<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 000-30205
CABOT MICROELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-4324765
(State of Incorporation) (I.R.S. Employer Identification No.)
870 NORTH COMMONS DRIVE 60504
AURORA, ILLINOIS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (630) 375-6631
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
----------- ------------
As of July 31, 2000, the Company had 23,589,744 shares of Common Stock, par
value $0.001 per share, outstanding.
<PAGE> 2
CABOT MICROELECTRONICS CORPORATION
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION ................................................ PAGE
Item 1. Financial Statements
Statements of Income
Three and Nine Months Ended June 30, 2000 and 1999 ....... 3
Pro Forma Statements of Income
Three and Nine Months Ended June 30, 2000 and 1999 ....... 4
Balance Sheets
June 30, 2000 and September 30, 1999 ..................... 5
Statements of Cash Flows
Nine Months Ended June 30, 2000 and 1999 ................. 6
Notes to Financial Statements ................................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................... 23
Item 2. Changes in Securities and Use of Proceeds ................... 23
Item 6. Exhibits and Reports on Form 8-K ............................ 24
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1.
CABOT MICROELECTRONICS CORPORATION
STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30 ENDED JUNE 30
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 50,145 $ 21,917 $122,664 $ 63,505
Revenue - related party 444 947 2,306 2,101
-------- -------- -------- --------
50,589 22,864 124,970 65,606
-------- -------- -------- --------
Cost of goods sold 22,415 10,060 56,387 29,119
Cost of goods sold - related party 424 947 2,347 2,101
-------- -------- -------- --------
22,839 11,007 58,734 31,220
-------- -------- -------- --------
Gross profit 27,750 11,857 66,236 34,386
Operating expenses:
Research and development 5,105 3,669 14,237 10,181
Selling and marketing 2,002 1,108 4,833 3,145
General and administrative 6,694 3,232 14,201 8,791
Amortization of goodwill and other intangibles 179 180 538 540
-------- -------- -------- --------
Total operating expenses 13,980 8,189 33,809 22,657
-------- -------- -------- --------
Operating income 13,770 3,668 32,427 11,729
Other income (expense) 20 -- 127 --
-------- -------- -------- --------
Income before income taxes 13,790 3,668 32,554 11,729
Provision for income taxes 5,000 1,307 11,800 4,179
-------- -------- -------- --------
Net income $ 8,790 $ 2,361 $ 20,754 $ 7,550
======== ======== ======== ========
Basic net income per share $ 0.38 $ 0.12 $ 1.02 $ 0.40
======== ======== ======== ========
Weighted average basic shares outstanding 23,383 18,990 20,417 18,990
======== ======== ======== ========
Diluted net income per share $ 0.37 $ 0.12 $ 0.99 $ 0.40
======== ======== ======== ========
Weighted average diluted shares outstanding 23,921 18,990 20,955 18,990
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
3
<PAGE> 4
CABOT MICROELECTRONICS CORPORATION
PRO FORMA STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JUNE 30 ENDED JUNE 30
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ 50,145 $ 21,917 $ 122,664 $ 63,505
Revenue - related party (a) 444 637 1,722 1,409
--------- --------- --------- ---------
50,589 22,554 124,386 64,914
--------- --------- --------- ---------
Cost of goods sold (b) 24,209 11,387 61,360 32,961
Cost of goods sold - related party (a) 376 525 1,562 1,158
--------- --------- --------- ---------
24,585 11,912 62,922 34,119
--------- --------- --------- ---------
Gross profit 26,004 10,642 61,464 30,795
Operating expenses:
Research and development 5,105 3,669 14,237 10,181
Selling and marketing 2,002 1,108 4,833 3,145
General and administrative (c) 4,581 3,232 12,088 8,791
Amortization of goodwill and other intangibles 179 180 538 540
--------- --------- --------- ---------
Total operating expenses 11,867 8,189 31,696 22,657
--------- --------- --------- ---------
Operating income 14,137 2,453 29,768 8,138
Other income (expense) 20 (303) (502) (909)
--------- --------- --------- ---------
Income before income taxes 14,157 2,150 29,266 7,229
Provision for income taxes (d) 5,132 766 10,608 2,576
--------- --------- --------- ---------
Net income $ 9,025 $ 1,384 $ 18,658 $ 4,653
========= ========= ========= =========
Basic net income per share (e) $ 0.39 $ 0.07 $ 0.91 $ 0.25
========= ========= ========= =========
Weighted average basic shares outstanding (e) 23,383 18,990 20,417 18,990
========= ========= ========= =========
Diluted net income per share (e) $ 0.38 $ 0.07 $ 0.89 $ 0.25
========= ========= ========= =========
Weighted average diluted shares outstanding (e) 23,921 18,990 20,955 18,990
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
pro forma financial statements.
(a) Reflects the revenue and cost of goods sold which would have resulted
had our new dispersions services agreement with Cabot Corporation
(effective upon completion of the initial public offering) been in
effect during the periods presented.
(b) Reflects the cost of goods sold which would have resulted had our new
fumed metal oxide supply agreement with Cabot Corporation (effective
upon completion of the initial public offering) been in effect during
the periods presented.
(c) Excludes the one-time charge of $2,113 related to options granted to
non-Cabot Microelectronics employees at the time of the initial public
offering.
