
ongoing agreements with Cabot;
- - Cabot's ability to control our management and affairs;
- - the nature, quality and pricing of transitional services Cabot has agreed to
provide us;
- - business opportunities that may be attractive to both Cabot and us;
- - litigation, labor, tax, employee benefit and other matters arising from our
separation from Cabot;
- - the incurrence of debt and major business combinations by us; and
- - sales or distributions by Cabot of all or any portion of its ownership
interest in us.
In addition, the contractual agreements we have with Cabot may be amended
from time to time upon agreement between the parties and, as long as Cabot is
our controlling stockholder, it will have the ability to require us to agree to
any such amendments. These agreements were made in the context of an affiliated
relationship and were negotiated in the overall context of our separation from
Cabot. The prices and other terms under these agreements may be less favorable
to us than what we could have obtained in arm's-length negotiations with
unaffiliated third parties for similar services or under similar leases. It is
particularly difficult to assess whether the price for fumed metal oxides
provided for under our fumed metal oxide supply agreement with Cabot is the same
as or different than the price we could have obtained in arm's-length
negotiations with an unaffiliated third party in light of the long-term nature
of the contract, the volumes provided for under the agreement and our particular
quality requirements. For more information about these arrangements, see
"Business -- Cabot as Our Raw Materials Supplier", "Business -- Dispersion
Services Agreement with Cabot" and "Relationships Between Our Company and Cabot
Corporation".
WE FACE RISKS ASSOCIATED WITH BEING A MEMBER OF CABOT'S CONSOLIDATED GROUP FOR
FEDERAL INCOME TAX PURPOSES
For so long as Cabot continues to own 80% of the vote and value of our
capital stock, we will be included in Cabot's consolidated group for federal
income tax purposes. Under a tax sharing agreement with Cabot that will become
effective upon completion of this offering, we will pay Cabot the amount of
federal, state and local income taxes that we would be required to pay to the
relevant taxing authorities if we were a separate taxpayer not included in
Cabot's consolidated or combined returns. In addition, by virtue of its
controlling ownership and the tax sharing agreement, Cabot will effectively
control substantially all of our tax decisions. Under the tax sharing agreement,
Cabot will have sole authority to respond to and conduct all tax proceedings
including tax audits relating to Cabot consolidated or combined income tax
returns in which we are included. Moreover, notwithstanding the tax sharing
agreement, federal law provides that each member of a consolidated group is
liable for the group's entire tax obligation. Thus, to the extent Cabot or other
members of the group fail to make any federal income tax payments required of
them by law, we could be liable for the shortfall. Similar principles may apply
for state income tax purposes in many states.
13
<PAGE> 15
IF THE ANTICIPATED SPIN-OFF IS NOT TAX-FREE, WE COULD BE LIABLE TO CABOT FOR THE
RESULTING TAXES
As described above under "Prospectus Summary -- Relationship with Cabot
Corporation", we will, after this offering, continue to be controlled by Cabot
and Cabot intends to divest itself of its remaining equity interest in us by
means of a tax-free spin-off. We will agree to indemnify Cabot in the event that
the spin-off is not tax-free to Cabot as a result of various actions taken by or
with respect to us or our failure to take various actions, all as to be set
forth in our tax sharing agreement with Cabot. We may not be able to control
some of the events that could trigger this liability. In particular, any
acquisition of us by a third party within two years of the spin-off could result
in the spin-off becoming a taxable transaction and give rise to our obligation
to indemnify Cabot for any resulting tax liability. For a discussion of the
other actions which could give rise to our obligation to indemnify Cabot if the
spin-off is not tax-free to Cabot, see "Relationships Between Our Company and
Cabot Corporation -- Tax Sharing Agreement".
RISKS RELATING TO THIS OFFERING
SINCE OUR COMMON STOCK HAS NOT TRADED PUBLICLY, THE INITIAL PUBLIC OFFERING
PRICE MAY NOT BE INDICATIVE OF THE MARKET PRICE OF OUR COMMON STOCK AFTER THIS
OFFERING, AND THE MARKET PRICE OF OUR COMMON STOCK MAY FLUCTUATE WIDELY AND
RAPIDLY
There is currently no public market for our common stock, and an active
trading market may not develop or be sustained after this offering. The initial
public offering price has been determined through negotiation between us and
representatives of the underwriters and may not be indicative of the market
price for our common stock after this offering.
The market price of our common stock could fluctuate significantly as a
result of:
- - economic and stock market conditions generally and specifically as they may
impact participants in the semiconductor industry;
- - changes in financial estimates and recommendations by securities analysts
following our stock;
- - earnings and other announcements by, and changes in market evaluations of,
participants in the semiconductor industry;
- - changes in business or regulatory conditions affecting participants in the
semiconductor industry;
- - announcements or implementation by us or our competitors of technological
innovations or new products; and
- - trading volume of our common stock.
The securities of many companies have experienced extreme price and volume
fluctuations in recent years, often unrelated to the companies' operating
performance. Specifically, market prices for securities of technology related
companies have frequently reached elevated levels, often following their initial
public offerings. These levels may not be sustainable and may not bear any
relationship to these companies' operating performances. If the market price of
our common stock reaches an elevated level following this offering, it may
materially and rapidly decline. In the past, following periods of volatility in
the market price of a company's securities, stockholders have often instituted
securities class action litigation against the company. If we were involved in a
class action suit, it could divert the attention of senior management, and, if
adversely determined, have a negative impact on our business, results of
operations and financial condition.
THE ACTUAL OR POSSIBLE SALE OF OUR SHARES BY CABOT, WHICH WILL OWN MORE THAN 80%
OF OUR OUTSTANDING SHARES, COULD DEPRESS OR REDUCE THE MARKET PRICE OF OUR
COMMON STOCK OR CAUSE OUR SHARES TO TRADE BELOW THE PRICES AT WHICH THEY WOULD
OTHERWISE TRADE
The market price of our common stock could drop as a result of sales of a
large number of shares of our common stock in the market after this offering or
the perception that these sales could occur. These factors also could make it
more difficult for us to raise funds through future offerings of our common
stock.
14
<PAGE> 16
Upon the completion of this offering, there will be 22,989,744 shares of
our common stock outstanding, assuming the underwriters do not exercise their
option to purchase additional shares from us. Based on the same assumption,
after this offering Cabot will beneficially own 82.6% of our outstanding common
stock. The shares of our common stock sold in this offering will be freely
tradable without restriction, except for any shares acquired by an affiliate of
our company (which can be sold under Rule 144 under the Securities Act, subject
to various volume and other limitations). Cabot is not obligated to retain these
shares, except that subject to limited exceptions, it has agreed not to sell or
otherwise dispose of any shares of common stock for 180 days after the
completion of this offering without the consent of our underwriters. After the
expiration of this 180 day period, Cabot could dispose of its shares of our
common stock through a public offering, spin-off or other transaction and has
indicated its intention to do so through a spin-off.
ANTI-TAKEOVER PROVISIONS UNDER OUR CERTIFICATE OF INCORPORATION AND BYLAWS, OUR
RIGHTS PLAN AND DELAWARE GENERAL CORPORATION LAW MAY ADVERSELY AFFECT THE PRICE
OF OUR COMMON STOCK, DISCOURAGE THIRD PARTIES FROM MAKING A BID FOR OUR COMPANY
OR REDUCE ANY PREMIUMS PAID TO OUR STOCKHOLDERS FOR THEIR COMMON STOCK
Amendments we intend to make to 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. These amendments, our bylaws, our rights plan and the various
provisions of Delaware General Corporation Law may adversely affect the price of
our common stock, discourage third parties from making a bid for our company or
reduce any premiums paid to our stockholders for their common stock. For
example, we intend to amend our certificate of incorporation to authorize our
board of directors to issue up to 20 million shares of blank check preferred
stock and to attach special rights and preferences to this preferred stock. The
issuance of this preferred stock may make it more difficult for a third party to
acquire control of us. We also intend to amend our certificate of incorporation
to provide for the division of our board of directors into three classes as
nearly equal in size as possible with staggered three-year terms. This
classification of our board of directors could have the effect of making it more
difficult for a third party to acquire our company, or of discouraging a third
party from acquiring control of our company. In addition, the rights issued to
our stockholders under our rights plan may make it more difficult or expensive
for another person or entity to acquire control of us without the consent of our
board of directors. See "Description of Capital Stock -- Preferred Stock",
"-- Anti-takeover Effects of Our Certificate of Incorporation and Bylaws and
Provisions of Delaware Law" and "-- Rights Plan" for a more complete description
of our capital stock, our certificate of incorporation, our rights plan and the
effects of the Delaware General Corporation Law that could hinder a third
party's attempts to acquire control of us.
INVESTORS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
If you purchase common stock in this offering, you will pay more for your
shares than the amounts paid by Cabot for its shares. As a result, you will
experience immediate and substantial dilution of approximately $13.58 per share,
representing the difference between the assumed initial public offering price of
$16.00 per share and our net tangible book value per share as of December 31,
1999 after giving effect to this offering. In addition, you may experience
further dilution to the extent that shares of our common stock are issued upon
the exercise of stock options or under our employee stock purchase plan. The
shares initially issuable under our employee stock purchase plan will be issued
at a purchase price less than the public offering price per share in this
offering. In addition, some of the stock options we may issue in the future may
have exercise prices below the initial public offering price. See "Dilution" for
a more complete description of how the value of your investment in our common
stock will be diluted upon the completion of this offering.
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<PAGE> 17
USE OF PROCEEDS
We estimate the net proceeds from our sale of 4,000,000 shares of common
stock will be $57.2 million, after deducting the underwriting discount and
estimated expenses of this offering and of the asset transfer. If the
underwriters' over-allotment option is exercised in full, we estimate the net
proceeds will be $66.1 million.
We intend to use all of the net proceeds from this offering to pay a
dividend to Cabot in an amount equal to the lesser of the amount of the net
proceeds and Cabot's tax basis in us as of the completion of this offering. Any
net proceeds not used for this purpose will be used for general working capital
purposes. See "Capitalization" for a further discussion of Cabot's tax basis in
us.
DIVIDEND POLICY
Except for the $17.0 million dividend that we expect to pay to Cabot prior
to the completion of this offering using borrowings under our term credit
facility and the dividend that we expect to pay to Cabot immediately following
the completion of this offering, we have never declared or paid any cash
dividends on our capital stock. We presently intend to retain future earnings,
if any, to finance the expansion of our business and do not expect to pay any
cash dividends in the foreseeable future. Payment of future cash dividends, if
any, will be at the discretion of our board of directors after taking into
account various factors, including our financial condition, operating results,
current and anticipated cash needs and plans for expansion.
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<PAGE> 18
CAPITALIZATION
Prior to the completion of this offering, we expect to borrow $17.0 million
under our new term credit facility and to pay the proceeds of this borrowing to
Cabot as a dividend. Under our IPO and Distribution Agreement with Cabot, which
will be effective upon the completion of this offering, we have agreed not to
incur more than $50.0 million of indebtedness so long as Cabot owns at least 50%
of our outstanding stock. We also intend to pay a subsequent dividend to Cabot
at the completion of this offering in an amount equal to the lesser of the net
proceeds of this offering and Cabot's estimated tax basis in us as of the
completion date.
Cabot's estimated tax basis in us was approximately $71.2 million at
December 31, 1999. This estimated tax basis is expected to increase as a result
of our earnings and any capital contributions made by Cabot after December 31,
1999 and will decrease by the $17.0 million that we will pay to Cabot as a
dividend from borrowings under our term credit facility. After payment of this
dividend, Cabot estimates that its tax basis in us as of the completion date
will be approximately $66.2 million.
The following table sets forth, as of December 31, 1999, our capitalization
on an actual basis and on a pro forma as adjusted basis to give effect to:
- - our borrowing of $17.0 million under our term credit facility;
- - our payment to Cabot of a cash dividend of $17.0 million from the borrowing
under our term credit facility;
- - our receipt of net proceeds from this offering equal to $57.2 million, which
is based on an assumed initial public offering price of $16.00 per share,
estimated underwriting discounts and expenses of $6.8 million and the
assumption that the underwriters do not exercise their option to acquire
additional shares from us;
- - our payment to Cabot of a cash dividend of $54.2 million, which represents
Cabot's estimated tax basis in us at December 31, 1999 ($71.2 million) minus
the $17.0 million dividend we intend to pay to Cabot from the borrowing under
our term credit facility; and
- - the retention by Cabot of the fumed alumina plant in Tuscola, Illinois and the
land and building at Cabot's dispersions facility in Barry, Wales (the total
value of all of these assets was approximately $1.6 million at December 31,
1999).
The foregoing adjustments are based on Cabot's estimated tax basis in us at
December 31, 1999 of $71.2 million. While we expect that Cabot's estimated tax
basis in us will increase prior to the completion date of this offering as a
result of our earnings and any capital contributions made by Cabot after
December 31, 1999, these earnings and capital contributions will increase our
Division equity by about the same amount. As noted above, Cabot estimates that
its tax basis in us as of the completion date after payment of the $17.0 million
dividend referred to above will be approximately $66.2 million. If we had used
this estimated tax basis in the foregoing adjustments, then the amount of the
second dividend to Cabot would have been $57.2 million, the total assumed net
proceeds of this offering (because they are less than the $66.2 million
estimated tax basis).
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<PAGE> 19
This table should be read in conjunction with "Selected Financial Data",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our combined financial statements and the notes to our combined
financial statements, each of which is included in this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------
PRO FORMA
ACTUAL AS ADJUSTED
------ -----------
(in thousands)
<S> <C> <C>
Total long term debt, less current portion of $1,013........ $ -- $15,987
Division equity............................................. 75,056 59,456
------- -------
Total capitalization.............................. $75,056 $75,443
======= =======
</TABLE>
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DILUTION
Our net tangible book value as of December 31, 1999 was approximately $71.2
million, or $3.75 per share. Net tangible book value per share is equal to our
total tangible assets minus our total liabilities divided by the number of
shares of our common stock outstanding. Assuming we had sold the 4,000,000
shares of common stock offered by this prospectus at an assumed initial public
offering price of $16.00 per share, and after deducting discounts and
commissions and estimated offering expenses payable by us and the two dividend
payments to Cabot referred to above under "Capitalization" totaling $71.2
million, our pro forma net tangible book value at December 31, 1999 would have
been approximately $55.6 million, or $2.42 per share. This represents an
immediate decrease in net tangible book value of $1.33 per share to Cabot and an
immediate dilution of $13.58 per share to new investors. Dilution is determined
by subtracting net tangible book value per share after the offering from the
amount of cash paid by a new investor for a share of common stock. The following
table illustrates the substantial and immediate per share dilution to new
investors:
<TABLE>
<CAPTION>
PER SHARE
----------------
<S> <C> <C>
Assumed initial public offering price....................... $16.00
Net tangible book value as of December 31, 1999........... $ 3.75
Dividend payments to Cabot................................ (3.75)
Increase in pro forma net tangible book value attributable
to new investors....................................... 2.42
------
Pro forma net tangible book value after this offering....... 2.42
------
Dilution to new investors................................... $13.58
======
</TABLE>
The following table summarizes as of December 31, 1999 the number of shares
of common stock purchased from us, the total consideration paid to us and the
average price per share paid by Cabot and by new investors at an assumed initial
public offering price of $16.00 per share and without giving effect to the
underwriting discount and assumed offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 18,989,744 82.6% $ 4,870,000 7.1% $ 0.26
New investors................. 4,000,000 17.4 64,000,000 92.9 16.00
---------- ----- ----------- ------
Total....................... 22,989,744 100.0% $68,870,000 100.0%
========== ===== =========== ======
</TABLE>
If the underwriters exercise their over-allotment option in full, the net
tangible book value per share of common stock as of December 31, 1999 would have
been $2.73 per share, which would result in dilution to the new investors of
$13.27 per share, and the number of shares held by the new investors will
increase to 4,600,000, or 19.5% of the total number of shares to be outstanding
after this offering, and the number of shares held by Cabot will be 18,989,744
shares, or 80.5% of the total number of shares to be outstanding after this
offering.
19
<PAGE> 21
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with,
and are qualified by reference to, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our combined financial
statements and the notes to our combined financial statements, each of which is
included elsewhere in this prospectus. The selected financial data presented is
for the five-year period ended September 30, 1999 and for the three months ended
December 31, 1998 and 1999. The combined statement of operations data for the
fiscal years ended September 30, 1997, 1998 and 1999 and the combined balance
sheet data as of September 30, 1998 and 1999 are derived from our combined
financial statements, which have been audited by PricewaterhouseCoopers LLP,
independent public accountants, and are included elsewhere in this prospectus.
The combined statement of operations data for the fiscal years ended September
30, 1995 and 1996 and the combined balance sheet information as of September 30,
1995, 1996 and 1997 are derived from our unaudited combined financial
statements, which are not included in this prospectus. The combined statements
of operations data for the three months ended December 31, 1998 and 1999 and the
combined balance sheet information as of December 31, 1999 are derived from our
unaudited interim combined financial statements, which are included elsewhere in
this prospectus. Because we began to operate as a separate division of Cabot in
July 1995, the combined statement of operations data for 1995 includes only
three months of activity.
The unaudited interim financial information for the three months ended
December 31, 1998 and 1999 has been prepared on the same basis as the annual
financial statements and includes all adjustments, consisting only of normal
recurring adjustments, which management considers necessary for the fair
presentation of that financial information. The unaudited results for interim
periods are not necessarily indicative of results to be expected for any other
interim period or the full year.
Unaudited pro forma net income per share has been calculated using the
18,989,744 shares that will be owned by Cabot at the completion of this offering
and the number of shares that we would have been required to issue to fund a
dividend to Cabot in an amount equal to Cabot's tax basis in us at each period
end minus the earnings from that period at an issue price per share equal to
$14.30, which is the assumed initial public offering price of $16.00 per share
less the estimated underwriting discounts and offering expenses.
An income tax benefit was recorded in 1997 as a result of a tax credit for
research and development activities that exceeded our statutory taxes for that
period.
20
<PAGE> 22
<TABLE>
<CAPTION>
THREE MONTHS
THREE MONTHS ENDED
ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31,
SEPTEMBER 30, --------------------------------------- -----------------
1995 1996 1997 1998 1999 1998 1999
------------- ------- ------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS
DATA:
Revenue -- external................ $4,242 $23,373 $33,851 $56,862 $95,701 $20,325 $34,230
Revenue -- related party........... 761 961 1,360 1,969 2,989 550 816
------ ------- ------- ------- ------- ------- -------
Total revenue...................... 5,003 24,334 35,211 58,831 98,690 20,875 35,046
------ ------- ------- ------- ------- ------- -------
Cost of goods sold -- external..... 2,264 12,386 18,561 27,686 44,902 9,486 15,372
Cost of goods sold -- related
party............................ 761 961 1,360 1,969 2,989 550 816
------ ------- ------- ------- ------- ------- -------
Total cost of goods sold........... 3,025 13,347 19,921 29,655 47,891 10,036 16,188
------ ------- ------- ------- ------- ------- -------
Gross profit................... 1,978 10,987 15,290 29,176 50,799 10,839 18,858
Operating expenses:
Research and development......... 27 6,984 8,411 10,139 14,551 3,445 4,484
Selling and marketing............ 591 674 1,028 3,293 4,572 954 1,250
General and administrative....... 604 4,122 4,468 8,576 11,880 2,570 3,896
Amortization of goodwill and
other intangibles.............. 179 720 720 720 720 180 180
------ ------- ------- ------- ------- ------- -------
Total operating expenses....... 1,401 12,500 14,627 22,728 31,723 7,149 9,810
------ ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes............................ 577 (1,513) 663 6,448 19,076 3,690 9,048
Provision for (benefit from) income
taxes............................ 222 (647) (45) 2,211 6,796 1,313 3,300
------ ------- ------- ------- ------- ------- -------
Net income (loss).............. $ 355 $ (866) $ 708 $ 4,237 $12,280 $ 2,377 $ 5,748
====== ======= ======= ======= ======= ======= =======
Unaudited pro forma net income per
share............................ $ 0.58 $ 0.26
======= =======
Unaudited pro forma shares
outstanding...................... 21,054 22,378
======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
AS OF SEPTEMBER 30, -----------------------
----------------------------------------------- PRO FORMA
1995 1996 1997 1998 1999 1999 1999
---- ---- ---- ---- ---- ---- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED BALANCE SHEET DATA:
Current assets....................... $ 3,957 $ 5,817 $ 8,781 $15,581 $26,120 $32,695 $32,695
Property, plant and equipment, net... 4,045 16,797 17,195 24,713 40,031 46,400 44,800
Other assets......................... 6,928 6,284 5,547 4,837 4,123 3,891 3,891
------- ------- ------- ------- ------- ------- -------
Total assets......................... $14,930 $28,898 $31,523 $45,131 $70,274 $82,986 $81,386
======= ======= ======= ======= ======= ======= =======
Current liabilities.................. $ 651 $ 2,649 $ 2,980 $ 4,870 $ 7,775 $ 7,402 $78,602
Long-term liabilities................ 61 40 119 233 422 528 528
------- ------- ------- ------- ------- ------- -------
Total liabilities.................... 712 2,689 3,099 5,103 8,197 7,930 79,130
Division equity...................... 14,218 26,209 28,424 40,028 62,077 75,056 2,256
------- ------- ------- ------- ------- ------- -------
Total liabilities and division
equity............................. $14,930 $28,898 $31,523 $45,131 $70,274 $82,986 $81,386
======= ======= ======= ======= ======= ======= =======
</TABLE>
21
<PAGE> 23
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
The following unaudited pro forma combined statements of income have been
prepared to reflect adjustments to our historical results of operations to give
effect to various transactions as if those transactions had been consummated at
earlier dates, as described in this prospectus.
We historically sold various dispersion products to Cabot at our cost of
manufacturing. We have entered into a new dispersion services agreement with
Cabot, which will become effective upon the completion of this offering, under
which we will provide dispersion products to Cabot at our cost plus a standard
margin. Under the new agreement, Cabot will supply us with the fumed metal oxide
raw materials for these dispersions at no cost to us, which will reduce both our
cost of goods sold and revenue for these dispersions. The unaudited pro forma
combined statements of income have been adjusted to reflect the reduction in
revenue and related cost of goods sold which would have resulted had the
dispersion services agreement been in effect for the year ended September 30,
1999.
We historically purchased fumed metal oxides, critical raw materials for
our slurries, from Cabot at Cabot's budgeted standard cost. We have entered into
a new fumed metal oxide supply agreement with Cabot which will become effective
upon the completion of this offering under which we will purchase fumed metal
oxides at a contractually agreed upon price. The agreement provides for fixed
price increases each year and other price increases if Cabot's cost of producing
fumed metal oxides increases. The unaudited pro forma combined statements of
income have been adjusted to reflect the additional costs that we would have
incurred based on the initial contractual price if the fumed metal oxide supply
agreement had been in effect for the year ended September 30, 1999.
The unaudited pro forma combined statements of income should be read in
connection with, and are qualified by reference to, our combined financial
statements and related notes, as well as "Management's Discussion and Analysis
of Financial Condition and Results of Operations", included elsewhere in this
prospectus. We believe that the assumptions used provide a reasonable basis for
presenting the significant effects directly attributable to the transactions
discussed above. The unaudited pro forma combined statements of income are not
necessarily indicative of the results that would have been reported had such
events actually occurred on the dates specified, nor are they indicative of our
future results.
22
<PAGE> 24
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31, 1999
----------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(in thousands, except per share data)
(unaudited)
<S> <C> <C> <C>
Revenue -- external.................................. $34,230 $ -- $34,230
Revenue -- related party............................. 816 (242)(a) 574
------- ------- -------
Total revenue........................................ 35,046 (242) 34,804
------- ------- -------
Cost of goods sold -- external....................... 15,372 1,388(b) 16,760
Cost of goods sold -- related party.................. 816 (326)(a) 490
------- ------- -------
Total cost of goods sold............................. 16,188 1,062 17,250
------- ------- -------
Gross profit.................................... 18,858 (1,304) 17,554
Operating expenses:
Research and development........................... 4,484 4,484
Selling and marketing.............................. 1,250 1,250
General and administrative......................... 3,896 --(c) 3,896
Amortization of goodwill and other intangibles..... 180 180
------- -------
Total operating expenses........................ 9,810 9,810
------- ------- -------
Operating income..................................... 9,048 (1,304) 7,744
Interest expense..................................... -- (316)(d) (316)
------- ------- =======
Income before income taxes........................... 9,048 (1,620) 7,428
Provision for income taxes........................... 3,300 (591)(e) 2,709
------- ------- -------
Net income...................................... $ 5,748 (1,029) $ 4,719
======= ======= =======
Pro forma net income per share(f).................... $ 0.26 $ 0.21
======= =======
Pro forma weighted average shares outstanding(f)..... 22,378 22,378
======= =======
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30, 1999
----------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(in thousands, except per share data)
(unaudited)
<S> <C> <C> <C>
Revenue -- external............................ $95,701 $ -- $95,701
Revenue -- related party....................... 2,989 (995)(a) 1,994
------- -------- -------
Total revenue.................................. 98,690 (995) 97,695
------- -------- -------
Cost of goods sold -- external................. 44,902 5,925(b) 50,827
Cost of goods sold -- related party............ 2,989 (1,344)(a) 1,645
------- -------- -------
Total cost of goods sold....................... 47,891 4,581 52,472
------- -------- -------
Gross profit.............................. 50,799 (5,576) 45,223
Operating expenses:
Research and development..................... 14,551 14,551
Selling and marketing........................ 4,572 4,572
General and administrative................... 11,880 --(c) 11,880
Amortization of goodwill and other
intangibles............................... 720 720
------- -------
Total operating expenses.................. 31,723 31,723
------- -------- -------
Operating income............................... 19,076 (5,576) 13,500
Interest expense............................... -- (1,213)(d) (1,213)
------- -------- -------
Income before income taxes..................... 19,076 (6,789) 12,287
Provision for income taxes..................... 6,796 (2,419)(e) 4,377
------- -------- -------
Net income................................ $12,280 $ (4,370) $ 7,910
======= ======== =======
Pro forma net income per share(f).............. $ 0.58 $ 0.38
======= =======
Pro forma weighted average shares
outstanding(f)............................... 21,054 21,054
======= =======
</TABLE>
24
<PAGE> 26
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
(a) Reflects the reduction in revenue and related cost of goods sold which would
have resulted if our new dispersion services agreement had been in effect
for the year ended September 30, 1999 and the three months ended December
31, 1999. Upon completion of this offering, a new dispersion services
agreement will be in effect under which we will sell various dispersion
products to Cabot at our cost plus an agreed upon margin. We have
historically sold these dispersion products to Cabot at cost. In addition,
we have historically purchased from Cabot the fumed metal oxide raw
materials we use to produce these dispersion products. Under the new
agreement, Cabot will supply us with these fumed metal oxide raw materials
at no cost to us. The pro forma effect of receiving these fumed metal oxide
raw materials at no cost to us decreases related party revenue and related
party cost of goods sold by $1,344 for the year ended September 30, 1999 and
$326 for the three months ended December 31, 1999. The pro forma effect of
selling products at our cost plus an agreed upon margin increases related
party revenue and gross profit by $349 for the year ended September 30, 1999
and $84 for the three months ended December 31, 1999.
(b) Reflects the additional costs that would have been incurred if our new fumed
metal oxide supply agreement with Cabot had been in effect for the year
ended September 30, 1999 and the three months ended December 31, 1999. We
have historically purchased fumed metal oxides, our primary raw materials
for CMP slurries, from Cabot at Cabot's budgeted standard cost. Upon the
completion of this offering, a new fumed metal oxide supply agreement will
be in effect with Cabot under which we will purchase fumed metal oxides at
contractually agreed upon prices, which are higher than prices we
historically paid and which will increase over the term of this agreement.
(c) We have operated as a wholly owned subsidiary of Cabot and as a result have
not incurred all costs necessary to operate on a stand-alone basis. While we
believe that our general and administrative costs could increase as a result
of being a stand-alone entity primarily for incremental legal, audit, risk
management and administrative costs, we are unable to quantify the potential
increase but do not expect it to be material.
(d) Reflects the interest expense associated with $17,000 in borrowings we
expect to incur to finance the dividend to Cabot.
(e) The effective tax rate derived from our income tax expense for the year
ended September 30, 1999 and three months ended December 31, 1999 were
applied to the pro forma adjustments to determine the income tax expense or
benefit associated with pro forma adjustments.
(f) Unaudited pro forma net income per share has been calculated using the
18,989,744 shares that will be owned by Cabot at the completion of this
offering and the number of shares that we would have been required to issue
to fund a dividend to Cabot in an amount equal to Cabot's tax basis in us at
each period end minus the earnings from that period at an issue price per
share equal to $14.30, which is the assumed initial public offering price of
$16.00 per share less the estimated underwriting discounts and offering
expenses.
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our historical combined financial statements and the notes to those financial
statements and our unaudited pro forma combined statements of income, which are
included in this prospectus. This prospectus contains forward-looking statements
relating to future events and our future financial performance. Actual results
could be significantly different from those discussed in this prospectus.
Factors that could cause or contribute to such differences include those set
forth in the section entitled "Risk Factors".
OVERVIEW
We develop, manufacture and supply CMP slurries to the semiconductor
industry. Our revenue consists of:
- - external sales of CMP slurries; and
- - related party revenue from fumed metal oxide dispersions sold to Cabot.
We derive substantially all of our revenue from external sales of CMP slurries.
These sales accounted for more than 96% of our total revenue in each of the
three years ended September 30, 1999 and for the three months ended December 31,
1999. We recognize revenue and accrue for anticipated warranty costs upon
delivery of products.
The primary factors affecting our revenue are sales volumes, average
selling prices and foreign currency effects. In recent years, sales volumes have
been positively impacted by the growth of the semiconductor industry, increased
demand for smaller, faster and more complex IC devices, pressure on IC device
manufacturers to reduce costs and successful new product introductions.
For 1999, our five largest customers accounted for approximately 58% of our
revenue, with Intel accounting for approximately 22% of our revenue, Marketech
accounting for approximately 15% of our revenue, and Takasago accounting for
approximately 10% of our revenue. Marketech and Takasago are distributors. For
the three months ended December 31, 1999, our five largest customers accounted
for approximately 53% of our revenue, with Intel accounting for approximately
14% of our revenue, Marketech accounting for approximately 15% of our revenue,
and Takasago accounting for approximately 11% of our revenue. The decline in the
percentage of our total revenue attributable to sales to Intel resulted from,
among other things, Intel's decision to significantly reduce purchases of one
type of CMP slurry from us. We believe that in the same year sales of our
products to our five largest end user customers accounted for approximately 45%
of our revenue.
A portion of our revenue is derived from sales in international markets.
Revenue from sales in Europe was 10% of our total revenue for the three months
ended December 31, 1999, 10% of our total revenue in 1999, 8% of our total
revenue in 1998 and 6% of our total revenue in 1997. Revenue from sales in Asia
was 40% of our total revenue for the three months ended December 31, 1999, 35%
of our total revenue in 1999, 23% of our total revenue in 1998 and 17% of our
total revenue in 1997. We expect our sales in Asia to continue to increase
significantly in the future as IC device manufacturers increase production in
Asia and we increase our marketing and distribution capabilities there. We
intend to use our Geino, Japan facility to support these sales.
Our revenue from Cabot was $0.8 million for the three months ended December
31, 1999, $3.0 million in 1999, $2.0 million in 1998 and $1.4 million in 1997.
In the past we sold fumed metal oxide dispersions to Cabot on a cost basis which
included the cost of the fumed metal oxide raw materials we purchased from
Cabot. We have entered into a new dispersion services agreement with Cabot which
will be effective upon the completion of this offering. Under the new agreement
with Cabot, Cabot will supply the fumed metal oxide raw materials for these
dispersions to us at no cost. Because the cost of the fumed metal oxide raw
materials will not be included in our cost of goods sold, it will also not be
included in the price we charge to Cabot for our dispersion services. Conse-
26
<PAGE> 28
quently, we expect our revenue from Cabot and our cost of goods sold
attributable to this revenue to decrease in the future.
Fumed metal oxides are the primary raw materials used in the manufacture of
most of our CMP slurries and account for a significant portion of our cost of
goods sold. We have entered into a fumed metal oxide supply agreement with
Cabot, effective as of the completion of this offering, pursuant to which Cabot
will continue to be our exclusive supplier of fumed metal oxides for our
currently existing CMP slurries. Although the agreement does not require us to
purchase from Cabot fumed metal oxides for CMP slurries that we develop in the
future, we expect that Cabot will be our primary supplier of fumed metal oxides
for these products as well. Under the new agreement, the prices we will pay to
Cabot in the future for fumed metal oxides will be higher than we have paid in
the past and will increase each year. See "Business -- Cabot as Our Raw
Materials Supplier".
We currently pay a royalty to Rippey Corporation in connection with our
acquisition of selected assets from Rippey in July 1995. This royalty is equal
to approximately 2.5% of all revenue derived from the sale of our CMP slurries.
This obligation will expire in the third quarter of 2002.
We have entered into a management services agreement with Cabot, which will
be effective upon the completion of this offering, pursuant to which Cabot will
provide administrative and corporate support services to us on an interim or
transitional basis. These services will be similar in scope to what Cabot
provided to us prior to this offering. Cabot will charge us for these services
at a price that reflects its cost to provide these services. We expect that the
cost to us will be similar to what our corporate charges were prior to this
offering.
We are, and, after this offering but prior to the spin-off, will continue
to be, included in Cabot's consolidated federal income tax group, and our
federal income tax liability will be included in the consolidated federal income
tax liability of Cabot. We have entered into a tax sharing agreement with Cabot,
which will be effective upon the completion of this offering, under which we
will pay Cabot an amount equal to our income tax liability calculated as if we
were an independent company. Under the terms of the tax sharing agreement, Cabot
will not be required to make any payment to us for the use of our tax attributes
that come into existence prior to the spin-off until the time that we would
otherwise be able to utilize those attributes.
We have been a part of Cabot since we began developing CMP slurries in
1985. We were organized as a separate division of Cabot in July 1995. Our
financial statements reflect our historical results of operations, financial
position and cash flows. These financial statements have been carved out from
the financial statements and records of Cabot using the historical results of
operations and cash flows and historical basis of the assets and liabilities of
our business, as adjusted to reflect allocations of certain corporate charges
that our management believes are reasonable. Our historical financial
information may not necessarily reflect the results of our operations, financial
position and cash flows in the future or what the results of operations,
financial position and cash flows would have been had we been a separate,
stand-alone entity during those periods.
27
<PAGE> 29
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of revenue of certain line items included in our combined statement of
operations data and our unaudited pro forma combined statements of income:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------------- -----------------------
PRO PRO
FORMA FORMA
1997 1998 1999 1999 1998 1999 1999
---- ---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue......................... 100% 100% 100% 100% 100% 100% 100%
Cost of goods sold.................... 56 50 49 54 48 46 50
--- --- --- --- --- --- ---
Gross profit.......................... 44 50 51 46 52 54 50
Research and development............ 24 17 15 15 17 13 13
Selling and marketing............... 3 6 4 4 5 3 3
General and administrative.......... 13 15 12 12 12 11 11
Amortization of goodwill and other
intangibles...................... 2 1 1 1 1 1 1
--- --- --- --- --- --- ---
Operating income...................... 2 11 19 14 17 26 22
Interest expense...................... 0 0 0 1 0 0 1
--- --- --- --- --- --- ---
Income before income taxes............ 2 11 19 13 17 26 21
Provision for income taxes............ 0 4 7 5 6 10 8
--- --- --- --- --- --- ---
Net income............................ 2% 7% 12% 8% 11% 16% 13%
=== === === === === === ===
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1999 VERSUS THREE MONTHS ENDED DECEMBER 31, 1998
REVENUE
Total revenue was $35.0 million for the three months ended December 31,
1999, which represented a 68%, or $14.2 million, increase from the three months
ended December 31, 1998. Revenue from external sales was $34.2 million for the
three months ended December 31, 1999, which represented an increase of 68%, or
$13.9 million, from the three months ended December 31, 1998. Of this increase,
$9.8 million was due to a 48% increase in volume and $4.1 million was due to
increased weighted average selling prices. The volume growth was driven by the
increased use of CMP slurries in the manufacture of IC devices, and temporary
inventory build-up by some customers for year 2000 rollover concerns. The growth
was especially strong with respect to sales of CMP slurries for polishing
tungsten, which increased 77% in volume terms. Sales of slurries for hard disk
drives contributed $2.0 million to the growth as compared to the three months
ended December 31, 1998. Weighted average selling prices rose due to the sale of
higher performance products which had higher average selling prices. Also, we
shifted some of our sales in Japan from sales to distributors to sales directly
to customers, which resulted in an increased weighted average selling price.
Related party revenue was $0.8 million for the three months ended December
31, 1999, which represented an increase of 48%, or $0.3 million, from the three
months ended December 31, 1998. This increase was due to higher volumes sold. On
a pro forma basis, for the three months ended December 31, 1999, related party
revenue would have been $0.6 million. This decrease reflects the fact that under
our existing arrangement with Cabot, we purchase from Cabot the fumed metal
oxide raw materials required to make the dispersions that we sell to Cabot and
the cost of these raw materials is included in the price we charge to Cabot,
while under our new dispersion services agreement Cabot will provide these raw
materials to us at no cost. As a result, our revenue and cost of goods
28
<PAGE> 30
sold will decrease as a result of the new arrangements.
COST OF GOODS SOLD
Total cost of goods sold was $16.2 million for the three months ended
December 31, 1999, which represented an increase of 61% or $6.2 million from the
three months ended December 31, 1998. Cost of goods sold related to external
sales was $15.4 million for the three months ended December 31, 1999, which
represented an increase of 62%, or $5.9 million, from the three months ended
December 31, 1998. Of this increase, $4.6 million was due to higher sales volume
and $1.3 million was due to higher weighted average costs per gallon. These
higher costs resulted from higher distribution costs resulting from the shift of
some sales to distributors to sales directly to customers in Japan and for raw
materials shipped to our manufacturing plant in Japan. Higher manufacturing
costs associated with improved quality requirements also contributed to this
increase. Because we sell products to Cabot at cost, our cost of goods sold for
these sales is equal to our related party revenue. On a pro forma basis, total
cost of goods sold would have been $17.3 million, which reflects a $1.4 million
increase for the fumed metal oxides we purchase from Cabot to produce our
slurries, partially offset by a $0.3 million decrease in the cost of goods sold
attributable to our new dispersion services agreement with Cabot, in each case
for the reasons described above.
GROSS PROFIT
Our gross profit as a percentage of net revenue was 54% for the three
months ended December 31, 1999 as compared to 52% for the three months ended
December 31, 1998. Higher weighted average margins for new products, a higher
percentage of direct sales to customers and higher utilization of manufacturing
capacity contributed to the margin improvement. On a pro forma basis, for the
three months ended December 31, 1999, gross profit as a percentage of revenue
was 50%.
RESEARCH AND DEVELOPMENT
Research and development expenses were $4.5 million in the three months
ended December 31, 1999, which represented an increase of 30%, or $1.0 million,
from the three months ended December 31, 1998. Of this increase, $0.6 million
was due to higher laboratory supply costs and other operating expenses
associated with the clean room. Increased staffing in other research and
development activities added $0.4 million to the increase in expenses.
Key activities during the three months ended December 31, 1999 involved the
development of advanced particle technology, new and enhanced slurry products
and new CMP polishing pad technology.
SELLING AND MARKETING
Selling and marketing expenses were $1.3 million in the three months ended
December 31, 1999, which represented an increase of 31%, or $0.3 million, for
the three months ended December 31, 1998. The increase was primarily due to the
hiring of additional customer support personnel in our North America, Japan and
Taiwan offices.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $3.9 million in the three months
ended December 31, 1999, which represented an increase of 52%, or $1.3 million,
from the three months ended December 31, 1998. The increase was primarily due to
$0.7 million of additional personnel costs needed to support the general growth
of our business and a $0.3 million increase in legal costs incurred in
connection with patent litigation.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles was $0.2 million in the
three months ended December 31, 1999 and the three months ended December 31,
1998 and related to goodwill and other intangible assets associated with the
acquisition of selected distributor assets from a third party in 1995.
29
<PAGE> 31
PROVISION FOR INCOME TAXES
The effective tax rate on income from operations was 36% in the three
months ended December 31, 1999 and the three months ended December 31, 1998.
NET INCOME
Net income was $5.7 million in the three months ended December 31, 1999,
which represented an increase of 142%, or $3.4 million, from the three months
ended December 31, 1998 as a result of the factors discussed above.
YEAR ENDED SEPTEMBER 30, 1999 VERSUS YEAR ENDED SEPTEMBER 30, 1998
REVENUE
Total revenue was $98.7 million in 1999, which represented an increase of
68%, or $39.9 million, over 1998. Revenue from external sales was $95.7 million
in 1999, which represented an increase of 68%, or $38.8 million, from 1998. The
increase in external revenue was primarily due to a 53% increase in volume and,
to a lesser extent, a 10% increase in weighted average selling prices. The
volume growth was driven by the increased use of CMP slurries in the manufacture
of IC devices. This growth was especially strong in Asia, where volumes across
all slurry product lines increased by 114% and we began to recognize revenue
from the sale of CMP slurries used to polish the magnetic heads and the coating
on hard disks in hard disk drives. Weighted average selling prices rose from
1998 to 1999 due to the sale of higher performance products which had higher
weighted average selling prices, particularly our CMP slurries for polishing
tungsten.
Related party revenue was $3.0 million in 1999, which represented an
increase of 52%, or $1.0 million, from 1998. This increase was due to higher
volumes sold. On a pro forma basis, for the fiscal year ended September 30,
1999, related party revenue would have been $2.0 million. This decrease reflects
the fact that under our existing arrangement with Cabot, we purchase from Cabot
the fumed metal oxide raw materials required to make the dispersions that we
sell to Cabot and the cost of these raw materials is included in the price we
charge to Cabot, while under our new dispersion services agreement Cabot will
provide these raw materials to us at no cost. As a result, our revenue and cost
of goods sold will decrease as a result of the new arrangements.
COST OF GOODS SOLD
Total cost of goods sold was $47.9 million in 1999, which represented an
increase of 61%, or $18.2 million, from 1998. Cost of goods sold related to
external sales was $44.9 million in 1999, which represented an increase of 62%,
or $17.2 million, from 1998. Of that increase, $14.6 million was due to higher
sales volume and the remainder was primarily due to higher manufacturing costs
associated with improved quality requirements and start up costs of our Geino,
Japan facility. On a pro forma basis, for the year ended September 30, 1999,
total cost of goods sold would have been $52.5 million, which reflects a $5.9
million increase for the fumed metal oxides we purchase from Cabot to produce
our slurries, partially offset by a $1.3 million decrease in the cost of goods
sold attributable to our new dispersion services agreement with Cabot, in each
case for the reasons described above.
GROSS PROFIT
Our gross profit as a percentage of revenue was 51% for 1999 and 50% for
1998. Higher margins from new products in 1999 were offset by increased spending
for expanded capacity and support capabilities. On a pro forma basis, for the
year ended September 30, 1999, gross profit as a percentage of revenue was 46%.
RESEARCH AND DEVELOPMENT
Research and development expenses were $14.6 million in 1999, which
represented an increase of 44%, or $4.4 million, from 1998. Of this increase,
$2.3 million was due to higher laboratory supply costs and other operating
expenses associated with the clean room. Increased staffing related to other
research and development activities accounted for an additional $1.5 million of
the increase and consumption of supplies in research and development activities
contributed the rest of the increase. Key activities during 1999 involved the
development of advanced particle
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<PAGE> 32
technology, new or enhanced slurry products and new CMP polishing pad products.
SELLING AND MARKETING
Selling and marketing expenses were $4.6 million in 1999, which represented
an increase of 39%, or $1.3 million, from 1998. Of this increase, $0.4 million
was due to the hiring of additional customer support personnel in the United
States, $0.4 million was due to increased selling costs in Japan and the rest
was due to increased production of product literature, costs relating to
industry trade shows and marketing consulting costs.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $11.9 million in 1999, which
represented an increase of 39%, or $3.3 million, from 1998. Charges for
corporate services provided by Cabot increased $1.8 million from 1998 to 1999 to
keep pace with the growth of our business. Of the remaining increase, $1.2
million was due to additional administrative personnel as a result of general
business growth and $0.3 million was due to outside legal fees incurred in
connection with patent litigation.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles was $0.7 million in 1999 and
1998 and related to goodwill and other intangible assets associated with the
acquisition of selected assets from a third party in 1995.
PROVISION FOR INCOME TAXES
The effective tax rate on income from operations was 36% in 1999 and 34% in
1998.
NET INCOME
Net income was $12.3 million in 1999, which represented an increase of
190%, or $8.0 million, from 1998 as a result of the factors discussed above.
YEAR ENDED SEPTEMBER 30, 1998 VERSUS YEAR ENDED SEPTEMBER 30, 1997
REVENUE
Total revenue was $58.8 million in 1998, which represented an increase of
67%, or $23.6 million, over 1997. Revenue from external sales was $56.9 million
in 1998, which represented an increase of 68%, or $23.0 million, from 1997. The
increase in external revenue was primarily due to a 61% increase in volume and,
to a lesser extent, a 4% increase in weighted average selling prices. The volume
growth was driven by the increased use of CMP slurries in the manufacture of IC
devices. Weighted average selling prices rose due to the sale of higher
performance products which had higher weighted average selling prices,
particularly our CMP slurries for polishing tungsten plugs.
Related party revenue was $2.0 million in 1998, an increase of 45% from
$1.4 million in 1997, and increased due to higher volumes sold.
COST OF GOODS SOLD
Total cost of goods sold was $29.7 million in 1998, which represented an
increase of 49%, or $9.7 million, from 1997. Cost of goods sold related to
external sales was $27.7 million, which represented an increase of 49%, or $9.1
million, from 1997. This increase was primarily due to higher sales volume.
GROSS PROFIT
Our gross profit as a percentage of revenue increased to 50% in 1998 from
44% in 1997. The improvement was primarily the result of higher volumes and
improved operating efficiencies, as well as a greater percentage of higher
margin new products, particularly our CMP slurries for polishing tungsten plugs.
RESEARCH AND DEVELOPMENT
Research and development expenses were $10.1 million in 1998, which
represented an increase of 21%, or $1.7 million, from 1997. The increase was due
to approximately $0.7 million of increased personnel costs, including increased
salary, fringe benefit, travel, recruiting and relocation expenses relating to
our development program teams. Approximately $0.4 million of the increase was
due to higher laboratory supply costs due to the increased size of the
development staff. Key activities during 1998 involved the
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<PAGE> 33
development of new CMP slurry and polishing pad products.
SELLING AND MARKETING
Selling and marketing expenses were $3.3 million in 1998, which represented
an increase of 220%, or $2.3 million, from 1997. Approximately $1.9 million of
the $2.3 million increase was due to increased staffing and travel expenses for
global customer support, including in North America, Asia and Europe. The
increase was also due to increased spending to perform market research and
conduct promotional activities such as participation in trade shows and creation
and distribution of product literature.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $8.6 million in 1998, which
represented an increase of 92%, or $4.1 million, from 1997. The increase in 1998
was primarily due to $2.0 million of increased legal expenses relating to patent
litigation. Approximately $0.8 million of the increase related to higher charges
for corporate services provided by Cabot and $0.4 million of the increase was
due to increased staffing expenses to support our overall business growth.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles was $0.7 million in 1998 and
1997 related to goodwill and other intangible assets associated with the
acquisition of selected assets from a third party in 1995.
PROVISION FOR INCOME TAXES
The effective tax rate on income from operations was 34% in 1998 as
compared to a tax benefit of 7% in 1997. An income tax benefit was recorded in
1997 as a result of a tax credit for research and development activities that
exceeded our statutory taxes for that period.
NET INCOME
Net income was $4.2 million in 1998, which represented an increase of 498%,
or $3.5 million, from 1997 as a result of the factors discussed above.
SELECTED QUARTERLY OPERATING RESULTS
The following table presents our unaudited financial information for the
eight quarters ended December 31, 1999. This unaudited financial information has
been prepared in accordance with generally accepted accounting principles
applied on a basis consistent with the annual audited financial statements and
in the opinion of management, they include all necessary adjustments, which
consist only of normal recurring adjustments necessary to present fairly the
financial results for the periods. The results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- -------- --------- --------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue......................... $14,001 $15,120 $17,620 $20,875 $21,867 $22,864 $33,084 $35,046
Cost of goods sold.................... 7,343 7,554 8,435 10,036 10,177 11,007 16,671 16,188
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.......................... 6,658 7,566 9,185 10,839 11,690 11,857 16,413 18,858
47.5% 50.0% 52.1% 51.9% 53.5% 51.9% 49.6% 53.8%
Operating expenses:
Research and development............ 2,501 2,455 2,900 3,445 3,067 3,669 4,370 4,484
Selling and marketing............... 1,077 1,013 554 954 1,083 1,108 1,427 1,250
General and administrative.......... 1,869 2,106 2,832 2,570 2,989 3,232 3,089 3,896
Amortization of goodwill and other
intangible assets................. 180 180 180 180 180 180 180 180
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.............. 5,627 5,754 6,466 7,149 7,319 8,189 9,066 9,810
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes............ 1,031 1,812 2,719 3,690 4,371 3,668 7,347 9,048
Provision for income taxes............ 353 622 932 1,313 1,559 1,307 2,617 3,300
------- ------- ------- ------- ------- ------- ------- -------
Net income............................ $ 678 $ 1,190 $ 1,787 $ 2,377 $ 2,812 $ 2,361 $ 4,730 $ 5,748
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
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<PAGE> 34
LIQUIDITY AND CAPITAL RESOURCES
We had cash flows from operating activities of $0.3 million in the three
months ended December 31, 1999 and $2.1 million in the three months ended
December 31, 1998. We had cash flows from operating activities of $9.0 million
in 1999, $2.3 million in 1998 and $0.4 million in 1997. Our principal capital
requirements have been to fund working capital needs that support the expansion
of our business. For the three months ended December 31, 1999, inventory was
also increased to prepare for any supply chain interruptions that might have
occurred due to the year 2000 date change.
