10-Q 1 w45461e10-q.txt FORM 10-Q FOR KULICKE & SOFFA 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended DECEMBER 31, 2000 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . --------- --------- Commission File No. 0-121 ------- KULICKE AND SOFFA INDUSTRIES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-1498399 ---------------------------- ------------------- (State or other jurisdiction (IRS Employer of incorporation) Identification No.) 2101 BLAIR MILL ROAD, WILLOW GROVE, PENNSYLVANIA 19090 ------------------------------------------------ --------- (Address of principal executive offices) (Zip Code) (215) 784-6000 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of January 31, 2000, there were 48,818,502 shares of the Registrant's Common Stock, Without Par Value outstanding. 2 KULICKE AND SOFFA INDUSTRIES, INC. FORM 10 - Q DECEMBER 31, 2000 INDEX Page No. -------- PART I. FINANCIAL INFORMATION: Item 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets - September 30, 2000 and December 31, 2000 3 Condensed Consolidated Statements of Operations - Three Months Ended December 31, 1999 and 2000 4 Condensed Consolidated Statements of Cash Flows - Three Months Ended December 31, 1999 and 2000 5 Notes to Condensed Consolidated Financial Statements 6 - 11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 - 26 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26 PART II. OTHER INFORMATION: Item 6. EXHIBITS AND REPORTS ON FORM 8 - K. 27 Signatures. 28 3 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements KULICKE AND SOFFA INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
December 31, September 30, 2000 2000 (unaudited) ASSETS -------- ----------- CURRENT ASSETS: Cash and cash equivalents $211,489 $ 81,854 Short-term investments 105,130 38,403 Accounts and notes receivable (less allowance for doubtful accounts: 9/30/00-$4,355; 12/31/00-$5,663) 188,485 160,506 Inventories, net 74,034 100,818 Prepaid expenses and other current assets 9,748 16,602 -------- -------- TOTAL CURRENT ASSETS 588,886 398,183 Property, plant and equipment, net 83,867 136,457 Intangible assets and goodwill, net 41,724 271,984 Other assets 8,375 9,826 -------- -------- TOTAL ASSETS $722,852 $816,450 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current portion of long-term debt $ 1,026 $ 11,447 Accounts payable 62,513 56,378 Accrued expenses 51,935 69,342 Income taxes payable 10,724 9,662 -------- -------- TOTAL CURRENT LIABILITIES 126,198 146,829 Other liabilities 7,967 8,887 Long term debt 175,000 228,500 Deferred Taxes 4,148 34,679 Minority interest 4,197 4,645 -------- -------- TOTAL LIABILITIES 317,510 423,540 --------- -------- Commitments and contingencies -- -- SHAREHOLDERS' EQUITY: Common stock, without par value 189,766 190,092 Retained earnings 220,263 208,577 Accumulated other comprehensive loss (4,687) (5,759) -------- -------- TOTAL SHAREHOLDERS' EQUITY 405,342 392,910 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $722,852 $816,450 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 4 KULICKE AND SOFFA INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
Three months ended December 31, ------------------------------ 1999 2000 --------- --------- Net sales $179,849 $155,384 Cost of goods sold 119,937 101,298 -------- -------- Gross profit 59,912 54,086 -------- -------- Selling, general and administrative 29,823 35,340 Research and development, net 12,103 17,593 Amortization of goodwill and intangibles 870 2,601 Purchased in-process research and development -- 11,709 -------- -------- Income (loss) from operations 17,116 (13,157) Interest income 1,090 3,900 Interest expense (514) (2,664) Equity in loss of joint ventures (346) -- -------- -------- Income (loss) before income taxes 17,346 (11,921) Income tax provision 4,978 7 -------- -------- Income (loss) before minority interest 12,368 (11,928) Minority interest in net loss of subsidiary 433 242 -------- --------- Net income (loss) $ 12,801 $(11,686) ======== ======== Net income (loss) per share: Basic $ 0.27 $ (.24) ======== ======== Diluted $ 0.26 $ (.24) ======== ======== Weighted average common shares outstanding: Basic 47,098 48,748 Diluted 50,684 48,748
The accompanying notes are an integral part of these consolidated financial statements. 4 5 KULICKE AND SOFFA INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Three months ended December 31, -------------------------------- 1999 2000 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income(loss) $ 12,801 $ (11,686) Adjustments to reconcile net income(loss) to net cash provided by (used in) operating activities: Depreciation and amortization 5,476 9,703 Purchased in-process research and development -- 11,709 Equity in loss of joint ventures 346 -- Minority interest in net loss of subsidiary (433) (242) Deferred taxes 2,333 (405) Changes in components of working capital, net of effects of acquired companies (23,953) 43,033 Other, net 1,443 (3,125) -------- --------- Net cash provided by (used in) operating activities (1,987) 48,987 -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Sale (purchase)of investments classified as available for sale (18,981) 67,323 Purchases of property, plant and equipment (8,436) (23,936) Purchase of Cerprobe Corp., net of cash -- (216,409) Purchase of Probe Technology Corp., net of cash -- (62,512) Investments in and loans to joint ventures (823) -- -------- --------- Net cash used in investing activities (28,240) (235,534) -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 169,579 58,000 Proceeds from issuance of common stock 1,330 122 Payments on borrowings -- (1,210) -------- --------- Net cash provided by financing activities 170,909 56,912 -------- --------- Changes in cash and cash equivalents 140,682 (129,635) Cash and cash equivalents at beginning of period 37,155 211,489 -------- --------- Cash and cash equivalents at end of period $177,837 $ 81,854 ========= ========= CASH PAID DURING THE PERIOD FOR: Interest $ 59 $ 4,364 Income Taxes $ 431 $ 499
The accompanying notes are an integral part of these consolidated financial statements 5 6 KULICKE AND SOFFA INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except per share and employee data) (unaudited) NOTE 1 - BASIS OF PRESENTATION: The condensed consolidated financial statement information included herein is unaudited, but in the opinion of management, contains all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company's financial position at December 31, 2000, and the results of its operations for the three month periods ended December 31, 1999 and 2000 and its cash flows for the three month periods ended December 31, 1999 and 2000. These financial statements should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. NOTE 2 - INVENTORIES: Inventories consist of the following: September 30, December 31, 2000 2000 -------- -------- Raw materials and supplies $ 50,394 $ 68,241 Work in process 22,687 26,569 Finished goods 17,194 22,244 -------- -------- 90,275 117,054 Inventory reserves (16,241) (16,236) -------- -------- $ 74,034 $100,818 ======== ======== NOTE 3 - EARNINGS PER SHARE: Basic net income (loss) per share ("EPS") is calculated using the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net income(loss) per share assumes the exercise of employee stock options and the conversion of the convertible securities to common shares unless the inclusion of these will have an anti-dilutive impact on net income(loss) per share. In addition, in computing diluted net income per share if convertible securities are assumed to be converted to common shares the after-tax amount of interest expense recognized in the period associated with the convertible securities is added back to net income. For the three months ended December 31, 2000, the exercise of stock options and the conversion of the convertible subordinated notes were not assumed since their conversion to common shares would have an anti-dilutive effect on net loss per share. 