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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2005
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-27892
SIPEX CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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04-6135748 |
(State of Incorporation)
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(IRS employer identification number) |
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233 South Hillview Drive, Milpitas, California
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95035 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (408) 934-7500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Name of exchange on which registered: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the
issuer as of the last business day of the registrants most recently completed second fiscal
quarter (July 2, 2005) was approximately $33,695,000 based upon the last reported price on the Pink
Sheets of $1.75 per share.
The number
of shares of the registrants common stock outstanding on August
15, 2006 was
approximately 35,550,378 shares.
EXPLANATORY NOTE
On January 20, 2005, we announced that our audit committee had commenced an internal
investigation over the possible improper recognition of revenue on sales for which price
protection, stock rotation and return rights might have been granted. As a result of this
investigation, we restated our previously reported results of operations for the fiscal year ended
December 31, 2003 and restated quarterly information for all fiscal quarters in the year ended
December 31, 2003 and the fiscal quarters ended April 3, 2004, July 3, 2004 and October 2, 2004 in
our annual report on Form 10-K for the year ended January 1,
2005.
In addition, because of the internal investigation we delayed the timely filing of our Forms
10-K for the fiscal years ended January 1, 2005 and December 31, 2005 and our quarterly reports on
Forms 10-Q for the periods ended April 2, 2005, July 2, 2005, October 1, 2005, April 1, 2006 and
July 1, 2006. We are also filing our quarterly reports on Forms 10-Q for the periods ended April 2, 2005,
July 2, 2005 and October 1, 2005 concurrently with this report.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains forward-looking statements that involve risks and
uncertainties. The statements that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, including,
without limitation, statements regarding our expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in this annual report on Form 10-K
are based on information available to us on the date hereof, and we assume no obligation to update
any such forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors, which may cause our actual results to differ materially from those
implied by the forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as may, will, should, expects, plans, anticipates,
believes, intends, estimates, predicts, potential, or continue or the negative of these
terms or other comparable terminology. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot offer any assurance of future results, levels
of activity, performance or achievements. Important factors that may cause actual results to differ
from expectations include those discussed in Risk Factors beginning on Item 1A in this document.
The terms Sipex, the Company, we, us, its and our as used in this annual report on Form
10-K refer to Sipex Corporation and its subsidiaries and its predecessors as a combined entity,
except where the context requires otherwise.
PART I
Item 1. Business:
The Form 10-K of Sipex Corporation (the Company, Sipex, we, us, or our) for the year
ended January 1, 2005 reflects a complete description of the restatement of our consolidated
financial statements and quarterly information for the year ended December 31, 2003 and the
quarterly information for the periods ended April 3, 2004, July 3, 2004 and October 2, 2004.
This report describes developments in our business and operations through the date of this
report.
Investigation and Restatement
On January 20, 2005, we announced that the audit committee of our board of directors had
commenced an internal investigation with the assistance of independent counsel and forensic
accounting experts due to the possible improper recognition of revenue during prior periods on
sales for which price protection, stock rotation or return rights might have been granted. In particular, in connection with the termination of a distributor relationship, management
discovered an e-mail which demonstrated that we had potentially granted rights of return to the
distributor. Upon discovery of this email, our management notified our audit committee, and the
audit committee began its internal investigation. In
addition, we announced that due to the timing of the audit committees investigation, we would
delay the announcement of our financial results for the fiscal quarter and year ended January 1,
2005, and might delay the timely filing of our Form 10-K for the year ended January 1, 2005.
Initially,
the scope of the internal investigation focused on one specific transaction with a distributor, in which our personnel improperly granted return rights to
the distributor. As a result of the information discovered during the investigation of these
transactions, the scope was expanded to evaluate certain additional transactions as well as other
components of the financial statement preparation and reporting process. Specifically, the audit
committees advisors analyzed and reviewed the following:
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transactions identified through interviews; |
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transactions identified through email searches; |
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aged accounts receivables; |
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credit memos and sales returns; |
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period-end transactions; |
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non-recurring transactions; |
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cut-off of revenue; and |
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return reserves. |
The investigation has been completed, and the audit committee has recommended that we take
certain remedial actions, including the adoption of the sell-through accounting
methodology for fiscal 2003 and 2004 and thereafter for
sales to all of our distributors, the termination and reprimand of certain employees and the
implementation of certain internal
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control procedures. These procedures included restructuring the
customer marketing function to require that our finance related activities are performed by the
finance department, annual ethics training for all employees, annual compliance confirmations for
all employees, certifications from the appropriate sales and marketing personnel, and staff
increases to upgrade the finance function.
The board of directors unanimously approved the audit committees recommendations. As such,
with the filing of this report, we are restating our financial statements and quarterly information
for the year ended December 31, 2003 and the quarterly information for the periods ended April 3,
2004, July 3, 2004 and October 2, 2004.
Previously, our revenue recognition policy was to record revenue upon shipment to our
distributors, or the ship-to method. Upon conclusion of the investigation, our management
determined that the sales returns provisions granted impacted their ability to reasonably estimate
the sales returns reserve. As we could not estimate the sales returns reserve, we concluded that
revenue for the transactions could not be recognized upon shipment to the distributors, and should
have been deferred until the resale of the products to the end customers, or the sell-through
method. The impact on the financial statements for correcting these errors primarily resulted in
recognizing deferred revenue on shipments when revenue was previously recognized until later
periods and in certain cases permanent reductions in revenue.
In addition, we identified and corrected various other errors related to the following revenue
items: sales cut-off errors, reversal of revenue when collectibility was not reasonably assured,
reversal of revenue related to an undocumented sale and deferral of engineering service contract
revenue. We also identified and corrected various other errors related to the following items:
errors in the recording of manufacturing personnel costs, improperly capitalized fixed assets,
errors in the calculation of depreciation, reclassification of foreign exchange gains to general
and administrative expenses, improper presentation of accrued fixed asset additions, and certain
other items.
The adjustments for the errors referred to above resulted in an aggregate decrease in revenue
of $12.9 million to $36.5 million for fiscal year 2003, compared to $49.4 million previously
reported. The net impact to gross loss was an increase of $4.7 million to $9.1 million, compared to
$4.4 million previously recorded for fiscal year 2003. The net effect to fiscal year 2003
operating expenses was an increase of $260,000 from $29.2 million that was previously reported. The
consolidated statement of operations impact of all of restatement adjustments increased 2003 net
loss by $5.2 million to $39.8 million, as compared to $34.6 million previously reported.
Delisting from the Nasdaq Global Market
On April 5, 2005, we received a Staff Determination notice from the Nasdaq Global Market
stating that we were not in compliance with Nasdaqs Marketplace Rule 4310(c)(14) because we had
not yet filed our annual report on Form 10-K for the year ended January 1, 2005. The notice stated
that our securities would be delisted from the Nasdaq Global Market on April 14, 2005, unless we
requested a hearing to appeal the delisting in accordance with Nasdaq Marketplace Rules 4800.
Likewise, on May 17, 2005, we received another Staff Determination notice from the Nasdaq
Global Market stating we were not in compliance with Nasdaqs Marketplace Rule 4310(c) (14) because
we had not yet filed our quarterly report on Form 10-Q for the quarterly period ended April 2, 2005
and that the Nasdaq Listing Qualifications Panel, or the Panel, would consider the filing
delinquency in rendering a determination regarding the continued listing on the Nasdaq Global
Market. We addressed the issues related to the delays in filing our periodic reports, and our
request for continued listing on the Nasdaq Global Market, at an oral hearing before the Panel on
May 19, 2005.
On June 21, 2005, the Panel denied our request for continued inclusion on the Nasdaq Global
Market. Our common stock was delisted from the Nasdaq Global Market effective with the beginning
of trading on Thursday, June 23, 2005. As a result, our common stock is currently traded on the
Pink Sheets electronic trading system for over-the-counter securities, where market makers and
brokers can submit bid and ask prices for our common stock on a daily basis. However, there can be
no assurances that our common stock will continue to be eligible for trading or quotation on this
or any alternative exchanges or markets.
Availability of Reports and Other Information
Our Internet website is www.sipex.com. On this website, the public can access our annual,
quarterly and current reports free of charge through a hyperlink to the Securities and Exchange
Commission, or the SEC, website as soon as reasonably practicable after we electronically file such
material with, or furnish such material to, the SEC. We intend to satisfy the
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disclosure
requirements under Item 10 of Form 10-K regarding amendment to, or waiver from, our code of
ethics by posting such information on our website at www.sipex.com, provided such method of
disclosure is then in compliance with the rules of the Nasdaq Global Market and the rules of the
SEC.
Company Overview
We were incorporated in May 1965 under the laws of the State of Massachusetts. Effective
October 2003, we changed our state of incorporation from Massachusetts to Delaware. We design,
manufacture and market, high performance, analog integrated circuits,
or ICs that primarily are
used by original equipment manufacturers, or OEMs, operating in the computing, consumer
electronics, communications and networking infrastructure markets. Some of the end product
applications that contain our ICs are cellular phones, base stations, computers, DVD players, and
digital cameras. Our products are sold either directly or through an international network of
manufacturers representatives and distributors.
While advances in digital technology have fueled the demand for digital ICs, they have also
created a demand for more precise, faster and more power efficient analog ICs. We possess a broad
portfolio of analog ICs, organized into three product families: power management, interface and
optical storage.
Recent Developments
Historically, we have fabricated a substantial portion of our products at our semiconductor
wafer manufacturing facility in Milpitas, California. In the third quarter of 2005, we decided to
close down the Milpitas wafer fabrication facility, or fab, and transfer the IC manufacturing
processes to a wafer fab operated by Hangzhou Silan Integrated Circuit Co., Ltd ., or Silan, in
Hangzhou, China and a wafer fab operated by Episil Technologies, Inc., or Episil, in Taiwan.
Definitive agreements regarding the transfer to China were entered into in February 2006, and the
transition is expected to be completed by the end of September 2006. With this new fabless
manufacturing model, we expect to achieve significant cost savings, but there can be no assurance
that the expected savings will be realized. We also use a number of third-party contractors to
fabricate, package and test our ICs.
During 2004 and 2005 a significant portion of our executive management team was changed,
including our Chief Executive Officer. Clyde R. Wallin was appointed as our Senior Vice President
of Finance and Chief Financial Officer in April 2004. Ralph Schmitt was appointed as our current
Chief Executive Officer in June 2005 and previously had worked for Cypress Semiconductor. In
addition, Edward Lam was appointed as our new Senior Vice President of Marketing and Business
Development in September 2005 and previously had worked for National Semiconductor, and Joel
Camarda was appointed as our Senior Vice President of Operations in November of 2005 and previously
had worked for Cypress Semiconductor.
Hereinafter, the years ended December 31, 2005, January 1, 2005, and December 31, 2003 are
also referred to as 2005, 2004, and 2003.
Semiconductor Industry Background
Integrated circuits, the essential building blocks of todays electronic products, are
classified as either digital or analog ICs. Digital ICs which include memory products,
microprocessors and digital signal processors, or DSPs process binary signals composed of strings
of 0s and 1s. Often they are constrained by market-based standards and depend on a companys
ability to design and manufacture very large-scale circuits, using expensive, state-of-the-art
process technologies that minimize device size.
Analog ICs act as the bridge between the digital world and physical world. They transform
signals derived from the physical environment, such as heat, pressure, sound and light, or monitor
and condition analog signals derived from external electronic inputs. In contrast with digital
ICs, analog ICs are most often designed and optimized for specialized applications in specialized
markets. Their development and successful market adoption requires close customer contact and the
deployment of small, tightly coordinated teams of experienced and highly skilled engineers who
understand the complexities of the ICs and understand the interrelationships with their layout,
process technology, packaging and end application.
Analog and digital IC manufacturers often share the characteristics of the semiconductor
industry including cyclical market demands, capacity limitations, oversupply conditions,
manufacturing variations, accelerated product life cycles, price erosion, global competition,
capital equipment expenditures and rapid technological changes. Product life cycles in the analog
IC market, with some exceptions, tend to be longer and customer pricing less volatile than digital
ICs because competition is more limited and customers tend to avoid major changes in the analog
components of their products because of the design
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complexities involved and the performance
requirements in typical analog IC applications. In addition, the capital expenditures for analog
IC manufacturers are typically lower because analog ICs usually consume less silicon area and
their fabrication processes are focused on device matching and careful layout and do not require
frequent and expensive equipment upgrades or replacements to remain competitive.
Sipexs Business Strategy
We supply our customers in target markets with an array of standard product choices as well as
custom products, which compete on the basis of features, performance, size, and pricing. We
maintain close working relationships with strategic customers. Through our close relationships, we
can understand the problems that our customers are facing and will be facing which enables us to
define and create our future products and technology roadmaps, and shorten our customers product
development cycles. In addition, we have been restructuring our operations since 2002 and continue
to do so in 2006 to reduce costs, improve productivity, and improve quality.
Sipex Markets, Applications and Products
We sell products into a variety of applications and markets including networking and
communications, computer and peripherals, industrial controls and instrumentation, and consumer
products. The customer end-products in these markets are driven by basically the same
requirements: higher operating efficiency, higher accuracy, more power output at lower voltages,
faster data transfer and higher bandwidth. These requirements provide opportunities for us to
develop our products with features designed for applications, ranging from power modules in routers
to pick-up heads in CD/DVD systems.
We currently support approximately one thousand ICs in three product categories: power
management, interface and optical storage. These products, whether custom or proprietary, are
designed for specific end applications that require unique feature sets, specific electrical
performance criteria (speed, precision, power, etc.), and additional system-level integration. We
focus on developing these products as standard analog ICs in order to serve larger markets and
reduce the risk of dependency on single customer requirements. Our interface product category
represents approximately one half of our total sales followed by power management and optical
storage, which is our smallest product line.
Power Management Products - These ICs regulate, control, monitor or provide the reference
voltage for a system or portion of a system. Direct current/direct current or DC/DC regulators and
pulse-width modulation/pulse-frequency modulation controllers convert voltage up or down within a
system and provide a controlled level of power to the system, independent of normal operating load,
line and temperature fluctuations. Supervisory ICs monitor power levels and notify controller ICs
of out-of-range power conditions. Voltage references establish benchmark voltages within a system
and provide constant outputs independent of temperature and other operating variations. Within this
product category, Sipex develops white light-emitting diode or LED drivers needed in virtually
every consumer portable device and in liquid crystal display LCD monitors. This product family is
replacing the electroluminescent lamp or EL driver family, which developed high voltage alternating
current or AC signals from low voltage battery sources that provide backlighting for LCDs.
The power management product portfolio expanded in 2004 with proprietary ICs including white
LED drivers, DC/DC regulators and controllers. These new products deliver improved power
efficiency, increased miniaturization and more power at lower output voltage levels to portable
power and distributed power applications.
Interface Products Interface products facilitate the transfer of digital signals between or
within electronic systems and ensure reliable connectivity between networks, computers and the
rapidly expanding mix of digital peripherals and consumer portable devices that connect to them.
Our single protocol RS-232 and RS-485 transceivers comply with international standards in
delivering multi-channel digital signals between two systems. Our proprietary multi-protocol
transceivers enable network equipment to communicate with a large population of peripherals that
use a diverse set of serial protocol standards without the added burden of multiple add-on boards
and cables.
The focus on lower voltage and low power consumption to conserve energy has made our low
voltage, interface ICs popular in a variety of digital peripherals including data cables for
personal digital assistants (PDAs), cellular phones and digital cameras. Multi-protocol ICs
continue to be used in networking and telecommunications equipment.
Optical Storage Products Our optical storage product family has been shipping in volume
since the second quarter of 2002. This product family provides electronic solutions for pick-up
heads used in optical storage systems, such as CD and DVD devices. Optical storage products are
customized to each customer, tend to have shorter design cycles, time-to-volume and product lives
than interface and power management products.
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Optical storage products consist of photo-detector ICs, advanced power control ICs and laser
diode drivers. The photo-detector ICs capture a portion of the light reflected from the optical
storage medium, convert it to a set of electronic digital signals and forward them to the chipset
for processing. The reflected light contains both data and tracking information. The advanced power
control ICs capture a portion of the optical power coming from the laser and feed it back into a
control system that regulates laser intensity. This control function is used to prevent damage to
the laser diode and extend the life of the system. For both of these functions, we have developed
technology that permits the photo-detection functions to be incorporated with their signal
conditioning circuitry. This functional integration enables faster read speeds and smaller
footprints in DVD-R/W, DVD-RAM and CD-R/W systems.
We have developed a family of laser diode drivers that control the laser diode in the pick-up
head. Our devices are designed to drive two lasers at high speed. This will allow the customer to
build a 780nm and 650nm system on one pick-up head for combo CD/DVD devices. We introduced our
first product in this product family during 2003.
Sales, Distribution and Marketing
We sell our products to OEM customers primarily through our distributor network, as well as
through a direct sales force and a network of independent sales representatives. The direct sales
force consists of country managers, regional sales managers and field applications engineers who
support our sales representatives, distributors and customers with technical support services. Our
sales staff and field application engineers also manage, train and support our network of
distributors and representatives. The sales and field applications staff are located in our
Billerica, Massachusetts and Milpitas, California facilities and in field offices in China,
Germany, Japan, Korea, Taiwan and the United Kingdom (See Note 14 to the consolidated financial
statements regarding Segment/Export Sales and Major Customers).
Most of our sales are generated through the worldwide distributor network. Most of our
design win activity is generated through our network of independent representatives and through
our direct sales force. Design wins are decisions by customers to include our products as a
component of the designs for their own future products.
International sales accounted for approximately 80%, 80%, and 86% of net sales in fiscal years
2005, 2004 and 2003, respectively.
Future Electronics Inc., or Future, a related party, is our exclusive distributor for North
America and Europe. Future is also our largest distributor worldwide, and accounted for 44%, 39%,
and 21% of total net sales for the years ended December 31, 2005, January 1, 2005, and December 31,
2003, respectively. We have a distribution agreement that provides for Future to act as our sole
distributor for certain products within North America and Europe. Sales to this distributor are
made under an agreement that provides protection against market price reduction for its inventory
of our products. We maintain a separate price list for products sold to Future, which is different
from the prices charged to customers in direct sales transactions. On a quarterly basis, Future is
permitted to return for credit up to 10% of its total purchases during the most recent three-month
period (credit is reduced to 5% with a 2% scrap allowance applicable to all purchases from us
starting April 1, 2006). We recognize revenue on sales to Future under the distribution agreement
when it sells the products through to the end customer, which is referred to as sell-through
accounting. For sales to all other distributors, we previously recognized revenue upon shipment,
but we changed to sell-through accounting effective January 1, 2003. We recognize revenue upon
shipment for direct sales to end customers as long as all other revenue recognition criteria are
met.
While Future is not currently represented on the Sipex Board of Directors, nor do they have
contractual rights to Board representation, from time to time, Futures senior management meets
with Sipex senior management to discuss strategic direction, sales and marketing considerations and
other issues facing us. In addition, Futures sales and marketing personnel frequently meet with
our sales and marketing staff regarding sales prospects and other concerns related to the market
for our products in a manner consistent with Futures practices with our other distribution
partners. Future has also provided information technology, accounting and other supports to us.
In Asia, we sell products through a number of distributors in addition to Future. All sales to
these international locations are denominated in U.S. dollars. We maintain separate price lists
for products sold to distributors, which typically reflect discounts from the prices charged to
customers in direct sales transactions, but do not provide price protection to these distributors
on items that are included in their inventory. During 2003, on a semi-annual basis, these Asian
distributors, except in Japan, were permitted to return up to 5% of their total purchases during
the most recent six-month period for credit against product purchases of an equivalent dollar
value. Our distributors in Japan were permitted to return up to 5% of their total purchases on a
quarterly basis. Effective in the first quarter of 2004, all distributors were permitted to return
products up to 5% of their most recent three-
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month purchases from Sipex. Effective as of January 1, 2003, we recognize revenue on sales to
these distributors when they sell the products through to their end customers. Prior to January 1,
2003, we recognized revenue on sales to these Asian distributors using a ship-to accounting
methodology for which we recognized revenue upon shipment to the distributors less estimated
reserves for returns.
We are subject to normal semiconductor market seasonality which is driven by two factors: (a)
the consumer product markets that build during the late summer for holiday season; and (b) the
general cyclical nature of the semiconductor industry. We are also subject to the normal risks of
conducting business internationally, including exchange rate fluctuations. To date, we have not
hedged the risks associated with fluctuations in exchange rates, but we may undertake such
transactions in the future.
Our marketing team develops long-term product and technology roadmaps based on first-hand
market knowledge, close customer relationships, industry experience, and a variety of public and
private market data. Detailed technical information in the form of data sheets, application notes
and tutorials are posted on our website and a variety of technical and sales materials are
published and distributed to customers, sales representative and distributors. We engage in print
advertising to raise market awareness of our products and services.
