UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to __________
Commission file number 0-121
KULICKE AND SOFFA INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1498399
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2101 Blair Mill Road, Willow Grove, PA 19090
(Address of principal executive offices) (zip code)
(Registrant's telephone number, including area code): (215) 784-6000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's common stock (its only voting
stock) held by non-affiliates of the Registrant as of December 1, 1998 was
approximately $382,764,000. (Reference is made to the final paragraph of Part
II, Item 5 herein for a statement of assumptions upon which this calculation is
based).
As of December 1, 1998, there were 23,401,614 shares of the Registrant's common
stock, Without Par Value, outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for the 1999 Annual Shareholders'
Meeting to be filed prior to January 8, 1999 are incorporated by reference into
Part III, Items 10, 11, 12 and 13 of this Report. Such Proxy Statement, except
for the parts therein which have been specifically incorporated by reference,
shall not be deemed "filed" for the purposes of this Report on Form 10-K.
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KULICKE AND SOFFA INDUSTRIES, INC.
1998 Annual Report on Form 10-K
Table of Contents
<TABLE>
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Page
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Part I
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Item 1. Business 1
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
Part II
Item 5. Market for the Registrants' Common Equity and Related Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 21
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 52
Part III
Item 10. Directors and Executive Officers of the Registrant 52
Item 11. Executive Compensation 52
Item 12. Security Ownership of Certain Beneficial Owners and Management 52
Item 13. Certain Relationships and Related Transactions 52
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 53
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PART I
Certain statements contained in this report 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 the statute. Such forward-looking
statements include, but are not limited to, statements that relate to the
Company's future revenue, product development, demand, competitiveness, gross
margins, operating expenses, management's plans and objectives for current and
future operations of the Company and the effects of the Company's current
resizing efforts. Such statements are based on current expectations and are
subject to risk and uncertainties, including those discussed below and under the
heading "Risk Factors" within the section of this report entitled "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in the Company's reports and registration statements filed from
time to time with the Securities and Exchange Commission.
Item 1. BUSINESS.
Kulicke and Soffa Industries, Inc. (the "Company" or "K&S") designs,
manufactures and markets capital equipment, related spare parts and packaging
materials used to assemble semiconductor devices ("semiconductors" or "IC's").
The Company also services, maintains, repairs and upgrades assembly equipment.
The equipment offered by the Company addresses a broad range of applications in
the semiconductor assembly process, including wire bonding systems, wafer dicing
saws and die and TAB bonders. Today, K&S is the world's largest supplier of
semiconductor assembly equipment, according to VLSI Research, Inc.
Through its American Fine Wire Corporation ("AFW"), Micro-Swiss, Ltd.
("Micro-Swiss") and Semitec subsidiaries, the Company offers packaging
materials, including bonding wire, capillaries, wedges, die collets and saw
blades. Packaging materials products have different manufacturing processes,
distribution channels and a less volatile revenue pattern than the Company's
capital equipment business. See Note 10 to the Company's Consolidated Financial
Statements, included herein, for financial results by business segment.
Through Flip Chip Technologies, L.L.C, a joint venture with Delco Electronics
Corporation, the Company provides wafer bumping and finishing services on a
contractual basis and licenses related technology. See Note 3 to the Company's
Consolidated Financial Statements, included herein, for a more detailed
discussion of Flip Chip Technologies, L.L.C.
The semiconductor industry experienced a downturn in fiscal 1998 due to the
ongoing financial turmoil in Asia, which has impacted the financial resources
available to some of the Company's Asian customers and cut demand for end-user
products that use semiconductors; to a slowdown in the rate of growth of
personal computer ("PC") sales; and a surplus of assembly capacity. As a result
of the industry-wide downturn, the Company reported a net loss for the year
ended September 30, 1998.
The Company was founded in 1951 and is a Pennsylvania Corporation. Its principal
offices are located at 2101 Blair Mill Road, Willow Grove, Pennsylvania, and its
telephone number is (215) 784-6000.
Products and Services
K&S offers a broad range of semiconductor assembly equipment, packaging
materials and complementary services and spare parts used in the semiconductor
assembly process. Set forth below is a table listing the approximate percentage
of the Company's net sales by principal product area for its fiscal years ended
September 30, 1998, 1997 and 1996.
Fiscal Year Ended
September 30,
----------------------------
1998 1997 1996
---- ---- ----
Wire bonders 58% 65% 57%
Additional assembly equipment 7% 7% 10%
Packaging materials 27% 22% 25%
Services and spare parts 8% 6% 8%
--- --- ---
100% 100% 100%
=== === ===
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Wire Bonders
The Company's principal product line is its family of wire bonders, which are
used to connect extremely fine wires, typically made of gold or aluminum,
between the bonding pads on the die and the leads on the IC package to which the
die has been bonded. The Company offers both ball and wedge bonders in automatic
and manual configurations. Ball bonders typically are used for leadframe-based
and laminate-based packages, while wedge bonders typically are used for ceramic
packages. The Company believes that its wire bonders offer competitive
advantages based on high productivity and superior process control enabling fine
pitch bonding and long, low wire loops, which are needed to assemble advanced IC
packages. The selling prices for the Company's automatic wire bonders range from
$60,000 to over $200,000 and from $8,000 to $40,000 for manual wire bonders, in
each case depending upon system configuration and purchase volume.
The Company has developed a new generation of wire bonders, the 8000 family,
which is based on an entirely new platform and has required the development of
new software and many subassemblies not part of the Company's prior series of
wire bonders. The first products in the 8000 family are the Model 8020 ball
bonder and Model 8060 wedge bonder. The Model 8020 replaced the Model 1488 plus
ball bonder. During fiscal 1998, the Company shifted production capacity from
the Model 1488 plus to the Model 8020 ball bonders, which by the fourth quarter
accounted for the majority of ball bonders sold. The Model 8060 was introduced
during the fiscal 1997 fourth quarter and began shipping in volume in the first
quarter of fiscal 1998. Due to an industry slowdown, on April 2, 1998 the
Company announced the cancellation of a major order that represented the
majority of planned shipments of the Model 8060 for the remainder of fiscal
1998. After negotiation of a settlement related to the major order cancellation,
the Company has reduced its production capacity for the Model 8060. During the
first quarter of fiscal 1998, the Company expanded its 8000 wire bonder platform
with the introduction of the Model 8090, a large area wedge bonder designed to
process the large panels and carriers used in chip-on-board (COB), multi-chip
modules (MCMs) and similar devices. During the second quarter of fiscal 1998,
the Company introduced the Model 8070, a bonder designed specifically for the
assembly of micro-BGA, and the 4500 digital series of manual wire bonders. The
Company has incurred incremental costs to date and may incur additional costs in
completing the customer evaluation and qualification process.
Additional Semiconductor Assembly Equipment
In addition to wire bonders, the Company produces and distributes other types of
semiconductor assembly equipment, including wafer dicing saws, die bonders and
TAB bonders, which allows the Company to leverage its significant investment in
customer relationships by offering its customers a broad range of assembly
equipment. Principal products offered by the Company consist of the following:
Dicing Saws. Dicing saws use diamond-embedded saw blades to cut silicon
wafers into individual semiconductor die. Dicing saws range in price from
$60,000 to more than $230,000. In October 1995, the Company entered into a
Manufacturing License and Supply Agreement with Tokyo Seimitsu Co. Ltd.
("TSK"). Under this agreement, the Company manufactures and distributes
TSK's automatic dicing saw as the Company's Model 7500. This product was
produced in the Company's Israeli machine manufacturing facility. In late
fiscal 1998 the Company ceased manufacturing dicing saws for TSK but is
continuing to develop with TSK a new model 7700 dicing saw.
Die Bonders. Die bonders are used to attach a semiconductor die to a
leadframe or other package before wire bonding. Through fiscal 1998, the
Company's product line included the Model 6900, an automatic multi-process
assembly system which can be configured to support either conventional die
bonding applications or alternate semiconductor assembly technologies, and
Model 4206 and 5408 machines. In late fiscal 1998, the Company entered into
a distribution agreement with DATACON GmbH, an Austrian company, to market,
principally, its MCM and Flip Chip die bonder product line worldwide
excluding Europe. The die bonders to be distributed by the Company are
expected to range in price from $200,000 to more than $500,000, depending
on configuration. In connection with the Company's resizing efforts in
fiscal 1998, the manufacture of Models 4206, 5408 and 6900 was
discontinued.
Tape Automated Bonding (TAB). TAB is an alternate interconnect method which
uses a thin, flexible film of laminated copper and polyamide in place of a
conventional wire. In a TAB assembled device, the die is bonded directly to
copper leads, thereby eliminating the need for wire bonding. The Company
has developed and is
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currently marketing the Model 8070 TAB bonder, an entirely new machine
based on the 8000 series of products. TAB bonders range in price from
$200,000 to over $400,000, depending upon configuration.
Flip Chip Assembly Systems. Flip Chip is an alternative assembly technique
in which the die is mounted face down in a package or other electronic
system using conductive bumps, thereby eliminating the need for
conventional die or wire bonding. The Model 2200, manufactured by DATACON
and distributed by the Company, can be configured to support flip chip
applications. Selling prices for flip chip applications exceed $300,000.
Factory Systems. Factory systems is a set of products and services designed
to automate data collection and material flow between process steps in
semiconductor assembly. The Company sells its own products and resells
equipment from other vendors and integrates such equipment into an
automated assembly line. The Company has entered into an alliance with PRI
Automation, Inc., to resell their material handling systems for certain
automation applications. In late fiscal 1998, the Company commenced a
project at a major customer's site to demonstrate the benefits from
semiconductor assembly automation.
The Company also offers different configurations of certain of its products for
non-semiconductor applications. For instance, the Company's Model 980 saw can be
configured for cutting and grinding hard and brittle materials, such as ceramic,
glass and ferrite, that are used in the fabrication of chip capacitors or disk
drive heads.
Packaging Materials
The Company currently offers a range of packaging materials to semiconductor
device assemblers which it sells under the brand names "American Fine Wire,"
"Micro-Swiss" and "Semitec." The Company intends to expand this business in an
effort to increase its revenues from materials used in the assembly of IC's. The
Company sells its packaging materials for use with competitors' assembly
equipment as well as its own equipment. The Company's principal packaging
materials products consist of the following:
Bonding Wire. AFW is a manufacturer of very fine (typically 0.001 inches in
diameter) gold and aluminum wire used in the wire bonding process. AFW
produces wire to a wide range of specifications, which can satisfy most
wire bonding applications. Gold bonding wire is generally priced based on a
fabrication charge per 1,000 feet of wire, plus the value of the gold. To
minimize AFW's financial exposure to gold price fluctuations, AFW obtains
gold for fabrication pursuant to a contract with its gold supplier,
Rothschild Australia Limited ("RAL"), and only purchases the gold upon
shipment and sale of the finished product to the customer. Accordingly,
fluctuations in the price of gold are generally absorbed by RAL or passed
on to AFW's customers.
Expendable Tools. The Micro-Swiss family of expendable tools includes
capillaries, wedges, die collets, saw blades and microspheres. Capillaries
and wedges are used to feed out, attach and cut the wires used in wire
bonding. Die collets are used to pick up and place die into packages.
Micro-Swiss brand hubless saw blades are used for cutting hard and brittle
materials. Semitec which was acquired in October, 1996, manufactures hub
blades which are used to cut silicon wafers into semiconductor die.
Services and Spare Parts
The Company believes that its knowledge and experience have positioned it to
deliver innovative, customer-specific services that reduce the cost of ownership
associated with the Company's equipment. Historically, the Company's offerings
in this area were limited to spare parts, customer training and extended
warranty contracts. In response to customer trends in outsourcing
equipment-related services, the Company is focusing on providing repair and
maintenance services, a variety of equipment upgrades, machine and component
rebuild activities and expanded customer training. These services are generally
priced on a time and materials basis. The service and maintenance arrangements
are typically subject to bi-annual or multi-year contracts.
Investment in Flip Chip Technologies, L.L.C.
The Company continuously evaluates investments in alternative packaging
technologies. To that end, in February 1996, the Company entered into a joint
venture agreement with Delco Electronics Corporation ("Delco") to provide wafer
3
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bumping services on a contract basis and to license related technologies through
Flip Chip Technologies, L.L.C. ("FCT"). FCT completed construction of its
manufacturing facility in Phoenix, Arizona during fiscal 1997, has commenced
production, and is currently working with customers to have its manufacturing
processes qualified. This qualification process is expected to continue
throughout fiscal 1999. In March of 1998 FCT introduced a new wafer level chip
sized package, named the Ultra CSPTM aimed at the chip scale packaging market,
defined as devices whose package surface area is no larger than 1.2 times the
area of the die. FCT has begun to have its Ultra CSPTM package qualified by
semiconductor device manufactures and semiconductor contract assemblers.
FCT has experienced losses since its inception. The Company has recognized its
proportionate share of such losses, based on its 51% equity interest in fiscal
1998, 1997 and 1996. See the "Risk Factors" section of Item 7 and the financial
statements of the Company and of FCT in Item 8 of this report for a detailed
discussion of the Company's financial commitments to FCT, the Company's
intention to convert its outstanding loans to FCT into equity units thereby
increasing its ownership share of FCT and the financial performance of FCT.
Customers
The Company's major customers include large semiconductor manufacturers and
subcontract assemblers worldwide. The following list identifies some of these
major customers:
Advanced Micro Devices Micron Technology
Advanced Semiconductor Engineering Motorola
Amkor Technology National Semiconductor
Anam NEC
Caesar Technology Orient Semiconductor Electronics
ChipPac Korea Philips Electronics
IBM SGS-Thomson Microelectronics
Intel Siemens
Lucent Technologies Texas Instruments
Sales to a relatively small number of customers have accounted for a significant
percentage of the Company's net sales. In fiscal 1998, sales to Intel accounted
for 17.6% of the Company's net sales. During fiscal 1997, sales to Anam (a
Korean-based customer) and Intel accounted for 12.5% and 10.2%, respectively, of
the Company's net sales. During fiscal 1996, sales to Anam and Intel accounted
for approximately 14.3% and 11.2%, respectively, of the Company's net sales. See
the "Risk Factors - Dependence on Key Customers" section of Item 7 of this
report.
The Company believes that developing long-term relationships with its customers
is critical to its success. By establishing these relationships with
semiconductor manufacturers and subcontract assemblers, the Company gains
insight into its customers' future IC packaging strategies. This information
assists the Company in its efforts to develop material, equipment and process
solutions that address its customers' future assembly requirements.
The Company expects that sales of its products to a limited number of customers
will continue to account for a high percentage of net sales for the foreseeable
future. The loss or reduction of orders from a significant customer, including
losses or reductions due to manufacturing, reliability or other difficulties
associated with the Company's products, changes in customer buying patterns,
market, economic or competitive conditions in the semiconductor or subcontract
assembly industries, could adversely affect the Company's business, financial
condition and operating results.
International Operations
The Company sells its products to semiconductor device manufacturers and
contract manufacturers, which are primarily located in or have operations in the
Asia/Pacific region. Approximately 80%, 85% and 79% of the Company's net sales
for fiscal 1998, 1997 and 1996, respectively, were for delivery to customer
locations outside of the United States, with the majority of such foreign sales
destined to customer locations in the Asia/Pacific region, including Taiwan,
Korea, Malaysia, Philippines, Singapore, Hong Kong and Japan. The Company
expects sales outside of the United States to continue to represent a
substantial portion of its future revenues.
In addition, the Company maintains manufacturing operations in countries other
than the United States, including operations located in Israel, Singapore and
Switzerland. Risks associated with the Company's international operations
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include risks of foreign currency and foreign financial market fluctuations,
international exchange restrictions, changing political conditions and monetary
policies of foreign governments, war, civil disturbances, expropriation, or
other events which may limit or disrupt markets.
Sales and Customer Support
The Company markets its semiconductor assembly equipment and its packaging
materials through separate sales organizations. With respect to semiconductor
assembly equipment, the Company's direct sales force, consisting of
approximately 100 individuals at September 30, 1998, is principally responsible
for the sale of major product lines to customers in the United States and the
Asia/Pacific region, including Japan. Lower volume product lines, as well as all
equipment sales to customers in Europe, are sold through a network of
manufacturer's representatives. The Company sells its packaging materials
product lines through a separate direct sales force and through manufacturer's
representatives.
The Company believes that providing comprehensive worldwide sales, service and
customer support are important competitive factors in the semiconductor
equipment industry. In order to support its U.S. and foreign customers whose
semiconductor assembly operations are located in the Asia/Pacific region, the
Company maintains a significant presence in the region, with sales facilities in
Hong Kong, Japan, Korea, Taiwan, Malaysia, the Philippines and Singapore, a
technology center in Japan and application labs in Singapore. The Company
supports its assembly equipment customers worldwide with over 250 customer
service and support personnel as of September 30, 1998, located in the United
States, Hong Kong, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan
and Thailand. The Company's local presence in the Asia/Pacific countries enables
it to provide more timely customer service and support as service
representatives and spare parts are positioned near customer facilities, and
affords customers the ability to place orders locally and to deal with service
and support personnel who speak the same language and are familiar with local
country practices.
Backlog
At September 30, 1998, the Company's backlog of orders approximated $54.0
million, compared to approximately $118.0 million at September 30, 1997. The
Company's backlog consists of product orders for which confirmed purchase orders
have been received and which are scheduled for shipment within 12 months.
Virtually all orders are subject to cancellation, deferral or rescheduling by
the customer with limited or no penalties. Because of the possibility of
customer changes in delivery schedules or cancellations and potential delays in
product shipments, the Company's backlog as of any particular date may not be
indicative of revenues for any succeeding quarterly period.
Manufacturing
The Company's assembly equipment manufacturing activities consist primarily of
integrating components and subassemblies to create finished systems configured
to customer specifications. The Company performs system design, assembly and
testing in-house at its Willow Grove, Pennsylvania and Haifa, Israel facilities,
but utilizes an outsourcing strategy for the manufacture of many of its major
subassemblies. K&S believes that outsourcing enables it to minimize its fixed
costs and capital expenditures and allows the Company to focus on product
differentiation through system design and quality control. The Company's
just-in-time inventory management strategy has reduced manufacturing cycle times
and has limited on-hand inventory. The Company has obtained ISO 9001
certification for operations in its Willow Grove, Pennsylvania facility and for
both of its Israeli manufacturing facilities. Additionally, the AFW
manufacturing facilities in Selma, Alabama, Switzerland and Singapore and the
Semitec facility in California have received ISO 9002 certification.
The Company manufactures its Micro-Swiss expendable tools at its facility in
Yokneam, Israel and its AFW product line, consisting of gold and aluminum
bonding wire, at facilities in Alabama, Singapore and Switzerland. Semitec hub
blades are manufactured in Santa Clara, California.
The Company relies on subcontractors to produce to the Company's specifications
many of the materials, components or subassemblies used in its products. Certain
of the Company's products, however, require components or assemblies of an
exceptionally high degree of reliability, accuracy and performance. Currently
there are a number of such items for which there are only a single or limited
number of suppliers which have been accepted by the Company as qualified
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suppliers. The Company generally does not maintain long-term contracts with its
subcontractors and suppliers. While the Company does not believe that its
business is substantially dependent on any contract or arrangement with any of
its subcontractors or suppliers, the Company's reliance on subcontractors and
single source suppliers involves a number of significant risks, including the
loss of control over the manufacturing process, the potential absence of
adequate capacity and the reduced control over delivery schedules, manufacturing
yields, quality and costs. Further, certain of the Company's subcontractors and
suppliers have relatively small operations and have limited financial and
manufacturing resources. In the event that any significant subcontractor or
single source supplier were to become unable or unwilling to continue to
manufacture or sell subassemblies, components or parts to the Company in
required volumes and of acceptable quality levels and prices, the Company would
have to identify and qualify acceptable replacements. The process of qualifying
subcontractors and suppliers could be lengthy, and no assurance can be given
that any additional sources would be available to the Company on a timely basis.
The Company has, from time to time, experienced reliability and quality problems
with certain key subassemblies provided by single source suppliers. The Company
also has experienced delays in the delivery of subassemblies from these and
other subcontractors in the past, which caused delays in Company shipments. If
supplies of such items were not available from any such source at acceptable
quality levels and prices and a relationship with an alternative supplier could
not be developed, shipments of the Company's products could be interrupted and
re-engineering of the affected product could be required with resulting delays.
In addition, from time to time, the Company has experienced manufacturing
difficulties and problems in its own operations which have caused delays and
have required remedial measures. Such delays, interruption and re-engineering
could damage the Company's relationships with its customers and have a material
adverse effect on the Company's business, financial condition and operating
results.
Research and Product Development
Because technological change occurs rapidly in the semiconductor industry, the
Company devotes substantial resources to its research and development programs
to maintain its competitiveness. The Company employed approximately 300
individuals in research and development at September 30, 1998. The Company
pursues the continuous improvement and enhancement of existing products while
simultaneously developing next generation products. For example, while the
performance of current generations of wire bonders is being enhanced in
accordance with a specific continuous improvement plan, the Company is
simultaneously developing the next generation wire bonders. Much of the next
generation equipment presently being developed by the Company is based on
modular, interchangeable subsystems, including the 8000 control platform, which
management believes will promote more efficient and cost-effective manufacturing
operations, lower inventory levels, improved field service capabilities and
shorter product development cycles, and allow the Company to introduce new
products more quickly. In fiscal 1998, the Company introduced two new bonders
based on technology developed for earlier models of the 8000 family, the Model
8090, a large area bonder appropriate for multichip modules and flat panel
displays and the Model 8070, an automatic lead bonder suitable for Micro Ball
Grid Array and tape automated bonding (TAB) applications.
The Company's net expenditures for research and development totaled
approximately $48.7 million, $46.0 million and $52.4 million during the fiscal
years ended September 30, 1998, 1997 and 1996, respectively. The Company has
received funding from certain customers and government agencies pursuant to
contracts or other arrangements for the performance of specified research and
development activities. Such amounts are recognized as a reduction of research
and development expense when specified activities have been performed. During
the fiscal years ended September 30, 1998, 1997 and 1996, such funding totaled
approximately $1.7 million, $2.0 million and $2.5 million, respectively.
Competition
The semiconductor equipment and packaging materials industries are intensely
competitive. Significant competitive factors in the semiconductor equipment
market include process capability and repeatability, quality and flexibility,
and cost of ownership, including throughput, reliability and automation,
customer support and price. The Company's major equipment competitors include
Shinkawa, Kaijo, ESEC and ASM Pacific Technology in wire bonders; ESEC,
Nichiden, ASM Pacific Technology and Alphasem in die bonders; and Disco
Corporation in dicing saws. Significant competitive factors in the semiconductor
packaging materials industry include price, delivery and quality. Major
competitors in the packaging materials line include Gaiser Tool Co. and Small
Precision Tools, Inc. with respect to expendable tools, Tanaka Electronic
Industries and Sumitomo Metal Mining in the bonding wire market, and Disco
Corporation with respect to dicing blades.
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In each of the markets it serves, the Company faces competition and the threat
of competition from established competitors and potential new entrants, some of
which may have greater financial, engineering, manufacturing and marketing
resources than the Company. Some of these competitors are Japanese companies
that have had and may continue to have an advantage over the Company in
supplying products to Japan-based companies due to their preferences to purchase
equipment from Japanese suppliers. Additionally, certain competitors may have
pricing advantages as a result of recent currency fluctuations in relation to
the U.S. dollar. The Company expects its competitors to continue to improve the
performance of their current products and to introduce new products with
improved price and performance characteristics. New product introductions by the
Company's competitors or by new market entrants could cause a decline in sales
or loss of market acceptance of the Company's existing products. If a particular
semiconductor manufacturer or subcontract assembler selects a competitor's
product for a particular assembly operation, the Company may experience
difficulty in selling a product to that company for a significant period of
time. Increased competitive pressure could also lead to intensified price-based
competition, resulting in lower prices which could adversely affect the
Company's business, financial condition and operating results. The Company
believes that to remain competitive it must invest significant financial
resources in new product development and expand its customer service and support
worldwide. There can be no assurance that the Company will be able to compete
successfully in the future.
Intellectual Property
Where circumstances warrant, the Company seeks to obtain patents on inventions
governing new products and processes developed as part of its ongoing research,
engineering and manufacturing activities. The Company currently holds a number
of United States patents some of which have foreign counterparts. The Company
believes that the duration of its patents generally exceeds the life cycles of
the technologies disclosed and claimed therein. Although the patents it holds
and may obtain in the future may be of value, the Company believes that its
success will depend primarily on its engineering, manufacturing, marketing and
service skills.
The Company also believes that much of its important technology resides in its
proprietary software and trade secrets. Insofar as the Company relies on trade
secrets and unpatented knowledge, including software, to maintain its
competitive position, there is no assurance that others may not independently
develop similar technologies and possibly obtain patents containing claims
applicable to the Company's products and processes. The sale of Company products
covered by such patents could require licenses that may not be available on
acceptable terms, or at all. In addition, although the Company executes
non-disclosure and non-competition agreements with certain of its employees,
customers, consultants, selected vendors and others, there is no assurance that
such secrecy agreements will not be breached.
Employees
At September 30, 1998, K&S had 2,057 permanent employees and 15 temporary
employees worldwide. The only Company employees represented by a labor union are
AFW's employees in Singapore. K&S considers its employee relations to be good.
Competition in the recruiting of personnel in the semiconductor and
semiconductor equipment industry is intense, particularly with respect to
certain engineering disciplines. The Company believes that its future success
will depend in part on its continued ability to hire and retain qualified
management, marketing and technical employees.
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Executive Officers of the Company
The following table sets forth certain information regarding the executive
officers of the Company.
<TABLE>
<CAPTION>
First Became
an Officer
Name Age (calendar year) Position
- ------------------- --- --------------- --------------------------------------------------------------------
<S> <C> <C> <C>
C. Scott Kulicke 49 1976 Chairman of the Board of Directors and Chief Executive Officer
Morton K. Perchick 61 1982 Executive Vice President
Clifford G. Sprague 55 1989 Senior Vice President and Chief Financial Officer
Moshe Jacobi 56 1992 Senior Vice President and General Manager of Kulicke & Soffa
(Israel) Ltd.
Walter Von Seggern 58 1992 Senior Vice President
Laurence P. Wagner 38 1998 Senior Vice President and President Packaging Materials
</TABLE>
C. Scott Kulicke has been Chief Executive Officer since 1979 and Chairman of the
Board since 1984. Prior to that he held a number of executive positions with the
Company. Mr. Kulicke is the son of Frederick W. Kulicke, Jr., a member of the
Board of Directors.
Morton K. Perchick joined the Company in 1980 and has served in various
executive positions, most recently as Senior Vice President, prior to his being
appointed Executive Vice President in July 1995.
Clifford G. Sprague joined the Company in March 1989 as Vice President and Chief
Financial Officer and was promoted to Senior Vice President in 1990. Prior to
joining the Company, he served for more than five years as Vice President and
Controller of the Oilfield Equipment Group of NL Industries, Inc., an oilfield
equipment and service company.
Moshe Jacobi has served as Senior Vice President and General Manager of Kulicke
and Soffa (Israel) Ltd since August 1998 and as the Senior Vice President and
President, Packaging Materials Group since November 1996. Prior to that, he
served as Senior Vice President Expendable Tools and Materials from July 1995
and as Vice President of the Company and Managing Director of Micro-Swiss Ltd.,
a wholly-owned subsidiary of the Company from November 1992. He was Division
Director and General Manager of the Micro-Swiss Division from July to November
1992, and, from August 1986 to July 1992, he was Deputy Managing Director of
Kulicke and Soffa (Israel) Ltd., a wholly-owned subsidiary of the Company.
Walter Von Seggern joined the Company in September 1992 as Vice President of
Engineering and Technology. He was appointed Senior Vice President in December
1996, became Senior Vice President, Marketing in April 1997 and since early 1998
has been a Senior Vice President in charge of new equipment business
opportunities. From April 1988 to April 1992, he worked for M/A-Com, Inc. He was
General Manager of M/A-Com's ANZAC, RGH and Eurotec Divisions from 1990 to 1992
and from 1988 to 1990, he was General Manager of M/A-Com's Radar Products
Division.
Laurence P. Wagner joined the Company in July 1998 as Senior Vice President and
President of Packaging Materials. From March 1996 until he joined the Company,
Mr. Wagner was Vice President and General Manager of Emcore Electronic
Materials, a compound semiconductor materials manufacturer. Before Emcore, Mr.
Wagner was the Operating Unit Manager of Shipley Company LLC, a division of Rohm
and Haas Company, where he had worked since 1989.
8
<PAGE>
Item 2. PROPERTIES.
<TABLE>
<CAPTION>
The Company's major facilities are described in the table below:
Lease
Products Expiration
Facility Approximate Size Function Manufactured Date
- ---------------- ------------------ ------------------------ ------------------------- -------------
<S> <C> <C> <C> <C>
Willow Grove, 214,000 sq.ft. (1) Corp. headquarters, Wire bonders, die bonders N/A
Pennsylvania manufacturing, and TAB bonders
technology center, sales
and service
Haifa, Israel 46,100 sq.ft. (2) Manufacturing, Manual wire bonders, April 2002
technology center, dicing saws and
assembly systems automatic multi-process
assembly systems
Yokneam, Israel 48,400 sq.ft. (1) Manufacturing, Micro- Capillaries, wedges and N/A
Swiss operations die collets
Yokneam, Israel 12,000 sq.ft. (2) Manufacturing, Micro- Hard material blades April 2003
Swiss operations
Hong Kong, China 10,600 sq.ft. (2) Sales and service N/A November 2000
Tokyo, Japan 10,700 sq.ft. (2) Technology center, sales N/A (3)
and service
Singapore 35,100 sq.ft. (2) Manufacturing, AFW Bonding wire May 2000
operations
Selma, Alabama 25,600 sq.ft. (2) Manufacturing, AFW Bonding wire October 2017
operations
Thalwil, 15,100 sq.ft. (2) Manufacturing, AFW Bonding wire (3)
Switzerland operations
Santa Clara, 13,600 sq.ft. (2) Manufacturing Dicing Saw October 2003
California Blades
</TABLE>
(1) Owned.
(2) Leased.
(3) Cancelable semi-annually upon six months' notice.
The Company also rents space for sales and service offices in Horsham,
Pennsylvania; Santa Clara, California; Mesa, Arizona; Korea; Taiwan; Malaysia;
Philippines; and Singapore and storage space in Hong Kong. The Company believes
that its facilities are generally in good condition.
