<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. Quarterly for the period ended June 30, 1999.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
COMMISSION FILE NO. 0-27104
YIELDUP INTERNATIONAL CORPORATION
(Exact name of small business issuer as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 77-0341206
---------------------------- ----------------------
<S> <C>
(State or other jurisdiction (I.R.S. Employer ID #)
of incorporation)
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117 EASY STREET
MOUNTAIN VIEW,
CALIFORNIA 94043
----------------------------------------
(Address of principal executive offices)
Issuer's telephone number, including area code: (650) 964-0100
Check whether the issuer: 1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
As of June 30, 1999, we had 6,891,979 shares of common stock outstanding, and
1,364,497 shares of Class A common stock outstanding for a total of 8,256,476
common stock outstanding. All shares of common stock and Class A common stock
have par value of $0.001 per share.
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
Page 1 of 19
<PAGE> 2
YIELDUP INTERNATIONAL CORPORATION
INDEX
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<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1) Condensed Balance Sheets -- June 30, 1999 and December 31, 1998 3
2) Condensed Statements of Operations -- Three Months and Six Months
ended June 30, 1999 and 1998 4
3) Condensed Statements of Cash Flows -- Six Months ended
June 30, 1999 and 1998 5
4) Notes to Financial Statements 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS 8-15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 16
ITEM 3. DEFAULTS ON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 17
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Page 2 of 19
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
YIELDUP INTERNATIONAL CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
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<CAPTION>
JUNE 30, DECEMBER 31,
------------ ------------
1999 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 554,019 $ 143,228
Short-term investments 10,000 10,000
Accounts receivable 1,878,224 1,401,413
Inventories 2,269,279 2,788,037
Prepaid expenses and other current assets 72,768 76,431
------------ ------------
Total current assets 4,784,290 4,419,109
Property, plant, and equipment 1,412,418 1,500,712
Other assets 228,435 206,712
------------ ------------
Total assets $ 6,425,143 $ 6,126,533
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 852,800 $ 747,730
Accrued liabilities 516,566 616,997
Current portion of capital lease obligations 16,841 15,994
Bank borrowings 1,039,937 1,223,963
Deferred revenue 2,825,000 0
Note payable to a director of the Company 0 500,000
------------ ------------
Total current liabilities 5,251,144 3,104,684
Long-term capital lease obligations 58,346 66,985
------------ ------------
Total liabilities 5,309,490 3,171,669
Stockholders' equity:
Class A common stock 1,364 1,364
Common stock 6,892 6,892
Additional paid-in capital 23,898,385 23,898,385
Notes receivable from stockholders (1,841) (1,841)
Accumulated deficit (22,789,147) (20,949,936)
------------ ------------
Total stockholders' equity $ 1,115,653 $ 2,954,864
============ ============
Total liabilities and stockholders' equity $ 6,425,143 $ 6,126,533
============ ============
</TABLE>
See accompanying notes to financial statements
Page 3 of 19
<PAGE> 4
YIELDUP INTERNATIONAL CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ----------------------------
1999 1998 1999 1998
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Gross revenues $1,416,104 $ 2,071,413 $ 2,808,206 $ 4,630,914
Cost of sales 1,004,405 1,176,816 2,240,922 2,646,281
---------- ----------- ----------- ----------
Gross margin 411,699 894,597 567,284 1,984,633
Operating expenses:
Research and development 519,519 715,760 1,042,704 1,428,394
Selling, general, and administrative 559,243 1,099,028 1,289,091 2,063,882
---------- ----------- ----------- -----------
Total operating expenses 1,078,762 1,814,788 2,331,795 3,492,276
---------- ----------- ----------- -----------
Operating loss (667,063) (920,191) (1,764,511) (1,507,643)
Interest (expense)/income, net (29,158) 78,656 (74,700) 93,238
---------- ----------- ----------- -----------
Net loss (696,221) (841,535) (1,839,211) (1,414,405)
Accretion on redeemable convertible
preferred stock 0 (650,000) 0 (650,000)
---------- ----------- ----------- -----------
Net loss applicable to holders of
common stock $ (696,221) $(1,491,535) $(1,839,211) $(2,064,405)
========== =========== =========== ===========
Basic and diluted net loss per share
applicable to holders of common stock $ (0.08) $ (0.26) $ (0.22) $ (0.36)
========== =========== =========== ==========
Shares used in basic and diluted per
share computations 8,256,476 5,774,533 8,256,476 5,761,103
========== =========== =========== ==========
</TABLE>
See accompanying notes to financial statements
Page 4 of 19
<PAGE> 5
YIELDUP INTERNATIONAL CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,839,211) $(1,414,405)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 303,109 264,910
Changes in operating assets and liabilities:
Accounts receivable (476,811) 17,785
Inventories 518,758 (1,126,347)
Prepaid expenses and other assets (18,060) 55,208
Accounts payable 105,070 (1,182,129)
Accrued liabilities (100,431) 144,639
Deferred revenue 2,825,000 --
----------- -----------
Net cash provided by/(used by) operating
activities 1,317,424 (3,240,339)
----------- -----------
Cash flows from investing activities:
Purchase of plant and equipment (214,815) (413,040)
Purchase of short-term investments, net -- 509,977
----------- -----------
Net cash (used by)/provided by investing
activities (214,815) 96,937
----------- -----------
Cash flows from financing activities
Repayment of note payable to a director of the Company (500,000) --
Payments under capital lease obligations (7,792) (28,620)
Payments on loans (184,026) (180,000)
Decrease in restricted cash on term loan -- 312,495
Issuance of common stock from option exercises -- 95,849
Issuance of Series A preferred stock, net -- 5,839,038
Issuance of Class A common stock from option exercise -- 6,900
----------- -----------
Net cash (used by)/provided by financing
activities (691,818) 6,045,662
---------- -----------
Net increase in cash and cash equivalents 410,791 2,902,260
Cash and cash equivalents at beginning of period 143,228 2,145,785
----------- -----------
Cash and cash equivalents at end of period $ 554,019 $ 5,048,045
=========== ===========
Supplemental cash flow disclosure:
Acquisition of equipment under capital lease obligations $ -- $ 92,759
Accretion on redeemable convertible preferred stock -- 650,000
Cash paid for interest $ 94,804 $ 28,526
=========== ===========
</TABLE>
See accompanying notes to financial statements
Page 5 of 19
<PAGE> 6
YIELDUP INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
YieldUP International Corporation (the "Company") 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 unaudited condensed financial information of the Company furnished
herein reflects all adjustments, consisting only of normal recurring
adjustments, which in the opinion of management are necessary to fairly state
the Company's financial position, results of operations and cash flows for the
periods presented. This Quarterly Report on Form 10-QSB should be read in
conjunction with the financial statements and notes thereto included in the
Company's 1998 Annual Report on Form 10-KSB. The results of operations for the
six months ended June 30, 1999 are not necessarily indicative of the results to
be expected for any subsequent period or for the entire year ending December 31,
1999.
NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of
shares of Class A common stock and common stock outstanding during the period.
Diluted net loss per share is based on the weighted average number of shares of
Class A common stock and common stock outstanding during the period and dilutive
common equivalent shares from stock options, warrants and preferred stock
outstanding during the period. No common equivalent shares are included for loss
periods as they would be anti-dilutive. In the three months and six months ended
June 30, 1999 there were 435,855 options, and in the three months and six months
ended June 30,1998 there were 244,099 options outstanding that could potentially
dilute basic earnings per share ("EPS") in the future that were not included in
the computation of diluted EPS because to do so would have been anti-dilutive
for those periods. In the three months and six months ended June 30, 1999 and
June 30, 1998 there were 4,155,000 Class B warrants outstanding with an exercise
price of $11.00 per share that were not included in the computation of diluted
EPS because to do so would have been anti-dilutive for those periods.
COMPREHENSIVE INCOME
We have no other components of comprehensive income other than our reported
amounts of net loss.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Board issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133, as amended in June
1999 by SFAS No. 137, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognizes all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated and accounted for as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. For a derivative not designated as a hedging instrument, changes in
the fair value of the derivative are recognized in earnings in the period of
change. The Company will be required to adopt this statement for the year ending
December 31, 2001 and management does not believe the adoption will have a
material effect on the financial position or results of operations of the
Company.
Page 6 of 19
<PAGE> 7
2. INVENTORIES
A summary of inventories follows:
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<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
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<S> <C> <C>
Raw materials $1,211,954 $1,840,088
Work in process 1,033,751 493,024
Evaluation units 1,805,228 1,308,052
Finished goods 1,558,108 2,486,053
---------- ----------
Gross inventory $5,609,041 $6,127,217
Less provision for excess inventory and
depreciation 3,339,762 3,339,180
---------- ----------
Net inventory $2,269,279 $2,788,037
========== ==========
</TABLE>
Evaluation units are installed at potential customers' sites.
3. ACCOUNTS RECEIVABLE
Accounts receivable at June 30, 1999 is net of a reserve for sales returns of
$236,389 and a reserve for bad debts of $409,891.
4. DEFERRED REVENUE
Included in the deferred revenue are royalty prepayments related to the
licensing agreement with FSI International. Revenue will be recognized when
products on which the royalty prepayments are based are sold.
5. LEGAL PROCEEDINGS
CFM Technologies, Inc. and CFMT, Inc. (collectively "CFM") filed a
complaint against us in United States District Court for the District of
Delaware in September 1995. The complaint alleged that the drying process
incorporated in certain of our products infringes a patent held by CFM. On
October 14, 1997, a federal court for the District of Delaware ruled in our
favor. In a written opinion granting summary judgment for us, the United States
District Court held that CFM had failed to produce evidence on three separate
elements of the patent claim. To establish infringement, evidence of all three
elements was required. On June 30, 1998, the United States District Court of
Delaware granted CFM's petition for re-argument of the summary judgment motion,
and the re-argument briefs have been filed by both parties. The court may not
sustain its original order. If the original order is overturned, the litigation
may proceed to trial, and the litigation and the associated costs may, and an
unfavorable adjudication will, have a material adverse impact on us. 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.
CFM filed an additional complaint against YieldUP in United States District
Court for the District of Delaware on December 30, 1998. The complaint alleged
that the cleaning process incorporated in certain of our products infringes
patents held by CFM. We believe that the additional CFM patent infringement
lawsuit is without merit and that none of our technology and products infringe
any of the CFM patents asserted in that litigation. Our technology is
substantially different from CFM's patented technology. We have filed an answer
to the complaint and a counter claim for non-infringement and invalidity of
CFM's patents. We plan to vigorously defend our intellectual property rights
against any and all claims. The associated costs may, and an unfavorable
adjudication will, have a material adverse impact on us. In both lawsuits filed
by CFM, they are asking for monetary damages and an injunction against our use
of those products at issue. 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.
