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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 000-30205
CABOT MICROELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-4324765
(State of Incorporation) (I.R.S. Employer Identification No.)
870 NORTH COMMONS DRIVE 60504
AURORA, ILLINOIS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (630) 375-6631
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES x NO
----------- -------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2 ).
YES x NO
----------- -------------
As of January 31, 2003 the Company had 24,366,359 shares of Common Stock, par
value $0.001 per share, outstanding.
CABOT MICROELECTRONICS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Statements of Income
Three Months Ended December 31, 2002 and 2001........................ 3
Consolidated Balance Sheets
December 31, 2002 and September 30, 2002............................. 4
Consolidated Statements of Cash Flows
Three Months Ended December 31, 2002 and 2001........................ 5
Notes to Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............. 19
Item 4. Controls and Procedures................................................. 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 19
Item 5. Other Information....................................................... 20
Item 6. Exhibits and Reports on Form 8-K........................................ 20
Signatures.............................................................. 21
Certifications.......................................................... 22
PART I. FINANCIAL INFORMATION
ITEM 1.
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS
ENDED DECEMBER 31,
2002 2001
-------- --------
Revenue ......................................... $ 57,273 $ 51,004
Cost of goods sold .............................. 27,665 23,746
-------- --------
Gross profit ............................ 29,608 27,258
Operating expenses:
Research and development ..................... 8,635 6,947
Selling and marketing ........................ 2,578 2,358
General and administrative ................... 4,368 3,884
Amortization of intangibles .................. 85 90
-------- --------
Total operating expenses ................... 15,666 13,279
-------- --------
Operating income ................................ 13,942 13,979
Other expense, net .............................. (5) (317)
-------- --------
Income before income taxes ...................... 13,937 13,662
Provision for income taxes ...................... 4,669 4,645
-------- --------
Net income ................................. $ 9,268 $ 9,017
======== ========
Basic earnings per share ........................ $ 0.38 $ 0.37
======== ========
Weighted average basic shares outstanding ....... 24,300 24,096
======== ========
Diluted earnings per share ...................... $ 0.38 $ 0.37
======== ========
Weighted average diluted shares outstanding ..... 24,579 24,532
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
3
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, SEPTEMBER 30,
2002 2002
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 76,796 $ 69,605
Accounts receivable, less allowance for doubtful
accounts of $693 at December 31, 2002
and $667 at September 30, 2002 ...................................... 28,141 26,082
Inventories ........................................................... 24,390 21,959
Prepaid expenses and other current assets ............................. 2,942 2,654
Deferred income taxes ................................................. 2,968 2,983
--------- ---------
Total current assets ............................................. 135,237 123,283
Property, plant and equipment, net ....................................... 131,449 132,264
Goodwill ................................................................. 1,373 1,373
Other intangible assets, net ............................................. 850 935
Deferred income taxes and other assets ................................... 414 530
--------- ---------
Total assets ..................................................... $ 269,323 $ 258,385
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 9,405 $ 11,748
Capital lease obligations ............................................. 1,612 1,585
Accrued expenses, income taxes payable and other current liabilities .. 17,248 17,238
--------- ---------
Total current liabilities ........................................ 28,265 30,571
Long-term debt ........................................................... 3,500 3,500
Capital lease obligations ................................................ 8,499 8,865
Deferred income taxes .................................................... 1,663 1,514
Deferred compensation and other long-term liabilities .................... 534 429
--------- ---------
Total liabilities ................................................ 42,461 44,879
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock:
Authorized: 200,000,000 shares, $0.001 par value
Issued and outstanding: 24,344,221 shares at December 31, 2002 and
24,254,819 at September 30, 2002 .................................... 24 24
Capital in excess of par value of common stock ........................ 117,007 114,116
Retained earnings ..................................................... 110,393 101,125
Accumulated other comprehensive loss .................................. (545) (1,688)
Unearned compensation ................................................. (17) (71)
--------- ---------
Total stockholders' equity ....................................... 226,862 213,506
--------- ---------
Total liabilities and stockholders' equity ....................... $ 269,323 $ 258,385
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
4
CABOT MICROELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
THREE MONTHS ENDED
DECEMBER 31,
2002 2001
-------- --------
Cash flows from operating activities:
Net Income ...................................................................... $ 9,268 $ 9,017
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................................................. 3,745 2,464
Noncash compensation and non-employee stock options ........................... (19) 85
Provision for inventory writedown ............................................. 547 473
Provision for doubtful accounts ............................................... 26 (195)
Stock option income tax benefits .............................................. 1,115 562
Deferred income taxes ......................................................... 164 (515)
Unrealized foreign exchange gain .............................................. (439) --
Other noncash expenses, net ................................................... 278 --
Changes in operating assets and liabilities:
Accounts receivable ........................................................... (1,706) 6,192
Inventories ................................................................... (2,656) (220)
Prepaid expenses and other assets ............................................. (100) (2)
Accounts payable, accrued liabilities and other current liabilities ........... (4,276) (1,304)
Income taxes payable, deferred compensation and other noncurrent liabilities .. 1,801 2,452
-------- --------
Net cash provided by operating activities .......................................... 7,748 19,009
Cash flows from investing activities:
Additions to property, plant and equipment ...................................... (2,286) (8,993)
-------- --------
Net cash used in investing activities .............................................. (2,286) (8,993)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of stock ............................................. 1,853 722
Principal payments under capital lease obligations .............................. (180) --
-------- --------
Net cash provided by financing activities .......................................... 1,673 722
-------- --------
Effect of exchange rate changes on cash ............................................ 56 (41)
-------- --------
Increase in cash ................................................................... 7,191 10,697
Cash and cash equivalents at beginning of period ................................... 69,605 47,677
-------- --------
Cash and cash equivalents at end of period ......................................... $ 76,796 $ 58,374
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
5
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BACKGROUND AND BASIS OF PRESENTATION
We believe we are the leading supplier of high performance polishing
slurries used in the manufacture of the most advanced integrated circuit ("IC")
devices, within a process called chemical mechanical planarization ("CMP"). CMP
is a polishing process used by IC device manufacturers to planarize many of the
multiple layers of material that are built upon silicon wafers to produce
advanced devices.
