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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 13, 1999.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form S-4
REGISTRATION STATEMENT
UNDER
SECURITIES ACT OF 1933
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FSI INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
MINNESOTA 3559 41-1223238
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) No.)
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322 LAKE HAZELTINE DRIVE,
CHASKA, MINNESOTA 55318
(612) 448-5440
(Address and telephone number of the registrant's principal executive offices)
JOEL A. ELFTMANN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
FSI INTERNATIONAL, INC.
322 LAKE HAZELTINE DRIVE,
CHASKA, MINNESOTA 55318
(612) 448-5440
(Name, address and telephone number of agent for service)
COPIES TO:
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<S> <C>
Douglas P. Long Douglas J. Rein
Faegre & Benson LLP Gray Cary Ware & Freidenrich LLP
2200 Norwest Center, 90 South Seventh Street 4365 Executive Drive, Suite 1600
Minneapolis, Minnesota 55402 San Diego, California 92121
(612) 336-3000 (619) 677-1400
</TABLE>
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Approximate date of commencement of proposed sale of the securities to the
public: UPON THE EFFECTIVE TIME OF THE MERGER DESCRIBED HEREIN.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement offering. [ ]
------------------------------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE(3)
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<S> <C> <C> <C> <C>
Common Stock, without par value, including
Rights to Purchase Preferred Stock(4)..... 1,299,105 shares $9.9713 $6,890,976 $0
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(1) Based upon the assumed maximum number of shares of FSI International, Inc.
common stock that may be issued in the merger described herein, which is
based upon the estimated number of shares of YieldUP International
Corporation common stock and Class A common stock that may be outstanding
immediately before the Merger (8,290,394 shares in the aggregate) and stock
consideration of .1567 of a share of FSI common stock for each such
outstanding share of YieldUP.
(2) Estimated solely for the purpose of calculating the registration fee, under
Rule 457(f)(1) and (3), based upon the reported high and low sale prices
per share of YieldUP common stock of $1.5625 on September 3, 1999 divided
by the exchange ratio of .1567, and after subtracting estimated cash
consideration of $6,062,765 payable to YieldUP stockholders.
(3) Under Rule 457(b), the fee is after deduction of $3,860 paid with respect
to the transaction pursuant to Section 14(g) of the Securities Exchange Act
of 1934.
(4) Rights to Purchase Preferred Stock are initially attached to and trade with
FSI common stock. Value attributable to the Rights, if any, is reflected in
the market price for FSI common stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
YIELDUP INTERNATIONAL CORPORATION
117 EASY STREET
MOUNTAIN VIEW, CALIFORNIA 94043
September 13, 1999
Dear Stockholders:
I invite you to attend a special meeting of the stockholders of YieldUP
International Corporation to be held as follows:
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YIELDUP SPECIAL MEETING OF STOCKHOLDERS
YieldUP corporate headquarters
117 Easy Street
LOCATION: Mountain View, California
DATE: October 20, 1999
TIME: 10:00 a.m.
</TABLE>
At this meeting you will be asked to vote on a proposal to approve a merger
between YieldUP and FSI International, Inc. pursuant to a reorganization
agreement among the companies and a subsidiary of FSI. FSI is acquiring YieldUP
and the form of the transaction is a merger. If the merger is approved, YieldUP
will become a subsidiary of FSI and you will become a shareholder of FSI. You
will receive 0.1567 of a share of common stock of FSI and $0.7313 in cash for
each of your shares of YieldUP common stock.
We have enclosed a proxy statement/prospectus that provides you with
detailed information concerning the merger. We have also enclosed a copy of the
agreement that governs the merger.
THE BOARD OF DIRECTORS OF YIELDUP UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
APPROVAL OF THE REORGANIZATION AGREEMENT AND THE MERGER.
This letter is your notice of the special meeting. Only stockholders of
record at the close of business on August 30, 1999 are entitled to receive this
notice and to vote on the reorganization agreement and the merger.
We have enclosed a proxy card that you may use to vote by mail. Whether or
not you plan to attend the meeting, please sign and date the proxy card and
return it in the enclosed envelope. If you attend the meeting in person, you may
vote personally even if you have previously returned your proxy card.
By Order of the Board of Directors,
[SIG]
Raj Mohindra
President and Chief Executive Officer
PLEASE DO NOT SEND STOCK CERTIFICATES AT THIS TIME.
<PAGE> 3
PROXY STATEMENT/PROSPECTUS
PROXY STATEMENT OF YIELDUP INTERNATIONAL CORPORATION
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 20, 1999
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PROSPECTUS OF FSI INTERNATIONAL, INC.
SHARES OF COMMON STOCK
------------------------------
The board of directors of YieldUP International Corporation has approved a
merger with FSI International, Inc. under a reorganization agreement dated
January 21, 1999. YieldUP's board of directors has called a special meeting of
YieldUP stockholders to vote on a proposal to approve the reorganization
agreement and the merger.
In the merger, FSI will issue to YieldUP stockholders $.7313 in cash and
.1567 of a share of FSI common stock for each share of YieldUP common stock and
Class A common stock held by them. On September 10, 1999, the closing sale price
per share for FSI common stock was $8.31. If the price of FSI common stock at
the effective time of the merger were equal to the closing sale price of FSI
common stock on that date, then the value of the consideration that stockholders
of YieldUP would be entitled to receive in exchange for each share of YieldUP
common stock and Class A common stock held by them would be $2.03.
THE BOARD OF DIRECTORS OF YIELDUP HAS UNANIMOUSLY APPROVED THE
REORGANIZATION AGREEMENT AND THE MERGER AND UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE THE REORGANIZATION AGREEMENT AND
THE MERGER.
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF FACTORS YOU
SHOULD CONSIDER IN ANALYZING THE PROPOSAL.
This proxy statement/prospectus is being mailed to YieldUP stockholders on
or about September 17, 1999. This document also constitutes the prospectus of
FSI with respect to the shares of FSI common stock to be issued in the merger,
which are listed on the Nasdaq National Market under the symbol "FSII."
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SHARES OF FSI COMMON STOCK OR
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS SEPTEMBER 13, 1999.
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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Questions and Answers About the Merger...................... 5
Summary..................................................... 7
The Merger................................................ 7
The Reorganization Agreement.............................. 8
Recommendation of the YieldUP Board and Reasons for the
Merger................................................. 8
Additional Interests of YieldUP's Officers, Directors, and
Employees in the Merger................................ 9
Fairness Opinion with Respect to the Merger............... 9
The Companies............................................. 9
The Special Meeting....................................... 10
Comparative Per-Share Market Data......................... 12
Selected Historical Financial Data........................ 12
Selected Unaudited Pro Forma Financial Data............... 15
Comparative Unaudited Per Share Data...................... 16
Share Price and Dividend Data............................. 17
Risk Factors................................................ 18
Risks Relating to the Merger.............................. 18
Risks Relating to FSI..................................... 18
Risks Relating to YieldUP................................. 24
General Information......................................... 33
The Special Meeting....................................... 33
Vote Required at Special Meeting.......................... 34
Solicitation of Proxies................................... 34
Other Matters............................................. 35
Background of the Merger.................................... 35
Recommendation of the YieldUP Board of Directors and
YieldUP's Reasons for the Merger.......................... 41
FSI's Reasons for the Merger................................ 43
Financial Information Exchanged Between FSI And YieldUP..... 43
Opinion of Financial Adviser to YieldUP..................... 45
The Merger.................................................. 50
General................................................... 50
Effective Time and Effect of the Merger................... 51
Exchange of Shares........................................ 51
Employee Benefit Plans and Stock Options.................. 52
YieldUP Warrants.......................................... 52
Conditions to Consummation of the Merger.................. 53
Representations, Warranties, and Covenants................ 54
Amendment, Termination, and Waiver........................ 54
Expenses and Termination Payments......................... 55
Legal Matters............................................. 55
Conduct of Business Before the Merger..................... 55
No Solicitation of Acquisition Transactions............... 56
Interests of Certain Persons in the Merger................ 56
Federal Income Tax Consequences........................... 57
Business and Management After the Merger.................. 60
Resale of Shares by YieldUP Affiliates.................... 60
Dissenters' Rights.......................................... 61
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3
<PAGE> 5
<TABLE>
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PAGE
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<S> <C>
Unaudited Pro Forma Combined Financial Information.......... 62
Forward-Looking Information................................. 73
Business of FSI............................................. 74
FSI Recent Developments..................................... 74
Business of YieldUP......................................... 76
Material Contracts Between FSI and YieldUP.................. 77
Description of FSI Capital Stock............................ 78
Common Stock.............................................. 78
Preferred Stock........................................... 78
Articles of Incorporation................................. 79
Share Rights Agreement.................................... 80
Liquidation............................................... 81
Limitation on Liability of Directors and
Indemnification........................................ 81
Transfer Agent............................................ 82
Comparative Rights of Shareholders of YieldUP and FSI....... 82
Voting Rights............................................. 82
Call of Shareholders' Meetings............................ 82
Shareholder Action Without a Meeting...................... 82
Amendments to Charter and Bylaws.......................... 83
Dissenters' Rights........................................ 84
Dividends; Stock Repurchases.............................. 84
Corporate Takeover Legislation............................ 85
Authorized Stock; Authority of Board of Directors to Issue
Preferred Stock........................................ 86
Share Rights Agreement.................................... 87
Limitation of Personal Liability of Directors............. 87
Indemnification of Directors, Officers, and Employees..... 87
Removal of Directors...................................... 88
Where You Can Find More Information......................... 88
Legal Matters............................................... 90
Experts..................................................... 90
Stockholder Proposals....................................... 90
Independent Accountants..................................... 90
Exhibit A -- Agreement and Plan of Reorganization, as
amended................................................... A-1
Exhibit B -- Opinion of Needham & Company, Inc.............. B-1
Exhibit C -- Delaware General Corporation Law Section 262... C-1
</TABLE>
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<PAGE> 6
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Please explain what I will receive in the merger.
A: If the merger is completed, you will receive $.7313 in cash and .1567 of a
share of FSI common stock for each share of YieldUP common stock or Class A
common stock that you hold. However, FSI will not issue fractional shares
of common stock. Instead, YieldUP stockholders entitled to a fractional
share will receive cash in the amount of the fraction times $12.00, rounded
to the nearest cent.
Q: What percentage of FSI's stock ownership will former YieldUP stockholders
hold after the merger?
A: If the merger is consummated, former YieldUP stockholders will hold
approximately 5.3% of FSI's outstanding common stock.
Q. Why did YieldUP seek a merger with FSI?
A. Semiconductor manufacturing companies are relying more and more on dealing
with fewer suppliers, many of which tend to be larger and more
well-established companies than YieldUP. YieldUP felt that it would benefit
from FSI's size, its long history of cleaning technology expertise, its
global support network, and its ability to make significant investments in
research and development, total quality management, and clean room
laboratory and manufacturing facilities. Since YieldUP is bringing
intellectual property and technology that does not currently exist in FSI
products, the alliance will likely create an environment in which YieldUP's
product line and technologies will be enhanced and retain their technical
advantages.
Q. Why did FSI seek to acquire YieldUP?
A. The acquisition provides FSI's Surface Conditioning Division with an entree
into the critical cleaning immersion market. By acquiring YieldUP and its
intellectual property, FSI believes that it is obtaining unique immersion
technologies that will expand FSI's capabilities to create a total cleaning
solution for customers. YieldUP's Mountain View, California operations also
strengthen FSI's presence in the important Silicon Valley market.
Q: What do I need to do now?
A: Just mail your signed proxy card in the enclosed return envelope as soon as
possible, so that your shares may be represented at the meeting of
YieldUP's stockholders.
Q: What do I do if I want to change my vote later?
A: Just send in a later-dated, signed proxy card to YieldUP's Corporate
Secretary so that it is received before the stockholders' meeting or attend
the meeting in person and vote.
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<PAGE> 7
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will vote your shares only if you provide instructions on how
to vote. Please tell your broker how you would like him or her to vote your
shares. If you do not tell your broker how to vote, your shares will not be
voted by your broker, which will have the effect of a vote against the
merger.
Q: Should I send in my stock certificates now?
A: No. After the merger is completed, Harris Trust and Savings Bank, the
exchange agent for the merger, will send YieldUP stockholders written
instructions for exchanging their stock certificates.
Q: When do you expect the merger to be completed?
A: We expect that the approval of YieldUP's stockholders will be the last
condition to effecting the merger. The effective time of the merger should
occur within four business days after the stockholders' meeting.
Q: What are the federal income tax consequences of the merger to YieldUP's
stockholders?
A: Generally you will not recognize a gain or a loss with respect to the
receipt of FSI common stock in exchange for your shares of YieldUP common
stock or Class A common stock in the merger. Receipt of the cash portion of
the merger consideration generally would be taxable, however.
Q: Does FSI pay dividends?
A: Like YieldUP, FSI does not pay dividends. FSI's board of directors does not
currently anticipate paying cash dividends in the future.
Q: Whom should I call with questions?
A: You may call Abhay Bhushan, YieldUP's Corporate Secretary, at (650)
964-0100 with any questions.
6
<PAGE> 8
SUMMARY
The following is a summary of material information contained in this proxy
statement/prospectus. For more information, you should refer to the information
in the main body of this proxy statement/prospectus along with the exhibits and
the information incorporated by reference. A copy of the reorganization
agreement is attached as Exhibit A to this proxy statement/prospectus. You
should refer to that agreement for a complete statement of the terms of the
merger, because it is the legal document that governs the merger.
THE MERGER
Structure of the Merger. This proxy statement/prospectus relates to the
proposed merger of YieldUP with a newly formed, wholly owned subsidiary of FSI,
under the reorganization agreement. The subsidiary will be the surviving
corporation in the merger and will continue as a wholly owned subsidiary of FSI.
Conversion of Shares. At the effective time of the merger, each
outstanding share of YieldUP common stock and Class A common stock, other than
shares held by persons who have properly asserted statutory dissenters' rights
under Delaware law, will be converted into the right to receive $.7313 in cash
and .1567 of a share of FSI common stock. FSI will not issue fractional shares
of FSI common stock. Instead, YieldUP stockholders entitled to a fractional
share will be entitled to receive an amount in cash equal to the fraction times
$12.00, rounded to the nearest cent. The shareholders of FSI will continue to
hold their shares of capital stock of FSI without any change.
Federal Income Tax Consequences. The merger is intended to qualify as a
"reorganization" within the meaning of Section 368(a) of the Internal Revenue
Code of 1986. That means that YieldUP stockholders would generally not recognize
gain or loss on the receipt of shares of FSI common stock in the merger.
Payments of the cash portion of the merger consideration and cash received in
lieu of fractional shares generally would be taxable, however. You are urged to
consult with your tax adviser to determine the specific tax consequences of the
merger to you.
Dissenters' Rights in the Merger. Under Delaware law, each holder of
shares of YieldUP common stock and Class A common stock is entitled to object to
the merger and demand payment for the holder's shares of YieldUP capital stock
in cash if the holder complies with strict statutory procedures.
Comparative Rights of YieldUP Stockholders Before and After the
Merger. The rights of the stockholders of YieldUP are currently governed by
YieldUP's certificate of incorporation and bylaws and Delaware law. At the
effective time of the merger, YieldUP stockholders will become shareholders of
FSI and their rights as FSI shareholders will then be governed by FSI's articles
of incorporation and bylaws and Minnesota law. There are differences between the
rights of YieldUP stockholders and the rights of FSI shareholders. These
differences include the additional anti-takeover provisions of Minnesota law
compared to Delaware law and the fact that FSI has adopted a share rights plan
whereas YieldUP has not. Each of these factors may have the effect of
discouraging a change of control of FSI that is not approved by FSI's board of
directors.
Surrender of Share Certificates. Stockholders of YieldUP should not
surrender their stock certificates until they receive transmittal materials,
which will be mailed following the effective time of the merger.
7
<PAGE> 9
THE REORGANIZATION AGREEMENT
Effective Time of the Merger. Subject to the conditions contained in the
reorganization agreement, FSI and YieldUP expect the merger to become effective
on or about October 20, 1999.
Conditions to the Merger. The obligations of FSI and YieldUP to effect the
merger are subject to conditions, including, among other things, that the
reorganization agreement and the merger shall have been approved by YieldUP
stockholders. Neither FSI nor YieldUP is aware of any federal or state
regulatory approvals that are necessary to consummate the merger that have not
been obtained.
Termination Payments. If the reorganization agreement is terminated, the
companies have agreed to the following payments:
-- If YieldUP terminates the agreement because of a material breach by
FSI, then FSI will pay YieldUP $1 million.
-- If FSI terminates the agreement because it is not approved by
YieldUP's stockholders or because YieldUP's board of directors
withdraws or adversely modifies its recommendation of the merger, the
board recommends a third-party offer, or a third-party tender offer
for YieldUP is announced and the YieldUP board recommends that
stockholders tender into the offer, then YieldUP will pay FSI $1
million.
-- If FSI terminates the agreement because of a material breach by
YieldUP and if a third party has announced its intention to acquire
YieldUP and a party other than FSI actually acquires YieldUP within
one year, then YieldUP will pay FSI $1 million.
Termination by FSI upon material breach by YieldUP or termination by either
party because either YieldUP's stockholders do not approve the merger or events
concerning a third-party acquisition of YieldUP occur will result in the loss by
YieldUP of the right to repurchase a license for its intellectual property that
it granted to FSI.
No Solicitation of Third-Party Offers. YieldUP has agreed not to solicit
or encourage offers for, or provide any confidential information relating to,
any acquisition of YieldUP or of a substantial portion of its assets. However,
YieldUP may supply information to third parties and cooperate or engage in
discussions with third parties relating to an acquisition transaction, but only
if the YieldUP board is required by its fiduciary duties to do so.
Accounting Treatment. The merger will be accounted for under the
"purchase" method of accounting. That means that FSI will record the excess of
the purchase price of YieldUP over the fair market value of YieldUP's assets as
goodwill.
RECOMMENDATION OF THE YIELDUP BOARD AND REASONS FOR THE MERGER
The board of directors of YieldUP has unanimously approved the
reorganization agreement and the merger and unanimously recommends that YieldUP
stockholders vote "FOR" approval of the reorganization agreement and the merger.
The YieldUP board based its recommendation upon its belief that the terms of the
reorganization agreement are fair to, and in the best interests of, YieldUP and
its stockholders, that the merger will result in benefits to YieldUP's
stockholders, and that the combination of YieldUP's technology and FSI's size,
marketing and sales network, and capital resources creates a
8
<PAGE> 10
significant enhancement of the strategic and marketing position for the combined
companies. The board also believes that there is a substantial likelihood that
YieldUP will be unable to continue as a going concern if the merger is not
consummated.
ADDITIONAL INTERESTS OF YIELDUP'S OFFICERS, DIRECTORS, AND EMPLOYEES IN THE
MERGER
Raj Mohindra, YieldUP's President and Chief Executive Officer, Suraj Puri,
its Vice President and Chief Technical Officer, and David Wong, its Director of
Process Technology, have entered into two-year employment agreements with the
surviving corporation upon the consummation of the merger. The annual salaries
payable under the employment agreements will be $180,000 for Mr. Mohindra,
$130,000 for Mr. Puri, and $100,000 for Mr. Wong. The employment agreements also
provide for participation in FSI's bonus programs and FSI's benefit plans.
Messrs. Mohindra, Puri, and Wong will also receive an aggregate of 120,000
incentive stock options to purchase FSI common stock under FSI's 1997 Omnibus
Stock Plan. A cash incentive payment of $50,000, is to be paid to Abhay Bhushan,
Executive Vice President and Chief Financial Officer upon completion of the
merger.
FAIRNESS OPINION WITH RESPECT TO THE MERGER
At the January 20, 1999 meeting of the YieldUP board of directors, Needham
& Company, Inc., financial adviser to YieldUP, rendered its oral opinion that,
as of that date and based upon and subject to the various considerations set
forth in its opinion, the amount of FSI common stock and cash to be received by
you under the reorganization agreement is fair from a financial point of view to
you. Needham delivered to the YieldUP board a written opinion dated January 21,
1999 confirming its oral opinion.
A COPY OF THE NEEDHAM OPINION IS ATTACHED AS EXHIBIT B TO THIS PROXY
STATEMENT/PROSPECTUS. YOU SHOULD READ THE OPINION IN ITS ENTIRETY FOR
INFORMATION ON THE ASSUMPTIONS MADE, AND MATTERS CONSIDERED, BY NEEDHAM IN
RENDERING ITS OPINION.
THE COMPANIES
FSI. FSI designs, manufactures, markets, and supports equipment used in
the fabrication of integrated circuits, which are tiny complexes of electronic
components and their connections produced on a slice of material such as
silicon. This equipment involves two different processes:
- microlithography, an optical process used to transfer images from a
master to individual integrated circuits; and
- surface conditioning, which is the removal of contaminants from the
surface of the integrated circuit.
FSI markets its products in North America, Europe, Japan, and the
Asia-Pacific region. FSI's subsidiaries include Semiconductor Systems, Inc. and
FSI International, Ltd. The term "FSI" refers to FSI International, Inc. and its
subsidiaries taken together, unless the context requires otherwise.
FSI's principal executive offices are located at 32 Lake Hazeltine Drive,
Chaska, Minnesota 55318, and its telephone number is (612) 448-5440.
9
<PAGE> 11
Recent Developments at FSI. On July 31, 1999, FSI sold its Chemical
Management Division to The BOC Group, Inc. for approximately $38 million in cash
(subject to adjustment for the change in net working capital from April 3, 1999
through closing). The Chemical Management Division designs and manufactures
chemical management systems that generate, blend, and dispense high-purity
chemicals, and blend and deliver polishing-chemical mixtures, to points of use
in a manufacturing facility, as well as related controls and support products.
See FSI's Annual Report on Form 10-K for the fiscal year ended August 29, 1998
for a general discussion of the business and operations of the Chemical
Management Division. The Chemical Management Division accounted for
approximately $56 million in sales during fiscal 1998 and approximately $37
million for the nine months ended May 29, 1999. See "Unaudited Pro Forma
Combined Financial Information" for additional information regarding the impact
of the sale of the Chemical Management Division on FSI's financial position and
results of operations. On September 3, 1999, FSI completed the prepayment of $42
million of its senior unsecured notes. The notes consisted of $30 million of
7.15% senior unsecured notes due to mature in 2004 and $12 million of 7.27%
senior unsecured notes due to mature in 2006. In addition to the payment of
principal and accrued interest, FSI paid the lenders approximately $690,000 in
make-whole penalties in connection with the prepayment.
YieldUP. YieldUP develops, manufactures, and markets cleaning, rinsing,
and drying equipment used during several steps in the manufacturing process for
semiconductors. YieldUP markets its products primarily in the United States,
Europe, and Asia. YieldUP's principal executive offices are located at 117 Easy
Street, Mountain View, California 94043, and its telephone number is (650)
964-0100.
The Combined Company. FSI and YieldUP both make equipment that performs
surface-conditioning processes. FSI's acquisition of YieldUP is intended to
provide customers with total cleaning solutions by expanding the
surface-conditioning market served by the combined company.
The surface-conditioning-equipment market consists of sub-markets, each
targeted to meet a particular process step, such as defect reduction, etching,
stripping, and critical clean. FSI and YieldUP's products complement one
another, because each is primarily targeted to separate components of the
surface-conditioning market. By combining the various process technologies at
each company, FSI believes that, on a combined basis, it will be capable of
providing equipment to address a broader range of the surface-conditioning
market and increase revenues and market share.
THE SPECIAL MEETING
Time, Date, and Place. The special meeting will be held on October 20,
1999, at YieldUP's offices, 117 East Street, Mountain View, California, at 10:00
a.m., local time.
Record Date, Quorum, and Shares Entitled to Vote. Everyone who owns common
stock or Class A common stock on August 30, 1999 is entitled to vote. The
presence, either in person or by proxy of at least one-third of the total number
of shares of YieldUP's outstanding capital stock is required to constitute a
quorum at the meeting. As of August 30, 1999, there were 6,925,897 shares of
common stock and 1,364,497 shares of Class A common stock outstanding.
Required Vote. Approval of the reorganization agreement and the merger
requires the affirmative vote of the majority of the voting power held by the
issued and outstanding
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<PAGE> 12
shares of YieldUP common stock and Class A common stock, voting together as a
single class. Each holder of record of YieldUP common stock is entitled to cast
one vote per common share. Each holder of record of YieldUP Class A common stock
is entitled to cast five votes per Class A common share.
As of August 30, 1999, the record date for the special meeting, directors
and executive officers of YieldUP and their affiliates possessed approximately
50% of the voting power of all issued and outstanding shares of YieldUP common
stock and Class A common stock entitled to vote at the YieldUP special meeting.
As of that date, two executive officers of YieldUP, Raj Mohindra and Suraj Puri,
owned shares representing approximately 44% of the voting power of all issued
and outstanding shares of YieldUP capital stock. Messrs. Mohindra and Puri have
executed voting agreements with FSI by which they have agreed to vote their
shares in favor of approval of the reorganization agreement and the merger.
Proxies and Revocation of Proxies. The enclosed proxy card permits you to
specify that your shares be voted "FOR" or "AGAINST" (or "ABSTAIN" from)
approval of the reorganization agreement and the merger. If properly signed and
returned, and not revoked, your proxy will be voted in accordance with its
instructions. If a signed proxy card is returned, but no instructions are
specified, the shares will be voted "FOR" approval of the reorganization
agreement and the merger.
You may revoke a previously granted proxy at any time before it is
exercised by filing with YieldUP's Corporate Secretary a letter revoking the
proxy or an executed proxy bearing a later date. This letter or later-dated
proxy must be received by YieldUP's Corporate Secretary by October 19, 1999. You
may also revoke your proxy if you attend the special meeting in person and so
request. Attendance at the special meeting will not, in itself, constitute
revocation of a previously granted proxy, however.
Purpose of Special Meeting. At the special meeting, you and other
stockholders of YieldUP will be asked to vote on a proposal to approve the
reorganization agreement and the merger and such other matters as may be
properly brought before the meeting.
Other Matters. Representatives of KPMG LLP, independent auditors of
YieldUP, are expected to be present at the special meeting and will be available
to respond to appropriate questions.
11
<PAGE> 13
COMPARATIVE PER-SHARE MARKET DATA
To assist in your analysis of the proposed merger, the following table
lists the closing prices per share for FSI common stock and YieldUP common stock
on January 10, 1999, which was the last trading day before the public
announcement of the merger, and on September 10, 1999. The table also lists for
those dates the equivalent per-share price for YieldUP common stock, which
equals $.7313 plus the product of the closing share price of FSI common stock on
the relevant date multiplied by .1567. Please remember, however, that the market
price of FSI common stock may fluctuate significantly. You should obtain a
current quote for FSI common stock before voting or if you are considering
changing your vote.
<TABLE>
<CAPTION>
FSI YIELDUP YIELDUP
COMMON STOCK COMMON STOCK EQUIVALENT PER-SHARE
------------ ------------ --------------------
<S> <C> <C> <C>
January 21, 1999............... $12.812 $1.938 $2.739
September 10, 1999............. $ 8.313 $1.688 $2.034
</TABLE>
SELECTED HISTORICAL FINANCIAL DATA
FSI's selected historical financial data presented below as of and for the
five fiscal years ended August 29, 1998 are derived from the financial
statements of FSI International, Inc. and its subsidiaries, which have been
audited by KPMG LLP, independent certified public accountants. Data as of and
for the quarters ended May 29, 1999 and May 30, 1998 have been derived from
unaudited financial statements of FSI and, in the opinion of FSI's management,
includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the results of operations for the periods then ended
and the financial position of FSI as of those dates. Interim operating results
are not necessarily indicative of the results that may be achieved for the
entire year. The following selected financial data should be read in conjunction
with FSI's Annual Report on Form 10-K as amended, including the financial
statements of FSI and the unaudited pro forma combined financial information
incorporated by reference or included elsewhere in this proxy
statement/prospectus.
12
<PAGE> 14
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
-------------------------------------------------------------- -------------------
AUGUST 29, AUGUST 30, AUGUST 31, AUGUST 26, AUGUST 27, MAY 29, MAY 30,
1998 1997 1996 1995 1994 1999 1998
---------- ---------- ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Sales................ $161,695 $162,888 $233,239 $169,891 $105,148 $ 80,837 $134,043
Gross profit......... 51,707 62,152 102,604 76,942 45,550 23,871 53,143
Selling, general, and
administrative
expenses........... 52,103 45,403 49,410 33,815 21,758 26,148 38,213
Research and
development
expenses........... 36,103 31,756 33,940 22,667 15,334 22,079 27,153
Operating income
(loss)............. (36,498) (15,007) 19,254 20,461 8,458 (24,356) (12,223)
Equity in earnings
(loss) of
affiliates......... 674 3,712 5,108 3,567 1,800 (1,957) 567
Net income (loss)
from continuing
operations......... $(20,664) $ (9,020) $ 19,874 $ 20,694 $ 8,737 $(31,270) $ (6,881)
Net income (loss)
from continuing
operations per
share -- Basic..... (0.91) (0.40) 0.90 1.19 0.62 (1.35) (0.30)
Net income (loss)
from continuing
operations per
share --
Diluted............ $ (0.91) $ (0.40) $ 0.86 $ 1.10 $ 0.58 $ (1.35) $ (0.30)
Weighted average
common shares...... 22,801 22,374 22,177 17,422 14,023 23,156 22,738
Weighted average
common shares and
potential common
shares............. 22,801 22,466 23,207 18,867 15,077 23,156 22,738
BALANCE SHEET DATA:
Total assets......... $294,366 $317,738 $278,562 $238,940 $ 80,023 $254,796 $311,071
Long-term debt....... 42,130 42,250 459 4,845 1,541 42,075 42,153
Stockholders'
equity............. 204,376 224,340 218,127 186,667 51,115 171,181 220,775
Dividends............ -- -- -- -- -- -- --
</TABLE>
YieldUP's selected historical financial data as of and for the five years
ended December 31, 1998 are derived from the financial statements of YieldUP,
which have been audited by KPMG LLP, independent certified public accountants.
Data as of and for the six months ended June 30, 1999 and 1998 have been derived
from unaudited financial statements of YieldUP and, in the opinion of YieldUP's
management, includes all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the results of operations for the
periods then ended and the financial position of YieldUP as of those dates.
Interim results are not necessarily indicative of the results that may be
achieved for the entire year. The following selected historical financial data
should be read in conjunction with YieldUP's Annual Report on Form 10-KSB as
amended, including the financial statements of YieldUP for the two-year period
ended December 31, 1998, the related notes and the independent auditors' report,
which contains an explanatory paragraph that states that YieldUP has suffered
recurring losses from operations that raise
13
<PAGE> 15
substantial doubt about the entity's ability to continue as a going concern, as
well as the unaudited pro forma combined financial information incorporated by
reference or included elsewhere in this proxy statement/prospectus. The
financial statements and the selected historical financial data do not include
any adjustments that might result from the outcome of that uncertainty.
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
YIELDUP INTERNATIONAL CORPORATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1998 1997 1996 1995 1994 1999 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................ $ 6,733 $ 7,465 $ 2,205 $ 1,129 $ 297 $ 2,808 $ 4,631
Cost of sales............ 7,309 5,964 2,631 -- -- 2,241 2,646
-------- -------- -------- -------- -------- -------- --------
Gross profit (loss)...... (576) 1,501 (426) 1,129 297 567 1,985
Selling, general, and
administrative
expenses............... 4,878 3,724 1,830 1,032 184 1,289 2,064
Research and development
expenses............... 2,750 2,022 1,223 1,737 271 1,043 1,428
-------- -------- -------- -------- -------- -------- --------
Operating income
(loss)................. (8,204) (4,245) (3,479) (1,640) (158) (1,765) (1,507)
Other income (expense),
net.................... 173 251 105 (190) (14) (74) 93
Investment write-off..... (2,000) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net loss................. (10,031) (3,994) (3,374) (1,830) (172) (1,839) (1,414)
Accretion on redeemable
convertible stock...... (1,331) -- -- -- -- -- (650)
-------- -------- -------- -------- -------- -------- --------
Net loss applicable to
holders of common
stock.................. (11,362) (3,994) (3,374) (1,830) (172) (1,839) (2,064)
======== ======== ======== ======== ======== ======== ========
Net loss per share --
Basic.................. $ (1.86) $ (0.81) $ (0.99) $ (0.89) $ (0.10) $ (0.22) $ (0.36)
Net loss per share --
Diluted................ $ (1.86) $ (0.81) $ (0.99) $ (0.89) $ (0.10) $ (0.22) $ (0.36)
Weighted average common
shares................. 6,115 4,947 3,406 2,053 1,792 8,256 5,768
Weighted average common
shares and potential
common shares.......... 6,115 4,947 3,406 2,053 1,792 8,256 5,768
BALANCE SHEET DATA:
Working capital
(deficit).............. $ 1,314 $ 9,547 $ 1,009 $ 5,036 $ (56) $ (467) $ 13,848
Total assets............. 6,127 16,925 3,961 6,635 368 6,425 20,299
Short-term debt.......... 1,740 618 406 29 220 1,057 502
Long-term debt, less
current maturities..... 67 -- 379 64 -- 58 --
Stockholders' equity
(deficit).............. 2,955 13,101 1,965 5,312 (13) 1,116 11,140
Dividends................ -- -- -- -- -- -- --
</TABLE>
14
<PAGE> 16
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
The selected pro forma combined financial data of FSI and YieldUP that
follow are derived from the unaudited pro forma combined financial information
included in the main body of this proxy statement/prospectus and presents the
pro forma effect of both the divestiture of FSI's Chemical Management Division
and the proposed acquisition of YieldUP by FSI. The pro forma information is not
necessarily indicative of the operating results or financial position that would
have occurred if the merger had been consummated as of the beginning of the
periods presented, nor is it necessarily indicative of future operating results
or financial position. The following selected financial data should be read in
conjunction with the separate historical financial statements of FSI and YieldUP
and notes to those statements, which are incorporated by reference into this
proxy statement/prospectus, and the unaudited pro forma combined financial
information, which is included in the main body of this proxy
statement/prospectus. See "Unaudited Pro Forma Combined Financial Information"
beginning on page 61 of this proxy statement/prospectus.
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
AUGUST 29, 1998 MAY 29, 1999
--------------- -----------------
<S> <C> <C>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
DATA:
Sales.......................................... $170,372,880 $ 85,011,221
Cost of goods sold............................. 119,125,522 60,308,472
------------ ------------
Gross profit................................... 51,247,358 24,702,749
Selling, general and administrative expenses... 60,998,305 30,988,031
Research and development expenses.............. 39,025,181 23,694,610
------------ ------------
Operating loss................................. (48,776,128) (29,979,892)
Other income (expense), net.................... (1,018,722) 1,342,903
------------ ------------
Loss before income taxes....................... (49,794,850) (28,636,989)
Income tax (benefit) expense................... (13,986,713) 6,608,850
------------ ------------
Income (loss) before equity in earnings of
affiliates................................... (35,808,137) (35,245,839)
Equity in earnings of affiliates............... 674,274 (1,956,827)
Accretion on redeemable convertible preferred
stock........................................ (1,330,962) --
------------ ------------
Net loss....................................... $(36,464,825) $(37,202,666)
============ ============
Net loss per common share -- Basic............. $ (1.51) $ (1.52)
Net loss income per common share -- Diluted.... $ (1.51) $ (1.52)
Weighted average common shares................. 24,095,205 24,449,940
Weighted average common shares and potential
common shares................................ 24,095,205 24,449,940
</TABLE>
<TABLE>
<CAPTION>
MAY 29, 1999
------------
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Working capital............................................. $113,644,023
Total assets................................................ 257,607,267
Short-term debt............................................. 1,116,474
Long-term debt, less current maturities..................... 42,073,406
Stockholders' equity........................................ 170,377,072
</TABLE>
15
<PAGE> 17
COMPARATIVE UNAUDITED PER SHARE DATA
The following table presents historical per share data of FSI and YieldUP
and combined per share data on an unaudited pro forma basis after giving effect
to the merger. These data should be read in conjunction with the selected
historical financial data, the unaudited pro forma combined financial
information, and the separate historical financial statements of FSI and YieldUP
and notes to those statements, included elsewhere or incorporated by reference
in this proxy statement/prospectus. The selected pro forma combined financial
data of FSI and YieldUP that follow are derived from the unaudited pro forma
combined financial information included in the main body of this proxy
statement/prospectus. The pro forma information is not necessarily indicative of
the operating results or financial position that would have occurred if the
merger had been consummated as of the beginning of the periods presented, nor is
it necessarily indicative of future operating results or financial position.
PER SHARE DATA
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
AUGUST 29, 1998 MAY 29, 1999
--------------- -----------------
<S> <C> <C>
HISTORICAL -- FSI:
Net loss per common share -- Basic
Continuing operations................... $(0.91) $(1.35)
Discontinued operations................. (0.05) (0.16)
Net loss................................ (0.96) (1.51)
Net loss per common share -- Diluted
Continuing operations................... (0.91) (1.35)
Discontinued operations................. (0.05) (0.16)
Net loss................................ (0.96) (1.51)
Book value................................. $ 8.87 $ 7.36
PRO FORMA COMBINED -- FSI:
Net loss per common share -- Basic
Net loss................................ $(1.51) $(1.52)
Net loss per common share -- Diluted
Net loss................................ (1.51) (1.52)
Book value................................. $ 8.65 $ 6.94
HISTORICAL -- YIELDUP:*
Net loss per common share -- Basic
Net loss................................ $(2.07) $(0.39)
Net loss per common share -- Diluted
Net loss................................ (2.07) (0.39)
Book value................................. $ 0.54 $ 0.14
PRO FORMA EQUIVALENT -- YIELDUP:
Net loss per common share -- Basic
Net loss................................ $(0.24) $(0.24)
Net loss per common share -- Diluted
Net loss................................ (0.24) (0.24)
Book Value................................. $ 1.36 $ 1.09
</TABLE>
- ---------------
* The historical YieldUP information is presented as of and for the 12 months
ended September 30, 1998 and as of and for the nine months ended June 30,
1999.
16
<PAGE> 18
SHARE PRICE AND DIVIDEND DATA
FSI common stock is listed and principally traded on the Nasdaq National
Market under the symbol "FSII." YieldUP common stock is listed and principally
traded on the Nasdaq Small Cap Market under the symbol "YILD."
The following table shows, for the calendar periods indicated, the reported
high and low sale prices on the Nasdaq Stock Market for FSI common stock and
YieldUP common stock:
<TABLE>
<CAPTION>
FSI YIELDUP
COMMON STOCK COMMON STOCK
----------------- -----------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997:
First Quarter......................... $18.250 $11.000 $10.875 $ 5.625
Second Quarter........................ 16.000 10.875 13.250 6.375
Third Quarter......................... 21.875 15.313 15.125 11.750
Fourth Quarter........................ 23.625 10.875 14.375 8.375
1998:
First Quarter......................... 14.625 11.000 13.063 9.500
Second Quarter........................ 12.250 8.000 10.875 4.875
Third Quarter......................... 9.875 5.031 5.500 1.250
Fourth Quarter........................ 10.938 3.500 3.500 0.500
1999:
First Quarter......................... 14.313 5.063 3.250 1.156
Second Quarter........................ 10.063 5.500 2.031 1.250
Third Quarter (through September
10)................................ 9.188 6.125 1.813 1.188
</TABLE>
Neither FSI nor YieldUP has ever paid cash dividends on its common stock.
FSI currently intends to retain all earnings for use in its business and does
not anticipate paying any cash dividends in the foreseeable future.
17
<PAGE> 19
RISK FACTORS
RISKS RELATING TO THE MERGER
Fixed Exchange Ratio May Limit the Value of FSI Stock Received by YieldUP
Stockholders
In the merger, each outstanding share of YieldUP common stock and Class A
common stock will be converted into the right to receive $.7313 in cash and
.1567 of a share of FSI common stock. There will be no adjustment of the
exchange ratio based on fluctuations in the market price of FSI common stock.
Consequently, the value of the FSI common stock that you expect to receive in
the merger could decrease from the date that you submit your proxy until the
effective date of the merger. You are urged to obtain a current quotation for
FSI common stock before voting or if you are considering changing your vote.
If FSI and YieldUP Cannot Effectively Integrate Their Operations, Then Potential
Benefits of the Merger May Not Be Realized
FSI and YieldUP will have to integrate their manufacturing, research and
development, and sales and marketing efforts. This integration includes the need
to make sure that systems operated by both companies are Year 2000 compliant.