6 7 A reconciliation of weighted average shares outstanding-basic to the weighted average shares outstanding-diluted appears below: Three months ended December 31, ------------------ 1999 2000 ------ ------ Weighted average shares outstanding - Basic 47,098 48,748 Potentially dilutive securities: Employee stock options 2,030 * Convertible subordinated notes 1,556 * ------ ------ Weighted average shares outstanding - Diluted 50,684 48,748 ====== ====== * Due to the Company's net loss for the three months ended December 31, 2000, potentially dilutive securities are deemed to be antidilutive. The weighted average number of shares for potentially dilutive employee and director stock options was 785,000 and for convertible subordinated notes was 7,642,000 in the three months ended December 31, 2000. The after-tax interest expense recognized by the Company in the three months ended December 31, 1999 associated with the convertible subordinated notes that was added back to net income in order to compute net income per diluted share was $0.3 million. NOTE 4 - OPERATING RESULTS BY BUSINESS SEGMENT: Operating results by business segment for the three month periods ended December 31, 2000 and 1999 were as follows:
Advanced Packaging Packaging Three months ended Equipment Materials Technology Test December 31, 2000: Segment Segment Segment Segment(1) Corporate Total --------- --------- ---------- ---------- --------- -------- Net sales $ 84,597 $ 48,207 $ 8,281 $ 14,299 $155,384 Cost of goods sold 47,994 34,491 8,028 10,785 101,298 -------- -------- ------- -------- -------- -------- Gross profit 36,603 13,716 253 3,514 54,086 Operating costs 31,511 8,256 6,499 5,653 $ 3,615 55,534 Purchased in-process research and development -- -- -- 11,709 -- 11,709 -------- -------- ------- -------- -------- -------- Income (loss) from operations $ 5,092 $ 5,460 $(6,246) $(13,848) $ (3,615) $(13,157) ======== ======== ======= ======== ======== ======== Income(loss) from operations before Cerprobe Corp. and Probe Technology acquisition related expenses $ 5,092 $ 5,460 $(6,246) $ 1,398 $ (3,615) $ 2,089 ======== ======== ======= ======== ======== ======== Segment assets at December 31, 2000 $219,025 $101,939 $50,280 $314,894 $130,312 $816,450 ======== ======== ======= ======== ======== ========
7 8
Advanced Packaging Packaging Three months ended Equipment Materials Technology Test December 31, 1999: Segment Segment Segment Segment(1) Corporate Total --------- --------- ---------- ---------- --------- -------- Net sales $132,531 $ 42,440 $ 4,878 $ -- $179,849 Cost of goods sold 84,333 30,323 5,281 -- 119,937 -------- -------- ------- -------- -------- -------- Gross profit 48,198 12,117 (403) -- 59,912 Operating expenses 28,291 6,678 4,236 -- $ 3,591 42,796 -------- -------- ------- -------- -------- -------- Income (loss) from operations $ 19,907 $ 5,439 $(4,639) $ -- $ (3,591) $ 17,116 ======== ======== ======= ======== ======== ======== Segment assets at December 31, 1999 $237,199 $ 89,330 $39,288 $ -- $208,836 $574,653 ======== ======== ======= ======== ======== ========
(1) Comprised of the recently acquired Cerprobe Corporation and Probe Technology Corporation. The Company completed its acquisition of Cerprobe in November 2000 and Probe Technology in December 2000. The results of both companies, from the date of acquisition through December 31, 2000 are included in loss from operations for the quarter ended December 31, 2000 but are not included in the operating results of the Company for any period preceding their respective dates of acquisition. Note 5 - DEBT In December 2000, the Company entered into a new $60.0 million (reducing to $40.0 million over a three year period) bank revolving credit facility which replaced the revolving credit facility that had been in place for several years. The new facility expires in December 2003. Borrowings are subject to compliance with financial and other covenants set forth in the revolving credit documents. Borrowings bear interest either at a Base Rate (defined as the higher of the prime rate or the federal funds rate plus 1/2%) or, at a LIBOR Rate (defined as LIBOR plus 1.0% to 2.0%, depending on the ratio of senior debt to earnings before interest, taxes, depreciation and amortization). The new revolving credit facility is guaranteed by certain of the Company's domestic subsidiaries and requires the Company maintain certain financial covenants including a leverage ratio, a liquidity ratio and a minimum net worth requirement. The revolving credit facility also limits the Company's ability to mortgage, pledge or dispose of a material portion of its assets and imposes restrictions on the Company's investments and acquisitions. The Company also has outstanding, $175.0 million of convertible subordinated notes. The notes are general obligations of the Company and subordinated to all senior debt. The notes bear interest at 4 3/4%, are convertible into the Company's common stock at $22.8997 per share and mature on December 15, 2006. There are no financial covenants associated with the notes and there are no restrictions on paying dividends, incurring additional debt or issuing or 8 9 repurchasing the Company's securities. Interest on the notes will be paid on June 15 and December 15 of each year. The Company may redeem the notes in whole or in part at any time after December 18, 2002 at prices ranging from 102.714% at December 19, 2002 to 100.0% at December 15, 2006. Note 6 - ACQUISITIONS In November 2000, the Company completed its tender offer for 100% of the outstanding shares of Cerprobe Corporation ("Cerprobe") for $20 per share. The total purchase price of Cerprobe, including transaction costs, the assumption of acquisition related liabilities and debt repayment, was approximately $225.0 million, payable in cash. In December 2000 the Company purchased all the outstanding shares of Probe Technology Corporation ("Probe Tech") for approximately $65.0 million, including transaction costs and the assumption of acquisition related liabilities, payable in cash. Both Cerprobe and Probe Tech design and manufacture semiconductor test interconnect solutions. The acquisitions have been recorded using the purchase method of accounting and accordingly the purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their fair values on the acquisition dates. The Company has allocated a portion of the purchase price for each acquisition to intangible assets valued using a discount rate of 25% for Cerprobe and 18% for Probe Tech. The portion of the purchase prices allocated to in-process R&D projects that did not have future alternative use and to which technological feasibility had not been established totaled $11.3 million for Cerprobe and $.4 million for Probe Tech and were charged to expense as of the acquisition dates. The purchase price allocation is preliminary and will likely change upon resolution of open matters including completion of appraisals, finalization of restructuring activities, purchase price adjustments and the final assessment of certain contingencies. The Company received a waiver of a bank covenant under its then existing bank revolving credit facility, which limited the amount the Company could spend on acquisitions, in order to complete the Cerprobe and Probe Tech acquisitions. The Company borrowed $55.0 million under its bank revolving credit facility to partially fund the purchase of Probe Tech. The operations of these two companies are being combined to create a test division, which is being disclosed as a separate business segment for financial reporting purposes. Pro forma operating results for the three months ended December 31, 1999 and December 31, 2000 assuming the acquisitions of Cerprobe and Probe Tech were consummated on October 1, 1999 appear below. This unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transaction had been consummated at the date indicated, nor is it necessarily indicative of the future operating results of the combined businesses. 