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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities
---
Exchange Act of 1934 (Fee required). For the fiscal year ended December 31,
1996
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
---
Act of 1934 (No fee required). For the transition period from _______________
to ________________
COMMISSION FILE NO. 0-27104
YIELDUP INTERNATIONAL CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 77-0341206
(State or other jurisdiction of incorporation) (I.R.S. Employer ID #)
117 EASY STREET
MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (415) 964-0100
Securities registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $0.001
CLASS A WARRANTS, NO
PAR VALUE
CLASS B WARRANTS, NO
PAR VALUE
(Title of Class)
Check whether the issuer: 1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
---
The Issuer's revenues for the fiscal year ended December 31, 1996 were
$2,204,590.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the average of bid and asked prices of the Registrant's
Common Stock on February 14, 1997 in the over-the-counter-market, was
approximately $20,344,260. Shares of voting stock held by each officer and
director and by each person who on that date owned 5% or more of the
outstanding voting stock have been excluded for purposes of the preceding
computation, in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of February 15, 1997, Registrant had 3,407,111 shares of Common Stock
outstanding, including shares of Class A Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
Transitional Small Business Disclosure Format YES NO X
--- ---
The exhibit index appears on page 28 of this Form 10-KSB Report.
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GENERAL
YieldUP develops, manufactures and markets cleaning, rinsing, and
drying equipment used during several steps in the manufacturing process for
semiconductors and other defect sensitive substrates. Based on the results
obtained by customers using its products, the Company believes its technology
allows more thorough and efficient cleaning, rinsing and drying than
conventional approaches and that the products based on this technology may
enable manufacturers to obtain improvements in the percentage of good product
produced, or yield. The Company's cleaning, rinsing and drying products also
reduce usage of certain environmentally hazardous materials and occupy less
floor space when compared to conventional equipment. The Company delivered its
initial product in July 1994 to one major semiconductor manufacturer and its
second product, the Omega 2000, a wafer cleaning, rinsing and drying system, in
December 1984 to another manufacturer. The Company currently has approximately
20 cleaning, rinsing, and drying systems installed at a number of customer
sites in the semiconductor, semiconductor equipment, photomask, and flat panel
display industries.
Disc-shaped wafers composed of silicon are the foundation on which
integrated circuits ("ICs") are manufactured in modern semiconductor
fabrication facilities. During the typical four to six week process of
fabricating ICs on these wafers, semiconductor manufacturers typically clean,
rinse and dry the wafers several times throughout the facility to prepare
in-process wafers for the next IC fabrication step, such as deposition or
photolithography. The likelihood of completing these steps successfully and
producing good chips depends significantly upon the cleanliness of the wafer.
The Company's products are designed to reduce wafer particle contamination,
stains, surface roughness and other defects that reduce IC yields with a
cost-effective, integrated cleaning, rinsing and drying system using filtration
technology, optimized rinsing options, no mechanical motion and reduced use of
environmentally hazardous materials.
The Company is marketing its products for application at several points
in the IC fabrication process, including prior to deposition, prior to
photolithography and following etching. In addition, the Company has also
marketed its products for use in the manufacturing processes of photomasks,
magnetic and optional disks, flat panel displays and chemical and
pharmaceutical products. The Company believes that there are numerous sites
within typical semiconductor, photomask, magnetic and optical disk, flat panel
display and chemical and pharmaceutical product manufacturing facilities where
manufacturers could improve processes and reduce contamination by replacing or
retrofitting existing equipment with the Company's products.
The Omega 2000 is a cleaning, rinsing and drying system which cleans,
rinses and dries in a single chamber. The Omega 2000 uses no moving parts in the
drying process and thereby avoids the mechanical shocks that occur during the
dryer sequence in certain conventional equipment. The Omega 2000's patented
drying process is designed to reduce contamination, water spots and meniscus
which can be left by conventional equipment. The Omega 2000 can be retrofitted
into existing wet benches used in manufacturing processes and is available as a
stand-alone unit which has a footprint significantly smaller than typical wet
benches. As a result, manufacturers may be able to integrate the Company's
products into their facilities without the need to abandon existing equipment.
Megasonic and chemical injection cleaning can be added to the Omega 2000 as
well.
The Company's Omega 4000 is a cleaning, rinsing, and drying system that
incorporates the rinsing and drying of the Omega 2000 and adds hydrofluoric
(HF) acid cleaning capability. The Company also markets a water filtration
product, the CleanPoint, for filtration of deionized water. The CleanPoint is
marketed to the same customers as the Company's cleaning, rinsing, and drying
systems. The CleanPoint filtration system is also an integral part of the
Company's other systems, the Omega 2000 and Omega 4000.
The Company currently has under development the Omega 1000, a low cost,
stand-alone rinsing and drying system designed to replace conventional spin
rinse dryer ("SRD") technology in manufacturing facilities. The Company is also
investigating the development of an automated wet bench capability that would
combine the Company's rinsing and drying systems with high temperature immersion
cleaning and other standard cleaning applications. The Company is also
investigating other industrial applications for its CleanPoint water filtration
system, including the pharmaceutical and chemical industries, both of which
require ultrapure water for product processing.
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PRODUCTS
Through analyzing the fabrication process of leading IC manufacturers,
the Company determined that the cleaning, rinsing and drying steps of the
manufacturing process present a significant, unfilled opportunity for yield
improvement. The Company has developed and is marketing equipment that
incorporates cleaning, rinsing and drying technologies which it believes may
help manufacturers achieve significant contamination reduction, and resulting
yield improvement. The Company currently markets the following products:
CleanPoint Water Filtration System
The CleanPoint Water Filtration System is a patented deionized water
filtration system designed to eliminate microscopic particle contamination in
deionized water at the point of use. The CleanPoint system is an integral part
of the Company's cleaning, rinsing, and drying systems and is also marketed
independently for other filtration applications.
Omega 2000
The Omega 2000 system is an integrated cleaning, rinsing and drying
system that integrates the Company's patented Surface Tension Gradient ("STG")
drying technology and the CleanPoint water filtration system with cleaning and
system control capability. The Omega 2000 system combines the advantages of
immersion technology and the convenience of full flow processors and is designed
to provide the following advantages versus conventional equipment:
* Single chamber cleaning, rinsing and drying of wafers, eliminating
cumbersome handling
* Improved rinse and dry cycle times for increased throughput
* Reduced build-up of scum that sometimes occurs with IsoPropyl Alcohol
("IPA") dryers
* Significantly lower usage of IPA, an environmentally hazardous
material, compared to conventional IPA dryers
* Reduction in surface roughness and haze
The Company offers chemical injection and megasonic cleaning as options
on the Omega 2000. The Company procures these cleaning subsystems from one of
several manufacturers of such systems. The Omega 2000 is available as a
stand-alone system or as a retrofit upgrade to an existing wet bench system.
Omega 4000
The Omega 4000 system builds on the Omega 2000 product by offering
integrated HF filtered etch cleaning capability in addition to the cleaning,
rinsing, and drying capabilities found on the Omega 2000 product. The filtered
etch module allows more thorough cleaning of certain types of processed wafers
than the Omega 2000. The Company procures the filtered etch capability from one
of several manufacturers of such systems. The Omega 4000 system can also be
configured with conventional robotics for wafer cassette handling.
The purchase prices of the Omega products range from $50,000 to
$400,000.
Products Under Development
Omega 1000
The Omega 1000 system is designed to be a low cost, stand-alone rinse
and dry system that can replace conventional SRD technology in semiconductor
manufacturing facilities. The Omega 1000 is expected to incorporate the STG
drying technology and CleanPoint water filtration system and to provide the
following benefits to semiconductor manufacturers:
* No mechanical motion of wafers, thus preventing wafer breakage problems
associated with SRDs
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- Minimal moving parts provide higher system reliability and reduced
equipment maintenance cost
- Reduced water spots and organic residues by eliminating the build-up
of water meniscus common in SRDs
The Company is investigating the development of an automated wet bench
capability that would combine the Company's rinsing and drying systems with
high temperature immersion cleaning and other standard cleaning applications.
The Company anticipates that if this new product development is started, that
many of the subsystems of the new product would have to be procured from one of
several manufacturers of such subsystems. The Company is also investigating the
market for cleaning, rinsing, and drying equipment capable of handling new
twelve inch silicon wafers and the development required by the Company to adapt
its products for this new market. No assurance can be given that, even if the
Company undertakes any of these projects, that the product development efforts
will be successful or that any products developed will achieve commercial
success.
STRATEGY
YieldUP's goal is to become a leading provider of cleaning, rinsing and
drying equipment used in semiconductor, photomask, magnetic and optical disk,
flat panel display and chemical and pharmaceutical product manufacturing
facilities. As part of its marketing process, the Company has allowed leading
IC and wafer manufacturers to test its products at their facilities. The
Company believes that integration of the Company's products into manufacturing
lines of several major semiconductor manufacturers will cause other
manufacturers to follow suit. There can be no assurance, however, that any of
these manufacturers will continue to use the Company's products or that any
other manufacturers will make any purchases of the Company's products.
The Company will also seek to adapt its products to be able to take
advantage of the expected shift in the semiconductor industry from six and
eight inch silicon wafers to twelve inch silicon wafers. That move will require
IC manufacturers to either refurbish existing manufacturing sites or construct
new ones. During the transition, the Company expects that semiconductor
manufacturers will reevaluate those aspects of the manufacturing process which
have a significant impact on yield, since the potential losses associated with
reduced yields will increase as wafer sizes increase and critical dimensions
decrease. The Company also intends to focus on the opportunities to install its
products at new manufacturing sites.
