<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 1997
REGISTRATION NO. 33-97792-LA
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST EFFECTIVE AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
YIELDUP INTERNATIONAL CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
------------------------
<TABLE>
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DELAWARE 3569 77-0341206
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
RAJ MOHINDRA
PRESIDENT
117 EASY STREET
MOUNTAIN VIEW, CA 94043
(415) 964-0100
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE, PRINCIPAL EXECUTIVE
OFFICES AND PRINCIPAL PLACE OF BUSINESS)
------------------------
COPIES TO:
DOUGLAS J. REIN, ESQ.
SCOTT M. STANTON, ESQ.
GRAY CARY WARE & FREIDENRICH
A PROFESSIONAL CORPORATION
400 HAMILTON AVENUE
PALO ALTO, CA 94301
(415) 328-6561
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value, and Class B
Warrants(2)............................... 2,215,000(3) $ 7.00 $15,505,000 $ 4,698.48
- ----------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value(4)............ 4,160,000(3) $11.00 $45,760,000 $13,866.67
- ----------------------------------------------------------------------------------------------------------------------
Units(6).................................... 130,000 $ 7.00 $ 910,000 $ 275.76
- ----------------------------------------------------------------------------------------------------------------------
Total....................................... $62,175,000 $18,840.91*
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</TABLE>
* All of this amount has been previously paid.
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to rule 457.
(2) Issuable upon exercise of Class A Warrants.
(3) Pursuant to Rule 416, this Registration Statement also covers such
indeterminable additional shares as may become issuable as a result of any
future anti-dilution adjustments in accordance with the terms of the
Warrants, as described in the Prospectus.
(4) Issuable upon exercise of outstanding Class B Warrants and those which may
acquired upon exercise of Class A Warrants.
(5) Each Unit consists of one share of one share of Common Stock, one Class A
Warrant and one Class B Warrant. All such Units are issuable upon exercise
of the Unit Purchase option sold to D.H. Blair Investment Banking Corp., the
underwriter of the Registrant's initial public offering.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED MARCH 3, 1997
PROSPECTUS
YIELDUP INTERNATIONAL CORPORATION
2,215,000 SHARES OF COMMON STOCK
2,215,000 REDEEMABLE CLASS B WARRANTS
4,160,000 SHARES OF COMMON STOCK ISSUABLE ON EXERCISE OF CLASS B WARRANTS
130,000 UNITS
The 2,215,000 shares of Common Stock (the "Common Stock") and the 2,215,000
Redeemable Class B Warrants (the "Class B Warrants") offered by YieldUP
International Corporation ("YieldUP" or the "Company") are issuable upon
exercise of 2,215,000 outstanding Redeemable Class A Warrants (the "Class A
Warrants"). Each Class A Warrant entitles the holder to purchase, at an exercise
price of $7.00 (subject to adjustment), one share of Common Stock and one Class
B Warrant, until November 21, 2000. The Class A Warrants are subject to
redemption by the Company for $.05 per Warrant, on not less than 30 days'
written notice, if the average closing bid price of the Common Stock exceeds
$9.80 per share (subject to adjustment) for 30 consecutive business days ending
within 15 days of the date the Class A Warrants are called for redemption.
The 4,160,000 shares of Common Stock offered by the Company are issuable on
exercise of 1,945,000 outstanding Class B Warrants and 2,215,000 Class B
Warrants issuable upon exercise of outstanding Class A Warrants. Each Class B
Warrant entitles the holder to purchase, at an exercise price of $11.00 (subject
to adjustment), one share of Common Stock, until November 21, 2000. The Class B
Warrants are subject to redemption by the Company for $.05 per Warrant, on not
less than 30 days' written notice, if the average closing bid price of the
Common Stock exceeds $15.40 per share (subject to adjustment) for 30 consecutive
business days ending within 15 days of the date the Class B Warrants are called
for redemption.
The Company's Common Stock, Class A Warrants and Class B Warrants are
traded on the Nasdaq SmallCap Market under the symbols "YILD," "YILDW" and
"YILDZ," respectively. On February 27, 1997, the last reported sales prices of
the Common Stock, Class A Warrants and Class B Warrants as reported on the
Nasdaq SmallCap Market were $10 1/2, $5 3/4 and $2 1/2, respectively.
Each unit (a "Unit") offered by the Company consists of one share of Common
Stock, one Class A Warrant and one Class B Warrant. All of the Units offered
hereby are issuable upon exercise of an option (the "Unit Purchase Option")
granted in favor of designees of D.H. Blair Investment Banking Corp., the
underwriter of the Company's initial public offering. The Unit Purchase Option
is exercisable during the three year period commencing November 21, 1997. The
Class A Warrants and Class B Warrants contained in the Units are not subject to
redemption unless the Unit Purchase Option has been exercised.
The Common Stock and the Company's Class A Common Stock (the "Class A
Common Stock") are essentially identical, except that the Class A Common Stock
has five votes per share and the Common Stock has one vote per share, and each
share of Class A Common Stock is convertible into one share of Common Stock.
Assuming the exercise of all Class A Warrants, the officers and directors of the
Company will control approximately 57.2% of the total voting power of the shares
of the Company and will therefore be able to elect all of the Company's
directors and to control the Company. See "Principal Stockholders." The Class A
Common Stock is automatically converted into Common Stock upon any sale or
transfer, except to certain permitted transferees.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO SOLICITATION PROCEEDS TO
PUBLIC AGENT FEE COMPANY(1)
- ----------------------------------------------------------------------------------------------------
Common Stock and Class B Warrants issuable on
exercise of Class A Warrants................ $7.00 $0.35 $6.65
- ----------------------------------------------------------------------------------------------------
Common Stock issuable on exercise of Class B
Warrants.................................... $11.00 $0.55 $10.45
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</TABLE>
(1) Before deducting estimated expenses of the offering of $147,500 payable by
the Company.
------------------------
The date of this Prospectus is , 1997
<PAGE> 3
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any amendments
thereto) on Form SB-2 under the Securities Act with respect to the securities
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto, and the financial statements and notes filed as a part thereof.
Statements made in this Prospectus concerning the contents of any document
referred to herein are not necessarily complete. With respect to each such
document filed with the Commission as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved. The Registration Statement, including the exhibits thereto and the
financial statements and notes filed as a part thereof, as well as such reports
and other information filed with the Commission, may be inspected without charge
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part thereof
may be obtained from the Commission upon the payment of certain fees prescribed
by the Commission.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: New York Regional Office, Seven
World Trade Center, New York, New York 10048, and Chicago Regional Office, 500
West Madison Street, Chicago, Illinois 60661. Copies of such materials can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 upon payment of the prescribed fees. The Common
Stock and Warrants of the Company are quoted on the Nasdaq SmallCap Market.
Reports, proxy statements and other information concerning the Company may be
inspected at the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006. The Commission maintains a World Wide Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's Web site is http://www.sec.gov.
YieldUP, CleanPoint and Omega are unregistered trademarks of the Company.
All other brand names or trademarks appearing in this Prospectus are the
property of their respective holders.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. The statements contained in this Prospectus that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E 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 "Risk
Factors" and elsewhere in this Prospectus.
THE COMPANY
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, a wafer rinsing system, in July 1994 to one major semiconductor
manufacturer and its second product, the Omega 2000, a cleaning, rinsing and
drying system, in December 1994 to another manufacturer. The Company currently
has approximately 20 cleaning, rinsing and drying systems installed at 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. In addition, the Company has also marketed its
products for use in the manufacturing processes of magnetic and optical disks,
flat panel displays, photomasks and chemical and pharmaceutical products. The
Company believes that there are numerous sites within typical 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
drying 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 the manufacturing process and is available as
a stand-alone unit with 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
manufacturing equipment. Megasonic and chemical injection cleaning can be added
to the Omega 2000 as well.
The 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 its patented 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.
YieldUP was incorporated in California in June 1993 and reincorporated in
Delaware in September 1995. The Company's principal executive offices are
located at 117 Easy Street, Mountain View, California 94043, and its telephone
number is (415) 964-0100.
3
<PAGE> 5
THE OFFERING
Securities Offered......... 2,215,000 shares of Common Stock and 2,215,000
Class B Warrants issuable on exercise of Class A
Warrants. Each Class A Warrant entitles the holder
to purchase, at an exercise price of $7.00 (subject
to adjustment), one share of Common Stock and one
Class B Warrant.
4,160,000 shares of Common Stock issuable on
exercise of Class B Warrants. Each Class B Warrant
entitles the holder to purchase, at an exercise
price of $11.00 (subject to adjustment), one share
of Common Stock.
The Class A and Class B Warrants are exercisable
until November 21, 2000, unless earlier redeemed.
See "Description of Securities -- Warrants."
Capital Stock Outstanding:
Prior to exercise of
Class A Warrants......... 1,495,000 shares of Common Stock(1)
1,912,111 shares of Class A Common Stock(2)
After exercise of Class A
Warrants................. 3,710,000 shares of Common Stock(1)
1,912,111 shares of Class A Common Stock(2)
Warrants Outstanding:
Prior to exercise of
Class A Warrants......... 2,215,000 Class A Warrants
1,945,000 Class B Warrants
After exercise of Class A
Warrants................. 4,160,000 Class B Warrants
Rights of Common Stock and
Class A Common Stock..... The rights of the holders of Common Stock and Class
A Common Stock are essentially identical, except
that holders of Common Stock are entitled to one
vote per share, and holders of Class A Common Stock
are entitled to five votes per share, and each
share of Class A Common Stock is convertible into
one share of Common Stock. The Class A Common Stock
is automatically converted into Common Stock upon
any sale or transfer, except to certain permitted
transferees. See "Description of
Securities -- Common Stock and Class A Common
Stock."
