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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO ____________
COMMISSION FILE NO. 0-27104
YIELDUP INTERNATIONAL CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN OUR CHARTER)
DELAWARE 77-0341206
(STATE OR OTHER JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER ID #)
117 EASY STREET 94043
MOUNTAIN VIEW, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Issuer's telephone number, including area code:
(650) 964-0100
Securities registered under Section 12(b) of the Act:
NONE
Securities registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001
CLASS B WARRANTS, NO PAR VALUE
(TITLE OF CLASS)
Check whether the issuer: 1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that we was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of our knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Our revenues for the fiscal year ended December 31, 1998 were
$6,732,574.
The aggregate market value of the voting stock held by non-affiliates
of YieldUP International Corporation, based upon the closing price of our common
stock on December 31, 1998 in the over-the-counter-market, was approximately
$12,124,000. Shares of voting stock held by each officer and director and by
each person who on that date owned 5% or more of the outstanding voting stock
have been excluded for purposes of the preceding computation, in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of December 31, 1998, 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 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for our 1999 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-KSB
Report.
Transitional Small Business Disclosure Format YES [ ] NO [X]
The exhibit index appears on page 38 of this Form 10-KSB Report.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
MERGER
On January 21, 1999, YieldUP International Corporation ("YieldUP") entered
into a definitive agreement with FSI International, Inc. ("FSI"), for FSI to
acquire all of its outstanding stock. The form of the transaction will be a
merger ("the Merger"). Under the terms of the definitive agreement, 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 $.7313 cash and .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 of the Merger by the
stockholders of YieldUP. FSI and YieldUP anticipate that the transaction will be
completed in late April or early May of 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.
GENERAL
We develop, manufacture, and market 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 our products, we believe our technology allows more thorough and efficient
cleaning, rinsing and drying than conventional approaches, and that the products
based on our technology may enable manufacturers to obtain improvements in the
percentage of good product produced, or yield. Our cleaning, rinsing and drying
products also reduce the usage of certain environmentally hazardous materials,
and occupy less floor space when compared to conventional equipment. We
currently have approximately 120 cleaning, rinsing and drying systems installed
at about 80 customer sites in the semiconductor, semiconductor equipment,
magnetic disk, flat-panel display, and photo-mask industries.
Disc-shaped wafers composed of silicon are the foundation on which
integrated circuits ("ICs") are manufactured in semiconductor fabrication
facilities. During the typical four to six week process of fabricating IC's on
these wafers, semiconductor manufacturers typically clean, rinse and dry the
wafers several times to prepare the wafer for the next IC fabrication step. For
example, before and after many steps such as etching and deposition of
materials, the manufacturer must thoroughly clean, rinse and dry the wafers to
remove any contaminants or moisture. The likelihood of completing these steps
successfully and producing good ICs depends significantly upon the cleanliness
of the wafers throughout all the process steps. Our products are designed to
reduce wafer particle contamination, stains, surface roughness, and other
defects that reduce IC yields, offering a cost-effective, integrated cleaning,
rinsing and drying system using patented filtration, rinsing and drying
technology with no mechanical motion and greatly reduced use of environmentally
hazardous materials.
We are marketing our products for application at several points in the IC
fabrication process, and for use in the manufacturing processes of magnetic
disks, photo-masks and flat-panel displays. We believe that there are numerous
sites within typical high technology manufacturing facilities where
manufacturers could improve processes and reduce defects by replacing or
retrofitting existing equipment with our products.
Our products include the CleanPoint de-ionized water filtration system, the
Omega 1000 Rinsing and Drying System designed to replace the conventional
Spin-Rinse Dryers ("SRD's"), the Omega 2000 Cleaning, Rinsing and Drying system
designed to handle large substrates including 12 inch (300mm) wafers and flat
panels, and the Omega 4000 Cleaning Rinsing and Drying system that provides
integrated hydrofluoric acid cleaning capability. We are also developing new
products and technology, which we expect to market in the latter half of 1999
and 2000.
During the year ended December 31, 1998 our revenues, net of sales returns
of $512,000 and allowance for returns of $747,429 were $6,732,574, compared to
$7,465,447 for the year ended December 31, 1997. The decrease in revenue of 10%
in 1998 over 1997 was due to a decrease in the level of shipments and sales
returns and provision for returns for our cleaning, rinsing, and drying
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systems as a result of adverse industry conditions. We continue to modify and
improve our products, generally based on feedback from our customers, and have
increased our sales to OEM customers, and our export sales to Europe.
Our cost of sales was $7,309,387 for the year ended December 31, 1998, and
$5,964,228 for the year ended December 31, 1997. Our gross deficit was $576,813
for the year ended December 31, 1998, compared to a gross margin of $1,501,219
or 20.1% for the year ended December 31, 1997. The gross deficit was due to
lower than expected revenues, sales returns and provision for sales returns of
$1,259,429, and a provision for excess inventory of $2,740,910. Our cost of
sales remained high during 1998 due to manufacturing expenses being allocated
over relatively few units. We expect that future gross margins should improve to
the extent unit shipments and revenue increase and we are able to continue our
transition to increased shipments of standardized products and lower unit
material costs.
PRODUCTS
Through analyzing the fabrication process of leading semiconductor
manufacturers, we determined that the cleaning, rinsing and drying steps of the
manufacturing process present a significant, unfilled opportunity for yield
improvement. We have developed and are marketing equipment that incorporates our
patented cleaning, rinsing, and drying technologies which we believe may help
manufacturers achieve significant contamination reduction, and resulting yield
improvement. We currently market the following products:
CleanPoint Water Filtration System
The CleanPoint Water Filtration System is a patented de-ionized water
filtration system designed to eliminate microscopic particle contamination in
de-ionized water at the point of use. The CleanPoint system is an integral part
of our cleaning, rinsing, and drying systems and is also marketed independently
for other filtration applications.
Omega 1000
The Omega 1000 system is a low cost, stand-alone rinsing and drying system
with a small footprint designed to replace conventional SRD technology in
semiconductor manufacturing facilities. It has an advanced two-chamber design
which provides two independently controlled rinsing and drying chambers for
increased flexibility and throughput. The Omega 1000 incorporates our patented
Surface Tension Gradient ("STG") drying technology and patented CleanPoint water
filtration system. This process is designed to reduce contamination and water
spots, which can be left by conventional equipment.
The Omega 1000 system provides the following benefits to semiconductor
manufacturers:
- No mechanical motion of wafers, thus preventing wafer breakage problems
associated with SRD's
- Minimal moving parts provide higher system reliability and reduced
equipment maintenance cost
- No particle contamination at 0.2 micron and above added to product wafers
by rinse/dry process
- Reduced water spots and organic residues by eliminating the build-up of
water meniscus common in SRD's
Omega 2000
The Omega 2000 system is an integrated cleaning, rinsing and drying system
that uses the same rinse and dry technology as in the Omega 1000 and couples it
with additional cleaning options and system control capabilities. The Omega 2000
system combines the advantages of immersion technology and the convenience of
full flow processors and is designed to process larger substrates at higher
throughputs. We offer chemical injection and megasonic cleaning as options on
the Omega 2000. We procure these cleaning subsystems from one of several
manufacturers of such systems. The Omega 2000 is available as a stand-alone
system or as a drop-in upgrade to an existing wet bench system. The drop-in
upgrade version of the Omega 2000 is being marketed to wet bench manufacturers
(Original Equipment Manufacturers or OEM's) as the Omega 2100 system.
The Omega 2000 and the Omega 2100 provide the following advantages compared
to conventional equipment:
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- 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
Omega 4000
The Omega 4000 is a cleaning, rinsing and drying system that builds on the
Omega 2000 product by offering an integrated hydrofluoric acid (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. We procure the HF
capability from one of several manufacturers of such systems. The Omega 4000
system is also configured with robotics for wafer cassette handling.
The list price of the Omega products ranges from $95,000 for the Omega 1000
to $500,000 for the fully configured Omega 4000.
We are devoting substantial resources to the development of new types of
cleaning, rinsing and drying systems based on the development of new
technologies and our patented technologies that can greatly simplify and enhance
wet processing. No assurance can be given that these development efforts will be
successful or that any products developed will achieve commercial success.
STRATEGY
Our goal is to become a leading provider of cleaning, rinsing, and drying
equipment used in modern semiconductor manufacturing facilities. We are
marketing our products and providing evaluation systems to leading IC and wafer
manufacturers for wet processing applications with a very high IC yield
leverage. We believe that integration of our products into the manufacturing
lines of several major semiconductor manufacturers will provide support for
sales into other manufacturers' facilities. In addition, we are marketing our
products to the research and development areas within the semiconductor
companies to gain acceptance of our technology in the development of future
semiconductor manufacturing processes that require lower contamination. We have
also achieved success in additional markets for our products in other defect
sensitive industries including magnetic disks, flat panel displays, and
photo-masks.
We have adapted our products to capitalize on the expected shift in the
semiconductor industry from six and eight inch (150mm and 200mm) silicon wafers
to twelve inch (300mm) silicon wafers. That move will require IC manufacturers
to either refurbish existing manufacturing sites or construct new ones. During
the transition to larger wafers, we expect 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 yield will
increase as wafer size increases and critical dimensions decrease.
We also sell to manufacturers of wet benches who act as OEM's for us, and
incorporate our rinsing and drying systems into their existing or new automated
wet benches. Because many customers want automated wet benches which incorporate
rinsing and drying technologies such as that available from us, it is important
that we work with the manufacturers of automated wet benches to penetrate this
customer base. Generally, we sell our products to our OEM partners at a
discounted rate based upon volume purchases. We have previously announced such
OEM partner relationships and intend to continue our OEM relationships. We
expect a significant part of our future business may come from OEM sales.
We are additionally targeting the magnetic disk and flat panel display
markets, and have achieved initial success in adapting our technology to the
needs of these industries. We have recruited qualified personnel and obtained
the required test and measurement system for our laboratory for this purpose. We
believe that a significant part of our future business may come from disk and
flat panel display manufacturers.
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CUSTOMERS, MARKETING AND SERVICE
We are marketing our cleaning, rinsing, and drying systems for application
at several points in the IC fabrication process. Thus, potential customers with
large manufacturing facilities could potentially have use for several of our
products within a single facility. We have sold systems to semiconductor
manufacturers who have integrated our products into existing or new wet benches
or have used them in a stand-alone configuration. We have also sold systems to
semiconductor equipment manufacturers, magnetic disk manufacturers, flat panel
display manufacturers, and photo-mask manufacturers. We are collaborating with
several automated wet-bench manufacturers, for integrating our systems into the
wet-benches of these manufacturers.
In the United States, we market our products through direct customer
contact and manufacturer representatives. These representatives provide sales
support to end-users in their territories. We use our own personnel to provide
service support for end-users in the United States. In Europe, we market our
products through divisions of Teltec Semiconductor, which provide both sales and
service support to end-users. In Japan, we distribute our products through
Kanematsu Semiconductor Corp., which provides both sales and service support to
end-users. Other distributors include Premtek in Taiwan, Sekwang Hitech Company
in South Korea, and WKK in Singapore. We have agreements with our
representatives and distributors which generally grant the representative or
distributor an exclusive right to sell products in a specified territory and
allow termination by either party without cause on 90 days written notice.
In the United States, we use our own personnel for all equipment
installations, field service and maintenance. In Europe, we have agreements with
divisions of Teltec Semiconductor to perform all equipment installations, field
service and maintenance. In Japan, we have similar agreements with Kanematsu
Semiconductor, and are similarly using our distributors in Taiwan, Singapore and
South Korea. We typically provide customers with a twelve-month warranty
covering parts and labor.
During 1997 and 1998, the major portion of our revenues came from shipments
to North America, with a smaller portion of revenues coming from shipments to
Asia-Pacific region and from shipments to Europe.
BACKLOG
We schedule production of our systems based upon backlog, informal customer
commitments and general economic forecasts for our targeted markets. We include
in our backlog only those customer orders for systems for which we have 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. We have
not entered into any long-term purchase agreements with any customers. Customers
commit to purchase our products by issuing purchase orders. The timing of the
purchase orders' issuance depends on the customer's delivery requirements.
Our backlog of orders was approximately $1,348,520 as of December 31, 1998,
all of which we expect to deliver within the next six months. The systems
included in the backlog have been ordered by semiconductor manufacturers,
original equipment manufacturers, and magnetic disk manufacturers. The equipment
requirements of manufacturers cannot be determined with accuracy, and therefore
our backlog at any particular date is not indicative of future growth. In
addition, because of possible changes in delivery schedules, the ability of
customers to cancel, defer or reschedule, and potential delays in system
shipments, our backlog at any particular date is not necessarily representative
of actual sales of any succeeding period. Further, all potential sales will
depend on final delivery and testing of equipment.
MANUFACTURING, ASSEMBLY AND TESTING
Our equipment manufacturing operations consist of assembly of subsystems
into final configuration and final testing in a cleanroom prior to customer
shipment. We fabricate certain custom plastic components that are incorporated
into our systems, and also procure subsystems and materials from a number of
distributors and multiple outside suppliers.
Our strategic goal is to continue to use contract manufacturers for our
standard subsystems as manufacturing volume increases and product designs
mature. We do not have written contracts with our suppliers and choose suppliers
based on considerations of quality, cost and delivery time.
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PRODUCT DEVELOPMENT
We incurred research and development expenses of $2,749,925 in 1998 and
$2,021,790 in 1997. Research and development expenses represent costs incurred
for the design and development of new products, the redesign of existing
products, and the costs associated with technology development. None of our
research and development costs in 1998 and 1997 were paid for by customers, or
other outside organizations.
The market for semiconductor fabrication equipment is characterized by
rapid technological advancement and product innovation. We believe that
development of new products will be required to allow us to compete effectively
in the market. As of December 31, 1998, we had 20 full-time employees whose
duties included research and development. We intend to hire additional research
and development personnel in 1999.
We have established an advanced applications laboratory complete with a
Class 1 cleanroom and measurement and test equipment to assist in the
development of our processes and products, perform customer demonstrations and
evaluations, and assure the quality of products shipped to customers. We intend
to continue our research and development activities through internal research
and cooperative research relationships with customers and other technology
companies.
We intend to continue product enhancement programs focusing on improving
reliability and performance, developing additional features and capabilities,
increasing throughput capacity, promoting ease of equipment operations, and
reducing costs. We also believe we can improve standardization of our systems,
and improve product quality, reduce costs and shorten lead times using contract
manufacturing and pre-fabricated items.
EMPLOYEES
On December 31, 1998, we had 55 full-time employees, including 20 in
manufacturing, 18 in research, engineering and product development, 11 in sales
and marketing and 6 in finance and administration. All of the employees were
located in the United States. No employee of YieldUP is currently represented by
a labor union. Management considers employee relations to be good.
We intend to add employees from time to time as necessary to meet our
evolving management, research and development, sales and marketing, service and
manufacturing needs. We believe that our future success is dependent to a
significant degree on our ability to attract and retain additional skilled
personnel to enable us to develop our business and compete.
BUSINESS RISKS
In addition to the other information in this Annual Report, the following
risk factors should be considered carefully in evaluating YieldUP and our
business. This Annual Report contains forward-looking statements that involve
risks and uncertainties. The statements contained in this Annual Report that are
not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities and Exchange Act of 1934, including statements
regarding our expectations, beliefs, intentions, plans or strategies regarding
the future. All forward-looking statements included in this document are based
on information available to us on the date thereof, and we assume no obligation
to update any such forward-looking statements.
Our operations are subject to numerous risks, including unforeseeable
expenses as well as specific risks of the semiconductor equipment industry. We
may never achieve profitable operations. See "Financial Statements" and the
accompanying Notes.
The Semiconductor Industry is Experiencing a Downturn Which May Materially and
Adversely Affect Us
The semiconductor equipment industry is highly cyclical and has
historically experienced periodic and often prolonged downturns. Currently, the
industry is in the midst of such a downturn. We can neither predict nor avoid
such downturns. A downturn in the semiconductor industry could materially
adversely affect our backlog level, business, financial condition, and results
of operations. Any downturn in the market demand for integrated circuits would
likely reduce to an even greater extent the willingness of the manufacturers of
semiconductor devices to make substantial capital expenditures and would
adversely affect our business, financial condition, and results of operations.
We Have Experienced Operating Losses in the Past and We Expect to Sustain Losses
in the Future
We have experienced significant operating losses since our inception in
June 1993 and only commenced significant shipments of
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our products in the fourth quarter of 1995. We have experienced net losses of
$11,361,922 in 1998, $3,993,642 in 1997 and $3,374,035 in 1996. Accordingly, we
have a limited operating history on which to base the evaluation of our
business, and our prior operating results are not indicative of the results
which may be achieved in the future. As of December 31, 1998, our accumulated
deficit was $20,949,936. Our operating losses have been and will continue to be
principally the result of the various costs associated with our product
development, manufacturing, and sales and marketing activities. We may never
achieve profitability if we remain an independent entity and FSI may not be able
to generate profits from the acquired operations of YieldUP.
We believe that our existing capital resources will not enable us to fund
our operations through 1999. We will need to obtain additional capital to fund
our operations in 1999, which may result in dilution to the current
stockholders. The existence of Class B warrants may also complicate future
capital raising activities because of their potentially dilutive effect on the
purchasers of equity securities and the anti-dilution provisions of the Class B
warrants. These anti-dilution provisions could reduce the exercise price of the
Class B warrants. If we are unable to obtain the necessary capital, we will be
required to significantly curtail operations.
In December 1998, we redeemed all outstanding shares of the Series A
preferred stock for approximately $6 million which significantly reduced our
available capital resources.
On December 14, 1998, we issued a promissory note in the principal amount
of $500,000 to Abhay Bhushan, a director and chief financial officer of YieldUP,
bearing interest at the rate of nine percent (9.0%) per annum. The purpose of
the loan was to redeem the Series A preferred stock. The promissory note was
repaid in full on January 29, 1999.
On March 4, 1998, we granted 2,439 five year warrants to a commercial
lender to purchase YieldUP common stock at an exercise price of $10.25 per
share, to secure a commitment to receive a loan for up to $500,000 for our
capital equipment, at an interest rate equal to the lender's prime rate (7.75%
at December 31, 1998) plus 1.75%, and to create a $4 million revolving credit
line collaterized by our qualifying accounts receivable, at an interest rate
equal to the lender's prime rate plus 1.25%. In November 1998, the revolving
credit line was reduced from $4,000,000 to $2,000,000. As of December 31, 1998,
we were not in compliance with certain covenants of the loan agreement. We
obtained a waiver of such non-compliance from the lender through January 31,
1999 and are currently in negotiation with such lender to restructure the
covenants and terms of the loans.
On May 5, 1998, we issued 5,149 shares of common stock upon the net
exercise of a warrant held by a commercial lender.
Our Products Employ Proprietary Technology and this Technology May Infringe on
the Intellectual Property Rights of Third Parties
We rely on patent, trade secret and copyright protection for our products
and technology. We have obtained eight United States patents since 1996 relating
to our cleaning, rinsing and drying products and technologies and have filed
twenty-four additional U.S. and foreign patent applications. The process of
obtaining patents can be expensive and our patent applications may not result in
the issuance of patents. Our issued patents may not provide us with meaningful
competitive advantages, and challenges may be issued against the validity and
enforceability of any patent issued to us.
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, we may not have
adequate remedies for any breach, and our trade secrets may become known to or
independently developed by others.
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. Our current or future products may infringe on the patents of
others.
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 us;
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- to protect trade secrets or know-how owned by us;
- to defend us 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, which by itself could have a material adverse effect on our business,
financial condition and operating results. Further, adverse determinations in
such litigation could result in the loss of proprietary rights, subject us to
significant liabilities to third parties, require us to seek licenses from third
parties or prevent us from manufacturing or selling our products, any of which
could have a material adverse effect on our business, financial condition and
results of operations. See "Legal Proceedings."
We May Not Be Able To Successfully Compete in the Highly Competitive
Semiconductor Manufacturing Market
There is intense competition in the markets for our products. Our smaller
resources and yet to be fully proven products make us 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 with
a significant advantage over us because our 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. We may not be able to
overcome these disadvantages.
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 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.
We currently compete principally on the basis of superior contamination
reduction, better price/performance, improved equipment reliability, smaller
footprint, lower operating costs, and reduction in hazardous chemical usage. We
believe that these factors as well as the ease of use, price, reputation,
service and familiarity are important competitive criteria for selection of
cleaning, rinsing and drying equipment by potential customers. These factors may
not give us a competitive edge in the future and any failure to do so may have a
material adverse impact on our business or operating results.
We May Not Be Able To Adequately Diversify Our Products
We anticipate that the substantial majority of our future revenues will
come from sales of our cleaning, rinsing, and drying systems. Our revenues
declined in 1998 partially as a result of a substantial downturn in the
semiconductor industry. Should the demand for, or pricing of, our products
decline due to:
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- increased competitive pressure;
- the introduction of superior systems or processes;
- changes in the semiconductor, magnetic or optical disk, flat panel
display or photo-mask industries; or
- other factors; then
our business, financial condition and results of operations would be materially
adversely affected.
Our ability to diversify our operations through the introduction and sale
of new products and broader acceptance of our cleaning, rinsing, and drying
systems is dependent on the success of our continuing research, product
development and engineering activities, as well as our marketing efforts. We may
not be able to develop, acquire, introduce or market new products in a timely or
cost-effective manner and any new products or improvements we develop may not
achieve market acceptance or result in acceptable profit margins.
Accordingly, we are dependent on overall market acceptance of our products.
Our Operating Results Can Vary Substantially From Quarter To Quarter
We expect to derive a substantial portion of our revenues from the sale of
a relatively small number of systems, which typically range in list price from
$95,000 to $500,000. As a result, a small reduction in number of systems shipped
in a quarter due to changing demand, rescheduling or cancellation of an order,
or supplier delays would have a material adverse effect on our revenues and
results of operations for that quarter.
In addition, our need for continued investment in research and development
and sales, marketing and service will limit our ability to reduce expenses in
response to any such decrease in sales. If our anticipated level of revenues is
not achieved for a particular period, our operating results could be adversely
affected by our inability to reduce costs. Because we build certain
sub-assemblies according to forecast, a reduction in customer orders could also
result in excessive inventories which could adversely affect our results of
operations and liquidity. The impact of these and other factors on our operating
results in any future period cannot be accurately forecast.
We May Not Have an Adequate Supply of Our Product Because We Depend on Third
Parties for Supplies
We have no written contracts with any of our key suppliers, and such
suppliers may terminate our relationships with us at any time without notice.
Any such termination would materially impair our ability to satisfy any orders
for our products and would materially adversely affect our results of
operations. If any of our outside suppliers terminate their relationship with
us, we will be required to replace such suppliers. In such an event, we may not
be able to find replacement suppliers and such replacement suppliers may be more
expensive than our current suppliers, thereby materially adversely affecting our
results of operations.
It Takes A Long Time To Sell Our Products
Sales of our products have been, and are expected to continue to be,
characterized by a relatively long sales cycle, generally six to nine months,
due to such factors as the substantial time required by potential customers for
technical evaluation of our products prior to purchase, and the high cost and
the critical role our products will play in the manufacturing process. We
believe that the sales cycle will continue to be lengthy as certain of our
anticipated customers centralize purchasing decisions, which is expected to
intensify the evaluation process and require additional sales and marketing
expenditures by us.
In Order To Compete Effectively in the Semiconductor Market, We Need to Develop
New Products That Are Acceptable To Our Clients
Semiconductor, magnetic disk, flat-panel display and photo-mask
manufacturing equipment and processes are subject to rapid technological changes
and product obsolescence. We believe that our future success will depend in part
upon our ability to develop and enhance our current products and develop new
products, processes and technologies to meet such anticipated changes. If we do
not successfully introduce new products in a timely manner, any competitive
position we may develop could be lost, and our sales reduced. We may not be able
to develop and introduce new products which satisfy customer needs and achieve
market acceptance. If we fail to manage our research and development efforts,
such failure will have a material adverse effect upon our business and
prospects.
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The Loss of a Single Customer May Have an Adverse Effect on Our Business
Historically, we have sold a significant proportion of our systems in each
period to a limited number of customers. For example, our three top customers
accounted for 30% of gross revenues in 1998 and 34% of our revenues in 1997. A
single customer accounted for 11.8% of gross revenues in 1998 and 19.8% in 1997.
As a particular customer starts or expands a new facility or production line,
sales to that customer may increase sharply; conversely, as a customer completes
a facility or discontinues a production line, sales to that customer may
decrease sharply. The failure to replace such sales with sales to other
customers in succeeding periods would have a material adverse effect on our
business, financial condition and results of operations. We expect that sales to
relatively few customers will continue to account for a high percentage of our
revenues in any accounting period in the foreseeable future. A reduction in
orders from any customer or the cancellation of any significant order could have
a material adverse effect on our business, financial condition and results of
operations. None of our customers have entered into a long-term agreement
requiring them to purchase our products.