The Company has also initiated marketing activities and made limited
sales in other industries with defect-sensitive manufacturing processes. The
Company believes that manufacturers of magnetic and optical disks, flat panel
displays, and pharmaceutical and chemical products, have use of the Company's
products, because those manufacturers also depend upon the reduction of foreign
particles during the manufacturing process.
CUSTOMERS, MARKETING AND SERVICE
The Company is marketing its cleaning, rinsing and drying systems for
application at several points in the IC fabrication process, including prior to
deposition, prior to photolithography and following etching. In addition, the
Company has also marketed its products for use in the manufacturing process of
magnetic and optical disks, flat panel displays and chemical and pharmaceutical
products. Potential customers with large manufacturing facilities could have
use for several of the Company's products within a single facility. The Company
has sold its systems to semiconductor, photomask and flat panel display
manufacturers who have integrated the YieldUP products into existing wet
benches or have used them in a stand-alone configuration. The Company is also
collaborating with automated wet-bench manufacturers, for integrating its
system into the wet benches of these manufacturers.
In the United States, the Company markets its products through direct
customer contact and manufacturer representatives. These representatives
provide both sales and service support to end users in their territories. In
Europe, the Company markets its products through divisions of Teltec
Semiconductor which provide both sales and service support to end users. In
Japan and Taiwan, the Company distributes its
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products through Kanematsu Semiconductor Corp. which provides both sales and
service support to end users. The Company has agreements with its
representatives which generally grant the representative an exclusive right to
sell products in a specified territory and allow termination by either party
without cause on 90 days written notice.
In the United States, the Company plans to use its personnel for all
equipment installations, field service, and maintenance. In Europe, the Company
has agreements with divisions of Teltec Semiconductor to perform all equipment
installations, field service, and maintenance, and the Company has no current
plans to discontinue this arrangement. It is the Company's intent to maximize
the use of standard parts, modular design, and field replaceable units to
minimize equipment downtime and repair times, although there can be no
assurance that the Company will be successful in these efforts. The Company
typically provides customers with a twelve month warranty covering parts and
labor.
BACKLOG
The Company schedules production of its systems based upon backlog,
informal customer commitments and general economic forecasts for its targeted
markets. The Company includes in its backlog only those customer orders for
systems for which it has accepted purchase orders and for which delivery has
been specified within twelve months as well as orders for spare parts and
service and support of systems. The Company has not entered into any long term
purchase agreements with any customers. Customers commit to purchase the
Company's products by issuing purchase orders. The timing of the purchase
orders' issuance depends on the customer's delivery requirements.
The Company's backlog was approximately $493,000 as of December 31,
1996, all of which the Company expects to deliver within the next 6 months. The
systems included in backlog have been ordered by a semiconductor device
manufacturer and a flat panel display manufacturer. No assurance can be given
that the systems will be delivered as promised or that they will perform as
designed. The equipment requirements of manufacturers cannot be determined with
accuracy, and therefore the Company's backlog at any certain date is not
indicative of future growth. In addition, because of possible changes in system
delivery schedules, the ability of the customers to cancel, defer or reschedule
with limited or no penalties, and potential delays in system shipments, the
Company's backlog at any particular date is not necessarily representative of
actual sales of any succeeding period. Further, all potential sales will depend
on final delivery and testing of the equipment.
MANUFACTURING, ASSEMBLY AND TESTING
The Company's equipment manufacturing operations consist of assembly of
systems into final configuration and final testing in a cleanroom at the
Company's main facility prior to customer shipment. The Company fabricates
certain custom plastic components that are incorporated into its systems, but
the remainder of the system materials are procured from a number of
distributors and outside suppliers.
The Company has no written contracts with any of its suppliers, and
such suppliers may terminate their relationships with the Company at any time
without notice. Any such termination may impair the Company's ability to
satisfy any orders for its products and may adversely affect the Company's
results of operations. The Company will be required to replace any outside
suppliers who terminate their relationships with the Company. In such event,
there could be no assurance that the Company would be able to find replacement
suppliers (on a timely basis or at all) or that such replacement suppliers
would not be more expensive than the Company's current arrangements, thereby
adversely affecting the Company's results of operations.
The Company's strategic goal is to use contract manufacturers to
manufacture its standard systems and subsystems as unit manufacturing volumes
increase and product designs mature. The Company expects that as it products
mature, there will be a decrease in the amount of custom manufacturing required
to satisfy customers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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MANUFACTURING AND DEVELOPMENT
The Company incurred manufacturing and development expenses of
approximately $3,854,000 in 1996, and $1,737,000 in 1995. Manufacturing and
development expenses represent costs incurred for the design and development of
new products, the redesign of existing products and the costs associated with
product sales. For 1995, separate amounts for manufacturing costs of goods sold
and research and development expense were not meaningful as these operating
activities were not separable during the period. For 1996, research and
development expenses were $1,223,002.
The market for semiconductor fabrication equipment is characterized by
rapid technological advancement and product innovation. The Company believes
that development of new products will be required to allow it to compete
effectively in this market. As of December 31, 1996 the Company had twelve full
time employees whose duties included research and development, and the Company
intends to hire additional product development personnel in 1997.
The Company has established relationships with key customers to gain
access to advanced semiconductor manufacturing technologies and measurement and
test equipment to assist in the development of its products. The Company
intends to continue its research and development activities through internal
research and cooperative research relationships with customers and other
technology companies.
The Company intends to continue its product enhancement programs
focusing on improving reliability and performance, developing additional
features, increasing throughput capabilities, promoting ease of equipment
operations and reducing production costs. The Company also believes it can
improve the standardization of its systems, and, using molds and contract
manufacturing to reduce manufacturing costs, shorten manufacturing lead times,
and improve product reliability and quality.
INTELLECTUAL PROPERTY RIGHTS
The Company relies on patent, trade secret and copyright protection for
its products and technology. The Company has received two United States patents
relating to its products and technologies and has filed four additional U.S.
and foreign patent applications. The process of obtaining patents can be
expensive and there can be no assurance that the patent applications will
result in the issuance of patents, that any issued patents will provide the
Company with meaningful competitive advantages, or that challenges will not be
issued against the validity or enforceability of any patent issued to the
Company.
The Company also relies on trade secrets and proprietary technology
that it seeks to protect, in part, through confidentiality agreements with
employees, consultants and other parties. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known to or independently developed by others.
In the absence of significant patent or other proprietary protection,
competitors may be able to copy the Company's technology or design approaches,
replicate its processes or gain access to its trade secrets. Moreover, there can
be no assurance that competitors will not be able to develop technologies
similar to or more advanced than the Company's or design around any patent
aspects of the Company's products or technology. No assurance can be given that
the Company's current or future products will not infringe on the patents of
others.
There has been substantial litigation regarding patent and other
intellectual property rights in semiconductor-related industries. Further
commercialization of the Company's products could provoke additional claims of
infringement from third parties. In the future, litigation may be necessary to
enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company or to defend the Company against claimed infringement of
the rights of others and to determine the scope and validity of the proprietary
rights of others. Any such litigation would likely result in substantial cost
and diversion of effort by the Company, which by itself could have a material
adverse effect on the Company's business, financial condition and operating
results. Further, adverse determinations in such litigation could result in the
Company's loss of proprietary rights, subject the Company to significant
liabilities to third parties, require the Company to seek
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licenses from third parties or prevent the Company from manufacturing or
selling its products, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION
There is intense competition in the markets for the Company's products.
The Company's lack of resources and proven products makes it extremely
vulnerable to competition from larger companies, many of which have
significantly greater financial, employee, product development and marketing
resources. Leading competitors have a larger installed base of products which
can provide them a significant advantage over the Company because the Company's
technology has not been widely deployed and therefore presents potential
customers with uncertainty not associated with existing equipment. In addition,
many manufacturers are reluctant to choose small companies as key suppliers due
to concerns about long term viability and product support. There can be no
assurance that the Company will overcome these disadvantages.
Competition for the Company's products currently comes from makers of
traditional and new cleaning, rinsing and drying equipment. Competitors include
manufacturers of SRDs such as Verteq and Semitool, IPA dryer manufacturers such
as S&K and Steag and integrated wet processing system manufacturers such as
Santa Clara Plastics, SubMicron Systems and Nippon Screen. There can be no
assurance that these competitors will not develop new products or improve their
existing products which, when combined with their existing market presence,
would make the Company's products obsolete or unmarketable. Any such development
would have a material adverse effect on the Company. There also can be no
assurance that the Company will be able to penetrate the wet processing
equipment market and convince manufacturers to install the Company's systems
either directly or through retrofitting in place of existing equipment.
Additional competition for the Company's products also currently comes from a
large number of small companies making cleaning, rinsing and drying equipment
which is less expensive than the Company's products. Because the Company's
products sell for significantly higher prices than such products, the Company
may not be able to compete effectively against them without lowering its
prices.
