-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D8xM6HTnGovoRZ79d8IRmkZ/wXfRPrgPaeZkIZ39slFv+hxH4/vetM5dl1ALhkn6 o4sVnTyzk5OwYfzmoDQxbQ== 0000893220-00-001440.txt : 20001228 0000893220-00-001440.hdr.sgml : 20001228 ACCESSION NUMBER: 0000893220-00-001440 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001227 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KULICKE & SOFFA INDUSTRIES INC CENTRAL INDEX KEY: 0000056978 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 231498399 STATE OF INCORPORATION: PA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-00121 FILM NUMBER: 796228 BUSINESS ADDRESS: STREET 1: 2101 BLAIR MILL RD CITY: WILLOW GROVE STATE: PA ZIP: 19090 BUSINESS PHONE: 2157846000 MAIL ADDRESS: STREET 1: 2101 BLAIR MILL RD CITY: WILLOW GROVE STATE: PA ZIP: 19090 10-K405 1 w43640e10-k405.txt KULICKE AND SOFFA INDUSTRIES, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the fiscal year ended SEPTEMBER 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission file number 0-121 KULICKE AND SOFFA INDUSTRIES, INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-1498399 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2101 BLAIR MILL ROAD, WILLOW GROVE, PA 19090 (Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (215) 784-6000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, WITHOUT PAR VALUE (Title of Class) 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the Registrant's common stock (its only voting stock) held by non-affiliates of the Registrant as of DECEMBER 1, 2000 was approximately $442,379,000. (Reference is made to the final paragraph of Part II, Item 5 herein for a statement of assumptions upon which this calculation is based). As of DECEMBER 1, 2000, there were 48,763,663 shares of the Registrant's common stock, without par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the 2001 Annual Shareholders' Meeting to be filed prior to January 8, 2001 are incorporated by reference into Part III, Items 10, 11, 12 and 13 of this Report. Such Proxy Statement, except for the parts therein which have been specifically incorporated by reference, shall not be deemed "filed" for the purposes of this Report on Form 10-K. 2 [THIS PAGE INTENTIONALLY LEFT BLANK] 3 KULICKE AND SOFFA INDUSTRIES, INC. 2000 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page PART I Item 1. Business 2 Item 2. Properties 10 Item 3. Legal Proceedings 11 Item 4. Submission of Matters to a Vote of Security Holders 11 PART II Item 5. Market for the Registrants' Common Equity and Related Stockholder Matters 11 Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30 Item 8. Financial Statements and Supplementary Data 30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 85 PART III Item 10. Directors and Executive Officers of the Registrant 85 Item 11. Executive Compensation 85 Item 12. Security Ownership of Certain Beneficial Owners and Management 85 Item 13. Certain Relationships and Related Transactions 85 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 86 1 4 PART I In addition to historical information, this report contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934, as amended (the "Exchange Act"), and are subject to the Safe Harbor provisions created by statute. Such forward-looking statements include, but are not limited to, statements that relate to our future revenue, product development, demand forecasts, competitiveness, gross margins, operating expense and benefits expected as a result of: - The projected growth rates in the overall semiconductor industry, the semiconductor assembly equipment market and the market for semiconductor packaging materials; - the anticipated development, production and licensing of our advanced packaging technology; - the successful integration of recent acquisitions into our company's operating structure and expected growth rates for these companies; - the projected continuing demand for wire bonders; and - the anticipated growing importance of the flip chip assembly process in high-end market segments. Generally words such as "may," "will," "should," "could," "anticipate," "expect," "intend," "estimate," "plan," "continue," and "believe," or the negative of or other variation on these and other similar expressions identify forward-looking statements. These forward-looking statements are made only as of the date of this report. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements are based on current expectations and involve risks and uncertainties and our future results could differ significantly from those expressed or implied by our forward-looking statements. These risks and uncertainties include, without limitation those described under Item 1. Business and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 1. BUSINESS. We design, manufacture and market capital equipment and packaging materials for sale to companies that manufacture and assemble semiconductor devices. We also service, maintain, repair and upgrade assembly equipment. Today, we are the world's largest supplier of semiconductor assembly equipment, according to VLSI Research, Inc. Our business is currently divided into three segments: equipment, packaging materials and advanced packaging technology. In November 2000 we acquired 100% of the stock of Cerprobe Corporation (referred to as Cerprobe) and in December 2000 we acquired 100% of the stock of Probe Technology Corporation (referred to as Probe Tech). Both Cerprobe and Probe Tech design and manufacture semiconductor test interconnect solutions. The acquisitions are a step forward in the Company's strategy to offer the most complete, capable and cost-effective interconnect solutions. These two companies will be merged together to create a test division and will be disclosed as a separate business segment for financial reporting purposes. Historically, the demand for semiconductors and our semiconductor assembly equipment has been volatile from period to period. An upturn in the semiconductor industry that began in fiscal 1999 contributed to record revenues of $899.3 million, for fiscal year 2000. This represents an increase of 125% over revenues of $398.9 million for fiscal year 1999. However, in early August and again in early November, we announced that customer order deferrals and push-outs would impact financial performance in the fourth quarter of fiscal 2000 and the first half of fiscal 2001. Kulicke and Soffa Industries, Inc. was incorporated in Pennsylvania in 1956. Our principal offices are located at 2101 Blair Mill Road, Willow Grove, Pennsylvania 19090 and our telephone number is (215) 784-6000. PRODUCTS AND SERVICES We offer a broad range of semiconductor assembly equipment, packaging materials, advanced packaging technologies and complementary services and spare parts used in the semiconductor assembly process. Set forth below is a table listing the approximate percentage of our net sales by principal product for our fiscal years ended September 30, 1998, 1999 and 2000. 2 5
FISCAL YEAR ENDED SEPTEMBER 30, ----------------------- 1998 1999 2000 ---- ---- ---- Wire bonders 58% 55% 69% Additional assembly equipment 7 7 4 Services and spare parts 8 6 4 Packaging materials 27 31 21 Advanced packaging technologies -- 1 2 ---- ---- ---- 100% 100% 100% ==== ==== ====
See Note 11 to our Consolidated Financial Statements for financial results by business segment. WIRE BONDERS Our principal product line is our family of wire bonders, which are used to connect extremely fine wires, typically made of gold or aluminum, between the bond pads on the die and the leads on the integrated circuit (IC) package to which the die has been bonded. We offer both ball and wedge bonders in automatic and manual configurations. Ball bonders typically are used for leadframe-based and laminate-based packages, while wedge bonders typically are used for ceramic packages. We believe that our wire bonders offer competitive advantages based on high productivity and superior process control, enabling fine pitch bonding and long, low wire loops, which are needed to assemble advanced IC packages. The selling prices for our automatic wire bonders range from $95,000 to over $200,000 and from $15,000 to $35,000 for manual wire bonders, in each case depending on system configuration and purchase volume. Our current generation of wire bonders, the 8000 family, required us to develop new software and many subassemblies that were not part of our prior series of wire bonders. The first products in the 8000 family were the Model 8020 ball bonder and Model 8060 wedge bonder. In the third quarter of fiscal 1999, we introduced the Model 8028 ball bonder, which accounted for the majority of ball bonders we sold during fiscal 2000. In the third quarter of fiscal 2000 we introduced two enhanced models - the 8028-S and 8028-PPS. The 8028-S offers approximately 10% more productivity, while the 8028-PPS combines productivity enhancements with robust fine pitch capability. In the first quarter of fiscal 2000, we introduced the 8098, a large area ball bonder designed for processing large panels used for hybrids, chip-on-board and multi-chip modules. The 8098 also supports wafer level bumping for flip chip and other area array applications. We continue to market the Model 8060 wedge bonder, the Model 8090, a large area wedge bonder and the 4500 digital series of manual wire bonders. As part of our strategy to reduce the manufacturing costs of our wire bonders, we transferred our automatic ball bonder manufacturing from Willow Grove, Pennsylvania to Singapore in fiscal 2000. ADDITIONAL SEMICONDUCTOR ASSEMBLY EQUIPMENT In addition to wire bonders, we produce and distribute other types of semiconductor assembly equipment, including wafer dicing saws, die bonders, solder sphere attachment systems, flip chip assembly systems and factory automation and integration systems. Dicing Saws. Dicing saws use diamond-embedded saw blades to cut silicon wafers into individual semiconductor die. We produce and market the Model 7500, an automatic dicing saw, and the Model 7700 (introduced in fiscal 2000) twin spindle dicing saw which is capable of dicing 300 mm wafers. These dicing saws range in price from $150,000 to more than $400,000. Die Bonders. Die bonders are used to attach a semiconductor die to a leadframe or other package before wire bonding. We have a 5 year distribution agreement with DATACON Semiconductor Equipment GmbH, an Austrian company, principally to market their multi-chip module and flip chip die bonder product line worldwide, excluding Europe. The die bonders range in price from $200,000 to more than $500,000, depending on configuration. We also market the 2200 apm, an extremely accurate multi chip bonder developed by DATACON which range in price from $300,000 to more than $600,000. 3 6 Solder Sphere Attachment Systems. During the fourth quarter of fiscal 2000, we introduced LaserPro, a solder sphere attachment system, which combines the accuracy of the 8000 wire bonder platform with a laser and proprietary ball placement system. LaserPro is used primarily for high volume, ultra fine pitch plastic ball grid array and chip scale package production. It ranges in price from $300,000 to $350,000 including ball size kits. Flip Chip Assembly Systems. Flip chip is an alternative assembly technique in which the die is inverted and attached to the package or board using conductive bumps, thereby eliminating the need for conventional die or wire bonding. The Model 2200 apm, manufactured by DATACON Semiconductor Equipment GmbH and distributed by us, can be configured to support flip chip applications. Factory Automation and Integration Systems. Factory systems include products and services designed to automate data collection and material flow between process steps in semiconductor assembly. We are successfully marketing the Knet, a PC-based information management system, as well as several software products for factory simulation and lot management. We also offer different configurations of some of our products for non-semiconductor applications. For instance, our Model 7100 and Model 980 saws can be configured for cutting and grinding hard and brittle materials, such as ceramic, glass and ferrite, that are used in the fabrication of chip capacitors, disk drive heads and optoelectronic materials and range in price from $70,000 to more than $150,000. PACKAGING MATERIALS We offer a range of packaging materials to semiconductor device assemblers which we sell under the brand names "American Fine Wire," "Micro-Swiss" and "Semitec." We have integrated these operating units with our equipment groups, and intend to expand this business in an effort to increase our revenues from materials used in the assembly of ICs. We also sell our packaging materials for use with competitors' assembly equipment. Our principal packaging materials are: Bonding Wire. American Fine Wire is a manufacturer of very fine (typically 0.001 inches in diameter) gold, aluminum and copper wire used in the wire bonding process. American Fine Wire produces wire to a wide range of specifications, which can satisfy most wire bonding applications. Expendable Tools. The Micro-Swiss family of expendable tools includes capillaries, wedges, die collets, saw blades and microspheres. Capillaries and wedges are used to feed out, attach and cut the wires used in wire bonding. Die collets are used to pick up and place die into packages. Micro-Swiss brand hubless saw blades are used to cut hard and brittle materials. Semitec manufactures hub blades that are used to cut silicon wafers into semiconductor die. In the fourth quarter of fiscal 2000, we decided not to devote additional capital to Advanced Polymer Solutions, a joint venture with Polyset Company, Inc. which was established to develop, manufacture and market advanced polymer materials for semiconductor and microelectronic packaging end users. This decision resulted in a write-off of $3.9 million representing our remaining investment in this venture. We have no further obligations or commitments to the joint venture. SERVICES AND SPARE PARTS We believe that our knowledge and experience have positioned us to deliver innovative, customer-specific services that reduce the cost of owning our equipment. Historically, our offerings in this area were limited to spare parts, customer training and extended warranty contracts. In response to customer trends in outsourcing packaging requirements, we are focusing on providing repair and maintenance services, a variety of equipment upgrades, machine and component rebuild activities and expanded customer training through a Customer Solutions Group. These services are generally priced on a time and materials basis. The service and maintenance arrangements are typically subject to bi-annual or multi-year contracts. 4 7 ADVANCED PACKAGING TECHNOLOGIES In February 1996, we entered into a joint venture agreement with Delco Electronics Corporation to license flip chip technology and to provide wafer bumping services on a contract basis through Flip Chip Technologies, LLC. Flip Chip Technologies intends to focus primarily on licensing its flip chip technology to customers. As of September 30, 2000, Flip Chip Technologies had sold three bumping licenses, and we expect it to sell additional licenses in fiscal 2001. In addition, Flip Chip Technologies is currently providing contract bump services to more than 20 customers, and continues to ramp capacity at its Phoenix facility. Flip Chip Technologies also developed and markets a wafer level chip scale package, named the Ultra CSP(TM), aimed at the chip scale packaging market. A chip scale device has a surface area no larger than 1.2 times the area of the die. As of September 30, 2000, we owned 76.9% of Flip Chip Technologies. Under various operating agreements, we manage Flip Chip Technologies jointly with Delco and have agreed not to compete with the joint venture. Flip Chip Technologies has also entered into various agreements with Delco that are customary in similar joint venture arrangements. We continuously evaluate investments in advanced packaging technologies. To that end, in fiscal 1999, we acquired the X-LAM technology of MicroModule Systems(TM), a Cupertino, California company, to enable production of high density substrates. We lease a 35,000 square foot manufacturing/research and development facility in Milpitas, California and are currently shipping UltraVia(TM) high density substrate samples to customers for qualification. To date, our Advanced Packaging Technology business has experienced losses. We expect these losses to continue as we continue to develop our X-LAM technology, however, we expect the Flip Chip Technologies operation to be profitable in fiscal 2001. INVESTMENT IN TEST PRODUCTS In November 2000 we acquired 100% of the stock of Cerprobe for approximately $225.0 million in cash, including transaction costs, and in December 2000 we acquired 100% of the stock of Probe Tech for approximately $65.0 million in cash, including transactions costs. Both Cerprobe and Probe Tech design and manufacture semiconductor test interconnect solutions. The acquisitions are a step forward in the Company's strategy to offer the most complete, capable and cost-effective interconnect solutions. These two companies will be merged together to create a test division and will be disclosed as a separate business segment for financial reporting purposes. CUSTOMERS Our major customers include large semiconductor manufacturers and subcontract assemblers worldwide. Some of these major customers are: Advanced Micro Devices Advanced Semiconductor Engineering Amkor Technologies ChipPAC Fujitsu IBM Infineon Technologies Intel Lucent Technologies Micron Technology Motorola National Semiconductor Orient Semiconductor Electronics Philips Electronics ST Microelectronics Siliconware Precision Texas Instruments Sales to a relatively small number of customers have accounted for a significant percentage of our net sales. In fiscal 2000, sales to Advanced Semiconductor Engineering accounted for 15.3% of our total sales and sales to Amkor Technologies accounted for 10.1% of our total sales. In fiscal 1999, no customer accounted for more than 10% of net sales, but in fiscal 1998 sales to Intel accounted for 17.6% of our net sales. 5 8 We believe that developing long-term relationships with our customers is critical to our success. By establishing these relationships with semiconductor manufacturers and subcontract assemblers, we gain insight into our customers' future IC packaging strategies. This information assists us in our efforts to develop material, equipment and process solutions that address our customers' future assembly requirements. INTERNATIONAL OPERATIONS We sell our products to semiconductor device manufacturers and contract manufacturers, which are primarily located in or have operations in the Asia/Pacific region. Approximately 91% of our fiscal 2000 net sales, 83% of our fiscal 1999 net sales and 80% of our fiscal 1998 net sales were for delivery to customer locations outside of the United States. The majority of these foreign sales were destined to customer locations in the Asia/Pacific region, including Taiwan, Korea, Malaysia, the Philippines, Singapore, Hong Kong and Japan. We expect sales outside of the United States to continue to represent a substantial portion of our future revenues. In addition, we maintain manufacturing operations in countries other than the United States, including operations located in Israel, Singapore and Switzerland. Risks associated with our international operations include risks of foreign currency and foreign financial market fluctuations, international exchange restrictions, changing political conditions and monetary policies of foreign governments, war, civil disturbances, expropriation, or other events which may limit or disrupt markets. SALES AND CUSTOMER SUPPORT We operate a single sales management team to coordinate activities and improve customer support. Our direct sales force, consisting of approximately 70 individuals at September 30, 2000, is responsible for the sale of all product lines, including those of our equipment, packaging materials and advanced packaging technology businesses, to customers in the United States and the Asia/Pacific region, including Japan. Lower volume product lines, as well as all equipment sales to customers in Europe, are sold through a network of manufacturers' representatives. We believe that providing comprehensive worldwide sales, service, training and support are important competitive factors in the semiconductor equipment industry, and we have combined these functions into a customer operations group. In order to support our U.S. and foreign customers whose semiconductor assembly operations are located in the Asia/Pacific region, we maintain a significant presence in the region, with sales facilities in Hong Kong, Japan, Korea, Taiwan, Malaysia, the Philippines and Singapore, a technology center in Japan and application labs in Singapore. We also maintain customer resource centers in Taiwan, the Philippines and Singapore. We support our assembly equipment customers worldwide with over 220 customer service and support personnel as of September 30, 2000, located in the United States, Hong Kong, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand. Our local presence in the Asia/Pacific countries enables us to provide more timely customer service and support by positioning our service representatives and spare parts near customer facilities, and affords customers the ability to place orders locally and to deal with service and support personnel who speak the customer's language and are familiar with local country practices. BACKLOG At September 30, 2000, our backlog of orders approximated $143.0 million, compared to approximately $93.0 million at September 30, 1999. Our backlog consists of product orders for which we have received confirmed purchase orders, and which are scheduled for shipment within 12 months. Virtually all orders are subject to cancellation, deferral or rescheduling by the customer with limited or no penalties. Because of the possibility of customer changes in delivery schedules or cancellations and potential delays in product shipments, our backlog as of any particular date may not be indicative of revenues for any succeeding quarterly period. MANUFACTURING Equipment. Our assembly equipment manufacturing activities consist primarily of integrating components and subassemblies to create finished systems configured to customer specifications. During fiscal 2000, we performed system design, assembly and testing in-house at our Willow Grove, Pennsylvania, Singapore and Haifa, Israel facilities, utilizing an outsourcing strategy for the manufacture of many of our major subassemblies. We believe that outsourcing enables us to minimize our fixed costs and capital expenditures and allows us to focus on product differentiation through system 6 9 design and quality control. Our just-in-time inventory management strategy has reduced our manufacturing cycle times and limited our on-hand inventory. We have obtained ISO 9001 certification for our equipment manufacturing facilities in Willow Grove, Pennsylvania, Singapore and Haifa, Israel. Packaging Materials. We manufacture our Micro-Swiss expendable tools at our facility in Yokneam, Israel and our American Fine Wire product line, consisting of gold and aluminum bonding wire, at facilities in Selma, Alabama, Singapore and Thalwil, Switzerland. We plan to add a fourth American Fine Wire facility in Taiwan in fiscal 2001. We manufacture our Semitec hub blades in Santa Clara, California. All three American Fine Wire facilities, as well as the Semitec facility, have received ISO 9002 certification and the Micro-Swiss facility has received ISO 9001 certification. Advanced Packaging Technology. We maintain manufacturing facilities in Phoenix, Arizona for Flip Chip Technologies and in Milpitas, California for our X-LAM technology. RESEARCH AND PRODUCT DEVELOPMENT Because technological change occurs rapidly in the semiconductor industry, we devote substantial resources to our research and development programs to maintain our competitiveness. We employed approximately 370 individuals in research and development at September 30, 2000. We pursue the continuous improvement and enhancement of existing products while simultaneously developing next generation products. For example, while the performance of current generations of wire bonders is being enhanced in accordance with a specific continuous improvement plan, we are simultaneously developing the next generation wire bonders. Much of the next generation equipment we are presently developing is based on modular, interchangeable subsystems, including the 8000 control platform, which is promoting more efficient and cost-effective manufacturing operations, lowering inventory levels, improving field service capabilities and reducing product development cycles, and allowing us to introduce new products more quickly. In fiscal 2000, we introduced two new bonders based on technology developed for earlier models of the 8000 family, the Model 8028-S, an automatic ball bonder that offers increased accuracy and productivity over its predecessor, the Model 8028, and the Model 8028-PPS, which combines productivity enhancements with robust fine pitch capability. Our net expenditures for research and development totaled approximately $50.1 million, $37.2 million and $48.7 million during the fiscal years ended September 30, 2000, 1999 and 1998, respectively. We have received funding from certain customers and government agencies pursuant to contracts or other arrangements for the performance of specified research and development activities. Such amounts are recognized as a reduction of research and development expense when specified activities have been performed. During the fiscal years ended September 30, 2000, 1999 and 1998, such funding totaled approximately $1.1 million, $1.3 million and $1.7 million, respectively. COMPETITION The semiconductor equipment and packaging materials industries are intensely competitive. Significant competitive factors in the semiconductor equipment market include performance, quality, customer support and price. Our major equipment competitors include: - ASM Pacific Technology, Shinkawa, Kaijo and ESEC in wire bonders; - ESEC, Nichiden, ASM Pacific Technology and Alphasem in die bonders; and - Disco Corporation in dicing saws. Competitive factors in the semiconductor packaging materials industry include price, delivery and quality. Our significant packaging materials competitors with respect to expendable tools and blades include: - Gaiser Tool Co. and Small Precision Tools, Inc. in expendable tools; and - Disco Corporation in blades; and in the bonding wire market: - Tanaka Electronic Industries and Sumitomo Metal Mining. 7 10 In each of the markets we serve, we face competition and the threat of competition from established competitors and potential new entrants, some of which may have greater financial, engineering, manufacturing and marketing resources than we have. Some of these competitors are Japanese or Korean companies that have had and may continue to have an advantage over us in supplying products to local customers because many of these customers appear to prefer to purchase from local suppliers, without regard to other considerations. We expect our competitors to improve their current products' performance, and to introduce new products with improved price and performance characteristics. New product introductions by our competitors or by new market entrants could hurt our sales. If a particular semiconductor manufacturer or subcontract assembler selects a competitor's product for a particular assembly operation, we may not be able to sell a product to that manufacturer or assembler for a significant period of time because manufacturers and assemblers sometimes develop lasting relations with suppliers, and products in our industry often go years without requiring replacement. In addition, we may have to lower our prices in response to price cuts by our competitors, which could materially and adversely affect our business, financial condition and operating results. We cannot assure you that we will be able to continue to compete in these or other areas in the future. INTELLECTUAL PROPERTY Where circumstances warrant, we seek to obtain patents on inventions governing new products and processes developed as part of our ongoing research, engineering and manufacturing activities. We currently hold a number of United States patents some of which have foreign counterparts. We believe that the duration of our patents generally exceeds the life cycles of the technologies disclosed and claimed in the patents. Although the patents we hold and may obtain in the future may be of value, we believe that our success will depend primarily on our engineering, manufacturing, marketing and service skills. In addition, we believe that much of our important technology resides in our proprietary software and trade secrets. As long as we rely on trade secrets and unpatented knowledge, including software, to maintain our competitive position, there is no assurance that competitors may not independently develop similar technologies and possibly obtain patents containing claims applicable to our products and processes. The sale of our products covered by such patents could require licenses that may not be available on acceptable terms, or at all. In addition, although we execute non-disclosure and non-competition agreements with certain of our employees, customers, consultants, selected vendors and others, there is no assurance that such secrecy agreements will not be breached. ENVIRONMENTAL MATTERS We are subject to various federal, state, local and foreign laws and regulations governing, among other things, the generation, storage, use, emission, discharge, transportation and disposal of hazardous materials and the health and safety of our employees. In addition, we are subject to environmental laws which may require investigation and cleanup of any contamination at facilities we own or operate or at third party waste disposal sites we use or have used. These laws could impose liability even if we did not know of, or were not responsible for, the contamination. We have in the past and will in the future incur costs to comply with environmental laws. We are not, however, currently aware of any costs or liabilities relating to environmental matters, including any claims or actions under environmental laws or obligations to perform any cleanups at any of our facilities or any third party waste disposal sites, that we expect to have a material adverse effect on our business, financial condition or operating results. It is possible, however, that material environmental costs or liabilities may arise in the future. EMPLOYEES At September 30, 2000, we had 2,805 permanent employees, 34 temporary employees and 513 contract personnel worldwide. Our only employees represented by a labor union are America Fine Wire's employees in Singapore. Generally, we believe our employee relations to be good. Competition in the recruiting of personnel in the semiconductor and semiconductor equipment industry is intense, particularly with respect to software engineering. We believe that our future success will depend in part on our continued ability to hire and retain qualified management, marketing and technical employees. 8 11 EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth certain information regarding the executive officers of the Company.
First Became an Officer Name Age (calendar year) Position - ------------------------- --- --------------- ---------------------------- C. Scott Kulicke 51 1976 Chairman of the Board of Directors and Chief Executive Officer Morton K. Perchick 63 1982 Executive Vice President, Office of the President Alexander A. Oscilowski 41 1999 Senior Vice President, Office of the President David A. Leonhardt 42 1997 Senior Vice President Charles Salmons 45 1992 Senior Vice President Clifford G. Sprague 57 1989 Senior Vice President and Chief Financial Officer Laurence P. Wagner 40 1998 Senior Vice President
C. Scott Kulicke: Chief Executive Officer since 1979 and Chairman of the Board since 1984. Prior to that he held a number of executive positions with us. Mr. Kulicke also serves on the Board of Directors of General Semiconductor, Inc. and Xetel Corporation. Morton K. Perchick: Executive Vice President, Office of the President. He was appointed to our newly created Office of the President in May 2000. Named Executive Vice President in July 1995. He joined us in September 1980 as Director, Quality and Reliability. He became Vice President in 1982 and moved to general management in 1986, when he assumed responsibility for operations. In 1990, he was appointed Senior Vice President/General Manager. Alexander A. Oscilowski: Senior Vice President, Office of the President. He joined us in 1999 as Vice President of Strategic Marketing. In May 2000, he was appointed to the newly created Office of the President. He joined SEMATECH in 1993 as director of Assembly & Packaging and was director of Advanced Technology until January 1999. Previously, he served as semiconductor packaging manager in the semiconductor operations unit for Digital Equipment and was an assembly manager, packaging supervisor and process engineer at Texas Instruments. David A. Leonhardt: Senior Vice President. He was promoted to Senior Vice President and Co-President of our Advanced Bonding Systems Group in November 1999. In March 1998, he became Vice President and General Manager of the Equipment Group, after serving as Vice President of Strategic Marketing since December of 1996. Prior to that, he spent four years as a Director of our Ball Bonder Division and a year as Product Manager for Wedge Bonder Products. Charles Salmons: Senior Vice President, Customer Operations. He was appointed Senior Vice President, Customer Operations in 1999. He joined us in 1978, and has held positions of increasing responsibility throughout the accounting, engineering and manufacturing organization. In 1994 he became Vice President of Operations and was named General Manager, Wire Bonder Operations in 1998. Clifford G. Sprague: Senior Vice President and Chief Financial Officer. He joined us as Vice President and Chief Financial Officer in March 1989. In May 1990 he was promoted to Senior Vice President. Prior to joining us, he served for more than five years as Vice President and Controller of the Oilfield Equipment Group of NL Industries, Inc., an oilfield equipment and service company. Laurence P. Wagner: Senior Vice President: He joined us in July 1998 as Senior Vice President and President of Packaging Materials. In November 1999, he was promoted to Senior Vice President and Co-President of the Advanced Bonding Systems Group. Previously he was with Emcore Corporation, where he was vice president of Emcore Electronic Materials. Prior to 1996, he worked for Shipley Company LLC, a Division of Rohm and Haas Company in a number of progressively responsible positions. 9 12 ITEM 2. PROPERTIES. Our major facilities are described in the table below:
LEASE APPROXIMATE PRODUCTS EXPIRATION FACILITY SIZE FUNCTION MANUFACTURED DATE - --------------------- ------------------ -------------------------------- --------------------- ----------- Willow Grove, 214,000 sq.ft. (1) Corp. headquarters, Wire bonders N/A Pennsylvania manufacturing, technology center, sales and service Phoenix, Arizona 45,000 sq.ft. (2) Technology center, Manufacturing Wafer bumping services April 2006 Milpitas, California 35,000 sq.ft. (2) Technology center Laminate substrates July 2006 Selma, Alabama 25,600 sq.ft. (2) Manufacturing, American Fine Bonding wire October 2017 Wire operations Santa Clara, 13,600 sq.ft. (2) Manufacturing Dicing saw blades October 2003 California Singapore 73,700 sq.ft (2) Manufacturing, Wire bonders September 2002 technology center, assembly systems Singapore 35,100 sq.ft. (2) Manufacturing, American Fine Bonding wire May 2003 Wire operations Haifa, Israel 46,100 sq.ft. (2) Manufacturing, Manual wire bonders, April 2002 technology center, dicing saws and assembly systems automatic multi-process assembly systems Yokneam, Israel 48,400 sq.ft. (1) Manufacturing, Micro- Capillaries, wedges and N/A Swiss operations die collets Yokneam, Israel 12,000 sq.ft. (2) Manufacturing, Micro- Hard material blades April 2003 Swiss operations Tokyo, Japan 10,700 sq.ft. (2) Technology center, N/A (3) sales and service Thalwil, 15,100 sq.ft. (2) Manufacturing, American Fine Bonding wire (3) Switzerland Wire operations Kaohsuing, 28,406 sq.ft. Manufacturing, American Fine Bonding wire August 1, 2010 Taiwan Wire operations and sales and service
(1) Owned. (2) Leased. (3) Cancellable semi-annually upon six months notice. We also rent space for sales and service offices in Horsham, Pennsylvania; Santa Clara, California; Mesa, Arizona; Korea; Taiwan; Malaysia; the Philippines; and Hong Kong. We believe that our facilities generally are in good condition. 10 13 ITEM 3. LEGAL PROCEEDINGS. From time to time, we are a plaintiff or defendant in various cases arising out of our usual and customary business. We cannot assure you of the results of pending or future litigation, but we do not believe that resolution of these matters will materially and adversely affect our business, financial condition or operating results. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our common stock is traded on the Nasdaq National Market under the symbol "KLIC." The following table lists the high and low per share sale prices for our common stock for the periods indicated:
HIGH LOW ---- --- Fiscal 2000: First Quarter $ 22 5/8 $ 11 1/2 Second Quarter 43 21/32 19 19/32 Third Quarter 40 5/16 19 15/16 Fourth Quarter 33 1/8 13 1/8 Fiscal 1999: First Quarter $ 10 15/16 $ 4 11/16 Second Quarter 17 5/8 8 13/16 Third Quarter 14 1/2 9 1/2 Fourth Quarter 14 1/2 9 9/16
On December 1, 2000, there were 620 holders of record of the shares of outstanding common stock. The payment of dividends on our common stock is within the discretion of our board of directors. We do not currently pay cash dividends on our common stock and we do not expect to declare cash dividends on our common stock in the near future. We intend to retain earnings to finance the growth of our business. Our Gold Supply Agreement between American Fine Wire and its subsidiaries and their gold supplier contains certain financial covenants and prohibits American Fine Wire from paying any dividends or making any distributions without the consent of the supplier if, following the payment of the dividend or distribution, the net worth of American Fine Wire is less than $7.0 million. For the purposes of calculating the aggregate market value of the shares of our common stock held by nonaffiliates, as shown on the cover page of this report, we have assumed that all the outstanding shares were held by nonaffiliates except for the shares held by our directors and executive officers. However, this does not necessarily mean that all directors and executive officers of the Company are, in fact, affiliates of the Company, or that there are not other persons who may be deemed to be affiliates of the Company. Further information concerning shareholdings of executive officers, directors and principal shareholders is included in our proxy statement relating to our 2001 Annual Meeting of Shareholders filed or to be filed with the Securities and Exchange Commission. 11 14 ITEM 6. SELECTED FINANCIAL DATA. The following selected consolidated financial data should be read in conjunction with our consolidated financial statements, related notes and other financial information included elsewhere herein.
FISCAL YEARS ENDED SEPTEMBER 30, --------------------------------------------------------------------- 1996(1) 1997 1998 1999 2000 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net sales: Equipment $ 287,234 $ 391,721 $ 302,107 $ 269,854 $ 692,062 Packaging materials 93,942 110,186 108,933 124,450 185,570 Advanced packaging technology -- -- -- 4,613 21,641 --------- --------- --------- --------- --------- Total net sales 381,176 501,907 411,040 398,917 899,273 --------- --------- --------- --------- --------- Cost of goods sold: Equipment 163,844 228,854 191,948 188,958 419,732 Packaging materials 75,270 89,148 82,259 90,326 130,548 Advanced packaging technology -- -- -- 6,098 22,897 --------- --------- --------- --------- --------- Total cost of goods sold 239,114 318,002 274,207 285,382 573,177 --------- --------- --------- --------- --------- Operating expenses: Equipment(3) 102,515 97,143 107,083 92,157 120,244 Packaging materials(3) 14,563 21,029 24,553 23,500 32,876 Advanced packaging technology -- -- -- 5,314 19,096 Corporate(2) 7,566 8,070 9,353 12,296 15,421 --------- --------- --------- --------- --------- Total operating expenses(3) 124,644 126,242 140,989 133,267 187,637 --------- --------- --------- --------- --------- Income (loss) from operations: Equipment 20,875 65,724 3,076 (11,261) 152,086 Packaging materials 4,109 9 2,121 10,624 22,146 Advanced packaging technology -- -- -- (6,799) (20,352) Corporate(2) (7,566) (8,070) (9,353) (12,296) (15,421) --------- --------- --------- --------- --------- Total income (loss) from operations 17,418 57,663 (4,156) (19,732) 138,459 --------- --------- --------- --------- --------- Interest, net (164) 820 5,514 3,547 4,719 Equity in loss of joint ventures(4) (994) (6,701) (8,715) (10,000) (1,221) Other expenses (630) -- -- -- -- --------- --------- --------- --------- --------- Income (loss) before taxes 15,630 51,782 (7,357) (26,185) 141,957 Provision (benefit) for income taxes 3,783 13,463 (1,917) (8,221) 40,149 Minority interest -- -- -- 1,018 1,437 --------- --------- --------- --------- --------- Net income (loss) $ 11,847 $ 38,319 $ (5,440) $ (16,946) $ 103,245 ========= ========= ========= ========= ========= Basic net income (loss) per common share(5) $ 0.31 $ 0.92 $ (0.12) $ (0.36) $ 2.15 ========= ========= ========= ========= ========= Diluted net income (loss) per common share(5) $ 0.30 $ 0.90 $ (0.12) $ (0.36) $ 1.90 ========= ========= ========= ========= ========= Shares used in per common share calculations:(5) Basic 38,750 41,742 46,602 46,846 47,932 Diluted 39,576 42,856 46,602 46,846 56,496
AS OF SEPTEMBER 30, ----------------------------------------------------------- 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments(7) $ 58,422 $115,587 $106,900 $ 39,345 $316,619 Working capital 113,804 190,220 182,181 167,131 462,688 Total assets 249,554 376,819 342,584 378,145 722,852 Long-term debt(6)(7) 50,712 220 -- -- 175,000 Shareholders' equity 147,489 291,927 287,910 274,776 405,342
12 15 (1) The fiscal 1996 Consolidated Statement of Operations was reclassified for comparative purposes. (2) In January 1999, we purchased the X-LAM technology and fixed assets used in the design, development and manufacture of laminate substrates for $8.0 million. As a result of this purchase, we recorded a pre-tax charge of approximately $3.9 million for the write-off of in-process research and development. (3) In fiscal 2000, operating expense includes the write-off of $3.9 million, representing our remaining investment in our Advanced Polymer Solutions joint venture and the reversal into income of $2.5 million of the severance reserve which we established in fiscal 1999 for the elimination of approximately 230 positions associated with the relocation of our automatic ball bonder manufacturing from the United States to Singapore. During fiscal 1999, we recorded a pre-tax charge for severance of approximately $4.0 million and asset write-off costs of approximately $1.6 million in connection with the above mentioned move to Singapore. In fiscal 1999, we also recorded approximately $0.4 million for severance related to the reduction in workforce that began in fiscal 1998. During fiscal 1998, we recorded pre-tax charges of $8.4 million for severance and product discontinuance as a result of a slowdown in the semiconductor industry. Of this amount $6.0 million was associated with the equipment business, $1.7 million with the packaging materials business and $0.7 million was recorded in corporate expense. During fiscal 1996, we recorded a pre-tax charge in the equipment business of approximately $3.0 million for severance and the write-off of costs incurred in connection with the suspended Willow Grove facility expansion as a result of a slowdown in the semiconductor industry. (4) Equity in loss of joint ventures in fiscal 2000 consists solely of our share of the loss of Advanced Polymer Solutions, LLC a 51% owned joint venture. Equity in loss of joint ventures in fiscal 1999 consists of $9.2 million of our share of the loss of Flip Chip Technologies and $0.8 million of our share of the loss of Advanced Polymer Solutions. Fiscal 1996, 1997 and 1998 consist solely of our share of the loss of Flip Chip Technologies. (5) On June 26, 2000, the Company's Board of Directors approved a two-for-one stock split of its common stock. Pursuant to the stock split, each shareholder of record at the close of business on July 17, 2000 received one additional share for each common share held at the close of business on that date. The additional shares were distributed on July 31, 2000. All prior period earnings per share amounts have been restated to reflect the two-for-one stock split. For fiscal years 1998 and 1999 only the common shares outstanding have been used to calculate both the basic earnings per common share and diluted earnings per common share because the inclusion of potential common shares would be anti-dilutive due to the net losses reported in those years. (6) Does not include letters of credit or foreign exchange contract obligations. (7) In December 1999, we issued $175.0 million of convertible subordinated notes. In May 1997, we completed the sale of 3,450,000 shares of our common stock in an underwritten offering, resulting in net proceeds of approximately $101.0 million. A portion of these proceeds was used to repay the $50.0 million outstanding balance under the Company's existing bank revolving credit facility. 13 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. In addition to historical information, this report contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934, as amended (the "Exchange Act"), and are subject to the Safe Harbor provisions created by statute. Such forward-looking statements include, but are not limited to, statements that relate to our future revenue, product development, demand forecasts, competitiveness, gross margins, operating expense and benefits expected as a result of: - The projected growth rates in the overall semiconductor industry, the semiconductor assembly equipment market and the market for semiconductor packaging materials; - the anticipated development, production and licensing of our advanced packaging technology; - the successful integration of recent acquisitions into our company's operating structure and expected growth rates for these companies; - the projected continuing demand for wire bonders; and - the anticipated growing importance of the flip chip assembly process in high-end market segments. Generally words such as "may," "will," "should," "could," "anticipate," "expect," "intend," "estimate," "plan," "continue," and "believe," or the negative of or other variation on these and other similar expressions identify forward-looking statements. These forward-looking statements are made only as of the date of this report. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements are based on current expectations and involve risks and uncertainties and our future results could differ significantly from those expressed or implied by our forward-looking statements. These risks and uncertainties include, without limitation those described under Item 1. Business and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW We design, manufacture and market capital equipment and packaging materials for sale to companies that manufacture and assemble semiconductor devices. We also service, maintain, repair and upgrade assembly equipment. Today, we are the world's largest supplier of semiconductor assembly equipment, according to VLSI Research Inc. We sell our products to semiconductor device manufacturers and contract manufacturers, which are primarily located in or have operations in the Asia/Pacific region. Sales to customers outside of the United States accounted for 91% of net sales for fiscal 2000 and are expected to continue to represent a substantial portion of our future revenues. To support our international sales, we currently have major manufacturing operations in the United States, Israel and Singapore, sales facilities in Hong Kong, Japan, Korea, Taiwan, Malaysia, the Philippines and Singapore, a technology center in Japan and applications labs in Singapore. We also maintain customer resource centers in Taiwan, the Philippines and Singapore. We plan to open a new manufacturing facility in Taiwan in fiscal 2001 to produce bonding wire. In November 2000 we acquired 100% of the stock of Cerprobe Corporation (referred to as Cerprobe) and in December 2000 we acquired 100% of the stock of Probe Technology Corporation (referred to as Probe Tech). Both Cerprobe and Probe Tech design and manufacture semiconductor test interconnect solutions. The acquisitions are a step forward in the Company's strategy to offer the most complete, capable and cost-effective interconnect solutions. These two companies will be merged together to create a test division. Historically, the demand for semiconductors and our semiconductor assembly equipment has been volatile from period to period. An upturn in the semiconductor industry that began in fiscal 1999 contributed to record revenues of $899.3 million for fiscal year 2000. This represents an increase of 125% over revenues of $398.9 in fiscal 1999. However, in early August and again in early November, we announced that customer order deferrals and push-outs would impact financial performance in the fourth quarter of fiscal 2000 and the first half of fiscal 2001. Our business is currently divided into three segments, with a fourth segment comprised of the operations of Cerprobe and Probe Tech to be added in fiscal 2001. 14 17 Equipment Through our equipment business we design, manufacture and market semiconductor assembly equipment. Our principal product line is our family of wire bonders, which are used to connect extremely fine wires, typically made of gold or aluminum, between the bonding pads on the die and the leads on the IC package to which the die has been bonded. We are the world's largest manufacturer of wire bonders, according to VLSI. In fiscal 1999, we successfully introduced the Model 8028 automatic ball bonder and with its superior technical performance and productivity accounted for the majority of ball bonders we sold in fiscal 2000. In fiscal 2000 we relocated our automatic ball bonder manufacturing from the United States to Singapore and were able to ramp up production to historically high levels to meet the record demand. Packaging Materials Through our packaging materials business we design, manufacture and market a range of packaging materials to semiconductor device assemblers including very fine (typically 0.001 inches in diameter) gold, aluminum and copper wire, capillaries, wedges, die collets and saw blades. We expect to expand this business in an effort to increase our revenues from materials used in the assembly of ICs. In the fourth quarter of fiscal 2000, we decided not to devote additional capital to Advanced Polymer Solutions, a joint venture with Polyset Company, Inc. which was established to develop, manufacture and market advanced polymer materials for semiconductor and microelectronic packaging end users. This decision resulted in a write-off of $3.9 million representing our remaining investment in this venture. We have no further obligations or commitments to the joint venture. Advanced Packaging Technology This business segment reflects the operating results of our strategic initiative to develop new technologies for advanced semiconductor packaging. It is comprised of Flip Chip Technologies, LLC, a joint venture with Delco Electronics Corporation, and our X-LAM business unit. Through Flip Chip Technologies we license our flip chip technology and provide wafer bumping services. As of September 30, 2000, we owned 76.9% of Flip Chip Technologies. Under various operating agreements, we manage Flip Chip Technologies jointly with Delco and have agreed not to compete with the joint venture. Flip Chip Technologies has also entered into various agreements with Delco that are customary in similar joint venture arrangements. We established our X-LAM business unit to develop, manufacture and market high density interconnect substrates using either flip chip or advanced wire bonding interconnection schemes. We purchased the X-LAM technology for $8.0 million in fiscal 1999 and operate a research/manufacturing facility in Milpitas, California to fully develop and market the technology. In fiscal 2000, we recorded an operating loss for the X-LAM business of $13.8 million and expect to report a similar loss in fiscal 2001. Neither Flip Chip Technologies nor X-LAM has been profitable to date. However, we expect operating income from Flip Chip Technologies in fiscal 2001 to partially offset the expected losses at the X-LAM business unit. 15 18 The following table sets forth the percentage of our net sales from each business segment for the past three years:
FISCAL YEAR ENDED SEPTEMBER 30, ------------------------ SEGMENT 1998 1999 2000 - ------- ---- ---- ---- Equipment 73% 68% 77% Packaging Materials 27 31 21 Advanced Packaging Technology 0 1 2 ---- ---- ---- Total 100% 100% 100% ==== ==== ====
Net sales. We recognize net sales upon the shipment of products or performance of services. Provisions for estimated product returns, warranty and installation costs are accrued in the period of sale recognition. Our equipment sales depend on the capital expenditures of semiconductor manufacturers and subcontract assemblers worldwide which, in turn, depend on the current and anticipated market demand for semiconductors and products using semiconductors. The semiconductor industry historically has been highly volatile and has experienced periodic downturns and slowdowns which have had a severe negative effect on the semiconductor industry's demand for capital equipment. These downturns and slowdowns, coupled with the effect of the Asian economic crisis, adversely affected our sales during the latter half of fiscal 1998 and the first half of fiscal 1999. However, the semiconductor business cycle turned up in the second half of fiscal 1999 and resulted in record orders and shipments in fiscal 2000. Then in early August and again in early November, we announced that customer order deferrals and push-outs would impact financial performance in the fourth quarter of fiscal 2000 and the first half of fiscal 2001. Our packaging materials sales depend on the same semiconductor manufacturers and subcontract assemblers as our equipment sales. However, the volatility in demand for our packaging materials is less than that of our equipment sales due to the consumable nature of the packaging materials. We expect to expand this portion of our business to help offset the volatility of the equipment segment, and because the worldwide market for consumable packaging materials is larger than the market for our semiconductor assembly equipment. Our advanced packaging technology sales represent the sales from Flip Chip Technologies. We do not expect sales from our X-LAM business unit in fiscal 2001. Cost of goods sold. Our equipment cost of goods sold consists mainly of subassemblies, materials, direct and indirect labor costs and other overhead. We rely on subcontractors to manufacture many of the components and subassemblies for our products and we rely on sole source suppliers for some material components. Packaging materials cost of goods sold consists primarily of gold, aluminum, direct labor and other materials used in the manufacture of bonding wire, capillaries, wedges and other company products, with gold making up the majority of the cost. Gold bonding wire is generally priced based on a fabrication charge per 1,000 feet of wire, plus the value of the gold. To minimize our exposure to gold price fluctuations, we obtain gold for fabrication under a contract with our gold supplier on consignment and only purchase the gold when we ship the finished product to the customer. Accordingly, fluctuations in the price of gold are generally absorbed by our gold supplier or passed on to our customers. Since gold makes up a significant portion of the cost of goods sold by the packaging materials segment, the gross profit margins will be lower than can be expected in the equipment business. Cost of goods sold in our Advanced Packaging Technology segment is currently comprised of material, labor and overhead at Flip Chip Technologies. Our X-LAM operations will not report cost of goods sold until they begin to generate revenues, which is not expected to occur until fiscal 2002. Selling, general and administrative expense. Our selling, general and administrative expense is comprised primarily of personnel costs, professional costs, information technology and depreciation expenses. We expect our selling, general and administrative expenses to increase in fiscal 2001 as we include the operations of Cerprobe and Probe Tech and increase spending on information technology to develop and implement corporate-wide e-business capabilities. 16 19 As a result of customer order deferrals and push-outs in the fourth quarter of fiscal 2000 and the first quarter of fiscal 2001, we are resizing our workforce by eliminating approximately 110 positions. We will record a resizing charge of approximately $3.0 million in the first quarter of fiscal 2001 for severance and related costs associated with the eliminated positions. Research and development expense. Our research and development costs consist primarily of labor, prototype material and other costs associated with our developmental efforts to strengthen our product lines and develop new products. For example we introduced two new bonders, the Model 8028-S, an automatic ball bonder that offers increased accuracy and productivity over its predecessor, and the Model 8028-PPS, which combines productivity enhancements with robust fine pitch capability. Our research and development costs increased in fiscal 2000 and will increase further in fiscal 2001 as we include the operations of Cerprobe and Probe Tech and we introduce our 35 micron bonding process solution. RESULTS OF OPERATIONS The table below shows principal line items from our historical consolidated statements of operations, as a percentage of our net sales, for the three years ended September 30:
FISCAL YEAR ENDED SEPTEMBER 30, -------------------------------- 1998 1999 2000 ------ ------ ------ Net sales 100.0% 100.0% 100.0% Costs of goods sold 66.7 71.5 63.7 ------ ------ ------ Gross margin 33.3 28.5 36.3 Selling general and administrative 20.4 21.6 15.2 Research and development, net 11.9 9.3 5.6 Other costs 2.0 2.5 .1 ------ ------ ------ Income (loss) from operations (1.0)% (4.9)% 15.4% ====== ====== ======