Customers
Our customer base is comprised of industrial distributors, OEMs, original design
manufacturers, or ODMs, and electronic manufacturing services companies, or EMS. Industrial
distributors provide logistical and supply chain services to their customers. (See our disclosure
regarding Future, our exclusive distributor for North America and Europe under Sales, Distribution
and Marketing above). The OEMs and ODMs use our products as components in their equipment and
systems. In certain cases, we sell our products to EMS companies who buy our products and use them
in the systems and subsystems they manufacture for OEMs and ODMs. The end users of our products
include Bird Communications, Dell Computer, Hewlett-Packard, Huawei, IBM, Nortel Networks,
Panasonic, Philips, Samsung, Siemens AG, Toshiba and ZTE.
Backlog
Our product backlog was approximately $13.0 million at December 31, 2005 compared to $9.7
million at January 1, 2005. The higher backlog was due to increased customer purchase order
activities for delivery in 2006. We include in backlog all orders scheduled for delivery within
one year. However, our business is characterized by short-term orders and shipment schedules. We
generally permit orders to be canceled or rescheduled without significant penalty to customers. As
a result, the quantities of our products to be delivered and their delivery schedules may be
revised by customers to reflect changes in their needs. Since backlog can be canceled or
rescheduled, our backlog at any time is not necessarily indicative of future revenues. In
addition, due to the high percentage of our sales going through the distribution channel, our
backlog may be affected by inventory levels at our distributors.
Manufacturing
We have historically maintained a wafer fabrication facility in Milpitas, California which has
supplied most of our product needs, except for the optical storage products and certain power
products requiring more advanced process technologies. This wafer fabrication facility commenced
manufacturing operations in the second half of 1999, and was used to produce both four-inch and
six-inch diameter wafers. Previously we also used a four-inch wafer facility located in San Jose,
California, but that lease was assumed by an unrelated third party in early 2003 as a part of a
restructuring initiative. Likewise, at the end of December of 2002, we ceased all test operations
at our Billerica, Massachusetts facility and transferred those operations to our subcontractors in
Asia.
In the third quarter of 2005, we decided to transition to a fabless manufacturing structure
and to outsource all of our wafer fabrication operations to third party suppliers and
subcontractors. As such we intend to close the Milpitas, California fabrication facility and
transfer most of our wafer production to Silan, in Hangzhou, China, and Episil, in HsinChu, Taiwan.
We believe this conversion will lower our manufacturing costs and therefore enable us to pursue
market opportunities where historically we were unable to provide a cost effective solution to our
customers. The conversion to a fully fabless manufacturing model along with the use of third-party
foundries should enable us to minimize fixed costs and capital expenditures while providing access
to diverse manufacturing technologies without bearing the full risk of the obsolescence of such
technologies. We expect to complete this transition by the third quarter of 2006.
We test ICs or die on the wafers produced internally and by our foundries for compliance
with performance specifications before assembly. Our commercial products are assembled and tested
by a variety of subcontractors in Asia which have been
certified as ISO-9002, TL16949 compliant. Following testing, the packaged units are shipped
directly from our subcontractors to our customers worldwide.
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Product Quality Assurance and Reliability
We are committed to customer satisfaction and continuous improvement in all aspects of our
business. This is accomplished through a comprehensive quality and reliability system founded on
documented procedures. Quality tools such as statistical process control; cross-functional teaming
and advanced statistical analysis are used in qualification, production processes and quality
improvement activities. We maintain close relationships with our subcontractors and routinely
qualify suppliers to established standards. We are ISO-9001-2000 certified and have continuously
maintained our ISO certification since 1996. The Milpitas facility was ISO-14000 certified in 2005.
Patents, Licenses and Trademarks
We seek to protect our proprietary technology through patents and trade secret protection.
Currently, we hold a number of patents expiring between now and 2021 and have additional United
States patent applications pending, although we cannot offer assurance that any patents will result
from these applications. In 2005, we substantially increased our spending on intellectual property
protection and plan to significantly expand our intellectual property portfolio. In addition to
seeking patent coverage for our products and manufacturing technology, we believe that our success
heavily depends on the technical expertise and innovative abilities of our personnel. Accordingly,
we also rely on trade secrets and confidential technological know-how in the conduct of our
business. We cannot offer assurance that our patents or applicable trade secret laws will provide
adequate protection for our technology against competitors who may develop or patent similar
technology or reverse engineer our products. In addition, the laws of certain territories in which
our products are or may be developed, manufactured or sold, including Asia, Europe and Latin
America, may not protect our products and intellectual property rights to the same extent as the
laws of the United States of America.
Pursuant to license agreements, we pay a royalty to Maxim Integrated Products and Analog
Devices for certain interface product sales. We also paid a royalty to Timex Corporation for
certain electroluminescent product sales through September 2003 when the contract ended.
Research and Development
We believe that continued introduction of new products in target markets is essential to
growth. As performance demands and complexity of analog circuits have increased, the design and
development process have become a multi-disciplinary effort, requiring diverse competencies to
achieve customers desired performance. In addition to our staff of design engineers, we have an
infrastructure of product and test engineers who perform various support functions.
We spent $17.2 million in 2005, $14.7 million in 2004 and $13.3 million in 2003 on research
and development, representing 23.7%, 19.5%, and 36.3% of net sales for these years, respectively.
The increase in 2005 as a percentage of net sales was primarily due to the reduction in net sales
combined with increased research expenditures. We expect to focus more on the productivity of our
research and development investment through better product definition, consistent strategy and
improved tools. Overall expenditures in support of research and development activity are likely to
increase slightly in absolute dollars in the near future.
Our ability to compete depends in part upon continued introduction of technologically
innovative products on a timely basis. Research and development efforts are directed primarily at
designing and introducing new products and technologies. We seek to continually upgrade our
internal technology while also working with foundries to develop new technologies for new
generations of products. In addition, we seek to continually refine our manufacturing practices
and technology to improve product yields.
Competition
We compete in multiple segments of the analog integrated circuit market. This market is
intensely competitive and many major semiconductor companies presently compete or could compete
with us in the same applications or products. Our current primary competitors include AATI, Analog
Devices, Intersil, Linear Technology, Maxim Integrated Products, Micrel Semiconductor, National
Semiconductor, On Semiconductor, Pioneer, Semtech, Sharp, Sony and Texas Instruments among others.
Our primary competitors have substantially greater financial, technical, manufacturing, marketing,
distribution, other resources and broader product lines than we do. In addition, there are foreign
semiconductor makers that compete primarily on a price basis. Although foreign companies active in
the semiconductor market have not traditionally focused on the high
performance analog market, with the exception of the optical marketplace, many foreign
companies have the financial and other resources to participate successfully in these markets and
may become formidable competitors in the future.
7
We believe that product innovation, quality, reliability, solution, performance and the
ability to introduce products rapidly are important competitive factors in our target markets. We
compete primarily during the customers design-in stage of product development. We further believe
that cost competitiveness is paramount in every segment of the semiconductor industry.
Employees
At August 5, 2006, we had 393 full-time employees including 160 in manufacturing, 84 in
engineering, 98 in sales and marketing, and 51 in finance and administration. At December 31, 2005,
we had 357 full-time employees including 154 in manufacturing, 83 in engineering, 71 in sales and
marketing, and 49 in finance and administration.
We believe that our future success will depend, in part, on our ability to attract and retain
qualified technical and manufacturing personnel. This is particularly important in the areas of
product design and development, where competition for skilled personnel is intense. None of our
employees are subject to a collective bargaining agreement, and we have never experienced a work
stoppage.
Item 1A. Risk Factors
Our quarterly and annual operating results are volatile and difficult to predict and may cause our
stock price to fluctuate.
Our quarterly and annual operating results are affected by a wide variety of factors that
could materially and adversely affect net sales and profitability from period-to-period, including:
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the cyclical nature of the semiconductor industry; |
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the volatility of the optical device market; |
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competitive pressures on selling prices; |
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the mix of product sales, as our margins vary across product lines; |
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the timing and cancellation of customer orders; |
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the effect the timing of sales by our resellers may have on our reported results as a result of our sell-through
revenue recognition policies; |
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our ability to maintain and expand our distributor relationships; |
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our ability to design and manufacture products to meet customers and distributors specifications and expectations; |
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our ability to introduce new products and technologies on a timely basis; |
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market acceptance of our products and our customers products; |
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the introduction of products and technologies by our competitors; |
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the level of orders received that can be shipped in a quarter; |
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delays in shipments from our fabrication plant to assembly houses; |
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the availability of foundry capacity, raw materials and assembly and test capacity; |
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our ability to manufacture and have manufactured for us, the correct mix to respond to orders on hand and new
orders received in the future; |
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fluctuations in yields; |
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changes in product mix; |
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the level of future product returns; |
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the timing of investments in research and development, including tooling expenses associated with product
development, process improvements and production; |
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costs associated with increased regulation of corporate governance and disclosure and risks of non-compliance with
such regulation; and |
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the overall economic conditions in the United States and abroad. |
Due to the absence of substantial non-cancelable backlog, we typically plan our production and
inventory levels based on internal forecasts of customer demand, which are highly unpredictable and
can fluctuate substantially.
Our expense levels are based, in part, on expectations of future revenues and are, to a large
extent, fixed in the short-term. For example, we have a minimum purchase arrangement with two of
our suppliers based on requirements forecasted in advance. Our future revenues are difficult to
predict and at times in the past we have failed to achieve revenue expectations. We may be
8
unable
to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. If
revenue levels are below expectations for any reason, operating results are likely to be
unfavorably affected. We may also take steps to adjust our strategic product families and change
our cost structure, which may result in our incurring additional restructuring, reorganization and
other charges. Based on forecasts, we may increase our operating expenses for personnel and new
product development and for inventory in anticipation of increasing sales levels; therefore,
operating results would be worsened if increased sales are not achieved. In addition, we are
limited in our ability to reduce costs quickly in response to any revenue shortfalls.
Our business depends on market demand for products using analog semiconductors. A less robust
semiconductor market could negatively impact our net sales, results of operations and cash flows.
As a result of the foregoing and other factors, we may experience material fluctuations in future
operating results on a quarterly or annual basis, which could substantially negatively affect our
business, financial condition and operating results.
Our management has identified certain material weaknesses in the design and operation of our
internal controls, which, if not adequately addressed, could result
in accounting errors and call into
question the accuracy of our financial results.
For the year ended January 1, 2005, management informed the Audit Committee that they
identified the following material weaknesses, as defined by the Public Company Accounting
Oversight Board (PCAOB), in the design and operation of our internal controls:
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Entity-level control activities were not appropriately designed and operating
effectively to ensure a control environment that emphasized the
establishment of, adherence to, or adequate communication regarding appropriate internal
control for all aspects of our operations; |
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Internal controls over revenue recognition were not maintained adequately with respect to
(i) lack of communication and review of significant revenue
transactions, (ii) entering into arrangements
that were not within the original contractual distributor agreements related to return rights and
other concessions, (iii) improper sales cut-off procedures at
our German subsidiary, (iv) lack of sufficient
evidence of pre-sale evaluation of the reasonableness of customer collection capabilities, (v) lack of sufficient evidence of customer delivery and acceptance, (vi) improper recognition of revenues
related to engineering service contracts; and |
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During the final closing steps of the restatement process related to preparation of our
financial statements for the year ended January 1, 2005, our internal control procedures did not
operate effectively to update significant estimates based upon the best available information at that time.
The principal estimates needing updating related to valuation of excess and obsolete inventories.
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We have since adopted various policies and procedures to address these weaknesses;
however, we may have additional internal control weaknesses that may be identified in
the future. Any such weaknesses could result in further restatements, which could have an adverse
effect on our business and the trading price of our common stock.
Our ability to implement our business plan successfully in a volatile market requires
effective management systems and a system of financial processes and controls. We have identified a
need to further evaluate and improve our sell-through accounting
systems and procedures as well as our inventory valuation estimation
procedures and tools. In addition, we have begun the process of implementing a
new enterprise requirements planning system, which is expected to be completed in 2007. During the
process of preparing our consolidated financial statements, we are continuing to experience some
delays and difficulties due to reliance on manual reconciliations and analyses. If we are unable to
maintain an adequate level of processes and controls and improve our systems and procedures, we may
not be able to accurately report our financial performance on a timely basis and our business and
stock price would be adversely affected.
We may need to obtain a significant amount of additional capital in the future and may not be able
to secure adequate funds on a timely basis or on terms acceptable to us.
We have incurred substantial losses and negative cash flows from operations during recent
years. We may never generate sufficient revenues to achieve profitability. Even if we do achieve
profitability, we may not sustain or increase profitability on a
quarterly or annual basis in the future. Our continued negative cash flows from operations
coupled with our capital investment needs may require that we obtain additional financing.
If we are not able to obtain additional financing, we would most likely have insufficient cash
to meet our ongoing operating obligations as they come due in the ordinary course of business, and
could be required to seek protection under applicable bankruptcy laws. These matters raise
substantial doubt about our ability to continue as a going concern. Our consolidated financial
statements do not include any adjustments that might result from this uncertainty.
9
Our ability to raise funds may be adversely affected by factors beyond our control, including
market uncertainty and conditions in the capital markets. As such, we may not be able to obtain
additional financing on acceptable terms, or at all. If we issue additional equity or convertible
debt securities to raise funds, the ownership percentage of our existing stockholders would be
reduced and they may experience significant dilution. New investors may demand rights, preferences
or privileges that differ from, or are senior to, those of existing holders of our common stock,
including warrants in addition to the securities purchased and protection against future dilutive
transactions. Furthermore, even if we are able to raise funds in a financing transaction or
otherwise, the amount of the funds raised may be insufficient to resolve doubt about our ability to
continue as a going concern.
If we are unable to achieve positive cash flows or raise sufficient additional capital, we may be
forced to implement further expense reduction measures, including, but not limited to, the sale of
assets, the consolidation of operations, workforce reductions, and/or the delay, cancellation or
reduction of certain product development, marketing or other operational programs.
We are not currently listed on a national exchange or on the Nasdaq Global Market or Nasdaq Capital
Market, and can offer no assurance that we will ever be listed.
As a result of our failure to timely file financial statements for the year ended January 1,
2005, we were delisted from the Nasdaq Global Market effective June 23, 2005, and our common stock
is not currently listed on any national stock exchange. In order to be eligible for re-listing we
must meet Nasdaqs initial listing criteria. We cannot assure you that we will be able to meet
these criteria or that our common stock will ever be relisted on the Nasdaq or listed on any other
national market. Our common stock is currently traded on the Pink Sheets, LLC electronic trading
system for over the counter securities, which has not historically provided investors with the
level of liquidity found in other markets and exchanges.
There is a risk that the SEC could levy fines against us, or declare us to be out of compliance
with applicable laws, rules and regulations.
The SEC is investigating the events surrounding the restatement of our previously filed
consolidated financial statements for the year ended December 31, 2003 (and the interim periods
contained therein) and the fiscal quarters ended April 3, 2004, July 3, 2004 and October 2, 2004.
The SEC could conclude that we violated the rules of the Securities Act or the Exchange Act. In
either event, the SEC might bring civil or criminal actions against us or our current or former
employees, officers or directors, or might conclude that we lack sufficient internal controls to
warrant our being allowed to continue offering our shares to the public. Such an investigation
would involve substantial cost and could significantly divert the attention of management. Company
legal fees related to these matters and the cost of any fines imposed by the SEC are not covered by
insurance. In addition to sanctions imposed by the SEC, an adverse determination could
significantly damage our reputation with customers and vendors and harm our employees morale.
We may not successfully transfer our manufacturing processes to Silan in China and Episil
Technologies in Taiwan.
We are working toward transferring our manufacturing processes to foundries operated by Silan
in China and Episil in Taiwan in conjunction with the closure of the Milpitas,
California wafer fabrication facility. The transfer is a complicated and time-consuming process
that has already been met with significant unforeseen complications that have delayed the
integration transfer and required additional allocation of our resources. There can be no
guarantees that additional unforeseen integration issues will not arise in the future that could
cause additional delays which could materially adversely affect our ability to timely produce our
products for distribution.
In addition, the parties may be unable to achieve all or any of the expected benefits of the
relationship within the anticipated time-frames. The anticipated synergies between Sipex and Silan
or Episil may not be as significant as originally expected. The market for our
products in China may not grow as rapidly or as large as both parties currently anticipate. The
manufacturing processes and wafer testing may not be qualified by Sipex following the transfer from
Sipex to Silan or Episil or the qualification process may take significantly longer
than currently expected. This could result in additional operating costs, loss of customers, and
business disruption.
We may experience difficulties in developing and introducing new or enhanced products necessitated
by technological advances.
Our future success will depend, in part, upon our ability to anticipate changes in market
demand and evolving technologies. To remain competitive, we must enhance our current products and
develop and introduce new products that keep pace with technological advancements and address the
increasingly sophisticated needs of our customers. Our products may be rendered obsolete if we fail
to anticipate or react to change, and, as a result, our revenues and cash flow may be negatively
impacted. Our success depends on our ability to develop new semiconductor devices for existing and
new markets, to introduce these products
10
in a timely manner and to have these products selected for
design into new products of our customers. The development of these new devices is highly complex
and from time to time we have experienced delays in completing the development of new products.
Successful product development and introduction depends on a number of factors, including:
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accurate new product definition; |
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timely completion and introduction of new product designs; |
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availability of foundry capacity; |
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achievement of manufacturing yields; and |
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market acceptance of our products and our customers products. |
Our success also depends upon our ability to accurately specify and certify the conformance of
our products to applicable standards and to develop our products in accordance with customer
requirements. We may not be able to adjust to changing market conditions as quickly and
cost-effectively as necessary to compete successfully. We may not be able to introduce new products
in a timely and cost-effective manner or in sufficient quantities to meet customer demand or that
these products will achieve market acceptance. Furthermore, our customers products may not achieve
market acceptance.
The introduction of our new products may be delayed in order to test for and resolve design flaws.
Our products are complex and must meet stringent quality requirements. They may contain
undetected errors or defects, especially when new products are first introduced or when new
versions are released. We recently delayed the introduction of some of our new products in order
to perform further tests on the products and to identify and resolve any of these errors. We may
further delay the release of our new product lines. Such delays could have an adverse effect on
our market reputation and ability to generate sales.
We depend on distributors who sell directly to OEMs and the loss of one or more of our significant
distributors could have a material adverse effect on our business.
For the fiscal years 2005, 2004 and 2003 approximately 83%, 83%, and 73% respectively, of our
net sales were from shipments of our products to distributors who sell directly to OEMs. Our
agreements with distributors contain limited provisions for return of our products, including stock
rotations whereby distributors may return a percentage of their purchases from us based upon a
percentage of their most recent three months of shipments effective in the first quarter of 2004.
In addition, in certain circumstances upon termination of the distributor relationship,
distributors may return some portion of their prior purchases. The loss of business from any of our
significant distributors or the delay of significant orders from any of them, even if only
temporary, could significantly reduce our income, delay recognition of revenue and impact our
ability to accurately predict cash flow.
We may not successfully expand our sales and distribution channels.
An integral part of our strategy is to expand our sales and distribution channels,
particularly internationally. We are increasing resources dedicated to developing and expanding
these channels but we may not be successful doing so. If we are successful in increasing our sales
through indirect sales channels, we expect that those sales will be at lower per unit prices than
sales through direct channels, and revenues we receive for each sale will be less than if we had
sold the same product to the customer directly. Selling through indirect channels may also limit
our contact with our customers. As a result, our ability to accurately forecast sales, evaluate
customer satisfaction and recognize emerging customer requirements may be hindered. Even if we
successfully expand our distribution channels, any new distributors may not have the technical
expertise required to market and support our
products successfully. If distributors do not provide adequate levels of services and
technical support, our customers could become dissatisfied, we could be required to devote
additional resources for customer support and our brand name and reputation could be negatively
impacted. Our strategy of marketing products directly to our customers and indirectly through
distributors may result in distribution channel conflicts.
We derive a substantial portion of our revenues from Future Electronics, a related party, and our
revenues would likely decline significantly if Future elected not to make, cancel, reduce or defer
purchases of our products.
Future is a related party and has historically accounted for a significant portion of our
revenues. Future is our largest distributor worldwide and accounted for 44%, 39% and 21% of total
net sales in fiscal 2005, 2004 and 2003, respectively. We anticipate that sales of our products to
Future will continue to account for a significant portion of our revenues. The loss of Future as a
distributor, or a significant reduction in orders from Future would materially and adversely affect
our operating results, our business, our financial condition and our stock price.
11
We have a distributor agreement with Future that provides for Future to act as our sole
distributor for certain products within North America and Europe. If Future were to cease
distributing these products, we could experience a reduction in sales as we located replacement
distributors for these products. Sales to Future are made under an agreement that provides
protection against price reduction for their inventory of our products. As such, we could be
exposed to significant liability if the inventory value of the products held by Future declined
dramatically. Our distributor agreement with Future does not contain minimum purchase commitments.