See "Risks Relating to FSI -- If FSI and/or its Third party Vendors Are Not Year
2000 Compliant, Then FSI May Be Incapable of Conducting Business" and "Risks
Relating to YieldUP - The Failure of YieldUP and Suppliers, Customers, and
Others To Be Year 2000 Compliant Could Negatively Impact Its Business" for a
discussion of how each company is addressing the Year 2000 issue. If the
companies are not successful in this integration, then FSI's results of
operations could be adversely affected, employee morale could decline, and key
employees could leave. In addition, until YieldUP's existing customers have had
the opportunity to determine how well the combined organization operates, they
may cancel existing orders or delay placing new ones.
RISKS RELATING TO FSI
Because FSI's Business Depends on the Amount that Manufacturers of
Microelectronics Spend on Capital Equipment, Downturns in the Microelectronics
Industry May Adversely Affect FSI's Results
The microelectronics industry experiences periodic slowdowns, which may
have a negative effect on FSI's sales and operating results. For example, in
fiscal 1996, before the current industry slowdown, FSI reported net income of
$29 million. In contrast, in fiscal 1998, the second year of the current
slowdown, FSI reported a net loss of $22 million. FSI's business depends on the
amount that manufacturers of microelectronics spend on capital equipment. The
amount they spend on capital equipment depends on the existing and expected
demand for semiconductor devices and products that use semiconductor devices.
The microelectronics industry has experienced alternating upturns and downturns
in business activity. It is currently experiencing a downturn. FSI does not know
how long this downturn will last. Some semiconductor manufacturers have
experienced lower demand and increased pricing pressure for their products. As a
result, they have purchased less semiconductor processing equipment and have
sometimes delayed making decisions to purchase capital equipment. In some cases,
semiconductor manufacturers have cancelled or delayed orders for FSI's products.
18
<PAGE> 20
If FSI Does Not Continue to Develop New Products, It Will Not Be Able to Compete
Effectively
FSI's business and results of operations could decline if FSI does not
develop and successfully introduce new or improved products that the market
accepts. The technology used in microelectronics manufacturing equipment and
processes changes rapidly. Industry standards change constantly and equipment
manufacturers frequently introduce new products. FSI believes that
microelectronics manufacturers increasingly rely on equipment manufacturers like
FSI to:
- Design and develop more efficient manufacturing equipment
- Design and implement improved processes for microelectronics
manufacturers to use
- Make their equipment compatible with equipment made by other equipment
manufacturers
To compete, FSI must continue to develop, manufacture, and market new or
improved products that meet changing industry standards. To do this
successfully, FSI must:
- Select appropriate products
- Design and develop its products efficiently and quickly
- Implement its manufacturing and assembly processes efficiently and on
time
- Make products that perform well for its customers
- Market and sell its products effectively
- Introduce its new products in a way that does not reduce sales of its
existing products.
Future Acquisitions by FSI May Dilute Its Shareholders' Ownership Interests and
Have Other Adverse Consequences
Because of consolidations in FSI's industry and other competitive factors,
FSI's management will seek to acquire additional product lines, technologies,
and businesses if suitable opportunities develop. In 1995 and 1996, FSI
completed two acquisitions. Revenues from these acquisitions were $38.3 million
for fiscal 1998 and $33.5 million for fiscal 1997. Acquisitions may result in
the issuance of FSI stock, which may dilute FSI shareholders' ownership
interests and reduce earnings per share. Acquisitions may also increase debt
levels and the amortization of goodwill and other intangible assets, which could
have a significant negative effect on FSI's financial condition and operating
results. In addition, acquisitions involve numerous risks, including the
following:
- Difficulties in absorbing the new business, product line, or technology
- Diversion of management's attention from other business concerns
- Entering new markets in which FSI has little or no experience
- Possible loss of key employees of the acquired business.
19
<PAGE> 21
Because of the Current Industry Slowdown, Costs Associated With Our Idle
Facilities Have Increased While Revenues Have Decreased.
As a result of the current industry slowdown, FSI is not currently able to
fully utilize the new manufacturing facilities it added in last several years.
These additional facilities and related costs have increased FSI's overall
operating expenses. These higher expenses, together with lower revenues caused
by the industry slowdown, are having a negative effect on FSI's gross profit
margins. This negative effect will continue until FSI is able to increase its
use of its facilities.
Because of the Volatility of FSI's Stock Price, Your Ability to Trade Your FSI
Shares may be Aversely Effected and FSI's Ability to Raise Capital Through
Future Equity Financings may be Reduced.
The price of FSI stock has been volatile in the past and may continue to be
so in the future. In the 1998 calendar year, for example, FSI's stock price
ranged from $3.50 to $14.625 per share. The reasons for this volatility include:
- Variations in FSI's actual or anticipated financial results from quarter
to quarter
- Announcements made by FSI, its competitors, or its customers
- Government regulations
- Industry developments
- General market conditions.
The prices of technology stocks, including FSI, have been particularly
affected by extreme fluctuations in price and volume in the stock market
generally. These fluctuations have often been unrelated to the operating
performance of the companies whose stock is traded. These broad stock market
fluctuations may have a negative effect on FSI's stock price.
Because FSI's Quarterly Operating Results are Volatile, FSI's Stock Price Could
Decrease
In the past, FSI's operating results have fluctuated from quarter to
quarter and could continue to do so in the future. These fluctuations may have a
significant impact on FSI's stock price. The reasons for the fluctuations in
FSI's operating results, such as sales, gross profits, and net income, include:
- Economic conditions in the microelectronics industry
- Financial results of FSI's affiliates
- A large portion of revenues being generated by a small number of sales
- Timing of orders placed by major customers
- Competitive pricing pressures
- The proportion of total sales made up by international sales
- Product modifications requested by customers
- Product mix and performance.
20
<PAGE> 22
Because International Sales are Important to FSI, and Because Most of FSI's
International Sales are Through FSI's Affiliated Distributors, Reductions in the
Sales Efforts of These Affiliates Could Adversely Affect FSI's Results
The profits or losses of FSI's affiliated distributors, Metron Technology
B.V. and m - FSI Ltd., can also significantly affect FSI's financial results.
FSI makes most of its international sales through these affiliated distributors.
FSI has a 32% ownership interest in Metron and a 49% interest in m - FSI.
Fiscal 1998 sales for all operations through Metron was $67.0 million, or 31% of
total FSI sales. Fiscal 1998 sales for all operations through m - FSI was $13.0
million or 6% of total FSI sales. In addition, these affiliates also provide
service and support to many of FSI's international customers. Metron and
m - FSI also distribute or sell products for companies other than FSI. It could
have a negative effect on FSI's operating results if either of these affiliates
reduced its sales efforts, lost the business of a significant company for which
it distributes or sells products, or otherwise became less financially viable.
FSI cannot guarantee that Metron or m - FSI will continue to successfully
distribute FSI's products or the products of other companies. The failure of
Metron or m - FSI to do so could have a significant negative effect on FSI's
results of operations.
Changes in Demand Caused by Fluctuations in Interest and Currency Exchange Rates
May Reduce FSI's International Sales
Almost all of FSI's direct international sales are denominated in U.S.
dollars. Nonetheless, changes in demand caused by fluctuations in interest and
currency exchange rates may affect FSI's international sales. FSI makes most of
its international sales, however, through its affiliated distributors. Metron's
sales of FSI's and other companies' products are denominated in U.S. dollars,
but its expenses are generally denominated in foreign currencies. Accordingly,
fluctuations in interest and currency exchange rates may affect Metron's
financial results. m - FSI's sales are denominated in yen. As a result, U.S.
dollar/yen exchange rates may affect FSI's equity interest in m - FSI's
earnings.
Metron and m - FSI sometimes engage in so-called "hedging" or
risk-reducing transactions to try to limit the negative effects that the
devaluation of foreign currencies relative to the U.S. dollar could have on
operating results. They will do so if a sale denominated in a foreign currency
is sufficiently large to justify the costs of hedging. To hedge a sale, Metron
or m - FSI will typically commit to buy U.S. dollars and sell the foreign
currency at a given price at a future date. If the customer cancels the sale,
Metron or m - FSI may be forced to buy U.S. dollars and sell the foreign
currency at market rates to meet its hedging obligations and may incur a loss in
doing so. To date, the hedging activities of Metron and m - FSI have not had
any significant negative effect on FSI.
Because of the Need to Meet and Comply with Numerous Foreign Regulations and
Policies, the Changeability of the Political and Economic Environments in
Foreign Jurisdictions and the Difficulty of Managing Business Overseas, FSI May
Not Be Able to Sustain Its Historical Level of International Sales
FSI and its affiliates operate in a global market. In fiscal 1998,
approximately 41% of FSI's sales revenue derived from sales outside the United
States. In fiscal 1997, this figure was 36%, and in fiscal 1996 it was 35%.
These figures include sales through Metron and m - FSI, which accounted for 89%
of international sales in 1998, 82% in 1997, and 71% in 1996. FSI expects that
international sales will continue to represent a significant portion of
21
<PAGE> 23
total sales. Sales to customers outside the United States involve a number of
risks, including the following:
- Imposition of government controls
- Compliance with U.S. export laws and foreign laws
- Political and economic instability
- Trade restrictions
- Changes in taxes and tariffs
- Longer payment cycles
- Difficulty of administering business overseas
- General economic conditions.
In particular, the Japanese and Asian-Pacific markets are extremely
competitive. The semiconductor device manufacturers located there are very
aggressive in seeking price concessions from suppliers, including equipment
manufacturers like FSI. In fiscal 1998, approximately 37% of FSI's international
sales were attributable to these markets. Total sales to these markets have
declined from $54 million in fiscal 1996 to $34 million in fiscal 1998.
FSI seeks to meet technical standards imposed by foreign regulatory bodies.
However, FSI cannot guarantee that it will be able to comply with those
standards in the future. Any failure by FSI to design products to comply with
foreign standards could have a significant negative impact on FSI.
Because of the Significant Financial Resources Needed to Offer a Broad Range of
Products, to Maintain Customer Service and Support and to Invest in Research and
Development, FSI May Be Unable to Compete with Larger, Better Established
Competitors
The microelectronics equipment industry is highly competitive. FSI faces
substantial competition throughout the world. FSI believes that to remain
competitive, it will need significant financial resources to offer a broad range
of products, to maintain customer service and support, and to invest in research
and development. FSI believes that the microelectronics industry is becoming
increasingly dominated by large manufacturers who have the resources to support
customers on a worldwide basis. Some of FSI's competitors have substantially
greater financial, marketing, and customer-support capabilities than FSI. Large
equipment manufacturers may enter the market areas in which FSI competes. In
addition, smaller, emerging microelectronics equipment companies provide
innovative technology. FSI expects that its competitors will continue to improve
the design and performance of their existing products and processes. It also
expects them to introduce new products and processes with better performance and
pricing. FSI cannot guarantee that it will continue to compete effectively in
the United States or elsewhere.
Because FSI Does Not Have Long-Term Sales Commitments With Its Customers, if
These Customers Decide to Reduce, Delay or Cancel Orders or Choose to Deal with
FSI's Competitors, then FSI's Results Will Be Adversely Effected.
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If FSI's significant customers, including IBM, Texas Instruments, or
National Semiconductor, reduce, delay, or cancel orders, then FSI's operating
results will suffer. FSI's largest customers have changed from year to year.
Sales to FSI's top five customers accounted for approximately 30% of total sales
in each of fiscal 1998, 1997, and 1996. IBM accounted for more than 10% of
revenues during each of the last three years, representing 11% in fiscal 1998,
17% in fiscal 1997 and 11% in fiscal 1996. Texas Instruments accounted for 11%
of revenues during fiscal 1996. FSI currently has no long-term sales commitments
with any of its customers. Instead, FSI generally makes sales under purchase
orders.
It May Be Difficult for FSI to Compete With Stronger Competitors Resulting From
Industry Consolidation
FSI believes that industry consolidation may result in competitors that are
better able to compete. This could have a significant negative impact on FSI's
business, operating results, and financial condition. In the past several years,
FSI has seen a trend towards consolidation in the microelectronics equipment
industry. This trend continued in 1997 and 1998 with the completion of two large
mergers in the industry. FSI expects the trend towards consolidation to continue
as companies seek to strengthen or maintain their market positions in a rapidly
changing industry.
Because FSI Depends Upon Its Management and Technical Personnel For Its Success,
the Loss of Key Personnel Could Place FSI at a Competitive Disadvantage
FSI's success depends to a significant extent upon its management and
technical personnel. The loss of a number of these key persons could have a
negative effect on FSI's operations. Competition is high for such personnel in
FSI's industry in all locations. FSI periodically reviews its compensation and
benefit packages to ensure that they are competitive in the marketplace and
makes adjustments or implements new programs for that purpose, as appropriate.
FSI cannot guarantee that it will continue to attract and retain the personnel
it needs to continue to grow and operate profitably.
Because FSI's Intellectual Property is Important to Its Success, the Loss or
Diminution of FSI's Intellectual Property Rights Through Legal Challenge by
Others or From Independent Development by Others, Could Adversely Affect Its
Business
FSI attempts to protect its intellectual property rights through patents,
copyrights, trade secrets, and other measures. However, it believes that its
financial performance will depend more upon the innovation, technological
expertise, and marketing abilities of its employees than on such protection. In
connection with its intellectual property rights, FSI faces the following risks:
- Its pending patent applications may not be issued or may be issued with
more narrow claims
- Patents issued to FSI may be challenged, invalidated, or circumvented
- Rights granted under issued patents may not provide competitive
advantages to FSI
- Foreign laws may not protect FSI's intellectual property rights
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- Others may independently develop similar products, duplicate FSI's
products, or design around its patents.
As is typical in the semiconductor industry, FSI occasionally receives
notices from others alleging infringement claims. FSI has been involved in
patent infringement litigation in the past. It could become involved in similar
lawsuits or other patent infringement claims in the future. FSI cannot guarantee
the outcome of such lawsuits or claims, which may have a significant negative
effect on FSI's business or operating results.
If FSI and/or Its Third-Party Vendors Are Not Year 2000 Compliant, Then FSI May
Be Incapable of Conducting Business
FSI and third parties with which it does business rely on numerous computer
programs for day-to-day operations. FSI cannot predict whether it will be able
to effectively address its Year 2000 issues in a timely and cost-efficient
manner and without interruption to FSI's business. FSI has initiated discussions
with its significant suppliers regarding their plans to solve Year 2000 issues
where their systems interface with FSI's systems or otherwise impact FSI's
operations. FSI cannot predict whether Year 2000 difficulties encountered by
FSI's suppliers and other third parties with whom it does business will have a
material adverse impact on FSI's business, financial conditions, operating
results, or cash flows.
In the worst case, FSI or the third parties on which it depends may, for an
extended period of time, be incapable of conducting critical business
activities, such as manufacturing and shipping products and invoicing customers.
In addition, if public suppliers of water, electricity, or natural gas are
disrupted for a substantial period, FSI's operations may be materially adversely
affected.
Adoption of the Common European Currency May Adversely Affect FSI and its
Affiliated Distributors by Requiring Systems Modifications and Possibly
Increasing their Currency Exchange Risks
FSI is in the process of analyzing the issues raised by the introduction of
the common European currency unit, the "Euro." The use of the Euro began on
January 1, 1999 and will be phased-in through January 1, 2002. FSI does not
expect the cost of any necessary systems modification to be material and does
not anticipate that the introduction and use of the Euro will materially affect
the results of its or its affiliated distributors' international business
operations. Nor does FSI expect the Euro to have a material effect on the
currency exchange risks of its or its affiliated distributors' businesses. FSI's
management will continue to monitor the effect of the implementation of the
Euro.
RISKS RELATING TO YIELDUP
YieldUP's operations are subject to numerous risks, including the risks
associated with the semiconductor equipment industry generally. In addition to
the other information in this proxy statement/prospectus, you should carefully
consider the following risk factors in evaluating YieldUP and its business:
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Downturns in the Semiconductor Industry Adversely Affect YieldUP's Results
The semiconductor equipment industry is highly cyclical and has
historically experienced periodic and prolonged downturns, in which the
willingness of the manufacturers of semiconductor devices to make substantial
capital expenditures is greatly reduced. Currently, the industry is in the midst
of such a downturn. The continuation of the current downturn or the occurrence
of similar downturns in the future could materially adversely affect YieldUP's
business, financial condition, and results of operations.
YieldUP May Never Achieve Profitability if It Remains an Independent Entity
YieldUP has experienced significant operating losses since its inception in
June 1993 and the commencement of significant product shipments in the fourth
quarter of 1995. YieldUP has experienced net losses applicable to holders of
common stock of approximately $11.4 million in 1998, $4.0 million in 1997, and
$3.4 million in 1996. YieldUP's operating losses have been and will continue to
be principally the result of costs associated with product development,
manufacturing, and sales and marketing activities. As of June 30, 1999,
YieldUP's accumulated deficit was $22,789,147.
YieldUP's Existing Capital Resources Will Not Enable It To Fund Operations
Through 1999
YieldUP management believes that YieldUP's existing capital resources,
combined with payments received from a licensing agreement with FSI, will enable
YieldUP to fund operations through October 1999. YieldUP will need to obtain
additional capital to fund operations beyond that time, which may result in
dilution to current stockholders. If YieldUP is unable to obtain the necessary
capital, it will be required to significantly curtail operations.
YieldUP is Not in Compliance with its Loan Covenants, Which May Cause the Lender
to Pursue Remedies That Could Adversely Affect YieldUP's Business
YieldUP is a party to a loan agreement providing for a secured loan for
$0.5 million and a $2 million secured revolving credit line. As of March 31,
1999, YieldUP was not in compliance with the liquidity and quick-ratio covenants
under the loan agreement. Because of this noncompliance, the lender may declare
YieldUP to be in default and exercise it remedies under the agreement, including
seizing collateral. Under the loan agreement, the required minimum liquidity
ratio was 2.00 to 1.00, while YieldUP's liquidity ratio as 1.14 to 1.00 and the
required minimum quick ratio was 1.75 to 1.00, while YieldUP's quick ratio was
0.60 to 1.00. Effective June 30, 1999, YieldUP and the lender entered into a
loan modification agreement which waived the existing defaults and amended the
"Revolving Maturing Date" to September 15, 1999. Although YieldUP is currently
negotiating with the lender to extend the maturity date through October 20,
1999, there can be no assurance that this will happen. If the lender does not
agree to an extension, then YieldUP's capital resources will be even more
limited.
If YieldUP Does Not Protect Its Intellectual Property, Its Business and Results
Will be Adversely Affected
In the absence of significant patent or other proprietary protection,
competitors may be able to copy YieldUP's technology or design approaches,
replicate its processes, or gain
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access to its trade secrets. Moreover, our competitors may be able to develop
technologies similar to, or more advanced than, our products or technology. The
occurrence of events of this nature may materially adversely affect YieldUP's
business and results of operations.
YieldUP relies on patent, trade secret, and copyright protection for its
products and technology. YieldUP's issued patents may not provide it with
meaningful competitive advantages, however, and third parties may issue
challenges against the validity and enforceability of any patent issued to us.
Moreover, the process of obtaining patents can be expensive and YieldUP's
pending patent applications may not result in the issuance of patents.
YieldUP also relies on trade secrets and proprietary technology that it
seeks to protect, in part, through confidentiality agreements with employees,
consultants, and other parties. However, these agreements may be breached, and
YieldUP may not have adequate remedies for any breach. In addition, YieldUP's
trade secrets may become known to or independently developed by others.
Moreover, the laws of foreign countries may not protect YieldUP's
intellectual property to the same extent as do the laws of the United States.
YieldUP management believes that YieldUP has very limited intellectual property
right protection in Korea, Taiwan, China, India, and other Asian countries,
excluding Japan. YieldUP's sales to these countries combined has been less than
10% of its total revenues.
YieldUP is a Party to Intellectual Property Litigation in Which an Adverse
Result Could Harm Its Business and Results
CFM Technologies, Inc. and CFMT, Inc. (collectively "CFM") filed a
complaint against YieldUP in United States District Court for the District of
Delaware in September 1995. The complaint alleged that the drying process
incorporated in certain of YieldUP's products infringe upon a patent held by
CFM. On October 14, 1997, a federal court for the District of Delaware ruled in
YieldUP's favor. In a written opinion granting summary judgment for YieldUP, the
United States District Court held that CFM had failed to produce evidence on
three separate elements of the patent claim. To establish infringement, evidence
of all three elements was required. On June 30, 1998, the United States District
Court of Delaware granted CFM's petition for re-argument of the summary judgment
motion, and the re-argument briefs have been filed by both parties. The court
may not sustain its original order. If the original order is overturned, the
litigation may proceed to trial, and the litigation and the associated costs
may, and an unfavorable adjudication will, have a material adverse impact on
YieldUP. A loss, if any, resulting from an unfavorable adjudication, cannot
presently be estimated. Accordingly, no provision for any liability that may
result upon adjudication has been made in the financial statements of YieldUP.
CFM filed an additional complaint against YieldUP in United States District
Court for the District of Delaware on December 30, 1998. The complaint alleged
that the cleaning process incorporated in certain of our products infringes
patents held by CFM. YieldUP believes that the additional CFM patent
infringement lawsuit is without merit and that none of YieldUP's technology and
products infringe any of the CFM patents asserted in that litigation. YieldUP's
technology is substantially different from CFM's patented technology. YieldUP
plans to vigorously defend its intellectual property rights against any and all
claims. The associated costs may, and an unfavorable adjudication will, have a
material adverse impact on YieldUP. YieldUP's management believes that less
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than 20% of YieldUP's present revenues are from products that CFM alleges to
infringe its patents in this new lawsuit. In both law suits filed by CFM, they
are asking for monetary damages and an injunction against YieldUP's use of those
products at issue. A loss, if any, resulting from an unfavorable adjudication,
cannot presently be estimated. Accordingly, no provision for any liability that
may result upon adjudication has been made in the financial statements of
YieldUP.
There has been substantial litigation regarding patent and other
intellectual property rights in semiconductor-related industries. Increased
sales of our products could provoke additional claims of infringement from third
parties. In the future, litigation may be necessary to:
- enforce patents issued to YieldUP;
- protect trade secrets or know-how owned by YieldUP;
- defend against claimed infringement of the rights of others; and
- determine the scope and validity of the proprietary rights of others.
Any such litigation would likely result in substantial cost and diversion
of effort, which by itself could have a material adverse effect on YieldUP's
business, financial condition, and operating results. Further, adverse
determinations in litigation of this kind could result in the loss of
proprietary rights, subject YieldUP to significant liabilities to third parties,
require YieldUP to seek licenses from third parties, or prevent YieldUP from
manufacturing or selling its products.
YieldUP's Small Size and Relatively Recent Entry into the Market Makes It
Vulnerable to Competition from Established Companies
YieldUP may not be able to overcome the disadvantages posed by its small
size and recent entry into the market. There is intense competition in the
markets for YieldUP's products, and YieldUP's smaller resources and products
that are yet to be fully proven make YieldUP vulnerable to competition from
larger companies, which have significantly greater resources. Leading
competitors have a larger installed base of products, which can provide them
with a significant advantage over YieldUP because YieldUP's technology has not
been widely deployed and thus 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.
YieldUP May Not Be Able To Successfully Compete in the Innovative and Highly
Competitive Semiconductor Manufacturing Market
Competition for YieldUP's products currently comes from makers of
traditional 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 YieldUP's products
obsolete or unmarketable. Additional competition for YieldUP's products also
comes from a number of small companies making cleaning, rinsing, and drying
equipment that is less expensive than YieldUP's products. Because YieldUP's
products sell for significantly higher prices than those products, YieldUP may
not be able to compete effectively against them without lowering its prices.
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YieldUP currently competes 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. But these factors may not give YieldUP a competitive
edge in the future.
YieldUP management also expects that competition may arise from new
competitors and from new technological approaches, which could make YieldUP's
products obsolete. If YieldUP is unable to respond to the challenges of
competition, it may not able to achieve or maintain profitability at a level
required to support its survival or growth.
YieldUP's 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 customers of YieldUP.
Because YieldUP's Products are Not Diversified, Decreased Demand May Adversely
Affect All YieldUP Products
At present, over 95% of YieldUP's revenues come from the sales of its
cleaning, rinsing, and drying systems. YieldUP management anticipates that the
substantial majority of future revenues will come from sales of those systems.
As a result, decreased demand for systems of that kind would adversely affect
YieldUP as a whole. YieldUP's ability to diversify its operations through the
introduction and sale of new products is dependent on the success of continuing
research, product development, and engineering activities, as well as marketing
efforts. YieldUP 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.
YieldUP's Operating Results Can Vary Substantially From Quarter To Quarter
YieldUP typically derives a substantial portion of its 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, cancellation
of an order, or supplier delays could have a material adverse effect on
YieldUP's revenues and results of operations for that quarter. For example,
YieldUP's revenues increased substantially from $2 million in the third quarter
of 1997 to $3.3 million in the fourth quarter of 1997 due to the sale of several
large systems, but then declined to $2.6 million in the first quarter of 1998
and to $2.1 million in the second quarter of 1998, as the sales of the larger
systems reduced.
In addition, YieldUP's need for continued investment in research and
development and sales, marketing, and service limits YieldUP's ability to reduce
expenses in response to any such decrease in sales. Because YieldUP builds
sub-assemblies according to management's forecast, a reduction in customer
orders could also result in excessive inventories. The impact of these and other
factors on our operating results in any future period cannot be accurately
forecast.
YieldUP May Not Have an Adequate Supply of Products Because It Depends on Third-
Party Suppliers
YieldUP has no written contracts with any of its key suppliers, any of
which may terminate the relationships with YieldUP at any time without notice.
Any such termination
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would materially impair YieldUP's ability to satisfy orders for its products and
would materially adversely affect YieldUP's results of operations and financial
condition. Upon any such termination, YieldUP may not be able to find
replacement suppliers or the replacement suppliers that are found may be more
expensive than our current suppliers. YieldUP's key suppliers are Advanced
Micropolish Inc., Qualtronix Inc. and Millipore Corporation. Individually, these
suppliers provided less than 10% of YieldUP's total supply needs in the last 12
months.
YieldUP Needs to Develop Acceptable New Products In Order to Remain Competitive
The manufacturing equipment and processes used in market that YieldUP
serves are subject to rapid technological changes and product obsolescence.
YieldUP management believes that YieldUP's future success depends in part upon
its ability to enhance its current products and to develop new products,
processes, and technologies to meet anticipated changes. If YieldUP does not
successfully introduce new products in a timely manner, any competitive position
that it may develop could be lost, and its sales reduced. In addition, any new
products that YieldUP develops may not satisfy customer needs and achieve market
acceptance.
The Long Sales Cycles for YieldUP's Products May Result in Increased Sales and
Marketing Expenditures
Sales of YieldUP's products have been, and are expected to continue to be,
characterized by a relatively long sales cycle, generally six to nine months.
This is due to such factors as the substantial time required by potential
customers for technical evaluation of YieldUP's products before purchase, and
the high cost and the critical role YieldUP's products will play in the
manufacturing process. YieldUP Management believes that the sales cycle will
continue to be lengthy as certain of YieldUP's anticipated customers centralize
purchasing decisions, which is expected to intensify the evaluation process and
require additional sales and marketing expenditures by YieldUP.
The Loss of a Single Customer May Have an Adverse Effect on YieldUP's Business
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 those sales with sales to other
customers would have a material adverse effect on YieldUP's business, financial
condition, and results of operations. None of YieldUP's customers have entered
into a long-term agreement requiring them to purchase YieldUP products.
Historically, YieldUP has sold a significant proportion of its systems in
each period to a limited number of customers. For example, YieldUP's three top
customers accounted for 30% of its gross revenues in 1998 and 34% in 1997. A
single customer, Applied Materials, accounted for 11.8% of YieldUP's gross
revenues in 1998 and 19.8% in 1997; a single European customer, ST
Microelectronics, accounted for 9.4% of gross revenues in 1998; and a single
Original Equipment Manufacturer ("OEM") customer, SCP Global Technologies,
accounted for 9.1% of gross revenues in 1998. YieldUP management expect that
sales to relatively few customers will continue to account for a high percentage
of revenues in any accounting period in the foreseeable future. A reduction in
orders from
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any loss of any such large customer may have a material adverse effect on
YieldUP's financial condition.
YieldUP Depends on Third Parties to Increase Its Sales Potential
An increasing percentage of YieldUP's revenues, from 17% of gross revenues
in 1997 to 31% in 1998, is derived from sales to OEM customers. One significant
OEM customer, SCP Global Technologies, accounted for 9.1% of YieldUP's gross
revenues in 1998. YieldUP sells its systems to OEMs and they in turn integrate
those 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. Generally, our OEM
customers may terminate orders at any time without penalty.
Many of the markets in which our OEM customers operate have experienced
cyclical declines and advances. The downturns have been characterized by reduced
product demand and price erosion, which adversely affect the ability of our OEM
customers to make payments for YieldUP products in a timely manner, or at all.
One of YieldUP's OEM customers, UltraFab, declared bankruptcy, and YieldUP was
unable to collect $536,317 owed to it by UltraFab.
YieldUP's Results Are Impacted by International Affairs
Sales to international customers, primarily located in Japan and Europe,
comprised approximately 33% of YieldUP's gross revenues in 1998, 32% in 1997,
and 33% in 1996.
Sales to international customers are subject to risks, including the
following:
- exposure to currency fluctuations;
- the imposition of governmental controls;
- the need to comply with a wide variety of export and import 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.
YieldUP management believes that the economic turmoil in Asia has had an
adverse effect on YieldUP's operations. At December 31, 1998, YieldUP had
uncollected accounts receivable from Asian customers totaling $37,786.
Officers and Directors of YieldUP Control a Substantial Amount of Its Stock and
Thus Can Decide 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
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common stock are entitled to one vote per share. YieldUP's directors and
officers control approximately 50% of the voting power and are able to elect all
of YieldUP's directors and, hence, are able to control the affairs of YieldUP.
If the merger is not consummated, these officers and directors will continue to
control YieldUP.
YieldUP May Issue Preferred Stock That May Inhibit a Takeover of YieldUP
YieldUP's board of directors has authority to issue up to approximately
five million shares of preferred stock and to fix the rights and preferences of
those shares, without stockholder approval. 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 any preferred stock that
may be issued in the future. The issuance of preferred stock, although providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of delaying or preventing a change in
control of YieldUP.
YieldUP's Common Stock Could Be Delisted From The Nasdaq Market, Which Could
Adversely Affect Its Market Price and Liquidity
If the merger is not consummated and YieldUP is unable to satisfy the
Nasdaq SmallCap Market's maintenance requirements, YieldUP's common stock may be
delisted from the Nasdaq SmallCap Market. Currently, YieldUP does not meet the
maintenance requirements and has had communication from the Nasdaq SmallCap
Market regarding possible delisting of its common stock if the merger is not
consummated. In that event, trading, if any, in the common stock would
thereafter be conducted in the over-the-counter market in the so-called "pink
sheets" or the National Association of Securities Dealers "OTC Bulletin Board."
Consequently, the liquidity of YieldUP common stock could be impaired, not only
in the number of securities that could be bought and sold, but also through
delays in the timing of transactions, reduction in security analysts' and the
news media's coverage of YieldUP, and lower prices for the common stock than
might otherwise be obtained.
Under current criteria for continued listing on the Nasdaq SmallCap Market:
- YieldUP must maintain at least $2 million in total net tangible assets
or a market capitalization of $35 million or have $500,000 in net
income;
- the minimum bid price of YieldUP common stock must be at least $1.00 per
share;
- there must be at least 500,000 shares in the public float valued at $1
million or more;
- the common stock must have at least two active market makers; and
- the common stock must be held by at least 300 holders.
On December 8, 1998, YieldUP's Class B Warrants were delisted from the
Nasdaq SmallCap Market because there were no longer any active market makers
registered to trade the securities. The trading of these securities, if any, is
being conducted in the over-the-counter market in NASD's "OTC Bulletin Board."
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YieldUP's Common Stock Could Be Reclassified As "Penny Stock" and Subject To
Burdensome Restrictions That Could Adversely Impact Its Market Price and
Liquidity
The Securities and Exchange Commission has adopted rules that define a
"penny stock" as any equity security that has a market or exercise price of less
than $5.00 per share, subject to exceptions. YieldUP common stock may not
qualify for exemption from the penny-stock restrictions. If YieldUP's common
stock were subject to the rules on penny stocks, the market price and liquidity
of the common stock could be severely adversely affected.
For any transaction involving a penny stock, unless exempt, the rules
require delivery, before any transaction in a penny stock, of a disclosure
schedule prepared by the SEC relating to the penny-stock market. Disclosure is
also required to be made about current quotations for the securities and about
commissions payable to both the broker-dealer and the registered representative.
Finally, broker-dealers must send monthly statements to purchasers of penny
stocks disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.
The foregoing penny stock restrictions will not apply to our securities if:
- they are listed on the Nasdaq 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.
The Failure of YieldUP and Suppliers, Customers, and Others To Be Year 2000
Compliant Could Negatively Impact Its 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."
The final analysis of YieldUP's Y2K readiness is expected to be completed
by the middle of 1999. YieldUP has further implemented policy and procedures
that all new systems procured or developed are evaluated for Y2K readiness to
assure compliance. In the second half of 1999, YieldUP management will be
finalizing contingency plans, to respond to any unforeseen Y2K problems.
YieldUP has been advised by all of its suppliers and business partners,
including OEMs, that they are addressing and preparing for any Y2K issues that
they may have. If any of these suppliers or business partners are not Y2K
compliant, then YieldUP may experience a delay in manufacturing and shipping its
products. In the worst case, YieldUP or the third parties on which it depends
may, for an extended period of time, be incapable of conducting critical
business activities, such as manufacturing and shipping products and invoicing
customers. In addition, if public suppliers of water, electricity, or natural
gas are disrupted for a substantial period, YieldUP's operations may be
materially adversely affected.
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YieldUP May Not Be Able To Retain Its Key Personnel
YieldUP's success will, to a large extent, depend upon the continued
services of its executive officers, including in particular Raj Mohindra,
President and Chief Executive Officer. The loss of services of one or more of
these executive officers could materially adversely affect YieldUP. YieldUP does
not have employment agreements with any of its key personnel, but YieldUP is the
beneficiary of a key-man life insurance policy in the amount of $2 million on
Mr. Mohindra.
YieldUP's success will also depend, in part, upon its ability to retain the
personnel who have assisted in the development of its products, and to attract
and retain additional qualified operating, marketing, technical, and financial
personnel. The competition in the semiconductor equipment industry for qualified
personnel is often intense, and YieldUP may not be able to hire or retain
necessary personnel.
YieldUP Management is Analyzing Issues Related to the European Monetary
Conversion
On January 1, 1999, certain member states of the European Economic
Community fixed their respective currencies to a new currency, the Euro. On that
day, the Euro became a functional legal currency within those countries. During
the three years beginning January 1, 1999, business in those countries will be
conducted in both the existing national currency and the Euro. Companies
operating in or conducting business in those countries will need to ensure that
their financial and other software systems are capable of processing
transactions and properly handling the existing currencies, as well as the Euro.
YieldUP's management is assessing the impact that the Euro will have on its
internal systems and products. While management believes that YieldUP's
enterprise-wide financial and manufacturing information system will be Euro
compliant, this system has not yet been tested. Management has not determined
the costs related to any problems that may arise in the future. Any such
problems may materially adversely affect YieldUP's business, operating results,
and financial condition.
GENERAL INFORMATION
THE SPECIAL MEETING
YieldUP is delivering this proxy statement/prospectus to you and other
YieldUP stockholders in connection with the solicitation of proxies by the
YieldUP board of directors for use at the special meeting to be held on October
20, 1999, and at any adjournments or postponements of that meeting. This proxy
statement/prospectus also constitutes the prospectus of FSI with respect to
shares of FSI common stock to be issued in the merger.
The special meeting has been called for the purposes of:
- voting upon a proposal to approve the reorganization agreement and the
merger; and
- such other matters as may be properly brought before the special
meeting.
The merger will be accomplished by a merger of YieldUP with a newly formed
wholly owned subsidiary of FSI. The subsidiary will be the surviving corporation
in the merger and will continue as a wholly owned subsidiary of FSI.
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In the merger, all the outstanding shares of YieldUP common stock and Class
A common stock will be converted into the right to receive cash and shares of
FSI common stock. FSI shareholders will continue to hold their shares of FSI
common stock, without any change.
VOTE REQUIRED AT SPECIAL MEETING
At least one-third of the total number of outstanding shares of YieldUP
common stock and Class A common stock entitled to vote at the YieldUP special
meeting must be present, either in person or by proxy, to constitute a quorum at
the meeting.
The affirmative vote of the majority of the voting power of the issued and
outstanding shares of YieldUP common stock and Class A common stock, voting
together as a single class, is required to approve the reorganization agreement
and the merger. Each holder of YieldUP common stock is entitled to cast one vote
per share. Each holder of YieldUP Class A common stock is entitled to cast five
votes per share.
As of the record date for the special meeting, directors and executive
officers of YieldUP and their affiliates had the right to vote approximately 6%
of all issued and outstanding shares of YieldUP common stock and approximately
95% of all issued and outstanding Class A common stock entitled to vote at the
meeting, together representing approximately 50% of the voting power of all
YieldUP capital stock entitled to vote. These persons have indicated to YieldUP
that they intend to vote all of their shares in favor of approval of the
reorganization agreement and the merger.
As of August 30, 1999, two executive officers of YieldUP, Raj Mohindra and
Suraj Puri, own shares representing approximately 44% of the voting power of all
issued and outstanding shares of YieldUP capital stock. Messrs. Mohindra and
Puri have executed voting agreements with FSI by which they have agreed to vote
their shares in favor of approval of the reorganization agreement and the
merger.
SOLICITATION OF PROXIES
Directors, officers, and employees of YieldUP may solicit proxies from
stockholders by personal interview, special letter, telephone, or facsimile
transmission. YieldUP will bear the expenses of this solicitation on its behalf.
YieldUP will not specifically compensate its directors, officers, and other
employees for the solicitation of proxies. YieldUP will request brokerage houses
and other custodians, nominees, and fiduciaries to forward soliciting materials
to the beneficial owners of YieldUP common stock and Class A common stock owned
of record by those organizations. YieldUP will pay reasonable expenses incurred
in forwarding these materials.
You may revoke a proxy relating to the special meeting at any time before
it is exercised; however, mere attendance at the special meeting will not itself
have the effect of revoking the proxy. You may revoke a proxy before it is voted
by voting in person at the special meeting or by executing and sending a
subsequently dated proxy or written notice of revocation to YieldUP's Corporate
Secretary. The later-dated proxy or the revocation notice must be received by
YieldUP not later than the close of business on October 19, 1999.
A proxy in the accompanying form, when properly executed and returned, will
be voted in accordance with the instructions contained on the proxy. A properly
executed
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proxy on which no instruction has been indicated will be voted for approval of
the reorganization agreement and the merger.
OTHER MATTERS
As of the date of this proxy statement/prospectus, the YieldUP board does
not know of any business to be presented at the special meeting other than the
approval of the reorganization agreement and the merger. If any other matters
should properly come before the special meeting, the shares represented by
proxies will be voted with respect to such matters in accordance with the
judgment of the persons voting the proxies.
BACKGROUND OF THE MERGER
The terms of the reorganization agreement were determined through
arm's-length negotiations between the senior managements of YieldUP and FSI, and
were approved by the boards of directors of the companies, in consultation with
their respective financial and legal advisers. In determining the form of the
transaction and the form and amount of the consideration, numerous factors were
reviewed by the senior managements and boards of directors of YieldUP and FSI.
See "Recommendation of the YieldUP Board of Directors and YieldUP's Reasons for
the Merger" for a discussion of those factors. The following is a brief
discussion of those negotiations and related events.
On March 30, 1998, YieldUP raised proceeds of $5.76 million through the
sale of 600 shares of Series A convertible preferred stock to meet its capital
needs. YieldUP did not engage a financial adviser with respect to the sale of
its Series A shares. The price of YieldUP common stock declined substantially
after completion of the Series A financing, from a high of $13.06 in the first
quarter of 1998 to a low of $0.50 in the fourth quarter of 1998. This decline
was exacerbated by the existence of the Series A shares, which converted into
common stock based on the trading price of the common stock. At $0.50 per share,
each Series A share was convertible into approximately 21,000 shares of common
stock. During 1998, YieldUP issued an aggregate of 2,470,588 shares of its
common stock upon the conversion of 134 Series A shares, resulting in
significant and rapid dilution to YieldUP's existing common stockholders.
On October 16, 1998, Mr. Raj Mohindra, President and Chief Executive
Officer of YieldUP, met with a representative of Needham & Company, Inc. to
discuss the engagement of Needham to provide financial advisory services to
YieldUP.