Cabot Microelectronics, which was incorporated in October 1999 and formed
from the assets of Cabot Corporation's Microelectronics Materials Division,
completed its initial public offering in April 2000. As of September 29, 2000,
we became a wholly independent entity upon Cabot Corporation's spin-off of its
remaining ownership ("spin-off") in us by its distribution of 0.280473721 shares
of Cabot Microelectronics common stock as a dividend on each share of Cabot
Corporation common stock.
The unaudited consolidated financial statements have been prepared by Cabot
Microelectronics Corporation ("Cabot Microelectronics", "the Company", "us",
"we", or "our"), pursuant to the rules of the Securities and Exchange Commission
("SEC") and accounting principles generally accepted in the United States of
America. In the opinion of management, these unaudited consolidated financial
statements include all adjustments necessary for the fair presentation of Cabot
Microelectronics' financial position as of December 31, 2002, cash flows for the
three months ended December 31, 2002 and December 31, 2001 and results of
operations for the three months ended December 31, 2002 and December 31, 2001.
The results of operations for the three months ended December 31, 2002 may not
be indicative of the results to be expected for the fiscal year ending September
30, 2003. These unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes thereto
included in Cabot Microelectronics' Annual Report on Form 10-K for the fiscal
year ended September 30, 2002. We operate predominantly in one industry segment
- - the development, manufacture, and sale of CMP slurries.
The consolidated financial statements include the accounts of Cabot
Microelectronics and its subsidiaries. All intercompany transactions and
balances between the companies have been eliminated.
2. STOCK-BASED COMPENSATION
We have adopted the disclosure requirements of SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148") effective
December 2002. SFAS 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based compensation and also amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements about the methods of accounting for stock-based employee compensation
and the effect of the method used on reported results. As permitted by SFAS 148
and SFAS 123, we continue to apply the accounting provisions of Accounting
Principles Board ("APB") Opinion Number 25, "Accounting for Stock Issued to
Employees", and related interpretations, with regard to the measurement of
compensation cost for options granted under the Equity Incentive Plan and shares
issued under our Employee Stock Purchase Plan. No employee compensation expense
has been recorded as all options granted had an exercise price equal to the
market value of the underlying common stock on the date of grant. Had expense
been recognized using the fair value method described in
6
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SFAS 123, using the Black-Scholes option-pricing model, we would have reported
the following results of operations:
THREE MONTHS ENDED
DECEMBER 31,
2002 2001
---------- ----------
Net income, as reported ................. $ 9,268 $ 9,017
Deduct: total stock-based compensation
expense determined under the fair
value method, net of tax ........... (3,670) (2,892)
---------- ----------
Pro forma net income .................... $ 5,598 $ 6,125
========== ==========
Earnings per share:
Basic - as reported ................ $ 0.38 $ 0.37
========== ==========
Basic - pro forma .................. $ 0.23 $ 0.25
========== ==========
Diluted - as reported .............. $ 0.38 $ 0.37
========== ==========
Diluted - pro forma ................ $ 0.23 $ 0.25
========== ==========
3. EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128 "Earnings per Share",
requires companies to provide a reconciliation of the numerator and denominator
of the basic and diluted earnings per share computations. Basic and diluted
earnings per share were calculated as follows:
THREE MONTHS
ENDED DECEMBER 31,
2002 2001
----------- -----------
Numerator:
Earnings available to common shares .............. $ 9,268 $ 9,017
=========== ===========
Denominator:
Weighted average common shares ................... 24,300,495 24,095,558
(Denominator for basic calculation)
Weighted average effect of dilutive securities:
Stock based compensation .................... 278,559 436,820
----------- -----------
Diluted weighted average common shares ........... 24,579,054 24,532,378
=========== ===========
(Denominator for diluted calculation)
Earnings per share:
Basic ............................................ $ 0.38 $ 0.37
=========== ===========
Diluted .......................................... $ 0.38 $ 0.37
=========== ===========
7
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
THREE MONTHS
ENDED DECEMBER 31,
2002 2001
---- ----
Net Income.............................. $ 9,268 $ 9,017
Other comprehensive income:
Net unrealized gain on derivative
instruments ................... 9 6
Foreign currency translation adjustment 1,134 (2,873)
---------- --------
Total comprehensive income.............. $ 10,411 $ 6,150
========== ========
5. INVENTORIES
Inventories consisted of the following:
DECEMBER 31, SEPTEMBER 30,
2002 2002
---- ----
Raw materials................... $ 16,732 $ 13,779
Work in process................. 1,224 1,173
Finished goods.................. 6,434 7,007
--------- ---------
Total........................... $ 24,390 $ 21,959
========= =========
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill of $1,373, as of December 31, 2002, was unchanged from our fiscal
year ended September 30, 2002.
The components of intangible assets are as follows:
DECEMBER 31, 2002 SEPTEMBER 30, 2002
--------------------------- ---------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------ -------------- ------------
Trade secrets and know-how.................... $ 2,550 $ 1,913 $ 2,550 $ 1,850
Distribution rights, customer lists and other. 1,000 787 1,000 765
---------- --------- --------- ---------
Total intangible assets..................... 3,550 2,700 3,550 2,615
---------- --------- --------- ---------
Amortization expense of intangible assets was $85 for the three months
ended December 31, 2002. Estimated future amortization expense for the remaining
nine months of fiscal year 2003, fiscal 2004 and fiscal 2005 are $255, $340, and
$255, respectively.