Item 3. LEGAL PROCEEDINGS.
The Company is not aware of any material pending legal matters involving the
Company or its subsidiaries. See the discussion of certain legal contingencies
in Note 12 to the Company's Consolidated Financial Statements included herein.
9
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock trades on the Nasdaq National Market under the symbol
KLIC. The following table sets forth for the periods indicated the high and low
sale prices for the common stock, as reported on the Nasdaq National Market.
High Low
Fiscal 1998:
First Quarter $48 1/4 $16 1/2
Second Quarter 29 5/8 16 1/4
Third Quarter 24 13/16 13 7/8
Fourth Quarter 19 1/2 11 1/2
Fiscal 1997:
First Quarter $22 1/4 $10 1/2
Second Quarter 30 18 3/4
Third Quarter 35 5/8 20 3/4
Fourth Quarter 58 3/8 31
On December 1, 1998, there were 782 holders of record of the shares of
outstanding common stock.
The Company currently does not pay cash dividends on its common stock. The
Company presently intends to retain any future earnings for use in its business
and does not anticipate paying any cash dividends on the common stock in the
foreseeable future. The amended Gold Supply Agreement dated October 2, 1995
between AFW and its subsidiaries (collectively, the "AFW Companies") and their
gold supplier contains certain financial covenants and prohibits the AFW
Companies from paying any dividends or making any distributions without the
consent of the supplier if, following any such dividend or distribution, the net
worth of the AFW Companies would be less than $7.0 million.
During fiscal 1998, the Company contributed 89,284 shares of unregistered common
stock, valued at its fair market value, as its matching contribution to its
Section 401(k) Employee Incentive Savings Plan. Registration of such shares was
not required because the transaction did not constitute a "sale" under Section
2(3) of the Securities Act of 1933, or, alternatively, the transaction was
exempt pursuant to the private offering provisions of that Act and the rules
thereunder.
For the purposes of calculating the aggregate market value of the shares of
common stock of the Company held by nonaffiliates, as shown on the cover page of
this report, it has been assumed that all the outstanding shares were held by
nonaffiliates except for the shares held by directors and executive officers of
the Company. However, this should not be deemed to constitute an admission that
all directors and executive officers of the Company are, in fact, affiliates of
the Company, or that there are not other persons who may be deemed to be
affiliates of the Company. Further information concerning shareholdings of
executive officers, directors and principal shareholders is included in the
Company's definitive proxy statement relating to its 1999 Annual Meeting of
Shareholders filed or to be filed with the Securities and Exchange Commission.
10
<PAGE>
Item 6. SELECTED FINANCIAL DATA.
The selected financial data presented below should be read in conjunction with
the Company's Consolidated Financial Statements and notes thereto, which are
included elsewhere herein.
<TABLE>
<CAPTION>
Statement of Operations Data: Fiscal Year Ended September 30,
------------------------------------------------------------------------------
1998 1997 1996(a) 1995 1994
--------- -------- --------- --------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales $ 411,040 $ 501,907 $ 381,176 $ 304,509 $ 173,302
Gross profit $ 136,833 $ 183,905 $ 142,062 $ 137,052 $ 71,968
Income (loss) from operations (b) $ (4,156) $ 57,663 $ 17,418 $ 55,440 $ 13,930
Net income (loss) (b) $ (5,440) $ 38,319 $ 11,847 $ 42,822 $ 10,418
Net income (loss) per share:(c)
Basic $ (0.23) $ 1.84 $ 0.61 $ 2.44 $ 0.63
Diluted $ (0.23) $ 1.79 $ 0.60 $ 2.23 $ 0.63
Average shares outstanding:
Basic 23,301 20,871 19,375 17,563 16,409
Diluted 23,301 21,428 19,788 19,590 19,120
Balance Sheet Data: September 30,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- --------- --------- ---------
(in thousands)
Cash and cash equivalents and
short-term investments $ 106,900 $ 115,587 $ 58,422 $ 38,214 $ 21,687
Working capital $ 182,181 $ 190,220 $ 113,804 $ 103,909 $ 61,459
Total assets $ 342,584 $ 376,819 $ 249,554 $ 191,029 $ 121,198
Long-term debt $ -- $ 220 $ 50,712 $ 156 $ 26,474
Shareholders' equity (d) $ 287,910 $ 291,927 $ 147,489 $ 133,647 $ 63,234
</TABLE>
(a) The fiscal 1996 Consolidated Statement of Operations was reclassified for
comparative purposes. Also, in October 1995, the Company acquired American
Fine Wire Corporation ("AFW") through the acquisition of all of the common
stock of Circle "S" Industries, Inc., the parent corporation of AFW. AFW is
a manufacturer of fine gold and aluminum wire used in the wire bonding
process.
(b) In fiscal 1998, 1997 and 1996, the Company recognized pre-tax losses of
$8.8 million, $6.7 million and $1.0 million respectively, representing its
proportionate share of losses from its equity investment in FCT. In fiscal
1998, the Company recorded a pre-tax resizing charge of $8.4 million for
severance and product discontinuation costs as a result of the slowdown in
the semiconductor industry. In fiscal 1996, the Company recorded a pre-tax
resizing charge of $3.0 million for severance and the write-off of costs
incurred in connection with the suspended Willow Grove facility expansion
as a result of a slowdown in the semiconductor industry in that fiscal year
(see Note 2 to the Company's Consolidated Financial Statements). In fiscal
1996, the Company also recorded a pre-tax write-off of $630,000 for costs
incurred in connection with a proposed but withdrawn public offering of
common stock.
(c) Prior fiscal years restated to reflect requirements of SFAS 128.
(d) In fiscal 1997, the Company completed the sale of 3,450,000 shares of its
common stock in an underwritten offering, resulting in net proceeds to the
Company of approximately $101.1 million. In fiscal 1995, the Company called
for redemption of its 8% Convertible Subordinated Debentures (the
"Debentures") then outstanding, resulting in the conversion of
approximately $26.2 million of such Debentures into shares of the Company's
common stock.
11
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Certain statements contained in this discussion 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 the statute. Such forward-looking
statements include, but are not limited to, statements that relate to the
Company's future revenue, product development, demand, competitiveness, gross
margins, operating expenses, management's plans and objectives for current and
future operations of the Company and the effects of the Company's current
resizing efforts. Such statements are based on current expectations and are
subject to risk and uncertainties, including those discussed below and under the
heading "Risk Factors" within this section and in the Company's reports and
registration statements filed from time to time with the Securities and Exchange
Commission.
Introduction and Company Outlook
The Company's operating results primarily depend upon the capital expenditures
of semiconductor manufacturers and subcontract assemblers worldwide which, in
turn, depend on the current and anticipated market demand for semiconductors and
products using semiconductors. The semiconductor industry historically has been
highly volatile and has experienced periodic downturns and slowdowns which have
had a severe negative effect on the semiconductor industry's demand for capital
equipment, including assembly equipment manufactured and marketed by the Company
and, to a lesser extent, packaging materials such as those sold by the Company.
These downturns and slowdowns have also adversely affected the Company's
operating results, in particular, during the latter half of fiscal 1996 and
fiscal 1998. The Company does not consider its business to be seasonal in
nature.
The semiconductor industry experienced a downturn in fiscal 1998 due to the
ongoing financial turmoil in Asia, which has impacted the financial resources
available to some of the Company's Asian customers and cut demand for end-user
products that use semiconductors; to a slowdown in the rate of growth of
personal computer ("PC") sales; and a surplus of assembly capacity. The Company
expects the lower level of industry wide assembly equipment purchases to
continue, at least through the second quarter of fiscal 1999, which is expected
to result in the Company reporting net losses in the first 2 quarters of its
fiscal 1999.
In fiscal 1998, the Company continued its transition to a new generation of wire
bonders, the 8000 family, which is based on an entirely new platform and which
has required a significant amount of resources to be devoted to the development
of new software and subassemblies. The first products of the 8000 family, the
Model 8020 ball bonder and Model 8060 wedge bonder, accounted for 28% and 91%,
respectively, of total fiscal 1998 Company sales of ball bonders and wedge
bonders. In the fourth quarter of fiscal 1998, the Model 8020 ball bonder
accounted for 69% of total Company sales of ball bonders. The Company continues
to devote resources to enhance the Model 8020 and 8060 and to introduce new 8000
family machines. The Company also continues to sell its existing supply of 1400
wire bonder machines.
In February 1996, the Company entered into a joint venture agreement with Delco
Electronics Corporation ("Delco") to provide wafer bumping services on a
contract basis and to license related technologies through Flip Chip
Technologies, LLC ("FCT"). FCT completed construction of its manufacturing
facility in Phoenix, Arizona in fiscal 1997, has commenced production, and is
currently working with customers to have its manufacturing processes qualified.
This qualification process is expected to continue throughout fiscal 1999. FCT
has experienced losses since its inception. The Company has recognized its
proportionate share of such losses based on its 51% equity interest, including
losses of $8.7 million, $6.7 million and $1.0 million in fiscal 1998, 1997 and
1996, respectively. The Company currently expects FCT will incur additional
losses during fiscal 1999. See the "Risk Factors" section of Item 7 and the
financial statements of FCT in Item 8 of this report for a detailed discussion
of the Company's financial commitments to FCT, the Company's desire to convert
its outstanding loans to FCT into equity units thereby increasing its ownership
share of FCT and the financial performance of FCT.
12
<PAGE>
Results of Operations
Fiscal Years Ended September 30, 1998 and September 30, 1997
During the 1998 fiscal year ended September 30, 1998, the Company recorded
bookings totaling $347.0 million compared to $550.0 million during fiscal 1997.
The $203.0 million decrease in fiscal 1998 bookings primarily reflected an
industry-wide slowdown in orders for semiconductor assembly equipment. At
September 30, 1998, total backlog of customer orders approximated $54.0 million
compared to $118.0 million at September 30, 1997. Since the timing of deliveries
may vary and orders are generally subject to cancellation, the Company's backlog
as of any date may not be indicative of net sales for any succeeding period.
Net sales for the 1998 fiscal year decreased by $90.9 million to $411.0 million
from $501.9 million in fiscal 1997. The lower sales volume generally reflected
the slowdown in the semiconductor industry resulting in reduced demand for
semiconductor assembly equipment and to a lesser extent packaging materials. The
majority of the reduction in net sales was in the Company's equipment segment
where net sales decreased $89.6 million to $302.1 million in fiscal 1998
compared to $391.7 million in fiscal 1997. Fewer unit sales of ball bonders
(approximately 1,800 ball bonders were sold in fiscal 1998 compared to over
3,000 in fiscal 1997) were partially offset by higher unit sales of wedge
bonders resulting in the lower equipment segment sales in fiscal 1998. Packaging
materials segment net sales decreased $1.3 million to $108.9 million in fiscal
1998 from $110.2 million in fiscal 1997. The lower package material segment net
sales was due primarily to lower average selling prices of bonding wire as the
result of lower prevailing gold prices in fiscal 1998 compared to fiscal 1997.
International sales (shipments of the Company's products with ultimate foreign
destinations) comprised 80% and 85% of the Company's total sales during fiscal
1998 and 1997, respectively. Sales to customers in the Asia/Pacific region,
including Korea, Taiwan, Malaysia, Philippines, Japan, Singapore, Thailand and
Hong Kong, accounted for approximately 73% and 76% of the Company's total sales
in fiscal 1998 and 1997, respectively. During fiscal 1998, shipments to
customers located in Taiwan, Philippines, Malaysia and Korea accounted for
approximately 20%, 17%, 16% and 4% of net sales, compared to 22%, 8%, 13% and
19%, respectively, for the 1997 fiscal year. The most significant change in
foreign destination sales occurred in Korea, where Korean based customers which
have historically accounted for a significant percentage of Company sales, were
adversely affected by the financial turmoil in that country and as a result,
reduced their orders to the Company. The Company expects sales to Korean based
customers to remain at reduced levels in fiscal 1999.
Gross profit decreased to $136.8 million for fiscal 1998 from $183.9 million in
fiscal 1997 due primarily to the lower unit volume of equipment segment sales in
fiscal 1998. Gross profit as a percentage of net sales decreased to 33.3% in
fiscal 1998 compared to 36.6% in fiscal 1997, due to lower gross profit margin
in the equipment segment partially offset by higher gross profit margin in the
packaging materials segment. The equipment segment gross profit margin decreased
to 36.5% in fiscal 1998 from 41.6% in fiscal 1997 due primarily to the lower
unit volume which resulted in the absorption of manufacturing overhead costs by
fewer units. The packaging materials segment gross profit margin increased to
24.5% in fiscal 1998 compared to 19.1% in fiscal 1997 due primarily to improved
manufacturing efficiencies at its bonding wire and saw blade facilities.
Selling, general and administrative expenses ("SG&A") increased to $83.9 million
in fiscal 1998 from $80.2 million in fiscal 1997. This increase of $3.7 million
consisted of approximately $3.1million related to the equipment segment, $.4
million related to the packaging materials segment and $.2 million of
incremental corporate costs. The increase in the equipment segment SG&A was due
primarily to increased selling, marketing and customer support costs associated
with the launch of the new Model 8020 and 8060 wire bonders and increased
spending in connection with the planned 1999 implementation of the Company's new
Enterprise Resource Planning System, which will replace the segment's business
and accounting systems. The slight increase in the package materials SG&A costs
in fiscal 1998 was due to higher sales and distribution infrastructure costs.
Research and development costs ("R&D") increased to $48.7 million in fiscal 1998
from $46.0 million in the prior fiscal year. The majority of the R&D costs
incurred were in the equipment segment and were due to increased internal labor,
higher outside contract development costs and increased expenditures for
prototype materials as the Company continued development of additional products
in the 8000 family of wire bonders. The Company also continues to invest in new
technologies which may eventually lead to improved and alternative semiconductor
assembly technologies. Gross R&D expenditures were partially offset by funding
received from customers and governmental subsidies totaling $1.7 million in
fiscal 1998 compared to $2.0 million in fiscal 1997.
13
<PAGE>
The Company recorded resizing costs of $8.4 million in the fourth quarter of
fiscal 1998 reflecting the Company's efforts to reduce its workforce and
discontinue products in response to the industry-wide slowdown in orders for
semiconductor assembly equipment and to a lesser extent semiconductor packaging
materials. The resizing costs consisted of $5.0 million of severance, $2.8
million of asset write-offs associated with discontinued products and $.6
million of other liabilities associated with the resizing (See Note 2 to the
Company's Consolidated Financial Statements). At September 30, 1998, the Company
had accrued liabilities of $3.7 million in connection with the resizing charges,
the majority of which will be paid by the end of fiscal 1999. The Company
expects additional resizing charges in the first quarter of fiscal 1999 of less
than $1.0 million and, if industry conditions do not improve, may incur
additional resizing charges in subsequent quarters of fiscal 1999.
Loss from operations in fiscal 1998 was $4.2 million compared to operating
income of $57.7 million in fiscal 1997. The unfavorable variance to fiscal 1997
was due primarily to lower unit sales volume and gross profit in the Company's
equipment segment and to resizing charges, both the result of the slowdown in
the semiconductor industry. Partially off setting the lower operating income in
the equipment segment was a $3.8 million improvement in operating income in the
Company's packaging materials segment, excluding resizing charges.
Interest income, net of interest expense, increased by $4.7 million in fiscal
1998 compared to fiscal 1997, primarily due to the investment of net proceeds
from the Company's May 1997 public offering of common stock for a full year in
fiscal 1998 compared to a partial year in fiscal 1997 and to the paydown of all
outstanding bank debt with a portion of the proceeds of the public offering in
May 1997.
During fiscal 1998, the Company recognized an $8.8 million pre-tax loss from its
51% equity interest in FCT compared to a pre-tax loss of $6.7 million in fiscal
1997. The increase in the loss in fiscal 1998 resulted from delays in potential
customers' evaluations of FCT's manufacturing process and the generally soft
business environment in the semiconductor industry, along with a ramp-up of
FCT's production facility. See the discussion of FCT under the "Risk Factors"
section of this Item 7 and the financial statements in Item 8 for further
information regarding FCT.
The Company recorded a tax benefit of $1.9 million in fiscal 1998. The effective
tax rate of this benefit was 26%, resulting from U.S. pre-tax losses exceeding
foreign pre-tax income that was taxed at lower rates. The Company continues to
maintain a valuation allowance for deferred tax assets related to the acquired
domestic AFW net operating loss ("NOL") and NOL carryforwards of the Company's
Japanese subsidiary, since the Company cannot reasonably forecast sufficient
future earnings by these subsidiaries to fully utilize the NOL's during the
carryforward period. If benefits of the acquired NOL carryforward are realized,
such tax benefits would reduce the recorded amount of AFW goodwill.
The net loss for fiscal 1998 was $5.4 million compared to net income of $38.3
million in fiscal 1997, for the reasons enumerated above.
Fiscal Years Ended September 30, 1997 and September 30, 1996
During the 1997 fiscal year, the Company recorded bookings totaling $550.0
million compared to $358.4 million during fiscal 1996. The $191.6 million
increase in fiscal 1997 equipment bookings primarily reflected a significant
improvement in demand for semiconductor assembly equipment, principally gold
ball bonders, compared to the declining demand experienced throughout fiscal
1996. At September 30, 1997, total backlog of customer orders approximated
$118.0 million compared to $69.0 million at September 30, 1996.
Net sales for the 1997 fiscal year increased by $120.7 million to $501.9 million
from $381.2 million in fiscal 1996. This improvement generally reflected a
reversal of the fiscal 1996 trend of declining quarterly sales. Equipment
segment net sales increased to $391.7 million in fiscal 1997 compared to $287.2
million in fiscal 1996. During fiscal 1997, the Company sold more than 3,000
ball bonders compared to slightly more than 1,800 units during fiscal 1996.
Additionally, increased unit sales of automatic dicing saws contributed to the
fiscal 1997 increase. These volume increases were offset, in part, by lower
selling prices for the Model 1488 plus ball bonder line compared to the average
selling prices realized on ball bonders during fiscal 1996, and by reduced unit
sales of the Model SP2100 Tab bonder in fiscal 1997 compared to fiscal 1996.
Packaging materials segment net sales increased to $110.2 million in fiscal 1997
from $93.9 million in fiscal 1996. Of this increase, $6.3 million was
attributable to sales of hub blades following the October 1996 Semitec
acquisition and $8.8 million was due to increased sales volume of bonding wire,
which was
14
<PAGE>
offset, in part, by the effect on revenues of declining gold prices.
International sales (shipments of the Company's products with ultimate foreign
destinations) comprised 85% and 79% of the Company's total sales during fiscal
1997 and 1996, respectively. Sales to customers in the Asia/Pacific region,
including Korea, Taiwan, Malaysia, Philippines, Japan, Singapore, Thailand and
Hong Kong, accounted for approximately 76% and 72% of the Company's total sales
in fiscal 1997 and 1996, respectively. During fiscal 1997, total shipments
(including export sales) to customers located in Taiwan, Korea and Malaysia
accounted for approximately 22%, 19% and 13% of net sales, compared to 14%, 16%
and 14%, respectively, for the 1996 fiscal year.
Gross profit increased to $183.9 million for fiscal 1997 from $142.1 million for
fiscal 1996 due primarily to the fiscal 1997 increased unit volume of equipment
sales. Gross profit as a percentage of net sales decreased slightly to 36.6% in
fiscal 1997 compared to 37.3% in fiscal 1996, with declines being experienced in
both the equipment and packaging materials segments. The equipment segment gross
profit margin decreased to 41.6% in fiscal 1997 from 43.0% in fiscal 1996, due
primarily to lower average selling prices on ball bonders and reduced fiscal
1997 sales of higher margin upgrade kits and accessories compared to fiscal 1996
levels. The packaging materials segment gross profit margin declined to 19.1% in
fiscal 1997 compared to 19.9% in fiscal 1996. A shift in sales mix to lower
margin wire products in fiscal 1997 was the primary reason for this decline.
Selling, general and administrative expenses ("SG&A") increased to $80.2 million
in fiscal 1997 from $69.5 million in fiscal 1996. This increase of $10.7 million
consisted of approximately $4.3 million related to the equipment segment, $5.9
million related to the packaging materials segment and $.5 million of
incremental corporate costs. Fiscal 1997 SG&A costs included incremental costs
resulting from the October 1996 Semitec acquisition, generally higher employment
costs related to the increased sales volume, higher sales and management
incentive compensation costs due to improved fiscal 1997 sales and profitability
and costs incurred to relocate the Company's Micro-Swiss and AFW Singapore
manufacturing operations into new facilities during the year.
The impact of these increases was offset, in part, by certain non-recurring
equipment segment and corporate costs incurred in connection with the Company's
August 1996 resizing initiatives.
Research and development costs ("R&D") decreased to $46.0 million in fiscal 1997
from $52.2 million for the prior fiscal year. The majority of the R&D costs
incurred were in the equipment segment, and reflected lower outside contract
development costs and lower expenditures for prototype materials. During fiscal
1997, the Company continued to invest heavily in the development of the 8000
series wire bonders and the enhancement of many of its existing products,
including, but not limited to, the Model 1488 plus ball bonder and Model 1474fp
wedge bonder, to enable them to meet customer requirements for higher lead count
devices with finer pitch requirements at faster bonding speeds. The Company also
continues to invest in new technologies which may eventually lead to improved
and alternative semiconductor assembly technologies. Gross R&D expenditures were
partially offset by funding received from customers and governmental subsidies
totaling $2.0 million in fiscal 1997 compared to $2.5 million in fiscal 1996.
Income from operations increased to $57.7 million in fiscal 1997 from $17.4
million in fiscal 1996. This improvement resulted principally from the higher
net sales and gross profit in the equipment segment, offset, in part, by the
increased operating expenses noted above. The packaging materials segment
operating income declined to a break-even level in fiscal 1997 from $4.1 million
in fiscal 1996, primarily reflecting costs incurred in fiscal 1997 to relocate
the Micro-Swiss and AFW Singapore operations to new facilities, severance costs
and incremental costs to expand the packaging materials marketing and
distribution organizations.
Interest income, net of interest expense increased by approximately $1.0 million
in fiscal 1997 compared to fiscal 1996, primarily due to the investment of net
proceeds from the Company's May 1997 public offering of common stock. During
fiscal 1997, the Company recognized a $6.7 million loss from its equity interest
in FCT compared to a loss of $1.0 million in fiscal 1996. The increase in the
loss in fiscal 1997 resulted from a full year of start up activities during
fiscal 1997 compared to only a partial year of early start up activities during
fiscal 1996.
The Company's effective tax rate increased to 26% for fiscal 1997 from 24.2% in
fiscal 1996. The increase resulted largely from an increase in income
attributable to operations in the United States. This increase was offset in
part by the reversal of valuation allowances established in prior years related
to U.S. tax credits.
Net income increased to $38.3 million in fiscal 1997 compared to $11.8 million
in fiscal 1996, for the reasons
15
<PAGE>
enumerated above.
Effect of Recent Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), which establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. The comprehensive income and related cumulative equity
impact of comprehensive income items will be required to be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Only the impact of foreign currency translation
adjustments and unrealized gains or losses on securities available for sale are
expected to be disclosed as potential additional components of the Company's
income under the requirements of SFAS No. 130. This Statement is effective for
fiscal years beginning after December 15, 1997.
In fiscal 1998, the Company adopted Statement of Financial Accounting Standard
(FAS) 131, Disclosures about Segments of an Enterprise and Related Information.
FAS 131 supersedes FAS 14, Financial Reporting for Segments of a Business
Enterprise, replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. FAS 131 also requires
disclosure about products and services, geographic areas, and major customers.
The adoption of FAS 131 did not affect results of operations or financial
position but did affect the disclosure of segment information (see Note 10 to
the Company's Consolidated Financial Statements herein).
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133") was issued. SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective for all fiscal quarters for financial
statements for fiscal years commencing after June 15, 1999. Management has not
completed its review of SFAS 133 and has not determined the impact adoption will
have on the Company's financial statements.
Liquidity and Capital Resources
As of September 30, 1998, cash and investments totaled $106.9 million compared
to $115.6 million at September 30, 1997, additionally, the Company has a total
of $60 million available under a bank revolving credit facility, which expires
in March 2003. Borrowings are subject to the Company's compliance with financial
and other covenants set forth in the revolving credit documents. At September
30, 1998, the Company was in compliance with the covenants of the credit
facility and had no borrowings outstanding under that facility. The revolving
credit facility provides for borrowings denominated in either U.S. dollars or
foreign currencies. Borrowings in U.S. dollars bear interest either at a Base
Rate (defined as the greater of the prime rate minus 1/4% or the federal funds
rate plus 1/2%) or, at a LIBOR Rate (defined as LIBOR plus .4% to .8% depending
on the Company's leverage ratio). Foreign currency borrowings bear interest at a
LIBOR Rate, as defined above, applicable to the foreign currency.
During the past three fiscal years, the Company has financed its operations
principally through cash flows from operations. Cash generated by operating
activities totaled $21.7 million during fiscal 1998 compared to $42.0 million
during fiscal 1997 and $38.9 million in fiscal 1996. The lower cash generated
from operating activities was primarily the result of the net loss recorded by
the Company in fiscal 1998 due to the lower unit sales volume in the Company's
equipment segment.
At September 30, 1998, working capital was $182.2 million compared to $190.2
million at September 30, 1997. The lower working capital was due primarily to a
$39.0 million reduction in accounts receivable reflecting the significantly
reduced sales volume during the latter half of fiscal 1998, partially offset by
lower trade accounts payable of $23.2 million also reflecting the lower sales
and, therefore, production volume in the latter half of fiscal 1998.
During fiscal 1998, the Company invested approximately $16.2 million in property
and equipment, primarily for retooling of its equipment manufacturing facilities
for the transition to the 8000 series of machines, an increase in capacity for
the packaging and materials business and upgrading computer hardware and
software systems in connection with the implementation of a new Enterprise
Resource Planning System ("ERPS") which will become operational in
16
<PAGE>
fiscal 1999. The Company presently expects fiscal 1999 capital spending to
approximate $10.0 million. The principal capital projects planned for fiscal
1999 include the purchase of additional tooling and equipment necessary to
enhance and manufacture the 8000 series of machines, additional increases in
manufacturing capacity for the packaging and materials business segment and
additional investments in the new ERPS.
Pursuant to the terms of the FCT joint venture agreement, the Company made
capital contributions of $16.8 million through September 30, 1998. In addition,
the Company entered into three separate loan agreements totaling $22.0 million
with FCT during fiscal 1997 and 1998. As of September 30, 1998, $19.5 million
had been loaned to FCT under these loan agreements. During the first quarter of
fiscal 1999, the remaining $2.5 million was borrowed by FCT. Additionally, the
Company and FCT entered into a fourth loan agreement, whereby, the Company
committed to loan up to an additional $8.0 million to FCT during fiscal 1999 and
advanced $2.0 to FCT under this fourth agreement. The loans bear interest at the
prime rate plus 1 1/2%. During the first quarter of fiscal 1999, the Company
gave notice to FCT of its desire to convert the loans, together with accrued
interest, into equity units. See the "Risk Factors" section of this Item 7 for a
further discussion of FCT.
The Company entered into a joint venture agreement, in September 1998, to
develop, manufacture and market advanced polymer materials for semiconductor and
microelectronic packaging end users. The Company has committed to invest up to
$6.0 million in this joint venture.
The Company believes that anticipated cash flows from operations, its working
capital and amounts available under its revolving credit facilities will be
sufficient to meet the Company's liquidity and capital requirements for at least
the next 12 months. However, the Company may seek, as required, equity or debt
financing to provide capital for corporate purposes and/or to fund strategic
business opportunities, including possible acquisitions, joint ventures,
alliances or other business arrangements 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 the Company's products, semiconductor and semiconductor capital equipment
industry conditions and competitive factors and the nature and size of strategic
business opportunities which the Company may elect to pursue.
Risk Factors
Semiconductor Industry Volatility
The Company's operating results primarily depend upon the capital expenditures
of semiconductor manufacturers and subcontract assemblers worldwide which, in
turn, depend on the current and anticipated market demand for semiconductors and
products using semiconductors. The semiconductor industry historically has been
highly volatile and has experienced periodic downturns and slowdowns which have
had a severe negative effect on the semiconductor industry's demand for capital
equipment, including assembly equipment manufactured and marketed by the Company
and, to a lesser extent, packaging materials such as those sold by the Company.
These downturns and slowdowns have also adversely affected the Company's
operating results and the Company believes that such volatility will continue to
characterize the industry and to impact the Company's operations in the future.
Product Concentration
A significant portion of the Company's revenue is derived from sales of a
relatively small number of machines, most with selling prices ranging from
$60,000 to over $400,000. A delay in the shipment of a limited quantity of
machines, either due to manufacturing delays or to rescheduling or cancellations
of customer orders, could have a material adverse effect on the results of the
operations for any particular fiscal year or quarter.
Rapid Technology Change
The semiconductor and semiconductor equipment industries are subject to rapid
technological change and frequent new product introductions and enhancements.
The Company believes that its continued success will depend upon the extent to
which it is able to continuously develop and manufacture or otherwise acquire
new products and product enhancements and to introduce them into the market in
response to demands for higher performance assembly equipment.
17
<PAGE>
New Product Introduction
The Company incurred incremental costs in fiscal 1998 and is likely to incur
additional costs during the customer evaluation and qualification process of the
Company's newly introduced 8000 family of wire bonders to ensure the
functionality and reliability of these new products. The Company's inability to
successfully qualify new products, or its inability to manufacture and ship
these products in volume and on a timely basis, could adversely affect the
Company's competitive position.
Furthermore, to the extent the Company fails to accurately forecast demand in
volume and configuration for both its current and next-generation wire bonders
and generally to manage product transitions successfully, it could experience
reduced orders, delays in product shipments and increased risk of inventory
obsolescence. There can be no assurance that the Company will successfully
introduce and manufacture new products, that new products introduced by the
Company will be accepted in the marketplace or that the Company will manage its
product transitions successfully. The Company's failure to do any of the
foregoing could materially adversely affect the Company's business, financial
condition and operating results.
Dependence on Key Customers
Sales to a relatively small number of customers have accounted for a significant
percentage of the Company's net sales. In fiscal 1998, sales to Intel accounted
for 17.6% of the Company's net sales. During fiscal 1997, sales to Anam (a
Korean-based customer) and Intel accounted for 12.5% and 10.2%, respectively, of
the Company's net sales. During fiscal 1996, sales to Anam and Intel accounted
for approximately 14.3% and 11.2%, respectively, of the Company's net sales.