We Depend on Third Parties to Increase Our Sales Potential
An increasing percentage of our revenues is derived from sales to Original
Equipment Manufactures ("OEM") customers. We sell our cleaning, rinsing, and
drying systems to OEM's and they in turn integrate our systems into their larger
semiconductor manufacturing equipment. The timing and amount of sales to these
OEM customers ultimately depend on sales levels and shipping schedules for the
OEM products into which our products are incorporated. We have no control over
the shipping dates or volumes of products shipped by our OEM customers and OEM
customers may not continue to ship products that incorporate our products at
current levels, or at all.
Many of the markets in which our OEM customers operate have experienced
cyclical declines and advances. Cyclical downturns have been characterized by
reduced product demand and price erosion. Further, such downturns may adversely
affect the ability of our OEM customers to make payments for our products in a
timely manner, or at all, which could materially adversely affect our business,
financial condition and operating results. Generally, our OEM customers may
terminate orders at any time without penalty. Failure of these OEMs to achieve
significant sales of products incorporating our products and fluctuations in the
timing and volume of such sales could have a material adverse effect on our
business, financial condition and results of operations.
The loss of, or any reduction in, orders by a significant OEM customer
could have a material adverse effect on our business, financial condition and
results of operations. We may not able to maintain or continue to increase the
level of our sales in the future and we may not be able to retain existing OEM
customers or attract new ones.
We are Directly Impacted by International Affairs
Export sales to our international customers outside North America,
primarily to Japan and Europe, comprised approximately 33% of our gross revenues
in 1998, 32% in 1997 and 33% in 1996.
We believe that the economic turmoil in Asia has had an adverse effect on
our operations. Sales to customers outside the United States are subject to
risks, including:
- exposure to currency fluctuations;
- the imposition of governmental controls;
- the need to comply with a wide variety of foreign and U.S. export laws;
- political and economic instability;
- trade restrictions;
- changes in tariffs and taxes;
- longer payment cycles typically associated with foreign sales;
- the greater difficulty of administering business overseas; and
- general economic conditions.
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In addition, the laws of certain foreign countries may not protect our
intellectual property to the same extent as do the laws of the United States.
Although to date our results of operations have not been adversely affected by
currency exchange rate fluctuations because we have invoiced all of our
international sales in United States dollars, our results of operations could be
adversely affected by currency fluctuations in the future.
We have Issued Class B Warrants That Will Dilute Stockholders When They Are
Exercised
We have approximately 4,155,421 Class B warrants outstanding. Each Class B
warrant entitles the holder to acquire one share of common stock upon payment of
the exercise price of $11.00. Such exercise price may be reduced under certain
circumstances. The holders of Class B warrants will likely only exercise their
purchase right at a time when the price of the common stock is higher than
$11.00 per share, if the Merger is not consummated holders of common stock at
the time of exercise will suffer dilution.
Our Officers and Directors Control a Substantial Amount of Our Stock and
Therefore Can Influence Any Stockholder Vote
Holders of YieldUP's Class A common stock are entitled to five votes for
each share owned by them on all matters submitted to a vote of the stockholders,
while holders of common stock are entitled to one vote per share. Our directors
and officers control approximately 52% of the voting power and are able to elect
all of our directors and, hence, are able to control the affairs of YieldUP. In
addition, our directors and officers, subject to certain limitations imposed by
applicable law, are able to, among other things, amend our certificate of
incorporation and bylaws and effect or preclude fundamental corporate
transactions involving YieldUP, including the acceptance or rejection of any
proposals relating to a merger or an acquisition of YieldUP by another entity,
in each case without the approval of any of our other stockholders. If the
Merger is not consummated, these officers and directors will continue to control
YieldUP.
Our Charter Documents May Inhibit a Takeover
The Board of Directors has authority to issue up to 4,997,600 shares of
preferred stock and to fix the rights, preference, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. If the Merger is not consummated, then 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 the 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 our outstanding voting stock, thereby delaying, deferring or
preventing a change in control of YieldUP. 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.
We Could Be Delisted From The Nasdaq SmallCap Market
While our common stock meets the current Nasdaq SmallCap Market
requirements, such securities may not continue to meet the continued listing
requirements. Under current criteria for continued inclusion on the Nasdaq
SmallCap Market:
- we will have to 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 the common stock will have to 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 o the
common stock must be held by at least 300 holders.
On December 8, 1998, our 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."
If the Merger is not consummated and we are unable to satisfy the Nasdaq
SmallCap Market's maintenance requirements, our securities may be delisted from
the Nasdaq SmallCap Market. In such 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 NASD's "OTC Bulletin Board." Consequently, the
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liquidity of our 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 YieldUP, and lower prices for our securities than might otherwise be
obtained.
Our 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. Such an exemption may not become
available in any jurisdiction.
Our common stock Could Be Reclassified As "Penny Stock" and Subject To
Burdensome Restrictions
The Commission has adopted regulations which define a "penny stock" to be
any equity security that has a market price less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require
delivery, prior to any transaction in a penny stock, of a disclosure schedule
prepared by the Commission 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 SmallCap 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.
Our securities may not qualify for exemption from the penny stock
restrictions. If our securities were subject to the rules on penny stocks, the
market liquidity for our securities could be severely adversely affected.
We Do Not Pay Dividends
We have never paid any cash dividends on our common stock or Class A common
stock. We anticipate 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.
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".
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 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
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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.
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 middle of 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 expect that the financial institutions and customers are also devoting
resources to resolve their Y2K issues. Other than any pervasive problem, over
which we have no control, we do not expect the Y2K problem to have any material
adverse effect on our business, operating results or financial condition.
We May Not Be Able To Retain Key Engineering, Marketing, Sales and Management
Personnel Needed for Our Success
Our success will, to a large extent, depend upon the continued services of
our executive officers including in particular Raj Mohindra, President and Chief
Executive Officer. The loss of services of these executive officers could
materially adversely affect us. We do not have employment agreements with any of
our key personnel, but we are the beneficiary of key man life insurance in the
amount of $2 million on Mr. Mohindra.
Our success will also depend, in part, upon our ability to retain the
personnel who have assisted in the development of our 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 we may not be able to hire or retain
necessary personnel.
ITEM 2. DESCRIPTION OF PROPERTY
Our principal administrative, manufacturing, engineering and development,
and sales/ marketing facilities occupy approximately 14,400 square feet in a
single story building in Mountain View, California. The property is in good
condition and is occupied under a lease that expires in September 2001. We have
also leased an additional 3,000 square feet for our expanded Sales and Marketing
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Operations in Pleasanton, California. The property is in good condition and is
occupied under a lease that expires in October 2000.
Management believes that our facilities should be adequate for our operations
for at least the near term.
ITEM 3. 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 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. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during our
fourth quarter.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Since November 1995, our 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 the low sale prices of the common stock as reported by
the Nasdaq SmallCap Market. These figures reflect the inter-dealer prices
without retail markup, mark-down or commission and may not represent actual
transactions.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
1997
1st Quarter ......... $ 10 7/8 $ 5 5/8
2nd Quarter ......... 13 1/4 6 3/8
3rd Quarter ......... 15 1/8 11 3/4
4th Quarter ......... 14 3/8 8 3/8
1998
1st Quarter ......... $13 1/16 $ 9 1/2
2nd Quarter ......... 10 7/8 4 7/8
3rd Quarter ......... 5 1/2 1 1/4
4th Quarter ......... 3 1/2 1/2
</TABLE>
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On December 31, 1998, the last reported sale price of the common stock on
the Nasdaq SmallCap Market was $1 3/4 per share. As of December 31, 1998, there
were 25 holders of record of the common stock and 22 holders of record for the
Class A common stock, and we believe that there were over 1500 beneficial owners
of common stock.
DIVIDEND POLICY
We have not paid any cash dividends on our common stock or Class A common
stock. It is our present policy is to retain any earnings to finance the growth
and development of our business, and, therefore, we do not anticipate paying
cash dividends on our common stock or Class A common stock in the foreseeable
future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The information in this section contains forward-looking statements
describing our plans to increase revenues and gross margins on our products and
for debt and equity financing to meet our capital needs. Such statements are
made in reliance on the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Our 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. Our ability to execute our 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
"Business Risks" and elsewhere in this Annual Report.
RESULTS OF OPERATIONS
During the year ended December 31, 1998 our revenues, net of sales returns
of $512,000 and an additional provision for returns of $747,429 were $6,732,574,
compared to $7,465,447 for the year ended December 31, 1997. The decrease in net
revenues of 10% in 1998 over 1997 was due to a decrease in the level of
shipments, sales returns and provision for returns for our cleaning, rinsing,
and drying systems due to adverse industry conditions. Gross sales for 1998 were
$7,992,003, compared to $7,465,447 for 1997. The industry downturn became very
severe in the third quarter of 1998, and we experienced product returns for the
first time in our history. As a result of these unfavorable business conditions,
we reexamined all of our receivables and inventory on hand, and recorded a
provision for sales returns as well as a $2,740,910 provision for excess
inventory. We have further implemented a policy of revenue recognition only on
letter of credit or receipt of cash for certain of our customers. We continue to
modify and improve our products, generally based on feedback from our customers
and as a result have increased our sales to OEM's, and our export sales to
Europe.
During the year ended December 31, 1998, sales to a single U.S. customer
accounted for 11.8% of gross revenues, sales to a customer in Europe accounted
for 9.4% of gross revenues, and sales to an OEM customer accounted for 9.1% of
gross revenues. Gross sales to OEM's accounted for 31% of gross revenues during
the year ended December 31, 1998 compared to 17% of gross revenues during the
same period a year ago. Export sales to customers outside North America
accounted for 33% of gross revenues (20% in Europe and 13% in the Asia Pacific
region) during the year ended December 31, 1998 compared to 32% of gross
revenues (11% in Europe and 21% in the Asia Pacific region) during the same
period a year ago.
Backlog at December 31, 1998 totaled approximately $1,348,520 compared to
approximately $2,517,000 at December 31, 1997. New orders for the fourth quarter
of 1998 were $1,988,374. The continuing slowdown in the semiconductor equipment
and disk drive industries may negatively impact our ability to book new orders
in the future until there is a change in the conditions that are reducing
capital equipment spending by manufacturers.
Our cost of sales was $7,309,387 for the year ended December 31, 1998, and
$5,964,228 for the year ended December 31, 1997. Our gross deficit was $576,813
or 8.6% for the year ended December 31, 1998, compared to a gross margin of
$1,501,219 or 20.1% for the year ended December 31, 1997. The gross deficit was
due to lower than expected revenues, sales returns and provision for sales
returns of $1,259,429, and a provision for excess inventory of $2,740,910. Our
cost of sales remained high during 1998 due to manufacturing expenses being
allocated over relatively few units. We expect that future gross margins should
improve to the extent unit shipments and revenue increase and we are able to
continue our transition to increased shipments of standardized products and
lower unit material costs.
Research and development expenses were $2,749,925 for the year ended
December 31, 1998, and $2,021,790 for the year ended December 31, 1997. The
increase in research and development expenses was due mainly to an increase in
engineering personnel and
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an increase in expenses for prototype development of our new products compared
to 1997. Research and development expenses increased as a percentage of net
revenues to 40.8% in 1998 from 27.1% in 1997 due to decreased revenues and
increased research and development activity. In 1998, we continued to invest in
enhancement of our existing product line and started the development of new
technology and products. 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 were $4,877,568 for the year
ended December 31, 1998, and $3,724,100 for the year ended December 31, 1997.
The increase in selling, general, and administrative expenses reflected the
increase in bad debts and a provision for bad debt due to adverse industry
conditions, and increased legal expense for litigation and patent activity
compared to 1997. Selling, general and administrative expenses increased as a
percentage of net revenues to 72.4% in 1998 from 49.9% in 1997 due to decreased
revenues and increased bad debt expense. We expect that selling, general, and
administrative expenses will decline as a percentage of revenues to the extent
revenues increase and industry conditions improve.
Net interest income was $173,346 for the year ended December 31, 1998, and
$251,029 for the year ended December 31, 1997. The decrease in net interest
income in 1998 was due to lower investment and cash balances in 1998 when
compared to 1997, as a result of the increased losses resulting from the
industry downturn. We expect that interest income may decline in the future due
to lower investment and cash balances caused by operating losses in 1998, and
the redemption of the convertible preferred stock.
We sustained a net loss applicable to holders of common stock of
$11,361,922 for the year ended December 31, 1998, as compared to a net loss of
$3,993,642 for the year ended December 31, 1997. The net loss in 1998 included a
special charge of $2,666,867 related to the insolvency of a semiconductor
equipment manufacturer in which we had an equity interest, loan advances and
outstanding receivables, accretion on redeemable convertible preferred stock of
$1,330,962, and a provision for excess inventory of $2,740,910. Excluding these
items, the net loss for 1998 would have been $4,623,183. The net loss in 1997
included an $808,469 inventory write-off, due primarily to a decision by
management to discontinue our old product lines, and a non-cash expense of
$300,000 in the first quarter of 1997 related to an amendment to certain of our
Class A Warrants to resolve a potential dispute with holders of such warrants
with respect to the effectiveness of a resale registration statement relating to
such Class A Warrants. Excluding these two items, the net loss for 1997 would
have been $2,885,173. The continued net loss in 1998 was due primarily to
reduced revenues as a result of the severe industry downturn, the continued
product development activities and the provision for excess inventory. Net
losses are expected to continue until we are able to sell sufficient numbers of
cleaning, rinsing and drying systems to cover operating expenses, of which there
can be no assurance.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity during the year ended December 31, 1998 has
been the cash flow generated from the private placement of 600 Series A
Convertible Preferred Shares ("Series A Shares"), completed on March 30, 1998.
We raised net proceeds of approximately $5.76 million from the sale of the
Series A Shares which we used for general working capital purposes. During 1998,
we issued 2,470,588 shares of common stock upon the conversion of 134 Series A
Shares into common stock, according to the terms of the agreement with the
Series A stockholders. On December 21, 1998, we redeemed all of the remaining
466 outstanding Series A Shares for a cash payment of approximately $6 million.
As of December 31, 1998, we had cash and cash equivalents of $143,228, and
short-term investments of $10,000, accounts receivable of $1,401,413, and
inventories, net of reserve for excess inventory, of $2,788,037.
On March 4, 1998, we secured a commitment from a commercial lender to
receive a loan up to $500,000 for our capital equipment, at an interest rate of
the lender's prime rate (7.75% at December 31, 1998) plus 1.75%, and to
establish a $4 million revolving credit line collaterized by our qualifying
accounts receivable, at an interest rate of the lender's prime rate plus 1.25%.
In November 1998, the revolving credit line was reduced from $4,000,000 to
$2,000,000. As of December 31, 1998, we were not in compliance with certain
covenants of the loan agreement. We obtained a waiver of such non-compliance
from the lender through January 31, 1999 and are currently in negotiation with
such lender to restructure the covenants and terms of the loans.
On December 14, 1998, we issued a promissory note in the principal amount
of $500,000 to Abhay Bhushan, a director and chief financial officer of YieldUP,
bearing interest at the rate of nine percent (9.0%) per annum, to enable the
redemption of the Series A Shares. The promissory note was repaid in full on
January 29, 1999.
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Net cash used for operating activities was approximately $4,314,000 during
the year ended December 31, 1998, and $9,948,000 during the year ended December
31, 1997. The decrease in cash used for operating activities during 1998 was
primarily attributable to the increase in collection of accounts receivable and
reduction in purchases of inventory as compared to the cash used for operating
activities during 1997. This decrease in cash used was partially offset by a
reduction in our accounts payable and accrued liabilities during 1998.
Net cash provided by investing activities was approximately $924,000 during
the year ended December 31, 1998 as compared to net cash used for investing
activities of approximately $3,187,000 during the year ended December 31, 1997.
The increase in cash provided by investing activities during 1998 primarily
reflects the proceeds from sales of short-term investments.
Our financing activities provided net cash of approximately $1,388,000 for
the year ended December 31, 1998, and approximately $14,662,000 for the year
ended December 31, 1997. The decrease in the cash provided by financing
activities primarily resulted from the decrease in cash provided by stock
issuances during 1998 as compared to 1997 and the redemption of Series A Shares
during 1998. In addition, during 1998, we increased our borrowings and received
$1,498,000 in proceeds from notes payable compared to $250,000 in 1997, and the
availability of $407,000 in 1998 from a decrease in restricted cash. We repaid
$330,000 and $360,000 of our bank borrowings in 1998 and 1997, respectively.
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 ("the 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 $.7313 cash
and .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 anticipate that the transaction will be
completed in late April or early May of 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.
We believe that our existing capital resources will not enable us to fund
our operations through 1999. We will be required to seek additional capital if
we fail to merge with FSI, which may result in significant dilution to the
current stockholders. If we are unable to obtain the necessary capital, our
business, financial, and operating results may be materially adversely affected.
17
<PAGE> 18
ITEM 7. FINANCIAL STATEMENTS
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, 1998, 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, 1998, 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 2 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to this matter are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KPMG LLP
Mountain View, California
February 5, 1999
18
<PAGE> 19
YIELDUP INTERNATIONAL CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 143,228
Short-term investments 10,000
Accounts receivable, net of allowance for doubtful accounts 1,401,413
Inventories, net of reserve for excess inventory 2,788,037
Prepaid expenses and other current assets 76,431
------------
Total current assets 4,419,109
------------
Property and equipment 1,500,712
Other assets 206,712
------------
Total assets $ 6,126,533
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 747,730
Accrued liabilities 616,997
Current portion of capital lease obligations 15,994
Bank borrowings 1,223,963
Note payable to a director of the Company 500,000
------------
Total current liabilities 3,104,684
------------
Capital lease obligations, less current portion 66,985
------------
Total liabilities 3,171,669
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;
1,364,497 shares issued and outstanding
each share is entitled to five votes 1,364
Common stock
$.001 par value; 20,000,000 shares authorized;
6,891,979 shares issued and outstanding
each share is entitled to one vote 6,892
Additional paid-in capital 23,898,385
Notes receivable from stockholders (1,841)
Accumulated deficit (20,949,936)
------------
Total stockholders' equity $ 2,954,864
------------
Total liabilities and stockholders' equity $ 6,126,533
============
</TABLE>
See accompanying notes to financial statements
19
<PAGE> 20
YIELDUP INTERNATIONAL CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Gross revenues $ 7,992,003 $ 7,465,447
Less provision for sales returns (1,259,429) --
------------ ------------
Net revenues 6,732,574 7,465,447
Cost of sales 4,568,477 5,155,759
Provision for excess inventory 2,740,910 808,469
------------ ------------
Total cost of sales 7,309,387 5,964,228
Gross margin (deficit) (576,813) 1,501,219
------------ ------------
Operating expenses:
Research and development 2,749,925 2,021,790
Selling, general, and administrative 4,877,568 3,724,100
------------ ------------
Total operating expenses 7,627,493 5,745,890
------------ ------------
Operating loss (8,204,306) (4,244,671)
Investment write-off (2,000,000) --
Interest income, net 173,346 251,029
------------ ------------
Net loss (10,030,960) (3,993,642)
Accretion on redeemable convertible preferred stock (1,330,962) --
============ ============
Net loss applicable to holders of common stock $(11,361,922) $ (3,993,642)
============ ============
Basic and diluted net loss per share
applicable to holders of common stock $ (1.86) $ (0.81)
============ ============
Shares used in per share computations 6,114,841 4,946,858
============ ============
</TABLE>
See accompanying notes to financial statements
20
<PAGE> 21
YIELDUP INTERNATIONAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A SERIES A
COMMON STOCK COMMON STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances as of
December 31, 1996 1,912,111 $ 1,912 1,495,000 $ 1,495 -- $ --
Exercise of Class A
common stock options 46,861 47 -- -- -- --
Exercise of common
stock options -- -- 42,702 43 -- --
Exercise of Class A
warrants -- -- 2,257,690 2,257 -- --
Expense related to
certain Class A warrants -- -- -- -- -- --
Exercise of Class B
warrants -- -- 1,000 1 -- --
Conversion of Class A
common stock to (545,319) (545) 545,319 545 -- --
common stock
Payment of notes -- -- -- -- -- --
receivable
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balances as of
December 31, 1997 1,413,653 $ 1,414 4,341,711 $ 4,341 -- $ --
Exercise of Class A
common stock options 10,000 10 -- -- -- --
Exercise of common
stock options and warrants -- -- 20,524 21 -- --
Conversion of Class A
common stock to (59,156) (60) 59,156 60 -- --
common stock
Issuance of warrants
to lender -- -- -- -- -- --
Issuance of Series A
preferred stock -- -- -- -- 600 1
Conversion of Series A
preferred stock to -- -- -- --
common stock 2,470,588 2,470 (134) --
Redemption of Series A
preferred stock -- -- -- -- (466) (1)
Accreation on redeemable
preferred stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balances as of
December 31,1998 1,364,497 $ 1,364 6,891,979 $ 6,892 -- $ --
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE TOTAL
PAID-IN FROM ACCUMULATED STOCKHOLDER
CAPITAL STOCKHOLDERS DEFICIT EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance as of
December 31, 1996 $ 7,571,550 $ (15,348) $ (5,594,372) $ 1,965,237
Exercise of Class A
common stock options 86,173 -- -- 86,220
Exercise of common
stock options 238,610 -- -- 238,653
Exercise of Class A
warrants 14,477,951 -- -- 14,480,208
Expense related to
certain Class A warrants 300,000 -- -- 300,000
Exercise of Class B
warrants 10,999 -- -- 11,000
Conversion of Class A
common stock to -- -- -- --
common stock
Payment of notes -- 13,507 -- 13,507
receivable
Net loss -- -- (3,993,642) (3,993,642)
------------ ------------ ------------ ------------
Balances as of
December 31, 1997 $ 22,685,283 $ (1,841) $ (9,588,014) $ 13,101,183
Exercise of Class A
common stock options 6,890 -- -- 6,900
Exercise of common
stock options and warrants 95,828 -- -- 95,849
Conversion of Class A
common stock to -- -- -- --
common stock
Issuance of warrants
to lender 24,353 -- -- 24,353
Issuance of Series A
preferred stock 5,759,203 -- -- 5,759,204
Conversion of Series A
preferred stock to
common stock (2,470) -- -- --
Redemption of Series A
preferred stock (6,001,664) -- -- (6,001,665)
Accreation on redeemable
preferred stock 1,330,962 -- (1,330,962) --
Net loss -- -- (10,030,960) (10,030,960)
------------ ------------ ------------ ------------
Balances as of
December 31,1998 $ 23,898,385 $ (1,841) $(20,949,936) $ 2,954,864
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements
21
<PAGE> 22
YIELDUP INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(10,030,960) $ (3,993,642)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 574,174 293,322
Provision for bad debts 1,091,360 104,900
Provision for sales returns 1,259,429 --
Provision for excess inventory 2,740,910 808,469
Expenses related to certain Class A Warrants -- 300,000
Write-off of investment 2,000,000 --
Changes in operating assets and liabilities:
Accounts receivable 572,558 (3,730,201)
Inventories (850,347) (4,809,686)
Prepaid expenses and other assets 169,936 (917,140)
Accounts payable (1,764,474) 1,869,115
Accrued liabilities (76,702) 169,422
Customer deposits -- (43,000)
------------ ------------
Net cash used by operating activities (4,314,116) (9,948,441)
------------ ------------
Cash flows from investing activities:
Purchase of plant and equipment (572,311) (794,245)
Proceeds from sales of short-term investments 1,496,150 --
Decrease in restricted cash -- 103,129
Purchase of short-term investments, net -- (1,496,150)
Purchase of other investments -- (1,000,000)
------------ ------------
Net cash provided by (used by) investing activities 923,839 (3,187,266)
------------ ------------
Cash flows from financing activities
Proceeds from notes payable 998,317 250,000
Proceeds from note payable to a director of the Company 500,000 --
Payments under capital lease obligations (47,635) (57,268)
Payments of term loan (330,000) (360,000)
Decrease in restricted cash on term loan 406,749 --
Proceeds of notes receivable from stockholders -- 13,507
Issuance of common stock from option exercises 95,849 238,653
Issuance of common stock from warrant exercise -- 14,491,208
Issuance of Series A preferred stock, net 5,759,204 --
Redemption of Series A preferred stock (6,001,664) --
Issuance of Class A common stock from option exercise 6,900 86,220
------------ ------------
Net cash provided by financing activities 1,387,720 14,662,320
------------ ------------
Net increase (decrease) in cash and cash equivalents (2,002,557) 1,526,613
Cash and cash equivalents at beginning of year 2,145,785 619,172
------------ ------------
Cash and cash equivalents at end of year $ 143,228 $ 2,145,785
============ ============
Non-cash financing and investing activity:
Acquisition of equipment under capital lease obligations $ 92,758 $ --
Accretion on redeemable convertible preferred stock 1,330,962 --
============ ============
Cash paid for interest $ 69,258 $ 75,870
============ ============
</TABLE>
See accompanying notes to financial statements
22
<PAGE> 23
YIELDUP INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
We develop, manufacture, and market cleaning, rinsing and drying equipment
used in the manufacturing of semiconductor wafers and other defect sensitive
substrates.