8
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. ACCRUED EXPENSES, INCOME TAXES PAYABLE AND OTHER CURRENT LIABILITIES
Accrued expenses, income taxes payable and other current liabilities
consisted of the following:
DECEMBER 31, SEPTEMBER 30,
2002 2002
---- ----
Raw material accruals........... $ 1,786 $ 851
Accrued compensation............ 5,711 8,302
Warranty accrual................ 755 858
Fixed asset accrual............. 133 1,375
Income taxes payable............ 4,404 2,662
Other........................... 4,459 3,190
--------- ---------
Total........................... $ 17,248 $ 17,238
========= =========
We provide for the estimated cost of product returns based upon historical
experience and any known conditions or circumstances. Our warranty obligation is
affected primarily by product that does not meet specifications and performance
requirements and any related costs of addressing such matters. Should actual
incidences of product not meeting specifications and performance requirements
differ from our estimates, revisions to the estimated warranty liability may be
required.
We have historically not recorded warranty claims directly against warranty
reserves, but rather provided for them in the period in which they occurred. As
such, charges to and reductions in expenses represent the net change required to
maintain an appropriate reserve.
The changes in the warranty reserve for the three months ended December 31,
2002 are as follows:
Balance as of September 30, 2002 $ 858
Charges to (reduction in) expenses, net (103)
---------
Balance as of December 31, 2002. $ 755
=========
8. LONG-TERM DEBT
At December 31, 2002 long-term debt was comprised of an unsecured term loan
in the amount of $3,500 funded on the basis of the Illinois State Treasurer's
Economic Program. On February 6, 2003, we prepaid the entire $3,500 term loan
which had been due on April 3, 2005 and incurred interest at an annual rate of
4.68%. No gain or loss was recognized with respect to the prepayment.
On July 10, 2001 we entered into a $75,000 unsecured revolving credit and
term loan facility with a group of commercial banks. On February 5, 2002, this
agreement was amended with no material changes in terms. Under this agreement,
which terminates July 10, 2004, interest accrues on any outstanding balance at
either the institution's base rate or the eurodollar rate plus an applicable
margin. A non-use fee also accrues. Loans under this facility are anticipated to
be used primarily for general corporate purposes, including working capital and
capital expenditures. The credit agreement also contains various covenants. No
amounts are currently outstanding under this credit facility and we are
currently in compliance with the covenants.
9
CABOT MICROELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED AND IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. CONTINGENCIES
We periodically become subject to legal proceedings in the ordinary course
of business. We are not currently involved in any legal proceedings which we
believe will have a material impact on our consolidated financial position,
results of operations, or cash flows.
10. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45") which is effective for
guarantees issued or modified after December 31, 2002. FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that an
entity has issued, including a rollforward of the entity's product warranty
liabilities. We have adopted Interpretation No. 45 effective December 2002 which
had no impact on our consolidated financial position, results of operations or
cash flows. Applicable disclosures with respect to our product warranty reserve
have been made in Note 7. Accrued Liabilities, Income Taxes Payable and Other
Current Liabilities.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148") which is effective for
fiscal years ending after December 15, 2002, and interim disclosure provisions
are effective for financial reports containing financial statements for interim
periods beginning after December 15, 2002. SFAS 148 amends FASB Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based compensation. In addition, this statement
amends the disclosure requirements of SFAS 123 to require prominent disclosures
in both annual and interim financial statements about the methods of accounting
for stock-based employee compensation and the effect of the method used on
reported results. We have adopted the disclosure requirements of SFAS 148
effective December 2002 and will continue 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. We have made appropriate interim disclosures in Note 2.
Stock-Based Compensation.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46") which applies immediately to variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the entity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. We have adopted
Interpretation No. 46 effective December 2002, which had no impact on our
consolidated financial position, results of operations or cash flows because we
have no variable interest entities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations", as well as disclosures included elsewhere in this
Form 10-Q, include "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. This Act provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves so long as they identify these
statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact we
make in this Form 10-Q are forward-looking. In particular, the
10
statements herein regarding industry or general economic prospects or trends,
our future results of operations or financial position and statements preceded
by, followed by or that include the words "intends", "estimates", "plans",
"believes", "expects", "anticipates", "should", "could", or similar expressions,
are forward-looking statements. Forward-looking statements reflect our current
expectations and are inherently uncertain. Our actual results may differ
significantly from our expectations. We assume no obligation to update this
forward-looking information. The section entitled "Factors Affecting Future
Operating Results" describes some, but not all, of the factors that could cause
these differences. This section, "Management's Discussion and Analysis of
Financial Condition and Results of Operations", should be read in conjunction
with the consolidated financial statements and related notes thereto included in
Cabot Microelectronics' Annual Report on Form 10-K for the fiscal year ended
September 30, 2002.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2002 VERSUS THREE MONTHS ENDED DECEMBER 31, 2001
REVENUE
Total revenue was $57.3 million for the three months ended December 31,
2002, which represented a 12.3%, or $6.3 million, increase from the three months
ended December 31, 2001. Of this increase, $3.9 million was due to an increase
in sales volume and $2.4 million from an increase in weighted average selling
prices resulting from a change in product sales mix. Copper product revenue
increased 48.4% over the prior year quarter and tungsten and dielectric product
revenues combined increased by 5.3%. Revenue would have been $0.1 million higher
had the Japanese Yen average exchange rate for the quarter held constant with
the prior year's first fiscal quarter average.
COST OF GOODS SOLD
Total cost of goods sold was $27.7 million for the three months ended
December 31, 2002, which represented an increase of 16.5% or $3.9 million from
the three months ended December 31, 2001. This increase resulted from higher
volume and costs of production that were partially offset by the absence of the
Rippey royalty payment. We made the final Rippey payment in the fourth quarter
of fiscal 2002 and we have no further obligation under this contract.
