-----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, PxBd0No/Oj0ROxDMaVc5hw8rjxw872GPpXKcR/lDExhAqknUcm/yXgqRETY5SyHZ brFGBYkBakpu7lwxfwQeDg== 0000893220-01-500534.txt : 20010809 0000893220-01-500534.hdr.sgml : 20010809 ACCESSION NUMBER: 0000893220-01-500534 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010808 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-00121 FILM NUMBER: 1700308 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-Q 1 w52042e10-q.txt FORM 10-Q - KULICKE AND SOFFA INDUSTRIES, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________. Commission File No. 0-121 KULICKE AND SOFFA INDUSTRIES, INC. (Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1498399 ------------ ---------- (State or other jurisdiction of incorporation) (IRS Employer Identification No.) 2101 BLAIR MILL ROAD, WILLOW GROVE, PENNSYLVANIA 19090 - ------------------------------------------------ ----- (Address of principal executive offices) (Zip Code)
(215) 784-6000 (Registrant's telephone number) Indicate by check mark whether 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 . As of July 31, 2001, there were 49,015,752 shares of the Registrant's Common Stock, Without Par Value outstanding. 2 KULICKE AND SOFFA INDUSTRIES, INC. FORM 10 - Q JUNE 30, 2001 INDEX
Page No. -------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets September 30, 2000 and June 30, 2001 3 Consolidated Statements of Operations Three and Nine Months Ended June 30, 2000 and 2001 4 Consolidated Statements of Cash Flows Nine Months Ended June 30, 2000 and 2001 5 Notes to Unaudited Condensed Consolidated Financial Statements 6-14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15-29 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 29 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 29 SIGNATURES 30
- 2 - 3 PART I . FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS KULICKE AND SOFFA INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (in thousands)
SEPTEMBER 30, JUNE 30, 2000 2001 --------- --------- (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 211,489 $ 89,032 Short-term investments 105,130 43,767 Accounts and notes receivable, net of allowance for doubtful accounts of $4,355 at 9/30/00 and $6,169 at 6/30/01 188,485 103,532 Inventories, net 74,034 87,453 Prepaid expenses and other current assets 9,748 17,134 --------- --------- TOTAL CURRENT ASSETS 588,886 340,918 Property, plant and equipment, net 83,867 139,215 Intangible assets, primarily goodwill, net 41,724 259,720 Other assets 8,375 11,100 --------- --------- TOTAL ASSETS $ 722,852 $ 750,953 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current portion of long term debt $ 1,026 $ 6,626 Accounts payable 62,513 56,307 Accrued expenses 51,935 50,777 Income taxes payable 10,724 10,573 --------- --------- TOTAL CURRENT LIABILITIES 126,198 124,283 Other liabilities 7,967 8,679 Long term debt 175,000 227,933 Deferred taxes 4,148 18,086 Minority interest 4,197 49 --------- --------- TOTAL LIABILITIES $ 317,510 $ 379,030 ========= ========= Commitments and contingencies -- -- SHAREHOLDERS' EQUITY: Common stock, without par value 189,766 192,448 Retained earnings 220,263 188,112 Accumulated other comprehensive loss (4,687) (8,637) --------- --------- TOTAL SHAREHOLDER'S EQUITY 405,342 371,923 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 722,852 $ 750,953 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. - 3 - 4 KULICKE AND SOFFA INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------------------- ------------------------------- 2000 2001 2000 2001 --------- --------- --------- --------- Net Sales $ 268,258 $ 130,927 $ 670,260 $ 436,850 Cost of goods sold 166,980 89,461 433,470 298,193 --------- --------- --------- --------- Gross profit 101,278 41,466 236,790 138,657 Selling, general and administrative 35,554 33,378 97,916 108,399 Research and development, net 12,509 13,556 36,966 49,621 Amortization of goodwill and intangibles 867 6,730 2,610 16,048 Resizing costs -- -- -- 1,709 Purchased in-process research and development -- -- -- 11,709 --------- --------- --------- --------- Income (loss) from operations 52,348 (12,198) 99,298 (48,829) Interest income 3,145 1,307 7,520 6,997 Interest expense (2,525) (3,481) (5,378) (9,591) Other income -- -- -- 8,016 Equity in loss of joint ventures (340) -- (1,049) -- --------- --------- --------- --------- Income (loss) before income taxes 52,628 (14,372) 100,391 (43,407) Income tax provision (benefit) 14,858 (4,881) 28,400 (10,913) --------- --------- --------- --------- Income (loss) before minority interest 37,770 (9,491) 71,991 (32,494) Minority interest in net loss of subsidiary 437 15 1,039 343 --------- --------- --------- --------- NET INCOME (LOSS) $ 38,207 $ (9,476) $ 73,030 $ (32,151) ========= ========= ========= ========= NET INCOME (LOSS) PER SHARE: Basic $ 0.79 $ (0.19) $ 1.53 $ (0.66) ========= ========= ========= ========= Diluted $ 0.67 $ (0.19) $ 1.36 $ (0.66) ========= ========= ========= ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 48,382 48,929 47,688 48,829 Diluted 58,637 48,929 56,016 48,829
The accompanying notes are an integral part of these consolidated financial statements. - 4 - 5 KULICKE AND SOFFA INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
NINE MONTHS ENDED JUNE 30, -------------------------------------- 2000 2001 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 73,030 $ (32,151) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 18,034 40,143 Equity in loss of joint ventures 1,049 -- Purchased in-process R&D -- 11,709 Minority interest in net loss of subsidiary (1,039) (343) Deferred taxes 10,677 (17,271) Changes in components of working capital, net (54,303) 66,675 Collection of refundable income taxes 1,918 -- Other, net 3,156 4,519 --------- --------- Net cash provided by operating activities 52,522 73,281 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Sale (purchase) of investments classified as available for sale (88,673) 60,091 Purchases of property, plant and equipment (27,050) (44,421) Purchase of Flip Chip equity units -- (5,000) Purchase of Cerprobe Corp., net of cash received -- (216,409) Purchase of Probe Technology Corp., net of cash received -- (62,512) Investments in and loans to joint ventures (1,866) -- --------- --------- Net cash used in investing activities (117,589) (268,251) --------- --------- CASH FLOW FROM FINANCING ACTIVITIES: Net proceeds from borrowings 168,985 58,000 Payments on borrowings -- (6,598) Proceeds from issuance of common stock 14,611 1,111 Proceeds from sale of receivables -- 20,000 --------- --------- Net cash provided by financing activities 183,596 72,513 --------- --------- Changes in cash and cash equivalents 118,529 (122,457) Cash and cash equivalents at beginning of period 37,155 211,489 --------- --------- Cash and cash equivalents at end of period $ 155,684 $ 89,032 ========= ========= CASH PAID DURING THE PERIOD FOR: Interest $ 4,277 $ 11,187 Income taxes $ 5,147 $ 4,348
The accompanying notes are an integral part of these consolidated financial statements. - 5 - 6 KULICKE AND SOFFA INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except per share data and employee data) June 30, 2001 - -------------------------------------------------------------------------------- NOTE 1 - BASIS OF PRESENTATION The condensed consolidated financial statement information for fiscal year 2001 in this report is unaudited. However, we believe these financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company's financial position as of June 30, 2001, and the results of its operations for the three month and nine month periods ended June 30, 2000 and 2001 and its cash flows for the nine month periods ended June 30, 2000 and 2001. These financial statements should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. NOTE 2 - INVENTORIES Inventories consist of the following:
SEPTEMBER 30, JUNE 30, 2000 2001 --------- --------- Raw materials and supplies $ 50,394 $ 65,809 Work in process 22,687 25,037 Finished Goods 17,194 20,127 --------- --------- 90,275 110,973 Inventory reserves (16,241) (23,520) --------- --------- $ 74,034 $ 87,453 ========= =========
NOTE 3 - EARNINGS PER SHARE Basic net income (loss) per share ("EPS") is calculated using the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net income (loss) per share assumes the exercise of employee stock options and the conversion of the convertible securities to common shares unless the inclusion of these will have an anti-dilutive impact on net income (loss) per share. In addition, in computing diluted net income per share, the after-tax amount of interest expense recognized in the period associated with the convertible subordinated notes is added back to net income as if the convertible securities had been converted to common shares at the beginning of the period. For the three and nine month periods ended June 30, 2001, the exercise of stock options and the conversion of the convertible securities were not assumed since their conversion to common stock would have an anti-dilutive effect on net loss per share. - 6 - 7 KULICKE AND SOFFA INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except per share data and employee data) June 30, 2001 - -------------------------------------------------------------------------------- A reconciliation of the weighted average shares outstanding-basic to the weighted average shares outstanding-diluted appears below:
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 2000 2001 2000 2001 ------ ------ ------ ------ Weighted average shares outstanding - Basic 48,382 48,929 47,688 48,829 Potentially dilutive securities: Employee stock options 2,613 * 2,744 * Convertible subordinated notes 7,642 * 5,584 * ------ ------ ------ ------ Weighted average shares outstanding - Diluted 58,637 48,929 56,016 48,829 ====== ====== ====== ======
*Due to the Company's net loss for the three month and nine month periods ended June 30, 2001, potentially dilutive securities are deemed to be antidilutive. The weighted average number of shares for potentially dilutive employee and director stock options was 1,304,000 and 961,000, respectively, for the three and nine-month periods ended June 30, 2001 and 7,642,000 for the convertible subordinated notes for both the three and nine-month periods then ended. The after-tax interest expense recognized by the Company in the three and nine months ended June 30, 2000 associated with the convertible subordinated notes that was added back to net income in order to compute net income per diluted share was $1,351,000 and $2,983,000, respectively. - 7 - 8 KULICKE AND SOFFA INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except per share data and employee data) June 30, 2001 - -------------------------------------------------------------------------------- NOTE 4 - OPERATING RESULTS BY BUSINESS SEGMENT Operating results by business segment for the three and nine-month periods ended June 30, 2000 and 2001 were as follows: THREE MONTHS ENDED JUNE 30, 2001
ADVANCED PACKAGING PACKAGING EQUIPMENT MATERIALS TECHNOLOGY TEST (1) SEGMENT SEGMENT SEGMENT SEGMENT CORPORATE TOTAL --------- --------- --------- --------- ---------- --------- Net sales $ 52,222 $ 33,216 $ 11,340 $ 34,149 $ 130,927 Cost of goods sold 33,545 24,649 7,819 23,448 89,461 --------- --------- --------- --------- ---------- --------- Gross profit 18,677 8,567 3,521 10,701 -- 41,466 Operating expenses 21,831 5,678 5,774 9,774 $ 3,877 46,934 Amortization of goodwill and intangibles 568 352 5,810 6,730 --------- --------- --------- --------- ---------- --------- Income (loss) from operations $ (3,154) $ 2,321 $ (2,605) $ (4,883) $ (3,877) $ (12,198) ========= ========= ========= ========= ========== =========
NINE MONTHS ENDED JUNE 30, 2001
ADVANCED PACKAGING PACKAGING EQUIPMENT MATERIALS TECHNOLOGY TEST (1) SEGMENT SEGMENT SEGMENT SEGMENT CORPORATE TOTAL --------- --------- --------- --------- --------- --------- Net sales $ 195,462 $ 121,355 $ 29,001 $ 91,032 $ 436,850 Cost of goods sold 123,408 87,873 24,288 62,624 298,193 --------- --------- --------- --------- --------- --------- Gross profit 72,054 33,482 4,713 28,408 -- 138,657 Operating expenses 82,194 20,700 18,402 25,110 $ 11,614 158,020 Amortization of goodwill and intangibles -- 1,698 1,019 13,331 16,048 Resizing costs 1,424 254 31 1,709 Purchased in-process research and development 11,709 11,709 --------- --------- --------- --------- --------- --------- Income (loss) from operations $ (11,564) $ 10,830 $ (14,708) $ (21,742) $ (11,645) $ (48,829) ========= ========= ========= ========= ========= ========= Segment assets at June 30, 2001 $ 186,741 $ 88,346 $ 49,734 $ 282,024 $ 144,108 $ 750,953 ========= ========= ========= ========= ========= =========
- 8 - 9 KULICKE AND SOFFA INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except per share data and employee data) June 30, 2001 - -------------------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, 2000
ADVANCED PACKAGING PACKAGING EQUIPMENT MATERIALS TECHNOLOGY SEGMENT SEGMENT SEGMENT CORPORATE TOTAL -------- -------- -------- -------- -------- Net sales $215,957 $ 47,677 $ 4,624 $268,258 Cost of goods sold 127,820 33,818 5,342 166,980 -------- -------- -------- -------- -------- Gross profit 88,137 13,859 (718) -- 101,278 Operating expenses 32,471 7,106 4,471 $ 4,015 48,063 Amortization of goodwill and intangibles -- 566 301 867 -------- -------- -------- -------- -------- Income (loss) from operations $ 55,666 $ 6,187 $ (5,490) $ (4,015) $ 52,348 ======== ======== ======== ======== ========
NINE MONTHS ENDED JUNE 30, 2000
ADVANCED PACKAGING PACKAGING EQUIPMENT MATERIALS TECHNOLOGY SEGMENT SEGMENT SEGMENT CORPORATE TOTAL --------- --------- --------- --------- --------- Net Sales $ 521,333 $ 132,958 $ 15,969 $ 670,260 Cost of goods sold 322,247 94,565 16,658 433,470 --------- --------- --------- --------- --------- Gross profit 199,086 38,393 (689) -- 236,790 Operating expenses 90,566 19,899 12,820 $ 11,597 134,882 Amortization of goodwill and intangibles -- 1,697 913 -- 2,610 --------- --------- --------- --------- --------- Income from operations $ 108,520 $ 16,797 $ (14,422) $ (11,597) $ 99,298 ========= ========= ========= ========= ========= Segment assets at June 30, 2000 $ 301,960 $ 95,051 $ 44,737 $ 252,995 $ 694,743 ========= ========= ========= ========= =========
(1) The test segment is comprised of Cerprobe Corporation and Probe Technology Corporation. NOTE 5 - LONG TERM DEBT In December 2000, the Company entered into a $60.0 million (reducing to $40.0 million over a three-year period) bank revolving credit facility. The facility expires in December 2003. 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 earnings before interest, taxes, depreciation and amortization). This credit facility is guaranteed by certain of the Company's domestic subsidiaries and requires the Company to maintain certain financial covenants including a leverage ratio, a liquidity ratio and a minimum net worth. The credit facility also limits the Company's ability to mortgage, pledge or dispose of a material portion of its assets and imposes - 9 - 10 KULICKE AND SOFFA INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except per share data and employee data) June 30, 2001 - -------------------------------------------------------------------------------- restrictions on the Company's investments and acquisitions. At June 30, 2001, the Company had $57.0 million of cash borrowing outstanding under this facility. The Company also has outstanding, $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 is payable 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. NOTE 6 - ACQUISITIONS In November 2000, the Company completed a tender offer for 100.0% of the outstanding shares of Cerprobe Corporation ("Cerprobe") for $20 per share. The total purchase price of Cerprobe, including transaction costs, the assumption of acquisition related liabilities and debt repayment, was approximately $225.0 million, payable in cash. In December 2000 the Company purchased all the outstanding shares of Probe Technology Corporation ("Probe Tech") for approximately $65.0 million, including transaction costs and the assumption of acquisition related liabilities, payable in cash. Both Cerprobe and Probe Tech design and manufacture semiconductor test interconnect solutions. The acquisitions have been recorded using the purchase method of accounting and accordingly, the purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their fair values on the acquisition dates. The Company has allocated a portion of the purchase price for each acquisition to intangible assets valued using a discount rate of 25.0% for Cerprobe and 18.0% for Probe Tech. The portion of the purchase price allocated to in-process R&D projects that did not have future alternative use and to which technological feasibility had not been established totaled $11.3 million for Cerprobe and $0.4 million for Probe Tech. These amounts were charged to expense as of the acquisition dates. The purchase price allocation may change upon resolution of open matters including purchase price adjustments and the final assessment of certain contingencies. The Company received a waiver of a bank covenant under its then existing 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. The operations of these two companies have been combined to create a test division, which is disclosed as a separate business segment for financial reporting purposes. Unaudited pro forma operating results for the nine months ended June 30, 2000 and 2001 and the three months ended June 30, 2000 assuming the acquisitions of Cerprobe and Probe Tech were consummated on October 1, 1999 appear below. The operating results presented below for the three months ended June 30, 2001 are actual results. The 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. - 10 - 11 KULICKE AND SOFFA INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except per share data and employee data) June 30, 2001 - --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 2000 2001 2000 (1) 2001 --------- --------- --------- --------- Net sales $ 307,995 $ 130,927 $ 770,930 $ 464,273 Net income (loss) $ 34,633 $ (9,476) $ 47,187 $ (34,632) Diluted net income (loss) per share $ 0.61 $ (0.19) $ 0.90 $ (0.71)
(1) The results of Cerprobe for the nine months ended June 30, 2000 included a charge of $8.8 million for in-process R&D associated with its acquisition of OZ Technologies, Inc. The components of the purchase price allocation for the acquisitions of Cerprobe and Probe Tech are as follows:
CERPROBE PROBE TECH --------- --------- Current assets $ 44,223 $ 12,180 Property, plant, equipment and other long term assets 27,241 8,948 Acquired intangibles 80,800 30,253 Acquired in-process research and development 11,295 414 Goodwill 105,510 16,298 Less: Liabilities assumed (75,573) (3,432) --------- --------- Total $ 193,496 $ 64,661 ========= =========
The goodwill and intangible assets resulting from the acquisitions are being amortized on a straight-line basis over a 10-year period. The Cerprobe and Probe Tech in-process R&D value was comprised of several research and development projects that were scheduled to reach completion in 2001 and 2002. At the acquisition date, research and development projects ranged in completion from 10% to 90% complete. The lawsuit between Cerprobe and the former President, Director and shareholder of Silicon Valley Test & Repair, Inc. (a company acquired by Cerprobe Corporation in January 1997) was settled and dismissed in June 2001, with Cerprobe paying $280,000 in attorney's fees to opposing counsel. This amount has been charged to goodwill in the opening balance sheet, as a cost of the Cerprobe acquisition. NOTE 7 - INVESTMENT IN FLIP CHIP TECHNOLOGIES, LLC In March 2001, the Company purchased all outstanding equity units of Flip Chip Technologies LLC ("FCT"), not previously owned, from its former joint venture partner, Delco Electronics Corporation, for $5.0 million in cash plus future payments of up to $3.0 million depending on future operating revenues of FCT over the next four fiscal years. The $3.0 million of contingent payments, which are based upon future revenues, have not been recorded in the Company's financial statements at June 30, 2001. - 11 - 12 KULICKE AND SOFFA INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except per share data and employee data) June 30, 2001 - -------------------------------------------------------------------------------- NOTE 8 - RESIZING AND ACQUISITION RESTRUCTURING In the nine months ended June 30, 2001 the Company announced a 7.0% reduction in its workforce. As a result, the Company recorded a resizing charge for severance of $1.7 million for the elimination of 296 positions. In the same period, the Company also began integrating the operations of Cerprobe and Probe Tech, which will result in vacating several of their existing facilities. The Company recorded an increase in goodwill of $0.6 million associated with this integration program. The resizing costs and acquisition restructuring reserves are included in accrued liabilities. The components of these resizing and restructuring charges and the remaining reserves at June 30, 2001 are as follows:
SEVERANCE LEASE COSTS OTHER TOTAL ------- ------- ------- ------- Resizing costs $ 1,709 $ -- $ -- $ 1,709 Acquisition Restructuring 84 461 101 646 ------- ------- ------- ------- Balance at March 31, 2001 $ 1,793 $ 461 $ 101 $ 2,355 Spending under programs (749) (31) (70) (850) ------- ------- ------- ------- Balance at June 30, 2001 $ 1,044 $ 430 $ 31 $ 1,505 ======= ======= ======= =======
At June 30, 2001, 288 of the planned 296 positions have been eliminated, and the remainder will be eliminated in the fourth quarter of this fiscal year. The integration of Cerprobe and Probe Tech continues, and 3 of the 6 facilities identified for closure have been vacated at June 30, 2001. Severance and lease payments are expected to extend over the next four years. NOTE 9 - OTHER INCOME The Company recorded other income of $8.0 million in the three months ended March 31, 2001 as the result of a cash settlement of an insurance claim associated with a fire in our expendable tools facility. - 12 - 13 KULICKE AND SOFFA INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except per share data and employee data) June 30, 2001 - -------------------------------------------------------------------------------- NOTE 10 - COMPREHENSIVE INCOME (LOSS) For the three and nine month periods ended June 30, 2000 and 2001, the components of total comprehensive income (loss) are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------- 2000 2001 2000 2001 -------- -------- -------- -------- Net income / (loss) $ 38,207 $ (9,476) $ 73,030 $(32,151) -------- -------- -------- -------- Foreign currency translation adjustment 307 (980) (148) (3,951) Unrealized gain / (loss) on investments, net of taxes 4 (157) (31) 1 -------- -------- -------- -------- Other comprehensive income / (loss) 311 (1,137) (179) (3,950) -------- -------- -------- -------- Comprehensive income / (loss) $ 38,518 $(10,613) $ 72,851 $(36,101) ======== ======== ======== ========
NOTE 11 - ACCOUNTS RECEIVABLE SECURITIZATION In April 2001, the Company entered into a receivable securitization program in which all domestic accounts receivable were transferred to KSI Funding Corporation, a bankruptcy remote special purpose corporation and a wholly owned subsidiary of the Company. Under the facility, KSI Funding Corporation can sell up to a $40.0 million interest in all domestic receivables of the company. This facility was structured as a revolving securitization, whereby an interest in additional customer receivables can be sold as collections reduce the previously sold interest. In May, KSI Funding received $20.0 million for receivables sold under this facility. NOTE 12 - ACCOUNTING PRONOUNCEMENTS SFAS 133 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. There was no cumulative effect of adoption. 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. - 13 - 14 KULICKE AND SOFFA INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except per share data and employee data) June 30, 2001 - -------------------------------------------------------------------------------- SFAS 141 In July 2001, the FASB issued SFAS 141, "Business Combinations," which is required for all business combinations initiated after June 30, 2001. The standard eliminates the use of the pooling-of-interest method and improves the accounting and reporting for business combinations. The Company has adopted the standard as required effective July 1, 2001. The adoption will not have a material effect on the Company's results of operations or cash flows. SFAS 142 Also in July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets." This standard requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. This change is expected to provide investors with greater information regarding the economic value of goodwill and its impact on earnings. The Company will be required to adopt this standard in fiscal 2003, however early adoption in fiscal 2002 will be permitted. The Company has not yet determined the impact to its financial statements of adoption of this standard. SAB 101 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 adopt SAB 101 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, which do not meet SAB 101's guidance will be recorded as revenue in future periods. Changes in the Company's revenue recognition policy resulting from the guidelines 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 is currently assessing the full impact of SAB 101 on its reported financial results. Based on the Company's analysis to-date, the Company expects when SAB 101 is adopted to report a cumulative adjustment to net income of between $6.0 million and $10.0 million in fiscal 2001 for all prior annual periods based on a revenue deferral ranging between $20.0 million and $25.0 million. The Company expects that revenues in the first quarter of fiscal 2001 will be lower than previously reported by $2.0 million to $5.0 million, and revenues in the second quarter of fiscal 2001 will be lower than previously reported by $2.0 million to $4.0 million as a result of adoption of SAB 101. The Company expects that revenues in the third quarter of fiscal 2001 will be lower than reported herein by less than $2.0 million. The Company does not believe that SAB 101 will affect the underlying strength or weakness of our business operations as measured by the dollar value of our product shipments and cash flows. EITF DISCUSSIONS AND CONSENSUS 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. 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. The Company does not believe adoption of this pronouncement will have a material impact on its financial position or results of operations. In March 2001, the EITF discussed Issue No. 00-21, "Accounting for Multiple Element Revenue Arrangements" that addresses the accounting requirements for delivery or performance of multiple products, services, and/or rights to use assets when performance may occur at different points in time or over different periods of time. The Company does not believe that this pronouncement will have any impact on its financial position or results of operations. In March 2001, the EITF reached a final consensus on Issue No. 00-22, "Accounting for 'Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future" that addresses, among other issues, the accounting requirements of a vendor for an offer to a customer to rebate or refund a specified amount of cash that is redeemable only if the customer completes a specified cumulative level of revenue transactions or remains a customer for a specified period of time. This Issue was effective for quarters ending after February 15, 2001. The adoption of this Issue did not have any impact on the Company's financial position or results of operations. - 14 - 15 KULICKE AND SOFFA INDUSTRIES, INC. June 30, 2001 - -------------------------------------------------------------------------------- ITEM 2. 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 expenses 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 below and under the heading "Risk Factors" within this section and in our reports and registration statements filed from time to time with the Securities and Exchange Commission. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes on pages 6 to 14 of this Form 10-Q for a full understanding of our financial position and results of operations for the three and nine month periods ended June 30, 2001. INTRODUCTION We design, manufacture and market capital equipment, packaging materials and test interconnect solutions and provide flip chip bumping services for sale to companies that manufacture and assemble semiconductor devices. We also service, maintain, repair and upgrade assembly equipment, license our flip chip bumping process technology and are developing high density interconnect substrates. 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 60% for the nine months ended June 30, 2001 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 the United States, France, Germany, Hong Kong, Japan, Korea, Malaysia, the Philippines, Scotland, Singapore, Taiwan and Thailand, and applications labs in Japan, Singapore and Taiwan. Due to the slowing economy and a worldwide decline in demand for semiconductors, the semiconductor industry has experienced excess capacity and a severe contraction in demand for semiconductor manufacturing equipment. As a result, our net sales in the first three quarters of fiscal 2001 were significantly below those in the same periods in the prior year. Net sales have declined sequentially each quarter in fiscal 2001. We expect to experience continued declines in net sales in the fourth quarter of fiscal 2001 and that sales will remain weak through the first half of 2002. In addition, as a result of the expected decline in sales, we anticipate that our gross margin will decline in the fourth quarter of fiscal 2001, from that reported in the third quarter of fiscal 2001. Our backlog of customer orders at June 30, 2001 was $57.0 million as compared to $153.0 million at June 30, 2000 and $84.0 million at March 31, 2001. In anticipation of the slowing economy, we reduced our workforce by 7% in the third quarter ended June 30, 2001 and we expect to take additional cost reduction measures in the fourth quarter of fiscal 2001 to realign our cost structure to more closely reflect anticipated revenues, which may involve certain one-time charges. Staff Accounting Bulletin No. 101 ("SAB 101") issued by the SEC becomes applicable to us in the fourth quarter of 2001. Based on our analysis to-date, we expect when SAB 101 is adopted to report a cumulative adjustment to net income of between $6.0 million and $10.0 million in fiscal 2001 for all prior annual periods based on a revenue deferral ranging between $20.0 million and $25.0 million. We also expect that revenues in the first quarter of fiscal 2001 will be lower than previously reported by $2.0 million to $5.0 million and revenues in the second quarter of fiscal 2001 will be lower than previously reported by $2.0 million to $4.0 million as a result of our adoption of SAB 101. We expect that revenues in the third quarter of fiscal 2001 will be lower than reported herein by less than $2.0 million. It is difficult to predict the net effect of this pronouncement on revenues in the fourth quarter of fiscal 2001. However, to the extent revenue deferrals from prior periods, which are recognized in the fourth quarter, do not equal deferrals from the fourth quarter to future periods, our results for the fourth quarter could be different than anticipated. We believe that SAB 101 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. See "Recently Issued Accounting Pronouncements." In the first quarter of fiscal 2001, we took a step forward in our strategy to offer complete and cost-effective interconnect solutions by acquiring 100% of the stock of Cerprobe and 100% of the stock of Probe Tech. Both Cerprobe and Probe Tech design and manufacture semiconductor test interconnect solutions. These acquisitions have been recorded using the purchase method of accounting and have been consolidated with our operating results beginning on the date of acquisition. These two companies comprise our test segment. Refer to Footnote 6 in the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information regarding these acquisitions. In March 2001, we purchased the 19.6% equity share of Flip Chip previously owned by Delco Electronics Corporation for $5.0 million in cash, with a contingent future cash payment of up to $3.0 million depending upon the future operating revenues of Flip Chip. We now own 100% of Flip Chip. Our business is currently divided into four segments: EQUIPMENT We design, manufacture and market semiconductor assembly equipment. Our principal product line is our family of wire bonders, which are used to connect very fine wires, typically made of gold or aluminum, between the bonding pads on semiconductor die and the leads on an IC package to which the die has been attached. In fiscal 2001, we began selling the Models 8028S and 8028PPS automatic ball bonders which, with their improved technical performance and productivity, have accounted for the majority of ball bonders we sold in the first nine months of fiscal 2001. 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 record demand in fiscal 2000. PACKAGING MATERIALS 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, all of which are used in the semiconductor packaging process. Our packaging materials are optimized for use with our wire bonders to providing leading-edge efficiencies and capabilities. We expect to expand this business in an effort to increase our revenues from materials used in the assembly of ICs. 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 and our X-LAM business unit. Through Flip Chip we license our flip chip technology, provide wafer bumping services and market a wafer level chip scale package named "UltraCSP." Our flip chip technology was developed by a joint venture between Delco and us. 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 2001, we shipped high density substrates to customers for qualification. Flip Chip reported its first operating profits in the third quarter of fiscal 2001 but is expected to record an operating loss in the fourth quarter of fiscal 2001. X-LAM has not been profitable to date. TEST INTERCONNECT SOLUTIONS Our test interconnect solutions provide a broad range of products used to test semiconductors during wafer fabrication (wafer probing) and after they have been assembled and packaged (package or final testing). Our products include probe cards, automatic test equipment interface assemblies, ATE test boards, and test socket/contractors. Most of the test interconnect products we offer are custom designed or customized for a specific semiconductor or application. - 15 - 16 KULICKE AND SOFFA INDUSTRIES, INC. June 30, 2001 - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS SALES Net sales for the quarter ended June 30, 2001 were $130.9 million, a decline of 51.2% from the same period in the prior year, due to the continued slowing demand for semiconductors. This decline in sales reflected a 75.8% decline in sales for the equipment segment, primarily a reduction in the unit sales and average selling price of automatic ball bonders compared with the same period in fiscal 2000. Net sales in the packaging materials segment were down 30.3% from the same quarter in fiscal 2000, due to slowing demand for gold wire and expendable tools. Net sales in the advanced packaging segment were up 145.2% from the prior year due to higher bumping service revenue at Flip Chip. The newly formed test segment provided sales of $34.1 million for the current quarter. Net sales for the nine months ended June 30, 2001 were $436.9 million, down 34.8% from the $670.3 million reported for the comparable period in fiscal 2000. Consistent with results reported for the third quarter, year-to-date sales for the equipment segment were down 62.5%, due to lower revenues from sales of automatic ball bonders; slightly offset by higher unit sales of automatic dicing saws. Net sales in the packaging materials segment were down 8.7% year to date, as compared with the prior year, primarily due to reduced demand for gold wire and expendable tools. Higher bumping service revenues and license income at Flip Chip contributed to an 81.6% increase in net sales for the nine months ended June 30, 2001 for the advanced packaging materials segment over the same period in the prior year. Year-to-date sales for the test division were $91.0 million for the period from the dates of acquisition through June 30, 2001. - 16 - 17 KULICKE AND SOFFA INDUSTRIES, INC. June 30, 2001 - -------------------------------------------------------------------------------- For the three and nine months ended June 30, 2000 and 2001, the breakdown of shipments to major geographic regions is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 2000 2001 2000 2001 ---- ---- ---- ---- North America 8% 39% 11% 40% Asia Pacific 80% 38% 78% 43% Europe 5% 13% 5% 11% Japan 6% 9% 6% 6%
The lower percentage of shipments to the Asia/Pacific region was primarily due to the majority of test division sales going to U.S. based customers and a lower proportionate share of shipments (primarily ball bonders) to Asian based subcontract assemblers. GROSS PROFIT In the quarter ended June 30, 2001, gross profit was $41.5 million, a decline of 59.0% from $101.3 million in the prior year. The lower gross profit was due primarily to the lower unit sales and lower average selling price for automatic ball bonders in the equipment segment, resulting in a decline of 78.8% in gross profit for the segment. Gross margin (gross profit as a percentage of sales) was 31.7% for the current quarter, compared to 37.8% for the comparable quarter in the prior year. The decline in gross margin was primarily due to the lower average selling price in the equipment segment, and lower margins for the test division, as compared to the margins for the Company as a whole in the prior year. The equipment segment experienced a 5.0% decline in gross margin from the prior year. Flip Chip reported gross profit of $3.3 million. Gross profit for the nine months ended June 30, 2001 was $138.7 million, compared $236.8 million in the prior year, a decline of 41.4%. The lower gross profit was due primarily to the lower average selling price and lower unit sales in the equipment segment. Gross profit in the first nine months of fiscal 2001 was also adversely effected by inventory write-offs of $7.9 million as compared with total write downs of $2.3 million for the same period in fiscal 2000. Gross margin was 31.7% for the nine months ended June 30, 2001, as compared to 35.3% in the prior year. Excluding the inventory write-offs, gross margin for the nine months ended June 30, 2001 was 33.5%, as compared to 35.7%, for the comparable period in fiscal 2000. The newly formed test division reported gross profit of $28.4 million for the nine months ended June 30, 2001, which was negatively impacted by acquisition related inventory "step-up" costs of $4.2 million. The gross margins for the test segment and the advanced packaging technology segments were 31.2% and 16.3%, respectively. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative ("SG&A") expenses decreased $2.2 million or 6.1% in the three months ended June 30, 2001 as compared to the same period in the prior year due primarily to reductions in payroll, and other cost saving initiatives which began in the second quarter of the fiscal year. Expenses incurred in the test division, which amounted to $8.6 million for the quarter ended June 30, 2001, offset the majority of these cost savings. In the nine months ended June 30, 2001, SG&A expenses increased $10.5 million or 10.7% from the same period in the prior year, due to $21.8 million of SG&A expenses associated with the test division, partially offset by reductions in expenditures for employee - 17 - 18 KULICKE AND SOFFA INDUSTRIES, INC. June 30, 2001 - -------------------------------------------------------------------------------- compensation, outside services and other administrative functions. The expense reduction and cost containment actions initiated earlier in fiscal 2001 led to a sequential reduction of $6.3 million or 15.9% in SG&A expenses in the third quarter as compared to the second quarter. RESEARCH AND DEVELOPMENT Because technological change occurs rapidly in the semiconductor industry, we devote substantial resources to our research and development ("R&D") programs to maintain our technological leadership. This commitment to new product introductions and product development resulted in an increase in R&D expense of $1.0 million or 8.4% for the three months and $12.7 million or 34.2% for the nine months ended June 30, 2001 from the comparable periods of the prior year. The increased R&D expenses also included $1.2 million in the three months and $3.3 million in the nine months (from the date of acquisition through June 30, 2001) ended June 30, 2001 associated with the test division. In the third quarter of fiscal 2001, the Company aligned spending on R&D activities to current economic conditions, resulting in a sequential reduction in R&D spending of $4.9 million or 26.6% as compared to the second quarter of fiscal 2001. RESIZING COSTS In the third quarter, we began implementing the resizing plans announced in the second quarter of fiscal 2001, which resulted in a 7.0% reduction in our workforce. In the nine months ended June 30, 2001, we recorded a resizing charge for severance of $1.7 million for the elimination of 296 positions and we may incur additional resizing costs in the near term. No new charges were recorded in the third quarter. During the second quarter, we began integrating the operations of Cerprobe and Probe Tech, which will result in vacating several of their existing facilities. We recorded an increase in goodwill of $0.6 million associated with this integration program. Both programs are ongoing, and continuing as planned. Refer to Footnote 8 in the Notes to the Unaudited Condensed Consolidated Financial Statements for additional detail regarding these programs, and the spending incurred to date. ACQUISITION COSTS In the first quarter of fiscal 2001, we recorded a charge of $11.7 million for in-process R&D associated with the acquisitions of Cerprobe and Probe Tech representing the appraised value of products still in the development stage that did not have a future alternative use and have not reached technological feasibility. In the three and nine months ended June 30, 2001, we recorded amortization expense of $5.8 million and $13.3 million, respectively, associated with the goodwill and intangible assets resulting from the purchase of Cerprobe and Probe Tech. INCOME (LOSS) FROM OPERATIONS Loss from operations for the three and nine months ended June 30, 2001 was $12.2 million and $48.8 million, respectively, compared to income from operations of $52.3 million and $99.3 million in the comparable periods of the prior year. The operating loss in both the three and nine month periods ended June 30, 2001 was due primarily to the lower sales and associated gross profit, additional expenses associated with the acquisitions, higher R&D expenses, inventory write-offs and resizing costs. - 18 - 19 KULICKE AND SOFFA INDUSTRIES, INC. June 30, 2001 - -------------------------------------------------------------------------------- INTEREST As a result of the Cerprobe and Probe Tech acquisition, we increased our borrowings and reduced our investment portfolio in the latter portion of the first quarter to fund these purchases. This resulted in higher interest expense in the both the three and nine months ended June 30, 2001 and lower interest income for the same periods. OTHER INCOME Results for the nine months ended June 30, 2001 include other income of $8.0 million associated with the cash settlement of an insurance claim associated with a fire in our expendable tools facility. EQUITY IN LOSS OF JOINT VENTURES In the three and nine months ended June 30, 2000, we recorded losses of $0.3 million and $1.0 million, respectively, on our equity interest in Advanced Polymer Solutions, LLC ("APS"), a joint venture with Polyset Company, Inc. APS. The joint venture was dissolved in September 2000 and operations ceased at that time. TAX EXPENSE Our effective tax rate for fiscal 2001 is expected to approximate 34.0%, compared to 28.0% in the prior year. The higher expected tax rate for fiscal 2001 is due primarily to the tax benefits associated with expected losses from United States based operations at a rate higher than the tax rate on expected income generated from foreign operations. In the nine months ended June 30, 2001 we did not record an income tax benefit on the $11.7 million charge for in-process research and development. MINORITY INTEREST IN NET LOSS OF SUBSIDIARY In the three and nine months ended June 30, 2001, we recorded minority interest of $15 thousand and $0.3 million, respectively. The results for the three months ended June 30, 2001 include minority interest in a foreign Probe Tech subsidiary. The nine month results reflect the interest of our joint venture partner's share of the loss incurred at Flip Chip prior to our purchase of all outstanding Flip Chip equity units and the minority interest of the foreign Probe Tech subsidiary from the date of our acquisition of Probe Tech. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS SFAS 133 In June 1998, the Financial Accounting Standards Board (FASB) 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. We adopted this statement in the first quarter of 2001. There was no cumulative effect of adoption. The impact of SFAS No. 133 on our future results will be dependent upon the fair values of our derivatives and related financial instruments and could result in increased volatility. - 19 - 20 KULICKE AND SOFFA INDUSTRIES, INC. June 30, 2001 - -------------------------------------------------------------------------------- SFAS 141 In July 2001, the FASB issued SFAS 141, "Business Combinations," which is required for all business combinations initiated after June 30, 2001. The standard eliminates the use of the pooling-of-interest method and improves the accounting and reporting for business combinations. We have adopted the standard as required effective July 1, 2001. The adoption will not have a material effect on our results of operations or cash flows. SFAS 142 Also in July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets." This standard requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. This change is expected to provide investors with greater information regarding the economic value of goodwill and its impact on earnings. We will be required to adopt this standard in fiscal 2003, however early adoption in fiscal 2002 will be permitted. We have not yet determined the impact to our financial statements of adoption of this standard. SAB 101 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 adopt SAB 101 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, which do not meet SAB 101's guidance will be recorded as revenue in future periods. Changes in our revenue recognition policy resulting from the guidelines 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." We are currently assessing the full impact of SAB 101 on our reported financial results. Based on our analysis to-date, we expect when SAB 101 is adopted to report a cumulative adjustment to net income of between $6.0 million and $10.0 million in fiscal 2001 for all prior annual periods based on a revenue deferral ranging between $20.0 million and $25.0 million. We also expect revenues in the first quarter of fiscal 2001 will be lower than previously reported by $2.0 million to $5.0 million, and revenues in the second quarter of fiscal 2001 will be lower than previously reported by $2.0 million to $4.0 million as a result of adoption of SAB 101. We expect that revenues in the third quarter of fiscal 2001 will be lower than reported herein by less than $2.0 million. We believe that SAB 101 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. EITF DISCUSSIONS AND CONSENSUS 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 position or results of operations. - 20 - 21 KULICKE AND SOFFA INDUSTRIES, INC. June 30, 2001 - -------------------------------------------------------------------------------- In March 2001, the EITF discussed Issue No. 00-21, "Accounting for Multiple Element Revenue Arrangements" that addresses the accounting requirements for delivery or performance of multiple products, services, and/or rights to use assets when performance may occur at different points in time or over different periods of time. We do not believe that this pronouncement will have any impact on our financial position or results of operations. In March 2001, the EITF reached a final consensus on Issue No. 00-22, "Accounting for 'Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future" that addresses, among other issues, the accounting requirements of a vendor for an offer to a customer to rebate or refund a specified amount of cash that is redeemable only if the customer completes a specified cumulative level of revenue transactions or remains a customer for a specified period of time. This Issue was effective for quarters ending after February 15, 2001. The adoption of this Issue did not have any impact on our financial position or results of operations. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2001, cash, cash equivalents and investments totaled $132.8 million compared to $316.6 million at September 30, 2000. Additionally, we have a $60.0 million (reducing to $40.0 million over a three-year period) bank revolving credit facility. The credit 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 June 30, 2001, we had $57.0 million of cash borrowings outstanding under the facility and had utilized $1.1 million of availability under that credit facility to support letters of credit. 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, taxes, depreciation and amortization). In April 2001, we entered into a receivable securitization program in which we transferred all domestic account receivables to KSI Funding Corporation, a bankruptcy remote special purpose corporation and, our wholly owned subsidiary. Under the facility, KSI Funding Corporation can sell up to a $40.0 million interest in all of our domestic receivables. This facility was structured as a revolving securitization, whereby an interest in additional account receivables can be sold as collections reduce the previously sold interest. In the third quarter, we sold receivables under this agreement amounting to $20.0 million. Cash provided by operating activities totaled $73.3 million during the nine months ended June 30, 2001 compared to $52.5 million during the comparable period in the prior year. The cash provided by operating activities for the nine months ended June 30, 2001 was due primarily to the collection of accounts receivable. During the nine months ended June 30, 2001, we invested approximately $44.5 million in property and equipment compared to $27.0 million in the comparable period of the prior year. The capital spending in the nine months ended June 30, 2001 was primarily for information technology to develop corporate-wide e-business capabilities, increased capacity at Flip Chip, a new wire manufacturing facility in Taiwan and continued expansion of the manufacturing capabilities in our existing packaging materials facilities. Due to current business conditions we have reduced our planned capital expenditures for the remainder of fiscal 2001 from previously planned levels and expect total capital expenditures in the fourth quarter of fiscal 2001 to be less than $8.0 million. - 21 - 22 KULICKE AND SOFFA INDUSTRIES, INC. June 30, 2001 - -------------------------------------------------------------------------------- In the first quarter of fiscal 2001, we purchased two companies that design and manufacture semiconductor test interconnect solutions, for cash. During the nine months ended June 30, 2001, we paid $216.4 million for Cerprobe and $62.5 million for Probe Tech, net of cash acquired. We believe that anticipated cash flows from operations, working capital and amounts available under our accounts receivable securitization program will be sufficient to meet our liquidity and capital requirements for at least the next 12 months. However, we may seek, as we believe appropriate, 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 which could require substantial capital outlays. The timing and amount of such potential capital requirements cannot be determined at this time and 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 which we may elect to pursue. RISK FACTORS THE SEMICONDUCTOR INDUSTRY AS A WHOLE IS VOLATILE AND IS CURRENTLY EXPERIENCING A SIGNIFICANT DOWNTURN. 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 equipment, consumer electronics and automotive goods. Significant downturns in the market for semiconductor devices or in general economic conditions reduce demand for our products and materially 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 and test interconnect solutions that we sell. The semiconductor industry is in a downturn and has weakened significantly recently and we expect conditions to further weaken during the remainder of fiscal 2001 and to remain weak into 2002. This downturn is among the worst we have experienced: orders have been pushed out or cancelled, significantly reducing our backlog, sales have declined rapidly and we have, among other things, undertaken a significant resizing and have deferred capital expenditures. We cannot assure you as to when the current downturn will end or that it will not continue to worsen. This current downturn, like past downturns, has materially and adversely affected our operating results and we expect that it will continue to materially and adversely affect our business, financial condition and operating results in the near term. 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, which we expect will continue to be the case. Although these fluctuations are partly due to the volatile nature of the semiconductor industry, they also reflect the impact of other factors. Many of the factors that affect our operating results 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: - market downturns; - the mix of products that we sell because, for example: - some packaging materials have lower margins than assembly equipment and test interconnect solutions, - 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; - the cancellation, deferral or rescheduling of orders, because virtually all orders are subject to cancellation, deferral or rescheduling by the customer without prior notice and with limited or no penalties; - 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 cause customers to delay purchasing our products; - 22 - 23 KULICKE AND SOFFA INDUSTRIES, INC. June 30, 2001 - -------------------------------------------------------------------------------- - the timing of acquisitions; and - our competitors' introduction of new products. Many of our expenses, such as research and development, selling, general and administrative expenses, and interest expense 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, resizing and other costs of relocating facilities; and - inventory write-offs due to obsolescence. 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. OUR BUSINESS DEPENDS ON ATTRACTING AND RETAINING MANAGEMENT, MARKETING AND TECHNICAL EMPLOYEES WHO ARE IN GREAT DEMAND. As is the case with many other 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, specifically 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 materially and adversely affected. - 23 - 24 KULICKE AND SOFFA INDUSTRIES, INC. June 30, 2001 - -------------------------------------------------------------------------------- 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 and for test interconnect solutions customized to address technological advances in IC and capital equipment designs. 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 non-competitive. The development of new products may require significant capital expenditures over an extended period of time, and some products that we seek to develop may never become profitable. In fiscal 2001, for example, we have incurred significant losses in connection with our efforts to develop and commercialize X-LAM technology, and we anticipate continuing to incur such losses in the near term. In addition, the commercialization of X-LAM may require substantial capital investments for production facilities. In addition, we may not be able to develop and introduce products incorporating new technologies in a timely manner or at a price that will satisfy our customers' future 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. If we fail to accurately forecast demand for our products, including assembly equipment, packaging materials, test interconnect solutions and advanced packaging technologies, 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 IC package, as compared to traditional die and wire bonding. These technologies include flip chip and wafer scale packaging. In general, these advanced technologies eliminate the need for wires to establish the electrical connection between a die and its package. For some devices, these advanced technologies have largely replaced wire bonding. 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. If a significant shift to advanced technologies were to occur, demand for our wire bonders and related packaging materials and test interconnect solutions would diminish. One component of our strategy is to develop next generation technologies to allow us 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 supersede 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. - 24 - 25 KULICKE AND SOFFA INDUSTRIES, INC. June 30, 2001 - -------------------------------------------------------------------------------- A DECLINE IN DEMAND FOR ANY OF OUR PRODUCTS COULD CAUSE OUR REVENUE TO DECLINE SIGNIFICANTLY. Prior to our recent acquisitions of businesses in the test interconnect segment, our wire bonders have comprised over 50% 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 events beyond our control, our business, financial condition and operating results could be materially and adversely affected. Advanced packaging technologies and test interconnect solutions are less significant as a percentage of our revenues than wire bonders, but any deterioration in the demand for or prices of these products would materially and adversely affect our business, financial condition and operating results. BECAUSE A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR MOST OF 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, packaging materials, test interconnect solutions and flip chip bumping services and technology. Sales to a relatively small number of customers account for a significant percentage of our net sales. In fiscal 2000, sales to Advanced Semiconductor Engineering accounted for 15.3% of our net sales and sales to Amkor Technologies accounted for 10.1% of our 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 our net sales. 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 materially and adversely affect our business, financial condition and operating results. WE DEPEND ON A SMALL NUMBER OF SUPPLIERS FOR RAW MATERIALS, COMPONENTS AND SUBASSEMBLIES 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 raw 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 important components and raw materials, including gold. As a result, we are exposed to 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 may delay our shipments; - - our inadvertent use of defective or contaminated raw 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; - - the exposure of our suppliers and subcontractors to disruption for a variety of reasons, including work stoppage, fire, earthquake, flooding or other natural disasters; and - - delays in the delivery of raw materials or subassemblies, which, in turn, may cause delays in some of our shipments; and - - the loss of suppliers as a result of the consolidation of suppliers in the industry. 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. - 25 - 26 KULICKE AND SOFFA INDUSTRIES, INC. June 30, 2001 - -------------------------------------------------------------------------------- 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 and advanced packaging services and technology. Additionally, during fiscal 2001, we acquired two companies that design and manufacture test interconnect solutions, Cerprobe Corporation and Probe Technology Corporation, and we have combined their operations to create our test division. The success of this combination requires the integration of formerly separate businesses into one another and then into our operating and management structure. If this integration is unsuccessful or slower than anticipated, the benefits of these acquisitions may be deferred or may not be realized. 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, demands 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 could 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, test interconnect solutions and advanced packaging technologies often require different organizational and managerial skills than sales of traditional wire bonding technology. We cannot assure you that we will be able to develop the necessary skills to successfully produce and market these different products. WE MAY BE UNABLE TO CONTINUE TO COMPETE SUCCESSFULLY IN THE HIGHLY COMPETITIVE SEMICONDUCTOR EQUIPMENT, PACKAGING MATERIALS, TEST INTERCONNECT AND ADVANCED PACKAGING TECHNOLOGY INDUSTRIES. The semiconductor equipment, packaging materials, test interconnect solutions and advanced packaging technology industries are intensely competitive. In the semiconductor equipment, test interconnect solutions and advanced packaging technology markets, the significant competitive factors include performance quality, customer support and price, and in the semiconductor packaging materials industry include price, delivery and quality. In each of our markets, we face competition and the threat of competition from established competitors and potential new entrants, some of which have significantly greater financial, engineering, manufacturing and marketing resources than we have. Some of these competitors are Asian and European 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 and materials with improved price and performance characteristics. New product and materials 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 or materials for a - 26 - 27 KULICKE AND SOFFA INDUSTRIES, INC. June 30, 2001 - -------------------------------------------------------------------------------- particular assembly operation, we may not be able to sell products or materials to that manufacturer or assembler for a significant period of time because manufacturers and assemblers sometimes develop lasting relations with suppliers, and assembly equipment in our industry often goes 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. WE SELL MOST OF OUR PRODUCTS TO CUSTOMERS LOCATED OUTSIDE OF THE UNITED STATES, WE HAVE SUBSTANTIAL MANUFACTURING OPERATIONS LOCATED OUTSIDE OF THE UNITED STATES, AND WE RELY ON INDEPENDENT FOREIGN DISTRIBUTION CHANNELS FOR CERTAIN PRODUCT LINES, ALL 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, 91% of our net sales for fiscal 2000 and approximately 60% of our net sales for the nine months ended June 30, 2001 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 large 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. We also rely on non-U.S. suppliers for materials and components used in the equipment that we sell and we maintain substantial manufacturing operations in countries other than the United States, including operations in Israel, Singapore and Taiwan. We manufacture substantially all of our automatic ball bonders in Singapore. In addition, we rely on independent foreign distribution channels for certain product lines. 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 and materials suppliers have 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 materially and 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 primarily 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 also 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: - 27 - 28 KULICKE AND SOFFA INDUSTRIES, INC. June 30, 2001 - -------------------------------------------------------------------------------- - - 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 and alliances may also have rights to technology that we develop through these joint ventures and alliances. We may incur significant expense to protect or enforce our intellectual property rights. If we are unable to protect our intellectual property rights, our competitive position may be weakened. 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 on 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 - 28 - 29 KULICKE AND SOFFA INDUSTRIES, INC. June 30, 2001 - -------------------------------------------------------------------------------- of this litigation will not materially and adversely affect our business, financial condition and operating results. WE MAY BE MATERIALLY AND ADVERSELY AFFECTED BY ENVIRONMENTAL AND SAFETY LAWS AND REGULATIONS. We are subject to various and frequently changing federal, state, local and foreign laws and regulations governing, among other things, the generation, storage, use, emission, discharge, transportation and disposal of hazardous material, investigation and remediation of contaminated sites and the health and safety of our employees. Increasingly, public attention has focused on the environmental impact of manufacturing operations and the risk to neighbors of chemical releases from such operations. Proper waste disposal plays an important role in the operation of our manufacturing plants. In many of our facilities we maintain wastewater treatment systems that remove metals and other contaminants from process wastewater. These facilities operate under effluent discharge permits that must be renewed periodically. A violation of those permits may lead to revocation of the permits, fines, penalties or the incurrence of capital or other costs to comply with the permits. In the future, applicable land use and environmental regulations may: (1) impose upon us the need for additional capital equipment or other process requirements, (2) restrict our ability to expand our operations, (3) subject us to liability, and/or (4) cause us to curtail our operations. We cannot assure you that any costs or liabilities associated with complying with these environmental laws will not materially and adversely affect our business, financial condition and operating results. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. At June 30, 2001, we had a non-trading investment portfolio, excluding those classified as cash and cash equivalents, of $43.7 million. Due to the short term nature of the investment portfolio, if market interest rates were to increase immediately and uniformly by 100 basis points, there would be no material adverse effect on our business, financial condition or operating results. PART II. OTHER INFORMATION. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 10.1 Receivables purchase agreement among KSI Funding Corporation, Kulicke and Soffa Industries, Inc., Market Street Funding Corporation, and PNC Bank, National Association dated April 17, 2001. 10.2 Purchase and sale agreement between American Fine Wire Corporation, Cerprobe Corporation, Kulicke and Soffa Industries, Inc., Probe Technology Corporation and Semitec, as the Originators, and KSI Funding Corporation, dated April 17, 2001. (b) Reports on Form 8-K None - 29 - 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KULICKE AND SOFFA INDUSTRIES, INC. Date: August 8, 2001 By: /s/ CLIFFORD G. SPRAGUE -------------------------------------- Clifford G. Sprague Senior Vice President, Chief Financial Officer (Principal Financial Officer) - 30 - EX-10.1 3 w52042ex10-1.txt RECEIVABLES PURCHASE AGREEMENT 1 RECEIVABLES PURCHASE AGREEMENT dated as of April 17, 2001 among KSI FUNDING CORPORATION KULICKE AND SOFFA INDUSTRIES, INC. MARKET STREET FUNDING CORPORATION and PNC BANK, NATIONAL ASSOCIATION 2 TABLE OF CONTENTS ARTICLE I. AMOUNTS AND TERMS OF THE PURCHASES Section 1.1. Purchase Facility ............................................. 1 Section 1.2. Making Purchases .............................................. 1 Section 1.3. Purchased Interest Computation ................................ 2 Section 1.4. Settlement Procedures ......................................... 3 Section 1.5. Fees .......................................................... 6 Section 1.6. Payments and Computations, Etc. ............................... 6 Section 1.7. Increased Costs ............................................... 6 Section 1.8. Requirements of Law ........................................... 7 Section 1.9. Inability to Determine Euro-Rate .............................. 8 ARTICLE II. REPRESENTATIONS AND WARRANTIES; COVENANTS; TERMINATION EVENTS Section 2.1. Representations and Warranties; Covenants ..................... 9 Section 2.2. Termination Events ............................................ 9 ARTICLE III. INDEMNIFICATION Section 3.1. Indemnities by the Seller ..................................... 9 Section 3.2. Indemnities by the Servicer ................................... 11 ARTICLE IV. ADMINISTRATION AND COLLECTIONS Section 4.1. Appointment of the Servicer ................................... 11 Section 4.2. Duties of the Servicer ........................................ 12 Section 4.3. Lock-Box Arrangements ......................................... 13 Section 4.4. Enforcement Rights ............................................ 14 Section 4.5. Responsibilities of the Seller ................................ 15 Section 4.6. Servicing Fee ................................................. 15
i 3 ARTICLE V. MISCELLANEOUS Section 5.1. Amendments, Etc. .............................................. 15 Section 5.2. Notices, Etc. ................................................. 16 Section 5.3. Assignability ................................................. 16 Section 5.4. Costs, Expenses and Taxes ..................................... 17 Section 5.5. No Proceedings; Limitation on Payments ........................ 17 Section 5.6. Confidentiality ............................................... 17 Section 5.7. GOVERNING LAW AND JURISDICTION ................................ 18 Section 5.8. Execution in Counterparts ..................................... 18 Section 5.9. Survival of Termination ....................................... 18 Section 5.10. WAIVER OF JURY TRIAL ......................................... 18 Section 5.11. Entire Agreement ............................................. 19 Section 5.12. Headings ..................................................... 19 Section 5.13. Issuer's, Administrator's, Seller's and Servicer's Liabilities 19 Section 5.14. Tax Characterization ......................................... 19
EXHIBIT I Definitions EXHIBIT II Conditions of Purchases EXHIBIT III Representations and Warranties EXHIBIT IV Covenants EXHIBIT V Termination Events SCHEDULE I Credit and Collection Policy SCHEDULE II Lock-box Banks and Lock-box Accounts SCHEDULE III Trade Names SCHEDULE IV Fiscal Months ANNEX A Form of Information Package ANNEX B Form of Purchase Notice ANNEX C Form of Paydown Notice ii 4 This RECEIVABLES PURCHASE AGREEMENT (as amended, supplemented or otherwise modified from time to time, this "Agreement") is entered into as of April 17, 2001, among KSI FUNDING CORPORATION, a Delaware corporation, as seller (the "Seller"), KULICKE AND SOFFA INDUSTRIES, INC., a Pennsylvania corporation ("KSI"), as initial servicer (in such capacity, together with its successors and permitted assigns in such capacity, the "Servicer"), MARKET STREET FUNDING CORPORATION, a Delaware corporation (together with its successors and permitted assigns, the "Issuer"), and PNC BANK, NATIONAL ASSOCIATION, a national banking association ("PNC"), as administrator (in such capacity, together with its successors and assigns in such capacity, the "Administrator"). PRELIMINARY STATEMENTS. Certain terms that are capitalized and used throughout this Agreement are defined in Exhibit I. References in the Exhibits hereto to the "Agreement" refer to this Agreement, as amended, supplemented or otherwise modified from time to time. The Seller desires to sell, transfer and assign an undivided variable percentage interest in a pool of receivables, and the Issuer desires to acquire such undivided variable percentage interest, as such percentage interest shall be adjusted from time to time based upon, in part, reinvestment payments that are made by the Issuer. In consideration of the mutual agreements, provisions and covenants contained herein, the parties hereto agree as follows: ARTICLE I. AMOUNTS AND TERMS OF THE PURCHASES Section 1.1. Purchase Facility. (a) On the terms and conditions hereinafter set forth, the Issuer hereby agrees to purchase, and make reinvestments of, undivided percentage ownership interests with regard to the Purchased Interest from the Seller from time to time from the date hereof to the Facility Termination Date. Under no circumstances shall the Issuer make any such purchase or reinvestment if, after giving effect to such purchase or reinvestment, the aggregate outstanding Capital of the Purchased Interest would exceed the Purchase Limit. (b) The Seller may, upon at least 60 days' written notice to the Administrator, terminate the purchase facility provided in this Section in whole or, upon at least 30 days' written notice to the Administrator, from time to time, irrevocably reduce in part the unused portion of the Purchase Limit; provided, that each partial reduction shall be in the amount of at least $5,000,000, or an integral multiple of $1,000,000 in excess thereof, and that, unless terminated in whole, the Purchase Limit shall in no event be reduced below $20,000,000. Section 1.2. Making Purchases. (a) Each purchase (but not reinvestment) of undivided percentage ownership interests with regard to the Purchased Interest hereunder shall be made upon the Seller's irrevocable written notice in the form of Annex B (the "Purchase Notice") delivered to 5 the Administrator in accordance with Section 5.2 (which notice must be received by the Administrator before 11:00 a.m., New York City time) at least two Business Days before the requested purchase date, which notice shall specify: (A) the amount requested to be paid to the Seller (such amount, which shall not be less than $1,000,000 and shall be in integral multiples of $100,000, being the Capital relating to the undivided percentage ownership interest then being purchased), (B) the date of such purchase (which shall be a Business Day), and (C) the pro forma calculation of the Purchased Interest after giving effect to the increase in Capital. (b) On the date of each purchase (but not reinvestment) of undivided percentage ownership interests with regard to the Purchased Interest hereunder, the Issuer shall, upon satisfaction of the applicable conditions set forth in Exhibit II, make available to the Seller in same day funds, at PNC Bank, National Association, Philadelphia, PA, account number 031000053, ABA 8400108586, an amount equal to the Capital relating to the undivided percentage ownership interest then being purchased. (c) Effective on the date of each purchase pursuant to this Section and each reinvestment pursuant to Section 1.4, the Seller hereby sells and assigns to the Issuer an undivided percentage ownership interest in: (i) each Pool Receivable then existing, (ii) all Related Security with respect to such Pool Receivables, and (iii) all Collections with respect to, and other proceeds of, such Pool Receivables and Related Security. (d) To secure all of the Seller's obligations (monetary or otherwise) under this Agreement and the other Transaction Documents to which it is a party, whether now or hereafter existing or arising, due or to become due, direct or indirect, absolute or contingent, the Seller hereby grants to the Issuer a security interest in all of the Seller's right, title and interest (including any undivided interest of the Seller) in, to and under all of the following, whether now or hereafter owned, existing or arising: (i) all Pool Receivables, (ii) all Related Security with respect to such Pool Receivables, (iii) all Collections with respect to, and other proceeds of, such Pool Receivables and Related Security, (iv) the Lock-Box Accounts and all amounts on deposit therein, and all certificates and instruments, if any, from time to time evidencing such Lock-Box Accounts and such amounts on deposit therein, (v) all books and records of each Receivable, and all rights, remedies, powers and privileges of the Seller in any accounts into which Collections are or may be received and (vi) all proceeds and products of, and all amounts received or receivable under any or all of, the foregoing (collectively, the "Pool Assets"). The Issuer shall have, with respect to the Pool Assets, and in addition to all the other rights and remedies available to the Issuer, all the rights and remedies of a secured party under any applicable UCC. Section 1.3. Purchased Interest Computation. The Purchased Interest shall be initially computed on the date of the initial purchase hereunder. Thereafter, until the Facility Termination Date, the Purchased Interest shall be automatically recomputed (or deemed to be recomputed) on each Business Day other than a Termination Day. From and after the occurrence of any Termination Day, the Purchased Interest shall (until the event(s) giving rise to such Termination Day are satisfied or are waived by the Administrator) be deemed to be 100%. The Purchased Interest shall become zero when the Capital thereof and Discount thereon shall have been paid in full, all the amounts 2 6 owed by the Seller and the Servicer hereunder to the Issuer, the Administrator and any other Indemnified Party or Affected Person are paid in full, and the Servicer shall have received the accrued Servicing Fee thereon. Section 1.4. Settlement Procedures. (a) The collection of the Pool Receivables shall be administered by the Servicer in accordance with this Agreement. The Seller shall provide to the Servicer on a timely basis all information needed for such administration, including notice of the occurrence of any Termination Day and current computations of the Purchased Interest. (b) The Servicer shall, on each day on which Collections of Pool Receivables are received (or deemed received) by the Seller or the Servicer: (i) set aside and hold in trust (and shall, at the request of the Administrator, segregate in a separate account approved by the Administrator) for the Issuer, out of the Issuer's Share of such Collections, first, an amount equal to the Discount accrued through such day for each Portion of Capital and not previously set aside, second, an amount equal to the fees set forth in the Fee Letter accrued and unpaid through such day, and third, to the extent funds are available therefor, an amount equal to the Issuer's Share of the Servicing Fee accrued through such day and not previously set aside, (ii) subject to Section 1.4(f), if such day is not a Termination Day, remit to the Seller, on behalf of the Issuer, the remainder of the Issuer's Share of such Collections. Such remainder shall be automatically reinvested in Pool Receivables, and in the Related Security, Collections and other proceeds with respect thereto; provided, however, that if the Purchased Interest would exceed 100%, then the Servicer shall not reinvest, but shall set aside and hold in trust for the Issuer (and shall, at the request of the Administrator, segregate in a separate account approved by the Administrator) a portion of such Collections that, together with the other Collections set aside pursuant to this paragraph, shall equal the amount necessary to reduce the Purchased Interest to 100%, (iii) if such day is a Termination Day, set aside, segregate and hold in trust (and shall, at the request of the Administrator, segregate in a separate account approved by the Administrator) for the Issuer the entire remainder of the Issuer's Share of the Collections; provided, that if amounts are set aside and held in trust on any Termination Day of the type described in clause (a) of the definition of "Termination Day" and, thereafter, the conditions set forth in Section 2 of Exhibit II are satisfied or waived by the Administrator, such previously set-aside amounts shall be reinvested in accordance with clause (ii) on the day of such subsequent satisfaction or waiver of conditions, and (iv) release to the Seller (subject to Section 1.4(f)) for its own account any Collections in excess of: (x) amounts required to be reinvested in accordance with clause (ii) or the proviso to clause (iii) plus (y) the amounts that are required to be set aside pursuant to clause (i), the proviso to clause (ii) and clause (iii) plus (z) the Seller's Share of the Servicing Fee accrued and unpaid through such day and all reasonable and appropriate out- 3 7 of-pocket costs and expenses of the Servicer for servicing, collecting and administering the Pool Receivables. (c) The Servicer shall deposit into the Administration Account (or such other account designated by the Administrator), on each Settlement Date (or solely with respect to Collections held for the Issuer pursuant to clause (f)(iii) such other date approved by the Administrator with at least five (5) Business Days prior written notice to the Administrator of such payment), Collections held for the Issuer pursuant to clause (b)(i) or (f) plus the amount of Collections then held for the Issuer pursuant to clauses (b)(ii) and (iii) of Section 1.4; provided, that if KSI or an Affiliate thereof is the Servicer, such day is not a Termination Day and the Administrator has not notified KSI (or such Affiliate) that the right to retain the portion of the Collections set aside pursuant to clause (b)(i) that represent the Issuer's Share of the Servicing Fee is revoked, KSI (or such Affiliate) may retain the portion of the Collections set aside pursuant to clause (b)(i) that represents the Issuer's Share of the Servicing Fee. On the last day of each Settlement Period, the Administrator will notify the Servicer by facsimile of the amount of Discount accrued with respect to each Portion of Capital during such Settlement Period or portion thereof. (d) Upon receipt of funds deposited into the Administration Account pursuant to clause (c), the Administrator shall cause such funds to be distributed as follows: (i) if such distribution occurs on a day that is not a Termination Day and the Purchased Interest does not exceed 100%, first to the Issuer in payment in full of all accrued Discount and fees (other than Servicing Fees) with respect to each Portion of Capital, and second, if the Servicer has set aside amounts in respect of the Servicing Fee pursuant to clause (b)(i) and has not retained such amounts pursuant to clause (c), to the Servicer (payable in arrears on each Settlement Date) in payment in full of the Issuer's Share of accrued Servicing Fees so set aside, and (ii) if such distribution occurs on a Termination Day or on a day when the Purchased Interest exceeds 100%, first to the Issuer in payment in full of all accrued Discount with respect to each Portion of Capital, second to the Issuer in payment in full of Capital (or, if such day is not a Termination Day, the amount necessary to reduce the Purchased Interest to 100%), third, to the Servicer in payment in full of all accrued Servicing Fees, and fourth, if the Capital and accrued Discount with respect to each Portion of Capital have been reduced to zero, and all accrued Servicing Fees payable to the Servicer have been paid in full, to the Issuer, the Administrator and any other Indemnified Party or Affected Person in payment in full of any other amounts owed thereto by the Seller hereunder. After the Capital, Discount, fees payable pursuant to the Fee Letter and Servicing Fees with respect to the Purchased Interest, and any other amounts payable by the Seller and the Servicer to the Issuer, the Administrator or any other Indemnified Party or Affected Person hereunder, have been paid in full, all additional Collections with respect to the Purchased Interest shall be paid to the Seller for its own account. 