On October 21, Mr. Mohindra, Mr. Abhay Bhushan, Chief Financial Officer of
YieldUP, and Mr. Suraj Puri, Chief Technical Officer of YieldUP, met with
representatives of Needham to discuss strategies and opportunities for strategic
business combinations. Upon review of YieldUP's capital structure, Needham
advised YieldUP that the preferential redemption and liquidation rights of the
Series A shares which applied in a sale of YieldUP and the low trading price of
the common stock would result in an accrual of virtually all proceeds from a
sale of YieldUP to the holders of the Series A shares. Accordingly, Needham
advised that YieldUP would likely be unable to enter into a strategic
combination that would result in value to its common stockholders while the
Series A shares remained outstanding.
On October 29, 1998, the YieldUP board met to discuss strategic
alternatives that would strengthen YieldUP's financial and/or market position.
The meeting was attended
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by a representative from Gray Cary Ware & Freidenrich LLP, YieldUP's legal
counsel. YieldUP management presented financial forecasts for the fourth
quarter. These forecasts indicated that YieldUP would continue to experience
significant losses and a reduction in sales as a result of the prolonged
downturn in the semiconductor industry. Compounding this effect were increasing
difficulties in collecting accounts receivable from customers located in Asia
and the insolvency of a significant OEM customer, UltraFab. The YieldUP board
discussed licensing YieldUP's technology to other semiconductor manufacturers,
business combinations with financially stronger companies, private placement
equity financings, and minority corporate investments. The YieldUP board
directed management to begin exploring possible transactions of that nature with
other parties. The YieldUP board acknowledged, however, that the effects of the
prolonged downturn in the semiconductor industry were severely limiting capital
available to semiconductor equipment companies like YieldUP. Further, the
extremely low share price when combined with the existence of the Series A
shares had the effect of making investment in YieldUP common stock either
unattractive to new investors or potentially extremely dilutive to existing
common stockholders. Accordingly, the YieldUP board concluded that management
should first enter into negotiations with the holders of the Series A shares to
redeem as many of the Series A shares as prudent in order to protect common
stockholder value and to increase YieldUP's attractiveness as an investment
opportunity and as a strategic partner.
Acting under the YieldUP board's instructions, management initiated
negotiations with the holders of the Series A shares. Management also initiated
contact with potential private investors, including four existing investors,
financial institutions, and other companies in the
semiconductor-equipment-manufacturing industry regarding making investments in
YieldUP, licensing YieldUP's technology, or acquiring YieldUP. Management did
not receive responses from potential investors, acquirors, or licensees at this
time that management deemed acceptable or likely to be concluded. The responses
consisted of conditional indications of interest that: were at discounted
valuation levels; contemplated investments that were too small to address
YieldUP's needs; included timetables of a year or longer to completion; or
carried significant risks as to completion. Because YieldUP was unable to obtain
definitive proposals containing suitable terms from potential private investors,
acquirors, or licensees, the YieldUP board determined that redemption of the
Series A shares would likely be necessary to complete an acceptable transaction,
and that it would use available cash resources, increased bank borrowings, and a
loan from Mr. Bhushan to fund the redemption.
On November 5, 1998, Mr. Mohindra and Mr. Puri traveled to New York to meet
with the representatives of the Series A stockholders to discuss a possible
redemption of the Series A shares. On November 5, 1998, the closing sale price
of YieldUP common stock was $0.56 per share.
On November 12, 1998, representatives from Needham arranged a meeting
between YieldUP and FSI at FSI headquarters in Chaska, Minnesota. The meeting
was attended by the following persons: Mr. Mohindra and Mr. Puri from YieldUP; a
representative of Needham; Mr. Benno Sand, Chief Administrative Officer of FSI;
Mr. Dale Courtney, President, Surface Conditioning Division of FSI; Dr. Scott
Becker, Chief Technical Officer, Surface Conditioning Division of FSI; and Mr.
John Ely, General Manager, Batch Processing, Surface Conditioning Division of
FSI. At this time, YieldUP and FSI executed a non-disclosure agreement under
which the parties agreed to keep confidential the existence of the discussions
regarding the potential strategic combination and any nonpublic information
acquired by them during the course of their respective investiga-
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tions. On November 12, 1998, the closing per share sale price of YieldUP common
stock was $0.59 and of FSI common stock was $7.44.
On November 18 and 19, 1998, Dr. Becker and a representative of Faegre &
Benson LLP, FSI's outside legal counsel, met with the YieldUP technical team in
Mountain View, California to discuss and evaluate YieldUP's patents and
technology for a possible licensing arrangement or other strategic relationship,
including a possible merger of the two companies. On November 19, 1998, the
closing per share sale price of YieldUP common stock was $0.63 and of FSI common
stock was $8.44.
On November 20, 1998, YieldUP's management entered into a letter agreement
with Needham to formally engage Needham to act as YieldUP's exclusive financial
advisor in connection with a possible transaction involving YieldUP.
On December 7 through December 10, 1998, various representatives of FSI
visited YieldUP's headquarters in Mountain View, California, to evaluate the
suitability of a business combination and/or possible licensing arrangement
between the two companies. The FSI representatives involved in this meeting
included the following persons: Mr. Sand; Mr. Ben Sloan, Chief Operating Officer
of FSI; Dr. Becker; Mr. Courtney; Mr. Ely; Ms. Pat Hollister, Chief Financial
Officer of FSI; Mr. Luke Komarek, General Counsel of FSI; Mr. Mark Ahmann, V.P.
Human Resources of FSI; and a representative of Faegre & Benson. On December 10,
1998, the closing per share sale prices of YieldUP common sock was $1.97 and of
FSI common stock was $8.75.
On December 17, 1998, Mr. Mohindra traveled to Chaska, Minnesota, to meet
with Mr. Courtney, Mr. Sand, and Mr. Joel Elftmann, Chief Executive Officer of
FSI, to discuss the possibility of a business combination or licensing
arrangement. On December 17, 1998, the closing per share sale price of YieldUP
common stock was $1.94 and of FSI common stock was $7.25.
On December 21, 1998, YieldUP entered into an agreement to redeem all 466
of the outstanding Series A shares for an aggregate purchase price of
approximately $6.0 million, which included a premium on the outstanding Series A
shares of approximately 7%. To fund the redemption, YieldUP used $4.5 million
from its cash and cash-equivalent assets and borrowed $1.0 million from its
bank. Mr. Bhushan also loaned YieldUP $500,000 under a promissory note due March
31, 1999, which had an interest rate of 9% per year. The note has since been
paid in full. On December 21, 1998, the closing per share sale price of YieldUP
common stock was $2.00 and of FSI common stock was $6.88.
After completion of the redemption of the Series A shares, YieldUP's
working capital resources were substantially diminished, and, as a result,
completion of a significant financing, merger, or licensing transaction became
critical to YieldUP's long-term survival. Given the high level of interest
expressed by FSI in consummating some form of licensing or acquisition
transaction, and given the lack of adequate responses from other parties,
YieldUP focused its efforts principally on completing a transaction with FSI.
On December 29, 1998, at a special meeting of the YieldUP board, Mr.
Mohindra presented to the board the preliminary outline in writing from FSI of
terms and conditions for an acquisition of YieldUP by FSI. The initial valuation
communicated orally by FSI was approximately $18.0 million, which was equivalent
to about $1.94 per share, based upon a fully-diluted capitalization of 9.3
million shares. The transaction proposed by FSI contemplated a fixed value to be
paid partially in stock, with the number of shares determined at closing of the
transaction, and partially in cash. YieldUP stock price was
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$1.7812 on December 29, 1998. Mr. Mohindra also presented the board with a draft
from FSI of an intellectual property license agreement. The proposed terms
included an exclusive dealing arrangement whereby, in exchange for FSI's
agreement to continue negotiations, YieldUP would agree not to engage in
negotiations with parties other than FSI regarding a sale of YieldUP or its
technology or an investment in YieldUP for a period of 25 days. After a lengthy
discussion, the YieldUP board determined that the preliminary outline of the
terms and conditions for the proposed acquisition, including the initial
valuation proposed by FSI, was worthy of continued negotiations, and that
management should enter into the exclusive dealing arrangement and continue
negotiations with FSI to increase the valuation. The board also determined,
however, that YieldUP should not enter into the proposed license agreement prior
to obtaining a written agreement from FSI to acquire YieldUP because the license
agreement could substantially limit YieldUP's attractiveness to other potential
acquirors or investors. On December 29, 1998, the closing per share sale price
of YieldUP common stock was $1.78 and of FSI common stock was $10.69.
On December 31, 1998, after negotiations between the representatives of the
two parties, FSI orally offered $2.6119 per share of YieldUP common stock and
Class A common stock, comprised of $0.7313, or 28% in cash and $1.8806, or 72%
in FSI stock. In addition, representatives of FSI indicated that FSI would
proceed with negotiations regardless of YieldUP's position regarding the license
agreement if YieldUP would sign the exclusive dealing agreement. Accordingly,
acting pursuant to the direction of the YieldUP board, Mr. Mohindra signed the
agreement regarding exclusive dealing for a period of 25 days. On December 31,
1998, the closing per share sale price of YieldUP common stock was $1.75 and of
FSI common stock was $10.88.
On January 8, 1999, Faegre & Benson delivered an initial draft of the
reorganization agreement and a revised draft licensing agreement to YieldUP
management and Gray Cary. Management promptly delivered copies of the draft
agreements to the YieldUP board. On January 8, 1999, the closing per share sale
price of YieldUP common stock was $2.00 and of FSI common stock was $12.19.
From January 5 though January 18, 1999, YieldUP's management continued
negotiations with FSI management regarding valuation issues and had numerous
discussions with the members of the YieldUP board relating to both the draft
licensing and reorganization agreements. A revised draft of the license
agreement was delivered to the YieldUP board on January 18, 1999. Also during
this period, management and Gray Cary entered into detailed negotiations with
FSI and Faegre & Benson of all of the terms of the proposed reorganization
agreement and the proposed license agreement.
On January 18, 1999, the YieldUP board held a special meeting attended by
all members of the board as well as representatives from Gray Cary, Needham and
KPMG LLP, YieldUP's independent auditors. During the meeting, the representative
from Gray Cary made a detailed presentation to the board regarding its fiduciary
duties in the context of the proposed transaction with FSI. In preparation for
the meeting, each member of the board had reviewed a detailed memorandum
prepared by Gray Cary regarding the legal guidelines for directors, and the
board's fiduciary duties when considering a proposed business combination. On
January 15, 1999 (the last trading date before the January 18 meeting), the
closing per share sale price of YieldUP common stock was $1.88 and of FSI common
stock was $12.50.
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All the participants in the meeting discussed the results of the
negotiations to date and the details of the currently proposed transaction with
FSI. The board first examined the terms of the proposed license agreement and
identified unresolved issues related to continuing royalty payments and buyback
of the license agreement in case the merger was not consummated. After lengthy
discussion, the board instructed management to continue negotiations with FSI on
the licensing agreement.
After the conclusion of the discussion regarding the proposed license
agreement, a representative of Needham gave a presentation about the specific
financial terms of the reorganization agreement and described unresolved issues
with respect to the valuation. In particular, the representative of Needham
described to the board recent discussions regarding whether the number of shares
of FSI stock to be received by YieldUP stockholders should be fixed at the time
of signing of the reorganization agreement or determined at the time of closing
of the transaction based upon a fixed value. The board then discussed elements
of Needham's presentation, including allocation of expenses, valuation
methodologies, break-up fees, pricing mechanisms and the form of consideration.
At the conclusion of this discussion, the board instructed Needham to contact
senior management of FSI to negotiate the allocation of expenses and to agree to
accept a fixed number of shares and a fixed dollar amount per share as
consideration in the merger. The representative from Gray Cary then made a
presentation regarding the status of the negotiations of various terms and
details of the reorganization agreement. During this presentation, each of the
members of the board asked questions and participated in the discussion. During
the meeting, a revised reorganization agreement reflecting the results of the
negotiations described by the representative from Gray Cary was delivered to the
YieldUP board. The board made an initial review of the revised agreement and
instructed management and Gray Cary to negotiate the remaining unresolved
issues, including the provision for continuing insurance for directors and
officers, in accordance with the board's guidance. Each board member took a copy
of the reorganization agreement with him after the meeting to review the revised
terms and conditions in advance of the next board meeting.
On January 19, 1999, Needham spoke with FSI's senior management to
negotiate the terms of FSI's offer to acquire YieldUP, including the exchange
ratio. Through these conversations, FSI communicated its offer to acquire
YieldUP on the terms and conditions described in this proxy
statement/prospectus. At the conclusion of the call, Needham agreed to present
FSI's offer to the YieldUP board. Also on January 19, 1999, YieldUP management
discussed the royalty and buyback provisions of the license agreement with FSI's
senior management, and the parties reached agreement on the license agreement
substantially on the terms described in this proxy statement/prospectus. On
January 19, 1999, the closing per share sale price of YieldUP common stock was
$1.78 and of FSI common stock was $12.50.
On January 20, 1999, the YieldUP board held a special meeting attended by
all members of the board as well as representatives from Gray Cary and Needham.
Needham informed the YieldUP board of the terms that had been negotiated with
FSI's senior management. These terms were $0.7313 in cash and 0.1567 of a share
of FSI for each share of YieldUP common stock. The 0.1567 number was arrived at
by taking a $12.00 value for each FSI share for the $1.8806 consideration paid
in FSI stock. The $12.00 value was the average closing price of the FSI stock
for the ten trading days ending January 19, 1999. Needham then rendered its oral
opinion that, as of January 20, 1999, the consideration to be paid to the
holders of YieldUP common stock in the proposed merger
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was fair to those holders from a financial point of view. This opinion was
confirmed by a written opinion dated January 21, 1999 and was based on and
subject to the matters stated in that opinion. After detailed discussion of the
results of the negotiations with respect to the license agreement and the
reorganization agreement, the board determined that the reorganization agreement
was fair to, and in the best interest of, YieldUP and its stockholders, and
approved the reorganization agreement and the license agreement. The board
authorized management, on behalf of YieldUP, to execute and deliver the
reorganization agreement, the license agreement, and any other agreements,
instruments and documents contemplated thereby. On January 20, 1999, the closing
per share sale price of YieldUP common stock was $1.69 and of FSI common stock
was $12.81.
On August 25, 1999 the YieldUP board held a special meeting attended by all
members of the board as well as a representative from Gray Cary to consider
whether, in light of the changed circumstances since the execution of the
reorganization agreement, the merger continued to be in the best interests of,
and advisable to, the YieldUP stockholders. In its deliberations, the YieldUP
board considered each of the following events or circumstances:
- the inability of YieldUP and FSI to meet the financial projections
prepared prior to the execution of the reorganization agreement;
- the sale by FSI of its Chemical Management Division;
- the financial status of both companies;
- the current value to YieldUP's stockholders of the merger consideration;
- the lack of available alternatives to finance YieldUP's operations;
- the effect on the price and liquidity of YieldUP's stock, including
potential delisting from the Nasdaq SmallCap Market, if the merger was
not consummated;
- the extensive costs incurred to date by YieldUP in anticipation of the
merger;
- the lack of an update to the fairness opinion delivered by Needham; and
- the substantial likelihood that YieldUP would be unable to continue as a
going concern if the merger was not consummated.
After discussion, the board determined that:
- the inability of FSI and YieldUP to meet their financial projections was
largely a result of the unexpected and prolonged downturn in the
semiconductor industry;
- the sale by FSI of its Chemical Management Division was regarded as a
positive factor, taking into consideration that there existed no
synergies between YieldUP and this division and that the gross margins
realized from this division were lower than FSI's targeted gross
margins;
- the financial position of FSI, while falling short of the financial
projections previously prepared, for instance, FSI's projected gross
profits for the second quarter in 1999 was $17,450,000, but its actual
gross profit for that period was $10,566,000, still allowed for
potential growth and value to the YieldUP stockholders;
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- the value of the merger consideration still represented a premium to the
YieldUP stockholders of $0.39 or 28%;
- since YieldUP had defaulted on its primary credit facility and, given
the terms of the amended loan agreement, it would likely be unable to
secure any other type of financing unless the merger was consummated and
there had been no other offers to acquire YieldUP;
- if the merger was not consummated, the likely result would be a decline
in YieldUP's stock price and delisting from Nasdaq SmallCap Market
because YieldUP is not currently meeting the capitalization requirements
for listing on that exchange;
- the cost associated with not consummating the merger would be extensive,
including the payment to FSI of $1 million as a breakup fee, the loss by
YieldUP of the exclusive use of its technology pursuant to a license
agreement between FSI and YieldUP (valued by the board at substantially
in excess of the maximum royalties of $7.5 million payable by FSI under
the agreement), the potential loss of the $1,325,000 equipment sale made
to FSI in anticipation of the merger, the payment of $1.04 million to
YieldUP's primary lender to meet its loan obligations under its credit
facility, and approximately $350,000 in transaction/integration fees and
expenses incurred to date;
- given the financial condition of YieldUP and the other factors discussed
at the meeting, there would be no value to requesting an additional
fairness opinion from Needham; and
- taking into consideration all of the foregoing factors, YieldUP would
not be able to continue as an independent going concern if the merger
were not consummated.
At the conclusion of this meeting, the YieldUP board unanimously reaffirmed
its decision that the reorganization agreement was fair to, and in the best
interests of, YieldUP and its stockholders. On August 25, 1999, the closing per
share sale price of YieldUP common stock was $1.37 and of FSI common stock was
$6.53.
RECOMMENDATION OF THE YIELDUP BOARD OF DIRECTORS
AND YIELDUP'S REASONS FOR THE MERGER
After careful consideration, the YieldUP board has unanimously determined
the merger to be fair to and in the best interests of YieldUP and its
stockholders and approved the reorganization agreement. The YieldUP board
unanimously recommends that the stockholders of YieldUP vote for approval of the
reorganization agreement and the merger.
In reaching this determination, the YieldUP board considered the following:
- YieldUP's weakened financial position (low cash balance and high debt at
year-end 1998), the most recent CFM litigation filed on December 30,
1998, the resulting loss in competitive position, and the related
difficulties in continuing as an independent company. In order to
continue as an independent company, YieldUP would need significant
infusion of capital to continue operations and to invest in new product
development, and the prospect of raising capital at acceptable terms was
not very good, given the industry conditions.
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- Other strategic alternatives available to YieldUP carried significant
risks of unacceptable valuations, the investments being too small to
address YieldUP's needs, too long to complete, and posed significant
risks to completion.
- YieldUP and FSI had complementary technologies, products, critical
skills, and channels. While YieldUP was strong in immersion systems, FSI
was strong in spray systems. Together, the two companies could serve
most of the critical cleaning needs of their customers. YieldUP had
strong OEM channels, and FSI was strong in sales, especially in Europe
and Asia though its affiliates, Metron and m-FSI.
- An FSI and YieldUP merger would enable YieldUP's immersion systems to
penetrate the production fabs of large customers. These customers are
generally unwilling to buy critical cleaning products for their
fabrication operations from a small company, because of issues related
to the support and viability of small companies. The strategic and
market position of the combined companies would also be strengthened as
they would be a able to provide complete solutions to customers for
their critical cleaning applications.
- Recent market prices of YieldUP common stock and FSI common stock, as
well as market prices of YieldUP common stock and FSI common stock
during the past several years.
- Current industry, market, and economic conditions.
- A review with YieldUP board's outside counsel of the terms of the
reorganization agreement, including circumstances in which either
YieldUP or FSI may terminate the reorganization agreement and the
associated termination fees and the closing conditions to the merger.
- The opinion of Needham that, as of the date of the opinion, the
consideration to be paid to the holders of YieldUP common stock under
the merger is fair to those stockholders from a financial point of view.
- The structure of the merger, which generally will permit holders of
YieldUP common stock to have their shares converted into FSI common
stock on a "tax-free" basis, although cash received may be taxable.
- The likelihood that YieldUP will be unable to meet its repayment
obligations under its primary credit facility.
- The probability that YieldUP's stock will be delisted from the Nasdaq
SmallCap Market if the merger is not consummated.
- The significant costs YieldUP will incur if the merger is not
consummated.
- The inability of YieldUP to secure adequate financing to fund its
operations.
- The substantial likelihood that YieldUP will be unable to continue as a
going concern if the merger is not consummated.
The above factors were considered collectively by the YieldUP board without
giving specific weight to these factors. However, the overwhelming factors
supporting the board's assessment of the benefits of the merger were the first
five factors, including the 62% premium on the price of YieldUP stock on January
20, 1999, the date of the board's
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decision. None of the factors listed above were considered by the board to be
negative in their assessment of the proposed merger.
Certain directors and officers of YieldUP have interests in the merger in
addition to the interests of other YieldUP stockholders. See "The Merger --
Interests of Certain Persons in the Merger." The YieldUP board was aware of
these interests when they approved the reorganization agreement and the merger.
FSI'S REASONS FOR THE MERGER
The merger provides FSI's Surface Conditioning Division with an entree into
the critical cleaning immersion market. By acquiring YieldUP and its
intellectual property, FSI believes that it is obtaining unique immersion
technologies that will expand FSI's capabilities to create a total cleaning
solution for customers. YieldUP's Mountain View, California operations also
strengthen FSI's presence in the important Silicon Valley market.
FINANCIAL INFORMATION EXCHANGED BETWEEN FSI AND YIELDUP
In connection with their due diligence, FSI provided to YieldUP certain
projections of future financial performance prepared by the management of FSI,
and YieldUP provided to FSI certain projections of future financial performance
prepared by the management of YieldUP. The FSI projected financial information
was also provided to YieldUP's financial adviser in connection with its
analyses. The material portions of these projections are summarized below.
The statements regarding FSI's and YieldUP's financial projections
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act and are subject to
the safe harbors created thereby. In light of the significant uncertainties
inherent in forward-looking financial information of any kind, the inclusion of
such information in this document should not be regarded as a representation
that the financial projections will be achieved. You are cautioned that these
financial projections should not be regarded as fact and should not be relied
upon as an accurate representation of future results. The projections were not
examined, reviewed or complied by KPMG LLP, independent public accountants for
FSI and YieldUP, and KPMG LLP assumes no responsibility for the projections,
they do not express any opinion or any other form of assurance on the
projections and they disclaim any association with the projections. The
projections were not prepared in accordance with the standards for prospective
financial information established by the American Institute of Certified Public
Accountants. The financial projections were prepared for internal budgeting and
planning purposes and not for the purposes of the proposed merger or with a view
toward public disclosure. They were based on numerous subjective estimates and
other assumptions and are inherently subject to significant uncertainties and
contingencies. Further, there have been and will be differences between actual
and forecasted results and such differences may be material. As disclosed
elsewhere in this document under "Risk Factors," the business and operations of
FSI and YieldUP are subject to substantial risks which increase the uncertainty
inherent in the financial projections. Any of the factors disclosed under "Risk
Factors" could cause the actual results to differ materially from the financial
projections described above. See "Forward-Looking Information" for a discussion
regarding forward-looking statements contained in this document.
43
<PAGE> 45
The FSI projections were prepared in January 1999 and the YieldUP
projections were prepared in November 1998, and they have not been adjusted to,
and do not, reflect or take into account any circumstances or events occurring
after that date. FSI and YieldUP disclaim any duty to update or otherwise
publicly to revise the projections and make no representations as to whether the
projections will be achieved or otherwise. However, the companies currently
anticipate that actual results will be below the financial projections. See "FSI
Recent Developments" for a discussion of the recent disposition of the Chemical
Management Division of FSI and FSI's current outlook regarding fiscal 1999 and
fiscal 2000 operations and financial results.
The FSI projections included the following projections (the tables also
include reported actual results for those quarters that have been completed) (in
thousands). Please note that the projected numbers for all periods included
FSI's Chemical Management Division, which FSI sold on July 31, 1999. The actual
results for the quarter ended February 27, 1999 included the Chemical Management
Division whereas the actual results for the quarter ended May 29, 1999 did not.
<TABLE>
<CAPTION>
FISCAL
QUARTER FISCAL YEAR
ENDING ENDING
FISCAL QUARTER ENDED FISCAL QUARTER ENDED AUGUST 28, AUGUST 28,
FEBRUARY 27, 1999 MAY 29, 1999 1999 1999
-------------------- -------------------- ---------- -----------
PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED PROJECTED
--------- -------- --------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sales............................ $48,320 $ 33,035 $52,550 $ 37,674 $57,500 $192,570
Gross Profit..................... 17,440 7,092 17,450 10,566 21,560 66,130
Operating Income................. (2,790) (11,908) (3,410) (5,326) (540) (18,070)
Net (loss) income................ (1,820) (7,574) (2,230) (20,387) (240) (11,370)
</TABLE>
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
QUARTER QUARTER FISCAL QUARTER FISCAL YEAR
ENDING ENDING QUARTER ENDING ENDING
NOVEMBER 27, FEBRUARY 26, ENDING AUGUST 26, AUGUST 26,
1999 2000 MAY 27, 2000 2000 2000
------------ ------------ ------------ ---------- -----------
PROJECTED PROJECTED PROJECTED PROJECTED PROJECTED
------------ ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Sales............................. $58,000 $62,000 $67,000 $73,000 $260,000
Gross Profit...................... 22,910 24,950 27,640 31,030 106,530
Operating Income.................. 210 1,350 2,940 5,230 9,730
Net income........................ 560 1,400 2,540 4,180 8,680
</TABLE>
The YieldUP projections included in the following projections (the tables
also include reported actual results for those quarters that have been completed
(in thousands):
<TABLE>
<CAPTION>
QUARTER QUARTER
ENDING ENDING YEAR ENDING
QUARTER ENDED QUARTER ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
MARCH 31, 1999 JUNE 30, 1999 1999 1999 1999
------------------- ------------------ ------------- ------------ ------------
PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED PROJECTED PROJECTED
--------- ------- --------- ------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales.................... $3,000 $ 1,392 $4,100 $1,416 $4,500 $6,500 $18,100
Gross Profit............. 1,111 156 1,758 412 1,980 2,990 7,839
Operating Income......... (389) (1,097) 158 (667) 285 1,060 1,114
Net (loss) income........ (375) (1,143) 236 (697) 350 1,115 1,327
</TABLE>
44
<PAGE> 46
<TABLE>
<CAPTION>
QUARTER QUARTER QUARTER QUARTER
ENDING ENDING ENDING ENDING YEAR ENDING
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
2000 2000 2000 2000 2000
--------- --------- ------------- ------------ ------------
PROJECTED PROJECTED PROJECTED PROJECTED PROJECTED
--------- --------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales............................... $7,400 $8,800 $9,800 $14,200 $40,200
Gross Profit........................ 3,678 4,600 5,320 7,878 21,476
Operating Income.................... 1,488 1,970 2,270 3,928 9,656
Net income.......................... 1,503 2,048 2,335 3,983 9,869
</TABLE>
OPINION OF FINANCIAL ADVISER TO YIELDUP
OPINION OF FINANCIAL ADVISER
Under an engagement letter dated November 20, 1998, YieldUP retained
Needham to furnish financial advisory and investment banking services with
respect to the proposed merger and to render an opinion as to the fairness, from
a financial point of view, of the consideration to be paid in the proposed
merger to the holders of YieldUP common stock. The amount of consideration to be
paid in the merger was determined through arm's-length negotiations between
YieldUP and FSI and not by Needham, although Needham assisted YieldUP in these
negotiations.
At a meeting of the board of directors of YieldUP on January 20, 1999,
Needham delivered its oral opinion that, as of that date and based upon and
subject to the assumptions and other matters described in the written Needham
opinion, the proposed merger consideration is fair to the holders of YieldUP
common stock from a financial point of view. Needham subsequently confirmed its
opinion in writing as of January 21, 1999. THE NEEDHAM OPINION IS ADDRESSED TO
THE YIELDUP BOARD, IS DIRECTED ONLY TO THE FINANCIAL TERMS OF THE REORGANIZATION
AGREEMENT, AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER OF
YIELDUP AS TO HOW THE STOCKHOLDER SHOULD VOTE AT THE YIELDUP SPECIAL MEETING.
The complete text of the Needham opinion, which states the assumptions
made, matters considered, limitations on and scope of the review undertaken by
Needham, is attached to this proxy statement/prospectus as Exhibit B, and the
summary of the Needham opinion set forth in this proxy statement/prospectus is
qualified in its entirety by reference to the Needham opinion. YIELDUP
STOCKHOLDERS ARE URGED TO READ THE NEEDHAM OPINION CAREFULLY AND IN ITS ENTIRETY
FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, THE FACTORS CONSIDERED, AND THE
ASSUMPTIONS MADE BY NEEDHAM.
In arriving at the Needham opinion, Needham, among other things:
- reviewed a draft of the reorganization agreement dated January 20, 1999;
- reviewed certain publicly available information concerning YieldUP and
FSI and certain other relevant financial and operating data of YieldUP
and FSI furnished to it by YieldUP and FSI;
- reviewed the historical stock prices and trading volumes of YieldUP
common stock and FSI common stock;
- held discussions with members of senior management of YieldUP and FSI
concerning their current and future business prospects;
45
<PAGE> 47
- reviewed certain financial forecasts and projections prepared by the
respective managements of YieldUP and FSI;
- compared certain publicly available financial data of companies whose
securities are traded in the public markets and that Needham deemed
relevant to similar data for YieldUP;
- reviewed the financial terms of certain other business combinations that
Needham deemed generally relevant; and
- performed and/or considered such other studies, analyses, inquiries, and
investigations as Needham deemed appropriate.
Needham assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by or discussed with it
for purposes of rendering its opinion. Needham assumed that the financial
forecasts provided to Needham by YieldUP's and FSI's managements were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of these managements, at the time of preparation, of YieldUP's and
FSI's future operating and financial performance. Needham did not assume any
responsibility for or make or obtain any independent evaluation, appraisal or
physical inspection of the assets or liabilities of YieldUP or FSI. The Needham
opinion states that it was based on economic, monetary, and market conditions
existing as of its date. Although Needham assumed for purposes of its January
21, 1999 opinion that the merger will qualify as a tax-free reorganization for
purposes of Section 368(a) of the Internal Revenue Code of 1986, Needham would
have rendered its opinion as of that date regardless of whether the merger is
taxable to YieldUP stockholders. Needham expressed no opinion as to what the
value of FSI common stock will be when issued to the stockholders of YieldUP in
the merger or the prices at which the FSI common stock will actually trade at
any time. In addition, Needham was not asked to consider, and the Needham
opinion does not address, YieldUP's underlying business decision to engage in
the merger, the relative merits of the merger as compared to any alternative
business strategies that might exist for YieldUP, or the effect of any other
transaction in which YieldUP might engage. No limitations were imposed by
YieldUP on Needham with respect to the investigations made or procedures
followed by Needham in rendering the Needham opinion.
Based on this information, Needham performed a variety of financial
analyses of the merger and the merger consideration. The following paragraphs
summarize the material financial analyses performed by Needham in arriving at
the Needham opinion.
Contribution Analysis. Needham reviewed and analyzed the pro forma
contribution of each of YieldUP and FSI to pro forma combined balance sheet
information using YieldUP's December 31, 1998 balance sheet and FSI's November
28, 1998 balance sheet and to pro forma projected calendar 1998, 1999 and 2000
operating results. In the case of FSI, this was based on the 12 months ending
November 30, 1998, 1999 and 2000. Needham reviewed, among other things, the pro
forma contributions to net sales, assets, and stockholders' equity. This
analysis indicated that YieldUP would have contributed
- 3.6% of projected calendar 1998 pro forma combined net sales;
- 7.7% of projected calendar 1999 pro forma combined net sales;
- 12.8% of projected calendar 2000 pro forma combined net sales;
46
<PAGE> 48
- 2.1% of the pro forma combined total assets; and
- 1.7% of the pro forma combined stockholders' equity.
Based on the merger consideration, YieldUP's stockholders will own
approximately 5.9% of FSI after the merger and will have received $0.7313 per
share in cash for each share of YieldUP common stock. The closing price per
share of the YieldUP common stock on January 19, 1999 was $1.781. The results of
the contribution analysis are not necessarily indicative of the contributions
that the respective businesses may have in the future.
Accretion/Dilution Analysis. Needham reviewed certain pro forma financial
impacts of the merger, assuming that it had occurred at the end of the first
quarter of calendar 1999, on the holders of YieldUP and FSI common stock based
on the proposed merger consideration and YieldUP's and FSI's managements'
projected financial results, and assuming no cost savings resulting from the
merger. Based upon these projections and assumptions, Needham's analysis
indicated that the merger would result in dilution of the projected earnings per
share of FSI common stock for the fiscal year ending August 28, 1999 of
approximately 8% and could result in accretion to the projected earnings per
share of FSI common stock for the fiscal year ending August 26, 2000 of
approximately 24%. The actual operating or financial results achieved by the
combined entity may vary from projected results, and these variations may be
material. See "FSI Recent Developments -- Outlook" for a discussion of FSI's
current expectations regarding the dilutive nature of the transaction.
Selected Company Analysis. Using publicly available information, Needham
compared selected historical and projected financial and market data ratios for
YieldUP to the corresponding data and ratios of certain other publicly traded
semiconductor capital equipment companies that Needham deemed relevant because
their lines of businesses are similar to YieldUP's line of business. These
companies (the "Selected Companies") consisted of:
<TABLE>
<S> <C>
CFM Technologies, Inc. Mattson Technology, Inc.
FSI International, Inc. Semitool, Inc.
GaSonics International Corporation SubMicron Systems Corporation
</TABLE>
The following table sets forth information concerning the following
multiples for the Selected Companies and for YieldUP:
- total market capitalization as a multiple of last twelve months'
revenues ("LTM revenues");
- total market capitalization as a multiple of projected calendar 1998
revenues;
- total market capitalization as a multiple of projected calendar 1999
revenues;
- market value of common stock as a multiple of projected calendar 1999
earnings per share ("price/earnings multiple"); and
- market value as a multiple of historical book value.
47
<PAGE> 49
Needham calculated multiples for the Selected Companies based on the
closing stock prices on January 15, 1999 and for YieldUP based on the assumed
purchase price per share of YieldUP common stock of $2.61. The assumed purchase
price per YieldUP share was based on a price per share of FSI common stock of
$12.00; the closing price per share of FSI common stock on January 15, 1999 was
$12.50.
<TABLE>
<CAPTION>
YIELDUP
SELECTED COMPANIES IMPLIED
--------------------------- BY THE
HIGH LOW MEAN MEDIAN MERGER
---- ---- ---- ------ -------
<S> <C> <C> <C> <C> <C>
Total market capitalization to LTM
revenues............................. 1.4x 0.7x 1.1x 1.1x 2.9x
Total market capitalization to
projected calendar 1998 revenues..... 1.5x 0.7x 1.2x 1.2x 3.7x
Total market capitalization to
projected calendar 1999 revenues..... 1.7x 0.9x 1.3x 1.3x 1.4x
Projected calendar 1999 price/earnings
multiple............................. NM NM NM NM 27.9x
Market value to historical book
value................................ 2.3x 1.1x 1.6x 1.5x 7.0x
</TABLE>
NM = not meaningful due to projected calendar 1999 net losses for the Selected
Companies
Needham also analyzed the price/earnings multiples for the last twelve
months and for projected calendar 1998 but determined that the results were not
meaningful because of YieldUP's net losses for the last twelve months and
projected net losses for calendar 1998. Needham also noted that all but one of
the Selected Companies incurred net losses for the last twelve months and all of
the Selected Companies had projected net losses for calendar 1998 and 1999.
Selected Transaction Analysis. Needham also analyzed publicly available
financial information for 23 selected completed and pending mergers and
acquisitions of companies in the semiconductor capital equipment sector that
represent transactions since January 1, 1996 (the "Selected Transactions"). In
examining the Selected Transactions, Needham analyzed:
- the premium of consideration offered to the acquired company's stock
price one day prior to the announcement of the transaction;
- the premium of consideration offered to the acquired company's stock
price four weeks prior to the announcement of the transaction;
- the aggregate transaction value as a multiple of sales for the last
twelve months ("LTM sales"); and
- market value as a multiple of historical book value.
Needham also analyzed, for the Selected Transactions,
- the aggregate transaction value as a multiple of earnings before
interest and taxes for the last twelve months;
- the aggregate transaction value as a multiple of earnings before
interest, taxes, depreciation, and amortization for the last twelve
months;
48
<PAGE> 50
- and market value as a multiple of net income for the last twelve months;
but determined that the results were not meaningful because of YieldUP's net
losses for the last twelve months. In some cases, complete financial data was
not publicly available for the selected transactions and only partial
information was used in those instances.
The following table sets forth information concerning the stock price
premiums in the Selected Transactions and the stock price premiums implied by
the proposed merger. The premiums implied by the proposed merger were based on
an assumed purchase price of $2.61 per share of YieldUP common stock.
<TABLE>
<CAPTION>
SELECTED TRANSACTIONS
------------------------------ FSI/YIELDUP
HIGH LOW MEAN MEDIAN MERGER
----- ----- ----- ------ -----------
<S> <C> <C> <C> <C> <C>
One day stock price premium....... 61.7% -0.9% 22.0% 13.2% 46.6%
Four week stock price premium..... 70.2% 12.3% 35.6% 26.7% 32.7%
</TABLE>
The following table sets forth information concerning the multiples of
aggregate transaction value to LTM sales and the multiples of market value to
historical book value for the Selected Transactions and the same multiples
implied by the proposed merger. The multiples for the proposed merger were based
on an assumed purchase price of $2.61 per share of YieldUP common stock.
<TABLE>
<CAPTION>
SELECTED TRANSACTIONS
---------------------------- FSI/YIELDUP
HIGH LOW MEAN MEDIAN MERGER
----- ---- ---- ------ -----------
<S> <C> <C> <C> <C> <C>
Aggregate transaction value to LTM
sales............................... 5.9x 0.5x 2.1x 1.9x 2.9x
Market value to historical book
value............................... 19.7x 0.8x 4.6x 2.9x 7.0x
</TABLE>
No company, transaction or business used in the "Selected Company Analysis"
or "Selected Transaction Analysis" as a comparison is identical to YieldUP, FSI,
or the merger. Accordingly, these analyses are not simply mathematical; rather,
they involve complex considerations and judgments concerning differences in the
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the Selected Companies, Selected
Transactions, or the business segment, company, or transaction to which they are
being compared.
Other Analyses. In rendering its opinion, Needham considered other
analyses, including, among other things, a history of trading prices and volumes
for YieldUP and FSI, and an analysis of the stock price performance and certain
financial and operating data of a broad group of companies in the semiconductor
capital equipment industry.
This summary does not purport to be a complete description of the analyses
performed by Needham in connection with the rendering of the Needham opinion.
The preparation of a fairness opinion involves various determinations as to the
most appropriate and relevant quantitative and qualitative methods of financial
analyses and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Accordingly, Needham believes that its analyses must be considered
as a whole and that considering any portions of those analyses and of the
factors considered, without considering all analyses and factors, could create a
misleading or incomplete view of the process underlying its opinion. In its
analyses, Needham made numerous assumptions with respect to industry
performance, general business and economic, and other matters, many of which are
beyond the control of YieldUP or FSI. Any estimates contained in these analyses
are not necessarily indicative of actual values or predictive of future results
or values, which may be significantly more
49
<PAGE> 51
or less favorable as set forth therein. Additionally, analyses relating to the
values of business or assets do not purport to be appraisals or necessarily
reflect the prices at which businesses or assets may actually be sold.
Accordingly, these analyses and estimates are inherently subject to substantial
uncertainty. The Needham opinion and Needham's related analyses were only one of
many factors considered by YieldUP's board of directors in its evaluation of the
proposed merger and should not be viewed as determinative of the views of
YieldUP's board of directors or management with respect to the merger
consideration or the proposed merger.
Under the terms of the Needham engagement letter, YieldUP has paid or
agreed to pay Needham fees for rendering the Needham opinion and for financial
advisory services of $150,000 plus an amount equal to 2% of the aggregate
purchase price, subject to minimum fees aggregating $475,000 if the merger is
consummated. A substantial portion of Needham's fees are contingent on
consummation of the merger. Based upon the closing price of the FSI common stock
on September 10, 1999, the total fees payable to Needham would be approximately
$487,000. YieldUP has also agreed to reimburse Needham for certain of its
reasonable out-of-pocket expenses and to indemnify it against certain
liabilities relating to or arising out of services performed by Needham as
financial adviser to YieldUP.
Needham is a nationally recognized investment banking firm. As part of its
investment banking services, Needham is frequently engaged in the evaluation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements, and other purposes. Needham was retained by the YieldUP board of
directors to act as YieldUP's financial adviser in connection with the merger
based on Needham's experience as a financial adviser in mergers and acquisitions
as well as Needham's familiarity with the semiconductor capital equipment
industry. In the normal course of its business, Needham may actively trade the
equity securities of YieldUP or FSI for its own account or for the account of
its customers and, therefore, may at any time hold a long or short position in
those securities. In the past, Needham has provided investment banking,
financial advisory, and other services to FSI, for which it received customary
compensation.