With respect to the key raw materials used to make our products, we expect
that the cost of fumed silica we purchase from Cabot Corporation used in the
manufacture of CMP slurries will continue to increase according to the terms of
our existing fumed metal oxide agreement with Cabot Corporation, which provides
for a fixed annual increase in the price of silica of 2.0% of the initial price,
and additional price adjustments corresponding to Cabot Corporation's raw
material cost increases or decreases. Also, in order to meet certain of our
needs for fumed alumina, in December 2001, we entered into a fumed alumina
supply agreement with Cabot Corporation and an amendment to the fumed metal
oxide agreement with respect to its fumed alumina terms. Under this fumed
alumina supply agreement, Cabot Corporation expanded its capacity for the
manufacture of fumed alumina and we have the first right to all this capacity.
The agreement provides that the price Cabot Corporation charges us for fumed
alumina is based on all of its fixed and variable costs for producing the fumed
alumina, plus its capital costs for expanding its capacity, plus an agreed upon
rate of return on investment, plus incentive payments if they produce more than
a certain amount that meets our specifications per year
Our need for additional quantities of key raw materials in the future has
required and will continue to require that we enter into new supply arrangements
with third parties. Future arrangements may result in costs which are higher
than those in the existing agreements.
RESEARCH AND DEVELOPMENT
Research and development expenses were $8.6 million in the three months
ended December 31, 2002, which represented an increase of 24.3%, or $1.7
million, from the three months ended December 31, 2001. The majority of this
increase was due to
11
depreciation and operating costs of $1.1 million relating to our new R&D
facility which we opened in April 2002. An additional $0.5 million increase
resulted from allocating certain common facility operating costs to R&D. These
costs had previously been treated as general and administrative expense prior to
the R&D facility addition to our existing office building. Although R&D expense
in our first fiscal quarter of 2003 decreased sequentially due to reduced
spending on R&D supplies and other discretionary items, we expect R&D expenses
will increase in the future. Key activities during the three months ended
December 31, 2002 involved the continued development of new and enhanced slurry
products including products for copper applications, new CMP polishing pad
technology and advanced particle technology.
SELLING AND MARKETING
Selling and marketing expenses were $2.6 million in the three months ended
December 31, 2002, which represented an increase of 9.3%, or $0.2 million, from
the three months ended December 31, 2001. The increase resulted from higher
staff related costs associated with our customer support initiatives.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $4.4 million in the three months
ended December 31, 2002, which represented an increase of 12.5%, or $0.5
million, from the three months ended December 31, 2001. The increase primarily
resulted from an increase in depreciation of $0.6 million associated with
administrative areas of the R&D facility addition and our business systems that
were placed in service during the second fiscal quarter of 2002 and higher
insurance premiums of $0.2 million. These increases were partially offset by a
decrease in facilities charges due to the change in allocation of certain common
facility operating costs described under Research and Development. We expect
that general and administrative expenses will continue to increase due to higher
insurance premiums.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles was $0.1 million for both the three months
ended December 31, 2002 and 2001.
OTHER EXPENSE, NET
Other expense was negligible for the three months ended December 31, 2002,
compared to other expense of $0.3 million, for the three months ended December
31, 2001. The prior year expense resulted primarily from a payment of $0.3
million to Cabot Corporation to reimburse them for certain capital improvements
made to a facility used to supply us with raw material. These capital
improvements are no longer in service.
PROVISION FOR INCOME TAXES
The effective income tax rate was 33.5% for the three months ended December
31, 2002 and 34.0% for the three months ended December 31, 2001. The decrease in
the effective tax rate was mainly driven by an increase in tax credits from
expanded research and experimentation activities.
NET INCOME
Net income was $9.3 million for the three months ended December 31, 2002,
which represented an increase of 2.8%, or $0.3 million, from the three months
ended December 31, 2001 as a result of the factors discussed above.
12
LIQUIDITY AND CAPITAL RESOURCES
We had cash flows from operating activities of $7.7 million in the three
months ended December 31, 2002 and $19.0 million in the three months ended
December 31, 2001. Our cash provided by operating activities for the three
months ended December 31, 2002 originated from net income from operations of
$9.3 million and non-cash items of $5.4 million which were partially offset by a
net increase in working capital of approximately $7.0 million due to increases
in customer receivables and inventory and a decrease in accounts payable.
In the three months ended December 31, 2002, capital spending was $2.3
million, primarily for manufacturing equipment for the production of new
products and additional research and development equipment. Full fiscal year
2003 capital spending is anticipated to be approximately $24.0 million. In the
three months ended December 31, 2001, capital spending was $9.0 million,
primarily due to the construction of our new research and development facility
in Aurora, Illinois. We also purchased additional production-related equipment
to be used in Aurora, Illinois and invested in the development and
implementation of our stand alone business information systems.
Cash flows from financing activities were $1.7 million in the three months
ended December 31, 2002 and $0.7 million in the three months ended December 31,
2001. Cash provided from financing activities for the three months ended
December 31, 2002 resulted from the issuance of common stock of $1.9 million for
the exercise of stock options which was partially offset by principal payments
of $0.2 million made under capital lease obligations. Cash provided in the year
ago period resulted from the issuance of common stock for the exercise of stock
options.
We believe that cash generated by our operations and available borrowings
under our term loan and revolving credit facility will be sufficient to fund our
operations and expected capital expenditures for the foreseeable future.
However, we plan to expand our business and continue to improve our technology
and, to do so, we may be required to raise additional funds in the future
through public or private equity or debt financing, strategic relationships or
other arrangements.