4 8 (e) For the purposes of this Section 1.4: (i) if on any day the Outstanding Balance of any Pool Receivable is reduced or adjusted as a result of any defective, rejected, returned, repossessed or foreclosed goods or services, or any revision, cancellation, allowance, rebate, discount or other adjustment made by the Seller or any Affiliate of the Seller, or any setoff or dispute between the Seller or any Affiliate of the Seller and an Obligor, the Seller shall be deemed to have received on such day a Collection of such Pool Receivable in the amount of such reduction or adjustment; (ii) if on any day any of the representations or warranties in Section 1(g) or (n) of Exhibit III is not true with respect to any Pool Receivable, the Seller shall be deemed to have received on such day a Collection of such Pool Receivable in full; (iii) except as provided in clause (i) or (ii), or as otherwise required by applicable law or the relevant Contract, all Collections received from an Obligor of any Receivable shall be applied to the Receivables of such Obligor in the order of the age of such Receivables, starting with the oldest such Receivable, unless such Obligor designates in writing its payment for application to specific Receivables; and (iv) if and to the extent the Administrator or the Issuer shall be required for any reason to pay over to an Obligor (or any trustee, receiver, custodian or similar official in any Insolvency Proceeding) any amount received by it hereunder, such amount shall be deemed not to have been so received by the Administrator or the Issuer but rather to have been retained by the Seller and, accordingly, the Administrator or the Issuer, as the case may be, shall have a claim against the Seller for such amount, payable when and to the extent that any distribution from or on behalf of such Obligor is made in respect thereof. (f) If at any time the Seller shall wish to cause the reduction of Capital (but not to commence the liquidation, or reduction to zero, of the entire Capital of the Purchased Interest), the Seller may do so as follows: (i) the Seller shall give the Administrator and the Servicer written notice in the form of Annex C (A) at least two Business Days' prior to the date of such reduction for any reduction of Capital less than or equal to $10,000,000 and (B) at least five Business Days prior to the date of such reduction for any reduction of Capital greater than $10,000,000 in each case such notice shall include the amount of such proposed reduction and the proposed date on which such reduction will commence; (ii) on the proposed date of the commencement of such reduction and on each day thereafter, the Servicer shall cause Collections not to be reinvested until the amount thereof not so reinvested shall equal the desired amount of reduction; and (iii) the Servicer shall hold such Collections in trust for the Issuer, for payment to the Administrator on (1) the next Settlement Date immediately following the current Settlement 5 9 Period or (2) such other date approved by the Administrator with at least five (5) Business Days prior written notice to the Administrator of such payment, and Capital shall be deemed reduced in the amount to be paid to the Administrator only when in fact finally so paid; provided, that (a) the amount of any such reduction shall be not less than $1,000,000 and shall be an integral multiple of $100,000, and the entire Capital of the Purchased Interest after giving effect to such reduction shall be not less than $20,000,000 and shall be in an integral multiple of $100,000 (unless the entire Capital shall have been reduced to zero) and (b) the Seller shall choose a reduction amount, and the date of commencement thereof, so that to the extent practicable such reduction shall commence and conclude in the same Settlement Period. Section 1.5. Fees. The Seller shall pay to the Administrator certain fees in the amounts and on the dates set forth in a letter, dated the date hereof, among KSI, the Seller and the Administrator (as such letter agreement may be amended, supplemented or otherwise modified from time to time, the "Fee Letter"). Section 1.6. Payments and Computations, Etc. (a) All amounts to be paid or deposited by the Seller or the Servicer hereunder shall be made without reduction for offset or counterclaim and shall be paid or deposited no later than noon (New York City time) on the day when due in same day funds to the Administration Account. All amounts received after noon (New York City time) will be deemed to have been received on the next Business Day. (b) The Seller or the Servicer, as the case may be, shall, to the extent permitted by law, pay interest on any amount not paid or deposited by the Seller or the Servicer, as the case may be, when due hereunder, at an interest rate equal to 2.0% per annum above the Base Rate, payable on demand. (c) All computations of interest under clause (b) and all computations of Discount, fees and other amounts hereunder shall be made on the basis of a year of 360 (or 365 or 366, as applicable, with respect to Discount or other amounts calculated by reference to the Base Rate) days for the actual number of days elapsed. Whenever any payment or deposit to be made hereunder shall be due on a day other than a Business Day, such payment or deposit shall be made on the next Business Day and such extension of time shall be included in the computation of such payment or deposit. Section 1.7. Increased Costs. (a) If the Administrator, the Issuer, any Purchaser, any other Program Support Provider or any of their respective Affiliates (each an "Affected Person") reasonably determines that the existence of or compliance with: (i) any law or regulation or any change therein or in the interpretation or application thereof, in each case adopted, issued or occurring after the date hereof, or (ii) any request, guideline or directive from any central bank or other Governmental Authority (whether or not having the force of law) issued or occurring after the date of this Agreement, affects or would affect the amount of capital required or expected to be maintained by such Affected Person, and such Affected Person determines that the amount of such capital is increased by or based upon the existence of any commitment to make purchases of (or otherwise to maintain the investment in) Pool Receivables related to this Agreement or any related liquidity facility, credit enhancement facility and other commitments of the same type, then, upon 6 10 demand by such Affected Person (with a copy to the Administrator), the Seller shall promptly pay to the Administrator, for the account of such Affected Person, from time to time as specified by such Affected Person, additional amounts sufficient to compensate such Affected Person in the light of such circumstances, to the extent that such Affected Person reasonably determines such increase in capital to be allocable to the existence of any of such commitments. A certificate as to such amounts submitted to the Seller and the Administrator by such Affected Person shall be conclusive and binding for all purposes, absent manifest error. (b) If, due to either: (i) the introduction of or any change in or in the interpretation of any law or regulation or (ii) compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to any Affected Person of agreeing to purchase or purchasing, or maintaining the ownership of, the Purchased Interest in respect of which Discount is computed by reference to the Euro-Rate, then, upon demand by such Affected Person, the Seller shall promptly pay to such Affected Person, from time to time as specified by such Affected Person, additional amounts sufficient to compensate such Affected Person for such increased costs. A certificate as to such amounts submitted to the Seller and the Administrator by such Affected Person shall be conclusive and binding for all purposes, absent manifest error. (c) If such increased costs affect the related Affected Person's portfolio of financing transactions, such Affected Person shall use reasonable averaging and attribution methods to allocate such increased costs to the transactions contemplated by this Agreement. Section 1.8. Requirements of Law. If any Affected Person reasonably determines that the existence of or compliance with: (a) any law or regulation or any change therein or in the interpretation or application thereof, in each case adopted, issued or occurring after the date hereof, or (b) any request, guideline or directive from any central bank or other Governmental Authority (whether or not having the force of law) issued or occurring after the date of this Agreement: (i) does or shall subject such Affected Person to any tax of any kind whatsoever with respect to this Agreement, any increase in the Purchased Interest or in the amount of Capital relating thereto, or does or shall change the basis of taxation of payments to such Affected Person on account of Collections, Discount or any other amounts payable hereunder (excluding taxes imposed on the overall pre-tax net income of such Affected Person, and franchise taxes imposed on such Affected Person, by the jurisdiction under the laws of which such Affected Person is organized or a political subdivision thereof), (ii) does or shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, or deposits or other liabilities in or for the account of, purchases, advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of such Affected Person that are not otherwise included in the determination of the Euro-Rate or the Base Rate hereunder, or (iii) does or shall impose on such Affected Person any other condition, 7 11 and the result of any of the foregoing is: (A) to increase the cost to such Affected Person of acting as Administrator, or of agreeing to purchase or purchasing or maintaining the ownership of undivided percentage ownership interests with regard to the Purchased Interest (or interests therein) or any Portion of Capital, or (B) to reduce any amount receivable hereunder (whether directly or indirectly), then, in any such case, without duplication to any amounts paid or payable pursuant to Section 1.7 upon demand by such Affected Person, the Seller shall promptly pay to such Affected Person additional amounts necessary to compensate such Affected Person for such additional cost or reduced amount receivable. All such amounts shall be payable as incurred. A certificate from such Affected Person to the Seller and the Administrator certifying, in reasonably specific detail, the basis for, calculation of, and amount of such additional costs or reduced amount receivable shall be conclusive and binding for all purposes, absent manifest error; provided, however, that no Affected Person shall be required to disclose any confidential or tax planning information in any such certificate. Section 1.9. Inability to Determine Euro-Rate. (a) If the Administrator determines before the first day of any Settlement Period (which determination shall be final and conclusive) that, by reason of circumstances affecting the interbank eurodollar market generally, deposits in dollars (in the relevant amounts for such Settlement Period) are not being offered to banks in the interbank eurodollar market for such Settlement Period, or adequate means do not exist for ascertaining the Euro-Rate for such Settlement Period, then the Administrator shall give notice thereof to the Seller. Thereafter, until the Administrator notifies the Seller that the circumstances giving rise to such suspension no longer exist, (a) no Portion of Capital shall be funded at the Alternate Rate determined by reference to the Euro-Rate and (b) the Discount for any outstanding Portions of Capital then funded at the Alternate Rate determined by reference to the Euro-Rate shall, on the last day of the then current Settlement Period, be converted to the Alternate Rate determined by reference to the Base Rate. (b) If, on or before the first day of any Settlement Period, the Administrator shall have been notified by any Purchaser that, such Purchaser has determined (which determination shall be final and conclusive) that, any enactment, promulgation or adoption of or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by a governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by such Purchaser with any guideline, request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for such Purchaser to fund or maintain any Portion of Capital at the Alternate Rate and based upon the Euro-Rate, the Administrator shall notify the Seller thereof. Upon receipt of such notice, until the Administrator notifies the Seller that the circumstances giving rise to such determination no longer apply, (a) no Portion of Capital shall be funded at the Alternate Rate determined by reference to the Euro-Rate and (b) the Discount for any outstanding Portions of Capital then funded at the Alternate Rate determined by reference to the Euro-Rate shall be converted to the Alternate Rate determined by reference to the Base Rate either (i) on the last day of the then current Settlement Period if such Purchaser may lawfully continue to maintain such Portion of Capital at the Alternate Rate determined by reference to the Euro-Rate to such day, or (ii) 8 12 immediately, if such Purchaser may not lawfully continue to maintain such Portion of Capital at the Alternate Rate determined by reference to the Euro-Rate to such day. ARTICLE II. REPRESENTATIONS AND WARRANTIES; COVENANTS; TERMINATION EVENTS Section 2.1. Representations and Warranties; Covenants. Each of the Seller, KSI and the Servicer hereby makes the representations and warranties, and hereby agrees to perform and observe the covenants, applicable to it set forth in Exhibits III and IV, respectively. Section 2.2. Termination Events. If any of the Termination Events set forth in Exhibit V shall occur, the Administrator may, by notice to the Seller, declare the Facility Termination Date to have occurred (in which case the Facility Termination Date shall be deemed to have occurred); provided, that automatically upon the occurrence of any event (without any requirement for the passage of time or the giving of notice) described in paragraph (f) of Exhibit V, the Facility Termination Date shall occur. Upon any such declaration, occurrence or deemed occurrence of the Facility Termination Date, the Issuer and the Administrator shall have, in addition to the rights and remedies that they may have under this Agreement, all other rights and remedies provided after default under the Pennsylvania UCC and under other applicable law, which rights and remedies shall be cumulative. ARTICLE III. INDEMNIFICATION Section 3.1. Indemnities by the Seller. Without limiting any other rights that the Administrator, the Issuer, any Program Support Provider or any of their respective Affiliates, employees, officers, directors, agents, counsel, successors, transferees or assigns (each, an "Indemnified Party") may have hereunder or under applicable law, the Seller hereby agrees to indemnify each Indemnified Party from and against any and all claims, damages, expenses, costs, losses and liabilities (including Attorney Costs) (all of the foregoing being collectively referred to as "Indemnified Amounts") arising out of or resulting from this Agreement (whether directly or indirectly), the use of proceeds of purchases or reinvestments, the ownership of the Purchased Interest, or any interest therein, or in respect of any Receivable, Related Security or Contract, excluding, however: (a) Indemnified Amounts to the extent resulting from gross negligence or willful misconduct on the part of such Indemnified Party or its officers, directors, agents or counsel, (b) recourse (except as otherwise specifically provided in this Section 3.1) for collectibility or performance of the Receivables, and (c) Indemnified Amounts resulting from any act or failure to act by any Obligor in violation of the applicable Contract, or (d) any overall net income taxes or franchise taxes imposed on such Indemnified Party by the jurisdiction under the laws of which such Indemnified Party is organized or any political subdivision thereof. Without limiting or being 9 13 limited by the foregoing, and subject to the exclusions set forth in the preceding sentence, the Seller shall pay on demand (which demand shall be accompanied by documentation of the Indemnified Amounts, in reasonable detail) to each Indemnified Party any and all amounts necessary to indemnify such Indemnified Party from and against any and all Indemnified Amounts relating to or resulting from any of the following: (i) the failure of any Receivable included in the calculation of the Net Receivables Pool Balance as an Eligible Receivable to be an Eligible Receivable, the failure of any information contained in an Information Package to be true and correct, or the failure of any other information provided to the Issuer or the Administrator with respect to Receivables or this Agreement to be true and correct, (ii) the failure of any representation, warranty or statement made or deemed made by the Seller (or any of its officers) under or in connection with this Agreement to have been true and correct as of the date made or deemed made in all material respects when made, (iii) the failure by the Seller to comply with any applicable law, rule or regulation with respect to any Pool Receivable or the related Contract, or the failure of any Pool Receivable or the related Contract to conform to any such applicable law, rule or regulation, (iv) the failure to vest in the Issuer a valid and enforceable: (A) perfected undivided percentage ownership interest, to the extent of the Purchased Interest, in the Receivables in, or purporting to be in, the Receivables Pool and the other Pool Assets, or (B) first priority perfected security interest in the Pool Assets, in each case, free and clear of any Adverse Claim, (v) the failure to have filed, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Receivables in, or purporting to be in, the Receivables Pool and the other Pool Assets, whether at the time of any purchase or reinvestment or at any subsequent time, (vi) any dispute, claim, offset or defense (other than discharge in bankruptcy of the Obligor) of the Obligor to the payment of any Receivable in, or purporting to be in, the Receivables Pool (including a defense based on such Receivable or the related Contract not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the sale of the goods or services related to such Receivable or the furnishing or failure to furnish such goods or services or relating to collection activities with respect to such Receivable (if such collection activities were performed by the Seller or any of its Affiliates acting as Servicer or by any agent or independent contractor retained by the Seller or any of its Affiliates), 10 14 (vii) any failure of the Seller (or any of its Affiliates acting as the Servicer) to perform its duties or obligations in accordance with the provisions hereof or under the Contracts, (viii) any products liability or other claim, investigation, litigation or proceeding arising out of or in connection with merchandise, insurance or services that are the subject of any Contract, (ix) the commingling of Collections at any time with other funds, (x) the use of proceeds of purchases or reinvestments, or (xi) any reduction in Capital as a result of the distribution of Collections pursuant to Section 1.4(d), if all or a portion of such distributions shall thereafter be rescinded or otherwise must be returned for any reason. Section 3.2. Indemnities by the Servicer. Without limiting any other rights that the Administrator, the Issuer or any other Indemnified Party may have hereunder or under applicable law, the Servicer hereby agrees to indemnify each Indemnified Party from and against any and all Indemnified Amounts arising out of or resulting from (whether directly or indirectly): (a) the failure of any information contained in an Information Package to be true and correct, or the failure of any other information provided to the Issuer or the Administrator by, or on behalf of, the Servicer to be true and correct, (b) the failure of any representation, warranty or statement made or deemed made by the Servicer (or any of its officers) under or in connection with this Agreement to have been true and correct as of the date made or deemed made in all material respects when made, (c) the failure by the Servicer to comply with any applicable law, rule or regulation with respect to any Pool Receivable or the related Contract, (d) any dispute, claim, offset or defense of the Obligor to the payment of any Receivable in, or purporting to be in, the Receivables Pool resulting from or related to the collection activities with respect to such Receivable, or (e) any failure of the Servicer to perform its duties or obligations in accordance with the provisions hereof or any other Transaction Document to which it is a party, (f) the failure to have filed, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Receivables, in or purporting to be in the Receivables Pool and any other Pool Assets, whether at the time of any purchase or reinvestment or at any subsequent time, or (g) any commingling by the Servicer of Collections at any time with other funds. ARTICLE IV. ADMINISTRATION AND COLLECTIONS Section 4.1. Appointment of the Servicer. (a) The servicing, administering and collection of the Pool Receivables shall be conducted by the Person so designated from time to time as the Servicer in accordance with this Section. Until the Administrator gives notice to KSI (in accordance 11 15 with this Section) of the designation of a new Servicer, KSI is hereby designated as, and hereby agrees to perform the duties and obligations of, the Servicer pursuant to the terms hereof. Upon the occurrence of a Termination Event, the Administrator may designate as Servicer any Person (including itself) to succeed KSI or any successor Servicer, on the condition in each case that any such Person so designated shall agree to perform the duties and obligations of the Servicer pursuant to the terms hereof. (b) Upon the designation of a successor Servicer as set forth in clause (a), KSI agrees that it will terminate its activities as Servicer hereunder in an orderly manner that the Administrator determines will facilitate the transition of the performance of such activities to the new Servicer, and KSI shall reasonably cooperate with and assist such new Servicer. Such cooperation shall include all reasonable actions to permit access to and transfer of related records and use by the new Servicer of all licenses, hardware or software necessary or desirable to collect the Pool Receivables and the Related Security. (c) KSI acknowledges that, in making their decision to execute and deliver this Agreement, the Administrator and the Issuer have relied on KSI's agreement to act as Servicer hereunder. Accordingly, KSI agrees that it will not voluntarily resign as Servicer. (d) The Servicer may delegate its duties and obligations hereunder to any subservicer (each a "Sub-Servicer"); provided, that, in each such delegation: (i) such Sub-Servicer shall agree in writing to perform the duties and obligations of the Servicer pursuant to the terms hereof, (ii) the Servicer shall remain primarily liable for the performance of the duties and obligations so delegated, (iii) the Seller, the Administrator and the Issuer shall have the right to look solely to the Servicer for performance, and (iv) the terms of any agreement with any Sub-Servicer shall provide that the Administrator may terminate such agreement upon the termination of the Servicer hereunder by giving notice of its desire to terminate such agreement to the Servicer (and the Servicer shall provide appropriate notice to each such Sub-Servicer); provided, however, that if any such delegation is to any Person other than an Originator, the Administrator shall have consented in writing in advance to such delegation which consent shall not be unreasonably withheld. Section 4.2. Duties of the Servicer. (a) The Servicer shall take or cause to be taken all such action as may be necessary or advisable to administer and collect each Pool Receivable from time to time, all in accordance with this Agreement and all applicable laws, rules and regulations, with reasonable care and diligence, and in accordance with the Credit and Collection Policies. The Servicer shall set aside, for the accounts of the Seller and the Issuer, the amount of the Collections to which each is entitled in accordance with Article I. The Servicer may, in accordance with the applicable Credit and Collection Policy, extend the maturity of any Pool Receivable (but not beyond 30 days) and extend the maturity or adjust the Outstanding Balance of any Defaulted Receivable as the Servicer may determine to be appropriate to maximize Collections thereof; provided, however, that: for the purposes of this Agreement, (i) such extension shall not change the number of days such Pool Receivable has remained unpaid from the date of the original due date related to such Pool Receivable, (ii) such extension or adjustment shall not alter the status of such Pool Receivable as a Delinquent Receivable or a Defaulted Receivable or limit the rights of the Issuer or the 12 16 Administrator under this Agreement and (iii) if a Termination Event has occurred and KSI or an Affiliate thereof is serving as the Servicer, KSI or such Affiliate may make such extension or adjustment only upon the prior approval of the Administrator. The Seller shall deliver to the Servicer and the Servicer shall hold for the benefit of the Seller and the Administrator (individually and for the benefit of the Issuer), in accordance with their respective interests, all records and documents (including computer tapes or disks) with respect to each Pool Receivable. Notwithstanding anything to the contrary contained herein, the Administrator may direct the Servicer (whether the Servicer is KSI or any other Person) to commence or settle any legal action to enforce collection of any Pool Receivable or to foreclose upon or repossess any Related Security; provided, that unless so directed by the Administrator, the Servicer shall have no obligation to commence or settle any such legal action. (b) The Servicer shall, as soon as practicable following actual receipt of collected funds, turn over to the Seller the collections of any indebtedness that is not a Pool Receivable, less, if KSI or an Affiliate thereof is not the Servicer, all reasonable and appropriate out-of-pocket costs and expenses of such Servicer of servicing, collecting and administering such collections. The Servicer, if other than KSI or an Affiliate thereof, shall, as soon as practicable upon demand, deliver to the Seller all records in its possession that evidence or relate to any indebtedness that is not a Pool Receivable, and copies of records in its possession that evidence or relate to any indebtedness that is a Pool Receivable. (c) The Servicer's obligations hereunder shall terminate on the later of: (i) the Facility Termination Date and (ii) the date on which all amounts required to be paid to the Issuer, the Administrator and any other Indemnified Party or Affected Person hereunder shall have been paid in full. After such termination, if KSI or an Affiliate thereof was not the Servicer on the date of such termination, the Servicer shall promptly deliver to the Seller all books, records and related materials that the Seller previously provided to the Servicer, or that have been obtained by the Servicer, in connection with this Agreement. Section 4.3. Lock-Box Arrangements. Within 30 days from the initial purchase hereunder, the Seller shall enter into Lock-Box Agreements with all of the Lock-Box Banks and deliver original counterparts thereof to the Administrator. Upon the occurrence of a Termination Event, the Administrator may at any time thereafter give notice to each Lock-Box Bank that the Administrator is exercising its rights under the Lock-Box Agreements to do any or all of the following: (a) to have the exclusive ownership and control of the Lock-Box Accounts transferred to the Administrator and to exercise exclusive dominion and control over the funds deposited therein (b) to have the proceeds that are sent to the respective Lock-Box Accounts redirected pursuant to the Administrator's instructions rather than deposited in the applicable Lock-Box Account, and (c) to take any or all other actions permitted under the applicable Lock-Box Agreement. The Seller hereby agrees that if the Administrator at any time takes any action set forth in the preceding sentence, the Administrator shall have exclusive control of the proceeds (including Collections) of all Pool Receivables and the Seller hereby further agrees to take any other action that the Administrator may 13 17 reasonably request to transfer such control. Any proceeds of Pool Receivables received by the Seller or the Servicer thereafter shall be sent immediately to the Administrator. The parties hereto hereby acknowledge that if at any time the Administrator takes control of any Lock-Box Account, the Administrator shall not have any rights to the funds therein in excess of the unpaid amounts due to the Administrator, the Issuer or any other Person hereunder, and the Administrator shall distribute or cause to be distributed such funds in accordance with Section 4.2(b) and Article I (in each case as if such funds were held by the Servicer thereunder). Section 4.4. Enforcement Rights. (a) At any time following the occurrence of a Termination Event: (i) the Administrator may direct the Obligors that payment of all amounts payable under any Pool Receivable is to be made directly to the Administrator or its designee, (ii) the Administrator may instruct the Seller or the Servicer to give notice of the Issuer's interest in Pool Receivables to each Obligor, which notice shall direct that payments be made directly to the Administrator or its designee, and the Seller or the Servicer, as the case may be, shall give such notice at the expense of the Seller or the Servicer, as the case may be; provided, that if the Seller or the Servicer, as the case may be, fails to so notify each Obligor, the Administrator (at the Seller's or the Servicer's, as the case may be, expense) may so notify the Obligors, and (iii) the Administrator may request the Servicer to, and upon such request the Servicer shall: (A) assemble all of the records necessary or desirable to collect the Pool Receivables and the Related Security, and transfer or license to a successor Servicer the use of all software necessary or desirable to collect the Pool Receivables and the Related Security, and make the same available to the Administrator or its designee at a place selected by the Administrator, and (B) segregate all cash, checks and other instruments received by it from time to time constituting Collections in a manner acceptable to the Administrator and, promptly upon receipt, remit all such cash, checks and instruments, duly endorsed or with duly executed instruments of transfer, to the Administrator or its designee. (b) The Seller hereby authorizes the Administrator, and irrevocably appoints the Administrator as its attorney-in-fact with full power of substitution and with full authority in the place and stead of the Seller, which appointment is coupled with an interest, to take any and all steps in the name of the Seller and on behalf of the Seller necessary or desirable, in the determination of the Administrator, to collect any and all amounts or portions thereof due under any and all Pool Assets, including endorsing the name of the Seller on checks and other instruments representing Collections and enforcing such Pool Assets. Notwithstanding anything to the contrary contained in this subsection, (i) the Administrator agrees that it will refrain from taking any such steps until the occurrence of a Termination Event and (ii) none of the powers conferred upon such attorney-in-fact pursuant to the preceding sentence shall subject such attorney-in-fact to any liability if any action taken by it shall prove to be inadequate or invalid, nor shall they confer any obligations upon such attorney-in-fact in any manner whatsoever; provided, however, that the Administrator shall not be 14 18 relieved of any liability it might otherwise have to any party hereunder for its own gross negligence or willful misconduct. Section 4.5. Responsibilities of the Seller. (a) Anything herein to the contrary notwithstanding, the Seller shall: (i) perform all of its obligations, if any, under the Contracts related to the Pool Receivables to the same extent as if interests in such Pool Receivables had not been transferred hereunder, and the exercise by the Administrator or the Issuer of their respective rights hereunder shall not relieve the Seller from such obligations, and (ii) pay when due any taxes, including any sales taxes payable in connection with the Pool Receivables and their creation and satisfaction. The Administrator and the Issuer shall not have any obligation or liability with respect to any Pool Asset, nor shall either of them be obligated to perform any of the obligations of the Seller, KSI or the Originator thereunder. (b) KSI hereby irrevocably agrees that if at any time it shall cease to be the Servicer hereunder, it shall act (if the then-current Servicer so requests) as the data-processing agent of the Servicer and, in such capacity, KSI shall conduct the data-processing functions of the administration of the Receivables and the Collections thereon in substantially the same way that KSI conducted such data-processing functions while it acted as the Servicer. Section 4.6. Servicing Fee. (a) Subject to clause (b), the Servicer shall be paid a fee equal to 1.0% per annum (the "Servicing Fee Rate") of the daily average aggregate Outstanding Balance of the Pool Receivables. The Issuer's Share of such fee shall be paid through the distributions contemplated by Section 1.4(d), and the Seller's Share of such fee shall be paid by the Seller on each Settlement Date. (b) If the Servicer ceases to be KSI or an Affiliate thereof, the servicing fee shall be the greater of: (i) the amount calculated pursuant to clause (a), and (ii) an alternative amount specified by the successor Servicer not to exceed 110% of the aggregate reasonable costs and expenses incurred by such successor Servicer in connection with the performance of its obligations as Servicer. ARTICLE V. MISCELLANEOUS Section 5.1. Amendments, Etc. No amendment or waiver of any provision of this Agreement or any other Transaction Document, or consent to any departure by the Seller or the Servicer therefrom, shall be effective unless in a writing signed by the Administrator, and, in the case of any amendment, by the other parties thereto; and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure on the part of the Issuer or the Administrator to exercise, and no delay in exercising any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. 15 19 Section 5.2. Notices, Etc. (i) All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including facsimile communication) and shall be personally delivered or sent by certified mail, postage prepaid, or by facsimile, to the intended party at the mailing address or facsimile number of such party set forth under its name on the signature pages hereof or at such other address or facsimile number as shall be designated by such party in a written notice to the other parties hereto. All such notices and communications shall be effective (i) if personally delivered, when received, (ii) if sent by certified mail three (3) Business Days after having been deposited in the mail, postage prepaid, and (iii) if transmitted by facsimile, when sent, receipt confirmed by telephone or electronic means (and shall be followed by a hard copy sent by first class mail). Section 5.3. Assignability. (a) This Agreement and the Issuer's rights and obligations herein (including ownership of the Purchased Interest or an interest therein) shall be assignable, in whole or in part, by the Issuer and its successors and assigns with the prior written consent of the Seller; provided, however, that such consent shall not be unreasonably withheld; and provided further, that no such consent shall be required if the assignment is made to PNC, any Affiliate of PNC (other than a director or officer of PNC), any Purchaser or other Program Support Provider or any Person that is: (i) in the business of issuing Notes and (ii) associated with or administered by PNC or any Affiliate of PNC. Each assignor may, in connection with the assignment, disclose to the applicable assignee (that shall have agreed to be bound by Section 5.6) any information relating to the Servicer, the Seller or the Pool Receivables furnished to such assignor by or on behalf of the Servicer, the Seller, the Issuer or the Administrator. The Administrator shall give prior written notice of any assignment of the Issuer's rights and obligations (including ownership of the Purchased Interest to any Person other than a Program Support Provider). (b) The Issuer may at any time grant to one or more banks or other institutions (each a "Purchaser") party to the Liquidity Agreement, or to any other Program Support Provider, participating interests in the Purchased Interest. In the event of any such grant by the Issuer of a participating interest to a Purchaser or other Program Support Provider, the Issuer shall remain responsible for the performance of its obligations hereunder. The Seller agrees that each Purchaser or other Program Support Provider shall be entitled to the benefits of Sections 1.7 and 1.8. (c) This Agreement and the rights and obligations of the Administrator hereunder shall be assignable, in whole or in part, by the Administrator and its successors and assigns; provided, that unless: (i) such assignment is to an Affiliate of PNC, (ii) it becomes unlawful for PNC to serve as the Administrator or (iii) a Termination Event exists, the Seller has consented to such assignment, which consent shall not be unreasonably withheld. (d) Except as provided in Section 4.1(d), none of the Seller, KSI or the Servicer may assign its rights or delegate its obligations hereunder or any interest herein without the prior written consent of the Administrator. 16 20 (e) Without limiting any other rights that may be available under applicable law, the rights of the Issuer may be enforced through it or by its agents. Section 5.4. Costs, Expenses and Taxes. (a) In addition to the rights of indemnification granted under Section 3.1, the Seller agrees to pay on demand (which demand shall be accompanied by documentation thereof in reasonable detail) all reasonable costs and expenses in connection with the preparation, execution, delivery and administration (including periodic internal audits by the Administrator of Pool Receivables) of this Agreement, the other Transaction Documents and the other documents and agreements to be delivered hereunder (and all reasonable costs and expenses in connection with any amendment, waiver or modification of any thereof), including: (i) Attorney Costs for the Administrator, the Issuer and their respective Affiliates and agents with respect thereto and with respect to advising the Administrator, the Issuer and their respective Affiliates and agents as to their rights and remedies under this Agreement and the other Transaction Documents, and (ii) all reasonable costs and expenses (including Attorney Costs), if any, of the Administrator, the Issuer and their respective Affiliates and agents in connection with the enforcement of this Agreement and the other Transaction Documents. (b) In addition, the Seller shall pay on demand any and all stamp and other taxes and fees payable in connection with the execution, delivery, filing and recording of this Agreement or the other documents or agreements to be delivered hereunder, and agrees to save each Indemnified Party harmless from and against any liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees (except as otherwise provided in Section 3.1(d)). Section 5.5. No Proceedings; Limitation on Payments. Each of the Seller, KSI, the Servicer, the Administrator, each assignee of the Purchased Interest or any interest therein, and each Person that enters into a commitment to purchase the Purchased Interest or interests therein, hereby covenants and agrees that it will not institute against, or join any other Person in instituting against, the Issuer any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding, or other proceeding under any federal or state bankruptcy or similar law, for one year and one day after the latest maturing Note issued by the Issuer is paid in full. The provision of this Section 5.5 shall survive any termination of this Agreement. Section 5.6. Confidentiality. Unless otherwise required by applicable law, each of the Seller and the Servicer agrees to maintain the confidentiality of this Agreement and the other Transaction Documents (and all drafts thereof) in communications with third parties and otherwise; provided, that this Agreement may be disclosed to: (a) third parties to the extent such disclosure is made pursuant to a written agreement of confidentiality in form and substance reasonably satisfactory to the Administrator, and (b) the Seller's legal counsel and auditors if they agree to hold it confidential. Unless otherwise required by applicable law, each of the Administrator and the Issuer agrees to maintain the confidentiality of non-public financial information regarding KSI and its Subsidiaries and Affiliates; provided, that such information may be disclosed to: (i) third parties to the extent such disclosure is made pursuant to a written agreement of confidentiality in form and substance reasonably satisfactory to KSI, (ii) legal counsel and auditors of the Issuer or the Administrator if they agree to hold it confidential, (iii) the rating agencies rating the Notes, (iv) any 17 21 Program Support Provider or potential Program Support Provider (if they agree to hold it confidential), (v) any placement agent placing the Notes and (vi) any regulatory authorities having jurisdiction over PNC, the Issuer, any Program Support Provider or any Purchaser. Section 5.7. GOVERNING LAW AND JURISDICTION. (a) THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE COMMONWEALTH OF PENNSYLVANIA EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF A SECURITY INTEREST OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE COMMONWEALTH OF PENNSYLVANIA. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF PENNSYLVANIA OR OF THE UNITED STATES FEDERAL COURT SITTING IN PITTSBURGH, PENNSYLVANIA; AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE PARTIES HERETO CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT PERMITTED BY LAW, ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, THAT IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. EACH OF THE PARTIES HERETO WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH SERVICE MAY BE MADE BY ANY OTHER MEANS PERMITTED BY PENNSYLVANIA LAW. Section 5.8. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which, when so executed, shall be deemed to be an original, and all of which, when taken together, shall constitute one and the same agreement. Section 5.9. Survival of Termination. The provisions of Sections 1.7, 1.8, 3.1, 3.2, 5.4, 5.5, 5.6, 5.7, 5.10 and 5.13 shall survive any termination of this Agreement. Section 5.10. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO WAIVES THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS OR OTHERWISE. EACH OF THE PARTIES HERETO AGREES THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, EACH OF THE PARTIES HERETO FURTHER AGREES THAT ITS RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY 18 22 OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING THAT SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR ANY PROVISION HEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. Section 5.11. Entire Agreement. This Agreement and the other Transaction Documents embody the entire agreement and understanding between the parties hereto, and supersede all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof, except for any prior arrangements made with respect to the payment by the Issuer of (or any indemnification for) any fees, costs or expenses payable to or incurred (or to be incurred) by or on behalf of the Seller, the Servicer and the Administrator. Section 5.12. Headings. The captions and headings of this Agreement and any Exhibit, Schedule or Annex hereto are for convenience of reference only and shall not affect the interpretation hereof or thereof. Section 5.13. Issuer's, Administrator's, Seller's and Servicer's Liabilities. The obligations of the Issuer, the Administrator, the Seller and the Servicer under the Transaction Documents are solely the corporate obligations of the Issuer, the Administrator, the Seller and the Servicer, respectively. No recourse shall be had for any obligation or claim arising out of or based upon any Transaction Document against any stockholder, employee, officer, director or incorporator of the Issuer, the Administrator, the Seller or the Servicer; provided, however, that this Section shall not relieve any such Person of any liability it might otherwise have for its own gross negligence or willful misconduct. Section 5.14. Tax Characterization. Each party to this Agreement (a) acknowledges and agrees that it is the intent of the parties to this Agreement that, for federal, state and local income and franchise tax purposes only, the Purchaser's Interest will be treated as evidence of indebtedness secured by the Receivables and proceeds thereof, and (b) agrees to treat the Purchaser's Interest for federal, state and local income and franchise tax purposes as indebtedness, and (c) agrees that the provisions of this Agreement and all related Transaction Documents shall be construed to further these intentions of the Parties. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 19 23 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. KSI FUNDING CORPORATION By: /s/ Clifford G. Sprague ------------------------------------------- Name: CLIFFORD G. SPRAGUE Title: VICE PRESIDENT Address: KSI Funding Corporation 2101 Blair Mill Road Willow Grove, PA 19090 Attention: Robert Amweg Telephone: (215) 784-6541 Facsimile: (215) 784-6180 KULICKE AND SOFFA INDUSTRIES, INC. By: /s/ Robert F. Amweg ------------------------------------------- Name: ROBERT F. AMWEG Title: VICE PRESIDENT, TREASURER Address: Kulicke and Soffa Industries, Inc. 2101 Blair Mill Road Willow Grove, PA 19090 Attention: Robert Amweg Telephone: (215) 784-6541 Facsimile: (215) 784-6180 S-1 Receivables Purchase Agreement 24 MARKET STREET FUNDING CORPORATION By: /s/ Evelyn Echevarria ------------------------------------------- Name: EVELYN ECHEVARRIA Title: VICE PRESIDENT Address: Market Street Funding Corporation c/o AMACAR Group, LLC 6525 Morrison Boulevard, Suite 318 Charlotte, North Carolina 28211 Attention: Douglas K. Johnson Telephone No.: (704) 365-0569 Facsimile No.: (704) 365-1362 With a copy to: PNC Bank, National Association One PNC Plaza 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 Attention: John T. Smathers Telephone No.: (412) 762-6440 Facsimile No.: (412) 762-9184 S-2 Receivables Purchase Agreement 25 PNC BANK, NATIONAL ASSOCIATION, as Administrator By: /s/ John Smathers ------------------------------------------- Name: John Smathers Title: Vice President Address: PNC Bank, National Association One PNC Plaza 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 Attention: John T. Smathers Telephone No.: (412) 762-6440 Facsimile No.: (412) 762-9184 S-3 Receivables Purchase Agreement 26 EXHIBIT I DEFINITIONS As used in the Agreement (including its Exhibits, Schedules and Annexes), the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined). Unless otherwise indicated, all Section, Annex, Exhibit and Schedule references in this Exhibit are to Sections of and Annexes, Exhibits and Schedules to the Agreement. "Administration Account" means the account (account number 1002422076, ABA number 043000096) of the Administrator maintained at the office of PNC at One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707, or such other account as may be so designated in writing by the Administrator to the Servicer. "Administrator" has the meaning set forth in the preamble to the Agreement. "Adverse Claim" means a lien, security interest or other charge or encumbrance, or any other type of preferential arrangement; it being understood that any thereof in favor of, or assigned to, (a) the Issuer or the Administrator (for the benefit of the Issuer) shall not constitute an Adverse Claim and (b) PNC, as agent pursuant to the terms of the Pledge Agreement dated as of December 21, 2000, as amended by the Amendment to Pledge Agreement dated as of April 17, 2001 between PNC, as agent and KSI as pledgor, shall not constitute an Adverse Claim. "Affected Person" has the meaning set forth in Section 1.7 of the Agreement. "Affiliate" means, as to any Person: (a) any Person that, directly or indirectly, is in control of, is controlled by or is under common control with such Person, or (b) who is a director or officer: (i) of such Person or (ii) of any Person described in clause (a), except that, with respect to the Issuer, Affiliate shall mean the holder(s) of its capital stock. For purposes of this definition, control of a Person shall mean the power, direct or indirect: (x) to vote 25% or more of the securities having ordinary voting power for the election of directors or managers of such Person, or (y) to direct or cause the direction of the management and policies of such Person, in either case whether by ownership of securities, contract, proxy or otherwise. "Agreement" has the meaning set forth in the preamble to the Agreement. "Alternate Rate" for any Settlement Period for any Portion of Capital of the Purchased Interest means an interest rate per annum equal to: (a) 1.50% per annum above the Euro-Rate for such Settlement Period; provided, however, that if (x) it shall become unlawful for any Purchaser or Program Support Provider to obtain funds in the London interbank eurodollar market in order to make, fund or maintain any Purchased Interest, or if such funds shall not be reasonably available to any Purchaser or Program Support Provider, or (y) there shall not be at least two Business Days I-1 27 prior to the commencement of an applicable Settlement Period to determine a Euro-Rate in accordance with its terms, then the "Alternate Rate" shall be equal to the Base Rate in effect for each day during the remainder of such Settlement Period or (b) if requested by the Seller the Base Rate for such Settlement Period; provided, however, that the "Alternate Rate" for any day while a Termination Event exists shall be an interest rate equal to 2.00% per annum above the Base Rate in effect on such day. "Attorney Costs" means and includes all reasonable fees and disbursements of any law firm or other external counsel. "Bankruptcy Code" means the United States Bankruptcy Reform Act of 1978 (11 U.S.C. Section 101, et seq.), as amended from time to time. "Base Rate" means, for any day, a fluctuating interest rate per annum as shall be in effect from time to time, which rate shall be at all times equal to the higher of: (a) the rate of interest in effect for such day as publicly announced from time to time by PNC in Pittsburgh, Pennsylvania as its "prime rate." Such "prime rate" is set by PNC based upon various factors, including PNC's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above or below such announced rate, and (b) 0.50% per annum above the latest Federal Funds Rate. "BBA" means the British Bankers' Association. "Benefit Plan" means any employee benefit pension plan as defined in Section 3(2) of ERISA in respect of which the Seller, the Originator, KSI or any ERISA Affiliate is, or at any time during the immediately preceding six years was, an "employer" as defined in Section 3(5) of ERISA. "Business Day" means any day (other than a Saturday or Sunday) on which: (a) banks are not authorized or required to close in New York City, New York or Pittsburgh, Pennsylvania, and (b) if this definition of "Business Day" is utilized in connection with the Euro-Rate, dealings are carried out in the London interbank market. "Capital" means the amount paid to the Seller in respect of the Purchased Interest by the Issuer pursuant to the Agreement, or such amount divided or combined in order to determine the Discount applicable to any Portion of Capital, in each case reduced from time to time by Collections distributed and applied on account of such Capital pursuant to Section 1.4(d) of the Agreement; provided, that if such Capital shall have been reduced by any distribution, and thereafter all or a portion of such distribution is rescinded or must otherwise be returned for any reason, such Capital shall be increased by the amount of such rescinded or returned distribution as though it had not been made. I-2 28 "Change in Control" means that (a) KSI, ceases to own, directly or indirectly, 100% of the capital stock of the Seller free and clear of all Adverse Claims and (b) KSI, ceases to own, directly or indirectly, 100% of the capital stock of the Originators free and clear of all Adverse Claims. "Closing Date" means April 19, 2001. "Collections" means, with respect to any Pool Receivable: (a) all funds that are received by any Originator, KSI, the Seller or the Servicer in payment of any amounts owed in respect of such Receivable (including purchase price, finance charges, interest and all other charges), or applied to amounts owed in respect of such Receivable (including insurance payments and net proceeds of the sale or other disposition of repossessed goods or other collateral or property of the related Obligor or any other Person directly or indirectly liable for the payment of such Pool Receivable and available to be applied thereon), (b) all amounts deemed to have been received pursuant to Section 1.4(e) of the Agreement and (c) all other proceeds of such Pool Receivable. "Company Note" has the meaning set forth in Section 3.1 of the Purchase and Sale Agreement. "Concentration Percentage" means for any: (a) Group A Obligor, 16.00%, (b) Group B Obligor, 16.00%, (c) Group C Obligor 8.00% and (d) Group D Obligor, 4.00%. "Concentration Reserve" means, at any time: (a) the aggregate Capital at such time multiplied by (b)(i) the Concentration Reserve Percentage, divided by (ii) 100%, minus the Concentration Reserve Percentage. "Concentration Reserve Percentage" means, at any time, the largest of: (a) the sum of four largest Group D Obligor Percentages, (b) the sum of the two largest Group C Obligor Percentages and (c) the largest Group B Obligor Percentage or Group A Obligor Percentage. "Contract" means, with respect to any Receivable, any and all contracts, instruments, agreements, leases, invoices, notes or other writings pursuant to which such Receivable arises or that evidence such Receivable or under which an Obligor becomes or is obligated to make payment in respect of such Receivable. "Country Concentration Percentage" means for any: (a) Group A Foreign Country, 40.00%, (b) Group B Foreign Country, 20.00%, (c) Group C Foreign Country 10.00% and (d) Group D Foreign Country 5.00%; provided that, if the Philippines shall be considered a Group D Foreign Country, the percentage applicable to the Philippines shall be the sum of (i) 5%; plus (ii) the percentage of Eligible Receivables (not to exceed 4%) represented by AMKOR Technology, Inc. so long as KSI is the beneficiary of a performance guarantee from AMKOR Technology, Inc. in a form and substance satisfactory to the Administrator. "CP Rate" for any Settlement Period for any Portion of Capital means a rate calculated by the Administrator equal to: (a) the rate (or if more than one rate, the weighted average of the rates) I-3 29 at which Notes of the Issuer on each day during such period have been outstanding; provided, that if such rate(s) is a discount rate(s), then the CP Rate shall be the rate (or if more than one rate, the weighted average of the rates) resulting from converting such discount rate(s) to an interest-bearing equivalent rate plus (b) the commissions and charges charged by such placement agent or commercial paper dealer with respect to such Notes, expressed as a percentage of the face amount of such Notes and converted to an interest-bearing equivalent rate per annum. Notwithstanding the foregoing, the "CP Rate" for any day while a Termination Event exists shall be an interest rate equal to 2% above the Base Rate in effect on such day. "Credit and Collection Policy" means, as the context may require, those receivables credit and collection policies and practices of each Originator in effect on the date of the Agreement and described in Schedule I to the Agreement, as modified in compliance with the Agreement. "Current Days' Sales Outstanding" means, for any Fiscal Month, an amount computed as of the last day of such Fiscal Month equal to: (a) the average of the Outstanding Balance of all Pool Receivables that are not past their respective due date as of the last day of the most recent three Fiscal Months divided by (b)(i) the aggregate credit sales made by the Originator during the most recent three Fiscal Months divided by (ii) 90. "Cut-off Date" has the meaning set forth in the Purchase and Sale Agreement. "Debt" means: (a) indebtedness for borrowed money, (b) obligations evidenced by bonds, debentures, notes or other similar instruments, (c) obligations to pay the deferred purchase price of property or services, (d) obligations as lessee under leases that shall have been or should be, in accordance with generally accepted accounting principles, recorded as capital leases, and (e) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (a) through (d). "Defaulted Receivable" means a Receivable: (a) as to which any payment, or part thereof, remains unpaid for more than 150 days from the original due date for such payment, or (b) without duplication (i) as to which an Insolvency Proceeding shall have occurred with respect to the Obligor thereof or any other Person obligated thereon or owning any Related Security with respect thereto, or (ii) that has been written off the Seller's books as uncollectible. "Default Ratio" means the ratio (expressed as a percentage and rounded to the nearest 1/100 of 1%, with 5/1000th of 1% rounded upward) computed as of the last day of each Fiscal Month by dividing: (a) the aggregate Outstanding Balance of all Pool Receivables that became Defaulted Receivables during such month, by (b) (i) at all times during which the Current Days' Sales Outstanding is less than or equal to 45, the aggregate credit sales made by the Originator during the I-4 30 month that is six Fiscal Months before such month and (ii) at all other times, the aggregate credit sales made by the Originator during the month that is seven Fiscal Months before such month. "Default Event" means (i) KSI or any of its Subsidiaries shall fail to pay any principal of or premium or interest on any of its Debt that is outstanding in a principal amount of at least $5,000,000 in the aggregate when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement, mortgage, indenture or instrument relating to such Debt (and shall have not been waived); or (ii) any other event shall occur or condition shall exist under any agreement, mortgage, indenture or instrument relating to any such Debt and shall continue after the applicable grace period, if any, specified in such agreement, mortgage, indenture or instrument (and shall have not been waived), if, the effect of such, event or condition is to give the applicable debtholders the right (whether acted upon or not) to accelerate the maturity of such Debt. "Delinquency Ratio" means the ratio (expressed as a percentage and rounded to the nearest 1/100 of 1%, with 5/1000th of 1% rounded upward) computed as of the last day of each Fiscal Month by dividing: (a) the aggregate Outstanding Balance of all Pool Receivables that were Delinquent Receivables on such day by (b) the aggregate Outstanding Balance of all Pool Receivables on such day. "Delinquent Receivable" means a Receivable as to which any payment, or part thereof, remains unpaid for more than 90 days from the original due date for such payment. "Dilution Horizon" means, for any Fiscal Month, the ratio (expressed as a percentage and rounded to the nearest 1/100th of 1%, with 5/1000th of 1% rounded upward) computed as of the last day of such Fiscal Month of: (a) the aggregate credit sales made by the Originator during the two most recent Fiscal Months to (b) the aggregate Outstanding Balance of the Eligible Receivables at the last day of the most recent Fiscal Month. "Dilution Ratio" means the ratio (expressed as a percentage and rounded to the nearest 1/100th of 1%, with 5/1000th of 1% rounded upward), computed as of the last day of each Fiscal Month by dividing: (a) the aggregate amount of payments required to be made by the Seller pursuant to Section 1.4(e)(i) of the Agreement, other than payments related to the Specifically Reserved Dilution Amount, during such Fiscal Month by (b) the aggregate credit sales made by the Originator during the month that is one Fiscal Month before such month. "Dilution Reserve" means, on any date, an amount equal to: (a) the Capital at the close of business of the Servicer on such date multiplied by (b) (i) the Dilution Reserve Percentage on such date, divided by (ii) 100% minus the Dilution Reserve Percentage on such date. "Dilution Reserve Percentage" means on any date, the greater of (a) 3.00% and (b) the product of (i) the Dilution Horizon multiplied by (ii) the sum of (x) 2 times the average of the Dilution Ratios for the twelve most recent Fiscal Months and (y) the Spike Factor. I-5 31 "Discount" means: (a) for the Portion of Capital for any Settlement Period to the extent the Issuer will be funding such Portion of Capital during such Settlement Period through the issuance of Notes: CPR x C x ED/360 (b) for the Portion of Capital for any Settlement Period to the extent the Issuer will not be funding such Portion of Capital during such Settlement Period through the issuance of Notes: AR x C x ED/Year + TF where: AR = the Alternate Rate for the Portion of Capital for such Settlement Period, C = the Portion of Capital during such Settlement Period, CPR = the CP Rate for the Portion of Capital for such Settlement Period, ED = the actual number of days during such Settlement Period, Year = if such Portion of Capital is funded based upon: (i) the Euro-Rate, 360 days, and (ii) the Base Rate, 365 or 366 days, as applicable, and TF = the Termination Fee, if any, for the Portion of Capital for such Settlement Period; provided, that no provision of the Agreement shall require the payment or permit the collection of Discount in excess of the maximum permitted by applicable law; and provided further, that Discount for the Portion of Capital shall not be considered paid by any distribution to the extent that at any time all or a portion of such distribution is rescinded or must otherwise be returned for any reason. I-6 32 "Eligible Foreign Jurisdiction" means a country (other than the United States) as to which the Issuer and the Administrator have determined (a) that no other actions need be taken in order to perfect the interests of the Seller, KSI, any Originator, the Administrator and the Issuer as contemplated by the Transaction Documents other than those required to be taken under the laws of the United States or any state thereof or (b) all the actions required to be taken under the laws of such country in order to perfect the interests of the Seller, KSI, any Originator, the Administrator and the Issuer as contemplated by the Transaction Documents have been taken. "Eligible Foreign Obligor" means an Obligor (a) who is a resident of an Eligible Foreign Jurisdiction and (b) from whom the Servicer and the Administrator have received written acknowledgment from such Obligor or such other evidence satisfactory to the Administrator that such Obligor has received notice of the sale of the Receivables to the Seller pursuant to the Purchase and Sale Agreement, and the assignment of an undivided variable percentage interest in such Receivables and pledge of such Receivables to the Issuer pursuant to the Agreement. "Eligible Receivable" means, at any time, a Pool Receivable: (a) the Obligor of which is (i) a (1) United States resident or (2) an Eligible Foreign Obligor; provided, however, that if the Obligor of such Pool Receivable is not a United States resident or an Eligible Foreign Obligor, such Receivable shall satisfy the requirements of clause (a)(i), if the Outstanding Balance of such Receivable when added to the aggregate Outstanding Balance of all other Eligible Receivables that are included in the calculation of Net Receivables Pool Balance at such time of Obligors that are not United States residents or Eligible Foreign Obligors does not exceed 15.00% of the Outstanding Balance of all Eligible Receivables at such time as determined without giving effect to this proviso, (ii) not a government or a governmental subdivision, affiliate or agency, (iii) not subject to any action of the type described in paragraph (f) of Exhibit V to the Agreement and (iv) not an Affiliate of KSI, (b) that is denominated and payable only in U.S. dollars in the United States, (c) that does not have a stated maturity which is more than 60 days after the original invoice date of such Receivable; provided, however, that up to 20% of the aggregate Outstanding Balance of all Receivables may have a stated maturity which is more than 60 days but not more than 120 days after the original invoice date of such Receivable, (d) that arises under a duly authorized Contract for the sale and delivery of goods and services in the ordinary course of the applicable Originator's business, (e) that arises under a duly authorized Contract that is in full force and effect and that is a legal, valid and binding obligation of the related Obligor, enforceable against such Obligor in accordance with its terms, I-7 33 (f) that conforms in all material respects with all applicable laws, rulings and regulations in effect, (g) that is not the subject of any asserted dispute, offset, hold back defense, Adverse Claim or other claim, (h) that satisfies all applicable requirements of the applicable Credit and Collection Policy, (i) that has not been modified, waived or restructured since its creation, except as permitted pursuant to Section 4.2 of the Agreement, (j) in which the Seller owns good and marketable title, free and clear of any Adverse Claims, and that is freely assignable by the Seller (including without any consent of the related Obligor), (k) for which the Issuer shall have a valid and enforceable undivided percentage ownership or security interest, to the extent of the Purchased Interest, and a valid and enforceable first priority perfected security interest therein and in the Related Security and Collections with respect thereto, in each case free and clear of any Adverse Claim, (l) that constitutes an account as defined in the UCC, and that is not evidenced by instruments or chattel paper, (m) that is neither a Defaulted Receivable nor a Delinquent Receivable, (n) for which neither the Originator thereof, the Seller nor the Servicer has established any offset arrangements with the related Obligor, (o) of an Obligor as to which Defaulted Receivables of such Obligor do not exceed 25% of the Outstanding Balance of all such Obligor's Receivables, (p) that represents amounts earned and payable by the Obligor that are not subject to the performance of additional services by any Originator thereof, and (q) if the Obligor of which is located in the Philippines, the Seller and the Originator of such Pool Receivable have complied with requirements set forth in Section 1(r) of Exhibit IV to the Agreement and Section 2(k) of Exhibit IV to the Agreement, respectively. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute of similar import, together with the regulations thereunder, in each case as in effect from time to time. References to sections of ERISA also refer to any successor sections. I-8 34 "ERISA Affiliate" means: (a) any corporation that is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Internal Revenue Code) as the Seller, any Originator or KSI, (b) a trade or business (whether or not incorporated) under common control (within the meaning of Section 414(c) of the Internal Revenue Code) with the Seller, any Originator or KSI, or (c) a member of the same affiliated service group (within the meaning of Section 414(m) of the Internal Revenue Code) as the Seller, any Originator, any corporation described in clause (a) or any trade or business described in clause (b). "Euro-Rate" means with respect to any Settlement Period the interest rate per annum determined by the Administrator by dividing (the resulting quotient rounded upwards, if necessary, to the nearest 1/100th of 1% per annum) (i) the rate of interest determined by the Administrator in accordance with its usual procedures (which determination shall be conclusive absent manifest error) to be the average of the London interbank market offered rates for U.S. dollars quoted by the British Bankers' Association ("BBA") as set forth on Dow Jones Markets Service (formerly known as Telerate) (or appropriate successor or, if British Bankers' Association or its successor ceases to provide display page 3750 (or such other display page on the Dow Jones Markets Service system as may replace display page 3750) at or about 11:00 a.m. (London time) on the Business Day which is two (2) Business Days prior to the first day of such Settlement Period for an amount comparable to the Portion of Capital to be funded at the Alternate Rate and based upon the Euro-Rate during such Settlement Period by (ii) a number equal to 1.00 minus the Euro-Rate Reserve Percentage. The Euro-Rate may also be expressed by the following formula: Average of London interbank offered rates quoted by BBA as shown on Dow Jones Markets Service display page 3750 or appropriate successor Euro-Rate = ------------------------------------------------------- 1.00 - Euro-Rate Reserve Percentage where "Euro-Rate Reserve Percentage" means, the maximum effective percentage in effect on such day as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the reserve requirements (including without limitation, supplemental, marginal, and emergency reserve requirements) with respect to eurocurrency funding (currently referred to as "Eurocurrency Liabilities"). The Euro-Rate shall be adjusted with respect to any Portion of Capital funded at the Alternate Rate and based upon the Euro-Rate that is outstanding on the effective date of any change in the Euro-Rate Reserve Percentage as of such effective date. The Administrator shall give prompt notice to the Seller of the Euro-Rate as determined or adjusted in accordance herewith (which determination shall be conclusive absent manifest error). "Excess Concentration" means the sum of the amounts by which the Outstanding Balance of Eligible Receivables of each Obligor then in the Receivables Pool exceeds an amount equal to: (a) the Concentration Percentage for such Obligor multiplied by (b) the Outstanding Balance of all Eligible Receivables then in the Receivables Pool. I-9 35 "Excess Country Concentration" means the sum of the amounts by which the Outstanding Balance of Eligible Receivables of each Eligible Foreign Obligor then in the Receivables Pool exceeds an amount equal to: (a) the Country Concentration Percentage for the country of such Eligible Foreign Obligor multiplied by (b) the Outstanding Balance of all Eligible Receivables then in the Receivables Pool. "Facility Termination Date" means the earliest to occur of: (a) April 14, 2004, (b) the date determined pursuant to Section 2.2 of the Agreement, (c) the date the Purchase Limit reduces to zero pursuant to Section 1.1(b) of the Agreement, (d) the date that the commitments of the Purchasers terminate under the Liquidity Agreement, and (e) the Issuer shall fail to cause the amendment or modification of any Transaction Document or related opinion as required by Moody's or Standard and Poor's, and such failure shall continue for 30 days after such amendment is initially requested. "Federal Funds Rate" means, for any day, the per annum rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Board (including any such successor, "H.15(519)") for such day opposite the caption "Federal Funds (Effective)." If on any relevant day such rate is not yet published in H.15(519), the rate for such day will be the rate set forth in the daily statistical release designated as the Composite 3:30 p.m. Quotations for U.S. Government Securities, or any successor publication, published by the Federal Reserve Bank of New York (including any such successor, the "Composite 3:30 p.m. Quotations") for such day under the caption "Federal Funds Effective Rate." If on any relevant day the appropriate rate is not yet published in either H.15(519) or the Composite 3:30 p.m. Quotations, the rate for such day will be the arithmetic mean as determined by the Administrator of the rates for the last transaction in overnight Federal funds arranged before 9:00 a.m. (New York time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the Administrator. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System, or any entity succeeding to any of its principal functions. "Fee Letter" has the meaning set forth in Section 1.5 of the Agreement. "Fiscal Month" means, with respect to any date, the monthly period designated with respect to such date on Schedule IV hereto, as such Schedule may be modified or replaced from time to time. "Funding Base" means, at any time, an amount equal to the sum of (a) the Outstanding Balance of Receivables the Obligors of which are United States residents, plus (b) the Outstanding Balance of Receivables the Obligor of which is Advanced Semiconductor, Orient Semiconductor or such other Obligors approved by the Administrator provided, that the obligations of such Obligors are supported by letter of credit arrangements and provided, further, that PNC provides documentary services for invoices supported by such letter of credit arrangements, plus (c) without duplication, the Outstanding Balance of Receivables the Obligors of which are residents of Hong Kong, Japan, Korea, Malaysia, Philippines, Singapore Taiwan or such other countries as may be mutually agreed I-10 36 upon by KSI and the Administrator and are Subsidiaries of United States residents, provided, however, that the aggregate Outstanding Balance of such Receivables described in this clause (c) shall not exceed $10,000,000 plus (d) without duplication, the Outstanding Balance of Receivables the Obligors of which are Subsidiaries of United States residents so long as KSI or any Originator is the beneficiary of performance guarantees from such United States residents in form and substance satisfactory to the Administrator. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any body or entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including any court, and any Person owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Group A Foreign Country" means any Eligible Foreign Jurisdiction with a sovereign risk rating of at least: (a) "AA-" or better by Standard & Poor's and (b) "Aa3" or better by Moody's. "Group B Foreign Country" means an Eligible Foreign Jurisdiction, not a Group A Foreign Country, with a sovereign risk rating of at least: (a) "A-" to "A+" by Standard & Poor's and (b) "A3" to "A1" by Moody's. "Group C Foreign Country" means an Eligible Foreign Jurisdiction, not a Group A Foreign Country or a Group B Foreign Country, with a sovereign risk rating of at least: (a) a rating of "BBB-" to "BBB+" by Standard & Poor's and (b) "Baa3" to "Baa1" by Moody's. "Group D Foreign Country" means any Eligible Foreign Jurisdiction that is not a Group A Foreign Country, Group B Foreign Country or Group C Foreign Country. "Group A Obligor" means any Obligor with a short-term rating of at least: (a) "A-1" by Standard & Poor's, or if such Obligor does not have a short-term rating from Standard & Poor's, a rating of "A+" or better by Standard & Poor's on its long-term senior unsecured and uncredit-enhanced debt securities, and (b) "P-1" by Moody's, or if such Obligor does not have a short-term rating from Moody's, "A1"or better by Moody's on its long-term senior unsecured and uncredit-enhanced debt securities. "Group A Obligor Percentage" means, at any time, for each Group A Obligor, the percentage equivalent of: (a) the aggregate Outstanding Balance of the Eligible Receivables of such Group A Obligor less any Excess Concentrations of such Obligor, divided by (b) the aggregate Outstanding Balance of all Eligible Receivables at such time. "Group B Obligor" means an Obligor, not a Group A Obligor, with a short-term rating of at least: (a) "A-2" by Standard & Poor's, or if such Obligor does not have a short-term rating from Standard & Poor's, a rating of "BBB+" to "A" by Standard & Poor's on its long-term senior unsecured and uncredit-enhanced debt securities, and (b) "P-2" by Moody's, or if such Obligor does I-11 37 not have a short-term rating from Moody's, "Baa1" to "A2" by Moody's on its long-term senior unsecured and uncredit-enhanced debt securities. "Group B Obligor Percentage" means, at any time, for each Group B Obligor, the percentage equivalent of: (a) the aggregate Outstanding Balance of the Eligible Receivables of such Group B Obligor less any Excess Concentrations of such Obligor, divided by (b) the aggregate Outstanding Balance of all Eligible Receivables at such time. "Group C Obligor" means an Obligor, not a Group A Obligor or a Group B Obligor, with a short-term rating of at least: (a) "A-3" by Standard & Poor's, or if such Obligor does not have a short-term rating from Standard & Poor's, a rating of "BBB-" to "BBB" by Standard & Poor's on its long-term senior unsecured and uncredit-enhanced debt securities, and (b) "P-3" by Moody's, or if such Obligor does not have a short-term rating from Moody's, "Baa3" to "Baa2" by Moody's on its long-term senior unsecured and uncredit-enhanced debt securities. "Group C Obligor Percentage" means, at any time, for each Group C Obligor, the percentage equivalent of: (a) the aggregate Outstanding Balance of the Eligible Receivables of such Group C Obligor less any Excess Concentrations of such Obligor, divided by (b) the aggregate Outstanding Balance of all Eligible Receivables at such time. "Group D Obligor" means any Obligor that is not a Group A Obligor, Group B Obligor or Group C Obligor. "Group D Obligor Percentage" means, at any time, for each Group D Obligor: (a) the aggregate Outstanding Balance of the Eligible Receivables of such Group D Obligor less any Excess Concentrations of such Obligor, divided by (b) the aggregate Outstanding Balance of all Eligible Receivables at such time. "Indemnified Amounts" has the meaning set forth in Section 3.1 of the Agreement. "Indemnified Party" has the meaning set forth in Section 3.1 of the Agreement. "Independent Director" has the meaning set forth in paragraph 3(c) of Exhibit IV to the Agreement. "Information Package" means a report, in substantially the form of Annex A to the Agreement, furnished to the Administrator pursuant to the Agreement. "Insolvency Proceeding" means: (a) any case, action or proceeding before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors of a Person, or composition, marshaling of assets for creditors of a Person, or other, similar arrangement in respect of its creditors generally or any substantial portion of its I-12 38 creditors, in each of cases (a) and (b) undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute of similar import, together with the regulations thereunder, in each case as in effect from time to time. References to sections of the Internal Revenue Code also refer to any successor sections. "Issuer" has the meaning set forth in the preamble to the Agreement. "Issuer's Share" of any amount means such amount multiplied by the Purchased Interest at the time of determination. "KSI" has the meaning set forth in the preamble to the Agreement. "Liquidity Agent" means PNC in its capacity as the Liquidity Agent pursuant to the Liquidity Agreement. "Liquidity Agreement" means the Liquidity Asset Purchase Agreement, dated as of even date herewith, between the purchasers from time to time party thereto, the Issuer and PNC, as Administrator and Liquidity Agent, as the same may be further amended, supplemented or otherwise modified from time to time. "Lock-Box Account" means an account in the name of the Seller and maintained by the Seller at a bank or other financial institution for the purpose of receiving Collections. "Lock-Box Agreement" means an agreement, in form and substance satisfactory to the Administrator, among the Seller, the applicable Originator, the Servicer, the Administrator, the Issuer and a Lock-Box Bank. "Lock-Box Bank" means any of the banks or other financial institutions holding one or more Lock-Box Accounts. "Loss Reserve" means, on any date, an amount equal to: (a) the Capital at the close of business of the Servicer on such date multiplied by (b)(i) the Loss Reserve Percentage on such date divided by (ii) 100% minus the Loss Reserve Percentage on such date. "Loss Reserve Percentage" means, on any date, the greater of: (a) 7.00% or (b) the product of (i) 2 times (ii) the highest average of the Default Ratios for any three consecutive Fiscal Months during the twelve most recent Fiscal Months and (iii)(A)(1) at all times during which the Current Days' Sales Outstanding is less than or equal to 45, the aggregate credit sales made by the Originator during the five most recent Fiscal Months, and (2) at all other times, the aggregate credit sales made by the Originator during the six most recent Fiscal Months, divided by (B) the aggregate Outstanding Balance of Eligible Receivables as of such date. I-13 39 "Material Adverse Effect" means, relative to any Person with respect to any event or circumstance, a material adverse effect on: (a) the assets, operations, business or financial condition of such Person, (b) the ability of any of such Person to perform its obligations under the Agreement or any other Transaction Document to which it is a party, (c) the validity or enforceability of any other Transaction Document, or the validity, enforceability or collectibility of a material portion of the Pool Receivables, or (d) the status, perfection, enforceability or priority of the Issuer's or the Seller's interest in the Pool Assets. "Moody's" means Moody's Investors Service, Inc. "Net Receivables Pool Balance" means, at any time: (a) the Outstanding Balance of Eligible Receivables then in the Receivables Pool minus (b) the sum of (i) the Excess Concentration, (ii) the Excess Country Concentration and (iii) the Specifically Reserved Dilution Amount. "Notes" means short-term promissory notes issued, or to be issued, by the Issuer to fund its investments in accounts receivable or other financial assets. "Obligor" means, with respect to any Receivable, the Person obligated to make payments pursuant to the Contract relating to such Receivable. "Originator" has the meaning set forth in the Purchase and Sale Agreement. "Originator Assignment Certificate" means the assignment, in substantially the form of Exhibit C to the Purchase and Sale Agreement, evidencing Seller's ownership of the Receivables generated by each Originator, as the same may be amended, supplemented, amended and restated, or otherwise modified from time to time in accordance with the Purchase and Sale Agreement. "Outstanding Balance" of any Receivable at any time means the then outstanding principal balance thereof. "Payment Date" has the meaning set forth in Section 2.1 of the Purchase and Sale Agreement. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company or other entity, or a government or any political subdivision or agency thereof. "PNC" has the meaning set forth in the preamble to the Agreement. I-14 40 "Pool Assets" has the meaning set forth in Section 1.2(d) of the Agreement. "Pool Receivable" means a Receivable in the Receivables Pool. "Portion of Capital" means any separate portion of Capital being funded or maintained by the Issuer (or its successors or permitted assigns) by reference to a particular interest rate basis. In addition, at any time when the Capital of the Purchased Interest is not divided into two or more such portions, "Portion of Capital" means 100% of the Capital. "Program Support Agreement" means and includes the Liquidity Agreement and any other agreement entered into by any Program Support Provider providing for: (a) the issuance of one or more letters of credit for the account of the Issuer, (b) the issuance of one or more surety bonds for which the Issuer is obligated to reimburse the applicable Program Support Provider for any drawings thereunder, (c) the sale by the Issuer to any Program Support Provider of the Purchased Interest (or portions thereof) and/or (d) the making of loans and/or other extensions of credit to the Issuer in connection with the Issuer's Receivables-securitization program contemplated in the Agreement, together with any letter of credit, surety bond or other instrument issued thereunder (but excluding any discretionary advance facility provided by the Administrator). "Program Support Provider" means and includes any Purchaser and any other Person (other than any customer of the Issuer) now or hereafter extending credit or having a commitment to extend credit to or for the account of, or to make purchases from, the Issuer pursuant to any Program Support Agreement. "Purchase and Sale Agreement" means the Purchase and Sale Agreement, dated as of even date herewith, between the Seller, and each of the entities listed on Schedule I thereto, as such agreement may be amended, amended and restated, supplemented or otherwise modified from time to time. "Purchase and Sale Indemnified Amounts" has the meaning set forth in Section 9.1 of the Purchase and Sale Agreement. "Purchase and Sale Indemnified Party" has the meaning set forth in Section 9.1 of the Purchase and Sale Agreement. "Purchase Notice" has the meaning set forth in Section 1.2(a) of the Agreement. "Purchase and Sale Termination Date" has the meaning set forth in Section 1.4 of the Purchase and Sale Agreement. "Purchase and Sale Termination Event" has the meaning set forth in Section 8.1 of the Purchase and Sale Agreement. I-15 41 "Purchase Facility" has the meaning set forth in Section 1.1 of the Purchase and Sale Agreement. "Purchase Limit" means $40,000,000, as such amount may be reduced pursuant to Section 1.1(b)of the Agreement. References to the unused portion of the Purchase Limit shall mean, at any time, the Purchase Limit minus the then outstanding Capital. "Purchase Price" has the meaning set forth in Section 2.1 of the Purchase and Sale Agreement. "Purchase Report" has the meaning set forth in Section 2.1 of the Purchase and Sale Agreement. "Purchased Interest" means, at any time, the undivided percentage ownership interest in: (a) each and every Pool Receivable now existing or hereafter arising, (b) all Related Security with respect to such Pool Receivables and (c) all Collections with respect to, and other proceeds of, such Pool Receivables and Related Security. Such undivided percentage interest shall be computed as: Capital + Total Reserves ---------------------------- Net Receivables Pool Balance The Purchased Interest shall be determined from time to time pursuant to Section 1.3 of the Agreement. "Purchaser" has the meaning set forth in Section 5.3(b) of the Agreement. "Receivable" means any indebtedness and other obligations owed to the Seller (as assignee of any Originator) or any Originator by, or any right of the Seller or any Originator to payment from or on behalf of, an Obligor, whether constituting an account, chattel paper, instrument or general intangible, arising in connection with the sale of goods or the rendering of services by any Originator, and includes the obligation to pay any finance charges, fees and other charges with respect thereto. Indebtedness and other obligations arising from any one transaction, including indebtedness and other obligations represented by an individual invoice or agreement, shall constitute a Receivable separate from a Receivable consisting of the indebtedness and other obligations arising from any other transaction. "Receivables Pool" means, at any time, all of the then outstanding Receivables purchased by the Seller pursuant to the Purchase and Sale Agreement prior to the Facility Termination Date. "Reference Bank" means PNC. "Related Rights" has the meaning set forth in Section 1.1 of the Purchase and Sale Agreement. I-16 42 "Related Security" means, with respect to any Receivable: (a) all of the Seller's and the Originator thereof's interest in any goods (including returned goods), and documentation of title evidencing the shipment or storage of any goods (including returned goods), relating to any sale giving rise to such Receivable, (b) all instruments and chattel paper that may evidence such Receivable, (c) all other security interests or liens and property subject thereto from time to time purporting to secure payment of such Receivable, whether pursuant to the Contract related to such Receivable or otherwise, together with all UCC financing statements or similar filings relating thereto, and (d) all of the Seller's and the Originator thereof's rights, interests and claims under the Contracts and all guaranties, indemnities, insurance, letters of credit and other agreements (including the related Contract) or arrangements of whatever character from time to time supporting or securing payment of such Receivable or otherwise relating to such Receivable, whether pursuant to the Contract related to such Receivable or otherwise. "Seller" has the meaning set forth in the preamble to the Agreement. "Seller's Share" of any amount means the greater of: (a) $0 and (b) such amount minus the Issuer's Share. "Servicer" has the meaning set forth in the preamble to the Agreement. "Servicing Fee" shall mean the fee referred to in Section 4.6 of the Agreement. "Servicing Fee Rate" shall mean the rate referred to in Section 4.6 of the Agreement. "Settlement Date" means with respect to any Portion of Capital for any Settlement Period, (i) prior to the Facility Termination Date, the 15th day of each calendar month (or the next succeeding Business Day if such day is not a Business Day) beginning with May 15, 2001 and (ii) on and after the Facility Termination Date, each day selected from time to time by the Administrator (it being understood that the Administrator may select such Settlement Date to occur as frequently as daily), or, in the absence of such selection, the date specified in clause (i) above. "Settlement Period" means: (a) before the Facility Termination Date: (i) initially the period commencing on the date of the initial purchase pursuant to Section 1.2 of the Agreement (or in the case of any fees payable hereunder, commencing on the Closing Date) and ending on (but not including) the next Settlement Date, and (ii) thereafter, each period commencing on such Settlement Date and ending on (but not including) the next Settlement Date, and (b) on and after the Facility Termination Date: such period (including a period of one day) as shall be selected from time to time I-17 43 by the Administrator or, in the absence of any such selection, each period of 30 days from the last day of the preceding Settlement Period. "Solvent" means, with respect to any Person at any time, a condition under which: (i) the fair value and present fair saleable value of such Person's total assets is, on the date of determination, greater than such Person's total liabilities (including contingent and unliquidated liabilities) at such time; (ii) the fair value and present fair saleable value of such Person's assets is greater than the amount that will be required to pay such Person's probable liability on its existing debts as they become absolute and matured ("debts," for this purpose, includes all legal liabilities, whether matured or unmatured, liquidated or unliquidated, absolute, fixed, or contingent); (iii) such Person is and shall continue to be able to pay all of its liabilities as such liabilities mature; and (iv) such Person does not have unreasonably small capital with which to engage in its current and in its anticipated business. For purposes of this definition: (A) the amount of a Person's contingent or unliquidated liabilities at any time shall be that amount which, in light of all the facts and circumstances then existing, represents the amount which can reasonably be expected to become an actual or matured liability; (B) the "fair value" of an asset shall be the amount which may be realized within a reasonable time either through collection or sale of such asset at its regular market value; (C) the "regular market value" of an asset shall be the amount which a capable and diligent business person could obtain for such asset from an interested buyer