Page 7 of 19
<PAGE> 8
6. MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
We have adopted the provisions of Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information." We operate in one segment and accordingly have provide only the
required enterprise wide disclosures. For the three months ended June 30, 1999,
sales to two customer exceeded 10% of gross revenues. Sales to a single customer
in the United States, Philips Semiconductors, accounted for 32% of revenues, and
sales to an Original Equipment Manufacturer ("OEM") customer in the United
States, SubMicron Systems, accounted for 28% of revenues.
Export sales to our international customers outside North America,
primarily to Japan and Europe comprised approximately 4% of gross revenues (4%
in the Asia Pacific region) for the three months ended June 30, 1999, and 43% of
gross revenues (37% in Europe and 6% in the Asia Pacific region) for the three
months ended June 30, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
RESULTS OF OPERATIONS
The discussions in this Report contain forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Business Risks"
and elsewhere in this Report as well as in our other periodic reports filed with
the Securities and Exchange Commission.
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues decreased to $1,416,104 in the second quarter of 1999 from
$2,071,413 for the same period in 1998. The 32% decrease in revenues in the
second quarter of 1999 was due to a decrease in the level of shipments for our
cleaning, rinsing, and drying systems.
In the second quarter of 1999, sales to a single customer in the United
States, Philips Semiconductors, accounted for 32% of revenues, and sales to an
Original Equipment Manufacturer ("OEM") customer in the United States, SubMicron
Systems, accounted for 28% of revenues.
GROSS MARGIN
Our gross margin decreased to $411,699, or 29% of revenues, during the
second quarter of 1999 compared to a gross margin of $894,597, or 43% of
revenues, during the same period a year ago. This decline in gross margins was
due in part to the high fixed overhead costs allocated to reduced shipments and
revenue.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $519,519, or 37% of revenues, in the
second quarter of 1999, compared to $715,760, or 35% of revenues, for the same
period in 1998. The decrease in research and development expenses of $196,241
was due mainly to a decrease in engineering personnel compared to the same
period a year ago. We expect to continue to invest in new product research and
development and enhancement of existing products, although these expenses may
decline as a percentage of revenues to the extent revenues increase.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $559,243, or 39% of
revenues in the second quarter of 1999, compared to $1,099,028, or 53% of
revenues, for the same period in 1998. Selling, general, and administration
expenses decreased by $539,785 due to reduced commissions related to the
decrease in sales and reduced expenses for personnel and marketing. We expect
that selling, general, and administrative expenses may decline as a percentage
of revenues, to the extent revenues increase.
Page 8 of 19
<PAGE> 9
NET INTEREST EXPENSE
Net interest expense was $29,158, net of interest income of $7,338, for
second quarter of 1999 compared to net interest income of $78,656, net of
interest expense of $15,474, for the same period in 1998. In December 1998, we
increased borrowings and reduced cash in order to redeem all of the outstanding
shares of the Series A convertible Preferred Stock for approximately $6.0
million. The increase in net interest expense was the result of reduced interest
income due to the reduced cash balances and increased interest expense on the
additional borrowings.
NET LOSS
Net loss for the second quarter of 1999 was $696,221, or $0.08 per share
compared to a net loss applicable to holders of common stock of $1,491,535, or
$0.26 per share for the same period in 1998. The shares used in basic and
diluted per share computations were 8,256,476 for the second quarter of 1999,
and 5,774,533 for the same period in 1998.
We have incurred operating losses in each fiscal quarter since inception.
Such losses have been principally the result of the various costs associated
with product development and manufacturing activities as we seek to gain
acceptance of our products in the marketplace, and the prolonged downturn in the
semiconductor equipment industry. There can be no assurance that we will be
successful in generating future profits from the sales of our products.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues decreased to $2,808,206 in the first half of 1999 from $4,630,914
for the same period in 1998. The 39% decrease in revenues was due to a decrease
in the level of shipments for our cleaning, rinsing, and drying systems.
In the six months ended June 30, 1999, sales to a single customer in the
United States, Philips Semiconductors, accounted for 16% of revenues, sales to a
single customer in Europe, ST Microelectronics, accounted for 15% of revenues,
and sales to an OEM customer in the United States, SubMicron Systems, accounted
for 26% of revenues.
GROSS MARGIN
Our gross margin for the six month period ended June 30, 1999 decreased to
$567,284, or 20% of revenues, compared to gross margin of $1,984,633, or 43% of
revenues, during the same period a year ago. This decline in gross margin was
due in part to the high fixed overhead costs allocated to reduced shipments and
revenue.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $1,042,704, or 37% of revenues, in
the six month period ended June 30, 1999, compared to $1,428,394, or 31% of
revenues, for the same period in 1998. The decrease in research and development
expenses of $385,690 was due mainly to a decrease in engineering personnel
compared to the same period a year ago. We expect to continue to invest in new
product research and development and enhancement of existing products, although
these expenses may decline as a percentage of revenues to the extent revenues
increase.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses were $1,289,091, or 46% of
revenues in the six month period ended June 30, 1999, compared to $2,063,882, or
45% of revenues, for the same period in 1998. Selling, general, and
administration expenses decreased by $774,791 due to reduced commissions related
to the decrease in sales and reduced expenses for personnel and marketing. We
expect that selling, general, and administrative expenses may decline as a
percentage of revenues, to the extent revenues increase.
Page 9 of 19
<PAGE> 10
NET INTEREST EXPENSE
Net interest expense was $74,700, net of interest income of $11,058, for
six month period ended June 30, 1999 compared to net interest income of $93,238,
net of interest expense of $28,526, for the same period in 1998. In December
1998, we increased borrowings and reduced cash in order to redeem all of the
outstanding shares of the Series A convertible Preferred Stock for approximately
$6.0 million. The increase in net interest expense was the result of reduced
interest income due to the reduced cash balances and increased interest expense
on the additional borrowings.