DISCLOSURES ABOUT OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL
OBLIGATIONS
At December 31, 2002 and September 30, 2002, we did not have any
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which might have
been established for the purpose of facilitating off-balance sheet arrangements.
The following summarizes our contractual obligations at December 31, 2002,
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods.
CONTRACTUAL OBLIGATIONS LESS THAN 1-3 4-5 AFTER 5
(IN MILLIONS) TOTAL 1 YEAR YEARS YEARS YEARS
----- ----------- ----- ----- -----
Long-term debt............................ $ 3.5 $ 0.0 $ 3.5 $ 0.0 $ 0.0
Capital lease obligations ................ 10.1 1.6 3.3 2.1 3.1
Operating leases ......................... 1.1 0.5 0.4 0.1 0.1
Unconditional purchase obligations ....... 29.0 14.7 6.9 3.0 4.4
Other long-term obligations............... 1.5 0.2 1.3 0.0 0.0
------- ------- ------ ------- -------
Total contractual cash obligations........ $ 45.2 $ 17.0 $ 15.4 $ 5.2 $ 7.6
======= ======= ====== ======= =======
LONG-TERM DEBT
At December 31, 2002 long-term debt was comprised of an unsecured term loan
in the amount of $3.5 million funded on the basis of the Illinois State
Treasurer's Economic Program. On February 6, 2003, we prepaid the entire $3.5
million term
13
loan which had been due on April 3, 2005 and incurred interest at an annual rate
of 4.68%. No gain or loss was recognized with respect to the prepayment.
CAPITAL LEASE OBLIGATIONS
On December 12, 2001 we entered into a fumed alumina supply agreement with
Cabot Corporation. Under this agreement, Cabot Corporation expanded its capacity
in Tuscola, Illinois for the manufacture of fumed alumina. Payments by us for
capital costs for the facility have been treated as a capital lease for
accounting purposes and the present value of the minimum quarterly payments of
approximately $0.3 million resulted in a $9.8 million lease obligation and
related leased asset. The agreement has an initial five year term, which expires
in 2006, but we can choose to renew the agreement for another five year term,
which would expire in 2011. We also can choose not to renew the agreement
subject to certain terms and conditions and the payment of certain costs, after
the initial five year term. Capital lease payments to Cabot Corporation
commenced in the second quarter of fiscal 2002 and a total of $1.0 million has
been paid as of December 31, 2002.
On January 11, 2002 we entered into a CMP tool and polishing consumables
transfer agreement with a third party under which we agreed to transfer
polishing consumables to them in return for a CMP polishing tool. The polishing
tool has been treated as a capital lease and the aggregate fair market value of
the polishing consumables resulted in a $2.0 million lease obligation. The
agreement has approximately a three-year term, which expires in November 2004.
OPERATING LEASES
We lease certain vehicles, warehouse facilities, office space, machinery
and equipment under cancelable and noncancelable operating leases, most of which
expire within ten years and may be renewed by us.
UNCONDITIONAL PURCHASE OBLIGATIONS
Unconditional purchase obligations include our noncancelable purchase
commitments and take-or-pay arrangements with suppliers. We operate under an
amended fumed metal oxide agreement with Cabot Corporation for the purchase of
two key raw materials, fumed silica and fumed alumina. We are obligated to
purchase at least 90% of our six-month volume forecast of fumed silica and must
pay the difference if we purchase less than that amount. We currently anticipate
meeting minimum forecasted purchase volume requirements. Also, under our fumed
alumina supply agreement with Cabot Corporation we are obligated to pay certain
fixed, capital and variable costs through December of 2006. This agreement has
an initial five year term, but we can choose to renew the agreement for another
five year term, which would expire in December 2011. If we do not renew the
agreement, we will become subject to certain terms and conditions and the
payment of certain costs. Unconditional purchase obligations include $24.6
million of contractual commitments based upon our anticipated renewal of the
agreement through December 2011.
Unconditional purchase obligations also includes $0.6 million related to a
purchase agreement entered into with a supplier in July 2002 for certain
materials in which we are obligated to purchase, subject to the supplier's
ability to deliver, certain minimum quantities based upon certain forecasted
requirements over a one-year period. We currently anticipate meeting minimum
forecasted purchase volume requirements.
We also have a long-term agreement with a supplier to purchase materials
for use in one of our product lines that is not currently in commercial
production. As of December 31, 2002, we are obligated to purchase, subject to
the supplier's ability to deliver, $3.2 million of materials over the remaining
term of the agreement, which expires in June, 2005. There exists the possibility
that we will not require the entire amount of material provided for under the
agreement, but we still would be obligated to pay for it. We have not recorded a
liability for this possible loss as we plan to and are evaluating the use of the
production capabilities of this supplier in conjunction with this product line
strategy. We also are required to reimburse the supplier for all approved
research and development costs related to the materials. The supplier will repay
these research and development reimbursements if our material purchases from
them reach certain levels.
14
In November 2002, we entered into a purchase agreement for certain
materials with a supplier, and we are obligated to purchase $0.2 million over
the life of the contract. We also expect to purchase $0.5 million of capital
assets to be placed in service at this supplier.
OTHER LONG-TERM OBLIGATIONS
We have an agreement with Davies Imperial Coatings, Inc. ("Davies")
pursuant to which Davies will perform certain agreed-upon dispersion services.
We have agreed to purchase minimum amounts of services per year and to invest
approximately $0.2 million per year in capital improvements or other
expenditures to maintain capacity at the Davies dispersion facility. The initial
term of the agreement expires in October 2004, with automatic one-year renewals,
and contains a 90-day cancellation clause executable by either party. We are
obligated to make a termination payment if the agreement is not renewed.
On July 10, 2001 we entered into a $75.0 million unsecured revolving credit
and term facility with a group of commercial banks. Under this agreement, which
terminates July 10, 2004, we are obligated to pay an administrative fee and a
non-use fee. No amounts are currently outstanding under this agreement and we
are currently in compliance with the covenants.