FISCAL YEARS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999 During the fiscal year ended September 30, 2000, we recorded record bookings of $949.0 million compared to $438.0 million in fiscal 1999. The $511.0 million increase in fiscal 2000 bookings reflected a significant improvement in demand for semiconductor assembly equipment. At September 30, 2000, total backlog of customer orders approximated $143.0 million compared to $93.0 million at September 30, 1999. Since the timing of deliveries may vary and orders are generally subject to cancellation, our backlog as of any date may not be indicative of net sales for any succeeding period. The upturn in the semiconductor business cycle throughout most of fiscal 2000 resulted in record net sales of $899.3 million, an increase of $500.4 million or 125.4% above the prior fiscal year. Net sales increased sequentially each quarter beginning in the third quarter of fiscal 1999 through the third quarter of fiscal 2000, however, due to customer order deferrals, net sales in the fourth quarter of fiscal 2000 were below third quarter sales. We expect net sales in the first quarter of fiscal 2001 to be between $140 million and $165 million. Net sales in our equipment segment benefited the most from the upturn in the semiconductor business cycle and increased by $422.2 million to $692.1 million in fiscal 2000 compared to $269.9 million in fiscal 1999, an increase of 156.5%. The increase in equipment segment sales was driven by a strong demand for our automatic ball bonders. The higher equipment segment sales in fiscal 2000 also reflected an increase in the average selling prices for our Model 8028, which was the primary bonder sold in fiscal 2000, compared to the model 8020, which was the primary bonder sold in fiscal 1999. Packaging materials segment net sales increased $61.1 million to $185.6 million in fiscal 2000 from $124.5 million in fiscal 1999. The higher packaging material segment net sales were due primarily to a higher volume of gold wire and capillary shipments. Net sales of our advanced packaging technology segment reflect the sales of Flip Chip Technologies for all of fiscal 2000 compared to sales of Flip Chip Technologies for only four months in fiscal 1999. International sales (shipments of our products with ultimate foreign destinations) comprised 91% and 83% of our total sales during fiscal 2000 and 1999, respectively. Sales to customers in the Asia/Pacific region, including Korea, Taiwan, 17 20 Malaysia, the Philippines, Japan, Singapore, Thailand and Hong Kong, accounted for approximately 83% and 74% of our total sales in fiscal 2000 and 1999, respectively. During fiscal 2000, shipments to customers located in Taiwan, the Philippines, Singapore, and Malaysia accounted for approximately 31%, 11%, 10% and 9% of net sales, compared to 23%, 11%, 11% and 10%, respectively, for the 1999 fiscal year. Gross profit increased to $326.1 million in fiscal 2000 from $113.5 million in fiscal 1999 due primarily to the higher volume of equipment segment sales in fiscal 2000. The higher gross profit in fiscal 2000 was also partially due to an increase in gross profit as a percentage of sales (referred to as gross margin) of 7.8 percentage points to 36.3%. The equipment segment contributed the majority of the improvement in gross profit and gross margin. Equipment segment gross profit increased $191.4 million from the prior year to $272.3 million and its gross margin increased from 30.0% in fiscal 1999 to 39.4% in fiscal 2000. The increase in equipment segment gross profit was primarily due to a 168% increase in unit sales of automatic ball bonders. The improved equipment segment gross margin was due to a higher average selling price of the automatic bonders sold in fiscal 2000 compared to fiscal 1999 due to the higher performance levels of the Model 8028 compared to the Model 8020. Also, the average cost of a Model 8028 was less than the average cost of a Model 8020 primarily due to the move of the manufacturing operation of our automatic ball bonders from the United States to Singapore. The packaging materials segment gross profit and gross margin increased in fiscal 2000. The higher gross profit was primarily due to the higher volume of gold wire and capillary shipments. The higher gross margin was due to lower average cost of production resulting primarily from operating efficiencies from the higher unit volume and a shift in production mix to higher margin fine pitch products. The overall gross profit and gross margin in fiscal 2000 were negatively impacted by a $1.3 million negative gross profit recorded by Flip Chip Technologies in our advanced packaging technology segment. Selling, general and administrative (referred to as SG&A) expenses increased to $136.2 million in fiscal 2000 from $86.2 million in fiscal 1999. The $50.0 million increase was due primarily to additional personnel and compensation expenses associated with the growth in the size of the business in fiscal 2000 particularly in the equipment segment, the ramp-up of the X-LAM research facility and the inclusion of the operating results of Flip Chip Technologies for a full fiscal year in 2000 compared to four months in the prior year. Research and development costs increased to $50.1 million in fiscal 2000 from $37.2 million in the prior fiscal year. The higher research and development expense resulted from increasing expenditures for new product development in our equipment and packaging materials segments and reporting Flip Chip Technologies operations for a full year in 2000 compared to four months in the prior year and ramping up the X-LAM research capabilities. Gross research and development expenditures were partially offset by funding received from customers and governmental subsidies totaling $1.1 million in fiscal 2000 compared to $1.3 million in fiscal 1999. In the fourth quarter of fiscal 2000, we reversed into income $2.5 million of the $5.6 million reserve which we established in fiscal 1999 for the relocation of our automatic ball bonder manufacturing from Willow Grove, Pennsylvania to Singapore. The reserve was established to reflect provisions for severance and asset write-off costs resulting from the move. However, due to the significant increase in demand for microelectronics products we have retained engineering and marketing positions which were planned for downsizing. In addition, the majority of the direct and indirect manufacturing positions were eliminated through attrition in the workforce. The decision to retain the engineering and marketing positions in the U.S. and attrition in the workforce reduced the amount of severance required to be paid compared to the original estimate and resulted in the reversal of $2.5 million of the reserve. These relocation activities are now complete. In the fourth quarter of fiscal 2000, we decided not to devote additional capital to our joint venture with Polyset Company, Inc. which was established to develop, manufacture and market advanced polymer materials for semiconductor and microelectronic packaging end users. This decision resulted in a write-off of $3.9 million representing our remaining investment in this venture. We have no further obligations or commitments to the joint venture. Income from operations in fiscal 2000 was a record $138.5 million compared to a loss of $19.7 million in fiscal 1999. The favorable results in fiscal 2000 were due primarily to the significant improvement in net sales resulting from our capability to ramp-up our production with technologically superior bonding machines to take advantage of the demand for our products created by the upturn in the semiconductor business cycle. Income from operations in fiscal 2000 was also favorably impacted by an increase in gross profit as a percentage of net sales which was due primarily to the benefits 18 21 of the move of our automatic ball bonder manufacturing from the United States to Singapore. Interest income increased by $8.6 million and interest expense increased by $7.5 million, both increases resulted primarily from the issuance of $175.0 million of convertible subordinated notes in December 1999. Interest income was also favorably impacted by an increase in short term investments resulting from cash generated by our record level of income from operations and higher interest rates. See "Liquidity and Capital Resources." Equity in loss of joint ventures decreased from $10.0 million in fiscal 1999 to $1.2 million in fiscal 2000 due primarily to not recording Flip Chip Technologies under the equity method of accounting but rather reporting the operating results of Flip Chip Technologies with the operating results of the company. In fiscal 2000, equity in loss of joint ventures consists solely of our share of the loss from our 50% equity interest in Advanced Polymer Solutions, LLC which, as mentioned above, we dissolved and wrote-off our remaining investment. Our provision for income taxes in fiscal 2000 was $40.1 million compared to a benefit of $8.2 million in fiscal 1999. The provision for income tax in fiscal 2000 was due to record pretax income reported in fiscal 2000. The effective tax rate of the fiscal 2000 provision was 28%. The effective tax rate was favorably impacted by significant tax incentives we received from Singapore as an incentive for us to relocate our automatic ball bonder manufacturing operation to Singapore and from Israel for maintaining research and manufacturing facilities in Israel. We recorded a minority interest in the net loss of Flip Chip Technologies of $1.4 million. The minority interest reflects the portion of Flip Chip Technologies that is owned by Delco, our joint venture partner. Our net income for fiscal 2000 was $103.2 million compared to a net loss of $16.9 million in fiscal 1999, for the reasons enumerated above. FISCAL YEARS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 During the 1999 fiscal year ended September 30, 1999, we recorded bookings of $438.0 million compared to $347.0 million during fiscal 1998. The $91.0 million increase in fiscal 1999 bookings occurred in the second half of fiscal 1999 and primarily reflected a significant improvement in demand for semiconductor assembly equipment. At September 30, 1999, total backlog of customer orders approximated $93.0 million compared to $54.0 million at September 30, 1998. Since the timing of deliveries may vary and orders are generally subject to cancellation, our backlog as of any date may not be indicative of net sales for any succeeding period. Net sales for the 1999 fiscal year decreased by $12.1 million to $398.9 million from $411.0 million in fiscal 1998. During the first half of fiscal 1999, net sales totaled $134.7 million, or $108.5 million lower than the same six month period of fiscal 1998, reflecting the impact of the slowdown in the semiconductor industry which started in 1998. However, as the semiconductor business cycle turned up in the second half of fiscal 1999, net sales increased over the prior year in the third and fourth quarters by 20.8% and 101.3%, respectively. Net sales in our equipment segment decreased by $32.3 million to $269.9 million in fiscal 1999 compared to $302.1 million in fiscal 1998. The lower equipment segment sales were primarily due to significantly reduced demand for wedge bonders. We sold 117 wedge bonders in fiscal 1999, a 71% or $48.1 million decline from the fiscal 1998 level. This was partially offset by higher automatic ball bonder sales (approximately 2,000 machines sold in fiscal 1999 versus approximately 1,800 machines sold in fiscal 1998). The increase in ball bonder sales primarily occurred in the second half of fiscal 1999, reflecting the increased industry demand for semiconductor assembly equipment as well as the introduction of the new Model 8028 ball bonder. The lower equipment segment sales in fiscal 1999 also reflect reduced average selling prices for our Model 1488 and Model 8020 ball bonders partially offset by improved pricing for the Model 8028. Packaging materials segment net sales increased $15.6 million to $124.5 million in fiscal 1999 from $108.9 million in fiscal 1998. The higher packaging material segment net sales were due primarily to a higher volume of gold wire and capillary shipments during the second half of fiscal 1999. Net sales of our new advanced packaging technology segment reflect the sales of Flip Chip Technologies for the four months ended September 30, 1999. International sales (shipments of our products with ultimate foreign destinations) comprised 83% and 80% of our total sales during fiscal 1999 and 1998, respectively. Sales to customers in the Asia/Pacific region, including Korea, Taiwan, Malaysia, the Philippines, Japan, Singapore, Thailand and Hong Kong, accounted for approximately 74% and 73% of our total sales in fiscal 1999 and 1998, respectively. During fiscal 1999, shipments to customers located in Taiwan, 19 22 Singapore, the Philippines and Malaysia accounted for approximately 23%, 11%, 11% and 10% of net sales, compared to 20%, 5%, 17% and 16%, respectively, for the 1998 fiscal year. Gross profit decreased to $113.5 million for fiscal 1999 from $136.8 million in fiscal 1998 due primarily to the lower volume of equipment segment sales in fiscal 1999. Gross profit margin decreased to 28.5% in fiscal 1999 from 33.3% in fiscal 1998, due to lower gross profit margin in the equipment segment partially offset by higher gross profit margin in the packaging materials segment. The gross profit margin in fiscal 1999 was also negatively impacted by a $1.5 million negative gross profit recorded by our newly created advanced packaging technology segment. The equipment segment gross profit margin decreased to 30.0% in fiscal 1999 from 36.5% in fiscal 1998 due primarily to the lower average selling price for the segment's Model 1488 and 8020 ball bonders due to pricing competition and higher manufacturing costs associated with the Model 8020 and a sharp decline in sales of our higher margin wedge bonder. The packaging materials segment gross profit margin increased to 27.4% in fiscal 1999 from 24.5% in fiscal 1998 due primarily to operating efficiencies resulting from the impact of cost improvement programs implemented in fiscal 1998, the favorable impact of higher unit volumes of materials and higher margins on fine pitch products. Selling, general and administrative expenses increased to $86.2 million in fiscal 1999 from $83.9 million in fiscal 1998. The $2.3 million increase was due to $3.8 million of expenses associated with our new advanced packaging technology business units and $1.6 million of start up expenses for our new Singapore manufacturing facility, partially offset by lower selling, general and administrative expenses in our equipment segment. The lower selling, general and administrative expenses in our equipment segment were due to lower payroll and related costs resulting from our resizing efforts to reduce our workforce in late fiscal 1998 and early fiscal 1999. Research and development costs decreased to $37.2 million in fiscal 1999 from $48.7 million in the prior fiscal year. Our lower research and development expense was due to lower payroll and related costs resulting from our efforts to reduce our workforce in late fiscal 1998 and early fiscal 1999. We focused our research and development efforts on new product introductions (e.g., the Model 8028 ball bonder) and new product development. Gross research and development expenditures were partially offset by funding received from customers and governmental subsidies totaling $1.3 million in fiscal 1999 compared to $1.7 million in fiscal 1998. We recorded resizing costs of $5.9 million in fiscal 1999 reflecting provisions for severance and asset writeoff costs resulting from the announced move of our automatic ball bonder manufacturing to Singapore and additional severance in connection with the reduction in our workforce. At September 30, 1999, we had accrued liabilities of $4.0 million in connection with these severance costs, the majority of which will be paid in fiscal 2000. We also recorded resizing costs of $7.4 million and an impairment of goodwill of $1.0 million in fiscal 1998 for severance, asset writeoffs and other costs in response to the industry-wide slowdown in orders for semiconductor assembly equipment and to a lesser extent semiconductor packaging materials. In January 1999, we purchased the X-LAM technology and fixed assets used in the design, development and manufacture of laminate substrates for $8.0 million. In fiscal 1999, we recorded a charge of approximately $3.9 million for in-process research and development representing the appraised value of products still in the development stage that had not reached technological feasibility and an operating loss of $3.0 million. Loss from operations in fiscal 1999 was $19.7 million compared to a loss of $4.2 million in fiscal 1998. The unfavorable variance in fiscal 1999 was due primarily to an operating loss at our equipment business of $11.3 million compared to operating income of $3.1 million in the prior year and a loss at our new advanced packaging technology business of $6.8 million. The operating loss in our equipment business was due to lower net sales and gross profit margin and one-time charges for the move to Singapore and workforce reductions. The operating losses in our equipment and advanced packaging technology businesses were partially offset by an increase of $8.5 million in operating income in the packaging materials business. Additionally, as described previously, we recorded a $3.9 million write-off of in-process research and development relating to the acquisition of the X-LAM technology. Interest income, net of interest expense, decreased by $2.0 million in fiscal 1999 compared to fiscal 1998, primarily due to lower short-term investments resulting from the use of cash throughout fiscal 1999 to fund the net loss, working capital, capital expenditures and investments in new business initiatives. 20 23 Equity in Loss of Joint Ventures increased from $8.7 million in fiscal 1998 to $10.0 million in fiscal 1999. Our share of the pre-tax loss in Flip Chip Technologies for the eight months ended May 31, 1999 was $9.2 million versus $8.7 million for all of 1998. In fiscal 1999 we recognized 100% of the loss at Flip Chip Technologies for the eight months ended May 31, 1999 compared to recognizing only 51.0% of the Flip Chip Technologies loss in fiscal 1998, for reasons previously discussed. During fiscal 1999, we also recognized a $0.8 million loss from our 50% equity interest in Advanced Polymer Solutions, LLC, a joint venture established in fiscal 1999 to develop, manufacture and market advanced polymer materials for semiconductor and microelectronic packaging end users. We recorded a tax benefit of $8.2 million in fiscal 1999. The effective tax rate of this benefit was 33%. We increased our valuation allowance on foreign tax credit carryforwards, and continue to maintain a valuation allowance for deferred tax assets related to the acquired domestic American Fine Wire net operating loss and net operating loss carry-forwards of our Japanese subsidiary, because we cannot reasonably forecast sufficient future earnings by these subsidiaries to fully utilize the net operating losses during the carryforward period. If we realize the benefits of the American Fine Wire acquired net operating loss carryforward, the benefits would reduce the recorded amount of American Fine Wire goodwill. We believe that all of the net operating loss benefits generated during the year will be realized in the foreseeable future. We recorded a minority interest in the net loss of Flip Chip Technologies of $1.0 million. The minority interest reflects the portion (26.4%) of Flip Chip Technologies that was owned by Delco, our joint venture partner. Our net loss for fiscal 1999 was $16.9 million compared to a net loss of $5.4 million in fiscal 1998, for the reasons enumerated above. QUARTERLY RESULTS OF OPERATIONS The table below shows our quarterly net sales, gross profit and operating income (loss) by quarter for fiscal 2000 and 1999: (in thousands)
FIRST SECOND THIRD FOURTH FISCAL 2000 QUARTER QUARTER QUARTER QUARTER TOTAL - ----------- -------- -------- -------- -------- -------- Net sales $179,849 $222,153 $268,258 $229,013 $899,273 Gross profit 59,912 75,600 101,278 89,306 326,096 Income from operations 17,116 29,834 52,348 39,161 138,459
FIRST SECOND THIRD FOURTH FISCAL 1999 QUARTER QUARTER QUARTER QUARTER TOTAL - ----------- --------- --------- --------- --------- --------- Net sales $ 61,175 $ 73,561 $ 110,806 $ 153,375 $ 398,917 Gross profit 16,176 21,025 30,374 45,960 113,535 Income (loss) from operations (10,282) (17,087) (776) 8,413 (19,732)
The effect of the semiconductor industry upturn on our operating results is reflected in the quarterly results in the second half of fiscal 1999 and fiscal 2000. The customer order deferrals and push-outs we announced in August and November of 2000 are reflected in the lower sales in the fourth quarter of fiscal 2000 compared to the third quarter of fiscal 2000. EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 138, is effective for fiscal years beginning after June 15, 2000. The standard requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded in earnings or other comprehensive income, based on whether the instrument is designated as part of a hedge transaction and, if so, the type of hedge transaction. The company adopted this statement in the first quarter of 2001. The cumulative effect of adoption was not material. The impact of SFAS No. 133 on the company's future results will be dependent upon the fair values of the company's derivatives and related financial instruments and could result in increased volatility. 21 24 In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". The SAB summarizes certain of the Staff's views in applying generally accepted accounting principles to revenue recognition in the financial statements. We are required to begin reporting changes to our revenue recognition policy in the fourth quarter of fiscal year 2001. Accordingly, any shipments previously reported as revenue, including revenue reported for the first three quarters of fiscal 2001, that do not meet SAB 101's guidance will be recorded as revenue in future periods. Changes in our revenue recognition policy resulting from the interpretation of SAB 101 would not involve the restatement of prior fiscal year statements, but would, to the extent applicable, be reported as a change in accounting principle in the fiscal year ended September 30, 2001, with the appropriate restatement of interim periods as required by SFAS No. 3 "Reporting Accounting Changes in Interim Financial Statements." Our reported results of operations for the 12 months ending September 30, 2001 may include a cumulative adjustment for all prior annual and interim periods including an adjustment for revenue in the first quarter of fiscal 2001 as if SAB 101 had been adopted on October 1, 2000. We believe that SAB 101, to the extent that it will impact us, will not affect the underlying strength or weakness of our business operations as measured by the dollar value of our product shipments and cash flows. We are currently assessing the full impact of SAB 101 on our reported financial results. In May 2000, the Emerging Issues Task Force (EITF) issued EITF No. 00-14, "Accounting for Coupons, Rebates and Discounts" that addressed accounting for sales incentives. The Task Force concluded that in accounting for cash sales incentives a manufacturer should recognize the incentive as a reduction of revenue on the later date of the manufacturer's sale or the date the offer is made to the public. The reduction of revenues should be measured based on the estimated amount of incentives to be claimed by the ultimate customers. We must adopt this pronouncement in our fourth quarter of fiscal 2001. We do not believe the adoption of this pronouncement will have a material impact on the Company's financial statements. In September 2000, the EITF reached a final consensus on issue EITF No. 00-10, "Accounting for Shipping and Handling Revenues and Costs." The Task Force concluded that amounts billed to customers related to shipping and handling should be classified as revenue. We currently classify shipping and handling revenue as a reduction of cost of products sold. Further, the Task Force stated that shipping and handling cost related to this revenue should either be recorded in costs of goods sold or the Company should disclose where these costs are recorded and the amount of these costs. We must adopt this pronouncement in the fourth quarter of fiscal 2001. We do not believe adoption of this pronouncement will have a material impact on our financial statements. In March 2000, FASB Interpretation, or FIN, No. 44, "Accounting for Certain Transactions Involving Stock Compensation - An Interpretation of APB Opinion No. 25," was issued. FIN 44 clarifies the application of APB No. 25 for certain issues. FIN 44 clarifies the definition of employee for purposes of applying APB No. 25, the criteria for determining whether a plan qualifies as a non-compensatory plan, the accounting consequences of various modifications to the terms of a previously fixed option or award, and the accounting for an exchange of share compensation awards in a business combination, among others. FIN 44 was effective July 1, 2000 but certain conclusions in this interpretation cover specific events that occurred after either December 15, 1998 or January 12, 2000. FIN 44 did not have a significant effect on our financial position or results of operations. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2000, our cash, cash equivalents and investments totaled $316.6 million compared to $39.3 million at September 30, 1999. Additionally, on December 22, 2000 we entered into a new $60.0 million (reducing to $40 million over a three year period) bank revolving credit facility which replaced the revolving credit facility that had been in place for several years. The new facility expires in December 2003. The borrowings are subject to our compliance with financial and other covenants set forth in the revolving credit documents. At September 30, 2000, we had no cash borrowings outstanding under the then existing facility, but had utilized $1.1 million of availability under that credit facility to support letters of credit issued as security deposits for our manufacturing facility in Singapore and our X-LAM facility. The terms of the credit facility in place at September 30, 2000, as well as the new credit facility, contain limitations on the amount we can spend on acquisitions. The bank waived this limitation to permit the acquisitions of Cerprobe and Probe Tech for which we paid approximately, $225.0 million and $65.0 million, in cash, respectively. Borrowings bear interest either at a Base Rate (defined as the prime rate or the federal funds rate plus 1/2%) or, at a LIBOR Rate (defined as LIBOR plus 1.0% to 2.0%, depending on our ratio of senior debt to earnings before interest, 22 25 taxes, depreciation and amortization). In December 1999, we issued $175.0 million of convertible subordinated notes. The notes are general obligations of our company and subordinated to all senior debt. The notes bear interest at 4 3/4%, are convertible into our common stock at $22.8997 per share and mature on December 15, 2006. There are no financial covenants associated with the notes and there are no restrictions on paying dividends, incurring additional debt or issuing or repurchasing our securities. Interest on the notes is payable on June 15 and December 15 of each year. We may redeem the notes in whole or in part at any time after December 18, 2002 at prices ranging from 102.714% at December 19, 2002 to 100.0% at December 15, 2006. Cash generated from operating activities totaled $134.1 million during fiscal 2000 compared to cash used in operating activities of $37.9 million in fiscal 1999 and cash generated of $21.7 in fiscal 1998. The cash generated from operating activities in fiscal 2000 was primarily the result of our record net income partially offset by an increase in accounts receivable and inventory to support the record sales volume. At September 30, 2000, working capital was $462.7 million compared to $167.1 million at September 30, 1999. The higher working capital was due primarily to the cash generated from the issuance of the $175.0 million of convertible subordinated notes and cash generated from operations partially offset by higher accounts receivable and inventory to support the higher sales volume. During fiscal 2000, we invested approximately $38.3 million in property and equipment, primarily for leasehold improvements and tooling for our new X-LAM manufacturing and research facility, our new Singapore ball bonder facility and to increase manufacturing capacity for the packaging materials business. We presently expect fiscal 2001 capital spending to more than double as we upgrade and improve our information systems to develop and implement corporate-wide e-business capabilities, increase our capacity at Flip Chip Technologies and X-LAM, open a new wire manufacturing facility in Taiwan and continue to expand our manufacturing capabilities in our package materials business. We will also invest capital in our newly acquired Cerprobe and Probe Tech businesses. During fiscal 2000, we invested an additional $5.0 million in Flip Chip Technologies and increased our ownership percentage from 73.6% to 76.9%. We expect to invest between $10 million and $15 million in additional capital in Flip Chip Technologies in fiscal 2001 and to purchase Delphi Automotive Systems' (Delco) share of Flip Chip Technologies. In fiscal 2000, we contributed $2.2 million to our Advanced Polymer Solutions joint venture which we dissolved in the fourth quarter of fiscal 2000. Our total investment in the joint venture was $6.0 million. We do not expect to make any future investments in this business and are not obligated to do so. The Israeli government has funded a portion of the research and development costs related to some of our products. We are contingently liable to repay this funding through royalties to the Israeli government. Royalty payments are due only after sale of the funded products, are computed at varying rates from 2% to 5% of the sales and are limited to the amounts received from the Israeli government. At September 30, 2000, we estimate that contingent liabilities for royalties related to potential future product sales are approximately $3.4 million. We believe that anticipated cash flows from operations, our working capital, amounts available under our revolving credit facility and the availability of additional credit facilities will provide sufficient cash required for the purchase of Cerprobe and Probe Tech and to meet our liquidity and capital requirements for at least the next 12 months. However, we may seek, as required, equity or debt financing to provide capital for corporate purposes and/or to fund strategic business opportunities, including possible acquisitions, joint ventures, alliances or other business arrangements that could require substantial capital outlays. We cannot determine the timing or amount of these potential capital requirements at this time since they will depend on a number of factors, including demand for our products, semiconductor and semiconductor capital equipment industry conditions, competitive factors and the nature and size of strategic business opportunities that we may elect to pursue. 23 26 RISKS RELATED TO OUR BUSINESS OUR QUARTERLY OPERATING RESULTS FLUCTUATE SIGNIFICANTLY AND MAY CONTINUE TO DO SO IN THE FUTURE In the past, our quarterly operating results have fluctuated significantly. Although these fluctuations are partly due to the volatile nature of the semiconductor industry, they also reflect the impact of other factors, some of which are outside of our control. Some of the factors that could cause our revenues and/or operating margins to fluctuate significantly from period to period are: - the mix of products that we sell because, for example: - packaging materials generally have lower margins than assembly equipment, - some lines of equipment are more profitable than others, and - some sales arrangements have higher margins than others; - the volume and timing of orders for our products and any order postponements and cancellations by our customers; - adverse changes in our pricing, or that of our competitors; - higher than anticipated costs of development or production of new equipment models; - the availability and cost of key components for our products; - market acceptance of our new products and upgraded versions of our products; - our announcement of, or perception by others that we will introduce, new or upgraded products, which could delay customers from purchasing our products; - the timing of acquisitions; and - our competitors' introduction of new products. Many of our expenses, such as research and development and selling, general and administrative expenses, do not vary directly with our net sales. As a result, a decline in our net sales would adversely affect our operating results. In addition, if we were to incur additional expenses in a quarter in which we did not experience comparable increased net sales, our operating results would decline. Factors that could cause our expenses to fluctuate from period to period include: - the timing and extent of our research and development efforts; - severance and other costs of relocating facilities or resizings in market downturns; and - inventory writeoffs due to obsolesence. Because our revenues and operating results are volatile and difficult to predict, we believe that period-to-period comparisons of our operating results are not a good indication of our future performance. THE SEMICONDUCTOR INDUSTRY AS A WHOLE IS VOLATILE, AS ARE OUR FINANCIAL RESULTS Our operating results are significantly affected by the capital expenditures of semiconductor manufacturers and assemblers worldwide. Expenditures by semiconductor manufacturers and assemblers depend on the current and anticipated market demand for semiconductors and products that use semiconductors, such as personal computers, telecommunications, consumer electronics and automotive goods. Any significant downturn in the market for 24 27 semiconductor devices or in general economic conditions would likely reduce demand for our products and adversely affect our business, financial condition and operating results. Historically, the semiconductor industry has been volatile with sharp periodic downturns and slowdowns. These downturns have been characterized by, among other things, diminished product demand, excess production capacity and accelerated erosion of selling prices. This has severely and negatively affected the industry's demand for capital equipment, including the assembly equipment that we manufacture and market and, to a lesser extent, the packaging materials that we sell. These downturns and slowdowns have adversely affected our operating results. In the 1998 downturn, for example, our net sales declined from approximately $501.9 million in fiscal 1997 to $411.0 million in fiscal 1998 and continued to decline in the first half of fiscal 1999. Downturns in the future could similarly adversely affect our business, financial condition and operating results. THE INTEGRATION OF THE ACQUISITIONS OF CERPROBE CORPORATION AND PROBE TECHNOLOGY CORPORATION INTO OUR COMPANY'S OPERATING STRUCTURE AND EXPECTED GROWTH RATES FOR THESE COMPANIES MAY NOT BE REALIZED AND OUR EXPECTED BENEFITS MAY NOT OCCUR In November 2000 we acquired 100% of the stock of Cerprobe Corporation for approximately $225.0 million in cash and in December 2000 we acquired 100% of the stock of Probe Technology Corporation for approximately $65.0 million in cash. Both Cerprobe and Probe Tech design and manufacture semiconductor test interconnect solutions. While the test interconnect solutions that Cerprobe and Probe Tech design, manufacture and market are complimentary to our product lines, we do not have in-house expertise or knowledge of these products or markets. We have invested a significant amount of cash to acquire these companies and will invest a significant amount of management time and effort to integrate them into the company's operating structure, however, if we are unable to integrate them successfully or the expected growth rates for these companies do not occur our business, financial condition and operating results could be materially affected. OUR BUSINESS DEPENDS ON ATTRACTING AND RETAINING MANAGEMENT, MARKETING AND TECHNICAL EMPLOYEES WHO ARE IN GREAT DEMAND As is the case with all technology companies, our future success depends on our ability to hire and retain qualified management, marketing and technical employees. Competition is intense in personnel recruiting in the semiconductor and semiconductor equipment industries, particularly with respect to some engineering disciplines. In particular, we have experienced periodic shortages of software engineers. If we are unable to continue to attract and retain the technical and managerial personnel we require, our business, financial condition and operating results could be adversely affected. WE MAY NOT BE ABLE TO RAPIDLY DEVELOP AND MANUFACTURE NEW AND ENHANCED PRODUCTS REQUIRED TO MAINTAIN OR EXPAND OUR BUSINESS We believe that our continued success will depend on our ability to continuously develop and manufacture or acquire new products and product enhancements on a timely and cost-effective basis. We also must introduce these products and product enhancements into the market in response to customers' demands for higher performance assembly equipment. Our competitors may develop enhancements to, or future generations of, competitive products that will offer superior performance, features and lower prices that may render our products noncompetitive. We may not be able to develop and introduce products incorporating new technologies in a timely manner or at a price that will satisfy future customers' needs or achieve market acceptance. WE MAY NOT BE ABLE TO ACCURATELY FORECAST DEMAND FOR OUR PRODUCT LINES We typically operate our business with a relatively short backlog and order supplies and otherwise plan production based on internal forecasts of demand. Due to these factors, we have in the past, and may again in the future, fail to accurately forecast demand, in terms of both volume and configuration for either our current or next-generation wire bonders. This has led to and may in the future lead to delays in product shipments or, alternatively, an increased risk of inventory obsolescence. For example, we inaccurately forecasted demand for the Model 8020 wire bonder in 1998 and consequently recorded writeoffs for excess inventory. Also, we underestimated the magnitude of the improvement in the semiconductor industry at the end of fiscal 1999 and the demand for the new Model 8028 ball bonder; as a result some customer shipments were delayed in fiscal 2000. 25 28 If we fail to accurately forecast demand for our products, our business, financial condition and operating results could be materially and adversely affected. ADVANCED PACKAGING TECHNOLOGIES OTHER THAN WIRE BONDING MAY RENDER SOME OF OUR PRODUCTS OBSOLETE AND OUR STRATEGY FOR PURSUING THESE OTHER TECHNOLOGIES MAY BE COSTLY AND INEFFECTIVE Advanced packaging technologies have emerged that may improve device performance or reduce the size of an integrated circuit or IC package, as compared to traditional die and wire bonding. These technologies include flip chip, chip scale packaging and tape automated bonding. In general, these advanced technologies eliminate the need for wires to establish the electrical connection between a die and its package. For some assemblies, these advanced technologies have largely replaced wire bonding. However, today most ICs still employ die and wire bonding technology, and the possible extent, rate and timing of change is difficult, if not impossible, to predict. In fact, wire bonding has proved more durable than we originally anticipated, largely because of its reliability and cost. However, we cannot assure you that the semiconductor industry will not, in the future, shift a significant part of its volume into advanced packaging technologies, such as those discussed above. Presently, Intel, Motorola, IBM and Advanced Micro Devices, for example, have developed flip chip technologies for internal use, and a number of other companies are also increasing their investments in advanced packaging technologies. If a significant shift to advanced technologies were to occur, demand for our wire bonders and related packaging materials would diminish. One component of our strategy is to develop the capacity to use advanced technologies to allow us to compete in those portions of the market that currently use these advanced technologies and to prepare for any eventual decline in the use of wire bonding technology. There are a number of risks associated with our strategy to diversify into new technologies: - The technologies that we have invested in represent only some of the advanced technologies that may one day supercede wire bonding; - Other companies are developing similar or alternative advanced technologies; - Wire bonding may continue as the dominant technology for longer than we anticipate; - The cost of developing advanced technologies may be significantly greater than we expect; and - We may not be able to develop the necessary technical, research, managerial and other related skills to develop, produce, market and support these advanced technologies. As a result of these risks, we cannot assure you that any of our attempts to develop alternative technologies will be profitable or that we will be able to realize the benefits that we anticipate from them. BECAUSE WE HAVE A SMALL NUMBER OF PRODUCTS, A DECLINE IN DEMAND FOR, OR THE PRICE OF, ANY OF OUR PRODUCTS COULD CAUSE OUR REVENUES TO DECLINE SIGNIFICANTLY Historically, our wire bonders have comprised at least 55% of our net sales. If demand for, or pricing of, our wire bonders declines because our competitors introduce superior or lower cost systems, the semiconductor industry changes or because of other occurrences beyond our control, our business, financial condition and operating results would be materially and adversely affected. BECAUSE A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR NEARLY ALL OUR SALES, OUR REVENUES COULD DECLINE IF WE LOSE ANY SIGNIFICANT CUSTOMER The semiconductor manufacturing industry is highly concentrated, with a relatively small number of large semiconductor manufacturers and subcontract assemblers purchasing a substantial portion of semiconductor assembly equipment and packaging materials. Sales to our five largest customers accounted for approximately 41.4% of our fiscal 1998 net sales, 31.7% of our fiscal 1999 net sales and 41.9% of our fiscal 2000 net sales. In fiscal 2000, sales to Advanced Semiconductor Engineering accounted for 15.3 % of the Company's net sales and sales to Amkor Technologies accounted for 10.1% of the Company's net sales. In fiscal 1999 no customer accounted for more than 10% of total net sales but in fiscal 1998, sales to Intel accounted for 17.6% of the Company's net sales. 26 29 We expect that sales of our products to a limited number of customers will continue to account for a high percentage of our net sales for the foreseeable future. If we lose orders from a significant customer, or if a significant customer reduces its orders substantially, these losses or reductions will adversely affect our business, financial condition and operating results. WE DEPEND ON A SMALL NUMBER OF SUPPLIERS FOR MATERIALS AND, IF OUR SUPPLIERS DO NOT DELIVER THEIR PRODUCTS TO US, WE MAY BE UNABLE TO DELIVER OUR PRODUCTS TO OUR CUSTOMERS Our products are complex and require materials, components and subassemblies of an exceptionally high degree of reliability, accuracy and performance. We rely on subcontractors to manufacture many of the components and subassemblies for our products and we rely on sole source suppliers for some material components. Our reliance involves a number of significant risks, including: - loss of control over the manufacturing process; - changes in our manufacturing processes, dictated by changes in the market, that have delayed our shipments; - our inadvertent use of defective or contaminated materials; - the relatively small operations and limited manufacturing resources of some of our contractors and suppliers, which may limit their ability to manufacture and sell subassemblies, components or parts in the volumes we require and at quality levels and prices we can accept; - reliability and quality problems we experience with certain key subassemblies provided by single source suppliers; and - delays in the delivery of subassemblies, which, in turn, have caused delays in some of our shipments. If we are unable to deliver products to our customers on time for these or any other reasons, or if we do not maintain acceptable product quality or reliability in the future, our business, financial condition and operating results would be materially and adversely affected. WE ARE EXPANDING AND DIVERSIFYING OUR OPERATIONS, AND IF WE FAIL TO MANAGE OUR EXPANDING AND MORE DIVERSE OPERATIONS SUCCESSFULLY, OUR BUSINESS AND FINANCIAL RESULTS MAY BE MATERIALLY AND ADVERSELY AFFECTED In recent years, we have broadened our product offerings to include significantly more packaging materials. Although our strategy is to diversify our products and services, we may not be able to develop, acquire, introduce or market new products in a timely or cost-effective manner and the market may not accept any new or improved products we develop, acquire, introduce or market. Our diversification into new lines of business and our expansion through acquisitions and alliances has increased, and is expected to continue to increase, demand on our management, financial resources and information and internal control systems. Our success depends in significant part on our ability to manage and integrate acquisitions, joint ventures and other alliances and to continue to implement, improve and expand our systems, procedures and controls. If we fail to do this at a pace consistent with the development of our business, our business, financial condition and operating results would be materially and adversely affected. As we seek to expand our operations, we expect to encounter a number of risks, which will include: - risks associated with hiring additional management and other critical personnel; - risks associated with adding equipment and capacity; and - risks associated with increasing the scope, geographic diversity and complexity of our operations. In addition, sales and servicing of packaging materials and advanced technologies require different organizational and managerial skills than sales of traditional wire bonding technology. We cannot assure you that we will be able to develop 27 30 the necessary skills to successfully produce and market these different products. WE SELL MOST OF OUR PRODUCTS TO CUSTOMERS LOCATED OUTSIDE OF THE U.S. AND WE HAVE SUBSTANTIAL MANUFACTURING OPERATIONS LOCATED OUTSIDE OF THE U.S., BOTH OF WHICH SUBJECT US TO RISKS FROM CHANGES IN TRADE REGULATIONS, CURRENCY FLUCTUATIONS, POLITICAL INSTABILITY AND WAR Approximately 80% of our net sales for fiscal 1998, 83% of our net sales for fiscal 1999 and 91% of our net sales for fiscal 2000 were attributable to sales to customers for delivery outside of the United States. We expect our sales outside of the United States to continue to represent a substantial portion of our future revenues. Our future performance will depend, in significant part, on our ability to continue to compete in foreign markets, particularly in Asia. Asian economies have been highly volatile, resulting in significant fluctuation in local currencies, and political and economic instability. These conditions may continue or worsen, which could materially and adversely affect our business, financial condition and operating results. In addition, we rely on non-U.S. suppliers for materials and components used in the equipment that we sell. We also maintain substantial manufacturing operations in countries other than the United States, including operations in Israel and Singapore. As a result, a major portion of our business is subject to the risks associated with international commerce such as, risks of war and civil disturbances or other events that may limit or disrupt markets; expropriation of our foreign assets; longer payment cycles in foreign markets; international exchange restrictions; the difficulties of staffing and managing dispersed international operations; tariff and currency fluctuations; changing political conditions; foreign governments' monetary policies; and less protective foreign intellectual property laws. Because most of our foreign sales are denominated in United States dollars, an increase in value of the United States dollar against foreign currencies, particularly the Japanese yen, will make our products more expensive than those offered by some of our foreign competitors. Our ability to compete overseas in the future could be materially and adversely affected by a strengthening of the United States dollar against foreign currencies. The ability of our international operations to prosper also will depend, in part, on a continuation of current trade relations between the United States and foreign countries in which our customers operate and in which our subcontractors have assembly operations. A change toward more protectionist trade legislation in either the United States or foreign countries in which we do business, such as a change in the current tariff structures, export compliance or other trade policies, could adversely affect our ability to sell our products in foreign markets. OUR SUCCESS DEPENDS IN PART ON OUR INTELLECTUAL PROPERTY, WHICH WE MAY BE UNABLE TO PROTECT Our success depends in part on our proprietary technology. To protect this technology, we rely principally on contractual restrictions (such as nondisclosure and confidentiality agreements) in our agreements with employees, vendors, consultants and customers and on the common law of trade secrets and proprietary "know-how." We secondarily rely, in some cases, on patent and copyright protection, which may become more important to us as we expand our investment in advanced packaging technologies. We may not be successful in protecting our technology for a number of reasons, including: - Our competitors may independently develop technology that is similar to or better than ours; - Employees, vendors, consultants and customers may not abide by their contractual agreements, and the cost of enforcing those agreements may be prohibitive, or those agreements may prove to be unenforceable or more limited than we anticipate; - Foreign intellectual property laws may not adequately protect our intellectual property rights; and - Our patent and copyright claims may not be sufficiently broad to effectively protect our technology; patents or copyrights may be challenged, invalidated or circumvented; and we may otherwise be unable to obtain adequate protection for our technology. In addition, our partners in joint ventures and alliances may also have rights to technology we develop through those joint ventures and alliances. If we are unable to protect our technology, we could weaken our competitive position or face significant expense to protect or enforce our intellectual property rights. 28 31 THIRD PARTIES MAY CLAIM WE ARE INFRINGING ON THEIR INTELLECTUAL PROPERTY, WHICH COULD CAUSE US TO INCUR SIGNIFICANT LITIGATION COSTS OR OTHER EXPENSES, OR PREVENT US FROM SELLING SOME OF OUR PRODUCTS The semiconductor industry is characterized by rapid technological change, with frequent introductions of new products and technologies. As a result, industry participants often develop products and features similar to those introduced by others, increasing the risk that their products and processes may give rise to claims that they infringe on the intellectual property of others. We may unknowingly infringe on the intellectual property rights of others and incur significant liability for that infringement. If we are found to infringe on the intellectual property rights of others, we could be enjoined from continuing to manufacture, market or use the affected product, or be required to obtain a license to continue manufacturing or using the affected product. A license could be very expensive to obtain or may not be available at all. Similarly, changing our products or processes to avoid infringing the rights of others may be costly or impractical. Occasionally, third parties assert that we are, or may be, infringing on or misappropriating their intellectual property rights. In these cases, we will defend against claims or negotiate licenses where we consider these actions appropriate. Intellectual property cases are uncertain and involve complex legal and factual questions. If we become involved in this type of litigation, it could consume significant resources and divert our attention from our business. Some of our customers have received notices of infringement from the Lemelson Medical, Education and Research Foundation Limited Partnership (the "Lemelson Foundation"), alleging that equipment we have supplied to our customers, and processes this equipment performs, infringes on patents held by the Lemelson Foundation. These notices increased substantially in 1998, the year in which the Lemelson Foundation settled its suit against the Ford Motor Company, and entered into license agreements with Ford, GM and Chrysler. Since the settlement, a number of our customers, including Intel, have been sued by the Lemelson Foundation. Some of our customers have requested that we defend and indemnify them against the Lemelson Foundation's claims or contribute to any settlement the customer reaches with the Lemelson Foundation. We have received opinions from our outside patent counsel with respect to various Lemelson Foundation patents. We are not aware that any equipment we market or that any process performed by our equipment infringes on the Lemelson Foundation patents and we do not believe that the Lemelson Foundation matter or any other pending intellectual property claim against us will materially and adversely affect our business, financial condition or operating results. The ultimate outcome of any infringement or misappropriation claim affecting us is uncertain, however, and we cannot assure you that our resolution of this litigation will not materially and adversely affect our business, financial condition and operating results. OTHER RISKS ANTI-TAKEOVER PROVISIONS IN OUR ARTICLES OF INCORPORATION AND BYLAWS AND PENNSYLVANIA LAW MAY DISCOURAGE OTHER COMPANIES FROM ATTEMPTING TO ACQUIRE US Some provisions of our articles of incorporation and bylaws and of Pennsylvania law may discourage some transactions where we would otherwise experience a change in control. For example, our articles of incorporation and bylaws contain provisions that: - classify our Board of Directors into four classes, with one class being elected each year; - permit our Board to issue "blank check" preferred stock without shareholder approval; and - prohibit us from engaging in some types of business combinations with a holder of 20% or more of our voting securities without super-majority board or shareholder approval. Further, under the Pennsylvania Business Corporation Law, because our bylaws provide for a classified Board of Directors, shareholders may only remove directors for cause. These provisions and some provisions of the Pennsylvania Business Corporation Law could delay, defer or prevent us from experiencing a change in control and may adversely affect our common stockholders' voting and other rights. 29 32 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. At September 30, 2000, we had a non-trading investment portfolio of fixed income securities, excluding those classified as cash and cash equivalents, of $101.5 million (see Note 5 of the Company's Consolidated Financial Statements). These securities, like all fixed income instruments, are subject to interest rate and exchange rate risk and may fall in value if market rates change. If market interest rates were to increase immediately and uniformly by 10% from levels as of September 30, 2000, the fair market value of the portfolio would decline by approximately $600,000. We also had investments in equity securities of $1.3 million at September 30, 2000 of which 100% of the portfolio is vulnerable to market risk. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated Financial Statements of Kulicke and Soffa Industries, Inc. and Cerprobe Corporation listed in the index appearing under Item 14 (a)(1)(a), (b) and (c) herein are filed as part of this Report. 30 33 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Kulicke and Soffa Industries, Inc.: In our opinion, the consolidated financial statements listed in the index appearing under Item 14 (a)(1)(a) on page 86 present fairly, in all material respects, the financial position of Kulicke and Soffa Industries, Inc. and its subsidiaries at September 30, 2000 and September 30, 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14 (a)(2) on page 86 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania November 16, 2000, except as to Note 15, which is as of November 30, 2000 and December 8, 2000, and Note 16, which is as of December 22, 2000 31 34 KULICKE AND SOFFA INDUSTRIES, INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
SEPTEMBER 30, ------------------------ 1999 2000 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents (including time deposits: 1999 - $912; 2000 - $503) $ 37,155 $ 211,489 Short-term investments 2,190 105,130 Accounts and notes receivable (less allowance for doubtful accounts: 1999 - $1,727; 2000 - $4,355) 136,047 188,485 Inventories, net 61,782 74,034 Prepaid expenses and other current assets 9,906 9,748 Refundable income taxes 2,934 -- Deferred income taxes 11,071 -- --------- --------- TOTAL CURRENT ASSETS 261,085 588,886 Property, plant and equipment, net 67,485 83,867 Intangible assets, primarily goodwill (net of accumulated amortization: 1999 - $10,276; 2000 - $13,781) 44,637 41,724 Investments in and loans to joint ventures 2,940 -- Other assets 1,998 8,375 --------- --------- TOTAL ASSETS $ 378,145 $ 722,852 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current portion of long-term debt $ 1,178 $ 1,026 Accounts payable 61,962 62,513 Accrued expenses 27,210 51,935 Income taxes payable 3,604 10,724 --------- --------- TOTAL CURRENT LIABILITIES 93,954 126,198 Long term debt -- 175,000 Other liabilities 4,373 7,967 Deferred Taxes -- 4,148 Minority interest 5,042 4,197 --------- --------- TOTAL LIABILITIES 103,369 317,510 --------- --------- COMMITMENTS AND CONTINGENCIES (Note 13) SHAREHOLDERS' EQUITY: Preferred stock, without par value: Authorized - 5,000 shares; issued - none -- -- Common stock, without par value: Authorized - 200,000 shares; issued and outstanding: 1999 - 46,978; 2000 - 48,716 160,108 189,766 Retained earnings 117,018 220,263 Accumulated other comprehensive loss (2,350) (4,687) --------- --------- TOTAL SHAREHOLDERS' EQUITY 274,776 405,342 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 378,145 $ 722,852 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 32 35 KULICKE AND SOFFA INDUSTRIES, INC. CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED SEPTEMBER 30, --------------------------------------- 1998 1999 2000 --------- --------- --------- Net sales $ 411,040 $ 398,917 $ 899,273 Cost of goods sold 274,207 285,382 573,177 --------- --------- --------- Gross profit 136,833 113,535 326,096 Selling, general and administrative 83,854 86,226 136,179 Research and development, net 48,715 37,188 50,135 Resizing costs 7,472 5,918 (2,548) Asset impairment 948 -- 3,871 Purchased in-process research and development -- 3,935 -- --------- --------- --------- Income (loss) from operations (4,156) (19,732) 138,459 Interest income 5,776 3,762 12,418 Interest expense (262) (215) (7,699) Equity in loss of joint ventures (8,715) (10,000) (1,221) --------- --------- --------- Income (loss) before taxes (7,357) (26,185) 141,957 Provision (benefit) for income tax (1,917) (8,221) 40,149 --------- --------- --------- Income (loss) before minority interest (5,440) (17,964) 101,808 Minority interest in net loss of subsidiary -- 1,018 1,437 --------- --------- --------- Net income (loss) $ (5,440) $ (16,946) $ 103,245 ========= ========= ========= Net income (loss) per share: Basic $ (0.12) $ (0.36) $ 2.15 Diluted $ (0.12) $ (0.36) $ 1.90 Weighted average shares outstanding: Basic 46,602 46,846 47,932 Diluted 46,602 46,846 56,496
The accompanying notes are an integral part of these consolidated financial statements. 33 36 KULICKE AND SOFFA INDUSTRIES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
FISCAL YEAR ENDED SEPTEMBER 30, --------------------------------------- 1998 1999 2000 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (5,440) $ (16,946) $ 103,245 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 13,250 15,989 24,260 Tax benefit from exercise of stock options 115 180 12,444 Provision for doubtful accounts 29 812 2,758 Provision for impairment of assets 948 -- 3,871 Deferred taxes (1,087) (8,463) 15,219 Provision for inventory reserves 4,132 1,200 6,978 Equity in loss of joint ventures 8,715 10,000 1,221 Minority interest in net loss of subsidiary -- (1,018) (1,437) Purchased in-process research and development -- 3,935 -- Loss on write off and disposal of property and equipment 1,484 1,566 -- Non-cash employee benefits 2,240 1,662 2,437 Changes in working capital accounts, net of effect of acquired businesses: Accounts receivable 38,937 (66,833) (55,490) Inventories (6,103) (14,700) (19,267) Prepaid expenses and other assets (912) (4,801) 153 Refundable income taxes (5,270) 2,336 2,934 Accounts payable and accrued expenses (24,568) 36,182 25,289 Taxes payable (4,561) (42) 7,120 Other, net (185) 1,012 2,362 --------- --------- --------- Net cash provided by (used in) operating activities 21,724 (37,929) 134,097 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases (proceeds) from investments classified as available-for-sale, net (22,283) 28,075 (103,046) Purchases of plant and equipment (16,062) (10,891) (38,304) Purchase of X-LAM technology -- (8,000) -- Proceeds from sale of property and equipment 436 -- -- Investments in and loans to joint ventures (14,500) (10,912) (2,152) --------- --------- --------- Net cash used in investing activities (52,409) (1,728) (143,502) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Proceeds from debt offering -- -- 168,985 Payments on borrowings, including capitalized leases (808) (192) -- Proceeds from issuances of common stock 385 280 14,777 --------- --------- --------- Net cash provided by (used in) financing activities (423) 88 183,762 --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (19) 246 (23) --------- --------- --------- CHANGE IN CASH AND CASH EQUIVALENTS (31,127) (39,323) 174,334 CASH AND CASH EQUIVALENTS AT: BEGINNING OF YEAR 107,605 76,478 37,155 --------- --------- --------- END OF YEAR $ 76,478 $ 37,155 $ 211,489 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 34 37 KULICKE AND SOFFA INDUSTRIES, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS)
Accumulated Common Stock Other ------------------------ Retained Comprehensive Shareholders' Shares Amount Earnings Income (Loss) Equity --------- --------- --------- ------------- ------------ Balances at September 30, 1997 46,474 $ 155,246 $ 139,404 $ (2,723) $ 291,927 Employer contribution to the 401K plan 178 2,240 -- -- 2,240 Exercise of stock options 82 385 -- -- 385 Tax benefit from exercise of stock options -- 115 -- -- 115 Components of comprehensive income: Net loss -- -- (5,440) -- (5,440) Translation adjustment -- -- -- (1,433) (1,433) Unrealized gain on investments, net -- -- -- 116 116 ------------ Total comprehensive loss (6,757) --------- --------- --------- ------------- ------------ Balances at September 30, 1998 46,734 157,986 133,964 (4,040) 287,910 Employer contribution to the 401K plan 168 1,662 -- -- 1,662 Exercise of stock options 76 280 -- -- 280 Tax benefit from exercise of stock options -- 180 -- -- 180 Components of comprehensive income: Net loss -- -- (16,946) -- (16,946) Translation adjustment -- -- -- 2,622 2,622 Unrealized loss on investments, net -- -- -- (115) (115) Realized gain on investments included in net loss, net -- -- -- (49) (49) Minimum pension liability (net taxes of $413) -- -- -- (768) (768) ------------ Total comprehensive loss (15,256) --------- --------- --------- ------------- ------------ Balances at September 30, 1999 46,978 160,108 117,018 (2,350) 274,776 EMPLOYER CONTRIBUTION TO THE 401K PLAN 94 2,437 -- -- 2,437 EXERCISE OF STOCK OPTIONS 1,644 14,777 -- -- 14,777 TAX BENEFIT FROM EXERCISE OF STOCK OPTIONS -- 12,444 -- -- 12,444 COMPONENTS OF COMPREHENSIVE INCOME: NET INCOME -- -- 103,245 -- 103,245 TRANSLATION ADJUSTMENT -- -- -- (884) (884) UNREALIZED LOSS ON INVESTMENTS, NET -- -- -- (20) (20) MINIMUM PENSION LIABILITY (NET OF TAXES OF $772) -- -- -- (1,433) (1,433) ------------ TOTAL COMPREHENSIVE INCOME 100,908 --------- --------- --------- ------------- ------------ BALANCES AT SEPTEMBER 30, 2000 48,716 $ 189,766 $ 220,263 $ (4,687) $ 405,342 ========= ========= ========= ============= ============