As a result, Future could cease purchasing our products with short notice to us. In addition,
Future may defer or cancel orders without penalty, which would likely cause our revenues, our
business, our financial condition and our stock price to decline.
Affiliates of Future, our largest stockholder and distributor, beneficially own a significant
percentage of our common stock, which will allow them to significantly influence matters requiring
stockholder approval and could either discourage or entirely
facilitate a potential acquisition of
our company.
As of August 15, 2006, the affiliates of Future held approximately 16.3 million shares or approximately 46%, of our outstanding common stock. Neither Future nor its
affiliates are currently represented on our board of directors, and they do not have contractual
rights to such representation or to any participation in the corporate governance of management.
However, due to their ownership of a significant percentage of our common stock, they will be able
to exert significant influence over, and effectively control, actions requiring the approval of our
stockholders, including the election of directors, many types of change of control transactions and
amendments to our charter documents. The significant ownership percentage of Future could have the
effect of delaying or preventing a change of control of Sipex or otherwise discouraging a potential
acquirer from obtaining control of Sipex. Conversely, by virtue of Futures percentage ownership of
our stock, Future could facilitate a takeover transaction that our board of directors did not
approve.
Occasionally we enter into agreements that expose us to potential damages that exceed the value of
the agreement.
We have given certain customers increased indemnification for product deficiencies that is in
excess of the standard limited warranty indemnification and could possibly result in greater costs,
in excess of the original contract value. In an attempt to limit this liability, we have also
increased our errors and omission insurance policy to partially offset these potential additional
costs; however, our insurance coverage could be insufficient to prevent us from suffering material
losses if the indemnification amounts are large enough.
We may face significant risks related to our international operations.
We derive a significant portion of our net sales from international sales, including to Asia,
which are subject to certain risks, including:
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unexpected changes in legal and regulatory requirements; |
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changes in tariffs; |
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exchange rates and other barriers; |
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political and economic instability; |
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difficulties in accounts receivable collection; |
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difficulties in managing distributors or representatives; |
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difficulties in staffing and managing international operations; |
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difficulties in protecting our intellectual property overseas; |
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the seasonality of sales; and |
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potentially adverse tax consequences. |
These
risks may be compounded as a result of the transfer of our
manufacturing processes to Silan and Episil. Our international sales (sales to customers outside the United States) in the year ended
December 31, 2005 were $58.0 million, or 80% of total net sales and $60.3 million and $31.3 million
for the years ended 2004 and 2003, respectively, or 80% and 86% of total net sales, respectively.
There can be no assurance that economic and geopolitical troubles in any area of the world will not
have a material adverse effect on our business, results of operations and financial condition.
Our inability to meet any increase in demand could reduce our market share.
Demand shifts in the semiconductor industry are rapid and difficult to predict, and we may not
be able to respond quickly enough to an increase in demand, if any. Our ability to increase sales
of our products depends, in part, upon our ability to optimize the use of our manufacturing
capacity in a timely manner and, if necessary, expand our manufacturing capacity. If we are unable
to respond to rapid increases in demand, if any, for our products on a timely basis or to manage
any corresponding expansion of our manufacturing capacity effectively, our customers could increase
their purchases from our competitors, which would reduce our market share.
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If we are unable to compete effectively with existing or new competitors, we will experience fewer
customer orders, reduced revenues, reduced gross margins and lost market share.
We compete in markets that are intensely competitive, and which are subject to both rapid
technological change and continued price erosion. Our competitors include many large domestic and
foreign companies that have substantially greater financial, technical and management resources
than we have. Loss of competitive position could result in price reductions, fewer customer orders,
reduced revenues, reduced gross margins and loss of market share, any of which would affect our
operating results and financial condition. To remain competitive, we continue to evaluate our
manufacturing operations, looking for additional cost savings and technological improvements. If we
are not able to successfully implement new process technologies and to achieve volume production of
new products at acceptable yields, our operating results and financial condition may be affected.
In addition, if competitors in Asia reduce prices on commodity products, it would adversely affect
our ability to compete effectively in that region. Our future competitive performance depends on a
number of factors, including our ability to:
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accurately identify emerging technological trends and demand for product features and performance characteristics; |
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develop and maintain competitive products; |
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enhance our products by adding innovative features that differentiate our products from those of our competitors; |
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bring products to market on a timely basis at competitive prices; |
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respond effectively to new technological changes or new product announcements by others; |
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increase device performance and improve manufacturing yields; |
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adapt products and processes to technological changes; and |
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adopt and/or set emerging industry standards. |
There can be no assurance that our design, development and introduction schedules for new
products or enhancements to our existing and future products will be met. In addition, there can be
no assurance that these products or enhancements will achieve market acceptance, or that we will be
able to sell these products at prices that are favorable.
The implementation of a new management information system may disrupt our business.
We have begun the process of implementing a new enterprise resource planning and financial
accounting and planning system, and integrating this new system with our customer relationship
management system and our product management system. Implementation of the new management
information system, including the integration with other systems, is a very complex and time
consuming process that requires significant financial resources and personnel time, as well as
unifying operating policies and procedures to ensure that the total system operates efficiently and
effectively. Delays and/or errors in the implementation could result in additional costs and cause
disruptions to our business, which could adversely affect our ability to accurately report our
financial results on a timely basis, comply with our periodic reporting requirements on a timely
basis and could have a material adverse effect on our business, financial condition and operating
results.
A failure of our information systems would adversely impact our ability to process orders for and
manufacture products.
We operate a multinational business enterprise with manufacturing, administration and sales
groups located in Asia, Europe and the United States. These disparate groups are connected by a
virtual private network-based enterprise resource planning system, where daily manufacturing
operations and order entry functions rely on maintaining a reliable network among locations. Any
failure of our computer network or our enterprise resource planning system would impede our ability
to schedule orders, monitor production work in process and ship and bill our finished goods to our
customers.
We have only limited protection for our proprietary technology.
The semiconductor industry is characterized by frequent litigation regarding patent and other
intellectual property rights. Although we are not aware of any pending or threatened patent
litigation that we consider material, there can be no assurance that third parties will not assert
claims against us with respect to existing or future products or technologies and we have been
subject to such claims in the past. To determine the validity of any third party claims, such
litigation, whether or not determined in our favor could result in significant expense to us and
divert the efforts of our management personnel from productive tasks. In the event of an adverse
ruling in such litigation, we may be required to discontinue the use of certain processes, cease
the manufacture, use and sale of infringing products, and expend significant resources to develop
non-infringing technology or
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obtain licenses to the infringing technology. There can be no
assurance that licenses will be available on acceptable terms, or at all, with respect to disputed
third party technology. In the event of a successful claim against us and our failure to develop or
license a substitute technology at a reasonable cost, our business, financial condition and results
of operations would be materially and adversely affected.
There can be no assurance that foreign intellectual property laws will protect our
intellectual property rights. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate our products or design around any of our patents.
We may be subject to, or may initiate, interference proceedings in the U.S. patent office, which
can demand significant financial and management resources.
Our future success depends on retaining our key personnel and attracting and retaining additional
highly qualified employees.
Our success depends upon the continued service of our executive officers and other key
management and technical personnel, and on our ability to continue to attract, retain and motivate
qualified personnel, such as experienced analog circuit designers. The competition for these
employees is intense. Our employees are employed at-will, which means that they can terminate
their employment at any time. There can be no assurance that we will be able to retain our design
engineers, executive officers and other key personnel. The loss of the services of one or more of
our design engineers, executive officers or other key personnel or our inability to recruit
replacements for these personnel or to otherwise attract, retain and motivate qualified personnel
could seriously impede our success.
We have recently experienced significant changes in senior management and our corporate
organization.
Our Chief Executive Officer, Ralph Schmitt, joined Sipex in June 2005; Edward Lam, our Senior
Vice President of Marketing and Business Development, joined in September 2005; Joel Camarda, our
Senior Vice President of Operations, joined in November 2005; our Senior Vice President of Finance
and Chief Financial Officer, Clyde R. Wallin, joined in April 2004; and
our Senior Vice President of Worldwide Sales, Rick Hawron, joined in February 2004.
Accordingly, our management team has not been functioning as a unit for a long period of time. If
we do not effectively integrate these employees into our business, or if they do not work well
together as a management team to enable us to implement our strategy, our business will suffer.
Further changes in management may be disruptive to our business and may result in the departure of
existing employees and/or customers.
Product defects or compatibility problems with our products could damage our reputation, decrease
market acceptance of our technology, cause us to replace defective or incompatible products at a
substantial cost and result in potentially costly litigation.
A number of factors, including design flaws, materials failures, manufacturing problems, and
misapplication of our products may cause our products to contain undetected errors, defects or
compatibility problems. Defects or compatibility problems with our products may:
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cause delays in product introductions and shipments; |
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result in increased costs and diversion of development resources; |
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result in increased product returns and cause us to incur costs due to
unusable inventory or replacement of defective or incompatible
products; or |
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require design modifications. |
If any of our products contain defects, or have reliability, quality or compatibility
problems, our reputation might be damaged significantly and customers might be reluctant to buy our
products. This could result in the loss of existing customers and impair our ability to attract new
customers in the future. In addition, we may discover defects or failures in our products after
they are installed by customers. In such cases, we may incur significant costs and devote
substantial management resources to correct these problems. Our customers may also sue us for,
or otherwise seek to recover from us, any losses resulting from alleged defects or errors in our
products.
Our manufacturing processes are very complex, which may result in manufacturing difficulties.
Our manufacturing processes and the processes of our suppliers are highly complex and are
continuously being modified in an effort to improve yields and product performance. Process changes
can result in interruptions in production or significantly reduced yields causing product
introduction or delivery delays. In addition, yields can be adversely affected by minute impurities
in the environment or other problems that occur in the complex manufacturing process. Many of these
problems are difficult to diagnose and are time-consuming or expensive to remedy. From time to time
we have experienced unfavorable yield variances.
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In particular, new process technologies or new
products can be subject to especially wide variations in manufacturing yields and efficiency. There
can be no assurance that our foundries or the foundries of our suppliers will not experience
unfavorable yield variances or other manufacturing problems that result in delayed product
introduction or delivery delays. This risk is particularly significant in the near term as we
transfer our manufacturing processes to Silan and Episil.
We rely on outside foundries to supply certain of our wafers and those foundries may not produce at
acceptable levels.
Beginning in 2006, we are increasingly relying on outside foundries to supply certain of our
fully processed semiconductor wafers. This reliance on outside foundries presents the following
potential risks:
|
|
|
lack of adequate wafer supply; |
|
|
|
|
limited control over delivery schedules; |
|
|
|
|
unavailability of or delays in obtaining access to key process technologies; and |
|
|
|
|
limited control over quality assurance, manufacturing yields and production costs. |
Additionally, we do not have a guaranteed level of production capacity at any of these
foundries with the exception of two of our foundries for whom we provide minimum purchase
commitments in accordance with our supply agreement announced on August 21, 2003 and February 27,
2006. The ability of each foundry to provide wafers to us is limited by the foundrys available
capacity, and the foundrys allocation of its available capacity among multiple customers. There
can be no assurance that our third party foundries will allocate sufficient capacity to satisfy our
requirements. We have experienced decreased allocations of wafer supplies from our suppliers in the
past, which reduced our capacity to ship products, and, thus, recognize revenues. Furthermore, any
sudden reduction or elimination of any primary source or sources of fully processed wafers could
result in a
material delay in the shipment of our products. If any other delays or shortages occur in the
future, our business and operating results will be negatively impacted.
Our ability to meet current demand or any increase in demand for our products may be limited by our
ability to test our semiconductor wafers.
As part of our manufacturing process, we must test all of our semiconductor wafers using
certain probe testing equipment. As such, our ability to meet current demand or any increase in
demand for our products depends, in part, on our ability to purchase and install sufficient testing
equipment. Obtaining and installing this equipment is a time and capital intensive process and
depends on our ability to accurately predict future sales. In the first quarter of 2006, due to a
lack of sufficient probe testing equipment, we were unable to test an adequate number of wafers,
incurred delays in shipping products and were unable to meet the demand for our products. If we
are unable to estimate future sales correctly or we are unable to obtain the necessary testing
equipment on a timely basis, we will continue to be unable to meet the current demand or any
increased demand for our products.
Our wafer fabrication facility and the facilities of certain of our significant customers and third
party wafer suppliers are located in areas susceptible to earthquakes and other natural disasters.
Our Milpitas, California fabrication facility and the facilities of certain of our significant
customers and third-party wafer suppliers are located in areas that are susceptible to earthquakes
and other natural disasters. Damage caused by earthquakes or other natural disasters may result in
shortages in water or electricity or transportation, which could limit the production capacity of
our wafer facility and/or the ability of certain of our subcontractors to provide needed products.
Any reduction in production capacity or the ability to obtain fully processed semiconductor wafers
could cause delays or shortages in our product supply, which would negatively impact our business.
If our facilities or the facilities of our customers are damaged by future earthquakes or other
natural disasters, it could have a materially adverse effect on our business.
We rely on outside suppliers to assemble, test and ship product to our customers.
We rely on outside assembly houses to assemble, test and ship our product to end customers.
There can be no assurance that our third party suppliers will allocate sufficient capacity to us to
meet our requirements. Any sudden reduction or elimination of a primary source could result in
material delay in the shipment of our product and could have a material adverse affect on our
business and operating results.
In addition, we may transition the testing of our products to new companies. If the
transition does not proceed smoothly, this could also result in delays in the shipment of our
products.
15
Because
we rely on outside assembly houses to assemble, test and ship our products, we have
limited control over quality assurance, manufacturing yields and production costs, and we have in
the past experienced yield issues and delays. We could experience delays or yield issues in the
future due to the transfer of products from development to production, which could negatively
impact our business and operating results. In addition, if defects in our products are undetected,
we may experience higher warranty expenses than anticipated, which could negatively impact our
reputation, business and operating results.
The requirement that we expense employee stock options will have a material effect on our results
of operations in future periods.
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123 (Revised 2004), Share-Based Payment, or SFAS 123R, which requires the measurement of all share-based
payments to employees, including grants of employee stock options, using a fair-value-based method
and the recording of such expense in our consolidated statements of operations. The accounting
provisions of SFAS 123R became effective for our quarter beginning January 1, 2006. The pro forma
disclosures previously permitted under SFAS 123 are no longer an alternative to financial statement
recognition. As a result of adopting SFAS 123R, we will now have additional stock compensation
expense. The ultimate amount of future stock compensation expense will depend upon the number of
grants, the estimated grant date fair value, which depends upon significant assumptions including
stock volatility and estimated term, the assumed forfeiture rate and the requisite service period
for future grants. This expense will exceed the expense we currently record for our stock-based
compensation plans and will have a material effect on our results of operations in future periods.
We have incurred and will continue to incur increased costs as a result of being a public company.
We are spending an increased amount of management time and external resources to understand
and comply with changing laws, regulations and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and the Nasdaq
Global Market rules listing requirements. In addition, we have incurred and will continue to incur
significant legal, accounting and other expenses. We have a limited history with these types of
expenses and we may not accurately estimate these expenses in our financial planning. In addition,
our current and future financial results may be more difficult to compare to prior periods when we
did not incur these types of expenses.
We must comply with significant environmental regulations, employment tax regulations, employment
practices and other governmental regulations which are difficult and expensive.
We are subject to a variety of international, federal, state and local governmental
regulations related to employment taxes, employment practices and other governmental regulations
and regulations regarding the use, storage, discharge and disposal of toxic, volatile or otherwise
hazardous chemicals used in our manufacturing processes or residing in our products. The failure
to comply with present or future regulations could result in fines being imposed on us, suspension
of production or a cessation of operations. We believe that our activities conform to all presently
applicable state and federal regulations; however, we may not be in compliance with the Malaysian
pension regulations, although we do not anticipate that the non-compliance with Malaysian
regulations will have a material impact on our operations. Any failure by us to control the use of,
or adequately restrict the discharge of hazardous substances, or otherwise comply with
environmental regulations, could subject us to significant future liabilities. Any failure to
conform to employment tax regulations, employment practices regulations and other governmental
regulations, could result in remediation or other significant liabilities.
Our stock price has been volatile and could continue to remain volatile.
The trading price of our common stock is subject to wide fluctuations in response to
quarter-to-quarter variations in operating results, announcements of technological innovations or
new products by us or our competitors, general conditions in the semiconductor manufacturing and
electronic markets, changes in earnings estimates by analysts, or other events or factors. In
addition, the public stock markets have experienced extreme price and trading volume volatility in
recent months. During 2006, through the date of this report, our stock closing price ranged from a
high of $3.45 on April 27, 2006 to a low of $1.61 on January 3, 2006. This volatility has
significantly affected the market prices of securities of many technology companies for reasons
frequently unrelated to the operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of our common stock.
Item 1B. Unresolved Staff Comments:
None.
16
Item 2. Properties:
Our corporate office is located in Milpitas, California. Information regarding our principal
plants and properties as of December 31, 2005 appears below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate |
|
Owned Or |
|
Lease |
|
|
|
|
Facility Size |
|
Leased: Land |
|
Expiration |
Location |
|
Description |
|
(Square Feet) |
|
Area Owned |
|
Date |
Milpitas, CA
|
|
Manufacturing/Design Center/General Office
|
|
|
95,700 |
|
|
Owned
|
|
* |
Billerica, MA
|
|
Design Center/General Office
|
|
|
64,260 |
|
|
Leased
|
|
1/30/2008 |
Munich, Germany
|
|
General Office
|
|
|
2,740 |
|
|
Leased
|
|
3/31/2010 |
Tokyo, Japan
|
|
General Office
|
|
|
2,500 |
|
|
Leased
|
|
1/31/2007 |
Zaventem, Belgium
|
|
Design Center/General Office
|
|
|
9,540 |
|
|
Leased
|
|
9/30/2009 |
Shenzhen, China
|
|
General Office
|
|
|
1,310 |
|
|
Leased
|
|
4/25/2007 |
Shanghai, China
|
|
General Office
|
|
|
1,670 |
|
|
Leased
|
|
11/19/2007 |
Taipei, Taiwan
|
|
General Office
|
|
|
2,600 |
|
|
Leased
|
|
3/31/2008 |
Pointe-Claire, Quebec, Canada
|
|
General Office
|
|
|
2,594 |
|
|
Leased
|
|
1/31/2008 |
Ipoh, Perak, Malaysia
|
|
Warehouse
|
|
|
2,630 |
|
|
Leased
|
|
6-month notice |
|
|
|
* |
|
The property was sold and leased back on March 9, 2006 with an expiration date of March 31, 2011.
See Note 16 to consolidated financial statements relating to subsequent events. |
Subsequent to December 31, 2005, we have renewed or added leases including Korea and Belgium.
We believe that our existing facilities adequately serve our current needs. We have sublet a
portion of the facility located in Billerica, Massachusetts.
Item 3. Legal Proceedings:
Class Action Securities Litigation
Beginning on or about January 24, 2005, four securities class action suits were filed against
us and certain of our current and former officers and directors. All complaints were filed in the
United States District Court for the Northern District of California, San Francisco. The captions
of the cases were as follows: Keller v. Sipex Corporation, et al., (05-CV-00331) (WHA), Coil
Partners LLC v. Sipex Corporation, et al., (05-CV-00392) (WHA), Levy v. Sipex Corporation, et al.,
(05-CV-00505) (WHA), and Jacobson v. Sipex Corporation, et al., (05-CV-00712) (WHA).
The securities class action suits were filed on behalf of the purchasers of our common stock
in various class periods, beginning on or about April 10, 2003 and ending on January 20, 2005. The
plaintiffs in these cases alleged, among other things, violations of sections 10(b) and 20(a) of
the Exchange Act, and Rule 10b-5 promulgated thereunder, and sought unspecified
monetary damages and other relief against all defendants. Specifically, the complaints alleged
that we and the individual defendants made false or misleading public statements regarding our
financial results during the class periods.
On March 25, 2005, four lead plaintiff motions were filed asking the Court to consolidate the
class actions. Prior to the hearing on the lead plaintiff motions, the Levy and Keller plaintiffs
voluntarily agreed to dismiss their complaints. On May 12, 2005, the Court consolidated the
remaining cases under the caption In re Sipex Corporation Securities Litigation, Master File No.
05-CV-00392. Defendants Clyde Ray Wallin and Doug McBurnie were voluntarily dismissed from the
action on August 16, 2005, and defendant Phil Kagel was granted a motion to dismiss on November 17,
2005.
On January 18, 2006, the Court preliminarily approved the settlement of the class action
lawsuit. The settlement provides for a payment of $6.0 million to the plaintiffs and will be
entirely funded by proceeds from our directors and officers insurance policy. The specific terms
for distribution of the settlement fund to class members were disclosed in a notice which was sent
to the class members. On April 6, 2006, the United States District Court for the Northern District
of California, San Francisco, approved the final settlement of the securities class action lawsuit.