Cash Equivalents
Cash equivalents consist primarily of highly liquid debt instruments with
original maturity dates up to 90 days.
Short-Term Investments
Short-term investments are classified as "available-for-sale" 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. As of
December 31, 1998, short-term investment includes a certificate of deposit of
$10,000.
Concentration of Credit Risk
Financial instruments that potentially subject us to significant
concentration of credit risk consist primarily of cash equivalents, short-term
investments and trade receivables. Substantially all of our cash equivalents are
invested in certificates of deposit and money market funds. We perform ongoing
credit evaluations of our customers and generally require no collateral. We
maintain reserves for potential credit losses. At December 31, 1998, the
allowance for potential credit losses was approximately $555,000.
Inventories
Inventories are stated at the lower of first-in, first-out cost or market.
We periodically review our inventories for potential slow-moving and obsolete
items and write down impaired items to net realizable value.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets, generally three to five years. Property 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.
We review our long-lived assets and certain identifiable intangibles 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 undiscounted cash flows expected to be generated by the asset. If
such asset is considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of are reported at the lower of
the carrying amount or fair value, less costs to sell.
Revenue Recognition
Revenue is recognized after shipment when there is no significant
uncertainty regarding customer acceptance and payment. We have determined that
no significant uncertainties exist regarding customer acceptance and payment
when we have received signed evidence of an arrangement with the customer, our
product has been shipped and the collection of our receivable is probable. For
23
<PAGE> 24
certain of our customers, we recognize revenue only on letter of credit or
receipt of cash. We have established a reserve for sales returns, which as of
December 31, 1998 was approximately $747,000
Product Warranty
A provision for the estimated future costs of warranty repair is provided
at the time of sale.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the statement of operations in the period
that includes the enactment date. A valuation allowance is recorded for deferred
tax assets if it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
Stock Based Compensation
We account for our stock based compensation plans using the intrinsic value
method. As such, compensation expense is recorded if on the measurement date,
which is generally the date of grant, the current market price of the
underlying stock exceeds the exercise price.
Fair Value of Financial Instruments
The carrying amounts of our cash and cash equivalents, short-term
investments, accounts receivable, accounts payable, bank borrowings and notes
payable approximate their respective fair values.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Net Loss Per Share
Basic net loss per share is based on the weighted average number of shares
of Class A common stock and common stock outstanding. Diluted net loss per share
is based on the weighted average number of shares of Class A common stock and
common stock outstanding and dilutive common equivalent shares from stock
options and warrants outstanding using the treasury stock method. In 1998 and
1997, we had 946,768 options and 4,157,860 warrants and 658,806 options and
4,182,149 warrants outstanding, respectively, that were not included in the
computation of diluted EPS because to do so would have been antidilutive for
those years, however, such options and warrants could potentially dilute basic
EPS in the future.
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 financial statement presentation.
Comprehensive Income
We have no other components of comprehensive income other than our reported
amounts of net loss applicable to holders of common stock.
24
<PAGE> 25
(2) BASIS OF PRESENTATION AND LIQUIDITY
We have suffered recurring losses from operations that raise substantial
doubt about our ability to continue as a going concern. Our ability to continue
as a going concern is dependent upon our obtaining additional financing from
other sources. The accompanying financial statements have been prepared assuming
we will continue as a going concern and do not include any adjustments that
might result from the outcome of this uncertainty.
We currently anticipate that we will need to raise additional funds through
other public or private financing to adequately fund our operations through
December 31, 1999 and beyond before we reach profitability and positive cash
flow. On January 21, 1999, we entered into a definitive agreement with FSI
International, Inc. ("FSI"), for FSI to acquire all of the outstanding stock of
YieldUP. We also granted FSI a non-exclusive royalty-bearing license to our
patent portfolio. See Note 9.
(3) BALANCE SHEET COMPONENTS
Inventories
A summary of inventories follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-----------
<S> <C>
Raw materials $ 1,840,088
Work in process 493,024
Evaluation units 1,308,052
Finished goods 2,486,053
-----------
Gross inventory $ 6,127,217
Less provision for excess inventory 3,339,180
-----------
Net inventory $ 2,788,037
===========
</TABLE>
Evaluation units are systems installed at potential customers' sites. These
units are stated at cost less accumulated depreciation. Depreciation is provided
using the straight-line method over the estimated useful lives of the units,
generally three years.
Property and Equipment
A summary of property and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
----------
<S> <C>
Machinery and equipment $1,576,573
Furniture and fixtures 71,817
Leasehold improvements 857,360
----------
2,505,750
Less accumulated depreciation and amortization 1,005,038
----------
$1,500,712
==========
</TABLE>
(4) INCOME TAXES
We have a net operating loss carryforward at December 31, 1998 of
$13,282,000 for federal tax purposes and $6,675,000 for California state tax
purposes. The difference between the federal net operating loss and the
accumulated deficit is primarily attributed to the years ended December 31, 1993
and 1994 when we were an S-Corporation for taxation purposes. The difference
between the federal and California net operating loss carryforward is due to the
50% limitation of net operating loss carryforwards
25
<PAGE> 26
for California tax purposes. The federal net operating loss carryforwards expire
in the years 2010 through 2018. The California net operating loss carryforwards
expire in the years 2000 through 2003.
Federal and California tax laws impose significant restrictions on the
utilization of net operating loss carryforwards in the event of a change in the
ownership of YieldUP, 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 the federal and
$699,000 of the California tax 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 following reconciles the expected corporate federal income tax expense
(computed by multiplying our income before taxes by 34%) to our income tax
expense for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Expected income tax (benefit) $(3,411,000) $(1,358,000)
Expenses not deductible for tax purposes 21,000 71,000
State tax expense, net of Federal income tax benefit 1,000 1,000
Net operating loss not benefited 3,389,000 1,286,000
----------- -----------
Actual income tax expense $ -- $ --
=========== ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 5,106,000 $ 2,710,000
Reserves and accruals 2,126,000 506,000
Fixed assets 235,000 102,000
Research credit carryover 414,000 --
Other 16,000 11,000
----------- -----------
Total gross deferred tax assets 7,897,000 3,329,000
Less valuation allowance (7,897,000) (3,329,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
The net change in the valuation allowance was an increase of $4,568,000 for
the year ended December 31, 1998 and an increase of $1,559,000 for the year
ended December 31, 1997.
Gross deferred tax assets as of December 31, 1998 include approximately
$60,000 relating to the exercise of stock options, which will be credited to
equity when realized.
26
<PAGE> 27
(5) DEBT
Debt is comprised of two bank loans and a promissory note. The first bank
loan is a $2,000,000 revolving credit line collateralized by our qualifying
accounts receivable, which bears interest at the bank's prime rate (7.75% at
December 31, 1998) plus 1.25%. As of December 31, 1998, $840,000 was outstanding
under this loan, which matures on March 3, 1999. The second bank loan is a
capital equipment term loan, which bears interest at the same bank's prime rate
plus 1.75%. As of December 31, 1998, $408,316 was outstanding under this loan,
which matures on March 4, 2002. Principal payments on the term loan are due as
follows: $102,079 in 1999, $136,105 in 2000, $136,105 in 2001 and $34,027 in
2002. As of December 31, 1998, we were not in compliance with certain covenants
of the bank loan agreement. We obtained a waiver of such non-compliance from the
bank through January 31, 1999 and are currently in negotiation with the bank to
restructure covenants and terms of the loans.
Warrants to purchase 2,439 shares of common stock were issued to the bank
during the year ended December 31, 1998 in conjunction with the loan agreements.
The fair value assigned to the warrants was calculated using the Black-Scholes
option pricing model. The portions of the proceeds allocated to the warrants
amounted to $24,353 for the year ended December 31, 1998, which has been
recorded as a discount on the debt and as an increase to additional paid-in
capital. The discount will be amortized as additional interest expense using the
effective interest method over the life of the loan.
On December 14, 1998, we issued a promissory note in the principal amount
of $500,000 to Abhay Bhushan, a director and chief financial officer of YieldUP
at the interest rate of nine percent (9.0%) per annum, to enable the redemption
of the Series A Shares. The promissory note was repaid in full on January 29,
1999, including the $500,000 principal, and the $5,794.52 of interest incurred
from December 14, 1998 through January 29, 1999.
(6) COMMITMENTS AND CONTINGENCIES
Leases
We are obligated under operating leases for certain equipment, our
facilities and capital leases for certain equipment, that expire at various
dates during the next five years. Included in property and equipment are
machinery and equipment recorded under capital leases as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Machinery and equipment ..................... $115,950
Less accumulated amortization ............... 13,528
--------
$102,422
--------
</TABLE>
Future minimum lease payments under our non-cancelable operating leases and
future minimum capital lease payments as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ -------- ---------
<S> <C> <C>
1999 $ 23,856 $254,388
2000 23,856 224,328
2001 23,856 127,841
2002 23,856 --
2003 7,952 --
-------- ========
Total minimum lease payments $103,376 $606,557
========
Less amount representing interest 20,397
--------
Present value of minimum lease payments $ 82,979
Less current portion 15,994
========
$ 66,985
========
</TABLE>
27
<PAGE> 28
Rent expense was approximately $204,252 for the year ended December 31, 1998
and $149,751 for the year ended December 31, 1997.
Patent Matters
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 our 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 financial statements.
CFM filed an additional complaint against us 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 plan to vigorously
defend our intellectual property against any and all claims. 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 financial
statements.
(7) 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 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
permitted transferees which are mainly the stockholders' family members.
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 of Directors in the
resolutions authorizing the issuance of that particular series.
28
<PAGE> 29
On March 30, 1998, we completed a $6 million equity financing in a private
placement of Series A Convertible Preferred Stock (Series A Shares). Under the
securities purchase agreement, we issued 600 Series A Shares. After the
satisfaction of certain holding periods, each of the newly issued Series A
Shares were convertible, at the option of the holder, into shares of common
stock based upon a conversion price of $10.8625 per share or if lower, 100% of
the market price, defined as the lowest closing bid price during the 20 trading
days preceding a conversion. The convertible preferred stock carried a dividend
of 5% per year, payable in kind. Upon certain events, such as mergers or other
business combinations, delisting of our common stock from the Nasdaq SmallCap
Market and any breaches of representation, warranty or covenants of the
agreement, the Series A stockholders had the option to redeem their Series A
Shares for cash at 120% of face value. Consequently, we recorded an accretion on
redeemable preferred stock of $1,330,962 in 1998. We issued 2,470,588 shares of
common stock upon the conversion of 134 Series A Shares into common stock, in
accordance with the terms of the agreement with the Series A stockholders. On
December 21, 1998, we redeemed all of the remaining 466 outstanding Series A
Shares for a cash payment of approximately $6 million.
Warrants
As of December 31, 1998, all of our Class A Warrants had been exercised or
redeemed except 1,780 Class A warrants outstanding which can be redeemed by the
holders at a price of $0.05 per warrant. We incurred a non-cash expense of
$300,000 in the first quarter of 1997 related to an amendment to certain of our
Class A Warrants to resolve a potential dispute with holders of such warrants.
The terms of certain Class A warrants were amended to give certain Class A
warrant holders an additional 0.2 shares of common stock for each Class A
warrant exercised. We used the Black-Scholes option pricing model to value the
Class A warrants before and after the change in terms and determined that the
increase in value was approximately $300,000.
In September 1995, 450,000 Class B warrants were issued on a pro-rata basis
to all holders of our stock and stock options. This action was accounted for as
a recapitalization. In November 1995, 1,495,000 Class B warrants were issued as
part of our IPO which offered Units, each of which comprised one share of common
stock, a Class A warrant and a Class B warrant. Upon the conversion of the Class
A warrants, in April 1997, the Class A warrant holders were given 1,495,000
Class B warrants in accordance with the terms of the Class A warrant. These
Class B warrants were valued at their fair values at the time of their issuances
and these amounts are included in common stock in stockholders' equity.
As of December 31, 1998, we had issued and outstanding 4,155,421 Class B
warrants. 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 B warrants are subject to redemption by us, at a
price of $0.05 per warrant, if the average closing bid price of the common stock
exceeds certain prices within certain time periods. As of December 31, 1998,
1,000 Class B warrants have been exercised and no Class B warrants have been
redeemed.
On March 4, 1998, we granted 2,439 five-year warrants to a commercial
lender to purchase common stock at an exercise price of $10.25 per share.
Stock Option Plans
As of December 31, 1998, we have three stock-based compensation plans,
which are described below.
The Board of Directors has reserved 1,050,000 shares of common stock for
issuance under our 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 non-qualified 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. As of December 31, 1998, 671,026 options are
outstanding under the Option Plan.
Prior to the adoption of the Option Plan in September 1995, we 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").
We do 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, 1998, 190,742 options are outstanding under the
Prior Plan.
29
<PAGE> 30
On September 29, 1998, the Board of Directors adopted a stock option
repricing program to restore the incentive for employees to remain with YieldUP,
for eligible employees. Executive officers and directors of YieldUP were not
eligible for the stock option repricing program. Under the program, the
employees could opt for participation in the program by agreeing to a nine-month
exercise restriction in return for exchanging old options for newly priced
options on October 14, 1998. Under this program 439,800 options were repriced at
an exercise price of $0.63, the closing price of our common stock on the NASDAQ
SmallCap Market on October 14, 1998.
Under our 1995 Outside Directors Stock Option Plan (the "Directors Plan"),
200,000 shares of common stock have been reserved for issuance. The Directors
Plan provides for the automatic granting of non-qualified stock options to
directors of YieldUP who are not employees of YieldUP ("Outside Directors").
Under the Directors Plan, each new Outside Director elected will automatically
be granted at the date of his or her election an option to purchase 20,000
shares of common stock. 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 on the date of each annual meeting of stockholders an
option to purchase 5,000 shares of common stock. 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. As of December 31, 1998,
85,000 options are outstanding under the Director's Plan.
A summary of the status of our three fixed stock option plans as of
December 31, 1998 and 1997, and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICES
--------- ----------------
<S> <C> <C>
Balance as of December 31, 1996 ......... 610,287 $ 3.63
Granted ............................... 344,750 $ 10.04
Exercised ............................. (89,563) $ 3.63
Canceled .............................. (206,668) $ 6.10
--------- ---------
Balance as of December 31, 1997 ......... 658,806 $ 6.21
Granted ............................... 1,037,600 $ 3.51
Exercised ............................. (25,375) $ 4.05
Canceled .............................. (724,263) $ 9.04
--------- ---------
Balance as of December 31, 1998 ......... 946,768 $ 1.15
========= =========
</TABLE>
As of December 31, 1998, 502,492 shares were available for grant. The
number of options exercisable were 355,241 as of December 31, 1998, and 237,374
as of December 31, 1997.
We use the intrinsic value method in accounting for our plans. Accordingly,
no compensation cost has been recognized for any of the plans. Had compensation
cost for our three stock-based compensation plans been determined consistent
with SFAS No. 123, our net loss and net loss per share would have been increased
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net loss as reported ......... $(11,361,922) $ (3,993,642)
Pro forma .................. $ 12,785,596 $ (4,738,585)
Net loss per share as reported $ (1.86) $ (0.81)
Pro forma .................. $ (2.09) $ (0.96)
</TABLE>
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. Stock options granted to consultants and advisors are accounted for
using the fair value method under SFAS 123.
The weighted-average fair value of options granted was $2.89 in 1998 and
$6.79 in 1997.
The fair value of each option grant is estimated on the date of grant using
the Black Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997: no dividend yield; expected
volatility of 104% in 1998 and 67.5% in 1997; risk free interest rates of 4.53%
in 1998 and 6% in 1997; 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, 1998:
30
<PAGE> 31
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ----------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OF REMAINING AVERAGE OF AVERAGE
EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.63 -- $ 0.63 .......... 657,800 9.12 $ 0.6300 132,893 $ 0.6300
$ 0.69 -- $ 0.69 .......... 64,771 6.41 $ 0.6900 58,465 $ 0.6900
$ 0.76 -- $ 0.76 .......... 125,971 6.32 $ 0.7600 125,971 $ 0.7600
$ 1.63 -- $ 5.00 .......... 65,000 7.98 $ 3.8669 30,416 $ 5.0000
$ 5.88 -- $ 5.88 .......... 11,000 8.01 $ 5.8800 5,270 $ 5.8800
$ 7.50 -- $ 7.50 .......... 10,000 7.41 $ 7.5000 --
$ 8.00 -- $ 8.00 .......... 437 8.19 $ 8,0000 437 $ 8.0000
$ 9.75 -- $ 9.75 .......... 1,123 9.19 $ 9.7500 1,123 $ 9.7500
$11.75 -- $11.75 .......... 10,000 8.41 $11.7500 -- --
$13.00 -- $13.00 .......... 666 8.58 $13.0000 666 $13.0000
------- ---- -------- ------- --------
$ 0.63 -- $13.00 .......... 946,768 8.44 $ 1.1476 355,241 $ 1.1991
======= =======
</TABLE>
(8) 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 provided only the
required enterprise wide disclosures. For the year ended December 31, 1998,
sales to one customer exceeded 10% of gross revenues. Sales to Applied Materials
as a percent of gross revenues were 11.8% for the year ended December 31, 1998,
and 19.8% for the year ended December 31, 1997.
Export sales to our international customers outside North America,
primarily to Japan and Europe comprised approximately 33% of gross revenues (20%
in Europe and 13% in the Asia Pacific region) for the year ended December 31,
1998, and 32% of gross revenues (11% in Europe and 21% in the Asia Pacific
region) for the year ended December 31, 1997.
(9) SUBSEQUENT EVENTS
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 is anticipated to be a merger ("the 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, the definitive
agreement provides that each outstanding warrant to purchase shares of our
common stock under any warrant agreement will become a right to acquire FSI
common stock. Per the definitive agreement, 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 $.7313 cash and .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. As part of the definitive
agreement to be acquired by FSI, we also granted FSI a non-exclusive
royalty-bearing license to our patent portfolio.
31
<PAGE> 32
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following sets forth certain information regarding our executive
officers:
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of YieldUP and their ages as of
January 31, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Raj Mohindra .............. 54 President, Chief Executive Officer and Director
Abhay K. Bhushan .......... 54 Executive Vice President, Chief Financial Officer and Director
Suraj Puri ................ 54 Vice President, Chief Technical Officer and Director
Ram Paul Gupta(1) ......... 60 Director
Daniel Flamm(1) ........... 55 Director
</TABLE>
- ----------
(1) Members of the Compensation and Audit Committees.
Mr. Mohindra co-founded YieldUP in 1993 and has served as President, Chief
Executive Officer and a director of YieldUP since its inception. Prior to
joining YieldUP, 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. Bhushan co-founded YieldUP in 1993 and has served as Executive Vice
President and Chief Financial Officer since June 1997, and as a director of
YieldUP since its inception. He also served as Chief Financial Officer of
YieldUP from August 1993 until July 1995. From 1996 to 1997, Mr. Bhushan was
co-founder of Portola Communication, a software company, where he served as
Chairman, President, Chief Financial Officer and Vice President Business
Development. From 1974 to 1996, 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. Puri co-founded YieldUP in 1993 and has served as Vice President, Chief
Technical Officer and a director of YieldUP since its inception. Prior to
joining YieldUP, from 1986 to 1993, Mr. Puri served as an independent consultant
in the semiconductor industry.
Mr. Gupta has served as a director of YieldUP since July 1995. From 1992 to
the present, Mr. Gupta has served as President, Chief Executive Officer, Chief
Operating Officer and Vice President of Operations of Quality Semiconductor,
Inc., a semiconductor manufacturer. From 1988 to 1992, Mr. Gupta served as
President of Blackship Computers, Inc., a systems integration company.
Dr. Flamm has served as a director of YieldUP since September 1998. From
1995 to the present, Dr. Flamm has served as President of Microtechnology
Analysis Group. From 1988 to 1998, Dr. Flamm was the McKay lecturer at
University of California, Berkeley, in the Department of Electrical Engineering
and Computer Science. From 1977 to 1989, Dr. Flamm was a distinguished member of
technical staff at AT&T Bell Laboratories.
32
<PAGE> 33
The Board of Directors is divided into three classes. Each class of
directors consists of one or two directors, who serve staggered three year
terms.
Officers are elected by and serve at the discretion of the Board of
Directors. There are no family relationships among the directors or officers of
YieldUP.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires our directors and executive officers, and persons who
own more than ten percent of a registered class of our equity securities, to
file with the SEC initial reports of ownership and reports of changes in
ownership of common stock and other equity securities of YieldUP. Officers,
directors and greater than ten percent beneficial owners are required by SEC
regulation to furnish YieldUP with copies of all reports they file under Section
16(a).
To our knowledge, based solely on our review of the copies of such reports
furnished to YieldUP and written representation that no other reports were
required, all Section 16(a) filing requirements applicable to our officers,
directors and greater than ten-percent beneficial owners were complied with
during the year ended December 31, 1998.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the aggregate base salary and bonuses paid
by YieldUP for services rendered during 1996, 1997, and 1998 to our chief
executive officer and the other executive officers (the "Named Executive
Officers") who earned more than $100,000 in any of these years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION -------------
------------------------------------------ SECURITIES
ALL OTHER UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION OPTIONS
--------------------------- ---- -------- ------------ ------------
<S> <C> <C> <C> <C>
Raj Mohindra ............................... 1996 $138,459 $5,400(1) --
President and Chief Executive Officer .... 1997 $159,045 $7,200(1) --
1998 $149,317 $7,200(1)
Abhay Bhushan .............................. 1997 $ 67,721 $4,200(1) 60,000
Executive Vice President and Chief Financial 1998 $118,657 $7,200(1) (60,000)(3)
Officer (2)
Suraj Puri ................................. 1997 $ 98,242 $4,200(1) --
Vice President and Chief Technical Officer 1998 $ 99,524 $7,200(1) 90,000
</TABLE>
- ----------
(1) Represents automobile allowance payments.
(2) Mr. Bhushan became an employee of YieldUP in June 1997.
(3) Mr. Bhushan surrendered on November 12, 1998, the 60,000 options granted to
him in June 1997.
STOCK OPTION INFORMATION
The following table contains information concerning stock option grants to
the Named Executive Officers during the year ended December 31, 1998.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL OPTIONS
NUMBER OF GRANTED TO
SECURITIES EMPLOYEES
UNDERLYING IN FISCAL EXERCISE OR BASE EXPIRATION
NAME OPTIONS GRANTED YEAR PRICE($/SH) DATE
---- --------------- ------------- ---------------- ----------
<S> <C> <C> <C> <C>
Suraj Puri 90,000 8.9% $ 0.63 11/11/07
</TABLE>
33
<PAGE> 34
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR 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, 1998 and the year-end number and value of exercisable
and unexercisable options.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISE
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1998 DECEMBER 31, 1998(1)
ACQUIRED ON VALUE ------------------------------ -----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Raj Mohindra -- -- 125,971 -- $124,711 --
Suraj Puri .. -- -- 90,000 -- $100,800 --
Abhay Bhushan -- -- 14,479 -- $ 15,348 --
</TABLE>
- --------------------
(1) The value of "in-the-money" stock options represents the positive spread
between the exercise price of stock options, which was $0.76 per share for
Mr. Mohindra, $0.63 for Mr. Puri, and $0.69 for Mr. Bhushan, and the fair
market value for our common stock of $1.75 per share as of December 31,
1998, which was the closing price of our common stock on December 31,
1998.
We do not have employment agreements with any of our executive officers or
directors.
COMPENSATION OF DIRECTORS
From time to time, directors have received grants of options to purchase
our common stock. Directors who are not employees of YieldUP receive yearly
grants of options to purchase common stock under the Directors Plan. YieldUP
pays nominal amounts to outside members of the Board of Directors for meeting
participation and special assignments.