(d) The effective tax rate for the period presented was applied to pro
forma adjustments to determine the income tax provision or benefit
associated with the pro forma adjustments.
(e) Basic and diluted net income per share for the nine months ended June
30, 1999 have been calculated using the pro forma 18,990 shares owned
by Cabot for the period prior to the initial public offering. Basic and
diluted net income per share for the nine months ended June 30, 2000
have been calculated using the pro forma 18,990 shares owned by Cabot
for the period prior to the initial public offering in the weighted
average shares outstanding calculation.
4
<PAGE> 5
CABOT MICROELECTRONICS CORPORATION
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
--------- ---------
(UNAUDITED)
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 10,101 $ 38
Accounts receivable, less allowance for doubtful
accounts of $200 at June 30, 2000 (unaudited)
and $50 at September 30, 1999 27,534 19,888
Inventories 12,795 5,269
Prepaid expenses and other current assets 676 285
Deferred income taxes 640 640
--------- ---------
Total current assets 51,746 26,120
Property, plant and equipment, net 64,227 40,031
Goodwill, net 1,397 1,610
Other intangible assets, net 2,111 2,438
Deferred income taxes 151 75
--------- ---------
Total assets $ 119,632 $ 70,274
========= =========
Liabilities and stockholder's equity:
Current liabilities:
Accounts payable $ 3,884 $ 995
Payable to related party 7,542 --
Accrued expenses and other current liabilities 7,968 6,780
--------- ---------
Total current liabilities 19,394 7,775
Long-term debt 3,500 --
Deferred compensation 515 422
--------- ---------
Total liabilities 23,409 8,197
Stockholder's equity:
Common stock:
Authorized: 200,000,000 shares of $0.001 par value
Issued and outstanding: 23,589,744 shares in 2000, no shares issued in 1999 $ 24 $ --
Capital in excess of par value of common stock 88,042 --
Division equity -- 46,629
Retained earnings 8,790 16,714
Accumulated other comprehensive income (loss) 839 974
Unearned compensation (1,472) (2,240)
--------- ---------
Total stockholder's equity 96,223 62,077
--------- ---------
Total liabilities and stockholder's equity $ 119,632 $ 70,274
========= =========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
5
<PAGE> 6
CABOT MICROELECTRONICS CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
JUNE 30,
2000 1999
-------- --------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net Income $ 20,754 $ 7,550
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,266 1,873
Non-CMC employee stock options 2,113 --
Noncash compensation expense 825 675
Provision for inventory writedown 350 --
Deferred income tax expense (76) --
Loss on disposal of property, plant
and equipment 13 141
Changes in operating assets and liabilities:
Accounts receivable (7,651) (4,673)
Inventories (7,614) 562
Prepaid expenses and other current assets (392) 66
Accounts payable 2,882 810
Payable to related party 7,542 --
Accrued expenses and other current liabilities 1,230 70
Deferred compensation 93 141
-------- --------
Net cash provided by operating activities 23,335 7,215
Cash flows from investing activities:
Additions to property, plant and equipment (30,047) (11,942)
Proceeds from the sale of property, plant,
and equipment 1,689 65
-------- --------
Net cash used by investing activities (28,358) (11,877)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long term debt 17,000 --
Repayments of long term debt (13,500) --
Net capital contributed by Cabot Corporation 10,070 4,742
Net proceeds from issuance of stock 82,765 --
Dividends paid to Cabot Corporation (81,300) --
-------- --------
Net cash provided by financing activities 15,035 4,742
-------- --------
Effect of exchange rate changes on cash 51 (47)
-------- --------
Increase (decrease) in cash 10,063 33
Cash and cash equivalents at beginning of period 38 5
-------- --------
Cash and cash equivalents at end of period $ 10,101 $ 38
======== ========
The accompanying notes are an integral part of
these financial statements.
6
<PAGE> 7
CABOT MICROELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The unaudited financial statements have been prepared by Cabot
Microelectronics Corporation ("CMC", "Cabot Microelectronics", "us", "we",
or "our"), pursuant to the rules of the Securities and Exchange Commission
("SEC"). In the opinion of management, these unaudited financial statements
include all adjustments necessary for the fair presentation of Cabot
Microelectronics' results of operations for the three and nine months ended
June 30, 2000 and June 30, 1999, financial position as of June 30, 2000,
and cash flows for the nine months ended June 30, 2000 and June 30, 1999.
All such adjustments are of a normal recurring nature. The results of
operations for the three and nine months ended June 30, 2000 may not be
indicative of the results to be expected for the fiscal year ended
September 30, 2000. These financial statements should be read in
conjunction with the financial statements and related notes thereto
included in Cabot Microelectronics' Registration Statement on Form S-1 (No.
333-95093).
Our financial statements reflect the historical results of operations and
cash flows of the Cabot Microelectronics Corporation, which prior to the
initial public offering discussed in Note 2, operated as a division of
Cabot Corporation ("Cabot"). The financial statements include the accounts
of each subsidiary or part of each subsidiary which forms CMC. Intercompany
transactions between entities within CMC have been eliminated.