The accompanying notes are an integral part of these consolidated financial statements. 35 38 KULICKE AND SOFFA INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These consolidated financial statements include the accounts of Kulicke and Soffa Industries, Inc. and its subsidiaries (the "Company"), with appropriate elimination of intercompany balances and transactions. Nature of Business - The Company manufactures capital equipment and packaging materials used in the assembly of semiconductors. The Company's operating results primarily depend upon the capital expenditures of semiconductor manufacturers and subcontract assemblers worldwide which, in turn, depend on the current and anticipated market demand for semiconductors and products utilizing semiconductors. The semiconductor industry historically has been highly volatile and experienced periodic downturns and slowdowns which have had a severe negative effect on the semiconductor industry's demand for semiconductor capital equipment, including assembly equipment manufactured and marketed by the Company and, to a lesser extent, packaging materials such as those sold by the Company. These downturns and slowdowns have also adversely affected the Company's operating results. The Company believes such volatility will continue to characterize the industry and the Company's operations in the future. The semiconductor and semiconductor equipment industries are subject to rapid technological change and frequent new product introductions and enhancements. The Company invests substantial amounts in research and development to continuously develop and manufacture new products and product enhancements in response to demands for higher performance assembly equipment. In addition, the Company continuously pursues investments in alternative packaging technologies. The Company's inability to successfully develop new products and product enhancements or to effectively manage the introduction of new products into the marketplace could have a material adverse effect on the Company's results of operations, financial condition and liquidity. Management Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas involving the use of estimates in these financial statements include allowances for uncollectible accounts receivable, reserves for excess and obsolete inventory, warranties, carrying value and lives of fixed assets, goodwill and intangible assets, valuation allowances for deferred tax assets and deferred tax liabilities for unrepatriated earnings. Actual results could differ from those estimated. Vulnerability to Certain Concentrations - Financial instruments which may subject the Company to concentration of credit risk at September 30, 2000 and 1999 consist primarily of investments and trade receivables. The Company manages credit risk associated with investments by investing its excess cash in investment grade debt instruments of the U.S. Government, financial institutions and corporations. The Company has established investment guidelines relative to diversification and maturities designed to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. The Company's trade receivables result primarily from the sale of semiconductor equipment, related accessories and replacement parts and packaging materials to a relatively small number of large manufacturers in a highly concentrated industry. The Company continually assesses the financial strength of its customers to reduce the risk of loss. Accounts receivable at September 30, 2000 and 1999 included notes receivable of $4.0 million and $10,000 respectively. Writeoffs of uncollectible accounts have historically been insignificant. Sales to a relatively small number of customers account for a significant percentage of the Company's net sales. In fiscal 2000, sales to Advanced Semiconductor Engineering accounted for 15.3% of the Company's net sales and sales to Amkor Technologies accounted for 10.1% of the Company's net sales. In fiscal 1999, no customer accounted for more than 10% of net sales. However, in fiscal 1998, sales to Intel accounted for 17.6% of the Company's net sales. The Company expects sales of its products to a limited number of customers will continue to account for a high percentage of net sales for the foreseeable future. At September 30, 2000, Advanced Semiconductor Engineering accounted for 14.4% of total accounts receivable. No other customer accounted for more than 10% of total accounts receivable at September 30, 2000. The reduction or loss of orders from a significant customer could adversely affect the Company's business, financial condition, operating results and cash flows. 36 39 The Company relies on subcontractors to manufacture to the Company's specifications many of the components or subassemblies used in its products. Certain of the Company's products require components or parts of an exceptionally high degree of reliability, accuracy and performance for which there are only a limited number of suppliers or for which a single supplier has been accepted by the Company as a qualified supplier. If supplies of such components or subassemblies were not available from any such source and a relationship with an alternative supplier could not be promptly developed, shipments of the Company's products could be interrupted and re-engineering of the affected product could be required. Such disruptions could have a material adverse effect on the Company's results of operations. Cash Equivalents - The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Investments - Investments, other than cash equivalents, are classified as "trading," "available-for-sale" or "held-to-maturity", in accordance with SFAS 115, and depending upon the nature of the investment, its ultimate maturity date in the case of debt securities, and management's intentions with respect to holding the securities. Investments classified as "trading" are reported at fair market value, with unrealized gains or losses included in earnings. Investments classified as available-for-sale are reported at fair market value, with net unrealized gains or losses reflected as a separate component of shareholders' equity (accumulated other comprehensive income (loss)). Investments classified as held-to-maturity are reported at amortized cost. Realized gains and losses are determined on the basis of specific identification of the securities sold. Inventories - Inventories are stated at the lower of cost (determined on the basis of first-in, first-out) or market. Due to the volatility of demand for capital equipment and the rapid technological change in the semiconductor industry, the Company is vulnerable to risks of excess and obsolete inventory. The Company generally provides reserves for equipment inventory considered to be in excess of 6 months of forecasted future demand and provides reserves for spare part and consumables inventory considered to be in excess of 18 months of forecasted future demand. Property, Plant and Equipment - Property, plant and equipment are carried at cost. The cost of additions and those improvements which increase the capacity or lengthen the useful lives of assets are capitalized while repair and maintenance costs are expensed as incurred. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives as follows: buildings 25 to 40 years; machinery and equipment 3 to 8 years; and leasehold improvements are based on the shorter of the life of lease or life of asset. Purchased computer software costs related to business and financial systems are amortized over a five year period on a straight-line basis. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the carrying value of long-lived assets, including goodwill, is evaluated whenever changes in circumstances indicate the carrying amount of such assets may not be recoverable. In performing such review for recoverability, the Company compares the expected future cash flows to the carrying value of long-lived assets and identifiable intangibles. If the anticipated undiscounted future cash flows are less than the carrying amount of such assets, the Company recognizes an impairment loss for the difference between the carrying amount of the assets and their estimated fair value. If an asset being tested for recoverability was acquired in a business combination accounted for using the purchase method, the excess of cost over fair value of net assets that arose in that transaction is allocated to the assets being tested for recoverability on a pro rata basis using the relative fair values of the long-lived assets and identifiable intangibles acquired at the acquisition date. Depreciation expense was $20.1 million, $13.1 million, and $10.9 million for the fiscal years ended September 30, 2000, 1999 and 1998, respectively. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation accounts are adjusted accordingly, and any resulting gain or loss is recorded in current operations. Intangible Assets - Goodwill resulting from acquisitions accounted for using the purchase method is amortized on a straight-line basis over the estimated period to be benefited by the acquisitions ranging from five to twenty years. The weighted average life of the goodwill recorded by the Company on September 30, 2000 was 15.5 years. The Company accounts for impairment of goodwill in accordance with SFAS No. 121, as discussed above. In connection with the Company's resizing efforts in fiscal 1998, the Company discontinued certain die bonder products which the Company had acquired in 1994, and recorded an impairment to goodwill of $948,000. Foreign Currency Translation - The U.S. dollar is the functional currency for all subsidiaries except the Company's subsidiaries in Japan, Korea, the Philippines, Thailand, Switzerland and Taiwan. Gains and losses resulting from the translation of functional currency financial statement amounts into U.S. dollars are not included in determining net income but are accumulated in the cumulative translation adjustment account as a separate component of shareholders' equity (accumulated other comprehensive 37 40 income (loss)), in accordance with SFAS No. 52. Cumulative translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. Gains and losses resulting from foreign currency transactions are included in the determination of net income. Net exchange and transaction gains (losses) were $1.0 million, $13,000 and ($147,000), for the fiscal years ended September 30, 2000, 1999 and 1998, respectively. Revenue Recognition - Sales are recorded upon shipment of products or performance of services. Provisions for estimated product returns, warranty and installation costs are accrued in the period of sale recognition. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". The SAB summarizes certain of the Staff's views in applying generally accepted accounting principles to revenue recognition in the financial statements. The Company is required to begin reporting changes to our revenue recognition policy in the fourth quarter of fiscal year 2001. Accordingly, any shipments previously reported as revenue, including revenue reported for the first three quarters of fiscal 2001, that do not meet SAB 101's guidance will be recorded as revenue in future periods. Changes in our revenue recognition policy resulting from the interpretation of SAB 101 would not involve the restatement of prior fiscal year statements, but would, to the extent applicable, be reported as a change in accounting principle in the fiscal year ended September 30, 2001, with the appropriate restatement of interim periods as required by SFAS No. 3 "Reporting Accounting Changes in Interim Financial Statements." The Company's reported results of operations for the 12 months ending September 30, 2001 may include a cumulative adjustment for all prior annual and interim periods including an adjustment for revenue in the first quarter of fiscal 2001 as if SAB 101 had been adopted on October 1, 2000. We are currently assessing the full impact of SAB 101 on our reported financial results. Research and Development Arrangements - The Company receives funding from certain customers and government agencies pursuant to contracts or other arrangements for the performance of specified research and development activities. Such amounts are recognized as a reduction of research and development expense when specified activities have been performed. During fiscal 2000, 1999 and 1998, reductions to research and development expense related to such funding totaled $1.1 million, $1.3 million and $1.7 million, respectively. Income Taxes - Deferred income taxes are determined using the liability method in accordance with SFAS No. 109, "Accounting for Income Taxes." No provision is made for U.S. income taxes on the portion of undistributed earnings of foreign subsidiaries which are indefinitely reinvested in foreign operations. Environmental Expenditures - Future environmental remediation expenditures are recorded in operating expenses when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accrued liabilities do not include claims against third parties and are not discounted. Earnings Per Share - Earnings per share is calculated in accordance with SFAS No. 128, "Earnings Per Share". Basic earnings per share includes only the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the weighted average number of common shares and the dilutive effect of stock options and other potentially dilutive securities outstanding during the period. On June 26, 2000, the Company's Board of Directors approved a two-for-one stock split of its common stock. Pursuant to the stock split, each shareholder of record at the close of business on July 17, 2000 received one additional share for each common share held at the close of business on that date. The additional shares were distributed on July 31, 2000. All prior period earnings per share amounts have been restated to reflect the two-for-one stock split. See Note 12. Accounting for Stock-based Compensation - The Company accounts for stock option grants using the "intrinsic value method" prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and discloses the pro forma effect on net income and earnings per share as if the fair value method had been applied to stock option grants, in accordance with SFAS 123, "Accounting For Stock-Based Compensation". See Note 8. Reporting Comprehensive Income - In fiscal 1999, the Company adopted SFAS 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. The comprehensive income and related cumulative equity impact of comprehensive income items are required to be reported in a financial statement that is displayed with the same prominence as other financial statements. The impact of foreign currency translation adjustments, minimum pension liability adjustments and unrealized gains or losses on securities available-for-sale are considered to be components of the Company's comprehensive income under the requirements of SFAS 130. 38 41 Segment Disclosure - In fiscal 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS 131 also requires disclosure about products and services, geographic areas, and major customers. The adoption of SFAS 131 did not affect results of operations or financial position but did affect the disclosure of segment information (see "Segment Information" Note 11). Derivative Instruments and Hedging Activities - In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 138, is effective for fiscal years beginning after June 15, 2000. The standard requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded in earnings or other comprehensive income, based on whether the instrument is designated as part of a hedge transaction and, if so, the type of hedge transaction. The Company will adopt this statement in the first quarter of 2001. The cumulative effect of adoption was not material. The impact of SFAS No. 133 on the company's future results will be dependent upon the fair values of the company's derivatives and related financial instruments and could result in increased volatility. Coupons, Rebates and Discounts - In May 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-14, "Accounting for Coupons, Rebates and Discounts" that addressed accounting for sales incentives. The Task Force concluded that in accounting for cash sales incentives a manufacturer should recognize the incentive as a reduction of revenue on the later date of the manufacturer's sale or the date the offer is made to the public. The reduction of revenues should be measured based on the estimated amount of incentives to be claimed by the ultimate customers. The Company must adopt this pronouncement in our fourth quarter of fiscal 2001. Management does not believe the adoption of this pronouncement will have a material impact on the Company's financial statements. Shipping and Handling - In September 2000, the Emerging Issues Task Force ("EITF") reached a final consensus on issue EITF No. 00-10, "Accounting for Shipping and Handling Revenues and Costs." The Task Force concluded that amounts billed to customers related to shipping and handling should be classified as revenue. The Company currently classifies shipping and handling revenue as a reduction of cost of products sold. Further, the Task Force stated that shipping and handling cost related to this revenue should either be recorded in costs of goods sold or the Company should disclose where these costs are recorded and the amount of these costs. The Company must adopt this pronouncement in the fourth quarter of fiscal 2001. Management does not believe adoption of this pronouncement will have a material impact on our financial statements. Stock Compensation - In March 2000, FASB Interpretation, or FIN, No. 44, "Accounting for Certain Transactions Involving Stock Compensation - An Interpretation of APB Opinion No. 25," was issued. FIN 44 clarifies the application of APB No. 25 for certain issues. FIN 44 clarifies the definition of employee for purposes of applying APB No. 25, the criteria for determining whether a plan qualifies as a non-compensatory plan, the accounting consequences of various modifications to the terms of a previously fixed option or award, and the accounting for an exchange of share compensation awards in a business combination, among others. FIN 44 was effective July 1, 2000 but certain conclusions in this interpretation cover specific events that occurred after either December 15, 1998 or January 12, 2000. FIN 44 did not have a significant effect on the Company's financial position or results of operations Reclassifications - Certain amounts in the Company's prior year financial statements have been reclassified to conform to their presentation in the current fiscal year. NOTE 2: RESIZING COSTS During fiscal 1999, the Company announced plans to relocate its automatic ball bonder manufacturing from Willow Grove, Pennsylvania to Singapore. As a result, in fiscal 1999 the Company recorded a charge for severance of $4.0 million for the elimination of approximately 230 positions and asset writeoffs of $1.6 million. In fiscal 1999, the Company also recorded a charge of $397,000 for severance for an additional 30 employees related to the reduction in workforce that began in fiscal 1998. Write-downs of property, plant and equipment were made where carrying values exceeded the Company's estimate of proceeds from abandonment or disposal. These estimates were based principally on past experience of comparable asset disposals. 39 42 In the fourth quarter of fiscal 2000, the Company reversed into income $2.5 million of the $5.6 million reserve which it established in fiscal 1999 for the relocation of its automatic ball bonder manufacturing from Willow Grove, Pennsylvania to Singapore. The reserve was established to reflect provisions for severance and asset write-off costs resulting from the move. However, due to the significant increase in demand for microelectronics products the Company retained engineering and marketing positions which were planned for downsizing. In addition, the majority of the direct and indirect manufacturing positions were eliminated through attrition in the workforce. The decision to retain the engineering and marketing positions in the U.S. and attrition in the workforce reduced the amount of severance required to be paid compared to the original estimate and resulted in the reversal of $2.5 million of the reserve. These relocation activities are now complete. During fiscal 1998, the Company announced plans to resize its workforce and discontinue products due to a slowdown in orders for its semiconductor assembly capital equipment and to a lesser extent for its semiconductor packaging materials. As a result of the resizing activities, the Company reduced it worldwide workforce by approximately 21% or 500 employees. The Company recorded a resizing charge of $7.4 million in 1998 for severance ($4.9 million), product discontinuation costs ($1.9 million, primarily writeoff of fixed assets and excess inventory) and other costs ($628,000) and recorded an impairment of goodwill of $948,000, associated with the 1994 acquisition of certain assets from Assembly Technologies. Concurrent with the resizing charge and impairment of goodwill in fiscal 1998, the Company recorded in 1998 charges in its cost of goods sold of $2.4 million for excess and obsolete inventory and $1.4 million for excess purchase commitments resulting from the slowdown in orders for its semiconductor assembly equipment. NOTE 3: INVESTMENTS IN JOINT VENTURES Flip Chip Technologies, LLC In February 1996, the Company entered into a joint venture agreement with Delco Electronics Corporation ("Delco") providing for the formation and management of Flip Chip Technologies, LLC ("FCT"). FCT was formed to license related technologies and to provide wafer bumping services on a contract basis. The Company owned a 51.0% equity interest in FCT but participated equally with Delco in the management of FCT through an Executive Committee. Accordingly, the Company accounted for its investment in FCT using the equity method, and recognized its proportionate share of the operating results of the joint venture on the basis of its ownership interest through September 30, 1998. For the first eight months of fiscal 1999, the Company recognized 100% of the FCT pre-tax loss due to the existence of these loans and did not recognize interest income on loans to FCT due to uncertainties about FCT's ability to obtain additional financing from Delco and its ability to generate short-term positive cash flow. Effective May 31, 1999 the Company increased its ownership interest in FCT, from 51.0% to 73.6% by converting all of its outstanding loans and accrued interest to FCT, which totaled $32.8 million, into equity units and gained operating control of FCT. The Company accounted for the increase in ownership by the purchase method of accounting and began consolidating the results of FCT into the Company's financial statements on June 1, 1999. In fiscal 2000, the Company invested an additional $5.0 million in FCT and increased its percentage of ownership to 76.9%. The Company has recorded goodwill, since May 31, 1999, of $5.8 million associated with the increase in ownership of FCT and is amortizing the goodwill over 10 years. The Company recorded a pretax loss from FCT operations for the two fiscal years ended September 30, 1999 as follows:
(IN THOUSANDS) FISCAL YEAR ENDED SEPTEMBER 30, 1998 1999(1) ------- ------- Equity in loss of joint venture $ 8,715 $ 9,163 Consolidated with operations of the Company -- 3,003 ------- ------- Pretax loss from FCT operations $ 8,715 $12,166 ======= =======
(1) After minority interest 40 43 Unaudited pro forma operating results of the Company for fiscal 1998 and 1999, assuming the increase in ownership of FCT took place at the beginning of fiscal 1998, are as follows:
(IN THOUSANDS) FISCAL YEAR ENDED SEPTEMBER 30, 1998 1999 --------- --------- (UNAUDITED) Net sales $ 415,382 $ 418,157 Net loss (8,719) (16,268) Net loss per share - diluted (0.19) (0.35)
The pro forma operating results reflected above are not necessarily indicative of the future operating results of the Company. Advanced Polymer Solutions In September 1998, the Company entered into a joint venture agreement with Polyset Company, Inc. ("Polyset") providing for the formation and management of Advanced Polymer Solutions, LLC ("APS") to develop, manufacture and market advanced polymer materials for semiconductor and microelectronic packaging end users. In the fourth quarter of fiscal 2000, the Company and its joint venture partner decided not to devote additional capital to this venture and to dissolve the joint venture. The Company recorded an asset impairment of $3.9 million representing the write-off of the Company's remaining investment in APS. The Company invested $6.0 million in APS and reported pre-tax losses of $837,000 in fiscal 1999 and $1.2 million in fiscal 2000. The Company has no further obligations or commitments to the joint venture. NOTE 4: PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT Purchased in-process research and development represents the value assigned in a purchase business combination to research and development projects of the acquired business that were commenced but not yet completed at the date of acquisition, for which technological feasibility has not been established and which have no alternative future use in research and development activities or otherwise. In accordance with Statement of Financial Accounting Standards No. 2, "Accounting for Research and Development Costs," as interpreted by Interpretation No. 4, amounts assigned to purchased in-process research and development meeting the above criteria must be charged to expense at the date of consummation of the purchase business combination. In January 1999, the Company purchased enabling technology and fixed assets used in the design, development, manufacture, marketing and sale of laminate substrates (the "X-LAM technology") for $8.0 million. The Company has allocated the majority of the purchase price to intangible assets, including in-process research and development. The portion of the purchase price allocated to in-process research and development was charged to expense in fiscal 1999. The other purchased intangibles include core technology and assembled workforce. These intangibles are being amortized over their estimated useful lives of 1 to 5 years. The Company allocated the purchase price as follows:
(in thousands) In-process research and development $ 3,935 Core technology 3,447 Property, plant and equipment 513 Assembled workforce 105 ------- Total $ 8,000 =======
The Company obtained an independent valuation of the purchased in-process research and development. The income valuation approach was used to determine the fair value of the in-process research and development. The Company estimated that the purchased technology was 60% complete and the technology would be marketable in fiscal 2000 and would generate positive cash flow beginning in fiscal 2001. These estimates are subject to change, given uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. 41 44 NOTE 5: INVESTMENTS At September 30, 2000 and 1999, no short-term investments were classified as trading or held-to-maturity. Investments, excluding cash equivalents, consisted of the following at September 30, 1999 and 2000: (in thousands)
September 30, 1999 SEPTEMBER 30, 2000 --------------------- ----------------------------------- Unrealized UNREALIZED Fair Gains/ Cost FAIR GAINS/ COST Available-for-sale: Value (Losses) Basis VALUE (LOSSES) BASIS - ------------------ -------- -------- -------- -------- -------- -------- Equity securities $ -- $ -- $ -- $ 1,266 $ 53 $ 1,213 Corporate debt securities -- -- -- 101,49 (105) 101,599 Adjustable rate notes 2,190 (74) 2,264 2,370 -- 2,370 -------- -------- -------- -------- -------- -------- Short-term investments classified as available for sale $ 2,190 $ (74) $ 2,264 $105,130 $ (52) $105,182 ======== ======== ======== ======== ======== ========
After-tax unrealized losses of $68,000 (net of taxes of $37,000) and $48,000 (net of taxes of $26,000) were recorded as direct adjustments to shareholders' equity at September 30, 2000 and September 30, 1999, respectively. In fiscal 2000 the Company purchased $196.5 million of securities it classified as available-for-sale and sold $93.4 million of available-for-sale securities. NOTE 6: BALANCE SHEET COMPONENTS
(IN THOUSANDS) SEPTEMBER 30, ---------------------- INVENTORIES 1999 2000 -------- -------- Raw materials and supplies $ 35,981 $ 50,394 Work in process 24,033 22,687 Finished goods 16,696 17,194 -------- -------- 76,710 90,275 Inventory reserves (14,928) (16,241) -------- -------- $ 61,782 $ 74,034 ======== ========
(IN THOUSANDS) SEPTEMBER 30, ------------------------ PROPERTY, PLANT AND EQUIPMENT: 1999 2000 --------- --------- Land $ 1,453 $ 1,602 Buildings and building improvements 21,608 23,481 Machinery and equipment 105,148 129,684 Leasehold improvements 15,960 20,496 --------- --------- 144,169 175,263 Accumulated depreciation (76,684) (91,396) --------- --------- $ 67,485 $ 83,867 ========= =========
Accrued expenses at September 30, 2000 included $16.4 million for accrued wages, incentives and vacations and $13.0 million for customer advances for the future delivery of parts and services. Accrued expenses at September 30, 1999 included $12.1 million for accrued wages, incentives and vacations. No other accrued expenses were significant. NOTE 7: DEBT OBLIGATIONS At September 30, 2000, the Company had a short-term debt obligation of $1.0 million reflecting debt due to Delco, the 23.1% owner of FCT. At September 30 2000, the Company had a $60.0 million revolving credit facility which expires on March 26, 2003. At September 30, 2000, the Company had no cash borrowings outstanding under the credit facility, but had utilized $1.1 million 42 45 of availability under the credit facility to support letters of credit issued as security deposits for its new manufacturing facility in Singapore and its new X-LAM facility. The revolving credit facility provided for borrowings denominated in either U.S. dollars or foreign currencies. Borrowings in U.S. dollars bear interest either at a Base Rate (defined as the greater of the prime rate minus 1/4% or the federal funds rate plus 1/2%) or, at a LIBOR Rate (defined as LIBOR plus 0.4% to 0.8%, depending on the Company's leverage ratio). Foreign currency borrowings bear interest at a LIBOR Rate, as defined above, applicable to the foreign currency. The revolving credit facility was guaranteed by certain of the Company's domestic subsidiaries and required the Company to maintain certain financial covenants including a leverage ratio and an interest coverage ratio or liquidity ratio. The revolving credit facility also limited the Company's ability to mortgage, pledge or dispose of a material portion of its assets and imposes restrictions on the Company's investments and acquisitions. There were no borrowings under this bank credit facility during fiscal 2000. In December 1999, the Company issued $175.0 million of convertible subordinated notes. The notes are general obligations of the Company and subordinated to all senior debt. The notes bear interest at 4 3/4%, are convertible into the Company's common stock at $22.8997 per share and mature on December 15, 2006. There are no financial covenants associated with the notes and there are no restrictions on paying dividends, incurring additional debt or issuing or repurchasing the Company's securities. Interest on the notes will be paid on June 15 and December 15 of each year. The Company may redeem the notes in whole or in part at any time after December 18, 2002 at prices ranging from 102.714% at December 19, 2002 to 100.0% at December 15, 2006. Interest paid on the Company's debt obligations totaled $4.3 million, $215,000 and $262,000 in fiscal 2000, 1999 and 1998, respectively. NOTE 8: SHAREHOLDERS' EQUITY Common Stock In fiscal 2000, the Company's common stock increased by $14.8 million reflecting the proceeds from the exercise of employee and director stock options and increased by $12.4 million due to a tax benefit associated with the exercise of the stock options. The Company's common stock increased due to the issuance of common stock as matching contributions to the Company's 401(k) saving plan by $2.4 million, $1.7 million and $2.2 million in fiscal 2000, 1999 and 1998, respectively. Stock Option Plans The Company has six employee stock option plans covering substantially all employees (the "Employee Plans") pursuant to which options have been or may be granted at 100% of the market price of the Company's Common Stock on the date of grant. Options may no longer be granted under three of the plans. Options granted under the Employee Plans are exercisable at such dates as are determined in connection with their issuance, but not later than ten years after the date of grant. The following summarizes all employee stock option activity for the three years ended September 30, 2000:
(OPTION AMOUNTS IN THOUSANDS) SEPTEMBER 30, ------------------------------------------------------------------- 1998 1999 2000 ------------------- -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- -------- ------- -------- ------- -------- (SHARE AMOUNTS IN THOUSANDS) Options outstanding at beginning of period 2,144 $ 7.53 4,360 $ 8.99 5,732 $10.17 Granted or reissued 2,600 10.32 1,670 12.90 106 27.78 Exercise (82) 4.81 (76) 3.77 (1,480) 9.16 Terminated or canceled (302) 11.18 (222) 9.81 (249) 12.57 ----- ------ ------ ------ Options outstanding at end of period 4,360 8.99 5,732 10.17 4,109 10.82 ===== ====== ====== Options exercisable at end of period 634 6.90 1,404 8.29 1,250 9.13 ===== ====== ======
43 46 The following table summarizes information concerning currently outstanding and exercisable employee options at September 30, 2000: (OPTION AMOUNTS IN THOUSANDS)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------------------- ---------------------------- (SHARE AMOUNTS IN THOUSANDS) (SHARE AMOUNTS IN THOUSANDS) WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE - --------------- ----------- ----------- ---------- ----------- --------- $ 1.31 - $ 1.97 53 1.3 $ 1.52 53 $ 1.52 $ 1.98 - $ 4.42 130 4.0 4.03 130 4.03 $ 4.43 - $ 6.63 469 5.5 5.99 188 5.97 $ 6.64 - $ 9.95 1,258 7.5 6.72 392 6.72 $ 9.96 - $14.92 1,552 8.8 12.89 318 12.89 $14.93 - $22.38 559 6.2 17.89 169 17.42 $22.39 - $32.06 88 8.9 $29.23 0 $ 0.00 ------------ ----------- 4,109 7.4 $10.82 1,250 $ 9.13 ============ ===========
The Company also maintains two stock option plans for non-officer directors (the "Director Plans") pursuant to which options to purchase 5,000 shares of the Company's Common Stock at an exercise price of 100% of the market price on the date of grant are issued to each non-officer director each year. Options can no longer be granted under one of these plans. Options to purchase 298,000 shares at an average exercise price of $16.46 were outstanding under the Director Plans at September 30, 2000, of which options to purchase 97,000 shares were currently exercisable. In fiscal 2000, there were 164,000 options exercised under the Director Plans at an average exercise price of $8.98. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), in accounting for stock options granted to employees. Under APB 25, the Company generally recognizes no compensation expense in the income statement with respect to such grants. Unaudited pro forma information regarding net income and earnings per share is required by SFAS 123 for options granted after October 1, 1995 as if the Company had accounted for its stock option grants to employees under the fair value method of SFAS 123. The fair value of the Company's stock option grants to employees was estimated using a Black-Scholes option pricing model. The following assumptions were employed to estimate the fair value of stock options granted to employees:
FISCAL YEAR ENDED SEPTEMBER 30, ------------------------------ 1998 1999 2000 ------ ------ ------ Expected dividend yield $ 0.00 $ 0.00 $ 0.00 Expected stock price volatility 73.00% 74.00% 73.00% Risk-free interest rate 5.40% 5.84% 5.87% Expected life (years) 7 8 8
For pro forma purposes, the estimated fair value of the Company's stock options to employees is amortized over the options' vesting period. The Company's pro forma information follows:
(NET INCOME (LOSS) IN THOUSANDS) FISCAL YEAR ENDED SEPTEMBER 30, 1998 1999 2000 ----------- ----------- ----------- Weighted average fair value of options granted $ 15.18 $ 19.92 $ 21.27 Net income (loss) - as reported $(5,440) $(16,946) $103,245 Net income (loss) - unaudited pro forma $(8,040) $(20,499) $ 94,634 Net income (loss) per share- as reported, diluted $ (0.12) $ (.36) $ 1.90 Net income (loss) per share- unaudited pro forma, diluted $ (0.18) $ (.44) $ 1.75
44 47 At September 30, 2000, 7.9 million shares were reserved for issuance and 3.7 million shares were available for grant in connection with the Employee Plans and 968,000 shares were reserved for issuance and 670,000 shares were available for grant in connection with a Director Plan. NOTE 9: EMPLOYEE BENEFIT PLANS The Company has a non-contributory defined benefit pension plan covering substantially all U.S. employees who were employed on September 30, 1995. The benefits for this plan were based on the employees' years of service and the employees' compensation during the three years before retirement. The Company's funding policy is consistent with the funding requirements of Federal law and regulations. Effective December 31, 1995, the benefits under the Company's pension plan were frozen. As a consequence, accrued benefits no longer change as a result of an employee's length of service or compensation. Detailed information regarding the Company's defined benefit pension is as follows:
(IN THOUSANDS) FISCAL YEAR ENDED SEPTEMBER 30, -------------------------------------- 1998 1999 2000 -------- -------- -------- Change in benefit obligation: Benefit obligations at beginning of year: $ 11,198 $ 11,802 $ 11,956 Interest cost 840 885 1,008 Benefits paid (405) (407) (497) Actuarial (gain) loss 169 (324) 1,296 -------- -------- -------- Benefit obligation at end of year $ 11,802 $ 11,956 $ 13,763 ======== ======== ======== Change in plan assets: Fair value of plan assets at beginning of year: $ 10,372 $ 10,542 $ 11,201 Actual return on plan assets 490 1,066 (92) Employer contributions 85 -- 1,782 Benefits paid (405) (407) (497) -------- -------- -------- Fair value of assets at end of year $ 10,542 $ 11,201 $ 12,394 ======== ======== ======== Reconciliation of funded status: Funded status $ (1,260) $ (755) $ (1,369) Unrecognized actuarial loss 1,749 1,181 3,387 -------- -------- -------- Net amount recognized at year-end $ 489 $ 426 $ 2,018 ======== ======== ======== Amount recognized in the statement of financial position consists of: Accrued benefit liability $ (1,260) $ (755) $ (1,369) Accumulated other comprehensive income/unrecognized net loss 1,749 1,181 3,387 -------- -------- -------- Net amount recognized at year-end $ 489 $ 426 $ 2,018 ======== ======== ======== Components of net periodic benefit cost: Interest Cost $ 840 $ 885 $ 1,008 Expected return on plan assets (833) (858) (922) Recognized actuarial loss 8 36 104 -------- -------- -------- Net periodic benefit cost $ 15 $ 63 $ 190 ======== ======== ======== Weighted-average assumptions as of September 30: Discount rate 7.50% 7.75% 7.75% Expected long-term rate of return on plan assets 8.00% 8.00% 8.00% Rate of compensation increase * * *
* Not applicable due to the December 31, 1995 benefit freeze. The Company's foreign subsidiaries have retirement plans that are integrated with and supplement the benefits provided by laws of the various countries. They are not required to report nor do they determine the actuarial present value of accumulated benefits or net assets available for plan benefits. The Company believes these plans are substantially fully funded as to vested benefits. On a 45 48 consolidated basis, pension expense was $1.3 million, $998,000 and $914,000, in fiscal 2000, 1999 and 1998, respectively. The Company has a 401(k) Employee Incentive Savings Plan. This plan allows for employee contributions and matching Company contributions in varying percentages, depending on employee age and years of service, ranging from 30% to 175% of the employees' contributions. The Company's contributions under this plan totaled $2.4 million, $1.7 million, and $2.2 million in fiscal 2000, 1999, and 1998, respectively, and were satisfied by contributions of shares of Company common stock, valued at the market price on the date of the matching contribution. NOTE 10: INCOME TAXES Income (loss), including minority interest in net income (loss), before income taxes consisted of the following:
(IN THOUSANDS) FISCAL YEAR ENDED SEPTEMBER 30, --------------------------------------- 1998 1999 2000 --------- --------- --------- United States operation $ (17,953) $ (43,663) $ 76,851 Foreign operations 10,596 18,496 66,543 --------- --------- --------- $ (7,357) $ (25,167) $ 143,394 ========= ========= =========
The provision (benefit) for income taxes included the following:
FISCAL YEAR ENDED SEPTEMBER 30, ------------------------------------ 1998 1999 2000 -------- -------- -------- Current: Federal $ (7,210) $ (2,218) $ 19,988 State 50 50 500 Foreign 4,155 2,410 4,442 Deferred: Federal 840 (8,613) 15,219 Foreign 248 150 -- -------- -------- -------- $ (1,917) $ (8,221) $ 40,149 ======== ======== ========
The provision (benefit) for income taxes differed from the amount computed by applying the statutory federal income tax rate as follows:
FISCAL YEAR ENDED SEPTEMBER 30, ------------------------------------ 1998 1999 2000 -------- -------- -------- Computed income tax expense (benefit) based on U.S. statutory rate $ (2,575) $ (8,808) $ 50,188 Effect of earnings of foreign subsidiaries subject to different tax rates (289) 603 (206) Benefits from Israeli and Singapore Approved Enterprise Zones (1,532) (4,509) (12,817) Benefits of net operating loss and tax credit carryforwards and change in valuation allowance (951) 4,200 1,566 Non-deductible goodwill amortization 677 677 871 Provision for repatriation of certain foreign earnings, including foreign withholding taxes 3,298 150 -- Effect of revisions of prior year's estimated taxes (779) (533) -- Other, net 234 (1) 547 -------- -------- -------- $ (1,917) $ (8,221) $ 40,149 ======== ======== ========
Undistributed earnings of certain foreign subsidiaries for which taxes have not been provided approximate $95.0 million at September 30, 2000. Such undistributed earnings are considered to be indefinitely reinvested in foreign operations. 46 49 Undistributed earnings approximating $73.2 million are not considered to be indefinitely reinvested in foreign operations. Accordingly, as of September 30, 2000, deferred tax liabilities of $16.4 million including withholding taxes but net of estimated foreign tax credits, have been provided. Deferred income taxes are determined based on the differences between the financial reporting and tax basis of assets and liabilities as measured by the current tax rates. The net deferred tax balance is composed of the tax effects of cumulative temporary differences, as follows:
(IN THOUSANDS) SEPTEMBER 30, ---------------------- 1999 2000 -------- -------- Repatriation of foreign earnings, including foreign withholding taxes $ 16,414 $ 16,414 Depreciable assets 2,592 2,748 Prepaid expenses and other 1,541 2,098 -------- -------- Total deferred tax liability 20,547 $ 21,260 -------- -------- Inventory reserves 2,291 2,813 Warranty accrual 655 1,126 Other accruals and reserves 2,298 4,711 Intangible assets 1,446 1,515 Domestic NOL carryforwards 19,430 1,855 Foreign NOL carryforwards 6,359 6,869 Domestic tax credit carryforwards 5,409 6,241 Deferred intercompany profit 1,945 706 -------- -------- 39,833 25,836 Valuation allowance (8,215) (8,724) -------- -------- Total deferred tax asset 31,618 17,112 -------- -------- Net deferred tax asset (liability) $ 11,071 $ (4,148) ======== ========
Realization of deferred tax assets associated with the net operating loss and tax credit carryforwards is dependent upon generating sufficient taxable income prior to their expiration in the respective tax jurisdictions. The Company believes there is a risk that certain of these tax credit carryforwards may expire unused and, accordingly, has established certain valuation allowances. The valuation allowance at September 30, 2000 relates to acquired domestic net operating loss carryforwards expiring through the year 2010 whose realization is limited to the U.S. earnings of the acquired company, and foreign net operating loss carryforwards which are scheduled to expire through the 2005 fiscal year. Although realization is not assured for the remaining deferred tax assets, the Company believes it is more likely than not that they will be realized through future taxable earnings or alternative tax strategies. However, the net deferred tax assets could be reduced in the near term if the Company's estimates of taxable income during the carryforward period are significantly reduced or alternative tax strategies are no longer viable. In the event the tax benefits relating to acquired net operating loss carryforwards are realized, such benefits would reduce the recorded amount of goodwill. The IRS is currently auditing the Company's federal income tax returns for fiscal 1995, 1996, 1997 and 1998. Management believes sufficient taxes have been provided in prior years and that the ultimate outcome of the IRS audits will not have a material adverse impact on the Company's financial position, results of operations or cash flows. The Company paid income taxes of $6.3 million, $3.8 million, and $8.8 million, in fiscal 2000, 1999 and 1998, respectively. NOTE 11: SEGMENT INFORMATION The Company evaluates performance of its segments and allocates resources to them based on income from operations before interest, allocations of corporate expenses and income taxes. The Company operates primarily in three industry segments: equipment, packaging materials and advanced packaging technologies. The equipment business unit designs, manufactures and markets capital equipment and related spare parts for use in the semiconductor assembly process. Equipment also services, maintains, repairs and upgrades assembly equipment. The packaging materials business designs, manufactures and markets consumable packaging materials for use on the equipment the company markets as well as on competitors' equipment. The packaging materials products have different manufacturing processes, 47 50 distribution channels and a less volatile revenue pattern than the Company's capital equipment. The Company's investment in APS, recorded under the equity method of accounting, was considered part of the packaging materials segment. The advanced packaging technology business unit was established in fiscal 1999 to reflect the Company's strategic initiative to develop new technologies for advanced semiconductor packaging. This segment is comprised of FCT and the Company's X-LAM business unit. The products and services of all segments are, or will be, for sale to semiconductor device manufacturers. The table below presents information about reported segments: (IN THOUSANDS)
ADVANCED PACKAGING PACKAGING CORPORATE, EQUIPMENT MATERIALS TECHNOLOGY OTHER AND FISCAL YEAR ENDED SEPTEMBER 30, 2000 SEGMENT SEGMENT SEGMENT ELIMINATIONS CONSOLIDATED - ------------------------------------ --------- --------- --------- ------------ ------------ NET SALES $ 692,062 $ 185,570 $ 21,641 $ -- $ 899,273 COST OF GOODS SOLD 419,732 130,548 22,897 -- 573,177 --------- --------- --------- --------- --------- GROSS PROFIT 272,330 55,022 (1,256) -- 326,096 OPERATING EXPENSES 122,792 29,005 19,096 15,421 186,314 RESIZING COSTS (2,548) -- -- -- (2,548) ASSET IMPAIRMENT -- 3,871 -- -- 3,871 --------- --------- --------- --------- --------- INCOME FROM OPERATIONS $ 152,086 $ 22,146 $ (20,352) $ (15,421) $ 138,459 ========= ========= ========= ========= ========= EQUITY IN LOSS OF JOINT VENTURES $ -- $ (1,221) $ -- $ -- $ (1,221) ========= ========= ========= ========= ========= SEGMENT ASSETS $ 258,529 $ 97,366 $ 44,957 $ 322,000 $ 722,852 CAPITAL EXPENDITURES 13,830 8,021 16,453 -- 38,304 DEPRECIATION EXPENSE 9,923 3,897 6,301 -- 20,121
ADVANCED PACKAGING PACKAGING CORPORATE, EQUIPMENT MATERIALS TECHNOLOGY OTHER AND FISCAL YEAR ENDED SEPTEMBER 30, 1999 SEGMENT SEGMENT SEGMENT ELIMINATIONS CONSOLIDATED - ------------------------------------ --------- --------- --------- ------------ ------------ Net sales $ 269,854 124,450 $ 4,613 $ -- $ 398,917 Cost of goods sold 188,958 90,326 6,098 -- 285,382 --------- --------- --------- --------- --------- Gross profit 80,896 34,124 (1,485) -- 113,535 Operating expenses 86,239 23,500 5,314 8,361 123,414 Resizing costs 5,918 -- -- -- 5,918 Purchased in-process research and development -- -- -- 3,935 3,935 --------- --------- --------- --------- --------- Income (loss) from operations $ (11,261) $ 10,624 $ (6,799) $ (12,296) $ (19,732) ========= ========= ========= ========= ========= Equity in loss of joint ventures $ -- $ (837) $ (9,163) $ -- $ (10,000) ========= ========= ========= ========= ========= Segment assets $ 200,837 $ 86,398 $ 37,560 $ 53,350 $ 378,145 Capital expenditures 6,522 2,136 2,233 -- 10,891 Depreciation expense 7,339 3,951 1,814 -- 13,104
48 51
PACKAGING CORPORATE, EQUIPMENT MATERIALS OTHER AND FISCAL YEAR ENDED SEPTEMBER 30, 1998 SEGMENT SEGMENT ELIMINATIONS CONSOLIDATED - ------------------------------------ --------- --------- ------------ ------------ Net sales $ 302,107 $ 108,933 $ -- $ 411,040 Cost of goods sold 191,948 82,259 -- 274,207 --------- --------- --------- --------- Gross profit 110,159 26,674 -- 136,833 Operating expenses 101,099 22,829 8,641 132,569 Resizing costs 5,984 1,724 712 8,420 --------- --------- --------- --------- Income (loss) from operations $ 3,076 $ 2,121 $ (9,353) $ (4,156) ========= ========= ========= ========= Equity in loss of joint ventures $ -- $ -- $ (8,715) $ (8,715) ========= ========= ========= ========= Segment assets $ 129,568 $ 78,318 $ 134,698 $ 342,584 Capital expenditures 12,809 3,253 -- 16,062 Depreciation expense 7,285 3,611 -- 10,896
Intersegment sales are immaterial. Operating expenses identified as Corporate, Other and Eliminations consist entirely of corporate expenses. Assets identified as Corporate, Other and Eliminations consist of all cash and short-term investments of the Company and corporate income tax assets. The Company's market for its products is worldwide. The table below presents destination sales to unaffiliated customers and long-lived assets by country: (IN THOUSANDS)
DESTINATION LONG-LIVED FISCAL YEAR ENDED SEPTEMBER 30, 2000 SALES ASSETS - ------------------------------------ ---------- ---------- TAIWAN $282,395 $ 1,316 PHILIPPINES 102,517 683 SINGAPORE 90,438 81,939 UNITED STATES 83,480 242,322 MALAYSIA 78,002 147 KOREA 74,696 264 JAPAN 58,962 27,834 HONG KONG 40,079 691 ISRAEL 4,066 31,411 ALL OTHER 84,638 14,245 -------- -------- $899,273 $400,852 ======== ========
DESTINATION LONG-LIVED FISCAL YEAR ENDED SEPTEMBER 30, 1999 SALES ASSETS - ------------------------------------ ----------- ----------- Taiwan $ 93,317 $ 606 United States 69,353 230,337 Singapore 44,642 48,653 Philippines 42,607 656 Malaysia 40,172 127 Japan 19,262 13,738 Hong Kong 19,096 4,875 Israel 1,007 20,300 All other 69,461 5,503 -------- -------- $398,917 $324,795 ======== ========
49 52
DESTINATION LONG-LIVED FISCAL YEAR ENDED SEPTEMBER 30, 1998 SALES ASSETS - ------------------------------------ ----------- ---------- Taiwan $ 82,957 $ 660 United States 82,053 123,308 Philippines 70,675 796 Malaysia 63,817 149 Singapore 18,932 39,095 Korea 15,205 309 Hong Kong 14,815 6,863 Israel 1,397 24,834 All other 61,189 11,872 -------- -------- $411,040 $207,886 ======== ========
Sales to a relatively small number of customers account for a significant percentage of the Company's net sales. In fiscal 2000, sales to Advanced Semiconductor Engineering accounted for 15.3% of the Company's net sales and sales to Amkor Technologies accounted for 10.1% of the Company's net sales. In fiscal 1999 no customer accounted for more than 10% of total net sales. However, in fiscal 1998, sales to Intel accounted for 17.6% of the Company's net sales. The Company expects that sales of its products to a limited number of customers will continue to account for a high percentage of net sales for the foreseeable future. NOTE 12: OTHER FINANCIAL DATA Maintenance and repairs expense totaled $3.1 million, $2.6 million, and $3.6 million for fiscal 2000, 1999, and 1998, respectively. Warranty and retrofit expense was $8.8 million, $4.6 million, and $4.8 million for fiscal 2000, 1999 and 1998, respectively. Rent expense for fiscal 2000, 1999 and 1998 was $3.6 million, $3.2 million, and $3.0 million, respectively. A reconciliation of weighted average shares outstanding-basic to the weighted average shares outstanding-diluted appears below:
(shares in thousands) Fiscal Year Ended September 30, ------------------------------ 1998 1999 2000 ------ ------ ------ Weighted average shares outstanding - Basic 46,602 46,846 47,932 Potentially dilutive securities: Employee stock options * * 2,469 4-3/4% Convertible Subordinate Debt N/A N/A 6,095 ------ ------ ------ Weighted average shares outstanding - Diluted 46,602 46,846 56,496 ====== ====== ======
The after-tax interest expense recognized by the Company in fiscal 2000 associated with the convertible subordinated notes that was added back to net income in order to compute diluted net income per share was $4.3 million. * Due to the Company's net loss for the fiscal years ended September 30, 1999 and September 30, 1998, all potentially dilutive securities are deemed to be antidilutive. The weighted average number of shares for potentially dilutive securities (employee and director stock options) was 666,000 in fiscal 1999 and 366,000 in fiscal 1998. NOTE 13: COMMITMENTS AND CONTINGENCIES The Company has obligations under various operating leases, primarily for manufacturing and office facilities, which expire periodically through 2006. Minimum rental commitments under these leases (excluding taxes, insurance, maintenance and repairs, which are also paid by the Company), are as follows: $5.7 million in 2001; $4.9 million in 2002; $3.0 million in 2003; $1.9 million in 2004; $2.0 million in 2005 and $1.2 million thereafter. From time to time, third parties assert that the Company is, or may be, infringing or misappropriating their intellectual property rights. In such cases, the Company will defend against claims or negotiate licenses where considered appropriate. In addition, certain of the Company's customers have received notices of infringement from the Lemelson Medical, Education and Research Foundation Limited Partnership (the "Lemelson Foundation"), alleging that equipment supplied by the Company, and processes performed by such equipment, infringe on patents held by the Lemelson Foundation. This activity increased substantially in 1998, 50 53 the year in which the Lemelson Foundation settled its suit against the Ford Motor Company, and entered into License Agreements with Ford, GM and Chrysler. Since the settlement, a number of the Company's customers, including Intel, have been sued by the Lemelson Foundation. Certain customers have requested that the Company defend and indemnify them against the claims of the Lemelson Foundation or to contribute to any settlement the customer reaches with the Lemelson Foundation. The Company has received opinions from its outside patent counsel with respect to certain of the Lemelson Foundation patents. The Company is not aware that any equipment marketed by the Company, or process performed by such equipment, infringe on the Lemelson Foundation patents in question and does not believe that the Lemelson Foundation matter or any other pending intellectual property claim will have a material adverse effect on its business, financial condition, operating results or cash flows. However, the ultimate outcome of any infringement or misappropriation claim affecting the Company is uncertain, and there can be no assurances that the resolution of these matters will not have a material adverse effect on the Company's business, financial condition, operating results or cash flows. The Israeli government has funded a portion of the research and development costs related to certain products. The Company is contingently liable to repay such funding through royalties to the Israeli government. Royalty payments are due only upon sale of the funded products, are computed at varying rates from 2% to 5% of such sales and are limited to the amounts received from the Israeli government. Royalty payments to the Israeli government for the fiscal years ended September 30, 2000, 1999 and 1998 totaled $9,000, $4,000, and $286,000, respectively. At September 30, 2000, the Company was contingently liable for royalties approximating $3.4 million related to potential future product sales. The U.S. Customs Service has conducted an assessment of the Company's compliance with Customs Regulations for the fiscal year ended September 30, 1998 and has concluded that $201,000 of duty was not paid. They also concluded that for the fiscal years ended September 30, 1996, 1997 and 1999 unpaid duty amounted to $568,000. The Company has paid the total assessed duty of $769,000 and may be assessed a penalty on the unpaid duty. The amount of the assessed penalty and amount ultimately to be paid is unknown at this time, but could range from 0 to 8 times the assessed duty. 51 54 NOTE 14: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Financial information pertaining to quarterly results of operations follows: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED FIRST SECOND THIRD FOURTH SEPTEMBER 30, 2000: QUARTER QUARTER QUARTER QUARTER TOTAL - -------------------- -------- -------- -------- -------- --------- NET SALES $179,849 $222,153 $268,258 $229,013 $899,273 GROSS PROFIT 59,912 75,600 101,278 89,306 326,096 INCOME FROM OPERATIONS(1)(2) 17,116 29,834 52,348 39,161 138,459 INCOME BEFORE MINORITY INTEREST AND INCOME TAXES 17,346 30,417 52,628 41,566 141,957 INCOME TAX EXPENSE 4,978 8,564 14,858 11,749 40,149 MINORITY INTEREST IN NET LOSS 433 169 437 398 1,437 -------- -------- -------- -------- -------- NET INCOME $ 12,801 $ 22,022 $ 38,207 $ 30,215 $103,245 ======== ======== ======== ======== ======== NET INCOME PER SHARE: BASIC $ 0.27 $ 0.47 $ 0.79 $ 0.62 $ 2.15 DILUTED $ 0.26 $ 0.40 $ 0.67 $ 0.54 $ 1.90
Year ended First Second Third Fourth September 30, 1999: Quarter Quarter Quarter Quarter Total - ------------------- --------- --------- --------- --------- --------- Net sales $ 61,175 $ 73,561 $ 110,806 $ 153,375 $ 398,917 Gross profit 16,176 21,025 30,374 45,960 113,535 Income (loss) from operations(1)(3) (10,282) (17,087) (776) 8,413 (19,732) Income (loss) before minority interest and income taxes (12,663) (21,109) (1,224) 8,811 (26,185) Income tax expense (benefit) (3,800) (6,333) (283) 2,195 (8,221) Minority interest in net loss 282 736 1,018 ---------- --------- --------- --------- --------- Net income (loss) $ (8,863) $ (14,776) $ (659) $ 7,352 $ (16,946) ========= ========= ========= ========= ========= Net income (loss) per share: Basic $ (0.19) $ (0.32) $ (0.01) $ .16 $ (0.36) Diluted $ (0.19) $ (0.32) $ (0.01) $ .15 $ (0.36)
(1) Represents net sales less costs and expenses but before net interest expense, equity in loss of joint ventures and other expense. (2) Results for the fourth quarter of fiscal 2000 include the benefit from the reversal of $2.5 million of the severance reserve established in fiscal 1999 for the termination of employees in the United States as a result of the move of the manufacturing of the Company's automatic ball bonders to Singapore and a charge of $3.9 million for the write-off of the Company's investment in Advanced Polymer Solutions, LLC (3) Results for the first quarter of fiscal 1999 include a charge of $397,000 for severance in connection with the resizing of the Company's work-force begun in fiscal 1998. Results of the second quarter include a one-time charge of $5.6 million for severance and asset write-offs in connection with the move of ball bonder manufacturing to Singapore and a charge of $3.9 million for purchased in-process research and development in connection with the purchase of the X-LAM technology. 52 55 NOTE 15: SUBSEQUENT EVENT - ACQUISITIONS (UNAUDITED) On November 30, 2000, the Company completed its tender offer for 100% of the outstanding shares of Cerprobe Corporation ("Cerprobe") for $20 per share. The total purchase price, including transaction costs, of Cerprobe was approximately $225.0 million, payable in cash. On December 8, 2000 the Company purchased all the outstanding shares of Probe Technology Corporation ("Probe Tech") for approximately $65.0 million, including transaction costs, payable in cash. Both Cerprobe and Probe Tech design and manufacture semiconductor test interconnect solutions. The acquisitions will be recorded using the purchase method of accounting and accordingly the purchase price will be allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their fair values on the acquisition dates, as determined by management. The Company received a waiver of a bank covenant under its bank revolving credit facility, which limited the amount the Company could spend on acquisitions, in order to complete the Cerprobe and Probe Tech acquisitions. The Company borrowed $55.0 million under its bank revolving credit facility to partially fund the purchase of Probe Tech. These two companies will be merged together to create a test division and will be disclosed as a separate business segment for financial reporting purposes. Pro forma operating results for the twelve months ended September 30, 2000 assuming the acquisition of Cerprobe was consummated on October 1, 1999 appear below. This unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transaction had been consummated at the date indicated, nor is it necessarily indicative of the future operating results of the combined businesses. The proforma results do not give effect to the acquisition of Probe Tech as the impact is not material. The pro forma results of operations combine the Company's audited results with Cerprobe's results for the twelve months ended September 30, 2000, and give effect to the preliminary allocation of the purchase price, which may subsequently change.