9 10 Unaudited ProForma Combined Operating Results (in thousands, except per share amount) Three months ended December 31, ------------------------------- 1999(1) 2000 ------- ---- Net sales $205,480 $182,807 Net loss $(4,000) $(14,167) Basic and diluted net loss per share $(0.08) $(0.29) (1) The results of Cerprobe for the three months ended December 31, 1999 included a charge of $8.8 million for in-process R&D associated with its acquisition of OZ Technologies, Inc. The components of the preliminary purchase price allocation for the acquisitions of Cerprobe and Probe Tech are as follows: (In thousands) Cerprobe Probe Tech -------- --------- Current assets $ 44,223 $12,180 Property,plant,equipment and other long term assets 27,241 8,948 Acquired intangibles 80,800 30,253 Acquired in-process research and development 11,295 414 Goodwill 104,864 16,298 Less: Liabilities assumed (74,927) (3,432) -------- ------- Total $193,496 $64,661 ======== ======= The goodwill and intangible assets resulting from the acquisitions is being amortized on a straight-line basis over a 10-year period. The Cerprobe and Probe Tech in-process R&D value was comprised of several research and development projects which were scheduled to reach completion in 2001 and 2002. At the acquisition date, research and development projects ranged in completion from 10% to 90% complete. In February 1999, the former President, director and shareholder of Silicon Valley Test & Repair, Inc. (a company acquired by Cerprobe Corporation in January 1997) filed counterclaims against Cerprobe in an action Cerprobe brought to rescind the acquisition. The counterclaims allege breach of contract, conversion and other tortious conduct. Cerprobe's claims for rescission were denied. A summary judgment motion filed by Cerprobe seeking dismissal of most of the counterclaims, and a cross-motion for summary judgment filed by the defendant are pending. While the Company intends to vigorously defend the defendants' counter claims, it is impossible to predict the outcome of this or any other litigation. It is not anticipated that the suit will have a material adverse impact on the Company's financial condition or results of operations. The outcome of this case could potentially impact the Cerprobe purchase price allocation. 10 11 Note 7 - COMPREHENSIVE INCOME (LOSS): For the three months ended December 31, 1999 and 2000, the components of total comprehensive income (loss) are as follows: Three months ended December 31, -------------------------- 1999 2000 ------ ------ Net income(loss) $12,801 $(11,686) ------- -------- Foreign currency translation adjustment 217 (1,067) Unrealized gain(loss) on investments, net of taxes 4 (5) ------- -------- Other comprehensive income (loss) 221 (1,072) ------- -------- Comprehensive income(loss) $13,022 $(12,758) ======= ======== Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. In addition to historical information, this report contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934, as amended (the "Exchange Act"), and are subject to the Safe Harbor provisions created by statute. Such forward-looking statements include, but are not limited to, statements that relate to our future revenue, product development, demand forecasts, competitiveness, gross margins, operating expenses and benefits expected as a result of: o The projected growth rates in the overall semiconductor industry, the semiconductor assembly equipment market and the market for semiconductor packaging materials; o the anticipated development, production and licensing of our advanced packaging technology; o the successful integration of recent acquisitions into our company's operating structure and expected growth rates for these companies; o the projected continuing demand for wire bonders; and o the anticipated growing importance of the flip chip assembly process in high-end market segments. Generally words such as "may," "will," "should," "could," "anticipate," "expect," "intend," "estimate," "plan," "continue," and "believe," or the negative of or other variation on these and other similar expressions identify forward-looking statements. These forward-looking statements are made only as of the date of this report. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. 11 12 Forward-looking statements are based on current expectations and involve risks and uncertainties and our future results could differ significantly from those expressed or implied by our forward-looking statements. These risks and uncertainties include, without limitation, those described below and under the heading "Risk Factors" within this section and in our reports and registration statements filed from time to time with the Securities and Exchange Commission. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes on pages 3 to 11 of this Form 10-Q for a full understanding of our financial position and results of operations for the three month period ended December 31, 2000. INTRODUCTION We design, manufacture and market capital equipment, packaging materials and test interconnect solutions and provide flip chip bumping services for sale to companies that manufacture and assemble semiconductor devices. We also service, maintain, repair and upgrade assembly equipment and license our flip chip bumping process technology. Our operating results primarily depend upon the capital and operating 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 upturns which have had severe effects on the semiconductor industry's demand for capital equipment, including the assembly equipment we manufacture and market and, to a lesser extent, the packaging materials and test interconnect solutions we sell. We do not consider our business to be seasonal in nature. In November 2000 we acquired 100% of the stock of Cerprobe Corporation (referred to as Cerprobe) and in December 2000 we acquired 100% of the stock of Probe Technology Corporation (referred to as Probe Tech). Both Cerprobe and Probe Tech design and manufacture semiconductor test interconnect solutions. These acquisitions have been recorded using the purchase method of accounting and have been consolidated with the company's operating results beginning on the date of acquisition. The acquisitions were a step forward in our strategy to offer the most complete, capable and cost-effective interconnect solutions. These two companies comprise our new test segment. Beginning in the fourth quarter of fiscal 2000 we experienced customer order deferrals and push-outs. As a result, our net sales in the first quarter of fiscal 2001 were below those in the same period in the prior year and we expect our sales in the second quarter of fiscal 2001 to be below the first quarter's net sales. In reaction to the anticipated lower sales volume, on February 13, 2001, we announced a 7% reduction in our workforce. The financial impact of this reduction is currently being evaluated. 