Sales to these and other customers might be affected by a number of factors
including the transition from conventional assembly techniques to alternative
methods of semiconductor assembly for future generation products. The timing of
such a transition and the impact on the Company, if any, can not be determined
at this time. In the event a current customer would transition to an alternative
method, the Company's failure to acquire replacement customers for its equipment
business could have a material adverse affect on the Company's financial
condition and operating results.
Dependence on Key Suppliers
The Company relies on subcontractors to produce to the Company's specifications
many of the materials, components or subassemblies used in its products. Certain
of the Company's products, however, require components or assemblies of an
exceptionally high degree of reliability, accuracy and performance. Currently
there are a number of such items for which there are only a single or limited
number of suppliers which have been accepted by the Company as qualified
suppliers. The Company generally does not maintain long-term contracts with its
subcontractors and suppliers. While the Company does not believe that its
business is substantially dependent on any contract or arrangement with any of
its subcontractors or suppliers, the Company's reliance on subcontractors and
single source suppliers involves a number of significant risks, including the
loss of control over the manufacturing process, the potential absence of
adequate capacity and the reduced control over delivery schedules, manufacturing
yields, quality and costs. Further, certain of the Company's subcontractors and
suppliers are relatively small operations and have limited financial and
manufacturing resources. In the event that any significant subcontractor or
single source supplier were to become unable or unwilling to continue to
manufacture or sell subassemblies, components or parts to the Company in
required volumes and of acceptable quality levels and prices, the Company would
have to identify and qualify acceptable replacements. The process of qualifying
subcontractors and suppliers could be lengthy, and no assurance can be given
that any additional sources would be available to the Company on a timely basis.
Sales to Foreign Customers
Most of the Company's foreign sales are denominated in US dollars, and the
Company believes that the increase in value of the US dollar relative to certain
foreign currencies in fiscal 1998 has made the Company's products more expensive
in relation to products offered by certain of the Company's foreign competitors.
In addition, a majority of the Company's sales are to customers with operations
in the Asia/Pacific region which has been adversely affected by economic
turmoil. There can be no assurance that selling prices of future orders or that
the economic problems that persist in the Asia/Pacific region will not have a
material adverse effect on the Company's business and operating results.
18
<PAGE>
Dependence on Key Personnel
The future success of the Company is dependent upon its ability to hire and
retain qualified management, marketing and technical employees. Competition in
the recruiting of personnel in the semiconductor and semiconductor equipment
industry is intense, particularly with respect to certain engineering
disciplines. The inability for the Company to continue to attract and retain the
necessary technical and managerial personnel could have a material adverse
effect on the Company's business and operating results.
Intellectual Property
From time to time, third parties assert that the Company is, or may be,
infringing or misappropriating their intellectual property rights. In such
cases, the Company will defend against claims or negotiate licenses where
considered appropriate. In addition, certain of the Company's customers have
received notices of infringement from the Lemelson Medical, Education and
Research Foundation Limited Partnership (the "Lemelson Foundation"), alleging
that equipment supplied by the Company, and processes performed by such
equipment, infringe on patents held by the Lemelson Foundation. This activity
increased substantially in 1998, since in June of this year the Lemelson
Foundation settled its suit against the Ford Motor Company, and entered into
License Agreements with Ford, GM and Chrysler. Since then a number of the
Company's customers, including Intel, have been sued by the Lemelson Foundation.
Certain customers have requested that the Company defend and indemnify them
against the claims of the Lemelson Foundation or to contribute to any settlement
the customer reaches with the Lemelson Foundation. To date, however, no customer
who has settled with the Lemelson Foundation has, after settlement, sought
contribution from the Company. The Company has received opinions from its
outside patent counsel with respect to certain of the Lemelson Foundation
patents. The Company is not aware that any equipment marketed by the Company, or
process performed by such equipment infringe on the Lemelson Foundation patents
in question and does not believe that the Lemelson Foundation matter or any
other pending intellectual property claim will have a material adverse effect on
its business, financial condition or operating results. However, the ultimate
outcome of any infringement or misappropriation claim affecting the Company is
uncertain and there can be no assurances that the resolution of these matters
will not have a material adverse effect on the Company's business, financial
condition and operating results.
Volatility of Common Stock Price
The market price for the Company's common stock has been volatile and it could
continue to be subject to significant fluctuations in response to market or
industry conditions generally, or specific variations in quarterly operating
results, shortfalls in revenue or earnings from levels expected by securities
analysts and other factors, such as announcements of reductions in force,
departure of key employees, introduction of new products by the Company or by
the Company's competitors, disruptions with key customers or the occurrence of
political, economic or environmental events globally or in key sales regions. In
addition, the stock market has in recent years experienced significant price
fluctuations. These fluctuations often have been unrelated to the operating
performance of specific companies whose stocks are traded. Recent fluctuations
affecting the Company's common stock have been tied in part to the Asian
financial crisis and the price of semiconductors. Broad market fluctuations, as
well as economic conditions generally in the semiconductor industry, may
adversely affect the market price of the Company's common stock.
Investment in Flip Chip Technologies, LLC
In February 1996, the Company entered into a joint venture agreement with Delco
Electronics Corporation ("Delco") providing for the formation and management of
Flip Chip Technologies, L.L.C. ("FCT"). FCT was formed to provide wafer bumping
services on a contract basis and to license related technologies. The Company
owns a 51% equity interest in FCT but participates equally with Delco in the
management of FCT through an Executive Committee. Accordingly, the Company
accounts for its investment in FCT using the equity method, and recognizes its
proportionate share of the operating results of the joint venture on the basis
of its ownership interest. Through September 30, 1998, the Company had
contributed $16.8 million of capital and had loaned $19.5 million to FCT
pursuant to three revolving loan agreements.
Subsequent to September 30, 1998 the Company signed a fourth revolving loan
agreement for up to $8.0 million and committed to provide additional funding, if
required, in fiscal 1999. In the first quarter of fiscal 1999 FCT borrowed the
remaining $2.5 million available under loans issued prior to September 30, 1998
and borrowed $2.0 million under the
19
<PAGE>
fourth loan agreement. The loans bear interest at the prime rate plus 1 1/2%
(9.75% at September 30, 1998) and are secured by FCT's accounts receivable,
inventory and machinery and equipment. The loans are due on various dates
through November 19, 2000 with interest payable generally upon maturity. The
loans are convertible, at the Company's option, into additional equity units of
FCT. Under these agreements Delco also has certain rights, to purchase
additional equity units of FCT. On November 4, 1998, the Company notified Delco
of its desire to convert the outstanding loans into additional equity units of
FCT, subject to an appraisal of FCT and the value of an equity unit. Until the
appraisal is completed and the conversion valuation is determined the Company
cannot be certain as to if or when the conversion of the outstanding loans to
FCT equity units will take place. However, due to uncertainties surrounding
FCT's ability to obtain additional financing from Delco and its ability to
generate short-term positive cash flow, the Company expects that beginning in
fiscal 1999 it will recognize 100% of the operating results of FCT in its
financial statements and it will not record interest income from its loans to
FCT.
As a result of delays in the customers' evaluations of FCT's manufacturing
process and the generally soft business environment in the semiconductor
industry, FCT has not generated substantial operating revenues to date. The
Company is currently working with FCT management to balance FCT's planned
expense and spending levels with available financial resources but expects FCT
to report a loss from operations in fiscal 1999. The joint venture is subject to
numerous risks common to business arrangements of this nature. There can be no
assurance that FCT will ever become profitable, that the Company will make
additional capital contributions and loans to FCT, or that the anticipated
benefits of FCT will ever be realized. If FCT does not become profitable and
cash flow positive, the Company's business, financial condition and operating
results could be materially adversely affected.
Year 2000
The Year 2000 compliance issue (in which systems do not properly recognize date
sensitive information when the year changes to 2000) create risks for the
Company: if internal data management, accounting and/or manufacturing or
operating software and systems do not adequately or accurately process or manage
day or date information beyond the year 1999, there could be an adverse impact
on the Company's operations. To address the issue, the Company created an
internal task force to assess its state of readiness for possible "Year 2000"
issues and take the necessary actions to ensure Year 2000 compliance. The task
force has and continues to evaluate internal business systems, software and
other components which affect the performance of Company's products, and the
Company's vulnerability to possible "Year 2000" exposures due to suppliers' and
other third parties' lack of preparedness for the year 2000. To evaluate certain
equipment sold by the Company and certain equipment, tools and software used by
the Company, the Company employs Year 2000 Readiness Test scenarios established
by SEMATECH, an industry group comprised of U.S. semiconductor manufacturers.
Based on this assessment, the Company does not believe operation of such
equipment will be affected by the transition to the year 2000. The Company
expects that its review, corrective measures and contingency planning (where
necessary) will be complete by September 1999.
In connection with its review and corrective measures, the Company is currently
in the process of replacing the business and accounting systems of its equipment
manufacturing sites in the US and Israel with a new Enterprise Resource Planning
System ("ERPS") which is "Year 2000" compliant. As of September 30, 1998, the
Company has spent approximately $7.0 million in hardware, software, consulting
costs and internal expenses to implement the new ERPS and expects to spend an
additional $1.0 million in fiscal 1999 to complete the implementation. The
Company's system implementation plan currently anticipates conversion to the new
ERPS by the Willow Grove and Israeli equipment manufacturing facilities in the
second quarter of fiscal 1999. In addition to the direct costs of implementing
the ERPS the Company expects to spend approximately $1.0 million to train its
employees in the use of the ERPS and upgrade other hardware and software systems
to Year 2000 compliant status.
In addition, the Company has been in contact with its suppliers and other third
parties to determine the extent to which they may be vulnerable to "Year 2000"
issues. As this assessment progresses, matters may come to the Company's
attention which could give rise to the need for remedial measures which have not
yet been identified. As a contingency, the Company may replace the suppliers and
third party vendors who can not demonstrate to the Company that their products
or services will be Year 2000 compliant. The Company cannot currently predict
the potential effect of third parties' "Year 2000" issues on its business.
The Company believes that its Year 2000 compliance project will be completed in
advance of the Year 2000 date transition and will not have a material adverse
effect on the Company's financial condition or overall trends in the results of
operations. However, there can be no assurance that unexpected delays or
problems, including the failure to ensure Year 2000 compliance by systems or
products supplied to the Company by a third party, will not have an adverse
effect
20
<PAGE>
on the Company, its financial performance, or the competitiveness or customer
acceptance of its products.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At September 30, 1998, the Company had a non-trading investment portfolio of
fixed income securities, excluding those classified as cash and cash
equivalents, of $30.4 million (see Note 4 of the Company's Consolidated
Financial Statements). These securities, like all fixed income instruments, are
subject to interest rate risk and will fall in value if market interest rates
increase. If market interest rates were to increase immediately and uniformly by
100 basis points from levels as of September 30, 1998, the fair market value of
the portfolio would decline by approximately $200,000.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated Financial Statements of Kulicke and Soffa Industries, Inc. and
its subsidiaries and Flip Chip Technologies, LLC, listed in the index appearing
under Item 14 (a)(1)(a) and (b) herein are filed as part of this Report.
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Kulicke and Soffa Industries, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1)(a) and (2) on page 53 of this Annual Report on
Form 10-K present fairly, in all material respects, the financial position of
Kulicke and Soffa Industries, Inc. and its subsidiaries at September 30, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended September 30, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
November 19, 1998
22
<PAGE>
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
September 30,
-----------------------------
1998 1997
----------- ----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (including time
deposits; 1998 - $ 2,166; 1997 - $723) $ 76,478 $ 107,605
Short-term investments 30,422 7,982
Accounts and notes receivable (less allowance for doubtful
accounts; 1998 - $ 1,677; 1997 - $2,149) 66,137 105,103
Inventories, net 47,573 45,602
Prepaid expenses and other current assets 5,303 4,391
Refundable income taxes 5,270 --
Deferred income taxes 2,608 1,521
--------- ---------
TOTAL CURRENT ASSETS 233,791 272,204
Property, plant and equipment, net 48,269 45,648
Intangible assets, primarily goodwill, net 38,765 42,724
Investments in and loans to joint venture 19,920 14,135
Other assets 1,839 2,108
--------- ---------
TOTAL ASSETS $ 342,584 $ 376,819
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 192 $ 780
Accounts payable 24,223 47,408
Accrued expenses 23,549 24,932
Income taxes payable 3,646 8,864
--------- ---------
TOTAL CURRENT LIABILITIES 51,610 81,984
Long-term debt -- 220
Other liabilities 3,064 2,688
--------- ---------
TOTAL LIABILITIES 54,674 84,892
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 12) -- --
SHAREHOLDERS' EQUITY:
Preferred stock, without par value:
Authorized - 5,000 shares; issued - none -- --
Common stock, without par value:
Authorized - 100,000 shares; issued and
outstanding: 1998 - 23,367; 1997 - 23,237 157,986 155,246
Retained earnings 133,964 139,404
Cumulative translation adjustment (4,156) (2,723)
Unrealized gain on investments, net 116 --
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 287,910 291,927
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 342,584 $ 376,819
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-------------------------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 411,040 $ 501,907 $ 381,176
Cost of goods sold 274,207 318,002 239,114
--------- --------- ---------
Gross profit 136,833 183,905 142,062
Selling, general and administrative 83,854 80,212 69,465
Research and development, net 48,715 46,030 52,213
Resizing costs 8,420 -- 2,966
--------- --------- ---------
Income(loss) from operations (4,156) 57,663 17,418
Interest income 5,776 3,151 3,124
Interest expense (262) (2,331) (3,288)
Equity in loss of joint venture (8,715) (6,701) (994)
Other expense -- -- (630)
--------- --------- ---------
Income(loss) before taxes (7,357) 51,782 15,630
Provision(benefit) for income taxes (1,917) 13,463 3,783
--------- --------- ---------
Net income(loss) $ (5,440) $ 38,319 $ 11,847
========= ========= =========
Net income(loss) per share:
Basic $ (0.23) $ 1.84 $ 0.61
Diluted $ (0.23) $ 1.79 $ 0.60
Weighted average shares outstanding:
Basic 23,301 20,871 19,375
Diluted 23,301 21,428 19,788
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-----------------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ (5,440) $ 38,319 $ 11,847
Adjustments to reconcile net income(loss) to
net cash provided by operating activities:
Depreciation and amortization 13,250 11,329 9,658
Provision for doubtful accounts 29 1,065 178
Provision for impairment of goodwill 948 -- --
Deferred taxes on income (1,087) 244 (2,125)
Provision for inventory reserves 4,132 2,593 4,547
Equity in loss of joint venture 8,715 6,701 994
Loss on write off and disposal of property and equipment 1,484 -- --
Non-cash employee benefits 2,240 1,793 1,580
Changes in components of working capital,
excluding effects of business acquisitions:
Decrease (increase) in accounts receivable 38,937 (57,960) 38,959
Decrease (increase) in inventories (6,103) (3,201) (6,358)
Increase in prepaid expenses and
other current assets (912) (35) (483)
(Increase) collection of refundable income taxes (5,270) 6,212 --
Increase (decrease) in accounts payable and
accrued expenses (24,568) 30,668 (11,632)
Increase (decrease) in taxes payable (4,446) 3,527 (8,076)
Other, net (185) 726 (216)
--------- --------- ---------
Net cash provided by operating activities 21,724 41,981 38,873
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of net assets of Semitec in 1997;
AFW in 1996, net of cash acquired -- (4,510) (43,020)
Purchases of investments classified
as available-for-sale (108,482) (4,451) (28,512)
Proceeds from sales or maturities of investments:
Classified as available-for-sale 86,199 9,967 26,802
Classified as held-to-maturity -- -- 505
Purchases of plant and equipment (16,062) (13,516) (18,028)
Proceeds from sale of property and equipment 436 -- 781
Investments in and loans to joint venture (14,500) (19,280) (2,550)
--------- --------- ---------
Net cash used by investing activities (52,409) (31,790) (64,022)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on borrowings, including capitalized leases (808) (51,065) (8,537)
Proceeds from borrowings -- -- 50,000
Proceeds from issuances of common stock 385 103,112 394
--------- --------- ---------
Net cash provided by (used in) financing activities (423) 52,047 41,857
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (19) 23 12
--------- --------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS (31,127) 62,261 16,720
CASH AND CASH EQUIVALENTS AT:
BEGINNING OF YEAR 107,605 45,344 28,624
--------- --------- ---------
END OF YEAR $ 76,478 $ 107,605 $ 45,344
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements. See Note 6 for disclosure of non-cash financing activities.
25
<PAGE>
<TABLE>
<CAPTION>
KULICKE AND SOFFA INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Unrealized
Common Stock Cumulative Gain Total
----------------------- Retained Translation (Loss) on Shareholders'
Shares Amount Earnings Adjustment Investments Equity
--------- --------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1995 19,310 $ 45,757 $ 89,238 $ (1,348) $ -- $ 133,647
Employer contribution to the
401(k) plan 84 1,580 -- -- -- 1,580
Exercise of stock options 39 394 -- -- -- 394
Tax benefit from exercise of
stock options -- 1,002 -- -- -- 1,002
Translation adjustment -- -- -- (981) -- (981)
Net income -- -- 11,847 -- -- 11,847
--------- --------- --------- --------- --------- ---------
Balances at September 30, 1996 19,433 48,733 101,085 (2,329) -- 147,489
Common stock sold 3,450 101,103 -- -- -- 101,103
Employer contribution to the
401(k) plan 92 1,793 -- -- -- 1,793
Exercise of stock options 262 2,009 -- -- -- 2,009
Tax benefit from exercise of
stock options -- 1,608 -- -- -- 1,608
Translation adjustment -- -- -- (394) -- (394)
Net income -- -- 38,319 -- -- 38,319
--------- --------- --------- --------- --------- ---------
Balances at September 30, 1997 23,237 155,246 139,404 (2,723) -- 291,927
Employer contribution to the
401(k) plan 89 2,240 -- -- -- 2,240
Exercise of stock options 41 385 -- -- -- 385
Tax benefit from exercise of
stock options -- 115 -- -- -- 115
Translation adjustment -- -- -- (1,433) -- (1,433)
Unrealized gain on investments, net -- -- -- -- 116 116
Net loss -- -- (5,440) -- -- (5,440)
--------- --------- --------- --------- --------- ---------
Balances at September 30, 1998 23,367 $ 157,986 $ 133,964 $ (4,156) $ 116 $ 287,910
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
KULICKE AND SOFFA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements include the accounts of Kulicke and
Soffa Industries, Inc. and its subsidiaries (the "Company"), with appropriate
elimination of intercompany balances and transactions.
Nature of Business - The Company manufactures capital equipment and packaging
materials used in the assembly of semiconductors. The Company's operating
results primarily depend upon the capital expenditures of semiconductor
manufacturers and subcontract assemblers worldwide which, in turn, depend on the
current and anticipated market demand for semiconductors and products utilizing
semiconductors. The semiconductor industry historically has been highly volatile
and experienced periodic downturns and slowdowns which have had a severe
negative effect on the semiconductor industry's demand for semiconductor capital
equipment, including assembly equipment manufactured and marketed by the Company
and, to a lesser extent, packaging materials such as those sold by the Company.
These downturns and slowdowns have also adversely affected the Company's
operating results. The Company believes such volatility will continue to
characterize the industry and the Company's operations in the future.
The semiconductor and semiconductor equipment industries are subject to rapid
technological change and frequent new product introductions and enhancements.
The Company invests substantial amounts in research and development to
continuously develop and manufacture new products and product enhancements in
response to demands for higher performance assembly equipment. In addition, the
Company continuously pursues investments in alternative packaging technologies.
The Company's inability to successfully develop new products and product
enhancements or to effectively manage the introduction of new products into the
marketplace could have a material adverse effect on the Company's results of
operations, financial condition and liquidity.
Management Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The more significant areas involving the use of
estimates in these financial statements include allowances for uncollectible
accounts receivable, reserves for excess and obsolete inventory carrying value
and lives of fixed assets, goodwill and intangibles assets, valuation allowances
for deferred tax assets and deferred tax liabilities for unrepatriated earnings.
Actual results could differ from those estimated.
Vulnerability to Certain Concentrations - Financial instruments which may
subject the Company to concentration of credit risk at September 30, 1998 and
1997 consist primarily of investments and trade receivables. The Company manages
credit risk associated with investments by investing its excess cash in
investment grade debt instruments of the U.S. Government, financial institutions
and corporations. The Company has established investment guidelines relative to
diversification and maturities designed to maintain safety and liquidity. These
guidelines are periodically reviewed and modified to take advantage of trends in
yields and interest rates. The Company's trade receivables result primarily from
the sale of semiconductor equipment, related accessories and replacement parts
and packaging materials to a relatively small number of large manufacturers in a
highly concentrated industry. The Company continually assesses the financial
strength of its customers to reduce the risk of loss. Accounts receivable at
September 30, 1998 and 1997 included notes receivable of $524 and $50,
respectively. Write-offs of uncollectible accounts have historically been
insignificant.
Sales to a relatively small number of customers account for a significant
percentage of the Company's net sales. In fiscal 1998, sales to Intel accounted
for 17.6% of the Company's net sales. During fiscal 1997, sales to Anam (a
Korea-based customer) and Intel accounted for approximately 12.5% and 10.2%,
respectively, of the Company's net sales. In fiscal 1996, sales to Intel and
Anam accounted for 14.3% and 11.2%, respectively. The Company expects sales of
its products to a limited number of customers will continue to account for a
high percentage of net sales for the foreseeable future. The reduction or loss
of orders from a significant customer could adversely affect the Company's
business, financial condition and operating results.
The Company relies on subcontractors to manufacture to the Company's
specifications many of the components or
27
<PAGE>
subassemblies used in its products. Certain of the Company's products require
components or parts of an exceptionally high degree of reliability, accuracy and
performance for which there are only a limited number of suppliers or for which
a single supplier has been accepted by the Company as a qualified supplier. If
supplies of such components or subassemblies were not available from any such
source and a relationship with an alternative supplier could not be promptly
developed, shipments of the Company's products could be interrupted and
re-engineering of the affected product could be required. Such disruptions could
have a material adverse effect on the Company's results of operations.
Cash Equivalents - The Company considers all highly liquid investments with
original maturities of three months or less when purchased to be cash
equivalents.
Investments - Investments, other than cash equivalents, are classified as
"trading," "available-for-sale" or "held-to-maturity," depending upon the nature
of the investment, its ultimate maturity date in the case of debt securities,
and management's intentions with respect to holding the securities. Investments
classified as "trading" are reported at fair market value, with unrealized gains
or losses included in earnings. Investments classified as available-for-sale are
reported at fair market value, with net unrealized gains or losses reflected as
a separate component of shareholders' equity. Investments classified as
held-to-maturity are reported at amortized cost. Realized gains and losses are
determined on the basis of specific identification of the securities sold.
Inventories - Inventories are stated at the lower of cost (determined on the
basis of first-in, first-out) or market. Due to the volatility of demand for
capital equipment and the rapid technological change in the semiconductor
industry, the Company is vulnerable to risks of excess and obsolete inventory.
The Company generally provides reserves for inventory considered to be in excess
of 18 months of forecasted future demand.
Property, Plant and Equipment - Property, plant and equipment are carried at
cost. The cost of additions and those improvements which increase the capacity
or lengthen the useful lives of assets are capitalized while repair and
maintenance costs are expensed as incurred. Depreciation and amortization are
provided on a straight-line basis over the estimated useful lives as follows:
buildings 25 to 40 years; machinery and equipment 3 to 8 years; and leasehold
improvements based on the life of lease or life of asset. Purchased computer
software costs related to business and financial systems are amortized over a
five year period on a straight-line basis.
Intangible Assets - Goodwill resulting from acquisitions accounted for using the
purchase method is amortized on a straight-line basis over the estimated period
to be benefited by the acquisitions ranging from fifteen to twenty years. In
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," the carrying value of
long-lived assets, including goodwill, is evaluated whenever changes in
circumstances indicate the carrying amount of such assets may not be
recoverable. In performing such review for recoverability, the Company compares
the expected future cash flows to the carrying value of long-lived assets and
identifiable intangibles. If the anticipated undiscounted future cash flows are
less than the carrying amount of such assets, the Company recognizes an
impairment loss for the difference between the carrying amount of the assets and
their estimated fair value. If an asset being tested for recoverability was
acquired in a business combination accounted for using the purchase method, the
excess of cost over fair value of net assets that arose in that transaction is
allocated to the assets being tested for recoverability on a pro rata basis
using the relative fair values of the long-lived assets and identifiable
intangibles acquired at the acquisition date. In connection with the Company's
resizing efforts in fiscal 1998, the Company discontinued certain die bonder
products which the Company had acquired 1994, and recorded an impairment of
goodwill of $948.
Foreign Currency Translation - The U.S. dollar is the functional currency for
all subsidiaries except the Company's subsidiaries in Japan, Korea, Singapore,
Switzerland and Taiwan. Unrealized translation gains and losses resulting from
the translation of functional currency financial statement amounts into U.S.
dollars are not included in determining net income but are accumulated in the
cumulative translation adjustment account as a separate component of
shareholders' equity, in accordance with SFAS No. 52. Gain and losses resulting
from foreign currency transactions are included in the determination of net
income. Net exchange and transaction gains (losses) were ($147), ($135) and $57,
for the fiscal years ended September 30, 1998, 1997 and 1996, respectively.
28
<PAGE>
Revenue Recognition - Sales are recorded upon shipment of products or
performance of services. Expenses for estimated product returns, warranty and
installation costs are accrued in the period of sale recognition.
Research and Development Arrangements - The Company receives funding from
certain customers and government agencies pursuant to contracts or other
arrangements for the performance of specified research and development
activities. Such amounts are recognized as a reduction of research and
development expense when specified activities have been performed. During fiscal
1998, 1997 and 1996, reductions to research and development expense related to
such funding totaled $1,655, $2,018 and $2,473, respectively.
Income Taxes - Deferred income taxes are determined using the liability method
in accordance with SFAS No. 109, "Accounting for Income Taxes." No provision is
made for U.S. income taxes on undistributed earnings of foreign subsidiaries
which are indefinitely reinvested in foreign operations.
Earnings Per Share - In the fiscal 1998 first quarter ended December 31, 1997,
the Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," ("SFAS 128"). Under SFAS 128, basic earnings per share
includes only the weighted average number of common shares outstanding during
the period. Diluted earnings per share includes the weighted average number of
common shares and the dilutive effect of stock options and other potentially
dilutive securities outstanding during the period. All prior period earnings per
share amounts have been restated to reflect the requirements of SFAS 128. See
Note 11.
Accounting for Stock-based Compensation - In 1995, Statement of Financial
Accounting Standards No. 123 - "Accounting for Stock-Based Compensation" ("SFAS
No. 123") was issued. SFAS No. 123 defines the "fair value method" of accounting
for stock options or similar equity instruments, pursuant to which compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period. SFAS No. 123 permits companies to continue
to account for stock option grants using the "intrinsic value method" prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), and disclose the pro forma effect on net income and
earnings per share as if the fair value method had been applied to stock option
grants. The Company has elected to implement SFAS No. 123 on a disclosure basis
only (see Note 7).
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), which establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. The comprehensive income and related cumulative equity
impact of comprehensive income items will be required to be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Only the impact of foreign currency translation
adjustments and unrealized gains or losses on securities available for sale are
expected to be disclosed as potential additional components of the Company's
income under the requirements of SFAS No. 130. This Statement is effective for
fiscal years beginning after December 15, 1997.
In fiscal 1998, the Company adopted Statement of Financial Accounting Standard
(FAS) 131, Disclosures about Segments of an Enterprise and Related Information.
FAS 131 supersedes FAS 14, Financial Reporting for Segments of a Business
Enterprise, replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. FAS 131 also requires
disclosure about products and services, geographic areas, and major customers.
The adoption of FAS 131 did not affect results of operations or financial
position but did affect the disclosure of segment information (see "Segment
Information" Note 11).
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133") was issued. SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective for all fiscal quarters for financial
statements for fiscal years commencing after June 15, 1999. Management has not
completed its review of SFAS 133 and has not determined the impact adoption will
have on the Company's financial statements.
Reclassifications - Certain amounts in the Company's prior year financial
statements have been reclassified to conform to their presentation in the
current fiscal year.
29
<PAGE>
NOTE 2: RESIZING COSTS
During the quarter ended September 30, 1998, the Company announced plans to
resize its work force and discontinue products due to a recent slowdown in
orders for its semiconductor assembly capital equipment and to a lesser extent
for its semiconductor packaging materials. As a result of the resizing
activities, the Company reduced its worldwide workforce by approximately 21%.
The Company recorded a total resizing charge of $8,420 for severance, impairment
of goodwill associated with the 1994 acquisition of certain assets from Assembly
Technologies, product discontinuation costs (primarily write-off of fixed assets
and excess inventory) and other costs. The components of the resizing charge
consist of the following:
Fiscal 1998
-----------
Severance $4,953
Product discontinuation costs 1,891
Impairment of goodwill 948
Other 628
------
$8,420
======
At September 30, 1998, $3,716 of the resizing charge remains accrued on the
balance sheet representing anticipated future cash payments, the majority of
which will be paid in fiscal 1999. As of September 30, 1998, the Company had
made $1,865 of cash payments, relating primarily to severance. The Company
anticipates that there will be further charges in the first quarter of fiscal
1999 to complete the resizing activities. The aggregate amount of these
additional resizing charges in the first quarter of fiscal 1999 is not expected
to exceed $1,000.
Concurrent with the resizing charge in fiscal 1998 of $8,420, the Company
recorded charges in its cost of goods sold of $2,362 for excess and obsolete
inventory and $1,426 for purchase commitments resulting from the slowdown in
orders for its semiconductor assembly equipment.
In fiscal 1996, the Company recorded a resizing charge of $2,966, in response to
a rapid decline in customer demand for the Company's products. The fiscal 1996
resizing charge consisted of $1,189 for severance and $1,777 in connection with
a discontinued Willow Grove facility expansion.
NOTE 3: INVESTMENTS IN AND LOANS TO JOINT VENTURE
In February 1996, the Company entered into a joint venture agreement with Delco
Electronics Corporation ("Delco") providing for the formation and management of
Flip Chip Technologies, L.L.C. ("FCT"). FCT was formed to provide wafer bumping
services on a contract basis and to license related technologies.