THE MERGER
The following is a summary of the material terms of the reorganization
agreement, a complete copy of which is attached as Exhibit A to this proxy
statement/prospectus and incorporated by reference. The reorganization agreement
is the legal document that governs the merger; you are urged to review the
agreement in its entirety.
GENERAL
Upon the effective time of the merger, each outstanding share of YieldUP
common stock and Class A common stock will be converted, without any action on
the part of the stockholder, into the right to receive $.7313 in cash and .1567
of a share of FSI common stock. FSI will pay cash in lieu of the issuance of any
fractional shares of FSI common stock in the amount of the fraction times
$12.00, rounded to the nearest cent.
50
<PAGE> 52
The following table presents, for certain possible specified prices per
share of FSI common stock as of the effective time of the merger, the value of
the consideration to be received by YieldUP stockholders in exchange for each
share of YieldUP common stock or Class A common stock exchanged in the merger.
The FSI share prices are for illustration only; FSI's common stock may trade
above or below the range set forth below. You should obtain a current stock
quote for more accurate information. There is no provision in the reorganization
agreement that would allow either YieldUP to terminate the agreement if FSI's
share price falls below a certain level or FSI to terminate the agreement if its
share price rises above a certain level.
<TABLE>
<CAPTION>
VALUE OF STOCK VALUE OF TOTAL
FSI SHARE PRICE CASH CONSIDERATION CONSIDERATION CONSIDERATION
- --------------- ------------------ -------------- --------------
<S> <C> <C> <C>
10.0$0..... $.7313 $1.5670 $2.2983
9.50...... .7313 1.4887 2.2200
9.00...... .7313 1.4103 2.1416
8.50...... .7313 1.3320 2.0633
8.00...... .7313 1.2536 1.9849
7.50...... .7313 1.1753 1.9066
7.00...... .7313 1.0969 1.8282
6.50...... .7313 1.0186 1.7499
6.00...... .7313 0.9402 1.6715
5.50...... .7313 0.8619 1.5932
5.00...... .7313 0.7835 1.5148
4.50...... .7313 0.7052 1.4365
4.00...... .7313 0.6268 1.3581
3.50...... .7313 0.5485 1.2798
</TABLE>
EFFECTIVE TIME AND EFFECT OF THE MERGER
If the reorganization agreement and the merger are approved by YieldUP
stockholders and all other conditions to the consummation of the merger are
satisfied or waived, the merger will become effective upon the appropriate
filings with the Delaware Secretary of State and the Minnesota Secretary of
State. The effective time of the merger is expected to occur on or about October
20, 1999.
As of the effective time of the merger, YieldUP will be merged with a
subsidiary of FSI, which, as the surviving corporation, will continue as a
wholly owned subsidiary of FSI. The subsidiary will possess YieldUP's assets and
will be responsible for YieldUP's liabilities. The separate corporate existence
of YieldUP will terminate upon consummation of the merger.
EXCHANGE OF SHARES
After the effective time, each record holder of one or more certificates
previously representing shares of outstanding YieldUP common stock or Class A
common stock will be entitled, upon the surrender of the certificates to Harris
Trust and Savings Bank, FSI's stock transfer agent and the exchange agent for
the merger, to receive $.7313 in cash and .1567 of a share of FSI common stock.
After the effective time and until surrendered, each certificate previously
representing shares of YieldUP common stock or Class A common stock will be
deemed for all corporate purposes to evidence the ownership of the
51
<PAGE> 53
number of whole shares of FSI common stock into which those shares of YieldUP
capital stock have been converted.
FSI will not issue fractional shares of FSI common stock in the merger.
Instead, each YieldUP stockholder who would otherwise be entitled to a
fractional share will be paid an amount of cash, without interest, equal to the
fraction times $12.00, rounded to the nearest cent.
Detailed instructions and transmittal materials will be mailed to you after
the effective time of the merger regarding the method of exchanging certificates
formerly representing shares of YieldUP common stock and Class A common stock
for cash and certificates representing shares of FSI common stock. HOLDERS OF
CERTIFICATES REPRESENTING SHARES OF YIELDUP COMMON STOCK OR CLASS A COMMON STOCK
SHOULD NOT SURRENDER THEIR CERTIFICATES FOR EXCHANGE UNTIL THEY RECEIVE THE
APPROPRIATE TRANSMITTAL MATERIALS.
The shareholders of FSI will continue to hold their shares of common stock
of FSI without any change.
EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS
YieldUP employees will receive full credit for their service with YieldUP
for purposes of determining eligibility and levels of benefits in FSI's employee
benefit plans and arrangements, subject to the eligibility and other
participation requirements set forth in those plans and arrangements.
FSI will assume all unexercised options to purchase YieldUP common stock.
Once assumed, these options will be exercisable upon the same terms as under the
YieldUP option plan under which they were granted and the related stock option
agreements, except that each such option will be exercisable for the number of
shares of FSI common stock equal to the number of shares of YieldUP common stock
subject to the option immediately before the effective time of the merger times
.2177. The exercise price of the option will be correspondingly adjusted. As
soon as practicable after the effective time of the merger, FSI has agreed to
file and use its best efforts in obtaining effectiveness of a registration
statement with respect to the shares issuable upon exercise of these assumed
options.
As of August 30, 1999, the aggregate number of shares of YieldUP common
stock subject to outstanding options was 1,004,736, at exercise prices that
ranged from $0.63 to $13.00 per share, and of which 422,009 shares were vested.
YIELDUP WARRANTS
At the effective time of the merger, each outstanding warrant to purchase
YieldUP common stock will become a warrant to acquire, on substantially the same
terms, the amount of whole shares of FSI common stock and cash that the warrant
holder would have received if the holder had exercised the warrant immediately
before the merger. Following the effective time of the merger, FSI will assume
YieldUP's obligations under the applicable warrant agreements under which the
warrants were issued.
As of August 30, 1999, there were outstanding Series B warrants to purchase
4,155,421 shares of YieldUP common stock at an exercise price of $11.00 per
share and additional warrants to purchase 2,439 shares at an exercise price of
$10.25 per share. After giving effect to the merger, the exercise price of all
the YieldUP warrants will continue to
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<PAGE> 54
be significantly above the value of the cash and FSI common stock issuable upon
exercise of the warrants. For the $11.00 Series B warrants, the market price of
FSI common stock would have to reach over $65.50 per share before the value of
the cash and shares of FSI common stock received upon exercise would exceed the
warrant exercise price. The warrants expire in November 2000 and will not be
exercisable after that time.
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of each of FSI and YieldUP to consummate the merger are
subject to the following conditions:
- the approval of the reorganization agreement and the merger by the
YieldUP stockholders;
- the receipt of all governmental permits, consents, and approvals
reasonably necessary for the consummation of the merger;
- the listing on the Nasdaq Stock Market of the shares of FSI common stock
to be issued in the merger;
- the absence of court order, governmental proceeding, legislation, or
regulation making the consummation of the merger illegal or materially
affecting FSI's operation of YieldUP's business after the effective time
of the merger; and
- the receipt by FSI and YieldUP of opinions of their respective legal
counsel that the merger will qualify as a reorganization under Section
368(a) of the Internal Revenue Code.
Additional conditions to FSI's obligation to consummate the merger include
the following:
- the material accuracy, as of the date of the reorganization agreement
and the closing date of the merger, of the representations and
warranties of YieldUP, and the material performance of all of the terms
of the reorganization agreement to be performed by YieldUP before the
consummation of the merger;
- the receipt by FSI of an opinion of YieldUP's counsel as to certain
legal matters;
- the receipt by YieldUP of all third-party consents necessary for the
consummation of the merger;
- that holders of no more than 5% of the total outstanding shares of
YieldUP common stock and Class A common stock have asserted statutory
dissenters' rights;
- the receipt by FSI of certain audited financial statements of YieldUP;
and
- that Messrs. Mohindra, Puri, and Wong have agreed to satisfactory
employment agreements with the surviving corporation.
Additional conditions to YieldUP's obligation to consummate the merger
include the following:
- the material accuracy, as of the date of the reorganization agreement
and the closing date of the merger, of the representations and
warranties of FSI, and the
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<PAGE> 55
material performance of all of the terms of the reorganization agreement
to be performed by FSI before the consummation of the merger; and
- the receipt by YieldUP of an opinion of FSI's counsel as to certain
legal matters.
Under the reorganization agreement, FSI has no obligation to consummate the
merger if any condition to its obligation to consummate the merger is not
satisfied on or before the closing date of the merger, and YieldUP has no
obligation to consummate the merger if any condition to its obligation to
consummate the merger is not satisfied on or before the closing date of the
merger. These conditions may be waived or modified either mutually by the
parties or, with respect to certain conditions, by the party that is, or whose
stockholders are, entitled to the benefits of the condition. Neither FSI nor
YieldUP has any present intention to waive or modify any condition that it deems
material.
You should review Article VII of the reorganization agreement for a
complete statement of the conditions precedent to the obligations of the parties
to consummate the merger.
REPRESENTATIONS, WARRANTIES, AND COVENANTS
In the reorganization agreement, FSI and YieldUP have made various
representations, warranties, and covenants, relating to, among other things,
their respective businesses and financial condition, the accuracy of their
various filings with the SEC, the satisfaction of legal requirements for the
merger, and the absence of material litigation. You should review Articles III,
IV, and V of the reorganization agreement for a complete statement of the
representations, warranties, and covenants of the parties. The representations
and warranties expire upon consummation of the merger.
AMENDMENT, TERMINATION, AND WAIVER
The reorganization agreement may be amended at any time by written
agreement of the FSI board and the YieldUP board. After the reorganization
agreement has been approved by the stockholders of YieldUP, however, it may be
amended only as permitted by Delaware law. Any provision of the reorganization
agreement may be waived at any time by the party that is, or whose shareholders
are, entitled to the benefits of the provision.
The reorganization agreement may be terminated before the effective time of
the merger, whether before or after approval by YieldUP stockholders. The
conditions under which the reorganization agreement may be terminated include
the following:
- termination by mutual agreement of the boards of directors of FSI and
YieldUP;
- termination by either FSI or YieldUP if the merger is not consummated on
or before October 31, 1999;
- termination by either FSI or YieldUP if a governmental entity issues a
final order enjoining the merger;
- termination by either FSI or YieldUP if the YieldUP stockholders do not
approve the reorganization agreement and the merger at the special
meeting;
- termination by FSI if the YieldUP board of directors withdraws or
adversely modifies its recommendation of the merger, if the board
recommends a third-party
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<PAGE> 56
offer, or if a third-party tender offer for YieldUP is announced and the
YieldUP board recommends that stockholders tender into the offer; and
- termination by either FSI or YieldUP if its conditions to consummate the
merger have become impossible to fulfill through no fault of its own.
EXPENSES AND TERMINATION PAYMENTS
In general, FSI and YieldUP will each bear their own expenses incurred in
connection with the reorganization agreement. If the reorganization agreement is
terminated, however, the parties have agreed to the following payments:
- If YieldUP terminates the agreement because of a material breach by FSI,
then FSI will pay YieldUP $1 million.
- If FSI terminates the agreement because it is not approved by YieldUP's
stockholders or because YieldUP's board of directors withdraws or
adversely modifies its recommendation of the merger, the board
recommends a third-party offer, or a third-party tender offer for
YieldUP is announced and the YieldUP board recommends that shareholders
tender into the offer, then YieldUP will pay FSI $1 million.
- If FSI terminates the agreement because of a material breach by YieldUP
and if a third party has announced its intention to acquire YieldUP and
a party other than FSI actually acquires YieldUP within one year, then
YieldUP will pay FSI $1 million.
Termination by FSI upon material breach by YieldUP or termination by either
party because either YieldUP's stockholders do not approve the merger or events
concerning a third-party acquisition proposal for YieldUP occur will result in
the loss by YieldUP of the right to repurchase a license for a portion of its
intellectual property that it granted to FSI. See "Material Contracts Between
FSI and YieldUP" for a discussion of this license.
LEGAL MATTERS
Consummation of the merger is conditioned upon, among other things, the
absence of any judicial, governmental, regulatory, or administrative order
preventing or making illegal the consummation of the merger. In addition,
consummation of the merger is conditioned upon receipt of all consents,
authorizations, orders, and approvals of any governmental authority, without
material conditions, that are required in connection with the consummation of
the merger and related transactions, the failure of which to obtain would
prevent the consummation of the merger or would reasonably be expected to
materially and adversely affect the proposed benefits of the merger to FSI. FSI
and YieldUP believe that any required regulatory approvals have been obtained or
are likely to be secured without the imposition of any such conditions.
CONDUCT OF BUSINESS BEFORE THE MERGER
The reorganization agreement provides that, before the effective time of
the merger, YieldUP will conduct its business only in the ordinary course of
business and consistent with prior practice. The agreement also generally
provides for restrictions with respect to YieldUP on, among other things, the
amendment of any stock option agreement, entering
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<PAGE> 57
into or amending material contracts and other commitments, transferring or
granting certain rights in its intellectual property, declaring dividends or
other distributions, amending its charter or bylaws, acquiring or disposing of
any business, incurring certain indebtedness, and modifying any employee benefit
plan.
NO SOLICITATION OF ACQUISITION TRANSACTIONS
YieldUP has agreed not to initiate, solicit, negotiate, or encourage
proposals or offers, or provide any confidential information relating to any
acquisition of all or any substantial portion of the business or properties of
YieldUP. However, YieldUP may supply information to third parties and cooperate
or assist or engage in discussions or negotiations with third parties relating
to such an acquisition transaction, or modify or withdraw its recommendation of
the merger, but only if the YieldUP board:
- determines in good faith, upon the advice of counsel, that the failure
to provide such confidential information and access could reasonably be
expected to constitute a breach of its fiduciary duty to YieldUP
stockholders under Delaware law;
- believes in good faith, after consultation with Needham, that the
third-party offer is bona fide and more favorable, from a financial
point of view, to YieldUP stockholders than the merger; and
- receives an executed confidentiality agreement from the third party.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the YieldUP board with respect to the
merger, you should be aware that certain directors and officers of YieldUP have
interests in the merger that are in addition to the interests of other YieldUP
stockholders.
Raj Mohindra, President and Chief Executive Officer of YieldUP, and Suraj
Puri, Vice President and Chief Technical Officer, have each agreed, in their
capacity as holders of YieldUP common stock and Class A common stock, that they
will vote their shares in favor of the merger Agreement at the special meeting.
Together, Messrs. Mohindra and Puri represent 44% of the voting power of all
outstanding shares of YieldUP capital stock.
Along with David Wong, currently Director of Process Technology of YieldUP,
Messrs. Mohindra and Puri have agreed to enter into employment agreements with
the surviving corporation upon the consummation of the merger. Each of the
employment agreements is for a two-year term. Mr. Mohindra will be employed by
the surviving corporation as Vice President and General Manager. Mr. Puri will
be employed as Chief Technologist, and Mr. Wong will be employed as Process
Manager.
The employment agreements will be subject to early termination upon death,
disability, or termination of employment for cause. The annual salaries payable
under the employment agreements will be $180,000 for Mr. Mohindra, $130,000 for
Mr. Puri, and $100,000 for Mr. Wong. Under the employment agreements, if the
surviving corporation terminates the employee's employment for any reason other
than for cause, the employee would continue to receive his base salary during
the term of the agreement. In addition, under a Management Agreement to be
entered into between Mr. Mohindra and FSI, Mr. Mohindra will be entitled to
compensation, including one year's salary and incentive
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<PAGE> 58
compensation, upon his termination of employment following certain changes in
control of FSI.
The employment agreements also provide for participation in FSI's bonus
programs and for non-monetary benefits. The surviving corporation has agreed to
fund a split-dollar life insurance policy for Mr. Mohindra on terms
substantially similar to those provided by YieldUP. Messrs. Mohindra, Puri, and
Wong will also receive incentive stock options to purchase shares of FSI common
stock under FSI's 1997 Omnibus Stock Plan. The aggregate number of options for
the above-named individuals will total 120,000 shares. FSI will issue the
options for each recipient in three separate grants. FSI will grant each
recipient one-half of the options with an exercise price equal to the fair
market value of FSI common stock on the grant date, vesting over a period of
three years from the first anniversary of that date. The remaining stock options
for each recipient will be equally divided between one option exercisable at
125% of fair market value, vesting over three years from the second anniversary
of the grant date, and another option exercisable at 150% of fair market value,
vesting over three years from the third anniversary of the grant date.
YieldUP's bylaws provide for indemnification and advancement of expenses to
directors, officers, employees, and agents of YieldUP. In addition, in the case
of present and former officers and directors who are parties to the
indemnification agreements disclosed to FSI, YieldUP has agreed to indemnify
each such director or officer against all losses, costs, damages, and expenses
incurred in connection with his or her service to YieldUP, and to provide for
advancement of expenses. In the merger, the surviving corporation will assume
YieldUP's obligations under those indemnification agreements. FSI has also
agreed to maintain directors' and officers' liability insurance coverage for the
current and former directors and officers of YieldUP for a period of six years
after the effective time of the merger to the extent that the annual premium
payable by FSI for such coverage does not exceed 150% of the last annual premium
paid by YieldUP.
In addition to the foregoing benefits, each director or officer of YieldUP
who is a participant in YieldUP's employee benefit plans and stock option plans
will be entitled to the benefits described under the caption "The
Merger--Employee Benefit Plans and Stock Options."
The YieldUP board, recognizing the sacrifices that Mr. Bhushan would be
asked to make to complete any potential transaction with FSI, the critical
requirement for Mr. Bhushan's knowledge and participation in the process leading
up to an acquisition, the near certainty that his services would not be required
following an acquisition of YieldUP, and the benefit to stockholders that would
be obtained from such a transaction, unanimously approved, with Mr. Bhushan
being absent and not voting, a cash incentive payment to Mr. Bhushan of $50,000,
to be paid upon closing of a transaction involving the sale of YieldUP under the
terms of an agreement approved by the YieldUP board.
The YieldUP board of directors was informed of the interests described in
this section before approving the reorganization agreement and the merger.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations of the merger that are generally relevant to holders of YieldUP
common stock and Class A common stock, to FSI, to FSI's merger subsidiary, and
to YieldUP. This discussion
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<PAGE> 59
assumes that holders of YieldUP common stock and Class A common stock hold those
shares as capital assets. This discussion is based on the current provisions of
the Internal Revenue Code of 1986, existing and proposed Treasury Regulations
under the Internal Revenue Code, and current administrative rulings and court
decisions, all of which are subject to change. Any such change, which may or may
not be retroactive, could alter the tax consequences described below.
YieldUP stockholders should be aware that this discussion does not deal
with all federal income tax considerations that may be relevant to all
stockholders in light of their particular circumstances, such as stockholders
who are dealers in securities or who are subject to special treatment under the
Internal Revenue Code, such as insurance companies, tax-exempt organizations,
financial institutions, nonresident alien individuals, or foreign entities.
Others with special considerations include those who are subject to the
alternative-minimum-tax provisions of the Internal Revenue Code, who do not hold
YieldUP stock as capital assets, who acquired their shares in connection with
stock option plans or in other compensatory transactions, or who hold shares in
a hedging transaction or as part of a straddle or conversion transaction. In
addition, the following discussion does not address the tax consequences of the
merger under foreign, state, or local tax laws or the tax consequences of
transactions effectuated before or after, or concurrently with, the merger,
including any transactions in which shares of YieldUP capital stock are acquired
or shares of FSI common stock are disposed of. Nor does this discussion address
the tax consequences to the holders of options or warrants to purchase YieldUP
Stock assumed by FSI in the merger.
ACCORDINGLY, YIELDUP STOCKHOLDERS AND OPTION AND WARRANT HOLDERS ARE URGED
TO CONSULT THEIR OWN TAX ADVISERS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL, AND FOREIGN TAX
CONSEQUENCES.
Following is a description of the opinions of Gray Cary Ware & Freidenrich
LLP, counsel to YieldUP, and Faegre & Benson LLP, counsel to FSI, regarding the
material federal income tax consequences of the merger that are generally
applicable to holders of YieldUP stock. As discussed below, it is a condition to
the consummation of the merger that these firms render tax opinions to their
respective clients that the merger will be a "reorganization" for federal income
tax purposes within the meaning of Section 368(a) of the Internal Revenue Code.
This means that, subject to the limitations and qualifications described in this
section, YieldUP stockholders would generally not recognize gain or loss on the
receipt of shares of FSI common stock in the merger and that the following
federal income tax consequences will also result from the merger:
- The holders of YieldUP stock will recognize gain, but not loss, equal to
the lesser of (1) the gain realized, or (2) the cash portion of the
consideration received in the merger. The gain realized equals the fair
market value of the total consideration received in the merger minus the
adjusted tax basis of the holder's YieldUP stock exchanged in the
merger.
- Gain recognized by a holder of YieldUP stock will qualify for sale or
exchange treatment under Section 356(a)(2) of the Internal Revenue Code,
resulting in capital gain, if the YieldUP stock is a capital asset in
the hands of the holder.
- The tax basis of the FSI common stock to be received by the holders of
YieldUP stock will be equal to the basis of the YieldUP stock to be
surrendered in the
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<PAGE> 60
merger decreased by the cash received in the merger and increased by the
amount of gain recognized as a result of the merger.
- The holding period of the FSI common stock received by each YieldUP
stockholder will include the period for which the YieldUP stock
surrendered in exchange for the FSI common stock was considered to be
held, if the YieldUP stock so surrendered is held as a capital asset at
the effective time.
- Cash payments received by YieldUP stockholders in lieu of fractional
shares of FSI common stock will be treated as if the fractional shares
were distributed as part of the exchange and then were redeemed by FSI.
A stockholder receiving cash in lieu of fractional shares will generally
recognize capital gain or loss, measured by the difference, if any,
between the amount of cash received and the holder's basis in the
fractional share interest, if the fractional share interest is a capital
asset in the hands of the stockholder, and if the payment is not
essentially equivalent to a dividend, within the meaning of Section 302
of the Internal Revenue Code.
- If the shares were held as capital assets at the effective time of the
merger, a YieldUP stockholder who exercises dissenters' rights and
receives a cash payment for those shares generally should recognize
capital gain or loss measured by the difference between the
stockholder's basis in the shares and the amount of cash received. This
treatment will not apply, however, if the payment is deemed to be
"essentially equivalent to a dividend" within the meaning of Section
356(a)(2) of the Internal Revenue Code, after giving effect to the
constructive-ownership rules of the Code (a "Dividend Equivalent
Transaction"). A sale of shares under an exercise of dissenters' rights
generally will not be a Dividend Equivalent Transaction if, as a result
of the exercise, the stockholder exercising the dissenters' right owns
no shares of capital stock of FSI, either actually or constructively,
immediately after the merger.
- Certain noncorporate holders of YieldUP stock may be subject to backup
withholding at a 31% rate on cash payments received in exchange for
YieldUP stock, including any amount received in lieu of fractional
shares, or received by a noncorporate holder who exercises his or her
dissenters' rights. Backup withholding will not apply, however, to a
holder who furnishes a correct taxpayer identification number and
certifies under penalties of perjury that he or she is not subject to
backup withholding on the substitute Form W-9 included in the letter of
transmittal to be delivered to holders of YieldUP common stock after the
merger, or is otherwise exempt from backup withholding.
- Gain or loss will generally not be recognized by FSI, FSI's merger
subsidiary, or YieldUP as a result of the merger.
Neither FSI nor YieldUP will request a ruling from the Internal Revenue
Service in connection with the merger. The reorganization agreement provides
that the obligations of YieldUP and FSI to consummate the merger are subject to
the receipt of written opinions from their respective counsel that the merger
will constitute a reorganization under Section 368(a) of the Internal Revenue
Code. The condition regarding the receipt of the tax opinion may be waived by
FSI or YieldUP, although neither company has any current intention to waive this
condition. The YieldUP board of directors will re-solicit the vote of YieldUP's
stockholders if either company waives this condition. YieldUP stockholders
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should be aware that these tax opinions will not bind the IRS, and that the IRS
may assert a contrary position. These tax opinions will be made subject to
assumptions and qualifications, including the truth and accuracy of
representations made by YieldUP and FSI, including representations in
certificates to be delivered to counsel by the respective managements of YieldUP
and FSI.
If the merger failed to qualify as a reorganization under Section 368(a) of
the Internal Revenue Code, then YieldUP stockholders would recognize taxable
gain or loss with respect to each share of YieldUP common stock and Class A
common stock surrendered equal to the difference between the stockholder's basis
in the share and the sum of the cash and the fair market value, as of the
effective time of the merger, of the FSI common stock received in exchange for
the share. In such an event, a stockholder's aggregate basis in the FSI common
stock so received would equal its fair market value and the stockholder's
holding period for that stock would begin the day after the merger. In addition,
YieldUP would be treated as if it made a taxable sale or exchange of its assets.
Each YieldUP stockholder will be required to retain records and file with
the holder's federal income tax return a statement containing facts relating to
the merger.
THE PRECEDING DISCUSSION DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT TO THE MERGER. YIELDUP
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISERS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING REQUIREMENTS,
THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, AND OTHER TAX LAWS, AND
THE EFFECTS OF ANY PROPOSED CHANGES IN THE TAX LAWS.
BUSINESS AND MANAGEMENT AFTER THE MERGER
FSI intends to operate YieldUP in a manner substantially consistent with
its current operations. FSI will carefully review the operations of YieldUP in
an attempt to identify opportunities for expense reduction through the use of
shared resources with FSI.
After the merger, Dale A. Courtney, President of FSI's Surface Conditioning
Division, will serve as Chief Executive Officer of the surviving corporation.
Raj Mohindra, currently Chief Executive Officer of YieldUP, will serve as the
surviving corporation's Vice President and General Manager, and Suraj Puri,
currently YieldUP's Vice President and Chief Technical Officer, will serve as
its Chief Technologist.
After the merger, the following individuals will comprise the surviving
corporation's board of directors: Dale A. Courtney, Luke R. Komarek, and Benno
G. Sand. The current directors and executive officers of FSI will continue in
their present capacities after consummation of the merger.
RESALE OF SHARES BY YIELDUP AFFILIATES
The shares of FSI common stock to be received in the merger will be freely
transferable, except for shares of FSI common stock received by persons who are
deemed to be "affiliates," as defined in the rules under the Securities Act of
1933, of YieldUP immediately before the effective time of the merger. Shares of
FSI common stock received in the merger by persons who are affiliates of YieldUP
immediately before the effective time but do not become affiliates of FSI may be
sold by them only in accordance with the provisions of Rule 145 under the
Securities Act , under an effective registration statement under the Securities
Act, or in transactions exempt from registration under the Securities
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Act. Before the effective time of the merger, each of YieldUP's affiliates will
have entered into agreements with FSI under which each affiliate will agree to
comply with Rule 145. In addition, in connection with the voting agreements they
executed with FSI, Messrs. Mohindra and Puri have agreed not to sell any shares
of FSI common stock that they receive in the merger for 180 days following the
effective time of the merger.
DISSENTERS' RIGHTS
You have the right to have your YieldUP stock appraised by the Delaware
Court of Chancery and to receive the appraisal value of your YieldUP stock
instead of the cash and FSI stock you would receive in the merger. You must
strictly comply with Section 262 of the Delaware General Corporation Law in
order to have this right. The statutory right of appraisal granted by Section
262 requires strict compliance with the procedures set forth in Section 262.
Failure to follow any of those procedures may result in a termination or waiver
of appraisal rights under Section 262. The full text of Section 262 is attached
to this proxy statement/prospectus as Exhibit C.
A holder of YieldUP common stock electing to exercise appraisal rights
under Section 262 must:
- deliver a written demand for appraisal to YieldUP before the vote on the
approval of the reorganization agreement and the merger;
- continue to hold the shares until after the effective time of the
merger;
- not vote in favor of the merger;
- not exchange their shares;
- file a petition with the Delaware Court of Chancery; and
- strictly comply with Section 262.
YieldUP stockholders who wish to seek appraisal of their shares should
initiate all necessary action with respect to their appraisal rights within the
time periods and in the manner prescribed in Section 262. Failure to follow any
of the Section 262 requirements will cause the stockholder's right to an
appraisal to cease.
YieldUP stockholders considering seeking appraisal should be aware that the
fair value of their shares of YieldUP common stock determined under Section 262
could be more, the same, or less than the value of the consideration to be
received under to the reorganization agreement.
In view of the complexity of these provisions of Delaware law, any
stockholder of YieldUP who is considering exercising appraisal rights should
consult his or her legal adviser.
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UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
AS OF AND FOR THE NINE MONTHS ENDED MAY 29, 1999 AND FOR
THE FISCAL YEAR ENDED AUGUST 29, 1998
FSI INTERNATIONAL, INC. AND SUBSIDIARIES AND YIELDUP INTERNATIONAL CORPORATION
The following unaudited pro forma combined financial information presents
the pro forma effect of the divestiture of FSI's Chemical Management Division
and the proposed acquisition of YieldUP by FSI on FSI's historical financial
position and results of operations using the purchase method of accounting.
YieldUP's fiscal year ends December 31. In presenting the combination on a pro
forma basis, YieldUP's statement of operations for the year ended September 30,
1998 was combined with FSI's statement of operations for the year ended August
29, 1998. The pro forma statements of operations for the nine months ended May
29, 1999 and the balance sheet as of May 29, 1999 of FSI have been combined with
YieldUP's statement of operations for the nine months ended June 30, 1999 and
the balance sheet as of June 30, 1999. The pro forma combined financial
information should be read in conjunction with the historical financial
information of FSI and YieldUP appearing elsewhere or incorporated by reference
into this proxy statement/prospectus. The pro forma combined financial
information has been prepared and included as required by the rules and
regulations of the SEC and does not purport to be indicative of the results that
actually would have been obtained if the acquisition or the divestiture had been
effected on the dates indicated or of the results that may be obtained in the
future.
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
AND YIELDUP INTERNATIONAL CORPORATION
UNAUDITED PRO FORMA
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
YIELDUP
INTERNATIONAL PRO FORMA PRO FORMA
FSI CORPORATION ADJUSTMENTS COMBINED
INTERNATIONAL, INC. JUNE 30, FOR ACQUISITION MAY 29,
MAY 29, 1999 1999 AND DIVESTITURE 1999
------------------- ------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash, cash equivalents
and marketable
securities............ $ 79,778,165 $ 564,019 $ (6,653,000) (c) $ 73,689,184
Trade accounts
receivable, net....... 23,611,534 1,878,224 25,489,758
Trade accounts
receivable from
affiliates............ 4,528,488 -- 4,528,488
Inventories............. 36,232,266 2,269,279 182,000 (b) 38,683,545
Deferred Income tax
benefit............... 10,101,953 -- 10,101,953
Other current assets.... 5,105,116 72,768 5,177,884
Net assets of
discontinued
operations............ 13,104,433 -- (13,104,433) (k) --
------------ ----------- ------------
TOTAL CURRENT ASSETS...... 172,461,955 4,784,290 157,670,812
Property, plant and
equipment, net.......... 64,336,608 1,412,418 65,749,026
Intangibles............... -- -- 18,786,347 (a) 18,786,347
Investments in
affiliates.............. 13,615,129 -- 13,615,129
Deposits and other
assets.................. 4,382,518 228,435 (2,825,000) (l) 1,785,953
------------ ----------- ------------
254,796,210 6,425,143 257,607,267
============ =========== ============
CURRENT LIABILITIES:
Current maturities of
long-term debt........ 59,696 1,056,778 1,116,474
Trade accounts
payable............... 18,891,291 852,800 19,744,091
Accrued expenses........ 18,375,713 516,566 18,892,279
Customer deposits....... 834,789 -- 834,789
Deferred revenue........ 3,439,156 2,825,000 (2,825,000) (l) 3,439,156
------------ ----------- ------------
TOTAL CURRENT
LIABILITIES............. 41,600,645 5,251,144 44,026,789
------------ ----------- ------------
Long-term debt, less
current maturities...... 42,015,060 58,346 42,073,406
Deferred income taxes..... -- -- 1,130,000 (i) 1,130,000
STOCKHOLDERS' EQUITY:
Other stockholders'
equity................ 164,967,661 23,904,800 (23,904,800) (d) 184,328,661
2,688,000 (h)
16,673,000 (d)
Retained earnings
(deficit)............. 7,509,882 (22,789,147) 22,789,147 (d) (12,654,551)
(7,060,000) (g)
(13,104,433) (k)
Cumulative translation
adjustment.............. (1,297,038) -- (1,297,038)
------------ ----------- ------------
TOTAL STOCKHOLDERS'
EQUITY.................. 171,180,505 1,115,653 170,377,072
------------ ----------- ------------
$254,796,210 $ 6,425,143 $257,607,267
============ =========== ============
</TABLE>
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
AND YIELDUP INTERNATIONAL CORPORATION
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YIELDUP
FSI INTERNATIONAL PRO FORMA
INTERNATIONAL, INC. CORPORATION PRO FORMA COMBINED
YEAR ENDED YEAR ENDED ADJUSTMENTS YEAR ENDED
AUGUST 29, SEPTEMBER 30, FOR ACQUISITION AUGUST 29,
1998 1998 AND DIVESTITURE 1998
------------------- ------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
SALES............................ $161,695,114 $ 8,677,766 $170,372,880
Cost of goods sold............... 109,987,687 9,137,835 119,125,522
------------ ------------ ------------
Gross profit................... 51,707,427 (460,069) 51,247,358
Selling, general and
administrative expenses........ 52,102,864 5,421,441 3,474,000 (e) 60,998,305
Research and development
expenses....................... 36,102,507 2,922,674 39,025,181
------------ ------------ ------------
Operating (loss) income........ (36,497,944) (8,804,184) (48,776,128)
Interest expense................. (3,189,390) (89,447) (3,278,837)
Interest income.................. 4,774,458 259,096 (361,000) (f) 4,672,554
Investment write-off............. -- (2,000,000) (2,000,000)
Other expense, net............... (412,439) -- (412,439)
------------ ------------ ------------
Loss before income taxes....... (35,325,315) (10,634,535) (49,794,850)
Income tax (benefit) expense..... (13,986,713) -- (13,986,713)
------------ ------------ ------------
Loss before equity in earnings
of affiliates................ (21,338,602) (10,634,535) (35,808,137)
Equity in earnings of
affiliates..................... 674,274 -- 674,274
Accretion on redeemable
convertible preferred stock.... -- (1,330,962) (1,330,962)
------------ ------------ ------------
Net loss from continuing
operations................... (20,664,328) (11,965,497) (36,464,825)
Discontinued operations:
Loss from operations........... (1,287,763) -- 1,287,763 (k) --
------------ ------------ ------------
Net loss....................... $(21,952,091) $(11,965,497) $(36,464,825)
============ ============ ============
Net loss per common share --
Basic
Continuing operations.......... $ (0.91) $ (2.07) $ (1.51)
Discontinued operations........ (0.05) -- --
Net loss....................... (0.96) (2.07) (1.51)
Net loss per common share --
Diluted
Continuing operations.......... $ (0.91) $ (2.07) $ (1.51)
Discontinued operations........ (0.05) -- --
Net loss....................... (0.96) (2.07) (1.51)
Weighted average common shares... 22,801,415 5,771,876 (5,771,876) (j) 24,095,205
1,293,790 (j)
Weighted average common shares
and potential common shares.... 22,801,415 5,771,876 (5,771,876) (j) 24,095,205
1,293,790 (j)
</TABLE>
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<PAGE> 66
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
AND YIELDUP INTERNATIONAL CORPORATION
UNAUDITED PROFORMA
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YIELDUP
INTERNATIONAL PRO FORMA
FSI CORPORATION COMBINED
INTERNATIONAL, INC. NINE MONTHS PRO FORMA NINE MONTHS
NINE MONTHS ENDED ADJUSTMENTS ENDED
ENDED MAY 29, JUNE 30, FOR ACQUISITION MAY 29,
1999 1999 AND DIVESTITURE 1999
------------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
SALES.......................... $ 80,836,840 $ 4,174,381 $ 85,011,221
Cost of goods sold............. 56,965,694 3,342,778 60,308,472
------------ ----------- ------------
Gross profit................. 23,871,146 831,603 24,702,749
Selling, general and
administrative expenses...... 26,148,497 2,234,534 2,605,000 (e) 30,988,031
Research and development
expenses..................... 22,078,711 1,615,899 23,694,610
------------ ----------- ------------
Operating loss............... (24,356,062) (3,018,830) (29,979,892)
Interest expense............... (2,219,426) (109,083) (2,328,509)
Interest income................ 3,653,531 7,692 (270,000)(f) 3,454,223
Other expense, net............. 217,189 -- 217,189
------------ ----------- ------------
Loss before income taxes..... (22,704,768) (3,057,221) (28,636,989)
Income tax (benefit) expense... 6,608,850 -- 6,608,850
------------ ----------- ------------
Loss before equity in earnings
of affiliates................ (29,313,618) (3,057,221) (35,245,839)
Equity in earnings of
affiliates................... (1,956,827) -- (1,956,827)
------------ ----------- ------------
Net loss from continuing
operations................. (31,270,445) (3,057,221) (37,202,666)
Discounted operations:
Loss from operations......... (3,769,040) -- 3,769,040 (k) --
------------ ----------- ------------
Net loss................... $(35,039,485) $(3,057,221) $(37,202,666)
============ =========== ============
Net loss per common share
-- Basic
Continuing operations...... $(1.35) $(0.39) $ (1.52)
Discontinued operations.... (0.16) -- --
Net loss................... (1.51) (0.39) (1.52)
Net loss per common share
-- Diluted
Continuing operations...... $(1.35) $(0.39) $ (1.52)
Discontinued operations.... (0.16) -- --
Net loss................... (1.51) (0.39) (1.52)
Weighted average common
shares................... 23,156,150 7,870,927 (7,870,927)(j) 24,449,940
1,293,790 (j)
Weighted average common
shares and potential
common shares............ 23,156,150 7,870,927 (7,870,927)(j) 24,449,940
1,293,790 (j)
</TABLE>
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<PAGE> 67
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
AS OF AND FOR THE NINE MONTHS ENDED MAY 29, 1999 AND FOR
THE FISCAL YEAR ENDED AUGUST 29, 1998
The unaudited pro forma condensed combined financial statements reflect the
divestiture of FSI's Chemical Management Division as discontinued operations. On
June 9, 1999, FSI entered into an agreement to sell the Chemical Management
Division to the BOC Group, Inc. for approximately $38 million (subject to an
adjustment for the change in net working capital from April 3, 1999 through
closing). The transaction closed on July 31, 1999.
FSI is anticipating a pre-tax gain of approximately $25.0 million with
related taxes of $9.5 million. The pro forma financial statements do not reflect
the anticipated gain or cash proceeds from this transaction. See "FSI Recent
Developments" for discussion of the divestiture.
The unaudited pro forma condensed combined financial statements give effect
to the following pro forma adjustments relating to the proposed acquisition of
YieldUP:
(a) To reflect the excess of acquisition cost over the fair value of net
assets acquired. The purchase price, purchase-price allocation, and
financing of the transaction are summarized as follows:
<TABLE>
<S> <C> <C>
Purchase price paid:
Cash...................................... $ 6,038,000
Common stock.............................. 16,673,000
Costs associated with transaction......... 615,000
Value of FSI options issued in
substitution of YieldUP's options and
impact of warrants...................... 2,688,000
-----------
Total purchase consideration.............. $26,014,000
Allocated to:
In-process research and development
write-off............................... $ 7,060,000
Historical book value of YieldUP's assets
and liabilities......................... $1,115,653
Adjustments to step up assets and
liabilities to fair value:
Inventory............................... 182,000 1,297,653
----------
Deferred tax liability.................... (1,130,000)
Excess purchase price over allocation to
identifiable assets and liabilities:
Developed technology.................... 4,680,000
Assembled workforce..................... 770,000
Patent portfolio........................ 4,920,000
Customer relations...................... 180,000
Non-compete agreements.................. 90,000
Goodwill................................ 8,146,347 18,786,347
---------- -----------
Total allocation.......................... $26,014,000
===========
</TABLE>
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It is estimated that 1,293,790 shares of FSI stock and 228,317 of FSI
options will be issued to consummate the transaction based on the
0.1567 conversion ratio. The fair value of the stock was determined as
the average of the closing price of FSI's common stock for the 5 days
before, the 5 days after, and the date of the reorganization agreement,
January 21, 1999.
The valuation of intangible assets was determined as follows:
Developed Technology
Developed product technology represents proprietary know-how that is
technologically feasible as of the valuation date of April 30, 1999.
The developed technology was valued by discounting forecasted cash flow
directly related to each existing product technology. This included
cash flows resulting from both the sale of the current product and from
an imputed royalty rate on the sale of next generation products that
are expected to primarily leverage technologies, which were in-process
as of the valuation date.