In the three months ended December 31, 1999, cash flows used in investing
activities were $7.2 million, primarily due to the construction of our Aurora,
Illinois manufacturing building, the purchase of land in Korea for a new
distribution facility and the purchase of research and development equipment. In
the three months ended December 31, 1998, cash flows used in investing
activities were $6.8 million due to manufacturing capacity increases, the
acquisition of research and development equipment and land and construction of
our new headquarters building in Aurora, Illinois.
In 1999, cash flows used in investing activities were $17.1 million,
primarily due to the completion of our Geino, Japan facility and construction of
our Aurora, Illinois headquarters building. In 1998, cash flows used in
investing activities were $9.3 million due to manufacturing capacity increases
and the acquisition of research and development equipment. In 1997, cash flows
used in investing activities were $1.7 million, primarily related to additions
for the purchase of machinery and equipment used in production and research and
development.
We had cash flows from financing activities of $6.9 million for the three
months ended December 31, 1999 and $4.8 million for the three months ended
December 31, 1998, resulting from capital contributions from Cabot. We had cash
flows from financing activities of $8.1 million in 1999, $6.8 million in 1998,
and $1.2 million in 1997 resulting from capital contributions from Cabot.
Upon completion of this offering, we will have a $25 million unsecured
revolving credit facility with Fleet National Bank. Loans under this facility
will be used primarily for general corporate purposes, including working capital
and capital expenditures. There is a sublimit for letters of credit of $5
million. We may elect to borrow at either:
- - the higher of Fleet National Bank's base rate as announced from time to time
or the federal funds rate plus a margin of up to 0.50%; or
- - the LIBOR rate plus a margin of between 1.5% and 2.0%, determined quarterly.
Interest on base rate loans will be payable at the end of each calendar
quarter, and on LIBOR loans at the earlier of the end of each interest period or
quarterly.
All borrowings under our revolving credit facility will become due and
payable in April 2003. Borrowings under this credit facility may be prepaid at
any time, subject to payment of normal breakage costs, if any, in the case of
LIBOR loans.
We would breach our revolving credit facility if we were to incur losses
greater than $7.5 million in a single fiscal quarter or greater than $10 million
in two consecutive quarters. In addition to customary covenants, this credit
facility contains certain restrictions on our ability to incur additional
indebtedness, create liens, make certain investments, pay dividends or make
certain distributions on our stock, merge, consolidate, make certain
acquisitions or dispositions and enter into transactions with affiliates.
Upon the completion of this offering, we will also have an unsecured term
credit facility, consisting of a $3.5 million term loan and a $13.5 million term
loan, with LaSalle Bank National Association. We expect that all $17.0 million
of borrowings under this facility will be used to fund a dividend to Cabot.
The $3.5 million term loan will be funded on the basis of the State of
Illinois State Treasurers Economic Program. During the
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<PAGE> 35
period that we remain eligible for this program and the State of Illinois
maintains appropriate funds to cover the $3.5 million term loan, the outstanding
amount will bear interest at a rate equal to 1.75% plus:
- - until the second anniversary of the closing date of the loan, 70% of the two
year treasury rate; and
- - after the second anniversary of the closing date and until the termination
date of this credit facility, which will be five years from the closing date
of the credit facility, 70% of the three year treasury rate.
During any period in which we are ineligible for this program or the State
of Illinois removes funds on deposit with the lender for purposes of funding
this loan, the outstanding amount will bear interest at the rate applicable to
the $13.5 million term loan described below.
With respect to the $13.5 million term loan, we may elect to borrow at
either LaSalle Bank's base rate or the Eurodollar rate plus an applicable
margin, which will vary between 1.5% and 2.0% depending on our ratio of funded
debt to EBITDA.
Interest on the $3.5 million term loan and each base rate loan will be
payable quarterly. Interest on each Eurodollar loan will be payable on the last
day of the applicable interest period, which will be a one, two or three month
period.
During the existence of any event of default under the term credit
facility, the applicable interest rate on each type of loan will be increased
2.0%.
The total principal amount of the $3.5 million term loan will be payable
upon the termination date of the credit facility, which will be five years from
the closing date of this credit facility. Principal on the $13.5 million term
loan will be payable in quarterly installments of $337,500, with the balance
payable upon the termination date. Subject to specified minimum amounts, we can
convert base rate loans and Eurodollar loans into loans of the other type.
During the term of this facility, we will be subject to prepayment
provisions, financial ratios, default provisions and restrictive covenants
similar to those described with respect to our $25 million revolving credit
facility.
Under both our $25.0 million revolving credit facility and our $17.0
million term credit facility, we will be required to maintain the following
financial ratios:
- - a ratio of (A) cash plus short-term investments plus net accounts receivable
to (B) total current liabilities equal or above 1.25 to 1. The actual ratio as
of December 31, 1999 was 3.06 to 1. Assuming the $25.0 million of revolving
loans under our revolving credit facility and the $17.0 million of term loans
under our term credit facility had been outstanding on December 31, 1999, and
we had used all $17.0 million of borrowings under our term credit facility to
fund a dividend to Cabot as of that date, the ratio would have been 1.84 to 1;
- - a leverage ratio of (A) total funded indebtedness to (B) EBITDA below 2.25 to
1. This ratio would have been satisfied as of December 31, 1999 because we had
no funded indebtedness as of that date. Assuming the $25.0 million of
revolving loans under our revolving credit facility and the $17.0 million of
term loans under our term credit facility had been outstanding during the
three month period ended December 31, 1999, the ratio would have been 1.52 to
1; and
- - a minimum coverage ratio of (A) EBIT to (B) interest expense greater than 3.0
to 1. This ratio would have been satisfied as of December 31, 1999 because we
had no interest expense as of that date. Assuming the $25.0 million of
revolving loans under our revolving credit facility and the $17.0 million of
the term loans under our term credit facility had been outstanding during the
three month period ended December 31, 1999, the ratio would have been 7.40 to
1.
EBITDA is our net income before taxes plus interest expense, depreciation
and amortization. EBIT would take into account depreciation and amortization.
We estimate that our total capital expenditures in 2000 will be
approximately $32.5 mil-
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<PAGE> 36
lion, approximately $7.2 million of which we have already spent. Our major
capital expenditures in 2000 are expected to be:
- - approximately $20.4 million to expand our existing North American
manufacturing facilities and build and equip a new slurry manufacturing
facility adjacent to our current facility in Aurora, Illinois;
- - approximately $8.1 million to expand our existing manufacturing facility in
Geino, Japan and establish new distribution facilities in Asia;
- - approximately $0.7 million to expand and improve our Barry, Wales facility;
and
- - approximately $3.4 million for polishing and other equipment used in our
research and development activities.
We believe that cash generated by our operations and borrowings under our
revolving credit facility will be sufficient to fund our operations and expected
capital expenditures for the next 24 months. However, we plan to expand our
business and continue to improve our technology and, to do so, we may be
required to raise additional funds in the future through public or private
equity or debt financing, strategic relationships or other arrangements.
Financing may not be available on acceptable terms, or at all, and our failure
to raise capital when needed could negatively impact our business, financial
condition or results of operations. Because we will agree with Cabot that we
will not issue any securities if doing so would reduce Cabot's ownership of us
to less than 80% prior to the spin-off, our ability to raise capital through
further sales of equity securities is limited until the spin-off occurs.
Additional equity financing could be dilutive to the holders of our common stock
and debt financing, if available, may involve restrictive covenants. See "Risk
Factors -- Risks Relating to Our Business -- Our ability to raise capital in the
future may be limited and this may limit our ability to expand our business and
improve our technology".
Cabot is currently a defendant in two lawsuits involving Rodel. We have
agreed to indemnify Cabot for any liabilities or damages resulting from these
lawsuits. See "Business -- Legal Proceedings".
EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT
We conduct business operations outside of the United States through our
foreign operations. Our foreign operations maintain their accounting records in
their local currencies. Consequently, period to period comparability of results
of operations is affected by fluctuations in exchange rates. The primary
currencies to which we have exposure are the Japanese Yen and the British Pound.
Our exposure to foreign currency exchange risks has not been significant because
a significant portion of our foreign sales are denominated in U.S. dollars. As
foreign markets become a more significant portion of our business, we may enter
into forward contracts in an effort to manage foreign currency exchange
exposure.
MARKET RISK AND SENSITIVITY ANALYSIS
FOREIGN EXCHANGE RATE RISK
During 1999, less than 10% of our revenue was transacted in currencies
other than the U.S. dollar. We generally do not enter into forward exchange
contracts as a hedge against foreign currency exchange risk on transactions
denominated in foreign currencies or for speculative or trading purposes. We
have performed a sensitivity analysis assuming a hypothetical 10% adverse
movement in foreign exchange rates. As of September 30, 1999, 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.
Actual gains and losses in the future may differ materially from this analysis
based on changes in the timing and amount of foreign currency rate movements and
our actual exposures. We believe that our exposure to foreign currency exchange
rate risk at September 30, 1999 was not material.
There have been no material changes in market risk exposures through
December 31, 1999.
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NEW ACCOUNTING STANDARDS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". Statement of Position 98-1
provides guidance regarding whether computer software is internal-use software,
the capitalization of costs incurred for computer software developed or obtained
for internal use and accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the public.
We do not expect the impact of adopting Statement of Position 98-1, which will
be effective for us in fiscal 2000, to be material to our financial condition or
results of operations.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities". Statement of Position 98-5 requires companies to expense start-up
and organization costs as incurred. Statement of Position 98-5 broadly defines
start-up activities and provides examples to help entities determine costs that
are and are not within the scope of Statement of Position 98-5. Statement of
Position 98-5 will be effective for us in fiscal 2000, and its initial
application is to be reported as the cumulative effect of a change in accounting
principle. We do not expect the impact of adopting Statement of Position 98-5 to
be material to our financial condition or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". Statement of Financial Accounting Standards No. 133
establishes new standards of accounting and reporting for derivative instruments
and hedging activities. Statement of Financial Accounting Standards No. 133
requires all derivatives be recognized at fair value in the statement of
financial position, and the corresponding gains or losses be reported either in
the statement of operations or as a component of comprehensive income, depending
on the type of hedging relationship that exists. We do not expect the impact of
adopting Statement of Financial Accounting Standards No. 133, which will apply
to us in 2001, to be material to our financial condition or results of
operations.
In December 1999, the SEC released Staff Accounting Bulletin No. 101, which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. We are required to be in conformity
with the provisions of Staff Accounting Bulletin No. 101 no later than October
1, 2000 and do not expect a material change in our financial condition or
results of operations as a result of Staff Accounting Bulletin 101.
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<PAGE> 38
BUSINESS
OUR COMPANY
We are the leading supplier of slurries used in chemical mechanical
planarization, or CMP. We believe that we have an approximately 80% share of the
slurries sold to IC device manufacturers worldwide. CMP is a polishing process
used by IC device manufacturers to planarize many of the multiple layers of
material that are built upon silicon wafers to produce advanced IC devices.
Planarization is a polishing process that levels and smooths, and removes the
excess material from, the surfaces of these layers. CMP slurries are liquids
containing abrasives and chemicals that facilitate and enhance this polishing
process. CMP assists IC device manufacturers in producing smaller, faster and
more complex IC devices with fewer defects. We believe CMP will become
increasingly important in the future as manufacturers seek to further shrink the
size of these devices and improve their performance. Most of our CMP slurries
are used to polish insulating layers and the tungsten plugs that go through the
insulating layers and connect the multiple wiring layers of IC devices. We have
developed and have begun limited sales of new CMP slurries that our customers
use for polishing the coating on the hard disks and the magnetic heads in hard
disk drives, although in 1999 revenue from sales of these CMP slurries accounted
for less than 2.0% of our total revenue. We continue to develop slurries for
additional new applications. In addition, we have recently begun producing and
selling polishing pads used in the CMP process.
IC DEVICE MANUFACTURING
Today's advanced IC devices are composed of millions of transistors and
other electronic components connected by miles of wiring. The wiring, composed
primarily of aluminum and tungsten, carries electric signals through the
multiple layers of the IC device. Insulating material is used throughout the IC
device to isolate the electronic components and wiring to prevent short
circuiting and to improve the efficiency of electric signal travel within the
device. To increase performance, IC device manufacturers have progressively
increased the number, or density, of transistors and other electronic components
in each IC device.
The manufacturing process for IC devices typically begins with a circular
wafer of pure silicon. A large number of identical IC devices are manufactured
on each wafer at the same time, and at the end of the process, the wafer is cut
into the individual devices. The first step in the manufacturing process is to
build transistors and other electronic components on the silicon wafer. These
components are then wired together in a particular sequence to produce an IC
device with the desired characteristics. Once the transistors and other
electronic components are in place on the silicon wafer, they are usually
covered with a layer of insulating material, most often silicon dioxide.
CMP is used to planarize the insulating layers of an IC device and prepare
them for a process known as metallization. During metallization, wiring is added
to the surface of the insulating layer through a series of steps involving:
- - depositing metal, usually aluminum, onto the surface of the layer;
- - projecting an image of the desired wiring pattern on the layer using a process
known as photolithography; and
- - removing the excess deposited metal from the surface of the insulating layer
using a process known as etching, which leaves behind the desired wiring
pattern.
When the wiring is finished, another layer of insulating material is added and
planarized using CMP. This process of alternating insulating and wiring layers
is repeated until the IC device is completed. The electronic components and
wiring layers are connected by conductive plugs that are formed by making holes
in the insulating layers and filling those holes with metal, usually tungsten.
After these holes have been filled with tungsten, CMP is used to remove all the
excess tungsten above the surface of the insulating layer so that the top of the
plug is level with the surface of the
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<PAGE> 39
insulating layer before the next wiring layer is built. Manufacturing IC devices
requires precision processing in ultra clean, controlled environments.
The semiconductor industry has a generally accepted set of design rules
that describe current and projected feature size and spacing of electronic
components and wiring in IC devices. The feature size and spacing in these
design rules have been progressively decreasing to accommodate the demand for
increased circuit density and miniaturization. As the density of IC devices
increases, the amount of wiring needed to connect the transistors and other
electronic components to each other also increases. As IC devices become
smaller, this increase in wiring requires tighter and more precise spacing of
the wiring and has led to an increase in the layers of IC devices.
According to the Semiconductor Industry Association's National Technology
Roadmap for Semiconductors (1998 and 1999 Editions), the trends toward increased
density and miniaturization of IC devices are expected to continue. While the
number of layers varies by IC device type, an advanced logic device built with
today's common 0.25 micron feature size has approximately seven insulating and
six wiring layers and a typical memory device built with the same feature size
has approximately three insulating and two wiring layers. By 2001, the
Semiconductor Industry Association predicts that advanced IC devices will be
manufactured with a 0.15 micron feature size and that advanced logic devices
will have approximately eight insulating and seven wiring layers and advanced
memory devices will have approximately four insulating and three wiring layers.
CMP is currently used to polish both the insulating layers and the tungsten
plugs in IC devices in separate steps. As a result, even though CMP is not
currently used to polish the wiring layers, the number of CMP steps used to
produce an IC device is typically at least equal to the total number of
insulating and wiring layers in the device. While CMP is currently used more in
the manufacture of logic devices than memory devices, we believe that the use of
CMP in the manufacture of memory devices will increase in the future as the
feature size and spacing of these devices decreases and the number of layers in
the device increases.
The increased density and miniaturization of IC devices has also resulted
in an increased emphasis on reduction of defects and residue remaining after the
CMP process. A defect is any imperfection on a layer of an IC device that causes
a short circuit or other problem with the performance of the device. Residue
from the CMP process consists of particle and chemical residue left on the layer
surface as a result of the CMP process. The likelihood that a defect or residue
of a given size will negatively effect the performance of an IC device increases
as the density and miniaturization of the device increase. IC device
manufacturers are requiring that the number of defects per given area decline
and that the residues from the CMP process be reduced.
CHEMICAL MECHANICAL PLANARIZATION
The CMP process involves both chemical reactions and physical means to
planarize the insulating layers of an IC device that are built upon a silicon
wafer and the conductive tungsten plugs that go through the insulating layers
and connect the multiple wiring layers of IC devices. The wafer is typically
held on a rotating carrier which is spun at high speeds and pressed against a
rotating, polishing table. The portion of the table that comes in contact with
the wafer is covered by a textured, polishing pad. A CMP slurry is continuously
applied to the polishing pad during the CMP process to facilitate and enhance
the polishing process. CMP slurries are liquid compounds composed of high purity
deionized water, chemical additives and abrasive agents that chemically interact
with the surface material of the IC device at an atomic level.
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The following diagram demonstrates the CMP process as applied to the
insulating layers of an IC device:
[CMP OF OXIDE INSULATING LAYER GRAPHIC]
The following diagram demonstrates the CMP process as applied to the
conductive tungsten plugs of an IC device:
[CMP OF OXIDE TUNGSTEN PLUGS GRAPHIC]
BENEFITS OF CMP
CMP provides IC device manufacturers with a number of advantages. CMP
enables IC device manufacturers to produce smaller IC devices with greater
density, both of which improve the performance of the device. As IC devices
shrink and become more dense, they require smaller feature sizes and tighter
spacing between the wiring of the device. If the surface is not level, the
smaller feature size and tighter spacing make it more difficult for the
photolithography equipment to focus accurately and create the desired wiring
pattern. In addition, because today's smaller, denser IC devices have more
layers, any uneveness of a layer at or near the bottom of an IC device will get
magnified in the additional layers that are added to the device. Defects caused
by problems in the photolithography process or uneveness in the layers can lead
to:
- - short circuits;
- - reduced performance; and
- - at worst, failure of the IC device.
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By using CMP, IC device manufacturers can eliminate or minimize these problems.
By enabling IC device manufacturers to make smaller IC devices, CMP allows
them to increase their throughput, or the number of IC devices that they can
manufacture in a given time period. CMP also helps reduce the number of
defective or substandard IC devices produced, which increases the device yield.
Improvements in throughput and yield reduce an IC device manufacturer's total
production costs. Manufacturers can achieve further improvements in throughput
and yield through improvements in the CMP process that reduce defectivity rates
and decrease the amount of time required for the polishing process.
CMP SLURRIES
The characteristics that make an effective CMP slurry include:
- - high polishing rates, which increase productivity and throughput;
- - high selectivity, which means enhancing the polishing of specific materials
while inhibiting polishing of other materials;
- - uniform polishing of different surface materials at the same time, which
avoids problems such as dishing and erosion;
- - low levels of chemical and physical impurities, which reduce defects and
residues on the polished surface that can adversely affect IC device
performance; and
- - colloidal stability, which means the abrasive particles within the slurry do
not settle, which is important for uniform polishing with minimum defects.
Most of the foregoing qualities of CMP slurries affect and enhance not only
the performance of the IC devices but can also positively impact the cost of
ownership of the CMP process. Cost of ownership is a calculation by which IC
device manufacturers evaluate the benefits and costs of each production step by
analyzing the impact of that step on throughput and yield and the costs of the
production inputs of that step. This calculation allows IC device manufacturers
to compare competing production processes and inputs. An input that improves
throughput and yield may reduce the cost of ownership even though it costs more.
Prior to introducing a new or different CMP slurry into its manufacturing
process, an IC device manufacturer generally requires that the slurry be
qualified at each of its plants through a series of tests and evaluations
intended to ensure that the slurry will function properly in the manufacturing
process and to optimize the slurry's application. These tests may require
changes to the CMP process, the CMP slurry and/or the CMP polishing pad. While
this qualification process varies depending on numerous factors, it is not
unusual for this process to be very expensive and take six months or more to
complete. IC device manufacturers must take the cost, time delay and impact on
production into account when they consider switching to a new CMP slurry.
INDUSTRY TRENDS
The rapid growth of the CMP slurry market has been driven in large part by
the significant growth and technological advances the semiconductor industry has
experienced over the past decade. IC devices are critical components in an
increasingly wide variety of products and applications, including computers,
data processing, communications, telecommunications, the Internet, automobiles
and consumer and industrial electronics. As the performance of IC devices has
increased and their size and cost have decreased, the use of IC devices in these
applications has grown significantly. According to industry sources, the
worldwide semiconductor market as measured by total sales grew at an average
annual compound rate of 11% in the period from 1988 through 1998. Dataquest and
other industry sources project continued growth at similar rates in the future.
The rapid growth in the semiconductor industry, increasing demand for
smaller, higher performance and more complex IC devices and pressure on IC
device manufacturers to reduce their costs have led to increased use of CMP and
consumption of CMP slurries and polishing pads. We believe that worldwide
revenues from the sale of
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CMP slurries to IC device manufacturers grew to approximately $120 million in
1999. Industry surveys project that annual worldwide revenues in this market
will grow to between approximately $300 and $400 million by 2003. This projected
growth assumes increases in the number of IC devices produced, the percentage of
IC devices that are produced using CMP and the number of polishing steps used to
produce each device.
Although some sectors of the semiconductor industry have been highly
cyclical, sales of CMP slurries and polishing pads have not been adversely
affected by these trends. We believe this is because sales of CMP slurries and
polishing pads are driven primarily by the number of IC devices sold, which has
been much less cyclical than the prices of IC devices. In addition, we believe
that IC manufacturers have continued to increase their use of CMP because the
CMP process represents only a small percentage of the total production cost of
an IC device and is very important to the continued improvement of IC device
performance.
OTHER APPLICATIONS OF CMP IN THE
IC DEVICE MANUFACTURING PROCESS
CMP is primarily used today for polishing the insulating layers and
tungsten plugs in IC devices. However, we believe there are a number of other
applications for CMP in the IC device manufacturing process. We have undertaken
research, developed and successfully tested slurries for two applications that
we expect to be able to commercialize in the next three years. First, we have
developed and successfully tested CMP slurries for polishing copper because we
believe copper will increasingly be used in the future for both wiring and
conductive plugs because it conducts electricity better than aluminum and
tungsten. However, there are significant technological challenges and operating
issues that must be addressed before IC device manufacturers switch to copper
from aluminum and tungsten. To date, only a very limited number of IC device
manufacturers have switched to copper and their production using copper is very
limited.
Second, we have developed and successfully tested CMP slurries to planarize
the polysilicon material often used to build the electronic components on IC
devices. As the number of these electronic components per IC device increases,
we believe that the use of polysilicon CMP will increase.
We have also successfully tested and commenced limited commercial sales of
CMP slurries for use in connection with an IC device manufacturing process known
as shallow trench isolation, which is currently being used by some of the
leading IC device manufacturers. Shallow trench isolation is a relatively new
method of isolating the electronic components built on silicon wafers of an IC
device to prevent short circuits and other electrical interference. Shallow
trench isolation uses CMP before the first insulating layer is put down on the
wafer. Isolation methods used prior to shallow trench isolation did not use CMP.
By using CMP in conjunction with shallow trench isolation, IC device
manufacturers can achieve greater miniaturization and density of their IC
devices.
STRATEGY
Our objective is to maximize our profitability and stockholder value by
maintaining and leveraging our leading position in the CMP slurry market. Our
proven track record increases the propensity for IC device manufacturers to work
with us in the early stages of product development for their next generation IC
devices. In addition, IC device manufacturers would likely incur significant
evaluation and qualification costs if they switch to a new CMP slurry.
We will pursue the following strategies to achieve our objective:
REMAIN THE TECHNOLOGY LEADER IN CMP SLURRIES
We believe that technology is key to success in the CMP slurry market and
we plan to continue to devote significant resources to research and development.
We need to keep pace with the rapid technological advances in the semiconductor
industry so we can continue to deliver products that
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meet our customers' evolving needs. We intend to use our advanced research and
development, polishing and metrology capabilities to:
- - advance our understanding of our customers' technology, processes, and
performance requirements for qualified products;
- - further improve the chemical and mechanical qualities of our CMP products; and
- - demonstrate and deliver advanced CMP solutions to the semiconductor industry.
BUILD AND MAINTAIN CUSTOMER INTIMACY
We believe that building close relationships with our customers is another
key to success in the CMP slurry market. We work closely with our customers to
research and develop new and better CMP slurries, to integrate our slurries into
their manufacturing processes and to assist them with supply, warehousing,
packaging and inventory management. We plan to continue to devote significant
resources to enhancing our close customer relationships.
EXPAND GLOBALLY
We believe that having production facilities and personnel and other
resources in strategic locations around the world is key to the success of our
business, particularly in light of increased IC device manufacturing in Asia.
Accordingly, we have established a global presence by opening production
facilities in Barry, Wales and Geino, Japan. We also have assembled a team of
account managers and independent distributors strategically located in Europe,
Taiwan, Singapore, Japan and Korea and technical support and sales personnel
throughout the United States and in Europe and Asia. We intend to expand our
production capacity, technical support and sales in many of the locations around
the world where IC device production is concentrated.
ATTRACT AND RETAIN TOP QUALITY PERSONNEL
We have assembled a highly skilled and dedicated workforce that includes a
wide range of scientists and applications specialists, many of whom have
significant experience in the semiconductor industry. We plan to continue to
attract and retain experienced personnel committed to providing high performance
products and strong customer and applications support.
MAINTAIN TOP QUALITY PRODUCTS AND SUPPLY
Our customers demand consistent high quality products and a reliable source
of supply. We will continually advance our strict quality controls to improve
the uniformity and consistency of performance of our CMP products. The capacity
and location of our production facilities throughout the United States and in
Europe and Asia allow us to provide a reliable supply chain to meet our
customers' CMP slurry requirements in a consistent, timely manner.
EXPAND INTO NEW APPLICATIONS AND PRODUCTS
We intend to leverage our CMP experience and technology into new
applications and products. Starting from our core CMP slurries designed for
polishing the insulating layers of IC devices, we have developed and introduced
new slurries for CMP polishing of the tungsten plugs currently used to connect
the wiring between multiple layers of IC devices and for CMP polishing of the
magnetic heads and the coating on hard disks in hard disk drives. We have also
developed CMP slurries for polishing the aluminum and copper wiring layers of IC
devices. Additionally, we are using our knowledge of CMP materials to expand
into the production of CMP polishing pads so that we can provide our customers
with a broader range of applications and materials used in the CMP process.
PRODUCTS
CMP SLURRIES FOR IC DEVICES
We produce CMP slurries of various formulations for polishing a wide
variety of materials. We have developed new, improved generations of each of our
slurries as well as new slurries to keep pace with our customers' evolving
needs. We currently produce more than ten slurries for polishing the oxide
insulating layers of IC devices, which is the
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most common use of CMP in the IC device manufacturing process. We have
introduced new generations of oxide slurries that reduce both defectivity in IC
devices and the required polishing time. While our oxide CMP slurries are also
used to polish poly-silicon material, we have developed a CMP slurry
specifically engineered to polish this material which offers improved
selectivity to poly-silicon and fine poly-silicon surface finish.
We also manufacture more than seven slurry products for polishing tungsten.
As with our oxide slurries, we have introduced new generations of slurries for
polishing tungsten that offer improvements in polishing performance. These
improvements include faster polishing rates, greater polishing uniformity and
reduced defectivity.
The following table shows our primary products and the surfaces polished,
primary features and end uses:
<TABLE>
<CAPTION>
PRODUCT SURFACE POLISHED PRIMARY FEATURES END USES
<S> <C> <C> <C>
SC112 Oxide Original formulation IC devices
SC1 Oxide Concentrate form of SC112 IC devices
Semi-Sperse(R)12 Oxide High polishing rate IC devices
Semi-Sperse(R)25 Oxide High polishing rate IC devices
concentrate
Semi-Sperse(R)AM100 Oxide High purity IC devices
Semi-Sperse(R)AM100C Oxide High purity IC devices
Semi-Sperse(R)D7000 Oxide Low defectivity IC devices
Semi-Sperse(R)P1000 Polysilicon High selectivity IC devices
Semi-Sperse(R)FE400* Tungsten Low erosion IC devices
Semi-Sperse(R)WA400* Tungsten Low erosion IC devices
Semi-Sperse(R)W2000 Tungsten High performance IC devices
Semi-Sperse(R)W2585 Tungsten Low dishing, erosion IC devices
Lustra(TM)2090 Coating on hard disks Low defectivity Hard disk drives
</TABLE>
- ---------------
* These two products are sold together as a package.
CMP SLURRIES FOR HARD DISK DRIVES
In 1998 we introduced CMP slurries for CMP polishing of the magnetic heads
and the coating on hard disks in hard disk drives. We believe this CMP
application can significantly improve the surface finish of these coatings,
resulting in greater storage capacity of the substrates. We also believe that
this CMP application will improve the speed and reliability of information
exchange between the hard disks and the magnetic heads in hard disk drives. In
addition, we believe that, as with IC device manufacturers, CMP can also improve
the production efficiency of manufacturers of hard disk drives by helping them
increase their throughput and yield.
We developed our CMP slurries for hard disk drives by leveraging our core
slurry technology and manufacturing capacity and hiring personnel directly from
the industry who understand the needs of hard disk drive manufacturers. We also
established a dedicated research and development team and an applications
support team who employ a process solution approach similar to what we use for
our other slurry products. We believe that these markets offer significant
potential and that our products in this area offer superior performance over
currently used materials. We began commercial sale of these products in 1999. We
have generated more than $1.5 million of sales from these products during 1999.
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POLISHING PADS
CMP polishing pads are consumable materials used in the CMP process that
work in conjunction with the CMP slurry to facilitate the polishing process.
There are two principal types of CMP polishing pads used with CMP slurries:
- - a round pad that is designed to be affixed to a platform which moves in a
rotary or orbital motion; and
- - a developing technology in which a belt, roll or web polishing pad is affixed
to a platform that moves in a linear motion.
Both types of polishing pads are consumed during the CMP process as their
surface becomes worn by the polishing action.
The CMP polishing pad market is currently led by one principal supplier,
Rodel, which we believe has an approximately 90% share of the CMP polishing pad
market. Based on discussions with our customers as well as our own examination
of the CMP polishing pad market, we identified demand for higher quality, more
reliable and consistent polishing pads and the opportunity to jointly market our
CMP slurries and polishing pads to our existing customers.
Our first series of polishing pads, which was introduced in July 1999, is
designed for tungsten applications. In early 2000, our tungsten pad was
qualified by a major semiconductor manufacturer's process and we made our first
commercial sales of CMP polishing pads to this customer. We expect to introduce
an extended line of polishing pads in 2000. We believe that our CMP polishing
pads, which we manufacture using materials supplied by third parties, offer
advantages over currently available CMP polishing pads. These advantages include
higher removal rates, longer life and more uniform polishing. We also believe
that our new pad production technology provides fundamental improvements over
existing manufacturing methods that will result in increased pad consistency and
reliability. We further believe the compatibility of our CMP polishing pads and
slurries will enhance our ability to jointly market these products to our
existing and future customers.
We have had limited experience in developing and marketing polishing pads,
however. The development and production of polishing pads involve technologies
and production processes that are new to us. In addition, our polishing pads are
based on new pad production technology. We or the suppliers of the raw materials
that we use to make our polishing pads may not be able to solve any
technological or production problems that we or they may encounter. In addition,
if we or these suppliers are unable to keep pace with technological or other
developments in the design and production of polishing pads, we will probably
not be competitive in the polishing pad market. For these reasons, the expansion
of our business into this new product area may not be successful.
CUSTOMERS, SALES AND MARKETING
We primarily market our products directly to IC device manufacturers. For
the three months ended December 31, 1999, our five largest customers accounted
for approximately 53% of our revenue, with Intel accounting for approximately
14% of our revenue, Marketech accounting for approximately 15% of our revenue,
and Takasago accounting for approximately 11% of our revenue. For 1999, our five
largest customers accounted for approximately 58% of our revenue, with Intel
accounting for approximately 22% of our revenue, Marketech accounting for
approximately 15% of our revenue, and Takasago accounting for approximately 10%
of our revenue. Marketech and Takasago are distributors. We believe that in the
same year sales of our products to our five largest end user customers accounted
for approximately 45% of our revenue. We currently have a supply contract with
Intel for the supply of CMP slurry products over the three year period beginning
in January 1999 at specified prices.
Our marketing begins with development teams who work closely with our
customers, using our research and development facilities, to design CMP slurry
products tailored to our
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customers' needs. We then employ our applications teams who work with customers
to integrate our slurry products into customers' manufacturing processes.
Finally, we utilize our logistics and sales personnel to ensure reliable supply,
warehousing, packaging and inventory management. Through our interactive
approach, we build close relationships with our customers across a variety of
areas.
We also market our products through independent distributors and other
industry suppliers. We currently utilize independent distributors in Europe,
Taiwan and Singapore, who add to our global presence by complementing our
support personnel already located in those regions. By using our relationships
with other suppliers in the CMP industry, such as suppliers of polishing
equipment, we obtain client leads and recommendations of our products.
The IC device manufacturing industry is currently experiencing significant
growth in Asia. As a result, we have increased our focus on markets in Asia over
the last few years by increasing the number of account managers and applications
and customer support personnel present in this region. By building this regional
infrastructure, we have demonstrated a commitment to the Asian marketplace and
global expansion generally. We intend to make additional concentrated
investments in this region over the next few years.
CABOT AS OUR RAW MATERIALS SUPPLIER
The base ingredients for most of our CMP slurries are fumed metal oxides,
primarily fumed silica, which is an ultra-fine, high purity silica produced by a
flame process, and, to a much lesser extent, fumed alumina. Sales of CMP
slurries represented approximately 97% of our total revenue in 1999. Cabot is
currently our exclusive supplier of fumed metal oxides. Under our new fumed
metal oxide supply agreement with Cabot, which will become effective upon
completion of this offering, Cabot will continue to be our exclusive supplier of
fumed metal oxides, including fumed silica, for our existing slurry products.
Although the agreement does not require us to purchase fumed metal oxides from
Cabot for slurry products that we develop in the future, we expect that Cabot
will be our primary supplier of fumed metal oxides for these products as well.
Over 90% of the fumed metal oxides that we currently purchase from Cabot are
manufactured at its facility in Tuscola, Illinois.
Our agreement with Cabot contains the following terms with respect to fumed
silica:
- - provisions for a fixed annual increase in the price of fumed silica of
approximately 2% of the initial price and additional increases if Cabot's raw
material costs increase;
- - provisions requiring Cabot to supply us with fumed silica in volumes specified
by us;
- - provisions limiting Cabot's obligation to supply us with fumed metal oxides
from each of its Tuscola, Illinois and Barry, Wales facilities to specified
volumes from each facility;
- - provisions requiring us to supply Cabot with quarterly, six-month, annual and
18-month forecasts of our expected fumed silica purchases and limiting Cabot's
obligations to provide us with fumed silica to specified percentages in excess
of these forecasted volumes;
- - provisions that limit the amount we can forecast for any month to an amount no
greater than 20% of the forecasted amount for the previous month;
- - provisions requiring us to purchase at least 90% of the six-month volume
forecast and to pay specified damages to Cabot if we purchase less than that
amount;
- - provisions obligating us to pay all reasonable costs incurred by Cabot to
provide quality control testing at levels greater than Cabot provides to its
other customers; and
- - provisions that generally prohibit us from reselling any fumed silica
purchased from Cabot.
We estimate that the aggregate maximum payments we will make to Cabot for
fumed metal oxides under our new agreement with Cabot, taking into account the
approximately 2% annual price increases but not possible
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price increases for increases in Cabot's raw material costs, will be
approximately $18.7 million for the remaining six months in 2000, $50.4 million
in 2001 and $64.7 million in 2002. These estimates are based on a number of
assumptions, including assumptions regarding the growth of our business, which
may turn out to be wrong. Our actual aggregate payments to Cabot under our new
agreement with Cabot for these periods may be more or less than these estimates.
It is difficult to assess whether the prices we will pay to Cabot for fumed
metal oxides under our new agreement with Cabot are the same as or different
than the prices we could have obtained in arm's-length negotiations with an
unaffiliated third party in light of the long-term nature of the contract, the
volumes provided for under the agreement and our particular quality
requirements.
Under the new agreement, Cabot will also supply us with fumed alumina on
terms generally similar to those described above, except that the forecast
requirements do not apply to fumed alumina. The new agreement prohibits Cabot
from selling fumed metal oxides to third parties for use in CMP applications.
Under the new agreement, Cabot warrants that its products will meet our
agreed upon product specifications. We have no right to any consequential,
special or incidental damages for breach of that warranty or any other provision
of the agreement. Cabot will be obligated to replace noncompliant products with
products that meet the agreed upon specifications. The new agreement also
provides that any change to product specifications for fumed metal oxides must
be by mutual agreement. Any increased costs due to product specification changes
will be paid by us. If we require product specification changes that Cabot
cannot meet, we will have the right to purchase products meeting those
specifications from other suppliers.
Historically, we did not provide detailed product specifications to Cabot
and Cabot permitted us to return some products even if they met our
specifications. Under our new agreement, we will provide detailed specifications
to Cabot and will have no contractual right to return products that meet these
specifications.
The agreement has an initial term that expires in June 2005. Thereafter,
the agreement may be terminated by either party on June 30 or December 31 in any
year with at least 18 months prior written notice.
It may be difficult to secure alternative sources of fumed metal oxides in
the event Cabot encounters supply or production problems or terminates or
breaches its agreement with us. A significant reduction in the amount of fumed
metal oxides supplied by Cabot, a problem with the quality of those fumed metal
oxides or a prolonged interruption in their supply by Cabot could interfere with
our ability to produce our CMP slurries in the quantities and of the quality
required by our customers and in accordance with their delivery schedules.
DISPERSIONS SERVICES AGREEMENT WITH DAVIES
Cabot has assigned to us a dispersions services agreement with Davies
Imperial Coatings, Inc. pursuant to which Davies produces slurries for us. Under
this agreement, we provide raw materials, primarily fumed silica, to Davies and
it performs dispersion services. The price for these services is set at a
negotiated price, subject to increases. We have agreed to purchase minimum
amounts of services for each year of the agreement. If Davies fails to supply us
with required dispersions services, we have the right to provide these services
for ourselves or purchase them from third parties. The agreement provides for
renegotiation of the price paid for dispersions services on each two-year
anniversary of the agreement in order to reflect changes in Davies'
manufacturing costs. We have also agreed to invest during each year $150,000 in
capital improvements, capacity expansions and other expenditures to maintain
capacity at the Davies dispersions facility in Hammond, Indiana. We own most of
the dispersions equipment at the Davies facility.
Under the agreement, we must give Davies the opportunity to bid to provide
dispersion services for some of our products. Davies and its controlling
stockholders agree
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that, during the term of the agreement and for a period after the termination of
the agreement, they will not provide, nor assist any other person or entity in
providing, metal oxide dispersion services to any of our competitors. Under some
circumstances, we must pay these individuals noncompetition payments on the date
of the termination of the agreement and on the first anniversary of the
termination.
The agreement has an initial term that expires in October, 2004, and is
automatically renewed for one-year periods thereafter, unless either party gives
written notice to the other of its intention to terminate the agreement at least
90 days prior to the expiration of the term.
DISPERSIONS SERVICES
AGREEMENT WITH CABOT
Dispersions of fumed metal oxides are used in a variety of applications in
addition to CMP. These applications include paper applications and coatings such
as paints. In the past, Cabot has developed and sold fumed metal oxides
dispersions for these non-CMP applications, and intends to continue this
business after this offering and the expected spin-off. We performed dispersion
services for Cabot prior to our incorporation and Cabot intends to continue to
rely on us for these services in the future. Accordingly, we have entered into a
dispersions services agreement with Cabot, which will become effective upon
completion of this offering, under which we will continue to offer fumed metal
oxide dispersions services to Cabot, including the manufacturing, packaging and
testing of dispersions. Less than 10% of our current dispersions capacity will
be devoted to Cabot. The agreement provides that some dispersion services may be
subcontracted by us to Davies but we will remain liable for these services. The
dispersions services that we will provide to Cabot must be performed at our
facilities in Aurora, Illinois and Barry, Wales or at the Davies facility. Under
the agreement, Cabot will supply us with the fumed metal oxide particles
necessary for the manufacture of the dispersions.
We will charge Cabot for dispersion services that we perform under this
agreement at our dispersion manufacturing cost, as defined in the agreement,
plus 25% of this cost in the case of dispersion services we perform at our
dispersions facilities in Aurora, Illinois and Barry, Wales and 10% of this cost
in the case of dispersion services that we subcontract to Davies and which are
performed by Davies at its dispersions facility in Hammond, Indiana.
Our agreement with Cabot also contains the following terms:
- - provisions limiting our obligation to provide Cabot with dispersions to stated
maximum annual volumes for each of the three facilities;
- - provisions requiring Cabot to supply us with quarterly, six-month, annual and
18-month forecasts of their expected dispersions purchases and limiting our
obligation to provide Cabot with dispersions to specified percentages in
excess of these forecasted volumes;
- - provisions that provide that if we develop any intellectual property in the
course of performing dispersion services for Cabot, that intellectual property
will be jointly owned by us and Cabot;
- - provisions that provide that if we develop any intellectual property outside
of performing dispersion services for Cabot and use that intellectual property
in performing dispersion services for Cabot, then we are obligated to license
Cabot that intellectual property in exchange for a royalty payment;
- - provisions that generally prohibit Cabot from engaging a third party to
provide dispersion services unless we are unable to supply the requested or
agreed upon services, although Cabot retains the right to manufacture fumed
metal oxide dispersions itself or have Davies provide these services; and
- - provisions that generally prohibit us from performing dispersion services for
third parties whose products compete with any Cabot product or from selling
dispersion products in applications, other than CMP, that compete with any
Cabot product.
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The agreement has an initial term that expires in June, 2005. Thereafter,
the agreement may be terminated by either party on June 30 or December 31 in any
year with at least 18 months prior written notice. If Cabot terminates the
agreement, Cabot cannot purchase fumed metal oxides dispersion services from one
of our competitors. If we terminate the agreement, Cabot may purchase fumed
metal oxide dispersions services from any party without restriction.
NEGOTIATIONS WITH CABOT
REGARDING FUMED ALUMINA SUPPLY ARRANGEMENT
We have experienced increased demand for one of our CMP slurries for
polishing tungsten plugs and expect to experience in the future increased demand
for our CMP slurries for polishing copper wiring and conductive plugs. Fumed
alumina is an essential raw material for these slurries. We currently purchase
our fumed alumina from Cabot and expect to continue to do so after this offering
and the spin-off. In order to meet our anticipated future needs for fumed
alumina, Cabot needs to construct a new facility for the manufacture of fumed
alumina. We are currently in negotiations with Cabot regarding changes to our
fumed alumina supply arrangements. We have not reached final agreement with
Cabot on any of the terms of a new arrangement. Based on our negotiations to
date with Cabot, however, we expect that the price Cabot will charge us for
fumed alumina will be based on its fixed and variable costs for producing the
fumed alumina plus its capital costs for constructing the new facility plus an
agreed upon percentage of those costs. The payments in respect of the capital
costs will be amortized over a ten year period. Cabot estimates that the new
facility will cost between $4.5 million and $6.0 million. In addition, based on
our negotiations with Cabot, we would expect that the new plant would be
dedicated to satisfying our fumed alumina requirements and that we would have a
right of first option on all production and capacity at the plant.
RESEARCH AND DEVELOPMENT
We believe our future competitive position depends in part on our ability
to develop CMP applications tailored to our customers' needs. To this end, we
have established a technology center at our Aurora facility to provide
applications and product support to customers and to develop new products to
meet the needs of the semiconductor industry. The technology center is staffed
by a team that includes experts from the semiconductor industry and scientists
from key disciplines required for the development of high-performance CMP
products. The technology center is equipped with an advanced polishing and
metrology lab in a Class 10 clean room, a polishing lab in a Class 1000 clean
room, laboratories for product development and dispersion technology, and a
dispersions pilot plant. In our product development and dispersion technology
laboratory, our skilled technical personnel conduct kinetic studies of the
chemical reactions on the surface of the wafer. These kinetic data allow us to
adjust the composition of our slurries to avoid, among other things, non-uniform
polishing patterns. Understanding the chemical processes on the surface of the
polished wafer allows us to compose slurries specifically tailored to interact
with one element and to slow or essentially stop planarization as soon as this
particular element has been polished. We have also assembled dedicated
development teams that work closely with customers to identify their specific
technology and manufacturing challenges and to translate these challenges into
viable CMP process solutions.
We have historically purchased most of the equipment we use for research
and development. In September 1998, we entered into an agreement with a customer
under which we lease some CMP equipment in exchange for CMP slurries. This
equipment includes five IC polishing machines, one hard disk drive polishing
machine and various metrology equipment. The cost of this equipment can be
significant and we need to upgrade our equipment periodically to keep pace with
equipment developments in the semiconductor industry.
We expensed approximately $14.6 million for research and development in
1999. Investments in research and development equip-
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<PAGE> 50
ment are capitalized over their useful life and depreciated.
INTELLECTUAL PROPERTY
Our intellectual property is important to our success and ability to
compete. We currently have ten U.S. patents and 31 pending U.S. patent
applications covering CMP products and processes. In most cases we file
counterpart foreign patent applications. Many of these patents are important to
our continued development of new and innovative CMP products. 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
have a material adverse effect on our business, results of operations and
financial condition.
Significant litigation regarding intellectual property rights exists in our
industry. Cabot is currently involved in two separate legal actions brought
against it by Rodel alleging that Cabot is infringing some of Rodel's patents.
Although Cabot is the only named defendant in these lawsuits, we will agree to
indemnify Cabot for any and all losses and expenses arising out of this
litigation. For a further discussion of this litigation, see "-- Legal
Proceedings".
We cannot be certain that other third parties will not make a claim of
infringement against us. Any claims, even those without merit, could be time
consuming to defend, result in costly litigation and/or require us to enter into
royalty or licensing agreements. These royalty or licensing agreements, if
required, may not be available to us on acceptable terms or at all. A successful
claim of infringement against us could adversely affect our business, results of
operations and financial conditions. See "-- Legal Proceedings".
In addition, we have obtained a patent license from a third party covering
a polishing process used in the manufacturing of non-IC devices. Although we
expect to independently develop a new technology which will eliminate our need
for this licensed technology, there is no assurance that we will be successful
in doing so or that we will be able to continue to license this technology
beyond the eight years currently provided for in our license agreement.
COMPETITION
We are aware of only four other manufacturers with significant commercial
sales of CMP slurries for IC devices. We expect the competition to continue to
intensify. These manufacturers include Rodel, Fujimi, ChemFirst and Clariant. We
are aware of only three manufacturers with significant commercial sales of CMP
slurries for polishing the magnetic heads and the coating on the hard disks in
hard disk drives. These manufacturers include Rodel, Fujimi and Praxair. We may
also face competition from:
- - other companies that develop CMP products;
- - customers that currently have, or that may develop, in-house capacity to
produce their own CMP products; and
- - the development of polishing pads containing abrasives or other significant
changes in technology.
We compete primarily on the basis of our product design, level of service
and, to a lesser extent, price. We believe that we presently compete favorably
with respect to each of these factors. CMP products are evolving, however, and
we cannot give you any assurance that we will compete successfully in the
future. For a discussion of our market share of CMP slurries sold to IC device
manufacturers worldwide, see "-- Our Company".
PROPERTIES
Our principal U.S. facilities consist of:
- - our global headquarters in Aurora, Illinois, comprising approximately 65,000
square feet; and
- - a commercial dispersions plant and technical center in Aurora, Illinois,
comprising approximately 44,000 square feet.
49
<PAGE> 51
We are in the process of constructing an additional manufacturing and
distribution center in Aurora, Illinois. The initial phase of this construction
is planned to provide a facility of approximately 170,000 square feet that is
scheduled to be in operation by our third fiscal quarter of 2000.
We also have a commercial dispersions plant in Geino, Japan, comprising
approximately 40,000 square feet. In addition, we will lease or sublease from
Cabot the land and building at Cabot's dispersions facility in Barry, Wales. We
are in the process of constructing a distribution center in Ansung, South Korea.
This approximately 16,000 square foot facility is scheduled for completion by
the end of 2000.
We believe that our current facilities are suitable and adequate for their
intended purposes and, together with our facilities under construction, provide
us with sufficient capacity to meet our current and expected demand in the
foreseeable future. However, if we were to encounter delays in the construction
of our new facilities, we may face capacity constraints.