UNAUDITED PROFORMA COMBINED OPERATING RESULTS TWELVE MONTHS ENDED SEPTEMBER 30, 2000 --------------------------------------- (in thousands, except per share amount) Net sales $1,009,809 Net income $ 79,880 Diluted net income per share $ 1.49
NOTE 16: SUBSEQUENT EVENT - BANK FINANCING (UNAUDITED) On December 22, 2000, the Company entered into a new $60.0 million (reducing to $40.0 million over a three year period) bank revolving credit facility which replaced the revolving credit facility that had been in place for several years. The new facility expires in December 2003. The borrowings are subject to compliance with financial and other covenants set forth in the revolving credit documents. Borrowings bear interest either at a Base Rate (defined as the higher of the prime rate or the federal funds rate plus 1/2%) or, at a LIBOR Rate (defined as LIBOR plus 1.0% to 2.0%, depending on the ratio of senior debt to earning before interest, taxes, depreciation and amortization). The new revolving credit facility is guaranteed by certain of the Company's domestic subsidiaries and requires the Company maintain certain financial covenants including a leverage ratio, a liquidity ratio and a minimum net worth requirement. The new revolving credit facility also limits the Company's ability to mortgage, pledge or dispose of a material portion of its assets and imposes restrictions on the Company's investments and acquisitions. 53 56 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders of Cerprobe Corporation: We have audited the accompanying consolidated balance sheets of Cerprobe Corporation and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cerprobe Corporation and subsidiaries as of December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. KPMG LLP PHOENIX, ARIZONA FEBRUARY 15, 2000 54 57 CERPROBE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ---------------------------- 1999 1998 ---------------------------- Assets Current assets: Cash $ 3,484,045 $ 4,753,696 Short-term investment securities -- 14,305,400 Accounts receivable, net of allowance of $331,009 in 1999 and $333,364 in 1998 12,313,053 8,951,680 Inventories, net 9,728,500 5,303,631 Accrued interest receivable 22,157 102,093 Prepaid expenses 1,107,378 869,382 Income taxes receivable 4,041,140 714,811 Deferred tax asset 2,123,609 446,092 Net assets of discontinued operations -- 1,481,903 ----------- ----------- Total current assets 32,819,882 36,928,688 Property, plant, and equipment, net 23,537,021 21,169,934 Intangible assets, net 26,334,157 4,579,035 Other assets 676,485 1,007,917 ----------- ----------- Total assets $83,367,545 $63,685,574 =========== =========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 3,687,143 $ 2,534,997 Accrued expenses 5,584,724 3,075,894 Current portion of notes payable 10,334,878 138,985 Current portion of capital lease obligations 954,957 660,192 Net liabilities of discontinued operations 446,629 -- ----------- ----------- Total current liabilities 21,008,331 6,410,068 Notes payable, less current portion 5,200,034 731,555 Capital lease obligations, less current portion 2,454,637 2,472,563 Deferred tax and other liabilities 472,158 7,073 ----------- ----------- Total liabilities 29,135,160 9,621,259 ----------- ----------- Minority interest 1,115,545 590,465 Commitments and contingencies Stockholders' equity: Preferred stock, $.05 par value; authorized 10,000,000 shares; issued and outstanding none -- -- Common stock, $.05 par value; authorized 25,000,000 shares; issued 9,863,245 and outstanding 9,419,052 shares at December 31, 1999 and issued 8,131,279 and outstanding 7,645,126 shares at December 31, 1998 493,162 406,564 Additional paid-in capital 67,830,701 55,271,200 Retained earnings (deficit) (9,074,938) 3,505,734 Accumulated other comprehensive loss: Foreign currency translation (236,534) (188,131) ----------- ----------- 59,012,391 58,995,367 Treasury stock, at cost, 444,193 shares at December 31, 1999 and 486,153 shares at December 31, 1998 (5,027,278) (5,521,517) Notes receivable from related parties (868,273) -- ----------- ----------- Total stockholders' equity 53,116,840 53,473,850 ----------- ----------- Total liabilities and stockholders' equity $83,367,545 $63,685,574 =========== ===========
See accompanying notes to consolidated financial statements. 55 58 CERPROBE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, ------------------------------------------------------------ 1999 1998 1997 ---------------- -------------- -------------- Net sales $ 62,655,751 $ 76,207,477 $ 69,012,395 Costs of goods sold 41,637,001 45,052,300 39,251,446 ---------------- -------------- -------------- Gross profit 21,018,750 31,155,177 29,760,949 ---------------- -------------- -------------- Expenses: Selling, general, and administrative 21,214,773 18,316,839 16,218,709 Engineering and product development 4,806,971 3,101,082 996,253 In-process research and development 8,815,000 1,568,000 -- Goodwill amortization 785,981 461,301 386,467 ---------------- -------------- -------------- Total expenses 35,622,725 23,447,222 17,601,429 ---------------- -------------- -------------- Operating income (loss) (14,603,975) 7,707,955 12,159,520 ---------------- -------------- -------------- Other income (expense): Interest income 881,769 1,323,918 348,816 Interest expense (582,135) (269,115) (388,025) Other, net (527,138) 542,839 323,065 ---------------- -------------- -------------- Total other income (expense) (227,504) 1,597,642 283,856 ---------------- -------------- -------------- Income (loss) from continuing operations before minority interest and income taxes (14,831,479) 9,305,597 12,443,376 Minority interest (454,450) (383,637) 29,715 ---------------- -------------- -------------- Income (loss) from continuing operations before income taxes (15,285,929) 8,921,960 12,473,091 Income tax (expense) benefit 2,710,579 (3,685,308) (4,810,167) ---------------- -------------- -------------- Income (loss) from continuing operations (12,575,350) 5,236,652 7,662,924 Discontinued operations: Loss from operations of SVTR, Inc., net of taxes (5,322) (1,924,820) (5,766,956) Loss on disposal of SVTR, Inc., net of taxes -- (3,807,740) -- ---------------- -------------- -------------- Loss from discontinued operations (5,322) (5,732,560) (5,766,956) ---------------- -------------- -------------- Net income (loss) $ (12,580,672) $ (495,908) $ 1,895,968 ================ ============== ============== Net income (loss) per common share: Basic: From continuing operations $ (1.60) $ 0.66 $ 1.14 From discontinued operations -- (0.72) (0.86) ---------------- -------------- -------------- Net income (loss) per common share $ (1.60) $ (0.06) $ 0.28 ================ ============== ============== Weighted average number of common shares outstanding 7,884,628 7,963,747 6,690,265 ================ ============== ============== Diluted: From continuing operations $ (1.60) $ 0.63 $ 1.10 From discontinued operations -- (0.69) (0.83) ---------------- -------------- -------------- Net income (loss) per common share $ (1.60) $ (0.06) $ 0.27 ================ ============== ============== Weighted average number of common and common equivalent shares outstanding 7,884,628 8,251,373 6,982,368 ================ ============== ==============
See accompanying notes to consolidated financial statements. 56 59 CERPROBE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Number of Number of Preferred Common Shares Number of Shares Issued and Treasury Common Preferred Treasury Issued Outstanding Shares Stock Stock Stock ----------- ----------- --------- -------- --------- ----------- Balance, December 31, 1996 6,027,714 330 -- $301,386 $ 16 $ -- Exercise of stock options 95,265 -- -- 4,763 -- -- Issuance of common stock for acquisition 175,000 -- -- 8,750 -- -- Issuance of common stock in secondary offering, net of issuance cost of $226,764 1,800,000 -- -- 90,000 -- -- Redemption of preferred stock -- (330) -- -- (16) -- Tax benefit from exercise of nonqualified stock options -- -- -- -- -- -- Comprehensive income (loss): Foreign currency translation, net of taxes -- -- -- -- -- -- Net income -- -- -- -- -- -- Total comprehensive income ----------- ----------- --------- -------- --------- ----------- Balance, December 31, 1997 8,097,979 -- -- $404,899 $ -- $ -- Exercise of stock options 31,300 -- -- 1,565 -- -- Expenses of Issuance of common stock -- -- -- -- -- -- Issuance of common stock for employee stock purchase plan -- -- 37,198 -- -- 408,454 Exercise of warrants 2,000 -- (1,551) 100 -- (33,114) Purchase of treasury stock -- -- (521,800) -- -- (5,968,857) Tax benefit from exercise of nonqualified stock options -- -- -- -- -- -- Comprehensive income (loss): Foreign currency translation, net of taxes -- -- -- -- -- -- Net loss -- -- -- -- -- -- Total comprehensive loss ----------- ----------- --------- -------- --------- ----------- Balance, December 31, 1998 8,131,279 -- (486,153) $406,564 $ -- $(5,521,517) Exercise of stock options 231,966 -- -- 11,598 -- -- Issuance of common stock for acquisition 1,500,000 -- -- 75,000 -- -- Issuance of common stock for employee stock purchase plan -- -- 41,960 -- -- 494,239 Tax benefit from exercise of nonqualified stock options -- -- -- -- -- -- Notes receivable from related parties -- -- -- -- -- -- Comprehensive income (loss): Foreign currency translation, net of taxes -- -- -- -- -- -- Net loss -- -- -- -- -- -- Total comprehensive loss ----------- ----------- --------- -------- --------- ----------- Balance, December 31, 1999 9,863,245 -- (444,193) $493,162 $ -- $(5,027,278) =========== =========== ========= ======== ========= ===========
Notes Accumulated Additional Retained Receivable Other Total Paid-in Earnings from Related Comprehensive Stockholders' Capital (Deficit) Parties Income (loss) Equity ----------- ------------ ------------ ------------ ------------ Balance, December 31, 1996 $20,652,290 $ 2,105,674 $ -- $ 42,596 $ 23,101,962 Exercise of stock options 811,702 -- -- -- 816,465 Issuance of common stock for acquisition 1,662,062 -- -- -- 1,670,812 Issuance of common stock in secondary offering, net of issuance cost of $226,764 37,015,237 -- -- -- 37,105,237 Redemption of preferred stock (5,249,984) -- -- -- (5,250,000) Tax benefit from exercise of nonqualified stock options 245,000 -- -- -- 245,000 Comprehensive income (loss): Foreign currency translation, net of taxes -- -- -- (241,406) (241,406) Net income -- 1,895,968 -- -- 1,895,968 ------------ Total comprehensive income 1,654,562 ----------- ------------ ------------ ------------ ------------ Balance, December 31, 1997 $55,136,307 $ 4,001,642 $ -- $ (198,810) $ 59,344,038 Exercise of stock options 204,048 -- -- -- 205,613 Expenses of Issuance of common stock (178,650) -- -- -- (178,650) Issuance of common stock for employee stock purchase plan (74,519) -- -- -- 405,935 Exercise of warrants 33,014 -- -- -- -- Purchase of treasury stock -- -- -- -- (5,968,857) Tax benefit from exercise of nonqualified stock options 151,000 -- -- -- 151,000 Comprehensive income (loss): Foreign currency translation, net of taxes -- -- -- 10,679 10,679 Net loss -- (495,908) -- -- (495,908) ------------ Total comprehensive loss (485,229) ----------- ------------ ------------ ------------ ------------ Balance, December 31, 1998 55,271,200 $ 3,505,734 $ -- $ (188,131) $ 53,473,850 Exercise of stock options 1,387,065 -- -- -- 1,398,663 Issuance of common stock for acquisition 11,263,000 -- -- -- 11,338,000 Issuance of common stock for employee stock purchase plan (184,564) -- -- -- 309,675 Tax benefit from exercise of nonqualified stock options 94,000 -- -- -- 94,000 Notes receivable from related parties -- -- (868,273) -- (868,273) Comprehensive income (loss): Foreign currency translation, net of taxes -- -- -- (48,403) (48,403) Net loss -- (12,580,672) -- -- (12,580,672) ------------ Total comprehensive loss (12,629,075) ----------- ------------ ------------ ------------ ------------ Balance, December 31, 1999 $67,830,701 $ (9,074,938) $ (868,273) $ (236,534) $ 53,116,840 =========== ============ ============ ============ ============
57 60 CERPROBE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, ---------------------------------------------------------- 1999 1998 1997 ------------------ ------------------ ------------------ Cash flows from operating activities: Income (loss) from continuing operations $(12,575,350) $ 5,236,652 $ 7,662,924 Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used in) continuing operations: Depreciation and amortization 6,068,223 4,676,110 3,546,154 In-process research and development 8,815,000 1,568,000 - Loss on sale of equipment 184,763 373,245 12,583 Tax benefit from exercise of nonqualified stock options 94,000 151,000 245,000 Deferred income taxes (596,951) (509,174) 8,062 Provision for losses on accounts receivable 4,000 186,585 24,000 Provision for obsolete inventory 180,000 534,000 621,000 Compensation expense - - (33,536) Income (loss) applicable to minority interest 454,450 383,637 (29,715) Changes in working capital of continuing operations Accounts receivable 499,745 571,725 (2,689,975) Inventories (1,248,621) (736,703) (1,728,051) Prepaid expenses and other assets (42,877) (72,967) (236,085) Income taxes receivable (1,224,804) (243,765) (256,949) Accounts payable and accrued expenses 369,742 (1,359,857) 2,075,238 Accrued income taxes - (108,648) - Other liabilities (7,073) (9,627) - ------------ ------------ ------------ Net cash provided by continuing operations 974,247 10,640,213 9,220,650 ------------ ------------ ------------ Net cash used in discontinued operations (51,500) (1,161,467) (7,558,443) ------------ ------------ ------------ Net cash provided by operating activities 922,747 9,478,746 1,662,207 ------------ ------------ ------------ Cash flows from investing activities: Purchase of property, plant, and equipment (6,339,844) (11,900,133) (6,302,918) Redemption (purchase) of investment securities 14,305,400 12,695,298 (24,019,378) Investment in CRPB Investors, L.L.C. 213,620 88,455 107,293 Purchase of OZ Technologies, Inc., net of cash acquired (19,696,966) - - Purchase of Upsys-Cerprobe, L.L.C., net of cash acquired - (376,366) - Purchase of Cerprobe Europe S.A.S., net of cash acquired (31,135) (3,230,230) - Purchase of Cerprobe Interconnect Solutions, Inc., net of cash acquired - - (80,102) Purchase of SVTR, net of cash acquired - - (2,590,697) Proceeds from sale of equipment 11,487 15,267 74,683 Payment (issuance) of notes receivable (560,448) - 250,000 ------------ ------------ ------------ Net cash used in investing activities (12,097,886) (2,707,709) (32,561,119) ------------ ------------ ------------ Cash flows from financing activities: Issuance of notes payable 14,436,555 1,661,310 357,010 Redemption of convertible preferred stock - - (5,250,000) Payments on notes payable (6,261,632) (768,110) (1,856,141) Net proceeds (costs) from issuance of common stock - (178,650) 37,105,237 Purchase of treasury stock - (5,968,857) - Net proceeds from employee stock purchase plan 309,675 405,935 - Net proceeds from exercise of stock options 1,398,663 205,613 816,465 Capital contribution by minority interest partners - - 100,000 ------------ ------------ ------------ Net cash provided by (used in) financing activities 9,883,261 (4,642,759) 31,272,571 ------------ ------------ ------------ Effect of exchange rates on cash 22,227 (90,072) (241,406) ------------ ------------ ------------ Net increase (decrease) in cash (1,269,651) 2,038,206 132,253 Cash, beginning of period 4,753,696 2,715,490 2,583,237 ------------ ------------ ------------ Cash, end of period $ 3,484,045 $ 4,753,696 $ 2,715,490 ============ ============ ============
58 61 CERPROBE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Supplemental disclosures of cash flow information from continuing operations: Interest paid $ 582,135 $ 182,133 $ 221,248 ============ ========== =========== Income taxes paid $ 482,597 $2,049,282 $ 2,060,000 ============ ========== =========== Supplemental disclosures of non-cash investing activities: The Company made acquisitions for $37.9 million, $3.6 million, and $4.5 million in the years ended December 31, 1999, 1998, and 1997, respectively. The purchase prices were allocated to the assets acquired and liabilities assumed based on their fair values as indicated in the notes to the consolidated financial statements. A summary of the acquisitions is as follows: Purchase price $ 37,899,135 $3,626,366 $ 4,546,825 Less cash acquired (1,203,034) (19,770) (285,316) Notes payable issued (5,630,000) - - Common stock issued (11,338,000) - (1,670,812) ------------ ---------- ----------- Cash invested $ 19,728,101 $3,606,596 $ 2,590,697 ============ ========== =========== Notes receivable from the exercise of stock options from related parties $ 868,273 $ - $ - ============ ========== ===========
See accompanying notes to consolidated financial statements. 59 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS The Company offers comprehensive solutions principally in one segment of the semiconductor industry - semiconductor test interconnect. The Company is a leading manufacturer of probe cards, ATE interface assemblies, ATE test boards, and test sockets/contactors. The Company believes it is the only company that designs, manufactures, and assembles each of the electromechanical components that assure the integrity of the electrical test signal that passes from the ATE to the IC DUT. The Company's products address critical functions to assure IC quality, reduce manufacturing costs, improve the accuracy of manufacturing yield data, and identify repairable memory ICs. Unless the context indicates otherwise, all references to "Cerprobe" or the "Company" refer to Cerprobe Corporation and its subsidiaries. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Cerprobe Corporation and its subsidiaries: Cerprobe Europe Limited, Cerprobe Europe S.A.S., Cerprobe Asia Holdings Pte Ltd, Cerprobe Interconnect Solutions, Inc. ("CIS"), SVTR, Inc. ("SVTR"), Cerprobe Japan Co., Ltd, and OZ Technologies, Inc ("OZ"). All significant intercompany transactions have been eliminated in consolidation. Cerprobe Asia Holdings Pte Ltd is a 60% owner of Cerprobe Asia Pte Ltd; the balance is owned by Asian investors. Cerprobe Asia Pte Ltd's wholly owned subsidiaries, Cerprobe Singapore Pte Ltd and Cerprobe Taiwan Co., Ltd., operate full service sales and manufacturing plants. In January 1997, the Company acquired all of the outstanding stock of SVTR, Inc., a company that refurbishes, reconfigures, and services wafer probing equipment. In the third quarter of 1998, the Company discontinued operations of SVTR. See Note 17. In May 1997, the Company entered into a joint venture with Upsys Reseau Eurisys ("Upsys"), a French company owned by IBM and GAME COGEMA Group, a French testing and engineering company. The joint venture, called Upsys-Cerprobe, L.L.C., assembled and repaired Upsys's vertical probe card that had been distributed by Cerprobe throughout the United States and Asia. Cerprobe owned 55% of the joint venture and Upsys owned 45%. On June 25, 1998, the Company terminated its distribution agreement with Upsys, and in connection therewith, Cerprobe purchased Upsys's 45% interest in Upsys-Cerprobe, L.L.C. Accordingly, the consolidated financial statements as of and for the years ended December 31, 1999, 1998 and 1997 include the activities of Upsys-Cerprobe, L.L.C.as a consolidated entity with a minority interest through June 25, 1998. In September 1998, the Company acquired France-based Cerprobe Europe S.A.S. The Company designs, manufactures and distributes probe cards at its manufacturing plant near Marseilles. Accordingly, the consolidated financial statements as of and for the year ended December 31, 1998 include Cerprobe Europe S.A.S.'s activities since the date of acquisition. See Note 18. In March 1999, the Company formed Cerprobe Japan Co., Ltd. to operate a sales and distribution facility in Tokyo, Japan. In December 1999, the Company acquired California-based OZ Technologies, Inc. The Company offers systems solutions for IC package test and is a leading designer and producer of high performance test sockets and contactors. OZ also designs and distributes ATE test boards and burn-in interfaces and systems. Accordingly, the consolidated financial statements as of December 31, 1999 and for the year ended December 31, 1999 include OZ Technologies, Inc.'s activities since the date of acquisition. See Note 18. 60 63 USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet dates and reporting of revenues and expenses during the reporting periods to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost and depreciated using the straight-line method over the following estimated useful lives: Building 39 years Manufacturing tools and equipment 3-7 years Office furniture and equipment 3-7 years Computer hardware and software 3-5 years Leasehold improvements Life of lease
INTANGIBLES Intangibles consist of a license, goodwill, assembled workforce, patents and technology. Goodwill represents the amount by which the cost of businesses purchased exceeds the fair value of the net assets acquired. Goodwill is amortized over a period of seven to ten years using the straight-line method. Assembled workforce represents the amount allocated to an acquired company's existing personnel infrastructure and is being amortized over four years using the straight-line method. Patents and technology are stated at fair market value at the date of acquisition and are amortized over a period of five to eight years using the straight-line method. Research and development costs and any costs associated with internally developed patents, formulas or other proprietary technology are expensed in the year incurred. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful lives of intangibles may warrant revision or that the remaining balances may not be recoverable. When factors indicate that the assets should be evaluated for possible impairment, the Company uses an estimate of the undiscounted net cash flows over the remaining life of the assets in measuring whether the asset is recoverable. In November 1998, the Company entered into a 10 year manufacturing license agreement with Feinmetall GmbH to acquire an exclusive non-transferrable royalty bearing license to manufacture, use, sell, distribute, and repair ViProbe(R) products. This license covers worldwide territories except Europe. The license will be amortized over the period in which products are produced and will not exceed the ten year license term. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. FOREIGN CURRENCY TRANSLATION The financial statements of the Company's Europe, France, and Asia subsidiaries are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation". Assets and liabilities of the subsidiaries are translated into U.S. dollars at current exchange rates. Income and expense items are translated at the average exchange rate for the year. The resulting translation adjustments are recorded 61 64 directly as a separate component of stockholders' equity and minority interest. All transaction gains or losses are recorded in the statement of operations. REVENUE RECOGNITION The Company records revenue when goods are shipped. STOCK BASED COMPENSATION In accordance with the provisions of Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued to Employees," the Company measures stock-based compensation expense as the excess of the market price at the grant date over the amount the employee must pay for the stock. The Company's policy is to grant stock options at fair market value at the date of grant; accordingly, no compensation expense is recognized. As permitted, the Company has elected to adopt the pro forma disclosure provisions only of SFAS No. 123, "Accounting for Stock-Based Compensation." CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consists principally of cash, investment securities, forward currency contracts, and accounts receivable. The Company invests primarily in U.S. Treasury and government agency securities and corporate debt securities rated A1 or higher which have minimal credit risk. The Company places forward currency contracts with high credit-quality financial instruments in order to minimize credit risk exposure. Concentrations of credit risk with respect to accounts receivable are limited due to the Company's large semiconductor industry customer base. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, " Accounting for Derivative Instruments and Hedging Activities", which established standards for the accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. This statement generally requires recognition of gains and losses on hedging transactions. As issued, SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133- An Amendment of FASB Statement No. 133, " which deferred the effective date of SFAS No. 133 until June 15, 2000". The company is currently evaluating the impact of SFAS No. 133. RECLASSIFICATIONS Certain amounts in the 1997 and 1998 financial statements have been reclassified to conform with the 1999 presentation. (2) INVENTORIES Inventories consist of the following:
1999 1998 ----------- ----------- Raw materials $ 8,313,504 $ 5,147,311 Work-in-process 1,257,863 416,409 Finished goods 288,053 4,567 ----------- ----------- 9,859,420 5,568,287 Reserve for obsolete inventories (130,920) (264,656) ----------- ----------- $ 9,728,500 $ 5,303,631 =========== ===========
62 65 (3) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
1999 1998 ------------ ------------ Land $ 587,433 $ 589,950 Building 2,340,887 2,394,679 Manufacturing tools and equipment 17,479,305 15,385,727 Office furniture and equipment 3,372,043 2,489,523 Leasehold improvements 4,615,870 2,380,259 Computer hardware and software 9,523,321 4,675,543 Construction in progress 1,956,360 3,816,557 ------------ ------------ 39,875,219 31,732,238 Accumulated depreciation and amortization (16,338,198) (10,562,304) ------------ ------------ $ 23,537,021 $ 21,169,934 ============ ============
(4) INTANGIBLE ASSETS Intangible assets consist of the following:
1999 1998 ------------ ------------ Licenses $ 1,650,000 $ 1,528,575 Goodwill and assembled workforce 26,296,245 4,072,156 Patents and technology 613,057 340,840 ------------ ------------ 28,559,302 5,941,571 Accumulated amortization (2,225,145) (1,362,536) ------------ ------------ $ 26,334,157 $ 4,579,035 ============ ============
(5) OTHER ASSETS Other assets consist of the following:
1999 1998 ---------- ---------- Investment in CRPB Investors, L.L.C. $ 249,865 $ 463,845 Other assets and deposits 426,620 544,072 ---------- ---------- $ 676,485 $1,007,917 ========== ==========
In September 1996, the Company acquired a 36% interest in CRPB Investors, L.L.C., for $659,233. CRPB Investors, L.L.C., an Arizona limited liability company, was formed for the purpose of owning and operating the 83,000 square foot facility which serves as Cerprobe's worldwide headquarters. The investment is accounted for by the equity method of accounting. In 1999 and 1998, $(116,870) and $100,721, respectively, was recorded by Cerprobe as income (loss) from CRPB Investors, L.L.C. 63 66 (6) ACCRUED EXPENSES Accrued expenses consist of the following:
1999 1998 ---------- ---------- Accrued payroll and related taxes $2,579,820 $2,390,522 Other accrued expenses 2,279,484 685,372 Accrued acquisition costs 513,275 -- Lease termination costs 212,145 -- ---------- ---------- $5,584,724 $3,075,894 ========== ==========
(7) NOTES PAYABLE AND LINE OF CREDIT In December 1999, the Company entered into a three-year senior secured credit facility with Bank of America, N.A. (the "Loan and Security Agreement"). The Loan and Security Agreement includes a revolving credit facility in the amount of $15,000,000 subject to borrowing base requirements providing for advances of up to 85% of eligible accounts receivable. Advances on the revolving credit facility bear interest at prime rate plus 0.50%. The facility also includes an inventory term loan in the amount of approximately $5,800,000 and a machinery and equipment term loan in the amount of $2,000,000, both of which bear interest at prime rate plus 2.00%. The inventory term loan shall be repaid based upon a 24-month amortization with a balloon payment of the outstanding principal balance at the end of 12 months. The machinery and equipment term loan shall be repaid based upon a 60-month amortization with a balloon payment of the outstanding principal balance at the end of 36 months. All loans, advances, and other obligations, liabilities, and indebtedness of the Company shall be secured by valid, perfected, and enforceable first priority liens upon and security interest in substantially all of the Company's present and future assets, including all accounts, contract rights, inventory instruments, documents, fixtures, chattel paper, general intangibles, patents, trademarks, copyrights, trade names, deposit accounts, vehicles, equipment, and pledge of stock of all domestic subsidiaries of Cerprobe and OZ and 65% of the stock of each wholly-owned foreign subsidiary of Cerprobe. The facility is also guaranteed by all wholly-owned subsidiaries of Cerprobe and OZ. Advances under the revolving credit facility, the inventory term loan, and the machinery and equipment term loan were $1,300,878, $5,834,000, and $2,000,000 respectively, at December 31, 1999. The inventory term loan and the equipment term loan are at the maximum currently available under the terms of these loans. The Loan and Security Agreement contains a number of covenants that, among other things, restrict the ability of the Company to dispose of assets, incur additional indebtedness, incur guaranty obligations, prepay indebtedness except in accordance with relevant subordination provisions, pay dividends or make capital distribution (other than distributions in capital stock), create liens on assets, engage in mergers or consolidations (except that any subsidiary which is acquired solely for the Company's Common Stock and that any subsidiary of the Company may voluntarily merge into another subsidiary), engage in certain transactions with subsidiaries and affiliates, make any change in accounting policies or reporting practices except as required or permitted by generally accepted accounting principles and otherwise restrict corporate activities. In addition, the Loan and Security Agreement requires the Company to comply with certain financial covenants, including the maintenance of a consolidated Tangible Net Worth (as defined in the Loan and Security Agreement). At December 31, 1999, the Company was in violation of the Tangible Net Worth covenant under the line of credit agreement which was waived by the lender. The Loan and Security Agreement contains customary events of default, including the failure to pay principal when due or any interest or other amount that becomes due, any representation or warranty being made by the Company that is incorrect in any material respect on or as of the date made, a default in the performance of any covenant which continues for more than thirty days, default in certain other indebtedness, certain insolvency events, certain ERISA events, and certain change of control events. In addition pursuant to the OZ Technologies, Inc. acquisition, the Company issued to Selling Stockholders Notes in the 64 67 amount of $2,830,000 (the "Subordinated Promissory Note") and $2,800,000 (the "Promissory Note"). The Subordinated Promissory Note accrues interest at a rate of 10% per annum and matures December 3, 2002. The Promissory Note accrues interest at a rate of 10% per annum and was to have matured on February 3, 2000. The Selling Stockholders have agreed to extend maturity on this note until June 30, 2000. The Company may satisfy the Promissory Note on June 30, 2000 by paying in cash all amounts then due under the Promissory Note or by transferring its real property located at 10365 Sanden Drive, Dallas, Texas (the "Real Property") to the Selling Stockholders' agent, unencumbered except for minor liens and any mortgage that is executed by the Company in favor of the Selling Stockholders with respect to the Real Property. In the event that the Company satisfies the Promissory Note by transferring the Real Property to the Selling Stockholders' agent on June 30, 2000, the Stock Purchase Agreement provides that the Company and the Selling Stockholders' agent shall assign a value (the "Appraised Value") to the Real Property equal to the appraised value for the Real Property as determined by a mutually agreed-upon real estate appraiser. The Stock Purchase Agreement further provides that (1) to the extent the Appraised Value is less than $2,800,000 plus interest due under the Promissory Note, the amount of the difference shall be added to the principal amount of the Subordinated Promissory Note and (2) to the extent the Appraised Value is more than $2,800,000 plus interest due under the Promissory Note, the amount of the difference may be applied to reduce the principal amount of the Subordinated Promissory Note if doing so does not cause the Company to violate any covenant in any loan document to which it is a party. The Company also has various demand loans outstanding with minority shareholders of Cerprobe Asia Holdings, Pte Ltd. Interest is accrued at the five year Treasury Rate plus 1.50% per anum. These loans are not contractually due or not expected to be paid within the next 12 months, and accordingly, are classified as long-term debt. The outstanding balances, including interest at December 31, 1999 totaled $770,034 Long-term debt consists of the following:
1999 1998 ------------ ------------ Notes payable $ 15,534,912 $ 870,540 Less current portion (10,334,878) (138,985) ------------ ------------ Notes payable, less current portion $ 5,200,034 $ 731,555 ============ ============
Annual maturities of long-term debt are as follows: 2000 $ 10,334,878 2001 400,000 2002 4,030,000 Thereafter 770,034 ------------- $ 15,534,912 =============
(8) LEASES The Company leases certain equipment under capital leases. These assets have been capitalized at the present value of the future minimum lease payments and are included with manufacturing tools and equipment and office furniture at a cost of $5,547,998 and $4,710,745 with related accumulated amortization of $2,090,492 and $1,454,205 as of December 31, 1999 and 1998, respectively. In addition, the Company is obligated under certain noncancelable operating leases for the Company's manufacturing and office space. Certain operating lease agreements provide for annual rent escalations and renewal options. 65 68 The following is a schedule of the future minimum lease payments for the years ending December 31:
RENTALS RECEIVABLE CAPITAL OPERATING UNDER LEASES LEASES SUBLEASES ------------ ------------ --------- 2000 $ 1,140,177 $ 2,334,323 $ 47,600 2001 904,016 2,154,005 -- 2002 709,554 1,807,902 -- 2003 527,421 1,417,884 -- 2004 308,613 1,342,071 -- Thereafter 248,837 9,340,323 -- ------------ ------------ --------- Total future minimum lease payments 3,838,618 $ 18,396,508 $ 47,600 ============ ========= Less amounts representing interest (at rates ranging from 6.0% to 9.82%) (429,024) ------------ Present value of net minimum capital lease payments 3,409,594 Less current portion (954,957) ------------ Capital lease obligations, less current portion $ 2,454,637 ============
Depreciation expense for assets under capital leases is charged to depreciation and amortization expense. Rental expense for the years ended December 31, 1999, 1998, and 1997 was $1,959,970, $1,663,829, and $1,640,272, respectively. (9) INCOME TAXES Income tax expense (benefit) consists of the following:
1999 1998 1997 ----------- ----------- ----------- Foreign $ 805,988 $ 549,245 $ 115,763 Federal (3,177,178) 2,488,841 3,643,959 State (339,389) 647,222 1,050,445 ----------- ----------- ----------- $(2,710,579) $ 3,685,308 $ 4,810,167 =========== =========== =========== Current $(1,734,320) $ 4,194,482 $ 4,802,105 Deferred (976,259) (509,174) 8,062 ----------- ----------- ----------- $(2,710,579) $ 3,685,308 $ 4,810,167 =========== =========== ===========
66 69 A reconciliation of actual income taxes to income taxes at the "expected" United States federal corporate income tax rate of 34% is as follows:
1999 1998 1997 ----------- ----------- ----------- Income tax expense at "expected" federal corporate rate $(5,042,763) $ 3,033,466 $ 4,240,851 State income taxes, net of federal tax benefit (223,997) 427,167 693,294 In-process research and development expense not benefited 2,996,420 -- -- Foreign income taxed at lower than U.S. federal rate (151,450) (3,326) (79,408) Amortization of intangibles 240,307 156,843 131,406 Foreign sales corporation benefit -- (106,236) (82,501) Utilization of federal tax credit (703,642) -- -- Nontaxable income -- -- (79,013) Utilization of net operating loss carryforwards -- -- (47,706) Change in foreign and state valuation allowance 143,514 171,810 -- Other 31,032 5,584 33,244 ----------- ----------- ----------- $(2,710,579) $ 3,685,308 $ 4,810,167 =========== =========== ===========
The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability are as follows:
1999 1998 ----------- ----------- Deferred tax assets: Foreign tax loss carryforward $ 86,738 $ 349,364 Acquisition costs not currently deductible 581,902 616,747 Amortization not currently deductible 253,024 1,693 Currency translation not currently deductible 120,399 192,589 Reserves and accruals not currently deductible 1,024,801 446,092 Net operating loss carry forward 1,125,339 -- Income tax credits 379,609 -- ----------- ----------- Deferred tax assets $ 3,571,812 $ 1,606,485 Less valuation allowance (492,878) (349,364) ----------- ----------- Deferred tax assets $ 3,078,934 $ 1,257,121 Deferred tax liabilities: Difference between book and tax depreciation of property, plant and equipment (1,427,483) (581,930) ----------- ----------- Net deferred tax asset $ 1,651,451 $ 675,191 =========== ===========
67 70 Summary of current and long- term portion of deferred tax items are as follows:
1999 1998 ----------- ----------- Current asset $ 2,123,609 $ 446,092 Long-term asset (included in other assets) -- 229,099 Long-term liability (included in other liabilities) (472,158) -- ----------- ----------- $ 1,651,451 $ 675,191 =========== ===========
The valuation allowance increased by $143,514 in 1999 and $171,810 in 1998, and is due to state and foreign losses for which there is no assurance of realizing a tax benefit. A valuation allowance has not been provided for the other deferred tax assets since management believes realization of the deferred tax assets is considered more likely than not. (10) STOCKHOLDER'S EQUITY SHAREHOLDER RIGHTS PLAN On October 8, 1998, each shareholder of record received one Preferred Share Purchase Right ("Right") on each outstanding share of Common Stock owned. Each Right entitled shareholders to buy one one-thousandth of a share of newly created Series A Junior Participating Preferred Stock of the Company at an exercise price of $110. The Rights will be exercisable if a person or group hereafter acquires 15% or more of the Common Stock of the Company or announces a tender offer for 15% or more of the Common Stock. Should this occur, the Right will entitle its holder to purchase, at the Right's exercise price, a number of shares of Common Stock having a market value at the time of twice the Right's exercise price. Rights held by the 15% holder will become void and will not be exercisable to purchase shares at the bargain purchase price. If the Company is acquired in a merger or other business combination transaction after a person acquires 15% or more of the Company's Common Stock, each Right will entitle its holder to purchase, at the Right's then current exercise price, a number of the acquiring company's common shares having a market value at that time of twice the Right's exercise price. TREASURY STOCK During 1998, the Company repurchased 503,541 shares, or approximately 6%, of the Company's Common Stock in the open market at an approximate price of $11.37 per share. The Company has utilized 60,899 shares of the reacquired shares for reissuance in connection with its Employee Stock Purchase Plan. WARRANTS AND NON-EMPLOYEE STOCK OPTION Additionally, the Company issued 39,275 Common Stock warrants in January 1996. These warrants give the holder the right to purchase from the Company not more than 39,275 fully paid and non-assessable shares of the Company's Common Stock, $.05 par value, at a price of $16.55 per share on or after January 16, 1997, with expiration in January 2001. In 1998, 2,000 warrants were exercised. (11) STOCK OPTION PLANS The Company adopted in 1983, 1989, 1995, respectively, an incentive stock option plan, a non-qualified stock option plan, and a combination stock option plan. In 1999 the Company adopted an additional non-qualified stock option plan with a maximum of 1,000,000 shares of Common Stock to be issued under the plan. The combined plans provide for the issuance of options to purchase 3,585,000 shares of the Company's Common Stock, of which 1,126,600 were available for grant as of December 31, 1999. In accordance with the plans, options are to be granted at no less than 100% of the fair market value of the shares at the date of grant. The options become exercisable on a basis as established by the Company's Compensation Advisory Committee of the Board of Directors and are exercisable for a period of 5 to 10 years. The Company has elected to follow Accounting Principal Board ("APB") Opinion No. 25, "Accounting for Stock 68 71 Issued to Employees," and related Interpretations in accounting for its plans. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. Pro forma information regarding net income (loss) and earnings (loss) per share is required by SFAS No. 123 and it has been determined as if the Company had accounted for its employee stock options under the fair value method. The fair value of each option granted for 1999, 1998, and 1997 was estimated as of the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1999, 1998, and 1997, respectively; risk-free interest rates of 5.2%, 5.1%, and 5.6%; dividend yields of zero for all years; volatility factors of the expected market price of the Company's Common Stock of 60%, 52%, and 52%, respectively; and weighted average expected lives of the options of 5 years for 1999 and 3 years for 1998 and 1997. Pro forma net income (loss) reflects only options granted in years 1995 through 1999. Therefore, the full impact of calculating compensation cost for employee stock options under SFAS No. 123 is not reflected in the pro forma amounts presented below because compensation cost is reflected over the options' vesting periods of generally between 3 and 4 years and the compensation cost for options granted before January 1, 1995 is not considered. The Company's pro forma information follows:
1999 1998 1997 -------------- -------------- -------------- (UNAUDITED) ------------------------------------------------------ Net income (loss) As reported $ (12,580,672) $ (495,908) $ 1,895,968 Pro forma $ (13,196,904) $ (708,146) $ 1,784,019 Basic net income (loss) per share As reported $ (1.60) $ (0.06) $ 0.28 Pro forma $ (1.67) $ (0.09) $ 0.27 Diluted net income (loss) per share As reported $ (1.60) $ (0.06) $ 0.27 Pro forma $ (1.67) $ (0.09) $ 0.26
summary of the Company's employee stock option activity and related information for the years ended December 31 follows:
1999 1998 1997 -------------------------- -------------------------- -------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE -------------------------- -------------------------- -------------------------- Outstanding at beginning of year 1,199,566 $ 10.19 639,866 $ 8.81 593,631 $ 8.46 Granted 423,000 $ 8.43 984,000 $ 13.44 153,000 $ 10.38 Exercised (231,966) $ 6.03 (31,300) $ 6.57 (95,265) $ 8.57 Expired/canceled (199,300) $ 10.86 (393,000) $ 16.37 (11,500) $ 12.88 ---------- ---------- ---------- Outstanding at end of year 1,191,300 $ 10.27 1,199,566 $ 10.19 639,866 $ 8.81 ========== ========== ========== Exercisable at end of year 540,196 $ 10.70 569,898 $ 9.01 367,320 $ 7.45 ========== ========== ========== Weighted average fair value of options granted during the year $ 4.76 $ 5.35 $ 4.16 ========== ========== ==========
69 72 The following table summarizes information about stock options outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------- ------------------------ WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- NUMBER REMAINING AVERAGE NUMBER AVERAGE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE AT 12/31/99 LIFE PRICE AT 12/31/99 PRICE -------------- ----------- ---------- ----------- --------- $5.50 100,000 9.80 $ 5.50 20,000 $ 5.50 $7.00 150,000 10.00 $ 7.00 30,000 $ 7.00 $8.00 to $9.75 70,000 9.24 $ 8.34 30,000 $ 8.77 $10.25 to $10.50 263,800 7.31 $ 10.38 180,500 $ 10.37 $11.00 to $11.875 303,000 8.26 $ 11.15 152,664 $ 11.24 $12.250 to $13.125 243,500 8.72 $ 12.34 114,832 $ 12.44 $15.125 61,000 9.13 $ 15.13 12,200 $ 15.13 -------------- ----------- 1,191,300 8.59 $ 10.26 540,196 $ 10.26 ============== ===========
(12) COMPREHENSIVE INCOME The Company recognized comprehensive income (loss) for the years ended December 31, as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ Net income (loss) $(12,580,672) $ (495,908) $ 1,895,968 Other comprehensive income (loss), net of tax: Foreign currency translation adjustment (80,672) 17,798 (402,344) Tax benefit (expense) from foreign currency translation 32,269 (7,119) 160,938 ------------ ------------ ------------ Net other comprehensive income (loss) (48,403) 10,679 (241,406) ------------ ------------ ------------ Comprehensive income (loss) $(12,629,075) $ (485,229) $ 1,654,562 ============ ============ ============
(13) RELATED PARTY TRANSACTIONS In August 1999, the Company and certain of its Directors and Officers entered into Secured Promissory Notes and Stock Pledge Agreements, which totaled $841,465. The purpose of the loans was to exercise stock options scheduled to expire. Interest on the notes is at 6% per annum with note maturities in August 2002. The notes are fully recourse to the borrowers and are also collateralized by the Company's Common Stock. (14) SEGMENT INFORMATION The Company operates principally in one industry segment; the design, development, manufacture and market of semiconductor integrated circuit test products and services. The Company's principal customers are North American, European, and Asian-based semiconductor manufacturing companies. Two of the Company's customers exceeded 10% of net sales. The first customer accounted for 14%, 17%, and 17% of net sales for the years ended December 31, 1999, 1998, and 1997, respectively. The accounts receivable from that 70 73 customer were $327,118, $586,318, and $1,081,424 at December 31, 1999, 1998, and 1997, respectively. The second customer accounted for 13%, 12%, and 10% of net sales for the years ended December 31, 1999, 1998, and 1997, respectively, with accounts receivable of $639,091, $451,766, and $654,015 at December 31, 1999, 1998, and 1997, respectively. International sales represented 23%, 18%, and 18% of the Company's net sales in 1999, 1998, and 1997, respectively. The following is a summary of the Company's geographic operations:
North Europe America and Asia Eliminations Consolidated ------------ ------------ ------------ ------------ 1999 - ------------------ Customer sales $ 48,288,270 $ 14,367,481 $ -- $ 62,655,751 Intercompany sales 673,472 3,162,820 (3,836,292) -- ------------ ------------ ------------ ------------ Total sales $ 48,961,742 $ 17,530,301 $ (3,836,292) $ 62,655,751 ============ ============ ============ ============ Long-lived assets $ 60,059,515 $ 3,537,614 $(13,049,467) $ 50,547,662 ============ ============ ============ ============ 1998 - ------------------ Customer sales $ 62,412,140 $ 13,795,337 $ -- $ 76,207,477 Intercompany sales 494,987 3,304,021 (3,799,008) -- ------------ ------------ ------------ ------------ Total sales $ 62,907,127 $ 17,099,358 $ (3,799,008) $ 76,207,477 ============ ============ ============ ============ Long-lived assets $ 28,134,572 $ 4,375,940 $ (5,753,626) $ 26,756,886 ============ ============ ============ ============ 1997 - ------------------ Customer sales $ 56,670,599 $ 12,341,796 $ -- $ 69,012,395 Intercompany sales 864,575 2,110,599 (2,975,174) -- ------------ ------------ ------------ ------------ Total sales $ 57,535,174 $ 14,452,395 $ (2,975,174) $ 69,012,395 ============ ============ ============ ============ Long-lived assets $ 18,514,131 $ 1,967,317 $ (2,805,672) $ 17,675,776 ============ ============ ============ ============
Management does not believe significant credit risk existed at December 31, 1999. The Company monitors its customers' financial condition and does not require collateral. Historically, the Company has not experienced significant losses related to receivables from any individual or groups of customers. (15) COMMITMENTS AND CONTINGENCIES In October 1998, the Company filed an action against the former President, Director and shareholder of Silicon Valley Test & Repair, Inc., which was acquired by the Company by way of a merger into its wholly-owned subsidiary, SVTR, Inc., in January 1997. The suit seeks rescission of the acquisition and/or monetary damages arising from failure of the defendants to disclose material facts regarding the origins of certain software necessary for SVTR, Inc.'s business. In February 1999, the defendants filed a counter claim against the Company alleging conversion, interference with contractual relations, unfair business practices, breach of contract, and specific performance allegedly arising from the Company's actions to preclude the defendants from selling the Company stock received by defendants as part of the purchase price of Silicon Valley Test & Repair, Inc.; the Company seeks to recover this stock and the balance of the purchase price through its claims for rescission. In March 1999, the Company and SVTR filed an amended complaint. The defendants have responded and the action is proceeding to trial. While the Company intends to vigorously prosecute this action, it is impossible to predict the outcome of this or any litigation. It is not anticipated that this suit will have a material adverse impact on the Company's financial condition or results of operations. The Company is involved in other legal actions arising in the ordinary course of business. In the opinion of management, the disposition of these actions would not have a material adverse effect on the Company. 71 74 (16) EMPLOYEE BENEFIT PLANS In December 1997, the Board of Directors approved the Employee Stock Purchase Plan (the "ESPP") which provides employees the means to acquire an equity interest in the Company. Eligible employees of the Company can purchase Common Stock through payroll deductions at the lower of 85% of the closing price of the Common Stock on the offering commencement date or the offering termination date. Payroll deductions for the purchase of the stock may not exceed 10% of the employee's base compensation or $25,000. As of December 31, 1999, 60,899 shares had been purchased under this plan. The maximum number of shares that may be issued under this plan is 150,000. The Company established the Cerprobe Corporation 401(k) Plan ("the Plan") in 1993. Employees who have reached 18 years of age and who have completed 90 days of service for the Company are eligible to participate in the Plan. Participants may elect to defer up to 15% of their salary. Any contribution by the Company is at its discretion and only for those participants who have completed one year of service for the Company. The Company expensed discretionary contributions pursuant to the Plan in the approximate amounts of $264,778, $324,000, and $241,000 for the years ended December 31, 1999, 1998, and 1997, respectively. The participants are fully vested in their and the Company's contributions. (17) DISCONTINUED OPERATIONS In the third quarter of 1998, the Company discontinued operations of SVTR, a wafer prober refurbishing and upgrading subsidiary acquired by the Company in January 1997. The discontinuance resulted from questions regarding the origins of certain software necessary for SVTR's business. In March 1999, Cerprobe sold certain SVTR assets for $500,000. No gain or loss was recognized on the sale. SVTR has been accounted for as a discontinued operation and accordingly, its results of operations and financial position are segregated for all periods presented in the accompanying consolidated financial statements. Net sales, related losses and income taxes associated with the discontinued operations are as follows:
YEARS ENDED DECEMBER 31, ---------------------------- 1999 1998 ----------- ----------- Net sales $ -- $ 3,871,292 =========== =========== Loss from operations $ (8,869) $(3,550,636) Income tax benefit 3,547 1,625,816 ----------- ----------- Loss from operations, net $ (5,322) $(1,924,820) =========== =========== Loss on disposal $ -- $(6,346,233) Income tax benefit -- 2,538,493 ----------- ----------- Loss on disposal, net $ -- $(3,807,740) =========== ===========
The effective tax rate used in calculating the income tax benefit from discontinued operations is approximately the same as the Company's effective tax rate for continuing operations. The Company recorded a pretax charge of $4,597,034 to write down its assets to estimated net realizable value and to record additional liabilities in the shut down period. A charge of $1,749,199 was also recorded to reflect the estimated phase out costs and losses from operations associated with SVTR. The tax benefit associated with these charges was $2,538,493. 72 75 The net assets (liabilities) of SVTR, as reclassified in the accompanying consolidated balance sheets, include the following:
DECEMBER 31, ---------------------------- 1999 1998 ----------- ----------- Current assets $ 554,585 $ 3,445,737 Property, plant and equipment, net -- -- Intangibles, net -- -- Other assets 63,011 46,865 Current liabilities (289,358) (931,913) Long term debt (5,286) (19,847) Other long term liabilities (769,581) (1,058,939) ----------- ----------- $ (446,629) $ 1,481,903 =========== ===========
(18) ACQUISITIONS UPSYS-CERPROBE L.L.C. On June 25, 1998, the Company purchased Upsys's 45% interest in Upsys-Cerprobe L.L.C. The acquisition resulted in $376,366 of goodwill, which is being amortized on a straight-line basis over eight years. CERPROBE EUROPE S.A.S. (FORMERLY SEMICONDUCTEUR SERVICES S.A.) On September 30, 1998, the Company acquired France-based Cerprobe Europe S.A.S. for $3.0 million in cash and $250,000 in acquisition related expenses. Cerprobe Europe S.A.S. designs, manufactures and distributes probe cards. The acquisition resulted in $1,568,000 in-process research and development, which was charged to operations upon acquisition, and $508,051 in goodwill, which is being amortized on a straight-line basis over 10 years, and $98,000 in assembled workforce, which is being amortized on a straight line basis over 4 years. The acquisition was accounted for as a purchase and, accordingly, the accompanying consolidated balance sheet includes the assets purchased and liabilities assumed of Cerprobe Europe S.A.S. at December 31, 1998 and the accompanying consolidated statements of operations include the results of Cerprobe Europe S.A.S. since the date of acquisition. OZ TECHNOLOGIES, INC. ("OZ") In December 1999, the Company acquired all of the outstanding stock of OZ, a manufacturer of systems solutions for IC package testing and a leading designer and producer of high performance test sockets and contactors for $36,000,000. OZ also designs and distributes ATE test boards and burn-in interfaces and systems. The purchase price consisted of $19,000,000 in cash, notes payable of $5,600,000, and 1.5 million shares of Common Stock. Of the 1.5 million shares of common stock, up to 554,089 can be sold during the 180-day period on or after the effective date of the registration statement on Form S-3 with the Securities and Exchange Commission. If the selling shareholders sell the common stock during the 180-day period and the average proceeds per share after selling expenses are less than $7.58 per share and the average proceeds per share and the number of shares of Cerprobe Common Stock sold during the 180-day period shall be added to the Subordinated Promissory Note. The acquisition has been accounted for as a purchase and, accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based upon the estimated fair values at the date of acquisition. The acquisition resulted in $8,815,000 in-process research and development, which was charged to operations upon acquisition, $21,183,864 in goodwill which is being amortized on a straight-line basis over seven years and $1,009,091 in assembled workforce which is being amortized on a straight-line basis over four years. The purchase price of $36,000,000 plus acquisition costs of $1,900,000 was allocated as follows: 73 76 Purchase price: Cash $ 19,000,000 Note payable 5,630,000 Common Stock and additional paid in capital 11,338,000 Costs of acquisition 1,900,000 -------------- $ 37,868,000 ============== Assets acquired and liabilities assumed: Current assets $ 8,945,021 Property, plant and equipment 1,822,749 Other assets 87,209 In-process research and development 8,815,000 Goodwill and assembled workforce 22,192,955 Current liabilities (3,994,934) -------------- $ 37,868,000 ==============
At acquisition, the state of the research and development products was not yet at a technological or commercially viable state. The Company did not believe that the research and development products had any future alternative use because if these products were not finished and brought to ultimate product completion, they would have no other value. Therefore, consistent with generally accepted accounting principles, the Company recorded a charge for the full value of the in-process research and development. The consolidated balance sheet as of December 13, 1999 includes the accounts of OZ and results of operations since the date of the acquisition. The following summary, prepared on a pro forma basis, excluding the charge for in-process research and development, present the results of operations as if the acquisition had occurred on January 1, 1998.