Use of Proceeds............ Repayment of capital leases and term loan,
leasehold improvements and fixed assets, product
development, and general corporate and working
capital purposes, including financing of accounts
receivable. See "Use of Proceeds."
Risk Factors............... The securities offered hereby involve a high degree
of risk and should not be purchased by investors
who cannot afford the loss of their entire
investment. See "Risk Factors."
Nasdaq Symbols:
Common Stock............. YILD
Class A Warrants......... YILDW
Class B Warrants......... YILDZ
4
<PAGE> 6
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995
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<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................................................... $ 2,204,590 $ 1,129,012
Operating loss.................................................... (3,478,842) (1,639,751)
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>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------
AS
ACTUAL ADJUSTED(3)
---------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.................................................... $1,009,090 $ 15,591,340
Total assets....................................................... 3,960,724 18,542,974
Current liabilities................................................ 1,616,624 1,616,624
Stockholders' equity............................................... 1,965,237 16,547,487
</TABLE>
- ---------------
(1) Based on shares outstanding as of December 31, 1996 and does not include:
(i) an aggregate of 4,160,000 shares of Common Stock issuable upon exercise
of the Class B Warrants outstanding or issuable on exercise of Class A
Warrants; (ii) 520,000 shares of Common Stock issuable upon exercise of the
Unit Purchase Option and the underlying Warrants; (iii) 100,000 shares of
Common Stock reserved for issuance under the Company's 1995 Outside
Directors' Stock Option Plan; and (iv) 500,000 shares of Common Stock
reserved for issuance under the Company's 1995 Stock Option Plan. See
"Capitalization," "Management -- Stock Plans," "Description of Securities."
(2) Does not include 270,037 shares of Class A Common Stock issuable upon
exercise of outstanding options as of December 31, 1996. See
"Management -- Stock Plans."
(3) As adjusted to reflect the exercise of 2,215,000 Class A Warrants at an
exercise price of $7.00, and the application of the net proceeds therefrom,
after deducting the Solicitation Agent fee and estimated offering expenses.
See "Use of Proceeds."
-----------------------------
Unless otherwise indicated, all information in this Prospectus assumes (i)
exercise of all Class A Warrants and (ii) no exercise of (a) the Unit Purchase
Option, (b) the Class B Warrants, or (c) options granted or eligible for grant
under the Company's stock option plans.
5
<PAGE> 7
RISK FACTORS
An investment in the securities offered hereby involves a high degree of
risk. In addition to the other information in this Prospectus, the following
risk factors should be considered carefully in evaluating the Company and its
business before purchasing the securities offered by this Prospectus. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Prospectus that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E 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 Prospectus.
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 its existing capital resources will enable it to fund its
operations through the first quarter of 1997. In the event that significant
funds are not received from the exercise of the Class A Warrants, 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 Warrants may also complicate future capital raising activities
because of their potentially dilutive effect on purchasers of the Company's
equity securities and the antidilution provisions of the Warrants. If the
Company is unable to obtain the necessary capital, it will be required to
significantly curtail its activities or cease operations, which could result in
a significant decrease in, or total loss of, value of the securities offered by
this Prospectus. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and Notes
thereto.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; EXPENSE AND RISK OF PATENT LITIGATION
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
6
<PAGE> 8
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 patented
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 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. See "Business -- Intellectual
Property Rights."
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, 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 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. See "Business -- Litigation."
INTENSE COMPETITION; UNCERTAIN MARKET ACCEPTANCE
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 semiconductor
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. 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
7
<PAGE> 9
on the Company. There also can be no assurance that the Company will be able to
penetrate the wet processing equipment market and convince semiconductor or
other 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 or other 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.
See "Business -- Competition."
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.
"Business -- 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."
8
<PAGE> 10
DEPENDENCE ON KEY SUPPLIERS
The Company has no written contracts with any of its key suppliers, and
such suppliers may terminate their relationships with the Company at any time
without notice. Any such termination would materially impair the Company's
ability to satisfy any orders for its products and would materially adversely
affect the Company's results of operations. If any of the Company's outside
suppliers terminate their relationships with the Company, the Company will be
required to replace such suppliers. In such an event, there could be no
assurance that the Company would find replacement suppliers or that such
replacement suppliers would not be more expensive than the Company's current
suppliers, thereby materially adversely affecting the Company's results of
operations. See "Business -- Manufacturing, Assembly and Testing."
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.
See "Business -- Customers, Marketing and Service."
CYCLICALITY OF AND DEPENDENCE ON 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 Company intends to use a portion of the proceeds
from the exercise of the Class A Warrants to expand its research and development
activities. The failure of the Company to manage its research and development
efforts would have a material adverse effect upon its business and prospects.
See "Use of Proceeds" and "Business -- Manufacturing and Development."
9
<PAGE> 11
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 is the beneficiary of 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.
See "Management."
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. See
"Management -- Limitation of Liability and Indemnification."
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. Upon exercise
of all Class A Warrants, the directors and officers of the Company will control
approximately 57.2% 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. See "Principal
Stockholders" and "Description of Securities."
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. See
"Description of Securities."
10
<PAGE> 12
POTENTIAL PRICE VOLATILITY
The Company believes factors such as quarterly fluctuations in results of
operations, announcements of new orders by the Company, developments affecting
competitors and changes in either earnings estimates of the Company or
investment recommendations by stock market analysts may cause the market price
of its securities to fluctuate, perhaps substantially. In addition, in recent
years the stock market in general, and the shares of technology companies in
particular, have experienced extreme price fluctuations which are likely to
continue. These broad market and industry fluctuations may adversely affect the
market price of the securities of the Company.
INVESTIGATION OF THE SOLICITATION AGENT BY THE SECURITIES AND EXCHANGE
COMMISSION
Pursuant to contractual arrangements entered into at the time of its
initial public offering, the Company has agreed not to solicit exercises of
Warrants other than through D.H. Blair Investment Banking Corp. (the
"Solicitation Agent"). The Securities and Exchange Commission is conducting an
investigation concerning various business activities of the Solicitation Agent
and D.H. Blair & Co., Inc. ("Blair & Co."). The investigation appears to be
broad in scope, involving nearly all aspects of the Solicitation Agent's and
Blair & Co.'s compliance with the Federal securities laws in offerings of
securities, purchases and sales of securities, market-making activities and
securities sales practices during the period from January 1, 1985 to the
present. The Company has been advised by the Solicitation Agent that the
investigation has been ongoing since at least 1989 and that it is cooperating
with the investigation. The Company has been advised that the Solicitation Agent
cannot predict whether this investigation will ever result in any type of formal
enforcement action against the Solicitation Agent or, if so, whether any such
action might have an adverse effect on the Solicitation Agent or the securities
of the Company. An unfavorable resolution of the Securities and Exchange
Commission's investigation could have the effect of limiting or terminating such
firm's ability to make a market in the Company's securities, which could affect
the liquidity and price of such securities. See "Plan of Distribution."
POSSIBLE DELISTING FROM NASDAQ SMALLCAP MARKET AND MARKET ILLIQUIDITY
While the Company's Common Stock, Class A Warrants and Class B Warrants
meet the current Nasdaq SmallCap Market requirements there can be no assurance
that such securities will meet the continued listing requirements. Under current
criteria for continued inclusion on the Nasdaq SmallCap Market, (i) the Company
will have to maintain at least $2,000,000 in total assets and $1,000,000 in
total stockholders' equity, (ii) the minimum bid price of the Common Stock will
have to be $1.00 per share, (iii) there must be at least 100,000 shares in the
public float valued at $1,000,000 or more, (iv) the Common Stock must have at
least two active market makers, and (v) the Common Stock must be held by at
least 300 holders. Additionally, Nasdaq has recently published proposed
revisions to these standards that would make it more difficult for companies to
qualify or remain on the Nasdaq SmallCap Market.
If the Company is unable to satisfy the Nasdaq SmallCap Market's
maintenance requirements, its securities may be delisted from the Nasdaq
SmallCap Market. In such event, trading, if any, in the Common Stock and
Warrants would thereafter be conducted in the over-the-counter market in the
so-called "pink sheets" or the NASD's "Electronic Bulletin Board." Consequently,
the liquidity of the Company's securities could be impaired, not only in the
number of securities which could be bought and sold, but also through delays in
the timing of transactions, reduction in security analysts' and the news media's
coverage of the Company, and lower prices for the Company's securities than
might otherwise be attained.
The Company's securities have not been qualified or registered in all
states and will not be eligible for trading unless an exemption from the
qualification or registration requirements is available. There can be no
assurance that any such exemption will become available in any jurisdiction.
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS
The Class A Warrants may be redeemed by the Company at a redemption price
of $.05 per Warrant upon not less than 30 days' notice if the average bid price
of the Common Stock exceeds $9.80 per share for 30
11
<PAGE> 13
consecutive trading days ending within 15 days of the notice of redemption. Also
the Class B Warrants may be redeemed by the Company at a redemption price of
$.05 per Warrant upon not less than 30 days' notice if the average bid price of
the Common Stock exceeds $15.40 per share, for 30 consecutive trading days
ending within 15 days of the notice of redemption. Due to the level of market
prices for the Common Stock the Company currently has the right to initiate the
process to redeem the Class A Warrants. Redemption of the Warrants could force
the holders to exercise the Warrants and pay the exercise price therefor at a
time when it may be disadvantageous for the holders to do so, to sell the
Warrants at the then current market price when they might otherwise wish to hold
the Warrants, or to accept the redemption price, which, at the time the Warrants
are called for redemption, is likely to be substantially less than the market
value of the Warrants. Lack of qualification or registration under applicable
federal or state securities laws may mean that the Company would be unable to
issue securities upon exercise of the Warrants, including at the time when the
Warrants are called for redemption. See "Description of Securities -- Warrants."