The balance sheets have been prepared using the historical basis of
accounting and include all of the assets and liabilities specifically
identifiable to CMC. The statements of income include all revenue and costs
attributable to the CMC, 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 CMC based on criteria
that management believes to be equitable, such as the CMC'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 CMC. For the nine
months ended June 30, 1999 and 2000, such allocated costs amounted to
$3,731 and $4,523, respectively. Allocated costs may not necessarily be
indicative of the costs that would have been incurred by CMC on a
stand-alone basis.
2. SEPARATION FROM CABOT CORPORATION AND INITIAL PUBLIC OFFERING
In July 1999, Cabot Corporation announced its plans to create an
independent publicly-traded company, Cabot Microelectronics Corporation,
comprised of its Microelectronics Materials Division. Following the
completion of Cabot Microelectronics' initial public offering in April
2000, Cabot owns approximately 80.5% of Cabot Microelectronics' outstanding
common stock. Cabot has announced it plans to spin-off its remaining 80.5%
equity interest in Cabot Microelectronics on September 29, 2000. The
spin-off distribution will be made to Cabot Corporation stockholders of
record on September 13, 2000. However, Cabot is not obligated to complete
the spin-off in this time frame or at all. Cabot has received a private
letter ruling from the Internal Revenue Service confirming that the
transaction will be tax-free.
Cabot Microelectronics Corporation completed its initial public offering in
April 2000, receiving net proceeds of $82.8 million, after deducting
underwriting commissions and offering expenses, from the sale of 4,600,000
shares of common stock. CMC has paid Cabot, in aggregate, dividends of
$81.3 million. $17.0 million was paid from borrowings under a term credit
7
<PAGE> 8
CABOT MICROELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SEPARATION FROM CABOT CORPORATION AND INITIAL PUBLIC OFFERING - (CONTINUED)
facility prior to the initial public offering while $64.3 million was paid
using proceeds from the initial public offering.
3. NET INCOME PER SHARE
For the three and nine months ended June 30, 2000, basic net income per
share is calculated based on the weighted average shares of common stock
outstanding during the period, and diluted earnings per share is calculated
based on the weighted average of common stock outstanding, plus the
dilutive effect of stock options, calculated using the treasury stock
method. The calculation of weighted average shares outstanding includes the
pro forma 18,989,744 shares that were owned by Cabot Corporation prior to
the closing of the initial public offering.
Basic and diluted net income per share for the three and nine months ended
June 30, 1999 have been calculated using the pro forma 18,989,744 shares
that were owned by Cabot Corporation prior to the closing of the initial
public offering. These shares take into consideration a 18,989,744 to 1
stock split which occurred subsequent to March 31, 2000, but prior to the
completion of the initial public offering.
4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
Net Income $ 8,790 $ 2,361 $ 20,754 $ 7,550
Other comprehensive income:
Foreign currency
translation adjustment 170 (84) (134) (192)
-------- -------- -------- --------
Total comprehensive income $ 8,960 $ 2,277 $ 20,620 $ 7,358
======== ======== ======== ========
5. INVENTORIES
Inventories consisted of the following:
JUNE 30, SEPTEMBER 30,
2000 1999
------- -------
Raw materials $ 7,561 $ 3,297
Work in process 59 73
Finished goods 5,175 1,899
------- -------
Total $12,795 $ 5,269
======= =======
8
<PAGE> 9
CABOT MICROELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. DEBT
As of June 30, 2000 debt is comprised of a term loan in the amount of
$3,500 funded on the basis of the State of Illinois State Treasurers
Economic Program which is due on June 1, 2005. We originally borrowed
$17,000 under a term credit facility and paid the proceeds of this
borrowing to Cabot as a dividend. The original debt was comprised of a term
loan in the amount of $13,500 and the $3,500 term loan referred to above.
During the third quarter of 2000, Cabot Microelectronics repaid the $13,500
term loan and subsequent to June 30, 2000, this term loan was converted to
a revolving line of credit of $8,500. Under our initial public offering and
distribution agreement with Cabot, we agreed not to incur more than $50,000
in indebtedness so long as Cabot owns at least 50% of our outstanding
common stock.
7. LITIGATION
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 Roberts patent
is invalid because all of the claims contained in the patent were not
sufficiently different under applicable patent law from subject matter
contained in previously granted patents, specifically United States Patents
Nos. 4,705,566, 4,956,015 and 4,929,257, each of which is owned by a third
party not affiliated with Rodel or us. This motion was denied on September
30, 1999 based on the court's finding that there were genuine issues of
material fact to be determined at trial. After the ruling on the summary
judgment motion, Rodel filed a request for reexamination of the Roberts
patent with the United States Patent and Trademark Office (PTO), which was
granted on November 12, 1999. On March 28, 2000 the court issued an order
staying the Roberts action (with the exception of the pending motions to
amend and dismiss), which presently is in the discovery stage, pending
completion of the reexamination of the Roberts patent by the PTO.
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 (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. The parties are awaiting the court's decision on their
joint request to extend the currently scheduled completion of discovery
date of February 25, 2000, and trial date of December 4, 2000.
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.
9
<PAGE> 10
CABOT MICROELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. LITIGATION - (CONTINUED)
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 prevails in either of these cases, we may have to pay
damages and, in the future, may be prohibited from producing any products
found to infringe or required to pay Rodel royalty and licensing fees with
respect to sales of those products.