The Company owns a 51% equity interest in FCT but participates equally with
Delco in the management of FCT through an Executive Committee. Accordingly, the
Company accounts for its investment in FCT using the equity method, and
recognizes its proportionate share of the operating results of the joint venture
on the basis of its ownership interest. For income tax purposes, FCT is treated
as a partnership. Accordingly, no provision for income taxes is included in
FCT's separate financial statements. Rather, the Company's proportionate share
of the results of FCT are reported on a pre-tax basis. Through September 30,
1998, the Company had contributed $16,800 of capital and had loaned $19,500 to
FCT pursuant to three revolving loan agreements.
Subsequent to September 30, 1998 the Company signed a fourth revolving loan
agreement for up to $8,000 and committed to provide additional funding, if
required, in fiscal 1999. In the first quarter of fiscal 1999 FCT borrowed the
remaining $2,500 available under loans issued prior to September 30, 1998 and
borrowed $2,000 under the fourth loan agreement. The loans bear interest at the
prime rate plus 1 1/2% (9.75% at September 30, 1998) and are secured by FCT's
accounts receivable, inventory and machinery and equipment. The loans are due on
various dates through November 19, 2000 with interest generally payable upon
maturity. The loans are convertible, at the Company's option, into additional
equity units of FCT. Under these agreements Delco also has certain rights to
purchase additional equity units of FCT. On November 4, 1998, the Company
notified Delco of its desire to convert the outstanding loans into additional
equity units of FCT, subject to an appraisal of FCT and the value of an equity
unit. Until the appraisal is
30
<PAGE>
completed and the conversion valuation is determined the Company cannot be
certain as to if or when the conversion of the outstanding loans to FCT equity
units will take place. However, due to uncertainties surrounding FCT's ability
to obtain additional financing from Delco and its ability to generate short-term
positive cash flow, the Company expects that beginning in fiscal 1999 it will
recognize 100% of the operating results of FCT in its financial statements and
it will not record interest income from its loans to FCT.
Summarized financial information of FCT for the fiscal years ended September 30,
1998 and 1997, follows:
September 30,
-------------------------
1998 1997
-------- ---------
Current assets $ 2,505 $ 2,224
Property, plant and equipment, net 22,318 22,951
Total assets 25,594 25,608
Current liabilities 8,535 2,697
Notes payable, net of current portion 15,478 5,000
Members' equity 824 17,911
Fiscal Year Ended
September 30,
-------------------------
1998 1997
-------- ---------
Net sales $ 4,342 $ 887
Net loss (17,087) (13,139)
NOTE 4: INVESTMENTS
At September 30, 1998 and 1997, no short-term investments were classified as
trading. Investments, excluding cash equivalents, consisted of the following at
September 30, 1998 and 1997:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------------------- --------------------------------
Unrealized Unrealized
Fair Gains/ Cost Fair Gains/ Cost
Available-for-sale: Value (Losses) (1) Basis Value (Losses) Basis
- ------------------ ------ ------------ ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasuries $ 2,355 $ 21 $ 2,334 $ -- -- $ --
Corporate debt securities 28,067 136 27,931 --
Adjustable rate notes -- -- -- 5,062 -- 5,062
------- ------- ------- ------- ------- -------
Short-term investments
classified as available
for sale $30,422 $ 157 $30,265 $ 5,062 $ -- $ 5,062
======= ======= ======= ======= ======= =======
Held-to-maturity:
Corporate bonds with weighted
average maturity less than
three years $ -- -- -- $ 2,898 $ (22) $ 2,920
======= ======= ======= =======
Less: Short-term investments
classified as held-to maturity -- 2,920
------- -------
Held-to-maturity investments
maturing after one year, within five years $ -- $ --
======= =======
</TABLE>
(1) The after-tax unrealized gain of $116 is recorded as a direct adjustment to
shareholders' equity at September 30,1998.
31
<PAGE>
NOTE 5: BALANCE SHEET COMPONENTS
September 30,
-------------------------
Inventories: 1998 1997
-------- --------
Raw materials and supplies $ 28,062 $ 26,705
Work in process 11,381 15,262
Finished goods 23,788 16,480
-------- --------
63,231 58,447
Inventory reserves (15,658) (12,845)
-------- --------
$ 47,573 $ 45,602
======== ========
September 30,
-------------------------
1998 1997
-------- --------
Property, Plant and Equipment:
Land $ 1,453 $ 1,453
Buildings and building improvements 21,124 19,583
Machinery and equipment 72,992 63,187
Leasehold improvements 4,289 4,039
-------- --------
99,858 88,262
Accumulated depreciation (51,589) (42,614)
-------- --------
$ 48,269 $ 45,648
======== ========
Accrued expenses at September 30, 1998 and 1997 include $10,981 and $13,455,
respectively, for accrued wages, incentives and vacations.
NOTE 6: DEBT OBLIGATIONS
At September 30, 1998 and 1997, the Company's debt obligations consisted
entirely of capital lease obligations which mature in fiscal 1999. Interest paid
on the Company's debt obligations totaled $262, $2,331 and $3,288, in fiscal
1998, 1997 and 1996, respectively.
On March 26, 1998, the Company renegotiated the terms of its bank credit
facilities resulting in an Amended and Restated Loan Agreement providing for a
$60,000 revolving credit facility expiring on March 26, 2003. The new revolving
credit facility provides for borrowings denominated in either U.S. dollars or
foreign currencies. Borrowings in U.S. dollars bear interest either at a Base
Rate (defined as the greater of the prime rate minus 1/4% or the federal funds
rate plus 1/2%) or, at a LIBOR Rate (defined as LIBOR plus .4% to .8% depending
on the Company's leverage ratio). Foreign currency borrowings bear interest at a
LIBOR Rate, as defined above, applicable to the foreign currency.
The Amended and Restated Loan Agreement is guaranteed by certain of the
Company's domestic subsidiaries and requires the Company maintain certain
financial covenants including a leverage ratio and an interest coverage ratio or
liquidity ratio. The Amended and Restated Loan Agreement also limits the
Company's ability to mortgage, pledge or dispose of a material portion of its
assets and imposes restrictions on the Company's investments and acquisitions.
There were no borrowings under this bank credit facility during fiscal 1998. The
Company was in compliance with the covenants of the Amended and Restated Loan
Agreement as of September 30, 1998.
On October 2, 1995, the Company borrowed $15,000 under its bank credit facility
to fund the cash portion of the purchase price for the outstanding stock of
Circle "S" Industries, Inc., the parent corporation of American Fine Wire
Corporation ("AFW"), and also issued promissory notes totaling $34,395 to
certain selling shareholders of Circle "S." The promissory notes were repaid in
full on January 5, 1996, together with accrued interest thereon. To finance the
repayment of the promissory notes, on January 5, 1996, the Company borrowed the
remaining $35,000 available under a term credit facility. Borrowings under the
$50,000 term credit facility bore interest at the LIBOR rate plus 50 basis
points. Such borrowings were repaid in full in May 1997.
NOTE 7: SHAREHOLDERS' EQUITY
Common Stock
In May 1997, the Company completed the sale of 3,450,000 shares of its common
stock in an underwritten offering,
32
<PAGE>
resulting in net proceeds to the Company approximating $101,103. A portion of
these proceeds was used to repay the $50,000 outstanding balance under the
Company's existing bank revolving credit facility.
Stock Option Plans
The Company has four employee stock option plans for officers and key employees
(the "Employee Plans") pursuant to which options have been or may be granted at
100% of the market price of the Company's Common Stock on the date of grant.
Options may no longer be granted under three of the plans. Options granted under
the Employee Plans are exercisable at such dates as are determined in connection
with their issuance, but not later than ten years after the date of grant.
The following summarizes all employee stock option activity for the three years
ended September 30, 1998:
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------------------
1998 1997 1996
-------- -------- --------
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
(Share amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period 1,072 $15.05 815 $15.08 618 $ 6.93
Granted or reissued 1,300 $20.64 552 $12.00 259 $32.84
Exercised (41) $ 9.62 (231) $ 7.72 (37) $ 6.24
Terminated or canceled (151) $22.36 (64) $15.94 (25) $10.60
------ ------ ------
Options outstanding at
end of period 2,180 $17.98 1,072 $15.05 815 $15.08
====== ====== ======
Options exercisable at
end of period 317 $13.79 132 $12.35 223 $ 6.47
====== ====== ======
</TABLE>
The Company also maintains two stock option plans for non-officer directors (the
"Director Plans") pursuant to which options to purchase 5,000 shares of the
Company's Common Stock at an exercise price of 100% of the market price on the
date of grant are issued to each non-officer director each year. Options can no
longer be granted under one of these plans. Options to purchase 166,000 shares
at an average exercise price of $18.71 were outstanding under the Director Plans
at September 30, 1998, of which options to purchase 64,000 shares were currently
exercisable. Options to purchase 1,000 shares under the Director Plans were
exercised during 1998.
At September 30, 1998, 2,229,000 shares were reserved for issuance in connection
with the Company's employee stock option plans and 566,000 shares were reserved
for issuance in connection with the Company's director stock option plans.
As permitted under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company has
elected to follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25"), in accounting for stock options
granted to employees. Under APB No. 25, the Company generally recognizes no
compensation expense in the income statement with respect to such grants.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 for options granted after October 1, 1995 as if the Company had
accounted for its stock option grants to employees under the fair value method
of SFAS No. 123. The fair value of the Company's stock option grants to
employees was estimated using a Black-Scholes option pricing model.
The following assumptions were employed to estimate the fair value of stock
options granted to employees:
Fiscal Year Ended
September 30,
-------------------------------
1998 1997 1996
------ ------- -------
Expected dividend yield 0.00 $ 0.00 $ 0.00
Expected stock price volatility 73.00% 71.00% 71.00%
Risk-free interest rate 5.40% 6.16% 6.16%
Expected life (years) 7 6 6
33
<PAGE>
For pro forma purposes, the estimated fair value of the Company's stock options
to employees is amortized over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
-----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average fair value of options granted $ 15.18 $ 8.22 $ 22.47
Net income - as reported $ (5,440) $ 38,319 $ 11,847
Net income - pro forma $ (8,040) $ 37,069 $ 11,120
Earnings per share - as reported, diluted $ (0.23) $ 1.79 $ 0.60
Earnings per share - pro forma, diluted $ (0.35) $ 1.72 $ 0.56
</TABLE>
Options granted before October 1, 1995 have not been valued and no pro forma
compensation expense has been recognized.
NOTE 8: EMPLOYEE BENEFIT PLANS
The Company has a non-contributory defined benefit pension plan covering
substantially all U.S. employees. The benefits for this plan were based on the
employees' years of service and the employees' compensation during the three
years before retirement. The Company's funding policy is consistent with the
funding requirements of Federal law and regulations. Effective December 31,
1995, the benefits under the Company's pension plan were frozen. As a
consequence, accrued benefits will no longer change as a result of an employee's
length of service or compensation. The benefit freeze resulted in the
recognition of a $1,050 net curtailment gain in fiscal 1996, which was offset by
recognition of a $1,050 prior unrecognized loss.
Net pension cost for the U.S. plan comprises the following:
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
--------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Service cost-benefits earned
during the period $ -- $ -- $ 151
Interest cost on projected
benefit obligations 840 776 760
Recognition of prior unrecognized loss -- -- 1,050
Recognition of net curtailment gain -- -- (1,050)
Actual return on plan assets (490) (980) (570)
Net amortization and deferral (335) 260 (250)
Recognition of past service costs -- -- 75
-------- -------- --------
Net pension expense of U.S. plan $ 15 $ 56 $ 166
======== ======== ========
Weighted average discount rate 7.50% 7.50% 7.50%
Rate of increase in future compensation * * *
Expected long-term return on assets 8.00% 7.00% 7.00%
</TABLE>
* Not applicable due to the December 31, 1995 benefit freeze
The funded status of the U.S. plan follows:
<TABLE>
September 30,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Vested accumulated benefit obligation $ 11,802 $ 11,198
======== ========
Projected benefit obligation for service
rendered to date $ 11,802 $ 11,198
Plan assets at fair value, primarily mutual
fund investments and U.S. Treasury bills 10,542 10,372
-------- --------
Excess of projected benefit obligation
over plan assets (1,260) (826)
Unrecognized net loss 1,749 1,245
-------- --------
Prepaid pension cost $ 489 $ 419
======== ========
</TABLE>
34
<PAGE>
The Company's foreign subsidiaries have retirement plans that are integrated
with and supplement the benefits provided by laws of the various countries. They
are not required to report nor do they determine the actuarial present value of
accumulated benefits or net assets available for plan benefits. The Company
believes these plans are substantially fully funded as to vested benefits. On a
consolidated basis, pension expense was $914, $991 and $629, in fiscal 1998,
1997 and 1996, respectively.
The Company has a 401(k) Employee Incentive Savings Plan. This plan allows for
employee contributions and matching Company contributions in varying
percentages, depending on employee age and years of service, ranging from 30% to
175% of the employees' contributions. The Company's contributions under this
plan totaled $2,240, $1,793 and $1,580, in fiscal 1998, 1997 and 1996,
respectively, and were satisfied by contributions of shares of Company common
stock, valued at the market price on the date of the matching contribution.
NOTE 9: INCOME TAXES
Income before income taxes consisted of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
----------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
United States operations $(17,953) $ 32,879 $ (361)
Foreign operations 10,596 18,903 15,991
-------- -------- --------
$ (7,357) $ 51,782 $ 15,630
======== ======== ========
</TABLE>
The provision for income taxes included the following:
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
----------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ (7,210) $ 8,722 $ 2,523
State 50 700 25
Foreign 4,155 3,797 3,360
Deferred:
Federal 840 244 (2,625)
Foreign 248 -- 500
-------- -------- --------
$ (1,917) $ 13,463 $ 3,783
======== ======== ========
</TABLE>
The provision for income taxes differed from the amount computed by applying the
statutory federal income tax rate as follows:
<TABLE>
Fiscal Year Ended September 30,
----------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Computed income tax expense (benefit) based on
U.S. statutory rate $ (2,575) $ 18,124 $ 5,471
Effect of earnings of foreign subsidiaries
subject to different tax rates (289) (1,212) (1,017)
Benefits from Israeli Approved Enterprise Zones (1,532) (1,049) (1,660)
Benefits of net operating loss and tax credit
carryforwards and change in valuation allowance (951) (1,819) --
Non-deductible goodwill amortization 677 659 613
Provision for repatriation of certain foreign
earnings, including foreign withholding taxes 3,298 -- 500
Effect of revisions of prior year's estimated taxes (779) (205) 562
Benefits of Foreign Sales Corporation -- (985) (1,027)
Other, net 234 (50) 341
-------- -------- --------
$ (1,917) $ 13,463 $ 3,783
======== ======== ========
</TABLE>
35
<PAGE>
Undistributed earnings of certain foreign subsidiaries for which taxes have not
been provided approximate $21,371 at September 30, 1998. Such undistributed
earnings are intended to be indefinitely reinvested in foreign operations.
Undistributed earnings approximating $73,000 are not considered to be
indefinitely reinvested in foreign operations. Accordingly, as of September 30,
1998, deferred tax liabilities of $12,264 including withholding taxes but net of
estimated foreign tax credits, have been provided.
Deferred income taxes are determined based on the differences between the
financial reporting and tax basis of assets and liabilities as measured by the
current tax rates. The net deferred tax balance is composed of the tax effects
of cumulative temporary differences, as follows:
September 30,
--------------------------
1998 1997
-------- --------
Repatriation of foreign earnings,
including foreign withholding taxes $ 12,264 $ 3,711
Depreciable assets 2,073 1,832
Prepaid expenses and other 831 906
-------- --------
Total deferred tax liability 15,168 6,449
-------- --------
Inventory reserves 3,299 2,846
Warranty accrual 750 1,461
Other accruals and reserves 3,621 1,875
Acquired domestic NOL carryforwards 3,894 2,162
Foreign NOL carryforwards 4,436 2,492
Domestic tax credits carryforward 6,730 --
Deferred intercompany profit 2,137 1,788
-------- --------
24,867 12,624
Valuation allowance (7,091) (4,654)
-------- --------
Total deferred tax asset 17,776 7,970
-------- --------
Net deferred tax asset $ 2,608 $ 1,521
======== ========
Realization of deferred tax assets associated with the net operating loss and
tax credit carryforwards is dependent upon generating sufficient taxable income
prior to their expiration in the respective tax jurisdictions. The Company
believes there is a risk that certain of these net operating loss carryforwards
may expire unused and, accordingly, has established certain valuation
allowances. The valuation allowance at September 30, 1998 relates to acquired
domestic net operating loss carryforwards expiring through the year 2010 whose
realization is limited to the U.S. earnings of the acquired company, and foreign
net operating loss carryforwards which are scheduled to expire through the 2003
fiscal year. Although realization is not assured for the remaining deferred tax
assets, the Company believes it is more likely than not that they will be
realized through future taxable earnings or alternative tax strategies. However,
the net deferred tax assets could be reduced in the near term if the Company's
estimates of taxable income during the carryforward period are significantly
reduced or alternative tax strategies are no longer viable. In the event the tax
benefits relating to acquired net operating loss carryforwards are realized,
such benefits would reduce the recorded amount of goodwill.
The IRS is currently auditing the Company's federal income tax returns for
fiscal 1995, 1996 and 1997. Management believes sufficient taxes have been
provided in prior years and that the ultimate outcome of the IRS audits will not
have a material adverse impact on the Company's financial position or results of
operations.
The Company paid income taxes of $8,817, $9,965 and $11,699, in fiscal 1998,
1997 and 1996, respectively.
NOTE 10: SEGMENT INFORMATION
In fiscal 1998, the Company adopted FAS 131. The accounting policies of the
segments are the same as those described in Note 1, "Summary of Significant
Accounting Policies." The Company evaluates performance of its segments and
allocates resources to them based on income from operations before interest,
allocations of corporate expenses and income taxes.
36
<PAGE>
The Company operates primarily in two industry segments, the equipment segment
and the packaging materials segment. The equipment segment designs, manufactures
and markets capital equipment and related spare parts for use in the
semiconductor assembly process. The equipment segment also services, maintains,
repairs and upgrades assembly equipment. The packaging materials business
segment designs, manufactures and markets consumable packaging materials for use
on the equipment the company markets in the equipment segment as well as on
competitors' equipment. The packaging materials products have different
manufacturing processes, distribution channels and a less volatile revenue
pattern than the Company's capital equipment. The product of both segments are
for sale to semiconductor device manufacturers.
The table below presents information about reported segments:
<TABLE>
<CAPTION>
Packaging Corporate and
Equipment Materials Reconciling Consolidated
Fiscal Year Ended September 30, 1998 Segment Segment Items Total
- ------------------------------------ --------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 302,107 $ 108,933 $ -- $ 411,040
Cost of goods sold 191,948 82,259 -- 274,207
--------- --------- --------- ---------
Gross profit 110,159 26,674 -- 136,833
Operating expenses 101,099 22,829 8,641 132,569
Resizing costs 5,984 1,724 712 8,420
--------- --------- --------- ---------
Income (loss) from operations $ 3,076 $ 2,121 $ (9,353) $ (4,156)
========= ========= ========= =========
Segment assets $ 129,568 $ 78,318 $ 134,698 $ 342,584
Capital expenditures 12,809 3,253 -- 16,062
Depreciation expense 7,285 3,611 -- 10,896
<CAPTION>
Packaging Corporate and
Equipment Materials Reconciling Consolidated
Fiscal Year Ended September 30, 1998 Segment Segment Items Total
- ------------------------------------ --------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 391,721 $ 110,186 $ -- $ 501,907
Cost of goods sold 228,854 89,148 -- 318,002
--------- --------- --------- ---------
Gross profit 162,867 21,038 -- 183,905
Operating expenses 97,143 21,029 8,070 126,242
--------- --------- --------- ---------
Income (loss) from operations $ 65,724 $ 9 $ (8,070) $ 57,663
========= ========= ========= =========
Segment assets $ 159,124 $ 87,973 $ 129,722 $ 376,819
Capital expenditures 7,749 5,767 -- 13,516
Depreciation expense 5,977 2,968 -- 8,945
<CAPTION>
Packaging Corporate and
Equipment Materials Reconciling Consolidated
Fiscal Year Ended September 30, 1998 Segment Segment Items Total
- ------------------------------------ --------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 287,234 $ 93,942 $ -- $ 381,176
Cost of goods sold 163,844 75,270 -- 239,114
--------- --------- --------- ---------
Gross profit 123,390 18,672 -- 142,062
Operating expenses 99,549 14,563 7,566 121,678
Resizing costs 2,966 -- -- 2,966
--------- --------- --------- ---------
Income (loss) from operations $ 20,875 $ 4,109 $ (7,566) $ 17,418
========= ========= ========= =========
Segment assets $ 112,762 $ 76,365 $ 60,427 $ 249,554
Capital expenditures 9,669 8,359 -- 18,028
Depreciation expense 5,379 1,800 -- 7,179
</TABLE>
(1) Restated to reflect fiscal 1998 presentation
Intersegment sales are immaterial. Operating expenses identified as Corporate
and Reconciling Items consist entirely of corporate expenses. Assets identified
as Corporate and Reconciling Items consist of all cash and short-term
investments of the Company, the Company's equity investment in FCT and corporate
income tax assets.
37
<PAGE>
The Company's market for its products is worldwide. The table below presents
destination sales to unaffiliated customers and long-lived assets by country:
<TABLE>
<CAPTION>
Destination Long-Lived
Fiscal year ended September 30, 1998 Sales Assets
- ------------------------------------ ----------- ----------
<S> <C> <C>
Taiwan $ 82,957 $ 660
United States 82,053 123,308
Philippines 70,675 796
Malaysia 63,817 149
Singapore 18,932 39,095
Korea 15,205 309
Hong Kong(1) 14,815 6,863
Israel 1,397 24,834
All other 61,189 11,872
-------- --------
$411,040 $207,886
======== ========
</TABLE>
(1) The reduction in assets from $44,526 in fiscal 1997 to
$6,863 in fiscal 1998 was due to lower accounts receivable
resulting from the centralization of the Company's invoicing
practices, for equipment sales, to the US.
<TABLE>
<CAPTION>
Destination Long-Lived
Fiscal year ended September 30, 1998 Sales Assets
- ------------------------------------ ----------- ----------
<S> <C> <C>
Taiwan $109,822 $ 424
Korea 97,370 185
United States 74,817 122,061
Malaysia 66,231 127
Philippines 39,435 --
Singapore 26,825 42,762
Hong Kong 13,990 44,526
Israel 731 25,872
All other 72,686 11,140
-------- --------
$501,907 $247,097
======== ========
<CAPTION>
Destination Long-Lived
Fiscal year ended September 30, 1998 Sales Assets
- ------------------------------------ ----------- ----------
<S> <C> <C>
United States $ 79,609 $ 94,842
Korea 62,092 128
Taiwan 55,110 281
Malaysia 54,514 64
Philippines 35,142 --
Singapore 16,060 42,096
Hong Kong 8,766 27,430
Israel 1,312 21,855
All other 68,571 2,431
-------- --------
$381,176 $189,127
======== ========
</TABLE>
Sales to a relatively small number of customers account for a significant
percentage of the Company's net sales. In fiscal 1998, sales to Intel accounted
for 17.6% of the Company's net sales. During fiscal 1997, sales to Anam (a
Korea-based customer) and Intel accounted for approximately 12.5% and 10.2%,
respectively, of the Company's net sales. In fiscal 1996, sales to Intel and
Anam accounted for 14.3% and 11.2%, respectively. The Company expects that sales
of its products to a limited number of customers will continue to account for a
high percentage of net sales for the foreseeable future.
38
<PAGE>
NOTE 11: OTHER FINANCIAL DATA
In July 1998, the Company decided to discontinue the manufacture and sale of a
line of products acquired in July 1994 from Assembly Technologies. As a
consequence, no future cash flows from this product line were anticipated and
$948 of goodwill arising from this acquisition was written off in the Company's
fiscal 1998 fourth quarter, in accordance with the provisions of SFAS 121.
Maintenance and repairs expense totaled $3,582, $4,316 and $5,185 for fiscal
1998, 1997 and 1996, respectively. Warranty and retrofit expense was $4,796,
$5,788 and $2,326 for fiscal 1998, 1997 and 1996, respectively.
Rent expense for fiscal 1998, 1997 and 1996 was $2,997, $3,191 and $2,540,
respectively.
A reconciliation of weighted average shares outstanding-basic to the weighted
average shares outstanding-diluted appears below:
(Shares in thousands)
Fiscal Year Ended September 30,
-------------------------------
1998 1997 1996
------ ------ ------
Weighted average shares outstanding - Basic 23,301 20,871 19,375
Potentially dilutive securities:
Employee stock options * 557 413
------ ------ ------
Weighted average shares outstanding - Diluted 23,301 21,428 19,788
====== ====== ======
* Due to the Company's net loss for the fiscal year ended September 30, 1998,
all potentially dilutive securities are deemed to be antidilutive.
NOTE 12: COMMITMENTS AND CONTINGENCIES
The Company has obligations under various operating leases, primarily for
manufacturing and office facilities, which expire periodically through 2003.
Minimum rental commitments under these leases (excluding taxes, insurance,
maintenance and repairs, which are also paid by the Company), are as follows:
$1,778 in 1999; $1,404 in 2000; $582 in 2001; $473 in 2002; $53 in 2003 and $1
thereafter.
The Company entered into a joint venture agreement, in September 1998, to
develop, manufacture and market advanced polymer materials for semiconductor and
microelectronic packaging end users. The Company has committed to invest up to
$6,000 in this joint venture.
From time to time, third parties assert that the Company is, or may be,
infringing or misappropriating their intellectual property rights. In such
cases, the Company will defend against claims or negotiate licenses where
considered appropriate. In addition, certain of the Company's customers have
received notices of infringement from the Lemelson Medical, Education and
Research Foundation Limited Partnership (the "Lemelson Foundation"), alleging
that equipment supplied by the Company, and processes performed by such
equipment, infringe on patents held by the Lemelson Foundation. This activity
increased substantially in 1998, since in June of this year the Lemelson
Foundation settled its suit against the Ford Motor Company, and entered into
License Agreements with Ford, GM and Chrysler. Since then a number of the
Company's customers, including Intel, have been sued by the Lemelson Foundation.
Certain customers have requested that the Company defend and indemnify them
against the claims of the Lemelson Foundation or to contribute to any settlement
the customer reaches with the Lemelson Foundation. To date, however, no customer
who has settled with the Lemelson Foundation has, after settlement, sought
contribution from the Company. The Company has received opinions from its
outside patent counsel with respect to certain of the Lemelson Foundation
patents. The Company is not aware that any equipment marketed by the Company, or
process performed by such equipment infringe on the Lemelson Foundation patents
in question and does not believe that the Lemelson Foundation matter or any
other pending intellectual property claim will have a material adverse effect on
its business, financial condition or operating results. However, the ultimate
outcome of any infringement or misappropriation claim affecting the Company is
uncertain and there can be no assurances that the resolution of these matters
will not have a material adverse effect on the Company's business, financial
condition and operating results.
The Israeli government has funded a portion of the research and development
costs related to certain products. The Company is contingently liable to repay
such funding through royalties to the Israeli government. Royalty payments are
due only upon sale of the funded products, are computed at varying rates from 2%
to 5% of such sales, and are limited to
39
<PAGE>
the amounts received from the Israeli government. Royalty payments to the
Israeli government for the fiscal years ended September 30, 1998, 1997 and 1996
totaled $286, $148 and $351, respectively. At September 30, 1998, the Company
was contingently liable for royalties approximating $2,015 related to potential
future product sales.
NOTE 13: SELECTED QUARTERLY FINANCIAL DATA (unaudited)
Financial information pertaining to quarterly results of operations follows:
<TABLE>
<CAPTION>
Year ended First Second Third Fourth
September 30, 1998: Quarter Quarter Quarter Quarter (1) Total
- ------------------- --------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $ 123,111 $ 120,060 $ 91,693 $ 76,176 $ 411,040
Gross profit 45,345 45,987 30,185 15,316 136,833
Income (loss) from operations (2) 10,630 12,987 (3,202) (24,571) (4,156)
Income (loss) before income taxes $ 9,748 $ 11,894 $ (4,222) $ (24,777) $ (7,357)
Income tax expense (benefit) 2,924 2,703 (1,098) (6,446) (1,917)
--------- --------- --------- --------- ---------
Net income (loss) $ 6,824 $ 9,191 $ (3,124) $ (18,331) $ (5,440)
========= ========= ========= ========= =========
Net income (loss) per share:
Basic $ 0.29 $ 0.39 $ (0.13) $ (0.79) $ (0.23)
Diluted $ 0.29 $ 0.39 $ (0.13) $ (0.79) $ (0.23)
<CAPTION>
Year ended First Second Third Fourth
September 30, 1997: Quarter Quarter Quarter Quarter (1) Total
- ------------------- --------- --------- --------- -------- ----------
Net sales $ 81,844 $ 121,491 $ 146,380 $ 152,192 $ 501,907
Gross profit 28,781 45,235 53,836 56,053 183,905
Income from operations (2) 1,861 14,727 19,901 21,174 57,663
Income before income taxes $ 598 $ 12,904 $ 18,100 $ 20,180 $ 51,782
Income tax expense 179 3,602 4,571 5,111 13,463
--------- --------- --------- --------- ---------
Net income $ 419 $ 9,302 $ 13,529 $ 15,069 $ 38,319
========= ========= ========= ========= =========
Net income per share:
Basic $ 0.02 $ 0.47 $ 0.64 $ 0.65 $ 1.84
Diluted $ 0.02 $ 0.46 $ 0.62 $ 0.63 $ 1.79
</TABLE>
(1) Results for the fourth quarter of fiscal 1998 include a charge of $8,420
consisting of $4,953 of severance, $1,891 of product discontinuation costs,
$948 of goodwill write-off and $628 of other costs, in connection with the
resizing of the Company's work force and product lines resulting from a
slowdown in customer orders (see Note 2 to above).
(2) Represents net sales less costs and expenses but before net interest
expense, equity loss in joint venture and other expense.