12 13 RESULTS OF OPERATIONS - Three month period ended December 31, 2000 compared to the three month period ended December 31, 1999. During the three months ended December 31, 2000 we reported bookings of $115.0 million, including $15.0 million from the test segment, compared to $219.0 million recorded in the prior quarter and $206.9 million recorded for the three months ended December 31, 1999. At December 31, 2000, we had a backlog of customer orders totaling $125.0 million, including $22.0 million at the test segment, compared to $143.0 million at September 30, 2000 and $120.1 million at December 31, 1999. Since the timing of deliveries may vary and orders generally are subject to delay or cancellation, our backlog as of any date may not be indicative of sales for any succeeding period. Sales Net sales for the three months ended December 31, 2000 (which included approximately one month of revenue of Cerprobe and Probe Tech) were 13.6% below the comparable period in the prior year. The lower sales were primarily reflected in our equipment segment where unit sales of automatic ball bonders were 57% below the same quarter in the prior year. The lower unit sales volume of automatic ball bonders was partially offset by a 20% increase in the average selling price of the automatic ball bonders, reflecting sales of our newly introduced Models 8028S and 8028PPS automatic ball bonders which offer increased productivity and technical performance. Packaging materials sales were 13.6% higher than the prior year due to the increased volume of gold wire and expendable tool shipments. Also, sales of our advanced packaging segment were 69.8% higher than the prior year due to higher bumping service revenue and license income at Flip Chip Technologies LLC (referred to as Flip Chip), our joint venture with Delco Electronics Corporation. We also recorded $14.3 million in sales from Cerprobe and Probe Tech which are being reported as our test segment. International sales (shipments of our products with ultimate foreign destinations) comprised 72% and 90% of our total sales during the three months ended December 31, 2000 and 1999, respectively. Sales to customers in the Asia/Pacific region accounted for approximately 59% and 79% of our total sales during the three months ended December 31, 2000 and 1999, respectively. Gross Profit Gross profit decreased to $54.1 million compared to $59.9 million during the comparable period of the prior year due primarily to the lower volume of ball bonder shipments. However, gross margin (gross profit as a percentage of sales) increased to 34.8% in the three months ended December 31, 2000 from 33.3% in the prior year. The equipment business gross margin was 43.3% compared to 36.4% in the prior year due to a lower cost of production as a result of the move 13 14 of the ball bonder manufacturing to Singapore and a higher average selling price of our automatic ball bonders (primarily our Models 8028S and 8028PPS). The packaging materials business reported a gross margin of 28.5% for the three months ended December 31, 2000 compared to 28.6% in the comparable period of the prior year. Consolidated gross margin was also favorably impacted from a gross margin of 3.1% at our advanced packaging segment compared to a loss in the prior year, resulting from the higher bumping volume and license revenue at Flip Chip. The test segment recorded gross profit from operations, excluding an acquisition related inventory "step-up" charge of $1.8 million, of $5.4 million or 37.4% of sales. Selling, General and Administrative Selling, general and administrative ("SG&A") expenses increased $5.5 million in the three months ended December 31, 2000 from the comparable period in the prior year. The higher SG&A expenses included approximately $3.4 million associated with the operations of Cerprobe and Probe Tech. The remaining increase in SG&A expenses was due to higher payroll and related costs. Research and Development Net research and development ("R&D") expense for the three months ended December 31, 2000 increased $5.5 million to $17.6 million from $12.1 million in the comparable period of the prior year, reflecting our commitment to new product introductions and product development in our equipment and packaging materials businesses as well as R&D spending at X-LAM and Flip Chip. Acquisition Costs In connection with the acquisitions of Cerprobe and Probe Tech we recorded a charge of $11.7 million for in-process R&D representing the appraised value of products still in the development stage that did not have a future alternative use and have not reached technological feasibility. We also recorded amortization expense of $1.7 million associated with the goodwill and intangible assets associated with the purchase of Cerprobe and Probe Tech. Loss from Operations Loss from operations was $13.2 million for the three months ended December 31, 2000 compared to income from operations of $17.1 million in the comparable period of the prior year. The loss from operations was due primarily to the lower sales and associated gross profit, additional expenses associated with the newly acquired companies, higher R&D expense and the charge for in-process research and development. 14 15 Interest Interest income in the three months ended December 31, 2000 was $2.8 million higher than in the comparable period in the prior year. The higher interest income resulted from investment income on higher cash balances. However, due to the purchases of Cerprobe and Probe Tech for cash we have increased our borrowings and reduced our investment portfolio and we expect to report lower interest income in future quarters of fiscal 2001. Interest expense in the three months ended December 31, 2000 was $2.2 million higher than the prior year due to interest on our subordinated notes for a full quarter this year compared to a partial quarter last year and interest on bank borrowing to consummate the Probe Tech acquisition. Equity in loss of joint venture In the three months ended December 31, 1999 we recorded a loss on our equity interest in Advanced Polymer Solutions, LLC ("APS"), a joint venture with Polyset Company, Inc. APS was dissolved in September 2000 and operations ceased at that time. Tax Expense Our effective tax rate for fiscal 2000 is expected to approximate 28%, the same as the prior year. Our effective tax rate is favorably impacted by tax incentives associated with the move of the automatic ball bonder manufacturing to Singapore and incentives from Israel. In the three months ended December 31, 2000 we did not record an income tax benefit on the $11.7 million charge for in-process research and development. Minority Interest in Net Loss of Subsidiary In the three months ended December 31, 2000, we recorded minority interest of $0.2 million reflecting our joint venture partner's share of the loss incurred at Flip Chip. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 138, is effective for fiscal years beginning after June 15, 2000. The standard requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded in earnings or other comprehensive income, based on whether the instrument is designated as part of a hedge transaction and, if so, the type of hedge transaction. The company adopted this statement in the first quarter of 2001. There was no cumulative effect of adoption. The impact of SFAS No. 133 on the company's future results will be dependent upon the fair values of the 15 16 company's derivatives and related financial instruments and could result in increased volatility. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". The SAB summarizes certain of the Staff's views in applying generally accepted accounting principles to revenue recognition in the financial statements. We are required to adopt SAB101 in the fourth quarter of fiscal year 2001. Accordingly, any shipments previously reported as revenue, including revenue reported for the first three quarters of fiscal 2001, that do not meet SAB 101's guidance will be recorded as revenue in future periods. Changes in our revenue recognition policy resulting from the guidelines of SAB 101 would not involve the restatement of prior fiscal year statements, but would, to the extent applicable, be reported as a change in accounting principle in the fiscal year ended September 30, 2001, with the appropriate restatement of interim periods as required by SFAS No. 3 "Reporting Accounting Changes in Interim Financial Statements." We are currently assessing the full impact of SAB 101 on our reported financial results. Based on our analysis to-date, we expect when SAB 101 is adopted to report a cumulative adjustment to net income of between $10.0 million and $15.0 million in fiscal 2001 for all prior annual periods based on a revenue deferral ranging between $20.0 million and $30.0 million. We also expect revenues in the first quarter of fiscal 2001 will be lower than those reported in this report by $5.0 million to $10.0 million as a result of adoption of SAB 101. We believe that SAB 101 will not affect the underlying strength or weakness of our business operations as measured by the dollar value of our product shipments and cash flows. In May 2000, the Emerging Issues Task Force (EITF) issued EITF No. 00-14, "Accounting for Coupons, Rebates and Discounts" that addressed accounting for sales incentives. The Task Force concluded that in accounting for cash sales incentives a manufacturer should recognize the incentive as a reduction of revenue on the later date of the manufacturer's sale or the date the offer is made to the public. The reduction of revenues should be measured based on the estimated amount of incentives to be claimed by the ultimate customers. We must adopt this pronouncement in our fourth quarter of fiscal 2001. We do not believe the adoption of this pronouncement will have a material impact on the Company's financial statements. In September 2000, the EITF reached a final consensus on issue EITF No. 00-10, "Accounting for Shipping and Handling Revenues and Costs." The Task Force concluded that amounts billed to customers related to shipping and handling should be classified as revenue. We currently classify shipping and handling revenue as a reduction of cost of products sold. Further, the Task Force stated that shipping and handling cost related to this revenue should either be recorded in costs of goods sold or the Company should disclose where these costs are recorded and the amount of these costs. We must adopt this pronouncement in the fourth quarter of fiscal 2001. We do not believe 16 17 adoption of this pronouncement will have a material impact on our financial statements. LIQUIDITY AND CAPITAL RESOURCES: As of December 31, 2000, cash, cash equivalents and investments totaled $120.3 million compared to $316.6 million at September 30, 2000. Additionally, we have a $60.0 million (reducing to $40 million over a three year period) bank revolving credit facility. The bank facility expires in December 2003. The borrowings are subject to our compliance with financial and other covenants set forth in the revolving credit documents. At December 31, 2000, we had $58 million of cash borrowings outstanding under the facility and had utilized $1.1 million of availability under that credit facility to support letters of credit. Borrowings bear interest either at a Base Rate (defined as the prime rate or the federal funds rate plus 1/2%) or, at a LIBOR Rate (defined as LIBOR plus 1.0% to 2.0%, depending on our ratio of senior debt to earnings before interest, taxes, depreciation and amortization). Cash provided by operating activities totaled $49.0 million during the three months ended December 31, 2000 compared to cash used of $2.0 million during the comparable period in the prior year. The cash provided by operation activities was due primarily to the collection of accounts receivable. During the three months ended December 31, 2000, we invested approximately $23.9 million in property and equipment compared to $8.4 million in the comparable period of the prior year. The capital spending in the three months ended December 31, 2000 was primarily for information technology to develop corporate-wide e-business capabilities, increased capacity at Flip Chip, a new wire manufacturing facility in Taiwan and continued expansion of the manufacturing capabilities in our existing packaging materials facilities. In the three months ended December 31, 2000, we purchased two companies, for cash, that design and manufacture semiconductor test interconnect solutions. Through December 31, 2000, we had paid $216.4 million for Cerprobe and $62.5 million for Probe Tech, net of cash acquired. We believe that anticipated cash flows from operations, working capital and amounts available under our revolving credit facilities will be sufficient to meet our liquidity and capital requirements for at least the next 12 months. However, we may seek, as we believe appropriate, equity or debt financing to provide capital for corporate purposes and/or to fund strategic business opportunities, including possible acquisitions, joint ventures, alliances or other business arrangements which could require substantial capital outlays. The timing and amount of such potential capital requirements cannot be determined at this time and will depend on a number of factors, 17 18 including demand for the Company's products, semiconductor and semiconductor capital equipment industry conditions, competitive factors and the nature and size of strategic business opportunities which the Company may elect to pursue. RISK FACTORS: OUR QUARTERLY OPERATING RESULTS FLUCTUATE SIGNIFICANTLY AND MAY CONTINUE TO DO SO IN THE FUTURE In the past, our quarterly operating results have fluctuated significantly. Although these fluctuations are partly due to the volatile nature of the semiconductor industry, they also reflect the impact of other factors, some of which are outside of our control. Some of the factors that could cause our revenues and/or operating margins to fluctuate significantly from period to period are: o the mix of products that we sell because, for example: - packaging materials generally have lower margins than assembly equipment, - some lines of equipment are more profitable than others, and - some sales arrangements have higher margins than others; o the volume and timing of orders for our products and any order postponements and cancellations by our customers; o adverse changes in our pricing, or that of our competitors; o higher than anticipated costs of development or production of new equipment models; o the availability and cost of key components for our products; o market acceptance of our new products and upgraded versions of our products; o our announcement of, or perception by others that we will introduce, new or upgraded products, which could delay customers from purchasing our products; o the timing of acquisitions; and o our competitors' introduction of new products. Many of our expenses, such as research and development and selling, general and administrative expenses, do not vary directly with our net sales. As a result, a decline in our net sales would adversely affect our operating results. In addition, if we were to incur additional expenses in a quarter in which we did not experience comparable increased net sales, our operating results would decline. Factors that could cause our expenses to fluctuate from period to period include: o the timing and extent of our research and development efforts; 18 19 o severance, resizing and other costs of relocating facilities in market downturns; and o inventory writeoffs due to obsolesence. Because our revenues and operating results are volatile and difficult to predict, we believe that period-to-period comparisons of our operating results are not a good indication of our future performance. THE SEMICONDUCTOR INDUSTRY AS A WHOLE IS VOLATILE, AS ARE OUR FINANCIAL RESULTS Our operating results are significantly affected by the capital expenditures of semiconductor manufacturers and assemblers worldwide. Expenditures by semiconductor manufacturers and assemblers depend on the current and anticipated market demand for semiconductors and products that use semiconductors, such as personal computers, telecommunications, consumer electronics and automotive goods. Any significant downturn in the market for semiconductor devices or in general economic conditions would likely reduce demand for our products and adversely affect our business, financial condition and operating