17
Stockholder
Derivative Litigation
On February 8, 2005, a putative stockholder derivative suit was filed in the Superior Court of
the State of California, County of San Mateo, on behalf of Sipex against certain of our current and
former officers and directors for alleged fiduciary duty violations, gross negligence, unjust
enrichment and breach of contract (Lie v. McBurnie, et al., CIV444748). On March 25, 2005, a
second putative stockholder derivative suit was filed in the Superior Court of the State of
California, County of Santa Clara, on behalf of Sipex against certain of our current and former
officers and directors for alleged fiduciary duty violations, abuse of control, gross
mismanagement, waste of corporate assets and unjust enrichment (Nagdev v. Maghribi, et al.,
105CV038114).
The derivative complaints are based on similar facts and events as those alleged in the
securities class action suits. Specifically, the complaints allege that the individual defendants
deliberately damaged Sipex by, among other things, causing us to improperly recognize and report
revenue, causing us to issue false and misleading statements about our financial results, exposing
us to liability for securities fraud, and damaging our reputation.
On April 22, 2005, defendants in the Lie derivative action filed a petition with the Judicial
Council of California to coordinate the cases in Santa Clara County Superior Court. The petition
was granted on July 13, 2005 and the actions had since been coordinated and consolidated before
Judge Komar in Santa Clara Superior Court, under the consolidated caption, Sipex Derivative Cases,
Judicial Council Coordination Proceeding No. 4431, Lead Case No. 1-05-CV-038114.
On January 23, 2006, the Court approved the settlement of the stockholder derivative action.
The settlement provided for a payment of $300,000 to the plaintiffs, pursuant to the terms of the
settlement agreement, and the adoption of certain corporate governance measures and the payment of
attorneys fees and expenses to the derivative plaintiffs counsel, all of which were funded
entirely by proceeds from our directors and officers insurance policy.
Government Investigation
On
February 18, 2005, we announced that the SEC had commenced a formal investigation into
the same matters as those that were the subject of our previously announced internal investigation
into our financial and transactional records with regard to revenue recognition for the years ended
December 31, 2003 and January 1, 2005. The investigation is ongoing.
DiPietro v. Sipex
In April 2003, Plaintiff Frank DiPietro (former CFO of Sipex) brought an action against
us for his severance benefits. We counterclaimed for approximately $150,000 which was owed
under a promissory note signed by Mr. DiPietro. In
August 2004, we filed two motions for
summary judgment (one for Mr. DiPietros claims against it and one for its counterclaim against Mr.
DiPietro under the promissory note). In June 2005, the Middlesex Superior Court granted both of
our Motions for Summary Judgment. As a result, Mr. DiPietro was
ordered to pay us $149,486
plus costs and interest which has now appreciated to approximately $204,000 as of June 2006.
Interest is added to this amount at twelve (12%) percent per year. Mr. DiPietro filed a notice of
appeal on July 19, 2005. In addition, the court has required Mr. DiPietro to post a bond in the
amount of $150,000.
We
are also subject to other legal proceedings, claims, and litigation arising in the course of
business. We defend ourselves
vigorously against any such claims. The outcome of unresolved matters
related to the Companys legal proceedings, claims and
litigation is currently not determinable, and an unfavorable
outcome could have a material adverse effect on our consolidated financial position, results of
operations, or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders:
No
matters were submitted to a vote of our security holders during the fourth quarter
ended December 31, 2005.
Executive Officers of Sipex
Information relating to the executive officers of Sipex is set forth below. All officers held
office as of July 1, 2006, except as noted.
18
|
|
|
Name, Age & Position |
|
Business Experience |
Ralph Schmitt Age 45
Chief Executive Officer and
Director
|
|
Mr. Schmitt joined Sipex in June 2005 as chief executive officer and
member of the board of directors. Mr. Schmitt received his BSEE from
Rutgers University and began his career as a computer and
communications system hardware designer. Prior to joining Sipex, Mr.
Schmitt was the vice president of sales and marketing at Cypress
Semiconductor Corporation. Mr. Schmitt had also served on the boards
of Cypress subsidiaries, Silicon Light Machines and Cypress
Microsystems, and on the board of Azanda Networks. He also currently
serves on the board of StarGen, Inc., a privately held company. |
|
|
|
Clyde R. Wallin Age 53
Chief Financial Officer and
Senior Vice President of Finance
|
|
Mr. Wallin joined Sipex in April 2004 as chief financial officer and
senior vice president of Finance. Previously, from October 2002 to
April 2004, Mr. Wallin served as chief financial officer of iWatt,
Inc., a private analog semiconductor company. Prior to iWatt, from
September 2000 to October 2002, Mr. Wallin was the chief financial
officer for Kendin Communications, which was acquired by Micrel, Inc.,
and after this acquisition Mr. Wallin continued with Micrel, Inc. Mr.
Wallin earned a Bachelors of Science in Economics from the University
of Oregon and an MBA in Finance from the University of Chicago. |
|
|
|
Rick C. Hawron Age 52
Senior Vice President
Worldwide Sales
|
|
Mr. Hawron joined Sipex in February 2004 as senior vice president of
worldwide sales. Prior to joining Sipex, Mr. Hawron was the corporate
vice president at Future Electronics Inc. Mr. Hawron was employed by
Future Electronics Inc. for 27 years in various capacities around the
globe, including vice president and managing director for Europe. |
|
|
|
Ed Lam Age 46
Senior Vice President
Marketing and Business Development
|
|
Mr. Lam is senior vice president of marketing and business
development. He joined Sipex in September 2005, and has over 20 years
of analog semiconductor industry experience with National
Semiconductor Corporation. Mr. Lam earned his BSEE from San Francisco
State University. |
|
|
|
Joel Camarda Age 57
Senior Vice President of Operations
|
|
Mr. Camarda joined Sipex in November 2005 as senior vice president of
operations. Mr. Camarda started his career as a senior Manufacturing
engineer for National Semiconductor Corporation and later worked for
companies including Rockwell and Cypress Semiconductor Corporation.
Mr. Camarda has over 30 years of semiconductor industry experience.
Prior to joining Sipex, Mr. Camarda worked for Kulicke & Soffa (K&S)
Industries, where he served as the vice president of operations for
their test products division. Prior to K&S, he worked for Silicon
Storage Technology, Inc. Mr. Camarda earned his BS in Engineering
from New York Universitys School of Engineering. |
|
|
|
Lee Cleveland Age 43
Senior Vice President of Engineering
|
|
Mr. Cleveland joined Sipex in September of 2003. Mr. Cleveland was
promoted to senior vice president of engineering, effective October 1,
2005. Mr. Cleveland has held various technical and management
positions at AMD and Sipex. Mr. Cleveland graduated from UC Berkeley
with a degree in Electrical Engineering. |
19
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Delisting from the Nasdaq Global Market
On April 5, 2005, we received a Staff Determination notice from the Nasdaq Global Market
stating that we were not in compliance with Nasdaqs Marketplace Rule 4310(c)(14) because we had
not yet filed the Annual Report on Form 10-K for the year ended January 1, 2005. The notice stated
that our securities would be delisted from the Nasdaq Global Market at the opening of business on
April 14, 2005, unless we requested a hearing to appeal the delisting in accordance with Nasdaq
Marketplace Rules 4800, et seq. on or before 4:00 p.m. Eastern Time on April 12, 2005. On May 17,
2005, we received a Staff Determination notice from the Nasdaq Global Market stating we were not in
compliance with Nasdaqs Marketplace Rule 4310(c) (14) because we had not yet filed the Quarterly
Report on Form 10-Q for the quarterly period ended April 2, 2005 and that the Nasdaq Listing
Qualifications Panel (the Panel) would consider the filing delinquency in rendering a
determination regarding the continued listing on the Nasdaq Global Market. We addressed the issues
related to the delays in filing our Quarterly Report on Form 10-Q for the period ended April 2,
2005 and Annual Report on Form 10-K for the year ended January 1, 2005, and our request for
continued listing on the Nasdaq Global Market, at an oral hearing before the Panel on May 19, 2005.
From April 2, 1996, the date of our initial public offering, our common stock was available
for quotation on the Nasdaq Global Market under the symbol SIPX. However, as discussed in Item 1 of this
Form 10-K under the heading Delisting from the Nasdaq Global Market, on June 23, 2005, we were
delisted from the Nasdaq Global Market. The quotation of our common stock currently appears on
the Pink Sheets electronic quotation system with a trading symbol SIPX.PK where market makers
and brokers can submit bid and ask prices on a daily basis. We cannot provide assurance that our
common stock will continue to be eligible for trading or quotation on this or any alternative
exchanges or markets.
The following table sets forth, for the period indicated, the high and low closing sale prices
per share as reported on the Nasdaq Global Market or on the Pink Sheets for the periods referenced:
Quarterly Stock Market Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005 |
|
Dec. 31, 2005 |
|
Oct. 1, 2005 |
|
July 2, 2005 |
|
April 2, 2005 |
Stock price range per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
1.95 |
|
|
$ |
2.48 |
|
|
$ |
2.14 |
|
|
$ |
4.50 |
|
Low |
|
|
1.29 |
|
|
|
1.65 |
|
|
|
1.15 |
|
|
|
2.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2004 |
|
Jan. 1, 2005 |
|
Oct. 2, 2004 |
|
July 3, 2004 |
|
April 3, 2004 |
Stock price range per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
5.90 |
|
|
$ |
5.75 |
|
|
$ |
6.54 |
|
|
$ |
9.41 |
|
Low |
|
|
4.40 |
|
|
|
3.80 |
|
|
|
4.75 |
|
|
|
6.27 |
|
As of December 31, 2005, there were 61 stockholders of record. We believe that as of December
31, 2005, the number of beneficial holders of common stock exceeded 3,000. The last reported sale
price of the common stock on August 8, 2006 was $2.85 per share, as quoted on the Pink Sheets
electronic trading market. We have never declared or paid a cash dividend on our capital stock. We
currently intend to retain all of our earnings to finance future growth and, therefore, do not
anticipate paying any cash dividends on our common stock in the foreseeable future.
The
disclosure required by Item 201(d) of Regulation S-K is included in Item 12 of this annual
report on Form 10-K.
During February 2004, Alonim Investments Inc., or Alonim, one of the affiliates of Future,
exercised rights to convert promissory notes from us into our common stock for 4.6 million shares,
which have not been registered with the SEC (See Note 2 to our consolidated financial statements
for Related Parties). Likewise, on August 5, 2004, Alonim exercised an outstanding
warrant to purchase 900,000 shares of our common stock at an exercise price of $2.9458 per
share for a total of $2,651,000. These transactions were conducted pursuant to certain private
placement exemptions from the registration requirements of the Securities Act. In connection with
the warrant exercise, we also agreed to modify certain standstill restrictions on the affiliates of
Future to enable them to hold the lesser of (i) 49% of our issued and outstanding voting capital
stock and (ii) 42.5% of our issued and outstanding voting capital stock, measured on a Fully
Diluted Basis, as defined using the following equation: The
20
numerator includes all voting capital
stock and securities convertible into or exercisable for voting capital stock held by the
affiliates of Future and the denominator is the greater of (i) all shares of our voting capital
stock outstanding or issuable upon the exercise or conversion of vested securities convertible into
or exercisable for voting capital stock and (ii) 40,000,000 (as adjusted for stock dividends,
splits or like transactions). We used the proceeds from these transactions to help finance our
working capital needs. In addition, on August 9, 2004, Alonim purchased 2.5 million shares of our
common stock on the open market. As of December 31, 2005, the affiliates of Future held 16.3
million shares, or 46% of our outstanding capital stock.
On January 19, 2006, we completed a $7.0 million private loan transaction in which we issued a
9% secured note with convertible interest due January 19, 2008 to Rodfre Holdings LLC, or Rodfre,
an affiliate of Alonim and Future. The issuance of the note was not registered under the Securities Act and
was issued in a private placement. The note was secured by a deed of trust on our headquarters
property located in Milpitas, California. During March 2006, we sold our Milpitas property to
Mission West Properties for $13.4 million and used a portion of the proceeds from that transaction
to pay off and terminate this note.
On May 16, 2006, we placed $30.0 million of 5.5% Convertible Senior Notes due 2026, or the
2006 Notes, in a private placement. Rodfre, an affiliate of Alonim and of Future, purchased 50% of
the 2006 Notes, or $15,000,000 aggregate principal amount, sold in this offering. The remainder of
the 2006 Notes were purchased by other accredited investors. We intend to use the net proceeds of
approximately $28.7 million from the private placement for general corporate purposes. The 2006 Notes are
convertible into common stock at any time at a fixed conversion price of $2.68 per share. If fully
converted, the principal amount of the 2006 Notes would convert into approximately 11,194,030
shares of our common stock. A more detailed description of the terms of the 2006 Notes is provided
in Note 16 to our consolidated financial statements included in this 10-K filing, and in our Form
8-K filed with the SEC on March 19, 2006.
Item 6. Selected Financial Data:
Selected financial data for the last five years appear below (in thousands, except per-share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
Operating Results: |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
Net sales |
|
$ |
72,674 |
|
|
$ |
75,453 |
|
|
$ |
36,535 |
*** |
|
$ |
66,260 |
|
|
$ |
72,062 |
|
Gross profit (loss) |
|
|
13,749 |
|
|
|
11,796 |
|
|
|
(9,068 |
)*** |
|
|
(8,488 |
) |
|
|
(2,536 |
) |
As a % of net sales |
|
|
18.9 |
% |
|
|
15.6 |
% |
|
|
(24.8 |
)% |
|
|
(12.8 |
)% |
|
|
(3.5 |
)% |
Depreciation and amortization |
|
|
10,952 |
|
|
|
6,559 |
|
|
|
7,587 |
|
|
|
7,675 |
|
|
|
6,662 |
|
Research & development expenses |
|
|
17,248 |
|
|
|
14,710 |
|
|
|
13,252 |
|
|
|
12,944 |
|
|
|
12,858 |
|
Loss from operations |
|
|
(38,515 |
) |
|
|
(23,066 |
) |
|
|
(38,495 |
) |
|
|
(47,455 |
) |
|
|
(32,928 |
) |
Loss before income taxes |
|
|
(37,915 |
) |
|
|
(22,881 |
) |
|
|
(39,489 |
) |
|
|
(47,542 |
) |
|
|
(32,282 |
) |
Net loss |
|
|
(38,107 |
) |
|
|
(22,748 |
) |
|
|
(39,807 |
) |
|
|
(79,276 |
) |
|
|
(19,692 |
) |
As a % of net sales |
|
|
(52.4 |
)% |
|
|
(30.1 |
)% |
|
|
(109.0 |
)% |
|
|
(119.6 |
)% |
|
|
(27.3 |
)% |
Net loss per common share basic |
|
$ |
(1.07 |
) |
|
$ |
(0.69 |
) |
|
$ |
(1.41 |
) |
|
$ |
(2.92 |
) |
|
$ |
(0.82 |
) |
Net loss per common share diluted |
|
$ |
(1.07 |
) |
|
$ |
(0.69 |
) |
|
$ |
(1.41 |
) |
|
$ |
(2.92 |
) |
|
$ |
(0.82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet and Financial Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,969 |
|
|
$ |
15,523 |
|
|
$ |
18,338 |
|
|
$ |
6,489 |
|
|
$ |
4,874 |
|
Short-term investment securities |
|
|
|
|
|
|
249 |
|
|
|
2,994 |
|
|
|
9,980 |
|
|
|
|
|
Restricted cash equivalents and securities |
|
|
1,000 |
|
|
|
1,838 |
|
|
|
|
|
|
|
|
|
|
|
|
* |
Total assets |
|
|
50,442 |
|
|
|
88,066 |
|
|
|
101,296 |
|
|
|
98,786 |
** |
|
|
145,127 |
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
21,323 |
|
|
|
10,455 |
|
|
|
7,396 |
|
Working capital (deficit) |
|
|
(3,385 |
) |
|
|
14,346 |
|
|
|
24,468 |
|
|
|
27,775 |
|
|
|
36,260 |
|
Current ratio |
|
|
0.9 |
|
|
|
1.5 |
|
|
|
2.0 |
|
|
|
3.0 |
|
|
|
4.7 |
|
Purchase of property, plant and equipment |
|
|
878 |
|
|
|
1,921 |
|
|
|
2,024 |
|
|
|
4,108 |
|
|
|
40,441 |
* |
Stockholders equity |
|
|
22,521 |
|
|
|
60,080 |
|
|
|
54,233 |
|
|
|
74,520 |
|
|
|
127,822 |
|
|
|
|
* |
|
In June 2001, Sipex purchased the land, building and equipment of its Milpitas manufacturing facility for $35.0 million which was
formerly under lease. Proceeds for the buyout were provided through the liquidation of $36.8 million of restricted cash that had
previously secured the lease of the facility and equipment. |
|
** |
|
The 2002 decrease in total assets was mainly due to the establishment of a 100% valuation allowance of $31.9 million for
deferred tax assets, the disposition of machinery and equipment with a net book value of $6.7 million and $3.0 million write-off of goodwill. |
|
*** |
|
The decrease in net sales in 2003
was primarily due to non-cash charges as a reduction to sales of
$14.1 million in 2003 reflecting the fair value of conversion
rights related to the 2003 convertible note issued to Future, a
related party (See Note 3 to our consolidated financial
statements regarding Related Parties), and $12.6 million
initial impact for the revenue values of our products in the
distribution channel upon conversion to sell-through accounting (See
Note 3 to our consolidated financial statements regarding
Revenue Recognition). In addition, the 2003 gross loss increased by
$1.8 million as a result of the conversion to sell-through
accounting.
|
21
Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations:
The following discussion should be read together with our consolidated financial statements
and the related notes contained elsewhere in this annual report on Form 10-K.
Overview
We design, manufacture and market, high performance, analog ICs that are used primarily by
OEMs, operating in the computing, consumer, communications and networking infrastructure markets.
Some of the end product applications that contain our ICs are cellular phones, base stations,
computers, DVD players, and digital cameras. Our products fall into three major product families:
power management, interface and optical storage.
We focus on several key areas to drive operating and financial performance, including product
mix, new product introductions, capacity utilization, cost reductions and productivity. All of
these key areas are interrelated and important in achieving improved gross margin.
Product mix between our three product families and the sale of new products within each of our
product families can significantly impact overall gross margin. Power management product gross
margins have a wide range depending on the mix of sales within this product family. The very high
volume commodity products sold into the Asian market, such as power regulators, have generally
lower margins. By contrast, our advanced power management product offerings, such as white LED
(light emitting diode) drivers, and our Power BloxTM family, are newer products, and contribute
typically higher margins. Interface products typically have more moderate margins, due to the
multi-protocol family and the new low voltage interface products. Optical storage product gross
margins are typically within range of our average margin. The products in this line are typically
proprietary, but alternative suppliers often introduce competitive solutions.
Capacity utilization of our wafer fabrication facility in Milpitas, California was
historically an important factor in driving gross margin improvement. In the past, a large portion
of our fabrication cost structure was fixed, such as depreciation and payroll expense for process
engineering and manufacturing support, and this structure provided for lower per unit costs as the
volume of completed wafers increased. In the third quarter of 2005, we decided to outsource all of
our wafer fabrication operations and to begin shutting down the Milpitas, California facility. We
expect this transition to be completed by the third quarter of 2006. We believe that this
transition will improve the margins of our interface products and certain of our commodity market
power management products which we historically manufactured at the Milpitas facility; however,
because of this transition away from the fixed cost structure, we will not recognize the same
decrease in per unit manufacturing costs as production volumes increase.
Cost reductions and productivity improvements are required in order to remain competitive in
our marketplace. Cost reductions are achieved in several ways, such as re-designing the products
to shrink the size of the die providing more individual products per wafer produced. This
generates increased output without adding significant incremental cost. Other cost reductions and
productivity improvements come through product assembly and test yield improvement and test time
reduction.
Since 2003 we have continuously transformed our product mix, eliminating legacy products, such
as hybrid and EL (electroluminescent display drivers), while focusing on existing products and
increasing the sale of new products introduced in our three core product families. Net sales
attributed to legacy products decreased from $2.5 million in
2003 to $0.8 million in 2004
and $0.6 million in 2005. Net sales of our three core product families increased from $34.0 million in 2003 to
$74.7 million in 2004 and declined to $72.1 million in 2005.
Our wafer fabrication operation in Milpitas produced approximately 84%, 81% and 84% of our
wafer requirements in 2005, 2004 and 2003, respectively. Our wafer fabrication utilization in
Milpitas was 56%, 62% and 70% in 2005, 2004 and 2003, respectively. Wafer production declined by
12% and 10% in 2005 and 2004, respectively, as compared to each prior year.