Years ended December 31, 1999 1998 ---------------------------------- (unaudited) (unaudited) Net sales $89,292,000 $ 97,082,000 Net income (loss) (938,400) 2,944,600 Basic net income (loss) per share (0.10) 0.31 Diluted net income (loss) per share (0.10) 0.30
The pro forma results are not necessarily indicative of what the actual consolidated results of operations might have been if the acquisition had been effective at the beginning of 1998 or as a projection of future results. (19) FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires that the Company disclose estimated fair values for its financial instruments. The following summary presents a description of the methodologies and assumptions used to determine the amounts. The carrying amount of investment securities, receivables, accounts payable, and accrued expenses approximates fair value because of the short term nature of these items. The fair value of notes payable and capital lease obligations approximate the terms in the marketplace at which they could be replaced. Therefore, the fair value approximates the carrying value of these financial instruments. 74 77 (20) SUPPLEMENTAL FINANCIAL INFORMATION A summary of additions and deductions related to the allowances for accounts receivable and inventories for the years ended December 31, 1999, 1998 and 1997 follows:
Balance at Balance at beginning end of of year Additions Deductions year ---------- --------- ---------- ---------- Allowance for doubtful accounts: Year ended December 31, 1999 $333,364 $ 4,000 $ 6,355 $331,009 Year ended December 31, 1998 $215,179 $ 186,585 $ 68,400 $333,364 Year ended December 31, 1997 $223,000 $ 24,000 $ 31,821 $215,179 Allowance for obsolescence of inventories: Year ended December 31, 1999 $264,656 $ 180,000 $313,736 $130,920 Year ended December 31, 1998 $244,000 $ 534,000 $513,344 $264,656 Year ended December 31, 1997 $129,000 $ 621,000 $506,000 $244,000
(21) NET INCOME (LOSS) PER SHARE The following table sets forth the computation of basic and diluted net income (loss) per share:
1999 1998 1997 ------------ ------------ ------------- Net income (loss) $(12,580,672) $ (495,908) $ 1,895,968 ============ ============ ============= Weighted average outstanding common shares 7,884,628 7,963,747 6,690,265 Effect of dilutive securities: Stock options 62,768 287,626 292,103 Antidilutive effect of dilutive securities (62,768) -- -- ------------ ------------ ------------- Weighted average and common equivalent shares outstanding 7,884,628 8,251,373 6,982,368 ============ ============ ============= Basic net income (loss) per share $ (1.60) $ (0.06) $ 0.28 ============ ============ ============= Diluted net income (loss) per share $ (1.60) $ (0.06) 0.27 ============ ============ =============
75 78 (22) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FIRST QUARTER SECOND QUARTER THIRD QUARTER(1) FOURTH QUARTER(2) ------------- -------------- ----------------- ------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, 1999 - --------------------------- Net sales $ 15,606 $ 14,103 $ 14,932 $ 18,015 Gross profit 5,560 4,246 5,189 6,023 Operating income (loss) 335 (2,556) (1,070) (11,313) Income (loss) from continuing operations 150 (1,659) (878) (10,189) Net income (loss) 145 (1,659) (878) (10,189) Basic net income (loss) per share 0.02 (0.22) (0.11) (1.22) Diluted net income (loss) per share 0.02 (0.22) (0.11) (1.22) YEAR ENDED DECEMBER 31, 1998 - --------------------------- Net sales $ 22,953 $ 18,139 $ 20,107 $ 15,008 Gross profit 9,879 7,253 8,593 5,430 Operating income 4,445 1,686 1,354 223 Income from continuing operations 2,748 1,202 1,036 251 Net income (loss) 2,345 467 (3,557) 249 Basic net income (loss) per share 0.29 0.06 (0.46) 0.03 Diluted net income (loss) per share 0.28 0.06 (0.45) 0.03
(1) 1998 includes a write-off of in-process research and development of $1.6 million, or $0.11 per diluted share, related to the acquisition of Cerprobe Europe S.A.S. (2) 1999 includes a write-off of in-process research and development of $8.8 million and $ 1.05 per diluted share, related to the acquisition of OZ Technologies, Inc. 76 79 CERPROBE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 2000 1999 ---------------------------- (UNAUDITED) ASSETS Current assets: Cash $ 4,312,393 $ 3,484,045 Accounts receivable, net of allowance of $362,102 in 2000 and $397,763 in 1999 21,557,294 12,313,053 Inventories, net 12,597,563 9,728,500 Accrued interest receivable 68,925 22,157 Prepaid expenses 1,540,601 1,107,378 Income taxes receivable 36,101 4,041,140 Deferred tax asset 437,982 2,123,609 ----------- ----------- Total current assets 40,550,859 32,819,882 Property, plant, and equipment, net 21,613,746 23,537,021 Intangible assets, net 23,531,386 26,334,157 Other assets 732,094 676,485 ----------- ----------- Total assets $86,428,085 $83,367,545 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,199,021 $ 3,687,143 Accrued expenses 6,547,356 5,584,724 Current portion of notes payable 6,604,179 10,334,878 Current portion of capital lease obligations 1,108,469 954,957 Net liabilities of discontinued operations 336,322 446,629 ----------- ----------- Total current liabilities 19,795,347 21,008,331 Notes payable, less current portion 4,143,975 5,200,034 Capital lease obligations, less current portion 2,271,452 2,454,637 Deferred tax and other liabilities 939,875 472,158 ----------- ----------- Total liabilities 27,150,649 29,135,160 ----------- ----------- Minority interest -- 1,115,545 Commitments and contingencies -- -- Stockholders' equity: Preferred stock, $.05 par value; authorized 10,000,000 shares; issued and outstanding none -- -- Common stock, $.05 par value; authorized 25,000,000 shares; issued 9,897,897 and outstanding 9,489,732 shares at September 30, 2000 and issued 9,863,245 and outstanding 9,419,052 shares at December 31, 1999 494,895 493,162 Additional paid-in capital 68,021,279 67,830,701 Accumulated deficit (3,212,876) (9,074,938) Accumulated other comprehensive loss: Foreign currency translation (582,670) (236,534) ----------- ----------- 64,720,628 59,012,391 Treasury stock, at cost, 408,165 shares at September 30, 2000 and 444,193 shares at December 31, 1999 (4,616,169) (5,027,278) Notes receivable from related parties (827,023) (868,273) ----------- ----------- Total stockholders' equity 59,277,436 53,116,840 ----------- ----------- Total liabilities and stockholders' equity $86,428,085 $83,367,545 =========== ===========
See accompanying notes to condensed consolidated financial statements. 77 80 CERPROBE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------- ----------------------------------- 2000 1999 2000 1999 --------------- ---------------- -------------- ---------------- Net sales $ 34,773,473 $ 14,932,031 $ 92,521,191 $ 44,640,667 Cost of goods sold 18,901,569 9,742,588 51,229,896 29,644,646 --------------- ---------------- -------------- ---------------- Gross profit 15,871,904 5,189,443 41,291,295 14,996,021 --------------- ---------------- -------------- ---------------- Expenses: Selling, general, and administrative 8,480,325 4,939,049 23,138,915 14,647,956 Engineering and product development 1,359,765 1,186,108 3,649,132 3,248,051 Goodwill amortization 916,284 134,214 2,824,314 390,987 --------------- ---------------- -------------- ---------------- Total expenses 10,756,374 6,259,371 29,612,361 18,286,994 --------------- ---------------- -------------- ---------------- Operating income (loss) 5,115,530 (1,069,928) 11,678,934 (3,290,973) --------------- ---------------- -------------- ---------------- Other income (expense): Interest income 105,404 192,831 317,020 623,670 Interest expense (460,726) (105,286) (1,588,897) (309,268) Other, net 91,608 (80,087) 365,494 (81,163) --------------- ---------------- -------------- ---------------- Total other income (expense) (263,714) 7,458 (906,383) 233,239 --------------- ---------------- -------------- ---------------- Income (loss) from continuing operations before minority interest and income taxes 4,851,816 (1,062,470) 10,772,551 (3,057,734) Minority interest (158,478) (84,978) (873,147) (273,494) --------------- ---------------- -------------- ---------------- Income (loss) from continuing operations before income taxes 4,693,338 (1,147,448) 9,899,404 (3,331,228) Income tax (provision) benefit (1,608,404) 269,310 (4,037,342) 944,480 --------------- ---------------- -------------- ---------------- Income (loss) from continuing operations 3,084,934 (878,138) 5,862,062 (2,386,748) Discontinued operations: Loss from operations of SVTR, Inc., net of taxes -- -- -- (5,322) --------------- ---------------- -------------- ---------------- Net income (loss) $ 3,084,934 $ (878,138) $ 5,862,062 $ (2,392,070) =============== ================ ============== ================ Net income (loss) per common share: Basic: Net income (loss) per common share $ 0.33 $ (0.11) $ 0.62 $ (0.31) =============== ================ ============== ================ Weighted average number of common shares outstanding 9,486,424 7,836,237 9,444,969 7,740,136 =============== ================ ============== ================ Diluted: Net income (loss) per common share $ 0.31 $ (0.11) $ 0.59 $ (0.31) =============== ================ ============== ================ Weighted average number of common and common equivalent shares outstanding 10,053,426 7,836,237 9,887,542 7,740,136 =============== ================ ============== ================
See accompanying notes to condensed consolidated financial statements. 78 81 CERPROBE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- 2000 1999 -------------------------------- Cash flows from operating activities: Income (loss) from continuing operations $ 5,862,062 $(2,386,748) Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used in) continuing operations: Depreciation and amortization 7,538,325 4,279,538 Gain on sale of equipment (527,271) (3,176) Tax benefit from exercise of nonqualified stock options 50,000 71,000 Deferred income taxes 1,605,813 (17,168) Provision for losses on accounts receivable 15,979 4,000 Provision for obsolete inventory 479,180 180,000 Income applicable to minority interest 873,147 273,494 Changes in working capital of continuing operations: Accounts receivable (9,260,220) (174,435) Inventories (3,348,243) (1,594,055) Prepaid expenses and other assets (578,725) (293,052) Income taxes receivable 4,154,799 (1,963,188) Accounts payable and accrued expenses 2,474,509 562,730 Other liabilities 547,531 (7,073) ----------- ----------- Net cash provided by (used in) continuing operations 9,886,886 (1,068,133) ----------- ----------- Net cash provided by (used in) discontinued operations (260,067) 96,335 ----------- ----------- Net cash provided by (used in) operating activities 9,626,819 (971,798) ----------- ----------- Cash flows from investing activities: Purchase of property, plant and equipment (6,081,855) (4,745,100) Redemption of investment securities -- 5,471,541 Net distributions from CRPB Investors, L.L.C. 43,126 178,649 Purchase of Minority Interest in Cerprobe Asia Pte Ltd (914,237) -- Proceeds from sale of property, plant, and equipment 2,692,270 11,487 ----------- ----------- Net cash provided by (used in) investing activities (4,260,696) 916,577 ----------- ----------- Cash flows from financing activities: Issuance of notes payable 5,117,187 3,000,000 Payments on notes payable (9,933,618) (1,414,546) (Issuance) payment of notes receivable 41,250 (841,465) Net proceeds from employee stock purchase plan 254,718 177,674 Net proceeds from exercise of stock options 298,702 1,398,665 ----------- ----------- Net cash provided by (used in) financing activities (4,221,761) 2,320,328 ----------- ----------- Effect of exchange rates on cash (316,014) (143,659) ----------- ----------- Net increase in cash 826,348 2,121,448 Cash, beginning of period 3,484,045 4,753,696 ----------- ----------- Cash, end of period $ 4,312,393 $ 6,875,144 =========== =========== Supplemental disclosures of cash flow information from continuing operations: Interest paid $ 1,588,896 $ 309,268 =========== =========== Income taxes paid $ 1,522,148 $ 371,619 =========== ===========
See accompanying notes to condensed consolidated financial statements. 79 82 CERPROBE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PREPARATION The accompanying condensed consolidated financial statements as of September 30, 2000 and for the three and nine months ended September 30, 2000 and 1999 are unaudited, but reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of financial position and operating results for the interim periods. The condensed consolidated balance sheet as of December 31, 1999 was derived from the audited consolidated financial statements at such date. Pursuant to accounting requirements of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, the accompanying consolidated financial statements and notes do not include all disclosures required by generally accepted accounting principles for complete financial statements. Accordingly, these statements should be read in conjunction with Cerprobe Corporation's (the "Company") annual financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years. PRINCIPLES OF CONSOLIDATION The condensed consolidated financial statements include the accounts of Cerprobe Corporation and its subsidiaries: Cerprobe Europe Limited, Cerprobe Europe S.A.S., Cerprobe Asia Holdings Pte Ltd, Cerprobe Interconnect Solutions, Inc. ("CIS"), SVTR, Inc. ("SVTR"), Cerprobe Japan Co., Ltd, OZ Technologies, Inc. ("OZ"), OZTEK (M) Sdn. Bhd, Cerprobe International Holdings, Inc. and Cerprobe Foreign Sales Corporation. All significant intercompany transactions have been eliminated in consolidation. Prior to July 31, 2000 Cerprobe Asia Holdings Pte Ltd was a 60% owner of Cerprobe Asia Pte Ltd; the balance was owned by Asian investors. Cerprobe Asia Pte Ltd's wholly owned subsidiaries, Cerprobe Singapore Pte Ltd and Cerprobe Taiwan Co., Ltd., operate full service sales and manufacturing plants. As of July 31, 2000, Cerprobe Corporation purchased the minority ownership in Cerprobe Asia Pte Ltd resulting in 100% ownership by Cerprobe Corporation. In the third quarter of 1998, the Company discontinued operations of SVTR, a company that refurbished, reconfigured, and serviced wafer probing equipment. See Note 4. In March 1999, the Company formed Cerprobe Japan Co., Ltd. to operate a sales and distribution facility in Yokohama, Japan. In December 1999, the Company acquired California-based OZ Technologies, Inc. Accordingly, the consolidated financial statements as of December 31, 1999, and for the year ended December 31, 1999 include OZ's activities since the date of acquisition. See Note 5. In March 2000, the Company merged OZ and CIS into Cerprobe Corporation. As a result, OZ and CIS are no longer considered separate legal entities. RECLASSIFICATIONS Certain amounts in the 1999 financial statements have been reclassified to conform with the 2000 presentation. (2) COMMITMENTS AND CONTINGENCIES In October 1998, the Company filed an action against the former President, Director, and shareholder of Silicon Valley Test & Repair, Inc., which was acquired by the Company by way of merger into its wholly-owned subsidiary, SVTR, Inc., in January 1997. The suit seeks rescission of the acquisition and/or monetary damages arising from failure of the 80 83 defendants to disclose material facts regarding the origins of certain software necessary for SVTR, Inc.'s business. In February 1999, the defendants filed a counter claim against the Company alleging conversion, interference with contractual relations, unfair business practices, breach of contract, and specific performance allegedly arising from the Company's actions to preclude the defendants from selling the Company stock received by defendants as part of the purchase price of Silicon Valley Test & Repair, Inc.; the Company sought to recover this stock and the balance of the purchase price through its claims for rescission. In March 1999, the Company and SVTR filed an amended complaint. In July 2000, the defendants were granted Summary Judgement in their favor on all of Cerprobe and SVTR, Inc.'s claims. On September 5, 2000, the Company moved for summary judgement seeking dismissal of the majority of Defendants' counterclaims. On September 19, 2000, Defendants responded to the Company's motion and filed a cross-motion for summary judgement on each of their counterclaims. On October 19, 2000, the Court heard arguments on the Company's motion and the Defendants' cross-motion and took the matter under advisement. At present, the Court has not rendered its ruling on the matter. While the Company intends to vigorously defend the defendants' counter claim, it is impossible to predict the outcome of this or any other litigation. It is not anticipated that the suit will have a material adverse impact on the Company's financial condition or results of operations. The Company is involved in other legal actions arising in the ordinary course of business. In the opinion of management, the disposition of these actions would not have a material adverse effect on the Company. (3) COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) encompasses net income and "other comprehensive loss", which includes all other non-owner transactions and events which change stockholders' equity. The Company recognized comprehensive income (loss) for the nine months ended September 30, 2000 and 1999 as follows:
Nine months ended September 30, ------------------------------ 2000 1999 ----------- ----------- Net income (loss) $ 5,862,062 $(2,392,070) Other comprehensive loss, net of tax benefit: Foreign currency translation adjustment (971,117) (209,767) Tax benefit from foreign currency translation 388,447 83,907 ----------- ----------- Net other comprehensive loss (582,670) (125,860) ----------- ----------- Comprehensive income (loss) $ 5,279,392 $(2,517,930) =========== ===========
(4) DISCONTINUED OPERATIONS In the third quarter of 1998, the Company discontinued operations of SVTR, a wafer prober refurbishing and upgrading subsidiary. The discontinuance resulted from questions regarding the origins of certain software necessary for SVTR's business. SVTR has been accounted for as a discontinued operation and, accordingly, its results of operations and financial position are segregated for all periods presented in the accompanying consolidated financial statements. Net sales, related losses, and income taxes associated with the discontinued operations are as follows:
Nine months ended September 30, 1999 ------------------------------------ Net sales $ - --------------- Loss from operations $ (8,869) Income tax benefit 3,547 --------------- Loss from operations, net $ (5,322) ===============
81 84 The effective tax rate used in calculating the income tax benefit from discontinued operations is approximately the same as the Company's effective tax rate for continuing operations. The net liabilities of SVTR, as reclassified in the accompanying consolidated balance sheets, include the following:
September 30, 2000 December 31, 1999 ------------------ ------------------- Current assets $ 297,383 $ 554,585 Other assets 41,855 63,011 Current liabilities (35,055) (289,358) Long-term debt (208) (5,286) Other long-term liabilities (640,297) (769,581) ------------------ ------------------- $ (336,322) $ (446,629) ================== ===================
(5) ACQUISITIONS In December 1999, the Company acquired all of the outstanding stock of OZ, a manufacturer of systems solutions for IC package testing and a leading designer and producer of high performance test sockets and contactors, for $36 million. OZ also designs and distributes ATE test boards and burn-in interfaces and systems. The purchase price consisted of $19 million in cash, notes payable of $5.6 million, and 1.5 million shares of the Company's Common Stock. The acquisition has been accounted for as a purchase and, accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based upon the estimated fair values at the date of acquisition. As a result of the acquisition, $8.8 million of in-process research and development was charged to operations. Goodwill of $21.2 million is being amortized on a straight-line basis over seven years and $1.0 million of assembled workforce is being amortized on a straight-line basis over four years. The purchase price of $36 million plus acquisition costs of $1.9 million was allocated as follows: Purchase price: Cash $ 19,000,000 Notes payable 5,630,000 Common stock and additional paid in capital 11,338,000 Costs of acquisition 1,900,000 -------------- $ 37,868,000 ============== Assets acquired and liabilities assumed: Current assets $ 8,945,021 Property, plant, and equipment 1,822,749 Other assets 87,209 In-process research and development 8,815,000 Goodwill and assembled workforce 22,192,955 Current liabilities (3,994,934) -------------- $ 37,868,000 ==============
At acquisition, the state of the research and development products was not yet at a technological or commercially viable state. The Company did not believe that the research and development products had any future alternative use because if these products were not finished and brought to ultimate product completion, they would have no other value. Therefore, consistent with generally accepted accounting principles, the Company recorded a charge for the full value of the in-process research and development. The condensed consolidated balance sheets as of September 30, 2000 and December 31, 1999 include the accounts of OZ and results of operations since the date of acquisition. The following summary, prepared on a pro forma basis, excluding the charge for in-process research and development, presents the results of operations as if the acquisition had occurred on January 1, 1999. 82 85
Nine months ended September 30, 1999 ------------------ (unaudited) Net sales $ 65,764,000 Net loss (2,788,000) Basic net loss per share (0.30) Diluted net loss per share (0.30)
The pro forma results are not necessarily indicative of what the actual consolidated results of operations might have been if the acquisition had been effective at the beginning of 1999 or as a projection of future results. (6) RELATED PARTY TRANSACTIONS In August 1999, the Company and certain of its Directors and Officers entered into Secured Promissory Notes and Stock Pledge Agreements. The purpose of the loans was to exercise stock options scheduled to expire. Interest on the notes is at 6% per annum with note maturities in August 2002. The notes are fully recourse to the borrowers and are also collateralized by shares of the Company's Common Stock beneficially owned by the borrowers. In June 2000, the Company and Daniel J. Hill entered into an unsecured Promissory Note. The principal amount of the loan was $45,000, with a maturity of December 31, 2000. Interest on the note was 6% per annum. As of September 30, 2000 and December 31, 1999, the balance on all notes was $827,023 and $868,273, respectively. (7) SEGMENT INFORMATION The Company operates principally in one industry segment: the design, development, manufacture, and marketing of semiconductor integrated circuit test products and services. The Company's principal customers are North American, European, and Asian semiconductor manufacturing companies. One of the Company's customers exceeded 10% of net sales. This customer accounted for 17.8% and 15.5% of net sales for the nine months ended September 30, 2000 and 1999, respectively. The accounts receivable from the customer were $4,679,129 and $893,638 at September 30, 2000 and 1999, respectively. International sales represented 25.4% and 21.7% of the Company's net sales for the nine months ended September 30, 2000 and 1999, respectively. The following is a summary of the Company's geographic operations for the nine months ended September 30:
NORTH AMERICA EUROPE & ASIA ELIMINATIONS CONSOLIDATED ----------- ----------- ----------- ----------- 2000 Customer sales $69,052,782 $23,468,409 $ -- $92,521,921 Intercompany sales 1,581,576 4,062,517 (5,644,093) -- ----------- ----------- ----------- ----------- Total sales $70,634,358 $27,530,926 $(5,644,093) $92,521,921 =========== =========== =========== =========== Long-lived assets $42,627,582 $ 2,677,118 $ (159,568) $45,145,132 =========== =========== =========== =========== 1999 Customer sales $34,948,903 $ 9,691,764 $ -- $44,640,667 Intercompany sales 362,944 2,093,333 (2,456,277) -- ----------- ----------- ----------- ----------- Total sales $35,311,847 $11,785,097 $(2,456,277) $44,640,667 =========== =========== =========== =========== Long-lived assets $23,196,751 $ 3,133,246 $ (123,777) $26,206,220 =========== =========== =========== ===========
83 86 (8) SUBSEQUENT EVENTS On October 11, 2000, Cerprobe Corporation and Kulicke and Soffa Industries, Inc. ("K&S") signed a definitive agreement whereby, subject to the terms and conditions of the agreement, K&S will acquire Cerprobe. The acquisition, if consummated, will be made by means of a cash tender offer by a wholly-owned subsidiary of K&S for each share of Cerprobe common stock at a price of $20.00 per share. This will be followed by a back-end merger of Cerprobe with that subsidiary, with Cerprobe to remain as the surviving corporation and a subsidiary of K&S. The total purchase price, which also includes other acquisition-related costs, is expected to be approximately $225 million. The agreement has been unanimously approved by the boards of directors of both companies. The consummation of the tender offer is subject to customary closing conditions, including that a majority of the outstanding Cerprobe shares are tendered and the expiration or termination of the Hart-Scott-Rodino waiting period. The expiration of the Hart-Scott-Rodino waiting period has occurred. K&S commenced the tender offer on October 25, 2000, which, under the Securities and Exchange Commission rules, must be held open for a minimum of twenty business days. If K&S acquires at least 90% of the outstanding shares in the tender offer, it is expected that the back-end merger will be effected promptly after the consummation of the tender offer without a special meeting of shareholders. If less than 90% of the shares are acquired by K&S, a special meeting would be required for approval of the back-end merger, which would be assured if K&S acquires a majority of the outstanding shares in the tender offer. Cerprobe shareholders who do not tender their shares in the tender offer and who do not otherwise seek to have the value of their shares appraised under the applicable appraisal procedures under Delaware Law would receive $20.00 for each of their shares of common stock in the back-end merger. 84 87 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information required hereunder with respect to the directors will appear under the heading "ELECTION OF DIRECTORS" in the Company's Proxy Statement for the 2001 Annual Meeting, which information is incorporated herein by reference. The information required by Item 401(b) of Regulation S-K appears at the end of Part I, Item 1 of this report under the heading "Executive Officers of the Company." ITEM 11. EXECUTIVE COMPENSATION. The information required hereunder will appear under the heading "ADDITIONAL INFORMATION" in the Company's Proxy Statement for the 2001 Annual Meeting, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required hereunder will appear under the heading "ELECTION OF DIRECTORS" in the Company's Proxy Statement for the 2001 Annual Meeting, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required hereunder will appear under the heading "ADDITIONAL INFORMATION" in the Company's Proxy Statement for the 2001 Annual Meeting, which information is incorporated herein by reference. 85 88 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: (1)(a) Financial Statements - Kulicke and Soffa Industries, Inc.: Report of Independent Accountants 31 Consolidated Balance Sheet at September 30, 2000 and 1999 32 Consolidated Statement of Operations for the fiscal years ended September 30, 2000, 1999 and 1998 33 Consolidated Statement of Cash Flows for the fiscal years ended September 30, 2000, 1999 and 1998 34 Consolidated Statement of Changes in Shareholders' Equity for the fiscal years ended September 30, 2000, 1999 and 1998 35 Notes to Consolidated Financial Statements 36 - 53 (b) Financial Statements - Cerprobe Corporation: Report of Independent Accountants 54 Consolidated Balance Sheets at December 31, 1999 and 1998 55 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 56 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 1999, 1998 and 1997 57 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 58 - 59 Notes to Consolidated Financial Statements 60 - 76 (c) Financial Statements - Cerprobe Corporation: Condensed Consolidated Balance Sheets at September 30, 2000 (unaudited) and December 31, 1999 77 Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2000 (unaudited) and 1999 78 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 (unaudited) and 1999 79 Notes to Condensed Consolidated Financial Statements 80 - 84 (2) Financial Statement Schedules: II - Valuation and Qualifying Accounts 89 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits:
EXHIBIT NUMBER ITEM 2(i) Agreement and Plan of Merger, dated as of October 11, 2000, by and among Kulicke and Soffa Industries, Inc., Cardinal Merger Sub.,Inc. and Cerprobe Corporation is incorporated herein by reference from Exhibit D(1) to the Company's Form TO filed on October 25, 2000. 86 89 2(ii) Stock Option Agreement, dated October 11, 2000, by and among Kulicke and Soffa Industries, Inc., Cardinal Merger Sub., Inc. and Cerprobe Corporation, is incorporated herein by reference from Exhibit D(2) to the Company's Form TO filed on October 25, 2000. 2(iii) Form of Affiliate Tender Agreement, dated as of October 11, 2000, between Kulicke and Soffa Industries, Inc. and certain stockholders of Cerprobe Corporation, filed as Exhibit 4 to Kulicke and Soffa Industries, Inc.'s Schedule 13D filed on October 23, 2000 is incorporated herein by reference. 3(i) The Company's Amended and Restated Articles of Incorporation as of March 3, 1998, filed as Exhibit 3(i) to the Company's quarterly report on Form 10-Q for the quarterly period ended March 31, 1998 and Form of Amendment of Articles of Incorporation effective March 12, 1999, filed as Exhibit 3(i), to the Company's quarterly report on Form 10-Q for the quarterly period ended March 31, 1999, are incorporated herein by reference. 3(ii) The Company's By-Laws, as amended through June 26, 1990, filed as Exhibit 2.2 to the Company's Form 8-A12G dated September 8, 1995, is incorporated herein by reference. 4(i) Amended and Restated Loan Agreement between the Company and PNC Bank, N.A. dated March 26, 1998, filed as Exhibit 10(a) to the Company's quarterly report on Form 10-Q for the quarterly period ended March 31, 1998, is incorporated herein by reference. 4(ii) Indenture dated as of December 13, 1999 between the Company and Chase Manhattan Trust Company, National Association, as Trustee, filed as Exhibit 4.1 to the Company's Form 8-K dated December 13, 1999, is incorporated herein by reference. 4(iii) Registration Rights Agreement dated as of December 13, 1999 between the Company and Morgan Stanley & Co. Incorporated, filed as Exhibit 4.2 to the Company's Form 8-K dated December 13, 1999, is incorporated herein by reference. 4(iv) Credit Agreement dated December 21, 2000 between the Company and several Banks and PNC Bank, National Association, as agent for the Banks. 10(i) Form of Termination of Employment Agreement signed by Mr. Kulicke (Section 2(a) - 30 months), and Messrs. Perchick, Sprague, Jacobi, Wagner, Lendner, Leonhardt, May, Salmons, Sawachi, Spooner, Wolf, Belani, Chylak, Cristallo, Greenberger, Oscilowski, Torton, Amweg, Camarda, Hartigan, Kish, Mak, Marrs, Rheault and Strittmatter (Section 2(a) - 18 months), filed as Exhibit 10(vii) to the Company's quarterly report on Form 10-Q for the quarterly period ended March 31, 1998, is incorporated herein by reference.* 10(ii) The Company's 1994 Employee Incentive Stock Option and Non-Qualified Stock Option Plan (as amended and restated effective October 8, 1996), filed as Exhibit 10(viii) to the Company's Annual Report on Form 10-K for the year ended September 30, 1996, is incorporated herein by reference.* 10(iii) The Company's 1997 Non-Qualified Stock Option Plan for Non-Employee Directors (as amended and restated effective February 9, 1999), is incorporated herein by reference.* 10(iv) The Company's Executive Incentive Compensation Plan, As Amended Through October 14, 1997, filed as Exhibit 10(ix) to the Company's Annual Report on Form 10-K for the year ended September 30, 1997, is incorporated herein by reference.* 10(v) Gold Supply Agreement, as amended October 2, 1995 between American Fine Wire Corporation, et al, and Rothschild Australia Limited, filed as Exhibit 10.1 to the Company's Form 8-K dated September 14, 1995 as amended by Form 8-K/A on October 26, 1995, is incorporated herein by reference. 10(vi) The Company's Executive Deferred Compensation Plan (As Amended and restated Effective October 1, 1999), is incorporated herein by reference.* 10(vii) Operating Agreement of Flip Chip Technologies, LLC dated February 28, 1996, filed as Exhibit 10 to the Company's 87 90 Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1996, is incorporated herein by reference. 10(viii) Convertible Loan Agreements between the Company, Flip Chip Technologies, LLC and Delco Electronics Corporation dated June 16, 1997, October 30, 1997, February 18, 1998 and November 19, 1998 filed as Exhibit 10(xviii) to the Company's Annual Report on Form 10-K for the year ended September 30, 1998, is incorporated herein by reference. 10(ix) The Company's 1998 Employee Incentive Stock Option and Non-Qualified Stock Option Plan filed as Exhibit 10(a) to the Company's quarterly report on Form 10-Q for the quarterly period ended March 31, 1999, is incorporated herein by reference.* 10(x) Amendment No. 1 to the Company's 1998 Employee Incentive Stock Option and Non-Qualified Stock Option Plan., is incorporated by reference.* 10(xi) Amendment No. 1 to the Company's 1994 Employee Incentive Stock Option and Non-Qualified Stock Option Plan (as amended and restated effective October 8, 1996), is incorporated by reference.* 10(xii) Amendment No. 1 to the Company's 1988 Employee Incentive Stock Option and Non-Qualified Stock Option Plan (as amended and restated effective October 8, 1996), is incorporated by reference.* 21 Subsidiaries of the Company. 23.1 Consent of PricewaterhouseCoopers LLP (Independent Accountants). 23.2 Consent of KPMG LLP (Independent Public Accountants). 27 Financial Data Schedule. 99(i) Kulicke and Soffa Industries, Inc. and Cerprobe Corporation Unaudited Pro Forma Combined Statement of Operations and Balance Sheet * Indicates a Management Contract or Compensatory Plan. (b) Reports on Form 8-K: None 88 91 KULICKE AND SOFFA INDUSTRIES, INC. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
Charged Balance Charged to to other Balance at beginning costs and accounts- Deductions at end Description of period expenses describe describe of period - ------------------------------ --------------- --------------- --------------- --------------- --------------- Year ended September 30, 1998 - ----------------------------- Allowance for doubtful accounts $ 2,149 $ 29 $ -- $ 501(1) $ 1,677 =============== =============== =============== =============== =============== Inventory reserve $ 12,845 $ 4,132 $ -- $ 1,319(2) $ 15,658 =============== =============== =============== =============== =============== Valuation allowance for deferred taxes $ 4,654 $ 2,437(3) $ -- $ -- $ 7,091 =============== =============== =============== =============== =============== Year ended September 30, 1999 - ----------------------------- Allowance for doubtful accounts $ 1,677 $ 812 $ -- $ 762(1) $ 1,727 =============== =============== =============== =============== =============== Inventory reserve $ 15,658 $ 1,200 $ -- $ 1,930(2) $ 14,928 =============== =============== =============== =============== =============== Valuation allowance for deferred taxes $ 7,091 $ 5,124(3) $ -- $ -- $ 12,215 =============== =============== =============== =============== =============== YEAR ENDED SEPTEMBER 30, 2000 - ----------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS $ 1,727 $ 2,758 $ -- $ 130(1) $ 4,355 =============== =============== =============== =============== =============== INVENTORY RESERVE $ 14,928 $ 6,978 $ -- $ 5,665(2) $ 16,241 =============== =============== =============== =============== =============== VALUATION ALLOWANCE FOR DEFERRED TAXES $ 12,215 $ 509(3) $ -- $ -- $ 12,724 =============== =============== =============== =============== ===============
(1) Bad debts written off. (2) Disposal of excess and obsolete inventory. (3) Reflects the increase in the valuation allowance associated with net operating losses of the Company's Japanese subsidiary plus an increase in the valuation allowance related to U.S. tax credits. 89 92 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. KULICKE and SOFFA INDUSTRIES, INC. By: /s/ C. SCOTT KULICKE -------------------------------- C. Scott Kulicke Chairman of the Board and Chief Executive Officer Dated: December 27, 2000 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - -------------------------------------------- ----------------------------- -------------------- /s/ C. SCOTT KULICKE - ----------------------------------------- C. Scott Kulicke Chairman of the Board December 27, 2000 (Principal Executive Officer) and Director /s/ CLIFFORD G. SPRAGUE - ----------------------------------------- Clifford G. Sprague Senior Vice President December 27, 2000 (Principal Financial Officer) and Chief Financial Officer /s/ PHILIP V. GERDINE - ----------------------------------------- Philip V. Gerdine Director December 27, 2000 /s/ JOHN A. O'STEEN - ----------------------------------------- John A. O'Steen Director December 27, 2000 /s/ ALLISON F. PAGE - ----------------------------------------- Allison F. Page Director December 27, 2000 /s/ MACDONELL ROEHM, JR. - ----------------------------------------- MacDonell Roehm, Jr. Director December 27, 2000 /s/ LARRY D. STRIPLIN, JR. - ----------------------------------------- Larry D. Striplin, Jr. Director December 27, 2000 /s/ C. WILLIAM ZADEL - ----------------------------------------- C. William Zadel Director December 27, 2000
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EXHIBIT NUMBER ITEM 4(iv) Credit Agreement dated December 21, 2000 between the Company and several Banks and PNC Bank, National Association, as agent for the Banks. 21 Subsidiaries of the Company. 23.1 Consent of PricewaterhouseCoopers LLP (Independent Accountants) 23.2 Consent of KPMG LLP (Independent Public Accountants) 27 Financial Data Schedule 99(i) Kulicke and Soffa Industries, Inc. and Cerprobe Corporation Unaudited Pro Forma Combined Statement of Operations and Balance Sheet
EX-4.(IV) 2 w43640ex4-iv.txt CREDIT AGREEMENT 1 EXHIBIT 4(iv) CREDIT AGREEMENT CREDIT AGREEMENT, dated as of December 21, 2000, among KULICKE AND SOFFA INDUSTRIES, INC., a Pennsylvania corporation (the "Borrower"), the several banks and other financial institutions from time to time parties hereto (the "Banks") and PNC BANK, NATIONAL ASSOCIATION, as agent for the Banks hereunder (in such capacity, the "Agent"). W I T N E S S E T H: In consideration of the promises and the agreements hereinafter set forth, and intending to be legally bound hereby, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Affected Bank": has the meaning assigned to such term in Section 2.22. "Affiliate": as to any Person, any other Person which, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person and any member, director, officer or employee of any such Person. For purposes of this definition, "control" shall mean the power, directly or indirectly, either to (a) vote 10% or more of the securities having ordinary voting power for the election of directors of such Person or (b) direct or in effect cause the direction of the management and policies of such Person whether by contract or otherwise. "Agreement": this Credit Agreement, as amended, supplemented or otherwise modified from time to time. "Applicable Margin": for any LIBOR Loan on any date, the percentage per annum set forth below opposite the Leverage Ratio shown on the last Compliance Certificate delivered by the Borrower to the Agent pursuant to subsection 5.2(a) prior to such date:
Level Leverage Ratio Applicable Margin I Less than or equal to 1.0% 1.0 to 1.0 II Less than or equal to 1.25 1.25% to 1.0 but greater than 1.0 to 1.0 III Less than or equal to 1.75 1.50% to 1.0 but greater than 1.25 to 1.0 IV Less than or equal to 2.25 1.75% to 1.0 but greater than 1.75 to 1.0 V Greater than 2.25 to 1.0 2.0%
1 2 ; provided, however, that (a) adjustments, if any, to the Applicable Margin resulting from a change in the Leverage Ratio shall be effective five Business Days after the Agent has received a Compliance Certificate, (b) in the event that no Compliance Certificate has been delivered for a fiscal quarter prior to the last date on which it can be delivered without violation of subsection 5.2(a), the Applicable Margin from such date until such Compliance Certificate is actually delivered shall be that applicable under Level V, (c) in the event that the actual Leverage Ratio for any fiscal quarter is subsequently determined to be greater than that set forth in the Compliance Certificate for such fiscal quarter, the Applicable Margin shall be recalculated for the applicable period based upon such actual Leverage Ratio and (d) anything in this definition to the contrary notwithstanding, until receipt by the Agent of the Compliance Certificate for the fiscal year ending September 30, 2001, the Applicable Margin shall not be less than that provided under Level III. Any additional interest on the Loans resulting from the operation of clause (c) above shall be payable by the Borrower immediately upon the recalculation contemplated therein. "Application": in respect of each Letter of Credit issued by the Issuing Bank, an application, in such form as the Issuing Bank may specify from time to time, requesting issuance of such Letter of Credit. "Assignment and Acceptance": an assignment and acceptance entered into by a Bank and a Purchasing Bank, and accepted by the Agent, in the form of Exhibit B attached hereto, or such other form as shall be approved by the Agent. "Base Rate": for any day, a rate per annum (rounded upwards, if necessary, to the next 1/100th of 1%) equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus one half of one percent (0.5%). If for any reason the Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Agent to obtain sufficient quotations in accordance with the definition of such term, the Base Rate shall be determined without regard to clause (b) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, as the case may be. "Base Rate Loan": any Loan bearing interest at a rate determined by reference to the Base Rate. "Borrowing Date": any Business Day on which a Loan is to be made at the request of the Borrower under this Agreement. "Business Day": a day other than a Saturday, Sunday or other day on which commercial banks in Philadelphia, Pennsylvania are authorized or required by law to close and (a) with respect to advances or payments of Loans or any other matters relating to Loans denominated in an Optional Currency, such day also shall be a day on which dealings in deposits in the relevant Optional Currency are carried on in the applicable interbank market, (b) with respect to advances or payments of Loans denominated in an Optional Currency, such day shall also be a day on which all applicable banks into which Loan proceeds may be deposited are open for business and foreign exchange markets are open for business in the principal financial center of the country of such currency and (c) with respect to advances of LIBOR Loans made in Dollars or any other matters relating to LIBOR Loans made in Dollars, such day shall also be a day on which banks are open for dealings in dollar deposits in the London Interbank Market. "Capital Lease": at any time, a lease with respect to which the lessee is required to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP. "Capital Lease Obligations": at any time, the amount of the obligations under Capital Leases which would be shown at such time as a liability on a consolidated balance sheet of the Borrower and its consolidated Subsidiaries 2 3 prepared in accordance with GAAP. "Capital Stock": any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing. "Cash Investments": has the meaning assigned to such term in the definition of "Liquidity Ratio". "Cerprobe Acquisition": the acquisition by the Borrower or a Subsidiary thereof of 100% of the Capital Stock of Cerprobe Corporation. "Closing Date": the first date on which all of the conditions precedent set forth in Section 4.1 have been satisfied or waived by the Agent. "Code": the Internal Revenue Code of 1986, as amended from time to time. "Commitment": as to any Bank, the obligation of such Bank to make Loans, to issue and/or acquire participating interests in Letters of Credit hereunder, in an aggregate Dollar Equivalent amount at any one time outstanding not to exceed the amount set forth opposite such Bank's name on Schedule I hereto under the caption "Commitment," as the same may be changed from time to time in accordance with the provisions of this Agreement and/or any applicable Assignment and Acceptance. "Commitment Fees": those certain fees payable to the Banks on their unused Commitments as described in subsection 2.7(a). "Commitment Fee Rate": on any date, 0.375%. "Commitment Percentage": as to any Bank at any time, the percentage which such Bank's Commitment constitutes of the aggregate Commitments of all Banks at such time (or at any time after the Commitments shall have expired or terminated, the percentage which the amount of such Bank's Exposure constitutes of the aggregate amount of the Exposure of all Banks at such time). "Commitment Period": the period from and including the date hereof to but not including the Termination Date. "Commonly Controlled Entity": an entity, whether or not incorporated, which is under common control with the Borrower within the meaning of Section 4001 of ERISA or is part of a group which includes the Borrower and which is treated as a single employer under Section 414(b), (c), (m) or (o) of the Code. "Compliance Certificate": has the meaning assigned to such term in subsection 5.2(a). "Computation Date": has the meaning assigned to such term in subsection 2.6(a). "Contractual Obligation": as to any Person, any provision of any security issued by such Person or any provision of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "Declining Bank": has the meaning assigned to such term in subsection 2.14(d)(i). "Declining Bank's Maturity Date": has the meaning assigned to such term in subsection 2.14(d)(i). "Default": any of the events specified in Section 7, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition precedent therein set forth, has been satisfied. 3 4 "Dollar Equivalent": with respect to any amount of any currency, the Equivalent Amount of such currency expressed in Dollars. "Dollar Equivalent Facility Usage": at any time the sum of (i) the Dollar Equivalent amount of all Loans then outstanding, and (ii) the Letter of Credit Obligations then outstanding. "Dollars" and "$": dollars in lawful currency of the United States of America. "Domestic Subsidiary": shall mean any Subsidiary organized under the laws of any jurisdiction of the United States of America or one of its states, commonwealths or territories or the District of Columbia of which the Borrower owns more than seventy-five percent (75.0%) of the Capital Stock. "EBITDA": shall mean, for any period, consolidated net income (or net loss) plus the sum of (a) interest expense, (b) income tax expense, (c) depreciation and amortization, (d) non-cash extraordinary or unusual charges or other non-cash charges not incurred in the ordinary course of business included in the calculation of consolidated net income, less interest income and extraordinary or unusual gains or other gains not incurred in the ordinary course of business included in the calculation of consolidated net income, in each case determined for the Borrower and its Subsidiaries on a consolidated basis in accordance with GAAP for such period. "Environmental Laws": any and all Federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees or binding requirements of any Governmental Authority, or binding Requirement of Law regulating, relating to or imposing liability or standards of conduct concerning protection of the environment, as now or may at any time hereafter be in effect. "Equivalent Amount": at any time, as determined by the Agent (which determination shall be conclusive absent manifest error), with respect to an amount of any currency (the "Reference Currency") which is to be computed as an equivalent amount of another currency (the "Equivalent Currency"), the amount of such Equivalent Currency converted from such Reference Currency using the average spot rate quoted to the Agent (based on the market rates then prevailing and available to the Agent) or the commercial market rate of exchange, as determined by the Agent, for the sale of such Equivalent Currency for such Reference Currency at a time determined by the Agent on the second Business Day immediately preceding the event for which such calculation is made. "Equivalent Currency": has the meaning assigned to such term in the definition of Equivalent Amount. "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time. "Euro": Euro units. "Eurocurrency Rate Reserve Percentage": the maximum percentage (expressed as a decimal rounded upward to the nearest 1/100 of 1%) as determined by the Agent which is in effect during any relevant period: (i) as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the reserve requirements (including supplemental, marginal and emergency reserve requirements) with respect to eurocurrency funding (currently referred to as "Eurocurrency Liabilities") of a member bank in such System; and (ii) to be maintained by a Bank as required for reserve liquidity, special deposit, or a similar purpose by any governmental or monetary authority of any country or political subdivision thereof (including any central bank), against (A) any category of liabilities that includes deposits by reference to which a LIBOR Rate is to be determined, or (B) any category of extension of credit or other assets that includes Loans or Tranches to which a LIBOR Rate applies. "Event of Default": any of the events specified in Section 7, provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Existing Credit Agreement": the Amended and Related Credit Agreement, dated as of March 26, 1998 between the Borrower and PNC Bank, National Association, as heretofore amended, supplemented or otherwise modified. 4 5 "Exposure": as to any Bank at any date, an amount equal to the sum of (a) the aggregate Dollar Equivalent amount of all Loans made by such Bank then outstanding and (b) such Bank's Commitment Percentage multiplied by the Letter of Credit Obligations then outstanding. "Extension Request": has the meaning assigned to such term in subsection 2.14(d)(i). "Extensions of Credit": the collective reference to Loans made and Letters of Credit issued under this Agreement. "Federal Funds Effective Rate": for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "Fee Letter": the letter, dated December 1, 2000, from the Agent to the Borrower relating to the payment of certain fees and expenses in connection with the transactions contemplated hereby, as amended, supplemented or otherwise modified from time to time. "Flip Chip": has the meaning assigned to such term in subsection 5.11. "Foreign Subsidiary": shall mean any Subsidiary organized under the laws of any jurisdiction other than the United States of America or one of its states, commonwealths or territories or the District of Columbia of which the Borrower either directly or indirectly owns more than fifty-one percent (51.0%) of the Capital Stock. "GAAP": at any time with respect to the determination of the character or amount of any asset or liability or item of income or expense, or any consolidation or other accounting computation, generally accepted accounting principles as in effect in the United States on the date of, or at the end of the period covered by, the financial statements from which such asset, liability, item of income, or item of expense, is derived, or, in the case of any such computation, as in effect on the date when such computation is required to be determined, consistently applied. "Governmental Acts": has the meaning assigned to such term in subsection 2.8(j). "Governmental Authority": any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantor": shall mean any Subsidiary that is a party to a Guaranty. "Guaranty": shall mean each Guaranty and Suretyship Agreement which is now or hereafter executed by any of the then current Subsidiaries and delivered to the Agent in accordance with the provisions of Sections 4.1(b) or 6.3 of this Agreement. "Guaranty Obligation": as to any Person, any guarantee of payment or performance by such Person of any Indebtedness or other obligation of any other Person, or any agreement to provide financial assurance with respect to the financial condition, or the payment of the obligations of, such other Person (including, without limitation, purchase or repurchase agreements, reimbursement agreements with respect to letters of credit or acceptances, indemnity arrangements, grants of security interests to support the obligations of another Person, keepwell agreements and take-or-pay or through-put arrangements) which has the effect of assuring or holding harmless any third Person against loss with respect to one or more obligations of such third Person; provided, however, the term Guaranty Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guaranty Obligation of any Person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guaranty Obligation is made and (b) the maximum amount for which such contingently liable Person may be liable pursuant to the terms of the instrument embodying such Guaranty Obligation, unless such primary obligation and the maximum amount for which such contingently liable Person may be liable are not stated or 5 6 determinable, in which case the amount of such Guaranty Obligation shall be such contingently liable Person's maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith. Guaranty Obligations of any Person shall include the amount of any future "earn-out" or similar payments to be made to any other Person in connection with a permitted acquisition whether or not the same are reflected as indebtedness on the financial statements of the contingently liable Person. "Guaranty Opinion": an opinion or opinions of counsel reasonably acceptable to the Agent, with respect to the enforceability of a Guaranty in the form of Exhibit E delivered to the Agent by the applicable Subsidiary. "Indebtedness": of any Person at any date, without duplication: (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (other than trade liabilities incurred in the ordinary course of business payable in accordance with customary practices), including earn-outs and similar obligations, (b) any other indebtedness which is evidenced by a note, bond, debenture or similar instrument, (c) all Capital Lease Obligations of such Person, (d) all obligations of such Person in respect of outstanding letters of credit, acceptances and similar obligations created for the account of such Person, (e) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof, (f) net liabilities of such Person under interest rate cap agreements, interest rate swap agreements, foreign currency exchange agreements, netting agreements and other hedging agreements or arrangements (calculated on a basis satisfactory to the Agent and in accordance with accepted practice), (g) withdrawal liabilities of such Person or any Commonly Controlled Entity under a Plan, (h) all obligations of such Person under any lease treated as an operating lease under GAAP and as a loan or financing for U.S. income tax purposes, (i) all sales by such Person of (A) accounts or general intangibles for money due or to become due, (B) chattel paper, instruments or documents creating or evidencing a right to payment of money or (C) other receivables (collectively, "Receivables"), whether pursuant to a purchase facility or otherwise, other than in connection with the disposition of the business operations of such Person relating thereto or a disposition of defaulted Receivables for collection and not as a financing arrangement, and together with any obligation of such Person to pay any discount, interest, fees, indemnities, penalties, recourse, expenses or other amounts in connection therewith, and (j) all Guaranty Obligations of such Person with respect to liabilities of a type described in any of clauses (a) through (i) of this definition. The Indebtedness of any Person shall include any Indebtedness of any partnership in which such Person is the general partner. "Insolvency": with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA. "Insolvent": pertaining to a condition of Insolvency. "Interest Payment Date": (a) as to any Base Rate Loan, the last day of each calendar quarter while such 6 7 Loan is outstanding, (b) as to any LIBOR Loan having an Interest Period of three months or less, the last day of such Interest Period, and (c) as to any LIBOR Loan having an Interest Period longer than three months, the day which is (i) three months after the first day of such Interest Period and (ii) the last day of such Interest Period. "Interest Period": with respect to any LIBOR Loan: (a) initially the period commencing on the borrowing or continuation date, as the case may be, with respect to such LIBOR Loan and ending one, two, three or six months thereafter, as selected by the Borrower in its Notice of Borrowing, given with respect thereto; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such LIBOR Loan and ending one, two, three or six months thereafter, as selected by the Borrower by irrevocable notice to the Agent in a Notice of Borrowing not less than three Business Days prior to the last day of the then current Interest Period with respect thereto; provided, that the foregoing provisions relating to Interest Periods are subject to the following: (i) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day; (ii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; and (iii) no Interest Period shall extend beyond the Termination Date. "Investments": investments (by loan or extension of credit, purchase, advance, guaranty, capital contribution, creation or assumption of any other liability or otherwise) made in cash or by delivery of Property in any Person, whether by acquisition of stock or other ownership interest, indebtedness or other obligation, or by loan, advance or capital contribution, or any agreement to do any of the foregoing, which agreement is not conditioned upon obtaining the Agent's or the Banks' consent to the extent consent would be required by this Agreement. "Issuing Bank": PNC Bank, National Association, or such other Bank as designated by the Borrower to be the Issuing Bank and approved by the Required Banks, in its capacity as issuer of any Letter of Credit. "Law": any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, opinion, release, ruling, order, injunction, writ, decree or award of any Governmental Authority. "Lending Office": the lending office(s) of the Banks set forth on Schedule I hereto or notice of which has been given to the Agent in accordance with the provisions of this Agreement. "Letter of Credit": has the meaning assigned to that term in subsection 2.8(a). "Letter of Credit Coverage Requirement": with respect to each Letter of Credit at any time, 102% of the maximum amount available to be drawn thereunder at such time (determined without regard to whether any conditions to drawing could be met at such time). "Letter of Credit Fee": has the meaning assigned to that term in subsection 2.8(b). "Letter of Credit Fee Rate": on any date, the percentage per annum set forth below opposite the Leverage Ratio shown on the last Compliance Certificate delivered by the Borrower to the Agent pursuant to subsection 5.2(a) prior to such date: 7 8
Level Leverage Ratio Letter of Credit Fee Rate I Less than or equal to 1.0% 1.0 to 1.0 II Less than or equal to 1.25 1.25% to 1.0 but greater than 1.0 to 1.0 III Less than or equal to 1.75 1.50% to 1.0 but greater than 1.25 to 1.0 IV Less than or equal to 2.25 1.75% to 1.0 but greater than 1.75 to 1.0 V Greater than 2.25 to 1.0 2.0%
; provided, however, that (a) adjustments, if any, to the Letter of Credit Fee Rate resulting from a change in the Leverage Ratio shall be effective five Business Days after the Agent has received a Compliance Certificate, (b) in the event that no Compliance Certificate has been delivered for a fiscal quarter prior to the last date on which it can be delivered without violation of subsection 5.2(a), the Letter of Credit Fee Rate from such date until such Compliance Certificate is actually delivered shall be that applicable under Level V, (c) in the event that the actual Leverage Ratio for any fiscal quarter is subsequently determined to be greater than that set forth in the Compliance Certificate for such fiscal quarter, the Letter of Credit Fee Rate shall be recalculated for the applicable period based upon such actual Leverage Ratio and (d) anything in this definition to the contrary notwithstanding, until receipt by the Agent of the Compliance Certificate for the fiscal year ending September 30, 2001, the Letter of Credit Fee Rate shall be that applicable under Level III. Any additional fees on the Letters of Credit resulting from the operation of clause (c) above shall be payable by the Borrower to the Banks within five (5) days after receipt of a written demand therefor from the Agent. "Letter of Credit Obligations": at any time, an amount equal to the sum of (a) 100% of the maximum amount available to be drawn under all Letters of Credit outstanding at such time (determined without regard to whether any conditions to drawing could be met at such time) and (b) the aggregate amount of drawings under Letters of Credit which have not then been reimbursed pursuant to subsection 2.8(d)(i). "Letter of Credit Participant": in respect of each Letter of Credit, each Bank (other than the Issuing Bank) in its capacity as the holder of a participating interest in such Letter of Credit. "Leverage Ratio": on any date (a) Senior Funded Debt on such date to (b) EBITDA for the period of four consecutive fiscal quarters ending on such date, for the Borrower and its Subsidiaries determined on a consolidated basis in accordance with GAAP. To the extent that any Person is a Subsidiary on any date of determination, but was not a Subsidiary for the entire period of four consecutive fiscal quarters ending on such date, EBITDA of such Person before it became a Subsidiary shall not be included in calculating the Leverage Ratio. "LIBOR Loan": any Loan bearing interest at a rate determined by reference to the LIBOR Rate. "LIBOR Rate": (a) with respect to Loans in Dollars comprising any Tranche to which the LIBOR Rate applies for any Interest Period, the interest rate per annum determined by the Agent by dividing (the resulting quotient rounded upward to the nearest 1/100th of 1% per annum) (i) the rate of interest determined by the Agent in accordance with its usual procedures (which determination shall be conclusive absent manifest error) to be the London interbank offered rate 8 9 of interest per annum appearing on Dow Jones Market Service display page 3750 or such other display page of the Dow Jones Market Service as may replace such page evidencing quotes by the British Bankers' Association (or appropriate successor or, if the British Bankers' Association or its successor ceases to provide such quotes, a comparable replacement determined by the Agent) at approximately 11:00 a.m., London time, two (2) Business Days prior to the first day of such Interest Period for an amount comparable to such Tranche and having a borrowing date and a maturity comparable to such Interest Period by (ii) a number equal to 1.00 minus the Eurocurrency Rate Reserve Percentage. Such LIBOR Rate may also be expressed by the following formula: DJMS page 3750 quoted by British Bankers' LIBOR Rate = Association or appropriate successor ---------------------------------------------------------- 1.00 - Eurocurrency Rate Reserve Percentage The LIBOR Rate shall be adjusted with respect to any LIBOR Loan in Dollars outstanding on the effective date of any change in the Eurocurrency Rate Reserve Percentage as of such effective date. The Agent shall give prompt notice to the Borrower of the LIBOR Rate as determined or adjusted in accordance herewith, which determination shall be conclusive absent manifest error. (b) with respect to Loans in an Optional Currency comprising any Tranche to which the LIBOR Rate applies for any Interest Period, the interest rate per annum determined by Agent by dividing (the resulting quotient rounded upward to the nearest 1/100th of 1% per annum) (i) the rate of interest per annum determined by the Agent in accordance with its usual procedures (which determination shall be conclusive absent manifest error) to be the rate of interest per annum for deposits in the relevant Optional Currency which appears on the relevant Dow Jones Market Service page (or, if no such quotation is available on such Dow Jones Market Service page, on the appropriate Reuters Screen) at approximately 9:00 a.m., Philadelphia time, two (2) Business Days prior to the first day of such Interest Period for delivery on the first day of such Interest Period for a period, and in an amount, comparable to such Interest Period and principal amount of such Tranche ("Optional Currency Euro Rate") by (ii) a number equal to 1.00 minus the Eurocurrency Rate Reserve Percentage. Such LIBOR Rate may also be expressed by the following formula: LIBOR Rate = Optional Currency Euro Rate ----------------------------------------------- 1 - Eurocurrency Rate Reserve Percentage The LIBOR Rate shall be adjusted with respect to any LIBOR Loan in an Optional Currency outstanding on the effective date of any change in the Eurocurrency Rate Reserve Percentage as of such effective date. The Agent shall give prompt notice to the Borrower of the LIBOR Rate as determined or adjusted in accordance herewith, which determination shall be conclusive absent manifest error. The LIBOR Rate for any Loans in an Optional Currency shall be based upon the LIBOR Rate for the currency in which such Loans are requested. "Lien": any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement and any Capital Lease having substantially the same economic effect as any of the foregoing). "Liquidity Ratio": at any time, the ratio of cash and Cash Investments to Senior Funded Debt at such time, on a consolidated basis for the Borrower and its Subsidiaries. As used herein, "Cash Investments" means "Permitted Investments" which are held at a Bank or an affiliate thereof, and managed pursuant to the Borrower's direction and investment policy, plus (without duplication), to the extent the aggregate amount of Cash Investments exceeds $50,000,000, all other Permitted Investments in excess thereof, whether or held at a Bank or affiliate. "Loan Documents": this Agreement, the Notes, the Guaranties, the Pledge Agreements, any certificates delivered pursuant to this Agreement, and the Applications, as the same may be supplemented or amended from time to time in accordance herewith or therewith, and "Loan Document" shall mean any of the Loan Documents. 9 10 "Loans": has the meaning assigned to such term in subsection 2.1(a). "Material Adverse Effect" shall mean any event, condition or occurrence as to the Borrower which individually or in the aggregate with any other such event, condition or occurrence and whether through the effect on the Borrower's business, property, profits or financial condition could reasonably be expected to (a) result in, to the extent not fully covered by insurance, any liability, loss, forfeiture, penalty, costs, fine, expense, payment or other monetary obligation or loss of property of the Borrower in excess of 5% of the Borrower's consolidated shareholders' equity, determined in accordance with GAAP, as reflected in the Borrower's then most recently prepared annual or quarterly financial statements, and/or (b) materially impair the ability of the Borrower to meet all of its obligations to the Banks. "Material Subsidiary" shall mean, at any date, any Subsidiary in which either (i) the aggregate revenue generated by such Subsidiary equals or exceeds an amount equal to ten percent (10%) of the consolidated aggregate revenues generated by the Borrower and its Subsidiaries for the period of four consecutive fiscal quarters most recently ended, or (ii) the aggregate book value of the assets of such Subsidiary equals or exceeds ten percent (10%) of the then current book value of all the assets of the Borrower and its Subsidiaries. A Subsidiary that is a Material Subsidiary at any date pursuant to this definition shall continue to be or be deemed to be a Material Subsidiary at all times thereafter, without regard to the results of any future re-determination pursuant to this definition. "Materials of Environmental Concern": any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Law, including, without limitation, asbestos, polychlorinated biphynels, and ureaformaldehyde insulation. "Multiemployer Plan": a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Net Worth": at any date, the excess of assets over liabilities as would appear on a balance sheet for the Borrower and its Subsidiaries at such date, prepared on a consolidated basis in accordance with GAAP. "Nonqualified Deferred Compensation Plan": any unfunded, nonqualified deferred compensation arrangement of the Borrower or a Subsidiary intended to cover a select group of management or highly compensated employees or non-employee directors. "Notes": has the meaning assigned to such term in Section 2.3, as the same may be amended, supplemented or otherwise modified from time to time. "Notice of Borrowing": with respect to a Loan of any Type, a notice from the Borrower in respect of such Loan, containing the information in respect of such Loan and delivered to the Agent, in the manner and by the time specified pursuant to the terms hereof. A form of the Notice of Borrowing for Loans is attached hereto as Exhibit C. "Optional Currency": shall mean, in each case subject to availability, any freely convertible foreign currencies as may be requested by the Borrower and are acceptable to the Agent and the Banks in their sole discretion. "Original Currency": has the meaning assigned to such term in Section 2.19. "Other Currency": has the meaning assigned to such term in Section 2.19. "Other Taxes": has the meaning assigned to such term in subsection 2.17(b). "Participant": has the meaning assigned to such term in subsection 9.6(f). "PBGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA. "Permitted Investments": shall mean (a) direct obligations of, or obligations fully and unconditionally guaranteed by, the United States of America, (b) deposit accounts in, or certificates of deposit issued by, any commercial 10 11 bank in the United States of America having total capital and surplus in excess of Seventy Five Million Dollars ($75,000,000) or certificates of deposit which are fully insured by the Federal Deposit Insurance Corporation, (c) investment grade (rated in one of the four highest rating categories) commercial paper, bankers' acceptances or similar financial instruments, (d) investment grade bonds (rated in one of the four highest rating categories), (e) mutual funds having at least eighty percent (80%) of their assets in cash and/or investments included in (a), (b), (c) or (d) above, time deposits in commercial banks at subsidiary locations, (f) money market mutual funds, (g) floating rate notes resetting every 30 days or less (and rated in one of the four highest rating categories), (h) taxable or tax exempt auction rate preferred stock resetting every 7, 28, 35 or 49 days (and rated in one of the four highest rating categories), (i) repurchase agreements, the collateral for which is a Permitted Investment, (j) corporate bonds and medium term notes of U.S. corporations with a maturity date not to exceed 3 years from date of investment by the Borrower and a credit rating of not less than A from Standard & Poor's Rating Group, a division of McGraw Hill Corporation, or Moody's Investors Service, Inc., (k) with respect to amounts attributable to benefits under a Nonqualified Deferred Compensation Plan, mutual funds permitted under the Nonqualified Deferred Compensation Plan, and/or (l) asset backed securities having a credit rating by Standard & Poor's Rating Group or Moody's Investors Service, Inc., of not less than A. "Permitted Liens": shall mean: (a) Liens for taxes, assessments or similar charges incurred in the ordinary course of business which are not yet due and payable; (b) Pledges or deposits made in the ordinary course of business to secure repayment of workers' compensation, or to participate in any fund in connection with compensation, insurance, old-age pensions or other social security programs, as well as any underlying lien, if any, being replaced by such pledge or deposit; (c) Liens of mechanics, materialmen, warehousemen, carriers, or other like lienors, securing obligations incurred in the ordinary course of business that are not yet due and payable; (d) Good faith pledges or deposits made in the ordinary course of business to secure performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases, or to secure statutory obligations, or surety, appeal, indemnity, performance or other similar bonds required in the ordinary course of business, as well as any underlying lien, if any, being replaced by such pledge, deposit or bond; (e) Liens in favor of the Agent or the Banks to secure the obligations under the Loan Documents or under any interest or currency swap, future, option or other interest rate protection agreement relating to the Loans with the Agent or any Bank ("Hedge Liens"), which Hedge Liens may not rank higher than the Liens in favor of the Agent and the Banks under the Loan Documents; (f) Purchase Money Security Interests covering real estate or equipment in favor of the vendor or financier thereof, provided that the principal amount secured by each such security interest does not exceed the unpaid purchase price for such real estate or equipment; (g) Liens and encumbrances granted by (i) the Further Debenture dated October 2, 1995 between American Fine Wire Limited ("AFWL") and Rothschild Australia LTD ("RAL"), (ii) the Security Agreement dated December 31, 1992 between American Fine Wire Corporation ("AFW") and RAL and (iii) those certain Guaranty and Indemnity Agreements dated December 31, 1992 among RAL and each of AFWL, AFW & Dr. Mueller Feindraht AG, as such agreements are in effect on the date hereof (the "RAL Agreements"); (h) Liens existing on any asset of any Person at the time such Person is acquired by the Borrower and/or becomes a Subsidiary of the Borrower and not created in contemplation of such event; provided that, such Liens shall be limited to the property of such acquired Person and shall not attach to the property of any other Subsidiary by acquisition, merger or otherwise; (i) Liens granted in connection with the Securitization. 