Returns of and on the estimated fair value of the tangible and
intangible contributory assets were deducted from the cash flow model
to arrive at an estimate of the cash flow generated by the technology
being analyzed. These contributory assets include the assembled
workforce and trademark assets previously valued.
To assess the value of the developed technology assets, a discount rate
of 15% was applied to the forecasted cash flows of each developed
technology product. To assess the value of the core technology asset, a
discount rate of 20% was applied to the forecasted cash flows of the
royalties to the core technology. The discount rate for core technology
is higher than the rate for developed technology products because the
value of the core technology is dependent on the ability of the
high-risk in-process technology product to generate forecasted revenue.
Assembled Workforce
As of the April 30, 1999 valuation date, YieldUP possessed a skilled
assembled workforce of 54 employees. YieldUP's workforce is highly
skilled and a valuable asset from FSI's perspective. FSI valued the
trained and assembled YieldUP workforce using the replacement cost
approach. This approach determines the price a similar company would
pay to replace the workforce on an after-tax basis. The result is
equivalent to the premium a purchaser would pay for a company with an
assembled workforce in place. FSI management estimated the costs
associated with creating an assembled workforce in this industry, as
well as an overview of those employees deemed critical to the
enterprise.
Patent Portfolio
YieldUP has received eight United States patents relating to its
products and technologies, and has filed 24 additional U.S. and foreign
patent applications. The eight U.S. patents received by YieldUP relate
to methods and apparatus for delivering ultra-low particle counts in
semiconductor manufacturing, methods for
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<PAGE> 69
cleaning and drying a semiconductor wafer, and an ultra-low particle
semiconductor cleaner. These patents were issued from 1996 through
1998.
On January 21, 1999, YieldUP and FSI signed a license agreement to
allow FSI to use all patented and patent-pending technology in
connection with FSI's semiconductor cleaning, rinsing, and drying
products. In return, FSI would pay a royalty to YieldUP for the use of
the patented technology.
It was assumed that all existing and in-process technology products
would be subject to the patent royalty throughout their product lives.
As discussed, the value of a patent can be estimated using an income
approach commonly referred to as a relief-from-royalty method. This
approach estimates the future, after-tax royalties avoided by the
subject company's ownership of the patented technology, and discounts
them to a present value at an appropriate discount rate, thereby
arriving at an estimate of its fair value.
Customer Relations
YieldUP possesses established customer relationships with several large
companies who had previously purchased YieldUP's cleaning, rinsing, and
drying products. These relationships have value because some of these
existing customers may choose to make follow-up purchases for their
wafer fabrication facilities to compliment their existing equipment.
YieldUP's sales channel has material value in the context of YieldUP's
business model of selling evaluation versions of its products to gain
customer acceptance and is viewed by FSI as a valuable asset. It was
estimated that the absence of YieldUP's sales channel/customer
relationships would be expected to negatively impact revenues through
the end of 2001. The difference represents the incremental revenue that
is attributable to having the existing customer relationships in place.
From this incremental revenue forecast, variable expenses were
deducted, as well as variable cash flow adjustments that would be
expected in the event of such a decline in revenues. Net cash flow was
then discounted to a present value at an appropriate rate of return in
order to estimate the fair value of YieldUP's sales channel.
Customer relationships were also valued using the replacement-cost
approach. This approach determines the price a similar company would
pay to develop the customer relationships on an after-tax basis. The
result is equivalent to the premium a purchaser would pay for a company
with customer relationships in place.
Non-Compete Agreements
Under the reorganization agreement, three key YieldUP employees will
sign employment agreements with the surviving corporation in the
merger. Since these employment agreements will be on an "at will"
basis, with no penalties to the employee for leaving his employment, no
value was separately assigned to these employment agreements. Within
these three employment agreements are non-compete agreements that
preclude these individuals from competing with FSI for a period of two
years following termination of their employment.
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<PAGE> 70
It was estimated that potential competition from the three key
employees would be expected to negatively impact revenues through the
end of 2000. The difference represents the incremental revenue that is
attributable to having the non-competition agreements in place.
From this incremental revenue forecast, variable expenses were
deducted, as well as variable cash flow adjustments that would be
expected in the event of such a decline in revenues. Net cash flow was
then discounted to a present value at an appropriate rate of return in
order to estimate the fair value of the non-competition agreements.
(b) To reflect the step-up in inventory values to fair value based on
estimated selling prices of finished goods and demonstration
inventory.
(c) To reflect the cash portion of the purchase price including cash paid
to YieldUP stockholders and FSI's costs associated with the merger.
(d) To reflect the elimination of the stockholders' equity accounts of
YieldUP and to reflect the issuance of FSI common stock as partial
consideration for the merger.
(e) Represents the amortization of goodwill and other intangibles related
to the acquisition of YieldUP over periods ranging from two to nine
years, reflecting an estimate of the useful life of the intangibles.
(f) Represents the reduction in interest income earned by FSI for the nine
months ended May 29, 1999 and the fiscal year ended August 29, 1998 on
cash in the amount of the consideration paid for the acquisition of
YieldUP that would not have been earned had the acquisition been
consummated as of the beginning of the period.
(g) As part of the merger, FSI will be acquiring projects under
development, including the YieldUP 8000 series. The YieldUP 8000
series is based on a technology that integrates multiple gas-based
cleaning technologies, while also providing for the use of existing
liquid based technologies. In addition, the YieldUP 8000 is being
designed from the ground up as a modular, multi-tank-cleaning solution
designed to replace conventional wet benches. The YieldUP 8000 series
will debut with the YieldUP 8300, a three-tank cleaning, rinsing, and
drying system. The 8300 is designed to be modifiable, with the
addition or removal of cleaning tank modules, to form other models
including the 8100 (1 tank), 8200 (2 tanks), and 8400 (4 tanks). These
other models in the 8000 series will be introduced over time, based on
market demand and product mix.
The 8000 series is designed to integrate multiple gas-based cleaning
technologies including ammonia, HF, and/or HCI, as well as traditional
liquid-based cleaning technologies. Semiconductor manufacturers can customize
their cleaning process with their choice of various chemicals in their gaseous
or liquid forms in order to provide a total cleaning solution that works best
for their specific substrate. One advantage of gas-based cleaning is that it
requires very dilute chemistries to be effective, where concentrations of parts
per billion are sufficient. Dilute chemical concentrations result in a lower
cost of ownership for the customers and reduce environmental contamination by
these hazardous chemicals. Another advantage is that gas is inherently less
subject to particles and other
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<PAGE> 71
impurities than liquids and therefore cleaning will cause less wafer
contamination. This makes it essential for use in new smaller geometries of 0.25
micron and below.
The modularity of the 8000 series will allow the product to be placed in
various compact configurations within a cleanroom. The use of tanks for multiple
purposes, that is cleaning, rinsing, and drying, makes it possible to achieve
much smaller footprints than conventional wet benches. The compact and modular
nature of the product will also lower the cost of ownership by reducing the
required amount of cleanroom space, which can cost thousands of dollars per
square meter.
The 8000 series also enables the use of new and revolutionary ammonia and
IPA charging drying technologies. This gas-based drying technology carries many
of the advantages of gas-based cleaning, including reduced wafer contamination,
reduced environmental contamination, and the use of very dilute chemistries,
resulting in a lower cost of ownership. This revolutionary drying technology
also makes it possible to effectively rinse and dry very large substrates in
short periods of time, increasing wafer throughput.
YieldUP initiated development of the 8000 series in the fourth quarter of
1997. YieldUP has spent approximately 3.0 man-years of effort to date in the
development of the 8000 series. YieldUP believes that it requires an additional
0.6 man-years of effort to get the 8000 series to technological feasibility.
YieldUP's 8300 is expected to reach a beta version in the fourth quarter of
1999, at which point the product will be sold as an evaluation version to be
modified as necessary. YieldUP expects to spend another $1.2 million by the end
of third quarter 1999 to complete the technology.
In-process research and development was valued by discounting forecasted
cash flow directly related to the products expecting to result from the subject
research and development In each instance where a developed, core technology is
expected to be leveraged, a charge for core technology was deducted from the
forecast to provide a fair return on the leveraged technology. The assumed
charge for core technology is 2% of revenues on an after-tax basis.
The charge for core technology is deducted from the in-process product
forecasts in addition to the royalty rate for patented and patent-pending
technology. The basis for the charge for core technology is to provide a fair
return on any leveraged, but non-patentable technology, including trade secrets,
know-how, and other proprietary technology.
Returns of and on the estimated fair value of the tangible and intangible
contributory assets were deducted from the cash flow model to arrive at an
estimate of the cash flow generated by the technology being analyzed. These
contributory assets include the assembled workforce and trademark assets
previously valued.
To estimate the fair value of the in-process research and development
assets, a discount rate of 23% was employed, developed by analyzing the project
and market risks associated with the research and development effort, both in
terms of costs invested as of the valuation date relative to completion costs
and technical achievements. This discount rate represents a significant premium
above the discount rate utilized in the valuation of existing product technology
to account for the additional risks associated with in-process product
technologies.
FSI developed a calculation of the value of in-process research and
development assets that excludes cash flows attributable to remaining
development efforts required to develop the acquired incomplete technology into
commercially viable products. The
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<PAGE> 72
calculation of excluded cash flow was determined by evaluating the costs,
development time, and technological complexity required to develop the
in-process technology into commercially viable products. Based upon FSI
management's estimate that the in-process technology is 67% complete, it is
their opinion that the value of the in-process research and development assets
as of the valuation date is reasonably estimated at $7.l million.
The 8000 series represents a high-risk in-process technology asset since
the 8000 series is based on an entirely new platform than YieldUP's current
products. Certain technology developed by YieldUP for the 8000 series is
revolutionary as the 8000 series represents YieldUP's first product to integrate
both multiple gas-based cleaning technologies and gas-based drying technology
within a modular configuration design with a low cost of ownership. Some of this
technical risk is moderated by the project's late stage of development.
Market research indicates that there will be significant demand for a fully
integrated wafer cleaning solution, such as the 8000 series. However, YieldUP is
a new entrant in the wet bench market and may face significant competition from
more established players.
Therefore, an unusual charge of $7.1 million will be reflected in the
income statement of FSI in the reporting period in which the consummation of the
merger occurs due to the immediate write-off of in-process research and
development. At the effective date, it is expected that technological
feasibility of the acquired technology will not have been established and that
the technology has no alternative uses. (Note: On February 24, 1999, the FASB
voted to amend FASB Interpretation No. 4, Applicability of FASB Statement No. 2
to Business Combinations Accounted for by the Purchase Method and Statement of
Financial Accounting Standards No. 2, Accounting for Research and Development
Costs, to require that acquired intangibles related to research and development
activities be recognized as assets and amortized to expense over their estimated
useful lives. It is not clear what the effective date of transition rules will
be. Accordingly, the impact, if any, on the pro forma combined financial
statements cannot be determined.)
(h) To record the value of the FSI options issued in substitution of
YieldUP options and the impact of warrants as part of the purchase
price. The fair value of the stock options and the impact of the
warrants was determined at the acquisition date using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<S> <C>
Expected dividend yield............................... 0.0%
Annualized stock price volatility..................... 58.9%
Risk free interest rate............................... 5.1%
Expected life (years)................................. 5.5 (options)
Expected life (years)................................. 1.8 (warrants)
</TABLE>
The Black-Scholes option valuation model represents only an estimate of the
fair value of FSI's options because the model was developed for use in
estimating the fair value of traded options that, unlike FSI's options, have no
vesting restrictions and are fully transferable. In addition, the Black-Scholes
model requires the input of highly subjective assumptions including the
annualized stock price volatility.
(i) FSI did not record all of the deferred tax assets associated with the
losses of YieldUP due to the limitations on the timing of the
utilization of the losses and the timing and attributes of FSI's
future taxable income.
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<PAGE> 73
(j) Basic pro forma net income per common share was computed by dividing
pro forma net income by the pro forma combined weighted average number
of shares of common stock outstanding during the period. Diluted pro
forma net income per common share was calculated using the treasury
stock method to compute the weighted average common stock outstanding
assuming the conversion of dilutive potential common shares. The
effect of stock options was not included in the calculation of
dilutive income per share because their inclusion would have been
anti-dilutive. The pro forma adjustment for combined weighted average
number of common shares was based upon the number of common shares of
YieldUP outstanding multiplied by the exchange ratio of .1567.
(k) To reflect the impact of the divestiture of FSI's Chemical Management
Division.
(l) To eliminate FSI's license fee asset and YieldUP's deferred revenue
related to a pre-paid license fee paid by FSI to YieldUP.
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FORWARD-LOOKING INFORMATION
This proxy statement/prospectus contains forward-looking information
including information provided in "Risk Factors," "Unaudited Pro Forma Combined
Selected Financial Data," "Comparative Unaudited Per Share Data," "Unaudited Pro
Forma Combined Financial Statements" and "FSI Recent Developments -- Outlook."
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking information to encourage companies to provide prospective
information about themselves without fear of litigation so long as such
information is identified as forward-looking and is accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in the information.
Forward-looking information is indicated by the use of such words as "expects,"
"believes," "should," "could," "intends," "estimates," and "may," or other
comparable terminology. FSI and YieldUP identify the following important factors
that could cause FSI's and YieldUP's actual results to differ materially from
any such results that might be projected by FSI or YieldUP in forward-looking
information. All of these factors are difficult to predict, and many are beyond
the control of FSI and YieldUP. Accordingly, although FSI and YieldUP believe
that the assumptions underlying the forward-looking information are reasonable,
there can be no assurances that such assumptions will approximate actual
experience.
The important factors include the following:
- general economic conditions, changes in interest rates, and the
performance of stock markets;
- industry consolidation and increased competition;
- retention of key YieldUP customers, including OEM customers;
- expansion of YieldUP's product acceptance;
- development of new applications and processes;
- introduction of new products;
- retention and attraction of key technical personnel;
- the outcome of litigation pending against YieldUP;
- the combined company's ability to control costs and realize estimated
cost savings; and
- the integration of FSI and YieldUP's products, sales, and operations in
a timely and cost-effective manner.
You should also consider other risks and uncertainties discussed in
documents filed by FSI and YieldUP with the SEC and incorporated by reference
into this proxy statement/prospectus. Neither FSI nor YieldUP has any obligation
to update forward-looking information.
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BUSINESS OF FSI
FSI designs, develops, manufactures, markets, and supports microlithography
and surface conditioning equipment used in the fabrication of microelectronics,
such as advanced semiconductor devices and thin film heads, which are devices
that read from and write information to computers' hard disks. FSI operates two
divisions, the Microlithography Division and the Surface Conditioning Division.
FSI's Surface Conditioning Division sells products, processes, and services
using wet, vapor, and ultra-cold gas techniques to prepare the surfaces of
silicon wafers for subsequent processing. The Microlithography Division supplies
photoresist processing equipment and services for the semiconductor and thin
film head markets.
On April 4, 1996, FSI acquired Semiconductor Systems, Inc. ("SSI"), a
supplier of photoresist processing equipment and support. Principal SSI products
include the ORBITRAK(R) and the SCORPIO(TM)microlithography clusters. SSI's
operations are headquartered in Fremont, California.
FSI markets its products directly in North America and primarily through a
network of affiliated distributors in Europe, the Asia-Pacific region, and
Japan. Through these affiliated international distributors FSI endeavors to
provide timely and efficient worldwide customer service and support.
FSI RECENT DEVELOPMENTS
CHEMICAL MANAGEMENT DIVISION DIVESTITURE. On June 9, 1999, FSI agreed to
sell its Chemical Management Division to The BOC Group, Inc. for approximately
$38 million in cash (subject to adjustment for the change in net working capital
from April 3, 1999 through closing). The transaction closed on July 31, 1999.
The Chemical Management Division designs and manufactures chemical management
systems that generate, blend, and dispense high-purity chemicals, and blend and
deliver polishing-chemical mixtures, to points of use in a manufacturing
facility, as well as related controls and support products. See FSI's Annual
Report on Form 10-K for the fiscal year ended August 29, 1998 for a general
discussion of the business and operations of the Chemical Management Division.
The Chemical Management Division accounted for approximately $56 million in
sales during fiscal 1998 and approximately $24 million for the six months ended
February 27, 1999. See "Unaudited Pro Forma Combined Financial Information" for
additional information regarding the impact of the sale of the Chemical
Management Division on FSI's financial position and results of operations.
Under the asset purchase agreement, FSI has agreed to either retain or
indemnify The BOC Group with respect to specified obligations and liabilities of
the Chemical Management Division. These specified obligations and liabilities
are detailed in the asset purchase agreement between FSI and The BOC Group,
which is included as an exhibit to the registration statement of which this
proxy statement/prospectus is a part.
NOTE PREPAYMENTS. On September 3, 1999, FSI completed the prepayment of
$42 million of its senior unsecured notes. The notes consisted of $30 million of
7.15% senior unsecured notes due to mature in 2004 and $12 million of 7.27%
senior unsecured notes due to mature in 2006. In addition to the payment of
principal and accrued interest, FSI paid the lenders approximately $690,000 in
make-whole penalties in connection with the prepayment. At the time of the
prepayment, certain lenders had claimed that FSI was
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in default under certain covenants contained in the note agreements. These
claims were waived in connection with the repayment.
OUTLOOK. FSI does not normally provide detailed information on future
financial expectations. However, given the potential changes to FSI's business
model, due in part to the YieldUP merger and the Chemical Management Division
divestiture, FSI believes that it is appropriate to provide the following
information regarding FSI's future operations. This information contains
forward-looking statements. These statements involve known and unknown risks or
uncertainties that may cause FSI's actual results, performance or achievements
to be materially different from any future results expressed or implied by such
forward-looking statements. These factors include, among other things, those
listed under "Risk Factors" and elsewhere in this proxy statement/prospectus. In
light of the significant uncertainties inherent in forward-looking financial
information of any kind, the inclusion of such information in this document
should not be regarded as a representation that the projected results will be
achieved. You are cautioned that the following information should not be
regarded as fact and should not be relied upon as an accurate representation of
future results. See "Forward-Looking Information."
FSI's fiscal 1999 fourth quarter ended on August 28th. FSI will be going
through its year-end procedures and anticipates it will release its annual
earnings press release on or about October 12, 1999. Of significance during the
1999 fourth quarter:
- Sales are expected to be lower than the third quarter of fiscal 1999 due
primarily to two thin film head customers requesting changes in system
configuration, which resulted in shipment delays; and
- Orders are expected to be approximately $40 million for the fourth
quarter of 1999, which is above the order activity of fiscal 1999 third
quarter.
During the first quarter of fiscal 2000, programs which FSI will be working
on include:
- Completion of the YieldUP merger, including regulatory filings;
- AVALON to SAP data conversion, training, and SAP implementation;
- New product introductions, including the CALYPSO(TM) spin on dielectric
product;
- Begin the YieldUP Model 8000 series product characterization;
- POLARIS(R) 2500 cost-reduction programs;
- Finalize Year 2000 compliance programs; and
- Fiscal Year 2000 strategic and financial plan completion.
The YieldUP merger, when and if consummated, and the Chemical Management
Division divestiture are expected to have the following significant financial
impacts:
- FSI currently expects to have a one-time in-process research and
development charge relating to the acquisition of YieldUP of
approximately $7.1 million depending on the status of YieldUP research
and development projects at closing; and
- Sales levels would decrease as a result of the Chemical Management
Division divestiture partially offset by sales from YieldUP.
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FSI continues to work on its strategic and financial plan for fiscal 2000
and currently, based on industry forecasts, expects the following financial
results for fiscal 2000:
- Orders are expected to continue to increase, assuming industry
conditions continue to improve worldwide;
- Sales are expected to increase for the remaining two divisions as
compared to fiscal 1999, again assuming industry conditions continue to
improve;
- Gross margins are expected to be in the low to mid-30 percent range as
FSI expects to continue to experience pricing pressures and the impact
from its excess capacity. Successful cost reduction programs could
result in further improvements in the second half of fiscal 2000;
- SG&A expenses are expected to average between $9.0 and $10.0 million per
quarter, subject to the successful implementation of SAP, completing
Year 2000 compliance programs, and successful cost reduction programs;
- R&D expenses are expected to average $7.0 to $8.0 million per quarter,
as FSI continues to work on 300-mm programs, CALYPSO(TM) spin-on
dielectric system, and YieldUP Model 8000 series product introduction;
- Other income/expense including interest income and expense is expected
to increase income as a result of lower interest expense due to the
redemption of the unsecured notes offset by lower interest income
resulting from lower cash balances;
- It is expected there will be no tax benefit or expense until FSI can
demonstrate quarterly profitability; and
- Equity in earnings/losses of affiliates is expected to continue to
improve throughout the year as industry conditions improve in the
Asia-Pacific region.
Currently, FSI does not expect to return to profitability before the fourth
quarter of fiscal 2000. FSI believes, under the future business model, that the
current break-even level for FSI is expected to be approximately $45 million of
revenues per quarter, assuming a 35% gross profit margin. In addition, based on
current expectations, FSI believes that the merger will result in a slight
dilution of earnings per share of FSI common stock for fiscal 2000.
BUSINESS OF YIELDUP
YieldUP develops, manufactures, and markets cleaning, rinsing, and drying
equipment used during several steps in the manufacturing process for
semiconductors. It believes its technology allows more thorough and efficient
cleaning, rinsing, and drying than conventional approaches, and that the
products based on its technology may enable manufacturers to obtain improvements
in the percentage of good product produced, or yield. YieldUP and its customers
have tested YieldUP's products against conventional wet benches using spin-rinse
dryers and alcohol dryers and found that YieldUP's products produce wafers with
fewer particles and fewer water spots. YieldUP's cleaning, rinsing and drying
products also reduce the usage of certain environmentally hazardous materials,
and occupy less floor space when compared to conventional equipment. YieldUP
currently has approximately 120 cleaning, rinsing, and drying systems installed
at approximately
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80 customer sites in the semiconductor, semiconductor equipment, magnetic disk,
and flat-panel display industries.
During the typical four-to-six week process of fabricating integrated
circuits ("ICs") 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
disposition 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 of all the processing steps. YieldUP's
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.
YieldUP is marketing its 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. It believes 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 its products.
YieldUP's products include the CleanPoint de-ionized water filtration
system, the Omega 1000 Rinsing and Drying System designed to replace the
conventional Spin-Rinse Dryers, the Omega 2000 Cleaning, Rinsing and Drying
system designed to handle large substrates including 12 inch (300 mm) wafers and
flat panels, and the Omega 4000 Cleaning, Rinsing and Drying system that
provides integrated hydrofluoric acid cleaning capability.
For a more extensive discussion of YieldUP's business, you should review
YieldUP's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1998, a copy of which is delivered with, and incorporated by reference in, this
proxy statement/prospectus.
MATERIAL CONTRACTS BETWEEN FSI AND YIELDUP
In connection with the transactions contemplated by the reorganization
agreement, FSI and YieldUP entered into a License Agreement effective as of
January 22, 1999. Under the license agreement, in exchange for the license fees
and royalty payments required by the agreement, YieldUP granted FSI a
nonexclusive worldwide license to manufacture and market equipment and devices
in the microelectronics industry that incorporate YieldUP's technology.
The license granted to FSI under the license agreement may be repurchased
by YieldUP upon termination of the reorganization agreement. If, however, FSI
terminates the reorganization agreement due to material breach by YieldUP or if
either party terminates the reorganization agreement because either YieldUP's
stockholders do not approve the merger or events concerning a third-party
acquisition proposal for YieldUP occur, then YieldUP will have no option to
repurchase the license.
FSI filed the license agreement with the SEC as an exhibit to its Current
Report on Form 8-K filed January 27, 1999.
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On April 20, 1999 FSI and YieldUP amended the license agreement. Under the
amendment, FSI agreed to purchase three products from YieldUP and subsequently
deposited with YieldUP $1,325,000 as a deposit on the purchase price. The
deposit is refundable if either party terminates the reorganization agreement
for any reason prior to the delivery of the products. If the reorganization
agreement is terminated for any reason and YieldUP has no right to repurchase
the license agreement or elects not to, then FSI will keep any products
previously delivered to it under the amendment, pay any additional purchase
price amount related to those products, and apply any remaining deposit amount
to payment of royalties due YieldUP under the license agreement. If YieldUP
exercises its right to repurchase the license agreement in connection with a
termination of the reorganization agreement, then YieldUP must refund the
purchase price deposit and FSI must return the previously delivered YieldUP
products.
DESCRIPTION OF FSI CAPITAL STOCK
The following is a summary of the material provisions of FSI's articles of
incorporation, bylaws, and rights agreement. Copies of these documents are
included as exhibits to the registration statement of which this proxy
statement/prospectus is a part. You should refer to those documents for further
information.
FSI's articles of incorporation authorize the issuance of 50 million shares
of common stock, of which approximately 23.3 million shares were issued and
outstanding as of June 30, 1999, and 10 million shares of preferred stock, none
of which have been issued.
COMMON STOCK
The shares of FSI common stock offered in connection with the merger will
be fully paid and nonassessable. Upon any liquidation or dissolution of FSI, the
holders of FSI common stock share proportionately in the assets available for
distribution after payment of all prior claims, such as those of holders of debt
or preferred stock.
Holders of FSI common stock have no preemptive rights and have one vote for
each share held on each matter submitted to a vote of shareholders. Cumulative
voting for the election of directors is not permitted. Subject to any prior
rights of any preferred stock then outstanding, holders of FSI common stock are
entitled to receive proportionately those dividends as may be declared by FSI's
board of directors. FSI historically has not paid cash dividends on its common
stock, and FSI's board of directors does not anticipate paying cash dividends in
the near future.
PREFERRED STOCK
FSI's board of directors may issue from time to time preferred stock in one
or more series. The board is authorized to determine the designation of and
number of shares in each series and to fix the rights of the series. Shares of
preferred stock may be issued that have one or more of the following
characteristics:
- disproportionately high voting rights;
- class-voting rights;
- convertibility into shares of FSI common stock; and
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- seniority to FSI common stock for payment of dividends and upon
liquidation.
Although the issuance of preferred stock may have an adverse effect on the
rights of holders of common stock, the consent of holders of common stock is not
required for any such issuance.
ARTICLES OF INCORPORATION
FSI's articles of incorporation provide for a classified board of between
five and eleven directors, each serving staggered three-year terms. The number
of directors may be increased or decreased by the shareholders or increased by
the board of directors. Any change in the number of directors, however, must be
approved by 75% of the votes entitled to be cast by the holders of all
outstanding shares of capital stock of FSI, voting as a single class, unless the
change has been approved by a majority of the board of directors. No decrease in
the number of directors may shorten the term of an incumbent director. Removal
of a director from office, with or without cause, requires the affirmative vote
of 75% of the votes entitled to be cast by the holders of all outstanding shares
of capital stock of FSI, voting as a single class. Any vacancy on the board that
results from an increase in the number of directors may be filled by action of a
majority of the board of directors, and any other vacancy occurring in the board
of directors may be filled by a majority of the directors.
No person, other than one nominated by FSI's board of directors, is
eligible for election as a director unless a written request that his or her
name be placed in nomination is received by FSI's Corporate Secretary from a
record shareholder at least 60 days before the date of a shareholders' meeting.
In addition, the nominee must give his or her written consent to serve as a
director if elected.
FSI's articles of incorporation provide that "business combinations" with
beneficial owners of 10% or more of FSI's voting capital stock ("interested
shareholders") require, in addition to any vote required by law, the affirmative
vote of 75% of the votes entitled to be cast by the holders of all outstanding
shares of voting capital stock of FSI, voting as a single class. Business
combinations include the following:
- any merger, consolidation, or statutory exchange of shares of FSI with
an interested shareholder;
- any disposition to or from an interested shareholder or FSI of any
assets of FSI or the interested shareholder, if the assets have a value
of at least 10% of the book value of FSI's consolidated assets;
- the adoption of any plan for the liquidation or dissolution of FSI
proposed by or on behalf of an interested shareholder; and
- any transaction that has the effect of increasing the proportionate
share of capital stock of FSI beneficially owned by an interested
shareholder.
The super-majority vote by FSI's shareholders is not required to approve a
business combination if the business combination was approved by a majority of
those directors who were members of the board before the interested shareholder
became an interested shareholder or whose election or nomination was approved by
a majority of those directors ("continuing directors"). The vote is also not
required if the business combination meets conditions specified in FSI's
articles of incorporation, including the following:
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- a specified minimum consideration be received in the business
combination by holders of FSI capital stock;
- the interested shareholder not acquire any additional shares of capital
stock of FSI after becoming an interested shareholder, except as
approved by the continuing directors; and
- a proxy statement or information statement describing the proposed
business combination is mailed to all holders of FSI capital stock FSI
30 days before the consummation of the business combination.
The affirmative vote of the holders of 75% of the votes entitled to be cast
by the holders of all outstanding shares of FSI capital stock, voting as a
single class, is required to amend or repeal, or adopt any provisions
inconsistent with, those provisions of FSI's articles of incorporation discussed
above.
These provisions of FSI's articles of incorporation could have the effect
of delaying or preventing a change in control of FSI that is not approved by
FSI's board of directors. See also "Comparative Rights of Shareholders of
YieldUP and FSI -- Corporate Takeover Legislation." The Minnesota statutory
provisions described in that section could have a similar effect.
SHARE RIGHTS AGREEMENT
FSI is party to a Share Rights Agreement dated as of May 22, 1997. Under
the rights agreement, each share of FSI common stock has attached one
preferred-share-purchase right. Each right entitles the registered holder to
purchase from FSI one one-hundredth of a share of Series A Junior Participating
Preferred Stock of FSI for $90, subject to adjustment to prevent dilution.
Initially, the rights attach to all certificates representing FSI common
stock and no separate rights certificates are distributed. The rights will
separate from the common stock and a distribution date for the rights will
occur, however, upon the earlier of the following events:
- the close of business on the fifteenth day following a public
announcement that a person or group of affiliated or associated persons
has become an "acquiring person," defined as the beneficial owner of 15%
or more of FSI's outstanding common stock; or
- the close of business on the fifteenth day following the commencement or
public announcement of a tender offer or exchange offer, if the
consummation of the offer would result in a person or group becoming the
beneficial owner of 15% or more of FSI's outstanding common stock.
Until a distribution date occurs:
- the rights will be evidenced only by FSI common stock certificates and
will be transferred only with the common stock;
- newly issued common stock will contain a notation incorporating the
rights agreement by reference; and
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- the transfer of any common stock certificate will also transfer the
rights associated with that certificate.
As promptly as practicable following a distribution date, separate
certificates evidencing the rights will be mailed to record holders of FSI
common stock as of the close of business on the distribution date.
The rights are not exercisable until the distribution date. The rights will
expire on June 10, 2007, unless extended or earlier redeemed or exchanged by
FSI.
If any person or group becomes an acquiring person, then each holder of a
right, other than rights beneficially owned by the acquiring person, will
thereafter have the right to receive upon exercise a number of shares of FSI
common stock having a market value of two times the exercise price of the right.
The foregoing will not apply if the person first becomes an acquiring person in
a tender offer or exchange offer for all outstanding shares at a price and on
terms determined by FSI's board to be fair to FSI's shareholders and otherwise
in the best interests of FSI and its shareholders. This board determination must
be made before any change in control of FSI's board, however.
If, after the distribution date or within 15 days before that date, FSI is
acquired or 50% or more of FSI's assets or earning power is sold, then each
holder of a right, other than rights beneficially owned by the acquiring person,
will have the right to receive a number of common shares of the acquiring
company having a market value of two times the exercise price of the right. The
foregoing does not apply, however, to a transaction for at least the same
per-share consideration with a person who acquired FSI common stock through a
tender offer or exchange offer for all outstanding shares approved by FSI's
board of directors.
At any time before the close of business on the twentieth day after a
public announcement that a person or group of affiliated or associated persons
has become an acquiring person, FSI's board of directors may redeem the rights
in whole at a price of $.001 per right. However, this redemption may occur after
a person has become an acquiring person only if there has not been a change in
control of FSI's board of directors.
Until a right is exercised, the holder of the right, as such, has no rights
as a shareholder of FSI, including the right to vote or to receive dividends.
FSI filed a copy of the rights agreement with the SEC as an exhibit to
FSI's registration statement on Form 8-A dated June 5, 1997. That filing was
amended by FSI's filing of Form 8-A/A on April 26, 1998.
LIQUIDATION
Subject to preferential rights of shares of FSI preferred stock, if any, in
the event of a liquidation of FSI holders of FSI common stock are entitled to
share proportionately in the assets remaining after discharge of all obligations
and liabilities of FSI.
LIMITATION ON LIABILITY OF DIRECTORS AND INDEMNIFICATION
FSI's articles of incorporation and bylaws limit the liability of directors
for monetary damages to FSI and its shareholders for breach of fiduciary duty of
care to FSI and authorize the indemnification of directors, officers, and
employees to the fullest extent
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permitted by Minnesota law. FSI maintains a directors' and officers' liability
insurance policy.
TRANSFER AGENT
The Transfer Agent for FSI common stock is Harris Trust and Savings Bank.
COMPARATIVE RIGHTS OF SHAREHOLDERS OF YIELDUP AND FSI
As a result of the merger, you will no longer be a stockholder of YieldUP,
which is a Delaware corporation. Instead, you will become a shareholder of FSI,
which is a Minnesota corporation, and your rights will be governed by Minnesota
law and by FSI's articles of incorporation and bylaws. Your rights under the
Minnesota Business Corporation Act (the "Minnesota statute") and FSI's articles
of incorporation and bylaws will differ from your existing rights as
stockholders of YieldUP under the Delaware General Corporate Law (the "Delaware
statute") and YieldUP's certificate of incorporation and bylaws. We describe the
material differences in this section. You might regard as important other
differences that we do not include here. You should refer to the documents we
mention in this section if you want more information.
VOTING RIGHTS
FSI's articles of incorporation generally provide that holders of the
shares of FSI common stock are entitled to one vote per share. Holders of shares
of FSI common stock do not have any cumulative voting rights. Holders of shares
of FSI preferred stock have no voting rights, except as otherwise provided by
law or in the resolutions providing for the issuance of the preferred stock.
YieldUP's certificate of incorporation provides holders of shares of
YieldUP common stock are entitled to one vote per share and holders of shares of
YieldUP Class A common stock are entitled to five votes per share. YieldUP
stockholders do not have any cumulative voting rights.
CALL OF SHAREHOLDERS' MEETINGS
Under the Minnesota statute, the general rule is that holders of at least
10% of a corporation's outstanding voting shares have the right to demand a
special shareholders' meeting. However, only the holders of at least 25% of the
outstanding shares may call a special meeting to consider whether to effect a
business combination. No similar provisions exist in the Delaware statute.
However, the YieldUP certificate of incorporation provides that a special
meeting of stockholders may be called by the holders of at least 10% of the
shares entitled to vote at the meeting.
SHAREHOLDER ACTION WITHOUT A MEETING
Under the Delaware statute, any action required to be taken at an annual or
special meeting of stockholders may be taken without a meeting by written
consent. The written consent must describe the action taken. In addition, it
must be signed by stockholders having the number of votes that would needed to
take the same action at a meeting at which all shares entitled to vote on the
action were present. However, the YieldUP
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certificate of incorporation prohibits the taking of stockholder action by
written consent. The Minnesota statute provides that a meeting is required for
shareholders to take action unless the written consent of all shareholders
entitled to vote is obtained.
AMENDMENTS TO CHARTER AND BYLAWS
The Delaware statute generally requires a majority vote of all outstanding
voting stock to amend a corporation's certificate of incorporation. However, the
certificate of incorporation may require a higher vote. The YieldUP certificate
of incorporation requires the affirmative vote of the holders of two-thirds of
the voting power of all outstanding shares of YieldUP entitled to vote, voting
as a single class, to amend or repeal any of Articles 5 through 9 of the
certificate of incorporation. These provisions deal with various corporate
governance matters. This requirement is in addition to any vote of any class of
stock required by the Delaware statute.
The required vote to amend a corporation's articles of incorporation under
the Minnesota statute is generally only a majority of the voting power of the
shares that are actually present at the shareholders' meeting and entitled to
vote. However, the articles of incorporation may state a different required
vote. FSI's articles of incorporation require approval by 75% of the voting
power of outstanding shares in certain instances. See "FSI Capital Stock --
Articles of Incorporation."
Under the Delaware statute, a corporation's stockholders have the exclusive
power to adopt, amend, or repeal bylaws, unless the certificate of incorporation
also grants this power to the board of directors. The YieldUP certificate of
incorporation provides that each of the YieldUP board of directors and the
stockholders have the power to adopt, amend, or repeal the YieldUP bylaws. The
YieldUP certificate of incorporation also requires that any adoption, amendment,
or repeal of the YieldUP bylaws by the stockholders be approved by two-thirds of
the voting power of all outstanding shares of YieldUP, voting as a single class.
This requirement is in addition to any vote of any class of stock required by
the Delaware statute.
Under the Minnesota statute, the board of directors of a corporation has
the power to adopt, amend, or repeal bylaws, unless the articles of
incorporation reserve this power to the shareholders. FSI's articles of
incorporation do not reserve this power to the shareholders. FSI's board of
directors may therefore adopt, amend, or repeal FSI's bylaws. However, under the
Minnesota statute, FSI's board of directors, without shareholder approval, may
not adopt, amend, or repeal a bylaw that:
- fixes the quorum for shareholder meetings;
- prescribes procedures for removing directors or filling board vacancies;
- fixes the classifications, qualifications, or terms of office of
directors; or
- decreases the number of directors.
In addition, FSI shareholders retain the power to adopt, amend, or repeal
bylaws adopted, amended, or repealed by FSI's board of directors.
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DISSENTERS' RIGHTS
Under the Minnesota statute, shareholders are entitled to dissenters'
rights of appraisal in each of the following events:
- amendment to the articles of incorporation that materially and adversely
affects the shares of the shareholder because it does any of the
following:
- alters or abolishes preferential rights relating to the shares
- creates, alters, or abolishes redemption rights relating to the shares
- alters or abolishes preemptive rights of the shareholder
- excludes or limits the rights of a shareholder to vote on a matter or
to cumulate votes
- disposition of all or substantially all of the property and assets of a
corporation not made in the usual course of its business
- merger, but only if the shares of the shareholder are entitled to be
voted on the merger
- exchange, if the corporation's shares will be acquired by the acquiring
corporation, but only if the shareholder is entitled to vote on the
exchange
- other corporate action taken under a shareholder vote if the articles of
incorporation, bylaws, or a board resolution provides that dissenting
shareholders may obtain payment for their shares.
Stockholders of a Delaware corporation are entitled to similar dissenters'
rights. Under the Delaware statute, however, no dissenters' rights exist for
shares of stock of a constituent corporation in a merger or consolidation if the
shares are listed on a national securities exchange or the Nasdaq National
Market System or that are held by more than 2,000 record stockholders. However,
even in those circumstances, dissenters' rights will exist if the stockholders
are to receive anything other than the following:
- shares of stock of the surviving corporation;
- shares of stock of any other corporation that will be listed on a
national securities exchange or the Nasdaq National Market System or
will be held by more than 2,000 record stockholders;
- cash in lieu of fractional shares; or
- any combination of the foregoing clauses.
DIVIDENDS; STOCK REPURCHASES
Under the Delaware statute, a corporation may pay dividends only out of
its:
- surplus;
- net profits for the fiscal year in which the dividend is declared; and
- net profits for the preceding fiscal year.
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All dividend payments are subject to limitations for the benefit of
preference shares. A Delaware corporation may also repurchase shares of its
capital stock if it complies with statutory standards.
Under the Minnesota statute, a corporation may pay dividends or repurchase
its shares if the corporation will be able to pay its debts in the ordinary
course of business after paying the dividend or repurchasing the shares. This is
true regardless of whether the corporation has surplus or net profits, but is
subject to limitations for the benefit of preference shares.
CORPORATE TAKEOVER LEGISLATION
Both Minnesota and Delaware have enacted legislation regulating takeovers
of publicly held corporations and protecting shareholders of those corporations
in connection with business combinations. Under the Minnesota statute, if a
publicly held Minnesota corporation has an "interested shareholder," the
corporation may not enter into a business combination with the interested
shareholder for at least four years after the shareholder acquired a 10%
interest in the corporation. An "interested shareholder" is a beneficial holder
of 10% of the outstanding voting shares of a corporation who, within the
preceding four years, was a 10% shareholder, regardless of the person's current
shareholdings. This restriction does not apply, however, if a committee of the
board of directors made up of all of its "disinterested directors" approves the
acquisition of the 10% interest or the business combination before the date on
which the shareholder acquires the 10% interest. A "disinterested director" is
one who is not a current officer or employee of the corporation or a person who
was not an officer or employee of the corporation or a related organization
within the preceding five years.