Net sales decreased by 3.7% to $72.7 million for the year ended December 31, 2005, as compared
to $75.5 million for the year ended January 1, 2005. The decrease in net sales was due to a $2.2
million decline in net sales for the power management product line and a $1.1 million decline in
the interface product line, somewhat offset by a $0.8 million increase in the optical storage
product line. The decrease in net sales of the power product line was driven by an overall
softness in demand that led to a unit volume decline as well as a decline in average selling
prices. The decline in demand for the commodity products was only somewhat offset by increasing
demand for our proprietary power management products. The decline in net sales of the interface
product line was driven by a decline in average selling prices while unit volume increased. The
increase in net sales for the optical storage product line was primarily driven by an increase in
unit volume as demand for these products was strong.
22
Gross profit increased to $13.7 million in 2005 or 19% of net sales, as compared to $11.8
million or approximately 16% in 2004. The improvement in gross profit was comprised of
improvements in manufacturing yields lowering overall product costs as well as reductions in
inventory write-downs for excess and obsolete products. These cost reductions were offset by
recognition of $4.3 million of increased depreciation on the Milpitas, California facility after
determination that the facility had a shorter economic useful life to Sipex recorded in the fourth
quarter of 2005. The improvement in gross profit was comprised of the following: product mix,
higher margins at standard cost due to manufacturing yield and process improvements.
As of December 31, 2005, cash, cash equivalents and short-term investments, were $2.0 million
as compared to $15.8 million at January 1, 2005. The decrease of $13.8 million was principally due
to funding our ongoing operations with a use of $17.4 million in operating activities, cash
payments for capital expenditures of $878,000, partially offset by net proceeds of $3.0 million
short-term borrowing from our bank line of credit, issuance of common stock under employee stock
option plans for $683,000 and reductions in restricted cash of $838,000.
Net cash used in operating activities was $17.4 million, $8.9 million, and $8.2 million in
2005, 2004, and 2003, respectively. We will continue to depend upon our cash and cash equivalents
to fund our operations until such time that we generate cash from operating activities.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements 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
consolidated financial statements and the reported amounts of revenues and expenses during the
reporting period. On an ongoing basis, we evaluate our estimates, including those significant
estimates that are particularly susceptible to change, which include revenue recognition, inventory
valuation, restructuring and impairment, and income taxes. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable under the
circumstances. There can be no assurance that actual results will not differ from those estimates.
We have identified the accounting policies below as the policies most critical to our business
operations and the understanding of our results of operations. The impact and any associated risks
related to these policies on our business operations is discussed throughout Managements
Discussion and Analysis of Financial Condition and Results of Operations where such policies affect
our reported and expected financial results.
Revenue Recognition. We recognize revenue in accordance with SEC Staff Accounting Bulletin
(SAB) 104, Revenue Recognition. SAB 104 requires that four basic criteria must be met before
revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectibility is
reasonably assured.
Through the year ended December 31, 2002, we recognized revenue from distributors other than
Future upon title transfer and shipment because these customers had no price protection and had
limited return rights. Distributors were permitted to return products limited to a percentage of
their purchases over a specified period of time. We were able to estimate and establish appropriate
reserves for future returns from these distributors, and historically we received stock rotation
requests from our distributors that were within the amounts estimated and contractually allowed.
Starting in the first fiscal quarter of 2003, we began entering into arrangements that were not
within the original contractual distributor agreements in that we allowed return rights and other
concessions beyond the levels provided in the distributor agreements. Due to this change in customer arrangements, our management concluded it is unable to reasonably
estimate sales returns for arrangements with its distributors. This change was accounted for as a
change in estimate effective January 1, 2003, and resulted in sales and related cost of sales on
shipments to distributors being deferred until the resale to the end customer. The effect of this
change includes a reduction in net sales and gross margin of $12.6 million and $1.8 million,
respectively, recorded in the first quarter of 2003 for the reversal of sales and related costs
recognized prior to January 1, 2003.
Sales to Future are made under an agreement that provides protection against price reductions
of Sipexs products in Futures inventory. In addition, Future has stock rotation rights.
Pursuant to these stock rotation rights, Future is permitted on a quarterly basis to return for
credit up to 10% of its total purchases during the most recent three-month period (reduced to 5%
including a 2% scrap allowance effective April 1, 2006). As the price of products sold to Future
is not fixed or determinable until resold by Future to the end customer, Sipex is using
sell-through revenue accounting and deferring recognition of such sales and related cost of goods
sold until the product is sold by Future to its customers.
23
Under sell-through revenue accounting, accounts receivable are recognized and inventory
is relieved upon shipment to the distributor as title to the inventory is transferred upon
shipment; at which point we have a legally enforceable right to collection under normal terms. The
associated sales and cost of sales are deferred by recording deferred income (gross profit margin
on these sales) as shown on the face of the consolidated balance sheet. When the related product
is sold by our distributors to their end customers, we recognize previously deferred income as
sales and cost of sales.
For non-distributor customers, we recognize revenue when title to the product is transferred
to the customers, which occurs upon shipment or delivery, depending upon the terms of the customer
order, provided that persuasive evidence of a sales arrangement exists, the price is fixed and
determinable, title has transferred, collection of the resulting receivables is reasonably assured,
there are no customer acceptance requirements, and there are no remaining significant obligations.
Provisions for returns and allowances for non-distributor customers are provided for at the time
product sales are recognized. An allowance for sales returns and allowances for customers is
recorded based on historical experience or specific identification of an event necessitating an
allowance.
From time to time, we develop custom products for various customers under engineering service
contracts culminating in delivery of known functional development samples. We recognize revenue
under these agreements upon delivery of known functional development samples as delivery of such
represents the culmination of utility of the contract to the customer and agreed to milestones. We
recognize the costs as incurred associated with these contracts and present such costs as research
and development expenses due to the uncertain nature of the development efforts until delivery of
the known functional development samples. Certain of these engineering service contracts include
payments in advance of delivery of known functional development samples. These payments are
recorded in deferred income, other, until the time of delivery of the functional samples.
Valuation of Inventories. Sipex writes down the value of its inventories for estimated excess
quantities, obsolescence, and/or marketability deficiencies. In addition, we write down inventory
costs to the lower of cost or market which becomes the new cost basis. Excess and obsolete
inventories are determined by comparing current inventory quantities to current backlog,
anticipated future demand and shipment history. Lower of cost or market adjustments are determined
by reviewing shipments during the quarter as well as quarter beginning backlog and comparing
standard cost to anticipated market pricing. In estimating anticipated market pricing, we also
consider current market conditions, industry performance, distributor inventory levels and sales to
end-users and other relevant factors. If actual market conditions become less favorable than those
anticipated by management, additional write-downs of inventories may
be required in the future. During 2005, inventories with an original cost of $1.0 million, which had been previously written
down to zero, were sold and we recorded
write-downs of $5.0 million for excess and obsolete inventory. During 2004, inventories with an original cost of $874,000, which had been previously written down
to zero, were sold and we recorded write-downs of $8.6 million. During 2003, inventories with an original cost of $775,000, which had been previously written down
to zero, were sold and we recorded $2.9 million of
inventory write-downs.
Restructuring and Fixed Asset Impairment. The determination of the estimated restructuring
accrual and impairment requires significant management judgment. To estimate the restructuring
accrual, we prepare a plan that includes the number of employees to be terminated and the related
severance cost, the amount of impairment for certain fixed assets and inventory, the termination
costs of certain leases and the related actions required to execute the plan. It is possible that
future events such as voluntary employee terminations, sublease agreements or a shift in the timing
of the execution of the plan could result in significant changes to the original estimate.
We accounted for restructuring charges beginning January 1, 2003 in accordance with SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities when they are incurred
rather than at the date of commitment to an exit or disposal plan. Prior to January 1, 2003, we
accounted for restructuring in accordance with Emerging Issues Task Force Issue No. 94-3 (EITF
94-3), Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring) and SEC Staff Accounting Bulletin
No. 100 (SAB 100), Restructuring and Impairment Charges.
We review long-lived assets and certain identifiable intangibles for impairment in accordance
with the guidelines of SFAS No. 144 Accounting for Impairment of Disposal of Long Lived Assets
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
24
impairment is indicated, 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 cost to sell. In estimating
future net cash flows, management makes certain assumptions including future sales levels, gross
profit margins and expense levels and proceeds from disposition. The future net cash flows can
vary from management estimates due to unforeseen circumstances that may result in additional
impairment charges required to be recognized in the income statement.
During the fourth quarter of 2003 we established a $1.0 million restructuring reserve for our
facility in Billerica, Massachusetts. This followed our 2002 restructuring initiative in which we
transferred our back-end test operations to Asia in the first quarter of 2003 and began to
integrate other support activities to Milpitas, California. In the fourth quarter of 2003 we had
vacated and segregated approximately 75% of the Billerica, Massachusetts facility and were seeking
a lessee for this unoccupied space. During the third quarter of 2004, we incurred an additional
restructuring expense which reflected our plan to move the remaining operations to Milpitas,
California and consisted of $1.4 million for future lease payments, $447,000 write-off of leasehold
improvements and $32,000 for severance payments. During the year ended January 1, 2005, we utilized
$1.0 million of restructuring reserves, which was primarily the $447,000 write-off of leasehold
improvements, and lease costs associated with the unused portion of our Billerica facility. We made
additional adjustments to the restructuring for changes to the lease obligation totaling $60,000.
For the year ended January 1, 2005, the balance of the restructuring accrual principally consisted
of facility lease costs, and is expected to be paid over the next three years. The balance as of
the year ended January 1, 2005 is $1.8 million, of which $566,000 was the short-term portion and
$1.3 million was long term portion, respectively. The restructuring reserve represents the present
value of future lease payments subsequent to abandonment less any estimated sublease income net of
associated costs. To estimate future sublease income, we worked with an independent broker to
estimate the length of time to sublease the facility and the total amount to be received. However,
our estimates of expected sublease income could change in the future based on factors that affect
our ability to sublease this facility such as general economic conditions, financial viability of a
sublessee and the real estate market, among others.
In the second quarter of 2005, Sipex recognized a $9.4 million impairment charge for its
long-lived assets. Based on changes in the planned use for its wafer fabrication assets, we
performed an impairment evaluation in accordance with SFAS No. 144. Sipex determined that the
appropriate grouping for this impairment evaluation was the wafer fabrication assets taken together
and the associated cash flows for these assets. These assets were evaluated on a held-for-use basis
as we were required to operate our wafer fabrication facility until new wafer fabrication partner
processes were qualified. As the carrying value exceeded the undiscounted cash flows of the wafer
fabrication assets for the period of planned use by us, an impairment charge was recorded for the
difference between the carrying value and the fair value of the wafer fabrication assets which
management determined with the assistance of an independent appraisal firm. The impairment charge
primarily related to machinery and equipment and fabrication-related building improvements. While
we subsequently agreed to sell a substantial portion of its wafer fabrication machinery and
equipment to Silan by the end of the third quarter of 2006, its wafer fabrication assets remain in
use and Sipex will continue to record depreciation expense based on the estimated remaining useful
life at the time of impairment.
On August 29, 2005, the Board of Directors of Sipex approved a plan to close its wafer
fabrication operations located in Milpitas, California and transfer the fabrication to Silan in
China to reduce costs and improve operating efficiencies. As a result, we recognized total
restructuring charges of approximately $871,000 in the second half of 2005 including severance and
retention benefits totaling $766,000 for approximately 70 employees and other exit costs of
$105,000. We currently anticipates that the facility closure activities will be substantially
completed by the end of third quarter of 2006. In addition, during the third quarter of 2005, Sipex
decided not to transfer the remaining operations in Billerica to Milpitas that was originally
anticipated to be completed by the end of 2005. The adjustment to the restructuring accrual of
$294,000 during 2005 primarily included exiting costs of $213,000, offset by sublease income of
$293,000 and $195,000 recorded in the third quarter of 2005 as a reduction to future lease payment
obligation for not transferring such remaining operations in Billerica. Sublease income is recorded
on a cash basis due to the uncertainty of collectibility. The restructuring accrual balance as of
December 31, 2005 consisted of short-term portion of $1.4 million and long-term portion of
$584,000. The $2.0 million restructuring accrual balance included $1.2 million of facility lease
costs to be paid out over the next two years and the remaining portion to be paid out in less than
a year.
Income Taxes. In assessing the net realizable value of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become
taxable. Management considers the scheduled reversals of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this assessment. Based upon the level
of historical taxable income and projections for future taxable income over the periods in which
the deferred tax assets were deductible, management assessed that it is more likely than not that
the deferred tax assets at December 31, 2005 will not be realized in the future. Therefore we
maintained a full valuation allowance against our deferred tax assets.
25
Results of Operations
For the periods indicated, the following table sets forth the percentages of net sales
represented by the respective line items in our consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
2005 |
|
2004 |
|
2003 |
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
81.1 |
|
|
|
84.4 |
|
|
|
124.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
18.9 |
|
|
|
15.6 |
|
|
|
(24.8 |
) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
23.7 |
|
|
|
19.5 |
|
|
|
36.3 |
|
Marketing and selling |
|
|
14.6 |
|
|
|
11.4 |
|
|
|
20.3 |
|
General and administrative |
|
|
19.8 |
|
|
|
13.0 |
|
|
|
22.0 |
|
Restructuring and impairment |
|
|
13.8 |
|
|
|
2.3 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
71.9 |
|
|
|
46.2 |
|
|
|
80.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(53.0 |
) |
|
|
(30.6 |
) |
|
|
(105.3 |
) |
Other income (expense), net |
|
|
0.8 |
|
|
|
0.3 |
|
|
|
(2.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(52.2 |
)% |
|
|
(30.3 |
)% |
|
|
(108.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, 2005 compared to Fiscal Year Ended January 1, 2005
Net Sales. The table in Note 14 to our consolidated financial statements shows details of our
net sales by product lines and geographic locations for 2005 and 2004.
Net sales decreased by 3.7% to $72.7 million for the year ended December 31, 2005, as compared
to $75.5 million for the year ended January 1, 2005. The decrease in net sales was due to a $2.2
million decline in net sales for the power management product line and a $1.1 million decline in
the interface product line, somewhat offset by a $0.8 million increase in the optical storage
product line. The decrease in net sales of the power product line was driven by an overall
softness in demand that led to a unit volume decline as well as a decline in average selling
prices. The decline in demand for the commodity products was only somewhat offset by increasing
demand for our proprietary power management products. The decline in net sales of the interface
product line was driven by a decline in average selling prices while unit volume increased. The
increase in net sales for the optical storage product line was primarily driven by an increase in
unit volume as demand for these products was strong.
Geographically during 2005, international net sales were $58.0 million or 80% of total net
sales, as compared to $60.3 million or 80% in 2004. In 2005, sales in Japan declined by $1.7
million or 9%. This decline was driven by declines in power management and interface products
off-set by increases in optical storage products. In Asia, other than Japan, net sales decreased
by $1.3 million or 5% related to the declines in power management and interface. Net sales in
Europe and the rest of the world increased by $0.7 million or 5%, in 2005. Domestic net sales
declined by $0.5 million or 3% in 2005.
Gross Profit (Loss). Gross profit increased to $13.7 million in 2005 or 19% of net sales, as
compared to $11.8 million or approximately 16% in 2004. The improvement in gross profit was
comprised of improvements in manufacturing yields lowering overall product costs as well as
reductions in inventory write-downs for excess and obsolete products. These cost reductions were
offset by recognition of $4.3 million of increased depreciation on the Milpitas, California
facility after determination that the facility had a shorter economic useful life to Sipex recorded
in the fourth quarter of 2005. The improvement in gross profit was comprised of the following:
product mix, higher margins at standard cost due to manufacturing yield and process improvements.
Research and Development. Research and development expenses in 2005 were $17.2 million
compared to $14.7 million in 2004. The increase of $2.5 million was primarily due to increased
product development costs for outside design services costs and prototype wafers. In addition,
approximately $1.1 million of increased depreciation for the reduction in the economic life of the
Milpitas, California facility was recorded in 2005. As a percentage of net sales, research and
development costs were 23.7% in 2005 compared to 19.5% in the prior year. This was primarily due
to the increase in research and development expenses along with the lower net sales in 2005. We
anticipate that research and development spending will increase in 2006.
26
Marketing and Selling. Marketing and selling expenses were $10.6 million in 2005 compared to
$8.6 million in 2004. The increase of $2.0 million was primarily due to increased headcount with
higher salary and benefits, marketing communications and travel costs. In addition, approximately
$0.3 million of increased depreciation for the reduction in the economic life of the Milpitas,
California facility was recorded in 2005. These increases were primarily due to increased sales
and marketing efforts for our core product families. Marketing and selling expenses were 14.6% of
net sales in 2005 compared to 11.4% of net sales in 2004. This was primarily due to the decline in
net sales in 2005 as well as the increase in expenses.
General and Administrative. General and administrative expenses were $14.4 million in 2005
compared to $9.8 million in 2004 or an increase of $4.6 million. This increase was principally due
to legal fees associated with the internal investigation, consulting and audit fees related to the
financial restatement process and higher salary and benefits costs. In addition, approximately
$0.7 million of increased depreciation for the reduction in the economic life of the Milpitas,
California facility was recorded in 2005.
Restructuring and Fixed Asset Impairment. During the year ended January 1, 2005, we utilized
$1.0 million of restructuring reserves, which primarily included $447,000 for the write-off of
leasehold improvements, and $463,000 of lease costs associated with the unused portion of our
Billerica facility. We made additional adjustments to the restructuring accrual for changes to the
lease obligation totaling $60,000. For the year ended January 1, 2005, the balance of the
restructuring accrual principally consisted of facility lease costs, and is expected to be paid
over the next three years. The balance as of the year ended January 1, 2005 is $1.8 million, of
which $566,000 was the short-term portion and $1.3 million was long-term portion.
In the second quarter of 2005, Sipex recognized a $9.4 million impairment charge for its
long-lived assets. Based on changes in the planned use for its wafer fabrication assets, we
performed an impairment evaluation in accordance with SFAS No. 144. Sipex determined that the
appropriate grouping for this impairment evaluation was the wafer fabrication assets taken together
and the associated cash flows for these assets. These assets were evaluated on a held-for-use basis
as we were required to operate our wafer fabrication facility until new wafer fabrication partner
processes were qualified. As the carrying value exceeded the undiscounted cash flows of the wafer
fabrication assets for the period of planned use by us, an impairment charge was recorded for the
difference between the carrying value and the fair value of the wafer fabrication assets which
management determined with the assistance of an independent appraisal firm. While we subsequently
agreed to sell a substantial portion of its wafer fabrication machinery and equipment to Silan by
the end of the third quarter of 2006, its wafer fabrication assets remain in use and Sipex will
continue to record depreciation expense based on the estimated remaining useful life at the time of
impairment.
On August 29, 2005, our board of directors approved a plan to close our wafer fabrication
operations located in Milpitas, California and transfer the fabrication to Silan in China and other
vendors to reduce costs and improve operating efficiencies. As a result, we recognized total
restructuring charges of approximately $871,000 in the second half of 2005 including severance and
retention benefits totaling $766,000 for approximately 70 employees and other exit costs of
$105,000. We currently anticipates that the facility closure activities will be substantially
completed by the end of third quarter of 2006. In addition, during the third quarter of 2005, Sipex
decided not to transfer the remaining operations in Billerica to Milpitas that was originally
anticipated to be completed by the end of 2005. The adjustment to the restructuring accrual of
$294,000 during
2005 primarily included exiting costs of $213,000, offset by sublease income of $293,000 and
$195,000 recorded in the third quarter of 2005 as a reduction to future lease payment obligation
for not transferring such remaining operations in Billerica. Sublease income is recorded on a cash
basis due to the uncertainty of collectibility. The restructuring accrual balance as of December
31, 2005 consisted of a short-term portion of $1.4 million and a long-term portion of $584,000.
The $2.0 million restructuring accrual balance included $1.2 million of facility lease costs to be
paid out over the next two years and the remaining portion to be paid out in less than a year.
In November 2005, based on the previous decision to close our wafer fabrication operation
located at its Milpitas California headquarters facility, we decided to sell this facility. As a
result of a decision, we reduced the remaining estimated depreciation life for our headquarters
building and related improvements from 25 years to approximately four months. This change resulted
in an increase in depreciation expense recorded in the fourth quarter of 2005 of $6.5 million
(including $4.3 million included in cost of sales).
27
The following is a summary of the activity related to accrued restructuring costs and fixed
asset impairment for fiscal years 2004 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Restructuring |
|
|
Fixed Asset |
|
|
|
Costs |
|
|
Impairment |
|
Accrual balance December 31, 2003 |
|
$ |
1,070 |
|
|
$ |
|
|
Incurred 2004 |
|
|
1,858 |
|
|
|
|
|
Charges utilized |
|
|
(1,036 |
) |
|
|
|
|
Deferred rent adjustment |
|
|
15 |
|
|
|
|
|
Adjustments to accrual |
|
|
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
Accrual balance January 1, 2005 |
|
|
1,847 |
|
|
$ |
|
|
Incurred 2005 |
|
|
871 |
|
|
|
9,377 |
|
Charges utilized |
|
|
(726 |
) |
|
|
(9,377 |
) |
Sublease income received |
|
|
293 |
|
|
|
|
|
Adjustments to accrual |
|
|
(294 |
) |
|
|
|
|
|
|
|
|
|
|
|
Accrual balance December 31, 2005 |
|
$ |
1,991 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Other Income (Expense), Net. Other income (expense), net was $0.6 million in 2005 compared to
$185,000 in the prior year. The increase in other income (expense), net was attributable to higher
interest income on short-term investments, other income and lower interest expense associated with
the two convertible notes with Future (See Note 2 to our consolidated financial statements for
Related Parties). Both convertible notes were extinguished and converted into 4.6 million of our
common shares as of February 18, 2004.