results. Historically, the semiconductor industry has been volatile with sharp periodic downturns and slowdowns. These downturns have been characterized by, among other things, diminished product demand, excess production capacity and accelerated erosion of selling prices. This has severely and negatively affected the industry's demand for capital equipment, including the assembly equipment that we manufacture and market and, to a lesser extent, the packaging materials and test interconnect solutions that we sell. These downturns and slowdowns have adversely affected our operating results. Downturns in the future could similarly adversely affect our business, financial condition and operating results. THE INTEGRATION OF CERPROBE AND PROBE TECH INTO OUR COMPANY'S OPERATING STRUCTURE AND EXPECTED GROWTH RATES FOR THESE COMPANIES MAY NOT BE REALIZED AND OUR EXPECTED BENEFITS MAY NOT OCCUR In November 2000 we acquired the stock of Cerprobe Corporation for approximately $225.0 million and in December 2000 we acquired the stock of Probe Tech for approximately $65.0 million. Cerprobe and Probe Tech design and manufacture semiconductor test interconnect solutions. We have invested a significant amount of cash to acquire these companies and will invest a significant amount of management time and effort to integrate them into the company's operating structure, however, if we are unable to integrate them successfully or the expected growth rates for these companies do not occur our business, financial condition and operating results could be materially affected. OUR BUSINESS DEPENDS ON ATTRACTING AND RETAINING MANAGEMENT, MARKETING AND TECHNICAL EMPLOYEES WHO ARE IN GREAT DEMAND As is the case with all technology companies, our future success depends on our ability to hire and retain qualified management, marketing and technical employees. Competition is intense in personnel recruiting in the semiconductor and semiconductor equipment industries, particularly with respect to some engineering 19 20 disciplines. In particular, we have experienced periodic shortages of software engineers. If we are unable to continue to attract and retain the technical and managerial personnel we require, our business, financial condition and operating results could be adversely affected. WE MAY NOT BE ABLE TO RAPIDLY DEVELOP AND MANUFACTURE NEW AND ENHANCED PRODUCTS REQUIRED TO MAINTAIN OR EXPAND OUR BUSINESS We believe that our continued success will depend on our ability to continuously develop and manufacture or acquire new products and product enhancements on a timely and cost-effective basis. We also must introduce these products and product enhancements into the market in response to customers' demands for higher performance assembly equipment. Our competitors may develop enhancements to or future generations of competitive products that will offer superior performance, features and lower prices that may render our products noncompetitive. We may not be able to develop and introduce products incorporating new technologies in a timely manner or at a price that will satisfy future customers' needs or achieve market acceptance. WE MAY NOT BE ABLE TO ACCURATELY FORECAST DEMAND FOR OUR PRODUCT LINES We typically operate our business with a relatively short backlog and order supplies and otherwise plan production based on internal forecasts of demand. Due to these factors, we have in the past, and may again in the future, fail to accurately forecast demand, in terms of both volume and configuration for either our current or next-generation wire bonders. This has led to and may in the future lead to delays in product shipments or, alternatively, an increased risk of inventory obsolescence. If we fail to accurately forecast demand for our products, our business, financial condition and operating results could be materially and adversely affected. ADVANCED PACKAGING TECHNOLOGIES OTHER THAN WIRE BONDING MAY RENDER SOME OF OUR PRODUCTS OBSOLETE AND OUR STRATEGY FOR PURSUING THESE OTHER TECHNOLOGIES MAY BE COSTLY AND INEFFECTIVE Advanced packaging technologies have emerged that may improve device performance or reduce the size of an integrated circuit or IC package, as compared to traditional die and wire bonding. These technologies include flip chip, chip scale packaging and tape automated bonding. In general, these advanced technologies eliminate the need for wires to establish the electrical connection between a die and its package. For some devises, these advanced technologies have largely replaced wire bonding. However, today most ICs still employ die and wire bonding technology, and the possible extent, rate and timing of change is difficult, if not impossible, to predict. In fact, wire bonding has proved more durable than we originally anticipated, largely because of its reliability and cost. However, we cannot assure you that the semiconductor industry will not, in the future, shift a significant part of its volume into advanced packaging technologies, such as those discussed above. Presently, Intel, Motorola, IBM and Advanced Micro Devices, for example, have developed flip chip technologies for internal use, and a number of other companies are also increasing their investments in advanced packaging technologies. If a significant shift to advanced 20 21 technologies were to occur, demand for our wire bonders and related packaging materials would diminish. One component of our strategy is to develop the capacity to use advanced technologies to allow us to compete in those portions of the market that currently use these advanced technologies and to prepare for any eventual decline in the use of wire bonding technology. There are a number of risks associated with our strategy to diversify into new technologies: o The technologies that we have invested in represent only some of the advanced technologies that may one day supercede wire bonding; o Other companies are developing similar or alternative advanced technologies; o Wire bonding may continue as the dominant technology for longer than we anticipate; o The cost of developing advanced technologies may be significantly greater than we expect; and o We may not be able to develop the necessary technical, research, managerial and other related skills to develop, produce, market and support these advanced technologies. As a result of these risks, we cannot assure you that any of our attempts to develop alternative technologies will be profitable or that we will be able to realize the benefits that we anticipate from them. A DECLINE IN DEMAND FOR ANY OF OUR PRODUCTS COULD CAUSE OUR REVENUES TO DECLINE SIGNIFICANTLY Historically, our wire bonders have comprised at least 55% of our net sales. If demand for, or pricing of, our wire bonders declines because our competitors introduce superior or lower cost systems, the semiconductor industry changes or because of other occurrences beyond our control, our business, financial condition and operating results would be materially and adversely affected. BECAUSE A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR NEARLY ALL OUR SALES, OUR REVENUES COULD DECLINE IF WE LOSE ANY SIGNIFICANT CUSTOMER The semiconductor manufacturing industry is highly concentrated, with a relatively small number of large semiconductor manufacturers and subcontract assemblers purchasing a substantial portion of semiconductor assembly equipment and packaging materials. We expect that sales of our products to a limited number of customers will continue to account for a high percentage of our net sales for the foreseeable future. If we lose orders from a significant customer, or if a significant customer reduces its orders substantially, these losses or reductions will adversely affect our business, financial condition and operating results. WE DEPEND ON A SMALL NUMBER OF SUPPLIERS FOR MATERIALS AND, IF OUR SUPPLIERS DO NOT DELIVER THEIR PRODUCTS