The Company also expects that competition may arise from new
competitors and from new technological approaches adopted by new and existing
competitors. Because of the increasing focus on yield management in the
semiconductor manufacturing industry, equipment manufacturers are likely to
put an increased emphasis on contaminant reduction. Thus, competitive
technologies or new manufacturing techniques may be developed which could make
the Company's products obsolete, thereby materially adversely affecting the
Company. If the Company is unable to respond to the challenges of competition,
including changes in cleaning, rinsing and drying or semiconductor
manufacturing processes, there can be no assurance that the Company would be
able to achieve or maintain profitability at a level required to support its
survival or growth.
The Company currently competes principally on the basis of superior
contamination reduction, better price/performance, improved equipment
reliability, smaller footprint, lower operating cost and reduction in hazardous
chemical usage. The Company believes that these factors as well as ease of use,
price, reputation, service and familiarity are important competitive criteria
for selection of cleaning, rinsing and drying equipment by potential customers
in the manufacturing industries in which the Company competes. There can be no
assurance that the Company will compete favorably with respect to these or
other factors in the future, and any failure to compete successfully could have
a material adverse effect on the Company's business or operating results.
EMPLOYEES
On December 31, 1996, the Company had 30 full-time employees. Twelve of
the Company's employees work in engineering and product development; 11 work in
manufacturing and operations; four work in sales and marketing; and three in
administration. No employee of the Company is currently represented by a labor
union. Management considers its employee relations to be good.
The Company intends to add employees from time to time as necessary to
meet its evolving management, research and development, manufacturing,
marketing, sales and service needs. The Company believes that its future success
is dependent to a significant degree on its ability to attract and retain
additional skilled personnel to enable the Company to develop and compete.
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BUSINESS RISKS
In addition to the other information in this Annual Report, the
following risk factors should be considered carefully in evaluating the Company
and its business. This Annual Report contains forward-looking statements that
involve risks and uncertainties. The statements contained in this Annual Report
that are not purely historical are forward-looking statements within the meaning
of Section 27A of the Securities Exchange Act of 1934, including without
limitation statements regarding the Company's expectations, beliefs, intentions,
plans or strategies regarding the future. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth in the following risk factors and
elsewhere in this Annual Report.
GOING CONCERN OPINION
The report of the Company's independent auditors includes an explanatory
paragraph that describes the substantial doubt as to the ability of the Company
to continue as a going concern. The Company's proposed operations are subject to
numerous risks, including unforeseeable expenses, delays and complications, as
well as specific risks of the semiconductor equipment industry. There can be no
assurance that the Company will achieve profitable operations. See the Financial
Statements and Notes thereto.
HISTORY OF OPERATING LOSSES; NEED FOR ADDITIONAL FINANCING; LIMITED OPERATING
HISTORY.
The Company has experienced significant operating losses since its
inception in June 1993 and only commenced significant shipments of systems in
the fourth quarter of 1995. Accordingly, the Company has a very limited
operating history on which to base an evaluation of its business, and its prior
operating results are not indicative of results which may be achieved in the
future. As of December 31, 1996, the Company's accumulated deficit was
approximately $5,594,372. The Company's operating losses have been and will
continue to be principally the result of the various costs associated with the
Company's product development, manufacturing, and sales activities. The Company
believes that it existing capital resources will enable to fund its operations
through the first quarter 1997. The Company will be required to seek additional
capital to continue its operations beyond that time, which may result in
dilution to the current stockholders. The Company has no commitments for any
future funding, and there can be no assurance that the Company will be able to
obtain additional capital in the future. The existence of the Class A and Class
B Warrants may also complicate future capital raising activities. If the Company
is unable to obtain the necessary capital, it will be required to significantly
curtail its activities or cease operations. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and the Financial
Statements and Notes thereto.
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RELIANCE ON SINGLE PRODUCT FAMILY
The Company anticipates that the substantial majority of its future
revenues will come from sales of its cleaning, rinsing and drying systems.
Should the demand for, or pricing of, the Company's products decline due to
increased competitive pressure, the introduction of superior systems or
processes, changes in the semiconductor, magnetic or optical disk, flat panel
display or photomask industries or other factors, the Company's business,
financial condition and results of operations would be materially adversely
affected. The ability of the Company to diversify its operations through the
introduction and sale of new products and broader acceptance of its cleaning,
rinsing and drying systems is dependent on the success of the Company's
continuing research, product development and engineering activities, as well as
its marketing efforts. No assurance can be given that the Company will be able
to develop, acquire, introduce or market new products in a timely or
cost-effective manner or that any new products or improvements will achieve
market acceptance or result in acceptable margins. Accordingly, the Company
will be dependent on overall market acceptance of its products.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company expects to derive a substantial portion of its revenues from
the sale of a relatively small number of systems, which typically range in
purchase price from approximately $50,000 to $400,000. As a result, a small
reduction in the number of systems shipped in a quarter would have a material
adverse effect on the Company's revenues and results of operations for that
quarter. A delay in a shipment near the end of a particular quarter, due to,
for example, unanticipated shipment rescheduling or cancellation, supplier
delays in delivery of component parts or unexpected manufacturing difficulties
experienced by the Company, may cause financial results in a particular quarter
to fall significantly below the Company's expectations and may materially
adversely affect the Company's results of operations for such quarter.
In addition, the Company's need for continued investment in research,
development, engineering, marketing, customer service and support capabilities
will limit the Company's ability to reduce expenses in response to any such
decrease in sales. Moreover, because customer purchase orders are subject to
cancellation or rescheduling by the customer, backlog at any particular date is
not necessarily representative of actual sales for any succeeding period. If
the Company's anticipated level of revenues is not achieved for a particular
period, the Company's operating results could be adversely affected by its
inability to reduce costs. Because the Company builds certain subassemblies
according to forecast, a reduction in customer orders would also result in
excessive inventories which could adversely affect the Company's results of
operations and liquidity. The impact of these and other factors on the
Company's operating results in any future period cannot be accurately forecast.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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LENGTHY SALES CYCLE
Sales of the Company's products have been, and are expected to continue to
be, characterized by a relatively long sales cycle due to such factors as the
substantial time required by potential customers for technical evaluation of the
Company's products prior to purchase, high cost and the critical roles they will
play in the manufacturing process. Sales of the Company's systems may also
depend upon the decision of a prospective customer to upgrade the equipment in
its existing manufacturing facilities or to open new facilities, which typically
involves a significant capital commitment. The Company believes that the sales
cycle will continue to be lengthy as certain of its anticipated customers
centralize purchasing decisions, which is expected to intensify the evaluation
process and require additional sales and marketing expenditures by the Company.
CYCLICALITY OF SEMICONDUCTOR MANUFACTURING INDUSTRY
The semiconductor industry generally, and the semiconductor equipment
industry in particular, is highly cyclical and has historically experienced
periodic and often prolonged downturns. Downturns in the semiconductor industry
as well as changes in or uncertainty regarding technology, have frequently had a
severe and adverse effect on the semiconductor industry's demand for wafer
processing equipment. The Company's success will be dependent upon the ability
and willingness of manufacturers of semiconductor devices to make substantial
capital expenditures, which in turn will be largely dependent upon the market
demand for ICs and products using ICs produced by such manufacturers. No
assurance can be given that the Company will be able to develop or market any
products to meet the needs of such manufacturers or that such manufacturers will
be able or willing to make the capital expenditures necessary to acquire the
Company's products.
NEED TO DEVELOP NEW PRODUCTS AND TECHNOLOGIES
Semiconductor, flat panel display, magnetic and optical disk and photomask
manufacturing equipment and processes are subject to rapid technological changes
and product obsolescence. The Company believes that its future success will
depend in part upon its ability to develop and enhance its current products and
develop new products to meet such anticipated technological changes. To the
extent products developed by the Company are based upon anticipated changes,
sales of such products may be adversely effected if other technology becomes
accepted in the relevant industry. As a result of declining orders for their
existing products, manufacturers in the semiconductor equipment industry
experience significant quarterly fluctuations in operating results and must
replace such orders with orders for new products to achieve or maintain
profitability. If the Company does not successfully introduce new products or
enhanced versions of its current products in a timely manner, any competitive
position the Company may develop could be lost and the Company's sales, if any,
would be reduced. There can be no assurance that the Company will be able to
develop and introduce enhanced or new products which satisfy customer needs and
achieve market acceptance. The failure of the Company to manage its research and
development efforts would have a material adverse effect upon its business and
prospects.
11
<PAGE> 12
DEPENDENCE ON KEY PERSONNEL; MANAGEMENT OF EXPANDING OPERATIONS
The Company's success will, to a large extent, depend upon the
continued services of Raj Mohindra, President and Chief Executive Officer, and
Suraj Puri, Vice President and Chief Technical Officer. The loss of services of
either of these executive officers would materially and adversely affect the
Company. The Company does not have employment agreements with any of its key
personnel, but it does maintain key man life insurance in the amount of $2
million on Mr. Mohindra and $1 million on Mr. Puri.
The success of the Company will also depend, in part, upon its ability
to retain the personnel who have assisted in the development of the Company's
products, and to attract and retain additional qualified operating, marketing,
technical and financial personnel. The competition in the semiconductor
equipment industry for such qualified personnel is often intense, and there can
be no assurance that the Company will be able to hire or retain necessary
personnel. In addition, the Company will require additional senior management
and the development of additional expertise by existing management personnel,
as well as improved operational and financial systems, and there can be no
assurance that new personnel and systems will be successfully integrated or
that the developments will not result in a material adverse effect on the
Company.