40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Flip Chip Technologies, LLC:
We have audited the accompanying balance sheets of FLIP CHIP TECHNOLOGIES, LLC
(the Company; a Delaware limited liability company) as of September 30, 1998 and
1997, and the related statements of operations, members' equity and cash flows
for each of the two years in the period ended September 30, 1998, and for the
period from inception (February 28, 1996) through September 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Flip Chip Technologies, LLC as
of September 30, 1998 and 1997, and the results of its operations and its cash
flows for each of the two years in the period ended September 30, 1998, and for
the period from inception (February 28, 1996) through September 30, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
November 19, 1998.
41
<PAGE>
FLIP CHIP TECHNOLOGIES, LLC
BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,269,566 $ 1,823,799
Accounts receivable 1,052,161 298,819
Receivable from Member 58,583 --
Materials inventory 89,091 62,576
Prepaid expenses 35,464 38,918
------------ ------------
Total current assets 2,504,865 2,224,112
PROPERTY, PLANT AND EQUIPMENT, net 22,317,827 22,951,374
OTHER ASSETS 771,803 432,538
------------ ------------
$ 25,594,495 $ 25,608,024
============ ============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,721,686 $ 805,218
Accrued compensation and related taxes 742,438 878,501
Payable to Members -- 726,231
Accrued interest, current portion 559,966 60,000
Other accrued expenses 511,249 227,077
Notes payable to Members, current portion 5,000,000 --
------------ ------------
Total current liabilities 8,535,339 2,697,027
ACCRUED INTEREST, net of current portion 757,423 --
NOTES PAYABLE TO MEMBERS, net of current portion 15,478,142 5,000,000
COMMITMENTS AND CONTINGENCIES
MEMBERS' EQUITY:
Members' contributions 33,000,000 33,000,000
Accumulated deficit (32,176,409) (15,089,003)
------------ ------------
Total members' equity 823,591 17,910,997
------------ ------------
$ 25,594,495 $ 25,608,024
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
42
<PAGE>
FLIP CHIP TECHNOLOGIES, LLC
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997 AND
FOR THE PERIOD FROM INCEPTION (FEBRUARY 28, 1996)
THROUGH SEPTEMBER 30, 1996
1998 1997 1996
------------ ------------ ------------
NET REVENUE $ 4,342,133 $ 887,332 $ 98,639
COST OF MANUFACTURING 15,195,257 9,264,540 629,954
------------ ------------ ------------
Gross margin (10,853,124) (8,377,208) (531,315)
OPERATING EXPENSES:
Technology development 530,816 507,467 85,521
Sales and marketing 2,524,974 2,574,042 656,171
General and administrative 1,805,229 1,735,161 745,236
Licensing 214,033 -- --
------------ ------------ ------------
5,075,052 4,816,670 1,486,928
------------ ------------ ------------
LOSS FROM OPERATIONS (15,928,176) (13,193,878) (2,018,243)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 55,865 118,095 68,708
Other income 53,023 -- --
Interest expense (1,268,118) (63,685) --
------------ ------------ ------------
(1,159,230) 54,410 68,708
------------ ------------ ------------
NET LOSS $(17,087,406) $(13,139,468) $ (1,949,535)
============ ============ ============
The accompanying notes are an integral part of these statements.
43
<PAGE>
FLIP CHIP TECHNOLOGIES, LLC
STATEMENTS OF MEMBERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997 AND
FOR THE PERIOD FROM INCEPTION (FEBRUARY 28, 1996)
THROUGH SEPTEMBER 30, 1996
Members' Accumulated
Contributions Deficit Total
------------- ------------ ------------
BALANCE, February 28, 1996 $ -- $ -- $ --
Contributions of cash 5,000,000 -- 5,000,000
Net loss -- (1,949,535) (1,949,535)
------------ ------------ ------------
BALANCE, September 30, 1996 5,000,000 (1,949,535) 3,050,465
Contributions of cash 28,000,000 -- 28,000,000
Net loss -- (13,139,468) (13,139,468)
------------ ------------ ------------
BALANCE, September 30, 1997 33,000,000 (15,089,003) 17,910,997
Net loss -- (17,087,406) (17,087,406)
------------ ------------ ------------
BALANCE, September 30, 1998 $ 33,000,000 $(32,176,409) $ 823,591
============ ============ ============
The accompanying notes are an integral part of these statements.
44
<PAGE>
FLIP CHIP TECHNOLOGIES, LLC
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997 AND
FOR THE PERIOD FROM INCEPTION (FEBRUARY 28, 1996)
THROUGH SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(17,087,406) $(13,139,468) $ (1,949,535)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities-
Depreciation 3,964,021 2,146,314 4,247
Changes in assets and liabilities:
Increase in accounts receivable (753,342) (231,176) (67,643)
Increase in receivable from Member (58,583) -- --
Increase in materials inventory (26,515) (62,576) --
Decrease (increase) in prepaid expenses 3,454 (9,706) (29,212)
Increase in other assets (339,265) (229,038) (203,500)
Increase in accounts payable 916,468 89,979 715,239
Increase (decrease) in accrued construction costs -- (2,504,737) 2,504,737
(Decrease) increase in accrued compensation and
related taxes (136,063) 714,588 163,913
(Decrease) increase in payable to Members (726,231) 564,333 161,898
Increase in accrued interest 1,257,389 60,000 --
Increase in other accrued expenses 284,172 208,798 18,279
------------ ------------ ------------
Net cash (used in) provided by
operating activities (12,701,901) (12,392,689) 1,318,423
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (3,330,474) (20,433,227) (4,668,708)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Member contributions -- 28,000,000 5,000,000
Proceeds from loan from member 15,478,142 5,000,000 --
------------ ------------ ------------
Net cash provided by financing activities 15,478,142 33,000,000 5,000,000
------------ ------------ ------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (554,233) 174,084 1,649,715
CASH AND CASH EQUIVALENTS, beginning of period 1,823,799 1,649,715 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,269,566 $ 1,823,799 $ 1,649,715
============ ============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ -- $ -- $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
45
<PAGE>
FLIP CHIP TECHNOLOGIES, LLC
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
(1) NATURE OF OPERATIONS:
Company Profile
Flip Chip Technologies, LLC (the Company), a Delaware limited liability company
formed on February 28, 1996, operates under an operating agreement (the
Operating Agreement) between members Delphi-Delco Electronics System (Delco) and
Kulicke & Soffa Holdings, Inc. (K&S).
The Company entered into a technology transfer agreement (the Technology
Transfer Agreement) with Delco which permits the Company to use and sublicense
Delco's Flex-On-Cap bumping technology to provide wafer solder-bumping and
related services. The Company's manufacturing facility and corporate offices are
located in Phoenix, Arizona.
Commencement of Operations
The Company incurred significant expenses to commence manufacturing operations,
which has resulted in an accumulated deficit of $32,176,409 at September 30,
1998. The Company entered into a Convertible Revolving Loan Agreement with K&S
that provides the Company with access up to an additional $8 million in funding
(see Note 3). The Company's forecast for the year ended September 30, 1999
indicates that this funding is adequate to meet forecasted cash requirements, in
excess of cash generated from operations, for the year then ended. Should the
Company encounter cash requirements in excess of the additional $8 million,
management expects and has obtained written representation indicating that K&S
will fund additional cash requirements in excess of current forecasts. In
addition, on November 4, 1998, K&S elected to convert $21.5 million of debt to
capital contribution (see Note 9).
Strategy
The markets for the Company's technology are presently served by a host of
companies utilizing different wafer technologies which have significant
investments in their respective technologies. The Company's operating results
will depend to a significant extent on its ability to attract new customers to
use the Company's wafer bumping and finishing technology. The Company has
developed a plan to provide wafer bumping and finishing services to customers
and to sublicense the technology to those customers who desire to use the
technology in-house. The Company believes that its technology will be accepted
by a sufficient number of customers to sustain future profitable operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition
Revenue is recognized on the accrual basis after the wafer bumping process has
been completed and the product has been shipped to the customer.
46
<PAGE>
Research and Development
The Company is involved with developing new wafer bumping technologies. In
addition, Delco, under the Technology Transfer Agreement, is obligated to
provide certain technologies to the Company currently being, or to be,
developed. Expenses to develop new technology are included in technology
development in the accompanying statements of operations.
Cash and Cash Equivalents
Cash equivalents consist of investments in a money market account. The cash
equivalents are recorded at cost, which approximates market value of $1,163,325
and $1,812,072 at September 30, 1998 and 1997, respectively.
Materials Inventory
Materials inventory are recorded at cost and consist of raw materials used in
the wafer bumping process.
Significant Customers
Two customers each represented 26% of total revenue for the year ended September
30, 1998, and 20% and 37% of total accounts receivable, respectively, at
September 30, 1998.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost and is depreciated using the
straight-line method over the estimated useful lives of the respective assets,
which range from three to five years for machinery and equipment.
Building improvements consist of costs incurred related to the design and
construction of leasehold improvements on the Company's manufacturing and
corporate headquarters in Phoenix, Arizona. The improvements are being
depreciated using the straight-line method over the initial term of the lease,
which is ten years. Depreciation expense was $3,964,021, $2,146,314 and $4,247
in fiscal years 1998, 1997 and 1996, respectively. Property, plant and equipment
consisted of the following at September 30:
1998 1997
------------ ------------
Furniture, fixtures and computer equipment $ 595,101 $ 440,692
Building improvements 11,815,757 11,876,546
Machinery and equipment used in manufacturing 16,021,551 12,784,697
------------ ------------
28,432,409 25,101,935
Accumulated depreciation (6,114,582) (2,150,561)
------------ ------------
$ 22,317,827 $ 22,951,374
============ ============
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts receivable, accounts
payable and accrued expenses are stated at cost, which approximates fair value,
because of the short maturity of these financial instruments. The Company's
long-term debt bears interest at average interest rates which approximate market
rates at September 30, 1998.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
47
<PAGE>
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Other Assets
At September 30, 1998, other assets includes approximately $203,000 of deposits
on the building lease, $141,000 of utility deposits, unamortized lease payments
of $336,000 and $91,000 of deposits on equipment. Unamortized lease payments are
amortized straight-line over the term of the lease. At September 30, 1997, other
assets included approximately $203,000 of deposits on the building lease,
$88,000 of deposits on equipment, and $141,000 of utility deposits.
Income Taxes
The Company, with the consent of its members, is a limited liability company
which qualifies for tax treatment as a partnership for federal and state income
tax purposes. As a result, the Company's results of operations are included in
the income tax returns of its members. Therefore, the accompanying financial
statements do not include any provisions for income taxes.
Recently Issued Accounting Statements
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 130, Reporting Comprehensive Income and SFAS No.
131, Disclosures About Segments of an Enterprise and Related Information, in
June 1997. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Company is required to adopt these
statements during its fiscal year ending September 30, 1999 or later. The
adoption of these new standards are not expected to have a material impact on
the Company's financial statements.
(3) NOTES PAYABLE TO MEMBERS:
As of September 30, 1998, the Company has entered into three separate loan
agreements with K&S to borrow up to a total of $22 million. The notes carry
interest rates of prime (8.25% at September 30, 1998) plus 1.5% and mature two
years from the agreement dates. K&S has the option to convert these notes and
accrued interest to capital contributions, and Delco has the option to match the
capital contributions resulting from the conversion of the June 1997 and October
1997 loans. The notes are secured by accounts receivable, inventory, and
machinery and equipment. Loan information as of September 30 is as follows:
<TABLE>
<CAPTION>
Total Advances Accrued Interest
------------------------- -------------------------
Note Date Amount Maturity 1998 1997 1998 1997
- ------------- ----------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
June 1997 $ 5,000,000 June 1999 $ -- $ 5,000,000 $ 559,966 $ 60,000
October 1997 5,000,000 October 1999 5,000,000 -- 410,377 --
February 1998 12,000,000 February 2000 9,500,000 -- 289,661 --
</TABLE>
On November 19, 1998, the Company entered into a Convertible Revolving Loan
Agreement with K&S (the Loan Agreement). Pursuant to the Loan Agreement, the
Company is eligible for additional advances up to $8 million through its term,
which expires on November 19, 2000. Advances made pursuant to the Loan Agreement
are collateralized by substantially all of the Company's assets. K&S has the
right to convert amounts outstanding under the Loan Agreement to members'
contributions based upon the fair market value of the Company, as determined
pursuant to the Loan Agreement. On November 4, 1998, K&S gave notice of its
desire to convert $21.5 million of debt to capital contribution (see Note 9).
In February 1998, the Company entered into a loan agreement with Delco, pursuant
to which Delco will continue to provide and perform ongoing engineering support
services in accordance with the Technology Transfer Agreement.
48
<PAGE>
The amount owed to Delco for past engineering support costs as of the agreement
date were converted to this loan agreement, and subsequent billings for
engineering support services have been added to the loan amount. The note
carries an interest rate of prime (8.25% as of September 30, 1998) plus 1.5%.
The loan's principal and accrued interest balances as of September 30, 1998, are
$978,142 and $57,385, respectively. Delco has the option to convert this note
plus accrued interest to capital contributions.
(4) OPERATING AGREEMENT:
As stated above, the Company operates under the Operating Agreement, which was
entered into on February 28, 1996, between Delco and K&S. The Company registered
in Delaware as a limited liability company to obtain a license to use technology
and to engage in the business of providing wafer bumping services and licensing
or sublicensing technology related to such services.
The Company is managed by Delco and K&S through an Executive Committee comprised
of an executive representative from each Member. The Executive Committee
operates through a Management Committee, which is comprised of three individuals
from Delco, three individuals from K&S and the president of the Company.
Delco and K&S have made capital contributions of $33 million, and the ownership
is divided at 49% for Delco and 51% for K&S.
No Member is entitled to withdraw any part of its capital contribution except
upon dissolution of the Company. Distributions of accumulated profits may be
made in accordance with the Operating Agreement. Such distributions include
distributions of net cash flow, as defined, for years subsequent to the year
ended September 30, 1997.
The Members have agreed not to compete with the Company while being a Member of
the Company or for a period of 24 months thereafter.
The Company shall continue until such time of dissolution. Dissolution will
occur upon the following: the agreement of both Members to dissolve and
terminate the Company, the sale, abandonment or other disposition of all or
substantially all of the assets of the Company, or the dissolution of any Member
unless the remaining Member elects to continue the business.
(5) TECHNOLOGY TRANSFER AGREEMENT:
On February 28, 1996, the Company entered into the Technology Transfer Agreement
with Delco, allowing the Company to use and sublicense Flex-On-Cap (FOC)
technology owned by Delco. The Technology Transfer Agreement also gives the
Company exclusive rights to future bumping technology developed by Delco.
For a period of up to five years, Delco shall provide ongoing engineering
support, at the request of Company, in accordance with the terms in the
Technology Transfer Agreement.
The Company pays a royalty to Delco during the first five years equal to 10% of
gross profit, as defined in the Technology Transfer Agreement, derived from the
sale, service or transfer of licensed products made using the existing FOC
technology and technological improvements. Thereafter, the royalty rate shall be
decreased by 1% annually for each succeeding year for the next five years. At
the start of the 11th year, no further royalty shall be due.
Sublicensing profit is divided between Delco and the Company. Delco receives 30%
of the profit, as defined by the Technology Transfer Agreement, and the Company
receives the remaining 70%.
(6) MANUFACTURING SERVICES AGREEMENT:
The Manufacturing Services Agreement (the Service Agreement) was entered into on
February 28, 1996, between
49
<PAGE>
Delco and the Company. The agreement provides that Delco will agree to perform
manufacturing services at its facility in Kokomo, Indiana. Delco agrees to
perform these services through December 31, 1998, or until ten months after the
Company's manufacturing facility is production qualified, as defined by the
Service Agreement.
(7) RELATED PARTY TRANSACTIONS:
In connection with the Technology Transfer and Service Agreements described
above, the Company incurred costs to Delco for expense reimbursement. The
Company incurred the following expenses to Delco:
1998 1997
---------- ----------
Salaries and burden $ -- $ 145,177
Equipment cancellation fees -- 243,662
Engineering and development support 93,979 214,801
Materials, qualification and other costs 151,606 142,650
Manufacturing services 34,508 289,477
---------- ----------
$ 280,093 $1,035,767
========== ==========
At September 30, 1997, $726,231 of the aforementioned expenses are included in
Payable to Members in the accompanying balance sheets.
At September 30, 1998, the Company had a receivable from Delco of $58,583 for
wafer bumping and other services performed which are included in Receivable from
Member in the accompanying balance sheets.
(8) COMMITMENTS AND CONTINGENCIES:
Commitments
In December 1996, the Company entered into an agreement to purchase water
treatment services for its wafer processing facility. The term of the agreement
is ten years from March 1997. The base water service fee is approximately
$35,000 per month, adjusted annually based on the producer price
index-commodities for materials, supplies and labor.
The Company has a ten year agreement to purchase nitrogen through March 2007,
and is renewable for an additional five years. The base facility charge is
approximately $15,000 per month, adjusted annually for increases in labor and
utility costs.
Employee Benefit Plan
Substantially all employees of the Company are covered by a qualified 401(k)
plan. The plan is funded by voluntary employee contributions with the Company
matching 50% of employee contributions up to 6% of employee contributions. For
the years ended September 30, 1998, 1997 and 1996, the Company's matching
contribution was approximately $103,000, $53,000 and $-0-, respectively.
Operating Leases
The Company has entered into a lease agreement to occupy its manufacturing and
corporate headquarters facility. In addition, the Company leases manufacturing
and other equipment. Operating lease expense for the periods ended September 30,
1998, 1997 and 1996 was approximately $909,000, $612,000 and $22,000,
respectively. At September 30, 1998, future minimum rental commitments under the
noncancelable operating lease obligations are as follows:
50
<PAGE>
Year Ending
September 30,
-------------
1999 $ 845,230
2000 844,477
2001 602,401
2002 542,583
2003 361,482
Thereafter 1,150,826
--------------
Total future minimum lease payments $ 4,346,999
==============
Litigation
In the normal course of its business, the Company is subject to certain
contractual guarantees and litigation. In management's opinion, upon
consultation with legal counsel, there is no current litigation which will
materially affect the Company's financial position.
(9) SUBSEQUENT EVENT:
On November 4, 1998, K&S gave notice of its desire to convert the current
outstanding loan and unpaid interest to equity units in accordance with the
provisions of the Convertible Loan Agreements. The additional equity units
granted to K&S will be determined based on an independent appraisal of the
Company. Delco will have the option to make certain capital contributions and/or
convert its outstanding loan and unpaid interest to capital contribution (see
Note 3).
51
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required hereunder with respect to the directors will appear under
the heading "ELECTION OF DIRECTORS" in the Company's Proxy Statement for the
1999 Annual Meeting, which information is incorporated herein by reference.
The information required by Item 401(b) of Regulation S-K appears at the end of
Part I, Item 1 of this report under the heading "Executive Officers of the
Company."
Item 11. EXECUTIVE COMPENSATION.
The information required hereunder will appear under the heading "ADDITIONAL
INFORMATION" in the Company's Proxy Statement for the 1999 Annual Meeting, which
information is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required hereunder will appear on page one and under the heading
"ELECTION OF DIRECTORS" in the Company's Proxy Statement for the 1999 Annual
Meeting, which information is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required hereunder will appear under the heading "ADDITIONAL
INFORMATION" in the Company's Proxy Statement for the 1999 Annual Meeting, which
information is incorporated herein by reference.
52
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1)(a) Financial Statements - Kulicke and Soffa Industries, Inc.:
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants 22
Consolidated Balance Sheet at September 30, 1998 and 1997 23
Consolidated Income Statement for the fiscal years
ended September 30, 1998, 1997 and 1996 24
Consolidated Statement of Cash Flows for the fiscal years
ended September 30, 1998, 1997 and 1996 25
Consolidated Statement of Changes in Shareholders' Equity
for the fiscal years ended September 30, 1998, 1997 and 1996 26
Notes to Consolidated Financial Statements 27-40
(b) Financial Statements - Flip Chip Technologies, LLC:
Report of Independent Public Accountants 41
Balance Sheets at September 30, 1998 and 1997 42
Statements of Operations for the years ended September 30, 1998
and 1997, and for the period from inception (February 28, 1996)
through September 30, 1996 43
Statements of Members' Equity for the years ended September 30, 1998
and 1997, and for the period from inception (February 28, 1996)
through September 30, 1996 44
Statements of Cash Flows for the years ended September 30, 1998
and 1997, and for the period from inception (February 28, 1996)
through September 30, 1996 45
Notes to Financial Statements 46-51
(2) Financial Statement Schedules:
II - Valuation and Qualifying Accounts 56
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(3) Exhibits:
EXHIBIT
NUMBER ITEM
- ------- ----------------------------------------------------------------------
2.1(a) Agreement and Plan of Acquisition dated September 14, 1995, between
the Company, Circle "S" Industries, Inc. and Certain Stockholders of
Circle "S" Industries, Inc., filed as Exhibit 2.1(a) to the Company's
Form 8-K dated October 2, 1995, is incorporated herein by reference.
2.1(b) Agreement and Plan of Merger dated October 2, 1995, between the
Company, Kulicke and Soffa Acquisition Corporation and Circle "S"
Industries, Inc., filed as Exhibit 2.1(b) to the Company's Form 8-K
dated October 2, 1995, is incorporated herein by reference.
2.1(c) Escrow Agreement dated October 2, 1995, between the Company, Larry D.
Striplin, Jr. and Mellon Bank, N.A., filed as Exhibit 2.1(c) to the
Company's Form 8-K dated October 2, 1995, is incorporated herein by
reference.
53
<PAGE>
3(i) The Company's Amended and Restated Articles of Incorporation as of
March 3, 1998, filed as Exhibit 3(i) to the Company's quarterly report
on Form 10-Q for the quarterly period ended March 31, 1998, are
incorporated herein by reference.
3(ii) The Company's By-Laws, as amended through June 26, 1990, filed as
Exhibit 2.2 to the Company's Form 8-A12G dated September 8, 1995, is
incorporated herein by reference.
4(i) Amended and Restated Loan Agreement between the Company and PNC Bank,
N.A. dated March 26, 1998, filed as Exhibit 10(a) to the Company's
quarterly report on Form 10-Q for the quarterly period ended March 31,
1998, is incorporated herein by reference.
10(i) Form of Officer's Loan Agreement, Note and Stock Pledge Agreement,
filed as Exhibit 13(a) to Registration Statement No. 2-65612 filed
September 28, 1979, is incorporated herein by reference.
10(ii) Form of Termination of Employment Agreement signed by Mr. Kulicke
(Section 2(a) - 30 months), and Messrs. Perchick, Sprague, Von
Seggern, Jacobi, Wagner, Baskin, DeSouza, Furhovden, Lendner,
Leonhardt, May, Razon, Salmons, Sawachi, Spooner, and Wolf (Section
2(a) - 18 months), filed as Exhibit 10(vii) to the Company's quarterly
report on Form 10-Q for the quarterly period ended March 31, 1998, is
incorporated herein by reference.*
10(iii) Agreement between the Company and Frederick W. Kulicke, Jr., filed as
Exhibit 10(iii) to Company's Annual Report on Form 10-K for the year
ended September 30, 1989, is incorporated herein by reference.*
10(iv) The Company's 1980 Employee Incentive Stock Option Plan, filed as
Exhibit 10(iv) to the Company's Annual Report on Form 10-K for the
year ended September 30, 1989, is incorporated herein by reference.*
10(v) The Company's 1983 Employee Incentive Stock Option Plan, filed as
Exhibit 10(v) to the Company's Annual Report on Form 10-K for the year
ended September 30, 1989, is incorporated herein by reference.*
10(vi) The Company's 1988 Employee Incentive Stock Option and Non-Qualified
Stock Option Plan (as amended and restated effective October 8, 1996)
filed as Exhibit 10(vi) to the Company's Annual Report on Form 10-K
for the year ended September 30, 1996, is incorporated herein by
reference.*
10(vii) The Company's 1988 Non-Qualified Stock Option Plan for Non-Officer
Directors, as amended, filed as Exhibit 10(vii) to the Company's
Annual Report on Form 10-K for the year ended September 30, 1989, is
incorporated herein by reference.*
10(viii) The Company's 1994 Employee Incentive Stock Option and Non-Qualified
Stock Option Plan (as amended and restated effective October 8, 1996),
filed as Exhibit 10(viii) to the Company's Annual Report on Form 10-K
for the year ended September 30, 1996, is incorporated herein by
reference.*
10(ix) The Company's 1997 Non-Qualified Stock Option Plan for Non-Employee
Directors, filed as Exhibit 10(vii) to the Company's quarterly report
on Form 10-Q for the quarterly period ended March 31, 1998, is
incorporated herein by reference.*
10(x) The Company's Executive Incentive Compensation Plan, As Amended
Through October 14, 1997, filed as Exhibit 10(ix) to the Company's
Annual Report on Form 10-K for the year ended September 30, 1997, is
incorporated herein by reference.*
10(xi) Gold Supply Agreement, as amended October 2, 1995 between American
Fine Wire Corporation, et al, and Rothschild Australia Limited, filed
as Exhibit 10.1 to the Company's Form 8-K dated September 14, 1995 as
amended by Form 8-K/A on October 26, 1995, is incorporated herein by
reference.
54
<PAGE>
10(xii) Agreement of Employment between Circle "S" Industries, Inc. and Larry
D. Striplin, Jr. dated January 2, 1990, filed as Exhibit 10 (xiii) to
the Company's Annual Report on Form 10-K for the year ended September
30, 1995, is incorporated herein by reference.*
10(xiii) Amendment No. 1 to Agreement of Employment between Circle "S"
Industries, Inc. and Larry D. Striplin, Jr. dated May 1, 1995, filed
as Exhibit 10 (xiv) to the Company's Annual Report on Form 10-K for
the year ended September 30, 1995, is incorporated herein by
reference.*
10(xiv) Agreement between Circle "S" Industries, Inc. and Larry D. Striplin,
Jr. dated September 30, 1995, filed as Exhibit 10 (xv) to the
Company's Annual Report on Form 10-K for the year ended September 30,
1995, is incorporated herein by reference.*
10(xv) The Company's November 1994 Officers' Deferred Compensation Plan,
filed as Exhibit 10 (xiv) to the Company's Annual Report on Form 10-K
for the year ended September 30, 1997, is incorporated herein by
reference.*
10(xvi) Amendment No. 1 to the Company's November 1994 Officers' Deferred
Compensation Plan, dated September 18, 1998.*
10(xvii) Operating Agreement of Flip Chip Technologies, LLC dated February 28,
1996, filed as Exhibit 10 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended December 31, 1996, is incorporated
herein by reference.
10(xviii) Convertible Loan Agreements between the Company, Flip Chip
Technologies, LLC and Delco Electronics Corporation dated June 16,
1997, October 30, 1997, February 18, 1998 and November 19, 1998.
21 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP (Independent Accountants).
23.2 Consent of Arthur Andersen LLP (Independent Public Accountants).
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule for the fiscal year ended September
30, 1997.
27.3 Restated Financial Data Schedule for the fiscal year ended September
30, 1996.
* Indicates a Management Contract or Compensatory Plan.
(b) Reports on Form 8-K:
None
55
<PAGE>
KULICKE AND SOFFA INDUSTRIES, INC.
Schedule II-Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Charged
Balance Charged to to other Balance
at beginning costs and accounts- Deductions- at end
Description of period expenses describe describe of period
----------- ------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1996
Allowance for doubtful
accounts $ 1,094 $ 178 $ -- $ 45(1) $ 1,227
======= ======= ========= ========= =======
Inventory reserve $ 7,753 $ 6,058(2) $ -- $ 2,056(3) $11,755
======= ======= ========= ========= =======
Valuation allowance for
deferred taxes $ 607 $ 1,996 $ 2,512(4) $ -- $ 5,115
======= ======= ========= ========= =======
Year ended September 30, 1997
Allowance for doubtful
accounts $ 1,227 $ 1,065 $ -- $ 143(1) $ 2,149
======= ======= ========= ========= =======
Inventory reserve(9) $11,755 $ 2,593 $ -- $ 1,503(7) $12,845
======= ======= ========= ========= =======
Valuation allowance for
deferred taxes $ 5,115 $ 623(5) $ -- $ 1,084(6) $ 4,654
======= ======= ========= ========= =======
Year ended September 30, 1998
Allowance for doubtful
accounts $ 2,149 $ 29 $ -- $ 501(1) $ 1,677
======= ======= ========= ========= =======
Inventory reserve $12,845 $ 4,132 $ -- $ 1,319(7) $15,658
======= ======= ========= ========= =======
Valuation allowance for
deferred taxes $ 4,654 $ 2,437(8) $ -- $ -- $ 7,091
======= ======= ========= ========= =======
</TABLE>
(1) Bad debts written off.
(2) Amount includes $4,547 provision for excess and obsolete inventory.
(3) Disposal of excess and obsolete inventory and sales of demonstration and
evaluation inventory.
(4) Represents the valuation allowance established for U.S. net operating loss
carryforwards acquired in connection with the AFW acquisition.
(5) Reflects the increase in the valuation allowance associated with net
operating losses of the Company's Japanese subsidiary.
(6) Reversal of the valuation allowance related to US tax credits.
(7) Disposal of excess and obsolete inventory.
(8) Reflects the increase in the valuation allowance associated with net
operating losses of the Company's Japanese subsidiary plus an increase in
the valuation allowance related to US tax credits.
(9) Restated to conform with the fiscal 1998 presentation.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
KULICKE and SOFFA INDUSTRIES, INC.
By: C. SCOTT KULICKE
------------------------------
C. Scott Kulicke
Chairman of the Board and
Chief Executive Officer
Dated: December 18, 1998
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this Report has been signed by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------------- --------------------- -----------------
/s/ C. SCOTT KULICKE
- -----------------------------
<S> <C> <C>
C. Scott Kulicke Chairman of the Board December 18, 1998
(Principal Executive Officer) and Director
/s/ CLIFFORD G. SPRAGUE
- -----------------------------
Clifford G. Sprague Senior Vice President December 18, 1998
(Principal Financial Officer) and Chief Financial
Officer
Officer
/s/ JAMES W. BAGLEY
- -----------------------------
James W. Bagley Director December 18, 1998
/s/
- -----------------------------
Frederick W. Kulicke, Jr. Director December 18, 1998
/s/ JOHN A. O'STEEN
- -----------------------------
John A. O'Steen Director December 18, 1998
/s/ ALLISON F. PAGE
- -----------------------------
Allison F. Page Director December 18, 1998
/s/ MACDONELL ROEHM, JR.