TO US, WE MAY BE UNABLE TO DELIVER OUR PRODUCTS TO OUR CUSTOMERS 21 22 Our products are complex and require materials, components and subassemblies of an exceptionally high degree of reliability, accuracy and performance. We rely on subcontractors to manufacture many of the components and subassemblies for our products and we rely on sole source suppliers for some material components. Our reliance involves a number of significant risks, including: o loss of control over the manufacturing process; o changes in our manufacturing processes, dictated by changes in the market, that have delayed our shipments; o our inadvertent use of defective or contaminated materials; o the relatively small operations and limited manufacturing resources of some of our contractors and suppliers, which may limit their ability to manufacture and sell subassemblies, components or parts in the volumes we require and at quality levels and prices we can accept; o reliability and quality problems we experience with certain key subassemblies provided by single source suppliers; and o delays in the delivery of subassemblies, which, in turn, have caused delays in some of our shipments. If we are unable to deliver products to our customers on time for these or any other reasons, or if we do not maintain acceptable product quality or reliability in the future, our business, financial condition and operating results would be materially and adversely affected. WE ARE EXPANDING AND DIVERSIFYING OUR OPERATIONS, AND IF WE FAIL TO MANAGE OUR EXPANDING AND MORE DIVERSE OPERATIONS SUCCESSFULLY, OUR BUSINESS AND FINANCIAL RESULTS MAY BE MATERIALLY AND ADVERSELY AFFECTED In recent years, we have broadened our product offerings to include significantly more packaging materials. Although our strategy is to diversify our products and services, we may not be able to develop, acquire, introduce or market new products in a timely or cost-effective manner and the market may not accept any new or improved products we develop, acquire, introduce or market. Our diversification into new lines of business and our expansion through acquisitions and alliances has increased, and is expected to continue to increase, demand on our management, financial resources and information and internal control systems. Our success depends in significant part on our ability to manage and integrate acquisitions, joint ventures and other alliances and to continue to implement, improve and expand our systems, procedures and controls. If we fail to do this at a pace consistent with the development of our business, our business, financial condition and operating results would be materially and adversely affected. As we seek to expand our operations, we expect to encounter a number of risks, which will include: o risks associated with hiring additional management and other critical personnel; 22 23 o risks associated with adding equipment and capacity; and o risks associated with increasing the scope, geographic diversity and complexity of our operations. In addition, sales and servicing of packaging materials and advanced technologies require different organizational and managerial skills than sales of traditional wire bonding technology. We cannot assure you that we will be able to develop the necessary skills to successfully produce and market these different products. WE MAY BE UNABLE TO CONTINUE TO COMPETE SUCCESSFULLY IN THE HIGHLY COMPETITIVE SEMICONDUCTOR EQUIPMENT AND PACKAGING MATERIALS INDUSTRIES The semiconductor equipment and packaging materials industries are intensely competitive. Significant competitive factors in the semiconductor equipment market include performance quality, customer support and price. Our major equipment competitors include: o ASM Pacific Technology, Shinkawa, Kaijo and ESEC in wire bonders; o ESEC, Nichiden, ASM Pacific Technology and Alphasem in die bonders; and o Disco Corporation in dicing saws. Competitive factors in the semiconductor packaging materials industry include price, delivery and quality. Our significant packaging materials competitors with respect to expendable tools and blades include: o Gaiser Tool Co. and Small Precision Tools, Inc. in expendable tools; and o Disco Corporation in blades; and in the bonding wire market: o Tanaka Electronic Industries and Sumitomo Metal Mining. In each of the markets we serve, we face competition and the threat of competition from established competitors and potential new entrants, some of which may have greater financial, engineering, manufacturing and marketing resources than we have. Some of these competitors are Japanese or Korean companies that have had and may continue to have an advantage over us in supplying products to local customers because many of these customers appear to prefer to purchase from local suppliers, without regard to other considerations. 23 24 We expect our competitors to improve their current products' performance, and to introduce new products with improved price and performance characteristics. New product introductions by our competitors or by new market entrants could hurt our sales. If a particular semiconductor manufacturer or subcontract assembler selects a competitor's product for a particular assembly operation, we may not be able to sell a product to that manufacturer or assembler for a significant period of time because manufacturers and assemblers sometimes develop lasting relations with suppliers, and products in our industry often go years without requiring replacement. In addition, we may have to lower our prices in response to price-cuts by our competitors, which could materially and adversely affect our business, financial condition and operating results. We cannot assure you that we will be able to continue to compete in these or other areas in the future. WE SELL MOST OF OUR PRODUCTS TO CUSTOMERS LOCATED OUTSIDE OF THE U.S. AND WE HAVE SUBSTANTIAL MANUFACTURING OPERATIONS LOCATED OUTSIDE OF THE U.S., BOTH OF WHICH SUBJECT US TO RISKS FROM CHANGES IN TRADE REGULATIONS, CURRENCY FLUCTUATIONS, POLITICAL INSTABILITY AND WAR Approximately 80% of our net sales for fiscal 1998, 83% of our net sales for fiscal 1999 and 91% of our net sales for fiscal 2000 were attributable to sales to customers for delivery outside of the United States. We expect our sales outside of the United States to continue to represent a substantial portion of our future revenues. Our future performance will depend, in significant part, on our ability to continue to compete in foreign markets, particularly in Asia. Asian economies have been highly volatile, resulting in significant fluctuation in local currencies, and political and economic instability. These conditions may continue or worsen, which could materially and adversely affect our business, financial condition and operating results. In addition, we rely on non-U.S. suppliers for materials and components used in the equipment that we sell. We also maintain substantial manufacturing operations in countries other than the United States, including operations in Israel and Singapore. As a result, a major portion of our business is subject to the risks associated with international commerce such as, risks of war and civil disturbances or other events that may limit or disrupt markets; expropriation of our foreign assets; longer payment cycles in foreign markets; international exchange restrictions; the difficulties of staffing and managing dispersed international operations; tariff and currency fluctuations; changing political conditions; foreign governments' monetary policies; and less protective foreign intellectual property laws. Because most of our foreign sales are denominated in United States dollars, an increase in value of the United States dollar against foreign currencies, particularly the Japanese yen, will make our products more expensive than those offered by some of our foreign competitors. Our