LIMITATION OF LIABILITY
Due to limitations on the liability of officers and directors contained
in the Company's charter documents and agreements between the Company's officers
and directors and the Company, stockholders may have limited or no recourse
against such officers and directors for their negligent actions.
CONCENTRATION OF SHARE OWNERSHIP AND VOTING POWER
Holders of the Company's Class A Common Stock are entitled to five
votes for each share owned by them on all matters submitted to a vote of
stockholders, while holders of Common Stock are entitled to one vote per share.
The directors and officers of the Company control approximately 66.9% of the
voting power and will be able to elect all of the Company's directors and,
hence, will be able to control the affairs of the Company. In addition, the
directors and officers of the Company will, subject to certain limitations
imposed by applicable law, be able to, among other things, amend the Company's
Certificate of Incorporation and By-laws and effect or preclude fundamental
corporate transactions involving the Company, including the acceptance or
rejection of any proposals relating to a merger of the Company or an
acquisition of the Company by another entity, in each case without the approval
of any of the Company's other stockholders.
POTENTIAL ADVERSE EFFECT OF AUTHORIZED BUT UNISSUED PREFERRED STOCK ON HOLDERS
OF COMMON STOCK; ANTI-TAKEOVER EFFECTS
The Board of Directors has authority to issue up to 5,000,000 shares of
Preferred Stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the shareholders. The rights of the holders of the Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such Preferred Stock may have other rights, including
economic rights senior to the Common Stock, and, as a result, the issuance
thereof could have a material adverse effect on the market value of the Common
Stock. The Company has no present plans to issue shares of Preferred Stock.
12
<PAGE> 13
ITEM 2. DESCRIPTION OF PROPERTY
YieldUP's headquarters are located in Mountain View, California, where the
Company leases a total of approximately 14,400 square feet of office and
assembly space under a lease which expires in September 1998, with a current
monthly obligation of $10,000 plus taxes, maintenance and utilities. The
Company has an option to extend the lease on its current facilities for an
additional three years after September 1998.
ITEM 3. LEGAL PROCEEDINGS
CFM Technologies, Inc. and CFMT, Inc. (collectively "CFM") filed a complaint
against the Company in the United States District Court for the District of
Delaware in September 1995. The complaint alleges that the drying process
incorporated in certain of the Company's products infringes a patent held by
CFM. The Company believes that its drying process does not infringe the CFM
patent. The Company has filed a cross-complaint in this action seeking a
declarative judgment that the Company's products do not infringe the CFM
patent. However, litigation is inherently uncertain, and there can be no
assurance that the Company will not, as a result of this litigation, suffer a
material adverse effect on its business or financial condition. The trial for
this matter is currently scheduled to begin in July 1997. The Company expects
that the CFM litigation will continue to result in substantial costs and
diversion of effort by the Company which could materially adversely affect the
Company. The CFM litigation and any other such litigation could also continue
to delay or impede market acceptance of the Company's products. A decision
adverse to the Company in such litigation could result in substantial damages
payable by the Company and could support the issuance of an injunction
prohibiting further sales by the Company of some or all of its products.
Because the Company relies on a single product family for the substantial
majority of its revenues, any successful challenge by other parties to the
Company's right to use its designs could potentially render the Company
insolvent and jeopardize its ability to continue as a viable concern.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
Company's fourth quarter.
13
<PAGE> 14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Since November 1995, the Company's Common Stock has traded on the
Nasdaq SmallCap Market under the symbol "YILD." The following table sets forth
for the periods indicated the high and low sale prices of the Common Stock as
reported by the Nasdaq SmallCap Market. These figures reflect inter-dealer
prices without retail mark-up, mark-down or commission and may not represent
actual transactions.
<TABLE>
<CAPTION>
High Low
-------- -------
<S> <C> <C>
1996
1st Quarter......................... $6 $4 7/16
2nd Quarter......................... 8 5/8 5 3/8
3rd Quarter......................... 6 13/16 4 1/2
4th Quarter......................... 6 4 1/2
</TABLE>
On December 31, 1996, the last reported sale price of the Common Stock
on the Nasdaq SmallCap Market was $6 per share. As of December 31, 1996, there
were 8 holders of record of the Common Stock, and the Company believes that
there were over 300 beneficial owners of Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
During the years ended December 31, 1996 and 1995, the Company's
revenues were $2,204,590 and $1,129,012, respectively. The increase in revenue
in 1996 was due to an increase in shipments of the Company's cleaning, rinsing,
and drying systems.
Manufacturing and development expenses were $3,853,972 for the year
ended December 31, 1996, and $1,736,755 for the year ended December 31, 1995.
For 1995, separate amounts for manufacturing cost of goods sold and research and
development expense were not meaningful as these operating activities were
inseparable during that period. For 1996, manufacturing cost of goods sold was
$2,630,970 and research and development expense was $1,223,002. The increase in
manufacturing and development expenses reflected the continuing efforts to
develop and enhance the Company's products and the higher total manufacturing
costs associated with increased system shipments. In addition, in the fourth
quarter of 1995 the Company established its own manufacturing capability, so the
1995 manufacturing and development expenses only reflect approximately one
quarter of full operation of the manufacturing organization while the 1996
figures represent four quarters of manufacturing operation. The Company expects
to continue to invest in new product development and research, although these
expenses may decline over time as a percentage of revenues to the extent
revenues increase.
In order for the Company to achieve profitability, it will be necessary
to significantly increase revenue in future periods. Increasing revenues will
depend to a significant extent on the Company's ability to make multiple unit
sales to large companies. To achieve this goal, the Company has recently
strengthened its executive management in the sales and marketing organization
and believes that it must expand its product line and increase its marketing
efforts with respect to the semiconductor, magnetic and optical disk, flat
panel display, semiconductor equipment and photomask industries. In addition,
in order to achieve profitability, the Company must improve its gross margins.
The Company's negative gross margin on product sales during 1995 and 1996 was
due to fixed manufacturing overhead expense being spread over a small number of
units and high unit material cost. The high unit material costs were caused by
a high degree of customization and numerous engineering design changes as the
Company enhanced its products. The units shipped in 1995 and 1996 were
generally the first units produced of a particular design. The Company
anticipates that if unit shipment volume increases in future periods, per unit
overhead expenses and material costs will be reduced. In addition, in the first
quarter of 1997 the Company is transitioning to shipment of standardized
products, which should also begin to reduce the per unit material costs. The
Company believes that both of these trends may have the effect of improving the
Company's gross margin. If the Company is not able to make multiple unit sales
to large customers, to penetrate new industries, to manage the transition to
standardized products or to increase product shipments, the Company may be
unable to increase its revenues or improve its operating margins. Such failure
would have a material adverse effect on the Company and would impact its
ability to continue as a going concern. See Financial Statements and Notes
thereto.
Selling, general and administrative expenses were $1,829,460 for the
year ended December 31, 1996, and $1,032,008 for the year ended December 31,
1995. The increase in these expenses reflect the Company's increased marketing
activities for its products and additional employees. In addition, the Company
incurred increased legal expenses in 1996 versus 1995 related to the CFM patent
infringement litigation. There were also increases in legal, accounting, and
other administrative expenses in 1996 versus 1995 related to being a public
company. The Company expects that selling, general and administrative expenses
may decline as a percent of revenues to the extent revenues increase.
The net interest income was $104,807 for the year ended December 31,
1996, and the net interest expense was $190,272 for the year ended December 31,
1995. The net interest income in 1996 was due to interest income on a portion
of the funds raised in the Company's 1995 initial public offering. The interest
expense in 1995 was mainly due to $200,000 of debt discount charged to expense
in the fourth quarter of 1995 as a result of financing transactions completed
before the public offering. The Company expects that interest income may
decline in the future due to lower short term investment balances caused by
operating losses in 1996.
As a result of the foregoing factors, the Company sustained a net loss
of $3,374,035 for the year ended December 31, 1996, as compared to a net loss
of $1,830,023 for the year ended December 31, 1995. The increase in net loss
was due primarily to an increase in manufacturing and development costs
compared to 1995 and was related to the continued product development
activities and increased manufacturing operations. In addition, the Company
expanded its marketing, support, and administrative organizations to manage
increased sales and shipments of the Company's products. Net losses are
expected to continue until the Company is able to produce and sell sufficient
numbers of cleaning, rinsing and drying systems to cover operating expenses, of
which there can be no assurance.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 1996, the Company had cash, cash equivalents, and short
term investments of $629,172. Accounts receivable at December 31, 1996 totaled
$699,459 and represented primarily amounts due on systems shipped in the fourth
quarter of 1996.
The Company believes that its existing capital resources will enable it
to fund its operations through the first quarter of 1997. The Company will be
required to seek additional capital to continue its operations beyond that time,
which may result in dilution to the current stockholders. The Company has no
commitments for any future funding, and there can be no assurance that the
Company will be able to obtain additional capital in the future. The existence
of the Class A and Class B Warrants may also complicate future capital raising
activities. If the Company is unable to obtain the necessary capital, it will be
required to significantly curtail its activities or cease operations.