NET LOSS
Net loss for the six month period ended June 30, 1999 was $1,839,211, or
$0.22 per share compared to a net loss applicable to holders of common stock of
$2,064,405, or $0.36 per share for the same period in 1998. The shares used in
basic and diluted per share computations were 8,256,476 for the second quarter
of 1999, and 5,761,103 for the same period in 1998.
We have incurred operating losses in each fiscal quarter since inception.
Such losses have been principally the result of the various costs associated
with product development and manufacturing activities as we seek to gain
acceptance of our products in the marketplace, and the prolonged downturn in the
semiconductor equipment industry. There can be no assurance that we will be
successful in generating future profits from the sales of our products.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, and short-term investment balances at June 30, 1999
totaled $564,019, compared to $153,228 at December 31, 1998. The increase of
$410,791 was due to net cash generated by operating activities during the period
of approximately $1,317,424, which included deferred revenue comprising advance
payments related to the licensing agreement with FSI of $2,825,000, offset by
purchases of plant and equipment of $214,815, repayment of a note payable to a
director of YieldUP of $500,000, and other payments on loans of $184,026.
At June 30, 1999, we had accounts receivable of $1,878,224 compared to
$1,401,413 at December 31, 1998Inventories at June 30, 1999 were $2,269,279
compared to $2,788,037 at December 31, 1998. Net property, plant, and equipment
was $1,412,418 at June 30, 1999 compared to $1,500,712 at December 31, 1998. The
decrease in net property, plant and equipment was primarily the result of
depreciation.
The accounts payable balance at June 30, 1999 was $852,800 compared to
$747,730 at December 31, 1998. The increase in accounts payable was due
primarily to an increase in purchases of components for new product development,
legal fees associated with the proposed merger with FSI International and CFM
litigation (see "Legal Proceedings").
On January 21, 1999, we entered into a definitive agreement with FSI, for
FSI to acquire all of the outstanding stock of YieldUP. The form of the
transaction will be a merger. Under the terms of the definitive agreement, the
YieldUP stockholders will receive $0.7313 in cash and 0.1567 of a share of FSI
common stock for each share of YieldUP common stock. YieldUP option holders will
receive substitute options entitling them to purchase FSI common stock. When the
merger becomes effective, each outstanding warrant to purchase shares of our
common stock under any warrant agreement will become a right to acquire FSI
common stock. The warrants will be subject to substantially the same terms and
conditions as they were prior to the merger. Each warrant, upon payment of the
exercise price, will entitle the holder to receive $0.7313 cash and 0.1567 of a
share of FSI common stock for each share of YieldUP common stock the warrant
holder is entitled to. Completion of the transaction is subject to certain
closing conditions including, among other things, approval by the stockholders
of YieldUP. FSI and YieldUP currently anticipate that the transaction will be
completed in September 1999. As part of the agreement to be acquired by FSI, we
also granted FSI a non-exclusive royalty-bearing license to our patent
portfolio, and have received pre-paid licensing fees. We amended this licensing
agreement in April of 1999, which resulted in additional royalty prepayments by
FSI to YieldUP in the second quarter of 1999. Total payments received from FSI
are $2,825,000 to date as part of this agreement.
We believe our existing capital resources, combined with advance payments
of $2,825,000 received from a licensing agreement with FSI, will enable us to
fund operations through the middle of September 1999. If the merger with FSI is
cancelled or significantly delayed, we will need to obtain additional capital to
fund operations beyond that time, which may result in dilution to
Page 10 of 19
<PAGE> 11
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. If we are unable to obtain the necessary capital, we will
be required to significantly curtail operations.
BUSINESS RISKS
GENERAL
Our operations are subject to numerous risks associated with establishing
any new business, including unforeseeable expenses, delays and complications, as
well as specific risks of the semiconductor equipment industry. We have incurred
significant losses from our operations, and we may never achieve profitable
operations. Our smaller resources make us vulnerable to competition from larger
companies. Because our technology has not been widely deployed, it presents
potential customers with uncertainty not associated with existing equipment
marketed by competitors. In addition, many semiconductor manufacturers are
reluctant to choose small companies as key suppliers due to concerns about
long-term viability and product support. Since we expect to derive substantially
all of our future revenues from sales of cleaning, rinsing, and drying systems,
our business, financial condition and results of operations would be materially
adversely affected by declining demand for our products or decreasing prices and
margins for those products.
RISKS RELATING TO THE MERGER
Cancellation of or significant delay in the merger transaction with FSI
International could seriously harm our business
YieldUP believes that an important benefit to be realized from the acquisition
of YieldUP by FSI will be the integration of our management, strategies,
operations and product lines with those of FSI. This integration process may
cause an interruption of, or a loss of momentum in, our business activities if
the transaction is significantly delayed or is not consummated. Additionally, we
have incurred significant expenses and made resource commitments in connection
with the sale to FSI that would materially adversely affect our business and
financial condition if the transaction were not consummated. Although we are not
aware of any circumstance which would interfere with the consummation of the
sale to FSI, we cannot assure stockholders that the transaction will be
completed, and a cancellation or significant delay in completion of the
transaction could materially adversely affect our business, financial condition
and results of operations.