who is willing to Purchase such asset under ordinary selling conditions; and (D) the "present fair saleable value" of an asset means the amount which can be obtained if such asset is sold with reasonable promptness in an arm's-length transaction in an existing and not theoretical market. "Specifically Reserved Dilution Amount" means, at any time, the balance sheet reserve amount maintained by the Originators or the Servicer representing prepayment by specific Obligors for future spare parts purchases. Such amount attributed to any Obligor shall not exceed the aggregate Outstanding Balance of all Eligible Receivables due from such Obligor at such time. I-18 44 "Spike Factor" means, for any Fiscal Month, (a) the positive difference, if any, between: (i) the highest Dilution Ratio for any Fiscal Month during the twelve most recent Fiscal Months and (ii) the arithmetic average of the Dilution Ratios for such twelve months times (b) (i) the highest Dilution Ratio for any Fiscal Month during the twelve most recent Fiscal Months divided by (ii) the arithmetic average of the Dilution Ratios for such twelve months "Standard & Poor's" means Standard & Poor's, a division of The McGraw-Hill Companies, Inc. "Subsidiary" means, as to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock of each class or other interests having ordinary voting power (other than stock or other interests having such power only by reason of the happening of a contingency) to elect a majority of the Board of Directors or other managers of such entity are at the time owned, or management of which is otherwise controlled: (a) by such Person, (b) by one or more Subsidiaries of such Person or (c) by such Person and one or more Subsidiaries of such Person. "Termination Day" means: (a) each day on which the conditions set forth in Section 2 of Exhibit II to the Agreement are not satisfied or (b) each day that occurs on or after the Facility Termination Date. "Termination Event" has the meaning specified in Exhibit V to the Agreement. "Termination Fee" means, for any Settlement Period during which a Termination Day occurs, the amount, if any, by which: (a) the additional Discount (calculated without taking into account any Termination Fee or any shortened duration of such Settlement Period pursuant to the definition thereof) that would have accrued during such Settlement Period on the reductions of Capital relating to such Settlement Period had such reductions not been made, exceeds (b) the income, if any, received by the Issuer from investing the proceeds of such reductions of Capital, as determined by the Administrator, which determination shall be binding and conclusive for all purposes, absent manifest error. "Total Reserves" means, at any time the sum of : (a) the Yield Reserve, plus (b) the greater of (i) the sum of (A) Loss Reserve plus (B) the Dilution Reserve and (ii) the Concentration Reserve. "Transaction Documents" means the Agreement, the Lock-Box Agreements, the Fee Letter, the Purchase and Sale Agreement and all other certificates, instruments, UCC financing statements, reports, notices, agreements and documents executed or delivered under or in connection with any of the foregoing, in each case as the same may be amended, supplemented or otherwise modified from time to time in accordance with the Agreement. "Turnover Rate" means, for any Fiscal Month, an amount computed as of the last day of such Fiscal Month equal to: (a) the Outstanding Balance of all Pool Receivables as of the last day of such Fiscal Month divided by (b)(i) the aggregate credit sales made by the Originator during the three Fiscal Months ended on or before the last day of such Fiscal Month divided by (ii) 3. I-19 45 "UCC" means the Uniform Commercial Code as from time to time in effect in the applicable jurisdiction. "Unmatured Purchase and Sale Termination Event" means any event which, with the giving of notice or lapse of time, or both, would become a Purchase and Sale Termination Event. "Unmatured Termination Event" means an event that, with the giving of notice or lapse of time, or both, would constitute a Termination Event. "Yield Reserve" means, on any date, an amount equal to: (a) the Capital at the close of business of the Servicer on such date multiplied by (b)(i) the Yield Reserve Percentage on such date divided by (ii) 100% minus the Yield Reserve Percentage on such date. "Yield Reserve Percentage" means at any time: (PY + SFR) x 1.5 x TR ---------- 12 where: PY = the Base Rate as of the last day of the most recent Settlement Period, TR = the Turnover Rate, and SFR = the Servicing Fee Rate Other Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles. All terms used in Article 9 of the UCC in the Commonwealth of Pennsylvania, and not specifically defined herein, are used herein as defined in such Article 9. Unless the context otherwise requires, "or" means "and/or," and "including" (and with correlative meaning "include" and "includes") means including without limiting the generality of any description preceding such term. I-20 46 EXHIBIT II CONDITIONS OF PURCHASES 1. Conditions Precedent to Initial Purchase. The Initial Purchase under this Agreement is subject to the following conditions precedent that the Administrator shall have received on or before the date of such purchase, each in form and substance (including the date thereof) satisfactory to the Administrator: (a) A counterpart of the Agreement and the other Transaction Documents executed by the parties thereto. (b) Certified copies of: (i) the resolutions of the Board of Directors of each of the Seller, each Originator and KSI authorizing the execution, delivery and performance by the Seller, each Originator and KSI, as the case may be, of the Agreement and the other Transaction Documents to which it is a party; (ii) all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to the Agreement and the other Transaction Documents and (iii) the certificate of incorporation and by-laws of the Seller and KSI. (c) A certificate of the Secretary or Assistant Secretary of the Seller, each Originator and KSI certifying the names and true signatures of its officers who are authorized to sign the Agreement and the other Transaction Documents. Until the Administrator receives a subsequent incumbency certificate from the Seller, any Originator or KSI, as the case may be, the Administrator shall be entitled to rely on the last such certificate delivered to it by the Seller, such Originator or KSI, as the case may be. (d) Acknowledgment copies, or time stamped receipt copies, of proper financing statements or other instrument similar in effect, duly filed on or before the date of such initial purchase under the UCC of all jurisdictions or the laws of an Eligible Foreign Jurisdiction that the Administrator may deem necessary or desirable in order to perfect the interests of the Seller, KSI and the Issuer contemplated by the Agreement and the Purchase and Sale Agreement. (e) Acknowledgment copies, or time-stamped receipt copies, of proper financing statements or other instrument similar in effect, if any, necessary to release all security interests and other rights of any Person in the Receivables, Contracts or Related Security previously granted by any Originator, KSI or the Seller. (f) Completed UCC search reports, dated on or shortly before the date of the initial purchase hereunder, listing the financing statements filed in all applicable jurisdictions referred to in subsection (e) above that name any Originator or the Seller as debtor, together with copies of such other financing statements, and similar search reports with respect to judgment liens, federal tax liens, liens of the Pension Benefit Guaranty Corporation and liens resulting from the laws of an II-1 47 Eligible Foreign Jurisdiction in such jurisdictions, as the Administrator may request, showing no Adverse Claims on any Pool Assets. (g) Favorable opinions, in form and substance reasonably satisfactory to the Administrator, of: (i) Drinker, Biddle & Reath LLP, counsel for the Seller, the Originators, and the Servicer, and (ii) local counsel for the Seller, the Originators, and the Servicer. (h) Satisfactory results of a review and audit (performed by representatives of the Administrator) of the Servicer's collection, operating and reporting systems, the Credit and Collection Policy of each Originator, historical receivables data and accounts, including satisfactory results of a review of the Servicer's operating location(s) and satisfactory review and approval of the Eligible Receivables in existence on the date of the initial purchase under the Agreement. (i) A pro forma Information Package representing the performance of the Receivables Pool for the Fiscal Month before closing. (j) Evidence of payment by the Seller of all accrued and unpaid fees (including those contemplated by the Fee Letter and the Commitment Letter dated as of December 1, 2000 among PNC Capital Markets, Inc. and KSI), costs and expenses to the extent then due and payable on the date thereof, including any such costs, fees and expenses arising under or referenced in Section 5.4 of the Agreement and the Fee Letter. (k) The Fee Letter duly executed by the Seller and the Servicer. (l) Good standing certificates with respect to each of the Seller, each Originator and the Servicer issued by the Secretary of State (or similar official) of the state of each such Person's organization or formation and principal place of business. (m) The Liquidity Agreement and all other Transaction Documents duly executed by the parties thereto. (n) A computer file containing all information with respect to the Receivables as the Administrator or the Issuer may reasonably request. (o) Copies of executed Lock-Box Agreements with each Lock-Box Bank. (p) An Intercreditor Agreement, dated as of even date herewith, between PNC, as agent, the Issuer and the Administrator, as the same may be further amended, supplemented or otherwise modified from time to time. (q) Such other approvals, opinions or documents as the Administrator or the Issuer may reasonably request. II-2 48 2. Conditions Precedent to All Purchases and Reinvestments. Each purchase (except as to clause (a), including the initial purchase) and each reinvestment shall be subject to the further conditions precedent that: (a) in the case of each purchase, the Servicer shall have delivered to the Administrator on or before such purchase, in form and substance satisfactory to the Administrator, a completed pro forma Information Package to reflect the level of Capital and related reserves and the calculation of the Purchased Interest after such subsequent purchase and a completed Purchase Notice in the form of Annex B; and (b) on the date of such purchase or reinvestment the following statements shall be true (and acceptance of the proceeds of such purchase or reinvestment shall be deemed a representation and warranty by the Seller that such statements are then true): (i) the representations and warranties contained in Exhibit III to the Agreement are true and correct in all material respects on and as of the date of such purchase or reinvestment as though made on and as of such date (except to the extent that such representations and warranties relate expressly to an earlier date, and in which case such representations and warranties shall be true and correct in all material respects as of such earlier date); (ii) no event has occurred and is continuing, or would result from such purchase or reinvestment, that constitutes a Termination Event or an Unmatured Termination Event; (iii) the Capital does not exceed the Purchase Limit; and (iv) solely in the case of any purchase (but not reinvestment), no Default Event shall have occurred and be continuing. II-3 49 EXHIBIT III REPRESENTATIONS AND WARRANTIES 1. Representations and Warranties of the Seller. The Seller represents and warrants as follows: (a) The Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, and is duly qualified to do business and is in good standing as a foreign corporation in every jurisdiction where the nature of its business requires it to be so qualified, except where the failure to be so qualified would not have a Material Adverse Effect. (b) The execution, delivery and performance by the Seller of the Agreement and the other Transaction Documents to which it is a party, including its use of the proceeds of purchases and reinvestments: (i) are within its corporate powers; (ii) have been duly authorized by all necessary corporate action; (iii) do not contravene or result in a default under or conflict with: (A) its charter or by-laws, (B) any law, rule or regulation applicable to it except where such contravention, default or conflict would not reasonably be likely to have a Material Adverse Effect, (C) any indenture, loan agreement, mortgage, deed of trust or other material agreement or instrument to which it is a party or by which it is bound, or (D) any order, writ, judgment, award, injunction or decree binding on or affecting it or any of its property except where such contravention, default or conflict would not reasonably be likely to have a Material Adverse Effect; and (iv) do not result in or require the creation of any Adverse Claim upon or with respect to any of its properties. The Agreement and the other Transaction Documents to which it is a party have been duly executed and delivered by the Seller. (c) No authorization, approval or other action by, and no notice to or filing with, any Governmental Authority or other Person is required for its due execution, delivery and performance by the Seller of the Agreement or any other Transaction Document to which it is a party, other than (i) the Uniform Commercial Code filings and filings required pursuant to the laws of an Eligible Foreign Jurisdiction referred to in Exhibit II to the Agreement, all of which shall have been filed on or before the date of the first purchase hereunder or (ii) the failure to receive or make would not be reasonably likely to have a Material Adverse Effect. (d) Each of the Agreement and the other Transaction Documents to which the Seller is a party constitutes its legal, valid and binding obligation enforceable against the Seller in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws from time to time in effect affecting the enforcement of creditors' rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. (e) There is no pending or, to Seller's best knowledge, threatened action or proceeding affecting Seller or any of its properties before any Governmental Authority or arbitrator other than III-1 50 any action or proceeding that, if adversely determined, would not be reasonably likely to have a Material Adverse Effect. (f) No proceeds of any purchase or reinvestment will be used to acquire any equity security of a class that is registered pursuant to Section 12 of the Securities Exchange Act of 1934. (g) The Seller is the legal and beneficial owner of the Pool Receivables and Related Security, free and clear of any Adverse Claim. Upon each purchase or reinvestment, the Issuer shall acquire a valid and enforceable perfected undivided percentage ownership or security interest, to the extent of the Purchased Interest, in each Pool Receivable then existing or thereafter arising and in the Related Security, Collections and other proceeds with respect thereto, free and clear of any Adverse Claim. The Agreement creates a security interest in favor of the Issuer in the Pool Assets, and the Issuer has a first priority perfected security interest in the Pool Assets, free and clear of any Adverse Claims. No effective financing statement or other instrument similar in effect covering any Pool Asset is on file in any recording office, except those filed in favor of the Seller pursuant to the Purchase and Sale Agreement and the Issuer relating to the Agreement. (h) Each Information Package (if prepared by the Seller or one of its Affiliates, or to the extent that information contained therein is supplied by the Seller or an Affiliate), information, exhibit, financial statement, document, book, record or report furnished or to be furnished at any time by or on behalf of the Seller to the Administrator in connection with the Agreement or any other Transaction Document to which it is a party is or will be complete and accurate in all material respects as of its date or (except as otherwise disclosed to the Administrator at such time) as of the date so furnished, (i) The Seller's principal place of business and chief executive office (as such terms are used in the UCC) and the office where it keeps its records concerning the Receivables are located at the address referred to in Sections 1(b) and 2(b) of Exhibit IV to the Agreement. (j) The names and addresses of all the Lock-Box Banks, together with the account numbers of the Lock-Box Accounts at such Lock-Box Banks, are specified in Schedule II to the Agreement (or at such other Lock-Box Banks and/or with such other Lock-Box Accounts as have been notified to the Administrator in accordance with the Agreement) and all Lock-Box Accounts are subject to Lock-Box Agreements. The Seller has not granted to any Person, other than the Administrator as contemplated by the Lock-Box Agreements dominion and control of any Lock-Box Account, or the right to take control of any such account at a future time or upon the occurrence of a future event. (k) The Seller is not in violation of any order of any court, arbitrator or Governmental Authority which would be reasonably likely to have a Material Adverse Effect. (l) Neither the Seller nor any of its Affiliates has any direct or indirect ownership or other financial interest in the Issuer. III-2 51 (m) No proceeds of any purchase or reinvestment will be used for any purpose that violates any applicable law, rule or regulation, including Regulations T, U or X of the Federal Reserve Board. (n) Each Pool Receivable included as an Eligible Receivable in the calculation of the Net Receivables Pool Balance is an Eligible Receivable. (o) No event has occurred and is continuing, or would result from a purchase in respect of, or reinvestment in respect of, the Purchased Interest or from the application of the proceeds therefrom, that constitutes a Termination Event or an Unmatured Termination Event. (p) The Seller has accounted for each sale of undivided percentage ownership interests in Receivables in its books and financial statements as sales, consistent with generally accepted accounting principles. (q) The Seller has complied in all material respects with the Credit and Collection Policies of each Originator with regard to each Receivable originated by each Originator. (r) The Seller has complied in all material respects with all of the terms, covenants and agreements contained in the Agreement and the other Transaction Documents that are applicable to it. (s) The Seller's complete corporate name is set forth in the preamble to the Agreement, and it does not use and has not during the last six years used any other corporate name, trade name, doing-business name or fictitious name, except as set forth on Schedule III to the Agreement and except for names first used after the date of the Agreement and set forth in a notice delivered to the Administrator pursuant to Section 1(l)(iv) of Exhibit IV to the Agreement. (t) The Seller 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. In addition, the Seller is not a "holding company," a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. (u) With respect to each Receivable transferred to the Seller under the Purchase and Sale Agreement, Seller has given reasonably equivalent value to the Originator thereof in consideration therefor and such transfer was not made for or on account of an antecedent debt. No transfer by any Originator of any Receivable under the Purchase and Sale Agreement is or may be voidable under any section of the Bankruptcy Code. (v) Each Contract with respect to each Receivable is effective to create, and has created, a legal, valid and binding obligation of the related Obligor to pay the Outstanding Balance of the Receivable created thereunder and any accrued interest thereon, enforceable against the Obligor in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, III-3 52 insolvency, reorganization or other similar laws relating to or limiting creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law). (w) Since its most recent fiscal year end, there has been no change in the business, operations, financial condition, properties or assets of the Seller which would have a Material Adverse Effect on its ability to perform its obligations under the Agreement or any other Transaction Document to which it is a party or materially and adversely affect the transactions contemplated under the Agreement or such other Transaction Documents. 2. Representations and Warranties of KSI (including in its capacity as the Servicer). KSI, individually and in its capacity as the Servicer, represents and warrants as follows: (a) KSI is a corporation duly formed, validly existing and in good standing under the laws of the State of Pennsylvania, and is duly qualified to do business and is in good standing as a foreign corporation in every jurisdiction where the nature of its business requires it to be so qualified, except where the failure to be so qualified would not have a Material Adverse Effect. (b) The execution, delivery and performance by KSI of the Agreement and the other Transaction Documents to which it is a party, including the Servicer's use of the proceeds of purchases and reinvestments: (i) are within its corporate powers; (ii) have been duly authorized by all necessary corporate action; (iii) do not contravene or result in a default under or conflict with: (A) its charter or bylaws, (B) any law, rule or regulation applicable to it except where such contravention, default or conflict would not reasonably be likely to have a Material Adverse Effect, (C) any indenture, loan agreement, mortgage, deed of trust or other material agreement or instrument to which it is a party or by which it is bound, or (D) any order, writ, judgment, award, injunction or decree binding on or affecting it or any of its property except where such contravention, default or conflict would not reasonably be likely to have a Material Adverse Effect; and (iv) do not result in or require the creation of any Adverse Claim upon or with respect to any of its properties. The Agreement and the other Transaction Documents to which KSI is a party have been duly executed and delivered by KSI. (c) No authorization, approval or other action by, and no notice to or filing with any Governmental Authority or other Person, is required for the due execution, delivery and performance by KSI of the Agreement or any other Transaction Document to which it is a party other than those the failure to receive or make would not be reasonably likely to have a Material Adverse Effect. (d) Each of the Agreement and the other Transaction Documents to which KSI is a party constitutes the legal, valid and binding obligation of KSI enforceable against KSI in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws from time to time in effect affecting the enforcement of creditors' rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. III-4 53 (e) The balance sheets of KSI and its consolidated Subsidiaries as at December 31, 2000, and the related statements of income and retained earnings for the fiscal year then ended, copies of which have been furnished to the Administrator, fairly present the financial condition of KSI and its consolidated Subsidiaries as at such date and the results of the operations of KSI and its Subsidiaries for the period ended on such date, all in accordance with generally accepted accounting principles consistently applied, and since December 31, 2000 there has been no event or circumstances which have had a Material Adverse Effect. (f) Except as disclosed in the most recent audited financial statements of KSI furnished to the Administrator, there is no pending or, to its best knowledge, threatened action or proceeding affecting it or any of its Subsidiaries before any Governmental Authority or arbitrator other than any action or proceeding that, if adversely determined, would not be reasonably likely to have a Material Adverse Effect. (g) No proceeds of any purchase or reinvestment will be used to acquire any equity security of a class that is registered pursuant to Section 12 of the Securities Exchange Act of 1934. (h) Each Information Package (if prepared by KSI or one of its Affiliates, or to the extent that information contained therein is supplied by KSI or an Affiliate), information, exhibit, financial statement, document, book, record or report furnished or to be furnished at any time by or on behalf of the Servicer to the Administrator in connection with the Agreement is or will be complete and accurate in all material respects as of its date or (except as otherwise disclosed to the Administrator at such time) as of the date so furnished. (i) The principal place of business and chief executive office (as such terms are used in the UCC) of KSI and the office where it keeps its records concerning the Receivables are located at the address referred to in Section 2(b) of Exhibit IV to the Agreement. (j) KSI is not in violation of any order of any court, arbitrator or Governmental Authority, which would be reasonably likely to have a Material Adverse Effect. (k) Neither KSI nor any of its Affiliates has any direct or indirect ownership or other financial interest in the Issuer. (l) The Servicer has complied in all material respects with the Credit and Collection Policy of each Originator with regard to each Receivable originated by each Originator. (m) KSI has complied in all material respects with all of the terms, covenants and agreements contained in the Agreement and the other Transaction Documents that are applicable to it. (n) KSI 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. In addition, KSI is not a "holding company," a "subsidiary company" of a "holding company," or an "affiliate" III-5 54 of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. (o) Since its most recent fiscal year end, there has been no change in the business, operations, financial condition, properties or assets of the Servicer which would be reasonably likely to have a Material Adverse Effect on its ability to perform its obligations under the Agreement or any other Transaction Document to which it is a party or materially and adversely affect the transactions contemplated under the Agreement or such other Transaction Documents. (p) No license or approval is required for the Administrator or any successor Servicer to use any program used by the Servicer in the servicing of the Receivables, other than such licenses and approvals that have been obtained and are in full force and effect other than those the failure to obtain would not be reasonably likely to have a Material Adverse Effect. III-6 55 EXHIBIT IV COVENANTS 1. Covenants of the Seller. Until the latest of the Facility Termination Date, the date on which no Capital of or Discount in respect of the Purchased Interest shall be outstanding or the date all other amounts owed by the Seller under the Agreement to the Issuer, the Administrator and any other Indemnified Party or Affected Person shall be paid in full: (a) Compliance with Laws, Etc. The Seller shall comply in all material respects with all applicable laws, rules, regulations and orders, and preserve and maintain its corporate existence, rights, franchises, qualifications and privileges, except to the extent that the failure so to comply with such laws, rules and regulations or the failure so to preserve and maintain such rights, franchises, qualifications and privileges would not be reasonably likely to have a Material Adverse Effect. (b) Offices, Records and Books of Account, Etc. The Seller: (i) shall keep its principal place of business and chief executive office (as such terms or similar terms are used in the UCC) and the office where it keeps its records concerning the Receivables at the address of the Seller set forth under its name on the signature page to the Agreement or, pursuant to clause (l)(iv) below, at any other locations in jurisdictions where all actions reasonably requested by the Administrator to protect and perfect the interest of the Issuer in the Receivables and related items (including the Pool Assets) have been taken and completed and (ii) shall provide the Administrator with at least 30 days' written notice before making any change in the Seller's name or making any other change in the Seller's identity or corporate structure (including a Change in Control) that could render any UCC financing statement filed in connection with this Agreement "seriously misleading" as such term (or similar term) is used in the UCC; each notice to the Administrator pursuant to this sentence shall set forth the applicable change and the effective date thereof. The Seller also will maintain and implement (or cause the Servicer to maintain and implement) administrative and operating procedures (including an ability to recreate records evidencing Receivables and related Contracts in the event of the destruction of the originals thereof), and keep and maintain (or cause the Servicer to keep and maintain) all documents, books, records, computer tapes and disks and other information reasonably necessary or advisable for the collection of all Receivables (including records adequate to permit the daily identification of each Receivable and all Collections of and adjustments to each existing Receivable). Notwithstanding the above, in no event shall the Seller have or maintain, or be a partner in any partnership that has or maintains, its jurisdiction of organization, principal place of business or principal assets in any of the states of Colorado, Kansas, New Mexico, Oklahoma, Utah or Wyoming. (c) Performance and Compliance with Contracts and Credit and Collection Policy. The Seller shall (and shall cause the Servicer to), at its expense, timely and fully perform and comply with all material provisions, covenants and other promises required to be observed by it under the IV-1 56 Contracts related to the Receivables, and timely and fully comply in all material respects with the applicable Credit and Collection Policies with regard to each Receivable and the related Contract. (d) Ownership Interest, Etc. The Seller shall (and shall cause the Servicer to), at its expense, take all action necessary or desirable to establish and maintain a valid and enforceable undivided percentage ownership or security interest, to the extent of the Purchased Interest, in the Pool Receivables, the Related Security and Collections with respect thereto, and a first priority perfected security interest in the Pool Assets, in each case free and clear of any Adverse Claim, in favor of the Issuer, including taking such action to perfect, protect or more fully evidence the interest of the Issuer as the Issuer, through the Administrator, may reasonably request. (e) Sales, Liens, Etc. The Seller shall not sell, assign (by operation of law or otherwise) or otherwise dispose of, or create or suffer to exist any Adverse Claim upon or with respect to, any or all of its right, title or interest in, to or under any Pool Assets (including the Seller's undivided interest in any Receivable, Related Security or Collections, or upon or with respect to any account to which any Collections of any Receivables are sent), or assign any right to receive income in respect of any items contemplated by this paragraph. (f) Extension or Amendment of Receivables. Except as provided in the Agreement, the Seller shall not, and shall not permit the Servicer to, extend the maturity or adjust the Outstanding Balance or otherwise modify the terms of any Pool Receivable in any material respect, or amend, modify or waive, in any material respect, any term or condition of any related Contract (which term or condition relates to payments under, or the enforcement of, such Contract). (g) Change in Business or Credit and Collection Policy. The Seller shall not make (or permit any Originator to make) any material change in the character of its business or in any Credit and Collection Policy, or any change in any Credit and Collection Policy that would be reasonably likely to have a Material Adverse Effect with respect to the Receivables. The Seller shall not make (or permit any Originator to make) any other change in any Credit and Collection Policy without giving prior written notice thereof to the Administrator. (h) Audits. The Seller shall (and shall cause the Originator to), no more than twice annually (unless a Termination Event or an Unmatured Termination Event exists or there shall be a material variance in the performance of the Receivables) during regular business hours, and upon reasonable prior notice by the Administrator, permit the Administrator, or its agents or representatives: (i) to examine and make copies of and abstracts from all books, records and documents (including computer tapes and disks) in the possession or under the control of the Seller (or each Originator) relating to Receivables and the Related Security, including the related Contracts, (ii) to visit the offices and properties of the Seller and each Originator for the purpose of examining such materials described in clause (i) above, and to discuss matters relating to Receivables and the Related Security or the Seller's, KSI's or any Originator's performance under the Transaction Documents or under the Contracts with any of the officers, employees, agents or contractors of the Seller, KSI or any Originator having knowledge of such matters and (iii) without limiting the clauses (i) and (ii) above, no more than once annually (unless a Termination Event or an Unmatured Termination Event exists IV-2 57 or there shall be a material variance in the performance of the Receivables), during regular business hours, and upon reasonable prior notice, to engage certified public accountants or other auditors acceptable to the Seller and the Administrator to conduct, at the Seller's expense, a review of the Seller's books and records with respect to such Receivables. (i) Change in Lock-Box Banks, Lock-Box Accounts and Payment Instructions to Obligors. The Seller shall not, and shall not permit the Servicer or any Originator to, add or terminate any bank as a Lock-Box Bank or any account as a Lock-Box Account from those listed in Schedule II to the Agreement, or make any change in its instructions to Obligors regarding payments to be made to the Seller, any Originator, the Servicer or any Lock-Box Account (or related post office box), unless the Administrator shall have consented thereto in writing and the Administrator shall have received copies of all agreements and documents (including Lock-Box Agreements) that it may request in connection therewith. (j) Deposits to Lock-Box Accounts. The Seller shall (or shall cause the Servicer to): (i) instruct all Obligors to make payments of all Receivables to one or more Lock-Box Accounts or to post office boxes to which only Lock-Box Banks have access (and shall instruct the Lock-Box Banks to cause all items and amounts relating to such Receivables received in such post office boxes to be removed and deposited into a Lock-Box Account on a daily basis); provided, however, that with respect to any Receivable the Originator of which is American Fine Wire Corporation the Seller may instruct the Obligor of such Receivable to make payments with respect to such Receivable to American Fine Wire Corporation, 907 Ravenwood Drive, P.O. Box 966, Selma, Alabama 36701, and (ii) deposit, or cause to be deposited, any Collections received by it, the Servicer or any Originator into Lock-Box Accounts not later than one Business Day after receipt thereof. Each Lock-Box Account shall at all times be subject to a Lock-Box Agreement. The Seller will not (and will not permit the Servicer to) deposit or otherwise credit, or cause or permit to be so deposited or credited, to any Lock-Box Account cash or cash proceeds other than Collections. (k) Marking of Records. At its expense, the Seller shall: (i) mark (or cause the Servicer to mark) its master data processing records relating to Pool Receivables and related Contracts, including with a legend evidencing that the undivided percentage ownership interests with regard to the Purchased Interest related to such Receivables and related Contracts have been sold in accordance with the Agreement, and (ii) cause each Originator so to mark its master data processing records pursuant to the Purchase and Sale Agreement. (l) Reporting Requirements. The Seller will provide to the Administrator (in multiple copies, if requested by the Administrator) the following: (i) as soon as available and in any event within 60 days after the end of the first three quarters of each fiscal year of the Seller, balance sheets of the Seller as of the end of such quarter and statements of income, retained earnings and cash flow of the Seller for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, certified by the chief financial officer of such Person; IV-3 58 (ii) as soon as available and in any event within 120 days after the end of each fiscal year of the Seller, a copy of the financial statements for such year certified as to accuracy by the chief financial officer or treasurer of the Seller; (iii) as soon as possible and in any event within five days after the occurrence of each Termination Event or Unmatured Termination Event, a statement of the chief financial officer of the Seller setting forth details of such Termination Event or Unmatured Termination Event and the action that the Seller has taken and proposes to take with respect thereto; (iv) promptly after the filing or receiving thereof, copies of all reports and notices that the Seller or any Affiliate files under ERISA with the Internal Revenue Service, the Pension Benefit Guaranty Corporation or the U.S. Department of Labor or that the Seller or any Affiliate receives from any of the foregoing or from any multiemployer plan (within the meaning of Section 4001(a)(3) of ERISA) to which the Seller or any of its Affiliates is or was, within the preceding five years, a contributing employer, in each case in respect of the assessment of withdrawal liability or an event or condition that could, in the aggregate, result in the imposition of liability on the Seller and/or any such Affiliate which liability would be reasonably likely to have a Material Adverse Effect; (v) at least thirty days before any change in the Seller's name or any other change requiring the amendment of UCC financing statements, a notice setting forth such changes and the effective date thereof; (vi) promptly after the Seller obtains knowledge thereof, notice of any: (A) material litigation, investigation or proceeding that may exist at any time between the Seller and any Person or (B) material litigation or proceeding relating to any Transaction Document; (vii) promptly after the occurrence thereof, notice of a material adverse change in the business, operations, property or financial or other condition of the Seller, the Servicer or any Originator; and (viii) such other information respecting the Receivables or the condition or operations, financial or otherwise, of the Seller or any of its Affiliates as the Administrator may from time to time reasonably request. (m) Certain Agreements. Without the prior written consent of the Administrator, the Seller will not (and will not permit any Originator to) amend, modify, waive, revoke or terminate any Transaction Document to which it is a party or any provision of Seller's certificate of incorporation or by-laws; provided, however, that prior to April 1, 2001 the Seller will not amend, modify, waive or terminate any provision of its certificate of incorporation or by-laws. IV-4 59 (n) Restricted Payments. (i) Except pursuant to clause (ii) below, the Seller will not: (A) purchase or redeem any shares of its capital stock, (B) declare or pay any dividend or set aside any funds for any such purpose, (C) prepay, purchase or redeem any Debt, (D) lend or advance any funds or (E) repay any loans or advances to, for or from any of its Affiliates (the amounts described in clauses (A) through (E) being referred to as "Restricted Payments"). (ii) Subject to the limitations set forth in clause (iii) below, the Seller may make Restricted Payments so long as such Restricted Payments are made only in one or more of the following ways: (A) the Seller may make cash payments (including prepayments) on the Company Note in accordance with its terms, and (B) if no amounts are then outstanding under the Company Note, the Seller may declare and pay dividends. (iii) The Seller may make Restricted Payments only out of the funds it receives pursuant to Sections 1.4(b)(ii) and (iv) of the Agreement. Furthermore, the Seller shall not pay, make or declare: (A) any dividend if, after giving effect thereto, the Seller's tangible net worth would be less than $6,000,000, or (B) any Restricted Payment (including any dividend) if, after giving effect thereto, any Termination Event or Unmatured Termination Event shall have occurred and be continuing. (o) Other Business. The Seller will not: (i) engage in any business other than the transactions contemplated by the Transaction Documents; (ii) create, incur or permit to exist any Debt of any kind (or cause or permit to be issued for its account any letters of credit or bankers' acceptances) other than pursuant to this Agreement or the Company Note; or (iii) form any Subsidiary or make any investments in any other Person; provided, however, that the Seller shall be permitted to incur minimal obligations to the extent necessary for the day-to-day operations of the Seller (such as expenses for stationery, audits, maintenance of legal status, etc.). (p) Use of Seller's Share of Collections. The Seller shall apply the Seller's Share of Collections to make payments in the following order of priority: (i) the payment of its expenses (including all obligations payable to the Issuer and the Administrator under the Agreement and under the Fee Letter); (ii) the payment of accrued and unpaid interest on the Company Note; and (iii) other legal and valid corporate purposes. (q) Tangible Net Worth. The Seller will not permit its tangible net worth, at any time, to be less than $6,000,000. (r) At the beginning of each quarter the Seller shall send a written notice to each Obligor located in the Philippines notifying such Obligor that pursuant to this Agreement it has assigned an undivided variable percentage interest in the Receivables and has pledged the Receivables to the Issuer. (s) Funding Base. The Seller will not permit Capital, at any time, to be greater than the Funding Base. IV-5 60 2. Covenants of the Servicer and KSI. Until the latest of the Facility Termination Date, the date on which no Capital of or Discount in respect of the Purchased Interest shall be outstanding or the date all other amounts owed by the Seller under the Agreement to the Issuer, the Administrator and any other Indemnified Party or Affected Person shall be paid in full: (a) Compliance with Laws, Etc. The Servicer and, to the extent that it ceases to be the Servicer, KSI shall comply (and shall cause each Originator to comply) in all material respects with all applicable laws, rules, regulations and orders, and preserve and maintain its corporate existence, rights, franchises, qualifications and privileges, except to the extent that the failure so to comply with such laws, rules and regulations or the failure so to preserve and maintain such existence, rights, franchises, qualifications and privileges would not be reasonably likely to have a Material Adverse Effect. (b) Offices, Records and Books of Account, Etc. The Servicer and, to the extent that it ceases to be the Servicer, KSI, shall keep (and shall cause each Originator to keep) its principal place of business and chief executive office (as such terms or similar terms are used in the applicable UCC) and the office where it keeps its records concerning the Receivables at the address of the Servicer set forth under its name on the signature page to the Agreement or, upon at least 30 days' prior written notice of a proposed change to the Administrator, at any other locations in jurisdictions where all actions reasonably requested by the Administrator to protect and perfect the interest of the Issuer in the Receivables and related items (including the Pool Assets) have been taken and