14
<PAGE> 15
ITEM 7 FINANCIAL STATEMENTS
YIELDUP INTERNATIONAL CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1996
-------------
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 619,172
Restricted cash 509,878
Short-term investments 10,000
Accounts receivable 699,459
Inventories 677,383
Prepaid expenses and other assets 109,822
-------------
Total current assets 2,625,714
Property, plant, and equipment, net 894,499
Other assets 440,511
-------------
Total assets $ 3,960,724
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 643,089
Accrued liabilities 524,277
Customer deposits 43,000
Current portion of capital lease obligations and long-term debt 406,258
-------------
Total current liabilities 1,616,624
Long-term debt 330,000
Capital lease obligations, less current portion 48,863
-------------
Total liabilities 1,995,487
-------------
Stockholders' equity:
Preferred stock: -
$.001 par value; 5,000,000 shares authorized;
no shares issued and outstanding
Class A common stock: 1,912
$.001 par value; 2,229,927 shares authorized;
1,912,111 shares issued and outstanding;
each share is entitled to five votes
Common stock: 1,495
$.001 par value; 20,000,000 shares authorized;
1,495,000 shares issued and outstanding;
each share is entitled to one vote
Additional paid-in capital 7,571,550
Notes receivable from stockholders (15,348)
Accumulated deficit (5,594,372)
-------------
Total stockholders' equity 1,965,237
-------------
Total liabilities and stockholders' equity $ 3,960,724
=============
</TABLE>
See accompanying notes to financial statements
15
<PAGE> 16
YIELDUP INTERNATIONAL CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Revenues $ 2,204,590 $ 1,129,012
----------- -----------
Operating expenses:
Manufacturing and development 3,853,972 1,736,755
Selling, general, and administrative 1,829,460 1,032,008
----------- -----------
Total operating expenses 5,683,432 2,768,763
----------- -----------
Operating loss (3,478,842) (1,639,751)
Interest income (expense), net 104,807 (190,272)
----------- -----------
Net Loss $(3,374,035) $(1,830,023)
=========== ===========
Net loss per share $ (0.99) $ (0.89)
=========== ===========
Shares used in per share computations 3,406,395 2,052,632
=========== ===========
</TABLE>
See accompanying notes to financial statements
16
<PAGE> 17
YIELDUP INTERNATIONAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A
PREFERRED STOCK COMMON STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances as of
December 31, 1994 127,950 $ 128 1,537,298 $ 1,537 -- $ --
Sale of Series B
preferred stock 54,828 55 -- -- -- --
Sale of Series C
preferred stock 174,955 175 -- -- -- --
Repurchase of Class A
common stock from
terminated employee -- -- (21,719) (22) -- --
Sale of Class A
common stock -- -- 6,586 7 -- --
Exercise of Class A
common stock
options -- -- 30,403 30 -- --
Conversion of
preferred stock
into Class A common
stock (357,733) (358) 357,733 358 -- --
Payment of notes
receivable -- -- -- -- -- --
Sale of common
stock warrants, net -- -- -- -- -- --
Initial public offering
of common stock,
net of $1,496,856
issuance costs -- -- -- -- 1,495,000 1,495
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balances as of
December 31, 1995 -- -- 1,910,301 1,910 1,495,000 1,495
Exercise of Class A
common stock options -- -- 1,810 2 -- --
Payment of notes -- -- -- -- -- --
receivable
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balances as of
December 31, 1996 -- $ -- 1,912,111 $ 1,912 1,495,000 $ 1,495
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE TOTAL
PAID-IN FROM ACCUMULATED STOCKHOLDERS'
CAPITAL STOCKHOLDERS DEFICIT EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balances as of
December 31, 1994 $ 384,780 $ (9,200) $ (390,314) $ (13,069)
Sale of Series B
preferred stock 143,895 -- -- 143,950
Sale of Series C
preferred stock 869,861 (33,064) -- 836,972
Repurchase of Class A
common stock from
terminated employee (2,978) -- -- (3,000)
Sale of Class A
common stock 4,543 -- -- 4,550
Exercise of Class A
common stock
options 20,970 -- -- 21,000
Conversion of
preferred stock
into Class A
common stock -- -- -- --
Payment of notes
receivable -- 983 -- 983
Sale of common stock
warrants, net 172,582 -- -- 172,582
Initial public offering
of common stock,
net of $1,496,856
issuance costs 5,976,649 -- -- 5,978,144
Net loss -- -- (1,830,023) (1,830,023)
------------ ------------ ------------ ------------
Balances as of
December 31, 1995 7,570,302 (41,281) (2,220,337) 5,312,089
Exercise of Class A
common stock options 1,248 -- -- 1,250
Payment of notes -- 25,933 -- 25,933
receivable
Net loss -- -- (3,374,035) (3,374,035)
------------ ------------ ------------ ------------
Balances as of
December 31, 1996 $ 7,571,550 $ (15,348) $ (5,594,372) $ 1,965,237
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
17
<PAGE> 18
YIELDUP INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,374,035) $ (1,830,023)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 154,819 7,514
Changes in operating assets and liabilities:
Accounts receivable (20,032) (562,122)
Inventories (171,451) (419,054)
Prepaid expenses and other assets 59,110 (164,973)
Accounts payable (75,000) 646,091
Accrued liabilities 157,156 278,547
Customer Deposits (101,000) 144,000
------------ ------------
Net cash used for operating activities (3,370,433) (1,900,020)
------------ ------------
Cash flows from investing activities:
Purchase of equipment (751,892) (178,115)
Sale of fixed asset 22,000 -
Increase in restricted cash (888,741) -
Proceeds from sales of short-term investments 4,554,645 -
Purchases of short-term investments (2,499,933) (2,064,712)
------------ ------------
Net cash provided by (used for) investing activities 436,079 (2,242,827)
------------ ------------
Cash flows from financing activities:
Principal payments under capital lease obligations (40,123) (3,185)
Proceeds from term loan 750,000 -
Principal payments of term loan (60,000) -
Principal payments of notes payable to stockholders - (162,720)
Proceeds of notes receivable from stockholders 25,933 983
Issuance of bridge notes - 800,000
Principal payments of bridge notes - (800,000)
Issuance of common stock in public offering, net - 5,978,144
Issuance of preferred stock, net - 923,322
Issuance of warrants, net - 172,582
Issuances of Class A common stock, net of repurchases 1,250 22,550
------------ ------------
Net cash provided by financing activities 677,060 6,931,676
------------ ------------
Net (decrease) increase in cash and cash equivalents (2,257,294) 2,788,829
Cash and cash equivalents at beginning of year 2,876,466 87,637
------------ ------------
Cash and cash equivalents at end of year $ 619,172 $ 2,876,466
============ ============
Supplemental disclosure of cash flow information:
Notes receivable issued in connection with sale of preferred stock $ - $ 33,064
============ ============
Preferred stock issued in exchange for notes payable $ - $ 57,600
============ ============
Acquisition of equipment under capital lease obligations $ 42,000 $ 96,430
============ ============
Conversion of preferred stock into Class A common stock $ - $ 358
============ ============
</TABLE>
See accompanying notes to financial statements
18
<PAGE> 19
YIELDUP INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
YieldUP International Corporation (the Company or YieldUP) develops,
manufactures, and markets cleaning, rinsing and drying equipment used
in the manufacturing of semiconductor wafers and other defect
sensitive substrates.
Basis of Presentation
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company's recurring
losses from operations raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these
matters are to attempt to raise additional equity or debt financing to
meet its working capital requirements and to increase revenues and
improve gross margins. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Cash Equivalents
Cash equivalents consist primarily of highly liquid debt instruments
with original maturity dates up to 90 days.
Short-Term Investments
The Company accounts for short-term investments in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". Short-term
investments are classified as "available-for-sale" under the
provisions of SFAS No. 115 and are stated at fair value. Any
unrealized gains and losses are reported as a separate component of
stockholders' equity, but to date have not been significant.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
significant concentration of credit risk consist primarily of cash
equivalents and trade receivables. Substantially all of the Company's
cash equivalents are invested in certificates of deposit and money
market funds. The Company performs ongoing credit evaluations of its
customers and generally requires no collateral. The Company maintains
reserves for potential credit losses; historically, such losses have
been minor and within management's expectations.
Inventories
Inventories are stated at the lower of first-in, first-out cost or
market. The Company periodically reviews its inventories for
potential slow-moving and obsolete items and writes down impaired
items to net realizable value.
Property, Plant and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line method
over the estimated useful lives of the related assets, generally three
to five years. Property, plant and equipment recorded under capital
leases and leasehold improvements are amortized on a straight-line
basis over the shorter of the lease terms or their estimated useful
lives.
(continued)
19
<PAGE> 20
YIELDUP INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
Revenue Recognition
Revenue is recognized after shipment when there is no significant uncertainty
regarding customer acceptance and payment.
Product Warranty
A provision for the estimated future costs of warranty repair is provided at
the time of sale.
Manufacturing and Development Expenses
Manufacturing and development expenses represent costs incurred for the design
and development of new products, the redesign of existing products, and
manufacturing costs. For 1995, separate amounts for Manufacturing Cost of Goods
Sold and Research and Development expense were not meaningful as these operating
activities were inseparable during that period. For 1996, Manufacturing Cost of
Goods Sold was $2,630,970 and Research and Development expense was $1,223,002.
Income Taxes
The Company is accounting for income taxes in accordance with SFAS No. 109.