Income Tax Expense. Our income tax expense primarily relates to our foreign operations as we
continue to incur losses from domestic operations. In 2005, we recorded an income tax provision of
$192,000 in contrast to an income tax benefit of $133,000 in 2004 due to a reversal of the
previously established expected tax liability from our off-shore operations, primarily Belgium.
Notwithstanding our net operating losses, we did not record a tax benefit as we believed that it
was more likely than not, considering the level of historical taxable income and expectations
for future taxable income, that the operating loss would not be utilized in the future to offset
taxable income.
Fiscal Year Ended January 1, 2005 compared to Fiscal Year Ended December 31, 2003
Net Sales. Net sales increased 107% to $75.5 million for the year ended January 1, 2005, as
compared to $36.5 million for the year ended December 31, 2003. The $39.0 million increase in net
sales was primarily due to non-cash charges to sales of $14.1 million in 2003 reflecting the fair
value of conversion rights related to the 2003 convertible note issued to Future, a related party
(See Note 2 to our consolidated financial statements regarding Related Parties), and $12.6
million initial impact for the revenue values of our products in the distribution channel upon
conversion to sell-through accounting. The remaining $12.3 million increase in net sales reflected
a stronger demand for our products during 2004.
The table in Note 14 to our consolidated financial statements shows details of our net sales
by product lines and geographic locations for 2004 and 2003. The increases in net sales in 2004 as
compared to 2003 by product lines were as follows:
|
(a) |
|
Interface product net sales in 2004 increased by $23.0 million or 139% over 2003 due
primarily to the allocation of non-cash charges against sales of $11.0 million relating to
the fair value of conversion rights, and $6.5 million for conversion to the sell-through
accounting allocated to this product line in 2003. The increase attributable to higher
product demand amounted to $5.5 million. |
|
|
(b) |
|
Net sales of our power management product line increased $11.5 million, or 118%
primarily as a result of the allocation of the 2003 non-cash charges of $2.3 million and
$1.2 million relating to the conversion rights and conversion to sell-though accounting,
respectively, and $8.0 million attributable to sales growth. |
|
|
(c) |
|
Sales of our optical storage products increased $6.2 million, or 80%. The increase was
primarily due to the impact of the 2003 non-cash charge of $1.1 million relating to the
conversion to sell-through accounting methodology and a $5.1 million increase attributable
to the growth in demand for the new products introduced in 2003, particularly in Japan. |
|
|
(d) |
|
Sales of our legacy and EL product lines decreased by approximately $1.8 million. In
the third quarter of 2002, we sold the hybrid product family to SatCon Electronics Inc,
which resulted in no net sales for that product line in 2003. In addition, we discontinued
producing the electroluminescent display driver product family by the first quarter of
2003. Total sales in these product areas decreased by approximately $6.3 million but was
partially offset by a $3.8 million impact of the 2003 non-cash charge relating to the
conversion to sell-through methodology and an $0.8 million allocation of the 2003 non-cash
charge relating to the conversion rights. |
28
The increase in demand for the aforementioned product lines was attributable to several
factors, including the introduction of several new products; cost reductions in interface and power
management products allowing us to compete in commodity pricing market conditions; and increased
focus in managing the representative and distribution network to increase design wins for interface
and power management products.
The increase in net sales of our products in the international market also reflected the
impact of the 2003 non-cash charges to revenue of $8.5 million and $12.6 million relating to
conversion rights and conversion to sell-through accounting, respectively, that were attributed to
international. Geographically during 2004, international net sales increased by $28.9 million, or
92%, as compared to 2003. Sales in Japan grew by $8.4 million, or 83%, compared to 2003. The
ramping of optical storage products in 2004 accounted for this increase in Japan as the majority of
our optical storage product sales were generated in Japan. In Asia other than in Japan, net sales
also increased by $13.0 million or 93% in 2004, as the mix shifted from legacy products to power
management products. Net sales in Europe and the rest of the world increased $7.5 million, or
106% in 2004, due to the increase in both interface and power management products.
Domestic net sales in 2004 increased $10.0 million, or 192% due primarily to strong demand for
our interface products and the $5.6 million impact of the 2003 non-cash charge relating to the debt
conversion rights in the previous year.
Gross Profit (Loss). Gross profit was $11.8 million for the year ended January 1, 2005. The
gross loss of $9.1 million for the year ended December 31, 2003 included a non-cash charge to sales
reflecting the fair value of debt conversion rights of $14.1 million (See Note 2 to our
consolidated financial statements for Related Parties) and an initial impact of $1.8 million for
the gross margin recognized prior to January 1, 2003 reflecting the conversion to sell-through
accounting. Compared to 2003, the gross profit improved by $20.9 million in 2004. This improvement
in 2004 was driven by the following: product mix shifts toward higher margin products, lower
product costs due to manufacturing yield and process improvements and the sale of approximately
$874,000 of inventory in 2004 that was previously written-off. These improvements were partially
offset by higher inventory write-downs of $8.6 million in 2004, by the $14.1 million non-cash
charge for the fair value of debt conversion rights in 2003, and by the $1.8 million non-cash
charge (initial impact) for the margin portion on our products in the distribution channel due to
the conversion to sell-through revenue accounting. Manufacturing yield and process improvements
were the result of our continued effort primarily in standardizing manufacturing processes and
improving design for manufacturability.
During the second half of 2003 we converted a portion of our capacity to two-micron geometry
from five-micron geometry that resulted in increasing the number of circuits per wafer, and
increasing the end product sales value per wafer significantly with relatively minor increase in
wafer cost. This also contributed to our improved cost and yield performance.
Research and Development. Research and development expenses in 2004 were $14.7 million
compared to $13.3 million in 2003. The increase of $1.4 million was primarily due to increased
compensation costs, increased expenses for new mask sets and prototype wafers and outside design
consulting fees. As a percentage of net sales, research and development costs were 19.5% in 2004
compared to 36.3% in the prior year. This percentage decrease was primarily due to the increase in
net sales in 2004 versus the lower net sales in 2003, which resulted from the non-cash charges for
the fair value of debt conversion rights (See Note 2 to our consolidated financial statements for
Related Parties) and the conversion to the sell-through accounting. We anticipate that research and
development spending will increase in 2006 but remain roughly constant in terms of a percentage of
sales as compared to 2005.
Marketing and Selling. Marketing and selling expenses were $8.6 million in 2004 compared to
$7.4 million in 2003. The increase of $1.2 million was primarily due to increased headcount with
higher salary and benefits, marketing communications and travel costs, and increased sales
representative commissions. These increases were primarily due to increased sales in our core
product families, offset by a decrease in other expenses. Marketing and selling expenses were 11.4%
of net sales in 2004 compared to 20.3% of net sales in 2003. This percentage decrease was
primarily due to the increase in net sales in 2004 versus the lower net sales in 2003, which
resulted from the non-cash charges for the fair value of debt conversion rights (See Note 2 to our
consolidated financial statements regarding Related Parties) and for the conversion to sell-through
revenue accounting.
General and Administrative. General and administrative expenses were $9.8 million in 2004
compared to $8.1 million in 2003 or an increase of $1.7 million. This increase was principally due
to significant internal and external costs associated with compliance with the Sarbanes-Oxley Act
of 2002 and the costs for the audit of our 2004 consolidated financial statements, partially offset
by lower occupancy costs and depreciation expense. General and administrative expenses in 2004
represented 13% of net sales compared to 22% in 2003.
29
Restructuring. In 2002, we transferred our back-end test operations to Asia and completed the
move of our headquarters and major operations to Milpitas, California. During 2003, $330,000 was
reversed from the 2002 accrual for management reorganization charges and employee severance costs.
In December of 2003, we established a restructuring reserve of $1.0 million for our Billerica,
Massachusetts facility which includes a design center occupying approximately one-fourth of the
space. Accrued restructuring costs for the present value of future lease payments net of sublease
income and associated costs as of December 31, 2003 for this facility included a short-term portion
of $498,000 and a long-term portion of $572,000, respectively. In the third quarter of 2004, we
incurred an additional restructuring expense which reflected our plan to move the remaining
operations in Billerica, Massachusetts to Milpitas, California and consisted of $1.4 million for
future lease payments, $447,000 write-off of leasehold improvements and $32,000 for severance
payments.
During the year ended January 1, 2005, we utilized $1.0 million of restructuring reserves,
which primarily included $447,000 of write-off of leasehold improvements, and $463,000 of lease
costs associated with the unused portion of our Billerica facility. We made additional adjustments
to the restructuring for changes to the lease obligation totaling $60,000. For the year ended
January 1, 2005, the balance of the restructuring accrual principally consisted of facility lease
costs, and is expected to be paid over the next three years. The balance as of the year ended
January 1, 2005 is $1.8 million, of which $566,000 was the short-term portion and $1.3 million was
long-term portion.
The following is a summary of the activity related to restructuring accrual for fiscal years
2003 and 2004 (in thousand):
|
|
|
|
|
|
|
Restructuring |
|
|
|
Costs |
|
Accrual balance December 31, 2002 |
|
$ |
755 |
|
Incurred 2003 |
|
|
1,043 |
|
Charges utilized |
|
|
(535 |
) |
Deferred rent adjustment |
|
|
137 |
|
Adjustments to accrual |
|
|
(330 |
) |
|
|
|
|
Accrual balance December 31, 2003 |
|
|
1,070 |
|
Incurred 2004 |
|
|
1,858 |
|
Charges utilized |
|
|
(1,036 |
) |
Deferred rent adjustment |
|
|
15 |
|
Adjustments to accrual |
|
|
(60 |
) |
|
|
|
|
Accrual balance January 1, 2005 |
|
$ |
1,847 |
|
|
|
|
|
Other Income (Expense), Net. Other income (expense), net was $185,000 in 2004 compared to
$(994,000) in the prior year. The decrease in expense was attributable to the interest expense
associated with the two convertible notes with Future (See Note 2 to our consolidated financial
statements regarding Related Parties). During 2003 we paid interest on a convertible secured note
which was sold on September 27, 2002, or the First Note, until December 22, 2003 and paid interest
on a convertible secured note, which was sold on June 20, 2003, or the Second Note, until December
22, 2003. As of December 31, 2003 all future interest expense had been forgiven. Both convertible
notes were subsequently extinguished and converted into 4.6 million of our common shares as of
February 18, 2004.
Income Tax Expense. In 2004, we recorded income tax benefit of $133,000 due to reversal of
previously expected tax liability from our off-shore operations, primarily Belgium.
Income tax expense in 2003 was $318,000 based on the expected tax
liability from our off-shore operations, primarily Belgium. Notwithstanding our net operating losses, we did not record a tax benefit as we believed that it
was more likely than not, considering the level of historical taxable income and expectations
for future taxable income, that the operating loss would not be utilized in the future to offset
taxable income.
Financial Condition, Liquidity and Capital Resources
As of December 31, 2005, cash, cash equivalents and short-term investments, were $2.0 million
as compared to $15.8 million at January 1, 2005. The decrease of $13.8 million was principally due
to funding our ongoing operations with a use of $17.4 million in operating activities, cash
payments for capital expenditures of $878,000, partially offset by net proceeds of $3.0 million
short-term borrowing from our bank line of credit, issuance of common stock under employee stock
option plans for $683,000 and reductions in restricted cash of $838,000.
30
Net cash used in operating activities was $17.4 million, $8.9 million, and $8.2 million in
2005, 2004, and 2003, respectively. We will continue to depend upon our cash and cash equivalents
to fund our operations until such time that we generate cash from operating activities.
Net cash used in operating activities of $17.4 million in 2005 resulted primarily from a $38.1
million net loss and the unfavorable impact of a $6.9 million net change in assets and liabilities,
partially offset by $27.5 million of non-cash activities. Non-cash activities were primarily
comprised of depreciation and amortization of $11.0 million, $9.4 million of impairment charges,
and $5.0 million provision for inventories, provision for uncollectible receivables of $1.5
million, and a $577,000 net provision for restructuring costs. The changes in assets and
liabilities included an increase in inventory of $5.3 million, a decrease in accounts payable of
$3.4 million, a decrease in deferred income of $1.2 million and a decrease in accrued restructuring
costs of $433,000, partially offset by a decrease in accounts receivable of $1.7 million and an
increase in accrued expenses of $1.4 million, respectively. The $1.2 million decrease in deferred
income comprises of a decrease of $0.2 million from Future and a decrease of $1.0 million from
other distributors.
Net cash used in operating activities of $8.9 million in 2004 resulted primarily from a $22.7
million net loss and increase of $4.6 million in net assets and liabilities, partially offset by
$18.5 million of non-cash activities. Non-cash activities were primarily comprised of $8.6 million
provision for inventories, depreciation and amortization of $6.6 million, provision for
uncollectible receivables and sales returns and allowances of $1.3 million, and a $1.8 million
provision for restructuring. The changes in assets and liabilities included an increase in
inventory of $5.4 million, an increase in accounts receivable of $0.9 million, a decreases in
accrued restructuring costs of $608,000, partially offset by an increase in accrued expenses of
$1.4 million, an increase of deferred income of $620,000 and an increase in accounts payable of
$391,000. The $620,000 increase in deferred income comprises of an increase of $1.1 million from
Future offset by a decrease of $449,000 from other distributors.
Net cash used in operating activities in 2003 resulted primarily from a $39.8 million net
loss, of which approximately $27.7 million was non-cash activities, partially offset by the impact
of a $3.9 million net decrease in assets and liabilities. Non-cash activities primarily comprised
of a $14.1 million non-cash charge to sales for the fair value of debt conversion rights (See Note
3 to our consolidated financial statements regarding Related Parties), depreciation and
amortization of $7.6 million, a provision for inventories $2.9 million, a loss on disposal of
capital assets of $1.1 million, and restructuring charges of $713,000. The net changes in assets
and liabilities primarily included $7.4 million increase in deferred income associated with
increased shipments to our distributors, where revenue is recognized on a sell-through basis, a
decrease in prepaid and other current assets of $1.9 million, and increases in accounts payable and
accrued expenses of $2.3 million and $1.1 million, respectively. These were partly offset by
increases in accounts receivable and inventories of $3.2 million and $5.0 million, respectively, as
well as by a reduction in accrued restructuring costs of $535,000.
Accounts receivable, net of allowances, was $6.7 million and $9.9 million as of December 31,
2005 and January 1, 2005, respectively. The allowances for doubtful accounts receivable decreased
slightly to $1.3 million for 2005 from $1.4 million for 2004 which was primarily due to lower sales
allowances for product returns. The inventory reserve increased to $14.4 million for 2005 from
$12.5 million in 2004 reflecting a write-down of $5.0 million related to excess and obsolete
inventory which was offset by $1.0 million of inventory previously written down to zero that was
sold in 2005.
Net cash provided by investing activities in 2005 was $209,000, consisting of $850,000
proceeds from maturities of short-term securities, $838,000 from reductions in restricted cash,
offset by $878,000 of capital expenditures and $601,000 of purchases of short-term investment
securities.
Net cash used in investing activities in 2004 was $1.0 million, consisting of $6.3 million
purchases of short-term securities, purchase of property, plant and equipment of $1.9 million and
$1.8 million of deposit to restricted cash to meet a contractual obligation with a vendor, mostly
offset by the $9.0 million proceeds from maturity of short-term securities. During 2003, net cash
provided by investing activities was $5.0 million, which included $19.0 million proceeds from
maturity of short-term securities, partly offset by $12.0 million of purchases of short-term
securities and $2.0 million for purchases of property, plant and equipment.
Net cash provided by financing activities in 2005 was $3.7 million, resulting primarily from
$3.0 million of borrowings under our bank line of credit and $683,000 of net proceeds from issuance
of common stock under employee stock option plans. As of December 31, 2005, we violated the tangible net worth covenant
under our bank line of credit. However, the borrowings of $3.0 million were subsequently repaid in January 2006.
31
Net cash provided by financing activities in 2004 was $7.1 million, resulting primarily from
$2.7 million of net proceeds from issuance of warrants and $4.4 million of net proceeds from
issuance of common stock under employee stock option plans. Net cash provided by financing
activities in 2003 was $15.0 million. In the second quarter of 2003, we received cash of $10.3
million (net of debt issuance cost of $216,000) through the private placement of a convertible note
with an affiliate of Future. In December 2003 we entered into an agreement to terminate this note
and accelerate the associated conversion rights. As part of this agreement, we received $3.0
million in cash for this note and forgiveness of $411,000 interest charges on both outstanding
notes. Also, during 2003, we received $1.7 million from the
exercise of employee stock options.
On July 21, 2005, we entered into a Loan and Security Agreement, with Silicon Valley Bank, and
this agreement was subsequently amended on October 7, 2005, November 10, 2005, January 19, 2006,
May 18, 2006, and August 1, 2006. The agreement currently provides for a secured revolving line of
credit with an aggregate principal amount of up to $5,000,000, which may be used to borrow
revolving loans or to issue lines of credit on our behalf. We have granted to Silicon Valley Bank a
security interest in all presently existing and later acquired collateral, including but not
limited to goods, equipment, inventory, contract rights, and financial assets, in order to secure
the obligations and duties under such loan and security agreement. Advances accrue interest on the
outstanding principal balance at an annual rate equal to Silicon Valley Banks prime rate. The
agreement matures on September 30, 2006 at which time all outstanding advances must be repaid, and
all outstanding letters of credit must be cash collateralized. The agreement requires us to comply
with a minimum liquidity ratio. It also required us to retain a minimum tangible net worth.
However, the latest amendment dated August 1, 2006, has modified the agreement to delete the
requirement for a minimum tangible net worth and waive our non-compliance with the financial
covenant on tangible net worth for the periods ended April 1, 2006 and July 1, 2006. The agreement
contains additional affirmative covenants, including, among others, covenants regarding the payment
of taxes and other obligations, maintenance of insurance,
reporting requirements and compliance with applicable laws and regulations. In addition, the
agreement contains negative covenants limiting our ability to dispose of assets, change our
business plans, be acquired or beneficially owned, merge or consolidate, incur indebtedness, grant
liens, make investments, pay dividends, repurchase stock, and pay subordinated debt. The agreement
contains events of default that include, among others, non-payment of principal, interest or fees,
inaccuracy of representations and warranties, violations of covenants, bankruptcy and insolvency
events, any material adverse change, material judgments, cross defaults to certain other
indebtedness and seizure of assets. The occurrence of an event of default will increase the
applicable rate of interest by 5.0% and would, unless waived by Silicon Valley Bank, result in the
immediate payment of all of our obligations under the agreement.
As
of December 31, 2005, $3.0 million of borrowings were
outstanding under the agreement. The borrowings were subsequently
repaid in January 2006. However, we violated the
tangible net worth covenant at December 31, 2005.
On January 19, 2006, we announced the completion of a $7.0 million private loan financing in
which we issued a 9% secured note with convertible interest due January 19, 2008 to Rodfre, an
affiliate of Future. The note was secured by a deed of trust on our headquarters property located
in Milpitas, California. Accrued interest on the note was convertible into our common stock at the
option of the holder on January 19, 2007 and January 19, 2008. The conversion price would be the
volume weighted average price for sales of the common stock during the 20 trading days prior to the
date of conversion. The holder of the note could require repayment of the loan in the event of a
change of control of Sipex or the sale of the property subject to the deed of trust. The note was
subject to customary events of default. Interest on the note accrued at 9% compounded quarterly
and payable at maturity. In March 2006, we paid off the note from the proceeds of the sale of our
Hillview facility.
On March 9, 2006, we entered into an Agreement for Purchase and Sale of Real Property with
Mission West Properties L.P. The agreement provides for the sale of Sipexs Hillview facility to
Mission West Properties L.P. for a price of $13.4 million in cash. Simultaneously, we entered into
a Standard Form Lease agreement to lease back the Hillview facility from Mission West Properties
L.P. The lease term is 60 months with average lease payments of approximately $1.4 million per
year.
As
earlier mentioned, we used the proceeds from the sale of our Hillview facility to pay off
and terminate the $7.0 million private loan entered into on January 19, 2006, with an affiliate of
Future. The remaining balance of $5.6 million (net of sale related expenses) will be used in
operating activities. In addition, we have provided a security deposit of $1,265,000 in the form of
an irrevocable standby letter of credit issued to Mission West Properties, L.P. under our $5.0
million line of credit with Silicon Valley Bank. The security deposit is held as security for our
faithful performance of the terms, covenants, and conditions prescribed under the lease agreement.