34
<PAGE> 35
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our capital stock as of December 31, 1998, (i) by each person who
is known by us to own beneficially more than 5% of our capital stock, (ii) by
each of the Named Executive Officers and by each of our directors, and (iii) by
all officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OF SHARES OF
NUMBER OF SHARES SHARES OF CLASS CLASS A
NAME AND ADDRESS OF OF COMMON PERCENTAGE A COMMON COMMON
BENEFICIAL OWNER(1) STOCK(2) OF CLASS(3) STOCK(2) STOCK(3)
--------------------------- ---------------- ----------- ---------------- ------------
<S> <C> <C> <C> <C>
Raj Mohindra .............. 10,000 * 980,257(4) 65.8%
Abhay Bhushan ............. 147,537(5) 2.1% 262,070(6) 19.0%
Suraj Puri ................ 210,000(7) 3.0% 184,783(8) 13.5%
Ram Paul Gupta ............ 35,000(9) * 12,646(10) *
Daniel L. Flamm ........... 20,000(11) * -- --
All directors and executive
officers as a group (five
(5) persons) ............ 422,537(12) 5.9% 1,439756(13) 94.9%
</TABLE>
- ----------------------
* Represents less than one percent.
(1) All beneficial owners listed may be reached at 117 Easy Street, Mountain
View, California 94043.
(2) 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.
(3) Based on 1,364,497 shares of Class A common stock and 6,891,979 shares of
common stock outstanding as of December 31, 1998, plus shares which may be
acquired by the named person(s) upon exercise of outstanding options
exercisable within 60 days of March 1, 1999. Each share of Class A common
stock has five votes, and each share of common stock has one vote.
(4) Includes 125,971 shares of Class A common stock issuable upon exercise of
options exercisable within 60 days of March 1, 1999. 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.
(5) Includes 30,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of March 1, 1999.
(6) Includes 14,479 shares of Class A common stock issuable upon exercise of
options exercisable within 60 days of March 1, 1999. Also includes 43,434
shares of Class A common stock 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.
(7) Includes 190,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of March 1, 1999.
(8) Includes 7,239 shares of Class A common stock 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.
(9) Includes 35,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of March 1, 1999.
(10) Includes 12,646 shares of Class A common stock issuable upon exercise of
options exercisable within 60 days of March 1, 1999.
(11) Includes 20,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of March 1, 1999.
(12) Includes 175,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of March 1, 1999.
35
<PAGE> 36
(13) Includes 1,191,826 shares of Class A common stock issuable upon exercise of
options exercisable within 60 days of March 1, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the last two fiscal years, we had the following transactions with
certain of our officers, directors and holders of 5% of the outstanding shares
of YieldUP, as described below.
On December 14, 1998, we issued a promissory note in the principal amount
of $500,000 to Abhay Bhushan, a director and chief financial officer of YieldUP,
bearing interest at the rate of nine percent (9.0%) per annum. The promissory
note was repaid in full on January 29, 1999.
We believe that all transactions with affiliates described above were made
on terms no less favorable to us than could have been obtained from unaffiliated
third parties.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See the index of exhibits on pages 37 of this report
(b) Financial statements
(c) Reports on Form 8-K:
Current Reports on Form 8-K filed on January 27, 1999
36
<PAGE> 37
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, we have caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
YIELDUP INTERNATIONAL CORPORATION
(COMPANY)
/s/ RAJ MOHINDRA
-----------------------------------------------
Raj Mohindra, Chairman and Chief Executive
(Principal Executive Officer)
Date: March 12, 1999
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ RAJ MOHINDRA Chairman, Chief Executive Officer, and Director March 12, 1999
- ------------------------------------
Raj Mohindra
ABHAY K. BHUSHAN* Chief Financial Officer, and Director March 12, 1999
- ------------------------------------
Abhay K. Bhushan
(PRINCIPAL ACCOUNTING AND FINANCIAL OFFICER)
DANIEL L. FLAMM* Director March 12, 1999
- ------------------------------------
Daniel L. Flamm
RAM PAUL GUPTA* Director March 12, 1999
- ------------------------------------
Ram Paul Gupta
SURAJ PURI* Director March 12, 1999
- ------------------------------------
Suraj Puri
*by: /s/ RAJ MOHINDRA
--------------------------------
Raj Mohindra, Attorney-in-Fact
</TABLE>
37
<PAGE> 38
YIELDUP INTERNATIONAL CORPORATION
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
3.2* Certificate of Incorporation.
3.3** Bylaws.
4.1* Form of Warrant Agreement between YieldUP and the Warrant Agent, including the form of warrants.
10.1* Form of Indemnity Agreement.
10.2* 1995 Stock Option Plan and forms of agreement thereunder.
10.3* 1995 Outside Directors Stock Option Plan and forms of agreement thereunder.
10.5* Facilities lease between YieldUP and Lori A. Halligan Trust, dated September 11, 1995.
10.7* Loan and Security Agreement with Silicon Valley Bank dated September 16, 1996.
10.8 The Merger Agreement by and between YieldUP and FSI International, Inc., dated as of January 21, 1999.
10.9 License Agreement for Microelectronic Technology between YieldUP (Licensor) and FSI International, Inc.
(Licensee), dated as of January 21, 1999. Confidential treatment requested and granted.
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule
</TABLE>
- ----------
* The exhibit is incorporated by reference to Form SB-2 (Registration No.
33-97792-LA)
** The exhibit is incorporated by reference to YieldUP's Form 10-KSB for
the fiscal year ended December 31, 1997.
38
<PAGE> 1
EXHIBIT 10.8
[CONFORMED COPY]
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF REORGANIZATION
AMONG
FSI INTERNATIONAL, INC.,
BMI INTERNATIONAL, INC.
AND
YIELDUP INTERNATIONAL CORPORATION
- --------------------------------------------------------------------------------
DATED JANUARY 21, 1999
<PAGE> 2
TABLE OF CONTENTS
ARTICLE I THE MERGER...........................................................1
1.01. EFFECTIVE TIME OF THE MERGER......................................1
1.02. CLOSING...........................................................2
1.03. EFFECTS OF THE MERGER.............................................2
1.05. DIRECTORS AND OFFICERS OF SURVIVING CORPORATION...................3
ARTICLE II CONVERSION OF SECURITIES............................................3
2.01. EFFECT ON CAPITAL STOCK...........................................3
(a) Capital Stock of Sub..............................................4
(b) YieldUP Common Stock..............................................4
(c) Fractional Shares.................................................4
(d) Parent Stock......................................................4
(e) YieldUP Stock Options and Warrants................................4
(f) Dissenters' Rights................................................5
(g) Adjustments.......................................................5
2.02. EXCHANGE OF CERTIFICATES..........................................5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF YIELDUP..........................7
3.01. ORGANIZATION OF YIELDUP...........................................8
3.02. COMPANY CAPITAL STRUCTURE.........................................8
3.03. SUBSIDIARIES......................................................9
3.04. AUTHORITY.........................................................9
3.05. SEC FILINGS; FINANCIAL STATEMENTS................................10
3.06. INVENTORY........................................................11
3.07. NO UNDISCLOSED LIABILITIES.......................................11
3.08. NO CHANGES.......................................................11
3.09 TAXES............................................................13
3.10. RESTRICTIONS ON BUSINESS ACTIVITIES..............................14
3.11. TITLE TO PROPERTIES; ABSENCE OF PERMITTED LIENS AND ENCUMBRANCES;
CONDITION OF EQUIPMENT...........................................14
3.12. INTELLECTUAL PROPERTY............................................15
3.13. PRODUCT WARRANTIES AND CLAIMS....................................17
3.14. AGREEMENTS, CONTRACTS AND COMMITMENTS............................17
3.15. INTERESTED PARTY TRANSACTIONS....................................19
3.16. GOVERNMENTAL AUTHORIZATION.......................................19
3.17. LITIGATION.......................................................19
3.18. ACCOUNTS RECEIVABLE..............................................19
3.19. BANK ACCOUNTS; GUARANTIES; POWERS OF ATTORNEY....................20
3.20. CUSTOMERS........................................................20
3.21. SUPPLIERS........................................................20
3.22. MINUTE BOOKS.....................................................20
3.23. ENVIRONMENTAL MATTERS............................................20
3.24. BROKERS' AND FINDERS' FEES.......................................22
3.25. LABOR MATTER.....................................................22
3.26. EMPLOYEE BENEFIT PLANS...........................................22
3.27. INSURANCE........................................................24
3.28. COMPLIANCE WITH LAWS.............................................24
3.29. THIRD PARTY CONSENTS.............................................24
3.30. REGISTRATION STATEMENTS; PROXY STATEMENT.........................24
i
<PAGE> 3
3.31. COMPLETE COPIES OF MATERIALS.....................................25
3.32. YEAR 2000........................................................25
3.33. OPINION OF FINANCIAL ADVISOR.....................................25
3.34. VOTING AGREEMENTS................................................25
3.35 DISCLOSURE.......................................................25
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB...................26
4.01. ORGANIZATION, STANDING AND POWER.................................26
4.02. CAPITAL STRUCTURE................................................26
4.03. AUTHORITY........................................................27
4.04. SEC FILINGS; FINANCIAL STATEMENTS................................28
4.05. NO MATERIAL ADVERSE CHANGE.......................................28
4.06. LITIGATION.......................................................29
4.07. BROKERS' AND FINDERS' FEES.......................................29
4.08. REGISTRATION STATEMENT; PROXY STATEMENT..........................29
4.09. OWNERSHIP AND INTERIM OPERATIONS OF SUB..........................30
ARTICLE V CONDUCT OF BUSINESS PRIOR TO THE EFFECTIVE TIME.....................30
5.01. CONDUCT OF BUSINESS OF YIELDUP...................................30
5.02. COOPERATION......................................................33
ARTICLE VI ADDITIONAL AGREEMENTS AND COVENANTS................................33
6.01. NO SOLICITATION..................................................33
6.02. PROXY STATEMENT; REGISTRATION STATEMENT..........................34
6.03. ACCESS TO INFORMATION............................................35
6.04. YIELDUP STOCKHOLDERS' MEETING....................................35
6.05. LEGAL CONDITIONS TO MERGER.......................................35
6.06. PAYMENT OF TAXES.................................................36
6.07. PUBLIC DISCLOSURE................................................36
6.08. TAX-FREE REORGANIZATION..........................................36
6.09. NASDAQ QUOTATION.................................................37
6.10. STOCK PLANS AND WARRANTS.........................................37
6.11. CONSENTS.........................................................38
6.12. EMPLOYEE BENEFITS; EMPLOYEE ISSUES...............................38
6.13. REPORTS..........................................................38
6.14. NOTIFICATION OF CERTAIN MATTERS..................................38
6.15. ADDITIONAL AGREEMENTS; REASONABLE EFFORTS........................39
6.16 DIRECTOR AND OFFICER INSURANCE...................................39
ARTICLE VII CONDITIONS TO MERGER..............................................40
7.01. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.......40
(a) Stockholder Approval.............................................40
(b) Approvals........................................................40
(c) Registration Statement...........................................40
(d) NASDAQ...........................................................40
(e) No Injunctions or Restraints; Illegality.........................40
(f) Tax Opinions.....................................................40
(g) Comfort Letter...................................................40
7.02. ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT AND SUB...........41
(a) Accuracy of Representations and Warranties;
Compliance with Covenants........................................41
(b) Blue Sky Laws....................................................41
ii
<PAGE> 4
(c) Opinion of YieldUP's Counsel.....................................41
(d) Consents.........................................................42
(e) Dissenting Shares................................................42
(f) 1998 Audit.......................................................42
(g) Employment Agreements............................................42
7.03. ADDITIONAL CONDITIONS TO OBLIGATIONS OF YIELDUP..................42
(a) Accuracy of Representations and Warranties;
Compliance with Covenants........................................42
(b) Opinion of Parent's Counsel......................................42
ARTICLE VIII TERMINATION AND AMENDMENT........................................43
8.01. TERMINATION......................................................43
8.02. EFFECT OF TERMINATION............................................44
8.03. FEES AND EXPENSES................................................44
8.04. ALTERNATIVE TRANSACTION DEFINITION...............................45
8.05. AMENDMENT........................................................45
8.06. EXTENSION; WAIVER................................................45
ARTICLE IX MISCELLANEOUS......................................................46
9.01. NONSURVIVAL OF REPRESENTATIONS, WARRANTIES, AND AGREEMENTS.......46
9.02. NOTICES..........................................................46
9.03. INTERPRETATION...................................................47
9.04. COUNTERPARTS.....................................................47
9.05. ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES...................47
9.06. GOVERNING LAW....................................................47
9.07. ASSIGNMENT.......................................................47
ARTICLE X DEFINITIONS.........................................................48
10.01. SUBSIDIARY.......................................................48
10.02. AFFILIATE........................................................48
10.03. KNOWLEDGE........................................................48
iii
<PAGE> 5
EXHIBITS
Exhibit 3.34(a)...................Form of YieldUP Affiliate Agreement
Exhibit 3.34(b)...................Form of Rule 145 Letter
Exhibit 7.02(c)...................Form of Opinion of Counsel to YieldUP
Exhibit 7.03(b)...................Form of Opinion of Counsel to Parent
Exhibit 7.03(g)(1)................Form of Employment Agreement with Raj Mahindra
Exhibit 7.03(g)(2)................Form of Employment Agreement with Suraj Puri
Exhibit 7.03(g)(3)................Form of Employment Agreement with David Wong
iv
<PAGE> 6
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement"), dated January
21, 1999, is by and among FSI INTERNATIONAL, INC., a Minnesota corporation
("Parent"), BMI INTERNATIONAL, INC., a Minnesota corporation and a wholly owned
subsidiary of Parent ("Sub"), and YIELDUP INTERNATIONAL CORPORATION, a Delaware
corporation ("YieldUP").
WITNESSETH:
WHEREAS, the Boards of Directors of Parent, Sub and YieldUP deem it
advisable and in the best interests of each corporation and its respective
shareholders that Parent and YieldUP combine in order to advance the long-term
business interests of Parent and YieldUP;
WHEREAS, the strategic combination of Parent and YieldUP shall be effected
by the terms of this Agreement through a transaction in which YieldUP will merge
with and into Sub, and the stockholders of YieldUP will become shareholders of
Parent (the "Merger");
WHEREAS, in furtherance of the Merger, and upon the terms and conditions set
forth herein, each share of YieldUP's Common Stock, $.001 par value, and each
share of YieldUP's Class A Common Stock, $.001 par value (collectively, the
"YieldUP Common Stock"), issued and outstanding at the Effective Time (as
defined in Section 1.01 hereof), shall be converted into shares of Common Stock,
no par value, of Parent ("Parent Common Stock") and cash.
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants, and agreements set forth herein and other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, and intending to be legally bound, the parties hereby agree as
follows:
ARTICLE I
THE MERGER
1.01. Effective Time of the Merger. Subject to the provisions of this
Agreement, a Certificate of Merger and Articles of Merger (collectively, the
"Merger Articles"), shall each be duly executed and acknowledged by the
Constituent Corporations (as defined in Section 1.03 hereof), and thereafter
delivered to the Secretary of State of the State of Delaware and to the
Secretary of State of the State of Minnesota, respectively, for filing, as
provided in the General Corporation Law of the State of Delaware (the "Delaware
Law") and the Minnesota Business Corporation Act (the "Minnesota Law"), as soon
as practicable on or after the Closing Date (as defined in Section 1.02 hereof).
The Merger shall become effective at the time at which the Merger Articles shall
have been filed with both the Secretary of State of the State of Delaware
<PAGE> 7
and the Secretary of State of the State of Minnesota or at such time thereafter
as is provided in the Merger Articles (the "Effective Time").
1.02. Closing. The closing of the Merger (the "Closing") will take place at
9:00 a.m., Minneapolis time, on a date to be specified by Parent and YieldUP,
which shall be no later than the fourth business day after satisfaction or
waiver (to the extent waivable under Article VII) of all conditions to the
consummation of the Merger set forth in this Agreement (other than those
conditions that by their nature are to be satisfied at the Closing, but subject
to the satisfaction or wavier of those conditions) (the "Closing Date"), at the
offices of Faegre & Benson LLP, Minneapolis, Minnesota, unless another date or
place is agreed to in writing by Parent and YieldUP. All actions taken at the
Closing shall be deemed to have been taken simultaneously at the time the last
of any such actions is taken or completed.
1.03. Effects of the Merger.
(a) At the Effective Time, in accordance with this Agreement and
Delaware Law and Minnesota Law, (i) YieldUP shall be merged with and into Sub,
(ii) the separate corporate existence of YieldUP (except as such existence may
be continued by operation of law) shall cease and (iii) Sub shall continue as
the surviving corporation and shall be governed by Minnesota Law (Sub and
YieldUP are sometimes referred to herein as the "Constituent Corporations" and
Sub is sometimes referred to herein as "Surviving Corporation").
(b) At and after the Effective Time, the effect of the Merger shall be
as provided in the applicable provisions of Minnesota Law and Delaware Law.
Without limiting the generality of the foregoing, and subject thereto, at and
after the Effective Time, Surviving Corporation shall possess all the rights,
privileges, powers, and franchises of a public as well as of a private nature,
and be subject to all the restrictions, disabilities, and duties of each of the
Constituent Corporations; and all and singular rights, privileges, powers, and
franchises of each of the Constituent Corporations, and all property, real,
personal and mixed, and all debts, liabilities and duties due on whatever
account, and all and every other interest of or belonging to either of the
Constituent Corporations, as well as for stock subscriptions and all other
things in action or belonging to each of the Constituent Corporations, shall be
taken and deemed to be transferred to and vested in Surviving Corporation
without further act or deed, and all property, rights, privileges, powers, and
franchises, and all and every other interest shall be thereafter the property of
Surviving Corporation, and the title to any real estate vested by deed or
otherwise, in either of the Constituent Corporations, shall not revert or be in
any way impaired; but all rights of creditors and all liens upon any property of
either of the Constituent Corporations shall be preserved unimpaired, and all
debts, liabilities, and duties of the Constituent Corporations shall thereafter
attach to Surviving Corporation, and may be enforced against it to the same
extent as if such debts and liabilities had been incurred or contracted by it.
1.04. Articles of Incorporation and By-Laws of Surviving Corporation.
(a) The Articles of Incorporation of Sub as in effect immediately
prior to the Effective Time shall be the Articles of Incorporation of Surviving
Corporation, until duly amended in accordance with the terms thereof and of the
Minnesota Law, except that from and
2
<PAGE> 8
after the Effective Time, Article First of the Articles of Incorporation of Sub
shall be amended to be and read as follows:
"First: The name of the Corporation shall be Blue Mountain, Inc."
(b) The By-Laws of Sub in effect immediately prior to the Effective
Time shall be the By-Laws of Surviving Corporation, until duly amended in
accordance with the terms thereof, of the Articles of Incorporation of Surviving
Corporation and of the Minnesota Law.
1.05. Directors and Officers of Surviving Corporation.
(a) The directors of Sub holding office at the Effective Time
shall, from and after the Effective Time, be the directors of Surviving
Corporation, such directors to serve until their successors have been duly
elected or appointed and qualified or until their earlier death, resignation or
removal in accordance with Surviving Corporation's Articles of Incorporation and
By-Laws.
(b) The officers of Surviving Corporation from and after the Effective
Time shall be as at set forth below:
Dale A. Courtney Chief Executive Officer
Raj Mohindra Vice President
Suraj Puri Chief Technologist
Patricia M. Hollister Vice President
Benno G. Sand Secretary
Luke R. Komarek General Counsel
Such officers shall serve until their successors have been duly
elected or appointed and qualified or until their earlier death, resignation or
removal in accordance with Surviving Corporation's Articles of Incorporation and
By-Laws.
ARTICLE II
CONVERSION OF SECURITIES
2.01. Effect on Capital Stock. Subject to the other provisions of this
Article II, at the Effective Time, by virtue of the Merger and without any
action on the part of Parent, YieldUP, Sub or the holder of any shares of the
following securities:
(a) Capital Stock of Sub. Each issued and outstanding share of the
capital stock of Sub shall remain outstanding as one share of common stock of
the Surviving Corporation and shall not be converted into any other securities
or cash pursuant to the Merger. The certificates for such shares shall not be
surrendered or in any way modified by reason of the effectiveness of the Merger.
No stock of Sub will be issued pursuant to the Merger.
(b) YieldUP Common Stock. Each issued and outstanding share of YieldUP
Common Stock (other than Dissenting Shares (as defined in Section 2.01(f)
hereof) and shares of
3
<PAGE> 9
YieldUP Common Stock held of record by Parent, Sub, or YieldUP or any other
direct or indirect subsidiary of Parent or YieldUP immediately prior to the
Effective Time) shall be automatically converted into and become the right to
receive (i) .1567 of one share of Parent Common Stock (the "Share
Consideration"), and (ii) cash in the amount of $.7313 (the "Cash Consideration"
and, together with the Share Consideration, the "Merger Consideration"). At the
Effective Time, each share of YieldUP Common Stock held of record by Parent,
Sub, or YieldUP or any direct or indirect subsidiary of Parent or YieldUP shall
be canceled and cease to exist, and no payment shall be made with respect
thereto.
(c) Fractional Shares. No scrip or fractional shares of Parent Common
Stock shall be issued in the Merger. Each fractional share of Parent Common
Stock which a holder of YieldUP Common Stock would otherwise be entitled to
receive (after aggregating all shares of Parent Common Stock to be received by
such holder) shall be automatically converted into the right to receive, after
the later of the Effective Time or the surrender of such stockholder's
Certificate or Certificates (as defined in Section 2.01(d) hereof), from Parent,
an amount in cash in lieu of such fractional share of Parent Common Stock equal
to the product of such fraction multiplied by $1.8806 (rounded up or down to the
nearest $.01). Parent will make available to the Exchange Agent (as defined in
Section 2.02 hereof) the cash necessary for the purpose of paying for fractional
shares.
(d) Parent Stock. All shares of Parent Common Stock into which the
shares of YieldUP Common Stock are converted shall be fully paid and
nonassessable and will have Parent Rights attached thereto in accordance with
the Parent Rights Agreement (as such terms are defined in Section 4.02(a)
hereof). All shares of YieldUP Common Stock, when so converted, shall no longer
be outstanding and shall automatically be canceled and retired and shall cease
to exist, and holders of certificates which immediately prior to the Effective
Time represented shares of YieldUP Common Stock (the "Certificates") shall cease
to have any rights with respect thereto, except the right to receive the shares
of Parent Common Stock and any cash to be issued or paid in consideration
therefor upon the surrender of the Certificates in accordance with Section 2.02
hereof, without interest.
(e) YieldUP Stock Options and Warrants. At the Effective Time, (i) all
outstanding options to purchase YieldUP Common Stock (the "YieldUP Options")
under the YieldUP 1995 Stock Option Plan (the "Prior Plan"), the YieldUP 1995
Stock Option Plan (the "YieldUP Stock Option Plan") and the YieldUP 1995 Outside
Directors Stock Option Plan (the "YieldUP Directors Plan" and, together with the
Prior Plan and the YieldUP Stock Option Plan, the "YieldUP Option Plans") will
become options to purchase Parent Common Stock in accordance with Section 6.10
hereof and (ii) each outstanding warrant to acquire shares of YieldUP Common
Stock will become a warrant to acquire shares of Parent Common Stock and cash,
in accordance with Section 6.10 hereof.
(f) Dissenters' Rights. Notwithstanding any provision of this
Agreement to the contrary, any shares of YieldUP Common Stock outstanding
immediately prior to the Effective Time held by a holder who has demanded and
perfected the right, if any, for appraisal of those shares in accordance with
the provisions of Section 262 of the Delaware Law and as of the Effective Time
has not withdrawn or lost such right to such appraisal ("Dissenting Shares")
shall
4
<PAGE> 10
not be converted pursuant to this Article II, but the holder shall only be
entitled to such rights as are granted by the Delaware Law. If a holder of
shares of YieldUP Common Stock who demands appraisal of those shares under the
Delaware Law shall effectively withdraw or lose (through failure to perfect or
otherwise) the right to appraisal, then, as of the Effective Time or the
occurrence of such event, whichever last occurs, such Dissenting Shares shall be
converted into and represent only the right to receive, the Merger Consideration
(and cash in lieu of fractional shares in accordance with Section 2.01(c)
hereof). YieldUP shall give Parent (i) prompt notice of any written demands for
appraisal of any shares of YieldUP Common Stock, attempted withdrawals of such
demands, and any other instruments served pursuant to the Delaware Law and
received by YieldUP relating to stockholders' rights of appraisal, and (ii) the
opportunity to direct all negotiations and proceedings with respect to demands
for appraisal under the Delaware Law. YieldUP shall not, except with the prior
written consent of Parent, voluntarily make any payment with respect to any
demands for appraisal, offer to settle or settle any such demands or approve any
withdrawal of any such demands.
(g) Adjustments. The Share Consideration and Cash Consideration shall
be appropriately adjusted to reflect any stock split, reverse stock split, stock
dividend, recapitalization, exchange, subdivision, combination of, or other
similar change (including the exercise of any Parent Rights under the Parent
Rights Agreement) in Parent Common Stock or YieldUP Common Stock following the
date of this Agreement.