8. RECENT ACCOUNTING PRONOUNCEMENTS
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. Given our current limited use
of derivatives, we do not expect the impact of SFAS 133, which will be
effective for fiscal 2001, to be significant.
In June 2000, the SEC released Statement of Accounting Bulletin No. 101B
("SAB 101B"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. Cabot
Microelectronics Corporation is required to be in conformity with the
provisions of SAB 101B no later than July 1, 2001 and we do not expect a
material change in our financial condition or results of operations as a
result of SAB 101B.
10
<PAGE> 11
CABOT MICROELECTRONICS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations" includes "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. This Act provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves so long as they identify these
statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact we
make in this Form 10-Q are forward-looking. In particular, the statements herein
regarding industry prospects, our future results of operations or financial
position and statements preceded by, followed by or that include the words
"intends", "estimates", "plans", "believes", "expects", "anticipates", "should",
"could", or similar expressions, are forward-looking statements. Forward-looking
statements reflect our current expectations and are inherently uncertain. Our
actual results may differ significantly from our expectations. We assume no
obligation to update this forward-looking information. The section entitled
"Factors Affecting Future Operating Results" describes some, but not all, of the
factors that could cause these differences. For more information, refer to our
S-1 Registration Statement (No. 333-95093) and final prospectus filed with the
SEC in connection with our initial public offering.
OVERVIEW
Prior to the initial public offering on April 4, 2000, we operated as a division
of Cabot Corporation, a global chemical manufacturing company based in Boston,
Massachusetts. Cabot Microelectronics is the leading supplier of slurries used
in chemical mechanical planarization, or CMP. CMP is a polishing process used by
integrated circuit, or 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
our customers use for polishing the coating on the hard disks and the magnetic
heads in hard disk drives and continue to develop slurries for additional new
applications. In addition, we have recently begun producing and selling
polishing pads used in the CMP process.
PRO FORMA RESULTS
The following "Management's Discussion of Results of Operations" contains
unaudited pro forma results which reflect adjustments to our historical results
of operations to give effect to various transactions as if those transactions
had been consummated as of the periods presented. We historically sold various
dispersion products to Cabot at our cost of manufacturing. We have entered into
a new dispersion services agreement with Cabot, which became effective upon the
completion of the initial public 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. In addition, 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 became effective upon the completion of the
initial public 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. Pro forma results also exclude the effect of a one-time
charge of $2.1 million ($1.4 million after tax) for options granted to non-Cabot
Microelectronics employees at the time of the initial public offering. We
believe the assumptions used provide a reasonable basis for presenting the
significant effects directly attributable to the transactions discussed above.
The unaudited pro forma results of income are not necessarily indicative of the
results that would have been reported had such events actually occurred on the
dates specified, nor are they indicative of our future results.
11
<PAGE> 12
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 VERSUS THREE MONTHS ENDED JUNE 30, 1999
REVENUE
Total revenue was $50.6 million for the three months ended June 30, 2000, which
represented an 121%, or $27.7 million, increase from the three months ended June
30, 1999. Revenue from external sales was $50.1 million for the three months
ended June 30, 2000, which represented an increase of 129%, or $28.2 million,
from the three months ended June 30, 1999. Of this increase, $20.3 million was
due to a 93% increase in volume and $7.9 million was due to increased weighted
average selling prices. The volume growth was driven mainly by the increased use
of CMP slurries in the manufacture of IC devices.
COST OF GOODS SOLD
Total cost of goods sold was $22.8 million for the three months ended June 30,
2000, which represented an increase of 107% or $11.8 million from the three
months ended June 30, 1999. Cost of goods sold related to external sales was
$22.4 million for the three months ended June 30, 2000, which represented an
increase of 123%, or $12.4 million, from the three months ended June 30, 1999.
Of this increase, $9.4 million was due to higher sales volume and $3.0 million
was due to higher weighted average costs per gallon. These higher costs resulted
from improved quality requirements, higher raw material costs resulted from the
fumed metal oxide supply agreement with Cabot, and higher manufacturing and
distribution costs associated with our increased activities in the Asia Pacific
region. On a pro forma basis, total cost of goods sold would have been $24.6
million, which reflects the new fumed metal oxide supply and dispersion services
agreements with Cabot.
GROSS PROFIT
Our gross profit as a percentage of net revenue was 55% for the three months
ended June 30, 2000 as compared to 52% for the three months ended June 30, 1999.
The increase in gross profit resulted primarily from a higher percentage of our
sales coming from new, higher value products which have higher margins per
gallon. Pro forma gross profit as a percentage of net revenue was 51% for the
three months ended June 30, 2000 as compared to 47% for the three months ended
June 30, 1999.
RESEARCH AND DEVELOPMENT
Research and development expenses were $5.1 million in the three months ended
June 30, 2000, which represented an increase of 39%, or $1.4 million, from the
three months ended June 30, 1999. Of this increase, $0.5 million was due to
staffing and $0.9 million related to higher laboratory operating equipment and
supply costs. Various other increases of $0.2 million were offset by decreased
R&D allocations from Cabot Corporation. Key activities during the three months
ended June 30, 2000 involved the continued development of advanced particle
technology, new and enhanced slurry products and new CMP polishing pad
technology.