- -----------------------------
MacDonell Roehm, Jr. Director December 18, 1998
/s/ LARRY D. STRIPLIN, JR.
- -----------------------------
Larry D. Striplin, Jr. Director December 18, 1998
/s/ C. WILLIAM ZADEL
- -----------------------------
C. William Zadel Director December 18, 1998
</TABLE>
57
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER ITEM
- -------- ----------------------------------------------------------------------
10(xvi) Amendment No. 1 dated September 18, 1998 to the Company's November
1994 Officers' Deferred Compensation Plan
10(xviii) Convertible Loan Agreements between the Company, Flip Chip
Technologies, LLC and Delco Electronics Corporation dated June 16,
1997, October 30, 1997, February 18, 1998 and November 19, 1998.
21 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP (Independent Accountants)
23.2 Consent of Arthur Andersen LLP (Independent Public Accountants)
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule for the Fiscal Year Ended September
30, 1997
27.3 Restated Financial Data Schedule for the Fiscal Year Ended September
30, 1996
EXHIBIT 10(xvi)
AMENDMENT NO. 1
TO THE
KULICKE & SOFFA INDUSTRIES INC.
OFFICERS' DEFERRED COMPENSATION PLAN
WHEREAS, Kulicke & Soffa Industries Inc. (the "Company") established the
Kulicke & Soffa Industries Inc. Officers' Deferred Compensation Plan (the
"Plan") effective October 1, 1994 for the benefit of its eligible officers; and
WHEREAS, the Company desires to amend the Plan, with the consent of the
participants therein, to revise the definition of "Special Circumstance":
NOW THEREFORE, effective September 18, 1998, Section 1.24 of the Plan is
hereby amended to read as follows:
1.24 Special Circumstance means the reporting by K&S of consolidated
losses equal to or in excess of $50,000,000, over a measuring period not
exceeding two fiscal years of K&S (beginning with a fiscal year in which a
loss for the year is reported). A Special Circumstance shall be deemed to
occur on the date on which K&S makes an announcement of quarterly or annual
earnings showing consolidated losses, which together with losses reported
previously during the measuring period, equal or exceed such $50,000,000
amount.
IN WITNESS WHEREOF, the Company has caused this Amendment No. 1 to be
executed by its duly authorized officers this 18th day of September 1998.
[CORPORATE SEAL] KULICKE & SOFFA INDUSTRIES INC.
Attest:___________________ By:____________________________
EXHIBIT 10(xviii)
CONVERTIBLE REVOLVING LOAN AGREEMENT
THIS CONVERTIBLE REVOLVING LOAN AGREEMENT, dated as of June 16, 1997
(herein called the "Agreement"), is entered into between KULICKE AND SOFFA
HOLDINGS, INC., a Delaware corporation ("KS"), FLIP CHIP TECHNOLOGIES, L.L.C. a
Delaware Limited Liability Company ("Borrower") and DELCO ELECTRONICS
CORPORATION, a Delaware corporation ("DE").
WITNESSETH:
A. Borrower was organized pursuant to an Operating Agreement dated as of
February 28, 1996 (as same may be amended from time to time) (the "Operating
Agreement") by and among KS, DE, and Kulicke & Soffa Industries, Inc. ("Kulicke
& Soffa"), parent of KS. KS and DE are the sole members of Borrower.
B. Borrower desires to borrow funds from KS and KS is willing to make loans
and advances to Borrower under the terms and provisions hereinafter set forth.
C. KS is willing to make the loans and advances contemplated by this
Agreement on the condition that, at KS' election, some or all of the aggregate
amounts owed to KS may be converted into a Capital Contribution to Borrower in
the manner hereinafter provided. DE is willing to approve the transactions
contemplated by this Agreement, including KS' right to convert its debt, on the
condition that DE be allowed to make corresponding purchases of additional
Units, in the manner hereinafter provided, whenever KS exercises its right to
convert debt.
NOW, THEREFORE, the parties hereto, intending to be legally bound, covenant
and agree as follows:
SECTION 1 DEFINITIONS.
SECTION 1.01 Terms Defined Herein.
"Business Day" shall mean a day, other than a Saturday or Sunday, on which
the parties are open for business.
"Closing Date" shall mean the date of this Agreement.
"Loan Documents" shall mean this Agreement, the Revolving Loan Note and the
Collateral Documents to be executed and delivered to KS pursuant to the
provisions hereof.
"Material Adverse Effect" shall mean any specified event, condition or
occurrence as to Borrower which individually or in the aggregate with any other
such event, condition or occurrence and whether through the effect on Borrower's
business, property, prospects, profits or condition (financial or otherwise) or
otherwise could reasonably be expected to (a) result in, to the extent not fully
covered by insurance, any liability, loss, forfeiture, penalty, costs, fine,
expense, payment or other monetary obligation or loss of property of Borrower in
excess of 10% of Borrower's consolidated shareholder's equity, determined in
accordance with GAAP, as reflected in Borrower's then most recently prepared
annual or quarterly financial statements, and/or (b) materially impair the
ability of the Borrower to meet all of its Obligations to KS.
"Obligations" shall mean the obligations of Borrower to pay the principal
of and interest on the Revolving Loan Note and to satisfy and perform all of its
other existing and future obligations, liabilities and indebtedness to KS,
whether hereunder or, under any of the Loan Documents, and whether matured or
unmatured, direct or contingent, joint or several, including, without
limitation, any extensions, modifications, renewals thereof and substitutions
therefor.
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"Person" shall mean any individual, corporation, participation,
association, joint-stock company, trust, unincorporated organization, joint
venture, court or government division or agency thereof.
"Rate" shall mean the rate of interest specified in Section 2 of this
Agreement.
"Revolving Loan" shall mean the Revolving Loan facility established
pursuant to Section 2 of this Agreement.
"Revolving Loan Limit" shall mean $5,000,000.
"Revolving Loan Note" shall mean the promissory note evidencing Borrower's
obligation to repay the Revolving Loan.
"Revolving Loan Termination Date" shall mean the second anniversary of the
Closing Date or such other earlier date to which maturity is accelerated upon
occurrence of an Event of Default under Section 6. KS and Borrower may (without
obligation to do so) hereafter agree in writing to renew or extend the Revolving
Loan Termination Date with the prior written consent of DE.
SECTION 1.2 Terms Defined In Operating Agreement.
In addition to the foregoing definitions, the following terms, when used
herein, shall have the meanings given to them in the Operating Agreement:
"Additional Capital Contributions"
"Annual Budget"
"Budget Year"
"Capital Account"
"Capital Contributions"
"Member"
"Preliminary Valuation"
"Unit"
SECTION 2 THE REVOLVING LOAN.
SECTION 2.01 Revolving Loan.
Under and subject to the terms and conditions of this Agreement and within
the Revolving Loan Limit and as requested by an authorized officer of Borrower
from time to time through but not including the Revolving Loan Termination Date,
KS hereby establishes a Revolving Loan facility (the "Revolving Loan") pursuant
to which KS will make cash advances from time to time to or for the account of
Borrower. Unless sooner terminated pursuant to any other provision of this
Agreement, the Revolving Loan will terminate and the entire principal balance of
the Revolving Loan, together with all unpaid accrued interest thereon, shall be
repaid on the Revolving Loan Termination Date, without notice or demand. Each
advance under the Revolving Loan shall be made or issued following the giving of
notice by an authorized officer of Borrower to KS (which notice shall be given
not later than five (5) Business Days preceding the Business Day on which such
cash advance is required), specifying the date of borrowing and the amount
thereof. Cash advances shall be in multiples of $100,000. Upon fulfillment of
all applicable conditions to such advance set forth herein, KS will make such
funds available to the Borrower by wire transfer of funds to an account
designated by Borrower. The outstanding principal balance under the Revolving
Loan may fluctuate from time to time, to be reduced by repayments made by
Borrower, and to be increased by future loans, advances and extensions of credit
which may be made by KS, to or for the benefit of Borrower. Contemporaneously
herewith, Borrower will execute and deliver to KS the Revolving Loan Note to
evidence Borrower's obligation to repay KS for all amounts due or which may
become due in connection with the Revolving Loan.
SECTION 2.02 Interest Rate and Payments of Interest.
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(A) Interest shall be calculated and paid as follows:
(1) Interest on the principal balance of the Revolving Loan, from time
to time outstanding, will accrue at a rate equal to the Prime Rate in
effect from time to time plus one and one-half percentage points (1.5%) per
annum (the "Rate"). For the purposes hereof, "Prime Rate" means the Prime
Rate as published in the Wall Street Journal in the section entitled "Money
Rates."
(2) Each time the Prime Rate shall change, the Rate shall change
contemporaneously with such change in the Prime Rate. Interest shall be
calculated on the basis of a 365-day year, counting the actual number of
days elapsed, and shall be payable semi-annually, in arrears, on the last
day of each six month period during the term of the Revolving Loan.
(B) If, at any time, the Rate shall be finally determined by any court of
competent jurisdiction, governmental agency or tribunal to exceed the maximum
rate of interest permitted by any applicable Laws, then, for such time as such
Rate would be deemed excessive, application thereof shall be suspended and there
shall be charged in lieu thereof the maximum rate of interest permissible under
such Laws.
SECTION 2.03 Payments to KS.
All payments of interest on and principal of the Revolving Loan and all
fees and all other sums payable to KS hereunder shall be paid directly to KS in
immediately available funds, in United States currency. If any payment of
principal of, or interest on the Revolving Loan provided for herein or any other
amount due hereunder shall fall due on a day which is not a Business Day, then
such due date shall be extended to the next succeeding Business Day and
additional interest shall accrue and be payable for the period of such
extension. Borrower may, at its option, prepay the accrued interest on, and
principal of, the Revolving Loan from time to time and in whole or in part
without penalty.
SECTION 3 CONDITIONS.
The making of the Revolving Loan hereunder is subject to the following
conditions precedent (all documents to be in form and substance satisfactory to
KS and its counsel):
SECTION 3.01 Documents Required for the Closing.
The Borrower shall have duly executed and delivered to KS the following
items on the Closing Date:
(A) This Agreement;
(B) The Revolving Loan Note; and
(C) Each of the Collateral Documents, agreements, waivers, and statements
required by Section 4 hereof.
SECTION 3.02 Conditions for Advances.
Each request for an advance under the Revolving Loan shall constitute a
certification and affirmation that no Event of Default shall have occurred and
be continuing, and no event shall have occurred and be continuing which, with
the giving of notice or the passage of time, or both, could constitute an Event
of Default.
SECTION 4 COLLATERAL SECURITY.
SECTION 4.01 Collateral.
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To secure payment and performance of the Obligations, Borrower shall
execute, deliver and fully perform the Security Agreement attached hereto as
Exhibit A. The security interests, liens and rights granted by the Security
Agreement in favor of KS shall be first and prior liens.
4.02 Financing Statements.
The Borrower shall execute and deliver to KS such financing statements as
are necessary and appropriate to perfect KS's rights under the Security
Agreement and shall pay or reimburse KS for all costs, fees and taxes associated
with filing or recording such financing statements. Collectively, the Security
Agreement and any financing statements are referred to as the "Collateral
Documents."
SECTION 5 REPRESENTATIONS AND WARRANTIES.
To induce KS to enter into this Agreement, Borrower represents and warrants
to KS that:
(A) The making and performance of the Loan Documents will not (immediately,
with the passage of time, or with the giving of notice and the passage of time):
(1) Violate, or result in a default under, any contract, agreement or
instrument to which Borrower is a party or by which Borrower or its
property is or may be bound, where the same would have a Material Adverse
Effect, or
(2) Result in the creation or imposition of any security interest in,
or lien or encumbrance upon, any of the assets of Borrower, except such as
are in favor of KS;
(B) Borrower has the power and authority to enter into and perform the Loan
Documents and to incur the Obligations herein and therein provided for, and has
taken all proper and necessary action, corporate or otherwise, to authorize the
execution, delivery and performance of the Loan Documents;
(C) The Loan Documents, when executed and delivered will be, valid, binding
and enforceable against Borrower in accordance with their respective terms,
except to the extent that the enforceability thereof is limited by bankruptcy
and similar laws and equitable principles affecting the rights of creditors
generally;
(D) There are no liens, security interests or other encumbrances on or
affecting any of Borrower's personal or real property.
SECTION 6 DEFAULT.
SECTION 6.01 Events of Default.
Each of the following events shall constitute an Event of Default and upon
the occurrence thereof KS shall thereupon have the option (which is not intended
to diminish, alter or limit any other of KS' rights described in the Loan
Documents or any related agreements and documents) (A) to declare Borrower in
default under the Loan Documents, (B) to terminate any undertaking of KS in
connection with the Revolving Loan, and/or (C) to declare all Obligations
immediately due and payable, including, but not limited to, interest, principal,
expenses, advances to protect KS' position and reasonable attorneys' fees to
enforce the Loan Documents, and all related agreements and documents, and all of
KS' rights hereunder and thereunder, all without demand, notice, presentment or
protest, or further action of any kind:
(A) Borrower fails to pay to KS within ten (10) days after its due date,
any installment of interest or other charge payable hereunder or under any other
of the Loan Documents, or Borrower fails to pay to KS on the Revolving Loan
Termination Date, all unpaid principal and interest on the Revolving Loan.
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(B) Borrower fails to observe or perform any other material Obligation to
be observed or performed by it hereunder or under any of the other Loan
Documents, which failure, to the extent reasonably susceptible of cure, is not
cured within thirty (30) days of the earlier of (i) the date on which Borrower
has actual knowledge thereof and (ii) KS' giving Borrower written notice of the
occurrence thereof.
(C) Borrower becomes insolvent or generally fails to pay, or admits its
inability to pay, debts as they become due or makes a general assignment for the
benefit of any of its creditors.
(D) Borrower applies for, consents to, or acquiesces in the appointment of,
a trustee, receiver or other custodian for Borrower or any of the property of
Borrower or, in the absence of such application, consent or acquiescence, a
trustee, receiver or other custodian is appointed for Borrower or for a
substantial part of its property and is not discharged within sixty (60) days.
(E) Any bankruptcy, reorganization, liquidation, dissolution or other case
and proceeding under any bankruptcy or insolvency law is commenced in respect of
Borrower and if such case or proceeding is not commenced by Borrower, it is
consented to or acquiesced in by Borrower or remains for sixty (60) days
undismissed.
(F) A judgment creditor of Borrower shall obtain actual or constructive
possession of any of Borrower's properties by any means, including, but without
limitation, levy, distraint, replevin or self-help.
SECTION 6.02 Remedies.
After any acceleration of the Obligations, KS shall have in addition to the
rights and remedies given it by the Loan Documents, all those allowed by all
applicable laws.
SECTION 7 CONVERSION OF REVOLVING LOAN DEBT
SECTION 7.01 Revolving Loan Debt Defined.
As used in this Section 7, "Revolving Loan Debt" means the unpaid principal
of, and accrued interest on, the Revolving Loan, together with all other amounts
due from Borrower to KS pursuant to the Loan Documents.
SECTION 7.02 Conversion.
(A) KS shall have the right, exercisable in its discretion at any time, and
from time to time, during the period beginning 365 calendar days after the
Closing Date and continuing as long as any amount of Revolving Loan Debt is
outstanding, to convert some, or all, of the then outstanding Revolving Loan
Debt into a Capital Contribution and receive additional Units, but KS may not
(a) exercise its right to convert more than once during any 180 day period, or
(b) acquire Units upon any conversion to the extent it would cause DE to become
a Class B Member as defined in the Operation Agreement. In order to exercise
such conversion right, KS shall provide a written notice to Borrower and to DE,
specifying the amount of outstanding Revolving Loan Debt that KS elects to
convert to a Capital Contribution, which election may be subject to appraisal
and modification rights, as described in Sections 7.02(B) and 7.02(C) below. The
purchase price of the Units to be acquired by KS upon conversion shall be
determined in accordance with Section 7.02(B). On the date the conversion is
deemed completed, as hereinafter defined: (i) the amount in KS' Capital Account
shall be adjusted to reflect the additional Capital Contribution; (ii) KS shall
receive the additional Units based on the applicable Unit price; and (iii) the
amount of Revolving Loan Debt shall be reduced by the amount converted. The
conversion shall be deemed completed on the date of KS' written notice of
conversion, unless KS has the right under Section 7.02(C) below to increase or
decrease the amount of Revolving Loan Debt it elects to convert, in which event
the conversion shall be deemed completed, or rescinded if applicable, on the
date KS issues, or is deemed to have issued, its notice under Section 7.02(C).
Promptly following the date conversion is deemed completed, Borrower shall issue
a statement to each Member setting forth the Capital Contributions of each of
the Members, and the number of Units held by each of the Members, both before,
and after, giving effect to KS' additional Capital Contribution.
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(B) The price of the additional Units to be acquired by KS pursuant to each
election under Section 7.02(A) shall be based upon the fair market value of
Borrower as of the last day of the calendar month immediately preceding such
election (the "Valuation Date") and shall be equal to whichever of the following
amounts is stated to be applicable:
(i) if an appraisal has been completed pursuant to Section 3.3 of the
Operating Agreement and the date as of which the Company was appraised
within ninety (90) days of the Valuation Date, then the issue price of
Units specified in such appraisal shall be the applicable amount; or
(ii) if an appraisal as described in (i) has not been completed then
the price of Units shall be determined in accordance with the terms of
Sections 3.3 and 3.4 of the Operating Agreement, in which event the Unit
price determined by such appraisal shall be the applicable amount.
(C) If the price of Units to be acquired by KS pursuant to Section 7.02(A)
is determined by an appraisal pursuant to 7.02(B)(ii), then KS shall, by written
notice, have the right to increase or decrease the amount of Revolving Loan Debt
it elects to convert, including the right to elect not to convert any Revolving
Loan Debt.
SECTION 8 DE CONSENT AND RIGHT TO CONTRIBUTE.
SECTION 8.01 DE Consent.
DE hereby consents to the execution, delivery and performance of this
Agreement and all Collateral Documents and hereby approves all the terms of, and
all transactions contemplated by, this Agreement.
SECTION 8.02 DE Right to Purchase Additional Units.
The parties to this Agreement agree that DE shall have the right, for a
period of 120 days after the conversion is deemed completed in accordance with
Section 7.02, exercisable each time that KS exercises its right to convert
Revolving Loan Debt and purchase Units as provided in Section 7 above, to
purchase that number of additional Units which will result in DE owning the same
proportion of total Units issued by Borrower after giving effect to the
purchases of additional Units by KS and DE as DE owned prior to such purchases
of additional Units by KS and DE. The purchase price of the Units acquired by DE
pursuant to this Section shall be the same as the purchase price of the
corresponding Units acquired by KS. In order to exercise this right, DE shall
deliver a written notice to Borrower and KS indicating DE's exercise of the
right and specifying the appropriate amount of money to be contributed and Units
to be received. Upon Borrower's receipt of the appropriate additional Capital
Contribution in cash, the Capital Account of DE , and the number of Units issued
to DE, shall be adjusted accordingly. Borrower shall issue a statement to the
Members, like the statement called for in Section 7.02(A), reflecting these
changes in the Capital Account of, and Units held by, DE.
SECTION 9 MISCELLANEOUS.
SECTION 9.01 Notices.
Any notices or consents required or permitted by this Agreement or any of
the Loan Documents shall be given as specified in Section 13.2 of the Operating
Agreement except as otherwise provided in this Agreement.
SECTION 9.02 Applicable Law.
The substantive Laws of the Commonwealth of Pennsylvania shall govern the
construction of this Agreement and the rights and remedies of the parties
hereto.
SECTION 9.03 Binding Effect; Assignment; Entire Agreement; Modification.
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This Agreement may only be assigned to a Member. Borrower has no right to
assign any of its respective rights or Obligations hereunder without the prior
written consent of KS. This Agreement, and the documents executed and delivered
pursuant hereto, constitute the entire agreement among the parties relating to
the subject matter thereof. No modification or amendment hereof or of any
agreement referred to herein shall be binding or enforceable unless in writing
and signed on behalf of the party against whom enforcement is sought.
SECTION 9.04 Counterparts.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original, but all of which together shall constitute
but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first above written.
KULICKE AND SOFFA HOLDINGS, INC.
By:
---------------------------------
FLIP CHIP TECHNOLOGIES, INC.
By:
---------------------------------
DELCO ELECTRONICS CORPORATION
By:
---------------------------------
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CONVERTIBLE REVOLVING LOAN AGREEMENT
THIS CONVERTIBLE REVOLVING LOAN AGREEMENT, dated as of October 30, 1997
(herein called the "Agreement"), is entered into between KULICKE AND SOFFA
HOLDINGS, INC., a Delaware corporation ("KS"), FLIP CHIP TECHNOLOGIES, L.L.C. a
Delaware Limited Liability Company ("Borrower") and DELCO ELECTRONICS
CORPORATION, a Delaware corporation ("DE").
WITNESSETH:
A. Borrower was organized pursuant to an Operating Agreement dated as of
February 28, 1996 (as same may be amended from time to time) (the "Operating
Agreement") by and among KS, DE, and Kulicke & Soffa Industries, Inc. ("Kulicke
& Soffa"), parent of KS. KS and DE are the sole members of Borrower.
B. Borrower, KS and DE are parties to a Convertible Revolving Loan
Agreement dated as of June 16, 1997 (the "First Loan Agreement"). In connection
with the First Loan Agreement, Borrower executed a Revolving Loan Note dated
June 16, 1997 and Borrower and KS executed a Security Agreement dated as of June
16, 1997 (the "Security Agreement").
C. Borrower desires to borrow additional funds from KS and KS is willing to
make additional loans and advances to Borrower under the terms and provisions
hereinafter set forth.
D. KS is willing to make the loans and advances contemplated by this
Agreement on the condition that, at KS' election, some or all of the aggregate
amounts owed to KS may be converted into a Capital Contribution to Borrower in
the manner hereinafter provided. DE is willing to approve the transactions
contemplated by this Agreement, including KS' right to convert its debt, on the
condition that DE be allowed to make corresponding purchases of additional
Units, in the manner hereinafter provided, whenever KS exercises its right to
convert debt.
NOW, THEREFORE, the parties hereto, intending to be legally bound, covenant
and agree as follows:
SECTION 1 DEFINITIONS
SECTION 1.1 Terms Defined Herein.
"Business Day" shall mean a day, other than a Saturday or Sunday, on which
the parties are open for business.
"Closing Date" shall mean the date of this Agreement.
"Loan Documents" shall mean this Agreement, the Revolving Loan Note and the
Collateral Documents to be executed and delivered to KS pursuant to the
provisions hereof.
"Material Adverse Effect" shall mean any specified event, condition or
occurrence as to Borrower which individually or in the aggregate with any other
such event, condition or occurrence and whether through the effect on Borrower's
business, property, prospects, profits or condition (financial or otherwise) or
otherwise could reasonably be expected to (a) result in, to the extent not fully
covered by insurance, any liability, loss, forfeiture, penalty, costs, fine,
expense, payment or other monetary obligation or loss of property of Borrower in
excess of 10% of Borrower's consolidated shareholder's equity, determined in
accordance with GAAP, as reflected in Borrower's then most recently prepared
annual or quarterly financial statements, and/or (b) materially impair the
ability of the Borrower to meet all of its Obligations to KS.
"Obligations" shall mean the obligations of Borrower to pay the principal
of and interest on the Revolving Loan Note and to satisfy and perform all of its
other existing and future obligations, liabilities and indebtedness to KS,
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whether hereunder or, under any of the Loan Documents, and whether matured or
unmatured, direct or contingent, joint or several, including, without
limitation, any extensions, modifications, renewals thereof and substitutions
therefor.
"Person" shall mean any individual, corporation, participation,
association, joint-stock company, trust, unincorporated organization, joint
venture, court or government division or agency thereof.
"Rate" shall mean the rate of interest specified in Section 2 of this
Agreement.
"Revolving Loan" shall mean the Revolving Loan facility established
pursuant to Section 2 of this Agreement.
"Revolving Loan Limit" shall mean $5,000,000.
"Revolving Loan Note" shall mean the promissory note evidencing Borrower's
obligation to repay the Revolving Loan.
"Revolving Loan Termination Date" shall mean the second anniversary of the
Closing Date or such other earlier date to which maturity is accelerated upon
occurrence of an Event of Default under Section 6. KS and Borrower may (without
obligation to do so) hereafter agree in writing to renew or extend the Revolving
Loan Termination Date with the prior written consent of DE.
SECTION 1.2 Terms Defined In Operating Agreement.
In addition to the foregoing definitions, the following terms, when used
herein, shall have the meanings given to them in the Operating Agreement:
"Additional Capital Contributions"
"Annual Budget"
"Budget Year"
"Capital Account"
"Capital Contributions"
"Member"
"Preliminary Valuation"
"Unit"
SECTION 2 THE REVOLVING LOAN
SECTION 2.1 Revolving Loan.
Under and subject to the terms and conditions of this Agreement and within
the Revolving Loan Limit and as requested by an authorized officer of Borrower
from time to time through but not including the Revolving Loan Termination Date,
KS hereby establishes a Revolving Loan facility (the "Revolving Loan") pursuant
to which KS will make cash advances from time to time to or for the account of
Borrower. Unless sooner terminated pursuant to any other provision of this
Agreement, the Revolving Loan will terminate and the entire principal balance of
the Revolving Loan, together with all unpaid accrued interest thereon, shall be
repaid on the Revolving Loan Termination Date, without notice or demand. Each
advance under the Revolving Loan shall be made or issued following the giving of
notice by an authorized officer of Borrower to KS (which notice shall be given
not later than five (5) Business Days preceding the Business Day on which such
cash advance is required), specifying the date of borrowing and the amount
thereof. Cash advances shall be in multiples of $100,000. Upon fulfillment of
all applicable conditions to such advance set forth herein, KS will make such
funds available to the Borrower by wire transfer of funds to an account
designated by Borrower. The outstanding principal balance under the Revolving
Loan may fluctuate from time to time, to be reduced by repayments made by
Borrower, and to be increased by future loans, advances and extensions of credit
which may be made by KS, to or for the benefit of Borrower. Contemporaneously
herewith, Borrower will execute and
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deliver to KS the Revolving Loan Note to evidence Borrower's obligation to repay
KS for all amounts due or which may become due in connection with the Revolving
Loan.
SECTION 2.2 Interest Rate and Payments of Interest.
(A) Interest shall be calculated and paid as follows:
(1) Interest on the principal balance of the Revolving Loan, from time
to time outstanding, will accrue at a rate equal to the Prime Rate in
effect from time to time plus one and one-half percentage points (1.5%) per
annum (the "Rate"). For the purposes hereof, "Prime Rate" means the Prime
Rate as published in the Wall Street Journal in the section entitled "Money
Rates."
(2) Each time the Prime Rate shall change, the Rate shall change
contemporaneously with such change in the Prime Rate. Interest shall be
calculated on the basis of a 365-day year, counting the actual number of
days elapsed, and shall be payable on the Revolving Loan Termination Date.
(B) If, at any time, the Rate shall be finally determined by any court of
competent jurisdiction, governmental agency or tribunal to exceed the maximum
rate of interest permitted by any applicable Laws, then, for such time as such
Rate would be deemed excessive, application thereof shall be suspended and there
shall be charged in lieu thereof the maximum rate of interest permissible under
such Laws.
SECTION 2.3 Payments to KS.
All payments of interest on and principal of the Revolving Loan and all
fees and all other sums payable to KS hereunder shall be paid directly to KS in
immediately available funds, in United States currency. If any payment of
principal of, or interest on the Revolving Loan provided for herein or any other
amount due hereunder shall fall due on a day which is not a Business Day, then
such due date shall be extended to the next succeeding Business Day and
additional interest shall accrue and be payable for the period of such
extension. Borrower may, at its option, prepay the accrued interest on, and
principal of, the Revolving Loan from time to time and in whole or in part
without penalty.
SECTION 3 CONDITIONS
The making of the Revolving Loan hereunder is subject to the following
conditions precedent (all documents to be in form and substance satisfactory to
KS and its counsel):
SECTION 3.1 Documents Required for the Closing.
The Borrower shall have duly executed and delivered to KS the following
items on the Closing Date:
(A) This Agreement;
(B) The Revolving Loan Note;
(C) The Amendment to the First Loan Agreement attached hereto as Exhibit
B; and
(D) Each of the Collateral Documents, agreements, waivers, and statements
required by Section 4 hereof.
SECTION 3.2 Conditions for Advances.
Each request for an advance under the Revolving Loan shall constitute a
certification and affirmation that no Event of Default shall have occurred and
be continuing, and no event shall have occurred and be continuing which, with
the giving of notice or the passage of time, or both, could constitute an Event
of Default.
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SECTION 4 COLLATERAL SECURITY
SECTION 4.1 Collateral.
To secure payment and performance of the Obligations, Borrower shall
execute, deliver and fully perform the Amended and Restated Security Agreement
attached hereto as Exhibit A. The security interests, liens and rights granted
by the Amended and Restated Security Agreement in favor of KS shall be first and
prior liens.
SECTION 4.2 Financing Statements.
The Borrower shall execute and deliver to KS such financing statements as
are necessary and appropriate to perfect KS' rights under the Amended and
Restated Security Agreement and shall pay or reimburse KS for all costs, fees
and taxes associated with filing or recording such financing statements.
Collectively, the Amended and Restated Security Agreement and any financing
statements are referred to as the "Collateral Documents."
SECTION 5 REPRESENTATIONS AND WARRANTIES
To induce KS to enter into this Agreement, Borrower represents and warrants
to KS that:
(A) The making and performance of the Loan Documents will not (immediately,
with the passage of time, or with the giving of notice and the passage of time):
(1) Violate, or result in a default under, any contract, agreement or
instrument to which Borrower is a party or by which Borrower or its
property is or may be bound, where the same would have a Material Adverse
Effect, or
(2) Result in the creation or imposition of any security interest in,
or lien or encumbrance upon, any of the assets of Borrower, except such as
are in favor of KS;
(B) Borrower has the power and authority to enter into and perform the Loan
Documents and to incur the Obligations herein and therein provided for, and has
taken all proper and necessary action, corporate or otherwise, to authorize the
execution, delivery and performance of the Loan Documents;
(C) The Loan Documents, when executed and delivered will be, valid, binding
and enforceable against Borrower in accordance with their respective terms,
except to the extent that the enforceability thereof is limited by bankruptcy
and similar laws and equitable principles affecting the rights of creditors
generally;
(D) There are no liens, security interests or other encumbrances on or
affecting any of Borrower's personal or real property other than those granted
KS under the Security Agreement and the Amended and Restated Security Agreement.