2.02. Exchange of Certificates.
(a) Parent shall authorize Harris Trust and Savings Bank, or such
other firm as is reasonably acceptable to YieldUP, to serve as exchange agent
hereunder (the "Exchange Agent"). Promptly after the Effective Time, Parent
shall deposit or shall cause to be deposited in trust with the Exchange Agent
certificates representing the number of whole shares of Parent Common Stock to
which the holders of YieldUP Common Stock are entitled pursuant to this Article
II, together with cash sufficient to cover the aggregate Cash Consideration to
be paid to holders of YieldUP Common Stock and to pay for fractional shares then
known to Parent (such cash amounts and certificates being hereinafter referred
to as the "Exchange Fund"). The Exchange Agent shall, pursuant to irrevocable
instructions received from Parent, deliver the number of shares of Parent Common
Stock and pay the amounts of cash provided for in this Article II out of the
Exchange Fund. Additional amounts of cash, if any, needed from time to time by
the Exchange Agent shall be provided by Parent and shall become part of the
Exchange Fund. The Exchange Fund shall not be used for any other purpose, except
as provided in this Agreement, or as otherwise agreed to by Parent and YieldUP
prior to the Effective Time.
(b) As soon as practicable after the Effective Time, the Exchange
Agent shall mail and otherwise make available to each recordholder of the
YieldUP Common Stock (except with respect to Dissenting Shares and shares held
by Parent, Sub, and YieldUP) who, as of the Effective Time was a holder of a
Certificate, a letter of transmittal (satisfactory in form and substance to
Parent) and instructions for its use in effecting the surrender of the
Certificate for payment therefor and conversion thereof. Delivery shall be
effected, and risk of loss and title to the Certificate shall pass, only upon
proper delivery of the Certificate to the Exchange Agent and the letter of
transmittal shall so reflect. Upon surrender to the Exchange Agent of a
Certificate,
6
<PAGE> 11
together with a letter of transmittal duly executed and properly completed, the
holder of the Certificate shall be entitled to receive in exchange therefore (i)
shares of Parent Common Stock and cash to which that holder of YieldUP Common
Stock is entitled under Section 2.01(b) hereof (with such cash amount being
rounded up or down to the nearest $.01), and (ii) as to any fractional share, a
check representing the cash amount to which the holder is entitled under Section
2.01(c), and the Certificate so surrendered shall be marked "cancelled". No
interest will be paid or accrued on any Cash Consideration or any cash in lieu
of fractional shares payable upon surrender of the Certificate. Parent shall pay
any transfer or other taxes required by reason of the issuance of a certificate
representing shares of Parent Common Stock provided that such certificate is
issued in the name of the person in whose name the Certificate surrendered in
exchange therefor is registered; provided, however, that Parent shall not pay
any transfer or other tax if the obligation to pay such tax under applicable law
is solely that of the stockholder or if payment of any such tax by Parent
otherwise would cause the Merger to fail to qualify as a tax-free reorganization
under the Code. If any portion of the consideration to be received pursuant to
this Article II upon exchange of a Certificate is to be issued or paid to a
person other than the person in whose name the Certificate surrendered in
exchange therefor is registered, it shall be a condition of such issuance and
payment that the Certificate so surrendered shall be properly endorsed or
otherwise in proper form for transfer and that the person requesting such
exchange shall pay in advance any transfer or other taxes required by reason of
the issuance of a certificate representing shares of Parent Common Stock or a
check representing the Cash Consideration or any cash for a fractional share to
such other person, or establish to the satisfaction of the Exchange Agent that
such tax has been paid or that no such tax is applicable. From the Effective
Time until surrender in accordance with this Section 2.02, each Certificate
(other than Certificates representing treasury shares of YieldUP) shall be
deemed, for all corporate purposes other than the payment of dividends or other
distributions, to evidence only the right to receive the cash and Parent Common
Stock into which such shares of YieldUP Common Stock shall have been so
converted. No dividends that are otherwise payable on Parent Common Stock will
be paid to persons entitled to receive Parent Common Stock until such persons
surrender their Certificates. After such surrender, there shall be paid to the
person in whose name the Parent Common Stock shall be issued any dividends on
such Parent Common Stock that shall have a record date and payment date on or
after the Effective Time and prior to such surrender. If the payment date for
any such dividend is after the date of such surrender, such payment shall be
made on such payment date. In no event shall the persons entitled to receive
such dividends be entitled to receive interest on such dividends. All payments
in respect of shares of YieldUP Common Stock that are made in accordance with
the terms hereof shall be deemed to have been made in full satisfaction of all
rights pertaining to such securities.
(c) In case of any lost, mislaid, stolen, or destroyed Certificate,
the holder thereof may be required, as a condition precedent to the delivery to
such holder of the consideration described in Section 2.01 hereof and in
accordance with Section 167 of the Delaware Law, to deliver to Parent a bond in
such reasonable sum as Parent may direct as indemnity against any claim that may
be made against the Exchange Agent, Parent, or Surviving Corporation with
respect to the Certificate alleged to have been lost, mislaid, stolen, or
destroyed.
(d) After the Effective Time, there shall be no transfers on the stock
transfer books of Surviving Corporation of the shares of YieldUP Common Stock
that were outstanding
6
<PAGE> 12
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to Surviving Corporation for transfer, they shall be
canceled and exchanged for the consideration described in Section 2.01 hereof.
After the Effective Time, the shares of YieldUP Common Stock shall be delisted
from the Nasdaq Small Cap Market.
(e) Any portion of the Exchange Fund that remains unclaimed by the
stockholders of YieldUP for one year after the Effective Time shall be returned
to Parent, upon demand, and any holder of YieldUP Common Stock who has not
theretofore complied with Section 2.02(b) hereof shall thereafter look only to
Parent for issuance of the Merger Consideration to which such holder has become
entitled pursuant to Section 2.01 hereof; provided, however, that neither the
Exchange Agent nor any party hereto shall be liable to a holder of shares of
YieldUP Common Stock for any amount required to be paid to a public official
pursuant to any applicable abandoned property, escheat, or similar law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF YIELDUP
YieldUP represents and warrants to Parent and Sub that the statements
contained in this Article III are true and correct as of the date hereof, except
as set forth in the disclosure schedule delivered by YieldUP to Parent on or
before the date of this Agreement (the "YieldUP Disclosure Schedule"). The
YieldUP Disclosure Schedule shall be arranged in paragraphs corresponding to the
numbered and lettered paragraphs contained in this Article III and the
disclosures in any paragraph, including appropriate cross references, shall
qualify only the corresponding paragraph in this Article III. As used with
respect to YieldUP or Parent, as the case may be, the term "Material Adverse
Effect" means any change or effect that, individually or when taken together
with all changes or effects that have occurred before the determination of the
occurrence of the Material Adverse Effect, has had or is reasonably likely to
have a material adverse effect on the business, operations, assets (including
intangible assets), financial condition or results of operations of the party
and its subsidiaries taken as a whole; provided, however, any disruption of
customer or supplier relationships of a party arising primarily out of or
resulting primarily from actions contemplated by the parties in connection with,
or which is primarily attributable to the announcement of this Agreement or the
transactions contemplated hereby shall not be considered when determining if a
Material Adverse Effect has occurred.
3.01. Organization of YieldUP. YieldUP is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
YieldUP has the corporate power to own its property and to carry on its business
as now being conducted and as proposed to be conducted by YieldUP. YieldUP is
duly qualified to do business and in good standing as a foreign corporation in
each jurisdiction in which the failure to be so qualified would have a Material
Adverse Effect on YieldUP. YieldUP has delivered a true and correct copy of its
Certificate of Incorporation and By-Laws, each as amended to date, to Parent.
3.02. Company Capital Structure. The authorized capital stock of YieldUP
consists of (i) 22,229,927 shares of YieldUP Common Stock (including 2,229,927
shares of Class A
7
<PAGE> 13
Common Stock), of which, as of the close of business on January 15, 1999,
8,256,476 shares were issued and outstanding (including 1,364,497 shares of
Class A Common Stock), and (ii) 5,000,000 shares of Preferred Stock which are
divisible into such classes and series, with such designations, voting rights,
and other rights and preferences, as the Board of Directors of YieldUP (the
"Board of Directors") may from time to time determine, of which, on the date
hereof, there are no shares issued and outstanding and, except for 2,400 shares
designated as Series A Convertible Preferred Stock, par value $.001 per share,
no shares have been designated by the Board of Directors as to classes or
series. All outstanding shares of Company Common Stock are duly authorized,
validly issued, fully paid and non-assessable and not subject to preemptive
rights created by statute, the Certificate of Incorporation or By-Laws of
YieldUP or any agreement to which YieldUP is a party or by which it is bound. As
of the date hereof, YieldUP has reserved 1,284,465 shares of Common Stock for
issuance to employees, directors, and consultants pursuant to the YieldUP Option
Plans, of which 1,048,768 shares are subject to outstanding, unexercised options
(the "YieldUP Options"). Schedule 3.02 of the YieldUP Disclosure Schedule sets
forth for each outstanding YieldUP Option the name of the holder of such option,
the number of shares subject to such option, the exercise price of such option,
the vesting schedule of such option, whether or not such option qualifies as an
incentive stock option and, if the exercisability of such option will be
accelerated in any way by the transactions contemplated by this Agreement or for
any other reason, an indication of the extent of such acceleration. Such list
also describes any repricing of options which has taken place since YieldUP's
incorporation. Except for the YieldUP Options and warrants to purchase, under
warrant agreements described in Schedule 3.02 of the YieldUP Disclosure Schedule
(the "Warrant Agreements"), an aggregate of not more than 4,157,860 shares of
YieldUP Common Stock, there are no options, warrants, calls, rights,
commitments, or agreements of any character to which YieldUP is a party or by
which it is bound obligating YieldUP to issue, deliver, sell, repurchase, or
redeem, or cause to be issued, delivered, sold, repurchased, or redeemed, any
shares of capital stock of YieldUP or obligating YieldUP to grant, extend,
accelerate the vesting of, change the price of, or otherwise amend or enter into
any such option, warrant, call, right, commitment, or agreement. Except as set
forth in the YieldUP Disclosure Schedule, no adjustments to the purchase price,
number or type of securities purchasable, or other terms of the Warrant
Agreements or the warrants thereunder have been made or have been required to be
made since the initial effective date of such Warrant Agreements or warrants.
Except as set forth in the YieldUP Disclosure Schedule, YieldUP is not a party
to and is not aware of, any voting agreement, voting trust, proxy, or other
agreements or understandings with respect to the shares of capital stock of
YieldUP or any agreement, arrangement or understanding providing for
registration rights with respect to any shares of capital stock of YieldUP.
3.03. Subsidiaries. YieldUP does not have and has never had any subsidiaries
and does not otherwise own and, except as set forth in the YieldUP Disclosure
Schedule, has never otherwise owned any shares of stock or any interest in, or
control, directly or indirectly, any other corporation, partnership,
association, joint venture or other business entity (excluding any securities in
any publicly traded company held for investment by YieldUP and comprising less
than one percent of the outstanding stock of such company).
3.04. Authority. YieldUP has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and
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delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of YieldUP, subject only to the approval of the Merger by YieldUP's stockholders
as contemplated by Section 6.04 hereof. This Agreement has been duly executed
and delivered by YieldUP and constitutes the valid and binding obligation of
YieldUP, enforceable against YieldUP in accordance with its terms, except to the
extent that enforceability may be limited by applicable bankruptcy, insolvency,
or similar laws affecting the enforcement of creditors' rights generally, and
subject, as to enforceability, to general principles of equity. Except as set
forth in the YieldUP Disclosure Schedule, the execution and delivery of this
Agreement by YieldUP does not, and the consummation of the transactions
contemplated hereby will not, conflict with, or result in any violation of, or
default under (with or without notice or lapse of time, or both), or give rise
to a right of termination, cancellation, or acceleration of any obligation or
loss of any benefit under (i) any provision of the Certificate of Incorporation
or By-Laws of YieldUP, (ii) any YieldUP Material Contract (as defined in Section
3.14) or any YieldUP Authorization (as defined in Section 3.16) or (iii) any
judgment, order, decree, statute, law, ordinance, rule, or regulation applicable
to YieldUP or its properties or assets. No consent, approval, order or
authorization of, or registration, declaration or filing with, any court,
administrative agency or commission, or other governmental authority or
instrumentality ("Governmental Entity"), is required by or with respect to
YieldUP in connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby, except for (i) the filing
of the Certificate of Merger with the Secretary of State of the State of
Delaware and the Articles of Merger with the Secretary of State of the State of
Minnesota, (ii) filings in connection, or in compliance, with the provisions of
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), (iii) the filing of the Proxy Statement (as defined in Section 3.30
below) with the Securities and Exchange Commission (the "SEC") in accordance
with the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
(iv) such consents, approvals, orders, authorizations, registrations,
declarations, and filings as may be required under applicable federal and state
securities laws and the laws of any foreign country.
3.05. SEC Filings; Financial Statements.
(a) YieldUP has filed and made available to Parent all forms, reports,
and documents required to be filed by YieldUP with the SEC since January 1, 1996
(including all exhibits, notes, and schedules thereto and documents incorporated
by reference therein) (all such forms, reports, and documents, including any
such forms, reports, and documents filed with the SEC after the date hereof,
being collectively called the "YieldUP SEC Reports" and individually called a
"YieldUP SEC Report"). The YieldUP SEC Reports (i) at the time filed, with
respect to all of the YieldUP SEC Reports other than registration statements
filed under the Securities Act of 1933, as amended (the "Securities Act"), or at
the time of their respective effective dates, with respect to registration
statements filed under the Securities Act, complied, and any YieldUP SEC Reports
filed with the SEC after the date hereof will comply, as to form in all material
respects with the applicable requirements of the Securities Act or the Exchange
Act, as the case may be, and (ii) did not, and any YieldUP SEC Reports filed
after the date hereof will not, at the time filed or at the time of their
respective effective dates, as the case may be (or if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such filing),
contain any untrue statement of a material fact or omit to state a material fact
required to be stated in such YieldUP
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<PAGE> 15
SEC Reports or necessary in order to make the statements in such YieldUP SEC
Reports, in the light of the circumstances under which they were made, not
misleading. Since January 1, 1996, YieldUP has filed in a timely manner all
forms, reports, and documents that it was required to file with the SEC under
the Exchange Act and the rules and regulations of the SEC.
(b) Each of the financial statements (including, in each case, any
related notes) contained in the YieldUP SEC Reports at the time filed or at the
time of their respective effective dates, as the case may be, complied, or will
comply, as to form in all material respects with the applicable published rules
and regulations of the SEC with respect thereto, was, or will be, prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods involved (except as may be indicated in the notes
to such financial statements or, in the case of unaudited statements, as
permitted by Form 10-QSB of the SEC) and fairly presented, or will fairly
present, the financial position of YieldUP at the respective dates and the
results of its operations and cash flows for the periods indicated, except that
the unaudited interim financial statements were or are subject to normal and
recurring year-end adjustments and the absence of complete footnote disclosure.
YieldUP has provided Parent with YieldUP's unaudited financial statements as of
and for the period ended December 31, 1998; such financial statements, including
any related notes, are set forth in Schedule 3.05(b) of the YieldUP Disclosure
Schedule (the "Unaudited Statements"). The Unaudited Statements comply as to
form in all material respects with the applicable published rules and
regulations of the SEC with respect to financial statements included in a report
on Form 10-KSB, have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis with the consolidated
financial statements of YieldUP contained in the YieldUP SEC Reports (except as
may be indicated in the notes to the Unaudited Statements or as permitted by
Form 10-KSB of the SEC) and fairly present the financial position of YieldUP at
the date and the results of its operations and cash flows for the period
indicated, except that the Unaudited Statements do not contain a statement of
changes in cash flow and for the absence of complete footnote disclosure. The
unaudited balance sheet of YieldUP as of December 31, 1998 is referred to herein
as the "YieldUP Balance Sheet."
3.06. Inventory. All inventories reflected on the YieldUP Balance
Sheet and all inventories that have been acquired or produced since the date of
the YieldUP Balance Sheet are stated in accordance with generally accepted
accounting principles at the lower of cost or market. All raw materials,
finished goods, parts, and work-in-progress inventories are of a quality and
quantity usable by YieldUP in the ordinary course of its business, except for
obsolete items, all of which have been written down on YieldUP's books of
account to net realizable value or have been provided for by adequate reserves.
All finished goods inventories reflected on the YieldUP Balance Sheet and all
such inventories held on the date hereof and on the Closing Date are or are
reasonably expected to be saleable in the ordinary course of YieldUP's business,
net of reserves. Except as set forth in the YieldUP Disclosure Schedule, all
inventories of YieldUP as of the date hereof are located at YieldUP's
headquarters in Mountain View, California or at YieldUP's off-site storage
facility located in Mountain View, California.
3.07. No Undisclosed Liabilities. Except as set forth in the YieldUP
Disclosure Schedule, YieldUP does not have any liabilities, either accrued or
contingent (whether or not required to be reflected in financial statements in
accordance with generally accepted accounting
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principles), and whether due or to become due, which individually or in the
aggregate, (i) have not been reflected in YieldUP Balance Sheet, (ii) have not
been specifically described in this Agreement, or (iii) are not normal or
recurring liabilities incurred since December 31, 1998 in the ordinary course of
business consistent with past practices.
3.08. No Changes.
(a) Except as set forth in the YieldUP Disclosure Schedule, since the
date of the YieldUP Balance Sheet there has not been, occurred or arisen any:
(i) destruction or loss of any material assets of YieldUP
(whether or not covered by insurance); or
(ii) the commencement, notice, or threat of commencement of any
domestic or foreign governmental proceeding against or investigation of YieldUP
or its affairs.
(b) Except as set forth in the YieldUP Disclosure Schedule, since the
date of YieldUP Balance Sheet through the date of this Agreement YieldUP has
not:
(i) entered into any transaction except in the ordinary course
of business as conducted on the date of YieldUP Balance Sheet;
(ii) amended or changed the Certificate of Incorporation or
By-Laws of YieldUP;
(iii) made capital expenditures exceeding $25,000 individually or
$100,000 in the aggregate;
(iv) changed its accounting methods or practices (including any
change in depreciation or amortization policies or rates);
(v) revalued any of its assets;
(vi) declared, set aside, or paid a dividend or other
distribution with respect to the shares of YieldUP, or any direct or indirect
redemption, purchase, or other acquisition by YieldUP of any of its shares of
capital stock;
(vii) increased the salary or other compensation (including
stock-based compensation) payable or to become payable by YieldUP to any of its
officers, directors, or employees, or the declaration, payment, or commitment or
obligation of any kind for the payment, by YieldUP, of a bonus or other
additional salary or compensation to any such person;
(viii) acquired, sold, or transferred any asset of YieldUP other
than in the ordinary course of business and consistent with past practices;
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<PAGE> 17
(ix) made a loan to any person or entity, or guaranty by YieldUP
of any loan, other than advances to employees for travel and business expenses
in the ordinary course of business and consistent with past practices;
(x) amended or terminated any contract, agreement or license of
the type referred to in Section 3.14(a)-(q) to which YieldUP is a party, except
for any amendments required by law or contemplated by this Agreement;
(xi) waived or released any material right or claim of YieldUP,
including any write-off or other compromise of any account receivable of
YieldUP;
(xii) issued or sold any of its shares of capital stock or any
other of its securities, except for options granted under YieldUP Option Plans
and as disclosed in Schedule 3.02 of the YieldUP Disclosure Schedule and except
for issuance or sales as a result of exercises of stock options granted under
YieldUP Option Plans;
(xiii) experienced any labor trouble or received a claim of or
committed a wrongful discharge or other unlawful labor practice or action;
(xiv) experienced the termination by a third party or received
notice from a third party of the termination of any contract, agreement or
license of the type referred to in Section 3.14(a)-(q) to which YieldUP is a
party;
(xv) experienced a loss of services of any YieldUP personnel
material to the conduct of the business of YieldUP;
(xvi) incurred, assumed, or guaranteed any indebtedness for money
borrowed other than borrowings incurred for working capital purposes under
YieldUP's existing revolving credit facility; or
(xvii) entered into any negotiations or otherwise agreed to do any
of the things described in the preceding clauses (i) through (xv) (other than
negotiations with Parent and its representatives regarding the transactions
contemplated by this Agreement).
3.09 Taxes.
(a) Definitions. For the purposes of this Agreement, the following
definitions shall apply:
(i) "Taxes" means any and all federal, state, local and foreign
(including without limitation Canadian and provincial) taxes, assessments and
other governmental charges, duties, impositions and liabilities, including
without limitation those based upon or measured by gross receipts, income,
profits, sales, use and occupation, and value added, ad valorem, transfer,
franchise, withholding, payroll, recapture, employment, excise and property
taxes, together with all interest, penalties and additions imposed with respect
to such amounts and
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any obligations under any agreements or arrangements with any other person with
respect to such amounts and including any liability for taxes of a predecessor
entity.
(ii) "Returns" means all reports, estimates, declarations of
estimated tax, information statements and returns relating to, or required to be
filed in connection with, any Taxes, including information returns or reports
with respect to backup withholding and other payments to third parties.
(b) Tax Matters. Except as set forth in Schedule 3.09:
(i) All Returns required to be filed by or on behalf of YieldUP
have been duly filed on a timely basis (taking into account extensions) and
such Returns are true, complete and correct in all material respects.
(ii) YieldUP (A) has paid all Taxes required to be paid in full
on a timely basis, and (B) has withheld and paid over all Taxes required to have
been withheld and paid over, and complied with all information reporting and
backup withholding requirements, in connection with amounts paid or owing to any
employee, creditor, independent contractor or other third party.
(iii) To the knowledge of YieldUP, there is no Tax deficiency
outstanding or assessed against YieldUP. Further, YieldUP has not received any
written notice of a proposed assessment of taxes, or executed any waiver of any
statute of limitations on or extending the period for the assessment or
collection of any Tax which is still in effect. No audit or other examination of
any Return of YieldUP is presently in progress, and YieldUP has not been
notified of any request for such an audit or other examination. There is not
outstanding any power of attorney that is currently in force with respect to any
matter relating to Taxes for which YieldUP could be liable.
(iv) Except for those which have been accrued or reserved against
on YieldUP Balance Sheet and those incurred in the ordinary course of business
since December 31, 1998, YieldUP does not have any liabilities for unpaid Taxes,
whether asserted or unasserted, contingent or otherwise, for or with respect to
all periods prior to and including the Closing Date.
(v) YieldUP has not ever been a member of an affiliated group of
corporations within the meaning of Section 1504 of the Code. Further, YieldUP
has not ever been a party to a tax sharing or allocation agreement.
(vi) There are no liens for Taxes (other than for current Taxes
not yet due and payable) upon the assets of YieldUP.
(vii) None of the assets of YieldUP are treated as "tax-exempt use
property" within the meaning of Section 168(h) of the Code. YieldUP is not a
"consenting corporation" under Section 341(f) of the Code. There is no contract,
agreement, plan or arrangement covering any employee or former employee of
YieldUP that, individually or collectively, could give rise to the payment of
any amount that would not be deductible pursuant to Section 280G or 162 of the
Code. YieldUP has never been a "United States real property
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holding corporation" within the meaning of Section 897(c)(2) of the Code, and
the Buyer is not required to withhold tax by reason of Section 1445 of the Code.
All transactions that could give rise to an understatement of federal income tax
within the meaning of Section 6662 of the Code have been disclosed in accordance
with Section 6662 of the Code. No indebtedness of YieldUP is "corporate
acquisition indebtedness" within the meaning of Section 279(b) of the Code.
YieldUP is not required to include in income any adjustment pursuant to Section
481(a) of the Code by reason of a voluntary change in accounting method
initiated by YieldUP nor, to the knowledge of YieldUP, has the IRS proposed any
such adjustment or change in accounting method.
3.10. Restrictions on Business Activities. There is no agreement, judgment,
injunction, order, or decree binding upon YieldUP which has or could reasonably
be expected to have the effect of prohibiting or impairing any business practice
of YieldUP.
3.11. Title to Properties; Absence of Permitted Liens and Encumbrances;
Condition of Equipment.
(a) Schedule 3.11(a) of the YieldUP Disclosure Schedule sets forth a
true and complete list of all real property owned or leased by YieldUP, and, in
the case of leased real property, the name of the lessor, the date of the lease
and each amendment thereto and the aggregate annual rental or other fee payable
under any such lease. All such leases are in good standing, valid, and effective
in accordance with their respective terms, and there is not, under any such
leases, any existing material default or event of default (or event which with
notice or lapse of time, or both, would constitute a default and in respect of
which YieldUP has not taken adequate steps to prevent such default from
occurring).