completed. The Servicer and, to the extent that it ceases to be the Servicer, KSI, also will (and will cause each Originator to) maintain and implement administrative and operating procedures (including an ability to recreate records evidencing Receivables and related Contracts in the event of the destruction of the originals thereof), and keep and maintain all documents, books, records, computer tapes and disks and other information reasonably necessary or advisable for the collection of all Receivables (including records adequate to permit the daily identification of each Receivable and all Collections of and adjustments to each existing Receivable). (c) Performance and Compliance with Contracts and Credit and Collection Policy. The Servicer and, to the extent that it ceases to be the Servicer, KSI, shall (and shall cause each Originator to), at its expense, timely and fully perform and comply with all material provisions, covenants and other promises required to be observed by it under the Contracts related to the Receivables, and timely and fully comply in all material respects with the Credit and Collection Policy with regard to each Receivable and the related Contract. (d) Extension or Amendment of Receivables. Except as provided in the Agreement, the Servicer and, to the extent that it ceases to be the Servicer, KSI, shall not extend (and shall not permit any Originator to extend), the maturity or adjust the Outstanding Balance or otherwise modify the terms of any Pool Receivable in any material respect, or amend, modify or waive, in any material respect, any term or condition of any related Contract (which term or condition relates to payments under, or the enforcement of, such Contract). IV-6 61 (e) Change in Business or Credit and Collection Policy. The Servicer and, to the extent that it ceases to be the Servicer, KSI, shall not make (and shall not permit any Originator to make) any material change in the character of its business or in any Credit and Collection Policy, or any change in any Credit and Collection Policy that would be reasonably likely to have a Material Adverse Effect. The Servicer and, to the extent that it ceases to be the Servicer, KSI, shall not make (and shall not permit any Originator to make) any other change in any Credit and Collection Policy without giving prior written notice thereof to the Administrator. (f) Audits. The Servicer and, to the extent that it ceases to be the Servicer, KSI, shall (and shall cause each Originator to), no more than twice annually (unless a Termination Event or an Unmatured Termination Event exists or there shall be a material variance in the performance of the Receivables) during regular business hours and upon reasonable prior notice by the Administrator, permit the Administrator, or its agents or representatives: (i) to examine and make copies of and abstracts from all books, records and documents (including computer tapes and disks) in its possession or under its control relating to Receivables and the Related Security, including the related Contracts; (ii) to visit its offices and properties for the purpose of examining such materials described in clause (i)above, and to discuss matters relating to Receivables and the Related Security or its performance hereunder or under the Contracts with any of its officers, employees, agents or contractors having knowledge of such matters and (iii), without limiting the clauses (i) and (ii) above, no more than once annually (unless a Termination Event or an Unmatured Termination Event exists or there shall be a material variance in the performance of the Receivables), during regular business hours, and upon reasonable prior notice, to engage certified public accountants or other auditors acceptable to the Servicer and the Administrator to conduct, at the Servicer's expense, a review of the Servicer's books and records with respect to such Receivables. (g) Change in Lock-Box Banks, Lock-Box Accounts and Payment Instructions to Obligors. The Servicer and, to the extent that it ceases to be the Servicer, KSI, shall not (and shall not permit any Originator to) add or terminate any bank as a Lock-Box Bank or any account as a Lock-Box Account from those listed in Schedule II to the Agreement, or make any change in its instructions to Obligors regarding payments to be made to the Servicer or any Lock-Box Account (or related post office box), unless the Administrator shall have consented thereto in writing and the Administrator shall have received copies of all agreements and documents (including Lock-Box Agreements) that it may request in connection therewith. (h) Deposits to Lock-Box Accounts. The Servicer shall: (i) instruct all Obligors to make payments of all Receivables to one or more Lock-Box Accounts or to post office boxes to which only Lock-Box Banks have access (and shall instruct the Lock-Box Banks to cause all items and amounts relating to such Receivables received in such post office boxes to be removed and deposited into a Lock-Box Account on a daily basis); provided, however, that with respect to any Receivable the Originator of which is American Fine Wire Corporation the Servicer may instruct the Obligor of such Receivable to make payments with respect to such Receivable to American Fine Wire Corporation, 907 Ravenwood Drive, P.O. Box 966, Selma, Alabama 36701, and (ii) deposit, or cause to be deposited, any Collections received by it into Lock-Box Accounts not later than two IV-7 62 Business Days after receipt thereof. Each Lock-Box Account shall at all times be subject to a Lock-Box Agreement. (i) Marking of Records. At its expense, the Servicer shall mark its master data processing records relating to Pool Receivables and related Contracts, including with a legend evidencing that the undivided percentage ownership interests with regard to the Purchased Interest related to such Receivables and related Contracts have been sold in accordance with the Agreement. (j) Reporting Requirements. KSI shall provide to the Administrator (in multiple copies, if requested by the Administrator) the following: (i) as soon as available and in any event within 60 days after the end of the first three quarters of each fiscal year of KSI, balance sheets of KSI and its consolidated Subsidiaries as of the end of such quarter and statements of income, retained earnings and cash flow of KSI and its consolidated Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, certified by the chief financial officer of such Person; (ii) as soon as available and in any event within 120 days after the end of each fiscal year of such Person, a copy of the annual report for such year for such Person and its consolidated Subsidiaries, containing financial statements for such year audited by independent certified public accountants of nationally recognized standing; (iii) as to the Servicer only, as soon as available and in any event not later than two Business Days prior to the Settlement Date, an Information Package as of the most recently completed Fiscal Month or, if in the opinion of the Administrator reasonable grounds for insecurity exist with respect to the collectibility of the Pool Receivables or with respect to the Seller or Servicer's performance or ability to perform its obligations under the Agreement, within six Business Days of a request by the Administrator, an Information Package for such periods as is specified by the Administrator (but in no event more frequently than weekly); (iv) as soon as possible and in any event within five days after becoming aware of the occurrence of each Termination Event or Unmatured Termination Event, a statement of the chief financial officer of KSI setting forth details of such Termination Event or Unmatured Termination Event and the action that such Person has taken and proposes to take with respect thereto; (v) promptly after the sending or filing thereof, copies of all reports that KSI sends to any of its security holders, and copies of all reports and registration statements that KSI or any Subsidiary files with the Securities and Exchange Commission or any national securities exchange; provided, that any filings with the Securities and Exchange Commission that have been granted "confidential" treatment shall be provided promptly after such filings have become publicly available; IV-8 63 (vi) promptly after the filing or receiving thereof, copies of all reports and notices that KSI or any of its Affiliate files under ERISA with the Internal Revenue Service, the Pension Benefit Guaranty Corporation or the U.S. Department of Labor or that such Person or any of its Affiliates receives from any of the foregoing or from any multiemployer plan (within the meaning of Section 4001(a)(3) of ERISA) to which such Person or any of its Affiliate is or was, within the preceding five years, a contributing employer, in each case in respect of the assessment of withdrawal liability or an event or condition that could, in the aggregate, result in the imposition of liability on KSI and/or any such Affiliate which liability would be reasonably likely to have a Material Adverse Effect; (vii) at least thirty days before any change in KSI's or any Originator's name or any other change requiring the amendment of UCC financing statements, a notice setting forth such changes and the effective date thereof; (viii) promptly after KSI obtains knowledge thereof, notice of any: (A) litigation, investigation or proceeding that may exist at any time between KSI or any of its Subsidiaries and any Governmental Authority that, if not cured or if adversely determined, as the case may be, would have a Material Adverse Effect; (B) litigation or proceeding adversely affecting such Person or any of its Subsidiaries in which the amount involved is not covered by insurance or in which injunctive or similar relief is sought and that, if not cured or if adversely determined, as the case may be, would have a Material Adverse Effect; or (C) litigation or proceeding relating to any Transaction Document; (ix) promptly after the occurrence thereof, notice of a material adverse change in the business, operations, property or financial or other condition of KSI or any of its Subsidiaries; and (x) such other information respecting the Receivables or the condition or operations, financial or otherwise, of KSI or any of its Affiliates as the Administrator may from time to time reasonably request. (k) At the beginning of each quarter the Servicer shall (or shall cause the applicable Originator or the Seller, as applicable) to send a written notice to each Obligor located in the Philippines notifying such Obligor that pursuant to the Purchase and Sale Agreement all the Receivables have been sold to the Seller and pursuant to this Agreement the Seller has assigned an undivided variable percentage interest in the Receivables and has pledged the Receivables to the Issuer. (l) Funding Base. The Servicer will not permit Capital, at any time, to be greater than the Funding Base. 3. Separate Existence. Each of the Seller and KSI hereby acknowledges that the Purchasers, the Issuer and the Administrator are entering into the transactions contemplated by this Agreement and the other Transaction Documents in reliance upon the Seller's identity as a legal entity separate IV-9 64 from KSI and its Affiliates. Therefore, from and after the date hereof, each of the Seller and KSI shall take all steps specifically required by the Agreement or reasonably required by the Administrator to continue the Seller's identity as a separate legal entity and to make it apparent to third Persons that the Seller is an entity with assets and liabilities distinct from those of KSI and any other Person, and is not a division of KSI, its Affiliates or any other Person. Without limiting the generality of the foregoing and in addition to and consistent with the other covenants set forth herein, each of the Seller and KSI shall take such actions as shall be required in order that: (a) The Seller will be a limited purpose corporation whose primary activities are restricted in its certificate of incorporation to: (i) purchasing or otherwise acquiring from the Originators (or its Affiliates), owning, holding, granting security interests or selling interests in Pool Assets (or other receivables originated by any Originator or its Affiliates, and certain related assets), (ii) entering into agreements for the selling and servicing of the Receivables Pool (or other receivables pools originated by any Originator or its Affiliates), and (iii) conducting such other activities as it deems necessary or appropriate to carry out its primary activities; (b) The Seller shall not engage in any business or activity, or incur any indebtedness or liability, other than as expressly permitted by the Transaction Documents; (c) Not less than one member of the Seller's Board of Directors (the "Independent Director") shall be an individual who is not a direct, indirect or beneficial stockholder, officer, director, employee, affiliate, associate or supplier of KSI or any of its Affiliates. The certificate of incorporation of the Seller shall provide that: (i) the Seller's Board of Directors shall not approve, or take any other action to cause the filing of, a voluntary bankruptcy petition with respect to the Seller unless the Independent Director shall approve the taking of such action in writing before the taking of such action, and (ii) such provision cannot be amended without the prior written consent of the Independent Director; (d) The Independent Director shall not at any time serve as a trustee in bankruptcy for the Seller, KSI or any Affiliate thereof; (e) Any employee, consultant or agent of the Seller will be compensated from the Seller's funds for services provided to the Seller. The Seller will not engage any agents other than its attorneys, auditors and other professionals, and a servicer and any other agent contemplated by the Transaction Documents for the Receivables Pool, which servicer will be fully compensated for its services by payment of the Servicing Fee, and a manager, which manager will be fully compensated from the Seller's funds; (f) The Seller will contract with the Servicer to perform for the Seller all operations required on a daily basis to service the Receivables Pool. The Seller will pay the Servicer the Servicing Fee pursuant hereto. The Seller will not incur any material indirect or overhead expenses for items shared with KSI (or any other Affiliate thereof) that are not reflected in the Servicing Fee. To the extent, if any, that the Seller (or any Affiliate thereof) shares items IV-10 65 of expenses not reflected in the Servicing Fee or the manager's fee, such as legal, auditing and other professional services, such expenses will be allocated to the extent practical on the basis of actual use or the value of services rendered, and otherwise on a basis reasonably related to the actual use or the value of services rendered; it being understood that KSI shall pay all expenses relating to the preparation, negotiation, execution and delivery of the Transaction Documents, including legal, agency and other fees; (g) The Seller's operating expenses will not be paid by KSI or any other Affiliate thereof; (h) All of the Seller's business correspondence and other communications shall be conducted in the Seller's own name and on its own separate stationery; (i) The Seller's books and records will be maintained separately from those of KSI and any other Affiliate thereof; (j) All financial statements of KSI or any Affiliate thereof that are consolidated to include Seller will contain detailed notes clearly stating that: (i) a special purpose corporation exists as a Subsidiary of KSI, and (ii) each Originator has sold receivables and other related assets to such special purpose Subsidiary that, in turn, has sold undivided interests therein to certain financial institutions and other entities; (k) The Seller's assets will be maintained in a manner that facilitates their identification and segregation from those of KSI or any Affiliate thereof; (l) The Seller will strictly observe corporate formalities in its dealings with KSI or any Affiliate thereof, and funds or other assets of the Seller will not be commingled with those of KSI or any Affiliate thereof except as permitted by the Agreement in connection with servicing the Pool Receivables. The Seller shall not maintain joint bank accounts or other depository accounts to which KSI or any Affiliate thereof has independent access. The Seller is not named, and has not entered into any agreement to be named, directly or indirectly, as a direct or contingent beneficiary or loss payee on any insurance policy with respect to any loss relating to the property of KSI or any Subsidiary or other Affiliate of KSI. The Seller will pay to the appropriate Affiliate the marginal increase or, in the absence of such increase, the market amount of its portion of the premium payable with respect to any insurance policy that covers the Seller and such Affiliate; (m) The Seller will maintain arm's-length relationships with KSI (and any Affiliate thereof). Any Person that renders or otherwise furnishes services to the Seller will be compensated by the Seller at market rates for such services it renders or otherwise furnishes to the Seller. Neither the Seller nor KSI will be or will hold itself out to be responsible for the debts of the other or the decisions or actions respecting the daily business and affairs of the other. The Seller and KSI will immediately correct any known misrepresentation with IV-11 66 respect to the foregoing, and they will not operate or purport to operate as an integrated single economic unit with respect to each other or in their dealing with any other entity; and (n) KSI shall not pay the salaries of Seller's employees, if any. IV-12 67 EXHIBIT V TERMINATION EVENTS Each of the following shall be a "Termination Event": (a)(i) the Seller, KSI, any Originator or the Servicer (if KSI or any of its Affiliates) shall fail to perform or observe any term, covenant or agreement under the Agreement or any other Transaction Document and, except as otherwise provided herein, such failure shall continue for five Business Days after knowledge or notice thereof, (ii) the Seller or the Servicer shall fail to make when due any payment or deposit to be made by it under the Agreement and such failure shall continue unremedied for two Business Days or (iii) KSI shall resign as Servicer, and no successor Servicer reasonably satisfactory to the Administrator shall have been appointed; (b) KSI (or any Affiliate thereof) shall fail to transfer to any successor Servicer when required any rights pursuant to the Agreement that KSI (or such Affiliate) then has as Servicer; (c) any representation or warranty made or deemed made by the Seller, KSI or any Originator (or any of their respective officers) under or in connection with the Agreement or any other Transaction Document, or any information or report delivered by the Seller, KSI or any Originator or the Servicer pursuant to the Agreement or any other Transaction Document, shall prove to have been incorrect or untrue in any material respect when made or deemed made or delivered, and shall remain incorrect or untrue for 10 days after notice to the Seller or the Servicer of such inaccuracy; (d) the Seller or the Servicer shall fail to deliver the Information Package pursuant to the Agreement, and such failure shall remain unremedied for two Business Days; (e) the Agreement or any purchase or reinvestment pursuant to the Agreement shall for any reason: (i) cease to create, or the Purchased Interest shall for any reason cease to be, a valid and enforceable perfected undivided percentage ownership or security interest to the extent of the Purchased Interest in each Pool Receivable, the Related Security and Collections with respect thereto, free and clear of any Adverse Claim, or (ii) cease to create with respect to the Pool Assets, or the interest of the Issuer with respect to such Pool Assets shall cease to be, a valid and enforceable first priority perfected security interest, free and clear of any Adverse Claim, (f) the Seller, KSI or any Originator shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Seller, KSI or any Originator seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other V-1 68 similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 60 days, or any of the actions sought in such proceeding (including the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property) shall occur; or the Seller, KSI or any Originator shall take any corporate action to authorize any of the actions set forth above in this paragraph; (g)(i) the (A) Default Ratio shall exceed 3.00% or (B) the Delinquency Ratio shall exceed 22.00% or (ii) the average for three consecutive Fiscal Months of: (A) the Default Ratio shall exceed 2.20%, (B) the Delinquency Ratio shall exceed 20.00% or (C) the Dilution Ratio shall exceed 4.25%. (h) a Change in Control shall occur, (i) at any time (i) the sum of (A) the Capital plus (B) the Total Reserves, exceeds (ii) the sum of (A) the Net Receivables Pool Balance at such time plus (B) the Issuer's Share of the amount of Collections then on deposit in the Lock-Box Accounts (other than amounts set aside therein representing Discount and fees), and such circumstance shall not have been cured within five (5) days, (j) (i) KSI or any of its Subsidiaries shall fail to pay any principal of or premium or interest on any of its Debt that is outstanding in a principal amount of at least $5,000,000 in the aggregate when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement, mortgage, indenture or instrument relating to such Debt (and shall have not been waived); or (ii) any other event shall occur or condition shall exist under any agreement, mortgage, indenture or instrument relating to any such Debt and shall continue after the applicable grace period, if any, specified in such agreement, mortgage, indenture or instrument (and shall have not been waived), if, in either case: (a) the effect of such non-payment, event or condition is to cause the acceleration of the maturity of such Debt, or (b) any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), redeemed, purchased or defeased, or an offer to repay, redeem, purchase or defease such Debt shall be required to be made, in each case before the stated maturity thereof; (k) either: (i) a contribution failure shall occur with respect to any Benefit Plan sufficient to give rise to a lien under Section 302(f) of ERISA, (ii) the Internal Revenue Service shall file a notice of lien asserting a claim or claims pursuant to the Internal Revenue Code with regard to any of the assets of Seller, any Originator, KSI or any ERISA Affiliate and such lien shall have been filed and not released within 10 days, or (iii) the Pension Benefit Guaranty Corporation shall, or shall indicate its intention in writing to the Seller, any Originator, KSI or any ERISA Affiliate to, either file a notice of lien asserting a claim pursuant to ERISA with regard to any assets of the Seller, any Originator, KSI or any ERISA Affiliate or terminate any Benefit Plan that has unfunded benefit liabilities, or any steps shall have been taken to terminate any Benefit Plan subject to Title IV of V-2 69 ERISA so as to result in any liability and such lien shall have been filed and not released within 10 days. V-3 70 SCHEDULE I CREDIT AND COLLECTION POLICY 71 SCHEDULE II LOCK-BOX BANKS AND LOCK-BOX ACCOUNTS 72 SCHEDULE III TRADE NAMES
Corporate Name Trade Names / Fictitious Names - -------------- ------------------------------ KSI Funding Corporation None
Schedule III-1 73 SCHEDULE IV FISCAL MONTHS Schedule IV-1 74 ANNEX A TO RECEIVABLES PURCHASE AGREEMENT FORM OF INFORMATION PACKAGE Annex A-1 75 ANNEX B TO RECEIVABLES PURCHASE AGREEMENT FORM OF PURCHASE NOTICE Annex B-1 76 FORM OF PURCHASE NOTICE ________, [2001] PNC Bank, National Association One PNC Plaza, 3rd Floor 249 Fifth Avenue Pittsburgh, PA 15222-2707 Ladies and Gentlemen: Reference is hereby made to the Receivables Purchase Agreement, dated as of April 17, 2001 (as heretofore amended or supplemented, the "Receivables Purchase Agreement"), among KSI Funding Corporation, ("Seller"), Kulicke and Soffa Industries, Inc. as Servicer, Market Street Funding Corporation ("Issuer") and PNC Bank National Association, (the "Administrator"). Capitalized terms used in this Purchase Notice and not otherwise defined herein shall have the meanings assigned thereto in the Receivables Purchase Agreement. This letter constitutes a Purchase Notice pursuant to Section 1.2(a) of the Receivables Purchase Agreement. Seller desires to sell an undivided variable interest in a pool of receivables on___________, [2001], for a purchase price of $____________. Subsequent to this purchase, the aggregate outstanding Capital will be $____________. Seller hereby represents and warrants as of the date hereof, and as of the date of purchase, as follows: (i) the representations and warranties contained in Exhibit III of the Receivables Purchase Agreement are correct in all material respects on and as of such dates as though made on and as of such dates and shall be deemed to have been made on such dates; (ii) no Termination Event or Unmatured Termination Event has occurred and is continuing, or would result from such purchase; (iii) after giving effect to the purchase proposed hereby, the aggregate outstanding Capital of the Purchased Interest will not exceed 100% and the Capital will not exceed the Purchase Limit; (iv) no Default Event shall have occurred and is continuing; and (v) the Facility Termination Date shall not have occurred. 77 IN WITNESS WHEREOF, the undersigned has caused this Purchase Notice to be executed by its duly authorized officer as of the date first above written. KSI FUNDING CORPORATION By:_______________________________ Name Printed:_____________________ Title:____________________________ S-1 78 ANNEX C TO RECEIVABLES PURCHASE AGREEMENT FORM OF PAYDOWN NOTICE Annex C-1 79 FORM OF PAYDOWN NOTICE --------------,----- PNC Bank, National Association 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 Attention: John T. Smathers Ladies and Gentlemen: Reference is hereby made to the Receivables Purchase Agreement, dated as of April 17, 2001 (as amended, supplemented or otherwise modified, the "Receivables Purchase Agreement"), among KSI Funding Corporation, as Seller, Kulicke and Soffa Industries, Inc. as Servicer, Market Street Funding Corporation, as Issuer and PNC Bank, National Association, as Administrator. Capitalized terms used in this paydown notice and not otherwise defined herein shall have the meanings assigned thereto in the Receivables Purchase Agreement. This letter constitutes a paydown notice pursuant to Section 1.4(f)(i) of the Receivables Purchase Agreement. The Seller desires to reduce the Capital on____________,_____(1) by the application of $___________ in cash to pay Capital and Discount to accrue (until such cash can be used to pay commercial paper notes) with respect to such Capital, together with all costs related to such reduction of Capital. - ---------- (1) Notice must be given at least five Business Days' prior to the requested paydown date, in the case of reductions in excess of $10,000,000, or at least two Business Days' prior to the requested paydown date, in the case of reductions of $10,000,000 or less. 80 IN WITNESS WHEREOF, the undersigned has caused this paydown notice to be executed by its duly authorized officer as of the date first above written. KSI FUNDING CORPORATION By:____________________________ Name: Title: S-1 EX-10.2 4 w52042ex10-2.txt PURCHASE AND SALE AGREEMENT 1 ================================================================================ PURCHASE AND SALE AGREEMENT Dated as of April 17, 2001 between VARIOUS ENTITIES LISTED ON SCHEDULE I, as the Originators and KSI FUNDING CORPORATION ================================================================================ Purchase and Sale Agreement 2 TABLE OF CONTENTS
Page ---- ARTICLE I AGREEMENT TO PURCHASE AND SELL SECTION 1.1 Agreement To Purchase and Sell ................................. 1 SECTION 1.2 Timing of Purchases ............................................ 3 SECTION 1.3 Consideration for Purchases .................................... 3 SECTION 1.4 Purchase and Sale Termination Date ............................. 3 SECTION 1.5 Intention of the Parties ....................................... 3 ARTICLE II PURCHASE REPORT; CALCULATION OF PURCHASE PRICE SECTION 2.1 Purchase Report ................................................ 4 SECTION 2.2 Calculation of Purchase Price .................................. 4 ARTICLE III PAYMENT OF PURCHASE PRICE SECTION 3.1 Contribution of Receivables and Initial Purchase Price Payment .................................................. 5 SECTION 3.2 Subsequent Purchase Price Payments ............................. 5 SECTION 3.3 Settlement as to Specific Receivables and Dilution ............. 6 SECTION 3.4 Reconveyance of Receivables .................................... 7 ARTICLE IV CONDITIONS OF PURCHASES SECTION 4.1 Conditions Precedent to Initial Purchase ....................... 7 SECTION 4.2 Certification as to Representations and Warranties ............. 9 SECTION 4.3 Additional Originators ......................................... 9 ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE ORIGINATOR SECTION 5.1 Organization and Good Standing ................................. 10 SECTION 5.2 Due Qualification .............................................. 10 SECTION 5.3 Power and Authority; Due Authorization ......................... 10
Purchase and Sale Agreement 3 SECTION 5.4 Valid Sale; Binding Obligations ................................. 10 SECTION 5.5 No Violation .................................................... 10 SECTION 5.6 Proceedings ..................................................... 11 SECTION 5.7 Bulk Sales Acts ................................................. 11 SECTION 5.8 Government Approvals ............................................ 11 SECTION 5.9 Financial Condition ............................................. 11 SECTION 5.10 Licenses, Contingent Liabilities, and Labor Controversies ....... 11 SECTION 5.11 Margin Regulations .............................................. 12 SECTION 5.12 Quality of Title ................................................ 12 SECTION 5.13 Accuracy of Information ......................................... 12 SECTION 5.14 Offices ......................................................... 12 SECTION 5.15 Trade Names ..................................................... 12 SECTION 5.16 Taxes ........................................................... 13 SECTION 5.17 Compliance with Applicable Laws ................................. 13 SECTION 5.18 Reliance on Separate Legal Identity ............................. 13 SECTION 5.19 Investment Company .............................................. 13 ARTICLE VI COVENANTS OF THE ORIGINATORS SECTION 6.1 Affirmative Covenants ........................................... 13 SECTION 6.2 Reporting Requirements .......................................... 15 SECTION 6.3 Negative Covenants .............................................. 15 SECTION 6.4 Lock-Box Banks .................................................. 16 SECTION 6.5 Accounting for Purchases ........................................ 16 SECTION 6.7 Substantive Consolidation ....................................... 16 ARTICLE VII ADDITIONAL RIGHTS AND OBLIGATIONS IN RESPECT OF RECEIVABLES SECTION 7.1 Rights of the Company ........................................... 18 SECTION 7.2 Responsibilities of the Originators ............................. 18 SECTION 7.3 Further Action Evidencing Purchases ............................. 19 SECTION 7.4 Application of Collections ...................................... 19 ARTICLE VIII PURCHASE AND SALE TERMINATION EVENTS SECTION 8.1 Purchase and Sale Termination Events ............................ 20 SECTION 8.2 Remedies ........................................................ 20
Purchase and Sale Agreement 4 ARTICLE IX INDEMNIFICATION SECTION 9.1 Indemnities by the Originators ............................... 21 ARTICLE X MISCELLANEOUS SECTION 10.1 Amendments, etc .............................................. 22 SECTION 10.2 Notices, etc ................................................. 23 SECTION 10.3 No Waiver; Cumulative Remedies ............................... 23 SECTION 10.4 Binding Effect; Assignability ................................ 23 SECTION 10.5 Governing Law ................................................ 23 SECTION 10.6 Costs, Expenses and Taxes .................................... 24 SECTION 10.7 SUBMISSION TO JURISDICTION ................................... 24 SECTION 10.8 WAIVER OF JURY TRIAL ......................................... 24 SECTION 10.9 Captions and Cross References; Incorporation by Reference .... 25 SECTION 10.10 Execution in Counterparts .................................... 25 SECTION 10.11 Acknowledgment and Agreement ................................. 25 SECTION 10.12 No Proceeding ................................................ 25 SECTION 10.13 Limited Recourse ............................................. 25 SCHEDULES Schedule I List of Originators Schedule 5.6 Proceedings Schedule 5.14A Chief Executive Office of Each Originator Schedule 5.14B Location of Books and Records of Originators Schedule 5.15 Trade Names EXHIBITS Exhibit A Form of Purchase Report Exhibit B Form of Company Note Exhibit C Form of Originator Assignment Certificate Exhibit D Form of Joinder Agreement
Purchase and Sale Agreement 5 THIS PURCHASE AND SALE AGREEMENT (this "Agreement"), dated as of April 17, 2001, is entered into between the VARIOUS ENTITIES LISTED ON SCHEDULE I (each, an "Originator"; and collectively, "Originators"), and KSI FUNDING CORPORATION, a Delaware corporation (the "Company"). DEFINITIONS Unless otherwise indicated herein, capitalized terms used in this Agreement are defined in Exhibit A to the Receivables Purchase Agreement of even date herewith (as the same may be amended, supplemented or otherwise modified from time to time, the "Receivables Purchase Agreement") among the Company, as the Seller; Kulicke and Soffa Industries, Inc. (individually, "KSI"), as the initial Servicer; Market Street Funding Corporation and PNC Bank, National Association, as the Administrator. All references herein to months are to calendar months unless otherwise expressly indicated. BACKGROUND: 1. The Company is a special purpose corporation, all of the issued and outstanding shares of which are owned by Kulicke and Soffa Industries, Inc., a Pennsylvania corporation; 2. The Originators generate Receivables in the ordinary course of their businesses; 3. The Originators, in order to finance their respective businesses, wish to sell Receivables to the Company, and the Company is willing to purchase Receivables from the Originators, on the terms and subject to the conditions set forth herein; 4. The Originators and the Company intend this transaction to be an absolute and irrevocable true sale of Receivables by each Originator to the Company, providing the Company with the full benefits of ownership of the Receivables, and the Originators and the Company do not intend the transactions hereunder to be characterized as a loan from the Company to any Originator or for the Receivables to be a part of any Originator's estate in the event of an Insolvency Proceeding of any Originator; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto agree as follows: ARTICLE I AGREEMENT TO PURCHASE AND SELL SECTION 1.1 Agreement To Purchase and Sell. On the terms and subject to the conditions set forth in this Agreement, each Originator, severally and for itself, agrees to sell to the Company, and the Company agrees to purchase from such Originator, from time to time on Purchase and Sale Agreement 6 or after the Closing Date, but before the Purchase and Sale Termination Date, all of such Originator's right, title and interest in and to: (a) each Receivable of such Originator that existed and was owing to such Originator at the closing of such Originator's business on February 28, 2001 (the "Cut-off Date") other than Receivables contributed pursuant to Section 3.1 (the "Contributed Receivables"); (b) each Receivable generated by such Originator from and including the Cut-off Date to and including the Purchase and Sale Termination Date; (c) all rights to, but not the obligations of such Originator under all Related Security; (d) all monies due or to become due to such Originator with respect to any of the foregoing; (e) all books and records of such Originator related to any of the foregoing, and all rights, remedies, powers and privileges of such Originator in any accounts into which Collections are or may be received; and (f) all collections and other proceeds and products of any of the foregoing (as defined in the applicable UCC) that are or were received by such Originator on or after the Cut-off Date, including, without limitation, all funds which either are received by such Originator, the Company or the Servicer from or on behalf of the Obligors in payment of any amounts owed (including, without limitation, invoice price, finance charges, interest and all other charges) in respect of Receivables, or are applied to such amounts owed by the Obligors (including, without limitation, any insurance payments that such Originator or the Servicer applies in the ordinary course of its business to amounts owed in respect of any Receivable, and net proceeds of sale or other disposition of repossessed goods or other collateral or property of the Obligors in respect of Receivables or any other parties directly or indirectly liable for payment of such Receivables). All purchases and contributions hereunder are absolute and irrevocable shall be made without recourse except as expressly provided in Sections 3.3, 3.4 and 9.1, but shall be made pursuant to, and in reliance upon, the representations, warranties and covenants of the Originators set forth in this Agreement and each other Transaction Document. No obligation or liability to any Obligor on any Receivable is intended to be, or shall be, assumed by the Company hereunder, and any such assumption is expressly disclaimed. The Company's foregoing commitment to purchase Receivables and the proceeds and rights described in clauses (c) through (f) (collectively, the "Related Rights") is herein called the "Purchase Facility." 