On May 16, 2006, we placed $30.0 million of 5.5% Convertible Senior Notes due 2026 in a
private placement. Rodfre, an affiliate of Future, purchased 50% of the 2006 Notes or $15,000,000
aggregate principal amount being sold in this offering. The remainder of the 2006 Notes was
purchased by other accredited investors. We intend to use the net proceeds from the private
placement for general corporate purposes. The 2006 Notes bear interest of 5.5% per year, payable
semi-annually on May 15 and November 15 of each year, commencing on November 15, 2006, and mature
on May 18, 2026. The 2006 Notes are convertible into common stock at any time at a fixed conversion
price of $2.68 per share. If fully converted, the principal amount of the
32
2006 Notes would convert
into approximately 11,194,030 shares of our common stock. At any time following the effectiveness
of a registration statement related to the resale of the common stock issuable upon the conversion
of the 2006 Notes, we may, subject to certain conditions, elect to automatically convert the 2006
Notes into common stock if the average price of our common stock exceeds 150% of the conversion
price for at least 20 trading days during any consecutive 30 trading-day period, ending within 5
days of the notice of automatic conversion. We have the right to redeem the 2006 Notes at par plus
accrued interest at anytime after May 15, 2009 and the purchasers have the right to require us to
repurchase the 2006 Notes at par plus accrued interest on May 15 in 2011, 2016 and 2021.
The 2006 Notes provide that since we were not current in our SEC filings by August 15, 2006, we will pay additional interest
on the 2006 Notes at an annual rate of 1.5% for the period beginning August 15, 2006 through the
date that our filings become current. In addition, if our common stock is not listed on the Nasdaq
Global Market, the New York Stock Exchange or another national exchange or automated quotation
system by December 31, 2006, we will pay additional interest on the 2006 Notes at an annual rate of
1.5% for the period beginning December 31, 2006 through the date that our common stock becomes
listed for trading on one of the national exchanges. Likewise, the Registration Rights Agreement entered into in connection with the 2006 Notes
provides that since we have not filed a registration statement for the shares of our common stock
issuable upon conversion of the 2006 Notes or exercise of the warrants issued in connection with
the 2006 Notes, we will pay additional payments to the noteholders equal to a per annum rate of
0.8% times the principal amount of the Notes for the period beginning on August 15, 2006 through
the date that the registration statement is filed; provided, however, that we may face increased
payments if the filing of the registration statement is delayed by over 60 days, or if the
registration statement is not declared effective by December 31, 2006.
A more detailed description of the terms of the 2006 Notes is presented in Note 16 to our
consolidated financial statements included in this 10K filing and in our Form 8-K filing with the
SEC on May 19, 2006.
We believe that our existing cash and cash equivalents are adequate to fund operations,
capital expenditures and research and development efforts for the next twelve months. However, in
the event that we need to arrange additional funds for
operations, there is no guarantee that financing will be available or that it will be on terms that
we will accept. In the long-term, we believe that the results of our recent years restructuring
activities, transition to a fabless model, cost control actions and revised product line focus will
eventually result in a return to positive cash flow from operations at which time we anticipate
that additional equity or debt financing would become available for financing working capital
requirements and capital expenditure plans. However, there is no guarantee that we will return to
positive cash flow from operations or that financing, if required, will be available or that it
will be on terms that we will accept.
Contractual Obligations
Our contractual obligations as of December 31, 2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than |
|
|
1 - 3 |
|
|
3 - 5 |
|
|
More Than |
|
|
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Restructuring liability (1) |
|
$ |
1,245 |
|
|
$ |
596 |
|
|
$ |
649 |
|
|
$ |
|
|
|
$ |
|
|
Operating leases (2) |
|
|
1,530 |
|
|
|
598 |
|
|
|
697 |
|
|
|
235 |
|
|
|
|
|
Purchase commitment- PolarFab |
|
|
2,272 |
|
|
|
2,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase commitment- Cadence Design |
|
|
1,867 |
|
|
|
856 |
|
|
|
1,011 |
|
|
|
|
|
|
|
|
|
Other (3) |
|
|
388 |
|
|
|
388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
7,302 |
|
|
$ |
4,710 |
|
|
$ |
2,357 |
|
|
$ |
235 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents estimated lease payments with related costs for the unused portion of our Billerica, MA facility. |
|
(2) |
|
Excludes the lease payments related to restructuring facility at Billerica, MA that are included in (1) above. |
|
(3) |
|
Includes licensing and testing services with various vendors. |
Effect of Recent Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46). This interpretation provides guidance on the identification of
entities controlled through means other than voting rights. FIN 46 specifies how a business
enterprise should evaluate its interests in a variable interest entity to determine whether to
consolidate that entity. A variable interest entity must be consolidated by its primary
beneficiary if the entity does not effectively disperse risks among the parties involved. In
December 2003 the FASB issued FIN 46R which defers the implementation date for us to the year
ending January 1, 2005. As we do not have an interest in a variable interest entity, we did not
have a material impact on our consolidated financial position, results of operations or cash flows.
33
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 149 was effective for contracts entered into or modified after June
30, 2003. The adoption of SFAS No. 149 did not have a material impact on our consolidated
financial position, results of operations or cash flows.
On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. SFAS No. 150 requires issuers to classify as
liabilities (or assets in some circumstance) three
classes of freestanding financial instruments that embody obligations for the issuer. SFAS
No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is
otherwise effective at the beginning of the first interim period beginning after June 15, 2003. We
adopted the provisions of SFAS No. 150 on June 29, 2003, and the adoption did not have an effect on
our consolidated financial position, results of operations or cash flows.
In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition (SAB No. 104), which codifies, revises and rescinds certain sections of SAB No.
101, Revenue Recognition, in order to make this interpretive guidance consistent with
current authoritative accounting and auditing guidance and SEC rules and regulations. The
changes noted in SAB No. 104 did not have a material effect on our consolidated results of
operations, consolidated financial position or cash flows.
In March 2004, the FASB issued EITF Issue No. 03-1, or EITF 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments which provided new
guidance for assessing impairment losses on investments. Additionally, EITF 03-1 includes new
disclosure requirements for investments that are deemed to be temporarily impaired. The disclosure
requirements are effective for annual periods ending after June 15, 2004. The adoption of EITF 03-1
did not have a material impact on our consolidated financial statements.
In October 2004, the FASB approved EITF Issue 04-10 Determining Whether to Aggregate
Operating Segments That Do Not Meet the Quantitative Thresholds which addresses an issue in the
application of paragraph 19 of SFAS No. 131, Disclosures about Segments of an Enterprise and
related information. EITF 04-10 is effective for fiscal years ending after September 15, 2005. The
adoption of this issue did not have a material impact to the disclosures relating to our
consolidated financial statements.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an Amendment of ARB No. 43,
Chapter 4. The amendments made by SFAS No. 151 are intended to improve financial reporting by
clarifying that abnormal amount of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges and by requiring the allocation
of fixed production overheads to inventory based on the normal capacity of the production
facilities. The guidance is effective for inventory costs incurred beginning on January 1, 2006.
The adoption of SFAS No. 151 did not have a material impact on our consolidated financial
statements.
In December 2004, the FASB issued SFAS 123R (revised 2004), Share-Based Payment. SFAS 123R
is a revision of FASB 123 and supersedes APB No. 25. SFAS 123R establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments for goods or
services or incurs liabilities in exchange for goods or services that are based on the fair value
of the entitys equity instruments. SFAS 123R primarily focuses on accounting for transactions in
which an entity obtains employee services in share-based payment transactions. SFAS 123R requires
an entity to measure the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award over the period during which an
employee is required to provide service for the award. The grant-date fair value of employee share
options and similar instruments must be estimated using option-pricing models adjusted for the
unique characteristics of those instruments unless observable market prices for the same or similar
instruments are available. In addition, SFAS 123R requires a public entity measure the cost of
employee services received in exchange for an award of liability instruments based on its current
fair value and that the fair value of that award will be re-measured subsequently at each reporting
date through the settlement date. The effective date of SFAS 123R for us is January 1, 2006. Due
to the anticipated increase in stock compensation expense, we expect the adoption to have a
significant impact on our consolidated operating results.
In December 2004, the FASB staff issued FSP FAS 109-1, Application of FASB Statement No. 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by
the American Jobs Creation Act of 2004 (the FSP) to provide guidance on the application of
Statement 109 to the provision within the American Jobs Creation Act of 2004 (the Act) that
provides tax relief to U.S. domestic manufacturers. The FSP states that the manufacturers
deduction provided for under the Act should be accounted for as a special deduction in accordance
with Statement 109 and not as a tax rate
34
reduction. A special deduction is accounted for by
recording the benefit of the deduction in the year in which it can be taken in our tax return,
rather than by adjusting deferred tax assets and liabilities in the period of the Acts enactment
(which would have been done if the deduction on qualified production activities were treated as a
change in enacted tax rates). The FSP was effective upon issuance. The adoption of the FSP did not
have a material impact on our consolidated financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment
of Accounting Principles Board (APB) No. 29, Accounting for Nonmonetary Transactions. SFAS No. 153
requires exchanges of productive assets to be accounted for at fair value, rather than at carryover
basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is
determinable within reasonable limits, or (2) the transactions lack commercial substance. SFAS No.
153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. The adoption of the standard did not have a material effect on our consolidated financial
statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS
No. 154 establishes new standards on accounting for changes in accounting principles. Pursuant to
the new rules, all such changes must be accounted for by retrospective application to the financial
statements of prior periods unless it is impracticable to do so. The Statement is effective for
accounting changes and error corrections made in fiscal years beginning after December 15, 2005,
with early adoption permitted for changes and corrections made in years beginning after May 2005.
Adoption of SFAS No. 154 did not have a material impact on our consolidated financial position,
results of operations or cash flows.
In November 2005, the FASB issued FSP Nos. FAS 115-1 and FAS 124-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments (FSP 115-1), which
replaces the measurement and recognition guidance set forth in the EITF Issue No. 03-01, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, and
codifies certain existing guidance on investment impairment. FSP 115-1 clarifies that an investor
should recognize an impairment loss no later than when the impairment is deemed
other-than-temporary, even if a decision to sell the security has not been made, and also provides
guidance on the subsequent accounting for an impaired debt security. FSP 115-1 also requires
certain disclosures about unrealized losses that have not been recognized as other-than-temporary
impairments. The guidance in FSP 115-1 amends SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities and is effective for reporting periods beginning after December 15,
2005. We adopted the provisions of FSP 115-1 beginning on January 1, 2006, and the adoption did not
have a material impact on our financial condition or results of operations.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments, an amendment of FASB Statements No. 133 and 140. SFAS No. 155 will be effective for
us beginning in the first quarter of 2007. The statement permits interests in hybrid financial
instruments that contain an embedded derivative that would otherwise require bifurcation, to be
accounted for as a single financial instrument at fair value, with changes in fair value recognized
in earnings. This election is permitted on an instrument-by-instrument basis for all hybrid
financial instruments held, obtained, or issued as of the adoption date. We are assessing the
impact of the statement.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48) as an interpretation of FASB Statement No. 109, Accounting for Income Taxes
(SFAS 109). This Interpretation clarifies the accounting for uncertainty in income taxes
recognized by prescribing a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. This Interpretation also provides guidance on de-recognition of tax benefits previously
recognized and additional disclosures for unrecognized tax benefits, interest and penalties. The
evaluation of a tax position in accordance with this Interpretation begins with a determination as
to whether it is more likely than not that a tax position will be sustained upon examination based
on the technical merits of the position. A tax position that meets the more-likely-than-not
recognition threshold is then measured at the largest amount of benefit that is greater than 50
percent likely of being realized upon ultimate settlement for recognition in the financial
statements. FIN 48 is effective no later than fiscal years beginning after December 15, 2006, and
is required to be adopted by us in the first quarter of fiscal year 2007. We are assessing the
impact of the adoption of FIN 48.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
We invest excess cash in financial investments that are sensitive to market risks as part of
our investment strategy. None of these market-sensitive instruments are held for trading purposes.
We do not own derivative financial instruments in our portfolio. The investment portfolio contains
instruments that are subject to the risk of a decline in interest rates. As required by our
investment policy, available funds are invested in a manner that assures maximum safety and
liquidity and, secondarily, maximizes yield within such constraints.
35
Interest Rate Risk
Our financial investments consist primarily of high quality commercial paper and money market
funds. We believe we have no material exposure to interest rate risk.
Our exposure to market risk for changes in interest rates relates primarily to the increase or
decrease in the amount of interest income we can earn on our investment portfolio and interest
expense we are charged on borrowings. We do not use derivative financial instruments or engage in
hedging activities in our investment portfolio. We ensure the safety and preservation of our
invested principal funds by limiting default risks, market risk and reinvestment risk. We mitigate
default risk by investing in safe and high-credit quality securities.
We had short-term investments of $249,000 as of January 1, 2005. Our short-term investments
consisted of highly liquid investments with original maturities at the date of purchase of between
91 to 94 days. These investments are subject to interest rate risk and will fall in value if market
interest rates increase. We believe a hypothetical increase in market interest rates by 10% from
levels at January 1, 2005, would cause the fair value of these short-term investments to fall by an
immaterial amount. Since we are not required to sell these investments before maturity, we have
the ability to avoid realizing losses on these investments due to a sudden change in market
interest rates. On the other hand, declines in the interest rates over time will reduce our
interest income.
We had two outstanding convertible notes for $21.3 million, at December 31, 2003. These
instruments had a fixed interest rate of 1.5% and 5.75% per annum. These two convertible notes were
subsequently converted into our common stock in February 2004. On January 19, 2006, we completed a
$7.0 million private loan financing transaction in which we issued a 9% secured note with
convertible interest due January 19, 2008 to an affiliate of Future. The convertible interest note
also provided for a fixed interest rate. On March 9, 2006, the $7.0 million note was paid off and
terminated through funding from the sale proceeds of our Hillview facility in Milpitas, California.
Because the interest rates of these instruments were fixed, a hypothetical 10% increase in interest
rates will not have a material effect on our financials. Interest rate increases, however, will
increase interest expense associated with future borrowings by us, if any. We do not hedge against
interest rate fluctuations.
In 2005, we entered into a Loan and Security Agreement with Silicon Valley Bank which provides
us with a line of credit up to $5,000,000 and charges interest at the prime rate. However, we do
not believe that a hypothetical increase in market interest rates by 10% from current levels would
result in a material increase in our overall expenses.
On May 16, 2006 we placed $30.0 million of 5.5% Convertible Senior Notes due 2026. The 2006
Notes provide for a fixed interest rate although the rate may be increased if we do not meet
certain conditions. A more detailed description of the terms of the 2006 Notes is provided in Note
16 to our consolidated financial statements included in this 10-K filing, and in our Form 8-K filed
with the SEC on May 22, 2006. Because the interest rates of the 2006 Notes were fixed, a
hypothetical 10% increase in interest rates will not have a material effect on our financials.
As discussed above, since we were not current in our SEC filings by August 15, 2006,
we will pay additional interest on the 2006 Notes at an annual rate of 1.5% for the period beginning August 15, 2006 through the date that our filings become
current. In addition, if our common stock is not listed on the Nasdaq Global Market, the New York Stock Exchange or another national exchange or automated
quotation system by December 31,
2006, we will pay additional interest on the 2006 Notes at an annual rate of 1.5% for the period beginning December 31, 2006 through the date that our
common stock becomes listed for trading on one of the national exchanges.
Foreign Currency Exchange Risk
The majority of our sales, expense, and capital purchasing activities are transacted in U.S.
dollars. However, since a portion of our operations consists of sales activities outside of the
U.S., we enter into transactions in other currencies. We are primarily exposed to changes in
exchange rates for the euro, Japanese yen, and British pound. Currently, we have no plan to enter
into any foreign currency hedging program since the amounts involved have not been material.
Foreign currency fluctuations did not have a material impact on our consolidated financial
position, results of operations or cash flows in fiscal 2005, 2004 and 2003.
36
Item 8. Financial Statements and Supplementary Data:
Sipexs consolidated financial statements and related Report of Independent Registered Public
Accounting Firm are presented in the following pages.
Schedules not listed above have been omitted since they are not applicable or are not required, or
the information required to be set forth therein is included in the consolidated financial
statements or Notes thereto.