ENVIRONMENTAL MATTERS
Our facilities are subject to various environmental laws and regulations,
including those relating to air emissions, wastewater discharges, the handling
and disposal of solid and hazardous wastes, and occupational safety and health.
We believe that our facilities are in substantial compliance with applicable
environmental laws and regulations. Our facilities have incurred, and will
continue to incur, capital and operating expenditures and other costs in
complying with these laws and regulations in both the United States and abroad.
However, we do not anticipate that the future costs of environmental compliance
will have a material adverse effect on our business, financial condition or
results of operations.
EMPLOYEES
As of April 3, 2000, we employed a total of 281 individuals, including 24
in sales and marketing, 80 in research and development, 31 in administration and
146 in operations. None of our employees are covered by collective bargaining
agreements. We have not experienced any work stoppages and consider our
relations with our employees to be satisfactory.
LEGAL PROCEEDINGS
In June 1998, one of our major competitors, Rodel Inc., filed a lawsuit
against Cabot in the United States District Court for the District of Delaware
entitled Rodel, Inc. v. Cabot Corporation (Civil Action No. 98-352). In this
lawsuit, Rodel has requested a jury trial and is seeking a permanent injunction
and an award of compensatory, punitive, and other damages relating to
allegations that Cabot is infringing United States Patent No. 4,959,113
(entitled "Method and Composition for Polishing Metal Surfaces"), which is owned
by an affiliate of Rodel. We refer to this patent as the Roberts patent and this
lawsuit as the Roberts lawsuit. Cabot filed an answer and counterclaim seeking
dismissal of the Roberts lawsuit with prejudice, a judgment that Cabot is not
infringing the Roberts patent and/or that the Roberts patent is invalid, and
other relief. Cabot subsequently filed a motion for a summary judgment that the
Rodel patent is invalid because all of the claims contained in the patent were
not sufficiently different under applicable patent law from subject matter
contained in previously granted patents, specifically United States Patents Nos.
4,705,566, 4,956,015 and 4,929,257, each of which is owned by a third party not
affiliated with Rodel or us. This motion was denied on September 30, 1999 based
on the court's finding that there were genuine issues of material fact to be
determined at trial. Although the Roberts lawsuit is presently in the discovery
stage and trial is scheduled to begin in November 2000, the trial date has not
yet been scheduled. After the ruling on the summary judgment motion, Rodel filed
a request for reexamination of the Roberts patent with the United States Patent
and Trademark Office, which was granted on November 12, 1999.
In April 1999, Rodel commenced a second lawsuit against Cabot in the United
States District Court for the District of Delaware entitled Rodel, Inc. v. Cabot
Corporation
50
<PAGE> 52
(Civil Action No. 99-256). In this lawsuit, Rodel has requested a jury trial and
is seeking a permanent injunction and an award of compensatory, punitive, and
other damages relating to allegations that Cabot is infringing two other patents
owned by an affiliate of Rodel. These two patents are United States Patent No.
5,391,258 (entitled "Compositions and Methods for Polishing") and United States
Patent No. 5,476,606 (entitled "Compositions and Methods for Polishing"). We
refer to these patents as the Brancaleoni patents and this lawsuit as the
Brancaleoni lawsuit. Cabot has filed an answer and counterclaim to the complaint
seeking dismissal of the complaint with prejudice, a judgment that Cabot is not
infringing the Brancaleoni patents and/or that the Brancaleoni patents are
invalid, and other relief. The Brancaleoni lawsuit is presently in the discovery
stage which is currently scheduled to be completed by February 25, 2000. Trial
is presently scheduled to commence on December 4, 2000. The parties have jointly
requested that the court extend these dates.
In the Roberts lawsuit, the only product that Rodel to date has alleged
infringes the Roberts patent is our W2000 slurry, which is used to polish
tungsten and which currently accounts for a significant portion of our total
revenue. In the Brancaleoni lawsuit, Rodel has not alleged that any specific
product infringes the Brancaleoni patents; instead, Rodel alleges that our
United States Patent No. 5,858,813 (entitled "Chemical Mechanical Polishing
Slurry for Metal Layers and Films" and which relates to a CMP polishing slurry
for metal surfaces including, among other things, aluminum and copper) is
evidence that Cabot is infringing the Brancaleoni patents through the
manufacture and sales of unspecified products. At this stage, we cannot predict
whether or to what extent Rodel will make specific infringement claims with
respect to any of our products other than W2000 in these or any future
proceedings. It is possible that Rodel will claim that many of our products
infringe its patents.
Although Cabot is the only named defendant in these lawsuits, we have
agreed to indemnify Cabot for any and all losses and expenses arising out of
this litigation as well as any other litigation arising out of our business.
While we believe there are meritorious defenses to the pending actions and
intend to defend them vigorously, these defenses may not be successful. If Rodel
wins either of these cases, we may have to pay damages and, in the future, may
be prohibited from producing any products found to infringe or required to pay
Rodel royalty and licensing fees with respect to sales of those products.
In addition, we may be subject to future infringement claims by Rodel or
others with respect to our products and processes. Such claims, even if they are
without merit, could be expensive and time consuming to defend and if we were to
lose any future infringement claims we could be subject to injunctions, damages
and/or royalty or licensing agreements. Royalty or licensing agreements, if
required as a result of any pending or future claims, may not be available to
use on acceptable terms or at all. Successful claims of infringement against us
could adversely affect our business, financial condition and results of
operations.
Moreover, we have agreed to indemnify Intel, one of our major customers, up
to a maximum amount of $40.0 million, for any losses this customer may incur as
a result of intellectual property claims brought against it arising out of its
purchase or use of our products. Consequently, we may be obligated to indemnify
this customer for any losses it incurs as a result of these claims even though
we are not a party to these claims.
51
<PAGE> 53
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table contains information regarding our executive officers
and directors.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
------------------------------------- --- -----------------------------------------------
<S> <C> <C>
Kennett F. Burnes 56 Chairman of the Board
Samuel W. Bodman 61 Director
William P. Noglows 41 Director
Juan Enriquez-Cabot 40 Director designee
John P. Frazee, Jr. 55 Director designee
Steven V. Wilkinson 58 Director designee
Ronald L. Skates 58 Director designee
Matthew Neville 46 President and Chief Executive Officer, Director
William C. McCarthy 56 Vice President, Chief Financial Officer,
Treasurer and Secretary
Daniel J. Pike 36 Vice President of Operations
J. Michael Jenkins 46 Vice President of Human Resources
Bruce M. Zwicker 47 Vice President of Sales and Marketing
Chris C. Yu 41 Technology and marketing specialist
</TABLE>
------------------------
KENNETT F. BURNES was elected Chairman of the Board of our company in
December 1999. He has served as Cabot's Chief Operating Officer since 1996 and
Cabot's President since 1995. He was elected a director of Cabot in 1992. Before
joining Cabot in 1987, Mr. Burnes was a partner at Choate, Hall & Stewart, a
Boston-based law firm, where he practiced corporate and business law for nearly
20 years. He received both his bachelor and law degrees from Harvard University.
SAMUEL W. BODMAN was elected a director of our company in December 1999. He
has served as Cabot's Chairman and Chief Executive Officer since 1988. Before
joining Cabot, Mr. Bodman was President, Chief Operating Officer and a director
of FMR Corp., the holding company overseeing all activities of Fidelity
Investments. Mr. Bodman received his Ph.D. in chemical engineering from
Massachusetts Institute of Technology. In addition to serving on Cabot's board,
Mr. Bodman serves on the boards of John Hancock Mutual Life Insurance Company,
Security Capital Group Incorporated, Thermo Electron Corporation and Westvaco
Corporation.
WILLIAM P. NOGLOWS was elected a director of our company in January 2000.
He has served as an Executive Vice President of Cabot since 1998 and serves as
Director of Global Manufacturing and General Manager of Carbon Black. From 1984
to 1998, he held various positions at Cabot, including General Manager of
Cabot's Cab-O-Sil Division and Managing Director of Cabot Australasia. Mr.
Noglows received his BS from Georgia Institute of Technology.
JUAN ENRIQUEZ-CABOT will become a director of our company prior to the
closing of this offering. Since August 1997 Mr. Enriquez-Cabot has been a
researcher at Harvard University's David Rockefeller Center. From August 1996 to
August 1997 he was a senior researcher at Harvard Business School. From June
1996 to August 1997 he was a fellow at Harvard University's Center for
International Affairs. From June 1994 through June 1996 he was a director of
Democracy and Development, a research institution in Mexico City, Mexico. He
received both his bachelor and MBA degrees from Harvard University.
JOHN P. FRAZEE, JR. will become a director of our company prior to the
closing of this offering. Since June 1999 he has served as Chairman and Chief
Executive Officer of Paging Network, Inc., a provider of wireless communications
services. From August 1997 to June 1999 he served as Chairman, Presi-
52
<PAGE> 54
dent and Chief Executive Officer of Paging Network. From September 1993 until
August 1997 Mr. Frazee managed investments as a private investor. From March
1993 until September 1993 he was President and Chief Operating Officer of Sprint
Communications. In addition to serving on our board, Mr. Frazee serves on the
boards of Dean Foods Company, Homestead Village, Inc., Paging Network, Security
Capital Group Incorporated and Vast Wireless Solutions. Mr. Frazee received his
bachelor degree in political science from Randolph-Macon College.
STEVEN V. WILKINSON will become a director of our company prior to the
completion of this offering. He has been retired since September 1998. Prior to
retirement, he worked for Arthur Andersen LLP, where he became a partner in
April 1974. Mr. Wilkinson received his BA in economics from DePauw University
and his MBA from the University of Chicago.
RONALD L. SKATES will become a director of our company prior to the
completion of this offering. He has been a private investor since October 1999.
From 1989 to October 1999, Mr. Skates served as President and Chief Executive
Officer and as a director of Data General Corporation, a computer systems
company. He received both his bachelor and MBA degrees from Harvard University.
Mr. Skates is a director of Cabot Industrial Trust, a public real estate
investment trust.
MATTHEW NEVILLE has served as our President and Chief Executive Officer
since December 1999. He was elected a director of our company in December 1999.
Mr. Neville has served as a Vice President of Cabot since 1997 and as General
Manager of our company since 1996. From 1983 to 1996, Mr. Neville held various
positions at Cabot, including Director of Research and Development for the
Cabot's Cab-O-Sil Division. Mr. Neville received his Ph.D. in chemical
engineering from Massachusetts Institute of Technology. Mr. Neville will resign
as a Vice President of Cabot upon the closing of this offering.
WILLIAM C. MCCARTHY has served as our Vice President, Chief Financial
Officer and Treasurer since December 1999 and as our Secretary since February
2000. Mr. McCarthy has served as Chief Financial Officer since February 1999.
From August 1998 to February 1999, Mr. McCarthy was pursuing personal interests
and was not employed. From February 1976 to August 1998, Mr. McCarthy held
various positions at Texas Instruments, including controller of Texas
Instruments' Corporate Services division. Mr. McCarthy received his BS in
business and his MBA from Texas A&M University.
DANIEL J. PIKE has served as our Vice President of Operations since
December 1999. Mr. Pike served as our Director of Global Operations from August
1996 to December 1999. Mr. Pike worked for FMC Corporation's Pharmaceutical
Division as a marketing manager from December 1993 until August 1996 and as a
financial analyst from June 1992 until December 1993. Mr. Pike received his BS
in chemical engineering from the University of Buffalo and his MBA from Wharton
School of Business of University of Pennsylvania.
J. MICHAEL JENKINS has served as our Vice President of Human Resources
since December 1999. Mr. Jenkins has served as our Director of Human Resources
since May 1999. From August 1984 until May 1999, Mr. Jenkins was employed for 15
years by Gas Chromatography Division of Hewlett-Packard holding various
positions, including Human Resources and Quality Manager. Mr. Jenkins received
his MA in human resources from Lincoln University.
BRUCE M. ZWICKER has served as our Vice President of Sales and Marketing
since December 1999. Mr. Zwicker has served as our Director, Global Business and
Sales from 1997 to December 1999. Since February 1988, Mr. Zwicker has held
various positions with Cabot, including Dispersion Products Line Manager. Prior
to joining Cabot, Mr. Zwicker worked for Unocal Corporation. Mr. Zwicker
received his BS in microbiology from Purdue University.
CHRIS C. YU has served as a technology and marketing specialist since
January 2000. From May 1999 until January 2000, Mr. Yu served as our Director of
Research and Technology. After indicating his desire to
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<PAGE> 55
leave our company in January 2000, Mr. Yu decided to resign from that position
but to remain with our company and focus on product development of CMP slurries
for copper-based applications and technology-based applications for customers.
From April 1998 to May 1999, Mr. Yu served as our Director of Interconnect
Technology. From January 1996 to April 1998, Mr. Yu served as our Program
Manager for Tungsten Technology. From August 1994 to January 1996, Mr. Yu was
employed by Rockwell International as Advanced Process Methods principal
engineer leading the development of planarization technologies. Mr. Yu has also
held various positions with Motorola and Micron Technology. Mr. Yu received his
Ph.D. in physics from Pennsylvania State University.
BOARD OF DIRECTORS
Our board of directors is currently composed of four directors. Prior to
the completion of this offering, we will increase our board of directors to
include four independent directors.
We intend to amend our certificate of incorporation to divide the board of
directors into three classes: Class I, whose terms will expire at the annual
meeting of stockholders to be held in 2001, Class II, whose terms will expire at
the annual meeting of stockholders to be held in 2002, and Class III, whose
terms will expire at the annual meeting of stockholders to be held in 2003.
Messrs. Noglows and Enriquez-Cabot are, or upon their appointment will be, in
Class I. Messrs. Wilkinson, Skates and Burnes are, or upon their appointment
will be, in Class II. Messrs. Bodman, Frazee, and Neville are, or upon their
appointment will be, in Class III. At each annual meeting of stockholders
beginning in 2001, the successors to directors whose terms will then expire will
be elected to serve from the time of election and qualification until the third
annual meeting following election.
In addition, our certificate of incorporation will provide that the
authorized number of directors may be changed only by resolution of the board of
directors. Any additional directorships resulting from an increase in the number
of directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the total number of directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Prior to the completion of this offering, we will establish an audit
committee and a compensation committee consisting of members of our board of
directors. The audit committee will recommend the annual appointment of our
auditors and review with our auditors the scope of audit and non-audit
assignments and related fees, accounting principles we use in financial
reporting, internal auditing procedures and the adequacy of our internal control
procedures. The audit committee will initially have three members, who will be
Messrs. Enriquez-Cabot, Frazee, and Wilkinson. The compensation committee will
review and approve the compensation and benefits for our employees, directors
and consultants, administer our employee benefit plans, authorize and ratify
stock option grants and other incentive arrangements and authorize employment
and related agreements. The compensation committee will initially have three
members, who will be Messrs. Burnes, Frazee and Wilkinson.
COMPENSATION OF DIRECTORS
Directors who are also our employees receive no additional compensation for
their services as directors. Except as set forth below, each of our directors
who is not an employee of ours will receive:
- - upon his original appointment or election as a director, options to purchase
15,000 shares of our common stock which will vest over a three year period;
- - on an annual basis, options to purchase 5,000 shares of our common stock which
will vest over a four year period;
- - a $10,000 annual fee;
- - a $1,000 fee for attendance at each meeting of our board of directors or a
committee of the board; and
- - reimbursement of travel and other out-of-pocket costs incurred in attending
meetings.
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<PAGE> 56
As long as Cabot controls us, any director who is also an employee of Cabot will
not be entitled to the $10,000 annual fee or the $1,000 fee for attendance at
board and committee meetings.
EXECUTIVE OFFICERS
Our board of directors appoints our executive officers. Our executive
officers serve at the discretion of our board of directors.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
In our fiscal year ended September 30, 1999, we did not have a compensation
committee or any other committee serving a similar function. Decisions as to the
compensation of executive officers were made by Cabot.
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
Chief Executive Officer and our four other executive officers who, based on
employment with Cabot, were the most highly compensated for the fiscal year
ended September 30, 1999. All of the information in this table reflects
compensation earned by the listed individuals for services rendered to Cabot. In
connection with this offering, we have established employee benefit plans and
arrangements so that, following this offering, the compensation and employee
benefits of our executive officers and all of our other employees will be
provided primarily by us. See "--Compensation and Employee Benefit Plans" and
"Relationships Between Our Company and Cabot Corporation -- Employee Matters
Agreement".
SUMMARY COMPENSATION TABLE FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
-------------------------------------- RESTRICTED
OTHER ANNUAL STOCK ALL OTHER
NAME AND COMPENSATION AWARD(S) COMPENSATION
PRINCIPAL POSITIONS YEAR SALARY($) BONUS($) ($) ($)(1) ($)(2)
- ------------------- ---- ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Matthew Neville.............. 1999 190,000 100,000 378,000 28,929
President and Chief
Executive Officer
William C. McCarthy.......... 1999 106,250 53,000(3) 82,711(4) 190,350(5) 10,102
Vice President, Chief
Financial Officer,
Treasurer and Secretary
Daniel J. Pike............... 1999 146,250 60,000 170,100 18,453
Vice President of
Operations
Chris C. Yu.................. 1999 162,637 65,000 45,000(6) 344,475(5) 21,078
Former Director of Research
and Technology
Bruce M. Zwicker............. 1999 132,728 48,000 94,500 15,642
Vice President of Sales and
Marketing
</TABLE>
- ---------------
(1) The value of the shares of Cabot restricted stock set forth in the table was
determined by subtracting the amount paid by the named executive officer to
Cabot for the shares from the fair market value of the shares on the date of
grant. The following named executive officers were granted the following
shares of Cabot restricted stock in the fiscal year ended September 30, 1999
under an equity incentive plan of Cabot: Mr. Neville, 20,000 shares; Mr.
McCarthy, 7,500 shares; Mr. Pike, 9,000 shares; Mr. Yu, 15,000 shares; and
Mr. Zwicker, 5,000 shares.
The number of shares and value (calculated at fair market value as of
September 30, 1999 ($23.75 per share), less the amount paid by the named
executive officer for the shares) of all shares of Cabot restricted stock
held by the named executive officers on September 30, 1999 (including the
shares referred to in the column of the Table headed "Restricted Stock
Award(s)"), were as follows:
55
<PAGE> 57
Mr. Neville, 44,000 shares ($589,750); Mr. McCarthy, 5,500 shares
($118,475); Mr. Pike, 15,500 shares ($210,275); Mr. Yu, 14,500 shares
($247,600); and Mr. Zwicker, 11,500 shares ($154,538).
Except for a portion of the shares of Cabot restricted stock granted to Mr.
McCarthy and Mr. Yu (see note 5 below), the restricted stock set forth in
the table vests, in whole, three years from the date of grant. In accordance
with Cabot's long-term incentive compensation program under its equity
incentive plans, each of the named individuals paid to Cabot 30-40% of the
fair market value of the shares of stock listed in this footnote on the date
of grant. Some of the funds for the payment for this restricted stock were
borrowed from Merrill Lynch Bank & Trust Co. by all of the named executive
officers under a loan facility available to all recipients of restricted
stock grants under this program. The recipients (including the named
executive officers) borrowing funds from Merrill Lynch Bank & Trust are
obligated to pay interest on the loans at the prime rate and to repay the
funds borrowed. Shares purchased with borrowed funds must be pledged to
Merrill Lynch Bank & Trust as collateral for the loans when the restrictions
lapse. Cabot also guarantees payment of the loans in the event the
recipients fail to honor their obligations. The loans are full recourse.
Dividends are paid on the shares of restricted stock. In 1999, Cabot ceased
using the loan facility, purchased the outstanding loan balance from Merrill
Lynch Bank & Trust, and commenced to make loans under the program bearing
interest at 6% per annum and otherwise on terms substantially identical to
the bank loans.
(2) The information in the column headed "All Other Compensation" includes (a)
matching contributions to Cabot's tax-qualified savings plan and accruals
under a non-qualified supplemental savings plan, or CRISP, for the fiscal
year ended September 30, 1999 and (b) contributions to Cabot's tax-qualified
employee stock ownership plan and accruals under a supplemental employee
stock ownership plan, or ESOP, for the fiscal year ended September 30, 1999
on behalf of the named executive officers in the following amounts:
<TABLE>
<CAPTION>
NAME CRISP ESOP
---- ----- ----
<S> <C> <C>
Mr. Neville.................... $ 15,763 $13,166
Mr. McCarthy................... $ 5,180 $ 4,337
Mr. Pike....................... $ 11,039 $ 6,723
Mr. Yu......................... $ 11,961 $ 8,288
Mr. Zwicker.................... $ 9,435 $ 5,572
</TABLE>
Cabot provides Mr. Neville (but none of our other named executive officers)
with death benefit protection in the amount of three times his salary,
including $50,000 of group life insurance coverage. No amount has been
included in the column headed "All Other Compensation" for this benefit
because Cabot accrued no amount for the benefit and the benefit, other than
the group life insurance (which is available to all Cabot employees in
amounts determined by the level of their salaries), is not funded by
insurance on Mr. Neville's life. Cabot funds the cost of the program
generally by insurance on the lives of various other present and former
Cabot employees. The value of this benefit, based upon the taxable income
it would constitute if it were insurance, does not exceed approximately
$1,500 per year for Mr. Neville. Cabot also provides our other named
executive officers with death benefit protection in the amount of one times
their salary. The value of this benefit to each of our named executive
officers other than Mr. Neville (Mr. McCarthy, $585; Mr. Pike, $691; Mr.
Yu, $829; and Mr. Zwicker, $636) is reflected in the column headed "All
Other Compensation".
(3) This figure reflects a $10,000 sign-on bonus paid to Mr. McCarthy. Mr.
McCarthy's hire date was February 2, 1999.
(4) This figure reflects reimbursement of relocation expenses.
(5) 6,000 of the 7,500 shares of Cabot restricted stock Mr. McCarthy received,
and 6,000 of the 15,000 shares of Cabot restricted stock Mr. Yu received,
were granted for no cash purchase price; Mr. McCarthy's 6,000 shares vest in
equal increments in June, 1999, February, 2000 and February, 2001; Mr. Yu's
6,000 shares vest annually as follows: one-half in November, 1998,
one-quarter on November 15, 1999 and one-quarter on November 15, 2000.
(6) This figure reflects a reimbursement to Mr. Yu for income tax obligations on
shares of restricted stock awarded to him.
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<PAGE> 58
AGGREGATE OPTION EXERCISES FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999 AND
FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the exercise of
Cabot stock options by our named executive officers during 1999, the number of
unexercised Cabot stock options held by named executive officers on September
30, 1999, and the value of the unexercised in-the-money Cabot stock options on
that date.
<TABLE>
<CAPTION>
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
AT FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Matthew Neville....... 2,400 37,275 5,000 -- 80,031 --
Chris C. Yu........... -- -- -- 7,150 -- --
</TABLE>
- ---------------
(1) We determined the value of unexercised in-the-money options as of September
30, 1999 by taking the difference between the fair market value of a share
of Cabot common stock on September 30, 1999 ($23.75 per share) and the
option exercise price, multiplied by the number of shares underlying the
options as of that date. Options held by Mr. Yu were out of the money on
that date, and we have therefore recorded no value for them.
PENSION PLAN BENEFITS
Prior to this offering, our employees, including our named executive
officers, participated in Cabot's tax-qualified cash balance plan. This plan
provides retirement benefits to plan participants based on their compensation
and years of service, expressed as an account balance. In addition, prior to
this offering, some of our named executive officers participated in Cabot's
non-qualified supplemental cash balance plan, which provides supplemental
retirement benefits not available under the cash balance plan by reason of
limitations set by the Internal Revenue Code and the Employee Retirement Income
Security Act. We do not intend to sponsor a tax-qualified or a supplemental cash
balance plan, and, accordingly, all of our employees will stop accruing benefits
under these plans in connection with this offering.
COMPENSATION AND EMPLOYEE BENEFIT PLANS
We have adopted various employee benefit plans and arrangements for the
purpose of providing compensation and employee benefits to our employees after
this offering, including our executive officers. Some of these plans are
described below. These plans and arrangements include an equity incentive plan,
an employee stock purchase plan, a tax-qualified savings plan and a
non-qualified supplemental savings plan. To the extent necessary or advisable
under applicable law, Cabot, as our sole stockholder, will approve these plans
prior to this offering.
LONG-TERM INCENTIVES
We have adopted the Cabot Microelectronics Corporation 2000 Equity
Incentive Plan, and Cabot, as our sole stockholder, has approved the plan. The
following description of certain features of the plan is qualified in its
entirety by reference to the full text of the plan.
Some of our employees (including our executive officers) hold options to
acquire Cabot common stock granted under Cabot's equity incentive plans. In
connection with the distribution, we and Cabot are considering giving these
employees the choice of retaining these awards or receiving, in consideration
for the cancellation of these awards, replacement awards under our 2000 Equity
Incentive Plan. These replacement awards will be subject to the same terms and
conditions as in effect prior to the cancellation of the prior Cabot awards,
except that (1) our common stock will be substituted for Cabot common stock
subject to the awards, and (2) the replacement awards will be adjusted to
preserve the intrinsic value to the holders immediately prior to cancellation of
the prior Cabot awards. Some of our employees also hold shares of Cabot
restricted stock, and we do not expect that these awards will be cancelled and
replaced with replacement awards.
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General; Shares Available for Issuance under the Plan. The 2000 Equity
Incentive Plan will enable us to make awards of options and restricted stock
(including purchase restricted stock) to eligible employees, directors,
consultants and advisers of our company and our affiliates. We believe that the
plan will also provide us with flexibility in designing and providing incentive
compensation in order to attract and retain individuals who are in a position to
make significant contributions to our success, to reward individuals for past
contributions and to encourage individuals to take into account our long-term
interests through ownership of our common stock. Subject to adjustment for stock
splits and similar events, the maximum number of shares of common stock that may
be issued under the plan is 3.5 million shares. This number does not include
shares which will become available under the plan because of events such as
forfeitures, methods of cashless exercise and open market repurchases. Because
options issued under the plan will not be exercisable until after the spin-off,
the issuance of these options will not require us to issue any of our common
stock until that date. Awards of shares of our common stock, including
restricted stock, may be made by us under the plan. Prior to the spin-off,
however, we cannot issue any shares of our common stock if doing so would reduce
Cabot's percentage ownership in us to less than 80.5%.
Administration; Eligible Grantees. The 2000 Equity Incentive Plan will be
administered by our full board or our compensation committee, consisting of at
least one member of our board of directors. However, if required by law, this
committee will consist of at least two members of our board, neither of whom may
be one of our employees. Officers and other key employees (including employees
of our subsidiaries) who are responsible for or contribute to the management,
growth or profitability of our business and the business of our subsidiaries are
eligible to receive awards under the plan, but no employee may receive awards
under the plan in any calendar year covering more than 300,000 shares of common
stock. Our directors, advisers and consultants, as well as individuals who are
employees of our affiliates, may also receive awards under the plan.
Stock Options. The compensation committee may grant stock options under
the 2000 Equity Incentive Plan. Stock options enable the holder of the option to
purchase shares of our common stock at a price specified by the compensation
committee at the time the award is made. The plan permits the granting of stock
options that qualify as incentive stock options under Section 422 of the
Internal Revenue Code and stock options that do not qualify for incentive stock
option treatment. The compensation committee determines the per share exercise
price of all stock options and, as a general rule, this price may not be less
than the fair market value of a share of common stock at the time of grant.
Options granted in connection with this offering will be granted at the initial
public offering price. Prior to the spin-off, the exercisability of vested stock
options will be limited so that Cabot's percentage ownership in us will not drop
below 80.5%. The compensation committee will determine when an option may be
exercised and its term, but the term may not exceed ten years.
Restricted Stock. The compensation committee may grant restricted stock
under the 2000 Equity Incentive Plan. In general, an award of restricted stock
entitles the recipient to shares of common stock, subject to restrictions
determined by the compensation committee. The compensation committee may require
the recipient to provide consideration for the restricted stock as a condition
to the grant of the restricted stock. Restrictions on restricted stock lapse as
specified by the compensation committee at the time of grant. Until the
restrictions lapse, shares of restricted stock are non-transferable. Recipients
of restricted stock have all rights of a stockholder with respect to the shares,
including voting and dividend rights, subject only to the conditions and
restrictions generally applicable to restricted stock or to other restrictions
and conditions specifically set forth in the award agreement.
Effect of Termination of Employment. As a general rule, the effect that a
termination of employment will have on a holder's awards will be set forth in
his or her award agree-
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ment. We expect that some terminations, such as terminations upon death or for
permanent disability, may result in the accelerated vesting of options and the
lapsing of restrictions on restricted stock. We also expect that other
terminations will result in the forfeiture of unvested options and restricted
stock.
Adjustments for Changes in Capitalization; Change in Control. The
compensation committee will make appropriate adjustments to the maximum number
of shares of common stock that may be delivered under the plan and to
outstanding awards to reflect stock dividends, stock splits, and similar changes
in capitalization. When granting awards under the plan, the compensation
committee may provide for the accelerated vesting of options, and for the
immediate lapsing of restrictions on restricted stock in the event of a "Change
in Control" (as defined in the plan).
Amendment and Termination. The compensation committee may at any time
discontinue granting awards under the plan. Our board of directors may at any
time amend the plan or terminate the plan as to any further grants of awards.
However, none of these actions may, without the approval of our stockholders,
increase the maximum number of shares of common stock available under the plan,
extend the time within which awards may be granted, or amend the provisions of
the plan relating to amendments. Nor may any of these actions adversely affect
the rights of a holder of any previously granted award.
GRANTS UNDER THE 2000 EQUITY INCENTIVE PLAN
In connection with this offering, we intend to grant stock options to all
of our directors and employees, including our executive officers, under the 2000
Equity Incentive Plan. An aggregate of 988,240 shares of common stock are
issuable upon the exercise of these options, and the exercise price of these
options will be the initial public offering price. The following table sets
forth the number of shares of our common stock underlying these options:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND POSITIONS UNDERLYING OPTIONS
- ------------------ ------------------
<S> <C>
Matthew Neville............................................. 90,000
President and Chief Executive Officer, Director
William C. McCarthy......................................... 36,000
Vice President, Chief Financial Officer, Treasurer and
Secretary
Daniel J. Pike.............................................. 45,000
Vice President of Operations
J. Michael Jenkins.......................................... 30,000
Vice President of Human Resources
Bruce M. Zwicker............................................ 36,000
Vice President of Sales and Marketing
Executive officers as a group (5 persons)................... 237,000
Non-employee directors as a group (7 persons)............... 260,000
All employees as a group (281 persons)...................... 728,240
</TABLE>
In addition, we intend to grant options to acquire 257,300 shares of common
stock under the 2000 Equity Incentive Plan to Cabot employees who are not
directors of our company. The exercise price for these options will be the
initial public offering price.
Up to one-third of the foregoing options to be granted to our employees and
directors will generally vest upon their grant and the balance of these options
will vest over a two to four year period. The foregoing options granted to Cabot
employees in their capacities as Cabot employees vest in their entirety upon
their grant.
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ANNUAL INCENTIVES
We intend to make annual cash bonuses to our employees, including our
executive officers, to provide them with an incentive to carry out our business
plan and to reward them for having done so. We intend to set performance goals
in each fiscal year at the beginning of the fiscal year, and we intend to base
the bonuses on an evaluation of our performance in the light of those goals.
EMPLOYEE STOCK PURCHASE PLAN
We have adopted a 2000 Employee Stock Purchase Plan, under which we have
initially reserved for issuance 475,000 shares of our common stock, and Cabot,
as our sole stockholder, has approved the plan. We intend that the plan will
become effective in connection with this offering and that the first offering
period under the plan will commence in connection with this offering. We also
intend that the plan will qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code; there may be offering periods under
the plan, however, including the first offering period, that do not qualify
under Section 423.
Administration; Eligible Employees. The compensation committee will
administer the plan. The compensation committee, as plan administrator, will
have full authority to adopt administrative rules and procedures and to
interpret the provisions of the plan. Each of our full-time employees, and each
full-time employee of any future subsidiaries that we designate as eligible to
participate in the plan, will be eligible to participate in the plan. In
addition, the Internal Revenue Code requires us to exclude some employees from
participating in the plan and sets limits on how much common stock a participant
may purchase under the plan, and we will comply with these exclusions and
limitations.
Securities Subject to the Plan. The plan limits the number of shares of
common stock initially reserved for issuance under the plan to 475,000 shares.
The shares issuable under the plan will be made available from authorized but
unissued shares of our common stock or from shares that we purchase on the open
market after this offering. We will prorate the shares to be issued in any
offering to the extent necessary to preserve the tax-free nature of the
spin-off. We cannot issue any shares of our common stock under the plan,
however, if doing so would reduce Cabot's percentage ownership in us to less
than 80.5%.
Adjustments; Change in Control. In the event that any change to the
outstanding common stock occurs (whether by reason of any recapitalization,
stock dividend, stock split, exchange or combination of shares or other change
in corporate structure), we will make appropriate adjustments to:
- - the maximum number and class of securities issuable under the plan;
- - the maximum number and class of securities purchasable per participant during
any plan offering; and
- - the number and class of securities and the price per share in effect under
each outstanding purchase right.
It is intended that any adjustments will prevent any dilution or
enlargement of rights under the plan. In the event of various corporate events
such as our dissolution or liquidation, or a merger, or a sale of all or
substantially all of our assets, the plan offering which would otherwise be in
effect on the date of the event will accelerate and will end on the last payday
before the date of the event. On that date, all outstanding purchase rights will
automatically be exercised.
Plan Offering Periods and Purchase Rights. The plan will offer shares of
common stock from time to time through a series of plan offerings, each with a
duration of approximately six months. (However, the first plan offering may be
slightly longer or shorter than six months, depending on when this offering
occurs.) The plan offerings will commence as designated from time to time by the
compensation committee. Each plan offering will in any event begin and end on a
business day. On the day a plan offering begins, each participant with respect
to that plan offering will receive a right to purchase shares of our common
stock through payroll deductions made during that plan offering. In general,
each participant may authorize periodic pay-
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roll deductions in an amount of between one percent and ten percent of his or
her gross cash compensation for each pay period during the plan offering. A
participant may elect to reduce or increase future payroll deductions. The
purchase date of shares under the plan will occur on the day that the plan
offering ends, and whole and deemed fractional shares will be purchased using
the aggregate payroll deductions withheld from the participant for the plan
offering. We will not issue fractional shares under the plan. In general, a
participant may withdraw from the plan at any time by giving written notice.
Plan Offering Price. The price per share of common stock in any plan
offering will in general be 85% of the lower of:
- - the fair market value per share of common stock on the day the plan offering
begins; and
- - the fair market value per share of common stock on the day the plan offering
ends.
The fair market value on the first day of the first offering period will be
the initial public offering price. Thereafter, the fair market value will be
determined by reference to the closing price of our common stock on the Nasdaq
on the relevant date.
Amendment and Termination. We may, in our sole discretion, terminate or
amend the plan, but the amendment and termination of the plan may not adversely
affect outstanding purchase rights without the consent of the holders of those
rights. If we terminate the plan, we may end a plan offering and accelerate the
exercise date of all outstanding purchase rights. We will refund (without
interest) any remaining payroll deductions after we terminate the plan.
New Plan Benefits. Because the benefits under the plan will depend on
elections to participate and the fair market value of our common stock on
various future dates, we cannot determine the benefits that our executive
officers and other employees may receive under the plan.
RETIREMENT BENEFITS
We have adopted a tax-qualified savings plan for the benefit of our
employees, including our executive officers. Our employees will begin to
participate in this plan as of the first day of the month immediately following
the month in which the offering occurs. The savings plan will provide that we
will make discretionary contributions to participants' accounts, as well as cash
matching contributions in amounts based on participants' deferral elections. In
addition, we have adopted a non-qualified savings plan to provide supplemental
benefits to those employees who are affected by limits on compensation contained
in the Internal Revenue Code.
We do not currently sponsor a tax-qualified or supplemental defined benefit
pension plan, and we do not currently have any intention to adopt such a plan.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In connection with this offering and the spin-off, we expect to adopt
change-in-control arrangements covering our executive officers and other key
employees. These arrangements will likely provide for a cash severance payment,
continued medical benefits and other ancillary payments and benefits upon some
terminations of a covered employee's employment following a change in control.
Terminations of employment entitling a covered employee to these payments and
benefits will likely include (1) termination of the employee by us (or a
successor) other than for cause and (2) termination by the covered employee upon
reduction in compensation, duties or responsibilities, or relocation, or other
circumstances constituting constructive termination.
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RELATIONSHIPS BETWEEN OUR COMPANY AND CABOT CORPORATION
CABOT AS OUR CONTROLLING STOCKHOLDER
Immediately prior to this offering, Cabot will be our sole stockholder.
Upon completion of this offering, Cabot will beneficially own 82.6% of the
outstanding shares of our common stock, or 80.5% if the underwriters' over-
allotment option is exercised in full. For as long as Cabot continues to
beneficially own more than 50% of the outstanding shares of common stock, Cabot
will be able to direct the election of all of the members of our board of
directors and exercise a controlling influence over our business and affairs,
including any determinations with respect to:
- - mergers or other business combinations involving our company;
- - the acquisition or disposition of assets by our company;
- - the incurrence of indebtedness by our company;
- - the issuance of any additional common stock or other equity securities;
- - the payment of dividends with respect to the common stock;
- - amendments, waivers and modifications to our fumed metal oxide supply
agreement and dispersions services agreement with Cabot and the other interim
and ongoing agreements we have entered into with Cabot; and
- - some determinations with respect to treatment of items in our tax returns
which are consolidated or combined with Cabot's tax returns.
Similarly, Cabot will have the power to:
- - determine matters submitted to a vote of our stockholders without the consent
of our other stockholders;
- - prevent a change in control of our company; and
- - take other actions that might be favorable to Cabot.
Cabot has announced that after the offering it intends to distribute pro
rata to its stockholders all of the shares of common stock it owns by means of a
tax-free distribution. Cabot's final determination to proceed will require a
declaration of the spin-off by Cabot's board of directors. Such a declaration is
not expected to be made until certain conditions, many of which are beyond the
control of Cabot, are satisfied, including:
- - receipt by Cabot of a ruling from the IRS as to the tax-free nature of the
spin-off; and
- - the absence of any change in future market or economic conditions (including
developments in the capital markets) of Cabot's or our company's business and
financial condition that causes Cabot's board of directors to conclude that
the spin-off is not in the best interest of Cabot's stockholders.
We have been advised by Cabot that it expects the spin-off to occur six to
twelve months after the date of a private letter ruling from the IRS confirming
that the spin-off is tax-free to Cabot. If Cabot completes the spin-off, the
increased number of shares available in the market may have an adverse effect on
the market price of the common stock. See "Risk Factors -- Risks Relating to Our
Separation from Cabot".
For a description of certain provisions of our certificate of incorporation
concerning the allocation of business opportunities that may be suitable for
both us and Cabot, see "Description of Capital Stock -- Corporate
Opportunities".
For the purposes of governing some of the relationships between us and
Cabot following the spin-off and this offering, we and Cabot have entered into
commercial arrangements, principally the fumed metal oxide supply agreement, the
dispersions services agreement and the facilities lease arrangements. In
addition, we have entered into a master separation agreement providing for the
transfer of the assets and liabilities of our business, as operated by Cabot, to
us. We have also entered into a trademark license agreement with Cabot which
will provide for the license to us by Cabot of some of its trademarks and have
entered into a confiden-
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tial disclosure and license agreement with Cabot that will provide for
confidential treatment of specified information, licenses for specified
intellectual property and the transfer of dispersion-related intellectual
property. Furthermore, we have also entered into various agreements with Cabot
regarding certain arrangements between the parties during the interim period
between the closing of this offering and the completion of the spin-off. These
agreements are the management services agreement, the initial public offering
and distribution agreement, the employee matters agreement and the registration
rights agreement. In addition, we and Cabot have entered into a tax sharing
agreement to address the allocation of certain tax liabilities between the
parties.
All of the foregoing agreements will be effective on or prior to the
completion of this offering. Because these agreements were entered into at a
time when we were a wholly owned subsidiary of Cabot, they were not the result
of arm's-length negotiations between the parties. These agreements were made in
the context of an affiliated relationship and negotiated in the overall context
of our separation from Cabot. The prices and other terms under these agreements
may be less favorable to us than what we could have obtained in arm's-length
negotiations with unaffiliated third parties for similar services or under
similar leases. Because we did not negotiate with a third party for any of the
services or raw materials provided for under our agreements with Cabot, however,
it is difficult to determine whether the terms of those agreements are less
favorable to us than those that we could have obtained in arm's length
negotiations with an unaffiliated third party. In addition, because the
quantities and some of the products required to be supplied under the fumed
metal oxide supply agreement, and, to a lesser extent, the dispersion services
agreement, are unique, it is difficult to compare those terms with those that
might have been obtained from an unaffiliated third party.
The agreements summarized below have been filed as exhibits to the
registration statement of which this prospectus forms a part. See "Where You Can
Find More Information".
COMMERCIAL ARRANGEMENTS WITH CABOT
FUMED METAL OXIDE SUPPLY AGREEMENT
We have entered into a fumed metal oxide supply agreement with Cabot, which
will be effective upon the completion of this offering, under which Cabot will
continue to be our exclusive supplier of fumed silica and fumed alumina for
existing products and our primary supplier for future products. For a more
complete description of this agreement, see "Business -- Cabot as Our Raw
Materials Supplier".
DISPERSIONS SERVICES AGREEMENT WITH CABOT
We have entered into a dispersions services agreement with Cabot, which
will be effective upon the completion of this offering, under which we will
continue to offer fumed metal oxide dispersions services to Cabot. For a more
complete description of this agreement, see "Business -- Dispersions Services
Agreement with Cabot".
FACILITIES LEASE ARRANGEMENTS
We have entered into an agreement with Cabot to lease or sublease the land
and, building at its dispersions facility in Barry, Wales. This building space
comprises approximately 62,300 square feet. The lease payments total
approximately $60,000 per year. This lease will expire after ten years, subject
to earlier termination in some circumstances.
MASTER SEPARATION AGREEMENT
To effect our separation from Cabot, Cabot and we have entered into a
master separation agreement. Under this agreement, Cabot and its subsidiaries
have transferred to us substantially all of the assets and liabilities of Cabot
that are used exclusively in, relate exclusively to or arise directly from the
business conducted by us as a division of Cabot at any time on or before the
date of the transfer of these assets and liabilities to us,
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which we refer to as the contribution date, including:
- - all business operations whose financial performance is reflected in our
financial statements for the period ended September 30, 1999 as set forth
elsewhere in this prospectus; and
- - all business operations initiated or acquired by us after the date of those
financial statements.
Cabot will not transfer to us some excluded assets, including the fumed alumina
plant at Cabot's Tuscola, Illinois facility and the land, building and other
improvements and fixtures in Barry, Wales that we sublease from Cabot.
We have assumed and agreed to perform all liabilities and obligations of
Cabot relating to or arising out of these business operations any time on or
before the date of the transfer of these business operations to us, which we
refer to as the contribution date, other than various excluded liabilities.
These assumed liabilities include all liabilities relating to or arising out of
these business operations as conducted through the contribution date that are
unknown to Cabot and/or unrealized as of the contribution date and that become
known to Cabot or are realized or otherwise arise after the contribution date.
Except as expressly set forth in the master separation agreement or any
other agreement entered into between Cabot and us in connection with our
separation from Cabot, neither Cabot nor our company is making any
representation or warranty as to the business, assets or liabilities transferred
or assumed as part of the separation. Except as otherwise expressly set forth in
the separation agreement or in an ancillary agreement, all assets are being
transferred on an as is, where is, basis.
INTELLECTUAL PROPERTY
Under the master separation agreement, Cabot has transferred to us its
intellectual property rights related solely to the business conducted by us as a
division of Cabot. This transferred intellectual property includes:
- - patents;
- - copyrights;
- - trademarks;
- - technology, know-how and trade secrets;
- - licenses and other rights concerning third party technology and intellectual
property; and
- - the right to sue for infringements of these patents, copyrights, trademarks
and other intellectual property.
Cabot has agreed to assign to us various contracts with third parties relating
to our business.
FEES
We have agreed to pay the costs of the transfer of assets from Cabot to us,
including:
- - moving expenses;
- - transfer taxes;
- - expenses related to notices to customers, suppliers and other third parties;
- - fees related to the transfer or issuance of licenses, permits and franchises;
- - fees related to the assignment or transfer of contracts, agreements and
intellectual property;
- - recording and other fees, taxes, charges and assessments related to the
transfer of real property;
- - costs related to the transfer or establishment of any domestic and foreign
branch office; and
- - costs related to the transfer of any employee.
INDEMNIFICATION
Pursuant to the master separation agreement, we have agreed to indemnify,
defend and hold harmless Cabot and each of its subsidiaries and their respective
successors-in-interest against any losses, claims, dam-
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ages, liabilities or actions arising out of or in connection with:
- - the liabilities assumed by us as part of the separation, including any
liabilities arising out of the current litigation with Rodel; and/or
- - our conduct of our business and affairs after the contribution date.
Cabot has agreed to indemnify, defend and hold harmless us and each of our
subsidiaries and their respective successors-in-interest against any losses,
claims, damages, liabilities or actions, resulting from, relating to or arising
out of or in connection with:
- - the excluded assets, meaning assets used or owned in connection with any
businesses and operations of Cabot and its affiliates other than our business;
and/or
- - the excluded liabilities, including liabilities that are not incidental to or
do not arise out of our business and various liabilities in respect of
indebtedness, income taxes, employee or retirement benefit plans and other
liabilities.
Under the terms of the master separation agreement, we and Cabot, as
indemnifying parties, have various rights. The indemnitee may defend and, with
the consent of the indemnifying party, compromise and settle a claim and will be
entitled to reimbursement for its reasonable attorneys' fees and expenses
incurred in defending the claim and indemnification for any liabilities incurred
as a result of the claim.
An indemnifying party may elect to defend, at its own expense and through
counsel chosen by it, any claim by a third party if the claim will, or is likely
to, obligate the indemnifying party to provide indemnification. If an
indemnifying party elects to defend a third-party claim, it will be required to
pay:
- - the indemnitee's reasonable out-of-pocket expenses incurred in connection with
its cooperation in the defense of the claim; and
- - under some circumstances, the reasonable fees and expenses of separate counsel
for the indemnitee, including primary counsel, local counsel and, in patent
litigation, special patent counsel.
If an indemnifying party elects to defend a third-party claim but, in the
reasonable judgment of an indemnitee, the indemnifying party fails to timely,
properly and adequately defend the third-party claim, the indemnitee may do so.
There are restrictions on the ability of the indemnifying party to settle or
compromise a claim if the settlement or compromise would be harmful to the
indemnitee. The master separation agreement specifically provides that until we
notify Cabot that we will assume the defense of the lawsuits instituted by Rodel
against Cabot, Cabot will continue to defend these lawsuits and we will
indemnify Cabot for any losses and expenses, including attorneys' fees, that it
incurs as a result of these actions. For a further discussion of the Rodel
lawsuits, see "Business -- Legal Proceedings".
If an indemnitee recovers amounts from third parties, such as an insurance
company, these amounts will reduce the amount the indemnifying party must pay
unless the indemnitee or its affiliates remain directly or indirectly liable for
those amounts pursuant to self-insurance or re-insurance arrangements. If the
indemnitee incurs a net tax cost from the receipt of an indemnification payment,
the indemnifying party must compensate the indemnitee for the amount of the net
tax cost. If the indemnitee receives a net tax benefit from incurring or paying
for any indemnified loss or liability, the amount the indemnifying party must
pay will be reduced to take account of the net tax benefit.
DISPUTE RESOLUTION
The master separation agreement contains provisions that govern the
resolution of disputes, controversies or claims that may arise between us and
Cabot except to the extent otherwise provided for in any other agreement entered
into between Cabot and us in connection with our separation from Cabot. The
master separation agreement provides that the parties will use all commercially
reasonable efforts to settle all disputes arising in connection with the
agreement without
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resorting to mediation, arbitration or otherwise. If these efforts are not
successful, either party may submit the dispute for non-binding mediation. If
mediation is not successful in resolving any dispute, any party may resort to
any remedies it may have at common law or otherwise, including litigation.
Neither party will be entitled to consequential, special, exemplary or punitive
damages.
FURTHER ASSURANCES
In addition to the actions specifically provided for elsewhere in the
master separation agreement, each of our company and Cabot has agreed to use all
commercially reasonable efforts to cause all actions, agreements and obligations
set forth in the master separation agreement to be performed.
TRADEMARK LICENSE AGREEMENT
We have entered into a trademark license agreement with Cabot that governs
our use of various trademarks used in our business. Under the agreement, Cabot
has granted to us a worldwide royalty-free license to use the trademarks solely
in connection with the manufacture, sale or distribution of products related to
our business. The license includes the right to use the term "Cabot" as a trade
name, either individually or in combination with other terms. This license also
includes the right to grant sublicenses to our wholly-owned subsidiaries, for so
long as they remain wholly-owned subsidiaries. We may not transfer or assign the
license without Cabot's prior written consent.