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS
Current Warrant holders will only be able to exercise the Warrants if (i) a
current prospectus under the Securities Act of 1933, as amended (the "Securities
Act") relating to the securities underlying the Warrants is then in effect and
(ii) such securities are qualified for sale or exempt from qualification under
the applicable securities laws of the states in which the various holders of
Warrants reside. Although the Company has undertaken to use its best efforts to
maintain the effectiveness of a current prospectus covering the securities
underlying the Warrants, there can be no assurance that the Company will be able
to do so. There also can be no assurance that exemptions from the registration
on qualification requirements of those states in which the Company's securities
are not currently registered or qualified will be available at the time a
Warrant holder wishes to exercise his or her Warrant. The value of the Warrants
may be greatly reduced if a current prospectus, covering the securities issuable
upon the exercise of the Warrants, is not kept effective or if such securities
are not qualified, or exempt from qualification, in the states in which the
holders of Warrants reside. See "Description of Securities -- Warrants."
POSSIBLE RESTRICTIONS ON MARKET MAKING ACTIVITIES IN COMPANY'S SECURITIES
The Company has been advised that Blair & Co. makes a market in the
Company's securities. Regulation M promulgated by the Securities and Exchange
Commission (the "Commission") under the Securities Exchange Act of 1934, as
amended (the "1934 Act") may prohibit Blair & Co. from engaging in any market
making activities with regard to the Company's securities for the period from
five business days (or such other applicable period as Regulation M may provide)
prior to any solicitation by the Solicitation Agent of the exercise of Warrants
until the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that the Solicitation Agent
may have to receive a fee for the exercise of Warrants following such
solicitation. As a result, Blair & Co. may be unable to provide a market for the
Company's securities during certain periods while the Warrants are exercisable.
Any temporary cessation of such market-making activities could have an adverse
effect on the market price of the Company's securities. See "Plan of
Distribution."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
There are currently an aggregate of 3,407,111 shares of Common Stock and
Class A Common Stock outstanding. Of such shares approximately 3,140,000 are
freely tradeable without restriction, subject in certain instances to volume
limitations imposed by Rule 144. All remaining shares currently outstanding will
become eligible for resale at various times not later than May 1997.
Provided that the Company satisfies certain securities registration and
qualification requirements with respect to the securities underlying the
Warrants, any and all securities purchased upon exercise of the Warrants will be
freely tradeable.
The holders of the Unit Purchase Option have been granted registration
rights with respect to all shares underlying the Option Units purchased upon
exercise of the Underwriter's Unit Purchase Option. The sale, or
12
<PAGE> 14
availability for sale, of substantial amounts of Common Stock in the public
market could adversely affect the prevailing market price of the Common Stock
and could impair the Company's ability to raise additional capital through the
sale of its equity securities.
NO DIVIDENDS ANTICIPATED
The Company has never paid any cash dividends on its Common Stock or Class
A Common Stock. The Company anticipates that in the future, earnings, if any,
will be retained for use in the business or for other corporate purposes, and it
is not anticipated that cash dividends in respect of the Common Stock or Class A
Common Stock will be paid. See "Dividend Policy."
13
<PAGE> 15
USE OF PROCEEDS
The potential net proceeds to the Company from the exercise of the
2,215,000 Class A Warrants outstanding are estimated to be approximately
$14,500,000, after deducting estimated expenses payable by the Company and the
Solicitation Agent fee. The Company expects that the net proceeds will be
utilized for repayment of principal on a bank term loan, repayment of all
principal on outstanding capital leases, constructing and equipping new
manufacturing and engineering space, supporting the development of its Omega
1000, Omega 1100, and Omega 4000 systems, including the hiring of additional
engineering personnel, and enhancing existing products. The net proceeds may
also be used to finance additional accounts receivable and inventory. The
indebtedness under the bank loan is due in November 1998 and had an interest
rate of 8.25% as of December 31, 1996. The obligations under the capital leases
are payable from February 1997 through January 1999. The Company also expects
that it may be required to expend significant funds (consisting of legal fees)
in connection with the CFM litigation, but the inherent uncertainty of such
litigation makes it impossible to predict the amounts to be expended with any
degree of accuracy. See "Risk Factors -- Dependence on Proprietary Technology;
Risk and Expense of Patent Litigation" and "Business -- Litigation." Any
remaining proceeds will be used to fund general working capital requirements.
A portion of the proceeds may also be used to acquire or invest in
complementary businesses or products or to obtain the right to use complementary
technologies. While from time to time the Company evaluates potential
acquisitions of such businesses, products or technologies, there are no present
understandings, commitments or agreements with respect to any acquisition of
other businesses, products or technologies. Pending utilization, the net
proceeds of the exercise of the Warrants will be invested in short-term,
interest-bearing investments.
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock or Class A
Common Stock. It is the present policy of the Company to retain any earnings to
finance the growth and development of the business and, therefore, the Company
does not anticipate paying cash dividends on its Common Stock in the foreseeable
future.
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>
1995
4th Quarter (commencing November 21, 1995).......... $ 6 $4 3/4
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
1997
1st Quarter (through February 27, 1997)............. 10 3/4 5 7/8
</TABLE>
On February 27, 1997, the last reported sale price of the Common Stock on
the Nasdaq SmallCap Market was $10 1/2 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 the Common Stock.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
December 31, 1996, and (ii) on an as adjusted basis to reflect the exercise of
all outstanding Class A Warrants and the application of the net proceeds
therefrom, after deducting the Solicitation Agent fee and estimated offering
expenses payable by the Company.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------
AS
ACTUAL ADJUSTED
----------- -----------
<S> <C> <C>
Stockholders' equity:
Preferred stock -- par value $.001; 5,000,000 shares
authorized; no shares issued and outstanding, actual
and as adjusted...................................... -- --
Class A Common Stock -- par value $.001;
2,229,927 shares authorized; 1,912,111 shares issued
and outstanding, actual and as adjusted(1)........... $ 1,912 $ 1,912
Common Stock -- par value $.001; 20,000,000 shares
authorized; 1,495,000 shares issued and outstanding,
actual; 3,710,000 shares issued and outstanding, as
adjusted............................................. 1,495 3,710
Additional paid in capital.............................. 7,571,550 22,151,585
Notes receivable from stockholders...................... (15,348) (15,348)
Accumulated deficit..................................... (5,594,372) (5,594,372)
----------- ------------
Stockholders' equity................................. 1,965,237 16,547,487
----------- ------------
Total capitalization............................ $ 1,965,237 $16,547,487
=========== ============
</TABLE>
- ---------------
(1) Based on shares outstanding as of December 31, 1996 and does not include:
(i) an aggregate of 4,160,000 shares of Common Stock issuable upon exercise
of the Class B Warrants outstanding or issuable on exercise of Class A
Warrants; (ii) 520,000 shares of Common Stock issuable upon exercise of the
Unit Purchase Option and the underlying Warrants; (iii) 100,000 shares of
Common Stock reserved for issuance under the Company's 1995 Outside
Directors' Stock Option Plan; and (iv) 500,000 shares of Common Stock
reserved for issuance under the Company's 1995 Stock Option Plan.
15
<PAGE> 17
SELECTED FINANCIAL DATA
The statement of operations data presented below for the years ended
December 31, 1996 and December 31, 1995 and the balance sheet data as of
December 31, 1996 are derived from the financial statements of the Company
included elsewhere in this Prospectus that have been audited by KPMG Peat
Marwick LLP, independent certified public accountants. The data set forth below
is qualified by reference to, and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto and the discussion
thereof included elsewhere in this Prospectus. The results of operations for
1996 are not indicative of results that may be obtained in future periods.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
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 computation...................... 3,406,395 2,052,632
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
BALANCE SHEET DATA:
Working capital......................................................... $ 1,009,090
Total assets............................................................ 3,960,724
Accumulated deficit..................................................... (5,594,372)
Total stockholders equity............................................... 1,965,237
</TABLE>
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
YieldUP develops, manufactures and markets advanced cleaning, rinsing, and
drying equipment used at several steps in the manufacturing process of
semiconductors and other defective sensitive substrates. The Company began
operations in June 1993 providing yield consulting services, and, in December
1994, the Company shipped its first rinsing and drying system, the Omega 2000.
The Company's first significant shipment of systems occurred during the fourth
quarter of 1995. Currently the Company has approximately twenty cleaning,
rinsing and drying systems installed at customer sites. The Company's primary
source of revenues has been the shipment of cleaning, rinsing, and drying
equipment. The Company expects to continue to derive substantially all of its
revenue from sales of cleaning, rinsing, and drying equipment.
From inception, the Company has incurred significant losses due to limited
revenues and large investments in research and development. The Company began to
generate orders for its wafer cleaning, rinsing, and drying equipment during the
second quarter of 1995. Over the next year, the Company intends to spend a
significant portion of its revenues on new product development and enhancements
to existing products which will be required to exploit anticipated markets for
equipment designed for 12 inch wafers, flat panel displays, magnetic disks and
photomasks. However, future profitability will depend on a variety of factors,
including timely receipt of significant new orders, the level of market
acceptance of the Company's products, timely delivery of systems to customers,
new competitive product offerings, price fluctuations due to competition, and
industry capital equipment spending levels. There can be no assurance that the
Company will be able to achieve equipment sales growth or profitability. At
current operating expense levels, if the Company's sales do not increase, the
Company will continue to show significant operating losses. Additionally, the
Company is engaged in patent litigation which may result in significant
additional expenditures for legal fees which could have a material adverse
effect on the Company's results of operations.