SELLING AND MARKETING
Selling and marketing expenses were $2.0 million in the three months ended June
30, 2000, which represented an increase of 81%, or $0.9 million, for the three
months ended June 30, 1999. The increase was primarily due to the hiring of
additional customer support personnel in our North America, Japan and Taiwan
offices.
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GENERAL AND ADMINISTRATIVE
General and administrative expenses were $6.7 million in the three months ended
June 30, 2000, which represented an increase of 107%, or $3.5 million, from the
three months ended June 30, 1999. The increase includes a one-time charge of
$2.1 million ($1.4 million after tax) for options granted to non-Cabot
Microelectronics employees at the time of the initial public offering. Also, the
increase resulted from a $0.7 million increase in compensation and fringe
benefit expenses needed to support the general growth of the business, $0.5
million in outside service costs related to establishing CMC as a separate
business, $0.5 million in operating costs associated with our new corporate
office building and $0.1 million increase in the allowance for bad debts
reserve. These increases were partially offset by $0.2 million in decreased
outside legal costs due to reduced activity associated with patent disputes and
$0.2 million decrease in corporate allocations from Cabot as CMC established its
own corporate departments.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles was $0.2 million in the three
months ended June 30, 2000 and the three months ended June 30, 1999 and related
to goodwill and other intangible assets associated with the acquisition of
selected distributor assets from a third party in 1995.
PROVISION FOR INCOME TAXES
The effective tax rate on income from operations was 36% in the three months
ended June 30, 2000 and the three months ended June 30, 1999.
NET INCOME
Net income was $8.8 million in the three months ended June 30, 2000, which
represented an increase of 272%, or $6.4 million, from the three months ended
June 30, 1999 as a result of the factors discussed above. These results include
a one-time charge of $1.4 million after tax for options granted to non-Cabot
Microelectronics employees at the time of the initial public offering. Pro forma
net income was $9.0 million in the three months ended June 30, 2000, which
represented an increase of 552%, or $7.6 million, from the pro forma net income
for the three months ended June 30, 1999.
NINE MONTHS ENDED JUNE 30, 2000 VERSUS NINE MONTHS ENDED JUNE 30, 1999
REVENUE
Total revenue was $125.0 million for the nine months ended June 30, 2000, which
represented a 90%, or $59.4 million, increase from the nine months ended June
30, 1999. Revenue from external sales was $122.7 million for the nine months
ended June 30, 2000, which represented an increase of 93%, or $59.2 million,
from the nine months ended June 30, 1999. Of this increase, $42.7 million was
due to a 67% increase in volume and $16.5 million was due to increased weighted
average selling prices. Volume growth was driven mainly from the increased use
of CMP slurries in the manufacture of IC devices.
COST OF GOODS SOLD
Total cost of goods sold was $58.7 million for the nine months ended June 30,
2000, which represented an increase of 88% or $27.5 million from the nine months
ended June 30, 1999. Cost of goods sold related to external sales was $56.4
million for the nine months ended June 30, 2000, which represented an increase
of 94%, or $27.3 million, from the nine months ended June 30, 1999. Of this
increase, $19.6 million was due to higher sales volume and $7.7 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 previously sold
through distributors to sales directly to customers in Japan. Higher
manufacturing costs also resulted from improved quality requirements, higher raw
material costs resulted from the fumed metal oxide supply agreement with Cabot,
and higher manufacturing and distribution costs associated with our increased
activities in the Asia Pacific region. Because we sell products to Cabot at
cost, our related party cost of goods sold approximates our related party
revenue. On a pro forma basis, total cost of
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goods sold would have been $62.9 million, which reflects the new fumed metal
oxide supply and dispersion services agreements with Cabot.
GROSS PROFIT
Our gross profit as a percentage of net revenue was 53% for the nine months
ended June 30, 2000 as compared to 52% for the nine months ended June 30, 1999.
The increase in gross profit resulted primarily from a higher percentage of our
sales coming from new, higher value products which have higher margins per
gallon. Pro forma gross profit as a percentage of net revenue was 49% for the
nine months ended June 30, 2000 as compared to 47% for the nine months ended
June 30, 1999.
RESEARCH AND DEVELOPMENT
Research and development expenses were $14.2 million in the nine months ended
June 30, 2000, which represented an increase of 40%, or $4.1 million, from the
nine months ended June 30, 1999. Of this increase, $1.5 million represents
additional personnel and related recruiting and relocation expenses, $2.4
million resulted from higher laboratory operating equipment and supply costs.
Also, $0.5 million of higher outsourced development expenses were partially
offset by $0.4 million in decreased R&D allocations from Cabot Corporation. Key
activities during the nine months ended June 30, 2000 involved the continued
development of advanced particle technology, new and enhanced slurry products
and new CMP polishing pad technology.