Under the agreement, we agree to refrain from various actions that could
interfere with Cabot's ownership of the trademarks. The agreement contains
provisions regarding:
- - the creation of quality standards for our products;
- - the ability of Cabot to inspect our products and facilities; and
- - our obligation to cease production of and correct or properly destroy, any
products marketed under the licensed trademarks that fail to meet the quality
standards.
The agreement provides that our license to use the trademarks may be
terminated for various reasons, including our discontinued use of the
trademarks, our breach of the agreement or a change in control of us.
We will indemnify Cabot and its directors, officers and employees from
claims for damage or injury to persons or property or for loss of life or limb
if Cabot is found liable to any third party under any tort or products liability
or similar action in connection with the use by us of the licensed trademarks.
MANAGEMENT SERVICES AGREEMENT
We and Cabot have entered into a management services agreement, which will
be effective upon the completion of this offering, pursuant to which Cabot will
provide administrative and corporate support services to us on an interim or
transitional basis, including human resource, accounting, treasury, tax,
facilities, legal and information services. Cabot will charge us for these
services at cost, including all out-of-pocket, third-party costs and expenses
incurred by Cabot in providing the services. If Cabot incurs third-party
expenses on behalf of us as well as a Cabot entity, Cabot will be required to
allocate these expenses in good faith between us and the Cabot entity, as Cabot
shall determine in the exercise of its reasonable judgment. The agreement
provides for monthly invoicing of service charges. If we do not pay the invoiced
amount within 60 days following receipt of the invoice, we will be required to
pay interest at a specified rate, unless the invoiced amount is in dispute.
Cabot and we will be required to use reasonable efforts to resolve any disputes
promptly.
The management services agreement provides that the services provided by
Cabot will be substantially similar in scope, quality and nature to those
services provided to us prior to the contribution date. Cabot will also be
required to provide the services to us through the same or similarly qualified
personnel, but the selection of personnel to perform the various services will
be within the sole control of Cabot. In addition, Cabot will not be required to
materially increase the volume, scope or quality of the services
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provided beyond the level at which they were performed for us in the past. The
agreement provides that Cabot may cause any third party to provide any service
to us that Cabot is required to provide, but that Cabot will remain responsible
for any services it causes to be provided in this manner. Cabot will not be
required to provide any service to the extent the performance of the service
becomes impracticable due to a cause outside the control of Cabot, such as
natural disasters, governmental actions or similar events of force majeure.
Similarly, Cabot will not be required to provide any service if doing so would
require Cabot to violate any laws, rules or regulations. The agreement also
provides that Cabot and we may agree to additional services to be provided by
Cabot. The terms and costs of these additional services will be mutually agreed
upon by Cabot and us. These additional services may include services that were
not provided to us when we were a division of Cabot prior to the contribution
date.
Pursuant to the management services agreement, we will agree to indemnify
and hold harmless Cabot, each of its subsidiaries and their directors, officers,
agents and employees from any claims, damages and expenses arising out of the
services rendered to us unless resulting from their breach of contract, gross
negligence or willful misconduct on their part. In addition, we will agree that
these same persons shall be liable to us only for any claims, damages or
expenses resulting from breach of contract, gross negligence or willful
misconduct on their part.
The management services agreement will commence on the date of this
offering and will continue until the earlier of the date of the spin-off or two
years from the completion of this offering. Cabot and we may, by mutual
agreement, provide for the continuation of some services after the spin-off. In
addition, either Cabot or our company may terminate the management services
agreement with respect to one or more of the services provided under the
agreement:
- - If the other party has failed to perform any material obligation relating to
the terminated service; and
- - if the failure continues for a period of 30 days after the other party
receives notice of the failure from the terminating party.
CONFIDENTIAL DISCLOSURE AND
LICENSE AGREEMENT
We and Cabot have entered into a confidential disclosure and license
agreement with respect to confidential and proprietary information, intellectual
property and other matters whereby we and Cabot agree to keep confidential and
to cause our affiliates to keep confidential, and not to use for any
unauthorized purpose, confidential information regarding the other party.
Confidential information includes:
- - unpublished technology and know-how;
- - unpublished patent applications; and
- - trade secrets and other confidential or proprietary technical and business
information.
Confidential information does not include any information that:
- - is already known to the other party from a third-party source;
- - is or becomes publicly known;
- - is received from a third party without any obligations of confidentiality;
- - is disclosed to a third party without restrictions;
- - is independently developed by employees or consultants of the party receiving
the information; or
- - is approved for release by the disclosing party.
Cabot has granted to us and our affiliates an ancillary license, which is a
fully paid, world-wide, non-exclusive license to Cabot's copyrights, patents and
technology that:
- - are not included within the assets transferred under the master separation
agreement;
- - are owned by Cabot on the date of the transfer of assets to us;
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- - do not relate to (A) treated or untreated fumed metal oxide particles or the
manufacture or treatment of these particles or (B) cesium chemicals or other
products of Cabot's performance materials division or the manufacture of these
chemicals;
- - would be infringed or misappropriated by the manufacture, treatment,
processing, handling, marketing, sale or use of any of our products, excluding
treated or untreated fumed metal oxide particles and cesium chemicals or other
products of Cabot's performance materials division; and
- - were used by Cabot in connection with our activities, prior to our separation
from Cabot.
Cabot has agreed, on behalf of itself and its affiliates, not to assert any
of the patents and copyrights in published copyrightable material licensed to us
under the ancillary license against our customers with respect to our customers'
use of products manufactured or supplied by us under the ancillary license. The
ancillary license does not include the right to grant sublicenses to others. We
have agreed not to use the ancillary license in connection with any activity
that is competitive with any activity of Cabot.
We have granted to Cabot and its affiliates a fully paid, world-wide,
non-exclusive license to copyrights, patents and technologies that are among the
assets transferred to us under the master separation agreement and that would be
infringed by the manufacture, treatment, processing, handling, marketing, sale
or use of any products or services sold by Cabot for applications other than
CMP. We have agreed, on our own behalf and on behalf of our affiliates, not to
assert any of the patents and copyrights in published copyrightable material
licensed to Cabot under the license to Cabot against Cabot's customers with
respect to their use of non-CMP products manufactured or supplied by Cabot under
the license to Cabot. The license to Cabot does not include the right to grant
sublicenses to others. Cabot has agreed not to use the license in connection
with any activity that is competitive with any of our activities.
We have also agreed, on our own behalf and on behalf of our affiliates, not
to use specific information in our possession as of the date of the transfer of
assets to us for the manufacture of treated or untreated fumed metal oxide
particles and/or cesium chemicals and other products of Cabot's performance
materials division. This specific information is information concerning:
- - Cabot's fumed metal oxide products (treated and untreated) and related
manufacturing or treatment processes;
- - cesium chemicals and other products of Cabot's performance materials division
and related manufacturing processes; and
- - the raw materials, suppliers or equipment used in these products, processes
and chemicals, including product specifications.
Additionally, Cabot has assigned to us an undivided one-half interest in
and to various patents, copyrights and technology that relate to dispersion
technology, which are owned by Cabot and used in Cabot's dispersion business and
our business as of the date of the confidential disclosure and license
agreement. We will generally pay all costs associated with the transfer to us of
this intellectual property. Cabot and we will generally share the costs
associated with the prosecution and maintenance of these patents. Cabot and/or
we, individually or jointly, may bring enforcement proceedings against an
infringer of this dispersion intellectual property. Cabot and we have agreed to
notify the other party of any threat or allegation made by a third party that
any dispersion intellectual property infringes any third-party intellectual
property rights.
Cabot and we have agreed to restrictions on sublicenses and assignments of
the dispersion technology assets. Cabot has agreed not to sublicense or assign
the dispersion technology assets, including related intellectual property
rights, to any party for use in the production or sale of products for use in
CMP applications, without our prior consent. We have agreed not to sublicense or
assign the dispersion technology assets, including related intellectual property
rights, to any party for use in the production or sale of
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products for use in non-CMP applications, without the prior consent of Cabot.
INITIAL PUBLIC OFFERING AND
DISTRIBUTION AGREEMENT
GENERAL
We have entered into an initial public offering and distribution agreement
with Cabot governing our respective rights and duties with respect to this
offering and the spin-off. Cabot has announced that it plans to complete the
spin-off within six to twelve months after the date of a private letter ruling
from the IRS confirming that the spin-off is tax-free to Cabot. However, Cabot
is not obligated to complete the spin-off in this time frame or at all. We have
agreed to cooperate with Cabot in all respects to complete the spin-off. See
"Risk Factors -- Risks Relating to Our Separation from Cabot".
COVENANTS
After this offering, Cabot will continue to own a significant portion of
our common stock. As a result, Cabot will continue to include us as a subsidiary
for various financial reporting, accounting and other purposes. Accordingly, we
have agreed to certain covenants in the initial public offering and distribution
agreement, which will be binding on us as long as Cabot owns at least 50% of our
outstanding common stock. Some of these covenants are described below:
- - Covenants Regarding the Incurrence of Debt. We will not, and will not permit
any of our subsidiaries to create, incur or assume any indebtedness in excess
of an aggregate of $50.0 million outstanding at any time.
- - Other Covenants. We have also agreed that:
- we will not take any action which would have the effect of limiting
Cabot's ability to freely sell, pledge or otherwise dispose of shares of
our common stock or limiting the legal rights of or denying any benefit
to Cabot as our stockholder in a manner not applicable to our
stockholders generally;
- we will not amend our stockholder rights plan, or any successor plan, in
a manner that would result in Cabot's ownership of our common stock
causing the rights to detach or become exercisable as described under
"Description of Capital Stock -- Rights Plan";
- we will not issue any shares of common stock or any rights, warrants or
options to acquire our common stock, if after giving effect to such
issuance Cabot would own less than 80.5% of the then outstanding shares
of our common stock; and
- if Cabot determines that, due to any action on our part, its shareholding
in us has dropped or will drop below 80.5%, it can require us to reverse
or terminate the action or issue additional equity securities to it at no
cost, or purchase additional equity securities of us in the open market
or from other third parties, in which case we would have to reimburse
Cabot for the costs it incurred in making such a purchase. After the
second anniversary of the closing of this offering, these provisions
would terminate with respect to issuances of equity securities by us
under our 2000 Equity Incentive Plan and our 2000 Employee Stock Purchase
Plan, except that in the event of any such issuance we may still be
obligated to issue additional equity securities to Cabot at the per share
fair market value of those securities.
In addition, we have agreed that, for so long as Cabot is required to
consolidate our results of operations and financial position or account for its
investment in our company, we will provide Cabot financial information regarding
our company and our subsidiaries, consult with Cabot regarding the timing and
content of our earnings releases and cooperate fully with Cabot in connection
with its public filings.
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INDEMNIFICATION
We have generally agreed to indemnify Cabot and its affiliates against all
liabilities arising out of:
- - any breach by us or our affiliates of any of the provisions of the initial
public offering and distribution agreement;
- - any incorrect or incomplete financial information provided by us or our
affiliates to Cabot as required by the initial public offering and
distribution agreement; and
- - any material untrue statements or omissions in this prospectus and the
registration statement of which it is a part and in any and all registration
statements, information statements and/or other documents filed with the SEC
in connection with the spin-off.
Cabot has agreed to indemnify us and our affiliates against all liabilities
arising out of:
- - any breach by Cabot or its affiliates of any of the provisions of the initial
public offering and distribution agreement;
- - any incorrect or incomplete financial information provided by Cabot or its
affiliates to us as required by the initial public offering and distribution
agreement; and
- - any material untrue statements or omissions regarding Cabot in this prospectus
and the registration statement of which it is a part and in any and all
registration statements, information statements and/or other documents filed
with the SEC in connection with the spin-off.
Under the terms of the initial public offering and distribution agreement,
Cabot and we, as indemnifying parties, have various rights. The indemnitee may
defend and, with the consent of the indemnifying party, compromise and settle a
claim and will be entitled to reimbursement for its reasonable attorneys' fees
and expenses incurred in defending the claim and indemnification for any
liabilities incurred as a result of the claim.
An indemnifying party may elect to defend, at its own expense and through
counsel chosen by it, any claim by a third party if the claim will obligate the
indemnifying party to provide indemnification. If an indemnifying party elects
to defend a third-party claim, it will be required to pay:
- - the indemnitee's reasonable out-of-pocket expenses incurred in connection with
its cooperation in the defense of the claim; and
- - under some circumstances, the reasonable fees and expenses of separate counsel
for the indemnitee, including primary counsel and local counsel.
There are restrictions on the ability of the indemnifying party to settle
or compromise a claim if the settlement or compromise would be harmful to the
indemnitee.
If Cabot and we both claim to be entitled to indemnification for a
third-party claim, Cabot and we will jointly control the defense of the claim.
If one party fails to defend jointly, the other party will solely defend the
claim, but in no case will one party compromise or settle a third-party claim
without the consent of the other party. All expenses of either party during the
joint defense of a claim will be initially paid by the party incurring the
expenses, with the expenses reallocated and reimbursed in accordance with the
indemnification obligations of the parties at the end of the defense of the
claim.
If an indemnitee recovers amounts from third parties, such as an insurance
company, these amounts will reduce the amount the indemnifying party must pay
unless the indemnitee or its affiliates remain directly or indirectly liable for
those amounts pursuant to self-insurance or re-insurance arrangements. If the
indemnitee incurs a net tax cost from the receipt of an indemnification payment,
the indemnifying party must compensate the indemnitee for the amount of the net
tax cost. If the indemnitee receives a net tax benefit from incurring or paying
for any indemnified loss or liability, the amount the indemnifying party must
pay will be reduced to take account of the net tax benefit.
EXPENSES
We will pay the costs and expenses incurred in connection with our
separation
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from Cabot and this offering including the costs and expenses of financial,
legal, accounting and other advisers, if any. Cabot will pay the costs and
expenses incurred in connection with the spin-off, including the costs and
expenses of financial, legal, accounting and other advisors, if any.
TAX SHARING AGREEMENT
We are, and after this offering but prior to the spin-off will continue to
be, included in Cabot's consolidated federal income tax group, and our federal
income tax liability will be included in the consolidated federal income tax
liability of Cabot. We and Cabot have entered into a tax sharing agreement,
which will be effective upon the completion of this offering, pursuant to which
the amount of taxes to be paid or received by us with respect to consolidated or
combined returns of Cabot in which we are included generally are determined as
though we file separate federal, state, local and foreign income tax returns.
Under the terms of the tax sharing agreement, Cabot will not be required to make
any payment to us for the use of our tax attributes that come into existence
prior to the spin-off until such time as we would otherwise be able to utilize
such attributes.
Under the agreement, until the spin-off, Cabot will:
- - continue to have all the rights of a parent of a consolidated group;
- - have sole and exclusive responsibility for the preparation and filing of
consolidated federal and consolidated or combined state, local and foreign
income tax returns (or amended returns); and
- - have the power, in its sole discretion, to contest or compromise any asserted
tax adjustment or deficiency and to file, litigate or compromise any claim for
refund relating to these returns.
In general, the agreement provides that we will be included in Cabot's
consolidated group for federal income tax purposes for so long as Cabot
beneficially owns at least 80% of the total voting power and value of the
outstanding common stock, which we expect will be the case until the time of the
spin-off. Each member of a consolidated group is jointly and severally liable
for the federal income tax liability of each other member of the consolidated
group. Accordingly, although the tax sharing agreement allocates tax liabilities
between us and Cabot during the period in which we are included in Cabot's
consolidated group, we could be liable in the event that any federal tax
liability is incurred, but not discharged, by any other member of Cabot's
consolidated group. See "Risk Factors -- Risks Relating to Our Separation from
Cabot -- We face risks associated with being a member of Cabot's consolidated
group for federal income tax purposes".
Under the terms of the tax sharing agreement, we have agreed to indemnify
Cabot in the event that the spin-off is not tax free to Cabot as a result of
various actions taken by or with respect to us or our failure to take various
actions, including:
- - any acquisition of us by merger or otherwise, or an acquisition of a majority
of our shares, by any person or persons, within two years of the spin-off;
- - any redemption or repurchase by us of our capital stock, subject to certain
exceptions;
- - any issuance by us of our capital stock which is inconsistent with factual
statements or representations made to the IRS in connection with Cabot's
request for a private letter ruling regarding the tax-free nature of the
spin-off; and
- - any discontinuance of the active conduct of our current trades or businesses,
or the sale or other disposition of any of our assets other than in the
ordinary course of our business.
We may not be able to control some of the foregoing events that could
trigger this indemnification obligation.
REGISTRATION RIGHTS AGREEMENT
Although Cabot has announced its plans to complete the spin-off within six
to twelve months after the date of a private letter ruling from the IRS
confirming that the spin-off is tax-free to Cabot, we cannot assure you that
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the spin-off will occur within this time frame or at all. See "Risk
Factors -- Risk Factors Relating to Our Separation from Cabot". In the event
that Cabot does not complete the spin-off, Cabot could not freely sell all of
our shares that it owns without registration under the Securities Act.
Accordingly, we have entered into a registration rights agreement with
Cabot to provide it with registration rights relating to the shares of our
common stock which it holds. These registration rights generally become
effective at such time as Cabot informs us that it no longer intends to proceed
with or complete the spin-off. Cabot will be able to require us to register
under the Securities Act all or any portion of our shares covered by the
registration rights agreement. In addition, the registration rights agreement
will provide for various piggyback registration rights for Cabot. Whenever we
propose to register any of our securities under the Securities Act for ourselves
or others, subject to certain customary exceptions, we will be required to
provide prompt notice to Cabot and include in that registration all shares of
our stock which Cabot requests to be included.
The registration rights agreement sets forth customary registration
procedures, including a covenant by us to make available our employees and
personnel for road show presentations. All registration expenses incurred in
connection with the registration rights agreement will be paid by us. In
addition, we will be required to reimburse Cabot for the fees and disbursements
of its outside counsel retained in connection with any such registration. The
registration rights agreement also imposes customary indemnification and
contribution obligations on us for the benefit of Cabot and any underwriters
with respect to liabilities resulting from untrue statements or omissions in any
registration statement used in any such registration, although Cabot must
indemnify us for those liabilities resulting from information provided by Cabot.
The registration rights under the registration rights agreement will remain
in effect with respect to the shares covered by the agreement until:
- - those shares have been sold pursuant to an effective registration statement
under the Securities Act;
- - those shares have been sold to the public pursuant to Rule 144 under the
Securities Act;
- - those shares have been transferred and new certificates delivered, where the
new certificates do not bear a legend restricting further transfer and where
subsequent public distribution of those shares does not require registration
under the Securities Act; or
- - those shares cease to be outstanding.
EMPLOYEE MATTERS AGREEMENT
We and Cabot have entered into an employee matters agreement which will be
effective upon the completion of this offering. This agreement sets forth our
mutual understanding with respect to the responsibilities, obligations and
liabilities relating to the compensation and benefits of our employees in
connection with the offering and spin-off. Under this agreement, with certain
exceptions, we will be solely responsible for the compensation and benefits of
our employees on and following the offering. The principal exception to this
rule is retirement benefits for our employees; Cabot's tax-qualified retirement
plans will retain all assets and liabilities relating to our employees on and
after this offering (subject to any distributions from the plans that are
required or permitted by the plans and applicable law). The employee matters
agreement also provides that equity awards granted to our employees under
Cabot's equity incentive plans when they were employees of Cabot may be
converted into equity awards of our company upon agreement between Cabot and us.
OPTION GRANTS TO CABOT EMPLOYEES
We intend to grant options under the 2000 Equity Incentive Plan to Cabot
employees. See "Management -- Grants Under the 2000 Equity Incentive Plan".
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CORPORATE OPPORTUNITIES AND
CONFLICTS OF INTEREST
All of our directors have fiduciary duties to our company and our
stockholders under applicable Delaware law. Specifically, our directors are
charged with a duty of care and a duty of loyalty to our company and our
stockholders. This duty of care generally requires our directors to inform
themselves of all material information relevant to business decisions they make
on behalf of our company. This duty of loyalty generally requires our directors
to act in the best interests of our company and our stockholders and to refrain
from conduct that would injure our company or our stockholders or deprive our
company of an advantage or opportunity to which we are entitled.
Three members of our board of directors are also directors or executive
officers of Cabot. Our directors who are also directors or executive officers of
Cabot will also have fiduciary or similar duties to Cabot. As a result of their
duties and obligations to both companies, these directors may have conflicts of
interest with respect to matters involving or affecting us, such as acquisitions
and other corporate opportunities that may be suitable for both us and Cabot. In
addition, after this offering and the spin-off, a number of our directors and
executive officers will continue to own Cabot stock and options on Cabot stock
they acquired as employees of Cabot. This ownership could create, or appear to
create, potential conflicts of interest when these directors and officers are
faced with decisions that could have different implications for our company and
Cabot. While there are provisions in our certificate of incorporation designed
to resolve these conflicts in a manner that is fair to both us and Cabot, these
conflicts may not ultimately be resolved in a fair manner to both parties. For a
further discussion of these provisions, see "Description of Capital
Stock -- Corporate Opportunities".
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SECURITY OWNERSHIP OF PRINCIPAL
STOCKHOLDER AND MANAGEMENT
PRINCIPAL STOCKHOLDER
The following table sets forth information with respect to beneficial
ownership of common stock by Cabot as of February 29, 2000 and as adjusted to
reflect the sale of the shares of common stock offered by us in this offering.
Cabot is the only person or entity that owns beneficially more than 5% of the
outstanding shares of common stock.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
SHARES
BENEFICIALLY OWNED
SHARES OF -------------------
NAME AND ADDRESS COMMON STOCK BEFORE AFTER
OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------- ------------------ -------- --------
<S> <C> <C> <C>
Cabot Corporation....................................... 18,989,744 100% 82.6
75 State Street
Boston, Massachusetts
</TABLE>
MANAGEMENT
The following table sets forth information regarding beneficial ownership
of the outstanding common stock of Cabot as of February 29, 2000 by (a) each of
our directors and each of the executive officers named in the Summary
Compensation Table and (b) all of our directors and executive officers as a
group. The number of shares of common stock shown below includes shares issuable
upon the exercise of stock options and, for each person who is a participant in
Cabot's employee stock plan, shares issuable upon conversion of shares of
Cabot's convertible preferred stock allocated to such participant's account
under Cabot's employee stock plan.
As used in this table, "beneficial ownership" means the sole or shared
power to vote or direct the voting or to dispose or direct the disposition of
any security. A person is deemed to be the beneficial owner of securities that
can be acquired within 60 days from the date of this prospectus through the
exercise of any option, warrant or right. Shares of common stock subject to
options, warrants or rights that are currently exercisable or exercisable within
60 days are deemed outstanding for computing the ownership percentage of the
person holding such options, warrants or rights, but are not deemed outstanding
for computing the ownership percentage of any other person. The amounts and
percentages are based upon 66,909,163 shares of Cabot common stock outstanding
as of February 29, 2000.
<TABLE>
<CAPTION>
PERCENTAGE
OWNERSHIP PERCENTAGE
SHARES OF OF OUR SHARES OF CABOT OWNERSHIP
NAME OUR COMMON STOCK COMPANY COMMON STOCK OF CABOT
- ---- ---------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Kennett F. Burnes(1)............. -- -- 548,717 *
Samuel W. Bodman(2).............. -- -- 1,481,464 2.2
William P. Noglows(3)............ -- -- 126,900 *
Matthew Neville(4)............... -- -- 77,830 *
William C. McCarthy.............. -- -- 6,129 *
Daniel J. Pike................... -- -- 17,583 *
Chris C. Yu...................... -- -- 19,948 *
Bruce M. Zwicker................. -- -- 25,288 *
All directors and executive
officers as a group (8
persons)(5).................... -- -- 2,287,753 3.4
</TABLE>
- ---------------
* Denotes less than 1% beneficial ownership.
(1) Includes 148,986 shares of Cabot common stock that Mr. Burnes has the right
to acquire pursuant to stock options.
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(2) Includes 41,725 shares of Cabot common stock that Mr. Bodman has the right
to acquire pursuant to stock options.
(3) Includes 22,186 shares of Cabot common stock that Mr. Noglows has the right
to acquire pursuant to stock options.
(4) Includes 5,000 shares of Cabot common stock that Mr. Neville has the right
to acquire pursuant to stock options.
(5) Excludes shares of Cabot common stock beneficially owned by Mr. Yu, our
former Director of Research and Technology.
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DESCRIPTION OF CAPITAL STOCK
We intend to amend our certificate of incorporation upon the completion of
this offering. The form of our amended certificate of incorporation has been
filed as an exhibit to the registration statement of which this prospectus is a
part. The following summarizes the terms and provisions of our capital stock
upon the closing of this offering. The summary is not complete, and you should
read the form of our certificate of incorporation and our bylaws.
Upon the completion of this offering, our authorized capital stock will
consist of 200 million shares, $0.001 par value per share, of common stock and
20 million shares, $0.001 par value per share, of preferred stock.
COMMON STOCK
Each share of our common stock will be identical in all respects. Each of
these shares will entitle its holder to the same rights and privileges enjoyed
by all other holders of common stock and will subject them to the same
qualifications, limitations and restrictions to which all other holders of
common stock will be subject. Holders of our common stock will be entitled to
one vote per share on all matters to be voted on by our stockholders. Holders of
common stock will not have cumulative rights, so that holders of a majority of
the shares of common stock present at a meeting at which a quorum is present
will be able to elect all of our directors eligible for election in a given
year. The holders of a majority of the voting power of the issued and
outstanding common stock will constitute a quorum. Holders of our common stock
will be entitled to receive ratably the dividends, if any, that are declared by
our board of directors. Our board of directors may declare dividends out of
funds legally available for the declaration of dividends, subject to the
preferential rights of any holder of preferred stock that may from time to time
be outstanding. Upon our liquidation, dissolution or winding up, the holders of
our common stock will be entitled to share pro rata in the distribution of all
of our assets available for distribution after satisfaction of all of our
liabilities and the payment of the liquidation preference of any preferred stock
that may be outstanding. The holders of our common stock will have no preemptive
or other subscription rights to purchase common stock, and there will be no
redemptive rights or sinking fund provisions.
PREFERRED STOCK
Our board of directors will be authorized to cause shares of preferred
stock to be issued in one or more series, to:
- - determine the number of shares of each series;
- - fix the rights, powers, preferences and privileges of each series;
- - fix any qualifications, limitations or restrictions thereon; and
- - increase or decrease the number of shares of each such series.
Among the specific matters that may be determined by the board of directors
are:
- - the annual rate of dividends;
- - the redemption price, if any;
- - the terms of a sinking or purchase fund, if any;
- - the amount payable in the event of any voluntary liquidation, dissolution or
winding up of the affairs of our company;
- - conversion rights, if any; and
- - voting powers, if any.
Depending upon the terms of the preferred stock established by our board of
directors, any or all series of preferred stock could have preferences over the
common stock with respect to dividends and other distributions and upon
liquidation or could have voting or conversion rights that could adversely
affect the holders of the outstanding common stock.
In addition, the preferred stock could delay, defer or prevent a change of
control of our company. We have no present plans to issue shares of preferred
stock. Prior to the completion of this offering, however, our
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board of directors will adopt a rights plan. See "-- Rights Plan".
LIMITATION ON DIRECTORS' LIABILITIES
Our certificate of incorporation will limit the liability of our directors
to us and our stockholders to the fullest extent permitted by Delaware law.
Specifically, our directors will not be personally liable for money damages for
breach of fiduciary duty as a director, except for liability:
- - for any breach of the director's duty of loyalty to us or our stockholders;
- - for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- - under Section 174 of the Delaware General Corporation Law, which concerns
unlawful payments of dividends, stock purchases or redemptions; and
- - for any transaction from which the director derived an improper personal
benefit.
ANTI-TAKEOVER EFFECTS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND
PROVISIONS OF DELAWARE LAW
Our certificate of incorporation our bylaws and Section 203 of the Delaware
General Corporation Law will contain provisions summarized below that may delay,
discourage or prevent the acquisition or control of our company by means of a
tender offer, open market purchase, proxy fight or otherwise, including
acquisitions that might result in a premium being paid over the market price of
the common stock.
STOCKHOLDER ACTION BY WRITTEN CONSENT UNTIL THE SPIN-OFF; SPECIAL MEETINGS
Our certificate of incorporation and our bylaws will permit stockholder
action by written consent until the time that Cabot and its affiliates cease to
beneficially own an aggregate of at least a majority of our then outstanding
shares of common stock. Thereafter, any action required or permitted to be taken
by our stockholders may be effected only at a duly called annual or special
meeting of stockholders and may not be effected by a written consent in lieu of
a meeting of stockholders. Prior to Cabot and its affiliates ceasing to
beneficially own an aggregate of at least a majority of our then outstanding
shares of common stock, we will call a special meeting of stockholders promptly
upon the request of Cabot. After Cabot and its affiliates cease to beneficially
own an aggregate of at least a majority of our then outstanding shares of common
stock, except as otherwise required by law and subject to the rights of the
holders of any preferred stock, special meetings of stockholders for any purpose
may be called only by our board of directors, its chairman or, at the written
request of a majority of our board of directors, our president, and the power of
stockholders to call a special meeting will be specifically denied.
ADVANCE NOTICE PROCEDURES
Our bylaws require advance notice of the nomination, other than by or at
the direction of our board of directors, of candidates for election as
directors, as well as for other stockholder proposals, to be considered at
annual meetings of stockholders. Subject to some exceptions, notice of intent to
nominate a director or raise matters at these meetings will have to be received
in writing by us not less than 90 nor more than 120 days prior to the
anniversary of the previous year's annual meeting of stockholders, and must
contain specific information concerning the person to be nominated or the
matters to be brought before the meeting and concerning the stockholder
submitting the proposal. If the chairman of a meeting determines that an
individual was not nominated, or other business was not brought before the
meeting, in accordance with the advance notice procedures, that individual will
not be eligible for election as a director, or that business will not be
conducted at such meeting, as the case may be.
BOARD OF DIRECTORS
Our certificate of incorporation and our bylaws will provide that the
number of directors shall be determined from time to time by a resolution
adopted by the majority of our directors. Our certificate of incorporation and
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our bylaws will also provide that the board of directors shall be divided into
three classes, as nearly equal in number as possible. Each director will hold
office until that person's successor is duly elected and qualified. Vacancies on
the board of directors shall be filled by a majority of the remaining directors,
or by a sole remaining director, or by our stockholders if the vacancy was
caused by the action of our stockholders.
Subject to the rights of the holders of any series of preferred stock or
any other series or class of stock to elect additional directors under specified
circumstances, prior to the date when Cabot and its affiliates cease to
beneficially own an aggregate of at least a majority of our then outstanding
shares of common stock, any director may be removed from office, with or without
cause, by the affirmative vote of the holders of at least a majority of the
outstanding common stock, voting together as a single class. On and after the
date when Cabot and its affiliates cease to beneficially own an aggregate of at
least a majority of our then outstanding shares of common stock, any director
may be removed from office only for cause upon the affirmative vote of holders
of at least 80% of our outstanding common stock, voting as a single class. A
director may not be removed by the stockholders at a meeting unless the notice
of the meeting states that the purpose, or one of the purposes, of the meeting
is removal of the director.
The provisions of our certificate of incorporation and bylaws described
above would preclude a third party from removing incumbent directors and
simultaneously gaining control of our board of directors by filling the
vacancies created by removal with its own nominees. Under the classified board
provisions described above, it would take at least two elections of directors
for any individual or group to gain control of our board of directors.
ADOPTION, AMENDMENT OR REPEAL OF CERTIFICATE OR BYLAWS
Our certificate of incorporation will provide that the affirmative vote of
holders of at least 80% of our outstanding common stock is required to amend,
repeal or adopt any provision of our certificate of incorporation inconsistent
with the provisions of that certificate regarding amendments to our bylaws,
stockholder action by written consent, special meetings of stockholders, our
board of directors and the election and removal of directors. Our certificate of
incorporation will further provide that our bylaws may be altered, amended or
repealed only by our board of directors or upon the affirmative vote of holders
of at least 80% of our outstanding common stock, voting together as a single
class.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
We must comply with the provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns, or,
in some cases, within three years prior, did own, 15% or more of the
corporation's voting stock. Under Section 203, a business combination between
our company and an interested stockholder is prohibited unless it satisfies one
of the following three conditions:
- - our board of directors must have previously approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder;
- - upon completion of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85% of
our voting stock outstanding at the time the transaction commenced, excluding,
for purposes of determining the number of shares outstanding, shares owned by
(1) persons who are directors and also officers and
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(2) employee stock plans, in some instances; and
- - the business combination is approved by our board of directors and authorized
at an annual or special meeting of the stockholders by the affirmative vote of
the holders of at least 66 2/3% of the outstanding voting stock that is not
owned by the interested stockholder.
CORPORATE OPPORTUNITIES
Our certificate of incorporation will provide that we and Cabot and our and
their respective subsidiaries may engage in the same or similar business
activities and lines of business and have an interest in the same areas of
corporate opportunities and that we and Cabot will continue to have contractual
and business relations with each other (including service of directors and
officers of Cabot as our directors and officers).
Our certificate of incorporation will provide that, except as Cabot may
otherwise agree in writing, Cabot will have the right to:
- - engage in the same or similar business activities or lines of business as us;
- - do business with any of our potential or actual customers or suppliers; and
- - employ or otherwise engage, or solicit for such purpose, any of our officers,
directors or employees.
Neither Cabot nor any officer, employee or director of Cabot will be liable to
us or our stockholders for breach of any fiduciary or other duty by reason of
these activities.
If Cabot acquires knowledge of a potential transaction or matter that may
be a corporate opportunity for both Cabot and us, Cabot will have no duty to
communicate that opportunity to us and will not be liable to us or our
stockholders because Cabot pursues or acquires that corporate opportunity for
itself, directs that corporate opportunity to another person or entity or does
not present that corporate opportunity to us.
If one of our directors, officers or employees who is also a director,
officer or employee of Cabot acquires knowledge of a potential transaction or
matter that may be a corporate opportunity for both us and Cabot, our
certificate will require that our director, officer or employee act in good
faith in accordance with the following policy:
- - a corporate opportunity offered to any person who is one of our directors but
not one of our officers or employees and who is also an officer or employee
(whether or not a director) of Cabot will belong to Cabot, unless the
opportunity is expressly offered to that person solely in his or her capacity
as our director, in which case the opportunity will belong to us;
- - a corporate opportunity offered to any person who is one of our officers or
employees whether or not a director and who is also a director but not an
officer or employee of Cabot will belong to us, unless the opportunity is
expressly offered to that person solely in his or her capacity as a director
of Cabot, in which case the opportunity will belong to Cabot; and
- - a corporate opportunity offered to any other person who is (1) either one of
our officers or employees and either an officer or employee of Cabot or (2) a
director of both us and Cabot, will belong to Cabot, unless such opportunity
is expressly offered to the person solely in his or her capacity as one of our
officers, directors or employees, in which case the opportunity will belong to
us.
For purposes of these corporate opportunity provisions, any of our
directors who is chairman or vice chairman of our board of directors or a
committee thereof will not be deemed to be one of our officers by reason of
holding the position, unless the person is one of our full-time employees. If a
corporate opportunity is offered to us or Cabot other than through a person who
is an officer, director or employee of both us and Cabot, either we or Cabot can
pursue that opportunity.
Under our certificate of incorporation, any corporate opportunity that
belongs to Cabot or to us pursuant to the policy described above will not be
pursued by the other or directed by the other to another person or
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entity unless and until Cabot or we, as the case may be, determine not to pursue
the opportunity. If the party to whom the corporate opportunity belongs does
not, however, within a reasonable period of time, begin to pursue, or thereafter
continue to pursue, such opportunity diligently and in good faith, the other
party may pursue such opportunity or direct it to another person or entity.
Our directors, officers or employees acting in accordance with the policy
described above:
- - will be deemed fully to have satisfied their fiduciary or other duties to us
and our stockholders with respect to that corporate opportunity;
- - will not be liable to us or our stockholders for any breach of fiduciary duty
by reason of the fact that Cabot pursues or acquires that opportunity for
itself or directs that corporate opportunity to another person or do not
communicate information regarding such opportunity to us;
- - will be deemed to have acted in good faith and in a manner they reasonably
believe to be in our best interests; and
- - will be deemed not to have breached any duty of loyalty or other duty those
persons may have to us or our stockholders and not to have derived an improper
benefit from these actions.
The corporate opportunity provisions in our certificate of incorporation
will expire on the date that Cabot ceases to beneficially own common stock
representing at least 20% of the combined voting power of outstanding shares of
our common stock.
Our certificate of incorporation will provide that any person purchasing or
otherwise acquiring any interest in any shares of our capital stock shall be
deemed to have notice of and to have consented to these provisions.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe, L.P.
RIGHTS PLAN
Our board of directors has adopted a rights plan. Our rights plan is
designed to make it more costly and thus more difficult to gain control of us
without the consent of our board of directors. Under the rights plan:
- - our board of directors will declare a dividend of one preferred share purchase
right, or a right, for each outstanding share of our common stock; and
- - each right will entitle the registered holder to purchase from us one
one-thousandth of a share of a new Series A Junior Participating Preferred
Stock, par value $.001 per share, at a price of $130 per one thousandth of a
share, with adjustment.
The description and terms of the rights are described in a rights agreement
between us and the designated rights agent. The description presented below is
intended as a summary only and is qualified in its entirety by reference to the
rights agreement, a form of which has been filed as an exhibit to the
registration statement of which this prospectus forms a part. See "Where You Can
Find More Information".
The rights will be attached to all certificates representing outstanding
shares of our common stock, and no separate right certificates will be
distributed. The rights will separate from the shares of our common stock on the
close of business on the tenth day after the earlier to occur of:
- - a public announcement that, without the prior consent of our board of
directors, a person or group, known as an acquiring person, including any
affiliates or associates of that person or group, acquired beneficial
ownership of securities having 15% or more of the voting power of all our
outstanding common stock. Cabot and its subsidiaries (for so long as they own
at least 50% of our outstanding equity securities), employee benefit plans
established by or for the benefit of employees of Cabot or its subsidiaries,
and members of the Godfrey L. Cabot family and various trusts, estates,
corporations and other entities established for the benefit of or directly or
indirectly owned by the members of the
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Godfrey L. Cabot family, are not included in the definition of acquiring
person except in cases where Cabot family members or these trusts, estates,
corporations and other entities are acting with certain third parties; and
- - the close of business on the tenth day following the date of the commencement
of, or announcement of an intention to commence, a tender offer or exchange
offer that would result in any person or group becoming an acquiring person.
We refer to the date on which the rights separate from our common stock as
the distribution date. The first date of public announcement that a person or
group has become an acquiring person is the stock acquisition date.
Until the distribution date, rights will be transferred only with the
shares of our common stock. In addition, until the distribution date, or earlier
redemption or expiration, of the rights:
- - new common stock certificates issued upon transfer or new issuance of shares
of common stock will contain a notation incorporating the rights agreement by
reference; and
- - the surrender for transfer of any certificates for shares of common stock
outstanding, even without a notation, will also constitute the transfer of the
rights associated with the shares of common stock represented by the
certificate.
As soon as practicable following the distribution date, separate
certificates evidencing the rights will be mailed to holders of record of the
shares of common stock as of the close of business on the distribution date, and
to each initial record holder of various shares of common stock issued after the
distribution date. The separate right certificates alone will evidence the
rights.
The rights are not exercisable until the distribution date and will expire
at 5:00 P.M., New York time, on April 7, 2010, unless earlier redeemed by us as
described below.
If any person becomes an acquiring person, except by a permitted offer as
defined below, or in the event that more than 50% of our assets or earning power
is sold or transferred in either case with or to an acquiring person, each
holder of a right will have, under the terms of the rights agreement, a flip-in
right. A flip-in right is the right to receive upon exercise the number of
shares of common stock, or, in the discretion of our board of directors, the
number of one-thousandths of a share of preferred stock, or, in some
circumstances, our other securities, having a value immediately before the
triggering event equal to two times the exercise price. Notwithstanding the
description above, following the occurrence of the event described above, all
rights that are, or generally were, beneficially owned by any acquiring person
or any affiliate or associate of an acquiring person will be null and void.
A permitted offer is a tender or exchange offer for all outstanding shares
of our common stock that is at a price and on terms determined, before the
purchase of shares under the tender or exchange offer, by our board of
directors, to be adequate, taking into account all factors that our board of
directors deems relevant, and otherwise in our best interests and our
stockholders' best interest, other than the person or any affiliate or associate
on whose behalf the offer is being made.
If, at any time following the stock acquisition date:
- - we are acquired in a merger or other business combination transaction in which
the holders of all of the outstanding shares of common stock immediately
before the completion of the transaction are not the holders of all of the
surviving corporation's voting power; or
- - more than 50% of our assets or earning power is sold or transferred with or to
an acquiring person; or
- - if in the transaction all holders of shares of common stock are not offered
the same consideration;
then each holder of a right, except rights which previously have been voided as
described above, shall afterwards have the right, known as a flip-over right, to
receive, upon
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exercise, shares of common stock of the acquiring company having a value equal
to two times the exercise price. The holder of a right will continue to have the
flip-over right whether or not the holder exercises or surrenders the flip-in
right.
The purchase price payable, and the number of thousandths of a share of
preferred stock or other securities issuable, upon exercise of the rights may be
adjusted from time to time to prevent dilution in the event of any one of the
following:
- - a stock dividend on, or a subdivision, combination or reclassification of, the
preferred stock;
- - the grant to holders of the shares of preferred stock of various rights or
warrants to subscribe for or purchase shares of preferred stock at a price, or
securities convertible into shares of preferred stock with a conversion price,
less than the then current market price of the shares of preferred stock; or
- - the distribution to holders of the shares of preferred stock of evidences of
indebtedness or assets, excluding regular quarterly cash dividends, or of
subscription rights or warrants, other than those referred to above.
The purchase price may also be adjusted in the event of:
- - a stock split of the shares of common stock;
- - a stock dividend on the shares of common stock payable in shares of common
stock; or
- - subdivisions, consolidations or combinations of the shares of common stock
occurring, in any case, before the distribution date.
With some exceptions, no adjustment in the purchase price will be required
until cumulative adjustments require an adjustment of at least 1% in the
purchase price. No fractional one-thousandth of a share of preferred stock will
be issued and, instead, an adjustment in cash will be made based on the market
price of the shares of preferred stock on the last trading day before the date
of exercise.
At any time before the earlier to occur of:
- - a person becoming an acquiring person; and
- - the expiration of the rights and various other circumstances,
we may redeem the rights in whole, but not in part, at a price of $0.01 per
right, or the redemption price, which redemption shall be effective upon the
action of our board of directors. Additionally, we may redeem the then
outstanding rights in whole, but not in part, at the redemption price in
connection with a merger or other business combination transaction or series of
transaction is which all holders of common stock are treated alike but not
involving an interested stockholder, as defined below.
The shares of preferred stock purchasable upon exercise of the rights will
be non-redeemable. Each share of preferred stock will have a minimum
preferential quarterly dividend equal to the greater of $10.00 per share and an
amount equal to 1,000 times the aggregate amount of all cash dividends per share
and non-cash dividends and distributions per share other than dividends payable
in the form of common stock. In the event of liquidation, the holders of
preferred stock will be entitled to receive the greater of:
- - $10.00 per share, plus the amount of accrued and unpaid dividends and
distributions on the preferred stock, whether or not declared; and
- - the aggregate amount per share equal to 1,000 times the aggregate amount to be
distributed per share to holders of common stock.
Each share of junior preferred stock will have 1,000 votes, voting together
with the shares of common stock. In the event of any merger, consolidation or
other transaction in which shares of common stock are exchanged, each share of
preferred stock will be entitled to receive 1,000 times the amount and type of
consideration received per share of common stock. The rights of the preferred
stock as to dividends, liquidation and voting,
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and in the event of mergers and consolidations, are protected by customary
anti-dilution provisions. In the event that the amount of accrued and unpaid
dividends on the preferred shares is equivalent to at least six full quarterly
dividends, the holders of the preferred shares shall have the right, voting as a
class, to elect two directors in addition to the directors elected by the
holders of the common shares until all cumulative dividends on the preferred
shares have been paid through the last quarterly dividend payment date or until
non-cumulative dividends have been paid regularly for at least one year.
Until a right is exercised, the holder will have no rights as a stockholder
with respect to the shares covered by that right, including, without limitation,
the right to vote or to receive dividends. While the distribution of the rights
was not taxable to our stockholders, stockholders may, depending upon the
circumstances, recognize taxable income should the rights become exercisable or
upon the occurrence of some subsequent events.
Interested stockholder means any acquiring person or any of their
affiliates or associates, or any other person in which an acquiring person or
their affiliates or associates have in excess of 5% of the total combined
economic or voting power, or any person acting in concert or on behalf of any
acquiring person or their affiliates or associates.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, 22,984,744 shares of common stock
will be outstanding, or 23,589,744 shares if the underwriters exercise their
over-allotment option in full. Of these shares, the 4,600,000 shares of common
stock, assuming the underwriters exercise their over-allotment option in full,
sold in this offering will be freely tradable without restriction or further
registration under the Securities Act, unless held by an "affiliate" of our
company as that term is defined in Rule 144 under the Securities Act. All of the
shares of common stock outstanding prior to this offering are "restricted
securities", as defined under Rule 144. These shares are restricted securities
because they were issued in private transactions not involving a public offering
and may not be sold in the absence of registration other than in accordance with
Rule 144 or Rule 701 promulgated under the Securities Act or another exemption
from registration. This prospectus may not be used in connection with any resale
of shares of common stock acquired in this offering by our affiliates.
The shares of our common stock that will continue to be held by Cabot after
the offering constitute "restricted securities" within the meaning of Rule 144,
and will be eligible for sale by Cabot in the open market after the offering,
subject to contractual lockup provisions and the applicable requirements of Rule
144. In connection with this offering, we and Cabot have agreed that, subject to
specified exceptions, for a period of 180 days after the date of this
prospectus, we and they will not, without the prior written consent of Goldman,
Sachs & Co., dispose of or hedge any shares of our common stock or any
securities convertible into or exchangeable for our common stock.
In general, under Rule 144 as currently in effect, if a minimum of one year
has elapsed since the later of the date of acquisition of the restricted
securities from the issuer or from an affiliate of the issuer, a person or
persons whose shares of common stock are aggregated, including persons who may
be deemed our affiliates, would be entitled to sell within any three-month
period a number of shares of common stock that does not exceed the greater of:
- - one percent of the then-outstanding shares of common stock, which equals
approximately 229,847 shares immediately after this offering; and
- - the average weekly trading volume during the four calendar weeks preceding the
date on which notice of the sale is filed with the SEC.
Sales under Rule 144 are also subject to certain restrictions as to the
manner of sale, notice requirements and the availability of current public
information about us. In addition, under Rule 144(k), if a period of at least
two years has elapsed since the later of the date restricted securities were
acquired from us or the date they were acquired from one of our affiliates, a
stockholder who is not our affiliate at the time of sale and who has not been
our affiliate for at least three months prior to the sale would be entitled to
sell shares of common stock in the public market immediately without compliance
with the foregoing requirements under Rule 144. Rule 144 does not require the
same person to have held the securities for the applicable periods. The
foregoing summary of Rule 144 is not intended to be a complete description.
Cabot has announced that it currently plans to complete its divestiture of
us by distributing all of the shares of our common stock which it owns to its
stockholders. See "Relationships Between Our Company and Cabot Corporation" and
"Risk Factors -- Risks Relating to Our Separation from Cabot".
Any shares distributed by Cabot will be eligible for immediate resale in
the public market without restrictions by persons other than our affiliates. Our
affiliates would be subject to the restrictions of Rule 144 described above
other than the one-year holding period requirement.
Immediately following this offering, none of the 18,989,744 "restricted
securities" will be available for immediate sale in the public market pursuant
to Rule 144(k). Shares of
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common stock issued pursuant to the 2000 Equity Incentive Plan generally will be
available for sale in the open market by holders who are not our affiliates and,
subject to the volume and other applicable limitations of Rule 144, by holders
who are our affiliates, unless those shares are subject to vesting restrictions
or the contractual restrictions described above. Following this offering, we
intend to file a registration statement on Form S-8 under the Securities Act to
register 3.5 million shares of common stock reserved or to be available for
issuance pursuant to our 2000 Equity Incentive Plan. Following this offering, we
also intend to file a registration statement on Form S-8 under the Securities
Act to register 475,000 shares of common stock reserved for issuance under our
2000 Employee Stock Purchase Plan.
Prior to this offering, there has been no public market for the common
stock. No information is currently available and we cannot predict the timing or
amount of future sales of shares, or the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the common stock prevailing from time to time. Sales of substantial
amounts of the common stock (including shares issuable upon the exercise of
stock options) in the public market after the lapse of the restrictions
described above, or the perception that such sales may occur, could materially
adversely affect the prevailing market prices for the common stock and our
ability to raise equity capital in the future. See "Risk Factors -- Risks
Relating to this Offering -- The actual or possible sale of our shares by Cabot,
which will own more than 80% of our outstanding shares, could depress or reduce
the market price of our common stock or cause our shares to trade below the
prices at which they would otherwise trade".