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 could 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.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Prospectus that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E 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 "Risk
Factors" and elsewhere in this Prospectus.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995.
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.
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<PAGE> 19
Manufacturing and development expenses were $3,853,972 for 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.
The information in the following two paragraphs contains forward-looking
statements describing the Company's plans to increase revenues and to reduce
gross margins on its products. Such statements are made in reliance on the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
Company's plans and intentions with respect to increasing revenues and improving
gross margins are subject to risks and uncertainties, and actual results could
differ materially from those projected in the forward-looking statements. The
Company's ability to execute its plans may be adversely affected by competitive
conditions, failure to timely complete development and installation of new
products and product enhancements, supply disruptions, customer purchasing
cycles and other factors described under "Risk Factors" and elsewhere in this
Prospectus.
In order for the Company to achieve profitability, it will be necessary to
significantly increase revenues in future periods. Increasing revenues will
depend to a significant extent on the Company's ability to make multiple
standard product 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 and enhance its product
line. The Company is focused on delivery in the first quarter of 1997 of the
enhanced Omega 4000 and new Omega 1000 products. The Company believes these
products have the highest probability of generating significant new revenues for
the Company in the second quarter of 1997. The Company currently has orders for
these systems from major semiconductor manufacturers, and a number of other
large companies have expressed interest in them. The Company plans to
demonstrate performance of these systems in a production environment in the
second quarter and believes it may be possible to generate additional orders for
these products beginning in the second quarter. In addition, the Company
believes that its recent marketing efforts with respect to its CleanPoint water
filtration system may begin to result in orders and revenues in the near term.
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 costs. 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
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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. See "Risk Factors."
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 plans to use approximately $500,000 from the potential proceeds
from the exercise of the Class A Warrants to construct and equip new
manufacturing and office facilities to support anticipated shipment levels and
personnel additions. The new facility should provide expansion capacity for
manufacturing operations and corporate functions for the next twelve months. The
Company also plans to use approximately $950,000 from the potential proceeds
from the exercise of the Class A Warrants for the repayment of a bank term loan
and several capital leases. The remainder of the proceeds from the exercise of
the Class A Warrants will be used to meet working capital requirements over the
next twelve months including financing additional accounts receivable and
inventory. See "Use of Proceeds."
Assuming all Class A Warrants are exercised, the Company believes that the
net proceeds from such exercise, together with existing cash balances, will be
sufficient to meet the Company's cash requirements for at least the next
twenty-four months. However, after that twenty-four month period or if the
Company's plans change, depending upon its level of operations, the Company may
require additional equity or debt financing to meet its working capital and
fixed asset requirements. If the Company requires additional financing in the
future, there can be no assurance that it will be available or that it will be
available on terms satisfactory to the Company.
The information in the following paragraph contains forward-looking
statements describing the Company's plans to raise debt and equity financing to
meet its capital needs. Such statements are made in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The
Company's plans and intentions with respect to raising capital are subject to
risks and uncertainties, and actual results could differ materially from those
projected in the forward-looking statements. The Company's ability to execute
its plans effectively may be adversely affected by factors outside the Company's
control, such as the bank's internal policies and procedures and adverse market
conditions, and other factors described under "Risk Factors" and elsewhere in
this Prospectus.
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
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future funding, and there can be no assurance that the Company will be able to
obtain additional capital in the future. However, the Company is currently in
negotiations to reduce the term loan collateral requirement by 50% and to create
a $2 million revolving credit line collateralized by the Company's qualifying
accounts receivable. The funds available to the Company, if any, under such line
of credit will depend on the Company's ability to generate revenues in the near
term. These two credit facilities should provide the Company with the necessary
funds to finance operations through the second quarter of 1997. In the event the
Class A warrants are not exercised, the Company believes that it may be able to
obtain funds through private placements of its securities within the next one to
two fiscal quarters. If the Company is unable to obtain the necessary capital,
it will be required to significantly curtail its activities or cease operations.
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BUSINESS
INTRODUCTION
YieldUP develops, manufactures and markets cleaning, rinsing, and drying
equipment used for 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 1994 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. 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. In addition, the Company has also marketed its
products for use in the manufacturing processes of photomasks, magnetic and
optical 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
drying 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 rinse dry 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
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system, including the pharmaceutical and chemical industries, both of which
require ultrapure water for product processing.
INDUSTRY BACKGROUND
The IC is a critical component in the computer, microprocessor, consumer
electronics, telecommunications, and defense industries. Virtually thousands of
industrial products, from wrist watches to automobiles, from burglar alarm
systems to machine tools, and from home appliances to missile guidance systems,
contain at least one IC. Each IC may contain hundreds of thousands, even
millions, of electronic circuits.
ICs are fabricated through a complex series of 100 to 300 process steps on
a silicon wafer. Steps which involve the application of an IC pattern and
removal of excess material are typically repeated several times during the
fabrication process, with alternating layers of conducting and insulating films
being deposited each time to create a structure on the wafer of 10 or more
layers. The resulting finished wafer consists of many ICs, which are then cut,
packaged and tested before shipment.
Advances in semiconductor equipment technology in recent years have
resulted in increasingly sophisticated ICs based on submicron geometries and
complex manufacturing processes. Although these advances have enabled
semiconductor manufacturers to place hundreds of ICs on a single silicon wafer,
as critical dimensions decrease, the size and density of defects have a greater
effect on yields. These defects are often the result of microscopic particles
and other contaminants on wafer surfaces during the fabrication process.
Limiting the presence of particles and other contaminants and removal of the
residue is vital to the ultimate performance of the IC and the resulting yield.
As a result, IC manufacturers have continued to invest in wafer processing
equipment. A semiconductor equipment industry trade association estimated that
worldwide shipments of semiconductor equipment grew from approximately $14
billion in 1994 to $24 billion in 1995. Of that amount, approximately $18
billion in 1995 was for wafer processing equipment, and wet processing systems
accounted for approximately $1.2 billion of such sales.
Particles and contaminants can be introduced to in-process wafers from a
variety of sources, including manufacturing equipment, process materials,
factory air and environment, water, chemicals and manufacturing personnel. Most
semiconductor manufacturers seek to reduce contamination problems through an
array of methods including the use of expensive clean rooms for processing
operations, automated handling and transporting of parts between production
operations, and garments and masks for personnel involved in the fabrication
process. Even with these costly methods, however, a long and tedious development
process of incremental improvements is required to remove a sufficient level of
contamination to achieve acceptable yields. This development process can take
months or even years.
Repetitive cleaning, rinsing and drying of the silicon wafers throughout
the manufacturing process, and at many different sites throughout the
manufacturing facility, is one of the array of methods traditionally utilized to
reduce contamination. Wafer surfaces are typically cleaned by exposing the wafer
to toxic acids which remove organic materials, such as polymers and photoresist
residues, and inorganic materials, such as metals and salts. Chemical processes
are used to prepare wafer surfaces. After the wafer surfaces have been cleaned
and prepared, the wafers are generally rinsed with de-ionized water to remove
chemicals and as many particles as possible and are then dried before proceeding
to the next series of operations. The effect of the cleaning process can,
however, be undermined by conventional rinsing and drying equipment which,
instead of thoroughly removing particles, can add particles or other defects to
the wafer surface. Further, conventional wet processing equipment can produce
variable results and does not provide a cost effective means to improve
production yields.
Photomasks, flat panel displays, and magnetic and optical disks, are
manufactured using many of the same cleaning, rinsing, and drying processes as
semiconductor manufacturing. As a result, the Company believes that its products
may provide similar benefits to manufacturers in these industries.
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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 clean, rinse and dry system that
integrates the Company's patented Surface Tension Gradient ("STG") drying
technology and the CleanPoint wafer 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 on wafers
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 cleaning capability in addition to the cleaning, rinsing, and
drying capabilities found on the Omega 2000 product. The HF cleaning module
allows more thorough cleaning of certain types of processed wafers than the
Omega 2000. The Company procures the HF cleaning 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
- Minimal moving parts provide higher system reliability and reduced
equipment maintenance cost
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- 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 for 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. See "Risk Factors -- Need to Develop New Products and Technologies."
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 for 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. In addition, the
Company has also marketed its products for use in the manufacturing processes 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 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
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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 for any succeeding period. Further, all potential sales will depend
on final delivery and testing of the equipment. See "Risk
Factors -- Fluctuations in Quarterly Results."
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 an 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. See "Risk Factors -- Dependence on Key
Suppliers."
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 its 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 that period. For 1996, research and
development expenses were $1,223,002.
The market for the Company's products 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. The Company currently has twelve full time employees whose
duties include 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
co-operative 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. See "Risk Factors -- Need to Develop New
Products and Technologies."
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 patented
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. See "Risk
Factors -- Dependence on Proprietary Technology; Expense and Risk of Patent
Litigation."
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 Dai 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. See "Risk
Factors -- Intense Competition; Uncertain Market Acceptance."
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.
27
<PAGE> 29
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.
FACILITIES
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. The Company intends to use a portion of the
potential proceeds from the Class A warrant exercise to construct and equip new
manufacturing and office facilities. Such new facilities should provide
expansion capacity for manufacturing operations and corporate functions for the
next twelve months.
LITIGATION
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. See "Risk Factors -- Dependence on Proprietary Technology;
Expense and Risk of Patent Litigation."
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<PAGE> 30
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages as of
December 31, 1996 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) Member 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
29
<PAGE> 31
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. See "Description of Securities -- Delaware Law and Certain Charter
Provisions."
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.