A publicly held Minnesota corporation is also subject to the
control-share-acquisition provisions of the Minnesota statute. These provisions
require the approval of the holders of a majority of all the corporation's
voting shares, including shares held by the acquiring person, and of a majority
of the corporation's voting shares held by disinterested shareholders, before a
person acquiring 20% or more of the corporation's voting shares can vote the
shares in excess of 20%. Similar shareholder approvals are required at the
one-third and majority voting levels.
The Minnesota statute also contains "anti-greenmail" provisions. These
provisions restrict the ability of a Minnesota corporation to repurchase shares
from a person or group holding shares constituting five percent or more of the
corporation's voting power if the person or group has beneficially owned those
shares for less than two years.
Finally, the Minnesota statute also contains a "fair price" provision. This
provides that an offeror may not acquire shares of a Minnesota corporation
within two years following the offeror's last purchase of shares in a takeover
offer, unless the selling shareholder is given a reasonable opportunity to
dispose of his or her shares to the offeror upon terms substantially equivalent
to those provided in the takeover offer. The fair price provision does not
apply, however, if the acquisition is approved by a committee of the board's
disinterested directors, who are not affiliated with the offeror, before the
purchase of any shares by the offeror under a takeover offer.
Delaware has not enacted legislation similar to the Minnesota's
control-share-acquisition or anti-greenmail legislation. However, Delaware has
enacted legislation that limits business combinations of Delaware corporations
with interested stockholders. Under
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the Delaware statute, an "interested stockholder" may not enter into business
combinations with the corporation for a period of three years following the date
on which the stockholder became an interested stockholder. Under Delaware law,
an "interested stockholder" is a person whose beneficial ownership in the
corporation is at least 15% of the outstanding voting securities, rather than
the 10% under the Minnesota statute. This prohibition does not apply if, before
the date on which the person became an interested stockholder, the board of
directors approves either the business combination or the transaction that
resulted in the person becoming an interested stockholder.
Unlike the Minnesota statute, the Delaware statute provides that the
business-combination provisions have no effect if:
- the tender offer or other transaction by which the stockholder became an
interested stockholder results in the stockholder beneficially owning at
least 85% of the voting securities of the corporation, excluding shares
owned by directors who are also officers and shares owned by employee
stock option plans; or
- the business combination is approved by the board of directors and
two-thirds of the shares held by stockholders other than the interested
stockholder.
In addition, FSI's articles of incorporation contain anti-takeover and
"interested shareholder" provisions. See "Description of FSI Capital Stock --
Articles of Incorporation."
AUTHORIZED STOCK; AUTHORITY OF BOARD OF DIRECTORS TO ISSUE PREFERRED STOCK
The authorized capital stock of YieldUP consists of 22,229,927 shares of
common stock and 5,357,733 shares of preferred stock. Of the authorized shares
of common stock, 20 million are designated "common stock" and 2,229,927 shares
are designated as "Class A common stock."
The Delaware statute permits YieldUP's board of directors to issue
authorized but unissued shares of common stock without shareholder action. In
addition, YieldUP's certificate of incorporation authorizes YieldUP's board of
directors, without further shareholder action, to issue the authorized but
unissued preferred stock in one or more series. The YieldUP board is authorized
to determine the designation of and number of shares in each series and to fix
or alter their rights.
YieldUP's board could authorize the issuance of one or more series of
preferred stock with rights that could impede the success of any proposed
merger, tender offer, proxy contest, or other attempt to gain control of YieldUP
not approved by the YieldUP board. Although the issuance of YieldUP preferred
stock may have an adverse effect on the rights of holders of YieldUP common
stock, the consent of the holders of YieldUP common stock is not required for
issuance.
The authorized capital stock of FSI consists of 50 million shares of common
stock and 10 million shares of preferred stock.
The Minnesota statute permits FSI's board of directors to issue authorized
but unissued shares of FSI common stock without shareholder action.
In addition, FSI's articles of incorporation authorize FSI's board of
directors, without shareholder action, to issue the authorized but unissued FSI
preferred stock in one or more series. FSI's board is authorized to determine
the designation and number of shares in
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each series and to fix the rights of the series. Shares of FSI preferred stock
may be issued that may have one or more of the following characteristics:
- disproportionately high voting rights;
- class-voting rights;
- convertibility into shares of FSI common stock; and
- priority to shares of FSI common stock for payment of dividends and upon
liquidation.
FSI's board could authorize the issuance of one or more series of FSI
preferred stock with voting rights or other rights and preferences that could
impede the success of any proposed merger, tender offer, proxy contest or other
attempt to gain control of FSI not approved by the FSI board. Although the
issuance of FSI preferred stock may have an adverse effect on the rights of
holders of FSI common stock, the consent of the holders of FSI common stock is
not be required for issuance.
SHARE RIGHTS AGREEMENT
FSI is party to a share rights agreement. Under the rights agreement, each
share of FSI common stock has attached one preferred share purchase right. Each
right entitles the registered holder to purchase from FSI one one-hundredth of a
share of Series A Junior Participating Preferred Stock of FSI for $90, subject
to adjustment to prevent dilution. The rights agreement provides for the
distribution of the rights upon the occurrence of certain events that may
constitute an attempt to effect a change in control of FSI. The rights agreement
could have the effect of delaying or preventing a change in control of FSI that
is not approved by FSI's board of directors. YieldUP does not have any similar
rights agreement. See "Description of FSI Capital Stock -- Share Rights
Agreement" for a more detailed description of the rights agreement.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
Both the Delaware statute and the Minnesota statute permit a corporation to
eliminate a director's personal liability for monetary damages for breach of
fiduciary duty. However, both statutes specify acts for which a corporation may
not eliminate liability. The principal difference between the Delaware statute
and Minnesota statute is that the Minnesota statute does not permit a
corporation to eliminate a director's liability for civil liabilities imposed
under portions of Minnesota's securities laws. YieldUP's certificate of
incorporation eliminates the liability of directors to the full extent permitted
by the Delaware statute. FSI's articles of incorporation and bylaws limit the
liability of directors for monetary damages to FSI and its stockholders for
breach of the fiduciary duty of care.
INDEMNIFICATION OF DIRECTORS, OFFICERS, AND EMPLOYEES
In general, the Minnesota statute requires, and the Delaware statute
permits, indemnification to cover potential liabilities of directors, officers,
and employees. In the case of actions brought by or in the interest of the
corporation, the Delaware statute limits indemnification to those expenses that
a court deems proper. However, if a director, officer, or employee successfully
defends an action, the Delaware statute provides that the person is entitled to
indemnification against his or her reasonable expenses. The Delaware and
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Minnesota statutes do not preclude other indemnification rights. FSI's articles
of incorporation and bylaws authorize the indemnification of directors,
officers, and employees to the full extent permitted by the Minnesota statute.
YieldUP's bylaws provide that YieldUP must indemnify directors, officers, and
employees to the full extent authorized by the Delaware statute.
REMOVAL OF DIRECTORS
Under the Minnesota statute, a director may be removed, with or without
cause, by a majority of the remaining directors if the director was named by the
board to fill a vacancy and the shareholders have not elected directors in the
interval between the time of appointment to fill a vacancy and the time of the
removal. The Delaware statute does not have a similar provision for the removal
of directors by the board. The Minnesota statute and the Delaware statute each
provide that any of the directors may be removed, with or without cause, by the
shareholders. YieldUP's certificate of incorporation provides that any such
removal requires the affirmative vote of a majority of the voting power of all
outstanding shares of YieldUP entitled to vote generally in the election of
directors, voting as a single class. FSI's articles of incorporation provide
that removal requires the affirmative vote of at least 75% of the votes entitled
to be cast by the holders of all outstanding shares of FSI capital stock, voting
as a single class.
WHERE YOU CAN FIND MORE INFORMATION
Both FSI and YieldUP file periodic reports, proxy statements, and other
information with the Securities and Exchange Commission. These SEC filings are
available to the public over the Internet at the SEC's web site (www.sec.gov).
You may also read and copy any document that either company files with the SEC
at the SEC's public reference facilities at 450 Fifth Street, N.W., Washington,
D.C. 20549; 7 World Trade Center, Suite 1300, New York, New York 10048; and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
You may obtain copies of the documents at prescribed rates by writing to the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of its public reference facilities.
Both FSI and YieldUP "incorporate by reference" into this proxy
statement/prospectus the information in documents they file with the SEC, which
means that they can disclose important information to you by referring you to
those documents. The information incorporated by reference is an important part
of this proxy statement/prospectus, and information that they file subsequently
with the SEC will automatically update this proxy statement/prospectus. The
companies incorporate by reference the documents listed below and any filings
they make with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the
Securities Exchange Act of 1934 after the filing of this proxy
statement/prospectus and before the merger is consummated.
FOR FSI:
- Annual Report on Form 10-K for the fiscal year ended August 29, 1998,
including information incorporated by reference into that report from
FSI's 1998 Annual Report to Shareholders and portions of its definitive
proxy statement for FSI's 1999 Annual Meeting of Shareholders, as
amended on Form 10-K/A on September 13, 1999;
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- Quarterly Reports on Form 10-Q for the quarters ended November 28, 1998
and February 27, 1999, as amended on Forms 10-Q/A on September 13, 1999,
and Quarterly Report on Form 10-Q for the quarter ended May 29, 1999;
- Current Reports on Form 8-K filed January 27, June 24, and August 13,
1999; and
- the description of FSI's common stock and related rights to purchase
preferred stock contained in FSI's Registration Statement on Form 8-A
dated October 31, 1988 and its Registration Statement on Form 8-A dated
June 5, 1997, as amended on Form 8-A/A on April 16, 1998.
You may request a copy of these filings, other than an exhibit to a filing
unless the exhibit is specifically incorporated by reference into the filing, at
no cost by contacting FSI at the following address:
Corporate Secretary
FSI International, Inc.
322 Lake Hazeltine Drive
Chaska, Minnesota 55318
(612) 361-7973
FOR YIELDUP:
- Annual Report on Form 10-KSB for the fiscal year ended December 31,
1998, as amended on Form 10-KSB/A, a copy of which is being delivered
together with this proxy statement/prospectus;
- Quarterly Reports on Form 10-QSB for the quarters ended March 31 and
June 30, 1999;
- Current Report on Form 8-K filed January 27, 1999; and
- the description of YieldUP's common stock contained in a registration
statement filed on Form 8-A.
You may request a copy of these filings, other than an exhibit to a filing
unless the exhibit is specifically incorporated by reference into the filing, at
no cost by contacting YieldUP at the following address:
Corporate Secretary
YieldUP International Corp.
117 Easy Street
Mountain View, California 94043
(650) 964-0100
IN ORDER TO OBTAIN TIMELY DELIVERY, YOU MUST REQUEST COPIES OF FSI'S OR
YIELDUP'S SEC FILINGS NO LATER THAN OCTOBER 13, 1999.
You should rely only on the information delivered with, or stated or
incorporated by reference in, this proxy statement/prospectus. Neither FSI nor
YieldUP has authorized anyone else to provide you with different information.
You should not assume that the information in this proxy statement/prospectus is
accurate as of any date other than the date on the front of this document. All
information concerning FSI included or incorporated by reference in this proxy
statement/prospectus has been provided by FSI,
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and all information concerning YieldUP included or incorporated by reference in
this proxy statement/prospectus has been provided by YieldUP.
LEGAL MATTERS
The validity of the shares of FSI common stock to be issued in the merger
will be passed upon for FSI by Faegre & Benson LLP, Minneapolis, Minnesota. Tax
consequences of the merger will be passed upon for FSI by Faegre & Benson LLP
and for YieldUP by Gray Cary Ware & Freidenrich LLP, San Diego, California.
EXPERTS
The consolidated financial statements and financial statement schedule of
FSI as of August 29, 1998 and August 30, 1997 and for each of the fiscal years
in the three-year period ended August 29, 1998, have been incorporated by
reference in the registration statement in reliance upon the reports of KPMG
LLP, independent certified public accountants, incorporated by reference herein,
and upon the authority of that firm as experts in accounting and auditing.
The financial statements of YieldUP as of December 31, 1998 and for each of
the years in the two-year period ended December 31, 1998, have been incorporated
by reference in the registration statement in reliance upon the report of KPMG
LLP, independent certified public accountants, incorporated by reference herein,
and upon the authority of that firm as experts in accounting and auditing. The
report of KPMG LLP covering the December 31, 1998 financial statements contains
an explanatory paragraph that states that YieldUP's recurring losses from
operations raise substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
STOCKHOLDER PROPOSALS
If the stockholders of YieldUP do not approve the reorganization agreement
and the merger, YieldUP anticipates holding its next annual meeting of
stockholders on December 15, 1999. Stockholder proposals intended to be
presented at that meeting must have been submitted by October 20, 1999 for
consideration by YieldUP for possible inclusion in the proxy materials for that
meeting.
INDEPENDENT ACCOUNTANTS
Representatives of KPMG LLP, YieldUP's independent auditors, are expected
to be present at the special meeting and will have the opportunity to make a
statement if they desire to do so and will be available to respond to
appropriate questions.
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- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF REORGANIZATION
AMONG
FSI INTERNATIONAL, INC.,
BMI INTERNATIONAL, INC.
AND
YIELDUP INTERNATIONAL CORPORATION
- --------------------------------------------------------------------------------
DATED JANUARY 21, 1999
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TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I THE MERGER........................................ A-6
1.01. EFFECTIVE TIME OF THE MERGER......................... A-7
1.02. CLOSING.............................................. A-7
1.03. EFFECTS OF THE MERGER................................ A-7
1.05. DIRECTORS AND OFFICERS OF SURVIVING CORPORATION...... A-8
ARTICLE II CONVERSION OF SECURITIES......................... A-8
2.01. EFFECT ON CAPITAL STOCK.............................. A-8
(a) Capital Stock of Sub.................................. A-8
(b) YieldUP Common Stock.................................. A-8
(c) Fractional Shares..................................... A-9
(d) Parent Stock.......................................... A-9
(e) YieldUP Stock Options and Warrants.................... A-9
(f) Dissenters' Rights.................................... A-9
(g) Adjustments........................................... A-10
2.02. EXCHANGE OF CERTIFICATES............................. A-10
ARTICLE III REPRESENTATIONS AND WARRANTIES OF YIELDUP....... A-12
3.01. ORGANIZATION OF YIELDUP.............................. A-12
3.02. COMPANY CAPITAL STRUCTURE............................ A-12
3.03. SUBSIDIARIES......................................... A-13
3.04. AUTHORITY............................................ A-13
3.05. SEC FILINGS; FINANCIAL STATEMENTS.................... A-14
3.06. INVENTORY............................................ A-15
3.07. NO UNDISCLOSED LIABILITIES........................... A-15
3.08. NO CHANGES........................................... A-15
3.09. TAXES................................................ A-17
3.10. RESTRICTIONS ON BUSINESS ACTIVITIES.................. A-18
3.11. TITLE TO PROPERTIES; ABSENCE OF PERMITTED LIENS AND
ENCUMBRANCES; CONDITION OF EQUIPMENT................ A-18
3.12. INTELLECTUAL PROPERTY................................ A-19
3.13. PRODUCT WARRANTIES AND CLAIMS........................ A-20
3.14. AGREEMENTS, CONTRACTS AND COMMITMENTS................ A-20
3.15. INTERESTED PARTY TRANSACTIONS........................ A-22
3.16. GOVERNMENTAL AUTHORIZATION........................... A-22
3.17. LITIGATION........................................... A-22
3.18. ACCOUNTS RECEIVABLE.................................. A-22
3.19. BANK ACCOUNTS; GUARANTIES; POWERS OF ATTORNEY........ A-23
3.20. CUSTOMERS............................................ A-23
3.21. SUPPLIERS............................................ A-23
3.22. MINUTE BOOKS......................................... A-23
3.23. ENVIRONMENTAL MATTERS................................ A-23
3.24. BROKERS' AND FINDERS' FEES........................... A-25
3.25. LABOR MATTER......................................... A-25
3.26. EMPLOYEE BENEFIT PLANS............................... A-25
3.27. INSURANCE............................................ A-26
3.28. COMPLIANCE WITH LAWS................................. A-26
3.29. THIRD PARTY CONSENTS................................. A-26
3.30. REGISTRATION STATEMENTS; PROXY STATEMENT............. A-27
</TABLE>
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<TABLE>
<S> <C>
3.31. COMPLETE COPIES OF MATERIALS......................... A-27
3.32. YEAR 2000............................................ A-27
3.33. OPINION OF FINANCIAL ADVISOR......................... A-27
3.34. VOTING AGREEMENTS.................................... A-27
3.35 DISCLOSURE............................................. A-28
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND
SUB....................................................... A-28
4.01. ORGANIZATION, STANDING AND POWER..................... A-28
4.02. CAPITAL STRUCTURE.................................... A-28
4.03. AUTHORITY............................................ A-29
4.04. SEC FILINGS; FINANCIAL STATEMENTS.................... A-30
4.05. NO MATERIAL ADVERSE CHANGE........................... A-30
4.06. LITIGATION........................................... A-31
4.07. BROKERS' AND FINDERS' FEES........................... A-31
4.08. REGISTRATION STATEMENT; PROXY STATEMENT.............. A-31
4.09. OWNERSHIP AND INTERIM OPERATIONS OF SUB.............. A-31
ARTICLE V CONDUCT OF BUSINESS PRIOR TO THE EFFECTIVE TIME... A-32
5.01. CONDUCT OF BUSINESS OF YIELDUP....................... A-32
5.02. COOPERATION.......................................... A-32
ARTICLE VI ADDITIONAL AGREEMENTS AND COVENANTS.............. A-34
6.01. NO SOLICITATION...................................... A-34
6.02. PROXY STATEMENT; REGISTRATION STATEMENT.............. A-35
6.03. ACCESS TO INFORMATION................................ A-36
6.04. YIELDUP STOCKHOLDERS' MEETING........................ A-36
6.05. LEGAL CONDITIONS TO MERGER........................... A-36
6.06. PAYMENT OF TAXES..................................... A-37
6.07. PUBLIC DISCLOSURE.................................... A-37
6.08. TAX-FREE REORGANIZATION.............................. A-37
6.09. NASDAQ QUOTATION..................................... A-38
6.10. STOCK PLANS AND WARRANTS............................. A-38
6.11. CONSENTS............................................. A-39
6.12. EMPLOYEE BENEFITS; EMPLOYEE ISSUES................... A-39
6.13. REPORTS.............................................. A-39
6.14. NOTIFICATION OF CERTAIN MATTERS...................... A-39
6.15. ADDITIONAL AGREEMENTS; REASONABLE EFFORTS............ A-39
6.16 DIRECTOR AND OFFICER INSURANCE......................... A-39
ARTICLE VII CONDITIONS TO MERGER............................ A-40
7.01. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER.............................................. A-40
(a) Stockholder Approval.................................. A-40
(b) Approvals............................................. A-40
(c) Registration Statement................................ A-40
(d) NASDAQ................................................ A-40
(e) No Injunctions or Restraints; Illegality.............. A-40
(f) Tax Opinions.......................................... A-41
(g) Comfort Letter........................................ A-41
7.02. ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT AND
SUB................................................. A-41
</TABLE>
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<TABLE>
<S> <C>
(a) Accuracy of Representations and Warranties; Compliance
with Covenants...................................... A-41
(b) Blue Sky Laws......................................... A-41
(c) Opinion of YieldUP's Counsel.......................... A-41
(d) Consents.............................................. A-42
(e) Dissenting Shares..................................... A-42
(f) 1998 Audit............................................ A-42
(g) Employment Agreements................................. A-42
7.03. ADDITIONAL CONDITIONS TO OBLIGATIONS OF YIELDUP...... A-42
(a) Accuracy of Representations and Warranties; Compliance
with Covenants...................................... A-42
(b) Opinion of Parent's Counsel........................... A-42
ARTICLE VIII TERMINATION AND AMENDMENT...................... A-42
8.01. TERMINATION.......................................... A-42
8.02. EFFECT OF TERMINATION................................ A-43
8.03. FEES AND EXPENSES.................................... A-43
8.04. ALTERNATIVE TRANSACTION DEFINITION................... A-44
8.05. AMENDMENT............................................ A-44
8.06. EXTENSION; WAIVER.................................... A-45
ARTICLE IX MISCELLANEOUS.................................... A-45
9.01. NONSURVIVAL OF REPRESENTATIONS, WARRANTIES, AND
AGREEMENTS.......................................... A-45
9.02. NOTICES.............................................. A-45
9.03. INTERPRETATION....................................... A-46
9.04. COUNTERPARTS......................................... A-46
9.05. ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES....... A-46
9.06. GOVERNING LAW........................................ A-46
9.07. ASSIGNMENT........................................... A-46
ARTICLE X DEFINITIONS....................................... A-47
10.01. SUBSIDIARY........................................... A-47
10.02. AFFILIATE............................................ A-47
10.03. KNOWLEDGE............................................ A-47
</TABLE>
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EXHIBITS
<TABLE>
<S> <C>
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 Mohindra
Exhibit 7.03(g)(2)............. Form of Employment Agreement with Suraj Puri
Exhibit 7.03(g)(3)............. Form of Employment Agreement with David Wong
</TABLE>
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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 and
the Secretary of State of the
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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 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."
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(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 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.
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(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 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
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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, 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
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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 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.
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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 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
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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 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
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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 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
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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 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;
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(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;
(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).
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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 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.
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(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 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
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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) 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 the following agreements
(or group of related agreements), whether written or oral (collectively, the
"YieldUP Material Contracts"):
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(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;
(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.
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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.
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
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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. Suppliers. 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
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.
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(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 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
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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 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
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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.
(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.
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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 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
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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 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
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subsidiary, and there are no outstanding securities convertible into or
exchangeable for any such capital stock or other equity interests, 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 the execution and delivery of this
Agreement by Parent and Sub
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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.
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
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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, Parent or Sub will promptly
inform YieldUP. Notwithstanding the foregoing, Parent and Sub make no
representation or warranty with respect to any information concerning YieldUP
supplied by YieldUP which is contained in any of the foregoing documents.
4.09. Ownership and Interim Operations of Sub. All outstanding capital
stock of Sub is owned by Parent and Parent is in control of Sub within the
meaning of
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Section 368(e) of the Code. Sub was formed solely for the purpose of engaging in
the transactions contemplated by this Agreement, has engaged in no other
business activities, and has conducted its operations only as contemplated by
this Agreement.
ARTICLE V
CONDUCT OF BUSINESS PRIOR TO THE EFFECTIVE TIME
5.01. Conduct of Business of YieldUP. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, YieldUP agrees (except to the extent that
Parent shall otherwise consent in writing), to carry on its business in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted, to pay its debts and Taxes when due subject to good faith
disputes over such debts or Taxes, to pay or perform other obligations when due,
and, to the extent consistent with such business, use all reasonable efforts
consistent with past practices and policies to preserve intact YieldUP's present
business organizations, keep available the services of its present officers and
key employees and preserve their relationships with customers, suppliers,
distributors, licensors, licensees, and others having business dealings with
YieldUP. YieldUP shall promptly notify Parent of any event or occurrence not in
the ordinary course of business of YieldUP, and of any event which could have a
Material Adverse Effect on YieldUP. Except as expressly contemplated by this
Agreement or as described in YieldUP Disclosure Schedules, YieldUP shall not,
without the prior written consent of Parent:
(a) Accelerate, amend or change the period of exercisability of options or
restricted stock granted under YieldUP Option Plans or authorize cash payments
in exchange for any options granted under any of such Plans;
(b) Enter into any commitment or transaction (i) which requires
performance over a period longer than six months in duration except transactions
in the ordinary course of business, or (ii) to purchase fixed assets for an
aggregate purchase price in excess of $50,000 through April 30, 1999, or in
excess of $10,000 per month thereafter;
(c) Grant any severance or termination pay to (i) any director or officer
or (ii) to any other employee in excess of an amount equaling one month's pay to
such individual (provided, however, that severance or termination pay shall not
be granted by YieldUP without Parent's written approval to more than five such
employees), except payments made pursuant to written agreements outstanding on
the date hereof and as disclosed on Schedule 3.14 of the YieldUP Disclosure
Schedules.
(d) Transfer, sell, or license to any person or entity any rights to or
interest in YieldUP Intellectual Property Rights, except in compliance with
existing agreements (which agreements are listed in Schedule 3.14 of the YieldUP
Disclosure Schedules) or in the ordinary course of business in connection with
product sales;
(e) Enter into, extend, modify or enlarge the rights of the other party
under any distribution, original equipment manufacturer, sales representative,
license, or other similar agreements pursuant to which any other party is
granted exclusive marketing or other exclusive rights of any type or scope with
respect to any products or technology of YieldUP;
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(f) Violate any of the YieldUP Material Contracts in such a manner as
would permit any other party thereto to cancel or terminate the same or entitle
any other party to seek damages from YieldUP, or amend or otherwise modify the
terms of any such YieldUP Material Contract in any manner that would be
materially adverse to the interests of YieldUP.
(g) Commence a lawsuit other than (i) for the routine collection of bills,
(ii) in such cases where YieldUP in good faith determines that failure to
commence suit could reasonably result in the material impairment of a valuable
aspect of YieldUP's business, provided that YieldUP consults with Parent prior
to the filing of such a suit, or (iii) for a breach of or to enforce this
Agreement;
(h) Declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of its capital stock, or
split, combine or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of capital stock of YieldUP, or repurchase or otherwise acquire,
directly or indirectly, any shares of YieldUP's Common Stock except from former
employees, directors and consultants in accordance with agreements providing for
the repurchase of shares in connection with any termination of service to
YieldUP;
(i) Issue, deliver or sell or authorize or propose the issuance, delivery
or sale of, or purchase or propose the purchase of, any shares of its capital
stock or securities convertible into, or subscriptions, rights, warrants or
options to acquire, or other agreements or commitments of any character
obligating it to issue any such shares or other convertible securities, other
than grants of stock options pursuant to the YieldUP Option Plans and the
issuance of shares of YieldUP Common Stock pursuant to the exercise of YieldUP
Options therefor outstanding as of the date of this Agreement;
(j) Cause or permit any amendments to its Certificate of Incorporation or
By-Laws;
(k) Acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the assets of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to the business of
YieldUP;
(l) Sell, lease, license, or otherwise dispose of any of its properties or
assets, except in the ordinary course of business;
(m) Incur any indebtedness for borrowed money other than debt incurred
under YieldUP's existing line of credit and in amounts and on terms consistent
with past practice, or guarantee any such indebtedness or issue or sell any debt
securities of YieldUP or guarantee any debt securities of others;
(n) Adopt or amend any employee benefit or stock purchase or option plan,
or enter into any employment contract, pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage rates
of its employees, except as required to comply with applicable law or to
maintain the qualified status of any plan under the Code, and except for annual
wage increases for employees that do not, in the aggregate, exceed five percent
of 1998 base compensation for all such employees and, individually, do not
exceed five percent of 1998 base compensation in the case of any officer;
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(o) Revalue any of its assets, including without limitation writing down
the value of inventory or writing off notes or accounts receivable other than in
the ordinary course of business, or change any accounting methods or practices;
(p) Pay, discharge, or satisfy in an amount in excess of $25,000 (in the
aggregate) any claim, liability, or obligation (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge, or
satisfaction in the ordinary course of business of liabilities reflected or
reserved against in the YieldUP Financial Statements (or the notes thereto);
(q) Make or change any election in respect of Taxes, adopt or change any
accounting method in respect of Taxes, file any Return or any amendment to a
Return (other than in the ordinary course of business), enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(r) Waive or release any right or claim of YieldUP, including any
write-off or other compromise of any account receivable of YieldUP, other than
in the ordinary course of business and in an amount not in excess of $10,000 per
amount or right or claim or $100,000 in the aggregate;
(s) Enter into any contract, agreement, or license of the type referred to
in Section 3.14(a)-(q) other than customer contracts or contracts for the
purchase of supplies and services and the sale of products and services entered
into in the ordinary course of business; or
(t) Take, or agree to take, any of the actions described in Sections
4.1(a) through (s) above, or any action which would make any of the
representations or warranties of YieldUP contained in this Agreement materially
untrue or incorrect or prevent YieldUP from performing or cause YieldUP not to
perform its covenants hereunder.
5.02. Cooperation. Subject to compliance with applicable law, from the
date hereof until the Effective Time, each of Parent and YieldUP shall confer on
a regular and frequent basis with one or more representatives of the other party
to report operational matters of materiality and the general status of ongoing
operations and shall promptly provide the other party and its counsel with
copies of all filings made by such party with any Governmental Entity in
connection with this Agreement, the Merger, and the transactions contemplated
hereby and thereby.
ARTICLE VI
ADDITIONAL AGREEMENTS AND COVENANTS
6.01. No Solicitation.
(a) YieldUP shall not directly or indirectly, through any officer,
director, employee, representative, or agent thereof, (i) solicit, initiate, or
encourage any inquiries or proposals that constitute, or could reasonably be
expected to lead to, a proposal or offer for a merger, consolidation, business
combination, sale of substantial assets, sale of shares of capital stock
(including without limitation by way of a tender offer), or similar transaction
involving YieldUP other than the transactions contemplated by this Agreement
(any of the foregoing inquiries or proposals being referred to in this Agreement
as an "Acquisition Proposal"), (ii) engage in negotiations or discussions
concerning, or provide any non-
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public information to any person or entity relating to, any Acquisition
Proposal, or (iii) agree to, approve, or recommend any Acquisition Proposal;
provided, however, that nothing contained in this Agreement shall prevent
YieldUP or its Board of Directors, from (x) furnishing non-public information
to, or entering into discussions or negotiations with, any person or entity in
connection with an unsolicited bona fide Acquisition Proposal by such person or
entity or recommending an unsolicited bona fide written Acquisition Proposal to
the stockholders, if and only to the extent that (A) the Board of Directors
determines in good faith after consultation with outside legal counsel that
failure to provide such non-public information would be in breach of their
fiduciary duties and the Board of Directors believes in good faith, after
consultation with their financial advisor, that such Acquisition Proposal is
bona fide and is, from a financial point of view, more favorable to the
stockholders of YieldUP than the Merger and (B) prior to furnishing such
non-public information to, or entering into discussions or negotiations with,
such person or entity, the Board of Directors receives from such person or
entity an executed confidentiality agreement with terms no more favorable to
such party than those contained in the Confidentiality and Nondisclosure
Agreement dated November 18, 1998 between Parent and YieldUP (the
"Confidentiality Agreement") or (y) complying with Rule 14e-2 or Rule 14d-9
promulgated under the Exchange Act with regard to an Acquisition Proposal.
(b) YieldUP shall notify Parent immediately (and no later than 24 hours)
after receipt by YieldUP (or its advisors), of any Acquisition Proposal or any
request for non-public information in connection with an Acquisition Proposal or
for access to the properties, books, or records thereof by any person or entity
that informs YieldUP that it is considering making, or has made, an Acquisition
Proposal. Such notice by YieldUP shall be made orally and in writing and shall
indicate in reasonable detail the identity of the offeror and the terms and
conditions of such proposal, inquiry, or contact.
(c) YieldUP shall immediately cease and cause to be terminated any
existing activities, discussions, or negotiations with any person conducted
previously with respect to any Acquisition Proposal, and will promptly request
that each such person return or destroy all confidential information previously
produced to that person by YieldUP or its advisors or representatives.
6.02. Proxy Statement; Registration Statement.
(a) As promptly as practicable after the execution of this Agreement,
Parent and YieldUP shall prepare and file with the SEC the Proxy Statement to be
sent to the stockholders of YieldUP in connection with the YieldUP Stockholders'
Meeting and Parent shall prepare and file with the SEC the Registration
Statement on Form S-4 pursuant to which the shares of Parent Common Stock to be
issued as a result of the Merger will be registered with the SEC, in which the
Proxy Statement will be included as a prospectus. Parent and YieldUP shall use
all reasonable efforts to cause the Registration Statement to become effective
as soon after such filing as practicable. The Proxy Statement shall include the
recommendation of the Board of Directors of YieldUP in favor of this Agreement
and the Merger provided that the Board of Directors of YieldUP may withdraw such
recommendation if such Board of Directors shall have determined in good faith,
after consultation with its outside legal counsel, that the withdrawal of such
recommendation is necessary for such Board of Directors to comply with its
fiduciary duties under applicable law. Parent and YieldUP shall make all other
necessary filings with respect to the Merger under the Securities Act and the
Exchange Act and the rules and regulations thereunder.
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(b) YieldUP shall take such action as may be necessary to cause the
representation set forth in Section 3.30 hereof to be true and correct at all
applicable times with respect to each of the Proxy Statement and the
Registration Statement.
(c) Parent shall take such action as may be necessary to cause the
representation set forth in Section 4.08 hereof to be true and correct at all
applicable times with respect to each of the Proxy Statement and the
Registration Statement.
6.03. Access to Information. Upon reasonable notice and to the extent
permitted under applicable law and the provisions of agreements to which Parent
or YieldUP, as the case may be, is a party, YieldUP and Parent shall each afford
to the officers, employees, accountants, counsel, and other representatives of
the other, access, during normal business hours during the period prior to the
Effective Time, to all its properties, books, contracts, commitments, and
records and, during such period, each of YieldUP and Parent shall furnish
promptly to the other (a) a copy of each report, schedule, registration
statement, and other document filed or received by it during such period
pursuant to the requirements of federal securities laws and (b) all other
information concerning its business, properties, and personnel as such other
party may reasonably request. Unless otherwise required by law, the parties will
hold any such information which is non-public in confidence in accordance with
the Confidentiality Agreement. No information or knowledge obtained in any
investigation pursuant to this Section 6.03 shall affect or be deemed to modify
a representation or warranty contained in this Agreement or the conditions to
the obligations of the parties to consummate the Merger.
6.04. YieldUP Stockholders' Meeting. YieldUP shall call a meeting of its
stockholders to be held as promptly as practicable for the purpose of voting
upon this Agreement and the Merger. The YieldUP Stockholders' Meeting shall be
held to vote on the Merger and this Agreement whether or not the Board of
Directors determines that any time after the date of this Agreement that this
Agreement is no longer advisable. Subject to Section 6.02(a) hereof, YieldUP
will, through its Board of Directors, recommend to its stockholders approval of
such matters and will use its best efforts to hold such meeting as soon as
practicable after the date hereof. YieldUP shall use all reasonable efforts to
solicit from its stockholders proxies in favor of such matters as long as the
recommendation of the Board of Directors remains in effect.
6.05. Legal Conditions to Merger. Each of Parent and YieldUP will take
all reasonable actions necessary to comply promptly with all legal requirements
which may be imposed on it with respect to the Merger (which actions shall
include, without limitation, furnishing all information required under the HSR
Act and in connection with approvals of or filings with any other Governmental
Entity) and will promptly cooperate with and furnish information to each other
in connection with any such requirements imposed upon either of them or any of
their Subsidiaries in connection with the Merger. Each of Parent and YieldUP
will, and will cause its Subsidiaries to, take all reasonable actions necessary
to obtain (and will cooperate with each other in obtaining) any consent,
authorization, order, or approval of, or any exemption by, any Governmental
Entity or other public third party, required to be obtained or made by Parent,
YieldUP in connection with the Merger or the taking of any action contemplated
thereby or by this Agreement. Nothing in this Section 6.05, however, shall
require Parent, in connection with the receipt of any regulatory approval, to
agree to (i) sell or agree to sell, discontinue, or limit, before or after the
Effective Time, any assets, businesses, or interests in any assets or businesses
of YieldUP, Parent or any of their respective affiliates or (ii) agree to any
conditions relating to, or changes or restrictions in, the operations of any
such assets or businesses that, in
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either case, is reasonably likely to materially and adversely impact the
economic or business benefits of the parties to the transactions contemplated
hereby.
6.06. Payment of Taxes.
(a) YieldUP shall pay prior to the Effective Time (i) all Taxes required
to be paid by YieldUP prior to that day, and (ii) shall withhold with respect to
its employees all federal and state income taxes, FICA, FUTA, and other Taxes
required to be withheld.
(b) Parent shall pay prior to the Effective Time (i) all Taxes required to
be paid by Parent prior to that day, and (ii) shall withhold with respect to its
employees all federal and state income taxes, FICA, FUTA, and other Taxes
required to be withheld.
6.07. Public Disclosure. Any public disclosures by Parent or YieldUP with
respect to the Merger or this Agreement, or with respect to anything involving
or referring to the other, shall be made in accordance with the terms of the
Confidentiality Agreement.
6.08. Tax-Free Reorganization.
(a) Parent and YieldUP shall each use its best efforts to cause the Merger
to be treated as a reorganization within the meaning of Section 368(a)(1)(A) and
Section 368(a)(2)(D) of the Code (a "Reorganization").
(b) To the extent permitted under applicable tax laws, the Merger shall be
reported as a Reorganization in all federal, state, and local tax returns filed
after the Effective Time.
(c) Following the Merger and for a period sufficient to qualify the Merger
as a Reorganization, Parent will cause Sub to hold, at least 90% of the fair
market value of YieldUP's net assets and 70% of the fair market value of
YieldUP's gross assets held immediately prior to the Merger. For purposes of
this subsection (c), amounts paid by YieldUP to YieldUP Stockholders who receive
cash or other property, to pay reorganization expenses, and in connection with
redemptions and distributions (except for regular, normal distributions) will be
treated as assets of YieldUP held immediately prior to the Merger.
(d) Following the Merger and for a period sufficient to qualify the Merger
as a Reorganization, Parent will cause Sub to continue the historic business of
YieldUP or use a significant portion of YieldUP's business assets in a business.
(e) Following the Merger and for a period sufficient to qualify the Merger
as a Reorganization, Parent will cause Sub not to issue additional shares of its
stock that would result in Parent losing control of Sub within the meaning of
section 368(c) of the Code.
(f) Following the Merger and for a period sufficient to qualify the Merger
as a Reorganization, Parent will not reacquire any of its stock issued in the
Merger, whether directly or through a partnership, successor, or a person
related to Parent within the meaning of Treasury Regulation Section
1.368-1(e)(3).
(g) Following the Merger and for a period sufficient to qualify the Merger
as a Reorganization, Parent will not liquidate Sub, merge Sub with or into
another corporation, sell or dispose of the stock of Sub (except for transfers
to other corporations controlled by Parent), or cause Sub to sell or dispose of
any of its assets or the assets acquired from YieldUP, except for dispositions
in the ordinary course of business or transfers described in Section
368(a)(2)(C) of the Code.
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(h) Parent, Sub, YieldUP and the stockholders of YieldUP will pay their
respective expenses, if any, incurred in connection with the Merger.
(i) At the Effective Time, no indebtedness between Parent and YieldUP or
between Sub and YieldUP will have been issued, acquired, or settled at a
discount.
(j) At the Effective Time, the fair market value of the assets of YieldUP
transferred to Sub will exceed the sum of liabilities assumed by Sub, plus the
amount of liabilities, if any, to which the transferred assets are subject. All
such liabilities of YieldUP assumed by Sub, and those as to which the
transferred assets are subject, will have been incurred by YieldUP in the
ordinary course of its business.
(k) At the Effective Time, none of Parent, YieldUP or Sub will be an
investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code.
(l) In connection with the tax opinions referred to in 7.01(f), each party
agrees to deliver letters of representation in such form and substance as is
customary in the giving of such tax opinions.
6.09. NASDAQ Quotation. Parent shall use its best efforts to cause the
shares of Parent Common Stock to be issued in the Merger to be approved for
quotation on the Nasdaq National Market, subject to official notice of issuance,
prior to the Closing Date.
6.10. Stock Plans and Warrants.
(a) At the Effective Time, each outstanding YieldUP Stock Option, whether
vested or unvested, shall be deemed to constitute an option to acquire, on
substantially the same terms and conditions as were applicable under the
respective YieldUP Option Plan and under the agreement relating thereto, that
number of whole shares of Parent Common Stock equal to the product of the number
of shares of YieldUP Common Stock that were issuable upon exercise of such
option immediately before the Effective Time multiplied by the Option Ratio (as
defined in Section 6.10(d) hereto) and rounded down to the nearest whole number
of shares of Parent Common Stock, and the per-share exercise price for the
shares of Parent Common Stock issuable upon exercise of such replaced YieldUP
Stock Option will be equal to the quotient determined by dividing the exercise
price per share of YieldUP Common Stock at which such option was exercisable
immediately before the Effective Time by the Option Ratio, rounded down to the
nearest whole cent. It is the intention of the parties that the YieldUP Stock
Options so modified in accordance with this Section 6.10 qualify following the
Effective Time as "incentive stock options" as defined in Section 422 of the
Code to the extent such options qualified as incentive stock options immediately
before the Effective Time.