2 Purchase and Sale Agreement 7 SECTION 1.2 Timing of Purchases. (a) Closing Date Purchases. Each Originator's entire right, title and interest in, to and under (i) each Receivable that existed and was owing to such Originator at the Cut-off Date (other than Contributed Receivables), (ii) all Receivables created by such Originator from and including the Cut-off Date, to and including the Closing Date (other than Contributed Receivables), and (iii) all Related Rights with respect thereto automatically shall be deemed to have been sold by such Originator to the Company on the Closing Date. (b) Subsequent Purchases. After the Closing Date, until the Purchase and Sale Termination Date, each Receivable and the Related Rights generated by each Originator shall be, and shall be deemed to have been, sold by such Originator to the Company immediately (and without further action) upon the creation of such Receivable. SECTION 1.3 Consideration for Purchases. On the terms and subject to the conditions set forth in this Agreement, the Company agrees to make Purchase Price payments to the Originators in accordance with Article III and to reflect all contributions in accordance with Section 3.1. SECTION 1.4 Purchase and Sale Termination Date. The "Purchase and Sale Termination Date" shall be the earliest to occur of (a) the date the Purchase Facility is terminated pursuant to Section 8.2 and (b) the Payment Date immediately following the day on which KSI shall have given written notice to the Company at or prior to 10:00 a.m. (New York City time) that the Originators desire to terminate this Agreement. SECTION 1.5 Intention of the Parties. It is the express intent of the parties hereto that (a) the transfers of the Receivables, Contributed Receivables and Related Rights by the Originators to the Company, as contemplated by this Agreement be treated as true, final, absolute and irrevocable sales or contributions, as applicable (without recourse except as expressly provided in Sections 3.3, 3.4 and 9.1), of all of the Originators' right, title and interest in, to and under the Receivables or the Contributed Receivables, as applicable, and Related Rights, and not as loans secured by the Receivables, Contributed Receivables and Related Rights, and (b) that the Receivables, Contributed Receivables and Related Rights not be part of their respective Originator's estate in the event of an Insolvency Proceeding of such Originator. For federal income tax and accounting purposes, each Originator and the Company will treat the transfer of the Receivables, Contributed Receivables and Related Rights to the Company as a sale, and the supporting tax records of each Originator and the Company will reflect the sale of the Receivables, Contributed Receivables and the Related Rights by the Originators to the Company. Each Originator and the Company will report the transfer of the Receivables, Contributed Receivables and the Related Rights as a sale in all publicly available filings and reports. The books, accounts and records of each Originator and the Company will reflect that, under generally accepted accounting principles, such Originator's Receivables, Contributed Receivables and Related Rights have been sold to the Company. Each Originator hereby acknowledges that neither the Company nor the Administrator has made any representation or 3 Purchase and Sale Agreement 8 warranty concerning the tax, accounting or legal characteristics or treatment of the Transaction Documents and that such Originator has relied solely on the advice of its own tax, accounting and legal advisors concerning the Transaction Documents and the accounting, tax and legal consequences and treatment of the transactions contemplated thereby. If, however, notwithstanding the intent of the parties, such transactions are deemed to be loans, each Originator hereby grants to the Company a first priority security interest in all of such Originator's right, title and interest in and to: (i) the Receivables, Contributed Receivables and the Related Rights now existing and hereafter created by such Originator, (ii) all monies due or to become due and all amounts received with respect thereto, (iii) all books and records of such Originator related to any of the foregoing, and all rights, remedies, powers and privileges of such Originator in any accounts into which Collections are or may be received; and (iv) all proceeds and products of any of the foregoing to secure all of such Originator's obligations hereunder. ARTICLE II PURCHASE REPORT; CALCULATION OF PURCHASE PRICE SECTION 2.1 Purchase Report. On the Closing Date and on each Settlement Date, the Servicer shall deliver to the Company and each Originator a report in substantially the form of Exhibit A (each such report being herein called a "Purchase Report") identifying, among other things: (a) Receivables purchased by the Company from each Originator on the Closing Date (in the case of the Purchase Report to be delivered on the Closing Date); (b) Receivables purchased by the Company from each Originator during the period commencing on, and including, the Settlement Date immediately preceding such Settlement Date to (but not including) such Settlement Date (in the case of each subsequent Purchase Report); and (c) the calculations of reductions of the Purchase Price for any Receivables as provided in Section 3.3 (a) and (b). SECTION 2.2 Calculation of Purchase Price. The "Purchase Price" to be paid to each Originator for the Receivables that are purchased hereunder from such Originator shall be determined in accordance with the following formula: PP = OB x FMVD where: PP = Purchase Price for each Receivable as calculated on the relevant Payment Date. 4 Purchase and Sale Agreement 9 OB = The Outstanding Balance of such Receivable on the relevant Payment Date. FMVD = Fair Market Value Discount, as measured on such Payment Date, which is equal to the quotient (expressed as percentage) of (a) one divided by (b) the sum of (i) one, plus (ii) the product of (A) the Prime Rate on such Payment Date plus 0.25% and (B) a fraction, the numerator of which is the Turnover Rate (calculated as of the last day of the Settlement Period next preceding such Payment Date) and the denominator of which is 365. "Payment Date" means (i) the Closing Date and (ii) each Business Day thereafter that Originators are open for business. "Prime Rate" means a per annum rate equal to the "Prime Rate" as published in the "Money Rates" section of The Wall Street Journal or if such information ceases to be published in The Wall Street Journal, such other publication as determined by the Administrator in its reasonable discretion. ARTICLE III PAYMENT OF PURCHASE PRICE SECTION 3.1 Contribution of Receivables and Initial Purchase Price Payment. (a) On the Closing Date, KSI shall, and hereby does, irrevocably and absolutely contribute to the capital of the Company Receivables and Related Rights consisting of each Receivable of KSI that existed and was owing to KSI on the Closing Date beginning with the oldest of such Receivables and continuing chronologically thereafter such that the aggregate Outstanding Balance of all such Contributed Receivables shall be not less than $6,000,000 (provided that no Receivables shall be contributed in part, but only in their entirety). (b) On the terms and subject to the conditions set forth in this Agreement, the Company agrees to pay to each Originator the Purchase Price for the purchase to be made from such Originator on the Closing Date partially in cash (in an amount to be agreed between the Company and such Originator and set forth in the initial Purchase Report) and partially by issuing a promissory note in the form of Exhibit B to such Originator with an initial principal balance equal to the remaining Purchase Price (each such promissory note, as it may be amended, supplemented, endorsed or otherwise modified from time to time, together with all promissory notes issued from time to time in substitution therefor or renewal thereof in accordance with the Transaction Documents, each being herein called a "Company Note"). SECTION 3.2 Subsequent Purchase Price Payments. On each Payment Date subsequent to the Closing Date, on the terms and subject to the conditions set forth in this Agreement, the 5 Purchase and Sale Agreement 10 Company shall pay to each Originator the Purchase Price for the Receivables generated by such Originator on such Payment Date and sold to the Company hereunder: (a) First, in cash to the extent the Company has cash available therefor; and (b) Second, to the extent any portion of the Purchase Price remains unpaid, the principal amount outstanding under the applicable Company Note shall be increased by an amount equal to such remaining Purchase Price. The Servicer shall make all appropriate record keeping entries with respect to each of the Company Notes to reflect the foregoing payments and reductions made pursuant to Section 3.3, and in the absence of manifest error the Servicer's books and records shall constitute rebuttable presumptive evidence of the principal amount of, and accrued interest on, each of the Company Notes at any time. Furthermore, the Servicer shall hold the Company Notes for the benefit of the applicable Originator. Each Originator hereby irrevocably authorizes the Servicer to mark the Company Notes "CANCELED" and to return such Company Notes to the Company upon the final payment thereof after the occurrence of the Purchase and Sale Termination Date. SECTION 3.3 Settlement as to Specific Receivables and Dilution. (a) If, on the day of purchase or contribution of any Receivable from an Originator hereunder, any of the representations or warranties set forth in Sections 5.4 and 5.12 are not true with respect to such Receivable or as a result of any action or inaction of such Originator, on any subsequent day, any of such representations or warranties set forth in Sections 5.4 and 5.12 are no longer true with respect to such Receivable, then the Purchase Price (or in the case of a Contributed Receivable the Outstanding Balance of such Receivable (the "Contributed Value")), with respect to such Receivable shall be reduced by an amount equal to the Outstanding Balance of such Receivable and shall be accounted to such Originator as provided in clause (c) below; provided, that if the Company thereafter receives payment on account of Collections due with respect to such Receivable, the Company promptly shall deliver such funds to such Originator. (b) If, on any day, the Outstanding Balance of any Receivable (including any Contributed Receivable) purchased or contributed hereunder is reduced or adjusted as a result of any defective, rejected, returned goods or services, or any discount or other adjustment made by any Originator, the Company or the Servicer or any setoff or dispute between any Originator or the Servicer and an Obligor as indicated on the books of the Company (or, for periods prior to the Closing Date, the books of Originator), then the Purchase Price or Contributed Value, as the case may be, with respect to such Receivable shall be reduced by the amount of such net reduction and shall be accounted to Originator as provided in clause (c) below. (c) Any reduction in the Purchase Price or Contributed Value of any Receivable pursuant to clause (a) or (b) above shall be applied as a credit for the account of the Company against the Purchase Price of Receivables subsequently purchased by the Company 6 Purchase and Sale Agreement 11 from such Originator hereunder; provided, however if there have been no purchases of Receivables from such Originator (or insufficiently large purchases of Receivables) to create a Purchase Price sufficient to so apply such credit against, the amount of such credit: (i) shall be paid in cash to the Company by such Originator in the manner and for application as described in the following proviso, or (ii) shall be deemed to be a payment under, and shall be deducted from the principal amount outstanding under, the Company Note payable to such Originator; provided, further, that at any time (y) when a Termination Event or Unmatured Termination Event exists under the Receivables Purchase Agreement or (z) on or after the Purchase and Sale Termination Date, the amount of any such credit shall be paid by such Originator to the Company by deposit in immediately available funds into the relevant Lock-Box Account for application by the Servicer to the same extent as if Collections of the applicable Receivable in such amount had actually been received on such date. SECTION 3.4 Reconveyance of Receivables. In the event that an Originator has paid to the Company the full Outstanding Balance of any Receivable pursuant to Section 3.3, the Company shall reconvey such Receivable to such Originator, without representation or warranty, but free and clear of all liens, security interests, charges, and encumbrances created by the Company. ARTICLE IV CONDITIONS OF PURCHASES SECTION 4.1 Conditions Precedent to Initial Purchase. The initial purchase hereunder is subject to the condition precedent that the Servicer (on the Company's behalf) shall have received, on or before the Closing Date, the following, each (unless otherwise indicated) dated the Closing Date, and each in form and substance satisfactory to the Servicer (acting on the Company's behalf): (a) An Originator Assignment Certificate in the form of Exhibit C from each Originator, duly completed, executed and delivered by each Originator; (b) A copy of the resolutions of the Board of Directors of each Originator approving the Transaction Documents to be delivered by it and the transactions contemplated hereby and thereby, certified by the Secretary or Assistant Secretary of such Originator; (c) Good standing certificates for each Originator issued as of a recent date acceptable to the Servicer by the Secretary of State of the jurisdiction of such Originator's organization and each jurisdiction where such Originator is qualified to transact business; 7 Purchase and Sale Agreement 12 (d) A certificate of the Secretary or Assistant Secretary of each Originator certifying the names and true signatures of the officers authorized on such Person's behalf to sign the Transaction Documents to be delivered by it (on which certificate the Servicer and the Company may conclusively rely until such time as the Servicer shall receive from such Person a revised certificate meeting the requirements of this clause (d)); (e) The certificate or articles of incorporation or other organizational document of each Originator duly certified by the Secretary of State of the jurisdiction of such Originator's organization as of a recent date, together with a copy of the by-laws of such Originator, each duly certified by the Secretary or an Assistant Secretary of such Originator; (f) Originals of the proper financing statements (Form UCC-1) that have been duly executed and name each Originator as the debtor/seller and the Company as the secured party/purchaser (and the Issuer, as assignee of the Company) of the Receivables generated by such Originator as may be necessary or, in the Servicer's or the Administrator's opinion, desirable under the UCC of all appropriate jurisdictions to perfect the Company's ownership interest in all Receivables and such other rights, accounts, instruments and moneys (including, without limitation, Related Security) in which an ownership or security interest may be assigned to it hereunder; the characterization of each Originator as the debtor and the Company as the secured party in each such financing statement is solely for protective purposes, and should in no way be construed as being contrary to the intent of the parties that this transaction be treated as a sale of such Originator's entire right, title and interest in and to the Receivables and the Related Security to the Company; (g) A written search report from a Person satisfactory to the Servicer listing all effective financing statements that name the Originators as debtors or sellers and that are filed in the jurisdictions in which filings were made pursuant to the foregoing clause (f), together with copies of such financing statements (none of which, except for those described in the foregoing clause (f), shall cover any Receivable or any Related Rights which are to be sold to the Company hereunder), and tax and judgment lien search reports from a Person satisfactory to the Servicer showing no evidence of such liens filed against any Originator; (h) A favorable opinion of Drinker Biddle & Reath LLP, counsel to the Originators, in form and substance satisfactory to the Servicer and the Administrator; (i) A Company Note in favor of each Originator, duly executed by the Company; and (j) A certificate from an officer of each Originator to the effect that the Servicer and such Originator have placed on the most recent, and have taken all steps reasonably necessary to ensure that there shall be placed on each subsequent, data processing report that it generates which are of the type that a proposed purchaser or lender would use to evaluate the Receivables, the following legend (or the substantive equivalent thereof): "THE RECEIVABLES DESCRIBED HEREIN HAVE BEEN CONTRIBUTED OR SOLD 8 Purchase and Sale Agreement 13 PURSUANT TO A PURCHASE AND SALE AGREEMENT, DATED AS OF APRIL 17, 2001, AS THE SAME MAY FROM TO TIME TO TIME BE AMENDED, SUPPLEMENTED OR OTHERWISE MODIFIED, BETWEEN CERTAIN ENTITIES LISTED ON SCHEDULE I THERETO, AS ORIGINATORS, AND KSI FUNDING CORPORATION, AS PURCHASER, AND AN UNDIVIDED, FRACTIONAL OWNERSHIP INTEREST IN THE RECEIVABLES DESCRIBED HEREIN HAS BEEN SOLD TO MARKET STREET FUNDING CORPORATION PURSUANT TO A RECEIVABLES PURCHASE AGREEMENT, DATED AS OF APRIL 17, 2001 AS THE SAME MAY FROM TO TIME TO TIME BE AMENDED, SUPPLEMENTED OR OTHERWISE MODIFIED, AMONG KSI FUNDING CORPORATION, AS SELLER, KULICKE AND SOFFA INDUSTRIES, INC., AS SERVICER, MARKET STREET FUNDING CORPORATION, AND PNC BANK, NATIONAL ASSOCIATION, AS ADMINISTRATOR." SECTION 4.2 Certification as to Representations and Warranties. Each Originator, by accepting the Purchase Price related to each purchase of Receivables generated by such Originator, shall be deemed to have certified that the representations and warranties contained in Article V are true and correct on and as of such day, with the same effect as though made on and as of such day. SECTION 4.3 Additional Originators. Additional Persons may be added as Originators hereunder, with the consent of the Company and the Administrator, provided that following conditions are satisfied on or before the date of such addition: (a) The Servicer shall have given the Administrator and the Company at least thirty days prior written notice of such proposed addition and the identity of the proposed additional Originator and shall have provided such other information with respect to such proposed additional Originator as the Administrator may reasonably request; (b) such proposed additional Originator has executed and delivered to the Company and the Administrator an agreement substantially in the form attached hereto as Exhibit D (a "Joinder Agreement"); (c) such proposed additional Originator has delivered to the Company and the Administrator each of the documents with respect to such Originator described in Sections 4.1 and 4.2; (d) the Administrator shall have received a written statement from each of Moody's and Standard & Poor's confirming that the addition of such Originator will not result in a downgrade or withdrawal of the current ratings of the Notes; and (e) the Purchase and Sale Termination Date shall not have occurred. 9 Purchase and Sale Agreement 14 ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE ORIGINATOR In order to induce the Company to enter into this Agreement and to make purchases hereunder, each Originator hereby makes, with respect to itself, the representations and warranties set forth in this Article V. SECTION 5.1 Organization and Good Standing. Such Originator has been duly incorporated or formed and is validly existing as a corporation, limited liability company or partnership, as applicable, in good standing under the laws of its jurisdiction of incorporation or formation, with power and authority to own its properties and to conduct its business as such properties are presently owned and such business is presently conducted. SECTION 5.2 Due Qualification. Such Originator is located and is qualified to transact business as a foreign corporation, limited liability company or partnership, as applicable, in good standing in all jurisdictions in which (a) the ownership or lease of its property or the conduct of its business requires such licensing or qualification and (b) the failure to be so licensed or qualified would be reasonably likely to have a Material Adverse Effect. SECTION 5.3 Power and Authority; Due Authorization. Such Originator has (a) all necessary power, authority and legal right (i) to execute and deliver, and perform its obligations under, each Transaction Document to which it is a party and (ii) to generate, own, sell, contribute and assign Receivables on the terms and subject to the conditions herein and therein provided; and (b) duly authorized such execution and delivery and such sale, contribution and assignment and the performance of such obligations by all necessary corporate action. SECTION 5.4 Valid Sale; Binding Obligations. Each sale or contribution, as the case may be, of Receivables made by such Originator pursuant to this Agreement is and shall constitute an irrevocable and absolute valid sale or contribution, as the case may be, transfer, and assignment of Receivables to the Company, enforceable against creditors of, and purchasers from, such Originator; and this Agreement constitutes, and each other Transaction Document to be signed by such Originator, when duly executed and delivered, will constitute, a legal, valid, and binding obligation of such Originator, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. SECTION 5.5 No Violation. The consummation of the transactions contemplated by this Agreement and the other Transaction Documents, and the fulfillment of the terms hereof or thereof, will not (a) conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time) a default under (i) such Originator's certificate or articles of incorporation or bylaws, limited partnership agreements, articles of organization or limited liability company agreements, as applicable or (ii) any indenture, loan agreement, mortgage, deed of trust, or other material agreement or instrument to which it is a 10 Purchase and Sale Agreement 15 party or by which it is bound, (b) result in the creation or imposition of any Adverse Claim upon any of its properties pursuant to the terms of any such indenture, loan agreement, mortgage, deed of trust, or other agreement or instrument, other than the Transaction Documents, or (c) violate any law or any order, rule or regulation applicable to it of any court or of any state or foreign regulatory body, administrative agency, or other governmental instrumentality having jurisdiction over it or any of its properties except where such violation would not reasonably be likely to have a Material Adverse Effect. SECTION 5.6 Proceedings. Except as set forth in Schedule 5.6, there is no action, suit, proceeding or investigation pending before any court, regulatory body, arbitrator, administrative agency, or other tribunal or governmental instrumentality (a) asserting the invalidity of any Transaction Document, (b) seeking to prevent such Originator from transferring any Receivable hereunder (or in the case such transfer does not constitute a sale under any applicable law, from granting or maintaining the security interest in any Receivable) to the Company or the consummation of any of the transactions contemplated by any Transaction Document or (c) seeking any determination or ruling that is reasonably likely to have a Material Adverse Effect. SECTION 5.7 Bulk Sales Acts. No transaction contemplated hereby requires compliance with, or will be subject to avoidance under, any bulk sales act or similar law. SECTION 5.8 Government Approvals. Except for the filing of the UCC financing statements referred to in Article IV, all of which, at the time required in Article IV, shall have been duly made and shall be in full force and effect, no authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for Originator's due execution, delivery and performance of any Transaction Document to which it is a party. SECTION 5.9 Financial Condition. (a) Material Adverse Effect. Since December 31, 2000, no event has occurred that has had, or is reasonably likely to have, a Material Adverse Effect. (b) Solvent. On the date hereof, and on the date of each purchase hereunder (both before and after giving effect to such purchase), such Originator shall be Solvent. SECTION 5.10 Licenses, Contingent Liabilities, and Labor Controversies. (a) Such Originator has not failed to obtain any licenses, permits, franchises or other governmental authorizations necessary to the ownership of its properties or to the conduct of its business, which violation or failure to obtain would be reasonably likely to have a Material Adverse Effect. (b) There are no labor controversies pending against such Originator that have had (or are reasonably likely to have) a Material Adverse Effect. 11 Purchase and Sale Agreement 16 SECTION 5.11 Margin Regulations. No use of any funds acquired by any Originator under this Agreement will conflict with or contravene any of Regulations, T, U and X promulgated by the Federal Reserve Board from time to time. SECTION 5.12 Quality of Title. (a) Each Receivable of such Originator (together with the Related Rights with respect to such Receivable) which is to be sold to the Company hereunder is or at the time of such sale shall be owned by such Originator, free and clear of any Adverse Claim, except as provided herein and in the Receivables Purchase Agreement. Whenever the Company makes a purchase or accepts a contribution hereunder, it shall have acquired and shall continue to have maintained a valid and perfected ownership interest (free and clear of any Adverse Claim) in all Receivables generated by such Originator and all Collections related thereto, and in Originator's entire right, title and interest in and to the Related Rights with respect thereto. (b) No effective financing statement or other instrument similar in effect covering any Receivable generated by such Originator or any Related Rights is on file in any recording office except such as may be filed in favor of the Company or the Originators, as the case may be, in accordance with this Agreement or in favor of the Issuer in accordance with the Receivables Purchase Agreement. (c) Unless otherwise identified to the Company on the date of the purchase or contribution hereunder, each Receivable purchased hereunder is on the date of purchase or contribution an Eligible Receivable. SECTION 5.13 Accuracy of Information. All factual written information heretofore or contemporaneously furnished (and prepared) by such Originator to the Company or the Administrator for purposes of or in connection with any Transaction Document or any transaction contemplated hereby or thereby is, and all other such factual written information hereafter furnished (and prepared) by such Originator to the Company or the Administrator pursuant to or in connection with any Transaction Document will be, true and accurate in all material respects on the date as of which such information is dated or certified. SECTION 5.14 Offices. Such Originator's principal place of business and chief executive office is located at the address set forth in Schedule 5.14A and the offices where such Originator keeps all its books, records and documents evidencing its Receivables, the related Contracts and all other agreements related to such Receivables are located at the addresses specified in Schedule 5.14B (or at such other locations, notified to the Servicer and the Administrator in accordance with Section 6.1(f)), in jurisdictions where all action required by Section 7.3 has been taken and completed. SECTION 5.15 Trade Names. Such Originator does not use any trade name other than its actual corporate name and the trade names set forth in Schedule 5.15. From and after the date 12 Purchase and Sale Agreement 17 that fell five (5) years before the date hereof, except as set forth in Schedule 5.15, such Originator has not been known by any legal name other than its corporate name as of the date hereof, nor has such Originator been the subject of any merger or other corporate reorganization. SECTION 5.16 Taxes. Such Originator has filed all tax returns and reports required by law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. SECTION 5.17 Compliance with Applicable Laws. Such Originator is in compliance with the requirements of all applicable laws, rules, regulations and orders of all governmental authorities, a breach of any of which, individually or in the aggregate, would be reasonably likely to have a Material Adverse Effect. SECTION 5.18 Reliance on Separate Legal Identity. Such Originator acknowledges that the Issuer and the Administrator are entering into the Receivables Purchase Agreement in reliance upon the Company's identity as a legal entity separate from such Originator. SECTION 5.19 Investment Company. Such Originator 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. In addition, such Originator is not a "holding company," a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. ARTICLE VI COVENANTS OF THE ORIGINATORS SECTION 6.1 Affirmative Covenants. From the date hereof until the first day following the Purchase and Sale Termination Date, each Originator will, unless the Administrator and the Company shall otherwise consent in writing: (a) Compliance with Laws, Etc. Comply in all material respects with all applicable laws, rules, regulations and orders with respect to the Receivables generated by it and the Contracts and other agreements related thereto except where the failure to so comply would not materially and adversely affect the collectibility of such Receivables or the rights of the Company hereunder. (b) Preservation of Corporate Existence. Except as otherwise permitted in Section 6.3(e), preserve and maintain its existence as a corporation, partnership or limited liability company, as applicable, and all rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified in good standing as a foreign corporation, partnership or limited liability company, as applicable, in each jurisdiction where the failure to 13 Purchase and Sale Agreement 18 preserve and maintain such existence, rights, franchises, privileges and qualification would be reasonably likely to have a Material Adverse Effect. (c) Receivables Reviews. (i) No more than twice annually (unless a Termination Event or an Unmatured Termination Event exists or there shall be a material variance in the performance of the Receivables) during regular business hours, and upon reasonable prior notice, permit the Company or the Administrator, or their respective agents or representatives, (A) to examine and make copies of and abstracts from all books, records and documents (including, without limitation, computer tapes and disks) in possession or under the control of each Originator relating to Receivables, including, without limitation, the related Contracts and purchase orders and other agreements related thereto, and (B) to visit the offices and properties of such Originator for the purpose of examining such materials described in clause (A) above and to discuss matters relating to Receivables originated by it or the performance hereunder with any of the officers or employees of each Originator having knowledge of such matters, and (ii) without limiting the foregoing clause (i) above, no more than once annually (unless a Termination Event or an Unmatured Termination Event exists or there shall be a material variance in the performance of the Receivables), during regular business hours, and upon reasonable prior notice, permit certified public accountants or other auditors acceptable to the Company and Administrator to conduct, at the Company's expense, a review of such Originator's books and records with respect to such Receivables. (d) Keeping of Records and Books of Account. Maintain and implement administrative and operating procedures (including, without limitation, an ability to re-create records evidencing Receivables it generates in the event of the destruction of the originals thereof), and keep and maintain all documents, books, records and other information reasonably necessary or advisable for the collection of such Receivables (including, without limitation, records adequate to permit the daily identification of each new Receivable and all Collections of and adjustments to each existing Receivable). (e) Performance and Compliance with Receivables and Contracts. Timely and fully perform and comply, in all material respects, with all provisions, covenants and other promises required to be observed by it under the Contracts and all other agreements related to the Receivables that it generates. (f) Location of Records. Keep its principal place of business and chief executive office, and the offices where it keeps its records concerning or related to Receivables, at the address(es) referred to in Schedule 5.14 or, upon 15 days' prior written notice to the Company and the Administrator, at such other locations in jurisdictions where all action required by Section 7.3 shall have been taken and completed. (g) Credit and Collection Policies. Comply in all material respects with its Credit and Collection Policy in connection with the Receivables that it generates and all Contracts and other agreements related thereto. 14 Purchase and Sale Agreement 19 (h) Post Office Boxes. On or prior to the date hereof, deliver to the Servicer (on behalf of the Company) a certificate from an authorized officer of such Originator to the effect that (i) the name of the renter of all post office boxes into which Collections may from time to time be mailed have been changed to the name of the Company (unless such post office boxes are in the name of the relevant Lock-Box Banks) and (ii) all relevant postmasters have been notified that each of the Servicer and the Administrator are authorized to collect mail delivered to such post office boxes (unless such post office boxes are in the name of the relevant Lock-Box Banks). (i) Transaction Documents. Comply in all material respects with the Transaction Documents to which it is a party. (j) Notice to Philippine Obligors . At the beginning of each quarter such Originator shall send a written notice to each Obligor located in the Philippines notifying such Obligor that pursuant to this Agreement all the Receivables have been sold to the Company. SECTION 6.2 Reporting Requirements. From the date hereof until the first day following the Purchase and Sale Termination Date, each Originator will, unless the Servicer (on behalf of the Company) shall otherwise consent in writing, furnish to the Company and the Administrator: (a) Purchase and Sale Termination Events . As soon as possible after the Originator has knowledge of the occurrence of, and in any event within three Business Days after the Originator has knowledge of the occurrence of each Purchase and Sale Termination Event or each Unmatured Purchase and Sale Termination Event in respect of such Originator, the statement of the chief financial officer or chief accounting officer of such Originator describing such Purchase and Sale Termination Event or Unmatured Purchase and Sale Termination Event and the action that such Originator proposes to take with respect thereto, in each case in reasonable detail; (b) Proceedings. As soon as possible and in any event within three Business Days after Originator otherwise has knowledge thereof, written notice of (i) material litigation, investigation or proceeding of the type described in Section 5.6 not previously disclosed to the Company and (ii) all material adverse developments that have occurred with respect to any previously disclosed litigation, proceedings and investigations; and (c) Other. Promptly, from time to time, such other information, documents, records or reports respecting the Receivables or the conditions or operations, financial or otherwise, of such Originator as the Company, the Issuer or the Administrator may from time to time reasonably request in order to protect the interests of the Company, the Issuer or the Administrator under or as contemplated by the Transaction Documents. 15 Purchase and Sale Agreement 20 SECTION 6.3 Negative Covenants. From the date hereof until the date following the Purchase and Sale Termination Date, each Originator agrees that, unless the Servicer (on behalf of the Company) and the Administrator shall otherwise consent in writing, it shall not: (a) Sales, Liens, Etc. Except as otherwise provided herein or in any other Transaction Document, sell, assign (by operation of law or otherwise) or otherwise dispose of, or create or suffer to exist any Adverse Claim upon or with respect to, any Receivable or related Contract or Related Security, or any interest therein, or any Collections thereon, or assign any right to receive income in respect thereof. (b) Extension or Amendment of Receivables. Except as otherwise permitted in Section 4.2(a) of the Receivables Purchase Agreement, extend, amend or otherwise modify the terms of any Receivable in any material respect generated by it, or amend, modify or waive, in any material respect, any Contract related thereto (which term or condition relates to payments under, or the enforcement of, such Contract). (c) Change in Business or Credit and Collection Policy. Make any change in the character of its business or materially alter its Credit and Collection Policy, which change or alteration would, in either case, materially adversely change the credit standing required of particular Obligors or potential Obligors or impair the collectibility of a material portion of Receivables generated by it. (d) Receivables Not to be Evidenced by Promissory Notes or Chattel Paper. Take any action to cause or permit any Receivable generated by it to become evidenced by any "instrument" or "chattel paper" (as defined in the applicable UCC). (e) Mergers, Acquisitions, Sales, etc . (i) Be a party to any merger or consolidation, except a merger or consolidation where such Originator is the surviving entity or is merged or consolidated with another Originator, or (ii) directly or indirectly sell, transfer, assign, convey or lease (other than to another Originator or wholly-owned Subsidiary thereof) (A) whether in one or a series of transactions, all or substantially all of its assets or (B) any Receivables or any interest therein (other than pursuant to this Agreement). SECTION 6.4 Lock-Box Banks. Make any changes in its instructions to Obligors regarding Collections or add or terminate any bank as a Lock-Box Bank unless the requirements of paragraph 2(g) of Exhibit IV to the Receivables Purchase Agreement have been met. SECTION 6.5 Accounting for Purchases. Account for or treat (whether in financial statements or otherwise) the transactions contemplated hereby in any manner other than as sales or contributions to capital of the Receivables and Related Rights by such Originator to the Company. SECTION 6.6 Transaction Documents. Enter into, execute, deliver or otherwise become bound by any agreement, instrument, document or other arrangement that restricts the right of 16 Purchase and Sale Agreement 21 such Originator to amend, supplement, amend and restate or otherwise modify, or to extend or renew, or to waive any right under, this Agreement or any other Transaction Document. SECTION 6.7 Substantive Consolidation. Each Originator hereby acknowledges that this Agreement and the other Transaction Documents are being entered into in reliance upon the Company's identity as a legal entity separate from such Originator and its Affiliates. Therefore, from and after the date hereof, each Originator shall take all reasonable steps necessary to make it apparent to third Persons that the Company is an entity with assets and liabilities distinct from those of such Originator and any other Person, and is not a division of such Originator, its Affiliates or any other Person. Without limiting the generality of the foregoing and in addition to and consistent with the other covenants set forth herein, such Originator shall take such actions as shall be required in order that: (a) such Originator shall not be involved in the day to day management of the Company; (b) such Originator shall maintain separate corporate records and books of account from the Company and otherwise will observe corporate formalities and have a separate area from the Company for its business; (c) the financial statements and books and records of such Originator shall be prepared after the date of creation of the Company to reflect and shall reflect the separate existence of the Company; provided, that the Company's assets and liabilities may be included in a consolidated financial statement issued by an affiliate of the Company; provided, however, that any such consolidated financial statement or the notes thereto shall make clear that the Company's assets are not available to satisfy the obligations of such affiliate; (d) except as permitted by the Receivables Purchase Agreement, (i) such Originator shall maintain its assets separately from the assets of the Company, (ii) and the Company's assets, and records relating thereto, have not been, are not, and shall not be, commingled with those of the Company; (e) all of the Company's business correspondence and other communications shall be conducted in the Company's own name and on its own stationery; (f) such Originator shall not act as an agent for the Company, other than KSI in its capacity as the Servicer, and in connection therewith, shall present itself to the public as an agent for the Company and a legal entity separate from the Company; (g) such Originator shall not conduct any of the business of the Company in its own name; (h) such Originator shall not pay any liabilities of the Company out of its own funds or assets; 17 Purchase and Sale Agreement 22 (i) such Originator shall maintain an arm's-length relationship with the Company; (j) such Originator shall not assume or guarantee or become obligated for the debts of the Company or hold out its credit as being available to satisfy the obligations of the Company; (k) such Originator shall not acquire obligations of the Company; (l) such Originator shall allocate fairly and reasonably overhead or other expenses that are properly shared with the Company, including, without limitation, shared office space; (m) such Originator shall identify and hold itself out as a separate and distinct entity from the Company; (n) such Originator shall correct any known misunderstanding respecting its separate identity from the Company; (o) such Originator shall not enter into, or be a party to, any transaction with the Company, except in the ordinary course of its business and on terms which are intrinsically fair and not less favorable to it than would be obtained in a comparable arm's-length transaction with an unrelated third party; and (p) such Originator shall not pay the salaries of the Company's employees, if any. ARTICLE VII ADDITIONAL RIGHTS AND OBLIGATIONS IN RESPECT OF RECEIVABLES SECTION 7.1 Rights of the Company. Each Originator hereby authorizes the Company, the Servicer or their respective designees to take any and all steps in such Originator's name necessary or desirable, in their respective determination, to collect all amounts due under any and all Receivables, including, without limitation, indorsing the name of such Originator on checks and other instruments representing Collections and enforcing such Receivables and the provisions of the related Contracts that concern payment and/or enforcement of rights to payment. SECTION 7.2 Responsibilities of the Originators. Anything herein to the contrary notwithstanding: 18 Purchase and Sale Agreement 23 (a) Collection Procedures. Each Originator agrees to direct its respective Obligors to make payments of Receivables directly to a post office box related to the relevant Lock-Box Account at a Lock-Box Bank; provided, however, that with respect to any Receivable the Originator of which is American Fine Wire Corporation, American Fine Wire Corporation may instruct the Obligor of such Receivable to make payments with respect to such Receivable to American Fine Wire Corporation, 907 Ravenwood Drive, P.O. Box 966, Selma, Alabama 36701. Each Originator further agrees to transfer any Collections that it receives directly to the Servicer (for the Company's account) within one (1) Business Day of receipt thereof, and agrees that all such Collections shall be deemed to be received in trust for the Company and that it shall take all reasonable steps to maintain and segregate such Collections separate and apart from all other funds and monies of Originator until transfer of such Collections to the Servicer. (b) Each Originator shall perform its obligations hereunder in all material respects, and the exercise by the Company or its designee of its rights hereunder shall not relieve such Originator from such obligations. (c) None of the Company, the Servicer or the Administrator shall have any obligation or liability to any Obligor or any other third Person with respect to any Receivables, Contracts related thereto or any other related agreements, nor shall the Company, the Servicer, the Issuer or the Administrator be obligated to perform any of the obligations of such Originator thereunder. (d) Each Originator hereby grants to the Servicer an irrevocable power of attorney, with full power of substitution, coupled with an interest, to take in the name of such Originator all steps necessary or advisable to endorse, negotiate or otherwise realize on any writing or other right of any kind held or transmitted by such Originator or transmitted or received by the Company (whether or not from such Originator) in connection with any Receivable and to take all other steps necessary to comply with its obligations as Servicer set forth in Article IV of the Receivables Purchase Agreement. SECTION 7.3 Further Action Evidencing Purchases. Each Originator agrees that from time to time, at its expense, it will promptly execute and deliver all further instruments and documents, and take all further action that the Servicer may reasonably request in order to perfect, protect or more fully evidence the Receivables and Related Rights purchased by or contributed to the Company hereunder, or to enable the Company to exercise or enforce any of its rights hereunder or under any other Transaction Document. Without limiting the generality of the foregoing, upon the request of the Servicer, such Originator will: (a) execute and file such financing or continuation statements, or amendments thereto or assignments thereof, and such other instruments or notices, as may be necessary or appropriate; and (b) mark the master data processing records that evidence or list (i) such Receivables and (ii) related Contracts with the legend set forth in Section 4.1(j). 19 Purchase and Sale Agreement 24 Each Originator hereby authorizes the Company or its designee to file one or more financing or continuation statements, and amendments thereto and assignments thereof, relative to all or any of the Receivables and Related Rights now existing or hereafter generated by Originator. If any Originator fails to perform any of its agreements or obligations under this Agreement, the Company or its designee may (but shall not be required to) itself perform, or cause the performance of, such agreement or obligation, and the expenses of the Company or its designee incurred in connection therewith shall be payable by Originator as provided in Section 9.1. SECTION 7.4 Application of Collections. Any payment by an Obligor in respect of any amount owed by it to any Originator shall, except as otherwise specified by such Obligor or required by applicable law and unless otherwise instructed by the Servicer (with the prior written consent of the Administrator) or the Administrator, be applied as a Collection of any Receivable or Receivables of such Obligor to the extent of any amounts then due and payable thereunder (such application to be made starting with the oldest outstanding Receivable or Receivables) before being applied to any other indebtedness of such Obligor. ARTICLE VIII PURCHASE AND SALE TERMINATION EVENTS SECTION 8.1 Purchase and Sale Termination Events. Each of the following events or occurrences described in this Section 8.1 shall constitute a "Purchase and Sale Termination Event": (a) A Termination Event (as defined in the Receivables Purchase Agreement) shall have occurred and, in the case of a Termination Event (other than one described in paragraph (f) of Exhibit V of the Receivables Purchase Agreement), the Administrator, shall have declared the Facility Termination Date to have occurred; or (b) Any Originator shall fail to make any payment or deposit to be made by it hereunder when due and such failure shall remain unremedied for two (2) Business Days; or (c) Any representation or warranty made or deemed to be made by any Originator (or any of its officers) under or in connection with this Agreement, any other Transaction Documents, or any other information or report delivered pursuant hereto or thereto shall prove to have been false or incorrect in any material respect when made or deemed made; or (d) Any Originator shall fail to perform or observe any other term, covenant or agreement contained in this Agreement on its part to be performed or observed and such failure shall remain unremedied for five (5) Business Days after written notice thereof shall have been given by the Servicer to such Originator. 