On September 25, 2002 we entered into a licensing agreement for a product
line under development. Under this agreement we are required to pay an annual
non-refundable minimum annual licensing fee. In addition, we have committed to
rent or purchase equipment to develop and commercialize the licensed product.
This agreement can be unilaterally terminated at any time, provided that certain
terms and conditions are met.
FACTORS AFFECTING FUTURE OPERATING RESULTS
RISKS RELATING TO OUR BUSINESS
WE HAVE A NARROW PRODUCT RANGE AND OUR PRODUCTS MAY BECOME OBSOLETE, OR
TECHNOLOGICAL CHANGES MAY REDUCE OR LIMIT INCREASES IN CMP CONSUMPTION
Our business is substantially dependent on a single class of products, CMP
slurries, which historically has accounted for almost all of our revenue. Our
business would suffer if these products became obsolete or if consumption of
these products decreased. Our success depends on our ability to keep pace with
technological changes and advances in the semiconductor industry and to adapt
and improve our products in response to evolving customer needs and industry
trends. Since its inception, the semiconductor industry has experienced rapid
technological changes and advances in the design, manufacture, performance and
application of IC devices and these changes and advances are expected to
continue in the future. One or more developments in the semiconductor or related
industries may render our products obsolete or less important to the IC device
manufacturing process.
A SIGNIFICANT AMOUNT OF OUR BUSINESS COMES FROM A LIMITED NUMBER OF LARGE
CUSTOMERS AND OUR REVENUE AND PROFITS COULD DECREASE SIGNIFICANTLY IF WE LOST
ONE OR MORE OF THEM AS CUSTOMERS
Our customer base is concentrated among a limited number of large
customers. One or more of these principal customers may stop buying CMP slurries
from us or may substantially reduce the quantity of CMP slurries they purchase
from us. Any cancellation, deferral or significant reduction in CMP slurries
sold to these principal customers or a significant number of smaller customers
could seriously harm our business, financial condition and results of
operations. Our five largest customers, of which two are distributors, accounted
for approximately 59% and 57% of our revenue for the three months ended December
31, 2002 and 2001, respectively.
15
DEMAND FOR OUR PRODUCTS AND OUR BUSINESS MAY BE ADVERSELY AFFECTED BY A FURTHER
DECLINE IN WORLDWIDE ECONOMIC AND INDUSTRY CONDITIONS
Our business is affected by current economic and industry conditions and it
is extremely difficult to predict sales of our products given uncertainties in
these factors. During fiscal 2001 and the first and second fiscal quarters of
2002 the global economic slowdown and weakening in demand for electronic
systems, coupled with higher than normal chip inventories, affected our
quarterly revenue trends. Although sales improved in the second half of fiscal
2002, we did not maintain this level of revenue into the first quarter of fiscal
2003 as weakness in end market demand continued. We remain cautious regarding
the health of the global economy and semiconductor industry, and further
declines or lack of improvement in current economic and industry conditions
could continue to adversely affect our business.
ANY PROBLEM OR INTERRUPTION IN OUR SUPPLY FROM SUPPLIERS OF OUR MOST IMPORTANT
RAW MATERIALS, INCLUDING FUMED METAL OXIDES, COULD DELAY OUR SLURRY PRODUCTION
AND ADVERSELY AFFECT OUR SALES
Fumed metal oxides, both fumed silica and fumed alumina, are significant
raw materials we use in many of our CMP slurries. Our business would suffer from
any problem or interruption in our supply of fumed metal oxides or other key raw
materials. We entered into a fumed metal oxide agreement with Cabot Corporation,
which became effective upon completion of our initial public offering in April,
2000. In December, 2001 we entered into a fumed alumina supply agreement with
Cabot Corporation and an amendment to the fumed metal oxide agreement with
respect to fumed alumina. Under these agreements, Cabot Corporation continues to
be our primary supplier of certain fumed metal oxides for our slurry products
produced as of the date of the initial public offering with respect to fumed
silica and as of the effective date of the new fumed alumina supply agreement
with respect to certain amounts of fumed alumina. Under the fumed alumina supply
agreement, Cabot Corporation expanded its capacity for the manufacture of fumed
alumina to which we have first right to all capacity from the expansion and,
under the amended fumed metal oxide agreement, we now have first right, subject
to certain terms and conditions, to the fumed alumina capacity from that
facility. We face the risk of significant increases in the price of fumed metal
oxides under these agreements if Cabot Corporation's cost of production
increases. It may be difficult to secure alternative sources of fumed metal
oxides in the event Cabot Corporation or another supplier is unable to supply us
with sufficient quantities of fumed metal oxides which meet the quality required
by our customers' supply needs and technical specifications, or encounters
supply problems, including but not limited to any related to quality,
functionality of equipment, natural disasters, work stoppages or raw material
availability. In addition, contractual amendments to the existing agreements
with, or non-performance by, Cabot Corporation or another supplier, may
adversely affect us as well.
In addition, if we change the supplier or type of key raw materials such as
fumed metal oxides we use to make our existing CMP slurries or are required to
purchase them from a different manufacturer or manufacturing facility, whether
Cabot Corporation or another party, in certain circumstances our customers are
forced to requalify our CMP slurries for their manufacturing processes and
products. The requalification process takes a significant amount of time to
complete, possibly interrupting or reducing our sales of CMP slurries to these
customers.
We have also specifically engineered our slurry chemistries with key raw
materials such as fumed metal oxides. A change in the fumed metal oxides or
other key raw materials we use to make our slurry products could require us to
modify our products. This modification may involve a significant amount of time
and cost to complete and could require our customers to requalify our products,
and therefore could have an adverse effect on our business and sales.