SFAS No. 109 prescribes an asset and liability approach that results in the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, SFAS No. 109
generally considers all expected future events other than the enactment of
changes in tax laws or rates. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
Stock Option Plan
The Company accounts for its stock option plan in accordance with the provisions
of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. SFAS No. 123, "Accounting for
Stock-Based Compensation", permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair value-based method defined in SFAS No. 123 has been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Fair Value of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, restricted
cash, short-term investments, accounts receivable, and accounts payable
approximate their respective fair values.
Use of Estimates
The Company's management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Reclassifications
Certain amounts in the 1995 financial statements have been reclassified to
conform with the 1996 financial statement presentation.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", on
January 1, 1996. This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
Net Loss Per Share
Net loss per share is based on the weighted average number of shares of common
stock, convertible preferred stock using the "as if converted" method at the
dates of issuance, and common equivalent shares from stock options and warrants
outstanding (when dilutive using the treasury stock method). Pursuant to certain
SEC Staff Accounting Bulletins, common and preferred stock issued for
consideration below the initial public offering (IPO) price and stock options
granted with exercise prices below the IPO price during the 12-month period
preceding the date of the initial filing of the Registration Statement, even
when antidilutive, have been included in the calculation of net loss per share,
using the treasury stock method based on the assumed IPO price, as if they were
outstanding for all periods presented prior to their issuance.
(continued)
20
<PAGE> 21
YIELDUP INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(2) BALANCE SHEET COMPONENTS
Restricted Cash
As of December 31, 1996, the Company had restricted cash in the form of
certificates of deposit, of $750,000 and $138,741 as collateral for
long-term debt and substantially all of the capital lease obligations,
respectively. Restricted cash aggregating $378,863 is classified as
other non-current assets in the accompanying balance sheet.
Short-Term Investments
The Company's short-term investments comprise a certificate of deposit
which is classified as "available-for-sale."
Inventories
A summary of inventories follows:
<TABLE>
<CAPTION>
December 31, 1996
---------------------
<S> <C>
Raw materials $ 364,510
Work in process 56,063
Evaluation units 218,070
Finished goods 38,740
----------
$ 677,383
==========
</TABLE>
Evaluation units are installed at potential customers' sites.
Property, Plant and Equipment
A summary of property, plant and equipment follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------
<S> <C>
Machinery and equipment $ 404,438
Furniture and fixtures 47,624
Leasehold improvements 594,374
----------
1,046,436
Less accumulated depreciation and amortization 151,937
----------
$ 894,499
==========
</TABLE>
(continued)
21
<PAGE> 22
YIELDUP INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(3) INCOME TAXES
The Company has a net operating loss carryforward for federal and
California tax purposes as of December 31, 1996 of $4,580,000 and
$2,290,000, respectively. The difference between the federal net
operating loss and the accumulated deficit is primarily attributed to
the years ending December 31, 1993 and 1994 when the Company was an S
corporation for taxation purposes. The difference between the federal
and California net operating loss carryforward is due to 50% limitation
of net operating loss carryforwards for California purposes. The
federal net operating loss carryforwards expire in the years 2010 and
2011. The California net operating loss carryforwards expire in the
years 2000 and 2001.
Federal and California tax laws impose significant restrictions on the
utilization of net operating loss carryforwards in the event of a shift
in the ownership of the Company, which constitutes an "ownership
change" as defined by Internal Revenue Code Section 382. The IPO of
YieldUP common stock in November 1995 resulted in such a change. As a
result, $1,400,000 of YieldUP's federal and California net operating
loss carryforwards are subject to an annual limitation approximating
$525,000. Any unused annual limitations may be carried forward to
increase the limitations in subsequent years.
The Company has fully offset its deferred tax assets, primarily
attributable to net operating loss carryforwards, with a valuation
allowance.
(4) LONG-TERM DEBT
Long-term debt comprises a bank term loan which is fully collateralized
by a certificate of deposit. The loan is payable in monthly
installments of $30,000, and bears interest at the bank's prime rate
(8.25% as of December 31, 1996).
As of December 31, 1996, maturities in subsequent years are as
follows: 1997, $360,000; and 1998, $330,000.
(5) COMMITMENTS AND CONTINGENCIES
Leases
The Company is obligated under operating leases for certain equipment
and its facilities, and capital leases for certain equipment, furniture
and fixtures that expire at various dates during the next three years.
The amount of equipment, furniture, and fixtures and related
accumulated amortization recorded under capital leases were as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------
<S> <C>
Machinery and equipment $ 103,500
Furniture and fixtures 37,930
---------
141,430
Less accumulated amortization 47,871
---------
$ 93,559
=========
</TABLE>
(continued)
22
<PAGE> 23
YIELDUP INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
Future minimum lease payments under the Company's noncancelable
operating leases and future minimum capital lease payments as of
December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Year ending Capital Operating
December 31, leases leases
------------ ------ ------
<S> <C> <C>
1997 $ 55,105 $ 151,962
1998 50,527 121,779
1999 1,386 1,348
---------- ----------
Total minimum lease payments 107,018 $ 275,089
==========
Less amount representing interest 11,897
----------
Present value of minimum lease payments 95,121
Less current portion 46,258
----------
$ 48,863
==========
</TABLE>
Facility and rent expense was approximately $140,789 and $41,475 for
the years ended December 31, 1996 and 1995, respectively.
Patent Matters
CFM Technologies, Inc. and CFMT, Inc. (collectively "CFM") filed a
complaint against the Company in the United States District Court for
the District of Delaware in September 1995. The complaint alleges that
the drying process incorporated in certain of the Company's products
infringes a patent held by CFM. The Company believes that its drying
process does not infringe the CFM patent. However, there can be no
assurance that the Company will not, as a result of this litigation,
suffer a material adverse effect on its business or financial
condition. The trial for this matter is scheduled to begin in July
1997. A decision adverse to the Company in such litigation could result
in substantial damages payable by the Company and could support the
issuance of an injunction prohibiting further sales by the Company of
some or all of its products. A loss, if any, resulting from an
unfavorable adjudication, cannot presently be estimated. Accordingly,
no provision for any liability that may result upon adjudication has
been made in the accompanying financial statements.
(6) STOCKHOLDERS' EQUITY
Preferred Stock
The Preferred Stock may be issued in series, and shares of each series
will have such rights and preferences as are fixed by the Board in the
resolutions authorizing the issuance of that particular series.
Stock Repurchase Plan
As of December 31, 1996, the Company had issued 1,318,346 shares of
Class A common stock subject to the Company's right to repurchase the
stock at the original issuance price, $0.14 per share. The shares
shall be released from the Company's repurchase option over a
four-year period. As of December 31, 1996, 234,202 shares of Class A
common stock were subject to repurchase.
Warrants
As of December 31, 1996, the Company had issued 2,215,000 Class A
warrants. The holder of each Class A warrant is entitled, upon payment
of the exercise price of $7.00, to purchase one share of common stock
and one Class B warrant. Unless previously redeemed, the Class A
warrants are exercisable at any time until November 21, 2000.
As of December 31, 1996, the Company had issued 1,945,000 Class B
warrants (4,160,000 Class B warrants if the Class A warrants are
exercised). The holder of each Class B warrant is entitled, upon
payment of the exercise price of $11.00, to purchase one share of
common stock. Unless previously redeemed, the Class B warrants are
exercisable at any time until November 21, 2000.
The Class A warrants and Class B warrants are subject to redemption by
the Company, at a price of $0.05 per warrant, if the average closing
bid price of the common stock exceeds certain prices within certain
time periods.
As of December 31, 1996, no warrants have been exercised or redeemed.
(continued)
23
<PAGE> 24
YIELDUP INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
Stock Option Plans
As of December 31, 1996, the Company has three stock-based compensation
plans, which are described below.
The Board of Directors has reserved (250,000 shares are subject to
stockholder approval) 500,000 shares of common stock for issuance
under the Company's 1995 Stock Option Plan (the Option Plan). Options
may be granted to employees (including officers), consultants,
advisers and directors, although only employees and directors and
officers, who are also employees, may receive "incentive stock
options" intended to qualify for certain tax treatment. The exercise
price of nonqualified stock options must equal at least 85% of the
fair market value of the common stock on the date of grant, and the
exercise price of incentive stock options must be no less than the
fair market value on the date of grant. Options granted under the
Option Plan vest over 4 years and must be exercised within 10
years.
Prior to the adoption of the Option Plan in September 1995, the
Company granted 346,411 options to purchase shares of Class A common
stock at prices ranging from $0.69 to $3.17 per share under a separate
option plan (the Prior Plan). The Company does not anticipate
granting any additional options to purchase Class A common stock under
the Prior Plan, and any shares subject to options under the Prior Plan
that terminate, or are canceled, will not be issued or used for new
options. As of December 31, 1996, 270,037 options are outstanding and
204,155 options are exercisable under the Prior Plan.
Under the Company's 1995 Outside Directors Stock Option Plan (the
Directors Plan), 100,000 shares of common stock have been reserved for
issuance. The Directors Plan provides for the automatic granting of
nonqualified stock options to directors of the Company who are not
employees of the Company (Outside Directors). Under the Directors
Plan, each new Outside Director elected will automatically be granted
an option to purchase 20,000 shares of common stock at the date of his
election. Additionally, each Outside Director, except for Outside
Directors who have received an initial grant of an option to purchase
20,000 shares within six months of the annual meeting of stockholders,
will automatically be granted an option to purchase 5,000 shares of
common stock on the date of each annual meeting of stockholders. The
exercise price of the options in all cases will be equal to the fair
market value of the common stock on the date of grant. Options
granted under the Directors Plan vest over 4 years and, generally,
must be exercised within 10 years.