ability to compete overseas in the future could be materially and adversely affected by a strengthening of the United States dollar against foreign currencies. The ability of our international operations to prosper also will depend, in part, on a continuation of current trade relations between 24 25 the United States and foreign countries in which our customers operate and in which our subcontractors have assembly operations. A change toward more protectionist trade legislation in either the United States or foreign countries in which we do business, such as a change in the current tariff structures, export compliance or other trade policies, could adversely affect our ability to sell our products in foreign markets. OUR SUCCESS DEPENDS IN PART ON OUR INTELLECTUAL PROPERTY, WHICH WE MAY BE UNABLE TO PROTECT Our success depends in part on our proprietary technology. To protect this technology, we rely principally on contractual restrictions (such as nondisclosure and confidentiality agreements) in our agreements with employees, vendors, consultants and customers and on the common law of trade secrets and proprietary "know-how." We secondarily rely, in some cases, on patent and copyright protection, which may become more important to us as we expand our investment in advanced packaging technologies. We may not be successful in protecting our technology for a number of reasons, including: o Our competitors may independently develop technology that is similar to or better than ours; o Employees, vendors, consultants and customers may not abide by their contractual agreements, and the cost of enforcing those agreements may be prohibitive, or those agreements may prove to be unenforceable or more limited than we anticipate; o Foreign intellectual property laws may not adequately protect our intellectual property rights; and o Our patent and copyright claims may not be sufficiently broad to effectively protect our technology; patents or copyrights may be challenged, invalidated or circumvented; and we may otherwise be unable to obtain adequate protection for our technology. In addition, our partners in joint ventures and alliances may also have rights to technology we develop through those joint ventures and alliances. If we are unable to protect our technology, we could weaken our competitive position or face significant expense to protect or enforce our intellectual property rights. THIRD PARTIES MAY CLAIM WE ARE INFRINGING ON THEIR INTELLECTUAL PROPERTY, WHICH COULD CAUSE US TO INCUR SIGNIFICANT LITIGATION COSTS OR OTHER EXPENSES, OR PREVENT US FROM SELLING SOME OF OUR PRODUCTS The semiconductor industry is characterized by rapid technological change, with frequent introductions of new products and technologies. As a result, industry participants often develop products and features similar to those introduced by others, increasing the risk that their products and processes may give rise to claims that they infringe on the intellectual property of others. We may unknowingly infringe on the intellectual property rights of others and incur significant liability for that infringement. If we are found to infringe on the intellectual property rights of others, we could be enjoined from continuing to manufacture, market or use the affected product, or be required to obtain a license to continue manufacturing or using the affected product. A license could be very expensive to obtain or may not be available at all. Similarly, changing our 25 26 products or processes to avoid infringing the rights of others may be costly or impractical. Occasionally, third parties assert that we are, or may be, infringing on or misappropriating their intellectual property rights. In these cases, we will defend against claims or negotiate licenses where we consider these actions appropriate. Intellectual property cases are uncertain and involve complex legal and factual questions. If we become involved in this type of litigation, it could consume significant resources and divert our attention from our business. Some of our customers have received notices of infringement from the Lemelson Medical, Education and Research Foundation Limited Partnership (the "Lemelson Foundation"), alleging that equipment we have supplied to our customers, and processes this equipment performs, infringes on patents held by the Lemelson Foundation. These notices increased substantially in 1998, the year in which the Lemelson Foundation settled its suit against the Ford Motor Company, and entered into license agreements with Ford, GM and Chrysler. Since the settlement, a number of our customers, including Intel, have been sued by the Lemelson Foundation. Some of our customers have requested that we defend and indemnify them against the Lemelson Foundation's claims or contribute to any settlement the customer reaches with the Lemelson Foundation. We have received opinions from our outside patent counsel with respect to various Lemelson Foundation patents. We are not aware that any equipment we market or that any process performed by our equipment infringes on the Lemelson Foundation patents and we do not believe that the Lemelson Foundation matter or any other pending intellectual property claim against us will materially and adversely affect our business, financial condition or operating results. The ultimate outcome of any infringement or misappropriation claim affecting us is uncertain, however, and we cannot assure you that our resolution of this litigation will not materially and adversely affect our business, financial condition and operating results. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. At December 31, 2000, we had a non-trading investment portfolio, excluding those classified as cash and cash equivalents, of $38.4 million. Due to the short term nature of the investment portfolio, if market interest rates were to increase immediately and uniformly by 100 basis points there would be no material or adverse affect on our business, financial condition or operating results. 26 27 PART II. OTHER INFORMATION. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit 10(a)- Form of Termination of Employment Agreement signed by Mr.Kulicke (Section 2(a) - 30 months), and Messrs. Perchick, Sprague, Jacobi, Lendner, Leonhardt, May, Salmons, Sawachi, Spooner, Wolf, Belani, Chylak, Cristallo, Greenberger, Oscilowski, Torton, Amweg, Camarda, Hartigan, Kish, Mak, Marrs, Rheault, Strittmatter and Close (Section 2(a) - 18 months). * (b) Reports on Form 8-K The Company filed a Form 8-K on October 12, 2000 making an Item 5 disclosure announcing that it had signed a definitive agreement to acquire Cerprobe Corporation. The Company filed a Form 8-K on November 8, 2000 making an Item 5 disclosure announcing the push-out of previously booked orders and deferrals of new orders by major assembly customers that were expected to adversely impact the Company's financial performance in the first fiscal quarter of 2001. The Company filed a Form 8-K on December 6, 2000 making an Item 2 disclosure announcing the completion of its tender offer for 100% of the shares of Cerprobe Corporation. The total amount of funds required by the Company to consummate the Offer and the subsequent merger and to pay related fees and acquired obligations was estimated to be approximately $225.0 million. The Company filed a Form 8-K on December 19, 2000 making an Item 5 disclosure announcing the completion of its acquisition of Probe Technology Corporation. The total purchase price, including acquisition-related costs was $64.0 million in cash. * Compensatory contract 27 28 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KULICKE AND SOFFA INDUSTRIES, INC. Date: February 13, 2001 By:/s/ CLIFFORD G. SPRAGUE ------------------------- ---------------------------------- Clifford G. Sprague Senior Vice President, Chief Financial Officer (Principal Financial Officer) 28