REGISTRATION RIGHTS
Some holders of our common stock are entitled to registration rights, which
are described under "Relationships Between Our Company and Cabot
Corporation -- Registration Rights Agreement".
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LEGAL MATTERS
Fried, Frank, Harris, Shriver & Jacobson (a partnership including
professional corporations), New York, New York will pass upon the validity of
the issuance of the shares of common stock offered hereby. The validity of the
shares being issued in this offering will be passed upon for the underwriters by
Sullivan & Cromwell, New York, New York.
EXPERTS
The financial statements as of September 30, 1998 and 1999 and for each of
the three years in the period ended September 30, 1999 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 with
respect to the common stock being offered by this prospectus. This prospectus
does not contain all of the information set forth in the registration statement
and the exhibits and schedules to the registration statement. For further
information with respect to us and the shares of common stock offered by this
prospectus, reference is made to the registration statement, including its
exhibits and schedules. With respect to statements contained in this prospectus
regarding the contents of any contract or any other document, reference is made
to the copy of that contract or other document filed as an exhibit to the
registration statement. You may review a copy of the registration statement,
including its exhibits and schedules, at the SEC's public reference room,
located at 450 Fifth Street, N.W., Washington, D.C. 20549, or at the SEC's
regional offices located at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and Seven World Trade Center, 13th Floor, New York, New York
10048 or on the Internet at http://www.sec.gov. You may obtain a copy of this
registration statement from the SEC's public reference room upon payment of
prescribed fees. Please call the SEC at (800) SEC-0330 for further information
on the operation of the public reference room.
As a result of this offering, we will become subject to the information and
reporting requirements of the Exchange Act and, in accordance with the Exchange
Act, we will file periodic reports, proxy statements and other information with
the SEC.
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CABOT MICROELECTRONICS MATERIALS DIVISION
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Report of Independent Accountants........................... F-2
Combined Balance Sheets at September 30, 1998 and 1999 and
at December 31, 1999 (unaudited).......................... F-3
Combined Statements of Income for the years ended September
30, 1997, 1998 and 1999 and for the three months ended
December 31, 1998 and 1999 (unaudited).................... F-4
Combined Statements of Division Equity for the years ended
September 30, 1997, 1998 and 1999 and for the three months
ended December 31, 1999 (unaudited)....................... F-5
Combined Statements of Cash Flows for the years ended
September 30, 1997, 1998 and 1999 and for the three months
ended December 31, 1998 and 1999 (unaudited).............. F-6
Notes to Combined Financial Statements...................... F-7
</TABLE>
F-1
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Cabot Corporation:
In our opinion, the accompanying combined balance sheets and the related
combined statements of income, of changes in Division equity and of cash flows
present fairly, in all material respects, the financial position of Cabot
Microelectronics Materials Division (the "Division"), a division of Cabot
Corporation, at September 30, 1998 and 1999, and the results of its operations
and its cash flows for each of the three years in the period ended September 30,
1999 in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Division's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
November 5, 1999
F-2
<PAGE> 90
CABOT MICROELECTRONICS MATERIALS DIVISION
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
------------------ PRO FORMA
1998 1999 1999 1999
---- ---- ---- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.......................................... $ 38 $ 38 $ 103 $ 103
Accounts receivable, less allowance for
doubtful accounts of $50 at September 30,
1998 and 1999 and December 31, 1999
(unaudited)................................ 9,057 19,888 22,563 22,563
Inventories................................... 5,913 5,269 8,617 8,617
Prepaid expenses and other current assets..... 142 285 772 772
Deferred income taxes......................... 431 640 640 640
------- ------- ------- -------
Total current assets.................. 15,581 26,120 32,695 32,695
Property, plant and equipment, net.............. 24,713 40,031 46,400 44,800
Goodwill, net................................... 1,890 1,610 1,540 1,540
Other intangible assets, net.................... 2,878 2,438 2,328 2,328
Deferred income taxes........................... 69 75 23 23
------- ------- ------- -------
Total assets.......................... $45,131 $70,274 $82,986 $81,386
======= ======= ======= =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.............................. $ 914 $ 995 1,220 1,220
Accrued expenses and other current
liabilities................................ 3,956 6,780 6,182 6,182
Distribution payable.......................... -- -- -- 71,200
------- ------- ------- -------
Total current liabilities............. 4,870 7,775 7,402 78,602
Deferred compensation........................... 233 422 528 528
------- ------- ------- -------
Total liabilities..................... 5,103 8,197 7,930 79,130
Commitments and contingencies (Note 14)
Division equity................................. 40,028 62,077 75,056 2,256
------- ------- ------- -------
Total liabilities and division equity........... $45,131 $70,274 $82,986 $81,386
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE> 91
CABOT MICROELECTRONICS MATERIALS DIVISION
COMBINED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
--------------------------- -----------------
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue...................................... $33,851 $56,862 $95,701 $20,325 $34,230
Revenue -- related party..................... 1,360 1,969 2,989 550 816
------- ------- ------- ------- -------
35,211 58,831 98,690 20,875 35,046
------- ------- ------- ------- -------
Cost of goods sold........................... 18,561 27,686 44,902 9,486 15,372
Cost of goods sold -- related party.......... 1,360 1,969 2,989 550 816
------- ------- ------- ------- -------
19,921 29,655 47,891 10,036 16,188
------- ------- ------- ------- -------
Gross profit....................... 15,290 29,176 50,799 10,839 18,858
Operating expenses:
Research and development................... 8,411 10,139 14,551 3,445 4,484
Selling and marketing...................... 1,028 3,293 4,572 954 1,250
General and administrative................. 4,468 8,576 11,880 2,570 3,896
Amortization of goodwill and other
intangibles............................. 720 720 720 180 180
------- ------- ------- ------- -------
Total operating expenses........... 14,627 22,728 31,723 7,149 9,810
------- ------- ------- ------- -------
Income before income taxes................... 663 6,448 19,076 3,690 9,048
Provision for (benefit from) income taxes.... (45) 2,211 6,796 1,313 3,300
------- ------- ------- ------- -------
Net income......................... $ 708 $ 4,237 $12,280 $ 2,377 $ 5,748
======= ======= ======= ======= =======
Unaudited pro forma net income per share..... $ 0.58 $ 0.26
======= =======
Unaudited pro forma shares outstanding....... 21,054 22,378
======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE> 92
CABOT MICROELECTRONICS MATERIALS DIVISION
COMBINED STATEMENTS OF CHANGES IN DIVISION EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
PARENT RETAINED COMPREHENSIVE COMPREHENSIVE UNEARNED DIVISION
INVESTMENT EARNINGS INCOME INCOME COMPENSATION EQUITY
---------- -------- ------------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996................... $27,147 $ (511) $ 25 $ (452) $26,209
Capital contribution from Cabot Corporation..... 1,214 1,214
Issuance of Cabot restricted stock under
employee compensation plans................... 451 (451) --
Amortization of deferred compensation........... 242 242
Net income...................................... 708 $ 708
Foreign currency translation adjustment......... 51 51
-------
Total comprehensive income...................... $ 759 759
------- ------- ------ ======= ------- -------
Balance at September 30, 1997................... 28,812 197 76 (661) 28,424
Capital contribution from Cabot Corporation..... 6,822 6,822
Issuance of Cabot restricted stock under
employee compensation plans................... 878 (878) --
Amortization of deferred compensation........... 449 449
Net income...................................... 4,237 $ 4,237
Foreign currency translation adjustment......... 96 96
-------
Total comprehensive income...................... $ 4,333 4,333
------- ------- ------ ======= ------- -------
Balance at September 30, 1998................... 36,512 4,434 172 (1,090) 40,028
Capital contribution from Cabot Corporation..... 8,067 8,067
Issuance of Cabot restricted stock under
employee compensation plans................... 2,050 (2,050) --
Amortization of deferred compensation........... 900 900
Net income...................................... 12,280 $12,280
Foreign currency translation adjustment......... 802 802
-------
Total comprehensive income...................... $13,082 13,082
------- ------- ------ ======= ------- -------
Balance at September 30, 1999................... 46,629 16,714 974 (2,240) 62,077
Capital contribution from Cabot Corporation
(unaudited)................................... 6,922 6,922
Issuance of Cabot restricted stock under
employee compensation plans (unaudited)....... 57 (57) --
Amortization of deferred compensation
(unaudited)................................... 275 275
Net income (unaudited).......................... 5,748 $ 5,748
Foreign currency translation adjustment
(unaudited)................................... 34 34
-------
Total comprehensive income (unaudited).......... $ 5,782 5,782
------- ------- ------ ======= ======= -------
Balance at December 31, 1999 (unaudited)........ $53,608 $22,462 $1,008 $(2,022) $75,056
======= ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-5
<PAGE> 93
CABOT MICROELECTRONICS MATERIALS DIVISION
COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
---------------------------- -----------------
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 708 $ 4,237 $ 12,280 $ 2,377 $ 5,748
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization...... 1,911 2,208 2,777 585 932
Noncash compensation expense....... 242 449 900 225 275
Provision for inventory
writedown........................ 30 140 130 -- --
Deferred income tax expense........ 91 (143) (215) -- 52
Loss on disposal of property, plant
and equipment.................... -- 30 141 -- (5)
Changes in operating assets and
liabilities:
Accounts receivable.............. (1,829) (3,213) (10,616) (1,775) (2,547)
Inventories...................... (1,201) (3,246) 646 899 (3,353)
Prepaid expenses and other
current assets................ (1) (139) (143) 40 (482)
Accounts payable................. 165 290 74 383 219
Accrued expenses and other
current liabilities........... 166 1,600 2,787 (700) (596)
Deferred compensation............ 79 114 189 47 106
------- ------- -------- ------- -------
Net cash provided by operating
activities............................ 361 2,327 8,950 2,081 349
------- ------- -------- ------- -------
Cash flows from investing activities:
Additions to property, plant and
equipment.......................... (1,692) (9,313) (17,194) (6,810) (7,196)
Proceeds from sale of property, plant
and equipment...................... -- 3 65 -- 6
------- ------- -------- ------- -------
Net cash used by investing activities... (1,692) (9,310) (17,129) (6,810) (7,190)
------- ------- -------- ------- -------
Net capital contributed by Cabot
Corporation........................... 1,214 6,822 8,067 4,706 6,922
------- ------- -------- ------- -------
Effect of exchange rate changes
on cash............................... 107 194 112 (56) (16)
------- ------- -------- ------- -------
Increase (decrease) in cash............. (10) 33 -- 33 65
Cash at beginning of period............. 15 5 38 5 38
------- ------- -------- ------- -------
Cash at end of period................... $ 5 $ 38 $ 38 $ 38 $ 103
======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE> 94
CABOT MICROELECTRONICS MATERIALS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO NOVEMBER 5, 1999 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
Cabot, Microelectronics Materials Division (the "Division") is a division
of Cabot Corporation ("Cabot"). The Division is a leading supplier to Chemical
Mechanical Planarization ("CMP") slurries to the semiconductor industry
worldwide. The accompanying financial statements are derived from the historical
books and records of Cabot and present the assets and liabilities, results of
operations and cash flows applicable to the Division. The financial statements
of the Division have been prepared for inclusion in a registration statement
relating to the public offering of a portion of the common stock of Cabot
Microelectronics Corporation ("CMC"), a wholly-owned subsidiary of Cabot which
was incorporated in October 1999.
The combined financial statements include the accounts of each subsidiary
or part of each subsidiary which forms Cabot's Microelectronics Materials
Division. Intercompany transactions between entities within the Division have
been eliminated.
The combined balance sheets have been prepared using the historical basis
of accounting and include all of the assets and liabilities specifically
identifiable to the Division. The combined statements of income include all
revenue and costs attributable to the Division, including a corporate allocation
of employee benefits and costs of shared services (including legal, finance,
human resources, information systems, corporate office, and safety, health and
environmental expenses). These costs are allocated to the Division based on
criteria that management believes to be equitable, such as the Division's
revenue, headcount, or actual utilization in proportion to Cabot's revenue,
headcount, or actual utilization. Management believes this provides a reasonable
estimate of the costs attributable to the Division. For the years ended
September 30, 1997, 1998 and 1999, such allocated costs amounted to $2,358,
$3,917, and $5,716, respectively, and are included in operating expenses. For
the three months ended December 31, 1998 and 1999, such allocated costs amounted
to $1,401 and $1,487, respectively. Allocated costs may not necessarily be
indicative of the costs that would have been incurred by the Division on a
stand-alone basis.
Unaudited Interim Financial Statements -- The accompanying financial
information as of December 31, 1999 and for the three-month periods ended
December 31, 1998 and 1999 is unaudited. The unaudited interim financial
information has been prepared on the same basis as the accompanying annual
financial statements. In the opinion of management, such interim financial
information reflects adjustments consisting of normal and recurring adjustments
necessary for a fair presentation of such financial information. The unaudited
results of operations for the interim periods ended December 31, 1998 and 1999
are not necessarily indicative of the results of operations to be expected for
any other interim period or for the full year.
Unaudited Pro Forma Balance Sheet -- The Division intends to distribute to
Cabot, in the form of two dividends, $17,000 expected to be borrowed under a
term loan facility (Note 16) and an amount equal to the lesser of Cabot's tax
basis in the Division upon the initial public offering (after the payment of the
$17,000 dividend) or the net proceeds of the offering. The unaudited pro forma
combined balance sheet has been prepared assuming an estimated $71,200
distribution was payable at December 31, 1999, Cabot's estimated tax basis in
the Division as of that date. In addition, certain assets amounting to
approximately $1,600, which were historically part of the Division, were not
transferred to CMC as discussed in Note 3 -- Arrangements with Cabot, Facilities
Lease Arrangements and Master Separation Agreement. The Division is
F-7
<PAGE> 95
CABOT MICROELECTRONICS MATERIALS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO NOVEMBER 5, 1999 IS UNAUDITED)
expected to lease $780 of these assets from Cabot after the initial public
offering. The removal of these assets is reflected in the pro forma balance
sheet.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH
Cash management for the Division was provided by Cabot and net cash
provided by Cabot was recorded as contributions of capital to the Division.
INVENTORIES
Inventories are stated at the lower of cost, determined on the first-in,
first-out (FIFO) basis, or market. Finished goods and work in process
inventories include material, labor and manufacturing overhead costs.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is based
on the following estimated useful lives of the assets using the straight-line
method:
<TABLE>
<S> <C>
Buildings................................................... 20-25 years
Machinery and equipment..................................... 5-10 years
Furniture and fixtures...................................... 5-10 years
Information systems......................................... 3-5 years
</TABLE>
Expenditures for repairs and maintenance are charged to expense as
incurred. Expenditures for major renewals and betterments are capitalized and
depreciated over the remaining useful lives. As assets are retired or sold, the
related cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of operations.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets were acquired in connection with a
July 1995 purchase of selected assets (see Note 4). Other intangible assets
consist of trade secrets and know-how, distribution rights, customer lists and
workforce in place. Goodwill and other intangible assets are amortized on the
straight-line basis over their estimated useful lives.
IMPAIRMENT OF LONG-LIVED ASSETS
The Division reviews long-lived assets, including goodwill, for impairment
whenever events or changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable or that the useful lives of
these assets are no longer appropriate. Each impairment test is based on a
comparison of the undiscounted cash flows to the recorded value of the asset. If
an impairment is indicated, the asset is written down to its estimated fair
value on a discounted cash flow basis.
FOREIGN CURRENCY TRANSLATION
The Division's operations in Europe and Asia operate primarily using the
local currency. Accordingly, all assets and liabilities of these operations are
translated using exchange rates in effect at the end of the period, and revenue
and costs are translated using weighted average exchange rates for the period.
The related translation adjustments are reported in Comprehen-
F-8
<PAGE> 96
CABOT MICROELECTRONICS MATERIALS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO NOVEMBER 5, 1999 IS UNAUDITED)
sive Income in division equity. Gains and losses resulting from foreign currency
transactions are immaterial for all periods presented.
FOREIGN EXCHANGE MANAGEMENT
The Division has used forward exchange contracts solely to hedge firm
commitments denominated in Japanese Yen associated with the construction of its
Japan plant. The terms of the currency instrument used to hedge this exposure
were consistent with the timing of the committed hedged transaction. The gains
and losses on the forward exchange contracts that were designated as hedges of
the firm commitment associated with the construction of its Japan plant were
deferred and capitalized as part of the cost of the plant. During fiscal 1998,
the Division had a $699 loss on these forward exchange contracts. Cash flows
from these forward exchange contracts have been included in additions to
property, plant and equipment in the combined statement of cash flows. The
purpose of the Division's foreign currency management activity is to protect the
Division from the risk that eventual cash flow requirements from significant
foreign currency commitments may be adversely affected by changes in exchange
rates. The Division has not entered into any other derivative transactions. The
Division had no forward exchange contracts during 1997 or 1999. The Division
does not use derivative financial instruments for trading or speculative
purposes.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The recorded amounts of cash, accounts receivable, and accounts payable
approximate their fair values.
CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Division to concentrations of credit
risk consist principally of accounts receivable. The Division performs ongoing
credit evaluations of its customers' financial condition and generally does not
require collateral to secure accounts receivable. The Division's exposure to
credit risk associated with nonpayment is affected principally by conditions or
occurrences within the semiconductor industry. The Division historically has not
experienced losses relating to accounts receivables from individual customers or
groups of customers. The Division maintains an allowance for doubtful accounts
based on an assessment of the collectibility of such accounts.
At September 30, 1998, one customer accounted for 40.2% of net accounts
receivable. At September 30, 1999, three customers accounted for 41.0% of net
accounts receivable.
Revenue from customers who represented more than 10% of revenue were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Customer A........................................ 42% 38% 22%
Customer B........................................ 11% 12% 10%
Customer C........................................ -- -- 15%
</TABLE>
Customers B and C in the above table are distributors.
F-9
<PAGE> 97
CABOT MICROELECTRONICS MATERIALS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO NOVEMBER 5, 1999 IS UNAUDITED)
REVENUE RECOGNITION
Revenue is recognized upon completion of delivery obligations, provided
acceptance and collectibility are reasonably assured. A provision for the
estimated warranty cost is recorded at the time revenue is recognized based on
the Division's historical experience.
The Division manufactures certain dispersions which are sold to Cabot at
cost. These sales are disclosed as revenue from related party in the combined
statements of income. Cabot and the Division have entered into a dispersions
services agreement, effective upon the closing date of the planned initial
public offering, which provides for dispersions to be sold to Cabot at cost plus
a margin. Under the new agreement, Cabot will supply the Division with fumed
metal oxide raw materials for these dispersions at no cost. Accordingly, the
cost of these fumed metal oxides will not be included in revenue or cost of
goods sold (see Note 3). Had the dispersions services agreement been effective
for the years ended September 30, 1997, 1998 and 1999 and the three months ended
December 31, 1998 and 1999, pro forma unaudited revenue from related party would
have been $988, $1,360, $1,994, $367 and $574, respectively.
COST OF GOODS SOLD
The Division has historically purchased all of its fumed metal oxides,
critical raw materials used in the manufacturing process, from Cabot at Cabot's
budgeted standard cost. Purchases of fumed metal oxides from Cabot by the
Division totaled $8,812, $16,273, and $20,310 during fiscal 1997, 1998, and
1999, respectively. Purchases of fumed metal oxides from Cabot by the Division
totaled $4,269 and $7,374 for the three months ended December 31, 1998 and 1999,
respectively.
The Division has entered into a new fumed metal oxide supply agreement with
Cabot, effective immediately prior to the closing date of the planned initial
public offering, under which it will purchase fumed metal oxides at a
contractually agreed upon price (see Note 3). Had the purchases of fumed metal
oxides that were recorded in cost of goods sold for the years ended September
30, 1997, 1998 and 1999 been at the price specified in the new supply agreement
rather than at Cabot's budgeted standard cost of manufacturing, pro forma
unaudited cost of goods sold would have been $21,235, $31,880, and $50,827,
respectively. Had the purchases of fumed metal oxides that were recorded in cost
of goods sold for the three months ended December 31, 1998 and 1999 been at the
price specified in the new supply agreement rather than at Cabot's budgeted
standard cost of manufacturing, pro forma unaudited cost of goods sold would
have been $10,738 and $16,760, respectively.
Cost of sales made to Cabot is disclosed as cost of goods sold from related
party in the combined statements of income. Had the dispersions services
agreement discussed above been effective for the years ended September 30, 1997,
1998 and 1999 and the three months ended December 31, 1998 and 1999, pro forma
unaudited cost of goods sold from related party would have been $838, $1,150,
$1,645, $301 and $490, respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
INCOME TAXES
The Division was not a separate taxable entity for federal, state or local
income tax purposes. The Division's operations are included in the consolidated
Cabot tax returns. An
F-10
<PAGE> 98
CABOT MICROELECTRONICS MATERIALS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO NOVEMBER 5, 1999 IS UNAUDITED)
income tax provision has been calculated on a separate return basis. Prior to
the consummation of the offering, the Division intends to enter into a
tax-sharing agreement with Cabot as described in Note 3.
Deferred income taxes are determined based on the estimated future tax
effects or differences between financial statement carrying amounts and the tax
bases of existing assets and liabilities. Provisions are made for the U.S.
income tax liability and additional non-U.S. taxes.
STOCK-BASED COMPENSATION
The Division participates in Cabot's stock-based compensation plans. In
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the
Division has elected to account for stock-based compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations. The Division discloses the
summary of pro forma effects to reported net income for fiscal 1997, 1998 and
1999, as if the Division had elected to recognize compensation cost based on the
fair value of the options and restricted stock granted by Cabot to employees of
the Division as prescribed by SFAS 123.
EARNINGS PER SHARE
Unaudited pro forma net income per share has been calculated using the
18,989,744 shares that will be owned by Cabot at the completion of the planned
initial public offering (the "offering") of a portion of the common stock of CMC
and the number of shares that the Division would have been required to issue to
fund a dividend to Cabot in an amount equal to Cabot's tax basis in the Division
at each period end minus the earnings from that period at an issue price per
share equal to $14.30, which is the assumed initial public offering price of
$16.00 per share less the estimated underwriting discounts and offering
expenses. Historical earnings per share are not presented in the accompanying
financial statements as such amounts are not considered meaningful.
USE OF ESTIMATES
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the combined financial statements and the reported amounts of revenue and
expenses during the reported period. Actual results could differ from those
estimates.
COMPREHENSIVE INCOME
The Division implemented SFAS No. 130 "Reporting Comprehensive Income"
("SFAS 130"), effective October 1, 1998. This standard requires the Division to
report the total changes in Division equity that do not result directly from
transactions with stockholders, including those which do not affect retained
earnings. Other comprehensive income recorded by the Division is solely
comprised of accumulated foreign currency translation adjustments, net of
related tax effects. The deferred tax expense associated with foreign currency
translation adjustments was $32, $58, and $492 during fiscal 1997, 1998 and
1999, respectively. The deferred tax expense associated with foreign currency
translation adjustments was $21 for the three months ended December 31, 1999.
F-11
<PAGE> 99
CABOT MICROELECTRONICS MATERIALS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO NOVEMBER 5, 1999 IS UNAUDITED)
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance regarding whether computer software is internal-use software,
the capitalization of costs incurred for computer software developed or obtained
for internal use and accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the public.
The Division does not expect the impact of adopting SOP 98-1, which will be
effective for the Division in fiscal 2000, to be material to its financial
condition or results of operations.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires companies to
expense start-up and organization costs as incurred. SOP 98-5 broadly defines
start-up activities and provides examples to help entities determine costs that
are and are not within the scope of SOP 98-5. SOP 98-5 will be effective for the
Division in fiscal 2000, and its initial application is to be reported as the
cumulative effective of a change in accounting principle. The Division does not
expect the impact of adopting SOP 98-5 to be material to its financial condition
or results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS 133 requires that all
derivatives be recognized at fair value in the balance sheet, and the
corresponding gains and losses be reported either in the statement of income or
as a component of comprehensive income, depending on the type of hedging
relationship that exists. The Division does not expect the impact of SFAS 133,
which will be effective for fiscal 2001, to be significant given its limited use
of derivatives.
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin No. 101 ("SAB 101"), which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. The Division is required to be in conformity with the
provisions of SAB 101 no later than October 1, 2000 and does not expect a
material change in its financial condition or results of operations as a result
of SAB 101.
3. ARRANGEMENTS WITH CABOT:
These combined financial statements have been prepared for inclusion in a
registration statement relating to the offering of a portion of the common stock
of CMC. Cabot will continue to beneficially own more than 80% of the outstanding
shares of common stock after the offering. In addition, Cabot has announced that
sometime after the offering it intends to distribute, pro rata to its
stockholders, all of the shares that it owns by means of a tax-free distribution
(subject to board of director's approval and other conditions) (the "spin-off").
CMC's relationship with Cabot following the offering and spin-off will be
governed by the following agreements.
F-12
<PAGE> 100
CABOT MICROELECTRONICS MATERIALS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO NOVEMBER 5, 1999 IS UNAUDITED)
FUMED METAL OXIDE SUPPLY AGREEMENT
The Division has entered into a fumed metal oxide supply agreement with
Cabot which will become effective upon the closing of the offering. Cabot will
continue to be the exclusive supplier of fumed metal oxides, including fumed
silica, for the Division's existing slurry products. The agreement provides for
a fixed annual increase in the price of fumed silica of approximately 2% and
additional increases if Cabot's raw material costs increase. The agreement
contains provisions requiring Cabot to supply the Division with fumed silica in
specified volumes. The Division is obligated to purchase at least 90% of the
six-month volume forecast and the Division must pay damages to Cabot if the
Division purchases less than that amount. In addition, the Division is obligated
to pay all reasonable costs incurred by Cabot to provide quality control testing
at levels greater than that which Cabot provides to other customers. Under the
agreement, Cabot will also supply fumed alumina on terms generally similar to
those described above. Cabot is not permitted to sell fumed metal oxides to
third parties for use in CMP applications.
Under the agreement, Cabot warrants that its products will meet the
Division's agreed upon product specifications. Cabot will be obligated to
replace noncompliant products with products that meet the agreed upon
specifications. The agreement also provides that any change to product
specifications for fumed metal oxides must be by mutual agreement. Any increased
costs due to product specification changes will be paid by the Division.
Historically, the Division did not provide detailed product specifications
to Cabot and the Division had the ability to return products that met
specifications. Under the new agreement, the Division will provide detailed
specifications and its ability to return products may be limited.
The agreement has an initial term that expires in June 2005 and may be
terminated thereafter by either party on June 30 or December 31 in any year upon
18 months prior written notice.
DISPERSIONS SERVICES AGREEMENT
The Division has entered into a dispersions services agreement with Cabot
which will become effective upon the closing of the offering. The Division will
continue to offer fumed metal oxide dispersions services to Cabot, including the
manufacturing, packaging and testing of the dispersions. Under the agreement,
Cabot shall supply the Division with the fumed metal oxide particles necessary
for the manufacture of the dispersions. The pricing of the dispersions services
will be determined on a cost-plus basis. The Division's obligation to provide
Cabot with dispersions will be limited to certain maximum volumes and Cabot will
be obligated to supply to the Division certain forecasts of their expected
dispersions purchases. Cabot agrees not to engage any third party other than
Davies to provide dispersion services unless the Division is unable to supply
the requested or agreed-upon services. The agreement has an initial term that
expires in June 2005 and may be terminated by either party on June 30 or
December 31 in any year upon 18 months prior notice.
FACILITIES LEASE ARRANGEMENTS
Beginning in March 2000, the Division will sublease from Cabot the land and
building space located in Barry, Wales that the Division has historically
utilized. These assets, with a carrying value of approximately $827 at September
30, 1999 and approximately $780 at December 31,
F-13
<PAGE> 101
CABOT MICROELECTRONICS MATERIALS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO NOVEMBER 5, 1999 IS UNAUDITED)
1999, have been included in the Division's property, plant and equipment balance
in the financial statements. As noted below under the caption "Master Separation
Agreement", these assets were not transferred to CMC and have been reflected as
a pro forma adjustment in the unaudited pro forma balance sheet. The lease will
expire after ten years, subject to earlier termination under certain
circumstances.
MASTER SEPARATION AGREEMENT
The Division has entered into a master separation agreement with Cabot that
provides for the transfer of the legal ownership of substantially all of the
assets and liabilities of the Division to CMC. The Division's land and building
located in Barry, Wales were not transferred to CMC as discussed above under the
caption "Facilities Lease Arrangements". In addition, assets with an approximate
carrying value of $200 at September 30, 1999 and $820 at December 31, 1999 were
not transferred upon the separation. These assets are included in the historical
balance sheets and the removal of these assets is reflected in the pro forma
balance sheet. CMC has agreed to pay the costs of the transfer of assets from
Cabot including moving expenses, transfer taxes, fees related to the assignment
of contracts and expenses related to notices to customers, suppliers or other
third parties.
The Division has assumed all liabilities and obligations of Cabot relating
to or arising out of the Division's business operations any time on or before
the date of the transfer of the Division's business operations to CMC other than
various excluded liabilities.
Under the master separation agreement, Cabot has transferred intellectual
property rights related solely to the business conducted by the Division,
including patents, copyrights, trademarks, technology and know-how and licenses
and other rights concerning third party technology and intellectual property.
CMC will indemnify Cabot against any losses or actions arising out of or in
connection with the liabilities assumed by CMC as part of the separation,
including any liabilities arising out of the current litigation with Rodel
discussed elsewhere and the conduct of CMC's business and affairs after the
separation date. The Master Separation Agreement also provides that Cabot will
continue to defend the lawsuits instituted by Rodel against Cabot until CMC
notifies Cabot that they will assume defense of the lawsuits.
TRADEMARK LICENSE AGREEMENT
The Division has entered into a trademark license agreement with Cabot that
governs their use of various trademarks used in their core business. Under the
agreement, Cabot has granted a worldwide royalty-free license to use the
trademarks in connection with the manufacture, sale or distribution of products
related to the business. Under the agreement, the Division will refrain from
various actions that could interfere with Cabot's ownership of the trademarks.
The agreement also provides that the Division's license to use the trademarks
may be terminated for various reasons, including discontinued use of the
trademarks, breach of the agreement, or a change in control of CMC.
MANAGEMENT SERVICES AGREEMENT
The Division and Cabot have entered into a management services agreement,
which will become effective upon the closing of this offering, pursuant to which
Cabot will provide certain
F-14
<PAGE> 102
CABOT MICROELECTRONICS MATERIALS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO NOVEMBER 5, 1999 IS UNAUDITED)
administrative and corporate support services to the Division on an interim or
transitional basis. Such services include human resources, accounting, treasury,
tax, facilities, legal and information services. The charges for such services
allow Cabot to recover the fully allocated costs of providing such services plus
all out-of-pocket, third party costs and expenses, but without any profit to
Cabot. The management services agreement commences on the date of the offering
and continues until the earlier of the date of the spin-off or two years from
the completion of the offering. By mutual agreement, Cabot and the Division may
provide for the continuation of some services after the spin-off.
CONFIDENTIAL DISCLOSURE AND LICENSE AGREEMENT
The Division has entered into a confidential disclosure and license
agreement with respect to confidential and proprietary information, intellectual
property and certain other matters. Cabot is expected to grant a fully paid,
world-wide non-exclusive license to the Division for Cabot's copyrights, patents
and technology that were used by Cabot in connection with the Division's
activities prior to their separation from Cabot. The Division has granted to
Cabot a fully paid, world-wide, non-exclusive license to copyrights, patents and
technologies that are among the assets transferred to the Division under the
master separation agreement and that would be infringed by the manufacture,
treatment, processing, handling, marketing, sale or use of any products or
services sold by Cabot for applications other than CMP.
In addition, Cabot has assigned an undivided one-half interest in various
patents, copyrights and technology that relate to dispersion technology, which
are owned by Cabot and used in Cabot's dispersion business and the Division's
business. Any costs, taxes or other fees related to the assignments and
transfers of intellectual property will generally be paid by the Division.
INITIAL PUBLIC OFFERING AND DISTRIBUTION AGREEMENT
The Division has entered into an initial public offering and distribution
agreement with Cabot which governs the respective rights and duties of the
Division and Cabot with respect to the offering and the spin-off. This agreement
will be effective as of the closing of the offering. After the offering, Cabot
will continue to own a significant portion of the common stock of CMC. As a
result, Cabot will continue to include CMC as a "subsidiary" for financial
reporting, accounting and other purposes. Accordingly, the Division has agreed
to certain covenants in the initial public offering and distribution agreement,
which will be binding on CMC as long as Cabot owns at least 50% of the CMC's
outstanding common stock. These covenants include restrictions on incurring debt
in excess of an aggregate of $50,000 outstanding at any time. CMC will not be
allowed to take any action which has the effect of limiting Cabot's ability to
freely sell, pledge or otherwise dispose of shares of CMC's common stock. In
addition, CMC will not be allowed to issue any shares of common stock or any
rights, warrants or options to acquire CMC's common stock, if after giving
effect to such issuance, Cabot would own less than 80.5% of the then outstanding
shares of CMC's common stock. If Cabot's shareholding in CMC has dropped or will
drop below 80.5%, Cabot can require CMC to reverse or terminate the action or
issue additional equity securities to it at no cost or purchase additional
equity securities of CMC in the open market or from other third parties, in
which case CMC would have to reimburse Cabot for the costs it incurred in making
such a purchase. After the second anniversary of the closing of the initial
public offering, these provisions would terminate with respect to issuances of
equity securities by CMC under CMC's 2000 Equity Incentive Plan and 2000
Employee Stock Purchase Plan except that, in the event of any such issuance, CMC
may still be obligated to issue
F-15
<PAGE> 103
CABOT MICROELECTRONICS MATERIALS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO NOVEMBER 5, 1999 IS UNAUDITED)
additional equity securities to Cabot at the per share fair market value of
those securities. Cabot has announced that it plans to complete a spin-off
within six to twelve months after the date of a private letter ruling from the
United States Internal Revenue Service confirming that the spin-off is tax-free
to Cabot. However, Cabot is not obligated to complete the spin-off in this time
frame or at all. The agreement indemnifies Cabot against all liabilities out of
any material untrue statements or omissions in the prospectus and registration
statement related to the offering. The Division is responsible for paying the
costs and expenses incurred in connection with the offering.
TAX-SHARING AGREEMENT
After the offering, the Division will continue to be included in Cabot's
consolidated federal income tax group for as long as Cabot beneficially owns at
least 80% of the total voting power and value of the outstanding common stock.
The Division and Cabot have entered into a tax-sharing agreement pursuant to
which the Division and Cabot will make payments between them to achieve the same
effects as if the Division were to file separate federal, state and local income
tax returns. Under the terms of the tax-sharing agreement, Cabot will not be
required to make any payment to the Division for the use of the Division's tax
attributes that arise prior to the spin-off until such time as the Division
would otherwise be able to utilize such attributes. Each member of a
consolidated group is jointly and severally liable for the federal income tax
liability of each other member of the consolidated group. Accordingly, although
the tax-sharing agreement allocates tax liabilities between the Division and
Cabot, during the period in which the Division is included in Cabot's
consolidated group, the Division could be liable in the event that any federal
tax liability is incurred, but not discharged, by any other member of Cabot's
consolidated group. The Division will indemnify Cabot in the event that the
expected spin-off is not tax free to Cabot as a result of various actions taken
by or with respect to the Division or the Division's failure to take various
actions.
REGISTRATION RIGHTS AGREEMENT
Although Cabot has announced its plans to complete a spin-off within six to
twelve months of the completion of the planned offering, there is no assurance
that the spin-off will occur within this time frame or at all. Accordingly, the
Division has entered into a registration rights agreement with Cabot to provide
it with registration rights relating to the shares of CMC common stock that it
holds. These registration rights will become effective at such time that Cabot
informs the Division that it no longer intends to proceed with or complete the
spin-off.
EMPLOYEE MATTERS AGREEMENT
The Division and Cabot have entered into an employee matters agreement
under which the Division will, with certain exceptions, be solely responsible
for the compensation and benefits of employees of the Division. The principal
exception is the retirement benefits for employees of the Division. Cabot's
tax-qualified retirement plans will retain all assets and liabilities relating
to employees of the Division on and after the offering (subject to any
distributions from the plans that are required or permitted by the plans and
applicable law). The employee matters agreement also provides that equity awards
granted to employees of the Division under Cabot's equity incentive plans may be
converted into equity awards of CMC upon agreement between Cabot and the
Division.
F-16
<PAGE> 104
CABOT MICROELECTRONICS MATERIALS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO NOVEMBER 5, 1999 IS UNAUDITED)
OPTION GRANTS TO CABOT EMPLOYEES
The Division has adopted the Cabot Microelectronics Corporation 2000 Equity
Incentive Plan. The Division intends to grant options under the 2000 Equity
Incentive Plan to Cabot employees.
4. ACQUISITION OF SELECTED ASSETS:
On July 3, 1995, the Division acquired selected assets used or created in
connection with the development and sale of polishing slurries. The acquisition
was accounted for using the purchase method of accounting. Accordingly, the
purchase price of $9,800 was allocated to the net assets acquired based on their
estimated fair values. Identifiable intangible assets, consisting primarily of
trade secrets and know-how, distribution rights, customer lists and workforce in
place, were valued at $4,300 and are being amortized on a straight-line basis
over their estimated useful lives of 7-10 years. The excess of purchase price
over the fair value of the net assets acquired (goodwill) was approximately
$2,800, and is being amortized on a straight-line basis over ten years.
Accumulated amortization of goodwill and other intangible assets as of September
30, 1998 and 1999 was $2,332 and $3,052, respectively. In addition to the
purchase price, the Division also pays a royalty fee in the amount of 2.5% of
total slurry revenue through June 30, 2002. Royalty fees are paid on a monthly
basis and are included in cost of goods sold.
5. INVENTORIES:
Inventories consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------- ------------
1998 1999 1999
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.............................. $3,466 $3,297 $5,065
Work in process............................ 91 73 29
Finished goods............................. 2,356 1,899 3,523
------ ------ ------
Total............................ $5,913 $5,269 $8,617
====== ====== ======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------ ------------
1998 1999 1999
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Land..................................... $ 1,889 $ 4,168 $ 5,026
Buildings................................ 9,539 21,448 22,196
Machinery and equipment.................. 10,066 15,350 16,330
Furniture and fixtures................... 271 939 1,471
Information systems...................... 53 374 324
Construction in progress................. 6,285 2,778 6,868
------- ------- -------
Total property, plant and equipment...... 28,103 45,057 52,215
Less: accumulated depreciation........... (3,390) (5,026) (5,815)
------- ------- -------
Net property, plant and equipment........ $24,713 $40,031 $46,400
======= ======= =======
</TABLE>
F-17
<PAGE> 105
CABOT MICROELECTRONICS MATERIALS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO NOVEMBER 5, 1999 IS UNAUDITED)
Depreciation expense was $1,191, $1,488 and $2,057 during fiscal 1997, 1998
and 1999, and $405 and $752 for the three months ended December 31, 1998 and
1999, respectively.
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1998 1999
---- ----
<S> <C> <C>
Raw material accruals.................................... $1,043 $1,265
Accrued compensation..................................... 1,177 1,568
Warranty accrual......................................... 348 891
Fixed asset accruals..................................... 280 712
Other.................................................... 1,108 2,344
------ ------
Total.......................................... $3,956 $6,780
====== ======
</TABLE>
8. DEFERRED COMPENSATION:
Under the Cabot Supplemental Employee Retirement Plan, certain officers and
employees of the Division elected to defer certain percentages of their
compensation to future periods. Amounts deferred as of September 30, 1998, 1999
and December 31, 1999 were $233, $422 and $528, respectively.
9. JOINT DEVELOPMENT AGREEMENT:
In September 1998, the Division entered into a three-year joint development
agreement with a customer in the semiconductor industry. Under the agreement,
the Division provides the customer with CMP slurries of up to $3,000 over a
three-year period in exchange for the use of CMP equipment provided by the
customer. The arrangement was accounted for as a nonmonetary transaction in
accordance with APB No. 29 "Accounting for Nonmonetary Transactions." The CMP
equipment was accounted for as an operating lease in accordance with SFAS No.
13, "Accounting for Leases." The cost of leasing the CMP equipment was valued
based upon the slurries that the customer is entitled to receive over the
three-year period. Total revenue and lease expense recognized under this
agreement were $776 and $1,000, respectively, for the year ended September 30,
1999. Deferred revenue of $224 was recorded as of September 30, 1999.
10. PENSION PLANS AND POSTRETIREMENT BENEFITS:
The Division participates in Cabot's noncontributory defined benefit
pension plans which cover substantially all Cabot employees. Those Cabot
employees who accept employment with CMC will terminate employment with Cabot
but will maintain their vested and unvested rights in the pension plans. Pension
benefits accrue under several benefit plans including the Cash Balance Plan
("CBP"), a defined benefit pension plan, and the Employee Stock Ownership Plan
("ESOP"). Cabot's funding policy is to contribute annual amounts based on
actuarial and economic assumptions designed to achieve adequate funding of
projected benefit obligations. The net periodic pension cost allocated to the
Division on behalf of its employees was $26, $96 and $61 during fiscal 1997,
1998 and 1999, respectively. In November 1988, the ESOP was
F-18
<PAGE> 106
CABOT MICROELECTRONICS MATERIALS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO NOVEMBER 5, 1999 IS UNAUDITED)
funded with Cabot's newly issued Series B Convertible Preferred Stock, which was
acquired with $75,000 borrowed by the ESOP. Benefits provided under Cabot's
defined benefit pension plans are primarily based on years of service and the
employee's compensation. ESOP costs incurred on behalf of employees of the
Division were $75, $90, and $99 during fiscal 1997, 1998 and 1999, respectively.
The Division participates in Cabot's defined benefit postretirement plans
that provide certain healthcare and life insurance benefits to retired
employees. Substantially all of Cabot's U.S. employees become eligible for these
benefits if they have met certain age and service requirements at retirement.
Cabot funds the plans as claims or insurance premiums are incurred.
Postretirement benefit expense is recognized as services are rendered by the
employees. Postretirement benefit costs incurred on behalf of employees of the
Division were $80, $81, and $99 during fiscal 1997, 1998 and 1999, respectively.
11. SAVINGS PLAN AND OTHER INCENTIVE COMPENSATION PLANS:
Cabot sponsors a profit sharing and savings plan called the Cabot
Retirement Incentive Savings Plan ("CRISP"). Substantially all of the Division's
domestic employees are eligible to participate in the plan under which Cabot
will make matching contributions of at least 75% of a participant's contribution
up to 7.5% of the participant's eligible compensation, subject to limitations
required by government laws or regulations. Contributions to the CRISP on behalf
of employees of the Division were $199, $258, and $385 during fiscal 1997, 1998
and 1999, respectively.
12. EQUITY INCENTIVE PLANS AND EMPLOYEE LOANS RECEIVABLE:
Cabot sponsors an Equity Incentive Plan for key employees under which
participants may be granted various types of stock-based awards. Awards under
the 1996 plan made as part of Cabot's Long-Term Incentive Program, which
constitutes a significant portion of the awards made under this plan, consist of
restricted stock and non-qualified stock options. Restricted stock could be
purchased at a price equal to 40% of the fair market value on the date of the
award or nonqualified stock options exercisable at the fair market value of
Cabot's common stock on the date of the award. Variations of the restricted
stock awards were made to international employees in order to try to provide
results comparable to U.S. employees. The awards generally vest on the third
anniversary of the grant for employees then employed by Cabot, and the options
generally expire five years from the date of grant. In November 1998, Cabot
Board of Directors adopted the 1999 Equity Incentive Plan. The 1999 plan was
approved by the stockholders of Cabot in March 1999. This plan is similar to the
1996 Equity Incentive Plan with the exception of the purchase price, which was
established at a price equal to 30% of the fair market value on the date of the
award. A limited number of awards are also available for no consideration under
both the 1996 plan and the 1999 plan in lieu of cash compensation.
Certain Cabot employees who will become employees of the Division have been
granted nonqualified stock options and restricted stock under these plans. Stock
options have been granted at the fair market value of Cabot's common stock on
the date of grant, vest ratably over four years, and generally expire ten years
from the date of grant. Restricted stock awards generally enable an employee to
purchase restricted stock at a price equal to 30% or 40% of the fair market
value on the date of the award and such awards generally vest on the third
anniversary date of the award. Compensation expense, equal to the discount on
the restricted
F-19
<PAGE> 107
CABOT MICROELECTRONICS MATERIALS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO NOVEMBER 5, 1999 IS UNAUDITED)
stock, is considered unearned and is deferred and recorded as a charge to income
over the vesting period. Unearned compensation is recorded as a component of
Division equity.
In May 1999, Cabot adopted a stock purchase assistance plan whereby Cabot
may extend credit to its employees to purchase restricted shares of Cabot
Corporation common stock awarded under Cabot's 1999 Equity Incentive Plan. Prior
to this date, loans were made available to employees by a third party financial
institution. On June 30, 1999, Cabot purchased, from the third party financial
institution, all such full recourse loans to Cabot employees outstanding as of
that date. As of September 30, 1999, notes receivable from employees of the
Division totaled approximately $1,383. These notes receivable are not included
in the historical financial statements of the Division. Upon the closing of the
planned initial public offering, any such notes receivables related to
restricted stock held by employees of the Division will remain with Cabot.
RESTRICTED STOCK
Shares of restricted stock awarded to employees of the Division are
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RESTRICTED EXERCISE
STOCK PRICE
---------- --------
<S> <C> <C>
Outstanding at September 30, 1996...................... 46,100 $ 9.67
Granted.............................................. 31,500 19.55
Vested............................................... (8,800) 6.14
Canceled............................................. -- --
-------
Outstanding at September 30, 1997...................... 68,800 14.64
Granted.............................................. 48,200 17.09
Vested............................................... (10,000) 10.00
Canceled............................................. (300) 14.13
-------
Outstanding at September 30, 1998...................... 106,700 16.19
Granted.............................................. 95,300 33.09
Vested............................................... (30,300) 9.62
Canceled............................................. (4,700) 17.70
-------
Outstanding at September 30, 1999...................... 167,000 $26.98
=======
</TABLE>
Total compensation expense recognized by the Division for restricted stock
based awards under APB 25 amounted to $242, $449, and $900 during fiscal 1997,
1998 and 1999, respectively.
F-20
<PAGE> 108
CABOT MICROELECTRONICS MATERIALS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO NOVEMBER 5, 1999 IS UNAUDITED)
STOCK OPTIONS
Cabot stock option activity related to employees of the Division is
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
STOCK EXERCISE
OPTIONS PRICE
------- --------
<S> <C> <C>
Balance at September 30, 1996........................... 13,072 $ 9.13
Granted............................................... 1,300 23.88
Exercised............................................. -- --
Canceled.............................................. -- --
------
Balance at September 30, 1997........................... 14,372 10.46
Granted............................................... 17,615 35.31
Exercised............................................. (4,000) 8.72
Canceled.............................................. -- --
------
Balance at September 30, 1998........................... 27,987 26.35
Granted............................................... 63,000 27.00
Exercised............................................. (2,400) 10.47
Canceled.............................................. (5,850) 35.31
------
Balance at September 30, 1999........................... 82,737 $26.67
======
</TABLE>
There were no options granted at prices below the quoted market price of
common stock.
Additional information about outstanding options to purchase Cabot common
stock held by employees of the Division at September 30, 1999 is as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICE OF SHARES LIFE (IN YEARS) PRICE OF SHARES PRICE
- ----------------------- --------- --------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$7.59-$10.47............. 6,272 .97 $ 7.75 6,272 $ 7.75
$23.88-$35.31............ 76,465 2.46 28.22 400 26.70
------ ------ ----- ------
82,737 $26.67 6,672 $ 8.89
====== ====== ===== ======
</TABLE>
As permitted by SFAS 123, the Division has chosen to continue to account
for stock options in accordance with the provisions of APB 25 and, accordingly,
no compensation expense related to stock option grants was recorded.
F-21
<PAGE> 109
CABOT MICROELECTRONICS MATERIALS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO NOVEMBER 5, 1999 IS UNAUDITED)
Pro forma information regarding net income is required by SFAS 123 and has
been determined as if the Division had accounted for stock options under the
fair value method using the Black-Scholes option-pricing model and the following
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected stock price volatility...................... 26% 34% 35%
Risk free interest rate.............................. 6.54% 5.63% 5.42%
Expected life of options............................. 4 years 4 years 4 years
Expected annual dividends............................ $0.40 $0.44 $0.44
</TABLE>
The estimated weighted average fair value of options granted by Cabot to
employees of the Division during fiscal 1997, 1998 and 1999 were $6.37, $11.00,
and $8.24, respectively. Had the fair value based method been adopted, the
Division's pro forma net income for fiscal 1997, 1998 and 1999 would have been
$707, $4,218 and $12,213, respectively.