Fixed Exchange Ratio May Limit the Value of FSI Stock Received by YieldUP
Stockholders
In the merger, each outstanding share of YieldUP common stock and Class A
common stock will be converted into the right to receive $0.7313 in cash and
0.1567 of a share of FSI common stock. There will be no adjustment of the
exchange ratio based on fluctuations in the market price of FSI common stock.
Consequently, the value of the FSI common stock received in the merger could
decrease from now until the effective date of the merger.
If FSI and YieldUP Cannot Effectively Integrate Their Operations, Then Potential
Benefits of the Merger May Not Be Realized
FSI and YieldUP will have to integrate their manufacturing, research and
development, and sales and marketing efforts. If the companies are not
successful in this integration, then FSI's results of operations could be
adversely affected, employee morale could decline, and key employees could
leave. In addition, until YieldUP's existing customers have had the opportunity
to determine how well the combined organization operates, they may cancel
existing orders or delay placing new ones.
OTHER BUSINESS RISKS
Downturns in the Semiconductor Industry Adversely Affect Our Results
The semiconductor equipment industry is highly cyclical and has
historically experienced periodic and prolonged downturns, in which the
willingness of the manufacturers of semiconductor devices to make substantial
capital expenditures is greatly reduced. Currently, the industry is in the midst
of such a downturn. The continuation of the current downturn or the occurrence
of similar downturns in the future could materially adversely affect our
business, financial condition, and results of operations.
Page 11 of 19
<PAGE> 12
We May Never Achieve Profitability if We Remain an Independent Entity
We have experienced significant operating losses since our inception in
June 1993 and the commencement of significant product shipments in the fourth
quarter of 1995. We have experienced net losses applicable to holders of common
stock of approximately $11.4 million in 1998, $4.0 million in 1997, and $3.4
million in 1996. Our operating losses have been and will continue to be
principally the result of costs associated with product development,
manufacturing, and sales and marketing activities. As of June 30, 1999,
YieldUP's accumulated deficit was $22,789,147.
Our Existing Capital Resources Will Not Enable Us To Fund Operations
Through 1999
We believe that our existing capital resources, combined with advance
payments of $2,825,000 received from a licensing agreement with FSI, will enable
us to fund operations through the middle of September 1999. We will need to
obtain additional capital to fund operations beyond that time, which may result
in dilution to current stockholders. If we are unable to obtain the necessary
capital, we will be required to significantly curtail operations.
We Are Not in Compliance With Our Loan Covenants, Which May Cause the Lender to
Pursue Remedies That Could Adversely Affect Our Business
YieldUP is a party to a loan agreement providing for a secured loan for
$0.5 million and a $2 million secured revolving credit line. As of June 30,
1999, YieldUP was not in compliance with the liquidity and quick-ratio covenants
under the loan agreement. The required minimum liquidity ratio was 2.00:1.00,
while YieldUP liquidity ratio was 1.44:1.00 as of June 30, 1999, and the
required minimum quick ratio was 1.75:1.00, while YieldUP quick ratio was
0.54:1.00 as of June 30, 1999. Because of this noncompliance, the lender may
declare YieldUP to be in default and exercise its remedies under the agreement,
including seizing collateral. Effective June 30, 1999, YieldUP and the lender
entered into a loan modification agreement, obtaining waiver of the existing
defaults and amending the "Revolving Maturity Date" to be September 15, 1999.
If We Do Not Protect Our Intellectual Property, Our Business and Results Will be
Adversely Affected
In the absence of significant patent or other proprietary protection,
competitors may be able to copy our technology or design approaches, replicate
our processes, or gain access to our trade secrets. Moreover, our competitors
may be able to develop technologies similar to, or more advanced than, our
products or technology. The occurrence of events of this nature may materially
adversely affect our business and results of operations.
We rely on patent, trade secret, and copyright protection for its products
and technology. Our issued patents may not provide us with meaningful
competitive advantages, however, and third parties may issue challenges against
the validity and enforceability of any patent issued to us. Moreover, the
process of obtaining patents can be expensive and our pending applications may
not result in the issuance of patents.
We also rely on trade secrets and proprietary technology that we seek to
protect, in part, through confidentiality agreements with employees,
consultants, and other parties. However, these agreements may be breached, and
we may not have adequate remedies for any breach. In addition, our trade secrets
may become known to or independently developed by others.
Moreover, the laws of foreign countries may not protect our intellectual
property to the same extent as do the laws of the United States. We believe that
we have very limited intellectual property right protection in Korea, Taiwan,
China, India, and other Asian countries, excluding Japan. Our sales to these
countries combined have been less than 10% of our total revenues.
We Are a Party to Intellectual Property Litigation in Which an Adverse Result
Could Harm Our Business and Results
CFM Technologies, Inc. and CFMT, Inc. (collectively "CFM") filed a
complaint against YieldUP in United States District Court for the District of
Delaware in September 1995. The complaint alleged that the drying process
incorporated in certain of YieldUP's products infringe upon a patent held by
CFM. On October 14, 1997, a federal court for the District of Delaware ruled in
YieldUP's favor. In a written opinion granting summary judgment for YieldUP, the
United States District Court held that CFM had failed to produce evidence on
three separate elements of the patent claim. To establish infringement ,
evidence of all three elements was
Page 12 of 19
<PAGE> 13
required. On June 30, 1998, the United States District Court of Delaware granted
CFM's petition for re-argument of the summary judgment motion, and the
re-argument briefs have been filed by both parties. The court may not sustain
its original order. If the original order is overturned, the litigation may
proceed to trial, and the litigation and the associated costs may, and an
unfavorable adjudication will, have a material adverse impact on YieldUP. 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 financial statements of YieldUP.