SELLING AND MARKETING
Selling and marketing expenses were $4.8 million in the nine months ended June
30, 2000, which represented an increase of 54%, or $1.7 million, for the nine
months ended June 30, 1999. Of this increase, $1.5 million was due to the hiring
of additional customer support personnel in our North America, Japan and Taiwan
offices. Also, product sample and tradeshow expenses increased by $0.2 million.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $14.2 million in the nine months ended
June 30, 2000, which represented an increase of 62%, or $5.4 million, from the
nine months ended June 30, 1999. The increase includes a one-time charge of $2.1
million ($1.4 million after tax) for options granted to non-Cabot
Microelectronics employees at the time of the initial public offering. Also, the
increase resulted from $1.7 million of additional compensation and fringe
benefit expenses needed to support the general growth of our business, $1.1
million in operating costs associated with the new corporate office, $0.7
million in outside service costs related to establishing CMC as a separate
business and $0.2 million in the allowance for bad debts reserve. These
increases were partially offset by $0.5 million in decreased charges for
corporate services provided by Cabot as CMC established its own corporate
departments.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles was $0.5 million in the nine
months ended June 30, 2000 and the nine months ended June 30, 1999 and related
to goodwill and other intangible assets associated with the acquisition of
selected distributor assets from a third party in 1995.
PROVISION FOR INCOME TAXES
The effective tax rate on income from operations was 36% in the nine months
ended June 30, 2000 and the nine months ended June 30, 1999.
NET INCOME
Net income was $20.8 million in the nine months ended June 30, 2000, which
represented an increase of 175%, or $13.2 million, from the nine months ended
June 30, 1999 as a result of the factors discussed above. These results include
a one-time charge of $1.4 million after tax for options granted to non-Cabot
Microelectronics employees at the time of the initial public offering. Pro forma
net income was $18.7 million in the nine months ended June 30, 2000, which
represented an increase of 301%, or $14.0 million, from the nine months ended
June 30, 1999.
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LIQUIDITY AND CAPITAL RESOURCES
We had cash flows from operating activities of $23.3 million in the nine months
ended June 30, 2000 and $7.2 million in the nine months ended June 30, 1999. Our
cash provided by operating activities originated from net income from operations
of $20.8 million plus non-cash items of $6.5 million, offset by a net increase
in working capital of $3.9 million. Our principal capital requirements have been
to fund working capital requirements and additions to property, plant and
equipment that support the expansion of our business. In the nine months ended
June 30, 2000, cash flows used in investing activities were $28.4 million,
primarily due to the construction of our Aurora, Illinois manufacturing
facility, the purchase of land and construction of a new distribution facility
in Korea and the purchase of research and development equipment. In the nine
months ended June 30, 1999, cash flows used in investing activities were $11.9
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. Cash flows from financing activities of $15.0 million for
the nine months ended June 30, 2000 resulted from capital contributions from
Cabot Corporation of $10.1 million, net proceeds from our initial public
offering of $82.8 million and borrowings of $17.0 million under a term credit
facility. Cabot Microelectronics paid Cabot Corporation dividends of $17.0
million in March, 2000 and $64.3 million in April, 2000. Also, during the third
quarter of 2000, CMC repaid $13.5 million of borrowings under the term credit
facility. Cash flows from financing activities for the nine months ended June
30, 1999 were $4.7 million and resulted from capital contributions from Cabot.
We believe we have the financial resources needed to meet business requirements
for the next twelve months, including capital expenditures for the expansion of
worldwide manufacturing capacity and working capital requirements.
FACTORS AFFECTING FUTURE OPERATING RESULTS
RISKS RELATING TO OUR BUSINESS
WE HAVE RECENTLY BEGUN OPERATING 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
Since our initial public offering we have been operating for the first time as a
stand-alone entity. Accordingly, we are developing and implementing 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
had 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 is
providing us with the various interim and ongoing services, these arrangements
will terminate upon the spin-off, which is planned to be completed on September
29, 2000. 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 we had as a division of Cabot or pursuant to these
arrangements. We are committed to developing the necessary systems and
infrastructure to operate as a stand-alone entity. However, any failure to do so
could seriously harm our business, results of operations and financial
condition.
HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS A
SEPERATE COMPANY.
The historical financial information we have presented may not reflect what our
results of operations, financial position and cash flows would have been had we
been a separate, stand-alone entity during the 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, information to evaluate our business is
limited. 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;
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- we have changed our fumed metal oxide supply and dispersion services
arrangements with Cabot and the prices we are paying under our new
agreements are higher than the prices we paid in the past; and
- the historical financial 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 historically has accounted for almost all of our revenue. Our
business would suffer if these products became obsolete or if consumption of
these products decreased. Our success depends on our ability to keep pace with
technological changes and advances in the semiconductor industry and to adapt
and improve our products in response to evolving customer needs and industry
trends. Since its inception the semiconductor industry has experienced rapid
technological changes and advances in the design, manufacture, performance and
application of IC devices and these changes and advances are expected to
continue in the future. One or more developments in the semiconductor industry
may render our products obsolete or less important to the IC device
manufacturing process, including:
- 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. For
the nine months ended June 30, 2000, our five largest customers accounted for
approximately 55% of our revenue, with Intel and Marketech each accounting for
approximately 16% of our revenue, and Takasago accounting for approximately 10%
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.
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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. 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 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 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.
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.
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 became effective upon completion of the initial public offering and
under which Cabot will continue to be our exclusive supplier of fumed metal
oxides for our current slurry products. We also expect Cabot will be our primary
supplier of fumed metal oxides for products 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
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- 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 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.
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
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 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.
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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 are new to us. For these reasons, the expansion of our business
into these new product areas or applications may not be successful.