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>
LONG-TERM
COMPENSATION
ANNUAL -------------
COMPENSATION SECURITIES ALL OTHER
------------ UNDERLYING ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS COMPENSATION
- -------------------------------------------------- ----- ------------ ------------- ------------
<S> <C> <C> <C> <C>
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 $131,461 45,000 --
</TABLE>
- ---------------
(1) Represents automobile allowance payments.
(2) Mr. Ciano resigned from the Company in November 1996.
STOCK OPTION INFORMATION
The following table contains information concerning stock option grants to
the Named Executive Officers in 1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
NUMBER OF OPTIONS/SARS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR
OPTIONS/SARS IN FISCAL BASE PRICE EXPIRATION
NAME GRANTED YEAR ($/SH) 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.
30
<PAGE> 32
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.
STOCK PLANS
1995 Stock Option Plans. The Board of Directors has reserved 500,000
shares of Common Stock (250,000 shares are subject to stockholder approval) for
issuance under the Company's 1995 Stock Option Plan (the "Option Plan"). As of
December 31, 1996, there were outstanding options to purchase 272,750 shares
under the Option Plan. Options may be granted to employees (including officers),
consultants, advisors 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 are generally immediately exercisable, vest over four years and must
be exercised within ten years. As of December 31, 1996, none of the options
granted under the Option Plan were vested.
Prior to the adoption of the Option Plan in September 1995, the Company
granted options to purchase shares of Class A Common Stock under a separate
option plan (the "Prior Plan"). A total of 270,037 shares of Class A Common
Stock remain subject to outstanding options. 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 which terminate or
are cancelled will not be issued or used for new options. As of December 31,
1996, options under the Prior Plan to purchase a total of 204,155 shares of
Class A Common Stock were vested and exercisable.
1995 Outside Directors Stock Option Plan. 100,000 shares of Common Stock
have been reserved for issuance under the Company's 1995 Outside Directors Stock
Option Plan (the "Directors Plan"). As of December 31, 1996, options to purchase
40,000 shares have been granted under the Directors Plan. 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 will automatically be granted an
option to purchase 20,000 shares of Common Stock on 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 are immediately exercisable but vest over four
years and generally must be exercised within ten years. As of December 31, 1996,
options under the Directors Plan to purchase a total of 10,000 shares of Common
stock were vested and exercisable.
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<PAGE> 33
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. See "-- Stock Plans -- 1995 Outside Directors Stock Option Plan." The
Company does not pay additional amounts for committee participation or special
assignments of the Board of Directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law, the
Company has adopted provisions in its Certificate of Incorporation which provide
that directors of the Company shall not be personally liable for monetary
damages to the Company or its stockholders for a breach of fiduciary duty as a
director, except for liability as a result of (i) a breach of the director's
duty of loyalty to the Company or its stockholders; (ii) acts or omissions not
in good faith or which involve intentional misconduct or knowing violation of
law; (iii) an act related to the unlawful stock repurchase or payment of a
dividend under Section 174 of Delaware General Corporation Law; and (iv)
transactions from which the director derived an improper personal benefit. Such
limitation of liability does not affect the availability of equitable remedies
such as injunctive relief or rescission.
The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, by bylaws, agreements or
otherwise, to the full extent permitted under Delaware law. The Company has
entered into separate indemnification agreements with its directors and officers
which are, in some cases, be broader than the specific indemnification
provisions contained in the Delaware General Corporation Law. The
indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
CERTAIN 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.
32
<PAGE> 34
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's capital stock as of December 31, 1996, and as
adjusted to reflect the exercise of the Class A Warrants, (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>
PERCENTAGE OWNERSHIP OF
ALL COMMON
STOCK OUTSTANDING(2)
--------------------------- PERCENTAGE OF
BEFORE AFTER VOTING POWER
NUMBER OF EXERCISE OF EXERCISE OF AFTER EXERCISE
SHARES BENEFICIALLY CLASS A CLASS A OF CLASS A
BENEFICIAL OWNER OWNED(1) WARRANTS WARRANTS(3) WARRANTS
- ---------------------------------- --------------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Raj Mohindra...................... 1,102,123(4) 30.2% 19.2% 36.1%
Abhay K. Bhushan.................. 312,605(5) 9.0 5.5 10.2
Suraj Puri........................ 220,804(6) 6.4 3.9 7.0
Bernard Slade..................... 124,587(7) 3.6 2.2 3.9
Ram Paul Gupta.................... 49,171(8) 1.4 * 1.1
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 32.1 57.2
</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 outstanding, 1,495,000
shares of Common Stock outstanding before the warrant exercise and
3,710,000 shares of Common Stock outstanding after the warrant exercise,
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) Assumes exercise of all 2,215,000 outstanding Class A Warrants.
(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.
33
<PAGE> 35
(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. Gupta.
(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.
34
<PAGE> 36
DESCRIPTION OF SECURITIES
GENERAL
The Company's authorized capital stock consists of 22,229,927 shares of
Common Stock, par value $.001 per share, including 2,229,927 shares of Class A
Common Stock and 20,000,000 shares of Common Stock, and 5,000,000 shares of
Preferred Stock, par value $.001 per share (the "Preferred Stock"). As of
December 31, 1996, there were outstanding 1,912,111 shares of Class A Common
Stock held by 66 holders and 1,495,000 shares of Common Stock held by eight
holders of record, and the Company believes that there are more than 300
beneficial holders of Common Stock.
COMMON STOCK AND CLASS A COMMON STOCK
The rights of the holders of the Common Stock and the Class A Common Stock
are essentially identical, except that: (i) the holders of the Common Stock are
entitled to one vote per share and holders of Class A Common Stock are entitled
to five votes per share with respect to all matters on which holders of the
Company's Common Stock are entitled to vote, (ii) if stock dividends, splits,
distributions, reverse splits, combinations, reclassification of shares, or
other recapitalizations (collectively, "recapitalizations") are declared or
effected, such recapitalizations shall be effected in a like manner with respect
to the Common Stock and the Class A Common Stock, except that payments in shares
of capital stock shall be paid in Common Stock with respect to Common Stock and
Class A Common Stock with respect to Class A Common Stock, and (iii) shares of
Class A Common Stock are convertible into Common Stock on a share-for-share
basis at the option of the holder at any time and all remaining shares of Class
A Common Stock will automatically be converted to Common Stock at such time as
there are fewer than 400,000 shares of Class A Common Stock outstanding.
In addition, the shares of Class A Common Stock are automatically converted
into shares of Common Stock upon their transfer to any person other than the
following transferees (the "Permitted Transferees"): (a) the spouse of a Class A
Common Stockholder; (b) any lineal descendants of a Class A Common Stockholder,
including adopted children (said descendants, together with the Class A Common
Stockholder and his or her spouse are hereinafter referred to as "Family
Members); (c) a trust for the sole benefit of a Class A Common Stockholder's
Family Members; (d) a partnership made up exclusively of Class A Common
Stockholders and their Family Members or a corporation wholly owned by Class A
Common Stockholders and their Family Members, and (e) to any of its partners or
stockholders as long as such partner or stockholder was a partner or stockholder
of the transferor at the time a transferor acquired its Class A Common Stock or
is a Permitted Transferee. There will be no trading market for the Class A
Common Stock.
Holders of the Common Stock and Class A Common Stock have equal ratable
rights to dividends from funds legally available therefor, when, as and if
declared by the Board of Directors, and are entitled to share ratably, as a
single class, in all of the assets of the Company available for distribution to
holders of shares of Common Stock and Class A Common Stock upon the liquidation,
dissolution or winding up of the affairs of the Company. Holders of Common Stock
or Class A Common Stock do not have preemptive or subscription rights. There are
no redemption or sinking fund provisions for the benefit of the Common Stock or
Class A Common Stock in the Company's Certificate of Incorporation. All
outstanding shares of Class A Common Stock are, and those shares of Common Stock
offered hereby will be, validly issued, fully paid and non-assessable. Since the
Common Stock does not have cumulative voting rights and, therefore, holders of
shares entitled to exercise more than 50% of the voting power are able to elect
all of the Directors of the Company, these voting provisions will result in the
existing directors and officers retaining control over the Company, despite any
accumulation of Common Stock by third parties.
The difference in voting rights described above increases the voting power
of the Class A Common Stockholders and accordingly has an anti-takeover effect.
The existence of the Class A Common Stock may make the Company a less attractive
target for a hostile takeover bid or render more difficult or discourage a
merger proposal, an unfriendly tender offer, a proxy contest, or the removal of
incumbent management, even if such transactions were favored by the stockholders
of the Company other than the Class A Common
35
<PAGE> 37
Stockholders. Thus, the stockholders may be deprived of an opportunity to sell
their shares at a premium over prevailing market prices in the event of a
hostile takeover bid. Those seeking to acquire the Company through a business
combination will be compelled to consult first with the holders of large numbers
of Class A Common Stock in order to negotiate the terms of such business
combination. Any such proposed business combination will have to be approved by
the Board of Directors, may be under the control of the Class A Common
Stockholders, and if stockholder approval were required, the approval of the
Class A Common Stockholders will be necessary before any such business
combination can be consummated.
WARRANTS
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, provided that at such time a
current prospectus relating the underlying Common Stock and Class B Warrants is
in effect and the underlying Common Stock and Class B Warrants are qualified for
sale or exempt from qualification under applicable state securities laws. The
Class A Warrants are subject to redemption, as described below.
Class B Warrants. The holder of each Class B Warrant is entitled to
purchase one share of Common Stock at an exercise price of $11.00. Unless
previously redeemed, the Class B Warrants are exercisable at any time until
November 21, 2000, provided that at such time a current prospectus relating to
the underlying Common Stock is then in effect and the underlying Common Stock is
qualified for sale or exempt from qualification under applicable state
securities laws. The Class B Warrants are subject to redemption, as described
below.