CFM filed an additional complaint against YieldUP in United States District
Court for the District of Delaware on December 30, 1998. The complaint alleged
that the cleaning process incorporated in certain of our products infringes
patents held by CFM. YieldUP believes that the additional CFM patent
infringement lawsuit is without merit and that none of YieldUP's technology and
products infringe any of the CFM patents asserted in the litigation. YieldUP's
technology is substantially different from CFM's patented technology. YieldUP
plans to vigorously defend its intellectual property rights against any and all
claims. The associated costs, may, and an unfavorable adjudication will, have a
material adverse impact on YieldUP. YieldUP's management believes that less than
20% of YieldUP ' present revenues are from products that CFM alleges to infringe
its patents in this new lawsuit. In both law suits filed by CFM, they are asking
for monetary damages and an injunction against YieldUP's use of those products
at issue. 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 financial statements of YieldUP.
There has been substantial litigation regarding patent and other
intellectual property rights in semiconductor-related industries. Increased
sales of our products could provoke additional claims of infringement from third
parties. In the future, litigation may be necessary to:
- enforce patents issued to YieldUP;
- protect trade secrets or know-how owned by YieldUP.
- defend against claimed infringement of the rights of others; and
- determine the scope and validity of the proprietary rights of
others.
Any such litigation would likely result in substantial cost and diversion
of effort, which by itself could have a material adverse effect on YieldUP's
business, financial condition, and operating results. Further, adverse
determinations in litigation of this kind could result in the loss of
proprietary rights, subject YieldUP to significant liabilities to third parties,
require YieldUP to seek licenses from third parties, or prevent YieldUP from
manufacturing or selling its products.
We May Not Be Able To Successfully Compete in the Highly Competitive
Semiconductor Manufacturing Market
Competition for our products currently comes from makers of traditional and
new cleaning, rinsing, and drying equipment. These competitors may be able to
develop new products or improve their existing products which, when combined
with their existing market presence, would make our products obsolete or
unmarketable. Any such development would have a material adverse effect on us.
We may not be able to penetrate the wet processing equipment market and convince
semiconductor or other manufacturers to install our systems either directly or
through retrofitting in place of existing equipment. Additional competition for
our products also currently comes from a large number of small companies making
cleaning, rinsing, and drying equipment which is less expensive than our
products. Because our products sell for significantly higher prices than such
products, we may not be able to compete effectively against them without
lowering our prices.
We also expect 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 our products obsolete, thereby
materially adversely affecting us. If we are unable to respond to the challenges
of competition, including changes in cleaning, rinsing, and drying of
semiconductor or other manufacturing processes, we may not able to achieve or
maintain profitability at a level required to support our survival or growth.
Our competitors include manufacturers of spin rinse dryers such as Verteq
and Semitool, IsoPropyl alcohol dryer manufacturers
Page 13 of 19
<PAGE> 14
such as S&K and integrated wet processing system manufacturers such as SCP
Global Technologies, Sub Micron Systems, Steag, FSI International, CFM
Technologies, and Dai Nippon Screen. Several of these competitors are also our
customers.
Our Common Stock Could Be Delisted From the Nasdaq Market, Which Could Adversely
Affect Our Market Price and Liquidity
If the merger is not consummated and we are unable to satisfy the Nasdaq
SmallCap Market's maintenance requirements, our common stock may be delisted
from the Nasdaq SmallCap Market. In that event, trading, if any, in the common
stock would thereafter be conducted in the over-the-counter market in the
so-called "pink sheets" or the National Association of Securities Dealers "OTC
Bulletin Board." Consequently, the liquidity of YieldUP common stock could be
impaired, not only in the number of securities that 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 YieldUP, and the lower prices for the
common stock than might otherwise be obtained.
Under current criteria for continued listing on the Nasdaq SamllCap Market:
- YieldUP must maintain at least $2 million in total net tangible
assets or a market capitalization of $35 million or have $500,000
in net income;
- the minimum bid price of YieldUP common stock must be at least
$1.00 per share;
- there must be at least 500,000 shares in the public float valued
at $1 million or more;
- the common stock must have at least two active market makers; and
- the common stock must be held by at least 300 holders.
On December 8, 1998, YieldUP's Class B Warrants were delisted from the
Nasdaq SmallCap Market because there were no longer any active market makers
registered to trade the securities. The trading of these securities, if any, is
being conducted in the over-the-counter market in NASD's "OTC Bulletin Board."
Our Common Stock Could Be Reclassified As "Penny Stock" and Subject to
Burdensome Restrictions That Could Adversely Impact Its Market Price and
Liquidity
The Securities and Exchange Commission has adopted rules that define a
"penny stock" as any equity security that has a market or exercise price of less
than $5.00 per share, subject to exceptions. YieldUP common stock may not
qualify for exemption from the penny-stock restrictions. If YieldUP's common
stock were subject to the rules on penny stocks, the market price and liquidity
of the common stock could be severely adversely affected.
For any transaction involving a penny stock, unless exempt, the rules
require delivery, before any transaction in a penny stock, of a disclosure
schedule prepared by the SEC relating to the penny-stock market. Disclosure is
also required to be made about current quotations for the securities and about
commissions payable to both the broker-dealer and the registered representative.
Finally, broker-dealers must send monthly statements to purchasers of penny
stocks disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.