(b) Except as set forth in YieldUP Disclosure Schedule, YieldUP has
good and valid title to, or, in the case of leased properties and assets, valid
leasehold interests in, all of its tangible properties and assets, real,
personal and mixed, used in its business, free and clear of any mortgages,
liens, pledges, charges, restrictions, encroachments, rights of third parties or
other encumbrances of any kind or character (each a "Lien" and, collectively
"Liens"), except (i) liens for current taxes not yet due and payable, (ii)
inchoate mechanic's, warehousemen's, materialmen's, or similar liens or rights
in the ordinary course of business, (iii) liens, encumbrances, restrictions,
encroachments, and easements, all with respect to tangible properties which were
not incurred with the borrowing of money or the obtaining of advances or credit
and which do not materially detract the value of or materially interfere with
the present use of the property subject thereto or effected thereby, or
otherwise materially impair present business operations at such properties, and
(iv) existing mortgages, liens, and encumbrances disclosed in the YieldUP
Balance Sheet (collectively, "Permitted Liens").
(c) Schedule 3.11(c) of the YieldUP Disclosure Schedule lists all
equipment owned, with either an original purchase price or current book value of
$25,000 or more, and leased by YieldUP, reflecting the location of such items
and whether they are owned or leased. The equipment owned or leased by YieldUP,
taken as a whole, is (i) adequate for the conduct of the business of YieldUP
consistent with its past practice, (ii) suitable for the uses to which it is
currently employed, (iii) in good operating condition subject to normal wear and
tear, (iv)
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reasonably maintained, and (v) not unreasonably dangerous or in need of renewal
or replacement, except for renewal or replacement in the ordinary course of
business.
3.12. Intellectual Property. YieldUP owns, or is licensed or otherwise
possesses legally enforceable rights to use all patents, trademarks, trade
names, service marks, copyrights, and any applications therefor, mask works,
schematics, technology, know-how, computer software programs or applications (in
both source code and object code form), and tangible or intangible proprietary
information or material that are used by YieldUP. Schedule 3.12(a) of the
YieldUP Disclosure Schedule lists all patents, registered trademarks and service
marks, registered copyrights, trade names and any applications therefor, which
relate to or are a part of YieldUP's products (the "YieldUP Intellectual
Property Rights"), and specifies the jurisdictions in which each such YieldUP
Intellectual Property Right has been issued or registered or in which an
application for such issuance and registration has been filed, including the
respective registration or application numbers and the names of all registered
owners. Schedule 3.12(b) includes and specifically identifies all third party
patents, trademarks, or copyrights (including software) (the "Third Party
Intellectual Property Rights") which to YieldUP's knowledge are incorporated in,
or form a part of, any YieldUP product. Schedule 3.12(b) lists (i) any requests
YieldUP has received to make any application or registration for patent,
copyright, trademark, or servicemark protection of YieldUP or Third Party
Intellectual Property Rights, including the identity of the requestor and the
item requested to be so applied for or registered, and the jurisdiction for
which such request has been made; (ii) all licenses, sublicenses, and other
agreements as to which YieldUP is a party and pursuant to which any person is
authorized to use any YieldUP Intellectual Property Right or any trade secret of
YieldUP; and (iii) all licenses, sublicenses, and other agreements as to which
YieldUP is a party and pursuant to which YieldUP is authorized to use any Third
Party Intellectual Property Rights, or other trade secret of a third party in or
as any product, and includes the identity of all parties thereto, a description
of the nature and subject matter thereof, the applicable royalty and the term
thereof (other than non-negotiated licenses of generally available commercial
software).
YieldUP is not, nor will it be as a result of the execution and delivery of
this Agreement or the performance of its obligations hereunder, in violation of
any license, sublicense or agreement described on Schedule 3.12(b). Except as
set forth in the YieldUP Disclosure Schedule, no claims with respect to YieldUP
Intellectual Property Rights, any trade secret of YieldUP, or Third Party
Intellectual Property Rights to the extent arising out of any use, reproduction,
or distribution of such Third Party Intellectual Rights by or through YieldUP,
have been asserted or, to the knowledge of YieldUP, are threatened by any
person, nor does YieldUP know of any grounds for any bona fide claims (i) to the
effect that the manufacture, sale, licensing, or use of any product as now used,
sold, or licensed or proposed for use, sale, or license by YieldUP infringes on
any copyright, patent, trademark, service mark, or trade secret; (ii) against
the use by YieldUP of any trademarks, trade names, trade secrets, copyrights,
patents, technology, know-how, or computer software programs and applications
used in YieldUP's business as currently conducted or as proposed to be conducted
by YieldUP; (iii) challenging the ownership, validity, or effectiveness of any
of YieldUP Intellectual Property Rights or other trade secret of YieldUP; or
(iv) challenging YieldUP's license or legally enforceable right to use of the
Third Party Intellectual Property Rights.
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All registered trademarks, service marks, and copyrights held by YieldUP are
valid and subsisting. Except as set forth in the YieldUP Disclosure Schedule, to
YieldUP's knowledge, there is no unauthorized use, disclosure, infringement, or
misappropriation of any of YieldUP Intellectual Property Rights, any trade
secret of YieldUP, or any Third Party Intellectual Property Right to the extent
licensed by or through YieldUP, by any third party, including any employee or
former employee of YieldUP. Except as set forth in the YieldUP Disclosure
Schedule, YieldUP (i) has not been sued or charged in writing as a defendant in
any claim, suit, action or proceeding which involves a claim of infringement of
any patents, trademarks, service marks, or copyrights or violation of trade
secret or other proprietary right of any third party; (ii) has no knowledge of
any basis for any such charge or claim; and (iii) has no knowledge of any
infringement liability with respect to, or infringement or violation by, YieldUP
of any patent, trademark, service mark, copyright, trade secret or other
proprietary right of another.
No YieldUP Intellectual Property Right, trade secret material to YieldUP or,
to YieldUP's knowledge, Third Party Intellectual Property Right is subject to
any outstanding order, judgment, decree, stipulation, or agreement restricting
in any manner the licensing thereof by YieldUP. YieldUP has not entered into any
agreement to indemnify any other person against any charge of infringement of
any YieldUP Intellectual Property Right, any trade secret of YieldUP, or any
Third Party Intellectual Property Right. Set forth in Schedule 3.12 of the
YieldUP Disclosure Schedule is a list of all infringement, noninfringement,
validity and invalidity opinions and analyses received or prepared by YieldUP or
its agents or representatives regarding YieldUP Intellectual Property Rights or
Third Party Intellectual Property Rights. Complete copies of all such opinions
and analyses have been provided to Parent.
3.13. Product Warranties and Claims. All products heretofore sold by YieldUP
during the two years preceding the date hereof have been in conformity with all
applicable contractual commitments and all express and implied warranties, and
YieldUP does not have any liability for replacement or repair of such products
or other damages in connection therewith, subject only to the reserve for
product warranty claims set forth in the YieldUP Balance Sheet and to ordinary
course customer servicing (consistent with industry practices). To YieldUP's
knowledge, the accrual for warranty related expenses as of December 31, 1998
contained in the YieldUP Balance Sheet adequately reflects, and at the Closing
Date will adequately reflect, an amount required for satisfaction of warranty
claims due in respect of goods sold or services provided by YieldUP prior to
such date. Such provision has been established in accordance with generally
accepted accounting principles. Except for the matters set forth in the YieldUP
Disclosure Schedule, YieldUP has not received any written complaint (that
remains unresolved) to the effect that (i) goods sold or services supplied by
YieldUP failed to meet the quality standards or warranty obligations applicable
to the agreements, contracts, or purchase orders under which such products or
services were supplied or (ii) YieldUP failed to meet its obligation to service
any products sold or serviced by YieldUP, that if found to be valid would
constitute a liability of YieldUP in excess of $25,000 for parts, labor and
other related expenses.
3.14. Agreements, Contracts and Commitments. As of the date of this
Agreement, except for Employee Plans (as defined in Section 3.26 hereof), as
contemplated by this Agreement or as set forth on the YieldUP Disclosure
Schedule, YieldUP does not have and is not a party to
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the following agreements (or group of related agreements), whether written or
oral (collectively, the "YieldUP Material Contracts"):
(a) any collective bargaining agreement;
(b) any agreements that contain any unpaid severance liabilities or
obligations;
(c) any bonus, deferred compensation, incentive compensation, pension,
profit-sharing or retirement plans, or any other employee benefit plans or
arrangements;
(d) any employment or consulting agreement, contract, or commitment
with an employee or individual consultant or salesperson or consulting or sales
agreement, contract, or commitment with a firm or other organization not
terminable by YieldUP on 30 days' notice without liability except to the extent
of applicable local law and/or general principles of wrongful termination law
may limit YieldUP's ability to terminate such employees;
(e) agreement or plan, including, without limitation, any stock option
plan, stock appreciation right plan, or stock purchase plan, any of the benefits
of which will be increased, or the vested benefits of which will be accelerated,
by the occurrence of any of the transactions contemplated by this Agreement or
the value of any of the benefits of which will be calculated on the basis of any
of the transactions contemplated by this Agreement;
(f) any fidelity or surety bond or completion bond;
(g) any lease of personal property having a value individually in
excess of $25,000;
(h) any agreement of indemnification or guaranty;
(i) any agreement, contract, or commitment containing any covenant
limiting the freedom of YieldUP to engage in any line of business or compete
with any person;
(j) any agreement, contract, or commitment relating to capital
expenditures and involving future obligations in excess of $25,000;
(k) any agreement, contract or commitment relating to the disposition
or acquisition of assets not in the ordinary course of business or any ownership
interest in any corporation, partnership, joint venture, or other business
enterprise;
(l) any mortgages, indentures, loans or credit agreements, security
agreements or other agreements or instruments relating to the borrowing of money
or extension of credit, including guaranties referred to in clause (h) hereof;
(m) any purchase order or contract for the purchase of raw materials
or acquisition of assets involving $50,000 or more;
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(n) any construction contracts;
(o) any distribution, original equipment manufacturing, sales
representation, joint marketing, or development agreement;
(p) any purchase order for the sale of Company products (other than
for spare parts) involving $50,000 or more (identified by invoice number, dollar
amount and scheduled shipment date); or
(q) any other agreement, contract, or commitment which involves
$25,000 or more and is not cancelable without penalty within thirty (30) days.
Schedule 3.14(a) of the YieldUP Disclosure Schedule contains a complete and
accurate description of any of the above that constitute oral agreements or oral
modifications, amendments or interpretations of oral agreements. Except for such
breaches or alleged breaches noted in the YieldUP Disclosure Schedule, YieldUP
has not breached, or received any claim or threat that it has breached, any of
the terms or conditions of any YieldUP Material Contract in such a manner as
would permit any other party to cancel or terminate the same or would permit any
other party to seek damages from YieldUP. Each YieldUP Material Contract is in
full force and effect and, except as otherwise disclosed, is not subject to any
default thereunder of which YieldUP is aware by any party obligated to YieldUP
pursuant thereto. Except as set forth in the YieldUP Disclosure Schedule, no
YieldUP Material Contract of the type referred to in Section 3.14(o) contains
any grant of exclusive territory.
3.15. Interested Party Transactions. Except as set forth on the YieldUP
Disclosure Schedule or in the YieldUP SEC Reports, no officer, director or
stockholder of YieldUP who owns at least 5% of the outstanding YieldUP Common
Stock (nor any ancestor, sibling, descendant or spouse of any of such persons,
or any trust, partnership or corporation in which any of such persons has or has
had an interest), has or has had, directly or indirectly, (i) an interest in any
entity which furnished or sold, or furnishes or sells, services or products that
YieldUP furnishes or sells, or proposes to furnish or sell, or (ii) any interest
in any entity that purchases from or sells or furnishes to, YieldUP, any goods
or services or (iii) a beneficial interest in any YieldUP Material Contract;
provided, that ownership of no more than one percent of the outstanding voting
stock of a publicly traded corporation shall not be deemed an "interest in any
entity" for purposes of this Section 3.15.
3.16. Governmental Authorization. Schedule 3.16 of the YieldUP Disclosure
Schedule sets forth an accurate list of each material federal, state, county,
local, or foreign governmental consent, license, permit, grant, or other
authorization issued to YieldUP by a Governmental Entity (i) pursuant to which
YieldUP currently operates or holds any interest in any of its properties or
(ii) which is required for the operation of its business or the holding of any
such interest (herein collectively called "YieldUP Authorizations"), which
YieldUP Authorizations are in full force and effect and constitute all YieldUP
Authorizations required to permit YieldUP to operate or conduct its business or
hold any interest in its properties.
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3.17. Litigation. Except as disclosed on the YieldUP Disclosure Schedule,
there is no action, suit or legal, administrative, arbitration or other
proceeding pending, filed, initiated or, to YieldUP's knowledge, threatened by
or against YieldUP, its properties or any of its officers or directors, nor, to
the knowledge of YieldUP, is there any basis therefor. To the knowledge of
YieldUP and except as set forth on the YieldUP Disclosure Schedule, there is no
investigation pending or threatened against YieldUP, its properties or any of
its officers or directors (nor is there any basis therefor) before or by any
Governmental Entity (including the National Association of Securities Dealers,
Inc.). No Governmental Entity has at any time challenged or questioned the legal
right of YieldUP to manufacture, offer, or sell any of its products in the
present manner or style thereof.
3.18. Accounts Receivable. All accounts receivable of YieldUP shown on the
YieldUP Balance Sheet arose in the ordinary course of business at the aggregate
amounts thereof, are collectible except to the extent of reserves shown on
YieldUP Balance Sheet (and, for accounts arising after December 31, 1998, to an
extent consistent with past reserve practices) and are carried at values
determined in accordance with generally accepted accounting principles
consistently applied on a reasonable basis. None of the accounts receivable of
YieldUP is subject to any claim of offset, recoupment, setoff, or counter-claim
and, to the knowledge of YieldUP, there are no facts or circumstances (whether
asserted or unasserted) that would give rise to any such claim. No distributor
of YieldUP is entitled, contractually or otherwise, to return any YieldUP
products that are subject of an account receivable for any full or partial
refund or credit. No accounts receivable are contingent upon the performance by
YieldUP of any obligation or contract. No person has any Lien on any of such
accounts receivable, and no agreement for deduction or discount has been made
with respect to any of such receivables.
3.19. Bank Accounts; Guaranties; Powers of Attorney. Schedule 3.19 of the
YieldUP Disclosure Schedule identifies (i) the name of each bank, financial, or
other institution in which YieldUP has an account or safe deposit box or in
which any assets of YieldUP are deposited, including with the names of all
persons authorized to draw thereon or to have access thereto, (ii) all
guaranties, endorsements, or indemnifications by YieldUP of any person, firm or
corporation and (iii) the names of all persons holding powers of attorney for
YieldUP.
3.20. Customers. Schedule 3.20 identifies each of YieldUP's customers which
accounted for at least five percent of total sales for each of the fiscal years
ended December 31, 1996, 1997 and 1998, and sets forth the total dollar volume
of goods and services purchased from YieldUP by such customers during each
period (each customer named on Schedule 3.20, a "Significant Customer"). YieldUP
has not been notified that any customer that was a Significant Customer in 1998
has terminated its relationship with YieldUP or intends not do business with
YieldUP.
3.21. uppliers. Schedule 3.21 of the YieldUP Disclosure Schedule identifies
each of YieldUP's suppliers which accounted for at least five percent of total
goods and services purchased by YieldUP for each of the fiscal years ended
December 31, 1996, 1997 and 1998, and sets forth the total dollar volume of
goods and services purchased by YieldUP from such suppliers during each period
(each supplier named on Schedule 3.21, a "Significant Supplier"). YieldUP
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has not been notified, that any supplier that was a Significant Supplier in 1998
has terminated its relationship with YieldUP or intends not do business with
YieldUP.
3.22. Minute Books. Except as set forth on the YieldUP Disclosure Schedule,
the minute books of YieldUP made available to counsel for Parent contain
complete and accurate minutes of all meetings or actions by written consent of
directors and shareholders of YieldUP since the time of incorporation of
YieldUP, and reflect all transactions referred to in such minutes accurately.
3.23. Environmental Matters.
(a) YieldUP is in compliance as of the date hereof with (and have
been at all times prior to the date hereof in compliance with) all laws, rules,
regulations, orders, ordinances, judgments, decrees and other legal requirements
relating to pollution or the protection of human health or the environment (the
"Environmental Laws").
(b) YieldUP possesses and is in compliance with all permits,
licenses, certificates, franchises and other authorizations relating to the
Environmental Laws necessary to conduct its business. YieldUP has delivered to
Parent correct and complete copies of all such permits, licenses, certificates,
franchises and other authorizations.
(c) Except as authorized by a YieldUP Authorization, the operations
of YieldUP have not resulted in any release of Hazardous Substances (as defined
below) on any real property that has ever been owned, leased or otherwise
operated by YieldUP.
(d) To the knowledge of YieldUP, there are not present in, on or
under any real property that has ever been owned, leased or otherwise operated
by YieldUP any Hazardous Substances (as defined below) in such form or
quantities so as to create any liability or obligation under any Environmental
Law or any other liability for YieldUP. To the knowledge of YieldUP, YieldUP
has no liability or potential liability under any Environmental Law with
respect to the disposal of any Hazardous Substances, whether at any property
owned or leased by the Seller or at any other location.
(e) There are no Environmental Claims (as defined below) pending or,
to the knowledge of YieldUP, threatened against YieldUP. There are no past or
present actions, activities, circumstances, conditions, events or incidents,
that could form the basis of any Environmental Claim against YieldUP or against
any person or entity whose liability for such Environmental Claim YieldUP has or
may have retained or assumed either contractually or by operation of law.
(f) Consummation of the transactions contemplated by this Agreement
will not constitute or result in a violation of any Environmental Law.
(g) (i) There is no asbestos contained in or forming a part of any
building or structure on real property owned or leased by YieldUP that could
result in any material liability for YieldUP or that could have a material
adverse effect on the value or marketability
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of such building or structure; (ii) no polychlorinated biphenyls are used or
stored at any real property owned or leased by YieldUP or contained in any
personal property owned, leased or operated by YieldUP; (iii) YieldUP does not
own or operate (and has never owned or operated) any underground storage tanks
regulated under the Environmental Laws, and (iv) to the knowledge of YieldUP, no
aboveground or underground storage tanks regulated under the Environmental Laws
are located on (or have ever been located on) any real property owned or leased
by YieldUP.
(h) YieldUP has not at any time transported to, or disposed of in, any
landfill or other facility any Hazardous Materials, which transportation or
disposal (under laws presently applicable to the landfill or other facility)
could result in any material liability for YieldUP.
(i) As used in this Section 3.23, the following terms shall have the
following meanings:
(i) "Hazardous Substances" means pollutants, contaminants,
hazardous substances, hazardous wastes, petroleum and fractions thereof, and all
other chemicals, wastes, substances and materials listed in, regulated by any
Environmental Law or defined or designated as hazardous, extremely hazardous or
toxic under any Environmental Law.
(ii) "Environmental Claim" means any notice by a person or entity
alleging potential liability (including, without limitation, potential liability
for any investigatory costs, cleanup costs, governmental response costs, natural
resource damages, property damages, personal injuries, or penalties) arising out
of, based on or resulting from (1) the presence, or release into the
environment, of any Hazardous Substances at any location, whether or not owned
by YieldUP or (2) circumstances forming the basis of a violation, or alleged
violation, of any Environmental Law.
3.24. Brokers' and Finders' Fees. Except as disclosed on the YieldUP
Disclosure Schedule with respect to Needham & Company, Incorporated, YieldUP has
not incurred, nor will it incur, directly or indirectly, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
3.25. Labor Matters. Schedule 3.25 of the YieldUP Disclosure Schedule lists
all current officers and management level employees of YieldUP (and their
respective titles). Except as set forth in the YieldUP Disclosure Schedule,
there are no material pending claims against YieldUP under any workers
compensation plan or policy or for short term or long term disability. YieldUP
has fully complied with all applicable provisions of COBRA and has no
obligations with respect to any former employees or qualified beneficiaries
thereunder, except as set forth in the YieldUP Disclosure Schedule. YieldUP has
not given to or received from any current employee of YieldUP notice of
termination of employment. There is no collective bargaining unit representing
any of YieldUP's employees. To the knowledge of YieldUP, no petition has been
filed and is
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pending with the National Labor Relations Board by any labor organization or any
group of employees for an election or certification regarding the representation
of any group of employees by a labor organization, nor to the knowledge of
YieldUP is there at present any solicitation or campaign by any labor
organization or employee for the representation of YieldUP's employees by a
labor organization.
3.26. Employee Benefit Plans.
(a) Schedule 3.26(a) of the YieldUP Disclosure Schedule lists all
employee benefit plans (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) and all bonus, stock option,
stock purchase, incentive, deferred compensation, supplemental retirement,
severance, and other similar employee benefit plans, programs, or arrangements,
and any current or former employment or executive compensation or severance
agreements, written or otherwise, for the benefit of, or relating to, any
current or former employee of YieldUP or any trade or business (whether or not
incorporated) which is a member or which is under common control with YieldUP
(an "ERISA Affiliate") within the meaning of Section 414(b), (c), (m) or (o) of
the Code, or any subsidiary of YieldUP under which YieldUP or an ERISA Affiliate
has or could have any obligations or liability (together, the "Employee Plans").
(b) Except as disclosed on the YieldUP Disclosure Schedule, (i) none
of the Employee Plans promises or provides retiree medical or other retiree
welfare benefits to any person except as required by applicable law, including
but not limited to COBRA; (ii) all Employee Plans are in compliance in all
material respects with the requirements prescribed by any and all applicable
statutes (including ERISA and the Code, except for the adoption of certain
amendments to conform to changes made by recent legislation provided that the
time period for adopting such amendments has not yet expired), orders, or
governmental rules and regulations currently in effect with respect thereto
(including all applicable requirements for notification to participants or
beneficiaries or the Department of Labor, Internal Revenue Service (the "IRS")
or Secretary of the Treasury), and YieldUP has performed all obligations
required to be performed by it under, is not in default under or violation of,
and has no knowledge of any default or violation by any other party to, any of
the Employee Plans; (iii) no Employee Plan is or within the prior six years has
been subject to, and YieldUP has not incurred, and does not expect to incur, any
liability under, Title IV of ERISA or Section 412 of the Code; and (iv) neither
YieldUP, any ERISA Affiliate nor any Employee Plan is subject to any excise tax
or any similar tax or penalty under the Code or ERISA.
(c) None of the following now exists or has existed within the
six-year period ending on the date hereof with respect to any Employee Plan: (i)
any act or omission by YieldUP constituting a violation of Section 402, 403, 404
or 405 of ERISA; (ii) any act or omission by YieldUP which constitutes a
violation of Sections 406 and 407 of ERISA and is not exempted by Section 408 of
ERISA or which constitutes a violation of Section 4975(c) of the Code and is not
exempted by Section 4975(d) of the Code; (iii) any act or omission by YieldUP
constituting a violation of Section 503, 510 or 511 of ERISA; or (iv) any act or
omission by YieldUP which could give rise to liability under Section 502 of
ERISA.
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(d) Each Employee Plan has been maintained in substantial compliance
with its terms, and all contributions, premiums, or other payments due from
YieldUP to (or under) any such Employee Plan have been fully paid or are
adequately provided for on the YieldUP Balance Sheet. All accruals thereon
(including, where appropriate, proportional accruals for partial periods) have
been made in accordance with generally accepted accounting principles
consistently applied on a reasonable basis. Except as set forth in the YieldUP
Disclosure Schedule, there has been no amendment, written interpretation, or
announcement (whether or not written) by YieldUP with respect to, or change in
employee participation or coverage under, any Employee Plan that would increase
the expense of maintaining such plans or arrangements, individually or in the
aggregate, above the level of expense incurred with respect thereto for the most
recently-ended fiscal year.
(e) YieldUP has made available to Parent complete, accurate and
current copies of all Employee Plans and all amendments, documents,
correspondence and filings relating thereto, including but not limited to any
statements, filings, reports, or returns filed with any Governmental Entity with
respect to the Employee Plans.
3.27. Insurance. Schedule 3.27 of the YieldUP Disclosure Schedule sets forth
an accurate list of all insurance policies and fidelity bonds covering the
assets, business, equipment, properties, operations, employees, officers, and
directors of YieldUP. There is no claim by YieldUP pending under any of such
policies or bonds as to which coverage has been questioned, denied, or disputed
by the underwriters of such policies or bonds. All premiums due and payable
under all such policies and bonds have been paid and YieldUP is otherwise in
full compliance with the terms of such policies and bonds (or other policies and
bonds providing substantially similar insurance coverage). To YieldUP's
knowledge, such policies of insurance and bonds are of the type and in amounts
customarily carried by persons conducting businesses similar to those of
YieldUP. YieldUP has no knowledge of any threatened termination of, or premium
increase with respect to, any of such policies.
3.28. Compliance With Laws. YieldUP has complied in all material respects
with, is not in material violation of, and has not received any notices of
violation with respect to, any federal, state, local or foreign statute, law, or
regulation with respect to the conduct of its business, or the ownership or
operation of its business.