Redemption. The Class A Warrants are subject to redemption by the Company,
on not less than 30 days written notice, at a price of $.05 per Class A Warrant,
if the average closing bid price of the Common Stock for any 30 consecutive
business days ending within 15 days of the date on which the notice of
redemption is given exceeds $9.80 per share. The Class B Warrants are subject to
redemption by the Company on not less than 30 days' written notice, at a price
of $.05 per Class B Warrant, if the average closing bid price of the Common
Stock for any 30 consecutive business days ending within 15 days of the date on
which the notice of redemption is given exceeds $15.40 per share. Holders of
Warrants will automatically forfeit their rights to purchase the shares of
Common Stock (and Class B Warrants in the case of the Class A Warrants) issuable
upon exercise of such Warrants unless the Warrants are exercised before the
close of business on the business day immediately prior to the date set for
redemption. All of the outstanding Warrants of a class, except for those
underlying the Unit Purchase Option, must be redeemed if any of that class are
redeemed. A notice of redemption shall be mailed to each of the registered
holders of the Warrants of a class, except for those underlying the Unit
Purchase Option, by first class mail, postage prepaid. The notice of redemption
shall specify the redemption price, the date fixed for redemption, the place
where the Warrant certificates shall be delivered and the redemption price to be
paid, and that the right to exercise the Warrants shall terminate at 5:00 p.m.
(New York City time) on the business day immediately preceding the date fixed
for redemption.
General. The Warrants may be exercised upon surrender of the
certificate(s) therefor on or prior to the earlier of their expiration or the
redemption date (as explained above) at the offices of the Company's warrant
agent (the "Warrant Agent") with the form of "Election to Purchase" on the
reverse side of the certificate(s) filled out and executed as indicated,
accompanied by payment (in the form of certified or cashier's check payable to
the order of the Company) of the full exercise price for the number of Warrants
being exercised.
The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price in certain events, such as stock
dividends, stock splits, mergers, certain issuances of Common Stock below fair
market value, sale of substantially all of the Company's assets, and for other
extraordinary events in order to enable the holders of the Warrants to obtain
the same or equivalent rights which they would have obtained if the Warrants had
been exercised prior to the event.
The Company is not required to issue fractional shares of Common Stock, and
in lieu thereof will make a cash payment based upon the current market value of
such fractional shares. The holder of a Warrant will not possess any rights as a
stockholder of the Company unless and until he exercises the Warrant.
36
<PAGE> 38
UNIT PURCHASE OPTION
The Company has granted to the designees of D.H. Blair Investment Banking
Corp., the underwriter of the Company's initial public offering and the
Solicitation Agent, the Unit Purchase Option to purchase up to 130,000 Units,
each Unit consisting of one share of Common Stock, one Class A Warrant and one
Class B Warrant. These Warrants will be identical to the Warrants described
above except that the Class A Warrants and the Class B Warrants included in the
Unit Purchase Option will not be subject to redemption by the Company, unless at
the time the Warrants are called for redemption, the Unit Purchase Option has
been exercised and the underlying Warrants are outstanding. The Unit Purchase
Option is exercisable during the three-year period commencing November 21, 1997
at an exercise price of $7.00 per Unit subject to adjustment in certain events
to protect against dilution. The holders of the Unit Purchase Option have
certain demand and piggyback registration rights. The existence of the Unit
Purchase Option and the inability of the Company to redeem the Warrants included
therein may hinder the Company's future financing or business transactions. See
"Plan of Distribution."
PREFERRED STOCK
General. 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. In designating
any series of Preferred Stock, the Board may, without further action by the
holders of Common Stock, fix the number of shares constituting that series and
fix the dividend rights, dividend rate, conversion rights, voting rights (which
may be greater or lesser than the voting rights of the Common Stock), rights and
terms of redemption (including any sinking fund provisions), and the liquidation
preferences of the series of Preferred Stock. It is to be expected that the
holders of any series of Preferred Stock, when and if issued, will have priority
claims to dividends and to any distributions upon liquidation of the Company,
and that they may have other preferences over the holders of the Common Stock.
The Board may issue series of Preferred Stock without action of the
stockholders of the Company. Accordingly, the issuance of Preferred Stock may
adversely affect the rights of the holders of the Common Stock. In addition, the
issuance of Preferred Stock may be used as an "anti-takeover" device without
further action on the part of the stockholders. Issuance of Preferred Stock may
dilute the voting power of holders of Common Stock (such as by issuing Preferred
Stock with super-voting rights) and may render more difficult the removal of
current management, even if such removal may be in the stockholders' best
interests. The Company has no current plans to issue any of the Preferred Stock.
DELAWARE SECTION 203
As a Delaware corporation, the Company is subject to Section 203 of the
Delaware General Corporation Law ("Section 203"), which regulates large
accumulations of shares, including those made by tender offers. Section 203 may
have the effect of significantly delaying a purchaser's ability to acquire the
entire interest in the Company if such acquisition is not approved by the
Company's Board. In general, Section 203 prevents an "Interested Stockholder"
(defined generally as a person with 15% or more of a corporation's outstanding
voting stock) from engaging in a "Business Combination" (defined below) with a
Delaware corporation for three years following the date such person became an
Interested Stockholder. For purposes of Section 203, the term "Business
Combination" is defined broadly to include mergers and certain other
transactions with or caused by the Interested Stockholder; sales or other
dispositions to the Interested Stockholder (except proportionately with the
corporation's other stockholders) of assets of the corporation or a subsidiary
equal to ten percent or more of the aggregate market value of the corporation's
consolidated assets or its outstanding stock; the issuance or transfer by the
corporation or a subsidiary of stock of the corporation or such subsidiary to
the Interested Stockholder (except for transfers in a conversion or exchange or
a pro rata distribution or certain other transactions, none of which increase
the Interested Stockholder's proportionate ownership of any class or series of
the corporation's or such subsidiary's stock); or receipt by the Interested
Stockholder (except proportionately as a stockholder), directly or indirectly,
of any loans, advances, guarantees, pledges or other financial benefits provided
by or through the corporation or a subsidiary.
37
<PAGE> 39
The three-year moratorium imposed on Business Combinations by Section 203
does not apply if: (a) prior to the date on which a stockholder becomes an
Interested Stockholder, the Board approves either the Business Combination or
the transaction which resulted in the person becoming an Interested Stockholder;
(b) the Interested Stockholder owns 85% of the corporation's voting stock upon
consummation of the transaction which made him or her an Interested Stockholder
(excluding from the 85% calculation shares owned by directors who are also
officers of the target corporation and shares held by employee stock plans which
do not permit employees to decide confidentially whether to accept a tender or
exchange offer); or (c) on or after the date a person becomes an Interested
Stockholder, the Board approves the Business Combination, and it is also
approved at a stockholder meeting by sixty-six and two-thirds percent (66 2/3%)
of the voting stock not owned by the Interested Stockholder.
Under Section 203, the restrictions described above do not apply if, among
other things, the corporation's original certificate of incorporation contains a
provision expressly electing not to be governed by Section 203. The Company's
Certificate of Incorporation does not contain such a provision. The restrictions
described above also do not apply to certain Business Combinations proposed by
an Interested Stockholder following the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
had not been an Interested Stockholder during the previous three years or who
became an Interested Stockholder with the approval of a majority of the
corporation's directors.
TRANSFER AND WARRANT AGENT.
The Transfer Agent for the Common Stock and Warrants and the Warrant Agent
for the Warrants is American Stock Transfer & Trust Company, New York, New York.
PLAN OF DISTRIBUTION
The Company has agreed, in connection with the exercise of Warrants
pursuant to solicitation by the Solicitation Agent, to pay to the Solicitation
Agent a fee of 5% of the Warrant exercise price, a portion of which may be
reallowed to any dealer who is a member of the NASD who solicited the exercise
(which may also be the Solicitation Agent) for each Warrant exercised, if (i)
the market price of the Common Stock of the Company at the time of exercise is
higher than the exercise price of the Warrants; (ii) the Warrants are not held
in any discretionary account; (iii) disclosure of compensation arrangements was
made both at the time of the Company's initial public offering and in documents
provided to holders of the Warrants at the time of exercise; (iv) the exercise
of the Warrants is solicited by a member of the NASD as designated in writing on
the Warrant Certificate Subscription Form; and (v) the solicitation of exercise
of the Warrants was not in violation of Rule 10b-6 promulgated under the 1934
Act. The Company has agreed not to solicit Warrant exercises other than through
the Solicitation Agent.
Regulation M promulgated under the 1934 Act may prohibit Blair & Co. from
engaging in any market making activities with regard to the Company's securities
for the period from five business days (or such other applicable period as
Regulation M may provide) prior to any solicitation by the Solicitation Agent of
the exercise of Warrants until the later of the termination of such solicitation
activity or the termination (by waiver or otherwise) of any right that the
Solicitation Agent may have to receive a fee for the exercise of Warrants
following such solicitation. As a result, Blair & Co. may be unable to provide a
market for the Company's securities during certain periods while the Warrants
are exercisable.
The Company has agreed to indemnify the Solicitation Agent against certain
liabilities, including liabilities under the Securities Act.
The Solicitation Agent has the right to designate one member of the
Company's board of directors until November 2000. The Solicitation Agent has
informed the Company that it has not yet and does not currently intend to
designate a board member.
Until November 2000, in the event the Solicitation Agent originates a
merger, acquisition, joint venture or transaction to which the Company is a
party, the Solicitation Agent will be entitled to receive a finder's fee
38
<PAGE> 40
in consideration for origination of such transaction. The fee is based on a
percentage of the consideration paid in the transaction ranging from 7% of the
first $1,000,000 to 2.5% of any consideration in excess of $9,000,000.