The foregoing penny stock restrictions will not apply to our securities if:
- they are listed on the Nasdaq SamllCap Market
- certain price and volume information is publicly available on a
current and continuing basis; and
- we meet certain minimum net tangible assets or average revenue
criteria.
The Failure of Our Systems, Key Suppliers and Customers To Be Year 2000
Compliant Could Negatively Impact Our Business
By the year 2000, most companies could face a potentially serious
information systems problem because many software applications and operational
programs written in the past were designed to handle dates formatted with
two-digit years and thus may not properly recognize calendar dates beginning in
the Year 2000 (Y2K). This problem could result in computers either outputting
incorrect data or shutting down altogether when attempting to process a date
such as "01/01/00".
Page 14 of 19
<PAGE> 15
In order to minimize the disruption to business and government that may be
caused by computer systems and software products that are not Y2K compliant,
many companies and government agencies worldwide have established programs to
evaluate and mitigate the risks and adverse effects of the Y2K problem.
Accordingly, YieldUP formed a Y2K Readiness team in 1998, comprising of
Information Technology personnel, finance and administration staff and product
software engineers. The team has assessed all critical software and operational
applications for review and evaluated Y2K compliance of its internal business
systems, manufacturing and design tools, current products, products sold in
recent years, and the most critical systems, services and products supplied to
the Company by third parties.
A four-step approach, comprising assessment, remediation, testing and
implementation, was used to determine the Y2K readiness of our systems, software
equipment and products. Such an approach provided a detailed method for tracking
the evaluation, repair and testing of systems, software, equipment and products
that may be affected by Y2K issues.
In the first step, we prepared an inventory of all systems, software,
equipment and products that we use internally or market as products to
customers. We then determined whether equipment met Y2K compliance. This
involved detailed analysis of the products by utilizing the Internet and
contacting the vendors directly. Letters of compliance were collected and
organized into a centralized location. Any systems that did not meet compliance
were identified.
The second step included repairing, upgrading and/or replacing any
non-compliant equipment or systems identified in the first step. This included
developing and implementing methods for immediately bringing them up to
compliance standards.
In the third step, we tested our systems, software and equipment for Y2K
readiness, or in certain cases, relying on test results or certifications
provided by third parties to us.
The fourth step involved placing compliant systems, software and equipment
into service.
A few issues were discovered with systems utilized in YieldUP's day-to-day
operations and with one of YieldUP's products. Solutions to these problems were
quickly addressed, resolved and tested by working with each vendor. The costs to
address the Y2K issues have been relatively small to date, and our products in
the field have been made compliant. Completion date for these issues was
December 1998. Final analysis of our readiness will be completed by the middle
of 1999. We have further implemented policy and procedures that all new systems
procured or developed are evaluated for Y2K readiness to assure compliance. In
the latter half of 1999, we will be finalizing contingency plans, to respond to
any unforeseen Y2K problems. We expect to develop these contingency plans
working with FSI, as the merger is expected to be complete by September 1999.
An analysis of the products that we market to customers was conducted in
the latter half of 1998. This analysis included the hardware, software and
firmware used in our products. Items tested were the computer systems that
control the products, hardware and the software for the products. An issue was
found with one of the software packages used on one of the products. Issues
found are not critical to the functionality of the system as a whole and the
product will continue to operate. Software patches are required for the software
to be Y2K compliant. Procedures have been written and any and all software
upgrades have been collected and distributed to all of our existing customers.
The patches were provided free-of-charge by the software package vendor. The
total cost to address the Y2K problem and upgrade any current business systems
is estimated to not be more than $25,000.
We believe we are diligently addressing the Y2K issues and that we will
satisfactorily identify and resolve all critical and significant Y2K problems in
our operations and products by the end of September 1999. The assessment and
remediation plan we have implemented is expected to significantly reduce the
level of uncertainty about the Y2K problem in our internal systems, our products
and our critical third-party suppliers. We are devoting the necessary resources
to identify and resolve any potential present or future Y2K issues.
We have been advised by all of our suppliers and business partners,
including OEMs, that they are addressing and preparing for any Y2K issues that
they may have. If any of these suppliers or business partners are not Y2K
compliant, then we may experience a delay in manufacturing and shipping our
products. In the worst case, YieldUP or the third parties on which it depends
may, for an extended period of time, be incapable of conducting critical
business activities, such as manufacturing and shipping products and invoicing
customers. In addition, if public suppliers of water, electricity, or natural
gas are disrupted for a substantial period, our operations may be materially
adversely affected.
Page 15 of 19
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
CFM Technologies, Inc. and CFMT, Inc. (collectively "CFM") filed a
complaint against us in United States District Court for the District of
Delaware in September 1995. The complaint alleged that the drying process
incorporated in certain of our products infringes a patent held by CFM. On
October 14, 1997, a federal court for the District of Delaware ruled in our
favor. In a written opinion granting summary judgment for us, the United States
District Court held that CFM had failed to produce evidence on three separate
elements of the patent claim. To establish infringement, evidence of all three
elements was required. On June 30, 1998, the United States District Court of
Delaware granted CFM's petition for re-argument of the summary judgment motion,
and the re-argument briefs have been filed by both parties. The court may not
sustain its original order. If the original order is overturned, the litigation
may proceed to trial, and the litigation and the associated costs may, and an
unfavorable adjudication will, have a material adverse impact on us. 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.