13. INCOME TAXES:
Income before income taxes was as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Domestic................................................ $293 $6,178 $18,655
Foreign................................................. 370 270 421
---- ------ -------
Total......................................... $663 $6,448 $19,076
==== ====== =======
</TABLE>
Taxes on income consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
U.S. federal and state:
Current............................................... $(156) $1,953 $6,522
Deferred.............................................. (17) (182) (234)
----- ------ ------
Total................................................... (173) 1,771 6,288
----- ------ ------
Foreign:
Current............................................... 20 401 489
Deferred.............................................. 108 39 19
----- ------ ------
Total................................................... 128 440 508
----- ------ ------
Total U.S. and foreign.................................. $ (45) $2,211 $6,796
===== ====== ======
</TABLE>
F-22
<PAGE> 110
CABOT MICROELECTRONICS MATERIALS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO NOVEMBER 5, 1999 IS UNAUDITED)
The provision for income taxes at the Divisions effective tax rate differed
from the provision for income taxes at the statutory rate as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Computed tax expense at the federal statutory rate...... $ 232 $2,257 $6,677
U.S. benefits from research and development
activities............................................ (353) (367) (344)
State taxes, net of federal effect...................... 10 58 508
Impact of foreign taxation at different rates,
repatriation and other................................ 62 354 155
Foreign sales corporation............................... (17) (118) (243)
Other, net.............................................. 21 27 43
----- ------ ------
(Benefit) provision for income taxes.................... $ (45) $2,211 $6,796
===== ====== ======
</TABLE>
The Division's effective tax rate differed from the statutory tax rate
during the three months ended December 31, 1998 and 1999 primarily as a result
of tax benefits generated as a result of research and development activities.
Significant components of deferred income taxes were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1998 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Amortization.............................................. $ 281 $ 367
Employee benefits......................................... 596 1,118
Inventory................................................. 100 89
Product warranty.......................................... 122 168
Accrued legal fees........................................ 64 105
State and local taxes..................................... 67 144
Other..................................................... 58 133
------ ------
Total deferred tax assets......................... $1,288 $2,124
====== ======
Deferred tax liabilities:
Depreciation and amortization............................. $ 698 $ 827
Translation adjustment.................................... 90 582
------ ------
Total deferred tax liabilities.................... $ 788 $1,409
====== ======
</TABLE>
14. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
Cabot, on behalf of the Division, leases certain transportation vehicles,
warehouse facilities, office space, machinery and equipment under cancelable and
noncancelable leases, most of which expire within ten years and may be renewed
by the Division. Rent expense under such arrangements during fiscal 1997, 1998
and 1999 totaled $160, $150 and $1,439, respectively.
F-23
<PAGE> 111
CABOT MICROELECTRONICS MATERIALS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO NOVEMBER 5, 1999 IS UNAUDITED)
Future minimum rental commitments under noncancelable leases as of
September 30, 1999 are as follows:
<TABLE>
<S> <C>
2000................................................ $1,327
2001................................................ 1,092
2002................................................ 69
2003................................................ 26
2004................................................ 11
2005 and thereafter................................. --
------
$2,525
======
</TABLE>
OTHER LONG-TERM COMMITMENTS
The Division has a long term supply agreement with the Division's largest
customer. The agreement was designed to provide this customer with specified
quantities of polishing slurries at agreed-upon prices. This agreement expires
in January 2002.
The Division has an agreement with Davies Imperial Coatings, Inc.
("Davies") pursuant to which Davies will perform certain agreed upon dispersion
services for the Division. The Division has agreed to purchase minimum amounts
of services per year and has also agreed to invest $150 per year in capital
improvements or other expenditures to maintain capacity at the Davies
dispersions facility. The initial term of this agreement expires in October
2004, with automatic one-year renewals, and contains a 90 day cancellation
clause executable by either party.
CONTINGENCIES
In June 1998, a lawsuit was commenced by Rodel, Inc. ("Rodel") against
Cabot seeking injunctive relief and damages relating to allegations that Cabot,
through the Division, is infringing on a United States patent that Rodel owns.
The action is presently in discovery and a trial is scheduled to begin in
November 2000. In April 1999, Rodel commenced a second lawsuit against Cabot
seeking injunctive relief and damages relating to allegations that Cabot is
infringing two other United States patents owned by an affiliate of Rodel. In
the first lawsuit, the only product that is specifically alleged to infringe a
Rodel patent is the Division's W2000 slurry, which is used to polish tungsten
and which currently accounts for a significant portion of the Division's
revenue. The second lawsuit does not allege infringement by any specific
products; instead, it cites one of Cabot's patents (which relates to a CMP
polishing slurry for metal surfaces including, among other things, aluminum and
copper) as evidence of infringement by Cabot through the manufacture and sale of
unspecified products. At this stage, the Division cannot predict whether or to
what extent Rodel will make specific infringement claims with respect to any of
the Division's products other than the Division's W2000 slurry in these or any
future proceedings. It is possible that Rodel will claim that many of the
Division's products infringe its patents.
Although Cabot is the only named defendant in these lawsuits, the Division
has agreed to indemnify Cabot for any and all losses and expenses arising out of
this litigation as well as any other litigation arising out of the Division's
business. Cabot and the Division believe that they have meritorious defenses to
these actions and intend to vigorously defend themselves. However, it is not
possible to predict the ultimate outcome of these lawsuits. These claims, even
if they are without merit, could be expensive and time consuming to defend and
could adversely
F-24
<PAGE> 112
CABOT MICROELECTRONICS MATERIALS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO NOVEMBER 5, 1999 IS UNAUDITED)
affect the Division's business, financial condition and results of operations.
If Cabot or the Division were to lose these lawsuits, they may be liable for
significant damages and legal expenses and may be enjoined from manufacturing
slurry products. It is not possible to estimate the amount of a probable loss,
if any, to the Division that might result from this matter. Accordingly, no
provision has been made in the Division's combined financial statements.
15. FINANCIAL INFORMATION BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA:
The Division has adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"), which was effective for the
fiscal year ended September 30, 1999.
The Division operates predominantly in one industry segment -- the
development, manufacture, and sale of CMP slurries. Although the Division's
products can be categorized into various product lines and periodic financial
information is available by product line, management determined that the
Division's business is considered one reportable segment in accordance with the
aggregation criteria under SFAS 131.
The Division does not classify export sales as foreign sales. Financial
information by geographic area was as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenue:
United States............................................. $33,650 $55,600 $89,666
Europe.................................................... 1,561 3,231 4,789
Asia...................................................... 0 0 4,235
------- ------- -------
Total....................................................... $35,211 $58,831 $98,690
======= ======= =======
Property, plant and equipment, net:
United States............................................. $14,975 $17,376 $25,324
Europe.................................................... 2,220 2,461 3,139
Asia...................................................... 0 4,876 11,568
------- ------- -------
Total....................................................... $17,195 $24,713 $40,031
======= ======= =======
</TABLE>
16. SUBSEQUENT EVENTS:
In December 1999, CMC obtained a letter of commitment from a bank for a
line of credit arrangement whereby CMC will be able to borrow an aggregate
amount of up to $25,000 for working capital, general corporate purposes and
capital expenditures. The term of the credit arrangement is three years. CMC
will be required to pay a fee on the $25,000 commitment amount until the loan
agreement is signed and will be required to pay a fee on unused portion of the
commitment amount after the loan agreement is signed. The line of credit is
subject to the consummation of the initial public offering of CMC's common stock
and certain limits for the aggregate indebtedness of CMC at the time of closing
of this credit arrangement. The credit facility contains certain restrictions
including restricting CMC's ability to incur additional indebtedness, pay
dividends, make certain acquisitions or dispositions and enter into transactions
with affiliates. In addition, CMC will be required to maintain certain financial
ratios.
F-25
<PAGE> 113
CABOT MICROELECTRONICS MATERIALS DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION SUBSEQUENT TO NOVEMBER 5, 1999 IS UNAUDITED)
In March 2000, CMC obtained a letter of commitment from a bank for an
unsecured term credit facility under which the lender would make term loans to
CMC in an aggregate amount of $17,000. The first term loan is in the amount of
$3,500 due in March 2005. The second term loan is in the amount of $13,500 with
quarterly repayments starting on June 30, 2000 and the remaining obligation due
in March 2005. Interest on the outstanding principal balance is due quarterly in
arrears. This term credit facility requires CMC to maintain certain financial
ratios. The proceeds of the loans under this credit facility are expected to be
used to finance the expected dividend to Cabot.
17. VALUATION AND QUALIFYING ACCOUNTS:
The following table sets forth activities in the Division's allowance for
doubtful accounts:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING CHARGES TO END OF
OF YEAR EXPENSES DEDUCTIONS YEAR
ACCOUNTS RECEIVABLE ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended:
September 30, 1997........................ $ 50 $ -- $-- $ 50
September 30, 1998........................ 50 -- -- 50
September 30, 1999........................ 50 -- -- 50
</TABLE>
The Division has historically not recorded warranty claims against warranty
reserves but rather provided for them in the period in which they occurred. As
such, charges to expenses represent the net charge required to maintain an
appropriate reserve.
<TABLE>
<S> <C> <C> <C> <C>
WARRANTY RESERVES
Year ended:
September 30, 1997........................ $ 82 $148 $-- $230
September 30, 1998........................ 230 118 -- 348
September 30, 1999........................ 348 543 -- 891
</TABLE>
F-26
<PAGE> 114
UNDERWRITING
Cabot Microelectronics, Cabot Corporation and the underwriters named below
have entered into an underwriting agreement with respect to the shares being
offered. Subject to certain conditions, each underwriter has severally agreed to
purchase the number of shares indicated in the following table. Goldman, Sachs &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and FleetBoston
Robertson Stephens Inc. are the representatives of the underwriters.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Goldman, Sachs & Co. .......................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
FleetBoston Robertson Stephens Inc..........................
--------
Total.............................................
========
</TABLE>
------------------------
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 600,000
shares from us to cover such sales. They may exercise that option for 30 days.
If any shares are purchased pursuant to this option, the underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by us. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
PAID BY
CABOT MICROELECTRONICS
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per Share............ $ $
Total................ $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and the
other selling terms.
We and Cabot have agreed with the underwriters not to sell or otherwise
dispose any of our common stock or securities convertible into or exchangeable
for shares of our common stock during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of the representatives. This
agreement does not apply to any existing employee benefit plans. See "Shares
Eligible for Future Sale" for a discussion of transfer restrictions.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 230,000 shares offered by this prospectus to be
sold to employees and friends of ours. The number of shares of common stock
available for sale to the general public will be reduced to the extent these
persons purchase the reserved shares. Any reserved shares which are not so
purchased will be offered by the Underwriters to the general public on the same
basis as the other shares of common stock offered by this prospectus.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among us and the
representatives. The factors to be considered in determining the initial public
offering price of the shares, in addition to prevailing market conditions, will
be our historical performance, estimates of the business
U-1
<PAGE> 115
potential and earnings prospects of our company, an assessment of our management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
Our common stock has been approved for listing on Nasdaq under the symbol
"CCMP".
In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on Nasdaq, in the
over-the-counter market or otherwise.
FleetBoston Robertson Stephens Inc., an underwriter in this offering, is an
affiliate of the lending bank under our credit facility. Merrill Lynch, Pierce,
Fenner & Smith Incorporated, also an underwriter in this offering, is an
affiliate of Merrill Lynch Bank & Trust, the lending bank for the loan facility
available to all recipients of restricted stock grants.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
We estimate that our share of the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $2.3 million.
We have agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act.
U-2
<PAGE> 116
INSIDE BACK COVER
[Map of our global headquarters and facilities]
Strategically Positioned for Success
<PAGE> 117
- -------------------------------------------------------
- -------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the common units offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 7
Use of Proceeds......................... 16
Dividend Policy......................... 16
Capitalization.......................... 17
Dilution................................ 19
Selected Financial Data................. 20
Unaudited Pro Forma Statements of
Income................................ 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 26
Business................................ 37
Management.............................. 52
Relationships Between Our Company and
Cabot Corporation..................... 62
Security Ownership of Principal
Stockholder and Management............ 74
Description of Capital Stock............ 76
Shares Eligible for Future Sale......... 84
Legal Matters........................... 86
Experts................................. 86
Where You Can Find More Information..... 86
Index to Financial Statements........... F-1
Underwriting............................ U-1
</TABLE>
------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriting and with respect to an unsold allotment or
subscription.
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
4,000,000 Shares
CABOT MICROELECTRONICS
CORPORATION
Common Stock
------------------
[Cobot MicroElectronic logo]
------------------
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
ROBERTSON STEPHENS
Representatives of the Underwriters
- -------------------------------------------------------
- -------------------------------------------------------
<PAGE> 118
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth expenses and costs payable by Cabot
Microelectronics (other than underwriting discounts and commissions) expected to
be incurred in connection with the issuance and distribution of the securities
described in this registration statement. All amounts are estimated except for
the Securities and Exchange Commission's registration fee and the National
Association of Securities Dealers' filing fee.
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
Registration fee under Securities Act....................... $ 20,645
NASD filing fee............................................. 8,000
Nasdaq National Market fees................................. 95,000
Legal fees and expenses..................................... 1,175,000
Accounting fees and expenses................................ 759,000
Printing and engraving expenses............................. 200,000
Registrar and transfer agent fees........................... 3,000
Miscellaneous expenses...................................... 39,355
----------
Total............................................. $2,300,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers as well as other
employees and individuals against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits and proceedings, whether civil, criminal, administrative, or
investigative (other than an action by or in the right of the corporation -- a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such action, and the statute requires court approval
before there can be any indemnification where the person seeking indemnification
has been found liable to the corporation. The statute provides that it is not
exclusive of other indemnification that may be granted by a corporation's
certificate of incorporation, bylaws, disinterested director vote, stockholder
vote, agreement, or otherwise.
Our bylaws and our certificate of incorporation require us to indemnify to
the fullest extent authorized by the DGCL any person made or threatened to be
made a party to an action, suit or proceeding, whether criminal, civil,
administrative or investigative, by reason of the fact that he or she is or was
a director or officer of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise.
As permitted by section 102(b)(7) of the DGCL, our certificate of
incorporation eliminates the liability of a director to the corporation or its
stockholders for monetary damages for such breach of fiduciary duty as a
director, except for liabilities arising (a) from any breach of the director's
duty of loyalty to the corporation or its stockholders; (b) from acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (c) under section 174 of the DGCL; or (d) from any transaction
from which the director derived an improper personal benefit.
II-1
<PAGE> 119
We intend to obtain primary and excess insurance policies insuring its
directors and officers and those of its subsidiaries against certain liabilities
they may incur in their capacity as directors and officers. Under these
policies, the insurer, on our behalf, may also pay amounts for which we have
granted indemnification to the directors or officers.
Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 to this registration statement, which provides for indemnification
by our Underwriters, their directors and officers who sign the registration
statement and persons who control us, under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) Exhibits
The following documents are filed as exhibits to this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of Cabot Microelectronics
Corporation.*
3.2 Amended and Restated By-Laws of Cabot Microelectronics
Corporation.*
3.3 Form of Amended and Restated Certificate of Incorporation of
Cabot Microelectronics Corporation.*
3.4 Form of Certificate of Designation, Preferences and Rights
of Series A Junior Participating Preferred Stock.*
4.1 Form of Cabot Microelectronics Corporation common stock
certificate.*
4.2 Rights Agreement.
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson
regarding the legality of the shares being registered.*
10.1 Master Separation Agreement, between Cabot Microelectronics
Corporation and Cabot Corporation.*
10.2 IPO and Distribution Agreement, between Cabot
Microelectronics Corporation and Cabot Corporation.*
10.3 Tax Sharing Agreement, between Cabot Microelectronics
Corporation and Cabot Corporation.*
10.4 Management Services Agreement, between Cabot
Microelectronics Corporation and Cabot Corporation.*
10.5 Fumed Metal Oxide Supply Agreement, between Cabot
Microelectronics Corporation and Cabot Corporation.*+
10.6 Confidential Disclosure and License Agreement, between Cabot
Microelectronics Corporation and Cabot Corporation.*
10.7 Trademark License Agreement, between Cabot Microelectronics
Corporation and Cabot Corporation. *
10.8 Dispersion Services Agreement, between Cabot
Microelectronics Corporation and Cabot Corporation.*+
10.9 Employee Matters Agreement, between Cabot Microelectronics
Corporation and Cabot Corporation.*
10.10 Registration Rights Agreement, between Cabot
Microelectronics Corporation and Cabot Corporation.*
10.11 Purchase Agreement between Cabot Corporation and Intel
Corporation.*+
</TABLE>
II-2
<PAGE> 120
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------
<C> <S>
10.12 Services Agreement by and among Davies -- Imperial Coatings,
Inc., Cabot Corporation, Donn Davies and JoAnn Davies.*+
10.13 Sublease for Barry, Wales facility.*
10.14 2000 Equity Incentive Plan.*
10.15 2000 Employee Stock Purchase Plan.*
10.16 Revolving Credit Agreement, among Cabot Microelectronics
Corporation, Fleet National Bank and Fleet National Bank.*
10.17 Credit Agreement, between Cabot Microelectronics Corporation
and LaSalle Bank National Association.*
23.1 Consent of PricewaterhouseCoopers, LLP
23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson
(included in Exhibit 5.1).*
23.3 Consent of Juan Cabot Enriquez*
23.4 Consent of John P. Frazee, Jr.*
23.5 Consent of Steven V. Wilkinson*
23.6 Consent of Ronald L. Skates
24.1 Power of Attorney.*
27.1 Financial Data Schedule.*
</TABLE>
- ---------------
* Previously filed.
+ Portions of these exhibits have been omitted pursuant to a request for
confidential treatment.
(B) Financial Statement Schedules
Financial statement schedules have been omitted because they are not
applicable or the required information is shown in the combined financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) To provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the underwriters to permit prompt delivery to each
purchaser.
(2) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
II-3
<PAGE> 121
(3) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE> 122
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 5 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Aurora, State of Illinois, on April 4, 2000.
CABOT MICROELECTRONICS CORPORATION
By: /s/ MATTHEW NEVILLE
------------------------------------
Matthew Neville
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Amendment No. 5 to
the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chairman of the Board
*
- ---------------------------------------
Kennett F. Burnes
President and Chief Executive Officer,
Director (Principal Executive Officer)
/s/ MATTHEW NEVILLE April 4, 2000
- ---------------------------------------
Matthew Neville
Vice President, Chief Financial Officer,
Treasurer and Secretary (Principal
Financial and Accounting Officer)
/s/ WILLIAM C. MCCARTHY April 4, 2000
- ---------------------------------------
William C. McCarthy
Director
*
- ---------------------------------------
Samuel W. Bodman
Director
*
- ---------------------------------------
William P. Noglows
*By: /s/ MATTHEW NEVILLE April 4, 2000
----------------------------------
Matthew Neville
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 123
EXHIBITS INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of Cabot Microelectronics
Corporation.*
3.2 Amended and Restated By-Laws of Cabot Microelectronics
Corporation.*
3.3 Form of Amended and Restated Certificate of Incorporation of
Cabot Microelectronics Corporation.*
3.4 Form of Certificate of Designation, Preferences and Rights
of Series A Junior Participating Preferred Stock.*
4.1 Form of Cabot Microelectronics Corporation common stock
certificate.*
4.2 Rights Agreement.
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson
regarding the legality of the shares being registered.*
10.1 Master Separation Agreement, between Cabot Microelectronics
Corporation and Cabot Corporation.*
10.2 IPO and Distribution Agreement, between Cabot
Microelectronics Corporation and Cabot Corporation.*
10.3 Tax Sharing Agreement, between Cabot Microelectronics
Corporation and Cabot Corporation.*
10.4 Management Services Agreement, between Cabot
Microelectronics Corporation and Cabot Corporation.*
10.5 Fumed Metal Oxide Supply Agreement, between Cabot
Microelectronics Corporation and Cabot Corporation.*+
10.6 Confidential Disclosure and License Agreement, between Cabot
Microelectronics Corporation and Cabot Corporation.*
10.7 Trademark License Agreement, between Cabot Microelectronics
Corporation and Cabot Corporation.*
10.8 Dispersion Services Agreement, between Cabot
Microelectronics Corporation and Cabot Corporation.*+
10.9 Employee Matters Agreement, between Cabot Microelectronics
Corporation and Cabot Corporation.*
10.10 Registration Rights Agreement, between Cabot
Microelectronics Corporation and Cabot Corporation.*
10.11 Purchase Agreement between Cabot Corporation and Intel
Corporation.*+
10.12 Services Agreement by and among Davies--Imperial Coatings,
Inc., Cabot Corporation, Donn Davies and JoAnn Davies.*+
10.13 Sublease for Barry, Wales facility.*
10.14 2000 Equity Incentive Plan.*
10.15 2000 Employee Stock Purchase Plan.*
10.16 Revolving Credit Agreement, among Cabot Microelectronics
Corporation, Fleet National Bank and Fleet National Bank.*
10.17 Credit Agreement, between Cabot Microelectronics Corporation
and LaSalle Bank National Association.*
23.1 Consent of PricewaterhouseCoopers, LLP.
23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson
(included in Exhibit 5.1).*
23.3 Consent of Juan Cabot Enriquez*
23.4 Consent of John P. Frazee, Jr.*
23.5 Consent of Steven V. Wilkinson*
23.6 Consent of Ronald L. Skates
24.1 Power of Attorney. *
27.1 Financial Data Schedule.*
</TABLE>
- ---------------
* Previously filed.
+ Portions of these exhibits have been omitted pursuant to a request for
confidential treatment.
<PAGE> 1
Exhibit 4.2
CABOT MICROELECTRONICS CORPORATION
and
EQUISERVE TRUST COMPANY, N.A.,
Rights Agent
RIGHTS AGREEMENT
Dated as of March 24, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Section 1. Certain Definitions ............................................... 1
Section 2. Appointment of Rights Agent ....................................... 5
Section 3. Issuance of Right Certificates .................................... 5
Section 4. Form of Right Certificate ......................................... 7
Section 5. Countersignature and Registration ................................. 8
Section 6. Transfer, Split-Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen
Right Certificate ................................................. 9
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights...... 10
Section 8. Cancellation and Destruction of Right Certificates ................ 12
Section 9. Reservation and Availability of Preferred Shares .................. 13
Section 10. Preferred Shares Record Date ..................................... 14
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights ................................................. 14
Section 12. Certificate of Adjusted Purchase Price or Number of Shares........ 22
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power .................................................... 23
Section 14. Fractional Rights and Fractional Shares .......................... 25
Section 15. Rights of Action ................................................. 27
Section 16. Agreement of Right Holders ....................................... 27
Section 17. Right Certificate Holder Not Deemed a Stockholder ................ 28
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C> <C>
Section 18. Concerning the Rights Agent ..................................... 29
Section 19. Merger or Consolidation or Change of Name of Rights Agent........ 29
Section 20. Duties of Rights Agent .......................................... 30
Section 21. Change of Rights Agent .......................................... 33
Section 22. Issuance of New Right Certificates .............................. 34
Section 23. Redemption and Termination ...................................... 34
Section 24. Exchange ........................................................ 36
Section 25. Notice of Certain Events ........................................ 37
Section 26. Notices ......................................................... 38
Section 27. Supplements and Amendments ...................................... 38
Section 28. Determination and Actions by the Board of Directors, etc ........ 39
Section 29. Successors ...................................................... 40
Section 30. Benefits of this Agreement ...................................... 40
Section 31. Severability .................................................... 40
Section 32. Governing Law ................................................... 40
Section 33. Counterparts .................................................... 41
Section 34. Descriptive Headings ............................................ 41
Signatures ................................................................... 42
</TABLE>
Exhibit A - Certificate of Designation, Preferences and Rights of Series A
Junior Participating Preferred Stock of Cabot Microelectronics
Corporation
Exhibit B - Form of Right Certificate
Exhibit C - Summary of Rights to Purchase Preferred Shares
<PAGE> 4
Defined Term Cross Reference Sheet
<TABLE>
<CAPTION>
Term Location
<S> <C>
Acquiring Person Section 1(a)
Act Section 1(b)
Adjustment Shares Section 11(a)(ii)
Adjusted Number of Shares Section 11(a)(iii)
Adjusted Purchase Price Section 11(a)(iii)
Affiliate Section 1(c)
Agreement Preface
Associate Section 1(c)
Beneficial Owner Section 1(d)
Beneficially Own Section 1(d)
Business Day Section 1(e)
Capital Stock Equivalent Section 11(a)(iii)
Close of Business Section 1(f)
Common Shares Section 1(g)
Corporation Preface
Current Per Share Market Price Section 11(d)(i)
</TABLE>
-iii-
<PAGE> 5
<TABLE>
<CAPTION>
<S> <C>
Distribution Date Section 3(a)
Documents Section 18
Equivalent Preferred Shares Section 11(b)
Exchange Act Section 1(c)
Exchange Ratio Section 24(a)
Final Expiration Date Section 7(a)
Interested Stockholder Section 1(j)
NASDAQ Section 11(d)(i)
Permitted Offer Section 1(k)
Person Section 1(l)
Preferred Shares Section 1(m)
Principal Party Section 13(b)
Proration Factor Section 11(a)(iii)
Purchase Price Section 4(a)
Record Date Preface
Redemption Date Section 7(a)
Redemption Price Section 23(a)(i)
Right Preface
Right Certificate Section 3(a)
Rights Agent Preface
</TABLE>
-iv-
<PAGE> 6
<TABLE>
<CAPTION>
<S> <C>
Rights Agreement Section 3(c)
Section 11(a)(ii) Event Section 1(o)
Section 13 Event Section 13(a)
Security Section 11(d)(i)
Shares Acquisition Date Section 1(q)
Subsidiary Section 1(r)
Summary of Rights Section 3(b)
Then Outstanding Section 1(d)(iii)
Trading Day Section 11(d)(i)
Triggering Event Section 1(s)
Voting Securities Section 13(a)
</TABLE>
-v-
<PAGE> 7
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of March 24, 2000 (this "Agreement"),
between Cabot Microelectronics Corporation, a Delaware corporation (the
"Corporation"), and EquiServe Trust Company, N.A., a national banking
association (the "Rights Agent").
The Board of Directors of the Corporation has authorized and declared a
dividend of one preferred share purchase right (a "Right") for each Common Share
(as hereinafter defined) of the Corporation outstanding at the Close of Business
on April 7, 2000 (the "Record Date"), each Right representing the right to
purchase one one-thousandth of a Preferred Share (as hereinafter defined), upon
the terms and subject to the conditions herein set forth, and has further
authorized and directed the issuance of one Right with respect to each Common
Share that shall become outstanding between the Record Date and the earliest of
the Distribution Date, the Redemption Date or the Final Expiration Date (as such
terms are hereinafter defined); provided, however, that Rights may be issued
with respect to Common Shares that shall become outstanding after the
Distribution Date and prior to the earlier of the Redemption Date and the Final
Expiration Date in accordance with the provisions of Section 22 of this
Agreement.
Accordingly, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions.
For purposes of this Agreement, the following terms have the meanings
indicated:
(a) "Acquiring Person" shall mean any Person who or which,
together with all Affiliates and Associates of such Person, shall be the
Beneficial Owner of 15% or more of the then outstanding Common Shares (other
than as a result of a Permitted Offer (as hereinafter defined)) or was such a
Beneficial Owner at any time after the date hereof, whether or not such person
continues to be the Beneficial Owner of 15% or more of the then outstanding
Common Shares. Notwithstanding the foregoing, (A) the term "Acquiring Person"
shall not include (i) the Corporation, (ii) any Subsidiary of the Corporation,
(iii) any employee benefit plan of the Corporation or of any Subsidiary of the
Corporation, (iv) any Person or entity organized, appointed or established by
the Corporation for or pursuant to the terms of any such plan, (v) any Person,
who or which together with all Affiliates and Associates of such Person becomes
the Beneficial Owner of 15% or more of the then outstanding Common Shares as a
result of the acquisition of Common Shares directly from the Corporation or (vi)
any Grandfathered Person, and (B) no Person shall be deemed to be an "Acquiring
Person" either (X) as a result of the acquisition of Common Shares by the
Corporation which, by reducing the number of Common Shares outstanding,
increases the proportional number of shares beneficially
1
<PAGE> 8
owned by such Person together with all Affiliates and Associates of such Person;
except that if (i) a Person would become an Acquiring Person (but for the
operation of this subclause X) as a result of the acquisition of Common Shares
by the Corporation, and (ii) after such share acquisition by the Corporation,
such Person, or an Affiliate or Associate of such Person, becomes the Beneficial
Owner of any additional Common Shares, then such Person shall be deemed an
Acquiring Person, or (Y) if such Person became an Acquiring Person
inadvertently, (i) promptly after such Person discovers that such Person would
otherwise have become an Acquiring Person (but for the operation of this
subclause Y), such Person notifies the Board of Directors that such Person did
so inadvertently and (ii) within 2 days after such notification, such Person is
the Beneficial Owner of less than 15% of the outstanding Common Shares.
(b) "Act" shall mean the Securities Act of 1933, as amended
and as in effect on the date of this Agreement.
(c) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended and in effect
on the date of this Agreement (the "Exchange Act").
(d) A Person shall be deemed the "Beneficial Owner" of and
shall be deemed to "Beneficially Own" any securities:
(i) which such Person or any of such Person's
Affiliates or Associates beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's
Affiliates or Associates has (A) the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding, or upon the exercise of conversion
rights, exchange rights, rights (other than the Rights), warrants or options, or
otherwise; provided, however, that a Person shall not be deemed the Beneficial
Owner of, or to Beneficially Own, securities tendered pursuant to a tender or
exchange offer made by or on behalf of such Person or any of such Person's
Affiliates or Associates until such tendered securities are accepted for
purchase or exchange; or (B) the right to vote pursuant to any agreement,
arrangement or understanding; provided, however, that a Person shall not be
deemed the Beneficial Owner of, or to Beneficially Own, any security if the
agreement, arrangement or understanding to vote such security (1) arises solely
from a revocable proxy or consent given to such Person in response to a public
proxy or consent solicitation made pursuant to, and in accordance with, the
applicable rules and regulations promulgated under the Exchange Act and (2) is
not also then reportable on Schedule 13D under the Exchange Act (or any
comparable or successor report); or
2
<PAGE> 9
(iii) which are beneficially owned, directly or
indirectly, by any other Person (or any Affiliate or Associate thereof) with
which such Person (or any of such Person's Affiliates or Associates) has any
agreement, arrangement or understanding (other than customary agreements with
and between underwriters and selling group members with respect to a bona fide
public offering of securities) relating to the acquisition, holding, voting
(except to the extent contemplated by the proviso to Section 1(d)(ii)(B)) or
disposing of any securities of the Corporation.
Notwithstanding anything in this definition of Beneficial Ownership to
the contrary, the phrase "then outstanding," when used with reference to a
Person's Beneficial Ownership of securities of the Corporation, shall mean the
number of such securities then issued and outstanding together with the number
of such securities not then actually issued and outstanding which such Person
would be deemed to own beneficially hereunder.
(e) "Business Day" shall mean any day other than a Saturday,
Sunday or U.S. federal holiday.
(f) "Close of Business" on any given date shall mean 5:00
P.M., New York City, New York time, on such date; provided, however, that if
such date is not a Business Day it shall mean 5:00 P.M., New York City, New York
time, on the next succeeding Business Day.
(g) "Common Shares" when used with reference to the
Corporation shall mean the shares of Common Stock, par value $.001 per share, of
the Corporation or, in the event of a subdivision, combination or consolidation
with respect to such shares of Common Stock, the shares of Common Stock
resulting from such subdivision, combination or consolidation. "Common Shares"
when used with reference to any Person other than the Corporation shall mean the
capital stock (or equity interest) with the greatest voting power of such other
Person or, if such other Person is a Subsidiary of another Person, the Person or
Persons which ultimately control such first-mentioned Person.
(h) "Distribution Date" shall have the meaning set forth in
Section 3 hereof.
(i) "Final Expiration Date" shall have the meaning set forth
in Section 7 hereof.
(j) "Grandfathered Person" shall mean any of the following:
(i) Cabot Corporation and any Subsidiary of Cabot
Corporation so long as Cabot Corporation and all Subsidiaries
of Cabot Corporation own 50% or more of the total outstanding
equity securities of the Corporation;
3
<PAGE> 10
(ii) any descendant of Godfrey L. Cabot (the deceased
founder of the Corporation), or any spouse, widow or widower
of any such descendant (any such descendants, spouses, widows
and widowers collectively defined as the "Cabot Family
Members");
(iii) any trust (including any voting trust) which is
in existence on the date of this Agreement and which has been
established by Godfrey L. Cabot or one or more Cabot Family
Members, any estate of, or the executor or administrator of
any estate of, or any guardian or custodian for, a Cabot
Family Member who died on or before the date of this Agreement
(such trusts, estates, executors, administrators or guardians
or custodians collectively defined as the "Cabot Family
Entities");
(iv) any estate of, or the executor or administrator
of any estate of, or any guardian or custodian for, a Cabot
Family Member who dies after the date of this Agreement, or
any trust established after the date hereof by one or more
Cabot Family Members or Cabot Family Entities, provided that
one or more Cabot Family Members or Cabot Family Entities,
collectively, are the beneficiaries of at least 80% of the
actuarially-determined beneficial interests in such estate or
trust;
(v) any charitable organization which qualifies as an
exempt organization under Section 501(c) of the Internal
Revenue Code of 1986, as amended ("Charitable Organization")
which is established by one or more Cabot Family Members or
Cabot Family Entities (a "Cabot Family Charitable
Organization");
(vi) any corporation of which at least 80% of the
voting power and at least 80% of the equity interest is held,
directly or indirectly, by or for the benefit of one or more
Cabot Family Members, Cabot Family Entities, estates,
executors, administrators, guardians or custodians or trusts
described in clause (iv) above, or Cabot Family Charitable
Organizations; and
(vii) any general partnership, limited partnership,
organization or other entity or arrangement of which at least
80% of the voting interest and at least 80% of the economic
interest is held, directly or indirectly, by or for the
benefit of one or more Cabot Family Members, Cabot Family
Entities, estates, executors, administrators, guardians or
custodians, or trusts described in clause (iii) above, or
Cabot Family Charitable Organizations;
provided, however, that a Grandfathered Person shall cease to
be a
4
<PAGE> 11
Grandfathered Person at the time that all or any part of its
interest in the Common Shares becomes reportable on a Schedule
13D under the Exchange Act (or any comparable or successor
report) as part of a "group" (as such term is defined or used
under Rule 13d-5(b) of the General Rules and Regulations under
the Exchange Act) which beneficially owns, directly or
indirectly, 15% or more of the then outstanding Common Shares
and includes one or more Persons (including any Affiliate or
Associate thereof) who (i) are not Grandfathered Persons and
(ii) individually or in the aggregate beneficially own,
directly or indirectly, in excess of 1% of the then
outstanding Common Shares.
For purposes of the definition of Grandfathered Person, the
term "descendant" shall be deemed to include adopted children and the issue of
such adopted children, including adopted issue, provided that any such adoptee
is adopted before his or her eighteenth birthday.
(k) "Interested Stockholder" shall mean any Acquiring Person
or any Affiliate or Associate of an Acquiring Person or any other Person in
which any such Acquiring Person, Affiliate or Associate has an interest, or any
other Person acting directly or indirectly on behalf of or in concert with any
such Acquiring Person, Affiliate or Associate.
(l) "Permitted Offer" shall mean a tender or exchange offer
which is for all outstanding Common Shares at a price and on terms determined,
prior to the purchase of shares under such tender or exchange offer, by at least
a majority of the members of the Board of Directors who are not officers of the
Corporation and who are not Acquiring Persons or Persons who would become
Acquiring Persons as a result of the offer in question or Affiliates,
Associates, nominees or representatives of any such Person, to be adequate
(taking into account all factors that such Directors deem relevant including,
without limitation, prices that could reasonably be achieved if the Corporation
or its assets were sold on an orderly basis designed to realize maximum value)
and otherwise in the best interests of the Corporation and its stockholders
(other than the Person or any Affiliate or Associate thereof on whose behalf the
offer is being made) taking into account all factors that such directors may
deem relevant.
(m) "Person" shall mean any individual, firm, partnership,
corporation, limited liability company, trust, association, joint venture or
other entity, and shall include any successor (by merger or otherwise) of such
entity.
(n) "Preferred Shares" shall mean shares of Series A Junior
Participating Preferred Stock, par value $.001 per share, of the Corporation,
having the relative rights, preferences and limitations set forth in the
Certificate of Designation, Preferences and
5
<PAGE> 12
Rights attached to this Agreement as Exhibit A.
(o) "Redemption Date" shall have the meaning set forth in
Section 7 hereof.
(p) "Section 11(a)(ii) Event" shall mean any event described
in Section 11(a)(ii) hereof.
(q) "Section 13 Event" shall mean any event described in
clause (x), (y) or (z) of Section 13(a) hereof.
(r) "Shares Acquisition Date" shall mean the first date of
public announcement (which, for purposes of this definition, shall include,
without limitation, a report filed pursuant to the Exchange Act) by the
Corporation or an Acquiring Person that an Acquiring Person has become such;
provided, that, if such Person is determined not to have become an Acquiring
Person pursuant to Section 1(a)(B)(Y) hereof, then no Shares Acquisition Date
shall be deemed to have occurred.
(s) "Subsidiary" of any Person shall mean any corporation or
other Person of which a majority of the voting power of the voting equity
securities or equity interest is owned, directly or indirectly, by such Person.
(t) "Triggering Event" shall mean any Section 11(a)(ii) Event
or any Section 13 Event.
Section 2. Appointment of Rights Agent.
The Corporation hereby appoints the Rights Agent to act as agent for
the Corporation in accordance with the terms and conditions hereof, and the
Rights Agent hereby accepts such appointment. The Corporation may from time to
time appoint such co-Rights Agents as it may deem necessary or desirable upon
ten (10) days' prior written notice to the Rights Agent. The Rights Agent shall
have no duty to supervise, and shall in no event be liable for, the acts and
omissions of any such co-Rights Agent.
Section 3. Issuance of Right Certificates.
(a) Until the earlier of (i) the Shares Acquisition Date or
(ii) the Close of Business on the tenth day (or such later date as may be
determined by action of the Board of Directors of the Corporation) after the
date of the commencement by any Person (other than the Corporation, any
Subsidiary of the Corporation, any employee benefit plan of the
6
<PAGE> 13
Corporation or of any Subsidiary of the Corporation or any Person or entity
organized, appointed or established by the Corporation for or pursuant to the
terms of any such plan) of, or of the first public announcement of the intention
of any Person (other than the Corporation, any Subsidiary of the Corporation,
any employee benefit plan of the Corporation or of any Subsidiary of the
Corporation or any Person or entity organized, appointed or established by the
Corporation for or pursuant to the terms of any such plan) to commence (which
intention to commence remains in effect for five Business Days after such
announcement), a tender or exchange offer the consummation of which would result
in any Person becoming an Acquiring Person (including, in the case of both (i)
and (ii), any such date which is after the date of this Agreement and prior to
the issuance of the Rights), the earlier of such dates being herein referred to
as the "Distribution Date," (x) the Rights will be evidenced (subject to the
provisions of Section 3(b) hereof) by the certificates for Common Shares
registered in the names of the holders thereof (which certificates shall also be
deemed to be Right Certificates) and not by separate Right Certificates, and (y)
the right to receive Right Certificates will be transferable only in connection
with the transfer of the underlying Common Shares (including a transfer to the
Corporation); provided, however, that if a tender or exchange offer is
terminated prior to the occurrence of a Distribution Date, then no Distribution
Date shall occur as a result of such tender or exchange offer. As soon as
practicable after the Distribution Date, the Corporation will prepare and
execute, the Rights Agent will countersign, and the Corporation will send or
cause to be sent by first- class, postage-prepaid mail, to each record holder of
Common Shares as of the Close of Business on the Distribution Date, at the
address of such holder shown on the records of the Corporation, a Right
Certificate, substantially in the form of Exhibit B hereto (a "Right
Certificate"), evidencing one Right for each Common Share so held. As of and
after the Distribution Date, the Rights will be evidenced solely by such Right
Certificates.
(b) As promptly as practicable following the Record Date, the
Corporation will send a copy of a Summary of Rights to Purchase Preferred
Shares, in substantially the form of Exhibit C hereto (the "Summary of Rights"),
by first-class, postage-prepaid mail, to each record holder of Common Shares as
of the Close of Business on the Record Date, at the address of such holder shown
on the records of the Corporation. With respect to certificates for Common
Shares outstanding as of the Record Date, until the Distribution Date, the
Rights will be evidenced by such certificates registered in the names of the
holders thereof together with a copy of the Summary of Rights attached thereto.
Until the Distribution Date (or the earlier of the Redemption Date or the Final
Expiration Date), the surrender for transfer of any certificate for Common
Shares outstanding on the Record Date, with or without a copy of the Summary of
Rights attached thereto, shall also constitute the transfer of the Rights
associated with such Common Shares. As a result of the execution of this
Agreement, on April 7, 2000, each share of Common Stock outstanding on such date
shall, subject to the terms and conditions of this Agreement, also represent one
Right and shall, subject to the terms and conditions of this Agreement,
represent the right to purchase one one-thousandth of a share of Preferred
Stock.
7
<PAGE> 14
(c) Certificates for Common Shares which become outstanding
(including, without limitation, reacquired Common Shares referred to below in
this paragraph (c)) after the Record Date but prior to the earliest of the
Distribution Date, the Redemption Date or the Final Expiration Date, shall be
deemed also to be certificates for Rights, and shall bear the following legend:
"This certificate also evidences and entitles the holder hereof to
certain rights as set forth in a Rights Agreement between Cabot
Microelectronics Corporation and EquiServe Trust Company, N.A., dated as
of March 24, 2000 (the "Rights Agreement"), the terms of which are
hereby incorporated herein by reference and a copy of which is on file
at the principal executive offices of Cabot Microelectronics Corporation
Under certain circumstances, as set forth in the Rights Agreement, such
Rights will be evidenced by separate certificates and will no longer be
evidenced by this certificate. Cabot Microelectronics Corporation will
mail to the holder of this certificate a copy of the Rights Agreement
without charge after receipt of a written request therefor. Under
certain circumstances set forth in the Rights Agreement, Rights issued
to, or held by, any Person who is, was or becomes an Acquiring Person or
an Affiliate or Associate thereof (as defined in the Rights Agreement)
and certain related persons, whether currently held by or on behalf of
such Person or by any subsequent holder, may become null and void."
With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with the Common Shares represented by
such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any such certificate shall also constitute the
transfer of the Rights associated with the Common Shares represented thereby. In
the event that the Corporation purchases or acquires any Common Shares after the
Record Date but prior to the Distribution Date, any Rights associated with such
Common Shares shall be deemed canceled and retired so that the Corporation shall
not be entitled to exercise any Rights associated with the Common Shares which
are no longer outstanding. The failure to print the foregoing legend on any such
Common Shares certificate or any other defect therein shall not affect in any
manner whatsoever the application or interpretation of the provisions of Section
7(e) hereof.
Section 4. Form of Right Certificate.
(a) The Right Certificates (and the forms of election to
purchase and of assignment to be printed on the reverse thereof) shall be
substantially in the form set forth in Exhibit B hereto and may have such marks
of identification or designation and such legends, summaries or endorsements
printed thereon as the Corporation may deem appropriate (which do not affect the
duties or responsibilities of the Rights Agent) and as are not inconsistent with
the provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or
8
<PAGE> 15
with any rule or regulation of any stock exchange on which the Rights may from
time to time be listed, or to conform to usage. Subject to the provisions of
Section 11 and Section 22 hereof, the Right Certificates shall entitle the
holders thereof to purchase such number of one one-thousandths of a Preferred
Share as shall be set forth therein at the price per one one-thousandth of a
Preferred Share set forth therein (the "Purchase Price"), but the amount and
type of securities purchasable upon the exercise of each Right and the Purchase
Price thereof shall be subject to adjustment as provided herein.
(b) Any Right Certificate issued pursuant to Section 3(a) or
Section 22 hereof that represents Rights which are null and void pursuant to
Section 7(e) of this Agreement and any Right Certificate issued pursuant to
Section 6 or Section 11 hereof upon transfer, exchange, replacement or
adjustment of any other Right Certificate referred to in this sentence, shall
contain (to the extent feasible) the following legend:
"The Rights represented by this Right Certificate are or were
Beneficially Owned by a Person who was or became an Acquiring Person or
an Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement). Accordingly, this Right Certificate
and the Rights represented hereby are null and void."
Provisions of Section 7(e) of this Agreement shall be operative whether or not
the foregoing legend is contained on any such Right Certificate. The Corporation
shall notify the Rights Agent to the extent that this Section 4(b) applies.
Section 5. Countersignature and Registration.
The Right Certificates shall be executed on behalf of the Corporation
by its Chairman of the Board, its Chief Executive Officer, its President, any of
its Vice Presidents, or its Treasurer, either manually or by facsimile
signature, shall have affixed thereto the Corporation's seal or a facsimile
thereof, and shall be attested by the Secretary or an Assistant Secretary of the
Corporation, either manually or by facsimile signature. The Right Certificates
shall be countersigned by the Rights Agent and shall not be valid for any
purpose unless so countersigned. In case any officer of the Corporation who
shall have signed any of the Right Certificates shall cease to be such officer
of the Corporation before countersignature by the Rights Agent and issuance and
delivery by the Corporation, such Right Certificates may nevertheless be
countersigned by the Rights Agent and issued and delivered by the Corporation
with the same force and effect as though the person who signed such Right
Certificates had not ceased to be such officer of the Corporation; and any Right
Certificate may be signed on behalf of the Corporation by any Person who, at the
actual date of the execution of such Right Certificate, shall be a proper
officer of the Corporation to sign such Right Certificate, although at the date
of the execution of this Agreement any such Person was not such an officer.
9
<PAGE> 16
Following the Distribution Date and receipt by the Rights Agent of a
list of record holders of Rights, the Rights Agent will keep or cause to be
kept, at its office set forth in Section 26 hereof or offices designated as the
appropriate place for surrender of such Right Certificate or transfer, books for
registration and transfer of the Right Certificates issued hereunder. Such books
shall show the names and addresses of the respective holders of the Right
Certificates, the number of Rights evidenced on its face by each of the Right
Certificates and the certificate number and the date of each of the Right
Certificates.
Section 6. Transfer, Split-Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right
Certificate.
Subject to the provisions of Section 4(b), Section 7(e) and Section 14
hereof, at any time after the Close of Business on the Distribution Date, and at
or prior to the Close of Business on the earlier of the Redemption Date or the
Final Expiration Date, any Right Certificate or Right Certificates may be
transferred, split up, combined or exchanged for another Right Certificate or
Right Certificates, entitling the registered holder to purchase a like number of
one one-thousandths of a Preferred Share (or, following a Triggering Event,
other securities, as the case may be) as the Right Certificate or Right
Certificates surrendered then entitled such holder (or former holder in the case
of a transfer) to purchase. Any registered holder desiring to transfer, split
up, combine or exchange any Right Certificate or Right Certificates shall make
such request in writing delivered to the Rights Agent, and shall surrender the
Right Certificate or Right Certificates to be transferred, split up, combined or
exchanged at the office or offices of the Rights Agent designated for such
purpose. Neither the Rights Agent nor the Corporation shall be obligated to take
any action whatsoever with respect to the transfer of any such surrendered Right
Certificate until the registered holder shall have completed and signed the
certificate contained in the form of assignment on the reverse side of such
Right Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Corporation or the Rights Agent shall reasonably
request. Thereupon the Rights Agent shall, subject to Section 4(b), Section 7(e)
and Section 14 hereof, countersign and deliver to the Person entitled thereto a
Right Certificate or Right Certificates, as the case may be, as so requested.
The Corporation may require payment of a sum sufficient to cover any tax or
governmental charge that may be imposed in connection with any transfer, split
up, combination or exchange of Right Certificates. If the Corporation requires
the payment referred to in the immediately preceding sentence, then the Rights
Agent shall not be required to process any transaction until it receives notice
from the Corporation that the Corporation has received such payment.
Upon receipt by the Corporation and the Rights Agent of evidence
satisfactory to them of the loss, theft, destruction or mutilation of a Right
Certificate, and, in case of
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loss, theft or destruction, of indemnity or security reasonably satisfactory to
them, and, at the Corporation's request, reimbursement to the Corporation and
the Rights Agent of all reasonable expenses incidental thereto, and upon
surrender to the Rights Agent and cancellation of the Right Certificate if
mutilated, the Corporation will make and deliver a new Right Certificate of like
tenor to the Rights Agent for countersignature and delivery to the registered
holder in lieu of the Right Certificate so lost, stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights.
(a) Subject to Section 7(e) hereof, the registered holder of
any Right Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein) in whole or in part at any time after the
Distribution Date upon surrender of the Right Certificate, with the form of
election to purchase and the certificate on the reverse side thereof duly
executed, to the Rights Agent at the office or offices of the Rights Agent
designated for such purpose, together with payment of the aggregate Purchase
Price for the total number of one one-thousands of a Preferred Share (or other
securities, as the case may be) as to which such surrendered Rights are
exercised, at or prior to the earliest of (i) the Close of Business on April 7,
2010 (the "Final Expiration Date"), (ii) the time at which the Rights are
redeemed as provided in Section 23 hereof (the "Redemption Date"); (iii) the
time at which the Rights are exchanged as provided in Section 24 hereof, or (iv)
the consummation of a transaction contemplated by Section 13(d) hereof.