20 Purchase and Sale Agreement 25 SECTION 8.2 Remedies. (a) Optional Termination. Upon the occurrence of a Purchase and Sale Termination Event, the Company (and not the Servicer) shall have the option, by notice to the Originators (with a copy to the Administrator), to declare the Purchase Facility as terminated. (b) Remedies Cumulative. Upon any termination of the Purchase Facility pursuant to Section 8.2(a), the Company shall have, in addition to all other rights and remedies under this Agreement, all other rights and remedies provided under the UCC of each applicable jurisdiction and other applicable laws, which rights shall be cumulative. ARTICLE IX INDEMNIFICATION SECTION 9.1 Indemnities by the Originators. Without limiting any other rights which the Company may have hereunder or under applicable law, each Originator, severally and for itself alone hereby agrees to indemnify the Company and each of its officers, directors, employees and agents (each of the foregoing Persons being individually called a "Purchase and Sale Indemnified Party"), forthwith on demand, from and against any and all damages, losses, claims, judgments, liabilities and related costs and expenses, including reasonable attorneys' fees and disbursements (all of the foregoing being collectively called "Purchase and Sale Indemnified Amounts") awarded against or incurred by any of them arising out of or as a result of the failure of such Originator to perform its obligations under this Agreement or any other Transaction Document, or arising out of the claims asserted against a Purchase and Sale Indemnified Party relating to the transactions contemplated herein or therein or the use of proceeds thereof or therefrom, excluding, however, (i) Purchase and Sale Indemnified Amounts to the extent resulting from gross negligence or willful misconduct on the part of such Purchase and Sale Indemnified Party, (ii) any indemnification which has the effect of recourse for collectibility or performance of the Receivables to any indemnitor (except as otherwise specifically provided under this Section 9.1), (iii) Purchase and Sale Indemnified Amounts to the extent resulting from any act or failure to act by an Obligor in violation of the applicable Contract and (iv) any tax based upon or measured by net income property, or gross receipts. Without limiting the foregoing, each Originator, severally for itself alone, shall indemnify each Purchase and Sale Indemnified Party for Purchase and Sale Indemnified Amounts relating to or resulting from: (a) the transfer by such Originator of an interest in any Receivable to any Person other than the Company; (b) the breach of any representation or warranty made by such Originator (or any of its officers) under or in connection with this Agreement or any other Transaction Document, or any information or report delivered by Originator pursuant hereto or thereto, which shall have been false or incorrect in any material respect when made or deemed made; 21 Purchase and Sale Agreement 26 (c) the failure by such Originator to comply with any applicable law, rule or regulation with respect to any Receivable generated by such Originator or the related Contract, or the nonconformity of any Receivable generated by such Originator or the related Contract with any such applicable law, rule or regulation; (d) the failure to vest and maintain vested in the Company an ownership interest in the Receivables generated by such Originator free and clear of any Adverse Claim, other than an Adverse Claim arising solely as a result of an act of the Company, the Issuer or the Administrator whether existing at the time of the purchase or contribution of such Receivables or at any time thereafter; (e) the failure to file, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Receivables or purported Receivables generated by such Originator, whether at the time of any purchase or contribution or at any subsequent time; (f) any dispute, claim, offset or defense (other than discharge in bankruptcy) of the Obligor to the payment of any Receivable or purported Receivable generated by such Originator (including, without limitation, a defense based on such Receivable's or the related Contract's not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the services related to any such Receivable or the furnishing of or failure to furnish such services; (g) any product liability claim arising out of or in connection with services that are the subject of any Receivable generated by such Originator; and (h) any tax or governmental fee or charge (other than any tax excluded pursuant to clause (iii) in the proviso to the preceding sentence), all interest and penalties thereon or with respect thereto, and all out-of-pocket costs and expenses, including the reasonable fees and expenses of counsel in defending against the same, which may arise by reason of the purchase or ownership of the Receivables generated by such Originator or any Related Security connected with any such Receivables. If for any reason the indemnification provided above in this Section 9.1 is unavailable to a Purchase and Sale Indemnified Party or is insufficient to hold such Purchase and Sale Indemnified Party harmless, then such Originator, severally and for itself, shall contribute to the amount paid or payable by such Purchase and Sale Indemnified Party to the maximum extent permitted under applicable law. 22 Purchase and Sale Agreement 27 ARTICLE X MISCELLANEOUS SECTION 10.1 Amendments, etc. (a) The provisions of this Agreement may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and executed by the Company and each Originator affected thereby (with the prior written consent of the Administrator). (b) No failure or delay on the part of the Company, the Servicer, any Originator or any third party beneficiary in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on the Company, the Servicer or any Originator in any case shall entitle it to any notice or demand in similar or other circumstances. No waiver or approval by the Company or the Servicer under this Agreement shall, except as may otherwise be stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval under this Agreement shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder. (c) The Transaction Documents contain a final and complete integration of all prior expressions by the parties hereto with respect to the subject matter thereof and shall constitute the entire agreement among the parties hereto with respect to the subject matter thereof, superseding all prior oral or written understandings. SECTION 10.2 Notices, etc. All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including facsimile communication) and shall be personally delivered or sent by certified mail, postage prepaid, or by facsimile, to the intended party at the mailing address or facsimile number of such party set forth under its name on the signature pages hereof or at such other address or facsimile number as shall be designated by such party in a written notice to the other parties hereto. All such notices and communications shall be effective (i) if personally delivered, when received, (ii) if sent by certified mail three (3) Business Days after having been deposited in the mail, postage prepaid, and (iii) if transmitted by facsimile, when sent, receipt confirmed by telephone or electronic means (and shall be followed by a hard copy sent by first class mail). SECTION 10.3 No Waiver; Cumulative Remedies. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Without limiting the foregoing, each Originator hereby authorizes the Company, at any time and from time to time, to the fullest extent permitted by law, to set off, against any obligations of such Originator to the Company arising in connection with the Transaction Documents (including, without limitation, amounts payable pursuant to Section 9.1) that are then due and payable or that are not then due and payable but are accruing in respect of the then current Settlement Period, any and all 23 Purchase and Sale Agreement 28 indebtedness at any time owing by the Company to or for the credit or the account of such Originator. SECTION 10.4 Binding Effect; Assignability. This Agreement shall be binding upon and inure to the benefit of the Company and each Originator and their respective successors and permitted assigns. No Originator may assign any of its rights hereunder or any interest herein without the prior written consent of the Company, except as otherwise herein specifically provided. This Agreement shall create and constitute the continuing obligations of the parties hereto in accordance with its terms, and shall remain in full force and effect until such time as the parties hereto shall agree. The rights and remedies with respect to any breach of any representation and warranty made by any Originator pursuant to Article V and the indemnification and payment provisions of Article IX and Section 10.6 shall be continuing and shall survive any termination of this Agreement. SECTION 10.5 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. SECTION 10.6 Costs, Expenses and Taxes. In addition to the obligations of the Originators under Article IX, each Originator, severally and for itself alone, agrees to pay on demand: (a) to the Company (and any successor and permitted assigns thereof) all reasonable costs and expenses incurred by such Person in connection with the enforcement of this Agreement and the other Transaction Documents; and (b) all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of this Agreement or the other Transaction Documents to be delivered hereunder, and agrees to indemnify each Purchase and Sale Indemnified Party against any liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees. SECTION 10.7 SUBMISSION TO JURISDICTION. EACH PARTY HERETO HEREBY IRREVOCABLY (a) SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE COMMONWEALTH OF PENNSYLVANIA OR THE FEDERAL COURT OF THE UNITED STATES SITTING IN PITTSBURGH, PENNSYLVANIA OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY TRANSACTION DOCUMENT; (b) AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH STATE OR UNITED STATES FEDERAL COURT; (c) WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING; (d) IRREVOCABLY CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO SUCH PERSON AT ITS ADDRESS SPECIFIED IN SECTION 10.2; 24 Purchase and Sale Agreement 29 AND (e) AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS SECTION 10.7 SHALL AFFECT THE COMPANY'S RIGHT TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING ANY ACTION OR PROCEEDING AGAINST ANY ORIGINATOR OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTIONS. SECTION 10.8 WAIVER OF JURY TRIAL. EACH PARTY HERETO WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER OR RELATING TO THIS AGREEMENT, ANY OTHER TRANSACTION DOCUMENT, OR ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT, AND AGREES THAT (a) ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY AND (b) ANY PARTY HERETO (OR ANY ASSIGNEE OR THIRD PARTY BENEFICIARY OF THIS AGREEMENT) MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF ANY OTHER PARTY OR PARTIES HERETO TO WAIVER OF ITS OR THEIR RIGHT TO TRIAL BY JURY. SECTION 10.9 Captions and Cross References; Incorporation by Reference. The various captions (including, without limitation, the table of contents) in this Agreement are included for convenience only and shall not affect the meaning or interpretation of any provision of this Agreement. References in this Agreement to any underscored Section or Exhibit are to such Section or Exhibit of this Agreement, as the case may be. The Exhibits hereto are hereby incorporated by reference into and made a part of this Agreement. SECTION 10.10 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Agreement. SECTION 10.11 Acknowledgment and Agreement. By execution below, each Originator expressly acknowledges and agrees that all of the Company's rights, title, and interests in, to, and under this Agreement (but not its obligations), shall be assigned by the Company pursuant to the Receivables Purchase Agreement, and each Originator consents to such assignment. Each of the parties hereto acknowledges and agrees that the Administrator, and the Issuer are third party beneficiaries of the rights of the Company arising hereunder and under the other Transaction Documents to which any Originator is a party. 25 Purchase and Sale Agreement 30 SECTION 10.12 No Proceeding. Each Originator hereby agrees that it will not institute, or join any other Person in instituting, against the Company any Insolvency Proceeding so long as any of the Company Notes remains outstanding and for at least one year and one day following the day on which the aggregate outstanding principal amount of each Company Note is paid in full. SECTION 10.13 Limited Recourse. Except as explicitly set forth herein, the obligations of the Company and the Originators under this Agreement or any other Transaction Documents to which each is a party are solely the obligations of the Company and each such Originator. No recourse under any Transaction Document shall be had against, and no liability shall attach to, any officer, employee, director, or beneficiary, whether directly or indirectly, of the Company or any Originator; provided, however, that this Section shall not relieve any such Person of any liability it might otherwise have for its own gross negligence or willful misconduct. [SIGNATURE PAGES FOLLOW] 26 Purchase and Sale Agreement 31 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. KSI FUNDING CORPORATION By: /s/ CLIFFORD G. SPRAGUE ----------------------------------- Name: Clifford G. Sprague Title: Vice President Address: KSI Funding Corporation 2101 Blair Mill Road Willow Grove, Pennsylvania 19090 Attention: Robert Amweg Telephone: (215) 784-6541 Facsimile: (215) 784-6180 S-1 Purchase and Sale Agreement 32 ORIGINATORS: AMERICAN FINE WIRE CORPORATION By: /s/ CLIFFORD G. SPRAGUE ----------------------------------- Name: Clifford G. Sprague Title: Sr. Vice President, Treasurer, CPO Address: American Fine Wire Corporation 907 Ravenwood Drive P.O. Box 966 Selma, Alabama 36701 Attention: Beth Johnson Telephone: (334) 875-4040 Facsimile: (334) 874-7119 CERPROBE CORPORATION By: /s/ MORTON K. PERCHICK ----------------------------------- Name: Morton K. Perchick Title: Vice President Address: Cerprobe Corporation 1150 North Fiesta Blvd. Gilbert, Arizona 85233 Attention: Kevin Hesse Telephone: (480) 333-1500 Facsimile: (480) 333-1672 S-2 Purchase and Sale Agreement 33 KULICKE AND SOFFA INDUSTRIES, INC. By: /s/ ROBERT F. AMWEG ----------------------------------- Name: Robert F. Amweg Title: Vice President, Treasurer Address: Kulicke and Soffa Industries, Inc. 2101 Blair Mill Road Willow Grove, Pennsylvania 19090 Attention: Robert Amweg Telephone: (215) 784-6541 Facsimile: (215) 784-6180 PROBE TECHNOLOGY CORPORATION By: /s/ MORTON K. PERCHICK ----------------------------------- Name: Morton K. Perchick Title: Vice President Address: Probe Technology Corporation 2424 Walsh Ave. Santa Clara, California 95051 Attention: Jake Vandenberg Telephone: (408) 980-1740 Facsimile: (408) 492-0154 S-3 Purchase and Sale Agreement 34 SEMITEC By: /s/ CLIFFORD G. SPRAGUE ----------------------------------- Name: Clifford G. Sprague Title: Sr. Vice President, Treasurer, CFO Address: Semitec 3025 Stender Way Santa Clara, California 95054 Attention: Tessie Pacheco Telephone: (408) 496-1092 Facsimile: (408) 496-1012 S-4 Purchase and Sale Agreement 35 Schedule I LIST OF ORIGINATORS American Fine Wire Corporation Cerprobe Corporation Kulicke and Soffa Industries, Inc. Probe Technology Corporation Semitec Purchase and Sale Agreement 36 Schedule 5.6 PROCEEDINGS Purchase and Sale Agreement 37 SCHEDULE 5.14A CHIEF EXECUTIVE OFFICE OF EACH ORIGINATOR ORIGINATOR CHIEF EXECUTIVE OFFICE ---------- ---------------------- American Fine Wire Corporation 907 Ravenwood Drive P.O. Box 966 Selma, Alabama 36701 Cerprobe Corporation 1150 North Fiesta Blvd. Gilbert, Arizona 85233 Kulicke and Soffa Industries, Inc. 2101 Blair Mill Road Willow Grove, Pennsylvania 19090 Probe Technology Corporation 2424 Walsh Ave. Santa Clara, California 95051 Semitec 3025 Stender Way Santa Clara, California 95054 Purchase and Sale Agreement 38 Schedule 5.14B LOCATION OF BOOKS AND RECORDS OF ORIGINATORS ORIGINATOR LOCATION OF BOOKS AND RECORDS ---------- ----------------------------- American Fine Wire Corporation 907 Ravenwood Drive P.O. Box 966 Selma, Alabama 36701 Cerprobe Corporation 1150 North Fiesta Blvd. Gilbert, Arizona 85233 Kulicke and Soffa Industries, Inc. 2101 Blair Mill Road Willow Grove, Pennsylvania 19090 Probe Technology Corporation 2424 Walsh Ave. Santa Clara, California 95051 Semitec 3025 Stender Way Santa Clara, California 95054 Purchase and Sale Agreement 39 Schedule 5.15 TRADE NAMES
Legal Name Trade Names - ---------- ----------- American Fine Wire Corporation None Cerprobe Corporation None Kulicke and Soffa Industries, Inc. None Probe Technology Corporation None Semitec None
Purchase and Sale Agreement 40 Exhibit A FORM OF PURCHASE REPORT Originator: Issuer: KSI Funding Corporation Payment Date: 1. Outstanding Balance of Receivables Purchased: 2. Fair Market Value Discount: 1/{1 + [(Prime Rate + 0.25%) x Turnover Rate]} 365 Where: Prime Rate = __________ Turnover Rate = __________ 3. Purchase Price (1 x 2) = $ __________ Purchase and Sale Agreement 41 Exhibit B FORM OF COMPANY NOTE _______________ _________, 2001 FOR VALUE RECEIVED, the undersigned, KSI Funding Corporation, a Delaware limited liability company ("Company"), promises to pay to [NAME OF THE ORIGINATOR], a _________ [CORPORATION] [LIMITED LIABILITY COMPANY] [LIMITED PARTNERSHIP] (the "Originator"), on the terms and subject to the conditions set forth herein and in the Purchase and Sale Agreement referred to below, the aggregate unpaid Purchase Price of all Receivables purchased by the Company from the Originator pursuant to such Purchase and Sale Agreement, as such unpaid Purchase Price is shown in the records of the Servicer. 1. Purchase and Sale Agreement. This Company Note is one of the Company Notes described in, and is subject to the terms and conditions set forth in, that certain Purchase and Sale Agreement of even date herewith (as the same may be amended, supplemented, amended and restated or otherwise modified in accordance with its terms, the "Purchase and Sale Agreement"), between the Company and the various entities listed on Schedule I thereto, including the Originator. Reference is hereby made to the Purchase and Sale Agreement for a statement of certain other rights and obligations of the Company and the Originator. 2. Definitions. Capitalized terms used (but not defined) herein have the meanings assigned thereto in Exhibit I to the Receivables Purchase Agreement (as defined in the Purchase and Sale Agreement). In addition, as used herein, the following terms have the following meanings: "Bankruptcy Proceedings" has the meaning set forth in clause (b) of paragraph 9 hereof. "Final Maturity Date" means the Payment Date immediately following the date that falls one hundred twenty one (121) days after the Purchase and Sale Termination Date. "Interest Period" means the period from and including a Settlement Date (or, in the case of the first Interest Period, the date hereof) to but excluding the next Settlement Date. "Prime Rate" has the meaning assigned thereto in the Purchase and Sale Agreement. "Receivables Purchase Agreement" means the Receivables Purchase Agreement, dated as of April 17, 2001, entered into among the KSI Funding Corporation, Kulicke and Soffa Industries, Inc., Market Street Funding Corporation, and PNC Bank, National Association. Exhibit B-1 Purchase and Sale Agreement 42 "Senior Interests" means, collectively, (i) all accrued and unpaid Discount, (ii) all fees payable by the Company to the Senior Interest Holders pursuant to the Receivables Purchase Agreement, (iii) all amounts payable pursuant to Section 1.7 and 1.8 of the Receivables Purchase Agreement, (iv) the aggregate Capital and (v) all other obligations owed by the Company to the Senior Interest Holders under the Receivables Purchase Agreement and other Transaction Documents that are due and payable, together with any and all interest and Discount accruing on any such amount after the commencement of any Bankruptcy Proceedings, notwithstanding any provision or rule of law that might restrict the rights of any Senior Interest Holder, as against the Company or anyone else, to collect such interest. "Senior Interest Holders" means, collectively, the Issuer, the Administrator and the Indemnified Parties. "Subordination Provisions" means, collectively, clauses (a) through (l) of paragraph 9 hereof. "Telerate Screen Rate" means, for any Interest Period, the rate for thirty day commercial paper denominated in dollars which appears on Page 1250 of the Dow Jones Telerate Service (or such other page as may replace that page on that service for the purpose of displaying dollar commercial paper rates) at approximately 9:00 a.m., New York City time, on the first day of such Interest Period. 3. Interest. Subject to the Subordination Provisions set forth below, the Company promises to pay interest on this Company Note as follows: (a) Prior to the Final Maturity Date, the aggregate unpaid Purchase Price from time to time outstanding during any Interest Period shall bear interest at a rate per annum equal to the Telerate Screen Rate for such Interest Period as determined by the Servicer; and (b) From (and including) the Final Maturity Date to (but excluding) the date on which the entire aggregate unpaid Purchase Price payable to the Originator is fully paid, such aggregate unpaid Purchase Price from time to time outstanding shall bear interest at a rate per annum equal to the Prime Rate. 4. Interest Payment Dates. Subject to the Subordination Provisions set forth below, the Company shall pay accrued interest on this Company Note on each Settlement Date, and shall pay accrued interest on the amount of each principal payment made in cash on a date other than a Settlement Date at the time of such principal payment. 5. Basis of Computation. Interest accrued hereunder that is computed by reference to the Telerate Screen Rate shall be computed for the actual number of days elapsed on the basis of a 360-day year, and interest accrued hereunder that is computed by reference to the rate described in paragraph 3(b) of this Company Note shall be computed for the actual number of days elapsed on the basis of a 365- or 366-day year. Exhibit B-2 Purchase and Sale Agreement 43 6. Principal Payment Dates. Subject to the Subordination Provisions set forth below, payments of the principal amount of this Company Note shall be made as follows: (a) The principal amount of this Company Note shall be reduced by an amount equal to each payment deemed made pursuant to Section 3.3 of the Purchase and Sale Agreement; and (b) The entire remaining unpaid Purchase Price of all Receivables purchased by the Company from the Originator pursuant to the Purchase and Sale Agreement shall be due and payable on the Final Maturity Date. Subject to the Subordination Provisions set forth below, the principal amount of and accrued interest on this Company Note may be prepaid on any Business Day without premium or penalty. 7. Payment Mechanics. All payments of principal and interest hereunder are to be made in lawful money of the United States of America. 8. Enforcement Expenses. In addition to and not in limitation of the foregoing, but subject to the Subordination Provisions set forth below and to any limitation imposed by applicable law, the Company agrees to pay all expenses, including reasonable attorneys' fees and legal expenses, incurred by the Originator in seeking to collect any amounts payable hereunder which are not paid when due. 9. Subordination Provisions. The Company covenants and agrees, and the Originator and any other holder of this Company Note (collectively, the Originator and any such other holder are called the "Holder"), by its acceptance of this Company Note, likewise covenants and agrees on behalf of itself and any holder of this Company Note, that the payment of the principal amount of and interest on this Company Note is hereby expressly subordinated in right of payment to the payment and performance of the Senior Interests to the extent and in the manner set forth in the following clauses of this paragraph 9: (a) No payment or other distribution of the Company's assets of any kind or character, whether in cash, securities, or other rights or property, shall be made on account of this Company Note except to the extent such payment or other distribution is (i) permitted under paragraph 1(n) of Exhibit IV of the Receivables Purchase Agreement or (ii) made pursuant to clause (a) or (b) of paragraph 6 of this Company Note; (b) In the event of any dissolution, winding up, liquidation, readjustment, reorganization or other similar event relating to the Company, whether voluntary or involuntary, partial or complete, and whether in bankruptcy, insolvency or receivership proceedings, or upon an assignment for the benefit of creditors, or any other marshalling of the assets and liabilities of the Company or any sale of all or substantially all of the assets of the Company other than as permitted by the Purchase and Sale Agreement (such proceedings being herein collectively Exhibit B-3 Purchase and Sale Agreement 44 called "Bankruptcy Proceedings"), the Senior Interests shall first be paid and performed in full and in cash before the Originator shall be entitled to receive and to retain any payment or distribution in respect of this Company Note. In order to implement the foregoing during any Bankruptcy Proceeding: (i) all payments and distributions of any kind or character in respect of this Company Note to which Holder would be entitled except for this clause (b) shall be made directly to the Administrator (for the benefit of the Senior Interest Holders); (ii) Holder shall promptly file a claim or claims, in the form required in any Bankruptcy Proceedings, for the full outstanding amount of this Company Note, and shall use commercially reasonable efforts to cause said claim or claims to be approved and all payments and other distributions in respect thereof to be made directly to the Administrator (for the benefit of the Senior Interest Holders) until the Senior Interests shall have been paid and performed in full and in cash; and (iii) Holder hereby irrevocably agrees that the Issuer (or the Administrator acting on the Issuer's behalf), in the name of Holder or otherwise, may demand, sue for, collect, receive and receipt for any and all such payments or distributions, and file, prove and vote or consent in any such Bankruptcy Proceedings with respect to any and all claims of Holder relating to this Company Note, in each case until the Senior Interests shall have been paid and performed in full and in cash; (c) In the event that Holder receives any payment or other distribution of any kind or character from the Company or from any other source whatsoever, in respect of this Company Note, other than as expressly permitted by the terms of this Company Note, such payment or other distribution shall be received in trust for the Senior Interest Holders and shall be turned over by Holder to the Administrator (for the benefit of the Senior Interest Holders) forthwith. Holder will mark its books and records so as clearly to indicate that this Company Note is subordinated in accordance with the terms hereof. All payments and distributions received by the Administrator in respect of this Company Note, to the extent received in or converted into cash, may be applied by the Administrator (for the benefit of the Senior Interest Holders) first to the payment of any and all expenses (including reasonable attorneys' fees and legal expenses) paid or incurred by the Senior Interest Holders in enforcing these Subordination Provisions, or in endeavoring to collect or realize upon this Company Note, and any balance thereof shall, solely as between the Originator and the Senior Interest Holders, be applied by the Administrator (in the order of application set forth in Section 1.4(d)(ii) of the Receivables Purchase Agreement) toward the payment of the Senior Interests; but as between the Company and its creditors, no such payments or distributions of any kind or character shall be deemed to be payments or distributions in respect of the Senior Interests; (d) Notwithstanding any payments or distributions received by the Senior Interest Holders in respect of this Company Note, while any Bankruptcy Proceedings are pending Holder shall not be subrogated to the then existing rights of the Senior Interest Holders in respect of the Senior Interests until the Senior Interests have been paid and performed in full and in cash. If no Bankruptcy Proceedings are pending, Holder shall only be entitled to exercise any subrogation rights that it may acquire (by reason of a payment or distribution to the Senior Interest Holders in respect of this Company Note) to the extent that any payment arising out of the exercise of such rights would be permitted under paragraph 1(n) of Exhibit IV of the Receivables Purchase Agreement; Exhibit B-4 Purchase and Sale Agreement 45 (e) These Subordination Provisions are intended solely for the purpose of defining the relative rights of Holder, on the one hand, and the Senior Interest Holders on the other hand. Nothing contained in these Subordination Provisions or elsewhere in this Company Note is intended to or shall impair, as between the Company, its creditors (other than the Senior Interest Holders) and Holder, the Company's obligation, which is unconditional and absolute, to pay Holder the principal of and interest on this Company Note as and when the same shall become due and payable in accordance with the terms hereof or to affect the relative rights of Holder and creditors of the Company (other than the Senior Interest Holders); (f) Holder shall not, until the Senior Interests have been paid and performed in full and in cash, (i) cancel, waive, forgive, transfer or assign, or commence legal proceedings to enforce or collect, or subordinate to any obligation of the Company, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, or now or hereafter existing, or due or to become due, other than the Senior Interests, this Company Note or any rights in respect hereof or (ii) convert this Company Note into an equity interest in the Company, unless Holder shall have received the prior written consent of the Administrator and the Issuer in each case; (g) Holder shall not, without the advance written consent of the Administrator and the Issuer, commence, or join with any other Person in commencing, any Bankruptcy Proceedings with respect to the Company until at least one year and one day shall have passed since the Senior Interests shall have been paid and performed in full and in cash; (h) If, at any time, any payment (in whole or in part) of any Senior Interest is rescinded or must be restored or returned by a Senior Interest Holder (whether in connection with Bankruptcy Proceedings or otherwise), these Subordination Provisions shall continue to be effective or shall be reinstated, as the case may be, as though such payment had not been made; (i) Each of the Senior Interest Holders may, from time to time, at its sole discretion, without notice to Holder, and without waiving any of its rights under these Subordination Provisions, take any or all of the following actions: (i) retain or obtain an interest in any property to secure any of the Senior Interests; (ii) retain or obtain the primary or secondary obligations of any other obligor or obligors with respect to any of the Senior Interests; (iii) extend or renew for one or more periods (whether or not longer than the original period), alter or exchange any of the Senior Interests, or release or compromise any obligation of any nature with respect to any of the Senior Interests; (iv) amend, supplement, amend and restate, or otherwise modify any Transaction Document; and (v) release its security interest in, or surrender, release or permit any substitution or exchange for all or any part of any rights or property securing any of the Senior Interests, or extend or renew for one or more periods (whether or not longer than the original period), or release, compromise, alter or exchange any obligations of any nature of any obligor with respect to any such rights or property; (j) Holder hereby waives: (i) notice of acceptance of these Subordination Provisions by any of the Senior Interest Holders; (ii) notice of the existence, creation, non-payment or non-performance of all or any of the Senior Interests; and (iii) all diligence in Exhibit B-5 Purchase and Sale Agreement 46 enforcement, collection or protection of, or realization upon, the Senior Interests, or any thereof, or any security therefor; (k) Each of the Senior Interest Holders may, from time to time, on the terms and subject to the conditions set forth in the Transaction Documents to which such Persons are party, but without notice to Holder, assign or transfer any or all of the Senior Interests, or any interest therein; and, notwithstanding any such assignment or transfer or any subsequent assignment or transfer thereof, such Senior Interests shall be and remain Senior Interests for the purposes of these Subordination Provisions, and every immediate and successive assignee or transferee of any of the Senior Interests or of any interest of such assignee or transferee in the Senior Interests shall be entitled to the benefits of these Subordination Provisions to the same extent as if such assignee or transferee were the assignor or transferor; and (l) These Subordination Provisions constitute a continuing offer from the holder of this Company Note to all Persons who become the holders of, or who continue to hold, Senior Interests; and these Subordination Provisions are made for the benefit of the Senior Interest Holders, and the Administrator may proceed to enforce such provisions on behalf of each of such Persons. 10. General. No failure or delay on the part of the Originator in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No amendment, modification or waiver of, or consent with respect to, any provision of this Company Note shall in any event be effective unless (i) the same shall be in writing and signed and delivered by the Company and Holder and (ii) all consents required for such actions under the Transaction Documents shall have been received by the appropriate Persons. 11. Maximum Interest. Notwithstanding anything in this Company Note to the contrary, the Company shall never be required to pay unearned interest on any amount outstanding hereunder and shall never be required to pay interest on the principal amount outstanding hereunder at a rate in excess of the maximum interest rate that may be contracted for, charged or received under applicable federal or state law (such maximum rate being herein called the "Highest Lawful Rate"). If the effective rate of interest which would otherwise by payable under this Company Note would exceed the Highest Lawful Rate, or if the holder of this Company Note shall receive any unearned interest or shall receive monies that are deemed to constitute interest which would increase the effective rate of interest payable by the Company under this Company Note to a rate in excess of the Highest Lawful Rate, then (i) the amount of interest which would otherwise by payable by the Company under this Company Note shall be reduced to the amount allowed by applicable law, and (ii) any unearned interest paid by the Company or any interest paid by the Company in excess of the Highest Lawful Rate shall be refunded to the Company. Without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received by the Originator under this Company Note that are made for the purpose of determining whether such rate exceeds the Highest Lawful Rate applicable to the Exhibit B-6 Purchase and Sale Agreement 47 Originator (such Highest Lawful Rate being herein called the "Originator's Maximum Permissible Rate") shall be made, to the extent permitted by usury laws applicable to the Originator (now or hereafter enacted), by amortizing, prorating and spreading in equal parts during the actual period during which any amount has been outstanding hereunder all interest at any time contracted for, charged or received by the Originator in connection herewith. If at any time and from time to time (i) the amount of interest payable to the Originator on any date shall be computed at the Originator's Maximum Permissible Rate pursuant to the provisions of the foregoing sentence and (ii) in respect of any subsequent interest computation period the amount of interest otherwise payable to the Originator would be less than the amount of interest payable to the Originator computed at the Originator's Maximum Permissible Rate, then the amount of interest payable to the Originator in respect of such subsequent interest computation period shall continue to be computed at the Originator's Maximum Permissible Rate until the total amount of interest payable to the Originator shall equal the total amount of interest which would have been payable to the Originator if the total amount of interest had been computed without giving effect to the provisions of the foregoing sentence. 12. No Negotiation. This Company Note is not negotiable except that is may be assigned to any Affiliate of the Originator. 13. GOVERNING LAW. THIS COMPANY NOTE HAS BEEN DELIVERED IN THE COMMONWEALTH OF PENNSYLVANIA, AND SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. 14. Captions. Paragraph captions used in this Company Note are for convenience only and shall not affect the meaning or interpretation of any provision of this Company Note. Exhibit B-7 Purchase and Sale Agreement 48 KSI FUNDING CORPORATION By: ___________________________ Name: __________________ Title: _________________ Exhibit B-8 Purchase and Sale Agreement 49 Exhibit C FORM OF JOINDER AGREEMENT THIS JOINDER AGREEMENT, dated as of ___________ , 20__ (this "Agreement") is executed by__________, a corporation organized under the laws of __________ (the "Additional Seller"), with its principal place of business located at __________. BACKGROUND: A. KSI Funding Corporation (the "Buyer") and each entity listed on Schedule I thereto (collectively, the "Sellers"), have entered into that certain Purchase and Sale Agreement, dated as of April 17, 2001 (as amended through the date hereof, and as it may be further amended from time to time, the "Purchase and Sale Agreement"). B. The Additional Seller desires to become a Seller pursuant to Section 4.3 of the Purchase and Sale Agreement. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Additional Seller hereby agrees as follows: SECTION 1. Definitions. Capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings assigned thereto in the Purchase and Sale Agreement or in the Receivables Purchase Agreement (as defined in the Purchase and Sale Agreement). SECTION 2. Transaction Documents. The Additional Seller hereby agrees that it shall be bound by all of the terms, conditions and provisions of, and shall be deemed to be a party to (as if it were an original signatory to), the Purchase and Sale Agreement and each of the other relevant Transaction Documents. From and after the later of the date hereof and the date that the Additional Seller has complied with all of the requirements of Section 4.3 of the Purchase and Sale Agreement, the Additional Seller shall be a Seller for all purposes of the Purchase and Sale Agreement and all other Transaction Documents. The Additional Seller hereby acknowledges that it has received copies of the Purchase and Sale Agreement and the other Transaction Documents. SECTION 3. Representations and Warranties. The Additional Seller hereby makes all of the representations and warranties set forth in Article V (to the extent applicable) of the Purchase and Sale Agreement as of the date hereof (unless such representations or warranties relate to an earlier date, in which as of such earlier date), as if such representations and warranties were fully set forth herein. The Additional Seller hereby represents and warrants that the chief place of business and chief executive office of the Additional Seller, and the offices where the Additional Seller keeps all of its Records and Related Security is as follows: Exhibit C-1 Purchase and Sale Agreement 50 ________________________ ________________________ ________________________ SECTION 4. Miscellaneous. This Agreement shall be governed by, and construed in accordance with, the internal laws of the Commonwealth of Pennsylvania. This Agreement is executed by the Additional Seller for the benefit of the Buyer, and its assigns, and each of the foregoing parties may rely hereon. This Agreement shall be binding upon, and shall inure to the benefit of, the Additional Seller and its successors and permitted assigns. [SIGNATURE PAGES FOLLOW] Exhibit C-2 Purchase and Sale Agreement 51 IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed by its duly authorized officer as of the date and year first above written. [NAME OF ADDITIONAL SELLER] By: __________________________ Name: _________________ Title: ________________ Consented to: KSI FUNDING CORPORATION By: ____________________________ Name: _____________________ Title: ____________________ Acknowledged by: PNC BANK, NATIONAL ASSOCIATION, as Administrator By: ____________________________ Name: ____________________ Title: ___________________ Exhibit C-3 Purchase and Sale Agreement 52 Exhibit D FORM OF ORIGINATOR ASSIGNMENT CERTIFICATE ORIGINATOR ASSIGNMENT CERTIFICATE Reference is made to the Purchase and Sale Agreement of even date herewith (as the same may be amended, supplemented, amended and restated or otherwise modified from time to time, the "Purchase and Sale Agreement") between the undersigned, the various entities listed on Schedule I, as Originators, and KSI Funding Corporation (the "Company"). Unless otherwise defined herein, capitalized terms used herein have the meanings provided in the Purchase and Sale Agreement or in Exhibit I to the Receivables Purchase Agreement (as defined in the Purchase and Sale Agreement), as applicable. The undersigned hereby sells, assigns and transfers unto the Company and its successors and assigns all right, title and interest of the undersigned in and to: (a) each Receivable of the undersigned that existed and was owing to the undersigned as of the Cut-off Date other than Receivables contributed pursuant to Section 3.1 of the Purchase and Sale Agreement; (b) each Receivable generated by the undersigned from and including the Cut-off Date to and including the Purchase and Sale Termination Date; (c) all rights to, but not the obligations under, all Related Security; (d) all monies due or to become due with respect to any of the foregoing; (e) all books and records of the undersigned related to any of the foregoing, and all rights, remedies, powers and privileges of such Originator in any accounts into which Collections are or may be received; and (f) all collections and other proceeds and products of any of the foregoing (as defined in the applicable UCC) that are or were received by the undersigned on or after the Cut-off Date, including, without limitation, all funds which either are received by the undersigned, the Company or the Servicer from or on behalf of the Obligors in payment of any amounts owed (including, without limitation, invoice price, finance charges, interest and all other charges) in respect of Receivables, or are applied to such amounts owed by the Obligors (including, without limitation, insurance payments that the undersigned or the Servicer applies in the ordinary course of its business to amounts owed in respect of any Receivable and net proceeds of sale or other disposition of repossessed goods or other collateral or property of the Obligors in respect of Receivables or any other parties directly or indirectly liable for payment of such Receivables). Exhibit D-1 Purchase and Sale Agreement 53 This Originator Assignment Certificate is made without recourse but on the terms and subject to the conditions set forth in the Transaction Documents to which the undersigned is a party. The undersigned acknowledges and agrees that the Company and its successors and assigns are accepting this Originator Assignment Certificate in reliance on the representations, warranties and covenants of the undersigned contained in the Transaction Documents to which the undersigned is a party. THIS ORIGINATOR ASSIGNMENT CERTIFICATE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE PURCHASE AND SALE AGREEMENT AND THE INTERNAL LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. Exhibit D-2 Purchase and Sale Agreement 54 IN WITNESS WHEREOF, the undersigned has caused this Originator Assignment Certificate to be duly executed and delivered by its duly authorized officer this ___ day of _____________, 2001. [ORIGINATOR] By:________________________________ Name:______________________________ Title:_____________________________ Originator Assignment S-1 Certificate (________) -----END PRIVACY-ENHANCED MESSAGE-----