CFM filed an additional complaint against YieldUP in United States District
Court for the District of Delaware on December 30, 1998. The complaint alleged
that the cleaning process incorporated in certain of our products infringes
patents held by CFM. We believe that the additional CFM patent infringement
lawsuit is without merit and that none of our technology and products infringe
any of the CFM patents asserted in that litigation. Our technology is
substantially different from CFM's patented technology. We have filed an answer
to the complaint and a counter claim for non-infringement and invalidity of
CFM's patents. We plan to vigorously defend our intellectual property rights
against any and all claims. The associated costs may, and an unfavorable
adjudication will, have a material adverse impact on us. In both lawsuits filed
by CFM, they are asking for monetary damages and an injunction against our use
of those products at issue. 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
Page 16 of 19
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3.1* Articles of Incorporation
3.2* Bylaws
10.1** The Merger Agreement by and between YieldUP and FSI International dated as of
January 21, 1999
10.2 First Amendment to the Merger Agreement and Plan of Reorganization by and
between YieldUP and FSI International dated as of June 18, 1999
27.1 Financial Data Schedule
</TABLE>
- ----------
* Incorporated herein by reference to the registration statement on Form
SB-2.
** Incorporated herein by reference to YieldUP's Annual Report on Form 10-KSB
for the year ended December 31, 1998.
(2) REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
YIELDUP INTERNATIONAL CORPORATION
(Registrant)
Date: August 16, 1999 By: /s/ Raj Mohindra
------------------------------------
Raj Mohindra,
President and Chief Executive
Officer
/s/ Abhay K. Bhushan
------------------------------------
Abhay K. Bhushan,
Executive Vice President and
Chief Financial Officer
Page 17 of 19
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3.1* Articles of Incorporation
3.2* Bylaws
10.1** The Merger Agreement by and between YieldUP and FSI International dated as of
January 21, 1999
10.2 First Amendment to the Merger Agreement and Plan of Reorganization by and
between YieldUP and FSI International dated as of June 18, 1999
27.1 Financial Data Schedule
</TABLE>
- ----------
* Incorporated herein by reference to the registration statement on Form
SB-2.
** Incorporated herein by reference to YieldUP's Annual Report on Form 10-KSB
for the year ended December 31, 1998.
<PAGE> 1
EXHIBIT 10.2
FIRST AMENDMENT
TO
AGREEMENT AND PLAN OF REORGANIZATION
This First Amendment (this "Amendment") is dated as of June 16, 1999, and
is made to the Agreement and Plan of Reorganization, dated as of January 21,
1999 (the "Original Agreement"), among FSI International, Inc., a Minnesota
corporation ("Parent"), BMI International, Inc., a Minnesota corporation and
wholly owned subsidiary of Parent, and YieldUP International Corporation, a
Delaware corporation ("YieldUP").
Whereas, Section 2.01(c) of the Original Agreement currently provides an
incorrect dollar amount to be paid to former YieldUP stockholders in lieu of the
issuance of fractional shares of Parent Common Stock;
Whereas, Section 8.01(b) of the Original Agreement currently provides that
either Parent or YieldUP may terminate the Original Agreement if the Merger
shall not have been consummated within 150 days of January 21, 1999; and
Whereas the parties to the Original Agreement desire to amend that
agreement to revise Sections 2.01(c) and 8.01(b) thereof.
Now, therefore, the parties hereby agree to amend the Original Agreement as
follows:
1. Fractional Shares. The reference in Section 2.01(c) of the Original
Agreement to "$1.8806" is hereby amended to read "$12.00."
2. Termination Date. Section 8.01(b) of the Original Agreement is hereby
amended and restated in its entirety to read as follows:
(b) by either Parent or YieldUP by action of its Board of Directors
if the Merger shall not have been consummated on or before August
31, 1999 (provided that the right to terminate this Agreement
under this Section 8.01(b) shall not be available to a party
whose failure to fulfill any obligation under this Agreement has
been the cause of or resulted in the failure of the Merger to
occur on or before such date);
3. Defined Terms. All capitalized terms used but not defined in this
Amendment have the meanings given them in the Original Agreement. All references
in the Original Agreement to "this Agreement" mean the Original Agreement as
amended by this Amendment.
4. Continuing Effect. Except as modified by this Amendment, the Original
Agreement remains in full force and effect, without change.
In witness whereof, the parties have caused this Amendment to be signed by
their respective officers thereunto duly authorized as of the date first written
above.
FSI INTERNATIONAL, INC.
By: Benno G. Sand
Its: Chief Administrative Officer
Page 18 of 19
<PAGE> 2
BMI INTERNATIONAL, INC.
By: Benno G. Sand
------------------------------------
Its: Chief Administrative Officer
YIELDUP INTERNATIONAL CORPORATION
By: Raj Mohindra
------------------------------------
Its: President and CEO
Page 19 of 19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 554,019
<SECURITIES> 10,000
<RECEIVABLES> 1,878,224
<ALLOWANCES> 0
<INVENTORY> 2,269,279
<CURRENT-ASSETS> 4,784,290
<PP&E> 2,720,566
<DEPRECIATION> 1,308,148
<TOTAL-ASSETS> 6,425,143
<CURRENT-LIABILITIES> 5,251,144
<BONDS> 3,940,124
0
0
<COMMON> 8,256
<OTHER-SE> 1,107,397
<TOTAL-LIABILITY-AND-EQUITY> 6,425,143
<SALES> 1,416,104
<TOTAL-REVENUES> 1,416,104
<CGS> 1,004,405
<TOTAL-COSTS> 1,004,405
<OTHER-EXPENSES> 1,078,762
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (29,158)
<INCOME-PRETAX> (696,221)
<INCOME-TAX> 0
<INCOME-CONTINUING> (696,221)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (696,221)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