SECTION 6 DEFAULT
SECTION 6.1 Events of Default.
Each of the following events shall constitute an Event of Default and upon
the occurrence thereof KS shall thereupon have the option (which is not intended
to diminish, alter or limit any other of KS' rights described in the Loan
Documents or any related agreements and documents) (A) to declare Borrower in
default under the Loan Documents, (B) to terminate any undertaking of KS in
connection with the Revolving Loan, and/or (C) to declare all Obligations
immediately due and payable, including, but not limited to, interest, principal,
expenses, advances to protect KS' position and reasonable attorneys' fees to
enforce the Loan Documents, and all related agreements and documents, and all of
KS' rights hereunder and thereunder, all without demand, notice, presentment or
protest, or further action of any kind:
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(A) Borrower fails to pay to KS within ten (10) days after its due date,
any installment of interest or other charge payable hereunder or under any other
of the Loan Documents, or Borrower fails to pay to KS on the Revolving Loan
Termination Date, all unpaid principal and interest on the Revolving Loan.
(B) Borrower fails to observe or perform any other material Obligation to
be observed or performed by it hereunder or under any of the other Loan
Documents, which failure, to the extent reasonably susceptible of cure, is not
cured within thirty (30) days of the earlier of (i) the date on which Borrower
has actual knowledge thereof and (ii) KS' giving Borrower written notice of the
occurrence thereof.
(C) Borrower becomes insolvent or generally fails to pay, or admits its
inability to pay, debts as they become due or makes a general assignment for the
benefit of any of its creditors.
(D) Borrower applies for, consents to, or acquiesces in the appointment of,
a trustee, receiver or other custodian for Borrower or any of the property of
Borrower or, in the absence of such application, consent or acquiescence, a
trustee, receiver or other custodian is appointed for Borrower or for a
substantial part of its property and is not discharged within sixty (60) days.
(E) Any bankruptcy, reorganization, liquidation, dissolution or other case
and proceeding under any bankruptcy or insolvency law is commenced in respect of
Borrower and if such case or proceeding is not commenced by Borrower, it is
consented to or acquiesced in by Borrower or remains for sixty (60) days
undismissed.
(F) A judgment creditor of Borrower shall obtain actual or constructive
possession of any of Borrower's properties by any means, including, but without
limitation, levy, distraint, replevin or self-help.
(G) The occurrence of an Event of Default under the First Loan Agreement.
SECTION 6.2 Remedies.
After any acceleration of the Obligations, KS shall have in addition to the
rights and remedies given it by the Loan Documents, all those allowed by all
applicable laws.
SECTION 7 CONVERSION OF REVOLVING LOAN DEBT
SECTION 7.1 Revolving Loan Debt Defined.
As used in this Section 7, "Revolving Loan Debt" means the unpaid principal
of, and accrued interest on, the Revolving Loan, together with all other amounts
due from Borrower to KS pursuant to the Loan Documents.
SECTION 7.2 Conversion.
(A) KS shall have the right, exercisable in its discretion at any time, and
from time to time during the period beginning on June 16, 1998 and continuing as
long as any amount of Revolving Loan Debt is outstanding, to convert some, or
all, of the then outstanding Revolving Loan Debt into a Capital Contribution and
receive additional Units. In order to exercise such conversion right, KS shall
provide a written notice to Borrower and to DE, specifying the amount of
outstanding Revolving Loan Debt that KS elects to convert to a Capital
Contribution, which election may be subject to appraisal and modification
rights, as described in Sections 7.2(B) and 7.2(C) below. The purchase price of
the Units to be acquired by KS upon conversion shall be determined in accordance
with Section 7.2(B). On the date the conversion is deemed completed, as
hereinafter defined: (i) the amount in KS' Capital Account shall be adjusted to
reflect the additional Capital Contribution; (ii) KS shall receive the
additional Units based on the applicable Unit price; and (iii) the amount of
Revolving Loan Debt shall be reduced by the amount converted. The conversion
shall be deemed completed on the date of KS' written notice of conversion,
unless KS has the right under Section 7.2(C) below to increase or decrease the
amount of Revolving Loan Debt it elects to convert, in which event the
conversion
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shall be deemed completed, or rescinded if applicable, on the date KS issues, or
is deemed to have issued, its notice under Section 7.2(C). Promptly following
the date conversion is deemed completed, Borrower shall issue a statement to
each Member setting forth the Capital Contributions of each of the Members, and
the number of Units held by each of the Members, both before, and after, giving
effect to KS' additional Capital Contribution.
(B) The price of the additional Units to be acquired by KS pursuant to each
election under Section 7.2(A) shall be based upon the fair market value of
Borrower as of the last day of the calendar month immediately preceding such
election (the "Valuation Date") and shall be equal to whichever of the following
amounts is stated to be applicable:
(i) if an appraisal has been completed pursuant to Section 3.3 of the
Operating Agreement and the date as of which the Company was appraised
within ninety (90) days of the Valuation Date, then the issue price of
Units specified in such appraisal shall be the applicable amount; or
(ii) if an appraisal as described in (i) has not been completed then
the price of Units shall be determined in accordance with the terms of
Sections 3.3 and 3.4 of the Operating Agreement, in which event the Unit
price determined by such appraisal shall be the applicable amount.
(C) If the price of Units to be acquired by KS pursuant to Section 7.2(A)
is determined by an appraisal pursuant to 7.2(B)(ii), then KS shall, by written
notice, have the right to increase or decrease the amount of Revolving Loan Debt
it elects to convert, including the right to elect not to convert any Revolving
Loan Debt.
(D) If KS exercises its conversion rights pursuant to this Section, and if,
within thirty (30) days thereafter, DE provides written notice to KS of DE's
good faith intention to seek management approval to exercise its rights under
Section 8.2 so as to avoid becoming a Class B Member, then the determination of
whether DE becomes a Class B Member shall not be made until after: (i) the
issuance of additional Units to DE pursuant to Section 8.2; or (ii) if DE, for
whatever reason, does not exercise its right to acquire additional Units
pursuant to Section 8.2, upon the expiration of the ninety (90) day period
specified therein.
SECTION 8 DE CONSENT AND RIGHT TO CONTRIBUTE
SECTION 8.1 DE Consent.
DE hereby consents to the execution, delivery and performance of this
Agreement and all Collateral Documents and hereby approves all the terms of, and
all transactions contemplated by, this Agreement.
SECTION 8.2 DE Right to Purchase Additional Units.
The parties to this Agreement agree that DE shall have the right, for a
period of 90 days after the conversion is deemed completed in accordance with
Section 7.2, exercisable each time that KS exercises its right to convert
Revolving Loan Debt and purchase Units as provided in Section 7 above, to
purchase a number of additional Units up to, but not exceeding, that number of
additional Units which will result in DE owning the same proportion of total
Units issued by Borrower after giving effect to the purchases of additional
Units by KS and DE as DE owned prior to such purchases of additional Units by KS
and DE. The purchase price of the Units acquired by DE pursuant to this Section
shall be the same as the purchase price of the corresponding Units acquired by
KS. In order to exercise this right, DE shall deliver a written notice to
Borrower and KS indicating DE's exercise of the right and specifying the
appropriate amount of money to be contributed and Units to be received. Upon
Borrower's receipt of the appropriate additional Capital Contribution in cash,
the Capital Account of DE, and the number of Units issued to DE, shall be
adjusted accordingly. Borrower shall issue a statement to the Members, like the
statement called for in Section 7.2(A), reflecting these changes in the Capital
Account of, and Units held by, DE.
SECTION 9 MISCELLANEOUS
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SECTION 9.1 Notices.
Any notices or consents required or permitted by this Agreement or any of
the Loan Documents shall be given as specified in Section 13.2 of the Operating
Agreement except as otherwise provided in this Agreement.
SECTION 9.2 Applicable Law.
The substantive Laws of the Commonwealth of Pennsylvania shall govern the
construction of this Agreement and the rights and remedies of the parties
hereto.
SECTION 9.3 Binding Effect; Assignment; Entire Agreement; Modification.
This Agreement may only be assigned to a Member. Borrower has no right to
assign any of its respective rights or Obligations hereunder without the prior
written consent of KS. This Agreement, and the documents executed and delivered
pursuant hereto, constitute the entire agreement among the parties relating to
the subject matter thereof. No modification or amendment hereof or of any
agreement referred to herein shall be binding or enforceable unless in writing
and signed on behalf of the party against whom enforcement is sought.
SECTION 9.4 Counterparts.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original, but all of which together shall constitute
but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first above written.
KULICKE AND SOFFA HOLDINGS, INC.
By:
----------------------------------
FLIP CHIP TECHNOLOGIES, INC.
By:
----------------------------------
DELCO ELECTRONICS CORPORATION
By:
----------------------------------
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CONVERTIBLE LOAN AGREEMENT
THIS CONVERTIBLE LOAN AGREEMENT, dated as of February 18, 1998 (herein
called the "Agreement"), is entered into between KULICKE AND SOFFA HOLDINGS,
INC., a Delaware corporation ("KS"), FLIP CHIP TECHNOLOGIES, L.L.C. a Delaware
Limited Liability Company ("Borrower") and DELCO ELECTRONICS CORPORATION, a
Delaware corporation ("DE").
WITNESSETH:
A. Borrower was organized pursuant to an Operating Agreement dated as of
February 28, 1996 (as same may be amended from time to time; the "Operating
Agreement") by and among KS, DE, and Kulicke & Soffa Industries, Inc. ("Kulicke
& Soffa"), parent of KS. KS and DE are the sole members of Borrower.
B. Borrower, KS and DE (collectively, the "Parties") are parties to a
Convertible Revolving Loan Agreement dated as of June 16, 1997 (the "First Loan
Agreement") and a Convertible Revolving Loan Agreement dated as of October 30,
1997 (the "Second Loan Agreement"). In connection with the First Loan Agreement,
Borrower and KS executed a Security Agreement dated as of June 16, 1997 which
was amended and restated in its entirety in connection with the Second Loan
Agreement by an Amended and Restated Security Agreement dated as of October 30,
1997 (the "Amended and Restated Security Agreement").
C. Borrower desires to borrow additional funds from KS, and KS is willing
to make additional loans and advances to Borrower under the terms and provisions
of this Agreement.
D. Borrower desires that the current DE accounts receivable for owed to DE
by Borrower be converted to an Accounts Receivable Loan from DE to Borrower and
that future accounts payable to be paid to DE by Borrower be added to the
Accounts Receivable Loan amount, and DE is willing to establish such loan and to
have the future accounts receivable added to the such Accounts Receivable Loan
under the terms and provisions of this Agreement.
E. KS is willing to make the loans and advances contemplated by this
Agreement on the condition that, at KS' election as hereinafter set forth, some
or all of the aggregate amounts owed to KS may be converted into a Capital
Contribution to Borrower in the manner hereinafter provided. DE is willing to
approve and agree to the transactions contemplated by this Agreement, including
KS' right to convert its loans and advances into a Capital Contribution to
Borrower on the condition that DE, at its election, will either be paid in full
by Borrower the then outstanding Accounts Receivable Loan, plus accrued
interest, or DE may elect, as set forth in this Agreement, that some or all of
the aggregate amount owed to DE for its Accounts Receivable Loan may be
converted into a Capital Contribution to Borrower as provided herein.
NOW, THEREFORE, the Parties , intending to be legally bound, covenant and
agree as follows:
AGREEMENT
SECTION 1 DEFINITIONS
SECTION 1.1 Terms Defined Herein.
"Accounts Receivable" shall mean the Current Accounts Receivable (as
hereinafter defined) owed and unpaid to DE and the future accounts receivable to
be invoiced to Borrower for ongoing engineering support services provided by DE
pursuant to Article 3, Section 3.5 of the Technology Transfer Agreement (as
hereinafter defined). For the purposes of this Agreement, the term "Accounts
Receivable" shall not include any royalty or licensing payments that DE is to
receive from the Borrower under the Technology Transfer Agreement.
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"Accounts Receivable Loan" shall mean the Accounts Receivable Loan facility
established pursuant to Section 2.2 of this Agreement.
"Accounts Receivable Loan Debt" shall have the meaning defined in Section
7.3 of this Agreement.
"Accounts Receivable Loan Note" shall mean the promissory note, attached
hereto as Exhibit E, evidencing Borrower's obligation to repay the Accounts
Receivable Loan.
"Accounts Receivable Loan Termination Date" shall mean the date that KS is
paid in full (not including conversion to equity) for its First Loan Agreement
and its Second Loan Agreement, the date that a conversion of the Revolving Loan
Debt is deemed complete in accordance with Section 7.2 of this Agreement or such
other earlier date to which maturity is accelerated upon the occurrence of an
Event of Default under Section 6.1. DE and Borrower may (without any obligation
to do so) hereafter agree in writing to renew or extend the Accounts Receivable
Loan Termination Date with the prior written consent of KS.
"Business Day" shall mean a day, other than a Saturday or Sunday, on which
the Parties are open for business.
"Closing Date" shall mean the date of this Agreement.
"Collateral Documents" shall have the meaning defined in Section 4.2 of
this Agreement.
"Current Accounts Receivable" shall mean $809,384.56, which is the current
accounts receivable amount owed by Borrower to DE and unpaid as of the Closing
Date.
"Event of Default" shall have the meaning defined in Section 6.1 of this
Agreement.
"First Loan Agreement" shall have the meaning defined in Recital B of this
Agreement.
"GAAP" shall mean generally accepted accounting principles consistently
applied.
"Loan Documents" shall mean this Agreement and all documents to be executed
and delivered to KS and DE pursuant to the provisions of Section 3.1 hereof,
including the Collateral Documents.
"Material Adverse Effect" shall mean any specified event, condition or
occurrence as to Borrower which individually or in the aggregate with any other
such event, condition or occurrence and whether through the effect on Borrower's
business, property, prospects, profits or condition (financial or otherwise) or
otherwise could reasonably be expected to (a) result in, to the extent not fully
covered by insurance, any liability, loss, forfeiture, penalty, costs, fine,
expense, payment or other monetary obligation or loss of property of Borrower in
excess of 10% of Borrower's consolidated shareholder's equity, determined in
accordance with GAAP, as reflected in Borrower's then most recently prepared
annual or quarterly financial statements, and/or (b) materially impair the
ability of the Borrower to meet all of its Obligations to KS and DE.
"Obligations" shall mean the obligations of Borrower to pay the principal
of and interest on the Revolving Loan Note and the obligations of Borrower to
pay the principal and interest on the Accounts Receivable Loan Note and to
satisfy and perform all of its other existing and future obligations,
liabilities and indebtedness to KS and DE, whether hereunder or, under any of
the Loan Documents, and whether matured or unmatured, direct or contingent,
joint or several, including, without limitation, any extensions, modifications,
renewals thereof and substitutions therefor.
"Person" shall mean any individual, corporation, participation,
association, joint-stock company, trust, unincorporated organization, joint
venture, court or government division or agency thereof.
"Prime Rate" shall have the meaning defined in Section 2.3 of this
Agreement.
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"Rate" shall mean the rate of interest specified in Section 2 of this
Agreement.
"Revolving Loan" shall mean the Revolving Loan facility established
pursuant to Section 2.1 of this Agreement.
"Revolving Loan Debt" shall have the meaning defined in Section 7.1 of this
Agreement.
"Revolving Loan Limit" shall mean $12,000,000.
"Revolving Loan Note" shall mean the promissory note, attached hereto as
Exhibit D, evidencing Borrower's obligation to repay the Revolving Loan.
"Revolving Loan Termination Date" shall mean the second anniversary of the
Closing Date or such other earlier date to which maturity is accelerated upon
the occurrence of an Event of Default under Section 6. KS and Borrower may
(without any obligation to do so) hereafter agree in writing to renew or extend
the Revolving Loan Termination Date with the prior written consent of DE.
"Second Loan Agreement" shall have the meaning defined in Recital B of this
Agreement.
"Technology Transfer Agreement" shall mean the Technology Transfer
Agreement by and between DE and the Borrower, which was dated and signed on
February 28, 1996.
"Valuation Date" shall have the meaning defined in Section 7.2(B) of this
Agreement.
SECTION 1.2 Terms Defined In Operating Agreement.
In addition to the foregoing definitions, the following terms, when used
herein, shall have the meanings given to them in the Operating Agreement:
"Additional Capital Contributions"
"Annual Budget"
"Budget Year"
"Capital Account"
"Capital Contributions"
"Member"
"Preliminary Valuation"
"Unit"
SECTION 2 THE REVOLVING LOAN and THE ACCOUNTS RECEIVABLE LOAN
SECTION 2.1 Revolving Loan.
Under and subject to the terms and conditions of this Agreement and within
the Revolving Loan Limit and as requested by an authorized officer of Borrower
from time to time through but not including the Revolving Loan Termination Date,
KS hereby establishes a Revolving Loan facility (the "Revolving Loan") pursuant
to which KS will make cash advances from time to time to or for the account of
Borrower. Unless sooner terminated pursuant to any other provision of this
Agreement, the Revolving Loan will terminate and the entire principal balance of
the Revolving Loan, together with all unpaid accrued interest thereon, shall be
repaid, without notice or demand, on the Revolving Loan Termination Date. Each
advance under the Revolving Loan shall be made or issued following the giving of
notice by an authorized officer of Borrower to KS (which notice shall be given
not later than five (5) Business Days preceding the Business Day on which such
cash advance is required), specifying the date of borrowing and the amount
thereof. Cash advances shall be in multiples of $100,000. Upon fulfillment of
all applicable conditions to such advance set forth herein, KS will make such
funds available to the Borrower by wire transfer of funds to an account
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designated by Borrower. The outstanding principal balance under the Revolving
Loan may fluctuate from time to time, to be reduced by repayments made by
Borrower, and to be increased by future loans, advances and extensions of credit
which may be made by KS, to or for the benefit of Borrower. Contemporaneously
herewith, Borrower will execute and deliver to KS the Revolving Loan Note to
evidence Borrower's obligation to repay KS for all amounts due or which may
become due in connection with the Revolving Loan.
SECTION 2.2 Accounts Receivable Loan.
Under and subject to the terms and conditions of this Agreement and as
requested by an authorized officer of Borrower from time to time through but not
including the Accounts Receivable Loan Termination Date, DE hereby establishes
an Accounts Receivable Loan facility (the "Accounts Receivable Loan") pursuant
to which DE will continue to provide and perform ongoing engineering support
services to assist Borrower in accordance with Article 3, Section 3.5 of the
Technology Transfer Agreement. DE will invoice Borrower for those services in
accordance with the Article 3, Section 3.5 of the Technology Transfer Agreement
with those future invoice amounts to be added to the Current Accounts
Receivable, subject to Borrower's right to dispute DE's invoiced amounts as
provided in the Technology Transfer Agreement or the applicable law. Unless
sooner terminated pursuant to any other provision of this Agreement, the
Accounts Receivable Loan will terminate and the entire principal balance of the
Accounts Receivable Loan, together with all unpaid accrued interest thereon,
shall be repaid, without notice or demand on the Accounts Receivable Loan
Termination Date. Borrower hereby acknowledges and agrees that it shall repay in
full the Accounts Receivable Loan plus accrued interest before using any cash
funds to expand its facilities. Interest shall begin accruing on the Current
Accounts Receivable as of the Closing Date and interest shall begin accruing on
each future unpaid invoice thirty (30) days after Borrower receives the invoice.
The outstanding principal balance under the Accounts Receivable Loan shall be as
of the date of this Agreement shall be in the initial principal sum of
$809,384.56, which balance may fluctuate from time to time, to be reduced by
repayments made by Borrower, and to be increased by future invoices submitted to
Borrower for payment. Contemporaneously herewith, Borrower will execute and
deliver to DE the Accounts Receivable Loan Note to evidence Borrower's
obligation to repay DE for all amounts due or which may become due in connection
with the Accounts Receivable Loan.
SECTION 2.3 Interest Rate and Payments of Interest.
(A) Interest shall be calculated and paid as follows:
(1) Interest on the principal balance of the Revolving Loan and the
Accounts Receivable Loan, from time to time outstanding, will accrue at a
rate equal to the Prime Rate in effect from time to time plus one and
one-half percentage points (1.5%) per annum (the "Rate"). For the purposes
hereof, "Prime Rate" means the Prime Rate as published in the Wall Street
Journal in the section entitled "Money Rates."
(2) Each time the Prime Rate shall change, the Rate shall change
contemporaneously with such change in the Prime Rate. Interest shall be
calculated on the basis of a 365-day year, counting the actual number of
days elapsed, and shall be payable on the Revolving Loan Termination Date
and the Accounts Receivable Loan Termination Date.
(B) If, at any time, the Rate shall be finally determined by any court of
competent jurisdiction, governmental agency or tribunal to exceed the maximum
rate of interest permitted by any applicable Laws, then, for such time as such
Rate would be deemed excessive, application thereof shall be suspended and there
shall be charged in lieu thereof the maximum rate of interest permissible under
such Laws.
SECTION 2.4 Payments to KS and DE.
All payments of interest on and principal of the Revolving Loan and the
Accounts Receivable Loan and all fees and all other sums payable to KS and DE
hereunder shall be paid directly to KS and DE in immediately available funds, in
United States dollars. If any payment of principal of, or interest on the
Revolving Loan or the Accounts Receivable Loan provided for herein or any other
amount due hereunder shall fall due on a day which is not a Business
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Day, then such due date shall be extended to the next succeeding Business Day
and additional interest shall accrue and be payable for the period of such
extension. Borrower may, at its option, prepay the accrued interest on, and
principal of, the Revolving Loan and the Accounts Receivable Loan from time to
time and in whole or in part without penalty.
SECTION 3 CONDITIONS
The making of the Revolving Loan and the Accounts Receivable Loan hereunder
is subject to the following conditions precedent (all documents to be in form
and substance satisfactory to KS and its counsel and DE and its counsel):
SECTION 3.1 Documents Required for the Closing.
The Borrower shall have duly executed and delivered to KS and DE the
following items on the Closing Date:
(A) This Agreement;
(B) The Revolving Loan Note, attached hereto as Exhibit D;
(C) The Amendment to the First Loan Agreement attached hereto as Exhibit B;
(D) The Amendment to the Second Loan Agreement attached hereto as Exhibit
C; and
(E) The Accounts Receivable Loan Note, attached hereto as Exhibit E;
( F) Each of the Collateral Documents required by Section 4 hereof.
SECTION 3.2 Conditions for Advances.
Each request for an advance under the Revolving Loan shall constitute a
certification and affirmation that no Event of Default shall have occurred and
be continuing, and no event shall have occurred and be continuing which, with
the giving of notice or the passage of time, or both, could constitute an Event
of Default.
SECTION 3.3 Conditions for Future Accounts Receivable
Each request by Borrower for ongoing engineering support services shall
constitute a certification and affirmation that no Event of Default shall have
occurred and be continuing, and no event shall have occurred and be continuing
which, with the giving of notice or the passage of time, or both, could
constitute an Event of Default.
SECTION 4 COLLATERAL SECURITY
SECTION 4.1 Collateral.
To secure the payment and performance of all its Obligations, Borrower
shall execute, deliver and fully perform the Amendment to Amended and Restated
Security Agreement attached hereto as Exhibit A (the "Security Agreement
Amendment"). The security interests, liens and rights granted by the Amended and
Restated Security Agreement, as amended by the Security Agreement Amendment, in
favor of KS shall be first and prior liens, and all payments, recoveries and
proceeds derived therefrom, after satisfaction in full of the "Obligations" as
defined in the First Loan Agreement and the "Obligations" as defined in the
Second Loan Agreement, shall be shared ratably by KS and DE in accordance with
their respective interests, as measured and evidenced by the outstanding
principal loan
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balances owed to KS and DE from time to time on the Revolving Loan and the
Accounts Receivable Loan, respectively.
SECTION 4.2 Financing Statements.
The Borrower shall execute and deliver to KS such financing statements as
are necessary and appropriate to perfect KS' rights and interests under the
Security Agreement Amendment and Borrower shall pay or reimburse KS for all
costs, fees and taxes associated with filing or recording such financing
statements. Collectively, the Security Agreement Amendment and any financing
statements are referred to as the "Collateral Documents."
SECTION 5 REPRESENTATIONS AND WARRANTIES
To induce KS and DE to enter into this Agreement, Borrower represents and
warrants to KS and DE that:
(A) The making and performance of the Loan Documents will not (immediately,
with the passage of time, or with the giving of notice and the passage of time):
(1) Violate, or result in a default under, any contract, agreement or
instrument to which Borrower is a party or by which Borrower or its
property is or may be bound, where the same would have a Material Adverse
Effect, or
(2) Result in the creation or imposition of any security interest in,
or lien or encumbrance upon, any of the assets of Borrower, except such as
are in favor of KS and DE;
(B) Borrower has the power and authority to enter into and perform the Loan
Documents and to incur the Obligations herein and therein provided for, and has
taken all proper and necessary action, corporate or otherwise, to authorize the
execution, delivery and performance of the Loan Documents;
(C) The Loan Documents, when executed and delivered will be, valid, binding
and enforceable against Borrower in accordance with their respective terms,
except to the extent that the enforceability thereof is limited by bankruptcy
and similar laws and equitable principles affecting the rights of creditors
generally;
(D) There are no liens, security interests or other encumbrances on or
affecting any of Borrower's personal or real property other than those granted
KS under the Collateral Documents.
SECTION 6 DEFAULT
SECTION 6.1 Events of Default.
Each of the following events shall constitute an Event of Default, and,
upon the occurrence of any Event of Default KS or DE, as applicable, shall have
the option (which is not intended to diminish, alter or limit any other of KS'
or DE's rights described in the Loan Documents or any related agreements and
documents): (A) to declare Borrower in default under the Loan Documents, (B) to
terminate any undertaking of KS in connection with the Revolving Loan or to
terminate any undertaking of DE in connection with the Accounts Receivable Loan,
and/or (C) to declare all Obligations of Borrower to the party declaring an
Event of Default (the "Declaring Party") immediately due and payable, including,
but not limited to, interest, principal, expenses, advances to protect the
Declaring Party's position and reasonable attorneys' fees to enforce the Loan
Documents, and all related agreements and documents, and all of the Declaring
Party's rights hereunder and thereunder, all without demand, notice, presentment
or protest, or further action of any kind:
(A) Borrower fails to pay to the Declaring Party within ten (10) days after
its due date, any installment of interest or other charge payable hereunder or
under any other of the Loan Documents, or Borrower fails to pay to the
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Declaring Party on the due date, all unpaid principal and interest on the
Revolving Loan or the Accounts Receivable Loan, as applicable.
(B) Borrower fails to observe or perform any other material Obligation owed
to the Declaring Party to be observed or performed by it hereunder or under any
of the other Loan Documents, which failure, to the extent reasonably susceptible
of cure, is not cured within thirty (30) days of the earlier of (i) the date on
which Borrower has actual knowledge thereof and (ii) the Declaring Party giving
Borrower written notice of the occurrence thereof.
(C) Borrower becomes insolvent or generally fails to pay, or admits its
inability to pay, debts as they become due or makes a general assignment for the
benefit of any of its creditors.
(D) Borrower applies for, consents to, or acquiesces in the appointment of,
a trustee, receiver or other custodian for Borrower or any of the property of
Borrower or, in the absence of such application, consent or acquiescence, a
trustee, receiver or other custodian is appointed for Borrower or for a
substantial part of its property and is not discharged within sixty (60) days.
(E) Any bankruptcy, reorganization, liquidation, dissolution or other case
and proceeding under any bankruptcy or insolvency law is commenced in respect of
Borrower and if such case or proceeding is not commenced by Borrower, it is
consented to or acquiesced in by Borrower or remains undismissed for a period of
sixty (60) days.
(F) A judgment creditor of Borrower shall obtain actual or constructive
possession of any of Borrower's properties by any means, including, but without
limitation, levy, distraint, replevin or self-help.
(G) Any Event of Default as defined in the First Loan Agreement or the
Second Loan Agreement, such an Event of Default may only be declared by KS.
SECTION 6.2 Remedies.
After any acceleration of the Obligations, KS and DE shall have in addition
to the rights and remedies given it by the Loan Documents, all those rights and
remedies allowed by any and all applicable laws.
SECTION 7 CONVERSION OF LOAN DEBT
SECTION 7.1 Revolving Loan Debt Defined.
As used in this Agreement, "Revolving Loan Debt" shall mean the unpaid
principal of, and accrued interest on, the Revolving Loan, together with all
other amounts due from Borrower to KS pursuant to the Loan Documents.
SECTION 7.2 Conversion of Revolving Loan Debt.
(A) KS shall have the right, beginning on the Closing Date and continuing
as long as any amount of the Revolving Loan Debt is outstanding, to convert
some, or all, of the then outstanding Revolving Loan Debt into a Capital
Contribution and receive additional Units; provided, however, that KS' right to
convert its Revolving Loan Debt may only be exercised no more frequently than
once every one hundred eighty (180) days after the Closing Date. In order to
exercise such conversion right, KS shall provide a written notice to Borrower
and to DE, specifying the amount of outstanding Revolving Loan Debt that KS
elects to convert to a Capital Contribution, which election may be subject to
appraisal and modification rights, as described in Sections 7.2(B) and 7.2(C)
below. The purchase price of the Units to be acquired by KS upon conversion
shall be determined in accordance with Section 7.2(B). On the date the
conversion is deemed completed, as provided in the next following sentence : (i)
the amount in KS' Capital Account shall be adjusted to reflect the additional
Capital Contribution; (ii) KS shall receive the additional Units based on the
applicable Unit price; and (iii) the amount of Revolving Loan Debt shall be
reduced by the amount converted. The conversion shall be deemed completed on the
date of KS' written notice of conversion, unless KS has the right under Section
7.2(C) below to increase or decrease the amount of Revolving Loan Debt it elects
to convert, in
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which event the conversion shall be deemed completed, or rescinded if
applicable, on the date KS issues its notice under Section 7.2(C). Promptly
following the date conversion is deemed completed, Borrower shall issue a
statement to each Member setting forth the Capital Contributions of each of the
Members, and the number of Units held by each of the Members, both before, and
after, giving effect to KS' additional Capital Contribution.