(b) The Purchase Price for each one one-thousandth of a
Preferred Share pursuant to the exercise of a Right shall initially be $130.00,
shall be subject to adjustment from time to time as provided in the next
sentence and in Sections 11 and 13(a) hereof and shall be payable in accordance
with paragraph (c) below. Anything in this Agreement to the contrary
notwithstanding, in the event that at any time after the date of this Agreement
and prior to the Distribution Date, the Corporation shall (i) declare or pay any
dividend on the Common Shares payable in Common Shares or (ii) effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares)
into a greater or lesser number of Common Shares, then in any such case, each
Common Share outstanding following such subdivision, combination or
consolidation shall continue to have one Right associated therewith and the
Purchase Price following any such event shall be proportionately adjusted to
equal the result obtained by multiplying the Purchase Price immediately prior to
such event by a fraction the numerator of which shall be the total number of
Common Shares outstanding immediately prior to the occurrence of the event and
the denominator of which shall be the total number of Common Shares outstanding
immediately following the occurrence of such event. The adjustment provided for
in the preceding sentence shall be made successively whenever such a dividend is
declared or paid or such a subdivision, combination or consolidation is
effected.
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(c) Upon receipt of a Right Certificate representing
exercisable Rights, with the form of election to purchase and the certificate
duly executed, accompanied by payment of the Purchase Price for the Preferred
Shares (or other securities, as the case may be) to be purchased and an amount
equal to any applicable tax or governmental charge required to be paid by the
holder of such Right Certificate in accordance with Section 6 hereof by
certified check, cashier's check or money order payable to the order of the
Corporation, the Rights Agent shall thereupon promptly (i) (A) requisition from
any transfer agent of the Preferred Shares certificates for the number of
Preferred Shares to be purchased and the Corporation hereby irrevocably
authorizes its transfer agent to comply with all such requests, or (B) if the
Corporation, in its sole discretion, shall have elected to deposit the Preferred
Shares issuable upon exercise of the Rights hereunder into a depositary,
requisition from the depositary agent depositary receipts representing such
number of one one-thousandths of a Preferred Share as are to be purchased (in
which case certificates for the Preferred Shares represented by such receipts
shall be deposited by the transfer agent with the depositary agent) and the
Corporation will direct the depositary agent to comply with such requests, (ii)
when appropriate, requisition from the Corporation the amount of cash to be paid
in lieu of issuance of fractional shares in accordance with Section 14 hereof,
(iii) after receipt of such certificates or depositary receipts, cause the same
to be delivered to or upon the order of the registered holder of such Right
Certificate, registered in such name or names as may be designated by such
holder, and (iv) when appropriate, after receipt thereof, deliver such cash to
or upon the order of the registered holder of such Right Certificate. In the
event that the Corporation is obligated to issue other securities (including
Common Shares) of the Corporation pursuant to Section 11(a) hereof, the
Corporation will make all arrangements necessary so that such other securities
are available for distribution by the Rights Agent, if and when necessary to
comply with this Agreement.
In addition, in the case of an exercise of the Rights by a
holder pursuant to Section 11(a)(ii), the Rights Agent shall return such Right
Certificate to the registered holder thereof after imprinting, stamping or
otherwise indicating thereon that the rights represented by such Right
Certificate no longer include the rights provided by Section 11(a)(ii) of this
Agreement and if less than all the Rights represented by such Right Certificate
were so exercised, the Rights Agent shall indicate on the Right Certificate the
number of Rights represented thereby which continue to include the rights
provided by Section 11(a)(ii).
(d) In case the registered holder of any Right Certificate
shall exercise less than all the Rights evidenced thereby, a new Right
Certificate evidencing Rights equivalent to the Rights remaining unexercised
shall be issued by the Rights Agent to the registered holder of such Right
Certificate or to his duly authorized assigns, subject to the provisions of
Section 6 and Section 14 hereof, or the Rights Agent shall place an
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<PAGE> 19
appropriate notation on the Right Certificate with respect to those Rights
exercised.
(e) Notwithstanding anything in this Agreement to the
contrary, from and after the first occurrence of a Section 11(a)(ii) Event, any
Rights Beneficially Owned by (i) an Acquiring Person or an Affiliate or
Associate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or
of any Affiliate or Associate thereof) who becomes a transferee after the
Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person (or
of any Affiliate or Associate thereof) who becomes a transferee prior to or
concurrently with the Acquiring Person becoming such and receives such Rights
pursuant to either (A) a transfer (whether or not for consideration) from the
Acquiring Person to holders of equity interests in such Acquiring Person or to
any Person with whom the Acquiring Person has a continuing agreement,
arrangement or understanding regarding the transferred Rights or (B) a transfer
which the Board of Directors of the Corporation has determined is part of an
agreement, arrangement or understanding which has as a primary purpose or effect
the avoidance of this Section 7(e), shall become null and void without any
further action and no holder of such Rights shall have any rights whatsoever
with respect to such Rights, whether under any provision of this Agreement or
otherwise. The Corporation shall notify the Rights Agent when this Section 7(e)
applies and shall use all reasonable efforts to insure that the provisions of
this Section 7(e) and Section 4(b) hereof are complied with, but neither the
Corporation nor the Rights Agent shall have any liability to any holder of Right
Certificates or other Person as a result of the Corporation's failure to make
any determinations with respect to an Acquiring Person or its Affiliates,
Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the
contrary, neither the Rights Agent nor the Corporation shall be obligated to
undertake any action with respect to a registered holder upon the occurrence of
any purported exercise as set forth in this Section 7 unless such registered
holder shall have (i) properly completed and signed the certificate contained in
the form of election to purchase set forth on the reverse side of the Right
Certificate surrendered for such exercise, and (ii) provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or
Affiliates or Associates thereof as the Corporation or the Rights Agent shall
reasonably request.
Section 8. Cancellation and Destruction of Right Certificates.
All Right Certificates surrendered for the purpose of exercise,
transfer, split up, combination or exchange shall, if surrendered to the
Corporation or to any of its agents, be delivered to the Rights Agent for
cancellation or in canceled form, or, if surrendered to the Rights Agent, shall
be canceled by it, and no Right Certificates shall be issued in lieu thereof
except as expressly permitted by any of the provisions of this Agreement. The
Corporation shall deliver to the Rights Agent for cancellation and retirement,
and the Rights Agent shall so cancel and retire, any other Right Certificate
purchased or acquired
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<PAGE> 20
by the Corporation otherwise than upon the exercise thereof. The Rights Agent
shall deliver all canceled Right Certificates to the Corporation, or shall, at
the written request of the Corporation, destroy such canceled Right
Certificates, and in such case shall deliver a certificate of destruction
thereof to the Corporation.
Section 9. Reservation and Availability of Preferred Shares.
The Corporation covenants and agrees that at all times prior to the
occurrence of a Section 11(a)(ii) Event it will cause to be reserved and kept
available out of its authorized and unissued Preferred Shares, or any authorized
and issued Preferred Shares held in its treasury, the number of Preferred Shares
that will be sufficient to permit the exercise in full of all outstanding Rights
and, after the occurrence of a Section 11(a)(ii) Event, shall, to the extent
reasonably practicable, so reserve and keep available a sufficient number of
Common Shares (and/or other securities) which may be required to permit the
exercise in full of the Rights pursuant to this Agreement.
So long as the Preferred Shares (and, after the occurrence of a Section
11(a)(ii) Event, Common Shares or any other securities) issuable upon the
exercise of the Rights may be listed on any national securities exchange, the
Corporation shall use its best efforts to cause, from and after such time as the
Rights become exercisable, all shares reserved for such issuance to be listed on
such exchange upon official notice of issuance upon such exercise.
The Corporation covenants and agrees that it will take all such action
as may be necessary to ensure that all Preferred Shares (or Common Shares and/or
other securities, as the case may be) delivered upon exercise of Rights shall,
at the time of delivery of the certificates for such shares or other securities
(subject to payment of the Purchase Price), be duly and validly authorized and
issued and fully paid and non-assessable shares or securities.
The Corporation further covenants and agrees that it will pay when due
and payable any and all U.S. federal and state taxes and charges which may be
payable in respect of the issuance or delivery of the Right Certificates or of
any Preferred Shares (or Common Shares and/or other securities, as the case may
be) upon the exercise of Rights. The Corporation shall not, however, be required
to pay any tax or other charge which may be payable in respect of any transfer
or delivery of Right Certificates to a Person other than, or the issuance or
delivery of certificates or depositary receipts for the Preferred Shares (or
Common Shares and/or other securities, as the case may be) in a name other than
that of, the registered holder of the Right Certificate evidencing Rights
surrendered for exercise, or to issue or to deliver any certificates or
depositary receipts for Preferred Shares (or Common Shares and/or other
securities, as the case may be) upon the exercise of any Rights, until any such
tax or other charge shall have been paid (any such
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<PAGE> 21
tax or other charge being payable by the holder of such Right Certificate at the
time of surrender) or until it has been established to the Corporation's
reasonable satisfaction that no such tax or other charge is due.
The Corporation shall use its best efforts to (i) file, as soon as
practicable following the Shares Acquisition Date, a registration statement
under the Act, with respect to the securities purchasable upon exercise of the
Rights on an appropriate form, (ii) cause such registration statement to become
effective as soon as practicable after such filing, and (iii) cause such
registration statement to remain effective (with a prospectus at all times
meeting the requirements of the Act and the rules and regulations thereunder)
until the date of the expiration of the rights provided by Section 11(a)(ii).
The Corporation will also take such action as may be appropriate under the blue
sky laws of the various states.
Section 10. Preferred Shares Record Date.
Each Person in whose name any certificate for Preferred Shares (or
Common Shares and/or other securities, as the case may be) is issued upon the
exercise of Rights shall for all purposes be deemed to have become the holder of
record of the Preferred Shares (or Common Shares and/or other securities, as the
case may be) represented thereby on, and such certificate shall be dated, the
date upon which the Right Certificate evidencing such Rights was duly
surrendered and payment of the Purchase Price (and any applicable taxes and
other governmental charges) was made; provided, however, that, if the date of
such surrender and payment is a date upon which the Preferred Shares (or Common
Shares and/or other securities, as the case may be) transfer books of the
Corporation are closed, such person shall be deemed to have become the record
holder of such shares on, and such certificate shall be dated, the next
succeeding Business Day on which the Preferred Shares (or Common Shares and/or
other securities, as the case may be) transfer books of the Corporation are
open.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights.
The Purchase Price, the number and kind of shares covered by each Right
and the number of Rights outstanding are subject to adjustment from time to time
as provided in this Section 11.
(a) (i) In the event the Corporation shall at any time after
the date of this Agreement (A) declare a dividend on the Preferred Shares
payable in Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C)
combine the outstanding Preferred Shares into a smaller number of Preferred
Shares or (D) issue any shares of its capital stock in a reclassification of the
Preferred Shares (including any such reclassification in
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connection with a consolidation or merger in which the Corporation is the
continuing or surviving corporation), except as otherwise provided in this
Section 11(a) and Section 7(e) hereof, the Purchase Price in effect at the time
of the record date for such dividend or of the effective date of such
subdivision, combination or reclassification, and the number and kind of shares
of capital stock issuable on such date, shall be proportionately adjusted so
that the holder of any Right exercised after such time shall be entitled to
receive the aggregate number and kind of shares of capital stock which, if such
Right had been exercised immediately prior to such date and at a time when the
Preferred Shares transfer books of the Corporation were open, such holder would
have owned upon such exercise and been entitled to receive by virtue of such
dividend, subdivision, combination or reclassification; provided, however, that
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the
Corporation issuable upon exercise of one Right. If an event occurs which would
require an adjustment under both Section 11(a)(i) and Section 11(a)(ii), the
adjustment provided for in this Section 11(a)(i) shall be in addition to, and
shall be made prior to, any adjustment required pursuant to Section 11(a)(ii).
(ii) In the event any Person, alone or together with its
Affiliates and Associates, shall become an Acquiring Person, then proper
provision shall be made so that each holder of a Right (except as provided below
and in Section 7(e) hereof) shall, for a period of 60 days after the later of
the occurrence of any such event or the effective date of an appropriate
registration statement under the Act pursuant to Section 9 hereof, have a right
to receive, upon exercise thereof at a price equal to the then current Purchase
Price, in accordance with the terms of this Agreement, such number of Common
Shares (or, in the discretion of the Board of Directors, one one-thousandths of
a Preferred Share) as shall equal the result obtained by (x) multiplying the
then current Purchase Price by the then number of one one-thousandths of a
Preferred Share for which a Right was exercisable immediately prior to the first
occurrence of a Section 11(a)(ii) Event, and dividing that product by (y) 50% of
the then current per share market price of the Corporation's Common Shares
(determined pursuant to Section 11(d) hereof) on the date of such first
occurrence (such number of shares being referred to as the "Adjustment Shares");
provided, however, that if the transaction that would otherwise give rise to the
foregoing adjustment is also subject to the provisions of Section 13 hereof,
then only the provisions of Section 13 hereof shall apply and no adjustment
shall be made pursuant to this Section 11(a)(ii);
(iii) In the event that there shall not be sufficient
treasury shares or authorized but unissued (and unreserved) Common Shares to
permit the exercise in full of the Rights in accordance with the foregoing
subparagraph (ii) and the Rights become so exercisable (and the Board of
Directors of the Corporation has determined to make the Rights exercisable into
fractions of a Preferred Share), notwithstanding any other
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<PAGE> 23
provision of this Agreement, to the extent necessary and permitted by applicable
law, each Right shall thereafter represent the right to receive, upon exercise
thereof at the then current Purchase Price in accordance with the terms of this
Agreement, (x) a number of (or fractions of) Common Shares (up to the maximum
number of Common Shares which may permissibly be issued) and (y) a number of (or
fractions of) one one-thousandths of a Preferred Share or a number of (or
fractions of) other equity securities of the Corporation (or, in the discretion
of the Board of Directors, debt) which the Board of Directors of the Corporation
has determined to have the same aggregate current market value (determined
pursuant to Section 11(d)(i) and (ii) hereof, to the extent applicable,) as one
Common Share (such number of, or fractions of, Preferred Shares, debt, or other
equity securities or debt of the Corporation being referred to as a "capital
stock equivalent") equal in the aggregate to the number of Adjustment Shares;
provided, however, if sufficient Common Shares and/or capital stock equivalents
are unavailable, then the Corporation shall, to the extent permitted by
applicable law, take all such action as may be necessary to authorize additional
Common Shares or capital stock equivalents for issuance upon exercise of the
Rights, including the calling of a meeting of stockholders; and provided,
further, that if the Corporation is unable to cause sufficient Common Shares
and/or capital stock equivalents to be available for issuance upon exercise in
full of the Rights, then each Right shall thereafter represent the right to
receive the Adjusted Number of Shares upon exercise at the Adjusted Purchase
Price (as such terms are hereinafter defined). As used herein, the term
"Adjusted Number of Shares" shall be equal to that number of (or fractions of)
Common Shares (and/or capital stock equivalents) equal to the product of (x) the
number of Adjustment Shares and (y) a fraction, the numerator of which is the
number of Common Shares (and/or capital stock equivalents) available for
issuance upon exercise of the Rights and the denominator of which is the
aggregate number of Adjustment Shares otherwise issuable upon exercise in full
of all Rights (assuming there were a sufficient number of Common Shares
available) (such fraction being referred to as the "Proration Factor"). The
"Adjusted Purchase Price" shall mean the product of the Purchase Price and the
Proration Factor. The Board of Directors may, but shall not be required to,
establish procedures to allocate the right to receive Common Shares and capital
stock equivalents upon exercise of the Rights among holders of Rights.
(b) In case the Corporation shall fix a record date for the
issuance of rights (other than the Rights), options or warrants to all holders
of Preferred Shares entitling them (for a period expiring within 45 calendar
days after such record date) to subscribe for or purchase Preferred Shares (or
shares having the same rights, privileges and preferences as the Preferred
Shares ("equivalent preferred shares")) or securities convertible into Preferred
Shares or equivalent preferred shares at a price per Preferred Share or
equivalent preferred share (or having a conversion price per share, if a
security convertible into Preferred Shares or equivalent preferred shares) less
than the then current per share market price of the Preferred Shares (as
determined pursuant to Section 11(d)
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hereof) on such record date, the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the number of Preferred Shares outstanding on such record date plus the
number of Preferred Shares which the aggregate offering price of the total
number of Preferred Shares and/or equivalent preferred shares so to be offered
(and/or the aggregate initial conversion price of the convertible securities so
to be offered) would purchase at such current per share market price, and the
denominator of which shall be the number of Preferred Shares outstanding on such
record date plus the number of additional Preferred Shares and/or equivalent
preferred shares to be offered for subscription or purchase (or into which the
convertible securities so to be offered are initially convertible); provided,
however, that in no event shall the consideration to be paid upon the exercise
of one Right be less than the aggregate par value of the shares of capital stock
of the Corporation issuable upon exercise of one Right. In case such
subscription price may be paid in a consideration part or all of which shall be
in a form other than cash, the value of such consideration shall be determined
in good faith by the Board of Directors of the Corporation, whose determination
shall be described in a statement filed with the Rights Agent and shall be
binding on the Rights Agent and the holders of the Rights. Preferred Shares
owned by or held for the account of the Corporation shall not be deemed
outstanding for the purpose of any such computation. Such adjustment shall be
made successively whenever such a record date is fixed; and in the event that
such rights, options or warrants are not so issued, the Purchase Price shall be
adjusted to be the Purchase Price which would then be in effect if such record
date had not been fixed.
(c) In case the Corporation shall fix a record date for the
making of a distribution to all holders of the Preferred Shares (including any
such distribution made in connection with a consolidation or merger in which the
Corporation is the continuing or surviving corporation) of evidences of
indebtedness or assets (other than a regular quarterly cash dividend or a
dividend payable in Preferred Shares) or subscription rights or warrants
(excluding those referred to in Section 11(b) hereof), the Purchase Price to be
in effect after such record date shall be determined by multiplying the Purchase
Price in effect immediately prior to such record date by a fraction, the
numerator of which shall be the then current per share market price (as
determined pursuant to Section 11(d) hereof) of the Preferred Shares on such
record date, less the fair market value (as determined in good faith by the
Board of Directors of the Corporation, whose determination shall be described in
a statement filed with the Rights Agent and shall be binding on the Rights Agent
and the holders of the Rights) of the portion of the assets or evidences of
indebtedness so to be distributed or of such subscription rights or warrants
applicable to one Preferred Share and the denominator of which shall be such
current per share market price of the Preferred Shares; provided, however, that
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the
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shares of capital stock of the Corporation to be issued upon exercise of one
Right. Such adjustments shall be made successively whenever such a record date
is fixed; and in the event that such distribution is not so made, the Purchase
Price shall again be adjusted to be the Purchase Price which would then be in
effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the
"current per share market price" of any security (a "Security") for the purpose
of this Section 11(d)(i)) on any date shall be deemed to be the average of the
daily closing prices per share of such Security for the thirty (30) consecutive
Trading Days (as such term is hereinafter defined) immediately prior to and not
including such date; provided, however, that in the event that the current per
share market price of the Security is determined during a period following the
announcement by the issuer of such Security of (A) a dividend or distribution on
such Security payable in shares of such Security or securities convertible into
such shares, or (B) any subdivision, combination or reclassification of such
Security and prior to the expiration of thirty (30) Trading Days after and not
including the ex-dividend date for such dividend or distribution, or the record
date for such subdivision, combination or reclassification, then, and in each
such case, the current per share market price shall be appropriately adjusted to
reflect the current market price per share equivalent of such Security. The
closing price for each day shall be the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if the Security is not
listed or admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the Security is
listed or admitted to trading or, if the Security is not listed or admitted to
trading on any national securities exchange, the last quoted price or, if not so
quoted, the average of the high bid and low asked prices as reported on the
Nasdaq Stock Market ("NASDAQ") or such other market or system then in use, or,
if on any such date the Security is not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Security selected by the Board of Directors
of the Corporation. If on any such date no such market maker is making a market
in the Security, the fair value of the Security on such date as determined in
good faith by the Board of Directors of the Corporation shall be used. The term
"Trading Day" shall mean a day on which the principal national securities
exchange on which the Security is listed or admitted to trading is open for the
transaction of business or, if the Security is not listed or admitted to trading
on any national securities exchange, a Business Day. Subject to Section
11(d)(ii), if any Security is not publicly traded, "current per share market
price" of such Security shall mean the fair market value per share as determined
in good faith by the Board of Directors of the Corporation, whose
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determination shall be described in a statement filed with the Rights Agent and
shall be binding on the Rights Agent and the holders of the Rights.
(ii) For the purpose of any computation hereunder, the
"current per share market price" of the Preferred Shares shall be determined in
accordance with the method set forth in Section 11(d)(i). If the Preferred
Shares are not publicly traded, the "current per share market price" of the
Preferred Shares shall be conclusively deemed to be the current per share market
price of the Common Shares as determined pursuant to Section 11(d)(i)
(appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof), multiplied by one thousand
(1,000). If neither the Common Shares nor the Preferred Shares are publicly held
or so listed or traded, "current per share market price" shall mean the fair
value per share as determined in good faith by the Board of Directors of the
Corporation, whose determination shall be described in a statement filed with
the Rights Agent and shall be binding on the Rights Agent and the holders of the
Rights.
(e) Anything herein to the contrary notwithstanding, no adjustment in
the Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least 1% in the Purchase Price; provided, however,
that any adjustments which by reason of this Section 11(e) are not required to
be made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 11 shall be made to the nearest
cent or to the nearest one one-thousandth of a Preferred Share or one one-
thousandth of any other share or security as the case may be. Notwithstanding
the first sentence of this Section 11(e), any adjustment required by this
Section 11 shall be made no later than the earlier of (i) three (3) years from
the date of the transaction which mandates such adjustment or (ii) the Final
Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 11(a)(ii)
or Section 13(a) hereof, the holder of any Right thereafter exercised shall
become entitled to receive any shares of capital stock of the Corporation other
than Preferred Shares, thereafter the number of other shares so receivable upon
exercise of any Right shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Preferred Shares contained in Section 11(a) through (c),
inclusive, and the provisions of Sections 7, 9, 10, 13 and 14 with respect to
the Preferred Shares shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Corporation subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-thousandths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
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(h) Unless the Corporation shall have exercised its election
so provided in Section 11(i) hereof, upon adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and 11(c) hereof, each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the Adjusted Purchase Price, that number of
one one-thousandths of a Preferred Share calculated to the nearest one
one-thousandth of a Preferred Share) obtained by (i) multiplying (A) the number
of Preferred Shares covered by a Right immediately prior to this adjustment of
the Purchase Price by (B) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price and (ii) dividing the product so obtained by
the Purchase Price in effect immediately after such adjustment of the Purchase
Price.
(i) The Corporation may elect on or after the date of any
adjustment of the Purchase Price to adjust the number of Rights, in lieu of any
adjustment in the number of one one-thousandths of a Preferred Share purchasable
upon the exercise of a Right. Each of the Rights outstanding after such
adjustment of the number of Rights shall be exercisable for the number of one
one-thousandths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one one-thousandth) obtained by dividing the Purchase
Price in effect immediately prior to adjustment of the Purchase Price by the
Purchase Price in effect immediately after adjustment of the Purchase Price. The
Corporation shall make a public announcement of its election to adjust the
number of Rights, indicating the record date for the adjustment, and, if known
at the time, the amount of the adjustment to be made, a copy of which public
announcement shall promptly be delivered to the Rights Agent. This record date
may be the date on which the Purchase Price is adjusted or any day thereafter,
but, if the Right Certificates have been issued, shall be at least ten (10) days
later than the date of the public announcement. If Right Certificates have been
issued, upon each adjustment of the number of Rights pursuant to this Section
11(i), the Corporation shall, as promptly as practicable, cause to be
distributed to holders of record of Right Certificates on such record date Right
Certificates evidencing, subject to Section 14 hereof, the additional Rights to
which such holders shall be entitled as a result of such adjustment, or, at the
option of the Corporation, shall cause to be distributed to such holders of
record in substitution and replacement for the Right Certificates held by such
holders prior to the date of adjustment, and upon surrender thereof, if required
by the Corporation, new Right Certificates evidencing all the Rights to which
such holders shall be entitled after such adjustment. Right Certificates so to
be distributed shall be issued, executed and countersigned in the manner
provided for herein and shall be registered in the names of the holders of
record of Right Certificates on the record date specified in the public
announcement.
(j) Irrespective of any adjustment or change in the Purchase
Price or the
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number of one one-thousandths of a Preferred Share issuable upon the exercise of
the Rights, the Right Certificates theretofore and thereafter issued may
continue to express the Purchase Price and the number of one one-thousandths of
a Preferred Share which were expressed in the initial Right Certificates issued
hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below the then par value, if any, of the number of
one one-thousandths of a Preferred Share, Common Shares or other securities
issuable upon exercise of the Rights, the Corporation shall take any corporate
action which may, in the opinion of its counsel, be necessary in order that the
Corporation may validly and legally issue such number of fully paid and
non-assessable one one-thousandths of a Preferred Share, Common Shares or other
securities at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Corporation may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the Preferred Shares, Common Shares or other securities of the Corporation, if
any, issuable upon such exercise over and above the Preferred Shares, Common
Shares or other securities of the Corporation, if any, issuable upon exercise on
the basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Corporation shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares or other securities, as the case may be, upon the occurrence of the event
requiring such adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Corporation shall be entitled to make such reductions in
the Purchase Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that it in its sole discretion shall determine
to be advisable in order that (i) any consolidation or subdivision of the
Preferred Shares, (ii) issuance wholly for cash of Preferred Shares at less than
the current market price, (iii) issuance wholly for cash of Preferred Shares or
securities which by their terms are convertible into or exchangeable for
Preferred Shares, (iv) stock dividends or (v) issuance of rights, options or
warrants referred to in this Section 11, hereafter made by the Corporation to
holders of its Preferred Shares shall not be taxable to such stockholders.
(n) The Corporation covenants and agrees that it shall not, at
any time after the Distribution Date, (i) consolidate with any other Person
(other than a Subsidiary of the Corporation in a transaction which does not
violate Section 11(o) hereof), (ii) merge with or into any other Person (other
than a Subsidiary of the Corporation in a transaction which does not violate
Section 11(o) hereof), or (iii) sell or transfer (or permit any Subsidiary to
sell or transfer), in one transaction, or a series of related transactions,
assets
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or earning power aggregating more than 50% of the assets or earning power of the
Corporation and its Subsidiaries (taken as a whole) to any other Person or
Persons (other than the Corporation and/or any of its Subsidiaries in one or
more transactions each of which does not violate Section 11(o) hereof), if (x)
at the time of or immediately after such consolidation, merger, sale or transfer
there are any charter or bylaw provisions or any rights, warrants or other
instruments or securities outstanding or agreements in effect or other actions
taken, which would materially diminish or otherwise eliminate the benefits
intended to be afforded by the Rights or (y) prior to, simultaneously with or
immediately after such consolidation, merger or sale, the stockholders of the
Person who constitutes, or would constitute, the "Principal Party" for purposes
of Section 13(a) hereof shall have received a distribution of Rights previously
owned by such Person or any of its Affiliates and Associates. The Corporation
shall not consummate any such consolidation, merger, sale or transfer unless
prior thereto the Corporation and such other Person shall have executed and
delivered to the Rights Agent a supplemental agreement evidencing compliance
with this Section 11(n).
(o) The Corporation covenants and agrees that, after the
Distribution Date, it will not, except as permitted by Section 23, Section 24 or
Section 27 hereof, take (or permit any Subsidiary to take) any action the
purpose of which is to, or if at the time such action is taken it is reasonably
foreseeable that the effect of such action is to, materially diminish or
otherwise eliminate the benefits intended to be afforded by the Rights.
(p) The exercise of Rights under Section 11(a)(ii) shall only
result in the loss of rights under Section 11(a)(ii) to the extent so exercised
and shall not otherwise affect the rights represented by the Rights under this
Agreement, including the rights represented by Section 13.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Sections 11 or 13 hereof,
the Corporation shall promptly (a) prepare a certificate setting forth such
adjustment, and a brief reasonably detailed statement of the facts and
computations accounting for such adjustment, (b) file with the Rights Agent and
with each transfer agent for the Common Shares and the Preferred Shares a copy
of such certificate and (c) mail a brief summary thereof to each holder of a
Right Certificate in accordance with Section 25 hereof. The Rights Agent shall
be fully protected in relying on any such certificate and on any adjustment
therein contained and shall have no duty with respect to and shall not be deemed
to have knowledge of such adjustment unless and until it shall have received
such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.
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(a) In the event that, on or following the Shares Acquisition
Date, directly or indirectly, (x) the Corporation shall consolidate with, or
merge with and into, any Interested Stockholder or, if in such merger or
consolidation all holders of Common Stock are not treated alike, any other
Person, (y) the Corporation shall consolidate with, or merge with, any
Interested Stockholder or, if in such merger or consolidation all holders of
Common Stock are not treated alike, any other Person, and the Corporation shall
be the continuing or surviving corporation of such consolidation or merger
(other than, in a case of any transaction described in (x) or (y), a merger or
consolidation which would result in all of the securities generally entitled to
vote in the election of directors ("voting securities") of the Corporation
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into securities of the surviving
entity) all of the voting securities of the Corporation or such surviving entity
outstanding immediately after such merger or consolidation and the holders of
such securities not having changed as a result of such merger or consolidation),
or (z) the Corporation shall sell or otherwise transfer (or one or more of its
Subsidiaries shall sell or otherwise transfer), in one transaction or a series
of related transactions, assets or earning power aggregating more than 50% of
the assets or earning power of the Corporation and its Subsidiaries (taken as a
whole) to any Interested Stockholder or Stockholders or, if in such transaction
all holders of Common Stock are not treated alike, any other Person (other than
the Corporation or any Subsidiary of the Corporation in one or more transactions
each of which does not violate Section 11(n) hereof), then, and in each such
case (except as provided in Section 13(d) hereof), proper provision shall be
made so that (i) each holder of a Right, except as provided in Section 7(e)
hereof, shall thereafter have the right to receive, upon the exercise thereof at
a price equal to the then current Purchase Price, in accordance with the terms
of this Agreement and in lieu of Preferred Shares, such number of freely
tradable shares of common stock of the Principal Party (as hereinafter defined),
not subject to any liens, encumbrances, rights of first refusal or other adverse
claims, as shall equal the result obtained by (A) multiplying the then current
Purchase Price by the number of one one-thousandths of a Preferred Share for
which a Right is then exercisable (without taking into account any adjustment
previously made pursuant to Section 11(a)(ii)) and dividing that product by (B)
50% of the then current per share market price of the Common Shares of such
Principal Party (determined pursuant to Section 11(d) hereof) on the date of
consummation of such Section 13 Event; (ii) such Principal Party shall
thereafter be liable for, and shall assume, by virtue of such Section 13 Event,
all the obligations and duties of the Corporation pursuant to this Agreement;
(iii) the term "Corporation" shall thereafter be deemed to refer to such
Principal Party, it being specifically intended that the provisions of Section
11 hereof shall apply only to such Principal Party following the first
occurrence of a Section 13 Event; and (iv) such Principal Party shall take such
steps (including, but not limited to, the reservation of a sufficient number of
its Common Shares) in connection with the consummation of any such transaction
as may be necessary to assure that the provisions hereof shall thereafter
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be applicable, as nearly as reasonably may be, in relation to the Common Shares
thereafter deliverable upon the exercise of the Rights.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in
clause (x) or (y) of the first sentence of Section 13(a), the Person that is the
issuer of any securities into which Common Shares of the Corporation are
converted in such merger or consolidation, and if no securities are so issued,
the Person that is the other party to such merger or consolidation (including,
if applicable, the Corporation if it is the surviving corporation); and (ii) in
the case of any transaction described in clause (z) of the first sentence of
Section 13(a), the Person that is the party receiving the greatest portion of
the assets or earning power transferred pursuant to such transaction or
transactions; provided, however, that in any of the foregoing cases, (1) if the
Common Shares of such Person are not at such time and have not been continuously
over the preceding twelve (12) month period registered under Section 12 of the
Exchange Act, and such Person is a direct or indirect Subsidiary of another
Person the Common Shares of which are and have been so registered, "Principal
Party" shall refer to such other Person; (2) in case such Person is a
Subsidiary, directly or indirectly, of more than one Person, the Common Shares
of two or more of which are and have been so registered, "Principal Party" shall
refer to whichever of such Persons is the issuer of the Common Shares having the
greatest aggregate market value; and (3) in case such Person is owned, directly
or indirectly, by a joint venture formed by two or more Persons that are not
owned, directly or indirectly, by the same Person, the rules set forth in (1)
and (2) above shall apply to each of the chains of ownership having an interest
in such joint venture as if such party were a "Subsidiary" of both or all of
such joint venturers and the Principal Parties in each such chain shall bear the
obligations set forth in this Section 13 in the same ratio as their direct or
indirect interests in such Person bear to the total of such interests.
(c) The Corporation shall not consummate any such
consolidation, merger, sale or transfer unless the Principal Party shall have a
sufficient number of its authorized shares of common stock which have not been
issued or reserved for issuance to permit the exercise in full of the Rights in
accordance with this Section 13 and unless prior thereto the Corporation and
such Principal Party shall have executed and delivered to the Rights Agent a
supplemental agreement providing for the terms set forth in paragraphs (a) and
(b) of this Section 13 and further providing that, as soon as practicable after
the date of any consolidation, merger, sale or transfer mentioned in paragraph
(a) of this Section 13, the Principal Party at its own expense shall:
(i) prepare and file a registration statement under
the Act with respect to the Rights and the securities purchasable upon exercise
of the Rights on an appropriate form, and will use its best efforts to cause
such registration statement to (A)
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become effective as soon as practicable after such filing and (B) remain
effective (with a prospectus at all times meeting the requirements of the Act)
until the Final Expiration Date;
(ii) use its best efforts to qualify or register the
Rights and the securities purchasable upon exercise of the Rights under the blue
sky laws of such jurisdictions as may be necessary or appropriate; and
(iii) deliver to holders of the Rights historical
financial statements for the Principal Party which comply in all respects with
the requirements for registration on Form 10 under the Exchange Act.
The provisions of this Section 13 shall similarly apply to successive
mergers or consolidations or sales or other transfers. The rights under this
Section 13 shall be in addition to the rights to exercise Rights and adjustments
under Section 11(a)(ii) and shall survive any exercise thereof.
(d) Notwithstanding anything in this Agreement to the
contrary, Section 13 shall not be applicable to a transaction described in
subparagraphs (x) and (y) of Section 13(a) if: (i) such transaction is
consummated with a Person or Persons who acquired Common Shares pursuant to a
Permitted Offer (or a wholly owned Subsidiary of any such Person or Persons);
(ii) the price per Common Share offered in such transaction is not less than the
price per Common Share paid to all holders of Common Shares whose shares were
purchased pursuant to such Permitted Offer; and (iii) the form of consideration
offered in such transaction is the same as the form of consideration paid
pursuant to such Permitted Offer. Upon consummation of any such transaction
contemplated by this Section 13(d), all Rights hereunder shall expire.
Section 14. Fractional Rights and Fractional Shares.
(a) The Corporation shall not be required to issue fractions
of Rights or to distribute Right Certificates which evidence fractional Rights.
In lieu of such fractional Rights, there shall be paid to the registered holders
of the Right Certificates with regard to which such fractional Rights would
otherwise be issuable, an amount in cash equal to the same fraction of the
current market value of a whole Right. For the purposes of this Section 14(a),
the current market value of a whole Right shall be the closing price of the
Rights for the Trading Day immediately prior to the date on which such
fractional Rights would have been otherwise issuable. The closing price for any
day shall be the last sale price, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular way,
in either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the New York
Stock Exchange or, if the Rights are not listed or admitted to
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trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Rights are listed or
admitted to trading or, if the Rights are not listed or admitted to trading on
any national securities exchange, the last quoted price or, if not so quoted,
the average of the high bid and low asked prices as reported on NASDAQ or such
other market or system then in use or, if on any such date the Rights are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in the Rights
selected by the Board of Directors of the Corporation. If on any such date no
such market maker is making a market in the Rights, the fair value of the Rights
on such date as determined in good faith by the Board of Directors of the
Corporation shall be used.
(b) The Corporation shall not be required to issue fractions
of Preferred Shares (other than fractions which are one one-thousandth or
integral multiples of one one-thousandth of a Preferred Share) upon exercise of
the Rights or to distribute certificates which evidence fractional Preferred
Shares (other than fractions which are one one-thousandth or integral multiples
of one one-thousandth of a Preferred Share). Fractions of Preferred Shares in
integral multiples of one one-thousandth of a Preferred Share may, at the
election of the Corporation, be evidenced by depositary receipts, pursuant to an
appropriate agreement between the Corporation and a depositary selected by it;
provided that such agreement shall provide that the holders of such depositary
receipts shall have the rights, privileges and preferences to which they are
entitled as beneficial owners of the Preferred Shares represented by such
depositary receipts. In lieu of fractional Preferred Shares that are not one
one-thousandth or integral multiples of one one-thousandth of a Preferred Share,
the Corporation shall pay to the registered holders of Right Certificates at the
time such Rights are exercised as herein provided an amount in cash equal to the
same fraction of the current market value of one Preferred Share. For the
purposes of this Section 14(b), the current market value of a Preferred Share
shall be the closing price of a Preferred Share (as determined pursuant to
Section 11(d)(ii) hereof) for the Trading Day immediately prior to the date of
such exercise.
(c) Following the occurrence of one of the transactions or
events specified in Section 11 giving rise to the right to receive Common
Shares, capital stock equivalents (other than Preferred Shares) or other
securities upon the exercise of a Right, the Corporation shall not be required
to issue fractions of shares or units of such Common Shares, capital stock
equivalents or other securities upon exercise of the Rights or to distribute
certificates which evidence fractions of such Common Shares, capital stock
equivalents or other securities. In lieu of fractional shares or units of such
Common Shares, capital stock equivalents or other securities, the Corporation
may pay to the registered holders of Right Certificates at the time such Rights
are exercised as herein provided an amount in cash equal to the same fraction of
the current market value of a
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share or unit of such Common Shares, capital stock equivalents or other
securities. For purposes of this Section 14(c), the current market value shall
be determined in the manner set forth in Section 11(d) hereof for the Trading
Day immediately prior to the date of such exercise and, if such capital stock
equivalent is not traded, each such capital stock equivalent shall have the
value of one one-thousandth of a Preferred Share.
(d) The holder of a Right by the acceptance of the Right
expressly waives his right to receive any fractional Rights or any fractional
share upon exercise of a Right (except as provided above). The Rights Agent
shall not be deemed to have knowledge of, and shall have no duty in respect of,
the issuance of fractional Rights or fractional shares until it shall have
received instructions from the Corporation concerning the issuance of the
fractional Rights or fractional shares upon which instructions the Rights Agent
may conclusively rely.
Section 15. Rights of Action.
All rights of action in respect of this Agreement, excepting the rights
of action given to the Rights Agent under Section 18 hereof, are vested in the
respective registered holders of the Right Certificates (and, prior to the
Distribution Date, the registered holders of the Common Shares); and any
registered holder of any Right Certificate (or, prior to the Distribution Date,
of the Common Shares), without the consent of the Rights Agent or of the holder
of any other Right Certificate (or, prior to the Distribution Date, of the
Common Shares), may, in his own behalf and for his own benefit, enforce, and may
institute and maintain any suit, action or proceeding against the Corporation to
enforce, or otherwise act in respect of, his right to exercise the Rights
evidenced by such Right Certificate (or, prior to the Distribution Date, of the
Common Shares) in the manner provided in such Right Certificate and in this
Agreement. Without limiting the foregoing or any remedies available to the
holders of Rights, it is specifically acknowledged that the holders of Rights
would not have an adequate remedy at law for any breach of this Agreement and
will be entitled to specific performance of the obligations under, and
injunctive relief against actual or threatened violations of the obligations of
any Person subject to, this Agreement.
Section 16. Agreement of Right Holders.
Every holder of a Right, by accepting the same, consents and agrees
with the Corporation and the Rights Agent and with every other holder of a Right
that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates are
transferable only
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on the registry books of the Rights Agent if surrendered at the office or
offices of the Rights Agent designated for such purpose, duly endorsed or
accompanied by a proper instrument of transfer and with the appropriate form
fully executed;
(c) subject to Section 7(f) hereof, the Corporation and the
Rights Agent may deem and treat the Person in whose name the Right Certificate
(or, prior to the Distribution Date, the associated Common Shares certificate)
is registered as the absolute owner thereof and of the Rights evidenced thereby
(notwithstanding any notations of ownership or writing on the Right Certificate
or the associated Common Shares certificate made by anyone other than the
Corporation or the Rights Agent) for all purposes whatsoever, and neither the
Corporation nor the Rights Agent, subject to the last sentence of Section 7(e)
hereof, shall be required to be affected by any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the
contrary, neither the Corporation nor the Rights Agent shall have any liability
to any holder of a Right or a beneficial interest in a Right or other Person as
a result of its inability to perform any of its obligations under this Agreement
by reason of any preliminary or permanent injunction or other order, judgment,
decree or ruling (whether interlocutory or final) issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated or
enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; provided, however, the Corporation must use its
best efforts to have any such order, decree, judgment, or ruling lifted or
otherwise overturned as soon as possible.
Section 17. Right Certificate Holder Not Deemed a Stockholder.
No holder, as such, of any Right Certificate shall be entitled to vote,
receive dividends or be deemed for any purpose the holder of the Preferred
Shares or any other securities of the Corporation which may at any time be
issuable on the exercise of the Rights represented thereby, nor shall anything
contained herein or in any Right Certificate be construed to confer upon the
holder of any Right Certificate, as such, any of the rights of a stockholder of
the Corporation or any right to vote for the election of directors or upon any
matter submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive notice of meetings or other
actions affecting stockholders (except as provided in Section 25 hereof), or to
receive dividends or other distributions or to exercise any preemptive or
subscription rights, or otherwise, until the Right or Rights evidenced by such
Right Certificate shall have been exercised in accordance with the provisions
hereof.
Section 18. Concerning the Rights Agent.
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The Corporation agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
other disbursements incurred in the preparation, execution, delivery, amendment,
administration and execution of this Agreement and the exercise and performance
of its duties hereunder. The Corporation also agrees to indemnify the Rights
Agent for, and to hold it harmless against, any loss, liability, damage,
judgment, fine, penalty, claim, demand, settlement, cost or expense, incurred
without gross negligence, bad faith or willful misconduct on the part of the
Rights Agent, for any action taken, suffered or omitted by the Rights Agent in
connection with the acceptance and administration of this Agreement, including
without limitation the costs and expenses of defending against any claim of
liability in the premises. The indemnity provided for herein shall survive the
expiration of the Rights and the termination of this Agreement.
The Rights Agent shall be authorized and protected and shall incur no liability
for, or in respect of, any action taken, suffered or omitted by it in connection
with, its acceptance and administration of this Agreement in reliance upon any
Right Certificate or certificate for Common Shares or for other securities of
the Corporation, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement, or other paper or document (collectively, "Documents") believed by it
to be genuine and to be signed, executed and, where necessary, verified or
acknowledged, by the proper Person or Persons. The Rights Agent shall not be
deemed to have knowledge of, and shall have no duty in respect of, any such
Documents, until it receives notice or instructions in respect thereof. In no
case will the Rights Agent be liable for special, indirect, punitive, incidental
or consequential loss or damage of any kind whatsoever, even if the Rights Agent
has been advised of the likelihood of such loss or damage.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
Any Person into which the Rights Agent or any successor Rights Agent
may be merged or with which it may be consolidated, or any Person resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any Person succeeding to the stock transfer or all or
substantially all of the stockholder services business of the Rights Agent or
any successor Rights Agent, shall be the successor to the Rights Agent under
this Agreement without the execution or filing of any paper or any further act
on the part of any of the parties hereto, provided that such Person would be
eligible for appointment as a successor Rights Agent under the provisions of
Section 21 hereof. In case at the time such successor Rights Agent shall succeed
to the agency created by this Agreement, any of the Right Certificates shall
have been countersigned but not delivered, any such successor Rights Agent may
adopt the countersignature of a predecessor Rights Agent and deliver such Right
Certificates so
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countersigned; and in case at that time any of the Right Certificates shall not
have been countersigned, any successor Rights Agent may countersign such Right
Certificates either in the name of the predecessor or in the name of the
successor Rights Agent; and in all such cases such Right Certificates shall have
the full force provided in the Right Certificates and in this Agreement. In case
at any time the name of the Rights Agent shall be changed and at such time any
of the Right Certificates shall have been countersigned but not delivered, the
Rights Agent may adopt the countersignature under its prior name and deliver
Right Certificates so countersigned; and in case at that time any of the Right
Certificates shall not have been countersigned, the Rights Agent may countersign
such Right Certificates either in its prior name or in its changed name; and in
all such cases such Right Certificates shall have the full force provided in the
Right Certificates and in this Agreement.
Section 20. Duties of Rights Agent.
The Rights Agent undertakes only those duties and obligations expressly
imposed by this Agreement (and no implied duties or obligations) upon the
following terms and conditions, by all of which the Corporation and the holders
of Right Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may
be legal counsel for the Corporation), and the advice or opinion of such counsel
shall be full and complete authorization and protection to the Rights Agent and
the Rights Agent shall incur no liability for or in respect of, any action
taken, suffered or omitted by it in good faith and in accordance with such
opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter (including, without limitation, the identity of an Acquiring Person and
the determination of the current market price of any Security) be proved or
established by the Corporation prior to taking, suffering or omitting any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any one of the Chairman of the Board, the
Chief Executive Officer, the President, any Vice President, the Treasurer or the
Secretary of the Corporation and delivered to the Rights Agent; and such
certificate shall be full authorization and protection to the Rights Agent and
the Rights Agent shall incur no liability in respect of any action taken,
suffered or omitted in good faith by it under the provisions of this Agreement
in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its
own gross negligence, bad faith or willful misconduct.
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(d) The Rights Agent shall not be liable for, or by reason of
any liability in respect of, the statements of fact or recitals contained in
this Agreement or in the Right Certificates (except its countersignature on such
Right Certificates) or be required to verify the same, but all such statements
and recitals are and shall be deemed to have been made by the Corporation only.
(e) The Rights Agent shall not be under any liability or
responsibility in respect of the validity of this Agreement or the execution and
delivery hereof (except the due execution hereof by the Rights Agent) or in
respect of the validity or execution of any Right Certificate (except its
countersignature thereof); nor shall it be responsible for any breach by the
Corporation of any covenant or condition contained in this Agreement or in any
Rights Certificate; nor shall it be responsible for any change in the
exercisability of the Rights (including the Rights becoming null and void
pursuant to Section 7(e) hereof) or any adjustment required under the provisions
of Section 11 or Section 13 hereof or responsible for the manner, method or
amount of any such adjustment or the ascertaining of the existence of facts that
would require any such adjustment (except with respect to the exercise of Rights
evidenced by Right Certificates after receipt of the certificate described in
Section 12 hereof); nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any
Preferred Shares or Common Shares to be issued pursuant to this Agreement or any
Right Certificate or as to whether any Preferred Shares or Common Shares will,
when issued, be validly authorized and issued, fully paid and non-assessable.
(f) The Corporation agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder from
any one of the Chairman of the Board, the Chief Executive Officer, the
President, any Vice President, the Treasurer or the Secretary of the
Corporation, and to apply to such officers for advice or instructions in
connection with its duties, and such instructions shall be full authorization
and protection to the Rights Agent and the Rights Agent shall incur no liability
for or in respect of any action taken, suffered or omitted by it in good faith
or lack of action in accordance with instructions of any such officer or for any
delay in acting while waiting for those instructions. Any application by the
Rights Agent for written instructions from the Corporation may, at the option of
the Rights Agent, set forth in writing any action proposed to be taken or
omitted by the Rights Agent under this Agreement and the date on or after which
such action shall be taken or suffered or such omission shall be effective. The
Rights Agent shall not be liable or responsible for any
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<PAGE> 39
action taken or suffered by, or omission of, the Rights Agent in accordance with
a proposal included in any such application on or after the date specified in
such application (which date shall not be less than five Business Days after the
date any officer of the Corporation actually receives such application, unless
any such officer shall have consented in writing to an earlier date) unless,
prior to taking any such action (or the effective date in the case of an
omission), the Rights Agent shall have received written instruction from any one
of the Chairman of the Board, the Chief Executive Officer, the President, any
Vice President, the Treasurer or the Secretary of the Corporation in response to
such application specifying the action to be taken, suffered or omitted.