16
OUR BUSINESS COULD BE SERIOUSLY HARMED IF OUR EXISTING OR FUTURE COMPETITORS
DEVELOP SUPERIOR SLURRY PRODUCTS, OFFER BETTER PRICING TERMS OR SERVICE, OBTAIN
CERTAIN INTELLECTUAL PROPERTY RIGHTS OR IF ANY OF OUR MAJOR CUSTOMERS DEVELOP
IN-HOUSE SLURRY MANUFACTURING CAPABILITY
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.
Competition has increased from other existing providers of CMP slurries and
opportunities exist for other companies with sufficient financial or
technological resources to emerge as potential competitors by developing their
own CMP slurry products. Some of our major customers currently manufacture
slurries in-house and others have the financial and technological capability to
do so. The existence or threat of increased competition and in-house production
could limit or reduce the prices we are able to charge for our slurry products.
In addition, our competitors may have or obtain intellectual property rights
which may restrict our ability to market our existing products and/or to
innovate and develop new products.
BECAUSE WE HAVE LIMITED EXPERIENCE IN MANUFACTURING AND SELLING CMP POLISHING
PADS, EXPANSION OF OUR BUSINESS INTO THIS AREA MAY NOT BE SUCCESSFUL
An element of our strategy is to leverage our current customer
relationships and technological expertise to expand our business into new
product areas and applications, including manufacturing CMP polishing pads. We
have had limited experience in developing and marketing these products, which
involve technologies and production processes that are relatively new to us. We,
the suppliers of the raw materials that we use to develop our polishing pads, or
the provider of pads for whom we act as distributor, may not be able to solve
any technological or production problems that we or they may encounter. In
addition, if we, our suppliers or pad provider are unable to keep pace with
technological or other developments in the design and production of polishing
pads, we will probably not be competitive in the polishing pad market. In
addition, our competitors may have or obtain intellectual property rights which
may restrict our ability to market our existing products and/or to innovate and
develop new products. For these reasons, the expansion of our business into CMP
polishing pads may not be successful.
BECAUSE WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY, OUR FAILURE TO ADEQUATELY
PROTECT OR OBTAIN IT COULD SERIOUSLY HARM OUR BUSINESS
Protection of intellectual property is particularly important in our
industry because CMP slurry and pad manufacturers develop complex and technical
formulas for CMP products which are proprietary in nature and differentiate
their products from those of competitors. Our intellectual property is important
to our success and ability to compete. We attempt to protect our intellectual
property rights through a combination of patent, trademark, copyright and trade
secret laws, as well as employee and third-party nondisclosure and assignment
agreements. Our failure to obtain or maintain adequate protection of our
intellectual property rights for any reason could seriously harm our business.
Policing the unauthorized use of our intellectual property is difficult,
and the steps we have taken may not detect or prevent the misappropriation or
unauthorized use of our technologies. In addition, other parties may
independently develop or otherwise acquire the same or substantially equivalent
technologies to ours.
WE ARE SUBJECT TO SOME RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS
We currently have operations and a large customer base outside the United
States. For fiscal 2002, approximately 66% of our revenue was generated by sales
to customers outside the United States. For the three months ended December 31,
2002, approximately 65% of our revenue was generated by sales to customers
outside the United States. We encounter risks in doing business in foreign
countries. These risks include, but are not limited to, adverse changes in
economic and political conditions, as well as the difficulty in enforceability
of business and customer contracts and agreements, including protection of
intellectual property rights. We have announced our intention to sell directly
to customers in Europe, Singapore and Malaysia beginning in
17
June, 2003. We currently service these customers through Metron, a third party
distributor. Selling directly may increase our risk of conducting business in
foreign countries.
OUR ABILITY TO RAISE CAPITAL IN THE FUTURE MAY BE LIMITED AND THIS MAY LIMIT OUR
ABILITY TO EXPAND OUR BUSINESS AND IMPROVE OUR TECHNOLOGY
We plan to expand our business and continue to improve our technology. This
may require funds in excess of those generated from operating activities and
from those available under existing credit facilities. Therefore, we may be
required to raise additional funds in the future through public or private
equity or debt financing, strategic relationships or other arrangements.
Financing may not be available on acceptable terms, or at all, and our failure
to raise capital when needed could negatively impact our financial condition or
results of operations. Additional equity financing may be dilutive to the
holders of our common stock and additional debt financing, if available, may
involve restrictive covenants.
RISKS RELATING TO THE MARKET FOR OUR COMMON STOCK
THE MARKET PRICE MAY FLUCTUATE SIGNIFICANTLY AND RAPIDLY
The market price of our common stock has and could continue to fluctuate
significantly as a result of factors such as: economic and stock market
conditions generally and specifically as they may impact participants in the
semiconductor industry; changes in financial estimates and recommendations by
securities analysts following our stock; earnings and other announcements by,
and changes in market evaluations of, us or participants in the semiconductor
industry; changes in business or regulatory conditions affecting us or
participants in the semiconductor industry; announcements or implementation by
us or our competitors of technological innovations or new products; and trading
volume of our common stock.
The securities of many companies have experienced extreme price and volume
fluctuations in recent years, often unrelated to the companies' operating
performance. Specifically, market prices for securities of technology related
companies have frequently reached elevated levels, often following their initial
public offerings. These levels may not be sustainable and may not bear any
relationship to these companies' operating performances. In the past, following
periods of volatility in the market price of a company's securities,
stockholders have often instituted securities class action litigation against a
company. If we were involved in a class action suit, it could divert the
attention of senior management, and, if adversely determined, have a negative
impact on our business, results of operations and financial condition.