A summary of the status of the Company's three fixed stock option
plans as of December 31, 1996 and 1995, and changes during the years
ended on those dates is presented below:
<TABLE>
<CAPTION>
Number of
Shares Exercise Prices
--------- ---------------
<S> <C> <C>
Balance as of December 31, 1994 -- $ --
Granted
Price = Fair Value 260,440 $0.69-5.00
Price > Fair Value 125,971 $0.76
Exercised (30,403) $0.69
-------- ----------
Balance as of December 31, 1995 356,008 $0.69-5.00
Granted
Price = Fair Value 332,000 $4.50-7.50
Exercised (1,810) $0.69
Canceled (103,411) $0.69-5.75
-------- ----------
Balance as of December 31, 1996 582,787 $0.69-7.50
======== ==========
</TABLE>
As of December 31, 1996 and 1995, the number of options exercisable was
217,925 and 173,871, respectively.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for any of the plans. Had compensation cost for the
Company's three stock-based compensation plans been determined
consistent with SFAS No. 123, the Company's net loss and net loss per
share would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net Loss As Reported $(3,374,035) $(1,830,023)
Pro Forma $(3,692,023) $(1,956,894)
Net Loss Per Share As Reported $ (0.99) $ (0.89)
Pro Forma $ (1.08) $ (0.95)
</TABLE>
The weighted-average fair value of options granted in 1996 and 1995,
was $3.84 and $1.46, respectively. The weighted-average fair value of
options granted in 1995 at greater than the market price was $0.38.
The effects of applying SFAS 123 in this proforma disclosure is not
indicative of the effects on reported results for future years. SFAS
123 does not apply to awards prior to 1995, and additional awards in
future years are anticipated.
The fair value of each option grant is estimated on the date of grant
using Black Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995,
respectively: no dividend yield; expected volatility of 67.5%; risk
free interest rates of 6%; expected lives of four years for the Prior
Plan and five years for the other two plans.
The following table summarizes information about fixed stock options
outstanding as of December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Exercise Prices As of 12/31/1996 Contractual Life Exercise Price As of 12/31/1996 Exercise Price
- --------------- ---------------- ---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
$0.6900 100,628 8.38 $0.69 63,705 $0.69
$0.7600 125,971 8.32 0.76 125,971 0.76
$3.1700 43,438 8.60 3.17 14,479 3.17
$4.5000 25,000 9.83 4.50 - -
$4.9700 66,000 9.98 4.97 - -
$5.0000 40,000 8.89 5.00 10,000 5.00
$5.2500 86,000 9.58 5.25 - -
$5.7500 14,750 9.13 5.75 3,770 5.75
$6.7500 47,500 9.49 6.75 - 0.00
$7.5000 33,500 9.41 7.50 - 0.00
------- ---- ---- ------- ----
$0.6900 582,787 9.01 3.59 217,925 1.18
======= =======
</TABLE>
24
<PAGE> 25
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
25
<PAGE> 26
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The following sets forth
certain information regarding the executive officers of the Registrant:
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages as
of January 31, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Raj Mohindra........... 51 President, Chief Executive Officer and Director
Suraj Puri............. 52 Vice President, Chief Technical Officer and Director
Scott M. Gibson........ 38 Vice President and Chief Financial Officer
Bernard Slade.......... 72 Director
Abhay K. Bhushan....... 50 Director
Ram Paul Gupta(1)...... 57 Director
William W.R. Elder(1).. 56 Director
</TABLE>
- ---------------
(1) Members of the Compensation and Audit Committees
Mr. Mohindra co-founded the Company in 1993 and has served as
President, Chief Executive Officer and a director of the Company since its
inception. Prior to joining the Company, from 1968 to 1993, he worked for IBM
where he held a number of operational, management and technical positions,
including head of the IBM Productivity Competence Center, Manager of Systems
Engineering and Senior Technical Staff Member.
Mr. Puri co-founded the Company in 1993 and has served as Vice
President, Chief Technical Officer and a director of the Company since its
inception. Prior to joining the Company, from 1986 to 1993, Mr. Puri served as
an independent consultant in the semiconductor industry. From 1978 to 1986, he
managed process engineering, technology transfer and yield improvement at
Advanced Micro Devices, a manufacturer of semiconductor devices.
Mr. Gibson joined the Company in August 1995 as Vice President and
Chief Financial Officer. Prior to joining the Company, from June 1994 to July
1995, Mr. Gibson was Vice President for Customer Satisfaction at Tencor
Instruments, a semiconductor equipment manufacturer. From 1992 to 1994, Mr.
Gibson served as Chief Financial Officer of Prometrix Corporation, a
semiconductor equipment manufacturer. From 1991 to 1992, Mr. Gibson was a
Product Accounting Manager for Stratacom Inc., a telecommunications equipment
manufacturer. Prior to that, from 1988 to 1991, Mr. Gibson served as Division
Controller for KLA Instruments, a manufacturer of wafer and mask inspection
systems for the semiconductor industry.
Mr. Slade co-founded the Company in 1993 and served as Vice President
with responsibility for East Coast and European Operations until December 1996.
Mr. Slade was appointed as a director of the Company in January 1997. From 1986
to 1993, Mr. Slade worked for Gemini Consulting, a management consulting firm,
where he specialized in productivity, product development, and manufacturing
issues. From 1957 to 1984, he worked for IBM where he held a number of product
development and operational management positions, including Corporate Director
of Manufacturing Technology and Director of Manufacturing Planning and Controls.
Mr. Bhushan co-founded the Company in 1993 and has served as a director
of the Company since its inception. He also served as Chief Financial Officer
of the Company from August 1993 until July 1995. Mr. Bhushan is currently
Chairman and Chief Financial Officer of Portola Communication, a software
company, where he has been employed since 1996. From 1974 through 1995, Mr.
Bhushan was employed by Xerox Corporation, where he served in various
capacities, including Manager of the Xerox Environmental Leadership Programs,
Manager of Systems Engineering and Standards and Manager of Business Strategy.
Mr. Gupta has served as a director of the Company since July 1995. From
1992 to the present, Mr. Gupta has served as President, Chief Operating Officer
and Vice President of Operations of Quality Semiconductor, Inc., a
semiconductor manufacturer. From 1988 to 1992, Mr. Gupta served as President
of Blackship Computers, Inc., a systems integration company. From 1983 to 1988,
Mr. Gupta held various management positions, including President, at General
Electric's Intensil Semiconductor operation.
Mr. Elder has served as a director of the Company since September 1995.
Since 1982, Mr. Elder has served as Chairman of the Board of Directors of
Genus, Inc., a semiconductor equipment company. Prior to founding Genus, Mr.
Elder served as president of Kasper Instruments, a division of Eaton
Corporation, a manufacturer of semiconductor equipment, and in several senior
management positions at Fairchild Semiconductor.
The Board of Directors is divided into three classes. Each class of
directors consists of one or two directors, who serve staggered three year
terms.
Officers are elected by and serve at the discretion of the Board of
Directors. There are no family relationships among the directors or officers of
the Company.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than ten percent of a registered class of the Company's
equity securities, to file with the SEC initial reports of ownership and reports
of changes in ownership of Common Stock and other equity securities of the
Company. Officers, directors and greater than ten percent beneficial owners are
required by SEC regulation to furnish the Company with copies of all reports
they file under Section 16(a).
To the Company's knowledge, based solely on its review of the copies of
such reports furnished to the Company and written representation that no other
reports were required, all Section 16(a) filing requirements applicable to its
officers, directors and greater than ten-percent beneficial owners were complied
with during the year ended December 31, 1996 except that Bernard Slade failed to
file on time a Form 4 for a transaction that occurred in November of 1996 due to
an administrative oversight.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the aggregate base salary and bonuses
paid by the Company for services rendered during 1995 and 1996 to the Company's
chief executive officer and the only other executive officer (the "Named
Executive Officers") who earned more than $100,000 in either year.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
LONG-TERM
COMPENSATION
ANNUAL SECURITIES ALL OTHER
COMPENSATION UNDERLYING ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS COMPENSATION
- --------------------------- ---- ------------ ------------ ------------
Raj Mohindra, President and Chief Executive Officer... 1995 $ 84,000 125,971 --
1996 $138,459 -- $5,400(1)
Robert Ciano, Vice President, Sales and Marketing(2).. 1995 -- -- --
1996 $131,461 45,000 --
</TABLE>
- -------------------
(1) Represents automobile allowance payments.
(2) Mr. Ciano resigned from the Company in November 1996.
STOCK OPTION INFORMATION
The following table contains information concerning stock option grants
to the Named Executive Officers in 1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
NUMBER OF OPTIONS/SARs
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR
OPTIONS/SARs IN FISCAL BASE PRICE EXPIRATION
NAME GRANTED YEAR ($/Sb) DATE
- ---- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Raj Mohindra ...................................... -- -- -- --
Robert Ciano ...................................... 45,000 12.4% $5.75 2/15/06(1)
</TABLE>
- ------------------
(1) The option expired without exercise 30 days after Mr. Ciano's resignation.
AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES
The following table sets forth, for the Named Executive Officers, the
shares acquired and the value realized on exercise of stock options during the
year ended December 31, 1996 and the year-end number and value of exercisable
and unexercisable options.