BECAUSE WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY, OUR FAILURE TO ADEQUATELY
PROTECT IT COULD SERIOUSLY HARM OUR BUSINESS
Protection of intellectual property is particularly important in our industry
because CMP slurry manufacturers develop complex and technical formulas for CMP
slurries which are proprietary in nature and differentiate their products from
those of competitors. Our intellectual property is important to our success and
ability to compete. We attempt to protect our intellectual property rights
through a combination of patent, trademark, copyright and trade secret laws, as
well as employee and third-party nondisclosure and assignment agreements. Our
failure to obtain or maintain adequate protection of our intellectual property
rights for any reason could seriously harm our business.
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 nine months ended June 30, 2000,
approximately 54% 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 difficulty in enforcing intellectual property rights in some
foreign countries.
As we continue to expand our business globally, our success will depend, in
part, on our ability to anticipate and effectively manage these and other risks.
EXCHANGE RATE FLUCTUATIONS COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS
As a result of our international operations, we expect to generate an increasing
portion of our revenue and incur a significant portion of our expenses in
currencies other than U.S. dollars. To the extent we are unable to match revenue
received in foreign currencies with costs paid in the same currency, exchange
rate fluctuations in any foreign currency could have a negative impact on our
financial condition or results of operations.
The financial condition and results of operations of some of our operating
entities are reported in various foreign currencies and then translated into
U.S. dollars at the applicable exchange rate for inclusion in our financial
statements. As a result, appreciation of the U.S. dollar against these foreign
currencies will have a negative impact on our reported revenue and operating
profits.
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OUR ABILITY TO RAISE CAPITAL IN THE FUTURE MAY BE LIMITED AND THIS MAY LIMIT OUR
ABILITY TO EXPAND OUR BUSINESS AND IMPROVE OUR TECHNOLOGY
We plan to expand our business and continue to improve our technology. To do so
we may be required to raise additional funds in the future through public or
private equity or debt financing, strategic relationships or other arrangements.
Financing may not be available on acceptable terms, or at all, and our failure
to raise capital when needed could negatively impact our financial condition or
results of operations. Additional equity financing may be dilutive to the
holders of our common stock and debt financing, if available, may involve
restrictive covenants. 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. The spin-off is
currently planned to be completed on September 29, 2000. However, Cabot may not
complete a divestiture of its remaining equity interest in us in this time frame
or at all.
RISKS RELATING TO OUR SEPARATION FROM CABOT
WE WILL BE CONTROLLED BY CABOT PRIOR TO THE PLANNED SEPTEMBER 29, 2000 SPIN-OFF
AND OUR OTHER STOCKHOLDERS WILL BE UNABLE TO AFFECT THE OUTCOME OF STOCKHOLDER
VOTING DURING THAT TIME
Cabot owns approximately 80.5% of our outstanding shares of common stock. Under
the initial public offering and distribution agreement that we have entered into
with Cabot, Cabot has 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 is in a position to continue
to control all matters affecting our company. Cabot has announced its plan to
spin-off its remaining 80.5% equity interest in Cabot Microelectronics on
September 29, 2000. 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 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, a number
of our directors and executive officers own Cabot stock and options on Cabot
stock they acquired as employees of Cabot. This ownership could create, or
appear to create, potential conflicts of interest when these directors and
officers are faced with decisions that could have different implications for our
company and Cabot. 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. Also, these provisions in our certificate of
incorporation will no longer be in effect following the completion of our
planned spin-off.
WE MAY HAVE CONFLICTS WITH CABOT WITH RESPECT TO OUR PAST AND ONGOING
RELATIONSHIPS
We may have conflicts with Cabot that we cannot resolve and, even if we are able
to do so, the resolution of these conflicts may not be as favorable as if we
were dealing with an unaffiliated party. Cabot continues 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 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:
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- 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 from the price we could have obtained in arm's-length
negotiations with an unaffiliated third party in light of the long-term nature
of the contract, the volumes provided for under the agreement and our particular
quality requirements.
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 50% or greater of the vote and value of
our capital stock, we will be included in Cabot's consolidated group for federal
income tax purposes. Under a tax sharing agreement with Cabot, we will pay Cabot
the amount of federal, state and local income taxes we would be required to pay
to the relevant taxing authorities if we were a separate taxpayer not included
in Cabot's consolidated or combined returns. In addition, by virtue of its
controlling ownership and the tax sharing agreement, 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.
IF THE PLANNED SPIN-OFF IS NOT TAX-FREE, WE COULD BE LIABLE TO CABOT FOR THE
RESULTING TAXES
Cabot has announced its plans to divest itself of its remaining equity interest
in us by means of a tax-free spin-off on September 29, 2000. We have agreed to
indemnify Cabot in the event the spin-off is not tax-free to Cabot as a result
of various actions taken by or with respect to us or our failure to take various
actions, all as set forth in our tax sharing agreement with Cabot. We may not be
able to control some of the events that could trigger this liability. In
particular, any acquisition of us by a third party within two years of the
spin-off could result in the spin-off becoming a taxable transaction and give
rise to our obligation to indemnify Cabot for any resulting tax liability.