3.29. Third Party Consents. Except as set forth in the YieldUP Disclosure
Schedule, no consent or approval is needed from any third party in order to
effect the Merger, this Agreement or any of the transactions contemplated
hereby.
3.30. Registration Statements; Proxy Statement. The information concerning
YieldUP supplied by YieldUP for inclusion in the Registration Statement (as
defined in Section 4.08) shall not at the time the Registration Statement is
declared effective by the SEC contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The information concerning YieldUP supplied by
YieldUP for inclusion in the proxy statement/prospectus to be sent to the
stockholders of YieldUP in
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connection with the meeting of YieldUP's stockholders to consider the Merger and
this Agreement (the "YieldUP Stockholders' Meeting") (such proxy
statement/prospectus as amended or supplemented is referred to herein as the
"Proxy Statement,") shall not, on the date the Proxy Statement is first mailed
to YieldUP's stockholders, at the time of YieldUP Stockholders' Meeting and at
the Effective Time, contain any statement which, at such time and in light of
the circumstances under which it shall be made, is false or misleading with
respect to any material fact, or omit to state any material fact necessary in
order to make the statements made therein not false or misleading; or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for YieldUP
Stockholders' Meeting which has become false or misleading. If at any time prior
to the Effective Time any event relating to YieldUP or any of its affiliates,
officers or directors should be discovered by YieldUP which should be set forth
in an amendment to the Registration Statement or a supplement to the Proxy
Statement, YieldUP shall promptly inform Parent and Sub. Notwithstanding the
foregoing, YieldUP makes no representation or warranty with respect to any
information concerning Parent or Sub supplied by Parent or Sub which is
contained in any of the foregoing documents.
3.31. Complete Copies of Materials. All documents made available to Parent
or its counsel in connection with their legal and accounting review of YieldUP
are true and complete copies thereof.
3.32. Year 2000. The YieldUP SEC Reports describe the efforts undertaken to
date by YieldUP with a view to assuring that its business is Millennium
Compliant (as hereinafter defined) prior to December 31, 1999. YieldUP has no
reason to believe that YieldUP is not Millennium Compliant. YieldUP has not
received notice from any Significant Customer or Supplier indicating that such
customer or supplier will not be Millennium Compliant and experience problems
related thereto that could have a Material Adverse Effect on YieldUP.
"Millennium Compliant" means that all software, hardware and associated devices
material to the conduct of a company's business will operate without error
relating to date data, including but not limited to any error relating to or
product of date data which represents references to different centuries or more
than one century or utilizes a four digit year code or format.
3.33. Opinion of Financial Advisor. The financial advisor of YieldUP,
Needham & Company, Incorporated, has delivered to the Board of Directors of
YieldUP an opinion dated the date of this Agreement that, from a financial point
of view, the consideration to be offered to the stockholders of YieldUP in the
Merger contemplated hereby is fair.
3.34. Voting Agreements. YieldUP has delivered to Parent an Agreement (the
"YieldUP Affiliate Agreement"), in substantially the form of Exhibit 3.34(a)
hereto, from, and executed by, each of Raj Mohindra and Suraj Puri and any
entity controlled thereby (each a "YieldUP Affiliate"), by which each YieldUP
Affiliate agrees, among other things, (i) to vote any shares of YieldUP Common
Stock for which they have voting power in favor of the Merger in any stockholder
vote to obtain approval to proceed with the Merger, (ii) to not sell or
otherwise dispose of any shares of Parent Common Stock for a period of 180 days
after the Effective Time and (iii) in the event such YieldUP Affiliate is a
representative of an institution that holds any shares of YieldUP Common Stock,
to use his or her best efforts to ensure that such institutions
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comply with the terms and conditions of such YieldUP Affiliate Agreement. In
addition, YieldUP will deliver to Parent prior to the Closing an agreement,
substantially in the form of Exhibit 3.34(b) hereto, from, and executed by, each
officer and director of YieldUP, by which such person agrees to comply with the
applicable requirements of Rule 145 promulgated under the Securities Act.
3.35 Disclosure No representation or warranty of YieldUP in this Agreement
or any document, exhibit, statement, certificate, or schedule furnished or to be
furnished to the Parent pursuant hereto, contains or will contain any untrue
statement of a material fact, or omits or will omit any material fact necessary
to make the statements therein not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub jointly and severally represent and warrant to YieldUP that
the statements contained in this Article IV are true and correct as of the date
hereof, except as set forth in the disclosure schedule delivered by Parent to
YieldUP on or before the date of this Agreement (the "Parent Disclosure
Schedule"). The Parent Disclosure Schedule shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
IV and the disclosure in any paragraph, including appropriate cross references,
shall qualify only the corresponding paragraph in this Article IV.
4.01. Organization, Standing and Power. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Minnesota. Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of Minnesota. Each of Parent and Sub has
the corporate power to own its properties and to carry on its business as now
being conducted and is duly qualified to do business and is in good standing in
each jurisdiction in which the failure to be so qualified would have a Material
Adverse Effect on Parent and its subsidiaries, taken as a whole. Parent has
delivered a true and correct copy of the Articles of Incorporation and By-Laws
of Parent and the Articles of Incorporation and By-Laws of Sub, each as amended
to date, to YieldUP.
4.02. Capital Structure.
(a) The authorized capital stock of Parent consists of 50,000,000
shares of Parent Common Stock, of which, as of the close of business on January
19, 1999, 23,229,905 shares were issued and outstanding, and 10,000,000 shares
of Preferred Stock, no par value, none of which, as of the date hereof, is
issued and outstanding. All of the issued and outstanding shares of capital
stock of Parent and its subsidiaries have been duly authorized and validly
issued, are fully paid and nonassessable and were not granted in violation of
any statutory preemptive rights. There are no outstanding subscriptions,
options, warrants, calls, or other agreements or commitments under which Parent
or any subsidiary is or may become obligated to issue, sell, transfer, or
otherwise dispose of, or purchase, redeem, or otherwise acquire, any shares of
capital stock of, or other equity interests in, Parent or any subsidiary, and
there are no outstanding securities convertible into or exchangeable for any
such capital stock or other equity interests,
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except for (i) options to purchase up to an aggregate of 2,345,695 shares (as of
the date hereof) of Parent Common Stock, (ii) shares of Parent Common Stock
issuable in accordance with Parent's Employee Stock Purchase Plan, (iii) up to
100,000 shares of Parent Common Stock issuable under a warrant agreement between
Parent and Aspect, Inc., and (iv) the Rights Agreement dated as of May 22, 1997
between Parent and Harris Trust and Savings Bank, as amended (the "Parent Rights
Agreement"), under which each outstanding share of Parent Common Stock has
attached to it certain rights (the "Parent Rights"), including rights under
certain circumstances to purchase one one-hundredth of a share of Parent Series
A Junior Participating Preferred Shares at $90 per share, subject to adjustment.
There are no stock appreciation rights, phantom stock rights, or performance
shares outstanding with respect to Parent or any of its subsidiaries. Except as
set forth in the Parent Disclosure Schedule, Parent owns, directly or
indirectly, all of the issued and outstanding shares of capital stock of every
class of each subsidiary, free and clear of all liens, security interests,
pledges, charges, and other encumbrances. There are no voting trusts or other
agreements or understandings to which Parent or any of its subsidiaries is a
party or of which Parent otherwise has knowledge with respect to the voting of
the capital stock of Parent or its subsidiaries.
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger, when issued in accordance with this Agreement, the Merger Agreement, and
the applicable provisions of Delaware Law will be duly authorized, validly
issued, fully paid, and nonassessable.
4.03. Authority. Parent and Sub have all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Parent and Sub. This Agreement
has been duly executed and delivered by Parent and Sub and constitutes the valid
and binding obligations of Parent and Sub enforceable against Sub in accordance
with its terms, except to the extent that enforceability may be limited by
applicable bankruptcy, insolvency, or similar laws affecting the enforcement of
creditors' rights generally, and subject, as to enforceability, to general
principles of equity. Except as set forth in the Parent Disclosure Schedule, the
execution and delivery of this Agreement do not, and the consummation of the
transactions contemplated hereby will not, conflict with, or result in any
violation or breach of, or default under (with or without notice or lapse of
time, or both), or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of a benefit under (i) any provision of
the Articles of Incorporation or By-Laws of Parent or the Certificate of
Incorporation or By-Laws of Sub or (ii) any mortgage, indenture, lease, contract
or other agreement or instrument, permit, concession, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to Parent or its properties or assets, except in the case of (ii) above, for
such conflicts, violations, breaches, defaults, rights, or losses which would
not prevent or delay consummation of the Merger, or otherwise prevent Parent or
Sub from performing its respective obligations under this Agreement, and which
would not, individually or in the aggregate, have a material adverse effect on
the business, operations, assets (including intangible assets), financial
condition or results of operations of Parent and its subsidiaries, taken as a
whole. No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to Parent or Sub in connection with
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the execution and delivery of this Agreement by Parent and Sub or the
consummation by Parent or Sub of the transactions contemplated hereby, except
for (i) the filing of the Merger Agreement with the Secretary of State of the
State of Delaware, (ii) filings in connection, or in compliance, with the
provisions of the HSR Act, (iii) the filing of the Registration Statement and
Proxy Statement with the SEC, the filing of a Form 8-K with the SEC after the
Closing Date, or any filings as may be required under applicable state
securities laws and the laws of any foreign country, and (v) where failure to
obtain such consents, approvals, orders, authorizations, registrations, or
declarations, or to make such filings, would not prevent or delay consummation
of the Merger, or otherwise prevent Parent or Sub from performing its respective
obligations under this Agreement, and would not, individually or in the
aggregate, have a Material Adverse Effect on Parent and its subsidiaries, taken
as a whole.
4.04. SEC Filings; Financial Statements.
(a) Parent has filed and made available to YieldUP all forms, reports,
and documents required to be filed by Parent with the SEC since August 27, 1995
(including all exhibits, notes, and schedules thereto and documents incorporated
by reference therein)(all such forms, reports, and documents, including any such
forms, reports, and documents filed with the SEC after the date hereof, being
collectively called the "Parent SEC Reports" and individually called a "Parent
SEC Report"). The Parent SEC Reports (i) at the time filed, with respect to all
of the Parent SEC Reports other than registration statements filed under the
Securities Act, or at the time of their respective effective dates, with respect
to registration statements filed under the Securities Act, complied, and any
Parent SEC Report filed with the SEC after the date hereof will comply, as to
form in all material respects with the applicable requirements of the Securities
Act or the Exchange Act, as the case may be, and (ii) did not, and any Parent
SEC Report filed after the date hereof will not, at the time filed or at the
time of their respective effective dates, as the case may be (or if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing), contain any untrue statement of a material fact or omit to state a
material fact required to be stated in such Parent SEC Reports or necessary in
order to make the statements in such Parent SEC Reports, in the light of the
circumstances under which they were made, not misleading. Since August 27, 1995,
Parent has filed in a timely manner all forms, reports, and documents that it
was required to file with the SEC under the Exchange Act and the rules and
regulations of the SEC. None of Parent's subsidiaries is required to file any
forms, reports, or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes) contained in the Parent SEC Reports at the time filed
or at the time of their respective effective date, as the case may be, complied,
or will comply, as to form in all material respects with the applicable
published rules and regulations of the SEC with respect thereto, was, or will
be, prepared in accordance with generally accepted accounting principles applied
on a consistent basis throughout the periods involved (except as may be
indicated in the notes to such financial statements or, in the case of unaudited
statements, as permitted by Form 10-Q of the SEC) and fairly presented, or will
fairly present, the consolidated financial position of Parent and its
subsidiaries at the respective dates and the consolidated results of its
operations and cash flows for the periods indicated, except that the unaudited
interim financial statements were or are subject to normal and recurring
year-end adjustments.
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<PAGE> 33
4.05. No Material Adverse Change. Except as disclosed in the Parent SEC
Reports or in the Parent Disclosure Schedule, from the date of the balance sheet
included in the Parent's most recently filed report on Form 10-Q through the
date of this Agreement, Parent has conducted its business in the ordinary course
and there has not occurred: (a) any material adverse change in the financial
condition, liabilities, assets, or business of Parent and its subsidiaries,
taken as a whole; (b) any amendments or changes in the Articles of Incorporation
or By-Laws of Parent; (c) any damage to, destruction or loss of any assets of
the Parent (whether or not covered by insurance) that materially and adversely
affects the financial condition or business of Parent and its subsidiaries,
taken as a whole; (d) any sale of a material amount of property of Parent,
except in the ordinary course of business; or (e) any adverse change of a
character that would be required to be disclosed in the next Form 10-Q or Form
10-K required to be filed by Parent.
4.06. Litigation. There is no action, suit, proceeding, claim, arbitration,
or investigation pending, or as to which Parent has received any notice of
assertion nor, to Parent's knowledge, is there a reasonable basis to expect such
notice of assertion, against Parent which in any manner challenges or seeks to
prevent, enjoin, alter, or materially delay any of the transactions contemplated
by this Agreement. Except as disclosed in the Parent SEC Reports or in the
Parent Disclosure Schedule, there is no suit, action or proceeding pending, or,
to the knowledge of Parent, threatened against Parent, which is reasonably
likely to have a Material Adverse Effect on Parent and its subsidiaries, taken
as a whole.
4.07. Brokers' and Finders' Fees. Except for the fee of Lehman Brothers,
Inc., Parent's financial adviser, Parent has not incurred, and will not incur,
directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement, the Merger
or any transaction contemplated hereby.
4.08. Registration Statement; Proxy Statement. Subject to the accuracy of
the representations of YieldUP made in Section 3.30, the Registration Statement
on Form S-4 pursuant to which the shares of Parent Common Stock to be issued in
the Merger will be registered with the SEC (the "Registration Statement") shall
not, at the time the Registration Statement (including any amendments or
supplements thereto) is declared effective by the SEC, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements included therein, in light of the circumstances
under which they were made, not misleading. The information concerning Parent
and Sub supplied by Parent for inclusion in the Proxy Statement shall not, on
the date the Proxy Statement is first mailed to YieldUP's stockholders, at the
time of YieldUP Stockholders' Meeting and at the Effective Time, contain any
statement which, at such time and in light of the circumstances under which it
shall be made, is false or misleading with respect to any material fact, or omit
to state any material fact necessary in order to make the statements therein not
false or misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for YieldUP Stockholders' Meeting which has become false or misleading.
If at any time prior to the Effective Time any event relating to Parent, Sub or
any of their respective affiliates, officers or directors should be discovered
by Parent or Sub which should be set forth in an amendment to the Registration
Statement or a supplement to the Proxy Statement,
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<PAGE> 1
EXHIBIT 10.9
[CONFORMED COPY]
LICENSE AGREEMENT FOR MICROELECTRONIC TECHNOLOGY
BETWEEN YIELDUP (LICENSOR) AND FSI (LICENSEE)
- --------------------------------------------------------------------------------
This Agreement is between YIELDUP INTERNATIONAL CORPORATION, a Corporation
organized under the laws of Delaware and having an office and a place of
business at Mountain View, California (hereinafter referred to as "YIELDUP") and
FSI INTERNATIONAL, INC., a Corporation organized under the laws of Minnesota and
having an office and place of business at Chaska, Minnesota (hereinafter
referred to as "FSI").
WITNESSETH THAT:
WHEREAS, YIELDUP has developed and continues to develop certain
technology useful in the microelectronics industry. Representative embodiments
of industrial equipment incorporating such technology include the YIELDUP(TM)
Wafer Filtration System, YIELDUP 1000 SRD Replacement System, YIELDUP 2000,
YIELDUP 4000 HF Last, and the YIELDUP 6000 cleaning, rinsing, and drying systems
currently being manufactured, developed, and/or commercially marketed by
YIELDUP.
WHEREAS, YIELDUP owns and controls certain know-how as well as a
portfolio of international patent properties (including patent applications and
patents) that relate to the YIELDUP technology.
WHEREAS, FSI desires to obtain a nonexclusive, worldwide license from
YIELDUP to allow FSI to manufacture and/or market industrial equipment and/or
devices in the microelectronics industry wherein such equipment and/or devices
would embody technology protected by YIELDUP patent properties and/or protected
as part of YIELDUP know how.
WHEREAS, YIELDUP is willing to grant such a license to FSI.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
ARTICLE I: DEFINITIONS
1.1 YIELDUP KNOW-HOW shall mean any technology disclosed by YIELDUP
to FSI on or before August 31, 1999, that relates to making, having made, making
for others, maintaining, operating, selling, offering to sell, leasing, or
otherwise distributing MICROELECTRONIC DEVICES and/or MICROELECTRONIC EQUIPMENT.
<PAGE> 2
1.2 YIELDUP PATENT RIGHTS shall mean any and all provisional,
nonprovisional, utility, design, reissue, reexamination, divisional,
continuation, continuation-in-part, extension, utility model, or any other
counterpart US and non-US patent applications and patents owned and/or
controlled, solely or jointly, by YIELDUP that have a priority date, claim
priority from a date, or are entitled to claim priority from a date on or before
August 31, 1999.
1.3 CONFIDENTIAL INFORMATION shall mean any materials or equipment,
or any written or verbal or written business or technical information, that is
disclosed by one party (the Disclosing Party) to the other party (the Recipient)
prior to the expiration or termination of this Agreement that relates to the use
of wet cleaning or immersion techniques to make, have made, make for others,
use, service, offer for sale, sell, import, export, lease, or otherwise
distribute MICROELECTRONIC DEVICES and/or MICROELECTRONIC EQUIPMENT.
CONFIDENTIAL INFORMATION also shall include the existence and content of this
Agreement. In order to protect the value and proprietary nature of YIELDUP
KNOW-HOW, both parties shall treat any YIELDUP KNOW-HOW that is confidential and
proprietary to YIELDUP as of the EFFECTIVE DATE of this agreement as if such
YIELDUP KNOW-HOW were CONFIDENTIAL INFORMATION of the other party hereunder.
1.4 EFFECTIVE DATE shall mean January 22, 1999.
1.5 IMPROVEMENT PATENT RIGHTS shall mean any and all provisional,
nonprovisional, utility, design, reissue, reexamination, divisional,
continuation, continuation-in-part, extension, utility model, or any other
counterpart US and non-US patent applications and patents owned and/or
controlled by YIELDUP that have a priority date, claim priority from a date, or
are entitled to claim priority from a date after August 31, 1999, and that claim
one or more inventions that were first conceived prior to August 31, 1999.
1.6 LICENSED METHOD(S) shall mean any and all methods encompassed
within or by one or more claims of the LICENSED TECHNOLOGY RIGHTS.
1.7 LICENSED PRODUCT(S) shall mean any and all MICROELECTRONIC
DEVICES and MICROELECTRONIC EQUIPMENT, or components of any of the foregoing,
encompassed within or by one or more claims of the LICENSED TECHNOLOGY RIGHTS.
1.8 LICENSED TECHNOLOGY RIGHTS shall mean any and all YIELDUP PATENT
RIGHTS, any and all IMPROVEMENT PATENT RIGHTS, and any and all YIELDUP KNOW-HOW.
1.9 MICROELECTRONIC DEVICE(S) shall mean any and all semiconductor
wafers, flat panel displays, compact discs, optical lenses, microelectronic
masks, multi-chip
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<PAGE> 3
modules, magnetic memory heads, printed circuit boards, solid state devices,
hard disks, and any component or combination of the foregoing.
1.10 MICROELECTRONIC EQUIPMENT shall mean any and all equipment, or
component or combination thereof, which may operate to manufacture and/or use
any MICROELECTRONIC DEVICE.
1.11 SUBSIDIARY shall mean any corporation, firm, partnership,
proprietorship, or other form of organization as to which FSI has at least a 50%
ownership interest, or any corporation, firm, partnership, proprietorship, or
other form of business organization as to which FSI exercises control of such
business. For purposes of this Agreement, Metron Technology B.V., a corporation
organized and existing under the laws of The Netherlands and having an office
and place of business at Burlingame, California, U.S.A., and its subsidiaries
shall each be deemed to be a SUBSIDIARY of FSI.
1.12 NET SALES PRICE shall mean the actual selling price of a ROYALTY
PRODUCT less packaging, transportation and insurance charges; import, export,
excise and value added taxes; custom duties; installation and service charges;
commissions to non-employee distributors or representatives; and credits or
returns.
If the ROYALTY PRODUCT was not separately itemized and priced and
was incorporated into another product or is part of a system or integrated tool,
the NET SALES PRICE of the ROYALTY PRODUCT shall be deemed to mean the gross
selling price of the product, system, or integrated tool, multiplied by the
ratio of the cost to manufacture the ROYALTY PRODUCT to the total manufacturing
cost of the product, system, or tool incorporating the ROYALTY PRODUCT adjusted
for all the deductions as provided by the foregoing paragraph.
1.13 ROYALTY PRODUCT(S) shall mean that portion of a LICENSED PRODUCT
which (a) embodies or uses all the elements or steps recited in any, one claim
of an issued YIELDUP PATENT RIGHT or of an issued IMPROVEMENT PATENT RIGHT; or
(b) is manufactured by use of all steps recited in any one claim of an issued
YIELDUP PATENT RIGHT or of an issued IMPROVEMENT PATENT RIGHT.
ARTICLE II:
LICENSE GRANT FROM YIELDUP TO FSI
2.1 YIELDUP agrees to grant and does hereby grant to FSI a
nonexclusive, worldwide license under the LICENSED TECHNOLOGY RIGHTS to make,
have made, make for others, use, service, offer for sale, sell, import, export,
lease, or otherwise distribute LICENSED PRODUCTS.
3
<PAGE> 4
2.2 YIELDUP agrees to grant and does hereby grant to FSI a
nonexclusive, worldwide license under the LICENSED TECHNOLOGY RIGHTS to practice
any and all LICENSED METHODS in order to make, have made, make for others, use,
service, offer for sale, sell, import, export, lease, or otherwise distribute
LICENSED PRODUCTS.
2.3 Except as provided in Article 6, FSI shall only have the right to
grant sublicenses under the license grants of this article to SUBSIDIARIES (the
"Buyback Option") of FSI.
2.4 YIELDUP shall not, in any transaction or combination of
transactions, transfer or offer to transfer any right, title, or interest in and
to any portion of the LICENSED TECHNOLOGY RIGHTS to any third party during the
period extending from the EFFECTIVE DATE through (i) the consummation of the
merger contemplated by the Agreement and Plan of Reorganization dated as of
January 21, 1999, among FSI and a wholly owned SUBSIDIARY of FSI and YIELDUP
("Reorganization Agreement"), (ii) the expiration of the option to purchase back
the licenses granted in this Agreement as provided in Article IX of this
Agreement (the "Buyback Option"), or (iii) the exercise of the Buyback Option.
If the merger is not consummated and the Buyback Option is not exercised, and
subject to Paragraph 2.5, YIELDUP shall, subsequently thereto, have the right to
transfer any portion of its right, title, and interest in and to the LICENSED
TECHNOLOGY RIGHTS to any third party.
2.5 In no event shall YIELDUP enter into any transaction with a third
party that diminishes any rights granted to FSI under this Agreement.
ARTICLE III: REPRESENTATIONS AND WARRANTIES
3.1 To the extent that Silicon Valley Bank has any interest in and to
the LICENSED TECHNOLOGY RIGHTS that might conflict with the right granted to FSI
under this Agreement, Silicon Valley Bank has executed the consent agreement
attached hereto as Exhibit A.
3.2 Subject to Paragraph 3.1, YIELDUP represents and warrants that it
is the owner of the entire right, title, and interest of LICENSED TECHNOLOGY
RIGHTS and that it has full right and power to grant the rights set forth in
this Agreement.
3.3 Subject to Paragraph 3.1, YIELDUP represents and warrants that it
has no agreements with or obligations to third parties, or any other
commitments, obligations, or liens, mortgages or encumbrances of any kind or
nature whatsoever which may diminish or limit in any manner the rights granted
to FSI under this Agreement.
4
<PAGE> 5
ARTICLE IV: COMPENSATION PAID BY FSI TO YIELDUP
In consideration for the license grants and rights granted by YIELDUP
to FSI under this Agreement, FSI shall pay YIELDUP a sum of [***CONFIDENTIAL
TREATMENT REQUESTED; PORTION OMITTED FILED SEPARATELY WITH THE SEC***] as
payment in full for such grants and rights. Such sum shall be paid by FSI to
YIELDUP as follows:
[***CONFIDENTIAL TREATMENT REQUESTED; PORTION OMITTED FILED SEPARATELY
WITH THE SEC***]
Each such payment listed above shall be made by wire transfer of immediately
available funds in accordance with reasonable written instructions provided by
YIELDUP to FSI. No other payments shall be due or payable to YIELDUP hereunder
by FSI or any authorized assignee, sublicensee, or other transferee of FSI
except for royalty payments as provided for in Sections 9.5(b) and (c), 9.7(b),
and 9.8 of this Agreement.