The Solicitation Agent has informed the Company that the Securities and
Exchange Commission is conducting an investigation concerning various business
activities of the Solicitation Agent and Blair & Co. The investigation appears
to be broad in scope, involving nearly all aspects of the Solicitation Agent's
and Blair & Co.'s compliance with the Federal securities laws in offerings of
securities, purchases and sales of securities, market-making activities and
securities sales practices during the period from January 1, 1985 to the
present. The Company has been advised by the Solicitation Agent that the
investigation has been ongoing since at least 1989 and that they are cooperating
with the investigation. The Company has been advised that the Solicitation Agent
cannot predict whether this investigation will ever result in any type of formal
enforcement action against the Underwriter or, if so, whether any such action
might have an adverse effect on the Solicitation Agent or the securities offered
hereby. The Company has been advised that Blair & Co. makes a market in the
Company's securities. An unfavorable resolution of the Commission's
investigation could have the effect of limiting or terminating such firm's
ability to make a market in the Company's securities, which could affect the
liquidity and price of such securities.
LEGAL MATTERS
The validity of the securities offered hereby is being passed upon by Gray
Cary Ware & Freidenrich, A Professional Corporation ("GCWF"). An investment
partnership composed of certain current and former attorneys of GCWF owns an
aggregate of 5,027 shares of Class A Common Stock, 497 Class A Warrants and
1,016 Class B Warrants, which Warrants are included in the Selling
Securityholder Warrants.
EXPERTS
The financial statements of YieldUp International Corporation as of
December 31, 1996, and for each of the years in the two-year period ended
December 31, 1996, have been included herein and in the registration statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
39
<PAGE> 41
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Balance Sheet as of December 31, 1996................................................. F-3
Statements of Operations for the years ended December 31, 1996 and 1995............... F-4
Statements of Stockholders' Equity for the years ended December 31, 1996 and 1995..... F-5
Statements of Cash Flows for the years ended December 31, 1996 and 1995............... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 42
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
YieldUP International Corporation:
We have audited the accompanying balance sheet of YieldUP International
Corporation (the Company), 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. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of YieldUP International
Corporation as of December 31, 1996, and the results of its operations and its
cash flows for each of the years in the two-year period then ended in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, 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 also described in Note 1. 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 5, 1997
F-2
<PAGE> 43
YIELDUP INTERNATIONAL CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31
1996
-----------
<S> <C>
ASSETS
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:
$.001 par value; 2,229,927 shares authorized; 1,912,111 shares issued and
outstanding; each share is entitled to five votes.......................... 1,912
Common stock:
$.001 par value; 20,000,000 shares authorized; 1,495,000 shares issued and
outstanding; each share is entitled to one vote............................ 1,495
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
F-3
<PAGE> 44
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................................................... 129,563 28,228
----------- -----------
Interest expense.................................................. (24,756) (218,500)
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
F-4
<PAGE> 45
YIELDUP INTERNATIONAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A NOTES
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL RECEIVABLE
----------------- ------------------ ------------------ PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS
-------- ------ --------- ------ --------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1994........ 127,950 $128 1,537,298 $1,537 -- $ -- $ 384,780 $ (9,200)
Sale of Series B preferred stock........ 54,828 55 -- -- -- -- 143,895 --
Sale of Series C preferred stock........ 174,955 175 -- -- -- -- 869,861 (33,064)
Repurchase of Class A common stock from
terminated employee................... -- -- (21,719) (22) -- -- (2,978) --
Sale of Class A common stock............ -- -- 6,586 7 -- -- 4,543 --
Exercise of Class A common stock
options............................... -- -- 30,403 30 -- -- 20,970 --
Conversion of preferred stock into Class
A common stock........................ (357,733) (358) 357,733 358 -- -- -- --
Payment of notes receivable............. -- -- -- -- -- -- -- 983
Sale of common stock warrants, net...... -- -- -- -- -- -- 172,582 --
Initial public offering of common stock,
net of $1,496,856 issuance costs...... -- -- -- -- 1,495,000 1,495 5,976,649 --
Net loss................................ -- -- -- -- -- -- -- --
-------- ---- --------- ------ --------- ------ ---------- --------
Balances as of December 31, 1995........ -- -- 1,910,301 1,910 1,495,000 1,495 7,570,302 (41,281)
Exercise of Class A common stock
options............................... -- -- 1,810 2 -- -- 1,248 --
Payment of notes receivable............. -- -- -- -- -- -- -- 25,933
Net loss................................ -- -- -- -- -- -- -- --
-------- ---- --------- ------ --------- ------ ---------- --------
Balances as of December 31, 1996........ -- $ -- 1,912,111 $1,912 1,495,000 $1,495 $7,571,550 $(15,348)
======== ==== ========= ====== ========= ====== ========== ========
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
----------- -------------
<S> <C> <C>
Balances as of December 31, 1994........ $ (390,314) $ (13,069)
Sale of Series B preferred stock........ -- 143,950
Sale of Series C preferred stock........ -- 836,972
Repurchase of Class A common stock from
terminated employee................... -- (3,000)
Sale of Class A common stock............ -- 4,550
Exercise of Class A common stock
options............................... -- 21,000
Conversion of preferred stock into Class
A common stock........................ -- --
Payment of notes receivable............. -- 983
Sale of common stock warrants, net...... -- 172,582
Initial public offering of common stock,
net of $1,496,856 issuance costs...... -- 5,978,144
Net loss................................ (1,830,023) (1,830,023)
----------- ----------
Balances as of December 31, 1995........ (2,220,337) 5,312,089
Exercise of Class A common stock
options............................... -- 1,250
Payment of notes receivable............. -- 25,933
Net loss................................ (3,374,035) (3,374,035)
----------- ----------
Balances as of December 31, 1996........ $(5,594,372) $ 1,965,237
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 46
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
F-6
<PAGE> 47
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 during
several steps in the manufacturing process for semiconductors 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, plant 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.
F-7
<PAGE> 48
YIELDUP INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 AND 1995
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.
F-8
<PAGE> 49
YIELDUP INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 AND 1995
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.
(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 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:
F-9
<PAGE> 50
YIELDUP INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 AND 1995
<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>
(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.
F-10
<PAGE> 51
YIELDUP INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 AND 1995
(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>
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.
F-11
<PAGE> 52
YIELDUP INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 AND 1995
(6) STOCKHOLDERS' EQUITY
Common Stock And Class A Common Stock
The terms of the Common Stock and the Class A Common Stock are essentially
identical, except that: (i) the holders of the Common Stock are entitled to one
vote per share and holders of Class A Common Stock are entitled to five votes
per share, (ii) if stock dividends, splits, distributions, reverse splits,
combinations, reclassification of shares, or other recapitalizations
(collectively, 'recapitalizations') are declared or effected, such
recapitalizations shall be effected in a like manner with respect to the Common
Stock and the Class A Common Stock, except that payments in shares of capital
stock shall be paid in Common Stock with respect to Common Stock and Class A
Common Stock with respect to Class A Common Stock, and (iii) shares of Class A
Common Stock are convertible into Common Stock on a share-for-share basis at the
option of the holder at any time and all remaining shares of Class A Common
Stock will automatically be converted to Common Stock as such time as there are
fewer than 400,000 shares of Class A Common Stock outstanding.
In addition, the shares of Class A Common Stock are automatically converted
into shares of Common Stock upon their transfer to any person other than the
permitted transferees which are mainly the stockholders family members.
Since the Common Stock does not have cumulative voting rights and,
therefore, holders of shares entitled to exercise more than 50% of the voting
power are able to elect all of the Directors of the Company, these voting
provisions will result in the existing directors and officers retaining control
over the Company, despite any accumulation of Common Stock by third parties.
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 to the founders of the Company subject to the Company's right to
repurchase the stock at the original issuance price, $0.14 per share. The right
to repurchase the stock is only exercisable if and when the owners of those
shares cease providing services to the Company. 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.
F-12
<PAGE> 53
YIELDUP INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 AND 1995
As of December 31, 1996, no warrants have been exercised or redeemed.
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 on
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
Granted 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.
F-13
<PAGE> 54
YIELDUP INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 AND 1995
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 with an exercise price in excess of 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>
F-14
<PAGE> 55
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY ANY SELLING SECURITYHOLDER, THE COMPANY OR THE
SOLICITATION AGENT. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 14
Dividend Policy....................... 14
Price Range of Common Stock........... 14
Capitalization........................ 15
Selected Financial Data............... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 21
Management............................ 29
Certain Transactions.................. 32
Principal Stockholders................ 33
Description of Securities............. 35
Plan of Distribution.................. 38
Legal Matters......................... 39
Experts............................... 39
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
YIELDUP
INTERNATIONAL
CORPORATION
2,215,000 SHARES OF COMMON STOCK
2,215,000 CLASS B WARRANTS
4,160,000 SHARES OF COMMON STOCK
ISSUABLE ON EXERCISE OF CLASS B WARRANTS
130,000 UNITS
------------------
PROSPECTUS
------------------
, 1997
======================================================
<PAGE> 56
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors, and other corporate agents under certain circumstances
and subject to certain limitations. The Registrant's Certificate of
Incorporation and By-Laws provide that the Registrant shall indemnify its
directors, officers, employees and agents to the full extent permitted by
Delaware General Corporation Law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. In addition, the
Registrant has entered into separate indemnification agreements with its
directors and officers which would require the Registrant, among other things,
to indemnify them against certain liabilities which may arise by reason of their
status or service (other than liabilities arising from willful misconduct of a
culpable nature) and to maintain directors' and officers' liability insurance,
if available on reasonable terms.