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RISKS RELATING TO THE MARKET FOR OUR COMMON STOCK
THE MARKET PRICE MAY FLUCTUATE WIDELY AND RAPIDLY
The market price of our common stock could fluctuate significantly as a result
of:
- 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. 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 OWNS 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
Cabot has announced its plan to spin-off its remaining 80.5% equity interest in
Cabot Microelectronics on September 29, 2000. These shares, which will be held
by a diverse group of shareholders rather than a single shareholder, will be
freely tradable. The market price of our common stock could be negatively
effected as a result of increased sales volume of our common stock 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.
There are 23,589,744 shares of our common stock outstanding and Cabot
beneficially owns 80.5% of our outstanding common stock. The shares of our
common stock sold in our initial public offering and the shares to be
distributed by Cabot in the spin-off 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).
ANTI-TAKEOVER PROVISIONS UNDER OUR CERTIFICATE OF INCORPORATION AND BYLAWS, OUR
RIGHTS PLAN AND DELAWARE GENERAL CORPORATION LAW MAY ADVERSELY AFFECT THE PRICE
OF OUR COMMON STOCK, DISCOURAGE THIRD PARTIES FROM MAKING A BID FOR OUR COMPANY
OR REDUCE ANY PREMIUMS PAID TO OUR STOCKHOLDERS FOR THEIR COMMON STOCK
Our certificate of incorporation, our bylaws, our rights plan and various
provisions of the Delaware General Corporation Law may make it more difficult to
effect a change in control of our company. Our certificate of incorporation, our
by-laws, our rights plan and the various provisions of Delaware General
Corporation Law may adversely affect the price of our common stock, discourage
third parties from making a bid for our company or reduce any premiums paid to
our stockholders for their common stock. For example, we have amended our
certificate of incorporation to authorize our board of directors to issue
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up to 20 million shares of blank check preferred stock and to attach special
rights and preferences to this preferred stock. The issuance of this preferred
stock may make it more difficult for a third party to acquire control of us. We
also amended our certificate of incorporation to provide for the division of our
board of directors into three classes as nearly equal in size as possible with
staggered three-year terms. This classification of our board of directors could
have the effect of making it more difficult for a third party to acquire our
company, or of discouraging a third party from acquiring control of our company.
In addition, the rights issued to our stockholders under our rights plan may
make it more difficult or expensive for another person or entity to acquire
control of us without the consent of our board of directors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT
We conduct business operations outside of the United States through our foreign
operations. Our foreign operations maintain their accounting records in their
local currencies. Consequently, period to period comparability of results of
operations is affected by fluctuations in exchange rates. The primary currencies
to which we have exposure are the Japanese Yen and the British Pound. Our
exposure to foreign currency exchange risks has not been significant because a
significant portion of our foreign sales are denominated in U.S. dollars. As
foreign markets become a more significant portion of our business, we have begun
to enter into forward contracts in an effort to manage foreign currency exchange
exposure. Less than 10% of our revenue is transacted in currencies other than
the U.S. dollar. We do not enter into forward exchange contracts for speculative
or trading purposes.
MARKET RISK AND SENSITIVITY ANALYSIS FOREIGN EXCHANGE RATE RISK
We have performed a sensitivity analysis assuming a hypothetical 10% adverse
movement in foreign exchange rates. As of June 30, 2000, the analysis
demonstrated that such market movements would not have a material adverse effect
on our financial position, results of operations or cash flows. 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 June 30, 2000 was not material.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Legal proceedings are discussed in "Footnote 7. - Litigation", under PART I,
Item 1 - Notes to Financial Statements and such discussion is incorporated
herein by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of CMC's Form S-1 Registration Statement (No. 333-95093)
relating to the initial public offering of its common stock was April 4, 2000. A
total of 4,600,000 shares of CMC's common stock were sold at a price of $20.00
per share to an underwriting syndicate led by Goldman, Sachs & Co., Merrill
Lynch & Co. and Robertson Stephens. The offering commenced on April 4, 2000.
Proceeds of the offering to CMC, net of $6.4 million of underwriting discounts,
were $85.6 million. Expenses related to the offering totaled $2.8 million,
resulting in net proceeds to CMC of approximately $82.8 million. Except with
respect to the payment to Cabot Corporation described below, we did not pay any
of the net proceeds of the offering, directly or indirectly, to any director,
officer or affiliate of CMC, or to any persons owning ten percent or more of our
common stock. Of the net proceeds, $64.3 million was paid as a dividend to Cabot
Corporation in April 2000. Also, $11.4 million was used for additions to
property, plant and equipment and remaining proceeds of $7.1 million are
invested in highly liquid money market funds.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibit numbers in the following list correspond to the
number assigned to such exhibits in the Exhibit Table of Item
601 of Regulation S-K:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27 Financial Data Schedule for the period
ended June 30, 2000, filed herewith.
(b) Reports on Form 8-K
No report on Form 8-K was filed by the Company during the three months ended
June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CABOT MICROELECTRONICS CORPORATION
Date: August 11, 2000 /s/ WILLIAM C. MCCARTHY
---------------------------------------------
William C. McCarthy
Vice President and Chief Financial Officer
[Authorized Officer, Principal Financial Officer]
Date: August 11, 2000 /s/ DANIEL S. WOBBY
---------------------------------------------
Daniel S. Wobby
Corporate Controller
[Principal Accounting Officer]
25