ANTI-TAKEOVER PROVISIONS UNDER OUR CERTIFICATE OF INCORPORATION AND BYLAWS, OUR
RIGHTS PLAN AND DELAWARE GENERAL CORPORATION LAW MAY ADVERSELY AFFECT THE PRICE
OF OUR COMMON STOCK, DISCOURAGE THIRD PARTIES FROM MAKING A BID FOR OUR COMPANY
OR REDUCE ANY PREMIUMS PAID TO OUR STOCKHOLDERS FOR THEIR COMMON STOCK
Our certificate of incorporation, our bylaws, our rights plan and various
provisions of the Delaware General Corporation Law may make it more difficult to
effect a change in control of our company. Our certificate of incorporation, our
by-laws, our rights plan and the various provisions of Delaware General
Corporation Law may adversely affect the price of our common stock, discourage
third parties from making a bid for our company or reduce any premiums paid to
our stockholders for their common stock. For example, our amended certificate of
incorporation authorizes our board of directors to issue up to 20 million shares
of blank check preferred stock and to attach special rights and preferences to
this preferred stock. The issuance of this preferred stock may make it more
difficult for a third party to acquire control of us. Also our amended
certificate of incorporation provides for the division of our board of directors
into three classes as nearly equal in size as possible with staggered three-year
terms. 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.
18
We have adopted change-in-control arrangements covering our executive
officers and other key employees. These arrangements provide for a cash
severance payment, continued medical benefits and other ancillary payments and
benefits upon termination of a covered employee's employment following a change
in control.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT
We conduct business operations outside of the United States through our
foreign operations. Our foreign operations maintain their accounting records in
their local currencies. Consequently, period to period comparability of results
of operations is affected by fluctuations in exchange rates. The primary
currencies to which we have exposure are the Japanese Yen and, to a lesser
extent, the British Pound and the Euro. From time to time we enter into forward
contracts in an effort to manage foreign currency exchange exposure. However, we
may be unable to hedge these exposures completely. Approximately 19% of our
revenue is transacted in currencies other than the U.S. dollar. We do not
currently enter into forward exchange contracts for speculative or trading
purposes.
MARKET RISK AND SENSITIVITY ANALYSIS FOREIGN EXCHANGE RATE RISK
We have performed a sensitivity analysis assuming a hypothetical 10%
adverse movement in foreign exchange rates. As of December 31, 2002, the
analysis demonstrated that such market movements would not have a material
adverse effect on our financial position, results of operations or cash flows
over a one year period. Actual gains and losses in the future may differ
materially from this analysis based on changes in the timing and amount of
foreign currency rate movements and our actual exposures. We believe that our
exposure to foreign currency exchange rate risk at December 31, 2002 was not
material.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days of the filing of this report, the Company's Chief Executive
Officer and Acting Principal Financial Officer have conducted an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14 and 15d-14. Based on that
evaluation, our Chief Executive Officer and Acting Principal Financial Officer
concluded that our disclosure controls and procedures are effective to make
known to them in a timely fashion material information related to the Company
required to be filed in this report. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to the date of their evaluation.
While we believe the present design of our disclosure controls and
procedures is effective to make known to our senior management in a timely
fashion all material information concerning our business, we will continue to
improve the design and effectiveness of our disclosure controls and procedures
to the extent necessary in the future to provide our senior management with
timely access to such material information, and to correct any deficiencies that
we may discover in the future.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings.
19
ITEM 5. OTHER INFORMATION
Pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as
added by Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for
disclosing to investors the non-audit services approved by our Audit Committee
to be performed by PricewaterhouseCoopers LLP, our external auditor. Non-audit
services are defined in the law as services other than those provided in
connection with an audit or a review of the financial statements of the Company.
During the quarter covered by this filing our Audit Committee approved the
following non-audit services performed by PricewaterhouseCoopers LLP: (1) tax
compliance consultations; (2) tax compliance and advice related to our foreign
operations; and (3) consultations with respect to our Equity Incentive Plans.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibit numbers in the following list correspond to the number
assigned to such exhibits in the Exhibit Table of Item 601 of Regulation S-K:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.22 Amendment to Cabot Microelectronics Corporation 401(k) Plan*
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
* Management contract, or compensatory plan or arrangement.
(b) Reports on Form 8-K
In a report dated October 24, 2002, Cabot Microelectronics
reported under Item 5. "Other Events" and Item 7. "Financial
Statements and Exhibits" that on October 24, 2002 Cabot
Microelectronics reported financial results for its fourth fiscal
quarter ended September 30, 2002.
In a report dated November 15, 2002, Cabot Microelectronics
reported under Item 5. "Other Events" and Item 7. "Financial
Statements and Exhibits" that on November 13, 2002 Cabot
Microelectronics announced that it intends to now begin posting
notice of transactions in the company's stock by executive
officers and directors on the company's website by the end of the
business day following the filing of Form 4's, Statement of
Changes in Beneficial Ownership of Securities, for such
transactions with the Securities and Exchange Commission.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CABOT MICROELECTRONICS CORPORATION
Date: February 12, 2003 /s/ MATTHEW NEVILLE
-------------------------------------
Matthew Neville
Chairman of the Board and Chief Executive Officer
[Principal Executive Officer]
Date: February 12, 2003 /s/ DANIEL S. WOBBY
------------------------------------
Daniel S. Wobby
Corporate Controller
[Principal Accounting Officer and Acting
Principal Financial Officer]
21
CERTIFICATIONS
I, Matthew Neville, Chief Executive Officer of Cabot Microelectronics
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cabot
Microelectronics Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors;
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 12, 2003 /s/ MATTHEW NEVILLE
--------------------------------
Matthew Neville
Chief Executive Officer
22
I, Daniel S. Wobby, Acting Principal Financial Officer of Cabot Microelectronics
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cabot
Microelectronics Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors;
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 12, 2003 /s/ DANIEL S. WOBBY
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Daniel S. Wobby
Acting Principal Financial Officer
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