<TABLE>
<CAPTION> NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 1996 AT DECEMBER 31, 1996(1)
ACQUIRED ON VALUE ----------------------------- -----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Raj Mohindra ................ -- -- 125,971 -- $660,008 --
Robert Ciano ................ -- -- -- -- -- --
</TABLE>
- -----------------------
(1) The value of "in-the-money" stock options represents the positive spread
between the exercise price of stock options, $0.76 per share, and the fair
market value for the Company's Common Stock of $6.00 per share as of
December 31, 1996, which was the closing price of the Company's Common Stock on
December 31, 1996.
The Company does not have employment agreements with any of its
executive officers or directors.
Compensation of Directors
From time to time, directors have received grants of options to purchase
the Company's Common Stock. Directors who are not employees of the Company
receive yearly grants of options to purchase Common Stock under the Directors
Plan. The Company does not pay additional amounts for committee participation or
special assignments of the Board of Directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's capital stock as of December 31, 1996,
(i) by each person who is known by the Company to own beneficially more than 5%
of the Company's capital stock, (ii) by each of the Named Executive Officers
and by each of the Company's directors, and (iii) by all officers and directors
as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OWNERSHIP OF
SHARES BENEFICIALLY ALL COMMON PERCENTAGE OF
BENEFICIAL OWNER OWNED(1) STOCK OUTSTANDING(2) VOTING POWER(3)
---------------- ------------------- ------------------------ ---------------
<S> <C> <C>
Raj Mohindra ................ 1,102,123(4) 30.2% 41.9
Abhay K. Bhushan ............ 312,605(5) 9.0 11.8
Suraj Puri .................. 220,804(6) 6.4 8.0
Bernard Slade ............... 124,587(7) 3.6 4.4
Ram Paul Gupta .............. 49,171(8) 1.4 1.3
William W.R. Elder .......... 20,000(9) * *
Robert Ciano ................ 0 -- --
All directors and executive
officers as a group
(eight (8) persons) ....... 1,888,020(10) 48.1 65.5
</TABLE>
- --------------
* Represents less than one percent.
(1) Except pursuant to applicable community property laws or as otherwise
noted, all shares are beneficially owned and sole voting, and investment
power is held by the persons named.
(2) Based on 1,912,111 shares of Class A Common Stock 1,495,000 shares of
Common Stock outstanding, plus shares which may be acquired by the named
person(s) upon exercise of outstanding options or Class A Warrants as of
April 30, 1997.
(3) Each share of Class A Common Stock has five votes, and each share of
Common Stock has one vote.
(4) Includes 121,866 shares of Common Stock issuable upon exercise of Class A
Warrants held by Mr. Mohindra and his family members. Includes 125,971
shares issuable upon exercise of options. Also includes 44,161 shares held
by family members of Mr. Mohindra, but Mr. Mohindra disclaims beneficial
ownership of all such shares except to the extent of any pecuniary
interest therein which he may have. Does not include an aggregate of
320,004 shares of Common Stock issuable upon exercise of Class B Warrants
held by Mr. Mohindra and his family members.
(5) Includes 50,895 shares of Common Stock issuable upon exercise of Class A
Warrants held by Mr. Bhushan and his family members. Includes 14,479
shares issuable upon exercise of options. Also includes 43,434 shares
held by family members of Mr. Bhushan, but Mr. Bhushan disclaims
beneficial ownership of all such shares except to the extent of any
pecuniary interest therein which he may have. Does not include an
aggregate of 103,866 shares of Common Stock issuable upon exercise of
Class B Warrants held by Mr. Bhushan and his family members.
(6) Includes 43,260 shares of Common Stock issuable upon exercise of Class A
Warrants held by Mr. Puri and his family members. Includes 3,619 shares
issuable upon exercise of options. Also includes 7,239 shares held by a
family member of Mr. Puri, but Mr. Puri disclaims beneficial ownership of
all such shares except to the extent of any pecuniary interest therein
which he may have. Does not include an aggregate of 80,611 shares of
Common Stock issuable upon exercise of Class B Warrants held by Mr. Puri
and his family members.
(7) Includes 27,586 shares of Common Stock issuable upon exercise of Class A
Warrants. Includes 5,791 shares issuable upon exercise of options. Does
not include an aggregate of 47,195 shares of Common Stock issuable upon
exercise of Class B Warrants held by Mr. Slade.
(8) Includes 4,316 shares of Common Stock issuable upon exercise of Class A
Warrants. Includes 38,822 shares issuable upon exercise of options. Does
not include an aggregate of 13,144 shares of Common Stock issuable upon
exercise of Class B Warrants held by Mr. Slade.
(9) Includes 20,000 shares issuable on exercise of outstanding options.
(10) Includes 252,215 shares of Common Stock issuable upon exercise of Class A
Warrants held by executive officers and their family members. Includes
263,120 shares issuable upon exercise of options, of which 196,780 shares
are vested. Does not include an aggregate of 584,677 shares of Common
Stock issuable upon exercise of Class B Warrants held by officers and
directors and their family members.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the last two fiscal years, the Company had the following
transactions with certain of its officers, directors and holders of 5% of the
outstanding shares of the Company, as described below.
In September 1995, the Company issued a promissory note in the
principal amount of $50,000 and 25,000 warrants which subsequently converted
into Class A Warrants to each of Raj Mohindra, Abhay Bhushan, Suraj Puri and
Bernard Slade, directors of the Company.
In October 1995, the Company distributed a dividend of 220,000 Class A
Warrants and 450,000 Class B Warrants pro rata among all holders of capital
stock and options to acquire capital stock of the Company, including all
officers and directors of the Company other than William Elder.
The Company believes that all transactions with affiliates described
above were made on terms no less favorable to the Company than could have been
obtained from unaffiliated third parties.
26
<PAGE> 27
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See the index of exhibits on pages 23 of this report
(b) Reports on Form 8-K: None filed
27
<PAGE> 28
YIELDUP INTERNATIONAL CORPORATION
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
<S> <C>
3.2 (*) Certificate of Incorporation.
3.3 (*) Bylaws.
4.1 (*) Form of Warrant Agreement between the Company and the
Warrant Agent, including the form of warrants.
10.1 (*) Form of Indemnity Agreement.
10.2 (*) 1995 Stock Option Plan and forms of agreement
thereunder.
10.3 (*) 1995 Outside Directors Stock Option Plan and forms of
agreement thereunder.
10.5 (*) Facilities lease between the Company and Lori A.
Halligan Trust, dated September 11, 1995.
10.7 (*) Loan and Security Agreement with Silicon Valley Bank
dated September 16, 1996.
11.1 Statement regarding computation of net loss per share
23.1 Consent of Independent Auditors
</TABLE>
(*) The exhibit is incorporated by reference to Form SB-2 (Registration No.
33-97792-LA) declared effective on November 21, 1995.
28
<PAGE> 29
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
YIELDUP INTERNATIONAL CORPORATION
(REGISTRANT)
Date: February 14, 1997 By: /s/ Raj Mohindra
------------------------------------------
Raj Mohindra, Chairman and Chief Executive
(Principal Executive Officer)
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
NAME/TITLE DATE
/s/ Raj Mohindra
- -------------------------------------- February 14, 1997
Raj Mohindra
Chairman, Chief Executive Officer, and
Director
/s/ Scott M. Gibson
- -------------------------------------- February 14, 1997
Scott M. Gibson
Chief Financial Officer
(PRINCIPAL ACCOUNTING AND FINANCIAL OFFICER)
/s/ William W.R. Elder
- -------------------------------------- February 14, 1997
William W.R. Elder
Director
/s/ Ram Paul Gupta
- -------------------------------------- February 14, 1997
Ram Paul Gupta
Director
/s/ Abhay Bhushan
- -------------------------------------- February 14, 1997
Abhay Bhushan
Director
/s/ Suraj Puri
- -------------------------------------- February 14, 1997
Suraj Puri
Director
/s/Bernard Slade
- -------------------------------------- February 14, 1997
Bernard Slade
Director
29
<PAGE> 1
EXHIBIT 11.1
YIELDUP INTERNATIONAL CORPORATION
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995
<S> <C> <C>
Net Loss ($3,374,035) ($1,830,023)
=================== ================
Weighted average number of 3,406,395 1,950,272
common shares outstanding
Number of common shares
in accordance with SAB No. 83 - 102,360
------------------- ----------------
Total 3,406,395 2,052,632
=================== ================
Net loss per share ($0.99) ($0.89)
=================== ================
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
YieldUP International Corporation
We consent to incorporation by reference in the registration statement (No.
333-19645) dated January 10, 1997 on Form S-3 and the registration statements
(No. 333-19647 and No. 333-19649) dated January 10, 1997 on Forms S-8 of YieldUP
International Corporation of our report dated February 6, 1997, relating to the
balance sheet of YieldUP International Corporation as of December 31, 1996, and
the related statements of operations, stockholders' equity, and cash flows for
each of the years in the two-year period then ended, which report appears in the
December 31, 1996, annual report on Form 10-KSB of YieldUP International
Corporation.
Our report dated February 5, 1997, contains an explanatory paragraph that
states that the Company's recurring losses from operations raise substantial
doubt about its ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
KPMG Peat Marwick LLP
San Jose, California
February 13, 1997