(b) At the Effective Time, each outstanding warrant (a "YieldUP Warrant")
to purchase shares of YieldUP Common Stock under any Warrant Agreement, shall
become a warrant to acquire, on substantially the same terms and conditions as
were applicable under such Warrant Agreement, that number of whole shares of
Parent Common Stock and cash that such holder of the YieldUP Warrant would have
received in the Merger if such holder would have exercised the YieldUP Warrant
immediately prior to the Merger.
(c) Parent shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Parent Common Stock for delivery under
the YieldUP Stock Options and the YieldUP Warrants assumed in accordance with
this Section 6.10. As soon as practicable after the Effective Time, Parent shall
file a registration statement on Form S-8 (or any successor or other appropriate
forms) with respect to the shares of
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Parent Common Stock subject to the assumed options and shall use its best
efforts to maintain the effectiveness of such registration statement for so long
as such options remain outstanding.
(d) For purposes of this Agreement, "Option Ratio" shall be .2177.
6.11. Consents. Each of Parent and YieldUP shall use all reasonable
efforts to obtain all necessary consents, waivers, and approvals under any of
Parent's or YieldUP's material agreements, contracts, licenses, or leases in
connection with the Merger.
6.12. Employee Benefits; Employee Issues. Following the Effective Time
and subject to the eligibility and other participation requirements and terms
contained in Parent's benefit programs and plans, all employees of YieldUP shall
be given credit for their periods of service with YieldUP as if such service
were with Parent in determining their eligibility for inclusion in, and the
level of benefits granted after the Effective Time under, Parent's current
employee benefit plans.
6.13. Reports. From and after the Effective Time and so long as necessary
in order to permit each officer and director of YieldUP to sell the shares of
Parent Common Stock received by them as a result of the Merger pursuant to Rule
145 and, to the extent applicable, Rule 144 under the Securities Act, Parent
will use its best efforts to file on a timely basis all reports required to be
filed by it pursuant to Section 13 or 15(d) of the Exchange Act, referred to in
paragraph (c)(1) of Rule 144 under the Securities Act (or, if applicable, Parent
will use its best efforts to make publicly available the information regarding
itself referred to in paragraph (c)(2) of Rule 144).
6.14. Notification of Certain Matters. YieldUP will give prompt notice to
Parent upon discovery thereof, and Parent will give prompt notice to YieldUP
upon discovery thereof, of (a) the occurrence, or failure to occur, of any event
which occurrence or failure would be likely to cause any representation or
warranty of such party contained in this Agreement to be untrue or inaccurate in
any material respect at any time from the date hereof to the Effective Time, and
(b) any material failure of such party, or any director, officer, employee,
agent or representative thereof, to comply with or satisfy any covenant,
condition, or agreement to be complied with or satisfied by it hereunder.
6.15. Additional Agreements; Reasonable Efforts. Subject to the terms and
conditions of this Agreement, each of the parties agrees to use all reasonable
efforts to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper, or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, subject to the appropriate vote of stockholders of YieldUP
described in Section 6.04 hereof, including cooperating fully with the other
party. In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement or to vest
the Surviving Corporation with full title to all properties, assets, rights,
approvals, immunities, and franchises of either of the Constituent Corporations,
the proper officers and directors of each party to this Agreement shall take all
such necessary action.
6.16 Director and Officer Insurance. Parent and the Surviving Corporation
shall maintain YieldUP's existing officers' and directors' liability insurance
("D&O Insurance") for a period of six (6) years after the Effective Time so long
as the annual premium therefor is not in excess of 150% of the last annual
premium paid prior to the date hereof (the "Current Premium"); provided,
however, that if the existing D&O Insurance expires, is terminated or canceled
during such six-year period, the Surviving Corporation will use
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its commercially reasonable efforts to obtain as much D&O Insurance as can be
obtained for the remainder of such period for a premium not in excess (on an
annualized basis) of 150% of the Current Premium; provided further, that, in
lieu of maintaining such existing D&O Insurance as provided above, Parent may
cause coverage to be provided under any policy maintained for the benefit of
Parent or any of its subsidiaries, so long as the terms, as a whole, are not
less advantageous to the intended beneficiaries thereof than the existing D&O
Insurance. In lieu of the purchase of such insurance by Parent or the Surviving
Corporation, YieldUP, with Parent's prior written consent, may purchase a six
year extended reporting period endorsement ("reporting tail coverage") under its
existing directors' and liability insurance coverage, provided that the total
cost of the reporting tail coverage shall not exceed $350,000, and provided that
such reporting tail coverage shall extend the director and officer liability
coverage in force as of the date hereof for a period of six (6) years from the
Effective Time for any claims based upon, arising out of, directly or indirectly
resulting from, in consequence of, or in any way involving wrongful acts or
omissions occurring on or prior to the Effective Time, including without
limitation all claims based upon, arising out of, directly or indirectly
resulting from, in consequence of, or in any way involving the Merger or related
events.
ARTICLE VII
CONDITIONS TO MERGER
7.01. Conditions to Each Party's Obligation To Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing Date of the
following conditions:
(a) Stockholder Approval. This Agreement and the Merger shall have been
approved and adopted by the requisite vote of the stockholders of YieldUP as may
be required by law, by the rules of the Nasdaq Small Cap Market, and by any
applicable provisions of YieldUP's Certificate of Incorporation and By-Laws.
(b) Approvals. There shall have been obtained permits, consents, and
approvals of securities or "blue sky" commissions or agencies of any
jurisdiction and of other governmental bodies or agencies that may reasonably be
deemed necessary so that the consummation of the Merger and the transactions
contemplated hereby will be in compliance with applicable laws, the failure to
comply with which would have a Material Adverse Effect on Surviving Corporation
after consummation of the Merger.
(c) Registration Statement. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings by a Governmental Entity seeking a stop order. The Proxy
Statement shall have been delivered to the stockholders of YieldUP in accordance
with the requirements of the Securities Act and the Exchange Act.
(d) NASDAQ. The shares of Parent Common Stock to be issued in the Merger
or to be issued pursuant to options and warrants granted pursuant to the Merger
shall have been approved for quotation on the Nasdaq National Market.
(e) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction, or other order issued by any court
of competent jurisdiction or other legal or regulatory restraints or prohibition
preventing the consummation of the Merger or materially limiting or restricting
Parent's conduct or operation of the
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business of Parent or YieldUP after the Merger shall have been issued, nor shall
any proceedings brought by any Governmental Entity seeking any of the foregoing
be pending; nor shall there be any action taken, or any statute, rule,
regulation, or order enacted, entered, enforced, or deemed applicable to the
Merger which makes the consummation of the Merger illegal.
(f) Tax Opinions. Parent shall receive the opinion of Faegre & Benson LLP
and YieldUP shall receive the opinion of Gray Cary Ware & Freidenrich LLP to the
effect that the Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Code, which opinions shall be dated on or about the date
the Proxy Statement is first mailed to the stockholders of YieldUP and which
shall be updated as of the Effective Time. In connection with providing such tax
opinions, counsel shall be entitled to rely upon tax certificates of Parent,
YieldUP and other applicable persons in such form and substance as is customary
in the giving of such opinions.
(g) Comfort Letter. On the date of the Proxy Statement, Parent and
YieldUP shall have received a letter (in form and substance as is customary in a
registered public offering) from KPMG Peat Marwick LLP, independent public
accountants of both Parent and YieldUP, dated as of such date, in connection
with such accountant's review of certain data and information contained in the
Registration Statement and the Proxy Statement.
7.02. Additional Conditions to Obligations of Parent and Sub. The
obligations of Parent and Sub to effect the Merger are subject to the
satisfaction of each of the following conditions, any of which may be waived in
writing exclusively by Parent and Sub.
(a) Accuracy of Representations and Warranties; Compliance with
Covenants. The representations and warranties of YieldUP contained in this
Agreement shall be true and correct in all material respects (i) as of the date
of this Agreement, and (ii) immediately prior to the Effective Time with the
same effect as if such representations and warranties had been made immediately
prior to the Effective Time (except for representations and warranties made as
of a specified date, which shall be true and correct as of such date), except to
the extent that any and all inaccuracies in any representations and warranties,
other than those in the first two sentences of Section 3.01, those in Section
3.02 and those in the first three sentences of Section 3.04, that were true and
correct on the date of this Agreement but were inaccurate immediately prior to
the Effective Time have not had, and are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on YieldUP (provided
that, for purposes of this clause (ii), any representation and warranty in
Article III that is qualified by materiality or Material Adverse Effect language
shall be read solely for purposes of this Section 7.02(a)(ii) as if such
language were not present). YieldUP shall have performed and complied in all
material respects with the agreements and obligations contained in this
Agreement required to be performed and complied with by it at or prior to the
Effective Time. Parent and Sub shall have received a certificate signed on
behalf of YieldUP by the Chief Executive Officer and the Chief Financial Officer
of YieldUP to the effects set forth in this paragraph (a).
(b) Blue Sky Laws. Parent shall have received all state securities or
"Blue Sky" permits and other authorizations necessary to issue shares of Parent
Common Stock pursuant to the Merger.
(c) Opinion of YieldUP's Counsel. Parent shall have received a written
opinion of counsel to YieldUP dated as of the Closing Date, substantially in the
form of Exhibit 7.02(c) hereto.
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(d) Consents. YieldUP shall have obtained all of the consents, waivers,
and approvals set forth in Schedule 7.03(d) of the YieldUP Disclosure Schedule.
(e) Dissenting Shares. The holders of not more than 5% of the total of
the issued and outstanding shares of YieldUP Common Stock shall have taken such
action prior to or at the time of the stockholders' vote as is necessary as of
that time to entitle them to the statutory dissenters' rights referred to in
Section 2.01(f) hereof.
(f) 1998 Audit. The audited balance sheet of YieldUP as of December 31,
1998 and 1997, the related statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1998, and the accompanying report of KPMG Peat Marwick LLP shall have been
delivered to Parent.
(g) Employment Agreements. Sub and each of Raj Mohindra, Suraj Puri, and
David Wong shall have entered into employment agreements, substantially in the
form attached hereto as Exhibits 7.02(g)(1), (2) and (3).
7.03. Additional Conditions to Obligations of YieldUP. The obligation of
YieldUP to effect the Merger is subject to the satisfaction of each of the
following conditions, any of which may be waived, in writing, exclusively by
YieldUP.
(a) Accuracy of Representations and Warranties; Compliance with
Covenants. The representations and warranties of Parent and Sub contained in
this Agreement shall be true and correct in all material respects (i) as of the
date of this Agreement, and (ii) immediately prior to the Effective Time with
the same effect as if such representations and warranties had been made
immediately prior to the Effective Time (except for representations and
warranties made as of a specified date, which shall be true and correct as of
such date); Parent and Sub shall each have performed and complied in all
material respects with the agreements and obligations contained in this
Agreement required to be performed and complied with by it at or prior to the
Effective Time; and YieldUP shall have received a certificate signed on behalf
of Parent by the Chief Executive Officer and Chief Financial Officer of Parent
to the effects set forth in this paragraph (a).
(b) Opinion of Parent's Counsel. YieldUP shall have received a written
opinion of counsel to Parent dated as of the Closing Date, substantially in the
form of Exhibit 7.03(b) hereto.
ARTICLE VIII
TERMINATION AND AMENDMENT
8.01. Termination. This Agreement may be terminated and the Merger and
the other transactions contemplated herein may be abandoned at any time prior to
the Effective Time, by written notice by the terminating party to the other
party, whether before or after approval of the matters presented in connection
with the Merger by the stockholders of YieldUP:
(a) by mutual written consent of the Board of Directors of Parent and
YieldUP; or
(b) by either Parent or YieldUP by action of its Board of Directors if the
Merger shall not have been consummated within 150 days of the date hereof
(provided that the right to terminate this Agreement under this Section 8.01(b)
shall not be available to a
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party whose failure to fulfill any obligation under this Agreement has been the
cause of or resulted in the failure of the Merger to occur on or before such
date);
(c) by either Parent or YieldUP by action of its Board of Directors if a
court of competent jurisdiction or other Governmental Entity shall have issued a
nonappealable final order, decree, or ruling or taken any other action, in each
case having the effect of permanently restraining, enjoining, or otherwise
prohibiting the Merger, except, if the party relying on such order, decree, or
ruling or other action has not complied with its obligations under Section 6.05
of this Agreement;
(d) by Parent or YieldUP by action of its Board of Directors, if, at the
YieldUP Stockholders' Meeting (including any adjournment or postponement
thereof), the requisite vote of the stockholders of YieldUP in favor of this
Agreement and the Merger shall not have been obtained;
(e) by Parent by action of its Board of Directors, if (i) the Board of
Directors of YieldUP shall have withdrawn or modified its recommendation of this
Agreement or the Merger in any way detrimental to Parent or shall have resolved
to so withdraw or modify such recommendation; (ii) the Board of Directors of
YieldUP shall have recommended to the stockholders of YieldUP an Alternative
Transaction (as defined in Section 8.04 hereof); or (iii) a tender offer or
exchange offer for 15% or more of the outstanding shares of YieldUP Common Stock
is commenced (other than by Parent or an Affiliate of Parent) and the Board of
Directors of YieldUP recommends that the stockholders of YieldUP tender their
shares in such tender or exchange offer;
(f) by Parent by action of its Board of Directors, if any of the
conditions set forth in Section 7.01 or 7.02 shall become impossible to fulfill
other than for reasons within the control of Parent, and such conditions shall
not have been waived under Article VII; or
(g) by YieldUP by action of its Board of Directors, if any of the
conditions set forth in Section 7.01 or 7.03 shall become impossible to fulfill
other than for reasons within the control of YieldUP, and such conditions shall
not have been waived under Article VII.
8.02. Effect of Termination.
(a) In the event of termination of this Agreement as provided in Section
8.01 hereof, this Agreement shall immediately become void and there shall be no
liability or obligation on the part of Parent, YieldUP, Sub or their respective
officers, directors, shareholders, or Affiliates, except as set forth in Section
8.03 hereof or except to the extent the termination is a result of a willful and
material breach by a party to this Agreement of any representation, warranty or
covenant contained in this Agreement (subject to Section 8.02(b)); provided that
the provisions of Section 8.02(b) and Section 8.03 of this Agreement shall
remain in full force and effect and survive any termination of this Agreement.
(b) In the event of a termination of this Agreement by YieldUP pursuant to
Section 8.01(g) hereof as a result of a willful and material breach of Parent,
Parent shall, as YieldUP's sole and exclusive remedy under this Agreement, in
equity or otherwise, pay to YieldUP an amount equal to $1,000,000 within five
business days of such termination.
8.03. Fees and Expenses.
(a) Except as set forth in this Section 8.03, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by
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the party incurring such expenses, whether or not the Merger is consummated;
provided, however, that Parent and YieldUP shall share equally all fees and
expenses, other than accountants, attorneys' and other professional fees,
incurred in connection with the filings and notices required under the HSR Act
and the printing and filing of the Proxy Statement (including any related
preliminary materials) and the Registration Statement (including financial
statements and exhibits) and any amendments or supplements.
(b) In the event of termination of this Agreement pursuant to Section
8.01(d) or (e) hereof, then, in addition to any damages which may be available
as a result of a material breach by YieldUP of any representation, warranty, or
covenant contained in this Agreement, YieldUP shall pay to Parent an amount
equal to $1,000,000. Such fee to be payable within five business days after such
termination.
(c) In the event of termination of this Agreement by Parent pursuant to
Section 8.01(b) or 8.01(f) hereof as a result of a material breach by YieldUP of
any representations, warranties or covenants contained in this Agreement and
prior to such termination (i) any person or group shall have informed YieldUP
(or the Board of Directors or an executive officer of YieldUP) that such person
or group proposes, intends to propose, is considering proposing, or will or may,
if the Merger is delayed, abandoned, or not approved by YieldUP's stockholders,
propose, an Alternative Transaction, or (ii) any such person or group or YieldUP
publicly announces (including without limitation any filing with any federal or
state office or agency) that such person or group has proposed, intends to
propose, is considering proposing, or will or may, if the Merger is delayed,
abandoned, or not approved by YieldUP's stockholders, propose, an Alternative
Transaction, and within one year after such termination an Alternative
Transaction (whether or not involving such person or group) is consummated,
then, in addition to any damages which may be available as a result of a
material breach by YieldUP of any representation, warranty, or covenant
contained in this Agreement, YieldUP shall pay to Parent an amount equal to
$1,000,000. Such fee shall be payable within five business days after the
consummation of such Alternative Transaction.
8.04. Alternative Transaction Definition. As used in this Agreement,
"Alternative Transaction" means either (i) a transaction pursuant to which any
person (or group of persons) including current management of YieldUP but other
than Parent or its Affiliates (a "Third Party") acquires outstanding shares of
YieldUP Common Stock pursuant to a tender offer or exchange offer or otherwise
that, in the aggregate possess 20% or more of the voting power of the
outstanding YieldUP Common Stock, (ii) a merger or other business combination
involving YieldUP pursuant to which any Third Party acquires outstanding equity
securities of YieldUP or of the entity surviving such merger or business
combination that, in the aggregate, possess 20% or more of the voting power of
such outstanding YieldUP securities or the securities of such other entity,
(iii) any other transaction pursuant to which any Third Party acquires control
of assets of YieldUP having a fair market value (as determined by the Board of
Directors of Parent in good faith) equal to more than 20% of the fair market
value of all the assets of YieldUP immediately prior to such transaction, or
(iv) any public announcement of a proposal, plan, or intention to do any of the
foregoing or any agreement to engage in any of the foregoing.
8.05. Amendment. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any time
before or after approval of the matters presented in connection with the Merger
by the stockholders of YieldUP, but, after any such approval, no amendment shall
be made which by law requires further approval by such stockholders without such
further approval. This
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Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
8.06. Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto, and (iii) waive compliance
with any of the agreements or conditions contained herein. Any agreement of a
party hereto to any such extension or waiver shall be valid only if set forth in
a written instrument signed on behalf of such party.
ARTICLE IX
MISCELLANEOUS
9.01. Nonsurvival of Representations, Warranties, and Agreements. None of
the representations, warranties, and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for the (i) agreements contained in (x) Sections 1.05, 2.01, 2.02,
6.07, 6.08, 6.10, 6.11, 6.12, 6.13, 6.15, 6.16, 8.02, and 8.03 hereof, (y) the
last sentence of Section 8.05, and (z) Article IX, and (ii) the agreements
delivered pursuant to Section 3.34 hereof. The Confidentiality Agreement shall
survive the execution and delivery of this Agreement.
9.02. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (which is
confirmed), or mailed by registered or certified mail (return receipt requested)
or sent by overnight courier to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
(a) if to Parent or Sub, to:
FSI International, Inc.
322 Lake Hazeltine Drive
Chaska, Minnesota 55318
Attention: Benno G. Sand
with a required copy to each of (which alone shall not constitute
notice):
FSI International, Inc.
322 Lake Hazeltine Drive
Chaska, Minnesota 55318
Attention: Luke R. Komarek
Faegre & Benson LLP
2200 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402-3901
Attention: Douglas P. Long
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(b) if to YieldUP, to:
YieldUP International Corporation
117 Easy Street
Mountain View, California 94043
Attention: Raj Mohindra
with a required copy to (which alone shall not constitute notice):
Gray Cary Ware & Freidenrich LLP
4365 Executive Drive, Suite 1600
San Diego, California 92121
Attention: Scott M. Stanton
9.03. Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes," or "including" are used in this Agreement they shall be deemed to be
followed by the words "without limitation." The phrase "made available" in this
Agreement shall mean that the information referred to has been made available if
requested by the party to whom such information is to be made available. The
phrases "the date of this Agreement," "the date hereof," and terms of similar
import, unless the context otherwise requires, shall be deemed to refer to the
date set forth in the first paragraph of this Agreement.
9.04. 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 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.
9.05. Entire Agreement; No Third Party Beneficiaries. This Agreement
(including the documents and the instruments referred to herein) (a) constitute
the entire agreement and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof
(except for the Confidentiality Agreement), and (b) except as specifically
provided herein, are not intended to confer upon any person other than the
parties hereto any rights or remedies hereunder.
9.06. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota without regard to any
applicable conflicts of law.
9.07. Assignment. Neither this Agreement nor any of the rights,
interests, or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of, and be enforceable by the parties
and their respective successors and assigns.
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ARTICLE X
DEFINITIONS
10.01. Subsidiary. As used in this Agreement, the term "subsidiary" shall
mean, with respect to any party, corporation, or other organization, whether
incorporated or unincorporated, of which (i) such party or any other Subsidiary
of such party is a general partner (excluding partnerships, the general
partnership interests of which held by such party or any Subsidiary of such
party do not have a majority of the voting interest in such partnership) or (ii)
at least a majority of the securities or other interests having by their terms
ordinary voting power to elect a majority of the Board of Directors or others
performing similar functions with respect to such corporation or other
organization is directly or indirectly owned or controlled by such party or by
any one or more of its Subsidiaries, or by such party and one or more of its
Subsidiaries.
10.02. Affiliate. As used in this Agreement, the term "Affiliate" of
"affiliate" shall have the meaning set forth in Rule 12b-2 of the General Rules
and Regulations promulgated under the Exchange Act.
10.03. Knowledge. All references in this Agreement to knowledge of a
corporation shall be deemed to mean knowledge of any one or more of its
executive officers.
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IN WITNESS WHEREOF, Parent, Sub, and YieldUP have caused this Agreement to
be signed by their respective officers thereunto duly authorized as of the date
first written above.
FSI INTERNATIONAL, INC.
By /s/ Benno G. Sand
-------------------------------------------
Its Chief Administrative Officer
BMI INTERNATIONAL, INC.
By /s/ Benno G. Sand
-------------------------------------------
Its Chief Administrative Officer
YIELDUP INTERNATIONAL CORPORATION
YIELDUP INTERNATIONAL CORPORATION
By /s/ Raj Mohindra
-------------------------------------------
Its President and Chief Executive Officer
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<PAGE> 140
FIRST AMENDMENT TO
AGREEMENT AND PLAN OF REORGANIZATION
This First Amendment (this "Amendment"), is dated as of June 16, 1999, and
is made to the Agreement and Plan of Reorganization, dated as of January 21,
1999 (the "Original Agreement"), among FSI International, Inc., a Minnesota
corporation ("Parent"), BMI International, Inc., a Minnesota corporation and
wholly owned subsidiary of Parent, and YieldUP International Corporation, a
Delaware corporation ("YieldUP").
Whereas, Section 2.01(c) of the Original Agreement currently provides an
incorrect dollar amount to be paid to former YieldUP stockholders in lieu of the
issuance of fractional shares of Parent Common Stock;
Whereas, Section 8.01(b) of the Original Agreement currently provides that
either Parent or YieldUP may terminate the Original Agreement if the Merger
shall not have been consummated within 150 days of January 21, 1999; and
Whereas, the parties to the Original Agreement desire to amend that
agreement to revise Sections 2.01(c) and 8.01(b) thereof.
Now, therefore, the parties hereby agree to amend the Original Agreement as
follows:
1. Fractional Shares. The reference in Section 2.01(c) of the Original
Agreement to "$1.8806" is hereby amended to read "$12.00."
2. Termination Date. Section 8.01(b) of the Original Agreement is hereby
amended and restated in its entirety to read as follows:
(b) by either Parent or YieldUP by action of its Board of Directors if
the Merger shall not have been consummated on or before August 31, 1999
(provided that the right to terminate this Agreement under this Section
8.01(b) shall not be available to a party whose failure to fulfill any
obligation under this Agreement has been the cause of or resulted in the
failure of the Merger to occur on or before such date);
3. Defined Terms. All capitalized terms used but not defined in this
Amendment have the meanings given them in the Original Agreement. All references
in the Original Agreement to "this Agreement" mean the Original Agreement as
amended by this Amendment.
4. Continuing Effect. Except as modified by this Amendment, the Original
Agreement remains in full force and effect, without change.
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In witness whereof, the parties have caused this Amendment to be signed by
their respective officers thereunto duly authorized as of the date first written
above.
FSI INTERNATIONAL, INC.
By /s/ Benno G. Sand
-------------------------------------------
Its Chief Administrative Officer
BMI INTERNATIONAL, INC.
By /s/ Benno G. Sand
-------------------------------------------
Its Chief Administrative Officer
YIELDUP INTERNATIONAL CORPORATION
By /s/ Raj Mohindra
-------------------------------------------
Its President and Chief Executive Officer
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<PAGE> 142
SECOND AMENDMENT TO
AGREEMENT AND PLAN OF REORGANIZATION
This Second Amendment (this "Amendment"), is dated as of August 12, 1999,
and is made to the Agreement and Plan of Reorganization, dated as of January 21,
1999 (the "Original Agreement"), as first amended on June 16, 1999, among FSI
International, Inc., a Minnesota corporation ("Parent"), BMI International,
Inc., a Minnesota corporation and wholly owned subsidiary of Parent, and YieldUP
International Corporation, a Delaware corporation ("YieldUP").
Whereas, Section 8.01(b) of the Original Agreement, as amended, currently
provides that either Parent or YieldUP may terminate the Original Agreement if
the Merger shall not have been consummated on or before August 31, 1999; and
Whereas, the parties to the Original Agreement desire to amend that
agreement to revise Section 8.01(b) thereof.
Now, therefore, the parties hereby agree to amend the Original Agreement as
follows:
1. Termination Date. Section 8.01(b) of the Original Agreement is hereby
amended and restated in its entirety to read as follows:
(b) by either Parent or YieldUP by action of its Board of Directors if
the Merger shall not have been consummated on or before September 30, 1999
(provided that the right to terminate this Agreement under this Section
8.01(b) shall not be available to a party whose failure to fulfill any
obligation under this Agreement has been the cause of or resulted in the
failure of the Merger to occur on or before such date);
2. Defined Terms. All capitalized terms used but not defined in this
Amendment have the meanings given them in the Original Agreement. All references
in the Original Agreement to "this Agreement" mean the Original Agreement as
amended by this Amendment and the first amendment.
3. Continuing Effect. Except as modified by this Amendment, the Original
Agreement remains in full force and effect, without change.
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In witness whereof, the parties have caused this Amendment to be signed by
their respective officers thereunto duly authorized as of the date first written
above.
FSI INTERNATIONAL, INC.
By /s/ Patricia M. Hollister
-------------------------------------------
Its Chief Financial Officer
BMI INTERNATIONAL, INC.
By /s/ Benno G. Sand
-------------------------------------------
Its Chief Administrative Officer
YIELDUP INTERNATIONAL CORPORATION
By /s/ Raj Mohindra
-------------------------------------------
Its President and Chief Executive Officer
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<PAGE> 144
THIRD AMENDMENT TO
AGREEMENT AND PLAN OF REORGANIZATION
This Third Amendment (this "Amendment"), is dated as of September 9, 1999,
and is made to the Agreement and Plan of Reorganization, dated as of January 21,
1999 (the "Original Agreement"), as amended on June 16 and August 12, 1999,
among FSI International, Inc., a Minnesota corporation ("Parent"), BMI
International, Inc., a Minnesota corporation and wholly owned subsidiary of
Parent, and YieldUP International Corporation, a Delaware corporation
("YieldUP").
Whereas, Section 8.01(b) of the Original Agreement, as amended, currently
provides that either Parent or YieldUP may terminate the Original Agreement if
the Merger shall not have been consummated on or before September 30, 1999; and
Whereas, the parties to the Original Agreement desire to amend that
agreement to revise Section 8.01(b) thereof.
Now, therefore, the parties hereby agree to amend the Original Agreement as
follows:
1. Termination Date. Section 8.01(b) of the Original Agreement is hereby
amended and restated in its entirety to read as follows:
(b) by either Parent or YieldUP by action of its Board of Directors if
the Merger shall not have been consummated on or before October 31, 1999
(provided that the right to terminate this Agreement under this Section
8.01(b) shall not be available to a party whose failure to fulfill any
obligation under this Agreement has been the cause of or resulted in the
failure of the Merger to occur on or before such date);
2. Defined Terms. All capitalized terms used but not defined in this
Amendment have the meanings given them in the Original Agreement. All references
in the Original Agreement to "this Agreement" mean the Original Agreement, as
amended.
3. Continuing Effect. Except as modified by this Amendment, the Original
Agreement remains in full force and effect, without change.
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In witness whereof, the parties have caused this Amendment to be signed by
their respective officers thereunto duly authorized as of the date first written
above.
FSI INTERNATIONAL, INC.
By /s/ Patricia M. Hollister
-------------------------------------------
Its Chief Financial Officer
BMI INTERNATIONAL, INC.
By /s/ Benno G. Sand
-------------------------------------------
Its Chief Administrative Officer
YIELDUP INTERNATIONAL CORPORATION
By /s/ Raj Mahindra
-------------------------------------------
Its President and Chief Executive Officer
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<PAGE> 146
[LETTERHEAD OF NEEDHAM & COMPANY, INC.]
January 21, 1999
Board of Directors
YieldUP International Corporation
117 Easy Street
Mountain View, California 94043
Members of the Board:
We understand that FSI International, Inc. ("FSI"), YieldUP International
Corporation ("YieldUP"), and a wholly owned subsidiary of FSI ("Acquisition
Sub") propose to enter into an Agreement and Plan of Reorganization (the "Merger
Agreement") whereby YieldUP will be merged with and into Acquisition Sub (the
"Merger"). The terms of the Merger will be set forth more fully in the Merger
Agreement.
Pursuant to the proposed Merger Agreement, we understand that at the
Effective Time (as defined in the Merger Agreement), each issued and outstanding
share of Common Stock, $0.001 par value, and Class A Common Stock, $0.001 par
value, of YieldUP (collectively, "YieldUP Common Stock") (other than shares held
by stockholders exercising statutory appraisal rights and shares held by FSI,
YieldUP or their respective subsidiaries) will be converted into the right to
receive $0.7313 in cash and 0.1567 shares of Common Stock, no par value of FSI
(the "FSI Common Stock") (collectively, the "Consideration").
You have asked us to advise you as to the fairness, from a financial point
of view, of the Consideration to be received by the holders of YieldUP Common
Stock in the Merger. Needham & Company, Inc., as part of its investment banking
business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of securities, private placements and
other purposes. We have acted as financial advisor to YieldUP in connection with
the Merger and will receive a fee for our services, a substantial portion of
which is contingent on the consummation of the Merger. In addition, YieldUP has
agreed to indemnify us for certain liabilities arising from our role as
financial advisor and out of the rendering of this opinion.
For purposes of this opinion we have, among other things: (i) reviewed a
draft of the Merger Agreement dated January 20, 1999; (ii) reviewed certain
publicly available information concerning YieldUP and FSI and certain other
relevant financial and operating data of YieldUP and FSI furnished to us by
YieldUP and FSI; (iii) reviewed the historical stock prices and trading volumes
of YieldUP Common Stock and FSI Common Stock; (iv) held discussions with members
of senior management of YieldUP and FSI concerning their current and future
business prospects; (v) reviewed certain financial forecasts and projections
prepared by the respective managements of YieldUP and FSI; (vi) compared certain
publicly available financial data of companies whose securities are
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traded in the public markets and that we deemed relevant to similar data for
YieldUP; (vii) reviewed the financial terms of certain other business
combinations that we deemed generally relevant; and (viii) performed and/or
considered such other studies, analyses, inquiries and investigations as we
deemed appropriate.
In connection with our review and in arriving at our opinion, we have
assumed and relied on the accuracy and completeness of all of the financial and
other information publicly available or furnished to or otherwise reviewed by or
discussed with us for purposes of rendering this opinion and have neither
attempted to verify independently nor assumed responsibility for verifying any
of such information. In preparing our opinion, we have assumed, with your
consent, equivalent value for the Common Stock and the Class A Common Stock of
YieldUP. In addition, we have assumed, with your consent, that (i) the Merger
will be accounted for under the purchase method of accounting, (ii) the Merger
will qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, and (iii) the terms set forth in the executed
Merger Agreement will not differ materially from the proposed terms provided to
us in the draft Merger Agreement dated January 20, 1999. With respect to
YieldUP's and FSI's financial forecasts provided to us by their respective
managements, we have assumed for purposes of our opinion that such forecasts
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of such managements, at the time of preparation, of the
future operating and financial performance of YieldUP and FSI. We express no
opinion with respect to such forecasts or the assumptions on which they were
based. We have not assumed any responsibility for or made or obtained any
independent evaluation, appraisal or physical inspection of the assets or
liabilities of YieldUP and FSI. Further, our opinion is based on economic,
monetary and market conditions as they exist and can be evaluated as of the date
hereof. Our opinion as expressed herein is limited to the fairness, from a
financial point of view, to the holders of YieldUP Common Stock of the
consideration to be received by such holders in the Merger and does not address
YieldUP's underlying business decision to engage in the Merger. Our opinion does
not constitute a recommendation to any stockholder of YieldUP as to how such
stockholder should vote on the proposed Merger.
We are not expressing any opinion as to what the value of FSI Common Stock
will be when issued to the stockholders of YieldUP pursuant to the Merger or the
prices at which FSI Common Stock will actually trade at any time.
In the ordinary course of our business, we may actively trade the equity
securities of YieldUP and FSI for our own account or for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
This letter and the opinion expressed herein are provided at the request
and for the information of the board of directors of YieldUP and may not be
quoted or referred to or used by such Board for any purpose without our prior
written consent, except that this letter may be disclosed in connection with any
registration statement or proxy statement used in connection with the Merger so
long as this letter is quoted in full in such registration statement or proxy
statement.
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Based upon and subject to the foregoing, it is our opinion that as of the
date hereof the Consideration to be received by the holders of YieldUP Common
Stock pursuant to the Merger is fair to such holders from a financial point of
view.
Very truly yours,
/s/ Needham & Company, Inc.
NEEDHAM & COMPANY, INC.
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DELAWARE GENERAL CORPORATION LAW
SEC. 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
Merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to sec.
251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or sec.
264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
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c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or
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consolidation, shall, also notify such stockholders of the effective date
of the merger or consolidation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of such notice, demand
in writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such holder's
shares. If such notice did not notify stockholders of the effective date of
the merger or consolidation, either (i) each such constituent corporation
shall send a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of
the effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders
on or within 10 days after such effective date; provided, however, that if
such second notice is sent more than 20 days following the sending of the
first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such
holder's shares in accordance with this subsection. An affidavit of the
secretary or assistant secretary or of the transfer agent of the
corporation that is required to give either notice that such notice has
been given shall, in the absence of fraud, be prima facie evidence of the
facts stated therein. For purposes of determining the stockholders entitled
to receive either notice, each constituent corporation may fix, in advance,
a record date that shall be not more than 10 days prior to the date the
notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be
such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of business
on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such
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a duly verified list. The Register in Chancery, if so ordered by the Court,
shall give notice of the time and place fixed for the hearing of such petition
by registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall
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be entitled to vote such stock for any purpose or to receive payment of
dividends or other distributions on the stock (except dividends or other
distributions payable to stockholders of record at a date which is prior to the
effective date of the merger or consolidation); provided, however, that if no
petition for an appraisal shall be filed within the time provided in subsection
(e) of this section, or if such stockholder shall deliver to the surviving or
resulting corporation a written withdrawal of his demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in subsection (e) of
this section or thereafter with the written approval of the corporation, then
the right of such stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed
as to any stockholder without the approval of the Court, and such approval may
be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 4.01 of FSI's Restated By-Laws provides that FSI shall indemnify
its directors and officers to the full extent required or permitted by Minnesota
Statutes or by other provisions of law. Section 302A.521 of the Minnesota
Business Corporation Act provides in substance that, unless prohibited or
limited by its articles of incorporation or By-Laws, a corporation must
indemnify an officer or director who is made or threatened to be made a party to
a proceeding by reason of his or her official capacity against judgments,
penalties, fines, settlements, and reasonable expenses, including attorneys'
fees and disbursements, incurred by such person in connection with the
proceeding, if certain criteria are met. These criteria, all of which must be
met by the person seeking indemnification, are:
(a) that such person has not been indemnified by another organization
for the same judgments, penalties, fines, settlements, and expenses;
(b) that such person acted in good faith;
(c) that no improper personal benefit was obtained by such person and
certain statutory conflicts of interest provisions have been satisfied, if
applicable;
(d) that, in the case of a criminal proceeding, such person had no
reasonable cause to believe that the conduct was unlawful; and
(e) that such person acted in a manner he reasonably believed was in
the best interests of the corporation or, in certain limited circumstances,
not opposed to the best interests of the corporation.
The determination as to eligibility for indemnification is made by the
members of the corporation's board of directors or a committee of the board who
are at the time not parties to the proceeding under consideration, by special
legal counsel, by the shareholders who are not parties to the proceeding, or by
a court.
Article VIII of FSI's Restated Articles of Incorporation provides that no
director shall be personally liable to FSI or its shareholders for monetary
damages for breach of fiduciary duty as a director, except:
(1) for any breach of the director's duty of loyalty to FSI or its
shareholders;
(2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
(3) for dividends, stock repurchases, and other distributions made in
violation of Minnesota law or for violations of the Minnesota securities
laws;
(4) for any transaction from which the director derived an improper
personal benefit; or
(5) for any act or omission occurring prior to the effective date of
the provision limiting such liability in FSI's Articles of Incorporation.
II-1
<PAGE> 155
Article VIII does not affect the availability of equitable remedies, such
as an action to enjoin or rescind a transaction involving a breach of fiduciary
duty, although, as a practical matter, equitable relief may not be available.
This Article also does not limit liability of the directors for violations of,
or relieve them from the necessity of complying with, the federal securities
laws.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
The following Exhibits are filed as part of this registration statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<S> <C> <C>
2.1 -- Agreement and Plan of Reorganization, dated as of January
21, 1999, among FSI, BMI International, Inc., and YieldUP
(included in the proxy statement/prospectus as Exhibit A).
2.2 -- Asset Purchase Agreement, dated as of June 9, 1999, between
FSI and The BOC Group, Inc.(1)
3.1 -- Restated Articles of Incorporation of FSI.(2)
3.2 -- Restated By-Laws of FSI.(3)
3.3 -- Amendment to Restated By-Laws of FSI.(4)
4.1 -- Note Purchase Agreement between FSI and Metropolitan Life
Insurance Company and other purchasers (Schedule A
omitted).(5)
4.2 -- Form of Rights Agreement dated as of May 22, 1997 between
FSI and Harris Trust and Savings Bank, National Association,
as Rights Agent.(6)
4.3 -- Amendment dated March 26, 1998 to Rights Agreement dated May
22, 1997 by and between FSI and Harris Trust and Saving
Bank, National Association as Rights Agent.(7)
5.1 -- Opinion of Faegre & Benson LLP.
8.1 -- Opinion of Faegre & Benson LLP regarding tax matters.
8.2 -- Opinion of Gray Cary Ware & Freidenrich LLP regarding tax
matters.
10.1* -- License Agreement for Microelectronic Technology between
YieldUP and FSI dated January 21, 1999.(8)
23.1 -- Consent of KPMG LLP (relating to financial statements of
FSI).
23.2 -- Consent of KPMG LLP (relating to financial statements of
YieldUP).
23.3 -- Consent of Faegre & Benson LLP (included in Exhibits 5.1 and
8.1).
23.4 -- Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 8.2).
24.1 -- Powers of Attorney from the directors and officers of FSI.
99.1 -- Form of Proxy of YieldUP.
99.2 -- Opinion of Needham & Company, Inc. (included in the proxy
statement/prospectus as Exhibit B).
99.3 -- Consent of Needham & Company, Inc.
99.4 -- Annual Report on Form 10-KSB/A of YieldUP for the fiscal
year ended December 31, 1998.
</TABLE>
- ---------------
* Contains portions for which confidential treatment has been granted.
(1) Incorporated by reference to FSI's Current Report on Form 8-K filed June 24,
1999.
II-2
<PAGE> 156
(2) Incorporated by reference to FSI's Quarterly Report on Form 10-Q for the
quarter ended February 24, 1990.
(3) Incorporated by reference to FSI's registration statement on Form S-1, Reg.
No. 33-25035.
(4) Incorporated by reference to FSI's Annual Report on Form 10-K for the fiscal
year ended August 26, 1989.
(5) Incorporated by reference to FSI's Quarterly Report on Form 10-Q for the
quarter ended March 1, 1997.
(6) Incorporated by reference to FSI's Current Report on Form 8-K, filed June 5,
1997.
(7) Incorporated by reference to FSI's Registration Statement on Form 8-A/A,
dated April 16, 1998.
(8) Incorporated by reference to FSI's Current Report on Form 8-K, filed January
27, 1999.
(B) FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report on Schedule*
Schedule II -- Valuation and Qualifying Accounts*
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or notes
thereto.
- ---------------
* Incorporated by reference to FSI's Annual Report on Form 10-K/A for the fiscal
year ended August 29, 1998.