(B) The price of the additional Units to be acquired by KS pursuant to each
election under Section 7.2(A) shall be based upon the fair market value of
Borrower as of the last day of the calendar month immediately preceding such
election (the "Valuation Date") and shall be equal to whichever of the following
amounts is stated to be applicable:
(i) if an appraisal has been completed pursuant to Section 3.3 of the
Operating Agreement and the date as of which the Company was appraised is
within ninety (90) days of the Valuation Date, then the issue price of
Units specified in such appraisal shall be the applicable amount; or
(ii) if an appraisal as described in (i) has not been completed then
the price of Units shall be determined in accordance with the terms of
Sections 3.3 and 3.4 of the Operating Agreement, in which event the Unit
price determined by such appraisal shall be the applicable amount.
(C) If the price of Units to be acquired by KS pursuant to Section 7.2(A)
is determined by an appraisal pursuant to 7.2(B)(ii), then KS shall, by written
notice, have the right to increase or decrease the amount of Revolving Loan Debt
it elects to convert, including the right to elect not to convert any Revolving
Loan Debt.
(D) If KS converts its Revolving Loan Debt as set forth in this Section
7.2, then, unless DE elects to convert its Account Receivable Loan Debt as set
forth in Section 7.4 of this Agreement, the Borrower shall pay to DE within
thirty (30) days after the date KS' conversion of the Revolving Loan Debt is
deemed complete as set forth in Section 7.2 the entire principal balance of the
Accounts Receivable Loan, together with all unpaid accrued interest thereon.
SECTION 7.3 Accounts Receivable Loan Debt Defined.
As used in this Agreement, "Accounts Receivable Loan Debt" shall mean the
unpaid principal of, and accrued interest on, the Accounts Receivable Loan,
together with all other amounts due from Borrower to DE pursuant to the Loan
Documents.
SECTION 7.4 Conversion of Accounts Receivable Loan Debt.
The Parties to this Agreement agree that DE shall have the right, beginning
on the date KS' conversion is deemed complete as set forth in Section 7.2 and
for a period of ninety (90) days thereafter, exercisable each time that KS
exercises its right to convert the Revolving Loan Debt and purchase Units as
provided in Section 7.2 above, to convert some, or all, of the then outstanding
Accounts Receivable Loan Debt into a Capital Contribution and receive additional
Units. The purchase price of the Units acquired by DE pursuant to this Section
shall be the same as the purchase price of the corresponding Units acquired by
KS. In order to exercise this right, DE shall deliver a written notice to
Borrower and KS indicating DE's exercise of the right and specifying the amount
of outstanding Accounts Receivable Loan Debt that DE elects to convert and the
Units to be received. Upon Borrower's receipt of such written notice, the
Capital Account of DE, and the number of Units issued to DE, shall be adjusted
accordingly and the amount of the Accounts Receivable Loan Debt shall be reduced
by the amount converted. Borrower shall issue a statement to the Members, like
the statement called for in Section 7.2(A), reflecting these changes in the
Capital Account of, and Units held by, DE.
SECTION 8 DE AND KS CONSENT
SECTION 8.1 DE and KS Consent.
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DE and KS hereby consent to the execution, delivery and performance of the
Loan Documents and hereby approve all the terms of, and all transactions
contemplated by, this Agreement.
SECTION 9 MISCELLANEOUS
SECTION 9.1 Notices.
Any notices or consents required or permitted by this Agreement or any of
the Loan Documents shall be given as specified in Section 13.2 of the Operating
Agreement except as otherwise provided in this Agreement.
SECTION 9.2 Applicable Law.
The substantive Laws of the Commonwealth of Pennsylvania shall govern the
construction of this Agreement and the rights and remedies of the parties
hereto.
SECTION 9.3 Binding Effect; Assignment; Entire Agreement; Modification.
This Agreement may only be assigned to a Member. Borrower has no right to
assign any of its respective rights or Obligations hereunder without the prior
written consent of KS and DE. This Agreement, and the documents executed and
delivered pursuant hereto, constitute the entire agreement among the Parties
relating to the subject matter thereof. No modification or amendment hereof or
of any agreement referred to herein shall be binding or enforceable unless in
writing and signed on behalf of the Party against whom enforcement is sought.
SECTION 9.4 Counterparts.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original, but all of which together shall constitute
but one and the same instrument.
Section 9.5 Recitals.
Recitals A through E set forth above are true and correct, accurately set
forth the factual background upon which this Agreement is premised and are fully
incorporated as substantive provisions of this Agreement by reference. Should
there be a conflict between the recitals A through E set forth above and the
Sections of this Agreement, the Sections of this Agreement will control.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed and delivered by their respective duly authorized officers as of the
day and year first above written.
KULICKE AND SOFFA HOLDINGS, INC.
By:
----------------------------------
FLIP CHIP TECHNOLOGIES, INC.
By:
----------------------------------
DELCO ELECTRONICS CORPORATION
By:
----------------------------------
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CONVERTIBLE LOAN AGREEMENT
THIS CONVERTIBLE LOAN AGREEMENT, dated as of November 19, 1998 (herein
called the "Agreement"), is entered into between KULICKE AND SOFFA HOLDINGS,
INC., a Delaware corporation ("KS"), FLIP CHIP TECHNOLOGIES, L.L.C. a Delaware
Limited Liability Company ("Borrower") and DELCO ELECTRONICS CORPORATION, a
Delaware corporation ("DE").
WITNESSETH:
A. Borrower was organized pursuant to an Operating Agreement dated as of
February 28, 1996 (as same may be amended from time to time) (the "Operating
Agreement") by and among KS, DE, and Kulicke & Soffa Industries, Inc. ("Kulicke
& Soffa"), parent of KS. KS and DE are the sole members of Borrower.
B. Borrower, KS and DE (collectively, the "Parties") are parties to a
Convertible Revolving Loan Agreement dated as of June 16, 1997 (the "First Loan
Agreement") , a Convertible Revolving Loan Agreement dated as of October 30,
1997 (the "Second Loan Agreement") and a Convertible Revolving Loan Agreement
dated as of February 18, 1998 (the "Third Loan Agreement"). In connection with
the First Loan Agreement, Borrower and KS executed a Security Agreement dated as
of June 16, 1997 which was amended and restated in its entirety in connection
with the Second Loan Agreement by an Amended and Restated Security Agreement
dated as of October 30, 1997 and again amended in connection with the Third Loan
Agreement by an Amendment to Amended and Restated Security Agreement dated as of
February 18, 1998 (as so amended, the "Amended and Restated Security
Agreement").
C. Borrower desires to borrow additional funds from KS and KS is willing to
make additional loans and advances to Borrower under the terms and provisions of
this Agreement.
D. KS is willing to make the loans and advances contemplated by this
Agreement on the condition that, at KS' election as hereinafter set forth, some
or all of the aggregate amounts owed to KS may be converted into a Capital
Contribution to Borrower in the manner hereinafter provided. DE is willing to
approve the transactions contemplated by this Agreement, including KS' right to
convert its loans and advances into a Capital Contribution to Borrower on the
condition that DE, at its election, will either be paid in full by Borrower the
then outstanding Accounts Receivable Loan, plus accrued interest, or DE may
elect, as set forth in this Agreement, that some or all of the aggregate amount
owed to DE for its Accounts Receivable Loan may be converted into a Capital
Contribution to Borrower as provided herein.
NOW, THEREFORE, the Parties hereto, intending to be legally bound, covenant
and agree as follows:
AGREEMENT
SECTION 1 DEFINITIONS
SECTION 1.1 Terms Defined Herein.
"Accounts Receivable Loan" shall have the meaning given to such term in the
Third Loan Agreement.
"Accounts Receivable Loan Debt" shall have the meaning given to such term
in the Third Loan Agreement.
Accounts Receivable Loan Note" shall have the meaning given to such term in
the Third Loan Agreement.
"Business Day" shall mean a day, other than a Saturday or Sunday, on which
the Parties are open for business.
"Closing Date" shall mean the date of this Agreement.
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"Collateral Documents" shall have the meaning defined in Section 4.2 of
this Agreement.
"Event of Default" shall have the meaning defined in Section 6.1 of this
Agreement.
"First Loan Agreement" shall have the meaning defined in Recital B of this
Agreement.
"GAAP" shall mean generally accepted accounting principles consistently
applied.
"Loan Documents" shall mean this Agreement and all documents to be executed
and delivered to KS and DE pursuant to the provisions of Section 3.1 hereof,
including the Collateral Documents.
"Material Adverse Effect" shall mean any specified event, condition or
occurrence as to Borrower which individually or in the aggregate with any other
such event, condition or occurrence and whether through the effect on Borrower's
business, property, prospects, profits or condition (financial or otherwise) or
otherwise could reasonably be expected to (a) result in, to the extent not fully
covered by insurance, any liability, loss, forfeiture, penalty, costs, fine,
expense, payment or other monetary obligation or loss of property of Borrower in
excess of 10% of Borrower's consolidated shareholder's equity, determined in
accordance with GAAP, as reflected in Borrower's then most recently prepared
annual or quarterly financial statements, and/or (b) materially impair the
ability of the Borrower to meet all of its Obligations to KS and DE.
"Obligations" shall mean the obligations of Borrower to pay the principal
of and interest on the Revolving Loan Note and the obligations of Borrower to
pay the principal and interest on the Accounts Receivable Loan Note to satisfy
and perform all of its other existing and future obligations, liabilities and
indebtedness to KS and DE, whether hereunder or, under any of the Loan
Documents, and whether matured or unmatured, direct or contingent, joint or
several, including, without limitation, any extensions, modifications, renewals
thereof and substitutions therefor.
"Person" shall mean any individual, corporation, participation,
association, joint-stock company, trust, unincorporated organization, joint
venture, court or government division or agency thereof.
"Prime Rate" shall have the meaning defined in Section 2.3 of this
Agreement.
"Rate" shall mean the rate of interest specified in Section 2 of this
Agreement.
"Revolving Loan" shall mean the Revolving Loan facility established
pursuant to Section 2.1 of this Agreement.
"Revolving Loan Debt" shall have the meaning defined in Section 7.1 of this
Agreement.
"Revolving Loan Limit" shall mean $6,500,000, subject to increase to
$8,000,000 as provided in Section 2.1 of this Agreement.
"Revolving Loan Note" shall mean the promissory note, attached hereto as
Exhibit D, evidencing Borrower's obligation to repay the Revolving Loan.
"Revolving Loan Termination Date" shall mean the second anniversary of the
Closing Date or such other earlier date to which maturity is accelerated upon
the occurrence of an Event of Default under Section 6. KS and Borrower may
(without any obligation to do so) hereafter agree in writing to renew or extend
the Revolving Loan Termination Date with the prior written consent of DE.
"Second Loan Agreement" shall have the meaning defined in Recital B of this
Agreement.
"Third Loan Agreement" shall have the meaning defined in Recital B of this
Agreement.
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<PAGE>
"Third Loan Agreement Revolving Loan" shall mean the Revolving Loan as
defined in the Third Loan Agreement.
"Valuation Date" shall have the meaning defined in Section 7.2(B) of this
Agreement.
SECTION 1.2 Terms Defined In Operating Agreement.
In addition to the foregoing definitions, the following terms, when used
herein, shall have the meanings given to them in the Operating Agreement:
"Additional Capital Contributions"
"Annual Budget"
"Budget Year"
"Capital Account"
"Capital Contributions"
"Member"
"Preliminary Valuation"
"Unit"
SECTION 2 THE REVOLVING LOAN
SECTION 2.1 Revolving Loan.
Under and subject to the terms and conditions of this Agreement and within
the Revolving Loan Limit and as requested by an authorized officer of Borrower
from time to time through but not including the Revolving Loan Termination Date,
KS hereby establishes a Revolving Loan facility (the "Revolving Loan") pursuant
to which KS will make cash advances from time to time to or for the account of
Borrower. Upon the written request of an authorized officer of Borrower, KS, in
its sole and absolute discretion may consider and, in its sole and absolute
discretion may approve, an increase in the Revolving Loan Limit to an amount not
exceeding $8,000,000. KS will send written notice to Borrower and DE if it
elects to so increase the Revolving Loan Limit. Unless sooner terminated
pursuant to any other provision of this Agreement, the Revolving Loan will
terminate and the entire principal balance of the Revolving Loan, together with
all unpaid accrued interest thereon, shall be repaid, without notice or demand,
on the Revolving Loan Termination Date. Each advance under the Revolving Loan
shall be made or issued following the giving of notice by an authorized officer
of Borrower to KS (which notice shall be given not later than five (5) Business
Days preceding the Business Day on which such cash advance is required),
specifying the date of borrowing and the amount thereof. Cash advances shall be
in multiples of $100,000. Upon fulfillment of all applicable conditions to such
advance set forth herein, KS will make such funds available to the Borrower by
wire transfer of funds to an account designated by Borrower. The outstanding
principal balance under the Revolving Loan may fluctuate from time to time, to
be reduced by repayments made by Borrower, and to be increased by future loans,
advances and extensions of credit which may be made by KS, to or for the benefit
of Borrower. Contemporaneously herewith, Borrower will execute and deliver to KS
the Revolving Loan Note to evidence Borrower's obligation to repay KS for all
amounts due or which may become due in connection with the Revolving Loan.
SECTION 2.2 Interest Rate and Payments of Interest.
(A) Interest shall be calculated and paid as follows:
(1) Interest on the principal balance of the Revolving Loan, from time
to time outstanding, will accrue at a rate equal to the Prime Rate in
effect from time to time plus one and one-half percentage points (1.5%) per
annum (the "Rate"). For the purposes hereof, "Prime Rate" means the Prime
Rate as published in the Wall Street Journal in the section entitled "Money
Rates."
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(2) Each time the Prime Rate shall change, the Rate shall change
contemporaneously with such change in the Prime Rate. Interest shall be
calculated on the basis of a 365-day year, counting the actual number of
days elapsed, and shall be payable on the Revolving Loan Termination Date.
(B) If, at any time, the Rate shall be finally determined by any court of
competent jurisdiction, governmental agency or tribunal to exceed the maximum
rate of interest permitted by any applicable Laws, then, for such time as such
Rate would be deemed excessive, application thereof shall be suspended and there
shall be charged in lieu thereof the maximum rate of interest permissible under
such Laws.
SECTION 2.3 Payments to KS.
All payments of interest on and principal of the Revolving Loan and all
fees and all other sums payable to KS hereunder shall be paid directly to KS in
immediately available funds, in United States dollars. If any payment of
principal of, or interest on the Revolving Loan provided for herein or any other
amount due hereunder shall fall due on a day which is not a Business Day, then
such due date shall be extended to the next succeeding Business Day and
additional interest shall accrue and be payable for the period of such
extension. Borrower may, at its option, prepay the accrued interest on, and
principal of, the Revolving Loan from time to time and in whole or in part
without penalty.
SECTION 3 CONDITIONS
The making of the Revolving Loan hereunder is subject to the following
conditions precedent (all documents to be in form and substance satisfactory to
KS and its counsel):
SECTION 3.1 Documents Required for the Closing.
The Borrower shall have duly executed and delivered to KS the following
items on the Closing Date:
(A) This Agreement;
(B) The Revolving Loan Note, attached hereto as Exhibit D;
(C) The Amendment to the First Loan Agreement attached hereto as Exhibit
B;
(D) The Amendment to the Second Loan Agreement attached hereto as Exhibit
C;
(E) The Amendment to the Third Loan Agreement, attached hereto as Exhibit
E; and
(F) Each of the Collateral Documents required by Section 4 hereof.
SECTION 3.2 Conditions for Advances.
Each request for an advance under the Revolving Loan shall constitute a
certification and affirmation that no Event of Default shall have occurred and
be continuing, and no event shall have occurred and be continuing which, with
the giving of notice or the passage of time, or both, could constitute an Event
of Default.
SECTION 4 COLLATERAL SECURITY
SECTION 4.1 Collateral.
To secure payment and performance of all its Obligations, Borrower shall
execute, deliver and fully perform the Second Amendment to Amended and Restated
Security Agreement attached hereto as Exhibit A (the "Security Agreement
Amendment"). The security interests, liens and rights granted by the Amended and
Restated Security
27
<PAGE>
Agreement, as amended by the Security Agreement Amendment, in favor of KS shall
be first and prior liens, and all payments, recoveries and proceeds derived
therefrom, after satisfaction in full of the "Obligations" as defined in the
First Loan Agreement and the "Obligations" as defined in the Second Loan
Agreement, shall be shared ratably by KS and DE in accordance with their
respective interests, as measured and evidenced by the outstanding principal
loan balances owed to KS from time to time on the Third Loan Agreement Revolving
Loan and the Revolving Loan collectively, and to DE from time to time on the
Accounts Receivable Loan, respectively.
SECTION 4.2 Financing Statements.
The Borrower shall execute and deliver to KS such financing statements as
are necessary and appropriate to perfect KS' rights under the Security Agreement
Amendment and Borrower shall pay or reimburse KS for all costs, fees and taxes
associated with filing or recording such financing statements. Collectively, the
Security Agreement Amendment and any financing statements are referred to as the
"Collateral Documents."
SECTION 5 REPRESENTATIONS AND WARRANTIES
To induce KS to enter into this Agreement, Borrower represents and warrants
to KS that:
(A) The making and performance of the Loan Documents will not (immediately,
with the passage of time, or with the giving of notice and the passage of time):
(1) Violate, or result in a default under, any contract, agreement or
instrument to which Borrower is a party or by which Borrower or its
property is or may be bound, where the same would have a Material Adverse
Effect, or
(2) Result in the creation or imposition of any security interest in,
or lien or encumbrance upon, any of the assets of Borrower, except such as
are in favor of KS;
(B) Borrower has the power and authority to enter into and perform the Loan
Documents and to incur the Obligations herein and therein provided for, and has
taken all proper and necessary action, corporate or otherwise, to authorize the
execution, delivery and performance of the Loan Documents;
(C) The Loan Documents, when executed and delivered will be, valid, binding
and enforceable against Borrower in accordance with their respective terms,
except to the extent that the enforceability thereof is limited by bankruptcy
and similar laws and equitable principles affecting the rights of creditors
generally;
(D) There are no liens, security interests or other encumbrances on or
affecting any of Borrower's personal or real property other than those granted
KS under the Collateral Documents.
SECTION 6 DEFAULT
SECTION 6.1 Events of Default.
Each of the following events shall constitute an Event of Default and upon
the occurrence of any Event of Default, KS shall have the option (which is not
intended to diminish, alter or limit any other of KS' rights described in the
Loan Documents or any related agreements and documents) (A) to declare Borrower
in default under the Loan Documents, (B) to terminate any undertaking of KS in
connection with the Revolving Loan, and/or (C) to declare all Obligations
immediately due and payable, including, but not limited to, interest, principal,
expenses, advances to protect KS' position and reasonable attorneys' fees to
enforce the Loan Documents, and all related agreements and documents, and all of
KS' rights hereunder and thereunder, all without demand, notice, presentment or
protest, or further action of any kind:
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<PAGE>
(A) Borrower fails to pay to KS within ten (10) days after its due date,
any installment of interest or other charge payable hereunder or under any other
of the Loan Documents, or Borrower fails to pay to KS on the Revolving Loan
Termination Date all unpaid principal and interest on the Revolving Loan.
(B) Borrower fails to observe or perform any other material Obligation to
be observed or performed by it hereunder or under any of the other Loan
Documents, which failure, to the extent reasonably susceptible of cure, is not
cured within thirty (30) days of the earlier of (i) the date on which Borrower
has actual knowledge thereof and (ii) KS' giving Borrower written notice of the
occurrence thereof.
(C) Borrower becomes insolvent or generally fails to pay, or admits its
inability to pay, debts as they become due or makes a general assignment for the
benefit of any of its creditors.
(D) Borrower applies for, consents to, or acquiesces in the appointment of,
a trustee, receiver or other custodian for Borrower or any of the property of
Borrower or, in the absence of such application, consent or acquiescence, a
trustee, receiver or other custodian is appointed for Borrower or for a
substantial part of its property and is not discharged within sixty (60) days.
(E) Any bankruptcy, reorganization, liquidation, dissolution or other case
and proceeding under any bankruptcy or insolvency law is commenced in respect of
Borrower and if such case or proceeding is not commenced by Borrower, it is
consented to or acquiesced in by Borrower or remains for sixty (60) days
undismissed.
(F) A judgment creditor of Borrower shall obtain actual or constructive
possession of any of Borrower's properties by any means, including, but without
limitation, levy, distraint, replevin or self-help.
(G) Any Event of Default as defined in the First Loan Agreement, the Second
Loan Agreement or the Third Loan Agreement.
SECTION 6.2 Remedies.
After any acceleration of the Obligations, KS shall have in addition to the
rights and remedies given it by the Loan Documents, all those rights and
remedies allowed by any and all applicable laws.
SECTION 7 CONVERSION OF LOAN DEBT
SECTION 7.1 Revolving Loan Debt Defined.
As used in this Section 7, "Revolving Loan Debt" means the unpaid principal
of, and accrued interest on, the Revolving Loan, together with all other amounts
due from Borrower to KS pursuant to the Loan Documents.
SECTION 7.2 Conversion of Revolving Loan Debt.
(A) KS shall have the right, beginning on the Closing Date and continuing
as long as any amount of the Revolving Loan Debt is outstanding, to convert
some, or all, of the then outstanding Revolving Loan Debt into a Capital
Contribution and receive additional Units; provided, however, that KS' right to
convert its Revolving Loan Debt may only be exercised no more frequently than
once every one hundred eighty (180) days after the Closing Date. In order to
exercise such conversion right, KS shall provide a written notice to Borrower
and to DE, specifying the amount of outstanding Revolving Loan Debt that KS
elects to convert to a Capital Contribution, which election may be subject to
appraisal and modification rights, as described in Sections 7.2(B) and 7.2(C)
below. The purchase price of the Units to be acquired by KS upon conversion
shall be determined in accordance with Section 7.2(B). On the date the
conversion is deemed completed, as provided in the next following sentence: (i)
the amount in KS' Capital Account shall be adjusted to reflect the additional
Capital Contribution; (ii) KS shall receive the additional Units based on the
applicable Unit price; and (iii) the amount of Revolving Loan Debt shall be
reduced by the amount converted. The conversion shall be deemed completed on the
date of KS' written notice of conversion, unless KS has the right
29
<PAGE>
under Section 7.2(C) below to increase or decrease the amount of Revolving Loan
Debt it elects to convert, in which event the conversion shall be deemed
completed, or rescinded if applicable, on the date KS issues its notice under
Section 7.2(C). Promptly following the date conversion is deemed completed,
Borrower shall issue a statement to each Member setting forth the Capital
Contributions of each of the Members, and the number of Units held by each of
the Members, both before, and after, giving effect to KS' additional Capital
Contribution.
(B) The price of the additional Units to be acquired by KS pursuant to each
election under Section 7.2(A) shall be based upon the fair market value of
Borrower as of the last day of the calendar month immediately preceding such
election (the "Valuation Date") and shall be equal to whichever of the following
amounts is stated to be applicable:
(i) if an appraisal has been completed pursuant to Section 3.3 of the
Operating Agreement and the date as of which the Company was appraised is
within ninety (90) days of the Valuation Date, then the issue price of
Units specified in such appraisal shall be the applicable amount; or
(ii) if an appraisal as described in (i) has not been completed then
the price of Units shall be determined in accordance with the terms of
Sections 3.3 and 3.4 of the Operating Agreement, in which event the Unit
price determined by such appraisal shall be the applicable amount.
(C) If the price of Units to be acquired by KS pursuant to Section 7.2(A)
is determined by an appraisal pursuant to 7.2(B)(ii), then KS shall, by written
notice, have the right to increase or decrease the amount of Revolving Loan Debt
it elects to convert, including the right to elect not to convert any Revolving
Loan Debt.
(D) If KS converts its Revolving Loan Debt as set forth in this Section
7.2, then, unless DE elects to convert its Accounts Receivable Loan Debt as set
forth in Section 7.4 of the Third Loan Agreement, the Borrower shall pay to DE
within thirty (30) days after the date KS's conversion of the Revolving Loan
Debt is deemed complete as set forth in this Section 7.2 the entire principal
balance of the Accounts Receivable Loan, together with all unpaid accrued
interest thereon.
SECTION 8 DE and KS CONSENT
DE and KS hereby consent to the execution, delivery and performance of the
Loan Documents and hereby approve all the terms of, and all transactions
contemplated by, this Agreement.
SECTION 9 MISCELLANEOUS
SECTION 9.1 Notices.
Any notices or consents required or permitted by this Agreement or any of
the Loan Documents shall be given as specified in Section 13.2 of the Operating
Agreement except as otherwise provided in this Agreement.
SECTION 9.2 Applicable Law.
The substantive Laws of the Commonwealth of Pennsylvania shall govern the
construction of this Agreement and the rights and remedies of the Parties
hereto.
SECTION 9.3 Binding Effect; Assignment; Entire Agreement; Modification.
This Agreement may only be assigned to a Member. Borrower has no right to
assign any of its respective rights or Obligations hereunder without the prior
written consent of KS. This Agreement, and the documents executed and delivered
pursuant hereto, constitute the entire agreement among the Parties relating to
the subject matter thereof. No modification or amendment hereof or of any
agreement referred to herein shall be binding or enforceable unless in writing
and signed on behalf of the Party against whom enforcement is sought.
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SECTION 9.4 Counterparts.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original, but all of which together shall constitute
but one and the same instrument.
SECTION 9.5 Recitals.
Recitals A through D set forth above are true and correct, accurately set
forth the factual background upon which this Agreement is premised and are fully
incorporated as substantive provisions of this Agreement by reference. Should
there be a conflict between the recitals A through D set forth above and the
Sections of this Agreement, the Sections of this Agreement will control.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first above written.
KULICKE AND SOFFA HOLDINGS, INC.
By:
----------------------------------
FLIP CHIP TECHNOLOGIES, INC.
By:
----------------------------------
DELCO ELECTRONICS CORPORATION
By:
----------------------------------
31
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY (1)
Name Jurisdiction of Incorporation
- ------------------------------ ---- -----------------------------
Kulicke and Soffa AG Switzerland
Kulicke & Soffa (Asia) Limited Hong Kong
Kulicke and Soffa (Japan) Ltd. Japan and Delaware
Kulicke and Soffa (Israel) Ltd. Israel
Kulicke and Soffa Investments, Inc. Delaware
Micro-Swiss Limited Israel
Kulicke and Soffa Leasing, Inc. Delaware
Kulicke & Soffa Singapore, Inc. Delaware
Kulicke & Soffa Export, Inc. Barbados
AFWH Sub, Inc. (Formerly Circle "S" Alabama
Industries, Inc.)
American Fine Wire Corporation Alabama
American Fine Wire, Limited Cayman Islands
Dr. Muller Feindraht AG Switzerland
Semitec (2) California
(1) Certain subsidiaries are omitted; however, such subsidiaries, even if
combined into one subsidiary, would not constitute a "significant
subsidiary" within the meaning of Regulation S-X.
(2) The shares of Semitec and the Company's equity interest in Flip Chip
Technologies, LLC are held by Kulicke and Soffa Holdings, Inc., a Delaware
corporation.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 2-68488, 33- 12453, 33-13577, 33-30884, 33-39265
and 333-0567) of Kulicke and Soffa Industries, Inc. of our report dated
November19, 1998 appearing on page 22 of this Form 10-K.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
December 18, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated November 19, 1998 for Flip Chip Technologies, LLC,
included in this Form 10-K of Kulicke and Soffa Industries, Inc. previously
filed Registration Statements File Nos. 2-68488, 33-12453, 33-13577, 33-30884,
33-39265 and 333-0567.
Arthur Andersen LLP
Phoenix, Arizona
December 18, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Audited Financial Statements for the fiscal year ended September 30,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 76,478
<SECURITIES> 30,422
<RECEIVABLES> 67,814
<ALLOWANCES> 1,677
<INVENTORY> 47,573
<CURRENT-ASSETS> 233,791
<PP&E> 99,858
<DEPRECIATION> 51,589
<TOTAL-ASSETS> 342,584
<CURRENT-LIABILITIES> 51,610
<BONDS> 0
0
0
<COMMON> 157,986
<OTHER-SE> 120,924
<TOTAL-LIABILITY-AND-EQUITY> 342,584
<SALES> 411,040
<TOTAL-REVENUES> 411,040
<CGS> 274,207
<TOTAL-COSTS> 274,207
<OTHER-EXPENSES> 140,989
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 262
<INCOME-PRETAX> (7,357)
<INCOME-TAX> (1,917)
<INCOME-CONTINUING> (5,440)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,440)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Audited Financial Statements for the fiscal year ended September 30,
1997 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 107,605
<SECURITIES> 7,982
<RECEIVABLES> 107,252
<ALLOWANCES> 2,149
<INVENTORY> 45,602
<CURRENT-ASSETS> 272,204
<PP&E> 88,262
<DEPRECIATION> 42,614
<TOTAL-ASSETS> 376,819
<CURRENT-LIABILITIES> 81,984
<BONDS> 200
0
0
<COMMON> 155,246
<OTHER-SE> 136,681
<TOTAL-LIABILITY-AND-EQUITY> 376,819
<SALES> 501,907
<TOTAL-REVENUES> 501,907
<CGS> 318,002
<TOTAL-COSTS> 318,002
<OTHER-EXPENSES> 126,242
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,331
<INCOME-PRETAX> 51,782
<INCOME-TAX> 13,463
<INCOME-CONTINUING> 38,319
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,319
<EPS-PRIMARY> 1.84
<EPS-DILUTED> 1.79
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Audited Financial Statements for the fiscal year ended September 30,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 45,344
<SECURITIES> 13,078
<RECEIVABLES> 48,683
<ALLOWANCES> 1,227
<INVENTORY> 44,519
<CURRENT-ASSETS> 162,651
<PP&E> 77,190
<DEPRECIATION> 36,047
<TOTAL-ASSETS> 249,554
<CURRENT-LIABILITIES> 48,847
<BONDS> 50,712
0
0
<COMMON> 48,733
<OTHER-SE> 98,756
<TOTAL-LIABILITY-AND-EQUITY> 249,554
<SALES> 381,176
<TOTAL-REVENUES> 381,176
<CGS> 239,114
<TOTAL-COSTS> 237,114
<OTHER-EXPENSES> 124,644
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,288
<INCOME-PRETAX> 15,630
<INCOME-TAX> 3,783
<INCOME-CONTINUING> 11,847
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,847
<EPS-PRIMARY> .61
<EPS-DILUTED> .60
</TABLE>