ARTICLE V: PATENT COSTS AND MARCH IN RIGHTS
5.1 Subject to Paragraphs 5.2 and 5.3, the filing, prosecution, and
maintenance of YIELDUP PATENT RIGHTS and IMPROVEMENT PATENT RIGHTS and the costs
thereof shall be the responsibility of YIELDUP.
5.2 In the event that YIELDUP elects, during the term of this
Agreement, not to file, prosecute, or maintain any patent, patent application,
or counterpart thereof constituting YIELDUP PATENT RIGHTS or IMPROVEMENT PATENT
RIGHTS, YIELDUP shall provide at least twenty (20) days advance written notice
of such election to FSI before any lapse of such rights would occur in order to
provide FSI the opportunity to continue to file, prosecute, or maintain such
patent, patent application, or counterpart thereof. If FSI, in its sole
discretion, elects to continue to file, prosecute, or maintain such patent,
patent application, or counterpart thereof, YIELDUP agrees to assign all of its
interest in and to such patent, patent application, or counterpart thereof to
FSI.
5.3 In the event that YIELDUP assigns any interest in any patent
application, patent, or counterpart thereof to FSI pursuant to Paragraph 5.2,
YIELDUP shall, during the term of this Agreement and thereafter, at the request
and expense of FSI, review, execute, acknowledge, verify, and deliver any and
all papers and do all other rightful acts, including the giving of testimony in
proceedings in which such patent application, patent, or counterpart thereof may
be involved or concerned, that FSI may consider to be necessary or proper to
secure to FSI the fullest rights to such patent application, patent, or
counterpart thereof in the United States and/or any foreign country or territory
of the world.
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<PAGE> 6
ARTICLE VI: ASSIGNMENT
6.1 If the merger contemplated by the Reorganization Agreement is
consummated or it is not consummated and the Buyback Option has expired, then
FSI shall have the right to assign, sublicense, or otherwise transfer all or a
portion of its rights under this Agreement, in whole or in part, to any spin-off
entity, acquired entity, merged entity, divestiture entity, or other form of
business organization that is a successor of the portion of FSI's business to
which this Agreement relates or to any corporation, firm, partnership,
proprietorship, or other form of business organization that owns more than 50%
of the stock of FSI entitled to vote for directors of FSI. In the event of any
transfer of rights under this Paragraph, FSI may reserve for itself all or a
portion of its rights under this Agreement.
6.2 Except as authorized in Paragraphs 2.1, 2.2, 2.3, and 6.1,
neither FSI nor any SUBSIDIARY shall have no right to assign or otherwise
transfer any of its rights in and to the LICENSED TECHNOLOGY RIGHTS, in whole or
in part, to any third party without the written consent of YIELDUP.
ARTICLE VII: CONFIDENTIALITY
7.1 The Recipient shall maintain, and will cause its employees to
maintain, the confidentiality of all CONFIDENTIAL INFORMATION received from the
Disclosing Party under this Agreement using the same care and safeguards with
respect to such CONFIDENTIAL INFORMATION as is used to maintain the
confidentiality of its own information of like character, but in no event less
than reasonable care. This obligation of confidentiality shall extend for the
longest period of (i) ten (10) years from the effective date of this Agreement,
or (ii) three (3) years from the expiration of this Agreement, or (iii) three
(3) years from the termination of this Agreement. CONFIDENTIAL INFORMATION
received under this Agreement shall be disclosed by the Recipient only to its
employees to whom disclosure is necessary to facilitate the purposes of this
Agreement. The Recipient warrants that all of its employees, agents,
consultants, or representatives who shall have access to CONFIDENTIAL
INFORMATION shall have been advised of their obligations under this Agreement.
Further, the Recipient warrants that all of its employees, agents, consultants,
or representatives who shall have access to CONFIDENTIAL INFORMATION are bound
by written agreements to maintain such information in confidence and not to use
such information except as expressly permitted herein.
7.2 As to any material or equipment submitted to the Recipient by the
Disclosing Party that is identified as CONFIDENTIAL INFORMATION by the
Disclosing Party, the Recipient shall not analyze such sample chemically,
microscopically, or in any other way that might reveal information other than
that which is apparent from unaided visual examination or from tests relating to
its performance, unless such analysis is reasonably required by the Recipient to
carry out the conversion process.
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<PAGE> 7
7.3 The obligations of confidentiality under this Agreement shall not
apply to CONFIDENTIAL INFORMATION that (a) is in the public domain without fault
of the Recipient, or (b) was known to the Recipient before receipt from the
Disclosing Party as demonstrated by written business records, or (c) is
independently developed by the Recipient, or (d) is disclosed to the Recipient
by a third party without restriction, or (e) is inherently disclosed in
connection with the marketing, selling, leasing, distributing, using,
maintaining, or operating of LICENSED PRODUCTS or the practice of LICENSED
METHODS.
7.4 The title to all CONFIDENTIAL INFORMATION provided to the
Recipient by the Disclosing Party shall remain vested in the Disclosing Party.
If the Disclosing Party requests the return of any tangible CONFIDENTIAL
INFORMATION, the Recipient shall return all such CONFIDENTIAL INFORMATION to the
Disclosing Party within thirty (30) days following the Disclosing Party's
request. However, the Recipient may retain in the office of its legal counsel
one copy of written information for record purposes only.
7.5 The Recipient shall not be liable for disclosure of CONFIDENTIAL
INFORMATION in compliance with any governmental statute, regulation, order, or
decree of a court or other governmental body; provided, however, that the
Recipient shall give reasonable notice to the Disclosing Party before the
Recipient's compliance with such statute, regulation, order, or decree.
7.6 A Recipient shall adhere to the U.S. Export Administration Laws
and Regulations and shall not export or re-export any technical data or products
received from the Disclosing Party or the direct product of such technical data
to any proscribed country listed in the U.S. Export Administration Regulations
unless properly authorized by the U.S. Government.
ARTICLE VIII: ENFORCEMENT
8.1 In the event that YIELDUP or FSI becomes aware of any
infringement or possible infringement of any LICENSED TECHNOLOGY RIGHTS in the
field of MICROELECTRONIC PRODUCTS and/or MICROELECTRONIC EQUIPMENT by an
unlicensed third party (the Infringing Party), YIELDUP or FSI, as the case may
be, shall promptly notify the other in writing regarding such infringement or
possible infringement. The notice shall include, if known, the name and address
of the Infringing Party, the alleged acts of infringement, and a summary of the
factual evidence supporting such claim of infringement, the names and phone
numbers of individuals possessing knowledge of the foregoing facts.
8.2 Within ninety (90) days of the date that a party provides notice
of infringing activity to the other party pursuant to Paragraph 8.1, YIELDUP
shall have the right in the first instance to initiate, prosecute, and control
any infringement litigation against an Infringing Party. YIELDUP shall notify
FSI in advance in writing of the intent of YIELDUP to bring or
7
<PAGE> 8
not bring any such action. After such ninety (90) day period, or upon receipt of
notice that YIELDUP elects not to bring an action against the Infringing Party,
FSI shall have the right to initiate, prosecute, and control any infringement
action against an Infringing Party in the name of YIELDUP as desired by FSI
and/or as required by law. FSI shall notify YIELDUP in advance in writing of the
intent of FSI to bring or not bring any such action.
8.3 Subject to Paragraphs 8.4, 8.5, 8.6, and 8.7, any action brought
by one party (the "Acting Party") against an Infringing Party shall be at the
expense of the Acting Party, and any recoveries gained in such Action shall be
entirely that of the Acting Party. Further, the Acting Party may initiate any
such Action in its own name, in the name of the other party (the "Non-Acting
Party"), or in the name of both parties, as required by law.
8.4 Upon request of the Acting Party and at the expense of the Acting
Party, the Non-Acting Party shall participate in any such Action, including (if
necessary) joinder as a party. If not requested by the Acting Party, the
Non-Acting Party may elect to participate in any such Action at the Non-Acting
Party's own expense. Whether such participation occurs upon request of the
Acting Party, or upon election by the Non-Acting Party, the Non-Acting Party
shall have a duty to cooperate reasonably with the Acting Party. Such
cooperation shall include cooperation to maximize the maintenance of all
attorney-client, work product, and joint defense privileges , and the parties
shall each instruct their respective counsel accordingly. As a condition of any
participation, the Non-Acting Party shall agree to be signatory to and be bound
by any protective order that might be entered by a court or stipulated to
between the Acting Party and the other party or parties.
8.5 Notwithstanding the right or obligation of the Non-Acting Party
to participate in an Action, the Acting Party shall retain control of any such
Action, including therefore the sole right to select, retain, and direct
counsel, and to make any and all decisions with respect to claims, defenses,
counterclaims, settlement, and strategy. However, the Acting Party shall, as is
reasonable, provide the Non-Acting Party with the opportunity to comment and
offer suggestions during the course of any such Action and shall, as is
reasonable, keep the Non-Acting Party informed of all developments in the
Action.
8.6 For some actions, the Acting and/or Non-Acting Party may desire
to share the expenses, recoveries, and/or liabilities that may result from an
action against an Infringing Party. Accordingly, upon the request of either the
Acting or Non-Acting Party, the parties shall negotiate in good faith to
determine how and if such expenses, recoveries, and/or liabilities would be
shared. Under no circumstances, however, can the Non-Acting Party have any
obligation, without the express written consent of the Non-Acting Party, to
enter into an agreement to share such expenses, recoveries, and/or liabilities.
Pursuant to such negotiations, the parties may also mutually agree, each acting
in its own discretion, to jointly institute an action against an Infringing
Party. In such event, the parties shall bear all expenses on an agreed upon
basis and shall share all recoveries on an agreed upon basis.
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<PAGE> 9
8.7 Neither party shall settle any action against any Infringing
Party in any manner that diminishes the rights of the other party without the
prior, written consent of the other party.
8.8 Any information provided to one party by the other party that
relates to an action against an Infringing Party shall be treated by the one
party as CONFIDENTIAL INFORMATION of the other party.
ARTICLE IX: TERM AND TERMINATION
9.1 Unless otherwise terminated by one or both parties as expressly
authorized in this Agreement, the term of this Agreement with respect to YIELDUP
PATENT RIGHTS and IMPROVEMENT PATENT RIGHTS shall expire at the end of the
enforceable term of the last to expire of licensed YIELDUP PATENT RIGHTS and
IMPROVEMENT PATENT RIGHTS. The term of this Agreement with respect to YIELDUP
KNOW-HOW shall continue in full force and effect unless earlier terminated as
expressly authorized in this Agreement. If the merger contemplated by the
Reorganization Agreement is consummated, then the licenses granted in this
Agreement shall become fully paid-up as of the date of consummation of the
merger.
9.2 YIELDUP shall have the right to terminate this Agreement in its
entirety in the event of a material breach by FSI of this Agreement, provided,
however, that YIELDUP must first provide FSI with sixty (60) days written notice
of such intent to terminate that clearly identifies the alleged breach at issue.
If FSI cures the breach, or can reasonably demonstrate that no breach has
occurred within such sixty (60) day period, then this Agreement shall remain in
full force and effect as if no such notice and/or breach had occurred. Any
sublicense granted under Paragraph 2.3 or any transfer made under Paragraph 6.1
shall also be terminated in the event that YIELDUP cancels this Agreement under
this Paragraph.
9.3 FSI shall have the right to terminate this Agreement in its
entirety, with or without cause, upon sixty (60) days written notice to YIELDUP.
9.4 Any obligation that accrued prior to any termination or
expiration of this Agreement shall survive such termination or expiration in
accordance with the terms of this Agreement applicable to such obligation.
9.5 (a) If the Reorganization Agreement is terminated by YIELDUP in
accordance with Section 8.01 of the Reorganization Agreement as a result of a
material breach by FSI, then YIELDUP shall have the right to terminate and
repurchase this License Agreement in its entirety as follows:
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<PAGE> 10
(i) YIELDUP shall provide FSI with written notice of the
termination and repurchase of the License Agreement within ninety (90) days of
the notice of termination of the Reorganization Agreement has been provided to
FSI.
(ii) Subject to Paragraph 9.6 of this Agreement, the notice
of termination of this Agreement must be accompanied by a termination fee equal
to the dollar amount previously paid by FSI pursuant to Article IV of this
Agreement, tendered in immediately available funds in the form of a cashier's
check or a wire transfer.
(b) If YIELDUP does not exercise its right to terminate and
repurchase the License pursuant to Section 9.5(a), then FSI shall pay YIELDUP a
royalty of [***CONFIDENTIAL TREATMENT REQUESTED; PORTION OMITTED FILED
SEPARATELY WITH THE SEC***] of the NET SALES PRICE of ROYALTY PRODUCTS sold
during each "Calendar Quarter" (January 1, April 1, July 1, and October 1),
within forty-five (45) days after the end of such quarter commencing with the
first full calendar quarter occurring after such termination of the
Reorganization Agreement. This License shall be fully paid up once FSI has paid
YIELDUP [***CONFIDENTIAL TREATMENT REQUESTED; PORTION OMITTED FILED SEPARATELY
WITH THE SEC***].
(c) If the Reorganization Agreement is terminated by FSI in
accordance with Section 8.01 of the Reorganization Agreement as a result of a
material breach by YIELDUP thereunder, then YIELDUP shall not have the option to
purchase back the licenses granted in this Agreement and FSI shall pay YIELDUP a
royalty of [***CONFIDENTIAL TREATMENT REQUESTED; PORTION OMITTED FILED
SEPARATELY WITH THE SEC***] of the NET SALES PRICE for ROYALTY PRODUCTS sold
during each "Calendar Quarter" (January 1, April 1, July 1, and October 1),
within forty-five (45) days after the end of such quarter commencing with the
first full calendar quarter occurring after such termination of the
Reorganization Agreement. If the event described in this Section 9.5(c) occurs,
then this license shall be fully paid up once FSI has paid YIELDUP
[***CONFIDENTIAL TREATMENT REQUESTED; PORTION OMITTED FILED SEPARATELY WITH THE
SEC***].
9.6 YIELDUP shall have the right to offset any damages payment
required of FSI under Section 8.02(b) of the Reorganization Agreement, if
applicable, against the termination fee of Paragraph 9.5(a)(ii) such that
YIELDUP would only be required to tender a net termination fee to FSI of the
amount paid by FSI under Article IV of this Agreement less the amount of the
damages payment under Section 8.02(b) of the Reorganization Agreement. If
YIELDUP elects to make such an offset, YIELDUP shall expressly indicate such
election in the notice of termination provided to FSI under Paragraph 9.5(a).
9.7 (a) If the Reorganization Agreement is terminated by either FSI
or YIELDUP in accordance with Section 8.01 of the Reorganization Agreement,
other than as a result of a material breach thereunder by either party or
pursuant to Section 8.01(d) or (e) of the Reorganization Agreement YIELDUP shall
have the right to terminate and repurchase this
10
<PAGE> 11
License Agreement in its entirety by providing FSI with written notice of such
termination within ninety (90) days after the termination of the Reorganization
Agreement, and the notice of termination must be accompanied by a termination
fee of the sum of [***CONFIDENTIAL TREATMENT REQUESTED; PORTION OMITTED FILED
SEPARATELY WITH THE SEC***] plus all amounts paid by FSI under Article IV of
this Agreement, tendered in immediately available funds in the form of a
cashiers check or a wire transfer.
(b) If YIELDUP fails to exercise its Buyback Option, then FSI
shall pay YIELDUP a royalty of [***CONFIDENTIAL TREATMENT REQUESTED; PORTION
OMITTED FILED SEPARATELY WITH THE SEC***] of the NET SALES PRICE of ROYALTY
PRODUCTS sold during each Calendar Quarter, within forty-five (45) days after
such Calendar Quarter, commencing with the first full calendar quarter after
such termination of the Reorganization Agreement. This license shall be fully
paid up once FSI has paid YIELDUP [***CONFIDENTIAL TREATMENT REQUESTED; PORTIOn
OMITTED FILED SEPARATELY WITH THE SEC***].
9.8 If the Reorganization Agreement is terminated in accordance with
Section 8.01(d) or 8.01(e) of the Reorganization Agreement (and provided that
YIELDUP shall not have materially breached the Reorganization Agreement), then
YIELDUP shall not have the option to terminate and repurchase this License
Agreement and FSI shall pay YIELDUP a royalty under this Section 9.8. The
royalties due YIELDUP by FSI for each Calendar Quarter shall be due within
forty-five (45) days after each Calendar Quarter commencing with the first full
calendar quarter after such termination of the Reorganization Agreement
according to the following schedule:
(a) FSI shall pay YIELDUP [***CONFIDENTIAL TREATMENT REQUESTED;
PORTION OMITTED FILED SEPARATELY WITH THE SEC***] of the NET SALES PRICE of
ROYALTY PRODUCTS until net sales of ROYALTY PRODUCTS in aggregate total
[***CONFIDENTIAL TREATMENT REQUESTED; PORTION OMITTED FILED SEPARATELY WITH THE
SEC***];
(b) FSI shall pay YIELDUP [***CONFIDENTIAL TREATMENT REQUESTED;
PORTION OMITTED FILED SEPARATELY WITH THE SEC***] of the NET SALES PRICE of
ROYALTY PRODUCTS for the net aggregate sales of ROYALTY PRODUCTS greater than
[***CONFIDENTIAL TREATMENT REQUESTED; PORTION OMITTED FILED SEPARATELY WITH THE
SEC***];
(c) FSI shall pay YIELDUP [***CONFIDENTIAL TREATMENT REQUESTED;
PORTION OMITTED FILED SEPARATELY WITH THE SEC***] of the NET SALES PRICE of
ROYALTY PRODUCTS for the net aggregate sale of ROYALTY PRODUCTS greater than
[***CONFIDENTIAL TREATMENT REQUESTED; PORTION OMITTED FILED SEPARATELY WITH THE
SEC***]. This license shall be fully paid up under this Section 9.8 once FSI has
paid
11
<PAGE> 12
YIELDUP [***CONFIDENTIAL TREATMENT REQUESTED; PORTIOn OMITTED FILED SEPARATELY
WITH THE SEC***].
ARTICLE X: MISCELLANEOUS PROVISIONS
10.1 NOTICES. Except for the cancellation notice and payment of the
cancellation fee by YIELDUP pursuant to Paragraph 9.2, any notices or
communications under this Agreement shall be in writing and shall be deemed to
have been duly given by either party to the other on the date hand-delivered,
sent by telex, facsimile, or mailed first class, postage prepaid, and sent to
the address or place of business of the other party as shown below.
TO YIELDUP:
President and CEO
YIELDUP INTERNATIONAL CORPORATION
117 Easy Street
Mountain View, California 94043
TO FSI:
General Counsel
FSI INTERNATIONAL, INC.
322 Lake Hazeltine Drive
Chaska, Minnesota 55318
The parties shall promptly provide written notice of any change of address to
the other party.
10.2 FORCE MAJEURE. Neither of the parties hereto shall be liable to
the other party or be deemed to be in default under this Agreement if its
performance is prevented in whole or in part by a Force Majeure, including but
not limited to, strikes, accidents, rebellions, blockades, riots, storms, fires,
explosions, acts of God, war, sabotage, any law or administrative ruling of any
government or political subdivision thereof having jurisdiction over such part,
or any other cause similar thereto which is beyond the reasonable control of the
party whose performance is prevented in whole or in part; provided, however,
that if the failure or delay in performance by a party persists continuously for
a period of six (6) months or more, the other party may cancel or terminate this
Agreement, in its entirety, by giving thirty (30) days written notice to the
non-performing party.
10.3 GOVERNING LAW. This Agreement shall be construed in accordance
with the laws of the State of Minnesota, without regard to application of the
principles of conflicts of law.
10.4 ENTIRE AGREEMENT. This Agreement contains the complete and entire
agreement between the parties hereto relating to the subject matter hereof, and
supersedes any previous communications, representations, or agreements, whether
verbal or written.
12
<PAGE> 13
10.5 AMENDMENT. No change, addition, waiver, amendment, or
modification of any of the terms of conditions hereof shall be valid or binding
on either party unless in writing and signed by an officer of an authorized
representative of both parties.
10.6 SEVERABILITY. The provisions of this Agreement shall be deemed
separable. Additionally, the parties hereto expressly agree that it is not the
intent of either party to violate any of the state or federal public policies,
statutes, or common laws of the United States. It is the intent of both parties
to make this Agreement binding only to the extent that it may lawfully be done
under existing state and federal laws of the United States, whichever may be
applicable. Therefore, if any part of this Agreement is rendered void, invalid,
or unenforceable, or is judged to be in violation of any state or federal law of
the United States, such rendering or judgment shall not affect the validity or
enforceability of the remainder of this Agreement; provided that if the part or
parts which are void, invalid, or unenforceable as aforesaid shall substantially
impair the value of this whole Agreement to either party, that party may cancel
and terminate this Agreement, in its entirety, by giving thirty (30) days
written notice to the other party.
10.7 WAIVER. A failure of either party to enforce any of the
provisions of this Agreement of any rights with respect thereto or to exercise
any election provided for herein, shall in no way be considered a waiver of such
provisions, rights, or elections or in any way to influence the validity of this
Agreement. No term or provisions hereof shall be deemed waived and no breach
excused or consented to, unless such waiver or consent shall be in writing and
signed by the party claimed to have waived or consented. The failure by a party
hereto to enforce any of said provisions, rights, or elections shall not
preclude or prejudice that party from alter enforcing or exercising the same or
in any other provisions, rights, or elections which it may have under this
Agreement. Any consent by any party to, or waiver of, a breach by the other,
whether express or implied, shall not constitute a consent or waiver of, or
excuse for any other different or subsequent breach. All remedies herein
conferred upon any party shall be cumulative and no one shall be exclusive of
any other remedy conferred by law or equity.
10.8 TIME OF THE ESSENCE. Time is of the essence in the performance of
each and every obligation and covenant imposed by this Agreement.
10.9 THIRD PARTY BENEFICIARIES. No third party, including any employee
of either party of this Agreement, shall have or acquire any rights as a third
party beneficiary by reason of this Agreement.
10.10 NO AGENCY OR PARTNERSHIP. Nothing contained in this Agreement
shall give either party the right to bind the other, or be deemed to constitute
the parties as agents for the other or as partners with each other or any third
party.
13
<PAGE> 14
10.11 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have all been signed by
each of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart. Facsimile signatures shall be
deemed original signatures.
<TABLE>
<CAPTION>
YIELDUP INTERNATIONAL FSI INTERNATIONAL, INC.
CORPORATION
<S> <C>
By: /s/ Raj Mohindra By: /s/ Patricia M. Hollister
------------------------------------------- ------------------------------------------
Printed Name: Raj Mohindra Printed Name: Patricia M. Hollister
--------------------------------- --------------------------------
Title: President and Chief Executive Officer Title: Chief Financial Officer and Corporate
---------------------------------------- ---------------------------------------
Controller
-----------
Date: January 21, 1999 Date: January 21, 1999
---------------------------------------- ---------------------------------------
</TABLE>
14
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
YieldUP International Corporation:
We consent to incorporation by reference in the registration statements (Nos.
333-19645, 333-19647, 333-19649, and 333-50743) on Forms S-3 and S-8 of YieldUP
International Corporation of our report dated February 5, 1999, relating to the
balance sheet of YieldUP International Corporation as of December 31, 1998, and
the related statements of operations, stockholders' equity, and cash flows for
each of the years in the two-year period then ended, which report appears in the
December 31, 1998, annual report on Form 10-KSB of YieldUP International
Corporation.
Our report dated February 5, 1999, contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations, which 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 LLP
Mountain View, California
March 9, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 143,228
<SECURITIES> 10,000
<RECEIVABLES> 1,401,413
<ALLOWANCES> 0
<INVENTORY> 2,788,037
<CURRENT-ASSETS> 4,419,109
<PP&E> 2,505,750
<DEPRECIATION> 1,005,038
<TOTAL-ASSETS> 6,126,533
<CURRENT-LIABILITIES> 3,104,684
<BONDS> 1,806,942
0
0
<COMMON> 8,256
<OTHER-SE> 2,954,864
<TOTAL-LIABILITY-AND-EQUITY> 6,126,533
<SALES> 6,732,574
<TOTAL-REVENUES> 6,732,574
<CGS> 7,309,387
<TOTAL-COSTS> 7,309,387
<OTHER-EXPENSES> 7,627,493
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (173,346)
<INCOME-PRETAX> (10,030,960)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,030,960)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,330,962)
<CHANGES> 0
<NET-INCOME> (11,361,922)
<EPS-PRIMARY> (1.86)
<EPS-DILUTED> (1.86)
</TABLE>