(h) The Rights Agent and any stockholder, affiliate, director,
officer or employee of the Rights Agent may buy, sell or deal in any of the
Rights or other securities of the Corporation or become pecuniarily interested
in any transaction in which the Corporation may be interested, or contract with
or lend money to the Corporation or otherwise act as fully and freely as though
it were not Rights Agent under this Agreement. Nothing herein shall preclude the
Rights Agent from acting in any other capacity for the Corporation or for any
other Person or legal entity.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys or agents, and the Rights Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Corporation or any other Person
resulting from any such act, default, neglect or misconduct, absent gross
negligence, bad faith or willful misconduct in the selection and continued
employment thereof.
(j) No provision of this Agreement shall require the Rights
Agent to expend or risk its own funds or otherwise incur any financial liability
in the performance of any of its duties hereunder or in the exercise of its
rights if it believes that repayment of such funds or adequate indemnification
against such risk or liability is not reasonably assured to it.
(k) If, with respect to any Rights Certificate surrendered to
the Rights Agent for exercise or transfer, the certificate attached to the form
of assignment or form of election to purchase, as the case may be, has not been
completed, the Rights Agent shall not take any further action with respect to
such requested exercise of transfer without first consulting with the
Corporation.
Section 21. Change of Rights Agent.
The Rights Agent or any successor Rights Agent may resign and be
discharged from its duties under this Agreement upon thirty (30) days' notice in
writing mailed to the
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<PAGE> 40
Corporation and to each transfer agent of the Common Shares or Preferred Shares
by registered or certified mail, and to the holders of the Right Certificates by
first-class mail. The Corporation may remove the Rights Agent or any successor
Rights Agent upon sixty (60) days' notice in writing, mailed to the Rights Agent
or successor Rights Agent, as the case may be, and to each transfer agent of the
Common Shares or Preferred Shares by registered or certified mail, and to
holders of the Right Certificates by first-class mail. If the Rights Agent
shall resign or be removed or shall otherwise become incapable of acting, the
Corporation shall appoint a successor to the Rights Agent. If the Corporation
shall fail to make such appointment within a period of sixty (60) days after
giving notice of such removal or after it has been notified in writing of such
resignation or incapacity by the resigning or incapacitated Rights Agent or by
the holder of a Right Certificate (who shall, with such notice, submit his Right
Certificate for inspection by the Corporation), then the registered holder of
any Right Certificate may apply to any court of competent jurisdiction for the
appointment of a new Rights Agent. Any successor Rights Agent, whether appointed
by the Corporation or by such a court, shall be a Person organized and doing
business under the laws of the United States or of the States of New York or
Illinois (or of any other state of the United States so long as such Person is
authorized to do business in the States of New York and Illinois), in good
standing, having an office in the States of New York or Illinois, which is
subject to supervision or examination by federal or state authority. After
appointment, the successor Rights Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as Rights
Agent without further act or deed; but the predecessor Rights Agent shall
deliver and transfer to the successor Rights Agent any property at the time held
by it hereunder, and execute and deliver any further assurance, conveyance, act
or deed necessary for the purpose. Not later than the effective date of any such
appointment the Corporation shall file notice thereof in writing with the
predecessor Rights Agent and each transfer agent of the Common Shares or
Preferred Shares, and mail a notice thereof in writing to the registered holders
of the Right Certificates. Failure to give any notice provided for in this
Section 21, however, or any defect therein, shall not affect the legality or
validity of the resignation or removal of the Rights Agent or the appointment of
the successor Rights Agent, as the case may be.
Section 22. Issuance of New Right Certificates.
Notwithstanding any of the provisions of this Agreement or of the
Rights to the contrary, the Corporation may, at its option, issue new Right
Certificates evidencing Rights in such form as may be approved by its Board of
Directors to reflect any adjustment or change in the Purchase Price and the
number or kind or class of shares or other securities or property purchasable
under the Right Certificates made in accordance with the provisions of this
Agreement.
In addition, in connection with the issuance or sale of Common Shares
following
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<PAGE> 41
the Distribution Date and prior to the earlier of the Redemption Date and the
Final Expiration Date, the Corporation (a) shall with respect to Common Shares
so issued or sold pursuant to the exercise of stock options or under any
employee plan or arrangement, or upon the exercise, conversion or exchange of
securities, notes or debentures issued by the Corporation, and (b) may, in any
other case, if deemed necessary or appropriate by the Board of Directors of the
Corporation, issue Right Certificates representing the appropriate number of
Rights in connection with such issuance or sale; provided, however, that (i) the
Corporation shall not be obligated to issue any such Right Certificates if, and
to the extent that, the Corporation shall be advised by counsel that such
issuance would create a significant risk of material adverse tax consequences to
the Corporation or the Person to whom such Right Certificate would be issued,
and (ii) no Right Certificate shall be issued if, and to the extent that,
appropriate adjustment shall otherwise have been made in lieu of the issuance
thereof.
Section 23. Redemption and Termination.
(a) (i) The Board of Directors of the Corporation may, at its
option, redeem all but not less than all of the then outstanding Rights at a
redemption price of $.01 per Right, as such amount may be appropriately adjusted
to reflect any stock split, stock dividend or similar transaction occurring
after the date hereof (such redemption price being hereinafter referred to as
the "Redemption Price"), at any time prior to the earlier of (x) the occurrence
of a Section 11(a)(ii) Event or (y) the Final Expiration Date.
(ii) In addition, the Board of Directors of the
Corporation may, at its option, at any time following the occurrence of a
Section 11(a)(ii) Event and the expiration of any period during which the holder
of Rights may exercise the rights under Section 11(a)(ii) but prior to any
Section 13 Event redeem all but not less than all of the then outstanding Rights
at the Redemption Price (x) in connection with any merger, consolidation or sale
or other transfer (in one transaction or in a series of related transactions) of
assets or earning power aggregating 50% or more of the earning power of the
Corporation and its subsidiaries (taken as a whole) in which all holders of
Common Shares are treated alike and not involving (other than as a holder of
Common Shares being treated like all other such holders) an Interested
Stockholder or (y)(aa) if and for so long as the Acquiring Person is not
thereafter the Beneficial Owner of 15% of the Common Shares, and (bb) at the
time of redemption no other Persons are Acquiring Persons.
(b) In the case of a redemption permitted under Section
23(a)(i), immediately upon the date for redemption set forth (or determined in
the manner specified) in a resolution of the Board of Directors of the
Corporation ordering the redemption of the Rights, and without any further
action and without any notice, the right to exercise the Rights will terminate
and the only right thereafter of the holders of Rights
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<PAGE> 42
shall be to receive the Redemption Price for each Right so held. In the case of
a redemption permitted only under Section 23(a)(ii), the right to exercise the
Rights will terminate and represent only the right to receive the Redemption
Price upon the later of ten (10) Business Days following the giving of such
notice or the expiration of any period during which the rights under Section
11(a)(ii) may be exercised. The Corporation shall promptly give public notice
and notify the Rights Agent of any such redemption; provided, however, that the
failure to give, or any defect in, any such notice shall not affect the validity
of such redemption. Within ten (10) days after such date for redemption set
forth in a resolution of the Board of Directors ordering the redemption of the
Rights, the Corporation shall mail a notice of redemption to all the holders of
the then outstanding Rights at their last addresses as they appear upon the
registry books of the Rights Agent or, prior to the Distribution Date, on the
registry books of the transfer agent for the Common Shares. Any notice which is
mailed in the manner herein provided shall be deemed given, whether or not the
holder receives the notice. Each such notice of redemption will state the method
by which the payment of the Redemption Price will be made. Neither the
Corporation nor any of its Affiliates or Associates may redeem, acquire or
purchase for value any Rights at any time in any manner other than that
specifically set forth in this Section 23 and other than in connection with the
purchase of Common Shares prior to the Distribution Date.
(c) The Corporation may, at its option, discharge all of its
obligations with respect to the Rights by (i) issuing a press release announcing
the manner of redemption of the Rights in accordance with this Agreement and
(ii) mailing payment of the Redemption Price to the registered holders of the
Rights at their last addresses as they appear on the registry books of the
Rights Agent or, prior to the Distribution Date, on the registry books of the
Transfer Agent of the Common Shares, and upon such action, all outstanding
Rights and Right Certificates shall be null and void without any further action
by the Corporation.
Section 24. Exchange.
(a) The Board of Directors of the Corporation may, at its
option, at any time after the time that any Person becomes an Acquiring Person,
exchange all or part of the then outstanding and exercisable Rights (which shall
not include Rights that have become null and void pursuant to the provisions of
Section 7(e) and Section 11(a)(ii) hereof) for Common Shares of the Corporation
at an exchange ratio of one Common Share per Right, appropriately adjusted to
reflect any stock split, stock dividend or similar transaction occurring after
the date hereof (such exchange ratio being hereinafter referred to as the
"Exchange Ratio"). Notwithstanding the foregoing, the Board of Directors of the
Corporation shall not be empowered to effect such exchange at any time after any
Person (other than the Corporation, any Subsidiary of the Corporation, any
employee benefit plan of the Corporation or any such Subsidiary, any Person
organized, appointed or established
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<PAGE> 43
by the Corporation for or pursuant to the terms of any such plan or any trustee,
administrator or fiduciary of such a plan), together with all Affiliates and
Associates of such Person, becomes the Beneficial Owner of 50% or more of the
Common Shares then outstanding.
(b) Immediately upon the action of the Board of Directors of
the Corporation ordering the exchange of any Rights pursuant to subsection (a)
of this Section 24 and without any further action and without any notice, the
right to exercise such Rights shall terminate and the only right thereafter of
the holders of such Rights shall be to receive that number of Common Shares
equal to the number of such Rights held by such holder multiplied by the
Exchange Ratio. The Corporation shall promptly give public notice and notify the
Rights Agent of any such exchange; provided, however, that the failure to give,
or any defect in, such notice shall not affect the validity of such exchange.
The Corporation promptly shall mail a notice of any such exchange to all of the
holders of such Rights at their last addresses as they appear upon the registry
books of the Rights Agent. Any notice which is mailed in the manner herein
provided shall be deemed given, whether or not the holder receives the notice.
Each such notice of exchange will state the method by which the exchange of the
Common Shares for Rights will be effected and, in the event of any partial
exchange, the number of Rights will be exchanged. Any partial exchange shall be
effected pro rata based on the number of Rights (other than Rights which have
become null and void pursuant to the provisions of Section 7(e) and Section
11(a)(ii) hereof) held by each holder of Rights.
(c) In any exchange pursuant to this Section 24, the
Corporation, at its option, may substitute Preferred Shares (or equivalent
preferred shares, as such term is defined in Section 11(b) hereof) for some or
all of the Common Shares exchangeable for Rights, at the initial rate of one
one-thousandth of a Preferred Share (or equivalent preferred share) for each
Common Share, as appropriately adjusted to reflect adjustments in the voting
rights of the Preferred Shares pursuant to the terms thereof, so that the
fraction of a Preferred Share delivered in lieu of each Common Share shall have
the same voting rights as one Common Share.
(d) The Board of Directors of the Corporation shall not
authorize any exchange transaction referred to in Section 24(a) hereof unless at
the time such exchange is authorized there shall be sufficient Common Shares or
Preferred Shares issued but not outstanding, or authorized but unissued, to
permit the exchange of Rights as contemplated in accordance with this Section
24.
Section 25. Notice of Certain Events.
(a) In case the Corporation shall propose (i) to pay any
dividend payable in stock of any class to the holders of its Preferred Shares or
to make any other distribution
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<PAGE> 44
to the holders of its Preferred Shares (other than a regularly quarterly cash
dividend), (ii) to offer to the holders of its Preferred Shares rights or
warrants to subscribe for or to purchase any additional Preferred Shares or
shares of stock of any class or any other securities, rights or options, (iii)
to effect any reclassification of its Preferred Shares (other than a
reclassification involving only the subdivision of outstanding Preferred
Shares), (iv) to effect any consolidation or merger into or with any other
Person (other than a Subsidiary of the Corporation in a transaction which does
not violate Section 11(n) hereof), or to effect any sale or other transfer (or
to permit one or more of its Subsidiaries to effect any sale or other transfer)
in one or more transactions, of 50% or more of the assets or earning power of
the Corporation and its Subsidiaries (taken as a whole) to any other Person or
Persons (other than the Corporation and/or any of its Subsidiaries in one or
more transactions each of which does not violate Section 11(n) hereof), or (v)
to effect the liquidation, dissolution or winding up of the Corporation, then,
in each such case, the Corporation shall give to the Rights Agent and to each
holder of a Right Certificate, in accordance with Section 26 hereof, a notice of
such proposed action and file a certificate with the Rights Agent to that
effect, which shall specify the record date for the purposes of such stock
dividend, or distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the Preferred Shares, if any such date is to be fixed,
and such notice shall be so given in the case of any action covered by clause
(i) or (ii) above at least twenty (20) days prior to the record date for
determining holders of the Preferred Shares for purposes of such action, and in
the case of any such other action, at least twenty (20) days prior to the date
of the taking of such proposed action or the date of participation therein by
the holders of the Preferred Shares, whichever shall be the earlier.
(b) In case of a Section 11(a)(ii) Event, then (i) the
Corporation shall as soon as practicable thereafter give to each holder of a
Right Certificate, in accordance with Section 26 hereof, a notice of the
occurrence of such event, which notice shall describe such event and the
consequences of such event to holders of Rights under Section 11(a)(ii) hereof,
and (ii) all references in the preceding paragraph (a) to Preferred Shares shall
be deemed thereafter to refer also to Common Shares and/or, if appropriate,
other securities of the Corporation.
Section 26. Notices.
Notices or demands authorized by this Agreement to be given or made by
the Rights Agent or by the holder of any Right Certificate to or on the
Corporation shall be sufficiently given or made if sent by first-class mail,
postage prepaid, addressed (until another address is filed in writing with the
Rights Agent) as follows:
Cabot Microelectronics Corporation
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<PAGE> 45
870 North Commons Drive
Aurora, Illinois 60504
Attention: Matthew Neville, President and
Chief Executive Officer
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Corporation or by the holder of any
Right Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Corporation) as follows:
EquiServe Trust Company, N.A.
c/o Equiserve Limited Partnership
150 Royall Street
Canton, MA 02021
Attention: Client Administration
Facsimile: 781-575-2549
Notices or demands authorized by this Agreement to be given or made by
the Corporation or the Rights Agent to the holder of any Right Certificate or,
if prior to the Distribution Date, to the holder of certificates representing
Common Shares shall be sufficiently given or made if sent by first-class mail,
postage prepaid, addressed to such holder at the address of such holder as shown
on the registry books of the Corporation.
Section 27. Supplements and Amendments.
Except as set forth in the penultimate sentence of this Section 27,
prior to the Distribution Date, the Corporation may and the Rights Agent shall,
if the Corporation so directs, supplement or amend any provision of this
Agreement without the approval of any holders of certificates representing
Common Shares. From and after the Distribution Date, the Corporation may and the
Rights Agent shall, if the Corporation so directs, supplement or amend this
Agreement without the approval of any holders of Right Certificates in order (i)
to cure any ambiguity, (ii) to correct or supplement any provision contained
herein which may be defective or inconsistent with any other provisions herein,
(iii) to shorten or lengthen any time period hereunder or (iv) to change or
supplement the provisions hereunder in any manner which the Corporation may deem
necessary or desirable and which shall not adversely affect the interests of the
holders of Right Certificates (other than an Acquiring Person or an Affiliate or
Associate of an Acquiring Person); provided, however, that this Agreement may
not be supplemented or amended to lengthen, pursuant to clause (iii) of this
sentence, (A) a time period relating to when the Rights may be redeemed at such
time as the Rights are not then redeemable, or (B) any other time period unless
any such lengthening is for the purpose of protecting, enhancing
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<PAGE> 46
or clarifying the rights of, and/or the benefits to, the holders of Rights. Upon
the delivery of a certificate from an appropriate officer of the Corporation
which states that the proposed supplement or amendment is in compliance with the
terms of this Section 27, and if requested by the Rights Agent an opinion of
counsel, the Rights Agent shall execute such supplement or amendment, provided
that such supplement or amendment does not adversely affect the rights or
obligations of the Rights Agent under Section 18 or Section 20 of this
Agreement. Prior to the Distribution Date, the interests of the holders of
Rights shall be deemed coincident with the interests of the holders of Common
Shares.
Section 28. Determination and Actions by the Board of Directors, etc.
The Board of Directors of the Corporation shall have the exclusive
power and authority to administer this Agreement and to exercise all rights and
powers specifically granted to the Board of Directors of the Corporation, or the
Corporation, or as may be necessary or advisable in the administration of this
Agreement, including, without limitation, the right and power to (i) interpret
the provisions of this Agreement, and (ii) make all determinations deemed
necessary or advisable for the administration of this Agreement (including,
without limitation, a determination to redeem or not redeem the Rights or to
amend the Agreement and whether any proposed amendment adversely affects the
interests of the holders of Right Certificates). For all purposes of this
Agreement, any calculation of the number of Common Shares or other securities
outstanding at any particular time, including for purposes of determining the
particular percentage of such outstanding Common Shares or any other securities
of which any Person is the Beneficial Owner, shall be made in accordance with
the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations
under the Exchange Act as in effect on the date of this Agreement. All such
actions, calculations, interpretations and determinations (including, for
purposes of clause (y) below, all omissions with respect to the foregoing) which
are done or made by the Board of Directors of the Corporation in good faith (and
the Rights Agent shall be able to assume that the Board of Directors of the
Corporation acted in such good faith), shall (x) be final, conclusive and
binding on the Corporation, the Rights Agent, the holders of the Right
Certificates and all other Persons, and (y) not subject the Board of Directors
of the Corporation to any liability to the holders of the Right Certificates.
Section 29. Successors.
All the covenants and provisions of this Agreement by or for the
benefit of the Corporation or the Rights Agent shall bind and inure to the
benefit of their respective successors and assigns hereunder.
Section 30. Benefits of this Agreement.
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<PAGE> 47
Nothing in this Agreement shall be construed to give to any person or
corporation other than the Corporation, the Rights Agent and the registered
holders of the Right Certificates (and, prior to the Distribution Date, the
Common Shares) any legal or equitable right, remedy or claim under this
Agreement; but this Agreement shall be for the sole and exclusive benefit of the
Corporation, the Rights Agent and the registered holders of the Right
Certificates (and, prior to the Distribution Date, the Common Shares).
Section 31. Severability.
If any term, provision, covenant or restriction of this Agreement is
held by a court of competent jurisdiction or other authority to be invalid, void
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
Section 32. Governing Law.
This Agreement, each Right and each Right Certificate issued hereunder
shall be deemed to be a contract made under the laws of the State of Delaware
and for all purposes shall be governed by and construed in accordance with the
laws of such State applicable to contracts to be made and performed entirely
within such State; except that all provisions regarding the rights, duties and
obligations of the Rights Agent shall be governed by and construed in accordance
with the laws of the State of New York applicable to contracts made and to be
performed entirely within such State.
Section 33. Counterparts
This Agreement may be executed in any number of counterparts and each
of such counterparts shall for all purposes be deemed to be an original, and all
such counterparts shall together constitute but one and the same instrument.
Section 34. Descriptive Headings.
Descriptive headings of the several Sections of this Agreement are
inserted for convenience only and shall not control or affect the meaning or
construction of any of the provisions hereof.
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<PAGE> 48
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and attested, all as of the date and year first
above written.
CABOT MICROELECTRONICS
CORPORATION
Attest:
By /s/ William C. McCarthy By: /s/ Matthew Neville
Name: William C. McCarthy, Secretary Name: Matthew Neville, President
EQUISERVE TRUST COMPANY, N.A.
Attest:
By: /s/ Carole A. McHugh By: /s/ Charles V. Rossi
Name: Carole A. McHugh Name: Charles V. Rossi
Title: Account Manager Title: Executive Vice President
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Exhibit A
CABOT MICROELECTRONICS CORPORATION
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF SERIES A JUNIOR PARTICIPATING
PREFERRED STOCK
(Pursuant to Section 151
of the General Corporation Law of the State of Delaware)
We, Matthew Neville, the President and Chief Executive Officer, and
William C. McCarthy, Chief Financial Officer and Secretary of Cabot
Microelectronics Corporation, a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), in
accordance with the provisions of Section 151 thereof, do hereby certify;
The Board of Directors, at a meeting held on March 24, 2000, adopted
the following resolution to create, upon the filing with the Secretary of State
of the State of Delaware, and the effectiveness of (the "Effective Time"), the
Corporation's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation"), a series of fifty thousand (50,000) shares of
Preferred Stock designated as Series A Junior Participating Preferred Stock;
WHEREAS, the Certificate of Incorporation will provide that the
Corporation is authorized to issue 20,000,000 shares of Preferred Stock, none of
which are currently issued and outstanding, now therefore it is:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation by Article IV of the Certificate of Incorporation
(as defined below), a series of Preferred Stock of the Corporation shall, upon
the Effective Time, be created out of the authorized but unissued shares of the
capital stock of the Corporation, such series to be designated Series A Junior
Participating Preferred Stock (the "Participating Preferred Stock"), to consist
of 50,000 shares, par value $.001 per share, of which the preferences and
relative and other rights, and the qualifications, limitations or restrictions
thereof, shall be as follows:
1. Future Increase or Decrease. Subject to paragraph 4(e) of
this resolution, the number of shares of said series may at any time or from
time to time be increased or decreased by the Board of Directors notwithstanding
that shares of such series may be outstanding at such time of increase or
decrease.
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<PAGE> 50
2. Dividend Rate.
(a) The holders of shares of Participating Preferred
Stock shall be entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available for the purpose, quarterly dividends
payable in cash on the first day of each January, April, July and October in
each year (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance (the "First Issuance") of a share or fraction of a share of
Participating Preferred Stock, in an amount per share (rounded to the nearest
cent) equal to the greater of (i) $10.00 and (ii) 1,000 times the aggregate per
share amount of all cash dividends and 1,000 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other distributions, other
than a dividend or distribution payable in shares of Common Stock, par value
$.001 per share, of the Corporation ("Common Stock") or by way of a subdivision
of the outstanding shares of Common Stock (by reclassification or otherwise),
declared on the Common Stock, since the immediately preceding Quarterly Dividend
Payment Date, or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share or fraction of a share of Participating
Preferred Stock. In the event the Corporation shall at any time after the First
Issuance declare or pay any dividend on the Common Stock payable in shares of
Common Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the amount to which holders of
shares of Participating Preferred Stock were entitled immediately prior to such
event under the preceding sentence shall be adjusted by multiplying such amount
by a fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
(b) On or after the First Issuance, no dividend on
Common Stock shall be declared unless concurrently therewith a dividend or
distribution is declared on the Participating Preferred Stock as provided in
paragraph (a) above; and the declaration of any such dividend on the Common
Stock shall be expressly conditioned upon payment or declaration of and
provision for a dividend on the Participating Preferred Stock as above provided.
In the event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $10.00 per share on
the Participating Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.
(c) Whenever quarterly dividends or other dividends
payable on the Participating Preferred Stock as provided in paragraph (a) above
are in arrears, thereafter
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<PAGE> 51
and until all accrued and unpaid dividends and distributions, whether or not
declared, on shares of Participating Preferred Stock outstanding shall have been
paid in full, the Corporation shall not redeem or purchase or otherwise acquire
for consideration shares of any stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Participating Preferred
Stock, provided that the Corporation may at any time redeem, purchase or
otherwise acquire shares of any such junior stock in exchange for shares of any
stock of the Corporation ranking junior (as to dividends and upon dissolution,
liquidation or winding up) to the Participating Preferred Stock.
(d) Dividends shall begin to accrue and be cumulative
on outstanding shares of Participating Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares of
Participating Preferred Stock, unless the date of issue of such shares is prior
to the record date for the first Quarterly Dividend Payment Date, in which case
dividends on such shares shall begin to accrue from the date of issue of such
shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a
date after the record date for the determination of holders of shares of
Participating Preferred Stock entitled to receive a quarterly dividend and
before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. The Board of
Directors may fix a record date for the determination of holders of shares of
Participating Preferred Stock entitled to receive payment of a dividend
distribution declared thereon, which record date shall be no more than 30 days
prior to the date fixed for the payment thereof.
3. Dissolution, Liquidation and Winding Up. In the event of
any voluntary or involuntary dissolution, liquidation or winding up of the
affairs of the Corporation (hereinafter referred to as a "Liquidation"), the
holders of Participating Preferred Stock shall be entitled to receive the
greater of (a) $10.00 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment and (b) the aggregate amount per share equal to 1,000 times the
aggregate amount to be distributed per share to holders of Common Stock (the
"Participating Preferred Liquidation Preference"). In the event the Corporation
shall at any time after the First Issuance declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the aggregate amount to which holders of shares of Participating
Preferred Stock were entitled immediately prior to such event under the
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
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<PAGE> 52
shares of Common Stock that were outstanding immediately prior to such event.
4. Voting Rights. The holders of shares of Participating
Preferred Stock shall have the following voting rights:
(a) Each share of Participating Preferred Stock shall
entitle the holder thereof to one thousand (1,000) votes on all matters
submitted to a vote of the stockholders of the Corporation. In the event the
Corporation shall at any time after the First Issuance declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the aggregate number of votes to which holders of shares of
Participating Preferred Stock were entitled immediately prior to such event
under the preceding sentence shall be adjusted by multiplying such number by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
(b) Except as otherwise provided herein, or by law,
the Corporation's Restated Certificate of Incorporation ("Certificate of
Incorporation") or the Bylaws of the Corporation (the "Bylaws"), the holders of
shares of Participating Preferred Stock and the holders of shares of Common
Stock shall vote together as one class on all matters submitted to a vote of
stockholders of the Corporation.
(c) If and whenever dividends on the Participating
Preferred Stock shall be in arrears in an amount equal to six quarterly dividend
payments, then and in such event the holders of the Participating Preferred
Stock, voting separately as a class (subject to the provisions of subparagraph
(d) below), shall be entitled at the next annual meeting of the stockholders or
at any special meeting to elect two (2) directors. Each share of Participating
Preferred Stock shall be entitled to one vote, and holders of fractional shares
shall have the right to a fractional vote. Upon election, such directors shall
become additional directors of the Corporation and the authorized number of
directors of the Corporation shall thereupon be automatically increased by such
number of directors. Such right of the holders of Participating Preferred Stock
to elect directors may be exercised until all dividends in default on the
Participating Preferred Stock shall have been paid in full, and when so paid and
set apart, the right of the holders of Participating Preferred Stock to elect
such number of directors shall cease, the term of such directors shall thereupon
terminate, and the authorized number of directors of the Corporation shall
thereupon return to the number of authorized directors otherwise in effect, but
subject always to the same provisions for the vesting of such special voting
rights in the case of any such future dividend default or defaults. The fact
that dividends
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<PAGE> 53
have been paid and set apart as required by the preceding sentence shall be
evidenced by a certificate executed by the President and the Chief Financial
Officer of the Corporation and delivered to the Board of Directors. The
directors so elected by holders of Participating Preferred Stock shall serve
until the certificate described in the preceding sentence shall have been
delivered to the Board of Directors or until their respective successors shall
be elected or appointed and qualify.
At any time when such special voting rights have been so vested in the
holders of the Participating Preferred Stock, the Secretary of the Corporation
may, and upon the written request of the holders of record of 10% or more of the
number of shares of the Participating Preferred Stock then outstanding addressed
to such Secretary at the principal office of the Corporation in the State of
Illinois, shall call a special meeting of the holders of the Participating
Preferred Stock for the election of the directors to be elected by them as
hereinabove provided, to be held in the case of such written request within
forty (40) days after delivery of such request, and in either case to be held at
the place and upon the notice provided by law and in the Bylaws of the
Corporation for the holding of meetings of stockholders; provided, however, that
the Secretary shall not be required to call such a special meeting (i) if any
such request is received less than ninety (90) days before the date fixed for
the next ensuing annual or special meeting of stockholders or (ii) if at the
time any such request is received, the holders of Participating Preferred Stock
are not entitled to elect such directors by reason of the occurrence of an event
specified in the third sentence of subparagraph (d) below.
(d) If, at any time when the holders of Participating
Preferred Stock are entitled to elect directors pursuant to the foregoing
provisions of this paragraph 4, the holders of any one or more additional series
of Preferred Stock are entitled to elect directors by reason of any default or
event specified in the Certificate of Incorporation, as in effect at the time of
the certificate of designation for such series, and if the terms for such other
additional series so permit, the voting rights of the two or more series then
entitled to vote shall be combined (with each series having a number of votes
proportional to the aggregate liquidation preference of its outstanding shares).
In such case, the holders of Participating Preferred Stock and of all such other
series then entitled so to vote, voting as a class, shall elect such directors.
If the holders of any such other series (if designated) have elected such
directors prior to the happening of the default or event permitting the holders
of Participating Preferred Stock to elect directors, or prior to a written
request for the holding of a special meeting being received by the Secretary of
the Corporation from the holders of not less than 10% of the then outstanding
shares of Participating Preferred Stock, then such directors so previously
elected will be deemed to have been elected by and on behalf of the holders of
Participating Preferred Stock as well as such other series, without prejudice to
the right of the holders of Participating Preferred Stock to vote for directors
if such previously elected directors shall resign, cease to serve or fail to
stand for
47
<PAGE> 54
reelection while the holders of Participating Preferred Stock are entitled to
vote. If the holders of any such other series are entitled to elect in excess of
two (2) directors, the Participating Preferred Stock shall not participate in
the election of more than two (2) such directors, and those directors whose
terms first expire shall be deemed to be the directors elected by the holders of
Participating Preferred Stock; provided that, if at the expiration of such terms
the holders of Participating Preferred Stock are entitled to vote in the
election of directors pursuant to the provisions of this paragraph 4, then the
Secretary of the Corporation shall call a meeting (which meeting may be the
annual meeting or special meeting of stockholders referred to in subparagraph
(c)) of holders of Participating Preferred Stock for the purpose of electing
replacement directors (in accordance with the provisions of this paragraph 4) to
be held on or prior to the time of expiration of the expiring terms referred to
above.
(e) Except as otherwise set forth herein or required
by law, the Certificate of Incorporation or the Bylaws, holders of Participating
Preferred Stock shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for the taking of any corporate action. No
consent of the holders of outstanding shares of Participating Preferred Stock at
any time outstanding shall be required in order to permit the Board of Directors
to: (i) increase the number of authorized shares of Participating Preferred
Stock or to decrease such number to a number not below the sum of the number of
shares of Participating Preferred Stock then outstanding and the number of
shares with respect to which there are outstanding rights to purchase; or (ii)
issue Preferred Stock which is senior to the Participating Preferred Stock,
junior to the Participating Preferred Stock or on a parity with the
Participating Preferred Stock.
5. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Participating Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 1,000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time after the First Issuance declare
or pay any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding shares
of Common Stock (by reclassification or otherwise than by payment of a dividend
in shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the amount set forth in the preceding sentence
with respect to the exchange or change of shares of Participating Preferred
Stock shall be adjusted by multiplying such amount by a
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<PAGE> 55
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
6. Redemption. The shares of Participating Preferred Stock
shall not be redeemable.
7. Conversion Rights. The Participating Preferred Stock is not
convertible into Common Stock or any other security of the Corporation.
8. Ranking. The Participating Preferred Stock shall rank
junior to all other classes and series of the Corporation's Preferred Stock as
to payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise.
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<PAGE> 56
IN WITNESS WHEREOF, the undersigned President and Chief Executive Officer and
Secretary and General Counsel of the Corporation each declares under penalty of
perjury the truth, to the best of his knowledge, of this Certificate of
Designation, Preferences and Rights of Series B Junior Participating Preferred
Stock.
Executed this day of April, 2000.
By: ________________________
Name: Matthew Neville
Title: President and
Chief Executive Officer
Attest:
___________________________
Name: William C. McCarthy
Title: Chief Financial Officer, Secretary
STATE OF ILLINOIS )
) ss.:
COUNTY OF ________ )
This instrument was acknowledged before me on April , 2000, by
Matthew Neville, as President and Chief Executive Officer of Cabot
Microelectronics Corporation and by William C. McCarthy, as Chief Financial
Officer and Secretary of Cabot Microelectronics Corporation They are personally
known to me and did not take an oath.
______________________________________
Name: ________________________________
Notary Public - State of Illinois
My Commission Expires:
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<PAGE> 57
Preferred
Exhibit B
Form of Right Certificate
Certificate No. R-_______ _______ Rights
NOT EXERCISABLE AFTER APRIL 7, 2010, OR EARLIER IF REDEEMED BY THE CORPORATION.
THE RIGHTS ARE SUBJECT TO REDEMPTION AT $0.01 PER RIGHT ON THE TERMS SET FORTH
IN THE RIGHTS AGREEMENT.
Right Certificate
Cabot Microelectronics Corporation
This certifies that ________________________, or registered assigns, is
the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement, dated as of March 24, 2000 (the "Rights Agreement"),
between Cabot Microelectronics Corporation, a Delaware corporation (the
"Corporation"), and Equiserve Trust Company, N.A., a national banking
association (the "Rights Agent"), to purchase from the Corporation at any time
after the Distribution Date (as such term is defined in the Rights Agreement)
and prior to 5:00 P.M., New York City, New York time, on April 7, 2010, unless
the Rights evidenced hereby shall have been previously redeemed by the
Corporation, at the office or offices of the Rights Agent designated for such
purpose, or at the office of its successor as Rights Agent, one one-thousandth
of a fully paid non-assessable share of Series A Junior Participating Preferred
Stock, par value $.001 per share (the "Preferred Shares"), of the Corporation,
at a purchase price of $130.00 per one one-thousandth of Preferred Share (the
"Purchase Price"), upon presentation and surrender of this Right Certificate
with the Form of Election to Purchase duly executed. The number of Rights
evidenced by this Right Certificate (and the number of one one-thousandths of a
Preferred Share which may be purchased upon exercise hereof) set forth above,
and the Purchase Price set forth above, are the number and Purchase Price as of
April 7, 2000 based on the Preferred Shares as constituted at such date.
Upon the occurrence of a Section 11(a)(ii) Event (as such term is
defined in the Rights Agreement), if the Rights evidenced by this Right
Certificate are Beneficially Owned by (i) an Acquiring Person or an Affiliate or
Associate of any such Acquiring Person (as such terms are defined in the Rights
Agreement), (ii) a transferee of any such Acquiring Person, Associate or
Affiliate who becomes a transferee after the Acquiring Person becomes such, or
(iii) under certain circumstances specified in the Rights Agreement, a
transferee of any such Acquiring Person, Associate or Affiliate who
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<PAGE> 58
becomes a transferee prior to or concurrently with the Acquiring Person becoming
such, such Rights shall become null and void and no holder hereof shall have any
right with respect to such Rights from and after the occurrence of such Section
11(a)(ii) Event.
As provided in the Rights Agreement, the Purchase Price and the number
of one one-thousandths of a Preferred Share or other securities which may be
purchased upon the exercise of the Rights evidenced by this Right Certificate
are subject to modification and adjustment upon the happening of certain events,
including Triggering Events (as such term is defined in the Rights Agreement).
This Right Certificate is subject to all of the terms, covenants and
restrictions of the Rights Agreement, which terms, covenants and restrictions
are hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Corporation and the holders of the Right Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the principal executive offices of
the Corporation and the office or offices of the Rights Agent.
This Right Certificate, with or without other Right Certificates, upon
surrender at the principal office of the Rights Agent, may be exchanged for
another Right Certificate or Right Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of
Preferred Shares or other securities as the Rights evidenced by the Right
Certificate or Right Certificates surrendered shall have entitled such holder to
purchase. If this Right Certificate shall be exercised in part, the holder shall
be entitled to receive upon surrender hereof another Right Certificate or Right
Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Certificate may be redeemed by the Corporation at a redemption price of
$0.01 per Right (subject to adjustment as provided in the Rights Agreement)
payable in cash.
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are one
one-thousandth or integral multiples of one one-thousandth of a Preferred Share,
which may, at the election of the Corporation, be evidenced by depositary
receipts), but in lieu thereof a cash payment will be made, as provided in the
Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of the Corporation which may at any time be
issuable on the exercise hereof, nor shall
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<PAGE> 59
anything contained in the Rights Agreement or herein be construed to confer upon
the holder hereof, as such, any of the rights of a stockholder of the
Corporation or any right to vote for the election of directors or upon any
matter submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive notice of meetings or other
actions affecting stockholders (except as provided in the Rights Agreement), or
to receive dividends or other distributions or to exercise any preemptive or
subscription rights, or otherwise, until the Right or Rights evidenced by this
Right Certificate shall have been exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
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<PAGE> 60
WITNESS the facsimile signature of the proper officers of the
Corporation and its corporate seal.
[SEAL]
ATTEST: CABOT MICROELECTRONICS CORPORATION
By:_____________________________ By:_____________________________
Name: William C. McCarthy Name: Matthew Neville
Title: Secretary Title: President
Countersigned:
EQUISERVE TRUST COMPANY, N.A.,
as Rights Agent
By:_____________________________
Authorized Officer
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<PAGE> 61
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED_________________ hereby sells, assigns and transfers
unto __________________________________________________________________________
_______________________________________________________________________________
(Please print name and address of transferee)
_______________________________________________________________________________
this Right Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint _______________ Attorney, to
transfer the within Right Certificate on the books of the within-named
Corporation, with full power of substitution.
Dated: ____________, ____
_____________________________
Signature
Signature Guaranteed:
_______________________________________________________
The undersigned hereby certifies that (1) the Rights evidenced
by this Right Certificate are not being sold, assigned or transferred by or on
behalf of a Person who is or was an Acquiring Person or an Affiliate or
Associate thereof (as such terms are defined in the Right Agreement) and (2)
after due inquiry and to the best knowledge of the undersigned, the undersigned
did not acquire the Rights evidenced by this Right Certificate from any Person
who is or was an Acquiring Person or an Affiliate or Associate thereof (as such
terms are defined in the Rights Agreement).
____________________________
Signature
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<PAGE> 62
Form of Reverse Side of Right Certificate -- continued
FORM OF ELECTION TO PURCHASE
(To be executed by the registered holder if such holder
desires to exercise Rights
represented by the Right Certificate.)
To the Rights Agent:
The undersigned hereby irrevocably elects to exercise _________________
Rights represented by this Right Certificate to purchase the Preferred Shares,
Common Shares or other securities issuable upon the exercise of such Rights and
requests that certificates for such Preferred Shares, Common Shares or other
securities be issued in the name of:
Please insert social security
or other identifying number ________________________________________________
_______________________________________________________________________________
(Please print name and address)
_______________________________________________________________________________
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number ________________________________________________
_______________________________________________________________________________
(Please print name and address)
_______________________________________________________________________________
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<PAGE> 63
Form of Reverse Side of Right Certificate -- continued
Dated: _______________, ____
__________________________
Signature
Signature Guaranteed:
57
<PAGE> 64
Form of Reverse Side of Right Certificate -- continued.
The undersigned hereby certifies that (1) the Rights evidenced
by this Right Certificate are not being exercised by or on behalf of a Person
who is or was an Acquiring Person or an Affiliate or Associate thereof (as such
terms are defined in the Rights Agreement) and (2) after due inquiry and to the
best knowledge of the undersigned, the undersigned did not acquire the Rights
evidenced by this Rights Certificate from any Person who is or was an Acquiring
Person or an Affiliate or Associate thereof (as such terms are defined in the
Rights Agreement).
______________________________
Signature
NOTICE
The signature on the foregoing Forms of Assignment and
Election and certificates must conform to the name as written upon the face of
this Right Certificate in every particular, without alteration or enlargement or
any change whatsoever.
In the event the certification set forth above in the Form of
Assignment or the Form of Election to Purchase, as the case may be, is not
completed, the Corporation and the Rights Agent will deem the Beneficial Owner
of the Rights evidenced by this Right Certificate to be an Acquiring Person or
an Affiliate or Associate thereof (as such terms are defined in the Rights
Agreement) and such Assignment or Election to Purchase will not be honored.
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<PAGE> 65
Exhibit C
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED SHARES
On March 24, 2000, the Board of Directors of Cabot Microelectronics
Corporation (the "Corporation") declared a dividend distribution of one
preferred share purchase right (a "Right") for each outstanding share of Common
Stock, par value $.001 per share (the "Common Shares"), of the Corporation. The
dividend is payable to the stockholders of record on April 7, 2000 (the "Record
Date"), and with respect to Common Shares issued thereafter until the
Distribution Date (as defined below) and, in certain circumstances, with respect
to Common Shares issued after the Distribution Date. Except as set forth below,
each Right, when it becomes exercisable, entitles the registered holder to
purchase from the Corporation one one-thousandth of a share of Series A Junior
Participating Preferred Stock, $.001 par value per share (the "Preferred
Shares"), of the Corporation at a price of $130.00 per one one-thousandth of a
Preferred Share (the "Purchase Price"), subject to adjustment. The description
and terms of the Rights are set forth in a Rights Agreement (the "Rights
Agreement") between the Corporation and EquiServe Trust Company, N.A., as Rights
Agent (the "Rights Agent"), dated as of March 24, 2000.
Initially, the Rights will be attached to all certificates representing
Common Shares then outstanding, and no separate Right Certificates will be
distributed. The Rights will separate from the Common Shares upon the earliest
to occur of (i) the date of first public announcement that an Acquiring Person
(as hereinafter defined) has become such; or (ii) 10 days (or such later date as
the Board may determine) following the commencement of, or announcement of an
intention to make, a tender offer or exchange offer the consummation of which
would result in a person or group becoming an Acquiring Person (as hereinafter
defined) (the earliest of such dates being called the "Distribution Date").
Subject to certain exceptions, an "Acquiring Person" is any person who or which
together with all affiliated and associates is the beneficial owner of 15% or
more of the outstanding Common Shares (except pursuant to a Permitted Offer (as
hereinafter defined). The date of first public announcement that a person or
group has become an Acquiring Person is the "Shares Acquisition Date." The
Rights Agreement provides that, until the Distribution Date, the Rights will be
transferred with and only with the Common Shares. Until the Distribution Date
(or earlier redemption or expiration of the Rights) new Common Share
certificates issued after the Record Date upon transfer or new issuance of
Common Shares will contain a notation incorporating the Rights Agreement by
reference. Until the Distribution Date (or earlier redemption or expiration of
the Rights), the surrender for transfer of any certificates for Common Shares
outstanding as of the Record Date, even without such notation or a copy of this
Summary of Rights being attached thereto, will also constitute the transfer of
the Rights associated with the Common Shares represented by such certificate. As
soon as practicable following the
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<PAGE> 66
Distribution Date, separate certificates evidencing the Rights ("Right
Certificates") will be mailed to holders of record of the Common Shares as of
the close of business on the Distribution Date (and to each initial record
holder of certain Common Shares issued after the Distribution Date), and such
separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date and will
expire at the close of business on April 7, 2010, unless earlier redeemed by the
Corporation as described below.
In the event that any person becomes an Acquiring Person or an
affiliate or associate thereof (except pursuant to a tender or exchange offer
which is for all outstanding Common Shares at a price and on terms which a
majority of certain members of the Board of Directors determines to be adequate
and in the best interests of the Corporation and its stockholders, other than
such Acquiring Person, its affiliates and associates (a "Permitted Offer")),
each holder of a Right will thereafter have the right (the "Flip-In Right") to
receive upon exercise the number of Common Shares or of one one-thousandths of a
share of Preferred Shares (or, in certain circumstances, other securities of the
Corporation) having a value (immediately prior to such triggering event) equal
to two times the exercise price of the Right. Notwithstanding the foregoing,
following the occurrence of the event described above, all Rights that are, or
(under certain circumstances specified in the Rights Agreement) were,
beneficially owned by any Acquiring Person or any affiliate or associate thereof
will be null and void.
In the event that, at any time following the Shares Acquisition Date,
(i) the Corporation is acquired in a merger or other business combination
transaction in which the holders of all of the outstanding Common Shares
immediately prior to the consummation of the transaction are not the holders of
all of the surviving corporation's voting power, or (ii) more than 50% of the
Corporation's assets or earning power is sold or transferred, in either case
with or to an Acquiring Person or any affiliate or associate or any other person
in which such Acquiring Person, affiliate or associate has an interest or any
person acting on behalf of or in concert with such Acquiring Person, affiliate
or associate, or, if in such transaction all holders of Common Shares are not
treated alike, any other person, then each holder of a Right (except Rights
which previously have been voided as set forth above) shall thereafter have the
right (the "Flip-Over Right") to receive, upon exercise, common shares of the
acquiring company (or in certain circumstances, its parent) having a value equal
to two times the exercise price of the Right. The holder of a Right will
continue to have the Flip-Over Right whether or not such holder exercises or
surrenders the Flip-In Right.
The Purchase Price payable, and the number of Preferred Shares, Common
Shares or other securities issuable, upon exercise of the Rights are subject to
adjustment from
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<PAGE> 67
time to time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Preferred Shares, (ii) upon
the grant to holders of the Preferred Shares of certain rights or warrants to
subscribe for or purchase Preferred Shares at a price, or securities convertible
into Preferred Shares with a conversion price, less than the then current market
price of the Preferred Shares or (iii) upon the distribution to holders of the
Preferred Shares of evidences of indebtedness or assets (excluding regular
quarterly cash dividends) or of subscription rights or warrants (other than
those referred to above).
The number of outstanding Rights and the number of one one-thousandths
of a Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Shares or a stock
dividend on the Common Shares payable in Common Shares or subdivisions,
consolidations or combinations of the Common Shares occurring, in any such case,
prior to the Distribution Date.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a minimum preferential
quarterly dividend payment of $10.00 per share but, if greater, will be entitled
to an aggregate dividend per share of 1,000 times the dividend declared per
Common Share. In the event of liquidation, the holders of the Preferred Shares
will be entitled to the greater of (i) a minimum preferential liquidation
payment of $10.00 per share and (ii) an aggregate payment per share of 1,000
times the aggregate payment made per Common Share. The Preferred Shares rank
junior to all other classes and series of the Corporation's preferred stock with
respect to dividends and upon liquidation, unless the terms of such other series
provides otherwise. These rights are protected by customary antidilution
provisions. In the event that the amount of accrued and unpaid dividends on the
Preferred Shares is equivalent to six full quarterly dividends or more, the
holders of the Preferred Shares, subject to certain limitations, shall have the
right, voting as a class, to elect two directors in addition to the directors
elected by the holders of the Common Shares until all cumulative dividends on
the Preferred Shares have been paid through the last quarterly dividend payment
date.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Preferred Shares will be issued (other than
fractions which are one one-thousandth or integral multiples of one
one-thousandth of a Preferred Share, which may, at the election of the
Corporation, be evidenced by depositary receipts) and in lieu thereof, an
adjustment in cash will be made based on the market price of the Preferred
Shares on the last trading day prior to the date of exercise.
At any time prior to the earlier to occur of (i) a person becoming an
Acquiring Person or (ii) the expiration of the Rights, and under certain other
circumstances, the
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Corporation may redeem the Rights in whole, but not in part, at a price of $0.01
per Right (the "Redemption Price") which redemption shall be effective upon the
action of the Board of Directors. Additionally, following the time a person
becomes an Acquiring Person and subject to certain other conditions, the
Corporation may redeem the then outstanding Rights in whole, but not in part, at
the Redemption Price, in certain circumstances, including redemption in
connection with a merger or other business combination transaction or series of
transactions involving the Corporation in which all holders of Common Shares are
treated alike but not involving (other than as a holder of Common Shares being
treated like all other holders) an Acquiring Person or its affiliates or
associates. The payment of the Redemption Price may be deferred under certain
circumstances as contemplated in the Rights Agreement.
All of the provisions of the Rights Agreement may be amended by the
Board of Directors of the Corporation prior to the Distribution Date. After the
Distribution Date, the provisions of the Rights Agreement may be amended by the
Board of Directors in order to cure any ambiguity, defect or inconsistency, to
make changes which do not adversely affect the interests of holders of Rights
(excluding the interests of any Acquiring Person), or, subject to certain
limitations, to shorten or lengthen any time period under the Rights Agreement.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Corporation, including, without limitation, the
right to vote or to receive dividends. While the distribution of the Rights will
not be taxable to stockholders of the Corporation, stockholders may, depending
upon the circumstances, recognize taxable income should the Rights become
exercisable or upon the occurrence of certain events thereafter.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement on Form 8-A dated
April 3, 2000. A copy of the Rights Agreement is available free of charge from
the Corporation. This summary description of the Rights does not purport to be
complete and is qualified in its entirety by reference to the Rights Agreement,
which is hereby incorporated herein by reference.
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1
(No. 333-95093) of our report dated November 5, 1999 relating to the financial
statements of Cabot Microelectronics Materials Division, a division of Cabot
Corporation, which appears in such Registration Statement. We also consent to
the references to us under the headings "Experts" and "Selected Financial Data"
in such Registration Statement.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 31, 2000
<PAGE> 1
Exhibit 23.6
CONSENT
The undersigned, Ronald L. Skates, has agreed to become a director of
Cabot Microelectronics Corporation (the "Company") upon the effectiveness of
the Company's Registration Statement on Form S-1, File No. 333-95093, as
amended (the "Registration Statement") filed with the Securities and Exchange
Commission in connection with the Company's initial public offering. The
undersigned hereby consents to being named as a director designee in the
Registration Statement.
Dated: March 31, 2000 Ronald L. Skates
---------------------------
Ronald L. Skates