11 12 "Person": an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. "Plan": at a particular time, any employee benefit plan which is covered by ERISA and in respect of which the Borrower or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Pledge Agreement": shall mean each Pledge Agreement which is now or hereafter executed by the Borrower or any Subsidiary and delivered to the Agent in accordance with the provisions of Section 4.1(b), 5.9 or 6.3 of this Agreement each as amended, supplemented, or otherwise modified from time to time. "Pledge Opinion": an opinion or opinions of counsel reasonably acceptable to the Agent with respect to the enforceability and perfection under all applicable laws of the security interests granted to the Agent in the Capital Stock of the applicable Foreign Subsidiary. "Prime Rate": the rate of interest per annum publicly announced from time to time by PNC Bank, National Association as its prime rate in effect at its principal office in Philadelphia, Pennsylvania; each change in the Prime Rate shall be effective on the date such change is publicly announced as effective. "Principal Office": the main banking office of the Agent in Philadelphia, Pennsylvania. "Probe Acquisition": the acquisition by the Borrower or a Subsidiary thereof of 100% of the Capital Stock of Probe Technology Corporation. "Properties": the collective reference to the facilities and properties owned, leased or operated by the Borrower or any of its Subsidiaries. "Publication 500": has the meaning assigned to such term in subsection 2.8(f). "Purchase Money Security Interest": Liens upon tangible personal property securing loans to the Borrower or deferred payments by the Borrower for the purchase of such tangible personal property, in each case securing amounts which do not exceed the purchase price of the property subject to such security interests. "Purchasing Bank": has the meaning assigned to such term in subsection 9.6(b). "Reference Currency": has the meaning assigned to such term in the definition of Equivalent Amount. "Regulation U": Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Regulation X": Regulation X of the Board of Governors of the Federal Reserve System as from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Reimbursement Obligation": in respect of each Letter of Credit, the obligation of the Borrower to reimburse the Issuing Bank for all drawings made thereunder in accordance with subsection 2.8(d)(i) and the Application related to such Letter of Credit for amounts drawn under such Letter of Credit. "Reorganization": with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "Replacement Bank": has the meaning assigned to such term in subsection 2.14(d)(ii). "Reportable Event": any of the events set forth in Section 4043(c)(1), (2), (4), (5), (6), (10) and (13) of ERISA. 12 13 "Required Banks": at any time, those Banks which are then in compliance with their obligations hereunder holding (a) 66 2/3% of the Commitments of such Banks or (b) in the event the Commitments shall have expired or been terminated, 66 2/3% of the Exposure of such Banks. "Requirement of Law": as to any Person, the Articles or Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case binding upon such Person or any of its property or to which such Person or any of its property is subject. "Responsible Officer": the chief executive officer, president or chief financial officer of a Person. Unless otherwise qualified, all references to a "Responsible Officer" in this Agreement shall refer to a Responsible Officer of the Borrower. "Securitization": a securitization financing on terms acceptable to all of the Banks, pursuant to which receivables of the Borrower are transferred and in respect of which the aggregate Indebtedness incurred by the Borrower and its Subsidiaries is not greater than $40,000,000. "Senior Funded Debt": at any date, without duplication, the aggregate of all indebtedness for borrowed money (other than Subordinated Debt), indebtedness in connection with the Securitization, Guaranty Obligations, Capital Lease Obligations and reimbursement obligations with respect to letters of credit, in each case, for the Borrower and its Subsidiaries determined on a consolidated basis. "Single Employer Plan": any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "Subordinated Debt": the Borrower's $175,000,000 4 3/4% Convertible Subordinated Notes due 2006, and other Indebtedness of the Borrower and its Subsidiaries that is subordinated to all Indebtedness of the Borrower and its Subsidiaries to the Banks on terms acceptable to the Banks. "Subsidiary": as to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only be reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower. "Taxes": has the meaning assigned to such term in Section 2.17. "Termination Date": the earlier of (a) December 20, 2003 and (b) the date the Commitments are terminated as provided herein, in each case, as such date may be extended pursuant to Section 2.14(d). "Tranche": specified portions of Loans outstanding as follows: (a) any Loans to which a LIBOR Rate applies which become subject to the same LIBOR Rate under the same Notice of Borrowing and which have the same Interest Period, which are denominated either in Dollars or in the same Optional Currency shall constitute one Tranche, and (b) all Loans to which the Base Rate applies shall constitute one Tranche. "Type": when used in respect of any Loan, shall refer to the Rate by reference to which interest on such Loan is determined. For purposes hereof, "Rate" shall include the LIBOR Rate and the Base Rate. "Voting Stock": Capital Stock of any class or classes of a Person the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the directors (or Persons performing similar functions). "Wholly-Owned Subsidiary": at any time, any Subsidiary one hundred percent (100%) of all of the equity 13 14 securities (except directors' qualifying shares) and Voting Stock of which are owned by the Borrower and its other Wholly-Owned Subsidiaries at such time. "Year 2000 Problem": has the meaning assigned to such term in Section 3.19. 1.2 Other Definitional Provisions. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in the Notes, the other Loan Documents or any certificate or other document made or delivered pursuant hereto or thereto. (b) As used herein and in the Notes and the other Loan Documents, and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms relating to the Borrower and its Subsidiaries not defined in Section 1.1 and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, Schedule and Exhibit references are to this Agreement unless otherwise specified. (d) The meanings given to terms defined in this Agreement shall be equally applicable to both the singular and plural forms of such terms. SECTION 2. LOANS AND TERMS OF COMMITMENTS 2.1 The Loans. (a) Commitments for Loans. Subject to the terms and conditions hereof, each Bank severally agrees to make revolving credit loans in either Dollars or one or more Optional Currencies (the "Loans") to the Borrower from time to time during the Commitment Period in an aggregate principal amount at any one time outstanding not to exceed the amount of such Bank's Commitment; provided, that (i) after giving effect to each such Loan, the aggregate Dollar Equivalent amount of outstanding Loans made by such Bank shall not exceed (x) such Bank's Commitment minus (y) such Bank's Commitment Percentage multiplied by the amount of Letter of Credit Obligations then outstanding, (ii) no Loan to which the Base Rate applies shall be made in an Optional Currency and (iii) the aggregate Dollar Equivalent amount of outstanding Loans in Optional Currencies made by all Banks shall not exceed $10,000,000 at any time. The Commitments may be terminated or reduced from time to time pursuant to Section 2.14. Within the foregoing limits, the Borrower may during the Commitment Period borrow, repay and reborrow under the Commitments, subject to and in accordance with the terms and limitations hereof. (b) Interest on Loans. The Loans may from time to time be (i) LIBOR Loans, (ii) Base Rate Loans or (iii) a combination thereof, as determined by the Borrower and notified to the Agent in accordance with Sections 2.4 and 2.5; provided, that no Loan shall be made as a LIBOR Loan after the date that is one month prior to the Termination Date. 2.2 Nature of Banks' Obligations with Respect to Loans. Each Bank shall be obligated to participate in each request for Loans pursuant to Section 2.4 in accordance with its Commitment Percentage. The obligations of each Bank hereunder are several. The failure of any Bank to perform its obligations hereunder shall not affect the obligations of the Borrower to any other party nor shall any other party be liable for the failure of any Bank to perform its obligations hereunder. The Banks shall have no obligation to make Loans hereunder on or after the Termination Date. 2.3 Notes. The Loans made by each Bank shall be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit A, with appropriate insertions as to payee, date and principal amount (a "Note"), payable to the order of such Bank and in a principal amount equal to the amount of the initial Commitment of such Bank; provided, 14 15 however, that the principal amount of each Loan made in an Optional Currency shall be paid by the Borrower in such Optional Currency. Each Bank is hereby authorized to record the date, currency, Type and amount of each Loan made by such Bank, each continuation thereof, each conversion of all or a portion thereof to another Type, the date and amount of each payment or prepayment of principal thereof and, in the case of LIBOR Loans, the length of each Interest Period with respect thereto, on the schedule annexed to and constituting a part of its Note, and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded, provided, that the failure of any Bank to make such recordation (or any error in such recordation) shall not affect the obligations of the Borrower hereunder or under such Note. Each Note shall (a) be dated the Closing Date, (b) be stated to mature on the Termination Date and (c) provide for the payment of interest in accordance with Sections 2.9 and 2.10. 2.4 Procedure for Loans. (a) Except as otherwise provided herein, the Borrower may from time to time prior to the Termination Date request the Banks to make Loans by delivering to the Agent, not later than 11:00 a.m., Philadelphia time, (i) three (3) Business Days prior to the proposed Borrowing Date with respect to the making of Loans in Dollars to which the LIBOR Rate applies and four (4) Business Days prior to the proposed Borrowing Date with respect to the making of Loans in an Optional Currency and (ii) the Business Day of the proposed Borrowing Date with respect to the making of a Loan to which the Base Rate applies, of a duly completed Notice of Borrowing or a request by telephone immediately confirmed in writing, it being understood that the Agent may rely on the authority of any individual making such a telephonic request without the necessity of receipt of such written confirmation. Each Notice of Borrowing shall be irrevocable and shall specify (i) the proposed Borrowing Date; (ii) the aggregate amount of the proposed Loans (expressed in the currency in which such Loans shall be funded) comprising each Tranche, the Dollar Equivalent amount of which shall be in integral multiples of $100,000 and not less than $2,500,000 or, if less, the maximum amount under the Commitment; (iii) whether the LIBOR Rate or Base Rate shall apply to the proposed Loans comprising the applicable Tranche; (iv) the currency in which such Loans shall be funded if the Borrower is electing the LIBOR Rate, and (v) in the case of a Tranche to which the LIBOR Rate applies, the Interest Period for the proposed Loans comprising such Tranche. (b) The Agent shall, promptly after receipt by it of a Notice of Borrowing pursuant to this Section 2.4, notify the Banks of its receipt of such Notice of Borrowing specifying: (i) the proposed Borrowing Date and the time and method of disbursement of the Loans requested thereby; (ii) the amount, currency, and Type of each such Loan and the applicable Interest Period (if any); and (iii) the apportionment among the Banks of such Loans as determined by the Agent in accordance with Section 2.2. Subject to the terms and conditions hereof, each Bank shall remit the principal amount of each Loan in the requested currency to the Agent at the Principal Office (or, with respect to Loans in an Optional Currency, such other Lending Office as the Agent shall from time to time notify such Bank) prior to 2:00 p.m., Philadelphia time (or, with respect to Loans in an Optional Currency, such other time as the Agent shall notify the Banks), on the Borrowing Date requested by the Borrower in funds immediately available to the Agent. Such borrowing will then be made available to the Borrower by the Agent crediting the account of the Borrower on the books of the office specified in subsection 9.2 (or, with respect to Loans in an Optional Currency, the applicable Lending Office of the Agent) with the aggregate of the amounts made available to the Agent by the Banks and in like funds as received by the Agent. Unless the Agent shall have received notice from a Bank prior to the date of any borrowing that such Bank will not make available to the Agent such Bank's portion of such borrowing, the Agent may assume that such Bank has made such portion available in accordance with this subsection 2.4(b) and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that any Bank shall not have made such Bank's pro rata portion of such borrowing available to the Agent, such Bank and the Borrower (without prejudice to the Borrower's rights against such Bank) severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent at (i) in the case of the Borrower, the interest rate applicable at the time to the Loans comprising such borrowing and (ii) in the case of such Bank, the Federal Funds Effective Rate, provided, that, if such Bank shall not pay such amount within three Business Days of such Borrowing Date, the interest rate on such overdue amount shall, at the expiration of such three Business Day period, be the rate per annum applicable to Base Rate Loans. If such Bank shall repay to the Agent such corresponding amount, such amount shall constitute such Bank's Loan as part of such borrowing for purposes of this Agreement. (c) If in a Notice of Borrowing no election as to the Type of Loan is specified in any such 15 16 notice, then the requested Loan shall be a Base Rate Loan. If a LIBOR Loan is requested but no Interest Period with respect to such Loan is specified in any such notice, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. 2.5 Conversion and Continuation Options. The Borrower shall have the right at any time upon prior irrevocable notice to the Agent (i) not later than 11:00 a.m., Philadelphia time, one Business Day prior to conversion, to convert any LIBOR Loan to a Base Rate Loan, (ii) not later than 11:00 a.m., Philadelphia time, three Business Days prior to conversion or continuation, to convert any Base Rate Loan into a LIBOR Loan or to continue any LIBOR Loan as a LIBOR Loan for any additional Interest Period, (iii) not later than 11:00 a.m. Philadelphia time, four Business Days prior to continuation, to continue any LIBOR Loan denominated in an Optional Currency as a LIBOR Loan in such currency for an additional period and (iv) not later than 11:00 a.m. Philadelphia time, four Business Days prior to conversion to convert the Interest Period with respect to any Loan in an Optional Currency to another permissible Interest Period, subject in each case to the following: (a) a LIBOR Loan may not be converted at a time other than the last day of the Interest Period applicable thereto; (b) any portion of a Loan maturing or required to be repaid in less than one month may not be converted into or continued as a LIBOR Loan; (c) no LIBOR Loan may be continued as such and no Base Rate Loan may be converted to a LIBOR Loan when any Default has occurred and is continuing and the Agent or the Required Banks have determined that such a continuation is not appropriate; (d) any portion of a LIBOR Loan that cannot be converted into or continued as a LIBOR Loan by reason of subsection 2.5(b) or 2.5(c) or as to which the Borrower has failed to give notice of conversion or continuation automatically shall in the case of a LIBOR Loan denominated in an Optional Currency be prepaid on the last day of the Interest Period in effect for such Loan (subject to the provisions of subsection 2.12(c)), or in the case of any other LIBOR Loan be converted to a Base Rate Loan on the last day of the Interest Period in effect for such Loan; (e) no LIBOR Loan denominated in an Optional Currency may be converted into a Base Rate Loan or converted into a LIBOR Loan denominated in another Optional Currency; and (f) the provisions of subsection 2.6(c) limiting under certain circumstances the continuation of LIBOR Loans denominated in an Optional Currency. Each request by the Borrower to convert or continue a Loan shall constitute a representation and warranty that no Default shall have occurred and be continuing. Accrued interest on a Loan (or portion thereof) being converted shall be paid by the Borrower at the time of conversion. In connection with each such conversion or continuation requested by the Borrower, the Borrower shall deliver to the Agent a Notice of Borrowing or shall make such request by telephone immediately confirmed in writing, it being understood that the Agent may rely on the authority of any individual making such telephonic request without the necessity of receipt of such written confirmation. 2.6 Utilization of Commitments in Optional Currencies. (a) The Agent will determine the Dollar Equivalent amount of (i) proposed Loans denominated in an Optional Currency as of the requested Borrowing Date, and (ii) outstanding Loans denominated in an Optional Currency as of the end of each Interest Period (each such date under clauses (i) and (ii), a "Computation Date"). (b) The Banks shall be under no obligation to make the Loans requested by the Borrower which are denominated in an Optional Currency if any Bank notifies the Agent by 5:00 p.m., Philadelphia time, three (3) Business Days prior to the Borrowing Date for such Loans that such Bank cannot due to market conditions provide its share of such Loans in such Optional Currency. In the event the Agent timely receives a notice from a Bank pursuant to the preceding sentence, the Agent will notify the Borrower no later than 12:00 noon, Philadelphia time, two (2) Business Days 16 17 prior to the Borrowing Date for such Loans that the Optional Currency is not then available for such Loans, and the Agent shall promptly thereafter notify the Banks of the same. If the Borrower receives a notice described in the preceding sentence, the Borrower may, by notice to the Agent not later than 5:00 p.m., Philadelphia time, two (2) Business Days prior to the Borrowing Date for such Loans, withdraw the Notice of Borrowing for such Loans. If the Borrower withdraws such Notice of Borrowing, the Agent will promptly notify each Bank of the same and the Banks shall not make such Loans. If the Borrower does not withdraw such Notice of Borrowing before such time, (i) the Borrower shall request that the Loans referred to in the Notice of Borrowing be made in Dollars or an a different Optional Currency in an amount equal to the Dollar Equivalent or other Optional Currency equivalent amount of such Loans and shall bear interest at the Base Rate or the LIBOR Rate, as elected by the Borrower, and (ii) the Agent shall promptly deliver a notice to each Bank stating: (A) that such Loans shall be made in the applicable currency and shall bear interest at the Base Rate or LIBOR Rate, as applicable, (B) the aggregate amount of such Loans, and (C) such Bank's pro rata share of such Loans. (c) If the Borrower delivers a Notice of Borrowing pursuant to Section 2.5 requesting that the Banks continue as a LIBOR Loan an outstanding Tranche of Loans denominated in an Optional Currency, the Banks shall be under no obligation to continue such LIBOR Loan if any Bank delivers to the Agent a notice by 5:00 p.m., Philadelphia time, three (3) Business Days prior to effective date of such continuation that such Bank cannot due to market conditions provide or continue Loans in such Optional Currency. In the event the Agent timely receives a notice from a Bank pursuant to the preceding sentence, the Agent will notify the Borrower no later than 12:00 noon, Philadelphia time, two (2) Business Days prior to the effective date of such continuation that the continuation of such Loans in such Optional Currency is not then available, and the Agent shall promptly thereafter notify the Banks of the same. If the Agent shall have so notified the Borrower that any such continuation of Optional Currency Loans is not then available, any notice of continuation with respect thereto shall be deemed withdrawn, and such Optional Currency Loans shall be prepaid on the last day of the Interest Period with respect to any such Optional Currency Loans, subject to the provisions of subsection 2.12(c) and to the Borrower's right to reborrow in Dollars or in another Optional Currency pursuant to Section 2.4. (d) The Borrower may deliver to the Agent a written request that Loans hereunder also be permitted to be made in any other lawful currency (other than Dollars), in addition to the currencies specified in the definition of "Optional Currency" herein, provided, that such currency must be freely traded in the offshore interbank foreign exchange markets, freely transferable, freely convertible into Dollars and available to the Banks in the applicable interbank market. The Agent may grant or deny such request at the direction of the Banks. The Agent will promptly notify the Banks of any such request and whether the Agent has granted or rejected such request. The Agent will promptly notify the Borrower of the acceptance or rejection by the Agent of the Borrower's request. The requested currency shall be approved as an Optional Currency hereunder only if the Agent approves the Borrower's request. (e) The Agent may, with respect to notices by the Borrower for Loans in an Optional Currency or voluntary prepayments of less than the full amount of an Optional Currency Tranche, engage in reasonable rounding of the Optional Currency amounts requested to be loaned or repaid; and, in such event, the Agent shall promptly notify the Borrower and the Banks of such rounded amounts and the Borrower's request or notice shall thereby be deemed to reflect such rounded amounts. 2.7 Fees. (a) The Borrower agrees to pay to the Agent for the account of each Bank, on each December 31, March 31, June 30 and September 30 during the Commitment Period and on the date on which the Commitments shall be permanently reduced or terminated as provided herein, a commitment fee (the "Commitment Fee") at a rate per annum equal to the Commitment Fee Rate in effect from time to time on the amount of the average daily unused amount of the Commitment during the preceding quarter (or shorter period commencing with the date hereof or ending with the Termination Date or the date on which such Commitments shall be terminated or reduced). All Commitment Fees shall be computed on the basis of the actual number of days elapsed in a year of 360 days and shall be paid in Dollars. The Commitment Fees due to each Bank shall commence to accrue on the date hereof, and shall cease to accrue on the Termination Date. The Agent shall distribute the applicable Commitment Fees on the Loans among the Banks pro rata in accordance with their respective Commitment Percentages. (b) The Borrower agrees to pay the Agent, for its own account, administrative and other 17 18 fees at the times and in the amounts set forth in the Fee Letter. (c) The foregoing fees shall be paid on the dates due, in immediately available funds, to the Agent for distribution, if and as appropriate, among the Banks. Once paid, none of the foregoing fees shall be refundable under any circumstances. 2.8 Letter of Credit Subfacility. (a) The Borrower may request the issuance of a letter of credit (each, a "Letter of Credit") by delivering to the Issuing Bank a completed Application and agreement for letters of credit in such form and with such other certificates, documents and information as the Issuing Bank may specify from time to time by no later than 10:00 a.m., Philadelphia time, at least five (5) Business Days, or such shorter period as may be agreed to by the Issuing Bank, in advance of the proposed date of issuance. Each Letter of Credit shall be denominated in Dollars. Subject to the terms and conditions hereof and in reliance on the agreements of the other Banks set forth in this Section 2.8, the Issuing Bank will issue a Letter of Credit, provided, that each Letter of Credit shall (A) have a maximum maturity of twelve (12) months from the date of issuance, and (B) in no event expire later than five (5) Business Day prior to the Termination Date, and provided further, that in no event shall (i) the amount of the Letter of Credit Obligations at any one time exceed the lesser of (x) $5,000,000, or (y) the Commitments minus the Dollar Equivalent amount of the outstanding Loans or (ii) the sum of the aggregate Dollar Equivalent amount of all Loans made by a Bank plus such Bank's share (based on its Commitment Percentage) of the amount of Loans and Letter of Credit Obligations then outstanding exceed its Commitment. The Issuing Bank shall not at any time be obligated to issue any Letter of Credit hereunder if such issuance would conflict with, or cause the Issuing Bank or any Letter of Credit Participant to exceed any limits imposed by any applicable Requirement of Law. Notwithstanding the provisions of this Section 2.8, the Banks and the Borrower hereby agree that the Issuing Bank may issue upon the Borrower's request, one or more Letter(s) of Credit which by its or their terms may be extended for additional periods of up to one year each provided that (i) the initial expiration date (or any subsequent expiration date) of each such Letter of Credit is not later than five (5) Business Days prior to the Termination Date, and (ii) renewal of such Letters of Credit, at the Issuing Bank's discretion, shall be available upon written request from the Borrower to the Issuing Bank at least thirty (30) days (or such other time period as agreed by the Borrower and the Agent) before the date upon which notice of renewal is otherwise required. (b) The Borrower shall pay in Dollars (i) to the Agent for the ratable account of the Banks a fee (the "Letter of Credit Fee") computed at the Letter of Credit Fee Rate in effect from time to time and (ii) to the Agent for the account of the Issuing Bank a fronting fee equal to 0.125% per annum, on the daily average undrawn stated amount of outstanding Letters of Credit (computed in each case on the basis of the actual number of days such Letters of Credit are outstanding in a year of 360 days), which amounts shall be payable quarterly in arrears commencing with the last Business Day of each December, March, June and September following the issuance of a Letter of Credit and on the Termination Date. The Borrower shall also pay to the Agent in Dollars for the sole account of the Issuing Bank, the Issuing Bank's then in effect customary fees and administrative expenses payable with respect to the Letters of Credit as the Issuing Bank may generally charge or incur from time to time in connection with the issuance, maintenance, modification (if any), assignment or transfer (if any), negotiation, and administration of Letters of Credit. Once paid, all of the above fees shall be nonrefundable under all circumstances. The Agent shall, promptly following its receipt thereof, distribute to the Issuing Bank and the Banks all fees and commissions received by the Agent for their respective accounts pursuant to this subsection. (c) (i) The Issuing Bank irrevocably agrees to grant and hereby grants to each Letter of Credit Participant, and, to induce the Issuing Bank to issue Letters of Credit hereunder, each Letter of Credit Participant irrevocably agrees to accept and purchase and hereby accepts and purchases from the Issuing Bank, on the terms and conditions hereinafter stated, for such Letter of Credit Participant's own account and risk, an undivided interest equal to such Letter of Credit Participant's Commitment Percentage in the Issuing Bank's obligations and rights under each Letter of Credit issued by the Issuing Bank hereunder and the amount of each draft paid by the Issuing Bank thereunder. Each Letter of Credit Participant unconditionally and irrevocably agrees with the Issuing Bank that, if a draft is paid under any Letter of Credit issued by the Issuing Bank for which the Issuing Bank is not reimbursed in full by the Borrower in accordance with the terms of this Agreement, such Letter of Credit Participant shall pay to the Issuing Bank upon demand at the Issuing Bank's address for notices specified herein an amount equal to such Letter of Credit Participant's share (based on its 18 19 Commitment Percentage) of the amount of such draft or any part thereof, which is not so reimbursed. Any action taken or omitted by the Issuing Bank under or in connection with a Letter of Credit, if taken or omitted in the absence of gross negligence or willful misconduct, shall not create for the Issuing Bank any resulting liability to any Bank. (ii) If any amount required to be paid by any Letter of Credit Participant to the Issuing Bank pursuant to subsection 2.8(c)(i) in respect of any unreimbursed portion of any payment made by the Issuing Bank under any Letter of Credit is not paid to the Issuing Bank on the date such payment is due from such Letter of Credit Participant, such Letter of Credit Participant shall pay to the Issuing Bank on demand an amount equal to the product of (x) such amount, times (y) the daily average Federal Funds Effective Rate, as quoted by the Issuing Bank, during the period from and including the date such payment is required to the date on which such payment is immediately available to the Issuing Bank, times (z) a fraction the numerator of which is the number of days that elapse during such period and the denominator of which is 360. A certificate of the Issuing Bank submitted to any Letter of Credit Participant with respect to any amounts owing under this subsection shall be conclusive in the absence of manifest error. (iii) Whenever, at any time after the Issuing Bank has made payment under any Letter of Credit and has received from any Letter of Credit Participant its pro rata share of such payment in accordance with subsection 2.8(c)(i), the Issuing Bank receives any payment related to such Letter of Credit (whether directly from the Borrower or otherwise, including by way of set-off or proceeds of collateral applied thereto by the Issuing Bank), or any payment of interest on account thereof, the Issuing Bank will distribute to such Letter of Credit Participant its pro rata share thereof; provided, however, that in the event that any such payment received by the Issuing Bank shall be required to be returned by the Issuing Bank, such Letter of Credit Participant shall return to the Issuing Bank the portion thereof previously distributed by the Issuing Bank to it. (d) (i) The Borrower agrees to reimburse the Issuing Bank in respect of a Letter of Credit on each date on which a draft presented under such Letter of Credit is paid by the Issuing Bank for the amount of (i) such draft so paid and (ii) any taxes, fees, charges or other costs or expenses incurred by the Issuing Bank in connection with such payment. Each such payment shall be made to the Issuing Bank at its Principal Office in Dollars and in immediately available funds. (ii) Interest shall be payable on any and all amounts remaining unpaid by the Borrower under this subsection from the date such amounts become payable (whether at stated maturity, by acceleration or otherwise) until payment in full at the per annum rate of the Base Rate plus 2.0% and shall be payable on demand by the Issuing Bank. (e) (i) The Borrower also agrees with the Issuing Bank that the Issuing Bank shall not be responsible for, and the Borrower's Reimbursement Obligations under subsection 2.8(d)(i) shall not be affected by, among other things (x) the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, provided, that reliance upon such documents by the Issuing Bank shall not have constituted gross negligence or willful misconduct of the Issuing Bank or (y) any dispute between or among the Borrower and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or (z) any claims whatsoever of the Borrower against any beneficiary of such Letter of Credit or any such transferee. (ii) The Issuing Bank shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions caused by the Issuing Bank's gross negligence or willful misconduct. (iii) The Borrower agrees that any action taken or omitted by the Issuing Bank under or in connection with any Letter of Credit or the related drafts or documents, if done in the absence of gross negligence or willful misconduct, shall be binding on the Borrower and shall not result in any liability of the Issuing Bank to the Borrower. (f) If any draft shall be presented for payment to the Issuing Bank under any Letter of Credit, the Issuing Bank shall promptly notify the Borrower of the date and amount thereof. The responsibility of the Issuing Bank to the Borrower in connection with any draft presented for payment under any Letter of Credit shall, in addition to any payment obligation expressly provided for in such Letter of Credit and any other obligation expressly imposed by the provisions of the Uniform Customs and Practice for Documentary Credits, 1993 Revision, International 19 20 Chamber of Commerce Publication No. 500 ("Publication 500") other than Article 48(g) thereof, be limited to determining that the documents (including each draft) delivered under such Letter of Credit in connection with such presentment are in conformity with such Letter of Credit. (g) To the extent that any provision of any Application related to any Letter of Credit is inconsistent with the provisions of this Agreement, the provisions of this Agreement shall apply. (h) The Borrower agrees to be bound by the terms of each Application and the Issuing Bank's written regulations and customary practices relating to letters of credit, though such interpretation may be different from the Borrower's own. It is understood and agreed that, except in the case of gross negligence or willful misconduct, the Agent shall not be liable for any error, negligence and/or mistakes, whether of omission or commission, in following the Borrower's instructions or those contained in the Letters of Credit or any modifications, amendments or supplements thereto. To the extent not otherwise inconsistent with this Agreement, the provisions of Publication 500 are hereby made a part of this Agreement with respect to the obligations in connection with each Letter of Credit. (i) Each Bank's payment obligation under subsection 2.8(c) and the obligations of the Borrower to reimburse the Issuing Bank upon a draw under a Letter of Credit, shall be absolute, unconditional and irrevocable under any circumstances, and shall be performed strictly in accordance with the terms of this Section 2.8 under all circumstances, including the following circumstances: (i) any set-off, counterclaim, recoupment, defense or other right which such Bank may have against the Issuing Bank, the Borrower or any other Person for any reason whatsoever; (ii) any lack of validity or enforceability of any Letter of Credit; (iii) the existence of any claim, set-off, defense or other right which the Borrower or any Bank may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Persons for whom any such transferee may be acting), the Issuing Bank or any Bank or any other Person or, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction (including any underlying transaction between the Borrower and the beneficiary for which any Letter of Credit was procured); (iv) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect even if the Issuing Bank has been notified thereof; (v) payment by the Issuing Bank under any Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Letter of Credit; (vi) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of the Borrower; (vii) any breach of this Agreement or any other Loan Document by the Borrower; (viii) the occurrence or continuance of an insolvency proceeding with respect to the Borrower; (ix) the fact that an Event of Default or a Default shall have occurred and be continuing; (x) the fact that the Termination Date shall have passed or this Agreement or the Commitments hereunder shall have been terminated; and (xi) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. 20 21 (j) In addition to amounts payable as provided in Section 9.5, the Borrower hereby agrees to protect, indemnify, pay and save harmless the Issuing Bank and the Banks from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable fees, expenses and disbursements of counsel) which the Issuing Bank may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of any Letter of Credit, other than as a result of (A) the gross negligence or willful misconduct of the Issuing Bank as determined by a final judgment of a court of competent jurisdiction or (B) subject to the following clause (ii), the wrongful dishonor by the Issuing Bank of a proper demand for payment made under any Letter of Credit, or (ii) the failure of the Issuing Bank to honor a drawing under any such Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority (all such acts or omissions herein called "Governmental Acts"). (k) As between the Borrower and the Issuing Bank, the Borrower assumes all risks of the acts and omissions of, or misuse of the Letters of Credit by, the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, the Issuing Bank shall not be responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for an issuance of any such Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged (even if the Issuing Bank shall have been notified thereof); provided, that reliance upon such documents by the Issuing Bank shall not have constituted gross negligence or willful misconduct of the Issuing Bank; (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) the failure of the beneficiary of any such Letter of Credit, or any other party to which such Letter of Credit may be transferred, to comply fully with any conditions required in order to draw upon such Letter of Credit or any other claim of the Borrower against any beneficiary of such Letter of Credit, or any such transferee, or any dispute between or among the Borrower and any beneficiary of any Letter of Credit or any such transferee; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, facsimile, cable, telex or otherwise; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (vii) the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (viii) any consequences arising from causes beyond the control of the Issuing Bank, including any Governmental Acts, and none of the above shall affect or impair, or prevent the vesting of, any of the Issuing Bank's rights or powers hereunder. In furtherance and extension and not in limitation of the specific provisions set forth above, any action taken or omitted by the Issuing Bank under or in connection with the Letters of Credit issued by it or any documents and certificates delivered thereunder, if taken or omitted in good faith, shall not create any liability of the Issuing Bank to the Borrower or any Bank. 2.9 Interest Rates and Payment Dates. The Borrower shall pay interest in respect of the outstanding unpaid principal amount of the Loans as selected by it from the Base Rate or LIBOR Rate set forth below applicable thereto, it being understood that, subject to the provisions of this Agreement, the Borrower may select different interest rates and different Interest Periods to apply simultaneously to Loans comprising different Tranches and may convert to or renew one or more interest rates with respect to all or any portion of Loans comprising any Tranche, provided, that there shall not be at any one time outstanding more than five (5) Tranches in the aggregate. If at any time the designated rate applicable to any Loan made by any Bank exceeds such Bank's highest lawful rate, the rate of interest on such Bank's Loan shall be limited to such Bank's highest lawful rate. Interest on the principal amount of each Loan made in an Optional Currency shall be paid by the Borrower in such Optional Currency. (a) Subject to the provisions of Section 2.10, each Base Rate Loan shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be) at a rate per annum equal to the Base Rate. (b) Subject to the provisions of Section 2.10, each LIBOR Loan shall bear interest at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days, provided that, for Loans made in an Optional Currency for which a 365-day basis is the only market practice available to the Agent, such rate shall be calculated on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be) equal to 21 22 the LIBOR Rate for the Interest Period in effect for such LIBOR Loan plus the Applicable Margin. (c) Interest on each Loan shall be payable in arrears on each Interest Payment Date applicable to such Loan; provided, that (i) interest accruing on overdue amounts pursuant to Section 2.10 shall be payable on demand as provided in such Section and (ii) accrued and unpaid interest on such Loans shall be payable on the Termination Date. (d) As soon as practicable the Agent shall notify the Borrower and the Banks of (i) each determination of a LIBOR Rate and (ii) the effective date and the amount of each change in the interest rate on a LIBOR Loan or Base Rate Loan. Each determination of an interest rate by the Agent, pursuant to any provision of this Agreement (including this Section 2.9 and Section 2.10) shall be conclusive and binding on the Borrower and the Banks in the absence of clearly demonstrable error. At the request of the Borrower, the Agent shall deliver to the Borrower a statement showing the quotations used by it in determining any interest rate pursuant to subsections 2.9(a) and (b). 2.10 Default Interest. Upon the occurrence of and during the continuance of an Event of Default under subsection 7.1(a) or (f), the outstanding principal amount of the Loans and, to the extent permitted by law, accrued and unpaid interest thereon and any other amount payable hereunder, shall bear interest from the date of such occurrence at a rate per annum which is equal to (i) with respect to Loans in Dollars, the greater of (a) two percent (2%) in excess of the Base Rate, and (b) the LIBOR Rate plus the Applicable Margin, and (ii) with respect to Loans in an Optional Currency, two percent (2.0%) in excess of the interest rate per annum at which one day deposits (or if such amount remains unpaid for more than three Business Days, then for such longer time as the Agent may elect) in the applicable Optional Currency are offered by major banks in the appropriate market, in each case, (after as well as before judgment). Upon the occurrence of and during the continuance of an Event of Default other than under subsection 7.1(a) or (f), the outstanding principal amount of the Loans and, to the extent permitted by law, accrued and unpaid interest thereon and any other amounts payable hereunder, shall bear interest from the date that the Agent, at the written request of the Required Banks, shall send notice to the Borrower of the application of the default rate at a rate per annum which is equal (i) with respect to Loans in Dollars, the greater of (a) two percent (2%) in excess of the Base Rate, and (b) the LIBOR Rate plus the Applicable Margin, and (ii) with respect to Loans in an Optional Currency, two percent (2.0%) in excess of the interest rate per annum at which one day deposits (or if such amount remains unpaid for more than three Business Days, then for such longer time as the Agent may elect) in the applicable Optional Currency are offered by major banks in the appropriate market, in each case, (after as well as before judgment). 2.11 Pro Rata Treatment of Loans and Payments; Commitment Fees. (a) Except as required under Section 2.13, each borrowing by the Borrower hereunder, each payment or prepayment of principal of the Loans, each payment of interest on such Loans, each payment of Commitment Fees and Letter of Credit Fees, and each reduction of the Commitments, shall be made pro rata among the Banks in accordance with their Commitment Percentages. (b) Each Bank agrees that in computing such Bank's portion of any borrowing to be made hereunder, the Agent may, in its discretion, round each Bank's percentage of such borrowing to the next higher or lower whole Dollar amount. 2.12 Payments. (a) The Borrower shall make each payment (including principal of or interest on any borrowing or any fees or other amounts) hereunder not later than 11:00 a.m., Philadelphia time, on the date when due to the Agent at its offices set forth in Section 9.2 for the ratable accounts of the Banks in Dollars in immediately available funds; provided that, any payments of principal of or interest on a Loan in an Optional Currency shall be made not later than the time that the Borrower shall be notified by the Agent for payments with respect to such Optional Currency, on the date due in immediately available funds at the Lending Office at which such Loan was made in such funds as may then be customary for the settlement of international transactions in such other Optional Currency. Such payments shall be made without set-off or counterclaim of any kind. The Agent shall distribute to the Banks any payments received by the Agent promptly upon receipt in like funds as received. The Agent shall promptly distribute such amounts to the Banks in immediately available 22 23 funds. The Agent's and each Bank's statement of account, ledger or other relevant record shall, in the absence of manifest error, be conclusive as the statement of the amount of principal of and interest on the Loans and other amounts owing under this Agreement (including the Equivalent Amounts of the applicable currencies where such computations are required). (b) Whenever any payment (including principal of or interest on any borrowing or any fees or other amounts) hereunder (other than payments on LIBOR Loans) shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or fees, if applicable. Whenever any payment (including principal of or interest on any borrowing or any fees or other amounts) hereunder on a LIBOR Loan shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day. (c) The entire amount of principal of and interest on any Loan made in an Optional Currency shall be repaid in the same Optional Currency in which such Loan was made, provided, however, that if it is impossible or illegal for the Borrower to effect payment of a Loan in the Optional Currency in which such Loan was made, or if the Borrower defaults in its obligations to do so, the Required Banks may at their option permit such payment to be made (i) at and to a different location, subsidiary, affiliate or correspondent of the Agent, or (ii) in the Equivalent Amount of Dollars or (iii) in an Equivalent Amount of such other currency (freely convertible into Dollars) as the Required Banks may solely at their option designate. Upon any events described in (i) through (iii) of the preceding sentence, the Borrower shall make such payment and the Borrower agrees to hold each Bank harmless from and against any loss incurred by any Bank arising from the cost to such Bank of any premium, any costs of exchange, the cost of hedging and covering the Optional Currency in which such Loan was originally made, and from any change in the value of Dollars, or such other currency, in relation to the Optional Currency that was due and owing. Such loss shall be calculated for the period commencing with the first day of the Interest Period for such Loan and continuing through the date of payment thereof. Without prejudice to the survival of any other agreement of the Borrower hereunder, the Borrower's obligations under this subsection shall survive termination of this Agreement. 2.13 LIBOR Rate Unascertainable; Illegality; Increased Costs; Deposits Not Available. (a) The Agent shall have the rights specified in subsection 2.13(c) if on any date on which a LIBOR Rate would otherwise be determined, the Agent shall have determined that: (i) adequate and reasonable means do not exist for ascertaining such LIBOR Rate; or (ii) a contingency has occurred which materially and adversely affects the secondary market for negotiable certificates of deposit maintained by dealers of recognized standing relating to the London interbank LIBOR market relating to the LIBOR Rate. (b) The Agent shall have the rights specified in subsection 2.13(c) if at any time any Bank shall have determined that: (i) the making, maintenance or funding of any Loan to which a LIBOR Rate applies has been made unlawful by compliance by such Bank in good faith with any Law or any interpretation or application thereof by any Governmental Authority or with any request or directive of any such Governmental Authority (whether or not having the force of Law), or (ii) the making, maintenance or funding of any Loan to which a LIBOR Rate applies has been made impracticable by compliance by such Bank in good faith with any Law or any interpretation or application thereof by any Governmental Authority or with any request or directive of any such Governmental Authority (whether or not having the force of Law), or (iii) such LIBOR Rate will not adequately and fairly reflect the cost to such Bank of the 23 24 establishment or maintenance of any such Loan, or (iv) after making all reasonable efforts, deposits of the relevant amount in Dollars or in the Optional Currency (as applicable) for the relevant Interest Period for a Loan to which a LIBOR Rate applies are not available to such Bank in the London interbank market. (c) In the case of any event specified in subsection 2.13(a) above, the Agent shall promptly so notify the Banks and the Borrower thereof, and in the case of an event specified in subsection 2.13(b) above, such Bank(s) shall promptly so notify the Agent and endorse a certificate to such notice as to the specific circumstances of such notice, and the Agent shall promptly send copies of such notice and certificate to the other Banks and the Borrower. Upon such date as shall be specified in such notice (which shall not be earlier than the date such notice is given), the obligation of (A) the Banks, in the case of such notice given by the Agent, or (B) such Bank(s), in the case of such notice given by such Bank(s), to allow the Borrower to select, convert to or renew a LIBOR Rate or select an Optional Currency (as applicable) shall be suspended until the Agent shall have later notified the Borrower, or such Bank(s) shall have later notified the Agent, of the Agent's or such Bank(s)', as the case may be, determination that the circumstances giving rise to such previous determination no longer exist. If at any time the Agent makes a determination under subsection 2.13(a) and the Borrower has previously notified the Agent of their selection of, conversion to or renewal of a LIBOR Rate and such interest rate has not yet gone into effect, such notification shall be deemed to provide for selection of, conversion to or renewal of a Base Rate Loan to the extent permitted hereunder. If any Bank notifies the Agent of a determination under subsection 2.13(b), the Borrower shall, subject to the Borrower's indemnification obligations under subsection 2.18 as to any Loan of the Bank to which a LIBOR Rate applies, on the date specified in such notice either (i) as applicable, convert such Loan (if not denominated in an Optional Currency) to the Base Rate or select a different Optional Currency or Dollars, or (ii) prepay such Loan in accordance with Section 2.15. Absent due notice from the Borrower of conversion or prepayment, such Loan shall automatically be converted to the Base Rate upon such specified date unless such Loan is in an Optional Currency in which case such Loan shall be prepaid. 2.14 Termination, Reduction and Extension of Commitments. (a) The aggregate Commitments shall be automatically and permanently reduced by (i) $1,666,666.67 on the last day of each fiscal quarter of the Borrower, commencing March 31, 2001, until the aggregate Commitments have been reduced by $20,000,000 in the aggregate pursuant to the provisions of this subsection (i), and (ii) the amount by which the aggregate principal amount borrowed pursuant to the Securitization exceeds $40,000,000 at any time (this provision shall not constitute consent by any Bank to increase the Indebtedness permitted in the Securitization); provided that, the reduction provided for in subsection (ii) shall not be counted as a reduction pursuant subsection (i) above). The Commitments shall be automatically terminated on the Termination Date whereupon all Loans and accrued interest thereon shall become due and payable. (b) Upon at least five Business Days' prior irrevocable written (including facsimile) notice to the Agent, the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Commitments; provided, however, that (i) each partial reduction of the Commitments shall be in a minimum principal amount of $1,000,000 or in a whole multiple thereof, and (ii) the Commitments may not be reduced or terminated if, after giving effect thereto and to any prepayments of the Loans made on the effective date thereof, the Dollar Equivalent Facility Usage at such time would exceed the aggregate amount of the Commitments at such time. Any such voluntary reduction of the Commitments shall reduce the scheduled reductions of the aggregate Commitments under Section 2.14(a)(i) in inverse order. (c) Each reduction in the Commitments hereunder shall be made ratably among the Banks in accordance with their respective Commitment Percentages. The Borrower shall pay to the Agent for the account of the Banks on the date of each termination or reduction of the Commitments, the Commitment Fees on the amount of the Commitments so terminated or reduced accrued to the date of such termination or reduction. (d) (i) During the period beginning one hundred and twenty (120) days and ending sixty (60) days prior to the initial and any subsequent Termination Date, the Borrower may deliver to the Agent (which shall promptly transmit to each Bank) a notice (an "Extension Request") requesting that the Commitments be extended to the date one year after the Termination Date then in effect (a "Subsequent Termination Date"). Within thirty (30) days after its 24 25 receipt of any such notice, each Bank shall notify the Agent of its willingness or unwillingness so to extend its Commitment. Any Bank that shall fail so to notify the Agent within such period shall be deemed to have declined to extend its Commitment. In the event that Banks holding at least 51% of the Commitments shall approve an Extension Request (i) the respective Commitments of the Banks shall, upon the full repayment to any Declining Bank (as defined below) provided for in the last sentence of this paragraph, and without further act by any party hereto, be extended to the Subsequent Termination Date but only with respect to the Banks that have given such written approval, and (ii) the term "Termination Date" shall thereafter mean such Subsequent Termination Date. Any such extension shall be evidenced by a written agreement among the Agent, the Banks that have approved such Extension Request and the Borrower, such agreement to be in form and substance acceptable to the Agent and the Banks. Except to the extent that a Bank that did not give its written approval to such Extension Request (a "Declining Bank") is replaced prior to the Termination Date in effect prior to such Extension Request (the "Declining Bank's Maturity Date"), as provided in clause (ii) below, the Loans and all interest, fees and other amounts owed to such Declining Banks hereunder shall be paid in full on the Declining Bank's Maturity Date. (ii) In the event that the Banks holding at least 51% of the Commitments shall have approved an Extension Request, the Borrower shall have the right, but not the obligation, at its own expense, upon notice to a Declining Bank and the Agent, to replace such Declining Bank (in accordance with and subject to the restrictions contained in Section 9.6) at any time before the fifth (5th) day prior to the Termination Date with a bank or other financial institution (a "Replacement Bank") willing to purchase all of the Declining Banks' interests and to approve the extension of the Termination Date. Upon the request of the Agent, a Declining Bank will transfer and assign without recourse (in accordance with and subject to the restrictions contained in Section 9.6) all of its interests, rights and obligations under its Commitment to the applicable Replacement Bank; provided, however, that (i) no such assignment shall conflict with any Requirement of Law, and (ii) such Declining Bank shall be paid in immediately available funds on the date of such assignment the principal of and interest accrued to the date of payment on the Loans made by such Declining Bank and all other amounts accrued for such Declining Bank's account or owed to it hereunder with respect to its Commitment and Loans (including fees and any unpaid costs or expenses). The addition of such Replacement Bank or Banks shall be subject to the consent of the Agent, which consent will not be unreasonably withheld. (iii) At any time prior to the replacement of a Declining Bank pursuant to clause (ii) above, the Borrower may, upon not less than 15 days' prior written notice to the Agent and such Declining Bank, elect to repay in full all Loans held by such Declining Bank as of a Business Day (prior to such Declining Bank's Maturity Date) set forth in such notice. In the event of such election by the Borrower, the Borrower shall pay to the Agent on the date designated in such notice, for the account of such Declining Bank, the outstanding amount of all Loans and other sums payable to such Declining Bank hereunder and all amounts (if any) payable to such Declining Bank under Section 2.18 by reason of such payment. 2.15 Prepayment of Loans. (a) The Borrower shall have the right at any time and from time to time to prepay Loans in the currency or currencies in which such Loans were made, in whole or in part, without premium or penalty (but in any event subject to subsection 2.18), upon prior written, telecopy or telephonic notice to the Agent given, in the case of Base Rate Loans, no later than 11:00 a.m., Philadelphia time, one Business Day before any proposed prepayment, and in the case of LIBOR Loans, no later than 11:00 a.m., Philadelphia time, three Business Days before any such proposed prepayment. In each case the notice shall specify the date, amount and currency of each such prepayment, whether the prepayment is of LIBOR Loans or Base Rate Loans, or a combination thereof, and, if a combination thereof, the amount allocable to each; provided, however, that each such partial prepayment shall be in the principal amount of at least (i) with respect to prepayments of Base Rate, $1,000,000 or in whole multiples of $100,000 in excess thereof, and (ii) with respect to prepayments of Loans in Dollars that bear interest at the LIBOR Rate, $2,500,000 or in whole multiples of $100,000 in excess thereof, and (iii) with respect to prepayment of Loans in an Optional Currency, the Dollar Equivalent of $2,500,000 or in whole multiples of $100,000 in excess thereof. (b) On the date of any termination or reduction of the Commitments pursuant to Section 2.14, the Borrower shall pay or prepay so much of the Loans as shall be necessary in order that the Dollar Equivalent Facility Usage at such time would not exceed the aggregate amount of the Commitments at such time. Any prepayment in respect of a voluntary reduction of the Commitments pursuant to Section 2.14(b) shall be applied to reduce scheduled 25 26 reductions of the aggregate Commitments under Section 2.14(a)(i) in inverse order. (c) If on any Computation Date the amount of the Dollar Equivalent Facility Usage is greater than the aggregate amount of the Commitments at such time, as a result of a change in exchange rates between one or more Optional Currencies and Dollars, then the Agent shall notify the Borrower of the same and the Borrower shall within two (2) Business Days after receiving such notice prepay so much of the Loans as shall be necessary in order that the Dollar Equivalent Facility Usage shall not exceed the aggregate amount of the Commitments after giving effect to such prepayments. (d) All prepayment notices shall be irrevocable. The principal amount of the Loans for which a prepayment notice is given, together with interest on such principal amount except with respect to Base Rate Loans, shall be due and payable on the date specified in such prepayment notice as the date on which the proposed prepayment is to be made in the currency in which such Loan was made. If the Borrower fails to specify the applicable Tranche which the Borrower is prepaying, the prepayment shall, subject to the immediately prior sentence, be applied to Base Rate Loans, then to Dollar LIBOR Loans and then to Optional Currency Loans, with payments applied to LIBOR Loans being applied in order of next maturing Interest Periods. Any prepayment hereunder shall be subject to the Borrower's obligation to indemnify the Banks under Section 2.18. (e) Upon receipt of any notice of prepayment, the Agent shall promptly notify each Bank thereof. (f) Amounts prepaid pursuant to this Section (other than subsection (b) hereof) may be reborrowed, subject to the terms and conditions hereof. 2.16 Requirements of Law. (a) In the event that any change in any Requirement of Law or in the interpretation, or application thereof or compliance by any Bank with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof: (i) shall subject any Bank to any tax of any kind whatsoever with respect to this Agreement, any Note, any Letter of Credit, any Application or any LIBOR Loan made by it or payments by the Borrower of principal, interest, fees or other amounts due from the Borrower hereunder, or change the basis of taxation of payments to such Bank in respect thereof (except for taxes covered by Section 2.17 and changes in the rate of tax on the net income or franchise taxes of such Bank or a surcharge on the net income or franchise taxes of such Bank); (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans, letters of credit or other extensions of credit by, or any other acquisition of funds by, any Bank or any Lending Office of any Bank which is not otherwise included in the determination of the interest rate on such LIBOR Loan hereunder; or (iii) shall impose on any Bank or any Lending Office of any Bank any other condition; and the result of any of the foregoing is to increase the cost to such Bank or its Lending Office, by an amount which such Bank reasonably deems to be material, of making, converting into, continuing or maintaining LIBOR Loans, maintaining any commitment hereunder or issuing or participating in Letters of Credit or to reduce any amount receivable hereunder in respect thereof then, in any such case, the Borrower shall as promptly as practicable (but in all events within ten (10) days) pay such Bank, upon its demand, any additional amounts necessary to compensate such Bank for such increased cost or reduced amount receivable, provided, however, that the Borrower shall not be liable to any Bank or the Agent for costs incurred more than ninety (90) days prior to receipt by the Borrower of such demand for payment from such Bank or, as the case may be, the Agent, unless such costs were incurred prior to such ninety (90) day period as a result of such present or future applicable law being retroactive to a date which occurred prior to such ninety (90) day period and such Bank or, as the case may be, the Agent, has given notice to the Borrower of the effectiveness of such law within ninety (90) days after the effective date thereof, and the Borrower shall not be required to pay any such compensation for any such increased costs to 26 27 the extent that the Agent or requesting Bank fails to claim such compensation for any similar increased costs from any similarly-situated borrower. If any Bank becomes entitled to claim any additional amounts pursuant to this subsection, it shall as promptly as practicable notify the Borrower, through the Agent, of the event by reason of which it has become so entitled. A certificate as to any additional amounts payable pursuant to this subsection setting out in reasonable detail the calculation thereof and a statement that such compensation is being requested from all other similarly-situated borrowers of such Bank, submitted by such Bank, through the Agent, to the Borrower shall be conclusive in the absence of clearly demonstrable error. This covenant shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder. (b) In the event that any Bank shall have determined that any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Bank or any corporation controlling such Bank with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof does or shall have the effect of reducing the rate of return on such Bank's or such corporation's capital as a consequence of its obligations hereunder or under any Letter of Credit to a level below that which such Bank or such corporation could have achieved but for such change or compliance (taking into consideration such Bank's or such corporation's policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, the Borrower shall as promptly as practicable pay such Bank, upon its demand, such additional amount or amounts as will compensate such Bank for such reduction. If any Bank becomes entitled to claim any additional amounts pursuant to this subsection, it shall as promptly as practicable notify the Borrower, through the Agent, of the event by reason of which it has become so entitled, provided, however, that the Borrower shall not be liable to any Bank or the Agent for costs incurred more than ninety (90) days prior to receipt by the Borrower of such demand for payment from such Bank or, as the case may be, the Agent, unless such costs were incurred prior to such ninety (90) day period as a result of such present or future applicable law being retroactive to a date which occurred prior to such ninety (90) day period and such Bank or, as the case may be, the Agent, has given notice to the Borrower of the effectiveness of such law within ninety (90) days after the effective date thereof, and the Borrower shall not be required to pay any such compensation for any such increased costs to the extent that the Agent or requesting Bank fails to claim such compensation for any similar increased costs from any similarly-situated borrower. A certificate as to any additional amounts payable pursuant to this subsection submitted by such Bank, through the Agent, to the Borrower shall be conclusive in the absence of clearly demonstrable error. This covenant shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder. (c) Each Bank agrees that it will use reasonable efforts in order to avoid or to minimize, as the case may be, the payment by the Borrower of any additional amount under subsections 2.16(a) or (b); provided, however, that no Bank shall be obligated to incur any expense, cost or other amount in connection with utilizing such reasonable efforts. 2.17 Taxes. (a) All payments made by the Borrower hereunder and under each Note shall be made free and clear of and without deduction for any present or future taxes, levies, imposts, deductions, charges, or withholdings, and all liabilities with respect thereto (excluding, in the case of the Agent and each Bank, net income taxes and franchise or gross receipts taxes imposed on the Agent or such Bank, as the case may be, as a result of a present or former connection between the jurisdiction of the government or taxing authority imposing such tax and the Agent or such Bank (excluding a connection arising solely from the Agent or such Bank having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or the Notes)) (all such non-excluded taxes, levies, imposts, duties, charges, fees, deductions and withholdings being hereinafter called "Taxes"). If the Borrower shall be required by Law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Agent and each Bank receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall timely pay the full amount deducted to the relevant tax authority or other authority in accordance with applicable Law. (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges, or similar levies which arise from any payment made hereunder or from 27 28 the execution, delivery, or registration of, or otherwise with respect to, this Agreement or any Note (hereinafter referred to as "Other Taxes"). (c) The Borrower shall indemnify the Agent and each Bank for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this subsection) paid by the Agent or any Bank and any liability (including penalties, interest, and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date the Agent or a Bank makes written demand therefor. (d) Within 30 days after the date of any payment of any Taxes by the Borrower, if available, the Borrower shall furnish to the Agent and each Bank, at its address referred to herein, the original or a certified copy of a receipt evidencing payment thereof. (e) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in subsections 2.17(a) through (d) shall survive the payment in full of principal and interest hereunder and under any instrument delivered hereunder. (f) Each Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to the Borrower and the Agent (i) two duly completed copies of United States Internal Revenue Service Form W-8ECI or W-8BEN or successor applicable form, as the case may be, and (ii) an Internal Revenue Service Form W-8 or W-9 or successor applicable form. Each such Bank also agrees to deliver to the Borrower and the Agent two further copies of the said Form W-8ECI or W-BEN and Form W-8 or W-9, or successor applicable forms or other manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower, and such extensions or renewals thereof as may reasonably be requested by the Borrower or the Agent, unless in any such case an event (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank so advises the Borrower and the Agent. Each such Bank shall certify (i) in the case of a Form W-8ECI or W-BEN, that it is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes and (ii) in the case of a Form W-8 or W-9 or successor applicable form, that it is entitled to an exemption from United States backup withholding tax. (g) Notwithstanding the foregoing subsections 2.17(a) through (e), the Borrower shall not be required to pay any additional amounts to any Bank in respect of United States withholding tax pursuant to such subsections if (i) the obligation to pay such additional amounts would not have arisen but for a failure by such Bank to comply with the requirements of subsection 2.17(f) or (ii) such Bank shall not have furnished the Borrower with such forms listed in subsection 2.17(f) and shall not have taken such other steps as reasonably may be available to it under applicable tax laws and any applicable tax treaty or convention to obtain an exemption from, or reduction (to the lowest applicable rate) of, such United States withholding tax. 2.18 Indemnity. (a) The Borrower agrees to indemnify each Bank and to hold each Bank harmless from any loss or expense which such Bank may sustain or incur as a consequence of (i) default by the Borrower in payment when due of the principal amount of or interest on any LIBOR Loan, (ii) default by the Borrower in making a borrowing of, conversion into or continuation of LIBOR Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (iii) default by the Borrower in making any prepayment after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (iv) the making of a prepayment (whether voluntary, mandatory, as a result of acceleration or otherwise) of LIBOR Loans on a day which is not the last day of an Interest Period with respect thereto, including, without limitation, in each case, any such loss or expense (but not any loss of margin) arising from the reemployment of funds obtained by it or from fees payable to terminate the deposits from which such funds were obtained. A certificate as to any amounts that a Bank is entitled to receive under this Section 2.18 submitted by such Bank, through the Agent, to the Borrower shall be conclusive in the absence of clearly demonstrable error and all such amounts shall be paid by the Borrower promptly upon demand by such Bank. This covenant shall survive the termination of this 28 29 Agreement and the payment of the Notes and all other amounts payable hereunder. (b) For the purpose of calculation of all amounts payable to a Bank under this subsection, each Bank shall be deemed to have actually funded its relevant LIBOR Loan through the purchase of a deposit bearing interest at the LIBOR Rate, in an amount equal to the amount of that LIBOR Loan and having a maturity comparable to the relevant Interest Period; provided, however, that each Bank may fund each of its LIBOR Loans in any manner it sees fit, and the foregoing assumptions shall be utilized only for the calculation of amounts payable under this subsection. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 2.19 Judgment Currency. (a) If for the purposes of obtaining judgment in any court it is necessary to convert a sum due hereunder or under a Note in any currency (the "Original Currency") into another currency (the "Other Currency"), the parties hereby agree, to the fullest extent permitted by Law, that the rate of exchange used shall be that at which in accordance with normal banking procedures the Agent could purchase the Original Currency with the Other Currency after any premium and costs of exchange on the Business Day preceding that on which final judgment is given. (b) The obligation of the Borrower in respect of any sum due from the Borrower to any Bank hereunder shall, notwithstanding any judgment in an Other Currency, whether pursuant to a judgment or otherwise, be discharged only to the extent that, on the Business Day following receipt by any Bank of any sum adjudged to be so due in such Other Currency, such Bank may in accordance with normal banking procedures purchase the Original Currency with such Other Currency. If the amount of the Original Currency so purchased is less than the sum originally due to such Bank in the Original Currency, the Borrower agrees, as a separate obligation and notwithstanding any such judgment or payment, to indemnify such Bank against such loss. 2.20 European Monetary Union. (a) If, as a result of the implementation of the European monetary union, (i) any Optional Currency ceases to be lawful currency of the nation issuing the same and is replaced by the Euro, or (ii) any Optional Currency and the Euro are at the same time recognized by any governmental authority of the nation issuing such currency as lawful currency of such nation and the Agent shall so request in a notice delivered to the Borrower, then any amount payable hereunder by the Borrower in such Optional Currency shall instead be payable in the Euro and the amount so payable shall be determined by translating the amount payable in such Optional Currency to the Euro at the exchange rate recognized by the European Central Bank for the purpose of implementing the European monetary union. Prior to the occurrence of the event or events described in clauses (i) and (ii) of the preceding sentence, each amount payable hereunder in any Optional Currency will, except as otherwise provided herein, continue to be payable only in that Optional Currency. (b) The Borrower agrees, at the request of the Agent, to compensate the Agent or any Bank for any loss, cost, expense or reduction in return that the Agent or such Bank shall reasonably determine shall be incurred or sustained by the Agent or such Bank as a result of the implementation of the European monetary union and that would not have been incurred or sustained but for the transactions provided for herein. A certificate of the Agent or such Bank setting forth the determination of the amount or amounts necessary to compensate the Agent or such Bank shall be delivered to the Borrower through the Agent and shall be conclusive absent manifest error so long as such determination is made on a reasonable basis. The Borrower shall pay the Agent or such Bank, as the case may be, the amount shown as due on any such certificate within ten (10) days after receipt thereof. (c) The Borrower and the Agent agree at the time of or at any time following the implementation of any changes to the European monetary union, to use reasonable efforts to enter into an agreement amending this Agreement in order to reflect the implementation of such changes, and to place the Banks and the Borrower in the position with respect to the settlement of payments of the Euro as they would have been with respect to the settlement of the Optional Currency it replaced. 2.21 Change of Lending Office. Each Bank agrees that, upon the occurrence of any event giving rise to the operation of Sections 2.16 or 2.17 with respect to such Bank, it will, if requested by the Borrower, use reasonable 29 30 efforts (subject to overall policy considerations of such Bank) to designate another lending office for any Loans affected by such event with the object of avoiding the consequences of such event; provided, that such designation is made on terms that, in the sole judgment of such Bank, cause such Bank and its lending office(s) to suffer no economic, legal, regulatory or other disadvantage, and provided, further, that nothing in this Section shall affect or delay the required performance of any of the obligations of the Borrower or the rights of any Bank pursuant to Sections 2.16 or 2.17. 2.22. Substitution of Banks. Upon the receipt by the Borrower from any Bank (an "Affected Bank") of a notice under Section 2.13(b) or a claim under Section 2.16 or 2.17, the Borrower may: (a) request one or more of the other Banks to acquire and assume all or part of such Affected Bank's Loans and Commitment; or (b) replace such Affected Bank by designating another bank or financial institution that is willing to acquire such Loans and assume such Commitment; provided that (i) such replacement does not conflict with any Requirement of Law, (ii) no Default or Event of Default shall have occurred and be continuing at the time of such replacement, (iii) the replacement bank or institution shall purchase, at par, all Loans, accrued interest and other amounts owing to such replaced Bank on and as of the date of replacement, (iv) the Borrower shall be liable to such replaced Bank under Section 2.18 if any LIBOR Loan owing to such replaced Bank shall be prepaid (or purchased) other than on the last day of the Interest Period relating thereto and shall pay any such amounts to such Bank on the date of such replacement, (v) the replacement bank or institution, if not already a Bank, shall be reasonably satisfactory to the Agent, (vi) the replaced Bank shall be obligated to make such replacement in accordance with the provisions of Section 9.6 (provided that the Borrower or replacement Bank shall be obligated to pay the registration and processing fee) and (vii) the Borrower shall pay all additional amounts (if any) required pursuant to Sections 2.16 or 2.17, as the case may be, to the extent such additional amounts were incurred on or prior to the consummation of such replacement. SECTION 3. REPRESENTATIONS AND WARRANTIES To induce the Agent and the Banks to enter into this Agreement and to make the Loans and issue or participate in the Letters of Credit, the Borrower hereby represents and warrants to the Agent and each Bank that: 3.1 Financial Condition. (a) The consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at September 30, 2000 and the related consolidated statements of income and of cash flows for the period ended on such date, copies of which have heretofore been furnished to each Bank, present fairly in all material respects the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the period then ended. All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved. Neither the Borrower nor any of its consolidated Subsidiaries had, at the date of the most recent balance sheet referred to above, any material Guaranty Obligation, liability for taxes, or any long-term lease or unusual forward or long-term commitment, including, without limitation, any interest rate or foreign currency swap or exchange transaction, which is required by GAAP to be but is not reflected in the foregoing statements or in the notes thereto. (b) The unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at June 30, 2000 and the related unaudited consolidated statements of income and of cash flows for the fiscal quarter ended on such date, certified by a Responsible Officer, copies of which have heretofore been furnished to each Bank, present fairly in all material respects the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the fiscal quarter then ended (subject to normal fiscal year end audit adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved. Neither the Borrower nor any of its consolidated Subsidiaries had, at the date of the balance sheet referred to above, any material Guaranty Obligation (except for any Guaranty Obligation not reflected because the underlying Indebtedness is reflected or not required by GAAP to be reflected on such consolidated balance sheet), liability for taxes, or any long-term lease or unusual forward or long-term commitment, including, without limitation, any interest rate or foreign currency swap or exchange transaction, which is required by GAAP to be but is not reflected in the foregoing statements or in the notes thereto. 30 31 3.2 No Change. Since September 30, 2000, there has been no development or event which has had or could reasonably be expected to have a Material Adverse Effect. 3.3 Corporate Existence; Compliance with Law. Each of the Borrower, each Domestic Subsidiary, and each Material Subsidiary that is a Foreign Subsidiary (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the corporate or other power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified to transact business and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification except where the failure to be so qualified could not reasonably be expected to have a Material Adverse Effect, and (d) is in compliance with all Requirements of Law except to the extent that its failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 3.4 Corporate Power; Authorization; Enforceable Obligations. The Borrower has the corporate power, authority, and legal right to make, deliver and perform this Agreement, the Applications and each other Loan Document to which it is a party and to borrow hereunder and has taken all necessary corporate action to authorize the Extensions of Credit on the terms and conditions of this Agreement and each other Loan Document to which it is a party and to authorize the execution, delivery and performance of this Agreement and each other Loan Document to which it is a party. No consent or authorization of, filing with or other act by or in respect of, any Governmental Authority or any other Person (including stockholders and creditors of the Borrower) is required in connection with the Extensions of Credit hereunder or with the execution, delivery, performance, validity or enforceability of this Agreement, the Notes, the Applications or any other Loan Document. This Agreement has been and each other Loan Document to which it is a party will be, duly executed and delivered on behalf of the Borrower. This Agreement constitutes and each other Loan Document when executed and delivered will constitute, a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 3.5 No Legal Bar. The execution, delivery and performance of this Agreement, the Notes, the Applications and the other Loan Documents by the Borrower, the Extensions of Credit extended hereunder and the use of the proceeds thereof will not violate any Requirement of Law or Contractual Obligation of the Borrower or any of its Subsidiaries and will not result in, or require, the creation or imposition of any Lien on any properties or revenues of the Borrower pursuant to any such Requirement of Law or Contractual Obligation, except for Liens created for the benefit of the Agent and the Banks pursuant to the Loan Documents. 3.6 No Material Litigation. Except as set forth on Schedule 3.6, no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries or against any of its or their respective properties or revenues (a) with respect to this Agreement, the Notes, the other Loan Documents or any of the transactions contemplated hereby, or (b) as to which there is a reasonable likelihood of an adverse determination and which, if adversely determined, could have a Material Adverse Effect. 3.7 No Default. Neither the Borrower nor any of its Subsidiaries is in default under or with respect to any of its Contractual Obligations in any respect which could have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. 3.8 Taxes. The Borrower has filed or caused to be filed all tax returns which, to its knowledge, are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves, if any, in conformity with GAAP have been provided on the books of the Borrower or its Subsidiaries, as the case may be), where the failure to do any of the foregoing would have a Material Adverse Effect; no federal tax Lien has been filed against the Borrower or any of its Subsidiaries. 31 32 3.9 Federal Regulations. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U), and no part of the proceeds of any Loans will be used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U or for any purpose which violates the provisions of Regulation U or any other Regulations of the Board of Governors of the Federal Reserve System. If requested by the Agent, the Borrower will furnish to the Agent and each Bank a statement to the foregoing effect in conformity with the requirements of FR Form U-l referred to in said Regulation U. No part of the proceeds of the Loans hereunder will be used for any purpose which violates, or which is inconsistent with, the provisions of Regulation X. 3.10 ERISA. Each Plan (such representations in respect of any Multiemployer Plan being made to the best knowledge of the Borrower) has complied in all material respects with the applicable provisions of ERISA and the Code. No prohibited transaction or accumulated funding deficiency or Reportable Event has occurred and is outstanding with respect to any Single Employer Plan. The present value of all accrued benefits under each Single Employer Plan of which the Borrower or a Commonly Controlled Entity is a sponsor (based on those assumptions used to fund the Plans), as calculated by the Borrower's actuaries, did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of the Plans allocable to such benefits, except that the present value of all accrued benefits under the Borrower's Retirement Income Plan (which benefits have been frozen) may from time to time exceed the value of the assets of such Plan allocable to such benefits and Borrower continues to make required contributions to such Plan as calculated by such Plan's actuary. Neither the Borrower nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan and neither the Borrower nor any Commonly Controlled Entity would become subject under ERISA to any liability if the Borrower or any such Commonly Controlled Entity were to withdraw completely from any Multiemployer Plan as of the valuation date most closely preceding the date this representation is made or deemed made. Such Multiemployer Plans are neither in Reorganization as defined in Section 4241 of ERISA nor Insolvent as defined in Section 4245 of ERISA. The present value (determined using actuarial and other assumptions which are reasonable in respect of the benefits provided and the employees participating) of the liability of the Borrower and each Commonly Controlled Entity for post-retirement benefits to be provided to their current and former employees under Plans which are welfare benefit plans (as defined in Section 3(1) of ERISA) does not, in the aggregate, exceed the assets under all such Plans allocable to such benefits. Neither the Borrower nor any Commonly Controlled Entity has any or has received notice of any liability under the Coal Industry Retiree Health Benefit Act of 1992. Neither a Reportable Event nor an "accumulated funding deficiency" within the meaning of Section 412 of the Code or Section 302 of ERISA has occurred during the five year period to the date on which this representation is made or deemed made with respect to any Single Employer Plan or Multiemployer Plan. No termination of a Single Employer Plan has occurred, and no Lien on assets of the Borrower or any Commonly Controlled Entity in favor of the PBGC or a Plan has arisen during such five year period. 3.11 Investment Company Act. The Borrower is not an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 3.12 Public Utility Holding Borrower Act. The Borrower is not subject to regulation as a "holding company", subject to regulation as an "affiliate" of a "holding company", or subject to regulation as a "subsidiary company" of a "holding company", in each case under the Public Utility Holding Company Act of 1935, as amended. 3.13 Environmental Matters. Except as set forth on Schedule 3.13 and except to the extent that all of the following could not reasonably be expected to have a Material Adverse Effect: (a) The Properties owned or operated by the Borrower or any Material Subsidiary do not contain, and to the knowledge of the Borrower and its Material Subsidiaries, have not previously contained, in, on, or under, including, without limitation, the soil and groundwater thereunder, any Materials of Environmental Concern in amounts or concentrations that constitute or constituted a violation of, or reasonably could give rise to liability under Environmental Laws. (b) The Properties owned or operated by the Borrower or any Material Subsidiary and all operations and facilities of the Borrower or a Material Subsidiary at such Properties are in compliance, and have in the last five years been in compliance with all Environmental Laws, and there is no contamination at, under or about such Properties 32 33 or violation of any Environmental Law with respect to such Properties or the business operated by the Borrower or any Subsidiary thereof which could reasonably be expected to interfere with the continued operation of any of such Properties. Neither the Borrower nor any of its Subsidiaries has assumed any liability of any Person under Environmental Laws. (c) Neither the Borrower nor any of its Subsidiaries has received or is aware of any claim, notice of violation, alleged violation, non-compliance, investigation or advisory action or potential liability regarding environmental matters or compliance of Environmental Law with regard to the Properties which has not been satisfactorily resolved by the Borrower or Subsidiary, nor is the Borrower nor any Subsidiary aware or have reason to believe that any such action is being contemplated, considered or threatened. (d) Materials of Environmental Concern have not been generated, treated, stored, transported or disposed of, at, on, from or under any of the Properties by the Borrower nor any of its Subsidiaries, nor have any Materials of Environmental Concern been transferred by the Borrower nor any of its Subsidiaries from the Properties to any other location except in either case in the ordinary course of business of the Borrower or any Subsidiary thereof in compliance with all Environmental Laws and such that it could not reasonably be expected to give rise to material liability under any applicable Environmental Law. (e) There are no governmental, administrative actions or judicial proceedings pending or, to the best knowledge of the Borrower and its Subsidiaries after reasonable inquiry, contemplated or threatened under any Environmental Laws to which the Borrower or any Subsidiary is or will be named as a party with respect to the Properties, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to any of the Properties. (f) There has been no release or threat of release of Materials of Environmental Concern at or from the Properties, or arising from or related to the operation of the Borrower or any of its Subsidiaries in connection with the Properties or otherwise in connection with the business operated by the Borrower or any of its Subsidiaries in violation of or in amounts or in a manner that could reasonably be expected to give rise to material liability under any Environmental Law. 3.14 No Material Misstatements. No financial statement, exhibit or schedule furnished by or on behalf of the Borrower to the Agent or any Bank in connection with the negotiation of this Agreement, any Note or any other Loan Document contains any misstatement of fact, or omitted or omits to state any fact necessary to make the statements therein not misleading under the circumstances under which they were made or given, where such misstatement or omission would be material to the interests of the Banks with respect to the performance of the Borrower of its obligations hereunder or thereunder. 3.15 Title to Properties. The Borrower has good and marketable title to or valid leasehold interest in all material properties, assets and other rights which it purports to own or lease or which are reflected as owned or leased on its books and records, free and clear of all Liens and encumbrances except Permitted Liens, and subject to the terms and conditions of the applicable leases, except for minor defects in title that do not interfere in any material respect with its ability to conduct its businesses as presently conducted. All leases of property are in full force and effect without the necessity for any consent which has not previously been obtained upon consummation of the transactions contemplated hereby unless the failure to be in effect or to obtain such consent would not have a Material Adverse Effect. 3.16 List of Subsidiaries. All of the Subsidiaries of the Borrower as of the date hereof are listed on Schedule 3.16 to this Agreement, and the respective number of shares of authorized Capital Stock and issued and outstanding Capital Stock, and the percentage of such outstanding Capital Stock owned by the Borrower and its Subsidiaries are as set forth on such schedule. The Subsidiaries designated on Schedule 3.16 as "Inactive" have no assets or liabilities and conduct no operations and (i) have not done so during the two year period prior to the Closing Date or (ii) are in the process of being dissolved, which dissolution the Borrower will cause to be completed. 3.17 Solvency. The Borrower is, and after receipt and application of the initial Loans hereunder will be, solvent such that: (a) the fair value of its assets (including without limitation the fair salable value of the goodwill and other intangible property of the Borrower) is greater than the total amount of its liabilities, including without limitation, 33 34 Guaranty Obligations (without duplication with respect to any Guaranty Obligation and the underlying Indebtedness guaranteed thereby), (b) the present fair salable value of its assets (including without limitation the fair salable value of the goodwill and other intangible property of the Borrower) is not less than the amount that will be required to pay the probable liability on its debts as they become absolute and matured, and (c) it is able to realize upon its assets and pay its debts and other liabilities and commitments (including Guaranty Obligations) as they mature in the normal course of business. The Borrower (a) does not intend to, and does not believe that it will, incur debts or liabilities beyond its ability to pay as such debts and liabilities mature, and (b) is not engaged in a business or transaction, or about to engage in a business or transaction, for which its property would constitute unreasonably small capital after giving due consideration to the prevailing practice and industry in which it is engaged. 3.18 Insurance. All insurance policies and bonds maintained by the Borrower and its Subsidiaries or any replacements thereof provide adequate coverage from reputable and financially sound insurers in amounts sufficient to insure the assets and risks of the Borrower and its Subsidiaries in accordance with prudent business practice in the industry of the Borrower and its Subsidiaries. 3.19 Year 2000. Prior to January 1, 2000, the Borrower reviewed the areas within its business and operations which could be adversely affected by, and developed a program to address on a timely basis, the risk that certain computer applications used by the Borrower may be unable to recognize and perform properly date-sensitive functions involving dates prior to and after December 31, 1999 (the "Year 2000 Problem"). The Year 2000 Problem did not result in, and is not reasonably expected to result in, any Material Adverse Effect. SECTION 4. CONDITIONS PRECEDENT 4.1 Conditions to Closing. This Agreement shall become effective upon the satisfaction of each of the following conditions precedent: (a) Loan Documents. The Agent shall have received (i) this Agreement, executed and delivered by a duly authorized officer of the Agent, each Bank and the Borrower, with a counterpart for each Bank, and (ii) for the account of each Bank, a Note conforming to the requirements hereof and executed by a duly authorized officer of the Borrower. (b) Pledge Agreements, Guarantors. With respect to all Foreign Subsidiaries that are Material Subsidiaries (except for AFWL), the Agent shall have received a Pledge Agreement in the form set forth as Exhibit D hereto from the Borrower or the Subsidiary that owns Capital Stock of such Foreign Subsidiary, pledging 65% of the Capital Stock of such Foreign Subsidiary owned by the Borrower and its Subsidiaries, together with stock certificates and undated stock powers in form and substance acceptable to the Agent. The Agent shall have received a Pledge Agreement in the form set forth as Exhibit D hereto from the Borrower and any other Subsidiary that owns Capital Stock of Kulicke and Soffa Investments, Inc., pledging 100% of the Capital Stock of Kulicke and Soffa Investments, Inc. owned by the Borrower and its Subsidiaries, together with stock certificates and undated stock powers in form and substance acceptable to the Agent. The Agent shall have received a Guaranty in the form set forth as Exhibit E hereto from each Domestic Subsidiary of the Borrower other than Kulicke and Soffa Investments, Inc. and Flip Chip. (c) Corporate Proceedings; No Default. The Agent shall have received, with a counterpart for each Bank, a certificate of the Secretary or an Assistant Secretary of the Borrower dated as of the Closing Date certifying (A) that attached thereto is a true and complete copy of the resolutions, in form and substance satisfactory to the Agent, of the Board of Directors of the Borrower authorizing (i) the execution, delivery and performance of this Agreement, the Notes and the other Loan Documents to which it is a party, and (ii) the Extensions of Credit contemplated hereunder and that such resolutions attached thereto have not been amended, modified, revoked or rescinded, (B) as to the incumbency and specimen signature of each officer executing any Loan Document on behalf of the Borrower and (C) that the representations contained in Section 3 are true and correct in all material respects, that the Borrower is in compliance with all covenants contained herein and there exists no Default or Event of Default after giving effect to the initial Loans hereunder. (d) Corporate Documents. The Agent shall have received, with a counterpart for each Bank, true and complete copies of the articles or certificate of incorporation certified by the Secretary of State or similar 34 35 official of the state of organization of the Borrower, and the by-laws of the Borrower, in each case, certified as of the Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of the Borrower. The documents and certifications of the Secretary or an Assistant Secretary contemplated in this subsection may be included within the certificate contemplated by subsection 4.1(c) above. (e) Fees and Expenses. The Agent shall have received (i) the fees required to be paid on the Closing Date pursuant to the Fee Letter and (ii) all other fees and expenses due and payable hereunder on or before the Closing Date (if then invoiced), including, without limitation, the reasonable fees and expenses accrued through the Closing Date of Ballard Spahr Andrews & Ingersoll, LLP, counsel to the Agent in connection with the transactions contemplated by the Loan Documents. (f) Legal Opinion. The Agent shall have received the executed legal opinion of Drinker Biddle, counsel to the Borrower, substantially in the form of Exhibit F. (g) Good Standing. The Agent shall have received certificates of good standing, subsistence and/or status dated a recent date from the Secretary of State or appropriate taxing or other authorities in the jurisdiction of incorporation or organization of the Borrower and the States of Alabama, Arizona, California and Indiana. (h) Acquisition Documents. The Agent shall have received copies of all agreements, documents and instruments delivered to or by the Borrower on or prior to the Closing Date pursuant to which the Cerprobe Acquisition and the Probe Acquisition are or will be completed. (i) Material Adverse Change. Since September 30, 2000, there shall have been no development or event which has had or could reasonably be expected to have a Material Adverse Effect. (j) Existing Credit Arrangements. On or before the initial Extension of Credit, the Existing Credit Agreement shall have been terminated and all Indebtedness thereunder shall have been repaid in full, all collateral (if any) pledged to secure such Indebtedness shall be released and executed amendments to Uniform Commercial Code financing statements shall either have been filed or be provided to the Agent, except that any Letters of Credit issued under the Existing Credit Agreement shall remain outstanding and shall be deemed to be Letter of Credit Obligations hereunder. (k) Additional Matters. All corporate and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement and the other Loan Documents shall be satisfactory in form and substance to the Agent, and the Agent shall have received such other documents and legal opinions in respect of any aspect or consequence of the transactions contemplated hereby or thereby as it shall reasonably request. 4.2 Conditions to Each Extension of Credit. The agreement of each Bank to make any Extension of Credit requested to be made by it on any date (including, without limitation, its initial Extension of Credit) is subject to the satisfaction of the following conditions precedent: (a) Representations and Warranties. Each of the representations and warranties made by the Borrower herein and in the other Loan Documents, shall be true and correct in all material respects on and as of such date as if made on and as of such date, except to the extent that such representations and warranties relate to an earlier date (in which case the representations and warranties that expressly relate to an earlier date shall be true and correct in all material respects as of such earlier date). (c) No Default. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the Extensions of Credit requested to be made on such date. Each request by the Borrower for an Extension of Credit hereunder shall constitute a representation and warranty by the Borrower as of the date of such Extension of Credit that the conditions contained in this Section 4.2 have been satisfied. 35 36 SECTION 5. AFFIRMATIVE COVENANTS The Borrower hereby agrees that, so long the Commitments remain in effect, any Note or Letter of Credit remains outstanding and unpaid (unless the Agent is holding as cash collateral with respect to each Letter of Credit, the Letter of Credit Coverage Requirement), or any other amount is owing to any Bank or the Agent hereunder, the Borrower shall: 5.1 Financial Statements. Furnish to each Bank: (a) as soon as available, but in any event not later than 90 days after the close of each fiscal year of the Borrower, a copy of the annual audit report for such fiscal year for the Borrower and its consolidated Subsidiaries, including therein a consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such fiscal year, and related consolidated statements of income and retained earnings and changes in cash flows of the Borrower and its consolidated Subsidiaries for such fiscal year, all in reasonable detail, prepared in accordance with GAAP applied on a basis consistently maintained throughout the period involved and with the prior fiscal year with such changes thereon as shall be approved by the Borrower's independent certified public accountants, such financial statements to be certified by a firm of nationally recognized independent certified public accountants selected by the Borrower, without a "going concern" or like qualification or exception or qualification arising out of the scope of the audit, and a copy of all management letters delivered by such accountants to the Borrower during such fiscal year; and (b) as soon as available, but in any event not later than 45 days after the end of each of the first three quarterly periods of each fiscal year of the Borrower, unaudited consolidated financial statements of the Borrower and its consolidated Subsidiaries, including therein (i) a consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such fiscal quarter, (ii) the related consolidated statements of income and retained earnings of the Borrower and its consolidated Subsidiaries, and (iii) the related consolidated statement of changes in cash flows of the Borrower and its consolidated Subsidiaries all for the period from the beginning of such fiscal quarter to the end of such fiscal quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the corresponding figures for the like period of the preceding fiscal year; all in reasonable detail, prepared in accordance with GAAP applied on a basis consistently maintained throughout the period involved and with prior periods and accompanied by a certificate of a Responsible Officer of the Borrower stating that the financial statements fairly present the financial condition of the Borrower and its consolidated Subsidiaries as of the date and for the periods covered thereby (subject to normal fiscal year end audit adjustments). (c) not later than the end of each fiscal year, an annual budget and financial projection for the Borrower and its Subsidiaries for the next fiscal year. 5.2 Certificates; Other Information. Furnish to each Bank: (a) concurrently with the delivery of the financial statements referred to in subsections 5.1(a) and 5.1(b), a certificate of a Responsible Officer of the Borrower (each a "Compliance Certificate") showing in detail the calculations demonstrating compliance with the financial covenants set forth in Section 6.1, together with a certificate of a Responsible Officer of the Borrower stating that such officer has obtained no knowledge of any Default or Event of Default except as specifically indicated; if the Compliance Certificate shall indicate that such officer has obtained knowledge of a Default or Event of Default, such Compliance Certificate shall state what efforts the Borrower is making to cure such Default or Event of Default; (b) no later than the twentieth day of each fiscal month, a certificate of a Responsible Officer of the Borrower showing in detail the calculations demonstrating compliance with the financial covenant set forth in Section 6.1(b) as of the last day of the prior fiscal month; and (c) within five days after the same are sent, copies of all financial statements and reports which the Borrower sent to its stockholders and (without duplication) within 15 days after the same are filed, copies of all financial statements and reports which the Borrower may make to, or file with, the Securities and Exchange Commission or any successor Governmental Authority and promptly, such additional financial and other information as the Agent or any 36 37 Bank may from time to time reasonably request. 5.3 Payment of Obligations. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its obligations of whatever nature (including but not limited to all taxes, assessments and governmental charges and levies upon them or upon its income, profits or property prior to the date on which penalties attach thereto), except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Borrower or its Subsidiaries, as the case may be. 5.4 Maintenance of Existence. Except as otherwise permitted in Section 6.3, preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, privileges and franchises necessary in the normal conduct of its business; comply with all Contractual Obligations and Requirements of Law, and cause each of its Material Subsidiaries to do the same, except to the extent that failure to comply therewith could not in the aggregate, reasonably be expected to have a Material Adverse Effect. 5.5 Maintenance of Insurance; Property. (a) Insure, and cause each of its Material Subsidiaries to insure, its properties and assets against loss or damage by fire and such other insurable hazards as such assets are commonly insured (including fire, extended coverage, property damage, worker's compensation, public liability and business interruption insurance) and against other risks in such amounts as similar properties and assets are insured by prudent companies in similar circumstances carrying on similar businesses, and with reputable and financially sound insurers, including self insurance to the extent customary. (b) Maintain, and cause each of its Material Subsidiaries to maintain, in good repair, working order and condition (ordinary wear and tear and casualty excepted) in accordance with the general practice of other businesses of similar character and size, all of those properties useful or necessary to its business, and, from time to time, each of the Borrower and its Subsidiaries will make or cause to be made all appropriate repairs, renewals or replacements thereof, in each case, except as would not, individually or in the aggregate, have a Material Adverse Effect. 5.6 Inspection of Property; Books and Records; Discussions. Keep, and cause its Material Subsidiaries to keep, proper books of records and account in conformity with GAAP and all Requirements of Law; and upon reasonable notice permit representatives of any Bank to visit and inspect any of its properties and examine and make abstracts from any of its books and records during normal business hours and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Borrower and its Subsidiaries with officers and employees of the Borrower and its Subsidiaries and with their independent certified public accountants. 5.7 Notices. Promptly give notice to the Agent and each Bank of: (a) the occurrence of any Default or Event of Default; (b) any (i) default or event of default under any Contractual Obligation of the Borrower or any Subsidiary thereof or (ii) litigation, investigation or proceeding which may exist at any time between the Borrower or any Subsidiary thereof and any Governmental Authority, which in either case, if not cured or if adversely determined, as the case may be, could have a Material Adverse Effect; (c) any litigation or proceeding by or against the Borrower or any Subsidiary thereof which, if adversely determined, could reasonably be expected to have a Material Adverse Effect, as reasonably determined by the Borrower's corporate counsel; (d) the following events, as soon as possible and in any event within 30 days after the Borrower knows or has reason to know thereof: (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to a Plan, any Lien in favor of PBGC or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of any Multiemployer Plan or (ii) the institution of 37 38 proceedings or the taking of any other action by the PBGC or the Borrower or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the terminating, Reorganization or Insolvency of, any Plan or (iii) an assessment of liability under the Coal Industry Retiree Health Benefit Act of 1992; and (e) an event which has had or could reasonably be expected to have a Material Adverse Effect. Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the Borrower and its Subsidiaries propose to take with respect thereto. 5.8 Environmental Laws. (a) Comply with, and require compliance by all Subsidiaries and all tenants and all subtenants, if any, with, all Environmental Laws and obtain and comply with and maintain, and require that all tenants and subtenants obtain and comply with and maintain, any and all licenses, approvals, registrations or permits required by Environmental Laws, except in each case to the extent that failure to so comply or obtain or maintain such documents could not reasonably be expected to have a Material Adverse Effect; (b) Comply with, and cause all Subsidiaries to comply with, all final lawful and binding orders and directives of all Governmental Authorities respecting Environmental Laws; and (c) Defend, indemnify and hold harmless the Agent and the Banks, and their respective employees, agents, officers, directors, successors and assigns from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature known or unknown, contingent or otherwise, arising out of, or in any way relating to any violation of or noncompliance with or liability under any Environmental Laws, or any orders, requirements or demands of Governmental Authorities related thereto which in each case relate to or arise in connection with the Borrower or any of its Subsidiaries, any Property or any activities relating to any other property or business of the Borrower or its Subsidiaries or the enforcement of any rights provided herein or in the other Loan Documents, including, without limitation, attorneys' and consultants' fees, response costs, investigation and laboratory fees, court costs and litigation expenses, except to the extent that any of the foregoing arise out of the gross negligence or willful misconduct of any of the foregoing enumerated parties. This indemnity shall continue in full force and effect regardless of the termination of this Agreement and the payment of the Notes. 5.9 New Foreign Subsidiaries; AFWL. Immediately after the time that any Foreign Subsidiary becomes a Material Subsidiary, the Borrower or the applicable Subsidiary shall (a) execute and deliver to the Agent a Pledge Agreement in the form attached hereto as Exhibit D that covers sixty-five percent (65%) of the ownership interest of the Borrower and its Subsidiaries in such Foreign Subsidiary and shall also deliver the original stock certificates (and undated stock powers) which evidence sixty-five percent (65%) of the ownership interest of the Borrower and its Subsidiaries therein to the Agent in accordance with and subject to the terms and provisions set forth in Exhibit D and (b) use its reasonable best efforts to deliver to the Agent within thirty days thereafter, a Pledge Opinion, together with any other documents or instruments required by counsel in order to enable it to deliver such Pledge Opinion; provided that the foregoing pledge obligation shall not apply to AFW for so long as it is prohibited from executing Pledge Agreements in favor of the Agent pursuant to the RAL Agreements. If at any time AFW is not longer prohibited from executing Pledge Agreements in favor of the Agent pursuant to the RAL Agreements, AFW shall deliver to the Agent a Pledge Agreement in accordance with the terms of the first sentence of this Section 5.9. 5.10 Use of Proceeds. Use the proceeds of the Loans (i) for working capital and general corporate purposes, (ii) for acquisitions permitted hereby and (iii) to repay Indebtedness under the Existing Credit Agreement. 5.11 Post-Closing Opinions. Deliver to the Agent within thirty days after the Closing Date, a Pledge Opinion with respect to the pledge of sixty-five percent (65%) of the Capital Stock of Kulicke and Soffa PTE Ltd. owned by Kulicke and Soffa Foreign Investments, Inc., together with any other documents or instruments required by counsel in order to enable it to deliver such Pledge Opinion. The Borrower shall use its reasonable best efforts to deliver to the Agent within thirty days after the Closing Date, a Guaranty Opinion with respect to the Guaranty executed as of the Closing Date by all 38 39 Domestic Subsidiaries that are not organized under the laws of the State of Delaware or the Commonwealth of Pennsylvania, together with any other documents or instruments required by counsel in order to enable it to deliver such Guaranty Opinion. The Borrower shall deliver to the Agent within seven days after the Closing Date, a Guaranty Opinion with respect to the Guaranty executed as of the Closing Date by SVTR, Inc. 5.12 Flip Chip Technologies, LLC. Cause Flip Chip Technologies, LLC ("Flip Chip") to execute and deliver to the Agent a Guaranty in the form of Exhibit E hereto not later than ten (10) days after Flip Chip becomes a Wholly-Owned Subsidiary. 5.13 Acquisitions. The Borrower shall deliver to the Agent copies of all material agreements, documents and instruments delivered to or by the Borrower on or after the Closing Date pursuant to which the Cerprobe Acquisition and the Probe Acquisition are or will be completed. SECTION 6. NEGATIVE COVENANTS The Borrower hereby agrees that, so long as any Commitments remain in effect, any Note or Letter of Credit remains outstanding and unpaid (unless the Agent is holding as cash collateral with respect to each Letter of Credit, the Letter of Credit Coverage Requirement), or any other amount is owing to any Bank or Agent hereunder, the Borrower shall not and shall not permit any of its Subsidiaries to, directly or indirectly: 6.1 Financial Condition Covenants. (a) Leverage Ratio. As of the last day of any fiscal quarter of the Borrower, permit the Leverage Ratio to be greater than 2.75 to 1. (b) Liquidity Ratio. At any time, permit the Liquidity Ratio to be less than 0.60 to 1.0. (c) Minimum Net Worth. As of the last day of any fiscal quarter of the Borrower, permit the Net Worth to be less than $364,808,000, with adjustments after the Closing Date to reflect the write off of investments in research and development acquired through the Cerprobe Acquisition and the Probe Acquisition, which adjustments shall be determined by the Borrower and be acceptable to the Agent, plus an increase on the last day of each fiscal year of the Borrower commencing September 30, 2001, by an amount equal to 65% of the consolidated net income of the Borrower and its Subsidiaries (if a positive number) for each fiscal year ending on or after September 30, 2001. (d) Minimum Usage. For the period from the Closing Date until the first anniversary thereof, permit the average aggregate Dollar Equivalent amount of all Loans and Letter of Credit Obligations outstanding to be less than eighty percent (80.0%) of the average total Commitments for such period, except to the extent any borrowing required to make up a shortfall in such percentage would result in a Default or Event of Default. For the period from the first anniversary of the Closing Date to the second anniversary of the Closing Date, permit the average aggregate Dollar Equivalent amount of all Loans and Letter of Credit Obligations outstanding to be less than the average outstanding loan amount under the Securitization for such period, except to the extent any borrowing required to make up a shortfall in such amount would result in a Default or Event of Default. 6.2 Limitation on Liens. Create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except for Permitted Liens. 6.3 Limitations on Fundamental Changes. (i) Enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), (ii) convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets, (iii) acquire any Capital Stock in any other Person, (iv) acquire all or substantially all of the assets of any other Person, (v) acquire any partnership or joint venture interest in any other Person or (vi) make any Investment in any other Person (other than a Permitted Investment and further Investments in Subsidiaries that either have previously provided the Agent with a Guaranty and a Guaranty Opinion (if requested by the Agent) or whose Capital Stock has been pledged to the Agent pursuant to a Pledge Agreement, with respect to which a Pledge Opinion has been delivered to the Agent), except (x) as otherwise described in Schedule 6.3 attached 39 40 hereto, (y) for mergers of Subsidiaries with existing Subsidiaries where either the Borrower or a Wholly-Owned Subsidiary of the Borrower is the surviving entity or the liquidation, winding up or dissolution of a Subsidiary that is not a Material Subsidiary and (z) for mergers and acquisitions of any other Person or Investments in any other Person which satisfy all of the following conditions: (a) The Borrower is the surviving entity with respect to any such merger; (b) Such merger, acquisition or Investment shall not cause the aggregate book value (without duplication) of all such (i) mergers and acquisitions by the Borrower and its Subsidiaries of Subsidiaries (other than any acquisition of equity interests in Flip Chip), to exceed $25,000,000 since the Closing Date, (ii) Investments by the Borrower and its Subsidiaries made during the Borrower's fiscal year ending September 30, 2001 (A) in Flip Chip to exceed $15,000,000 or (B) in other Subsidiaries (other than the Subsidiary party to the Securitization) that have not previously provided the Agent with a Guaranty and a Guaranty Opinion (if requested by the Agent) and whose stock was not pledged to the Agent pursuant to a Pledge Agreement, with respect to which a Pledge Opinion has been delivered to the Agent, to exceed $15,000,000 in the aggregate, or (C) in all Subsidiaries (other than the Subsidiary party to the Securitization) that have not previously provided the Agent with a Guaranty and a Guaranty Opinion (if requested by the Agent) and whose stock was not pledged to the Agent pursuant to a Pledge Agreement, with respect to which a Pledge Opinion has been delivered to the Agent, to exceed $25,000,000 in the aggregate, and (iii) Investments by the Borrower and its Subsidiaries made during any fiscal year of the Borrower thereafter in Subsidiaries (other than the Subsidiary party to the Securitization) that have not previously provided the Agent with a Guaranty and a Guaranty Opinion (if requested by the Agent) and whose stock was not pledged to the Agent pursuant to a Pledge Agreement, with respect to which a Pledge Opinion has been delivered to the Agent, to exceed (x) $15,000,000 in the aggregate or (y) $10,000,000 in any single Subsidiary; (c) if the Subsidiary being acquired is a Domestic Subsidiary (other than the Subsidiary party to the Securitization), then such Subsidiary shall simultaneously execute and deliver to the Agent a Guaranty in the form of Exhibit E to this Agreement, and, upon the request of the Agent in its sole discretion, use its reasonable best efforts to deliver to the Agent a Guaranty Opinion within thirty days after such acquisition is completed, together with any other documents or instruments required by counsel in order to enable it to deliver such Guaranty Opinion; and (d) if the Subsidiary being acquired is a Foreign Subsidiary which is a Material Subsidiary, then the Borrower or the applicable Subsidiary shall immediately execute and deliver to the Agent a Pledge Agreement in favor of the Agent in the form attached hereto as Exhibit D which encumbers sixty-five percent (65%) of the Borrower's and its Subsidiaries' ownership interest in such Foreign Subsidiary, together with the original stock certificates which evidence sixty-five percent (65%) of the Borrower's and its Subsidiaries' ownership interest therein and undated stock powers, in accordance with and subject to the terms and provisions set forth in Exhibit D; and such Subsidiary shall use its reasonable best efforts to deliver to the Agent within thirty days thereafter, a Pledge Opinion, together with any other documents or instruments required by counsel in order to enable it to deliver such Pledge Opinion; provided, that immediately after any such transaction referred to in this Section and after giving effect thereto, the Borrower is in compliance with this Agreement and no Default or Event of Default shall have occurred and be continuing or result from such transaction. Notwithstanding anything herein to the contrary, until the date thirty days after the Closing Date, all of the Domestic Subsidiaries party to the Guaranty on the Closing Date that are not organized under the laws of Pennsylvania or Delaware shall be deemed to have delivered a Guaranty Opinion solely for purposes of this Section 6.3. Notwithstanding anything herein to the contrary, until the date thirty days after the Closing Date, Kulicke and Soffa Foreign Investments, Inc. shall be deemed to have delivered a Pledge Opinion pursuant to Section 5.11 solely for purposes of this Section 6.3. 6.4 Limitation on Sale of Assets. Sell, transfer, lease or otherwise dispose of all or any part of their respective assets except for (i) the sale of Inventory in the ordinary course of its business, either directly to end customers or to the Borrower or other Subsidiaries for the ultimate sale to end customers, (ii) the disposition of equipment for obsolescence or which is, in the Borrower's reasonable judgment, no longer necessary in the operation of its business in the ordinary course thereof, (iii) the transfer of assets between Subsidiaries that either have provided the Agent with a Guaranty or whose stock has been pledged to the Agent pursuant to a Pledge Agreement, (iv) the sale of receivables in connection 40 41 with the Securitization, (v) sale and leaseback transactions with respect to assets owned by the Borrower on the Closing Date not exceeding $10,000,000 in the aggregate in any fiscal year of the Borrower and other sale and leaseback transactions with respect to assets purchased by the Borrower after the Closing Date, (vi) any other disposition which does not exceed $1,000,000 per disposition and $10,000,000 in the aggregate for all dispositions made in any single fiscal year of the Borrower. Notwithstanding the foregoing, but only to the extent necessary to complete a pending sale, transfer, lease or other disposal of one hundred percent (100%) of the Borrower's then current ownership interest in any of its then current Subsidiaries in a manner that otherwise complies in all respects with the applicable provisions of this Agreement, upon the prior written request of the Borrower received by Agent at any time other than during the continuance of an Event of Default, the Agent and the Banks agree to execute all documentation reasonably necessary to release its claims under either (1) the Guaranty, if any, that such Subsidiary had previously executed and delivered to the Agent or (2) the Pledge Agreement, if any, that the Borrower or its Subsidiary executed in connection with the pledge of the ownership interest of the Borrower in the Subsidiary in question. 6.5 Limitation on Indebtedness. Create, incur, assume or suffer or permit to exist any Indebtedness except: (a) Indebtedness to the Banks under the Loan Documents; (b) Indebtedness in connection with Capital Leases or Purchase Money Security Interests not to exceed $20,000,000 outstanding in the aggregate at any time; (c) Subordinated Debt; (d) Indebtedness incurred pursuant to the Securitization; and (e) Other Indebtedness in an aggregate principal amount outstanding not to exceed $10,000,000 at any time. 6.6 Limitation on Distributions. Except as set forth in Schedule 6.6 attached hereto, the Borrower will not suffer or permit any Subsidiary to be subject to any agreement or restriction which prohibits such Subsidiary from repaying or making cash dividends on or reductions of any Investment in such Subsidiary. 6.7 Transactions with Affiliates. Except for transactions required by the Securitization or as expressly permitted in this Agreement or between the Borrower and any Subsidiary or between Subsidiaries, directly or indirectly enter into any transaction or arrangement whatsoever (including without limitations any purchase, sale, lease or exchange of property or the rendering of any service) or make any payment to or otherwise deal with any Affiliate, except, as to all of the foregoing in the ordinary course of and pursuant to the reasonable requirements of the Borrower's and its Subsidiaries' business and upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary, as the case may be, than would be obtained in a comparable arm's length transaction with a Person not an Affiliate. 6.8 Use of Proceeds. Directly or indirectly apply any part of the proceeds of the Loans to the purchasing or carrying of any "margin stock" within the meaning of Regulation U. 6.9 Fiscal Year. Permit the fiscal year of the Borrower to end on a day other than September 30. 6.10 No Negative Pledge. Enter into any agreement with any Person other than the Agent and the Banks which prohibits or limits the ability of the Borrower or any Subsidiary to create, incur, assume or suffer to exist any Lien upon any of its properties, assets or revenues, whether now owned or hereafter acquired. SECTION 7. EVENTS OF DEFAULT 7.1 Events of Default. If any of the following events shall occur and be continuing: 41 42 (a) The Borrower (i) shall fail to pay when due any principal on any Note or any Reimbursement Obligation when due, or (ii) shall fail to pay any other amount payable hereunder or thereunder (including without limitation any fees) within five (5) days after the date due in accordance with the terms thereof or hereof; or (b) Any representation or warranty made or deemed made by the Borrower herein or in any other Loan Document is incorrect or misleading in any material respect on or as of the date made or deemed made; or (c) The Borrower shall default in the observance or performance of any agreement contained in Section 6.1 of this Agreement; provided that, in the case of a default under Section 6.1(b), such default is not cured within ten (10) days by the transfer of Permitted Investments to a Bank or affiliate thereof such that they would constitute Cash Investments and as a result thereof, the covenant in Section 6.1(b) would be satisfied, and, in the case of a default under Section 6.1(d), such default continues uncured for (30) days; or (d) The Borrower or any Subsidiary shall default in the observance or performance of any other agreement contained in this Agreement (other than as provided in subsections (a) through (c) above) or any other Loan Document, and such default shall continue unremedied (if it is capable of being remedied in such period) for a period of thirty (30) days after the earlier of (i) the date on which the Borrower or the Subsidiary in question has actual knowledge thereof and (ii) the date on which the Agent gives the Borrower and/or the Subsidiary in question written notice thereof; or (e) The Borrower, the Subsidiary party to the Securitization or any Material Subsidiary shall (i) fail to perform or observe any term, condition or covenant of any bond, note, debenture, loan agreement, indenture, guaranty, trust agreement, mortgage or similar instrument to which the Borrower or any Material Subsidiary is a party or by which it is bound, or by which any of its properties or assets may be affected (a "Debt Instrument"), and, as a result thereof (assuming the giving of appropriate notice thereof, if required), Indebtedness in an aggregate amount of $500,000 or more which is included therein or secured or covered thereby shall have been declared due and payable prior to the date on which such Indebtedness would otherwise become due and payable, (ii) suffer or permit Indebtedness in an aggregate amount of $500,000 or more which is included in any Debt Instrument or secured or covered thereby to have been declared due and payable prior to the date on which such Indebtedness would otherwise become due and payable, or (iii) fail to pay any Indebtedness for borrowed money due at final maturity or pursuant to demand under any Debt Instrument; or (f) The Borrower or any of its Material Subsidiaries applies for, consents to, or acquiesces in the appointment of, a trustee, receiver or other custodian for the Borrower or any of its Material Subsidiaries or any of the property of the Borrower or any of its Material Subsidiaries or, in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian is appointed for the Borrower or any of its Material Subsidiaries or for a substantial part of its property and is not discharged within sixty (60) days. Any bankruptcy, reorganization, liquidation, dissolution or other case and proceeding under any bankruptcy or insolvency law is commenced in respect of the Borrower or any of its Material Subsidiaries and, if such case or proceeding is not commenced by the Borrower or the Material Subsidiary in question, it is consented to or acquiesced in by the Borrower or the Material Subsidiary in question or remains undismissed for sixty (60) days. The Borrower or any of its Material Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they generally become due; or (g) The Borrower or any of its Material Subsidiaries shall suffer final judgments for the payment of money in an aggregate amount of $500,000 or more not covered by insurance or reserves satisfactory to the Agent and shall not discharge, satisfy or stay the same within a period of thirty (30) days; or (h) Without limiting the covenants and representations made herein relating ERISA matters: (A) any Reportable Event which the Agent reasonably determines to constitute grounds for the termination of any employee benefit plan by the PBGC or for the appointment by any United States District Court of a trustee to administer or liquidate any Plan; (B) the termination of any employee benefit plan, or any Defined Benefit Plan described in Section 414(j) or Section 414(k) of the Code, the present value of whose benefits that may be guaranteeable under Title IV of ERISA exceeds the amount of plan assets allocable to such benefits; (C) the appointment by any United States District Court of a trustee to administer any Plan; (D) the institution by the PBGC of proceedings to terminate any Plan; (E) the failure by the Borrower or any Commonly Controlled Entity to meet the minimum funding standards established in Section 302 of ERISA; or (F) the assertion of any claim of, or demand for, withdrawal liability under ERISA by any Multiemployer 42 43 Plan to which the Borrower or any Commonly Controlled Entity heretofore contributed or currently contributes, in each case, which has had or could reasonably be expected to have a Material Adverse Effect; or (i) The Borrower or any of its Material Subsidiaries discontinues its business operations or materially changes the nature of its business; or (j) (i) Any person or group within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "1934 Act") and the rules and regulations promulgated thereunder (a "Person") shall have, or have acquired, on a cumulative basis, beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act), directly or indirectly, of securities of the Borrower (or other securities convertible into such securities) representing a majority of the combined voting power of all securities of the Borrower entitled to vote in the election of directors (hereinafter called a "Controlling Person"); or (ii) a majority of the Board of Directors of the Borrower shall cease for any reason to consist of: (A) individuals who on the date hereof were serving as directors of the Borrower or (B) individuals who subsequently become members of the Board if such individuals' nomination for election or election to the Board is recommended or approved by a majority of the Board of Directors of the Borrower. For purposes of clause (i) above, a Person shall not be a Controlling Person if such Person holds voting power in good faith and not for the purpose of circumventing this Section as an agent, bank, broker, nominee, trustee, or holder of revocable proxies given in response to a solicitation pursuant to the 1934 Act, for one or more beneficial owners who do not individually, or, if they are a group acting in concert, as a group, have the voting power specified in clause (i) above; then, and in any such event, (A) if such event is an Event of Default specified in paragraph (f) above with respect to the Borrower, automatically the Commitments (including the obligations of the Issuing Bank to issue Letters of Credit and the Banks to participate therein) shall immediately terminate, and the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement, the Notes and the other Loan Documents shall automatically and immediately become due and payable (including, without limitation, all Letter of Credit Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder), and (B) if such event is any other Event of Default, with the consent of the Required Banks, the Agent may, or upon the written request of the Required Banks, the Agent shall, (i) by notice to the Borrower declare the Commitments to be terminated forthwith, whereupon the Commitments and the obligations of the Banks to make Loans, and the obligation of the Issuing Bank to issue Letters of Credit and the Banks to participate in any Letters of Credit thereafter issued shall immediately terminate; (ii) by notice of default to the Borrower, declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement, the Notes and the other Loan Documents to be due and payable forthwith, whereupon the same shall immediately become due and payable (including, without limitation, all Letter of Credit Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder); and/or (iii) by notice to the Borrower require the Borrower to, and the Borrower shall thereupon, deposit in a non-interest bearing account with the Agent, as cash collateral for its obligations under this Agreement, the Notes and the Applications, an amount equal to the Letter of Credit Coverage Requirement, and the Borrower hereby pledges to the Agent and the Banks, and grant to the Agent and the Banks a security interest in, all such cash as security for such obligations. Amounts held in such cash collateral account shall be applied by the Agent to the payment of drafts drawn under such Letters of Credit, and the unused portion thereof after all such Letters of Credit shall have expired or been fully drawn upon, if any, shall be applied to repay other obligations of the Borrower hereunder and under the Notes. After all such Letters of Credit shall have expired or been fully drawn upon, all Reimbursement Obligations shall have been satisfied and all other obligations of the Borrower hereunder and under the Notes shall have been paid in full, the balance, if any, in such cash collateral account shall be returned to the Borrower. The Borrower shall execute and deliver to the Agent, for the account of the Issuing Bank and the Letter of Credit Participants, such further documents and instruments as the Agent may request to evidence the creation and perfection of the within security interest in such cash collateral account. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. SECTION 8. THE AGENT 8.1 Appointment. Each Bank hereby irrevocably designates and appoints PNC Bank, National Association as the Agent of such Bank under this Agreement and the other Loan Documents, and each such Bank irrevocably authorizes PNC Bank, National Association, as the Agent for such Bank, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are 43 44 expressly delegated to the Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement and the other Loan Documents, the Agent shall not have any duties or responsibilities, except those expressly set forth herein or therein, or any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement and the other Loan Documents or otherwise exist against the Agent. PNC Bank, National Association agrees to act as the Agent on behalf of the Banks to the extent provided in this Agreement and the other Loan Documents. 8.2 Delegation of Duties. The Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to engage and pay for the advice and services of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible to the Banks for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 8.3 Exculpatory Provisions. Neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (a) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or the other Loan Documents (except for its or such Person's own gross negligence or willful misconduct) or (b) responsible in any manner to any of the Banks for any recitals, statements, representations or warranties made by the Borrower or any officer thereof contained in this Agreement, the other Loan Documents or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, the Notes or the other Loan Documents or for any failure of the Borrower to perform its obligations hereunder or thereunder. The Agent shall not be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or the other Loan Documents, or to inspect the properties, books or records of the Borrower. 8.4 Reliance by Agent. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any Note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, facsimile, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by such Agent. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or the other Loan Documents unless it shall first receive such advice or concurrence of the Required Banks as it deems appropriate or it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement, the Notes or the other Loan Documents in accordance with a request of the Required Banks, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Banks and all future holders of the Notes. 8.5 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless it has received notice from a Bank or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall give notice thereof to the Banks. The Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Banks; provided, that unless and until the Agent shall have received such directions, it may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Banks. 8.6 Non-Reliance on Agent and Other Banks. Each Bank expressly acknowledges that neither the Agent nor any of its respective officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Agent hereinafter taken, including any review of the affairs of the Borrower, shall be deemed to constitute any representation or warranty by the Agent to any Bank. Each Bank represents to the Agent that it has, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, 44 45 property, financial and other condition and creditworthiness of the Borrower and made its own decision to make its Loans hereunder and enter into this Agreement and each other Loan Document to which it is a party. Each Bank also represents that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower. Except for notices, reports and other documents expressly required to be furnished to the Banks by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrower which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. 8.7 Indemnification. The Banks agree to indemnify the Agent in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation, if any, of the Borrower to do so) in Dollars, ratably according to their respective Commitment Percentages, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Notes) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement, the other Loan Documents, or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Agent under or in connection with any of the foregoing; provided, that no Bank shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. The agreements in this Section 8.7 shall survive the payment of the Notes and all other amounts payable hereunder. 8.8 Agent in Its Individual Capacity. The Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower as though the Agent were not the Agent hereunder. With respect to its Loans made or renewed by it and any Note issued to it and with respect to any Letter of Credit issued or participated in by it, the Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Bank and may exercise the same as though it were not the Agent, and the terms "Bank" and "Banks" shall include the Agent in its individual capacity. 8.9 Successor Agent. The Agent may resign as Agent upon 30 days' notice to the Banks and the Borrower. If the Agent shall resign as Agent under this Agreement, then the Required Banks shall appoint from among the Banks a successor agent for the Banks, which appointment shall be subject to the approval of the Borrower (which approval shall not be unreasonably withheld and shall not be required if there shall then exist a Default or Event of Default). If no successor agent shall have been so appointed by the Required Banks and shall have accepted such appointment within 60 days after the retiring Agent's giving of notice of resignation then the retiring Agent may, on behalf of the Banks, appoint an interim successor agent. Any interim successor agent appointed under the preceding sentence may be replaced at any time by a successor agent designated by the Required Banks and subject to the approval of the Borrower (which approval shall not be unreasonably withheld and shall not be required if there shall then exist a Default or Event of Default). Any such successor agent shall succeed to the rights, powers and duties of the Agent, and the term "Agent" shall mean such successor agent effective upon its appointment, and the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement or any holders of the Notes. After any retiring Agent's resignation as Agent, the provisions of this Section 8.9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. 8.10 Beneficiaries. Except as expressly provided herein, the provisions of this Section 8 are solely for the benefit of the Agent and the Banks, and the Borrower shall not have any rights to rely on or enforce any of the provisions hereof, except for the Borrower's rights under Section 8.9 to approve a successor Agent. In performing its functions and duties under this Agreement and the other Loan Documents, the Agent shall act solely as agent of the Banks and does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for the Borrower. 45 46 SECTION 9. MISCELLANEOUS 9.1 Amendments and Waivers. Neither this Agreement, any Note any other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this Section. With the written consent of the Required Banks, the Agent and the Borrower may, from time to time, enter into written amendments (including letter amendments), supplements or modifications hereto and to the Notes and the other Loan Documents for the purpose of adding any provisions to this Agreement, the Notes or any other Loan Document or changing in any manner the rights of the Banks or of the Borrower hereunder or thereunder or waiving, on such terms and conditions as the Agent may specify in such instrument, any of the requirements of this Agreement, the Notes or any other Loan Document or any Default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, supplement or modification shall directly or indirectly (a) reduce the amount or extend the maturity of any Note or any installment thereof, or reduce the rate of interest or extend the time of payment of interest thereon, or reduce any fee payable to any Bank hereunder or extend the period for payment thereof, or change the duration or the amount of any Bank's Commitment in each case without the consent of the Bank affected thereby or (b) amend, modify or waive any provision of this Section or reduce the percentage specified in the definition of Required Banks or change the definition of Securitization, or consent to the release of any collateral for the repayment of the Loans, any Pledge Agreement or any Guaranty (except pursuant to the last sentence of Section 6.4), consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement, the Notes and the other Loan Documents, in each case without the written consent of all the Banks, or (c) amend, modify or waive any provision of Section 2.8 or any other provisions affecting Letters of Credit without the written consent of the Issuing Bank, or (e) amend, modify or waive any provision of Section 8 without the written consent of the then Agent. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Banks and shall be binding upon the Borrower, the Banks, the Agent and all future holders of the Notes. In the case of any waiver, the Borrower, the Banks and the Agent shall be restored to their former position and rights hereunder and under the outstanding Notes, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. 9.2 Notices; Lending Offices. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including electronic transmission, facsimile transmission or posting on a secured Web site), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or three days after being deposited in the mail, postage prepaid, or, in the case of facsimile transmission notice, when sent during normal business hours with electronic confirmation or otherwise when received, or in the case of electronic transmission, when received and in the case of posting on a secured Web site, upon receipt of (i) notice of such posting and (ii) rights to access such Web site, addressed as follows in the case of the Borrower, and the Agent or the Issuing Bank, and as set forth in Schedule I in the case of the other parties hereto, or to such other address as may be hereafter notified by the respective parties hereto and any future holders of the Notes: The Borrower: Kulicke and Soffa Industries, Inc. 2101 Blair Mill Road Willow Grove, PA 19090 Attention: Robert F. Amweg Facsimile: (215) 784-6180 The Agent PNC Bank, National Association or the 1600 Market Street Issuing Bank: Philadelphia, PA 19103 Attention: Forrest B. Patterson, Jr. Facsimile: (215) 585-6987 with a copy to: PNC Bank, National Association One PNC Plaza, 22nd Floor 249 Fifth Avenue Pittsburgh, PA 15222 Attention: Arlene Ohler 46 47 Facsimile: 412-762-8672 provided that (a) any notice, request or demand to or upon the Agent, the Issuing Bank or the Banks pursuant to Sections 2.4, 2.5, 2.8, 2.14 and 2.15, shall not be effective until received and (b) any notice of a Default or Event of Default hereunder shall be sent by facsimile or nationally recognized overnight courier. Schedule I lists the Lending Offices of each Bank. Each Bank may change its Lending Office by written notice to the other parties hereto. 9.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Bank, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 9.4 Survival of Representations and Warranties. All representations and warranties made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement, the Notes and the other Loan Documents. 9.5 Payment of Expenses and Taxes. The Borrower agrees (a) to pay or reimburse the Agent for all its out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and the syndication of, this Agreement, the Notes, the other Loan Documents and any other documents executed and delivered in connection herewith, and the consummation of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Agent, (b) to pay or reimburse the Agent for all its out-of-pocket costs and expenses incurred in connection with any amendment, supplement or modification to this Agreement, the Notes and the other Loan Documents and any other documents executed and delivered in connection therewith, and the administration of the Loans, including without limitation, the reasonable fees and disbursements of counsel, (c) pay or reimburse the Agent and each Bank for all its out-of-pocket costs and expenses and internal legal costs and expenses (in the case of the Agent only) incurred in connection with the enforcement or preservation of any rights under this Agreement, the Notes, the other Loan Documents and any such other documents, including, without limitation, reasonable fees and disbursements of counsel to the Agent and to the several Banks, (d) to pay, indemnify, and hold each Bank and the Agent harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the Notes, the other Loan Documents and any such other documents, and (e) to pay, indemnify, and hold each Bank and the Agent harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions (whether sounding in contract, in tort or on any other ground), judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of or in any other way arising out of or relating to, this Agreement, the Notes, the other Loan Documents or any such other documents contemplated by or referred to herein or therein or any action taken by any Bank or the Agent with respect to the foregoing including, without limitation, any of the foregoing relating to the use of proceeds of the Loans or the violation of, noncompliance with or liability under, any Environmental Laws applicable to the operations of the Borrower or its Subsidiaries (all the foregoing, collectively, the "indemnified liabilities"), provided, that the Borrower shall have no obligation hereunder to the Agent or any Bank with respect to indemnified liabilities arising from the gross negligence or willful misconduct of such person. The agreements in this Section shall survive repayment of the Notes and all other amounts payable hereunder. 9.6 Successors and Assigns. (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and permitted assigns of such party; and all covenants, promises and agreements by or on behalf of the Borrower, the Agent or the Banks that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns. The Borrower may not assign or transfer any of its rights or obligations under this Agreement or the other Loan Documents without the prior written consent of each Bank. 47 48 (b) Each Bank may, in accordance with applicable law, sell to any Bank or Affiliate thereof and, with the consent of the Borrower (which shall not be required in the case of an assignment to an affiliate of the assigning Bank or any assignment hereunder at any time that an Event of Default has occurred and is continuing) and the Agent (which consents shall not be unreasonably withheld or delayed), to one or more banks or other financial institutions (each, a "Purchasing Bank") all or any part of its interests, rights and obligations under this Agreement, the Notes and the other Loan Documents (including all or a portion of its Commitment and the Loans at the time owing to it and the Notes held by it); provided, however, that (i) so long as the Commitments are in effect, such assignment shall be in an amount not less than $5,000,000 (or such lesser amount as the Borrower and the Agent shall agree in their sole discretion), (ii) the parties to each such assignment shall execute and deliver to the Agent and the Borrower for its acceptance an Assignment and Acceptance, together with the Note subject to such assignment and a processing and recordation fee of $3,500 and (iii) unless otherwise agreed by the Agent and the Borrower in their sole discretion, such assignment shall be of all or a pro rata portion of such assigning Bank's Commitment and the Loans thereunder (i.e. no Bank may sell a non-pro rata interest). Upon acceptance and recording pursuant to paragraph (e) of this Section 9.6, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, (A) such Purchasing Bank shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Bank under this Agreement and (B) the assigning Bank thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Bank's rights and obligations under this Agreement and the other Loan Documents, such Bank shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.16, 2.17, 2.18, 2.19, 5.8(c) and 9.5 (to the extent that such Bank's entitlement to such benefits arose out of such Bank's position as a Bank prior to the applicable assignment). Such Assignment and Acceptance shall be deemed to amend this Agreement to the extent, and only to the extent, necessary to reflect the addition of such Purchasing Bank and the resulting amounts and percentages held by the Banks arising from the purchase by such Purchasing Bank of all or a portion of the rights and obligations of such assigning Bank under this Agreement, the Notes and the other Loan Documents. Notwithstanding any provision of this Section 9.6, the consent of the Borrower shall not be required for any assignment which occurs at any time when an Event of Default shall have occurred and be continuing. (c) By executing and delivering an Assignment and Acceptance, the assigning Bank thereunder and the Purchasing Bank thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Bank warrants that it is the legal and beneficial owner of the interest being assigned thereby, free and clear of any adverse claim and that its Commitment, and the outstanding balances of its Loans, without giving effect to assignments thereof which have not become effective, are as set forth in such Assignment and Acceptance, (ii) except as set forth in (i) above, such assigning Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the other Loan Documents, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto, or the financial condition of the Borrower or any Subsidiary thereof or the performance or observance by the Borrower or any Subsidiary thereof of any of its or their obligations under this Agreement or the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto; (iii) such Purchasing Bank represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such Purchasing Bank confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements delivered pursuant to Section 5.1 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such Purchasing Bank will independently and without reliance upon the Agent, such assigning Bank or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents; (vi) such Purchasing Bank appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to the Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto; and (vii) such Purchasing Bank agrees that it will perform in accordance with their terms all the obligations which by the terms of this Agreement and the other Loan Documents are required to be performed by it as a Bank including, if it is organized under the laws of a jurisdiction outside the United States, its obligation pursuant to Section 2.17 to deliver the forms prescribed by the Internal Revenue Service of the United States certifying as to the Purchasing Bank's exemption from United States withholding taxes with respect to all payments to be made to the Purchasing Bank under this Agreement. 48 49 (d) The Agent shall maintain at its offices in Philadelphia, Pennsylvania a copy of each Assignment and Acceptance and the names and addresses of the Banks, and the Commitments of, and principal amount of the Loans owing to, each Bank pursuant to the terms hereof from time to time. Such information maintained by the Agent shall be conclusive in the absence of manifest error and the Borrower, the Agent and the Banks may treat each Person whose name is recorded pursuant to the terms hereof as a Bank hereunder for all purposes of this Agreement. (e) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Bank and a Purchasing Bank (and in the case of a Purchasing Bank that is not then a Bank or an Affiliate thereof, by the Borrower and the Agent) together with the Note or Notes subject to such assignment and the processing and recordation fee referred to in paragraph (b) above, the Agent shall promptly (i) accept such Assignment and Acceptance, (ii) record the information contained therein and (iii) give notice thereof to the Banks. Within five Business Days after receipt of notice, the Borrower, at its own expense, shall execute and deliver to the Agent, in exchange for the surrender of the original Note(s) (A) with respect to the assignment of Loans of any Bank, a new Note to the order of such Purchasing Bank in an amount equal to the amount of each applicable commitment assumed and (B) if the assigning Bank has retained a Commitment, a new Note to the order of such assignor in the amount equal to the Commitment retained by it. Such new Note shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note; such new Note shall be dated the date of the surrendered Note which it replaces and shall otherwise be in substantially the form of Exhibit A hereto. Canceled Notes shall be returned to the Borrower. (f) Each Bank may without the consent of the Borrower or the Agent sell participations to one or more banks or other entities (each a "Participant") in any Loan owing to such Bank, any Note held by such Bank, any Commitment of such Bank or any other interest of such Bank hereunder and under the other Loan Documents, provided, however, that (i) such Bank's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Bank shall remain the holder of any such Note for all purposes under this Agreement and the other Loan Documents, (iv) the Borrower, the Banks and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement and the other Loan Documents, (v) in any proceeding under the Bankruptcy Code such Bank shall be, to the extent permitted by law, the sole representative with respect to the obligations held in the name of such Bank, whether for its own account or for the account of any Participant, (vi) such Bank shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of this Agreement or the Note or Notes held by such Bank or any other Loan Document, other than any such amendment, modification or waiver with respect to any Loan or Commitment in which such Participant has an interest that forgives principal, interest or fees or reduces the interest rate or fees payable with respect to any such Loan or Commitment, postpones any date fixed for any regularly scheduled payment of principal of, or interest or fees on, any such Loan or releases any guarantor of such Loan other than as provided in Section 6.4 hereof. (g) If amounts outstanding under this Agreement and the Notes are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement and any Note to the same extent as if the amount of its participating interest were owing directly to it as a Bank under this Agreement or any Note, provided that in purchasing such participation such Participant shall be deemed to have agreed to share with the Banks the proceeds thereof as provided in Section 9.8. The Borrower also agrees that each Participant shall be entitled to the benefits of Sections 2.16, 2.17, 2.18, 2.19, 5.8(c) and 9.5 with respect to its participation in the Commitments and the Loans outstanding from time to time; provided, that no Participant shall be entitled to receive any greater amount pursuant to such Sections than the assigning Bank would have been entitled to receive in respect of the amount of the participation transferred by such assigning Bank to such Participant had no such transfer occurred. (h) If any Participant of a Bank is organized under the laws of any jurisdiction other than the United States or any state thereof, the assigning Bank, concurrently with the sale of a participating interest to such Participant, shall cause such Participant (i) to represent to the assigning Bank (for the benefit of the assigning Bank, the other Banks, the Agent and the Borrower) that under applicable law and treaties no taxes will be required to be withheld by the Agent, the Borrower or the assigning Bank with respect to any payments to be made to such Participant in respect of its participation in the Loans and (ii) to agree (for the benefit of the assigning Bank, the other Banks, the Agent and the Borrower) that it will deliver the tax forms and other documents required to be delivered pursuant to subsection 2.17(f) and 49 50 comply from time to time with all applicable U.S. laws and regulations with respect to withholding tax exemptions. (i) Any Bank may at any time assign all or any portion of its rights under this Agreement and the Notes issued to it to a Federal Reserve Bank; provided that no such assignment shall release a Bank from any of its obligations hereunder. 9.7 Disclosure of Information. Unless otherwise consented to by the Borrower in writing, each of the Banks and the Agent agrees to use reasonable precautions to keep confidential, in accordance with its customary procedures for handling confidential information of the same nature and in accordance with safe and sound banking practices, any non-public information supplied to it by the Borrower pursuant to this Agreement; provided that nothing herein shall limit the disclosure of any such information (a) to the extent required by statute, rule, regulation or judicial process, (b) to counsel for any Bank or the Agent, (c) to bank examiners, auditors or accountants, (d) to the Agent or any other Bank, (e) in connection with any litigation to which any one or more of the Banks or the Agent is a party (but only to the extent the Agent or such Bank reasonably deems necessary to protect its interests) and (f) to any Participant or Purchasing Bank (or prospective Participant or Purchasing Bank) so long as such Participant or Purchasing Bank (or prospective Participant or Purchasing Bank) agrees to comply with the requirements of this section. 9.8 Adjustments; Set-off. (a) Except as provided in subsection 2.14(d) with respect to the Loans of a Declining Bank, if any Bank (a "benefitted Bank") shall at any time receive any payment of all or part of its Loans or the Reimbursement Obligations owing to it, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in subsection 7.1(f), or otherwise), in a greater proportion than its Commitment Percentage of any such payment to or collateral received by any other Bank, if any, in respect of such other Bank's Loans or the Reimbursement Obligations owing to it, or interest thereon, such benefitted Bank shall purchase for cash from the other Banks such portion of each such other Bank's Loans owing to it, or shall provide such other Banks with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such benefitted Bank to share the excess payment or benefits of such collateral or proceeds ratably with each of the Banks; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such benefitted Bank, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest unless the benefitted Bank is required to pay interest thereon, in which case each Bank returning funds to the benefitted Bank shall pay its pro rata share of such interest. The Borrower agrees that each Bank so purchasing a portion of another Bank's Loans may exercise all rights of payment (including, without limitation, rights of set-off) with respect to such portion as fully as if such Bank were the direct holder of such portion. (b) In addition to any rights and remedies of the Banks provided by law, upon the occurrence and during the continuance of an Event of Default, each Bank and affiliate thereof shall have the right, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by the Borrower hereunder or under the Notes (whether at the stated maturity, by acceleration or otherwise) to set-off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Bank or affiliate to or for the credit or the account of the Borrower. Each Bank agrees promptly to notify the Borrower and the Agent after any such set-off and application made by such Bank or its affiliate, provided that the failure to give such notice shall not affect the validity of such set-off and application. 9.9 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with the Borrower, on behalf of the Borrower, and each of the Banks. 9.10 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not 50 51 invalidate or render unenforceable such provision in any other jurisdiction. 9.11 Integration. This Agreement and the other Loan Documents represent the agreement of the parties hereto with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Agent or any Bank relative to the subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. 9.12 GOVERNING LAW. THIS AGREEMENT AND THE NOTES AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE COMMONWEALTH OF PENNSYLVANIA WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. 9.13 Submission To Jurisdiction; Waivers. The Borrower hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement or the Notes, or for recognition and enforcement of any judgement in respect thereof, to the non-exclusive general jurisdiction of the Courts of the Commonwealth of Pennsylvania, the courts of the United States of America for the Eastern District of Pennsylvania, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Borrower at its address set forth in Section 9.2 or at such other address of which the Agent shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, and without limiting the provisions of Section 5.8(c), each of the Agent and the Banks waives, any right it may have to claim or recover in any legal action or proceeding referred to in this Section any special, exemplary, punitive or consequential damages. 9.14 Acknowledgments. The Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement, the Notes and the other Loan Documents; (b) neither the Agent nor any Bank has any fiduciary relationship to the Borrower and the relationship hereunder between the Agent and Banks, on the one hand, and the Borrower, on the other hand, is solely that of debtor and creditor; and (c) no joint venture exists among the Banks or among the Borrower and the Banks. 9.15 No Right of Contribution. On and after the occurrence of an Event of Default hereunder, the Borrower shall not seek or be entitled to any reimbursement from any Subsidiary, or be subrogated to any rights of the Banks against the Subsidiaries, in respect of any payments made pursuant to the Loan Documents, until all amounts owing to the Banks hereunder and under the Notes are paid in full. 9.16 WAIVERS OF JURY TRIAL. EACH OF THE BORROWER, THE AGENT AND THE 51 52 BANKS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT, THE NOTES OR ANY OTHER LOAN DOCUMENT AND FOR ANY MANDATORY COUNTERCLAIM THEREIN. 52 53 IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed this Agreement as of the day and year first above written. KULICKE AND SOFFA INDUSTRIES, INC. By: ________________________________ Clifford G. Sprague Senior Vice President/CFO PNC BANK, NATIONAL ASSOCIATION, as a Bank and as Agent By:__________________________________ Forrest B. Patterson, Jr. Vice President 53 54 ABN AMRO BANK N.V., as a Bank By:__________________________________ Name: Title: COMERICA BANK - CALIFORNIA, as a Bank By:__________________________________ Name: Title: 54 55 EXHIBITS AND SCHEDULES TO CREDIT AGREEMENT The following Exhibits are attached hereto: EXHIBIT D Form of Pledge Agreement - Executed by Kulicke & Soffa Industries Inc. (pledging all shares of Kulicke & Soffa Investments, Inc.) and Kulicke & Soffa Foreign Investments, Inc. (pledging 65% of the shares of Kulicke & Soffa Pte. Ltd.) EXHIBIT E Form of Guaranty - Executed by each domestic subsidiary. 2. The following Exhibits and Schedules are not attached but a copy will be furnished to the Commission upon request. SCHEDULES SCHEDULE I Bank and Commitment Information SCHEDULE 3.6 Litigation SCHEDULE 3.13 Environmental Matters SCHEDULE 3.16 Subsidiaries SCHEDULE 6.3 Fundamental Changes SCHEDULE 6.6 Dividend Restrictions EXHIBITS - -------- EXHIBIT A Form of Note EXHIBIT B Form of Assignment and Acceptance Agreement EXHIBIT C Form of Notice of Borrowing EXHIBIT F Form of Opinion of Counsel 56 EXHIBIT D PLEDGE AGREEMENT This Pledge Agreement, dated as of December 21, 2000, made by (the "Pledgor" or "Borrower"), in favor of PNC BANK, NATIONAL ASSOCIATION, as agent (in such capacity, the "Agent") for the banks and other financial institutions (collectively, the "Banks") parties to the Credit Agreement (as defined below) and the other holders of Obligations (as defined below). W I T N E S S E T H : - - - - - - - - - - WHEREAS, the Borrower, the Banks and the Agent have entered into a Credit Agreement, dated as of the date hereof (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"); WHEREAS, pursuant to the provisions of the Credit Agreement and upon the terms and subject to the conditions set forth therein, the Banks have severally agreed to make certain loans to the Borrower to be evidenced by the notes issued by the Borrower thereunder; WHEREAS, the Pledgor is the legal and beneficial owner of the shares of Capital Stock of the entities described on Schedule I hereto (each an "Issuer"); and WHEREAS, it is a condition precedent to the obligation of the Banks to make their respective loans to the Borrower under the Credit Agreement that the Pledgor shall have executed and delivered this Pledge Agreement to the Agent for the ratable benefit of the holders of the Obligations. NOW, THEREFORE, in consideration of the premises and to induce the Agent and the Banks to make their respective loans to the Borrower under the Credit Agreement, the Pledgor hereby agrees with the Agent, for the ratable benefit of the holders of the Obligations, as follows: Defined Terms. Unless otherwise defined herein, terms which are defined in the Credit Agreement and used herein are so used as so defined, and the following terms shall have the following meanings: "Code" means the Uniform Commercial Code from time to time in effect in the Commonwealth of Pennsylvania. "Collateral" means the Pledged Stock and all Proceeds. "Obligations" shall mean the unpaid principal amount of, and interest on (including, without limitation, interest accruing after the maturity of the Loans and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Notes and all other obligations and liabilities of the Borrower to the Agent or to the Banks, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, the Credit Agreement, the Notes, the Letters of Credit, this Pledge Agreement, the Guaranties, the other Loan Documents, and any other document made, delivered or given in connection therewith or herewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all fees and disbursements of counsel to the Agent or to the Banks that are required to be paid by the Borrower pursuant to the terms of the Credit Agreement) or otherwise. "Pledge Agreement" means this Pledge Agreement, as amended, supplemented or otherwise modified from time to time. 57 "Pledged Certificates" means any certificates representing Pledged Stock, together with all options or rights of any nature whatsoever that may be issued or granted to the Pledgor while this Pledge Agreement is in effect. "Pledged Stock" means the Capital Stock of the Issuers owned by the Pledgor and described on Schedule I hereto, together with all certificates (including Pledged Certificates), options or rights of any nature whatsoever that may be issued or granted to the Pledgor while this Pledge Agreement is in effect. "Proceeds" means all "proceeds" as such term is defined in Section 9306(a) of the Code on the date hereof and, in any event, shall include, without limitation, all distributions or other income from the Pledged Stock, collections thereon or distributions with respect thereto. 2. Pledge; Grant of Security Interest. The Pledgor hereby grants to the Agent, for the ratable benefit of the holders of the Obligations, a first priority security interest in the Collateral, as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations. 3. Stock Powers. Concurrently with the delivery to the Agent of each Pledged Certificate, the Pledgor shall deliver an undated stock power covering such Pledged Certificate, duly executed in blank by such Pledgor, with, if the Agent requests, signature guaranteed. 4. Representations and Warranties. The Pledgor hereby represents and warrants that: (a) the Pledgor is the record and beneficial owner of the Pledged Stock set forth on Schedule I hereto; (b) all the Pledged Stock has been duly and validly issued and is fully paid and nonassessable; (c) the Pledgor has good and marketable title to the Pledged Stock set forth on Schedule I hereto, free of any and all Liens or options in favor of, or claims of, any other Person, except the Lien created by this Pledge Agreement; (d) the chief executive office, chief place of business and state of incorporation of the Pledgor is set forth on Schedule II hereto; and (e) upon the delivery of the Pledged Certificates, the Lien granted pursuant to this Pledge Agreement will constitute a valid, perfected first priority Lien on the Pledged Stock set forth on Schedule I hereto, enforceable as such against all creditors of the Pledgor and any Persons purporting to purchase any Pledged Stock from the Pledgor. 5. Covenants. The Pledgor covenants and agrees with the Agent and the Banks that from and after the date of this Pledge Agreement until the Obligations are paid in full and the Commitments are terminated: (a) If the Pledgor shall become entitled to receive or shall receive any certificate (including, without limitation, any certificate representing a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization or any certificate issued in the event that Pledged Stock shall come to be represented by certificates), option or rights, whether in addition to, in substitution of, as a conversion of, or in exchange for any Pledged Stock, or otherwise in respect thereof, except to the extent it would cause more than 65% of the Capital Stock of any Issuer to be pledged to the Agent for the benefit of the Banks, the Pledgor shall accept the same as the agent of the holders of the Obligations, hold the same in trust for the holders of the Obligations and deliver the same to the Agent in the exact form received, duly indorsed by the Pledgor to the Agent, if required, together with an undated power covering such certificate duly executed in blank by the Pledgor and with, if the Agent so requests, signature guaranteed, to be held by the Agent, subject to the terms hereof, as additional collateral security for the Obligations. Any sums paid upon or in respect of any Pledged Stock upon the 58 liquidation or dissolution of any Issuer shall be paid over to the Agent to be held by it hereunder as additional collateral security for the Obligations, and in case any distribution of capital shall be made on or in respect of any Pledged Stock or any property shall be distributed upon or with respect to any Pledged Stock pursuant to the recapitalization or reclassification of the capital of any Issuer or pursuant to the reorganization thereof, except to the extent otherwise limited in this Pledge Agreement, the property so distributed shall be delivered to the Agent to be held by it hereunder as additional collateral security for the Obligations. If any sums of money or property so paid or distributed in respect of any Pledged Stock shall be received by the Pledgor, the Pledgor shall, until such money or property is paid or delivered to the Agent, hold such money or property in trust for the holders of the Obligations, segregated from other funds of the Pledgor, as additional collateral security for the Obligations. (b) Without the prior written consent of the Agent which shall not unreasonably be withheld, the Pledgor will not (i) vote to enable, or take any other action to permit, any Issuer to issue any capital stock or other equity securities of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any capital stock or other equity securities of any nature of such Issuer, (ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Collateral, or (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Collateral or any of the other Capital Stock of any Issuer or any of its wholly-owned subsidiaries (together, the "Subsidiaries") or on any of the assets or property now owned or hereafter acquired by any Issuer or any of the Subsidiaries, except for the Lien provided for by this Pledge Agreement. The Pledgor will defend the right, title and interest of the Agent for the benefit of the holders of the Obligations in and to the Pledged Stock owned by the Pledgor against the claims and demands of all Persons whomsoever. (c) At any time and from time to time, upon the written request of the Agent, and at the sole expense of a Pledgor, the Pledgor will promptly and duly execute and deliver such further instruments and documents and take such further actions as the Agent may reasonably request for the purposes of obtaining or preserving the full benefits of this Pledge Agreement and of the rights and powers herein granted. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note, other instrument or chattel paper, such note, instrument or chattel paper shall be immediately delivered to the Agent, duly endorsed in a manner satisfactory to the Agent, to be held as Collateral pursuant to this Pledge Agreement. (d) The Pledgor agrees to pay, and to save the Agent and the Banks harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Pledged Stock owned by the Pledgor or in connection with any of the transactions contemplated by this Pledge Agreement including the granting of security hereunder or the exercising of any rights or remedies hereunder. (e) Unless it shall have given the Agent at least 30 days' prior written notice thereof, the Pledgor will not (i) change the location of its chief executive office or chief place of business, (ii) change its name, identity or organizational structure to such an extent that any financing statement filed by the Agent in connection with this Pledge Agreement would become seriously misleading or (iii) change the state of its incorporation. 6. Cash Distributions; Voting Rights. Unless an Event of Default shall have occurred and be continuing and the Agent shall have given notice to the Pledgor of the Agent's intent to exercise its rights pursuant to Section 8 below, and notwithstanding anything in Section 5(a) to the contrary, the Pledgor shall be permitted to receive all distributions (other than distributions paid in additional Capital Stock of any Issuer which shall be delivered to the Agent to the extent provided herein) and to exercise all voting and shareholder rights with respect to the Pledged Stock; provided, however, that no vote shall be cast or shareholder right exercised or other action taken which, in the Agent's reasonable judgment, would impair the Collateral or which would be inconsistent with or result in any violation of any provision of the Credit Agreement, the Notes or any of the other Loan Documents. 7. Rights of the Agent. (a) If an Event of Default shall occur and be continuing and the Agent shall give notice of its intent to exercise its rights hereunder to the Pledgor, (i) the Agent shall have the right to receive any and all cash distributions 59 paid in respect of the Pledged Stock and make application thereof to the Obligations in such order as the Agent may determine, and (ii) all Pledged Stock shall, at the request of the Agent, be registered in the name of the Agent or its nominee, and the Agent, or its nominee may thereafter exercise (A) all voting, shareholder and other rights pertaining to the Pledged Stock at any meeting of shareholders of any Issuer or otherwise and (B) any and all rights of conversion, exchange, subscription and any other rights, privileges or options pertaining to the Pledged Stock as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Stock upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the structure of any Issuer, or upon the exercise by the Pledgor or the Agent of any right, privilege or option pertaining to the Pledged Stock, and in connection therewith, the right to deposit and deliver any and all of the Pledged Stock with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as it may determine), all without liability except to account for property actually received by it and except for its gross negligence or willful misconduct, but the Agent shall have no duty to the Pledgor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing. (b) The rights of the Agent and the other holders of the Obligations hereunder shall not be conditioned or contingent upon the pursuit by it or them of any right or remedy against any other Person which may be or become liable in respect of all or any part of the Obligations or against any collateral security therefor, guarantee therefor or right of offset with respect thereto. Neither the Agent nor any other holder of the Obligations shall be liable for any failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so, nor shall the Agent be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. (c) The Agent may execute in its own name or on behalf of the Pledgor such UCC financing statement forms and similar instruments as the Agent may from time to time deem reasonably necessary or desirable to protect and perfect its security interest in the Collateral if the Pledgor has failed to do so within five days after written request by the Agent. (d) At any time and from time to time, upon the written request of the Agent, and at the sole expense of the Pledgor, the Pledgor shall promptly and duly execute and deliver such further instruments and documents and take such further action as the Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Pledge Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the Liens created hereby. The Pledgor also hereby authorizes the Agent to file any such financing or continuation statements without the signature of the Pledgor to the extent permitted by applicable law. A carbon, photographic, facsimile or other reproduction of this Pledge Agreement shall be sufficient as a financing statement for filing in any jurisdiction. 8. Remedies. If an Event of Default shall have occurred and be continuing and all applicable notice and cure periods shall have expired, the Agent, on behalf of the holders of the Obligations, may exercise, in addition to all other rights and remedies granted to it in this Pledge Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, the Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Pledgor, any Issuer or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign or give option or options to purchase or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, in the over-the-counter market, at any exchange, broker's board or office of the Agent or any Bank or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. Each holder of any Obligation shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Pledgor, which right or equity is hereby waived or released. The Agent shall apply any Proceeds from time to time held by it and the net proceeds of any such collection, recovery, receipt, appropriation, realization 60 or sale, after deducting all reasonable costs and expenses of every kind incurred in respect thereof or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Agent hereunder, including, without limitation, reasonable attorneys' fees and disbursements of counsel to the Agent, to the payment in whole or in part of the Obligations, in such order as the Agent may elect, and only after such application and after the payment by the Agent of any other amount required by any provision of law, including, without limitation, Section 9504(a)(3) of the Code, need the Agent account for the surplus, if any, to the Pledgor. To the extent permitted by applicable law, the Pledgor waives all claims, damages and demands it may acquire against any holder of any Obligation arising out of the lawful exercise by it of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 Business Days before such sale or other disposition. The Borrower shall remain liable for any deficiency if the proceeds of any sale or other disposition of Collateral are insufficient to pay the Obligations and the fees and disbursements of any attorneys employed by any holder of any Obligations to collect such deficiency. The Pledgor further waives and agrees not to assert any rights or privileges which it may acquire under Section 9112 of the Code. 9. Registration Rights; Private Sales. (a) The Pledgor recognizes that the Agent may be unable to effect a public sale of any or all the Pledged Stock, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, and may resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. The Pledgor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Agent shall be under no obligation to delay a sale of any of the Pledged Stock for the period of time necessary to permit any Issuer to register such securities for public sale under the Securities Act, or under applicable state or other securities laws, even if such Issuer would agree to do so. (b) The Pledgor further agrees to use its best efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Pledged Stock pursuant to this Section 9 valid and binding and in compliance with any and all other applicable Requirements of Law. The Pledgor further agrees that a breach of any of the covenants contained in this Section 9 will cause irreparable injury to the Agent and the Banks, that the Agent and the Banks have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 9 shall be specifically enforceable against the Pledgor, and the Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants. 10. Limitation on Duties Regarding Collateral. The Agent's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9207 of the Code or otherwise, shall be to deal with it in the same manner as the Agent deals with similar securities and property for its own account. Neither any holder of any Obligation nor any of its respective directors, officers, employees or agents shall be liable for any failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or otherwise. 11. Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. 12. Severability. Any provision of this Pledge Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provisions in any other jurisdiction. 61 13. Section Headings. The section headings used in this Pledge Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 14. No Waiver; Cumulative Remedies. No holder of any Obligation shall by any act (except by a written instrument pursuant to Section 15 hereof) be deemed to have waived any right or remedy hereunder or to have acquiesced in any default of any obligation under any Loan Document or in any breach of any of the terms and conditions hereof or thereof. No failure to exercise, nor any delay in exercising, on the part of any holder of any Obligation of any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by any holder of any Obligation of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 15. Waivers and Amendments; Successors and Assigns; Governing Law. None of the terms or provisions of this Pledge Agreement may be amended, supplemented or otherwise modified except by a written instrument executed by the Pledgor and the Agent, provided that any provision of this Pledge Agreement may be waived by the Agent in a letter or agreement executed by the Agent or by facsimile transmission from the Agent. This Pledge Agreement shall be binding upon the successors and assigns of the Pledgor and shall inure to the benefit of the holders of the Obligations and their respective successors and assigns. THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE SUBSTANTIVE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. 16. Notices. All notices hereunder to the Agent, the Pledgor or any Issuer to be effective shall be in writing (including by facsimile), and, unless otherwise expressly provided herein, shall be deemed to have been duly given when delivered or sent in the manner and to the respective addresses as provided in the Credit Agreement or, in the case of each Issuer, to its address set forth on Schedule II hereto. 17. Irrevocable Authorization and Instruction. The Pledgor hereby authorizes and instructs each Issuer to comply with any instruction received by it from the Agent in writing that (a) states that an Event of Default has occurred and is continuing and (b) is otherwise in accordance with the terms of this Pledge Agreement, without any other or further instructions from the Pledgor, and the Pledgor agrees that each Issuer shall be fully protected in so complying. The Pledgor hereby instructs each Issuer to mark its records to reflect the pledge of the Pledged Stock and to take such other action as may be required or customary to effect or evidence the pledge of the Collateral made and intended to be made pursuant to this Pledge Agreement. 18. Authority of Agent. The Pledgor acknowledges that the rights and responsibilities of the Agent under this Pledge Agreement with respect to any action taken by the Agent or the exercise or non-exercise by the Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Pledge Agreement shall, as between the Agent and the Banks, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Agent and the Pledgor, the Agent shall be conclusively presumed to be acting as agent for the holders of the Obligations with full and valid authority so to act or refrain from acting, and neither the Pledgor nor any Issuer shall be under any obligation, or entitlement, to make any inquiry respecting such authority. 19. Submission to Jurisdiction; Waivers. (a) The Pledgor hereby irrevocably and unconditionally: (i) submits for itself and its property in any legal action or proceeding relating to this Pledge Agreement, or for recognition and enforcement of any judgment in respect thereof to the non-exclusive general jurisdiction of the courts of the Commonwealth of Pennsylvania, the courts of the United States of America in the Eastern District of Pennsylvania, and appellate courts from any thereof; 62 (ii) consents that any such action or proceeding may be brought in such courts, and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (iii) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Pledgor at its address set forth in Schedule II hereto or at such other address of which the Agent shall have been notified; (iv) waives and hereby acknowledges that it is estopped from raising any objection based on forum non conveniens, any claim that any of the above-referenced courts lack proper venue or any objection that any of such courts lack personal jurisdiction over it so as to prohibit such courts from adjudicating any issues raised in a complaint filed with such courts against the Pledgor concerning this Pledge Agreement; (v) acknowledges and agrees that the choice of forum contained in this paragraph shall not be deemed to preclude the enforcement of any judgment obtained in any forum or the taking of any action under this Pledge Agreement to enforce the same in any appropriate jurisdiction; (vi) waives, and without limiting the provisions of Section 5.8(c) of the Credit Agreement, the Agent waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this subsection any special, exemplary or punitive or consequential damages; and (vii) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction. (B) THE PLEDGOR HEREBY UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING REFERRED TO IN PARAGRAPH (a) ABOVE AND FOR ANY MANDATORY COUNTERCLAIM THEREIN. 20. Release. This Pledge Agreement and the Pledged Certificates and related instruments delivered to the Agent hereunder shall be released by the Agent upon the earlier of (a) a disposition of Pledged Stock pursuant to the terms of such Section 6.4 of the Credit Agreement, to the extent of such disposition and in accordance with Section 6.4 and (b) the date on which the Obligations are paid in full and the Commitments are terminated. This Pledge Agreement shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Obligations is rescinded or must otherwise be restored or returned by the Agent or any Bank upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for the Borrower or any substantial part of its property, or otherwise, all as though such payments had not been made. 21. Counterparts. This Pledge Agreement may be executed by one or more of the parties to this Pledge Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 63 IN WITNESS WHEREOF, the undersigned have caused this Pledge Agreement to be duly executed and delivered as of the date first above written. By: ________________________________ Clifford G. Sprague Senior Vice President/CFO Agreed as to Section 19(a)(vi) and 20 only: PNC BANK, NATIONAL ASSOCIATION, as Agent By: ______________________________________ Forrest B. Patterson, Jr. Vice President 64 ACKNOWLEDGMENT AND CONSENT The undersigned Issuer referred to in the foregoing Pledge Agreement (the "Issuer") hereby acknowledges receipt of a copy of the Pledge Agreement to which this Acknowledgment and Consent is attached and agrees to be bound thereby and comply with the terms thereof insofar as such terms are applicable to it (including marking its records to reflect the pledge thereunder to the Agent). The Issuer agrees to notify the Agent promptly in writing of the occurrence of any of the events described in Section 5(a) of the Pledge Agreement. The Issuer further agrees that the terms of Section 9(b) of the Pledge Agreement shall apply to it, mutatis mutandis, with respect to all actions that may be required of it under or pursuant to or arising out of Section 9 of the Pledge Agreement. [ISSUER NAME] By: ___________________________________ Name: Title: 65 SCHEDULE I TO PLEDGE AGREEMENT DESCRIPTION OF PLEDGED STOCK
________________________________________________________________________________________________________________________________ PERCENTAGE OF ISSUER TYPE OF SHARES NUMBER OF SHARES OUTSTANDING SHARES ________________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________________________________
66 SCHEDULE II TO PLEDGE AGREEMENT CHIEF EXECUTIVE OFFICE OF PLEDGOR STATE OF INCORPORATION OF PLEDGOR ADDRESS OF ISSUERS 67 EXHIBIT E GUARANTY THIS GUARANTY, dated as of December 21, 2000 (this "Guaranty"), is made by each of the undersigned Subsidiaries of the Borrower (as defined below) (each, a "Guarantor") in favor of PNC Bank, National Association (the "Agent"), as agent for the financial institutions (the "Banks") from time to time parties to the Credit Agreement (as defined below). W I T N E S S E T H : - - - - - - - - - - WHEREAS, Kulicke and Soffa Industries, Inc. (the "Borrower"), the Agent and the Banks have entered into a Credit Agreement, dated as of the date hereof (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"); WHEREAS, each Guarantor is a Domestic Subsidiary of the Borrower and each Guarantor will benefit from the Loans made to the Borrower under the Credit Agreement; and WHEREAS, the Credit Agreement requires that each Guarantor execute a Guaranty in favor of the Agent and the Banks. NOW, THEREFORE, in consideration of the premises and to induce the Banks to make the Loans to the Borrower under the Credit Agreement, each Guarantor and the Agent, intending to be legally bound, hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, terms which are defined in the Credit Agreement and used herein are so used as so defined. As used herein, "Obligations" shall mean the unpaid principal amount of, and interest on (including, without limitation, interest accruing after the maturity of the Loans and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Notes and all other obligations and liabilities of the Borrower to the Agent or to the Banks, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, the Credit Agreement, the Notes, the Letters of Credit, this Guaranty, any Pledge Agreement, the other Loan Documents, and any other document made, delivered or given in connection therewith or herewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all fees and disbursements of counsel to the Agent or to the Banks that are required to be paid by the Borrower pursuant to the terms of the Credit Agreement) or otherwise. 2. Guaranty. Each Guarantor hereby unconditionally and irrevocably, jointly and severally, guaranties to the Agent and the Banks the prompt and complete payment and performance by the Borrower when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations. Each Guarantor further agrees to pay any and all expenses (including, without limitation, all fees and disbursements of counsel) which may be paid or incurred by the Agent and/or any Bank in enforcing, or obtaining advice of counsel in respect of, any of its rights under this Guaranty. Each Guarantor agrees that whenever, at any time or from time to time, it shall make any payment to the Agent or any Bank on account of its liability hereunder, it will notify the Agent in writing that such payment is made under this Guaranty. No payment or payments made by the Borrower or any other Person or received or collected by the Agent or any Bank from the Borrower or any other Person by virtue of any action or proceeding or any set-off or appropriation or application, at any time or from time to time, in reduction of or in payment of the Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of each Guarantor hereunder 68 which shall, notwithstanding any such payment or payments, remain in full force and effect until the Obligations are paid in full, the Commitments are terminated and no Letter of Credit is outstanding. 3. Right of Set-off. Upon the occurrence and during the continuance of any Event of Default, the Agent and each Bank is hereby irrevocably authorized at any time and from time to time without notice to the Guarantors, any such notice being hereby waived by each Guarantor, to set off and appropriate and apply any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Bank to or for the credit or the account of the Guarantors, in such amounts as such Bank may elect, on account of the liabilities of the Guarantors hereunder, as such Bank may elect, whether or not such Bank has made any demand for payment and although such liabilities and claims may be contingent or unmatured. Such Bank shall notify the Guarantors promptly of any such set-off made by it and the application made by it of the proceeds thereof, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Banks under this paragraph are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Banks may have. 4. No Subrogation. Notwithstanding any payment or payments made by any Guarantor hereunder or under any other Loan Document, or any set-off or application of funds of the Guarantor by the Agent or any Bank, the Guarantors shall not be entitled to be subrogated to any of the rights of any Bank against the Borrower or against any collateral security or guaranty or right of offset held by the Agent or any Bank for the payment of the Obligations, nor shall the Guarantors seek any reimbursement or indemnification from the Borrower in respect of payments made by the Guarantors hereunder or thereunder, until all amounts owing to the Agent and the Banks by the Borrower on account of the Obligations are paid in full. If any amount shall be paid to any Guarantor on account of such subrogation rights at any time when all of the Obligations shall not have been paid in full, such amount shall be held by such Guarantor in trust for the Banks segregated from other assets of such Guarantor, and shall forthwith upon receipt by such Guarantor, be turned over to the Agent in the exact form received by such Guarantor (duly indorsed by such Guarantor to the Agent for the benefit of the Banks, if required), to be applied against the Obligations, whether matured or unmatured, in such order as the Agent may determine. 5. Amendments, etc. with respect to the Obligations. Each Guarantor shall remain obligated hereunder notwithstanding that, without any reservation of rights against the Guarantors, and without notice to or further assent by the Guarantors, any demand for payment of any of the Obligations made by any Bank may be rescinded by such Bank, and any of the Obligations continued, and the Obligations, or the liability of any other party upon or for any part thereof, or any collateral security or guaranty therefor or right of offset with respect thereto may from time to time, in whole or in part, be amended, renewed, extended, modified, accelerated, compromised, waived, surrendered or released by the Agent or any Bank, and the Credit Agreement, the Notes, the other Loan Documents and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, as the Agent, on behalf of the Banks, may deem advisable from time to time, and any collateral security, guaranty or right of offset at any time held by any Bank for the payment of the Obligations may be sold, exchanged, waived, surrendered or released. Neither the Agent nor any Bank shall have any obligation to protect, secure, perfect or insure any lien at any time held by it as security for the Obligations or for this Guaranty or any other Loan Document or any property subject thereto. 6. Guaranty Absolute and Unconditional. Each Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by the Agent or any Bank upon this Guaranty or acceptance of this Guaranty; the Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred in reliance upon this Guaranty; and all dealings between the Borrower or the Guarantors, on the one hand, and the Agent and the Banks, on the other, shall likewise be conclusively presumed to have been had or consummated in reliance upon this Guaranty. Each Guarantor waives notice of acceptance of this Guaranty, notice of extensions of credit to the Borrower from time to time, notice of default, due diligence, presentment, notice of dishonor, protest, demand for payment and any defense based upon the Agent's or any Bank's failure to comply with the notice requirements of the applicable version of the Uniform Commercial Code Section 69 9504. This Guaranty shall be construed as a continuing, absolute and unconditional guaranty of payment without regard to (a) the validity or enforceability of the Credit Agreement, any Note, any other Loan Document, any of the Obligations or any collateral security therefor or guaranty or right of offset with respect thereto at any time or from time to time held by or for the benefit of the Bank, (b) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by the Borrower against the Agent or any Bank, or (c) any other circumstance whatsoever (with or without notice to or knowledge of the Borrower or the Guarantors) which constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrower for the Obligations, or of the Guarantors under this Guaranty, in bankruptcy or in any other instance. When the Agent or any Bank is pursuing its rights and remedies hereunder or thereunder against the Guarantors, such Person may, but shall be under no obligation to, pursue such rights and remedies as it may have against the Borrower or any other Person or against any collateral security or guaranty for the Obligations or any right of offset with respect thereto, and any failure by the Agent or any Bank to pursue such other rights or remedies or to collect any payments from the Borrower or any such other Person or to realize upon such collateral security or guaranty or to exercise any such right of offset, or any release of the Borrower or any such other Person or of any such collateral security, guaranty or right of offset, shall not relieve the Guarantors of any liability hereunder or thereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Agent or the Banks against the Guarantors. 7. Reinstatement. This Guaranty shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Obligations is rescinded or must otherwise be restored or returned by the Agent or any Bank upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for the Borrower or any substantial part of its property, or otherwise, all as though such payments had not been made. 8. Payments. Each Guarantor hereby agrees that the Obligations will be paid to the order of the Agent on behalf of the Banks without set-off or counterclaim in Dollars at the office of the Agent set forth in the Notes. 9. Severability. Any provision of this Guaranty which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10. Paragraph Headings. The paragraph headings used in this Guaranty are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 11. No Waiver; Cumulative Remedies. Neither the Agent nor any Bank shall by any act (except by a written instrument pursuant to paragraph 12 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Agent or any Bank, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Agent or any Bank of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Agent or any Bank would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 12. Waivers and Amendments; Successors and Assigns; Governing Law. None of the terms or provisions of this Guaranty may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the Agent on behalf of the Banks. This Guaranty shall be binding upon the successors and assigns of the Guarantors and shall inure to the benefit of the Agent and the Banks and their successors and assigns. 70 THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE SUBSTANTIVE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. 13. Notices. All notices, demands, requests, consents, approvals and other communications required or permitted hereunder must be in writing and will be effective upon receipt. Such notices and other communications may be hand-delivered, sent by facsimile transmission with confirmation of delivery and a copy sent by first-class mail, or sent by nationally recognized overnight courier service, to the addresses for the Bank and the applicable Guarantor set forth, with respect to the Bank, in the Note and, with respect to the Guarantors, in the signature pages hereto or to such other address as one may give to the other in writing for such purpose. 14. Authority of Agent. Each Guarantor acknowledges that the rights and responsibilities of the Agent under this Guaranty with respect to any action taken by the Agent or the exercise or non-exercise by the Agent of any option, right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Guaranty shall, as between the Agent and the Banks, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Agent and the Guarantors, the Agent shall be conclusively presumed to be acting as agent for the Banks with full and valid authority so to act or refrain from acting, and the Guarantors shall not be under any obligation, or entitlement, to make any inquiry respecting such authority. 15. Indemnity. Each Guarantor agrees to indemnify each of the Agent and each Bank, its directors, officers and employees and each legal entity, if any, who controls any of them (the "Indemnified Parties") and to hold each Indemnified Party harmless from and against any and all claims, damages, losses, liabilities and expenses (including all fees and charges of internal or external counsel with whom any Indemnified Party may consult and all expenses of litigation or preparation therefor) which any Indemnified Party may incur or which may be asserted against any Indemnified Party as a result of the execution of or performance under this Guaranty; provided, however, that the foregoing indemnity agreement shall not apply to claims, damages, losses, liabilities and expenses attributable to an Indemnified Party's gross negligence or willful misconduct. The indemnity agreement contained in this Paragraph shall survive the termination of this Guaranty. Each Guarantor may participate at its expense in the defense of any such claim. 16. Submission to Jurisdiction; Waivers. (a) Each Guarantor hereby irrevocably and unconditionally: (i) submits for itself and its property in any legal action or proceeding relating to this Guaranty, or for recognition and enforcement of any judgment in respect thereof to the non-exclusive general jurisdiction of the courts of the Commonwealth of Pennsylvania, the courts of the United States of America for the Eastern District of Pennsylvania, and appellate courts from any thereof; (ii) consents that any such action or proceeding may be brought in such courts, and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (iii) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the applicable Guarantor at its address set forth below or at such other address of which the Agent shall have been notified; (iv) waives and hereby acknowledges that it is estopped from raising any objection based on forum non conveniens, any claim that any of the above-referenced courts lack proper venue or any objection that any of such courts lack personal jurisdiction over it so as to prohibit such courts from adjudicating any issues raised in a complaint filed with such courts against the applicable Guarantor concerning this Guaranty; 71 (v) acknowledges and agrees that the choice of forum contained in this paragraph shall not be deemed to preclude the enforcement of any judgment obtained in any forum or the taking of any action under this Guaranty to enforce the same in any appropriate jurisdiction; (vi) waives, and without limiting the provisions of Section 5.8(c) of the Credit Agreement, the Agent waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this subsection any special, exemplary or punitive or consequential damages; and (vii) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction. (b) EACH GUARANTOR, AND BY ITS ACCEPTANCE HEREOF THE AGENT, HEREBY UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING REFERRED TO IN PARAGRAPH (a) ABOVE AND ANY MANDATORY COUNTERCLAIM THEREIN. EACH GUARANTOR ACKNOWLEDGES THAT IT HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS GUARANTY, INCLUDING THE WAIVER OF JURY TRIAL, AND HAS BEEN ADVISED BY COUNSEL AS NECESSARY OR APPROPRIATE. IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be duly executed and delivered as of the date first above written. [GUARANTOR] Address: ______________________ ______________________ Attn: Telephone: ___________ Fax: _________________ By:_________________________________ Name: Title: [GUARANTOR] Address: ______________________ ______________________ Attn: Telephone: ___________ Fax: _________________ By:_________________________________ Name: Title: [GUARANTOR] Address: ______________________ ______________________ Attn: Telephone: ___________ Fax: _________________ By:_________________________________ Name: Title: 72 [GUARANTOR] Address: ______________________ ______________________ Attn: Telephone: ___________ Fax: _________________ By:_________________________________ Name: Title: Agreed as to Section 16(a)(vi) only: PNC BANK, NATIONAL ASSOCIATION, as Agent By: _______________________________ Forrest B. Patterson, Jr. Vice President EX-21 3 w43640ex21.txt SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21 SUBSIDIARIES OF THE COMPANY (1)
Name Jurisdiction of Incorporation ---- ----------------------------- Kulicke and Soffa AG Switzerland Kulicke & Soffa (Asia) Limited Hong Kong Kulicke and Soffa (Japan) Ltd. Japan and Delaware Kulicke and Soffa (Israel) Ltd. Israel Kulicke and Soffa Investments, Inc. Delaware Micro-Swiss Limited Israel Kulicke and Soffa Leasing, Inc. Delaware Kulicke & Soffa Singapore, Inc. Delaware Kulicke and Soffa Pte Singapore Kulicke & Soffa Export, Inc. Barbados AFWH Sub, Inc. (Formerly Circle "S" Industries, Inc.) Alabama American Fine Wire Corporation Alabama American Fine Wire, Limited Cayman Islands Dr. Muller Feindraht AG Switzerland Semitec (2) California Flip Chip Technologies, LLC (2) Delaware Cerprobe Corporation Delaware Probe Technology Corporation Delaware
(1) Certain subsidiaries are omitted; however, such subsidiaries, even if combined into one subsidiary, would not constitute a "significant subsidiary" within the meaning of Regulation S-X. (2) The shares of Semitec and the Company's equity interest in Flip Chip Technologies, LLC and Advanced Polymer Solutions, LLC are held by Kulicke and Soffa Holdings, Inc., a Delaware corporation. EX-23.1 4 w43640ex23-1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-30540) and Forms S-8 (Nos. 2-68488, 33-12453, 33-13577, 33-30884, 33-39265, 333-0567, 333-69445, 333-69441, 333-37276 and 333-37278) of Kulicke and Soffa Industries, Inc. of our report dated November 16, 2000, except as to Note 15 which is as of November 30, 2000 and December 8, 2000, and Note 16, which is as of December 22, 2000, relating to the financial statements and financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania December 27, 2000 EX-23.2 5 w43640ex23-2.txt CONSENT OF KPMG LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Kulicke and Soffa Industries, Inc.: We consent to the inclusion of our report dated February 15, 2000, with respect to the consolidated balance sheets of Cerprobe Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1999, which report appears in Form 10-K of Kulicke and Soffa Industries, Inc. dated December 27, 2000. Phoenix, Arizona December 27, 2000 EX-27 6 w43640ex27.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE KULICKE & SOFFA INDUSTRIES, INC. FORM 10K FOR THE YEAR ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-2000 OCT-01-1999 SEP-30-2000 211,489 105,130 192,840 4,355 74,034 588,886 175,263 (91,396) 722,852 126,198 175,000 0 0 189,766 215,576 722,852 899,273 899,273 573,177 573,177 187,637 0 7,699 141,957 40,149 103,245 0 0 0 103,245 2.15 1.90 A TWO-FOR-ONE STOCK SPLIT OCCURRED EFFECTIVE JULY 31, 2000 FOR SHAREHOLDERS OF RECORD AT THE CLOSE OF BUSINESS ON JULY 17, 2000. PRIOR FINANCIAL DATA SCHEDULES HAVE NOT BEEN RESTATED TO REFLECT THE TWO-FOR-ONE STOCK SPLIT.
EX-99.(I) 7 w43640ex99-i.txt UNAUDITED PRO FORMA... 1 EXHIBIT 99(i) KULICKE AND SOFFA INDUSTRIES, INC. AND CERPROBE CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS AND BALANCE SHEET On November 30, 2000, the Company completed its tender offer for 100% of the outstanding shares of Cerprobe Corporation ("Cerprobe") for $20 per share. The total purchase price, including transaction costs and the repayment of debt, of Cerprobe was approximately $225.0 million, payable in cash. On December 8, 2000 the Company purchased all the outstanding shares of Probe Technology Corporation ("Probe Tech") for approximately $65.0 million, including transaction costs, in cash. Both Cerprobe and Probe Tech design and manufacture semiconductor test interconnect solutions. The acquisitions will be recorded using the purchase method of accounting and accordingly the purchase price will be allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their fair values on the acquisition dates, as determined by management. The Company received a waiver of a bank covenant under its bank revolving credit facility, which limited the amount the Company could spend on acquisitions, in order to complete the Cerprobe and Probe Tech acquisitions. The Company borrowed $55.0 million under its bank revolving credit facility to partially fund the purchase of Probe Tech. These two companies will be merged together to create a test division and will be disclosed as a separate business segment for financial reporting purposes. The following unaudited pro forma combined financial information was derived from the historical consolidated financial statements of the Company and Cerprobe. The Probe Tech historical financial results are not included in the pro forma information since the Probe Tech acquisition does not qualify as a significant acquisition. The pro forma results of operations combine the Company's audited results with Cerprobe's results for the twelve months ended September 30, 2000, and give effect to the preliminary allocation of the purchase price, which may subsequently change. The following unaudited pro forma combined results are presented for illustrative purposes only and are not necessarily indicative of the operating results that would have occurred if the transaction had been consummated at the date indicated, nor is it necessarily indicative of future operating results of the combined businesses. 2 Pro forma operating results for the twelve months ended September 30, 2000 assuming the acquisition of Cerprobe was consummated on October 1, 1999 appears below:
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS TWELVE MONTHS ENDED SEPTEMBER 30, 2000 ---------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) KULICKE PROFORMA PROFORMA AND SOFFA CERPROBE ADJUSTMENTS COMBINED ----------- ----------- ----------- ----------- Net sales $ 899,273 $ 110,536 $ 1,009,809 Costs of goods sold 573,177 63,222 636,399 ----------- ----------- ----------- Gross profit 326,096 47,314 373,410 Selling, general and administrative 132,674 29,706 162,380 Research and development, net 50,135 5,208 55,343 Goodwill amortization 3,505 3,219 $ 10,131(A) 16,855 In-process research and development -- 8,815 8,815 Resizing costs (2,548) -- (2,548) Asset impairment 3,871 -- 3,871 ----------- ----------- ----------- ----------- Income from operations 138,459 366 (10,131) 128,694 Interest, net 4,719 (1,287) (13,703)(B) (10,271) Other, net -- (81) (81) Equity in loss of joint venture (1,221) -- (1,221) ----------- ----------- ----------- ----------- Income (loss) before taxes 141,957 (1,002) (23,834) 117,121 Provision for income tax 40,149 2,270 (4,796)(C) 37,623 ----------- ----------- ----------- ----------- Income (loss) before minority interest 101,808 (3,272) (19,038) 79,498 Minority interest in net loss of subsidiary 1,437 (1,055) -- 382 ----------- ----------- ----------- ----------- Net income (loss) $ 103,245 $ (4,327) $ (19,038) $ 79,880 =========== =========== =========== =========== Net income (loss) per share: Basic $ 2.15 $ 1.67 Diluted $ 1.90 $ 1.49 Weighted average shares outstanding: Basic 47,932 47,932 Diluted 56,496 56,496
3 A pro forma condensed balance sheet at September 30, 2000 assuming the acquisition of Cerprobe was consummated on that date appears below:
UNAUDITED PRO FORMA COMBINED BALANCE SHEET AT SEPTEMBER 30, 2000 ---------------------------------------------------- (IN THOUSANDS) PRO FORMA K&S CERPROBE PRO FORMA COMBINED 9/30/2000 9/30/2000 ADJUSTMENTS 9/30/2000 --------- --------- ----------- --------- ASSETS: Cash and cash equivalents $211,489 $ 4,312 $ (119,870)(D) $ 95,931 Short-term investments 105,130 (105,130)(D) -- Accounts & notes receivable, net 188,485 21,557 210,042 Inventories 74,034 12,598 3,008(E) 89,640 Other current assets 9,748 2,084 11,832 --------- -------- ----------- --------- Total current assets 588,886 40,551 (221,992) 407,445 --------- -------- ----------- --------- Intangible assets, including goodwill 41,724 23,531 151,967(F) 217,222 Property, plant and equipment, net 83,867 21,614 105,481 Other assets 8,375 732 9,107 --------- -------- ----------- --------- Total assets $722,852 $86,428 $ (70,025) $ 739,255 ========= ======== =========== ========= LIABILITIES and SHAREHOLDERS' EQUITY Total current liabilities $126,198 $19,795 $ (6,604)(G) $ 139,389 Long term debt 175,000 4,144 (4,144)(G) 175,000 Other liabilities and minority interest 16,312 3,212 -- 19,524 Total shareholders equity 405,342 59,277 (59,277) 405,342 --------- -------- ----------- --------- Total liabilities & equity $722,852 $ 86,428 $ (70,025) $ 739,255 ========= ======== =========== =========
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS AND BALANCE SHEET The following adjustments were applied to the Company's historical financial statements and those of Cerprobe Corporation to arrive at the pro forma combined financial information. A. To record the amortization of goodwill, estimated to be approximately $152.0 million associated with the purchase of Cerprobe Corporation. The preliminary estimated useful life used is considered to be 15 years. B. To record the reduction of interest income related to the estimated $225.0 million, including transaction costs, cash payment for Cerprobe, using the average interest rate on short term investments that the Company realized in fiscal 2000 of 6.09%. C. To record the tax benefit related to the lower interest income at the Company's marginal tax rate in the United States of 35%. No tax benefit was assumed on the additional amortization expense. D. To record the payment of $225.0 million for the purchase of 100% of the stock of Cerprobe plus transaction costs. E. Set-up adjustment to record Cerprobe's inventory at fair value at September 30, 2000. F. To record the fair value of goodwill and intangible assets acquired. G. To record the payoff of all short term and long term debt of Cerprobe. -----END PRIVACY-ENHANCED MESSAGE-----