(C) REPORTS, OPINIONS OR APPRAISALS
Information requested hereunder is furnished as Exhibit 99.2 hereto and as
Exhibit B to the proxy statement/prospectus.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933, (ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement, and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement provided, however, that paragraphs (1)(i) and
(1)(ii) do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed by YieldUP pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
II-3
<PAGE> 157
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this registration statement shall be
deemed to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes as follows: that before any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
The undersigned registrant undertakes that every prospectus: (i) that is
filed pursuant to the immediately preceding paragraph, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Securities Act of 1933 and is
used in connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to this registration statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the
II-4
<PAGE> 158
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed after the effective date of
this registration statement through the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this registration statement when it became effective.
II-5
<PAGE> 159
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Chaska, State of
Minnesota, on the 7th day of September, 1999.
FSI INTERNATIONAL, INC.
/s/ JOEL A. ELFTMANN
By:
--------------------------------------
Joel A. Elftmann, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on the 7th day of September, 1999, by the
following persons in the capacities indicated:
<TABLE>
<C> <S>
/s/ JOEL A. ELFTMANN Chairman and Chief Executive Officer
- ------------------------------ (Principal Executive Officer)
Joel A. Elftmann
/s/ PATRICIA M. HOLLISTER Chief Financial Officer and Corporate
- ------------------------------ Controller (Principal Financial and
Patricia M. Hollister Accounting Officer)
</TABLE>
<TABLE>
<S> <C> <C>
Joel A. Elftmann
James A. Bernards
Neil R. Bonke
Terrence W. Glarner A majority of the board of directors*
Joanna T. Lau
Thomas D. George
Charles R. Wofford
</TABLE>
* Patricia M. Hollister, by signing her name hereto, does hereby sign this
document on behalf of each of the other above-named officers or directors of
the registrant pursuant to powers of attorney duly executed by such persons.
/s/ PATRICIA M. HOLLISTER
By:
--------------------------------------
Patricia M. Hollister, Chief
Financial
Officer and Corporate Controller
II-6
<PAGE> 160
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <C> <S> <C>
2.1 -- Agreement and Plan of Reorganization, dated
as of January 21, 1999, among FSI, BMI
International, Inc., and YieldUP (included
in the proxy statement/prospectus as Exhibit
A).......................................... Filed Electronically
2.2 -- Asset Purchase Agreement, dated as of June
9, 1999, between FSI and The BOC Group,
Inc. ....................................... Incorporated by Reference
3.1 -- Restated Articles of Incorporation of FSI... Incorporated by Reference
3.2 -- Restated By-Laws of FSI..................... Incorporated by Reference
3.3 -- Amendment to Restated By-Laws of FSI........ Incorporated by Reference
4.1 -- Note Purchase Agreement between FSI and
Metropolitan Life Insurance Company and
other purchasers (Schedule A omitted)....... Incorporated by Reference
4.2 -- Form of Rights Agreement dated as of May 22,
1997 between FSI and Harris Trust and
Savings Bank, National Association, as
Rights Agent................................ Incorporated by Reference
4.3 -- Amendment dated March 26, 1998 to Rights
Agreement dated May 22, 1997 by and between
FSI and Harris Trust and Saving Bank,
National Association as Rights Agent........ Incorporated by Reference
5.1 -- Opinion of Faegre & Benson LLP.............. Filed Electronically
8.1 -- Opinion of Faegre & Benson LLP regarding tax
matters..................................... Filed Electronically
8.2 -- Opinion of Gray Cary Ware & Freidenrich LLP
regarding tax matters....................... Filed Electronically
10.1 -- License Agreement for Microelectronic
Technology between YieldUP and FSI dated
January 21, 1999............................ Incorporated by Reference
23.1 -- Consent of KPMG LLP (relating to financial
statements of FSI).......................... Filed Electronically
23.2 -- Consent of KPMG LLP (relating to financial
statements of YieldUP)...................... Filed Electronically
23.3 -- Consent of Faegre & Benson LLP (included in
Exhibits 5.1 and 8.1)....................... Filed Electronically
23.4 -- Consent of Gray Cary Ware & Freidenrich LLP
(included in Exhibit 8.2)................... Filed Electronically
24.1 -- Powers of Attorney from the directors and
officers of FSI............................. Filed Electronically
99.1 -- Form of Proxy of YieldUP.................... Filed Electronically
99.2 -- Opinion of Needham & Company, Inc. (included
in the proxy statement/prospectus as Exhibit
B).......................................... Filed Electronically
99.3 -- Consent of Needham & Company, Inc........... Filed Electronically
99.4 -- Annual Report on Form 10-KSB/A of YieldUP
for the fiscal year ended December 31,
1998........................................ Filed Electronically
</TABLE>
II-7
<PAGE> 1
EXHIBIT 5
[Letterhead of Faegre & Benson LLP]
September 13, 1999
FSI International, Inc.
322 Lake Hazeltine Drive
Chaska, MN 55318
Re: Registration on Form S-4 of 1,299,105 Shares of
Common Stock
Ladies and Gentlemen:
We have acted as counsel to FSI International, Inc., a Minnesota
corporation, in connection with the registration by FSI under the Securities
Act of 1933, as amended, of 1,299,105 shares of its common stock, no par value
(the "Shares"). The Shares are being registered pursuant to a Registration
Statement on Form S-4 (as amended or supplemented, the "Registration
Statement") to be filed with the Securities and Exchange Commission. The
Shares are being issued pursuant to the Agreement and Plan of Reorganization,
dated January 21, 1999 (the "Reorganization Agreement"), among FSI, BMI
International, Inc., a Minnesota corporation and wholly owned subsidiary of FSI
("Sub"), and YieldUP International Corporation, a Delaware corporation.
We have examined such documents, records, and matters of law as we have
deemed necessary for the purposes of this opinion, and based thereupon, we are
of the opinion that the Shares to be issued upon the merger of YieldUP with and
into Sub are duly authorized and, upon the filings intended to effect the
merger of YieldUP with and into Sub in accordance with the Reorganization
Agreement and the laws of the States of Minnesota and Delaware, will be validly
issued, fully paid, and nonassessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to our firm under the caption "Legal Matters" in
the prospectus constituting a part of the Registration Statement.
Very truly yours,
/s/ Faegre & Benson LLP
Faegre & Benson LLP
<PAGE> 1
EXHIBIT 8.1
[Letterhead of Faegre & Benson LLP]
September 13, 1999
FSI International, Inc.
322 Lake Hazeltine Drive
Chaska, MN 55318
Ladies and Gentlemen:
We have acted as counsel to FSI International, Inc. ("FSI"), a Minnesota
corporation, in connection with the transactions described in the Agreement and
Plan of Reorganization dated January 21, 1999 (the "Agreement"), among FSI, BMI
International, Inc., a Minnesota corporation and a wholly owned subsidiary of
FSI ("Sub"), and YieldUP International Corporation, a Delaware corporation
("YieldUP"). Pursuant to the Agreement, at the Effective Time, as defined in
the Agreement, YieldUP shall be merged with and into Sub (the "Merger"), with
Sub being the surviving corporation. Except as otherwise indicated,
capitalized terms used herein have the meanings set forth in the Agreement.
FSI is filing with the Securities and Exchange Commission, as of the date
hereof, under the Securities Act of 1933, as amended (the "Securities Act"), a
registration statement on Form S-4 (the "Registration Statement") with respect
to the common stock of FSI to be issued to the YieldUP shareholders in the
Merger in exchange for their Common Stock and Class A Common Stock in YieldUP
(the "YieldUP Common Stock"). In addition, YieldUP and FSI have prepared a
Proxy Statement/Prospectus as of the date hereof (the "Proxy
Statement/Prospectus"), which is contained in and made a part of the
Registration Statement.
You have requested our opinion regarding whether the Merger will be treated
for federal income tax purposes as reorganization within the meaning of section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). In
delivering this opinion, we have reviewed the Agreement, and have also reviewed
and relied upon the accuracy of the facts stated in the Proxy
Statement/Prospectus (including Exhibits thereto) and such other materials as we
have deemed necessary or appropriate as a basis for our opinion, including
factual representations contained in the following: (a) an Officer's Tax
Certificate of FSI dated September 9, 1999, signed by an authorized officer of
FSI and delivered to us (the "FSI Certificate"); and (b) an Officer's Tax
Certificate of YieldUP dated September 9, 1999, signed by an authorized officer
of YieldUP and delivered to us (the "YieldUP Certificate").
The opinion expressed below is based upon existing law and currently
applicable Treasury regulations promulgated under the Code, published
administrative positions of the Internal Revenue Service contained in revenue
rulings and revenue procedures currently in effect, and judicial decisions.
Because this opinion is being delivered prior to the Effective Time of the
Merger, it must be considered prospective and dependent upon future events.
There can be no assurance that changes in the law may not occur, either
prospectively or retroactively, that could affect the United States federal
income tax consequences of the Merger. To the extent there are changes in such
legal authorities, our opinion is not applicable. We assume no obligation to
modify or supplement our opinion if, after the Merger, there are any changes in
the relevant legal authorities, or if we become aware of facts that might
change our
<PAGE> 2
FSI International, Inc.
September 13, 1999
Page 2
opinion. Our opinion is limited to the specific United States federal income
tax consequences presented below. No opinion is expressed as to any
transaction other than the Merger, including any transaction undertaken in
connection with the Merger. In addition, this opinion does not address any
estate, gift, state, local or foreign tax consequences that may result from the
Merger. Further, you should be aware that an opinion of counsel represents only
counsel's best legal judgment, and has no binding effect or official status of
any kind, and that no assurance can be given that contrary positions may not be
taken by the Service or that a court considering the issues would not hold
otherwise.
In addition, in connection with rendering this opinion, we have assumed
(without any independent investigation thereof) that: (a) to the extent any
expenses relating to the Merger (or the "plan of reorganization" within the
meaning of Treas. Reg. Section 1.368-1(c) with respect to the Merger) are
funded directly or indirectly by a party other than the incurring party, such
expenses will be reorganization expenses within the guidelines established in
Revenue Ruling 73-54, 1973-1 C.B. 187; (b) at all relevant times prior to and
including the Effective Date, (i) no outstanding indebtedness of FSI, YieldUP,
or Sub has or will represent equity for tax purposes; (ii) no outstanding
equity of FSI, YieldUP, or Sub has represented or will represent indebtedness
for tax purposes; (iii) no outstanding security, instrument, agreement or
arrangement that provides for, contains, or represents either a right to
acquire YieldUP capital stock (or to share in the appreciation thereof)
constitutes or will constitute "stock" for purposes of Section 368(c) of the
Code; and (c) original documents (including signature) are authentic, documents
submitted to us as copies conform to the original documents, and there has been
(or will be by the Effective Time of the Merger) due execution and delivery of
all documents where due execution and delivery are prerequisites to the
effectiveness thereof; (d) any statement or representation in the FSI
Certificate or the YieldUP Certificate made "to the best of knowledge" or
otherwise similarly qualified is correct without such qualification, and all
statements and representations in the FSI Certificate or the YieldUP
Certificate, whether or not qualified, are true and will remain true through
the Effective Date and thereafter where relevant; (e) the Merger will be
consummated pursuant to the Agreement (and without any waiver, breach or
amendment of any of the provisions thereof) and as described in the Proxy
Statement/Prospectus and will be effective under applicable state law; (f) the
Merger will be reported by FSI and YieldUP on their respective federal income
tax returns in a manner consistent with the opinion set forth below; (g) an
opinion of counsel, substantially identical in substance to this opinion, has
been delivered to YieldUP from Gray Cary Ware & Friedenrich LLP, and will not
be withdrawn prior to the Effective Date
Based on the foregoing documents, materials, assumptions and information,
and subject to the qualifications and assumptions set forth herein and in the
Proxy Statement/Prospectus, it is our opinion that (a) the Merger will be
treated for United States federal income tax purposes as a reorganization
pursuant to section 368(a) of the Code; (b) each of FSI, Sub and YieldUP will be
a "party to the reorganization" within the meaning of section 368(b) of the
Code; (c) no gain or loss will be recognized by FSI, Sub or YieldUP; and (d) all
of the material United States federal income tax consequences of the Merger are
contained in this opinion and in the Proxy Statement/Prospectus under the
heading "The Merger--Federal Income Tax Consequences," and that disclosure is
correct in all material respects, subject to the limitations set forth therein.
<PAGE> 3
FSI International, Inc.
September 13, 1999
Page 3
This opinion is being furnished solely for the benefit of FSI and may not
be relied upon in any manner or for any purpose by any other person.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the references to this firm in the Proxy
Statement/Prospectus. In giving this consent, we do not admit that we come
within the category of persons whose consent is required under Section 7 of the
Securities Act or the rules and regulations of the Commission thereunder.
Very truly yours,
/s/ Faegre & Benson LLP
FAEGRE & BENSON LLP
<PAGE> 1
EXHIBIT 8.2
[Letterhead of Gray Cary Ware & Freidenrich LLP]
September 13, 1999
YieldUP International Corporation
117 Easy Street
Mountain View, California 94043
Ladies and Gentlemen:
This opinion is being delivered to you in accordance with the requirements
of Item 601(b)(8) of Regulation S-K under the Securities Act of 1933, as
amended, in connection with the filing of a registration statement on Form S-4
of a Proxy Statement/Prospectus (the "Registration Statement") pursuant to the
Agreement and Plan of Reorganization dated as of January 21, 1999 (the
"Reorganization Agreement"), by and among FSI International, Inc., a Minnesota
corporation ("FSI"), BMI International, Inc., a Minnesota corporation and a
wholly owned subsidiary of FSI ("Sub"), and YieldUP International Corporation,
a Delaware corporation (the "Company"). Pursuant to the Reorganization
Agreement, the Company will merge with and into Sub, with Sub being the
surviving corporation (the "Merger").
Unless otherwise defined, capitalized terms referred to herein shall have
the same meanings as set forth in the Reorganization Agreement. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").
We have acted as counsel to the Company in connection with the preparation
and execution of the Reorganization Agreement. As such, and for the purpose of
rendering this opinion, we have examined and are relying upon (without any
independent investigation or review thereof) the truth and accuracy, at all
relevant times, of the statements, covenants, representations and warranties
contained in the following documents (including all schedules and exhibits
thereto): (1) the Reorganization Agreement; (2) factual representations made to
us in letters provided by the Company, Sub and FSI in connection with this
opinion (the "Officers' Certificates"); (3) the facts, statements, descriptions
and representations set forth in the Registration Statement; and (4) such other
instruments and documents related to the formation, organization and operation
of the Company, Sub and FSI or to the consummation of the Merger and the
transactions contemplated thereby as we have deemed necessary or appropriate in
order to enable us to render this opinion.
In connection with rendering this opinion, we have assumed or obtained
representations (and are relying thereon, without any independent investigation
or review thereof) that:
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there has been
(or will be by the Effective Time of the Merger) due execution and delivery of
all documents where due execution and delivery are prerequisites to
effectiveness thereof;
2. Any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification. As to all matters
in which a person or entity making a representation referred to above has
represented that such person or entity either is not a party to, does not have,
or is not aware of, any plan or intention, understanding or agreement, there is
in fact no such plan, intention, understanding or agreement;
<PAGE> 2
September 13, 1999
Page 2
3. All statements, descriptions and representations contained in any of
the documents referred to herein or otherwise made to us (including, but not
limited to the Officers' Certificates) are true and correct as of the date
hereof and will be true and correct at the Effective Time, and no actions have
been (or will be) taken which are inconsistent with such statements,
descriptions and representations;
4. The Merger will be consummated in accordance with the Reorganization
Agreement (and without any waiver, breach or amendment of any of the material
provisions thereof), will be effective under the applicable state law, and will
be reported by the Company and FSI on their respective federal income tax
returns in a manner consistent with the opinion set forth below; and
5. An opinion of Faegre & Benson LLP, counsel to FSI, substantially
identical in substance to this opinion, has been delivered and not withdrawn.
Based on our examination of the foregoing items and subject to the
assumptions, limitations and qualifications set forth herein and in the
Registration Statement, we are of the opinion that:
1. For United States federal income tax purposes, the Merger will
constitute a reorganization within the meaning of Section 368(a) of the Code;
2. Each of the Company, FSI and Sub will be a "party to the
reorganization" within the meaning of Section 368(b) if the Code;
3. The holders of Company stock will recognize gain, but not loss, equal
to the lesser of (i) the gain realized, or (ii) the cash portion of the
consideration received in the Merger. The gain realized equals the fair market
value of the total consideration received in the Merger minus the adjusted tax
basis of the holder's Company stock exchanged in the Merger; and
4. All of the material United States federal income tax consequences of the
Merger are contained in this opinion and in the Proxy Statement/Prospectus
included as part of the Registration Statement under the caption "The
Merger--Federal Income Tax Consequences," and such disclosure, insofar as it
relates to statements of law or legal conclusions, is correct in all material
respects.
This opinion represents and is based upon our best judgment regarding the
application of federal income tax laws arising under the Code, existing
judicial decisions, administrative regulations and published rulings and
procedures. Our opinion is not binding upon the Internal Revenue Service or
the courts, and the Internal Revenue Service is not precluded from successfully
asserting a contrary position. Because this opinion is being delivered prior
to the Effective Time of the Merger, it must be considered prospective and
dependent upon future events. Furthermore, no assurance can be given that
future legislative, judicial or administrative changes, on either a prospective
or retroactive basis, would not adversely affect the accuracy of the
conclusions stated herein. Nevertheless, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or other transactions contemplated
by the Reorganization Agreement. In addition, no opinion is expressed as to
any federal income tax consequences of the Merger or the other transactions
contemplated by the Reorganization Agreement except as specifically set forth
herein, and this opinion may not be relied upon except with respect to the
consequences specifically discussed herein.
No opinion is expressed as to any transaction other than the Merger as
described in the Reorganization Agreement or to any transaction whatsoever,
including the Merger, if any of the
<PAGE> 3
September 13, 1999
Page 3
transactions described in the Reorganization Agreement are not consummated in
accordance with the terms of such Reorganization Agreement and without waiver
or breach of any material provision thereof or if all of the representations,
warranties, statements and assumptions upon which we relied are not true and
accurate at all relevant times. In the event any one of the statements,
representations, warranties or assumptions upon which we have relied to issue
this opinion is incorrect, our opinion might be adversely affected and may not
be relied upon.
This opinion has been delivered to you only for the purposes stated and is
intended solely for the benefit of the Company and its stockholders. This
opinion may not be relied upon for any other purpose or by any other person or
entity, and may not be made available to any other person or entity, without
our prior written consent. We hereby consent, however, to the use of this
opinion as an exhibit to the Registration Statement and further consent to the
use of our name wherever appearing in the Registration Statement, including the
Proxy Statement/Prospectus constituting a part thereof, and any amendments
thereto.
Very truly yours,
/s/ Gray Cary Ware & Freidenrich LLP
GRAY CARY WARE & FREIDENRICH LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
FSI International, Inc.:
We consent to the use of our reports incorporated herein by reference and to
the references to our firm under the headings "Selected Historical Financial
Data" and "Experts" in the prospectus.
/s/ KPMG LLP
Minneapolis, Minnesota
September 13, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
YieldUP International Corporation:
We consent to the use of our report dated February 5, 1999, with respect to the
balance sheet of YieldUP International Corporation as of December 31, 1998, and
the related statements of operations, redeemable Series A Preferred stock and
stockholders' equity and cash flows for each of the years in the two-year
period then ended, incorporated by reference in the proxy statement/Form S-4 of
YieldUP International Corporation and FSI International, Inc., respectively,
filed on or about September 13, 1999, which report appears in the December 31,
1998, annual report on Form 10-KSB/A of YieldUP International Corporation and
to the references to our firm under the headings "Selected Historical Financial
Data" and "Experts" in the prospectus.
Our report dated February 5, 1999, contains an explanatory paragraph that
states that the Company has suffered recurring losses from operations, which
raises 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.
/s/ KPMG LLP
Mountain View, California
September 13, 1999
<PAGE> 1
EXHIBIT 24.1
FSI INTERNATIONAL, INC.
POWER OF ATTORNEY
OF DIRECTOR OR OFFICER
The undersigned director or officer of FSI International, Inc., hereby
appoints Joel A. Elftmann, Benno G. Sand, Patricia M. Hollister, and each of
them (with full power to act alone), as attorneys-in-fact and agents for the
undersigned, with full power of substitution, for and in the name, place, and
stead of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, the Registration
Statement on Form S-4 of FSI International, Inc., all amendments (including
post-effective amendments) and exhibits thereto, and all applications,
instruments, or documents to be filed with the Securities and Exchange
Commission pertaining to the registration of the securities covered thereby,
with full power and authority to perform all acts necessary or desirable to
effect the foregoing.
IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of
August, 1999.
/s/ Joel A. Elftmann
--------------------
Joel A. Elftmann
<PAGE> 2
FSI INTERNATIONAL, INC.
POWER OF ATTORNEY
OF DIRECTOR OR OFFICER
The undersigned director or officer of FSI International, Inc., hereby
appoints Joel A. Elftmann, Benno G. Sand, Patricia M. Hollister, and each of
them (with full power to act alone), as attorneys-in-fact and agents for the
undersigned, with full power of substitution, for and in the name, place, and
stead of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, the Registration
Statement on Form S-4 of FSI International, Inc., all amendments (including
post-effective amendments) and exhibits thereto, and all applications,
instruments, or documents to be filed with the Securities and Exchange
Commission pertaining to the registration of the securities covered thereby,
with full power and authority to perform all acts necessary or desirable to
effect the foregoing.
IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of
August, 1999.
/s/ Patricia M. Hollister
-------------------------
Patricia M. Hollister
<PAGE> 3
FSI INTERNATIONAL, INC.
POWER OF ATTORNEY
OF DIRECTOR OR OFFICER
The undersigned director or officer of FSI International, Inc., hereby
appoints Joel A. Elftmann, Benno G. Sand, Patricia M. Hollister, and each of
them (with full power to act alone), as attorneys-in-fact and agents for the
undersigned, with full power of substitution, for and in the name, place, and
stead of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, the Registration
Statement on Form S-4 of FSI International, Inc., all amendments (including
post-effective amendments) and exhibits thereto, and all applications,
instruments, or documents to be filed with the Securities and Exchange
Commission pertaining to the registration of the securities covered thereby,
with full power and authority to perform all acts necessary or desirable to
effect the foregoing.
IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of
August, 1999.
/s/ James A. Bernards
---------------------
James A. Bernards
<PAGE> 4
FSI INTERNATIONAL, INC.
POWER OF ATTORNEY
OF DIRECTOR OR OFFICER
The undersigned director or officer of FSI International, Inc., hereby
appoints Joel A. Elftmann, Benno G. Sand, Patricia M. Hollister, and each of
them (with full power to act alone), as attorneys-in-fact and agents for the
undersigned, with full power of substitution, for and in the name, place, and
stead of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, the Registration
Statement on Form S-4 of FSI International, Inc., all amendments (including
post-effective amendments) and exhibits thereto, and all applications,
instruments, or documents to be filed with the Securities and Exchange
Commission pertaining to the registration of the securities covered thereby,
with full power and authority to perform all acts necessary or desirable to
effect the foregoing.
IN WITNESS WHEREOF, I have hereunto set my hand this 28th day of
August, 1999.
/s/ Neil R. Bonke
-----------------
Neil R. Bonke
<PAGE> 5
FSI INTERNATIONAL, INC.
POWER OF ATTORNEY
OF DIRECTOR OR OFFICER
The undersigned director or officer of FSI International, Inc., hereby
appoints Joel A. Elftmann, Benno G. Sand, Patricia M. Hollister, and each of
them (with full power to act alone), as attorneys-in-fact and agents for the
undersigned, with full power of substitution, for and in the name, place, and
stead of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, the Registration
Statement on Form S-4 of FSI International, Inc., all amendments (including
post-effective amendments) and exhibits thereto, and all applications,
instruments, or documents to be filed with the Securities and Exchange
Commission pertaining to the registration of the securities covered thereby,
with full power and authority to perform all acts necessary or desirable to
effect the foregoing.
IN WITNESS WHEREOF, I have hereunto set my hand this 30th day of
August, 1999.
/s/ Terrence W. Glarner
-----------------------
Terrence W. Glarner
<PAGE> 6
FSI INTERNATIONAL, INC.
POWER OF ATTORNEY
OF DIRECTOR OR OFFICER
The undersigned director or officer of FSI International, Inc., hereby
appoints Joel A. Elftmann, Benno G. Sand, Patricia M. Hollister, and each of
them (with full power to act alone), as attorneys-in-fact and agents for the
undersigned, with full power of substitution, for and in the name, place, and
stead of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, the Registration
Statement on Form S-4 of FSI International, Inc., all amendments (including
post-effective amendments) and exhibits thereto, and all applications,
instruments, or documents to be filed with the Securities and Exchange
Commission pertaining to the registration of the securities covered thereby,
with full power and authority to perform all acts necessary or desirable to
effect the foregoing.
IN WITNESS WHEREOF, I have hereunto set my hand this 25th day of
August, 1999.
/s/ Joanna T. Lau
-----------------
Joanna T. Lau
<PAGE> 7
FSI INTERNATIONAL, INC.
POWER OF ATTORNEY
OF DIRECTOR OR OFFICER
The undersigned director or officer of FSI International, Inc., hereby
appoints Joel A. Elftmann, Benno G. Sand, Patricia M. Hollister, and each of
them (with full power to act alone), as attorneys-in-fact and agents for the
undersigned, with full power of substitution, for and in the name, place, and
stead of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, the Registration
Statement on Form S-4 of FSI International, Inc., all amendments (including
post-effective amendments) and exhibits thereto, and all applications,
instruments, or documents to be filed with the Securities and Exchange
Commission pertaining to the registration of the securities covered thereby,
with full power and authority to perform all acts necessary or desirable to
effect the foregoing.
IN WITNESS WHEREOF, I have hereunto set my hand this 26th day of
August, 1999.
/s/ Thomas D. George
---------------------
Thomas D. George
<PAGE> 8
FSI INTERNATIONAL, INC.
POWER OF ATTORNEY
OF DIRECTOR OR OFFICER
The undersigned director or officer of FSI International, Inc., hereby
appoints Joel A. Elftmann, Benno G. Sand, Patricia M. Hollister, and each of
them (with full power to act alone), as attorneys-in-fact and agents for the
undersigned, with full power of substitution, for and in the name, place, and
stead of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, the Registration
Statement on Form S-4 of FSI International, Inc., all amendments (including
post-effective amendments) and exhibits thereto, and all applications,
instruments, or documents to be filed with the Securities and Exchange
Commission pertaining to the registration of the securities covered thereby,
with full power and authority to perform all acts necessary or desirable to
effect the foregoing.
IN WITNESS WHEREOF, I have hereunto set my hand this 26th day of
August, 1999.
/s/ Charles R. Wofford
----------------------
Charles R. Wofford
<PAGE> 1
EXHIBIT 99.1
PROXY
YIELDUP INTERNATIONAL CORPORATION
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Raj Mahindra and Abhay Bhushan, and each of
them, with full power of substitution to represent the undersigned and to vote
all of the shares of stock of YieldUP International Corporation (the
"Company") which the undersigned is entitled to vote at the Annual Meeting of
Stockholders of the Company to be held at 117 Easy Street, Mountain View,
California 44043 on October 20, 1999 at 10:00 a.m., and at any adjournment
thereof (i) as hereinafter specified upon the proposals listed on the reverse
side and as more particularly described in the Company's Proxy Statement,
receipt of which is hereby acknowledged, and (ii) in their discretion upon such
other matters as may properly come before the meeting.
THE SHARES REPRESENTED HEREBY SHALL BE VOTED AS SPECIFIED. IF NO SPECIFICATION
IS MADE, SUCH SHARES SHALL BE VOTED FOR PROPOSAL NUMBER 1.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
<PAGE> 2
A vote FOR the following proposal is recommended by the Board of Directors:
1. APPROVAL OF THE MERGER AND REORGANIZATION AGREEMENT
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Even if you are planning to attend the meeting in person, you are urged to sign
and mail this Proxy in the return envelope so that your stock may be
represented at the meeting.
Sign exactly as your name(s) appears on your stock certificates. If shares of
stock stand on record in the names of two or more persons or in the name of
husband and wife, whether as joint tenants or otherwise, both or all of such
persons should sign this Proxy. If shares of stock are held of record by a
corporation, the Proxy should be executed by the President or Vice President
and the Secretary or Assistant Secretary, and the corporate seal should be
affixed thereto. Executors or administrators or other fiduciaries who execute
this Proxy for a deceased stockholder should give their title. Please date
this Proxy.
Signature(s)_______________________________ Date _____________________
<PAGE> 1
EXHIBIT 99.3
CONSENT OF NEEDHAM & COMPANY, INC.
We hereby consent to the inclusion in the Proxy Statement of YieldUP
International Corporation and Prospectus of FSI International, Inc. ("Proxy
Statement/Prospectus") forming part of this Registration Statement on Form S-4
of our opinion dated January 21, 1999 to the Board of Directors of YieldUP
International Corporation attached as Exhibit B to the Proxy
Statement/Prospectus and to the references to our opinion under the captions
"Summary--Fairness Opinion with Respect to the Merger" and "Background of the
Merger," "Recommendation of the YieldUP Board of Directors and YieldUP's
Reasons for the Merger," and "Opinion of Financial Adviser to YieldUP." In
giving such consent, we do not admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933
and the rules and regulations of the Securities and Exchange Commission
thereunder, nor do we thereby admit that we are experts with respect to any
part of such Registration Statement within the meaning of the term "experts" as
used in the Securities Act of 1933, as amended, or the rules and regulations of
the Securities and Exchange Commission promulgated thereunder.
/S/ Needham & Company, Inc.
NEEDHAM & COMPANY, INC.
September 8, 1999
<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[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)
<TABLE>
<S> <C>
DELAWARE 77-0341206
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER ID #)
INCORPORATION)
117 EASY STREET 94043
MOUNTAIN VIEW, CALIFORNIA (ZIP CODE)
</TABLE>
(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 X No ___
The exhibit index appears on page 38 of this Form 10-KSB Report.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
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. We have been issued eight U.S. patents for our cleaning, rinsing, and
drying technologies and have filed twenty-four additional U.S. and foreign
patent applications. The issued patents will expire in 2014 and 2015. We applied
for several U.S. trademarks in January 1998, and these trademark applications
are currently being processed. We granted a non-exclusive royalty-bearing
license to our patent portfolio to FSI International in January 1999.
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
2
<PAGE> 3
and provision for returns for our cleaning, rinsing, and drying 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:
- Single chamber cleaning, rinsing and drying of wafers, eliminating
cumbersome handling
- Improved rinse and dry cycle times for increased throughput
3
<PAGE> 4
- 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.
We are in compliance with environmental regulations. The costs and effects
of such compliance are not material.
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.
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
4
<PAGE> 5
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. See Note 8 to the Financial
Statements.
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.
We have multiple suppliers for plastic, our main raw material requirement.
Our principal suppliers are Advance Micropolish for gas mixing components,
multiple plastics suppliers such as Port Plastics, Valin, Beco, Sunnyvale Valve,
Fluoroware for valves and other components, Qualtronix for electrical
assemblies, Steven Engineering for mechanical assemblies, and Delta Diversified
and Expedite Precision for plastic shells.
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.
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
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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 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 have experienced significant operating losses since our inception in June
1993 and only commenced significant shipments of our products in the fourth
quarter of 1995. We have experienced net losses applicable to holders of common
stock 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
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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.
Our Existing Capital Resources Will Not Enable Us To Fund Our Operations Through
1999
We believe, our existing capital resources, combined with the payments
received from the licensing agreement with FSI, will enable us to fund
operations through June 1999. We will need to obtain additional capital to fund
our operations beyond June 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
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 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.
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;
- 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.
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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
At present, over 95% of our revenues come from the sales of our cleaning,
rinsing and drying systems. 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:
- 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
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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 Which Can
Negatively Effect Our Revenues And Results of Operations
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. For example, our
revenues increased substantially from $2 million in the third quarter of 1997 to
$3.3 million in the fourth quarter of 1997 due to the sale of several large
systems, and then declined to $2.6 million in the first quarter of 1998 and to
$2.1 million in the second quarter of 1998, as the sales of the larger systems
reduced.
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 and financial condition.
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.
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
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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.
A single customer, Applied Materials accounted for 11.8% of gross revenues
in 1998 and 19.8% in 1997, a single European customer, ST Microelectronics
accounted for 9.4% of gross revenues in 1998, and a single OEM customer, SCP
Global Technologies accounted for 9.1% of gross revenues in 1998. A loss of such
a large customer may have a material adverse effect on our financial condition.
We Depend on Third Parties to Increase Our Sales Potential
An increasing percentage of our revenues, from 17% of gross revenues in
1997 to 31% in 1998, 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. One of our OEM customers, UltraFab,
declared bankruptcy and we were unable to collect the money that they owed us.
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. One significant OEM customer, SCP Global Technologies,
accounted for 9.1% of our gross revenues in 1998. 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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At December 31, 1998, we had uncollected accounts receivable from our Asian
customers in the amount of $37,786. 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. We believe we have very limited intellectual property
right protection in Korea, Taiwan, China, India and other Asian countries,
excluding Japan. Our sales to these countries combined has been less than 10% of
our total revenues. 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. 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
- 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."
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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 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.
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This involved detailed analysis of the products by utilizing the Internet and
contacting the vendors directly. Letters of compliance were collected and
organized into a centralized location. Any systems that did not meet compliance
were identified.
The second step included repairing, upgrading and/or replacing any
non-compliant equipment or systems identified in the first step. This included
developing and implementing methods for immediately bringing them up to
compliance standards.
In the third step, we tested our systems, software and equipment for Y2K
readiness, or in certain cases, relying on test results or certifications
provided by third parties to us.
The fourth step involved placing compliant systems, software and equipment
into service.
A few issues were discovered with systems utilized in YieldUP's day-to-day
operations and with one of YieldUP's products. Solutions to these problems were
quickly addressed, resolved and tested by working with each vendor. The costs to
address the Y2K issues have been relatively small to date, and our products in
the field have been made compliant. Completion date for these issues was
December 1998. Final analysis of our readiness will be completed by the middle
of 1999. We have further implemented policy and procedures that all new systems
procured or developed are evaluated for Y2K readiness to assure compliance. In
the latter half of 1999, we will be finalizing contingency plans, to respond to
any unforeseen Y2K problems.
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 have been advised by all of our suppliers and business partners, which
includes OEMs, that they are addressing and preparing for any Y2K issues that
they may have. In the event any of these suppliers or business partners are not
Y2K compliant, we may experience a delay in shipping our products.
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.
Issues Related To The European Monetary Conversion
On January 1, 1999, certain member states of the European Economic
Community, including the Netherlands, fixed their respective currencies to a new
currency, the Euro. On that day, the Euro became a functional legal currency
within these countries. During the three years beginning on January 1, 1999,
business in these EEC member states will be conducted in both the existing
national currency, such as the Netherlands guilder, French franc or
deutschemark, and the Euro. Companies operating in or conducting
13
<PAGE> 14
business in EEC member states will need to ensure that their financial and other
software systems are capable of processing transactions and properly handling
the existing currencies, as well as the Euro. We are still assessing the impact
that the Euro will have on our internal systems and products. While we believe
our enterprise-wide financial and manufacturing information system will be Euro
compliant, we have not tested this system. We have not determined the costs
related to any problems that may arise in the future. Any such problems may
materially adversely affect our business, operating results and financial
condition.
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
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
because CFM has not specified the amount of damages they are seeking.
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. In both law suits filed by CFM, they are asking for
monetary damages and an injunction against our use of those products at issue. A
loss, if any, resulting from an unfavorable adjudication, cannot presently be
estimated because CFM has not specified the amount of damages they are seeking.
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
14
<PAGE> 15
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>
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. The provision for excess inventory was based on our assessment of
future inventory requirements. 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
15
<PAGE> 16
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 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, compared to 1997,
reflected the increase in bad debt expense of $1,091,360 due to adverse industry
conditions, and increased legal expense related to litigation of $100,948 and
increased patent activity expense of $23,721 (also see Item 3. Legal
Proceedings). The 1997 expenses included a non-cash expense of $300,000 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. 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, net of interest expense of $69,258, for
the year ended December 31, 1998, and net interest income was $251,029, net of
interest expense of $108,226, 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 applicable to
holders of common stock 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 investment of $1,000,000, a cash advance of $1,000,000, outstanding
receivables of $536,317 and $130,550 in prepaid deposits, 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
16
<PAGE> 17
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.
Such cash payment was funded by i) approximately $4.5 million of existing cash
resources, ii) $1 million of additional bank borrowings, and iii) $0.5 million
in proceeds from a promissory note to Abhay Bhushan, a director and chief
financial officer of YieldUP. 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 the
Liquidity and Quick Ratio 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.
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, redeemable Series A Preferred Stock and 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, plant, 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 and depreciation........... 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 REDEEMABLE SERIES A PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
REDEEMABLE SERIES A CLASS A
PREFERRED STOCK COMMON STOCK COMMON STOCK
-------------------- ------------------ ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ----------- --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1996......... -- $ -- 1,912,283 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
common stock........................... -- -- (545,319) (545) 545,319 545
Payment of notes receivable.............. -- -- -- -- -- --
Net loss................................. -- -- -- -- -- --
---- ----------- --------- ------ --------- ------
Balances as of December 31, 1997......... 0 $ 0 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......... -- -- -- -- 20,524 21
Conversion of Class A common stock to
common stock........................... -- -- (59,156) (60) 59,156 60
Issuance of warrants to lender........... -- -- -- -- -- --
Issuance of Series A preferred stock..... 600 5,759,204 -- -- -- --
Conversion of Series A preferred stock
to..................................... -- -- -- --
common stock........................... (134) (1,088,502) -- -- 2,470,588 2,470
Redemption of Series A preferred stock... (466) (6,001,664) -- -- -- --
Accretion on redeemable preferred
stock.................................. -- 1,330,962 -- -- -- --
Net loss................................. -- -- -- -- -- --
---- ----------- --------- ------ --------- ------
Balances as of December 31, 1998......... 0 $ 0 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>
Balances 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 receivable.................. -- 13,507 -- 13,507
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............. 95,828 -- -- 95,849
Conversion of Class A common stock to common
stock...................................... -- -- -- 0
Issuance of warrants to lender............... 24,353 -- -- 24,353
Issuance of Series A preferred stock......... -- -- -- --
Conversion of Series A preferred stock to
common stock............................... 1,086,031 -- -- 1,088,501
Redemption of Series A preferred stock....... -- -- -- --
Accretion 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 and depreciation........ 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............................................ $ 92,759 $ --
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
23
<PAGE> 24
product has been shipped and the collection of our receivable is probable. For
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 and depreciation...... 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 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.
25
<PAGE> 26
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
</TABLE>
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
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.
(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 the 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 portion of the proceeds allocated to the warrants
26
<PAGE> 27
amounted to $24,353, 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. 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>
CAPITAL OPERATING
YEAR ENDING 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>
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
27
<PAGE> 28
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.
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.
28
<PAGE> 29
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,
1000 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. See
Note 5.
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.
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.
29
<PAGE> 30
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.
30
<PAGE> 31
The following table summarizes information about fixed stock options
outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
OF REMAINING AVERAGE OF AVERAGE
RANGE OF 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 provide 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 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.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
31
<PAGE> 32
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.
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.
32
<PAGE> 33
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>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
-------------------------------- ------------
OTHER SECURITIES
ANNUAL 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.
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 A CLASS A
NAME AND ADDRESS OF OF COMMON PERCENTAGE 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% 1,439,756(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.
34
<PAGE> 35
(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.
(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 page 37 of this report
(b) Financial Statements
(c) Reports on Form 8-K:
Current Reports on Form 8-K filed on January 27, 1999
35
<PAGE> 36
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: September 9, 1999
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RAJ MOHINDRA Chairman, Chief Executive Officer, September 9, 1999
- --------------------------------------------- and Director
Raj Mohindra
ABHAY K. BHUSHAN* Chief Financial Officer, and September 9, 1999
- --------------------------------------------- Director
Abhay K. Bhushan
(Principal Accounting and Financial Officer)
DANIEL L. FLAMM* Director September 9, 1999
- ---------------------------------------------
Daniel L. Flamm
RAM PAUL GUPTA* Director September 9, 1999
- ---------------------------------------------
Ram Paul Gupta
SURAJ PURI* Director September 9, 1999
- ---------------------------------------------
Suraj Puri
*by: /s/ RAJ MOHINDRA
- ---------------------------------------------
Raj Mohindra, Attorney-in-Fact
</TABLE>
36
<PAGE> 37
YIELDUP INTERNATIONAL CORPORATION
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
<C> <S>
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 the Company's Form 10-KSB for
the fiscal year ended December 31, 1997.
*** Previously filed with the Company's Form 10-KSB for the fiscal year ended
December 31, 1998.
37