These indemnification provisions and the indemnification agreement entered
into between the Registrant and its officers and directors may be sufficiently
broad to permit indemnification of the Registrant's officers and directors for
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters named therein of the
Registrant and its officers and directors for certain liabilities arising under
the Securities Act, or otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the securities underlying the Class A Warrants. All amounts shown are
estimates except for the Nasdaq fee.
<TABLE>
<S> <C>
Nasdaq SmallCap Market fee...................................... $ 17,500
Blue sky qualification fees and expenses........................ 25,000
Printing and engraving expenses................................. 30,000
Legal fees and expenses......................................... 25,000
Accounting fees and expenses.................................... 25,000
Transfer agent and registrar fees............................... 10,000
Miscellaneous................................................... 15,000
--------
Total................................................. $147,500
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In the last three years the Registrant has sold and issued the following
unregistered securities:
(1) In July and August 1994, the Company issued approximately 238,000
shares of Common Stock to 11 employees and consultants (including Rudolph
Svejkovsky, George Plaut and Jeffrey Nowell) and Pramod Bansal and Raj
Mashruwala for an aggregate consideration of $32,845.
(2) From August through December 1994, the Company issued 127,950
shares of Series A Preferred Stock to 13 investors, including Steven Slade,
John Konop, Thomas Singer, Marie Dixon, Kevin Culkin, Richard Posey, Craig
Frolich, Michael Masciorini, Aaron Cohn, Eric Slade, Walter Masciorini,
Pramod Bansal and John Jubin, and two employees for an aggregate
consideration of $176,750.
(3) In January 1995, the Company issued 54,828 shares of Series B
Preferred Stock to 11 investors including Eric Slade, Deborah Tedeschi,
Ruth Epstein, John Konop, Richard Posey, Walter Masciorini, JKR & Co. (Jack
Kemp), Aaron Cohn, Kevin Culkin, Michael Masciorini and Craig Frolich for
an
II-1
<PAGE> 57
aggregate consideration of $151,500, and approximately 114,000 shares of
Series C Preferred Stock to six investors including Adolph Bohn, Henri
Zimmerli, Teltec GmbH (of which Mr. Bohn is President), Teltec SA (of which
Mr. Zimmerli is President), the Margaret and Stanly Shatsky Trust (of which
Stanly Shatsky is a trustee) and Jaideep Puri for an aggregate
consideration of approximately $567,000.
(4) From June through August 1995, the Company issued approximately
61,000 shares of Series C Preferred Stock to 12 investors, including Ram
Paul Gupta (a director of the Company), John and Joan Anderson, Sandrine
Weinbender, Manju Bansal, Rishi Bansal, Ashish Bansal, David Slone, Richard
Ogawa, K.T. Cherian, Pyare Lal Khanna, Suraj Puri (a director of the
Company), Masaharu Shinya, Raj Rajaratnam, Wolfe/Axelrod Associates (Steven
Axelrod, general partner) and GCW&F Partners II (Howard Clowes, executive
officer of corporate general partner), for an aggregate consideration of
approximately $300,000.
(5) In September 1995, the Company issued promissory notes and
warrants to 19 accredited investors for an aggregate consideration of
$1,000,000.
(6) From April through August 1995, the Company has granted options to
purchase approximately 350,000 shares of Common Stock to employees and
consultants (including Sanjeev Chitre, Eric Slade, Michael Masciorini,
Irwin Rosenthal and Craig Frolich), 34,025 of which have been exercised for
an aggregate exercise price of approximately $23,500.
There were no underwriters employed in connection with any of the
transactions set forth in Item 26.
The issuances described in Items 26(1) through 26(5) were exempt from
registration under the Securities Act because they did not involve a public
offering. The issuances described in Item 26(6) did not involve a public
offering and were also exempt from registration under the Securities Act in
reliance on Rule 701 promulgated thereunder as transactions pursuant to
compensatory benefit plans and contracts relating to compensation. The
recipients of securities in each such transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and other instruments issued in such transactions.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ----------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
1.2* Form of Unit Purchase Option between the Company and D. H. Blair Investment
Banking Corp.
1.3* Form of letter agreement, to be dated as of the effective date, between the
Registrant and D. H. Blair Investment Banking Corp.
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.
5.1* Opinion of Gray Cary Ware & Freidenrich.
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.
10.4* Subscription Agreement between the Company, D. H. Blair Investment Banking
Corp. and certain investors, dated September 29, 1995.
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 pro forma net loss per share.
</TABLE>
II-2
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ----------------------------------------------------------------------------
<C> <S>
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2* Consent of Gray Cary Ware & Freidenrich (included in Exhibit 5.1).
24.1* Power of Attorney.
27* Financial Data Schedule.
99 Form of Redemption Notice.
</TABLE>
- ---------------
* Previously filed.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liabilities under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 24 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 59
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Amendment to
Registration Statement to be signed on its behalf by the undersigned, in the
County of Santa Clara, City of Mountain View, California, on the 28th day of
February, 1997.
YIELDUP INTERNATIONAL CORPORATION
By: /s/ RAJ MOHINDRA
------------------------------------
Raj Mohindra
President and Chief Executive
Officer
(Principal Executive Officer)
In accordance with the requirements of the Securities Act, this
post-effective amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- --------------------------------- ------------------
<S> <C> <C>
/s/ RAJ MOHINDRA Chief Executive Officer and February 28, 1997
- ------------------------------------- Director (Principal Executive
Raj Mohindra Officer)
/s/ SCOTT M. GIBSON Chief Financial Officer February 28, 1997
- ------------------------------------- (Principal Financial and
Scott M. Gibson Accounting Officer)
SURAJ PURI* Vice President, Chief Technical February 28, 1997
- ------------------------------------- Officer and Director
Suraj Puri
RAM PAUL GUPTA* Director February 28, 1997
- -------------------------------------
Ram Paul Gupta
ABHAY K. BHUSHAN* Director February 28, 1997
- -------------------------------------
Abhay K. Bhushan
WILLIAM W.R. ELDER* Director February 28, 1997
- -------------------------------------
William W.R. Elder
Director
- -------------------------------------
Bernard Slade
*By: /s/ RAJ MOHINDRA February 28, 1997
------------------------
Raj Mohindra,
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 60
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement, (draft dated November 14, 1995).
1.2* Form of Unit Purchase Option between the Company and the Underwriter (draft dated
November 14, 1995).
1.3* Form of letter agreement, to be dated as of the effective date, between the
Registrant and the Underwriter.
3.1* Certificate of Incorporation to be filed prior to effectiveness of the Offering.
3.2* Certificate of Incorporation to be filed after effectiveness of the Offering.
3.3* Bylaws.
4.1* Form of Warrant Agreement between the Company and the Warrant Agent, including the
form of warrants.
5.1* Opinion of Gray Cary Ware & Freidenrich.
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.
10.4* Subscription Agreement between the Company, the Underwriter and certain investors,
dated September 29, 1995.
10.5* Facilities lease between the Company and Lori A. Halligan Trust, dated September
11, 1995.
10.6* Lease between the Company and Cooper-Imbernon dated April 4, 1995.
10.7* Loan and Security Agreement with Silicone Valley Bank dated September 16, 1996.
11.1* Statement regarding computation of pro forma net loss per share.
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2* Consent of Gray Cary Ware & Freidenrich (included in Exhibit 5.1).
24.1* Power of Attorney.
27 * Financial Data Schedule.
99 Form of Redemption Notice.
</TABLE>
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* Previously filed.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
YieldUP International Corporation
We consent to the use of our report dated February 5, 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, and to the references to
our firm under the heading "Experts" and "Selected Financial Data" in the
prospectus.
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 28, 1997
<PAGE> 1
EXHIBT 99
YIELDUP INTERNATIONAL CORPORATION
REDEMPTION NOTICE
CLASS A WARRANTS
YieldUP International Corporation, a Delaware corporation (the
"Company"), hereby delivers notice that all outstanding Class A Warrants of the
Company will be redeemed pursuant to the Warrant Agreement by and among the
Company, American Stock Transfer & Trust Company, and D.H. Blair Investment
Banking Corp.
Pursuant to Section 8(c) of the Warrant Agreement, holders of Class A
Warrants are hereby informed as follows:
(i) The Redemption Price is $.05 per Class A Warrant;
(ii) The Redemption Date is April __, 1997;
(iii) All Warrant Certificates which are to be redeemed shall be
delivered to the offices of American Stock Transfer & Trust Company,
__________________, after which delivery the Redemption Price will be paid to
the registered holder of such Warrant Certificate;
(iv) D.H. Blair Investment Banking Corp., 44 Wall Street, New York, NY
10008, will assist each Registered Holder of a Class A Warrant in connection
with the exercise thereof; and
(v) the right to exercise the Class A Warrants will terminate at 5:00
P.M. (New York time) on the business day immediately preceding the Redemption
Date.
THIS REDEMPTION NOTICE DOES NOT AFFECT THE CLASS B WARRANTS
A registration statement relating to the securities which may be
acquired upon exercise of the Class A Warrants has been filed with the
Securities and Exchange Commission. This Notice is accompanies by a
[preliminary] prospectus contained in such registration statement. [These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective.] [A final prospectus will be
provided once the registration statement is declared effective.] Holders of
Class A Warrants are encouraged to review the material in the prospectus,
including the section entitled "Risk Factors," before deciding to exercise the
Class A Warrants. This Notice shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
Only persons who reside in one of the following states will be allowed
to exercise any Class A Warrants they hold: California, New York
_____________________. Residents of other states will not be entitled to
exercise the Class A Warrants, and they must either sell their Class A Warrants
in the public market or accept the Redemption Price.