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Sipex Corporation:
We have audited the accompanying consolidated balance sheets of Sipex Corporation and
subsidiaries (the Company) as of December 31, 2005 and January 1, 2005, and the related
consolidated statements of operations, stockholders equity and comprehensive income (loss), and
cash flows for each of the three years in the period ended December 31, 2005. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. As of December 31, 2005, the Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial reporting as of
December 31, 2005. Accordingly, we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, 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, such consolidated financial statements present fairly, in all material
respects, the financial position of Sipex Corporation and subsidiaries as of December 31, 2005 and
2004, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2005, in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
August 17, 2006
38
SIPEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per-share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
January 1, 2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,969 |
|
|
$ |
15,523 |
|
Restricted cash |
|
|
500 |
|
|
|
613 |
|
Short-term investment securities |
|
|
|
|
|
|
249 |
|
Accounts receivable, less allowances of $820 and $1,143, respectively |
|
|
3,735 |
|
|
|
7,597 |
|
Accounts receivable, related party, less allowance of $529 and $271, respectively |
|
|
3,011 |
|
|
|
2,311 |
|
Inventories |
|
|
13,400 |
|
|
|
13,141 |
|
Prepaid expenses and other current assets |
|
|
1,300 |
|
|
|
1,604 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
23,915 |
|
|
|
41,038 |
|
Property, plant, and equipment, net |
|
|
25,803 |
|
|
|
45,318 |
|
Restricted cash noncurrent |
|
|
500 |
|
|
|
1,225 |
|
Other assets |
|
|
224 |
|
|
|
485 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
50,442 |
|
|
$ |
88,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Short-term borrowing |
|
$ |
3,000 |
|
|
$ |
|
|
Accounts payable |
|
|
7,394 |
|
|
|
10,863 |
|
Accrued expenses |
|
|
7,282 |
|
|
|
5,855 |
|
Accrued restructuring costs |
|
|
1,407 |
|
|
|
566 |
|
Deferred income, related party |
|
|
5,707 |
|
|
|
5,874 |
|
Deferred income, other |
|
|
2,510 |
|
|
|
3,534 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
27,300 |
|
|
|
26,692 |
|
Long-term accrued restructuring costs |
|
|
584 |
|
|
|
1,281 |
|
Other long-term liabilities |
|
|
37 |
|
|
|
13 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
27,921 |
|
|
|
27,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitment and contingencies (Note 12) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 1,000 shares authorized
and no shares issued or outstanding |
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 60,000 shares authorized;
35,550 and 35,394 shares issued and outstanding at December 31, 2005
and January 1, 2005, respectively |
|
|
355 |
|
|
|
354 |
|
Additional paid-in capital |
|
|
224,026 |
|
|
|
223,479 |
|
Accumulated deficit |
|
|
(201,841 |
) |
|
|
(163,734 |
) |
Accumulated other comprehensive loss |
|
|
(19 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
22,521 |
|
|
|
60,080 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
50,442 |
|
|
$ |
88,066 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
39
SIPEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31, 2005 |
|
|
January 1, 2005 |
|
|
December 31, 2003 |
|
Net sales |
|
$ |
40,847 |
|
|
$ |
46,219 |
|
|
$ |
28,760 |
|
Net sales, related party (net of $14,131 reduction in 2003 for
debt conversion rights see Note 2) |
|
|
31,827 |
|
|
|
29,234 |
|
|
|
7,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
72,674 |
|
|
|
75,453 |
|
|
|
36,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
35,103 |
|
|
|
41,250 |
|
|
|
26,426 |
|
Cost of sales, related party |
|
|
23,822 |
|
|
|
22,407 |
|
|
|
19,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
58,925 |
|
|
|
63,657 |
|
|
|
45,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
13,749 |
|
|
|
11,796 |
|
|
|
(9,068 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
17,248 |
|
|
|
14,710 |
|
|
|
13,252 |
|
Marketing and selling |
|
|
10,642 |
|
|
|
8,570 |
|
|
|
7,408 |
|
General and administrative |
|
|
14,420 |
|
|
|
9,784 |
|
|
|
8,054 |
|
Restructuring |
|
|
577 |
|
|
|
1,798 |
|
|
|
713 |
|
Impairment of fixed assets |
|
|
9,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
52,264 |
|
|
|
34,862 |
|
|
|
29,427 |
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(38,515 |
) |
|
|
(23,066 |
) |
|
|
(38,495 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
208 |
|
|
|
176 |
|
|
|
122 |
|
Interest expense |
|
|
(35 |
) |
|
|
(194 |
) |
|
|
(1,135 |
) |
Other, net |
|
|
427 |
|
|
|
203 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net |
|
|
600 |
|
|
|
185 |
|
|
|
(994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense (benefit) |
|
|
(37,915 |
) |
|
|
(22,881 |
) |
|
|
(39,489 |
) |
Income tax expense (benefit) |
|
|
192 |
|
|
|
(133 |
) |
|
|
318 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(38,107 |
) |
|
$ |
(22,748 |
) |
|
$ |
(39,807 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share basic and diluted |
|
$ |
(1.07 |
) |
|
$ |
(0.69 |
) |
|
$ |
(1.41 |
) |
Weighted average common shares outstanding
basic and diluted |
|
|
35,544 |
|
|
|
32,936 |
|
|
|
28,137 |
|
See accompanying notes to consolidated financial statements
40
SIPEX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
Number of |
|
|
|
|
|
|
Additional Paid- |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Stockholders' |
|
|
|
Shares |
|
|
$0.01 Par Value |
|
|
in Capital |
|
|
Deficit |
|
|
Income (Loss) |
|
|
Equity |
|
Balances at December 31, 2002 |
|
|
28,031 |
|
|
$ |
280 |
|
|
$ |
175,489 |
|
|
$ |
(101,179 |
) |
|
$ |
(70 |
) |
|
$ |
74,520 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,807 |
) |
|
|
|
|
|
|
(39,807 |
) |
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,744 |
) |
Issuance of common stock under stock option
plans |
|
|
272 |
|
|
|
3 |
|
|
|
1,289 |
|
|
|
|
|
|
|
|
|
|
|
1,292 |
|
Issuance of common stock under stock
purchase plan |
|
|
123 |
|
|
|
1 |
|
|
|
359 |
|
|
|
|
|
|
|
|
|
|
|
360 |
|
Fair value of debt conversion rights |
|
|
|
|
|
|
|
|
|
|
17,542 |
|
|
|
|
|
|
|
|
|
|
|
17,542 |
|
Compensation from acceleration of stock
option vesting |
|
|
|
|
|
|
|
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
61 |
|
Consulting services provided by related
party (see Note 2) |
|
|
|
|
|
|
|
|
|
|
202 |
|
|
|
|
|
|
|
|
|
|
|
202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2003 |
|
|
28,426 |
|
|
|
284 |
|
|
|
194,942 |
|
|
|
(140,986 |
) |
|
|
(7 |
) |
|
|
54,233 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,748 |
) |
|
|
|
|
|
|
(22,748 |
) |
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,760 |
) |
Issuance of common stock under stock option
plans |
|
|
1,377 |
|
|
|
14 |
|
|
|
4,230 |
|
|
|
|
|
|
|
|
|
|
|
4,244 |
|
Issuance of common stock under stock
purchase plan |
|
|
91 |
|
|
|
1 |
|
|
|
425 |
|
|
|
|
|
|
|
|
|
|
|
426 |
|
Issuance of common stock on conversion of
notes
payable, net of discount and issuance costs |
|
|
4,600 |
|
|
|
46 |
|
|
|
21,089 |
|
|
|
|
|
|
|
|
|
|
|
21,135 |
|
Issuance of common stock on exercise of
warrants |
|
|
900 |
|
|
|
9 |
|
|
|
2,642 |
|
|
|
|
|
|
|
|
|
|
|
2,651 |
|
Compensation from acceleration of stock
option vesting |
|
|
|
|
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
44 |
|
Other stock compensation expense |
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
7 |
|
Consulting services provided by related
party (see Note 2) |
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2005 |
|
|
35,394 |
|
|
|
354 |
|
|
|
223,479 |
|
|
|
(163,734 |
) |
|
|
(19 |
) |
|
|
60,080 |
|
Net loss and comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,107 |
) |
|
|
|
|
|
|
(38,107 |
) |
Issuance of common stock under stock option
plans |
|
|
156 |
|
|
|
1 |
|
|
|
461 |
|
|
|
|
|
|
|
|
|
|
|
462 |
|
Compensation from acceleration of stock
option vesting |
|
|
|
|
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
60 |
|
Other stock compensation expense |
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
9 |
|
Consulting services provided by related
party (see Note 2) |
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005 |
|
|
35,550 |
|
|
$ |
355 |
|
|
$ |
224,026 |
|
|
$ |
(201,841 |
) |
|
$ |
(19 |
) |
|
$ |
22,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
41
SIPEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31, 2005 |
|
|
January 1, 2005 |
|
|
December 31, 2003 |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(38,107 |
) |
|
$ |
(22,748 |
) |
|
$ |
(39,807 |
) |
Adjustments to reconcile net loss to net cash used in
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of debt conversion rights |
|
|
|
|
|
|
|
|
|
|
14,131 |
|
Stock compensation expense |
|
|
69 |
|
|
|
51 |
|
|
|
61 |
|
Depreciation and amortization |
|
|
10,952 |
|
|
|
6,559 |
|
|
|
7,587 |
|
Provision for inventories |
|
|
5,031 |
|
|
|
8,628 |
|
|
|
2,948 |
|
Provision for restructuring charges |
|
|
577 |
|
|
|
1,798 |
|
|
|
713 |
|
Forgiveness of interest on notes payable |
|
|
|
|
|
|
|
|
|
|
411 |
|
Loss on disposal of fixed assets |
|
|
39 |
|
|
|
|
|
|
|
1,144 |
|
Impairment of fixed assets |
|
|
9,377 |
|
|
|
|
|
|
|
|
|
Amortization of discount and issuance costs on notes payable |
|
|
|
|
|
|
57 |
|
|
|
360 |
|
Provision for uncollectible receivables and sales returns
and allowances |
|
|
1,484 |
|
|
|
1,323 |
|
|
|
157 |
|
Consulting services provided by related party |
|
|
17 |
|
|
|
100 |
|
|
|
202 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
1,678 |
|
|
|
(863 |
) |
|
|
(3,247 |
) |
Inventories |
|
|
(5,290 |
) |
|
|
(5,365 |
) |
|
|
(4,959 |
) |
Prepaid expenses and other current assets |
|
|
83 |
|
|
|
115 |
|
|
|
1,948 |
|
Other assets |
|
|
261 |
|
|
|
(278 |
) |
|
|
(44 |
) |
Accounts payable |
|
|
(3,444 |
) |
|
|
391 |
|
|
|
2,256 |
|
Accrued expenses |
|
|
1,427 |
|
|
|
1,374 |
|
|
|
1,063 |
|
Accrued restructuring costs |
|
|
(433 |
) |
|
|
(608 |
) |
|
|
(535 |
) |
Deferred income |
|
|
(1,191 |
) |
|
|
620 |
|
|
|
7,405 |
|
Other long-term liabilities |
|
|
24 |
|
|
|
(21 |
) |
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(17,446 |
) |
|
|
(8,867 |
) |
|
|
(8,172 |
) |
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturity of short-term investment securities |
|
|
850 |
|
|
|
9,000 |
|
|
|
19,000 |
|
Purchase of short-term investment securities |
|
|
(601 |
) |
|
|
(6,255 |
) |
|
|
(12,014 |
) |
Purchase of property, plant, and equipment |
|
|
(878 |
) |
|
|
(1,921 |
) |
|
|
(2,024 |
) |
Proceeds from sale of machinery and equipment |
|
|
|
|
|
|
20 |
|
|
|
|
|
Restricted cash decrease (increase) |
|
|
838 |
|
|
|
(1,838 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
209 |
|
|
|
(994 |
) |
|
|
4,962 |
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock under employee stock
plans |
|
|
683 |
|
|
|
4,449 |
|
|
|
1,652 |
|
Net proceeds from issuance of note payable and related
warrants |
|
|
|
|
|
|
|
|
|
|
10,344 |
|
Proceeds from exercise of warrants |
|
|
|
|
|
|
2,651 |
|
|
|
|
|
Legal fees for conversion of convertible debt to common stock |
|
|
|
|
|
|
(42 |
) |
|
|
|
|
Proceeds from acceleration of conversion rights |
|
|
|
|
|
|
|
|
|
|
3,000 |
|
Proceeds from short-term borrowing |
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
3,683 |
|
|
|
7,058 |
|
|
|
14,996 |
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on cash and
cash equivalents |
|
|
|
|
|
|
(12 |
) |
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(13,554 |
) |
|
|
(2,815 |
) |
|
|
11,849 |
|
Cash and cash equivalents at beginning of period |
|
|
15,523 |
|
|
|
18,338 |
|
|
|
6,489 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
1,969 |
|
|
$ |
15,523 |
|
|
$ |
18,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
48 |
|
|
$ |
13 |
|
|
$ |
143 |
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
|
|
|
$ |
5 |
|
|
$ |
522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment not paid at end of
period |
|
$ |
88 |
|
|
$ |
113 |
|
|
$ |
993 |
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible debt to common stock |
|
$ |
|
|
|
$ |
21,177 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Receivable from exercise of stock options |
|
$ |
|
|
|
$ |
221 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
42
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business
Sipex Corporation (Sipex or the Company) is a semiconductor Company that designs,
manufactures and markets high performance, value-added analog
integrated circuits (ICs) that are used primarily by
original equipment manufacturers (OEMs) operating in the computing, communications and networking
infrastructure markets.
While advances in digital technology have fueled the demand for digital ICs,
they have also created a rapidly growing demand for more precise, faster and more power efficient
analog ICs. Sipex possesses a broad portfolio of analog ICs, organized into three product families:
power management, interface and optical storage. Sipexs products are sold either directly to
customers or through a global network of manufacturers representatives and distributors.
The Companys wafer fabrication facility in Milpitas, California along with a number of
third-party contractors fabricate, package and test its ICs. In an effort to achieve significant
cost savings, in the third quarter of 2005 Sipex decided to close down the Milpitas wafer
fabrication facility and transfer the IC manufacturing processes from there to a wafer fabrication
facility operated by Hangzhou Silan Integrated Circuit Co., Ltd.
(Silan) in Hangzhou, China and a wafer
fabrication facility operated by Episil Technologies, Inc. in Taiwan. Definitive agreements
regarding this transfer were entered into in February 2006, and the transition is expected to be
completed by the end of September 2006.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America 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 revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates that are particularly susceptible to changes include those related to
revenues, sales returns and allowances, deferred income, inventory valuation, restructuring
reserves, asset impairments and income taxes.
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries, Sipex GmbH and Sipex Nippon. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Effective January 1, 2004, the Companys fiscal year was changed from a calendar year end to a
52 or 53-week fiscal year, which ends on the Saturday closest to December 31. As a result of the
change in the fiscal reporting period, the first quarter of fiscal year 2005 covered 91 days from
January 2, 2005 to April 2, 2005, the second quarter covered 91 days from April 3, 2005 to July 2,
2005, the third quarter covered 91 days from July 3, 2005 to October 1, 2005, and the fourth
quarter covered 91 days from October 2, 2005 to December 31, 2005. Hereinafter, the years ended
December 31, 2005, January 1, 2005, and December 31, 2003 are also referred to as 2005, 2004,
and 2003.
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin (SAB) 104,
Revenue Recognition. SAB 104 requires that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or
services rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably
assured.
Through the year ended December 31, 2002, the Company recognized revenue from distributors
other than Future Electronics Inc. (Future) upon title transfer and shipment because these
customers had no price protection and had limited return rights. Distributors were permitted to
return products limited to a percentage of their purchases over a specified period of time. The
Company was able to estimate and establish appropriate reserves for future returns from these
distributors and historically the Company received stock rotation
requests from its distributors
that were within the amounts estimated and contractually allowed. Starting in the first fiscal
quarter of 2003, the Company began entering into arrangements that were not within the original
contractual distributor agreements in that the Company allowed return rights and other concessions
beyond
the levels provided in the distributor agreements. Due to this change in customer arrangements, Company management concluded it is unable to
reasonably estimate sales returns for arrangements with its distributors. This change was accounted
for as a change in estimate effective January 1, 2003, and resulted in sales and related cost of
sales on shipments to distributors being deferred until the resale to the end customer. The effect
of this change includes a reduction in net sales and gross margin of $12.6 million and $1.8
million, respectively, recorded in the first quarter of 2003 for the reversal of sales and related
costs recognized prior to January 1, 2003.
43
Sales to Future are made under an agreement that provides protection against price reductions
of Sipexs products in Futures inventory. In addition, Future has stock rotation rights.
Pursuant to these stock rotation rights, Future is permitted on a quarterly basis to return for
credit up to 10% of its total purchases during the most recent three-month period. This credit
will be reduced to 5% applicable to all purchases made by Future from Sipex starting April 1, 2006.
Additionally, Sipex is providing Future with a 2% scrap allowance also effective April 1, 2006. As
the price of products sold to Future is not fixed or determinable until resold by Future to the end
customer, Sipex is using sell-through revenue accounting and deferring recognition of such sales
and related cost of goods sold until the product is sold by Future to its customers.
Under sell-through revenue accounting, accounts receivable are recognized and inventory is
relieved upon shipment to the distributor as title to the inventory is transferred upon shipment,
at which point the Company has a legally enforceable right to collection under normal terms. The
associated sales and cost of sales are deferred by recording deferred income (gross profit margin
on these sales) as shown on the face of the consolidated balance sheet. When the related product
is sold by the Companys distributors to their end customers, Sipex recognizes previously deferred
income as sales and cost of sales.
For non-distributor customers, the Company recognizes revenue when title to the product is
transferred to the customers, which occurs upon shipment or delivery, depending upon the terms of
the customer order, provided that persuasive evidence of a sales arrangement exists, the price is
fixed and determinable, title has transferred, collection of the resulting receivables is
reasonably assured, there are no customer acceptance requirements, and there are no remaining
significant obligations. Provisions for returns and allowances for non-distributor customers are
provided for at the time product sales are recognized. An allowance for sales returns and
allowances for customers is recorded based on historical experience or specific identification of
an event necessitating an allowance.
From time to time, Sipex develops custom products for various customers under engineering
service contracts culminating in delivery of known functional development samples. The Company
recognizes revenue under these agreements upon delivery of known functional development samples as
delivery of such represents the culmination of utility of the contract to the customer and agreed
to milestones. Sipex recognizes the costs as incurred associated with these contracts and presents
such costs as research and development expenses due to the uncertain nature of the development
efforts until delivery of the known functional development samples. Certain of these engineering
service contracts include payments in advance of delivery of known functional development samples.
These payments are recorded in deferred income, other, until the time of delivery of the functional
samples.
Research and Development
Research and development costs are expensed as incurred.
Net Loss Per Share
Basic net loss per share is based upon the weighted average number of common shares
outstanding. Diluted net loss per
share is based upon the weighted average number of common and common equivalent shares outstanding
assuming dilution. Common equivalent shares, consisting of outstanding stock options, convertible
debt and warrants, are included in the per share calculations where the effect of their inclusion
would be dilutive. As the Company had net losses in 2005, 2004 and 2003, the weighted average
number of common and common equivalent shares outstanding equals the weighted average number of
common and common equivalent shares.
44
A reconciliation of basic weighted average common shares with diluted weighted average shares
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
Weighted average common shares outstanding basic |
|
|
35,544 |
|
|
|
32,936 |
|
|
|
28,137 |
|
Net effect of dilutive potential common shares outstanding based
on the treasury stock method using the average
market price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted |
|
|
35,544 |
|
|
|
32,936 |
|
|
|
28,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive potential common shares excluded from the weighted average common
shares outstanding for net loss per share calculation are as follows (in
thousands, except per-share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
January 1, 2005 |
|
December 31, 2003 |
Option shares outstanding |
|
|
6,517 |
|
|
|
5,452 |
|
|
|
6,570 |
|
Weighted average
exercise price of option
shares outstanding |
|
$ |
2.87 |
|
|
$ |
5.98 |
|
|
$ |
5.51 |
|
Convertible note of
$12.0 million issued on
September 27, 2002
(conversion price at
$7.50) |
|
|
|
|
|
|
|
|
|
|
1,600 |
|
Convertible note of
$10.6 million issued on
June 20, 2003
(conversion price at
$3.52) |
|
|
|
|
|
|
|
|
|
|
3,000 |
|
Warrants issued on
September 27, 2002
(exercise price at
$2.9458) |
|
|
|
|
|
|
|
|
|
|
900 |
|
Concentration of Credit Risk
Financial instruments that potentially subject Sipex to concentrations of credit risk consist
primarily of cash equivalents, short-term investments (see below) and accounts receivable. Cash
equivalents consist of deposits with, or guaranteed by, major commercial banks, the maturities of
which are three months or less on the date of purchase. With respect to accounts receivable, Sipex
performs periodic credit evaluations of the financial condition of its customers and typically does
not require collateral from them. Management assesses the need for allowances for potential credit
losses by considering the credit risk of specific customers, historical trends and other
information. In addition, management reviews other inherent risks in the portfolio based on
current market conditions, the economic environment and the Companys concentration of credit risk.
Concentration of Other Risks
The semiconductor industry is characterized by rapid technological change, competitive pricing
pressures and cyclical market patterns. The Companys financial results are affected by a wide
variety of factors, including general economic conditions worldwide, economic conditions specific
to the semiconductor industry, the timely implementation of new manufacturing technologies, the
ability to safeguard patents and intellectual property in a rapidly evolving market and reliance on
assembly and test subcontractors, third-party wafer fabricators and independent distributors. In
addition, the semiconductor market has historically been cyclical and subject to significant
economic downturns at various times. The Company is exposed to the risk of obsolescence of its
inventory depending on the mix of future business. Additionally, the Company utilizes third-party
wafer fabricators as sole-source suppliers, primarily Polar, Episil and Silan. As a result, the
Company may experience significant period-to-period fluctuations in future operating results
because of the factors mentioned above or other factors.
Fair Values of Financial Assets and Financial Liabilities
The carrying values of cash and cash equivalents, short-term investments, accounts receivable,
accounts payable and accrued liabilities approximate their fair values due to the relatively short
periods to maturity of the instruments. The carrying value of short-term borrowings approximates
fair value as the interest rate is variable based on the related
banks prime rate (See Note 7).
Short-term Investments
Short-term investments, which primarily consist of highly rated commercial paper with original
maturities greater than 90 days, are accounted for under Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities issued
by the Financial Accounting Standards Board (FASB). Pursuant to the provisions of SFAS No. 115, the
Company has classified its short-term investments as held to maturity which represent investments
that the Company intends to hold to maturity and are recorded at amortized cost.
45
Inventories
Inventories are stated at the lower of cost or market. Costs are determined using the
first-in, first-out method.
Valuation of Inventories
Sipex writes down the value of its inventories for estimated excess quantities, obsolescence,
and/or marketability deficiencies. In addition, the Company writes down inventory costs to the
lower of cost or market which becomes the new cost basis. Excess and obsolete inventories are
determined by comparing current inventory quantities to current backlog, anticipated future demand
and shipment history. Lower of cost or market adjustments are determined by reviewing shipments
during the quarter as well as quarter beginning backlog and comparing standard cost to anticipated
market pricing. In estimating anticipated market pricing, the Company also considers current market
conditions, industry performance, distributor inventory levels and sales to end-users and other
relevant factors. If actual market conditions become less favorable than those anticipated by
management, additional write-downs of inventories may be required in the future. During 2005, inventories with an original cost of $1.0 million, which had been previously written
down to zero, were sold and the Company recorded write-downs
of $5.0 million for excess and obsolete inventory. During 2004, inventories with an original cost of $874,000, which had been previously written down
to zero, were sold and the Company recorded write-downs of $8.6 million. During 2003, inventories with an original cost of $775,000, which had been previously written down
to zero, were sold and the Company recorded $2.9
million of inventory write-downs.
Related Parties
Future is a related party and its affiliates own approximately 16.3 million shares or 46% of
Sipexs outstanding common stock as of December 31, 2005. Sipex has a distribution agreement that
provides for Future to act as the Companys sole distributor for certain products within North
America and Europe. Sales to Future are made under an agreement that provides protection against
price reduction for its inventory of Sipexs products. The Company recognizes revenue on sales to
Future under the distribution agreement when Future sells the products to end customers. Future has
historically accounted for a significant portion of the Companys revenues. It is the Companys
largest distributor worldwide and accounted for 44%, 39% and 21% of its total net sales for the
years ended December 31, 2005, January 1, 2005, December 31, 2003, respectively. The Company
anticipates that sales of its products to Future will continue to account for a significant portion
of its revenues.
From time to time, Future provides services and/or incurs expenses on behalf of the Company.
The fair value of the unreimbursed expenses and uncompensated services rendered by Future has been
recorded in the Companys consolidated financial statements as capital contributions totaling
$17,000, $100,000 and $202,000 for the years ended December 31, 2005, January 1, 2005 and December
31, 2003, respectively. In addition, Sipex recorded $44,000 of
reimbursement expense for marketing promotional materials charged by Future
for the year ended December 31, 2005.
On September 27, 2002, Sipex sold a convertible secured note (the First Note) with an
attached warrant to an affiliate of Future for an aggregate cash amount of $12.0 million. The
Company recorded the First Note at $10.4 million and the warrant at $1.6 million (recorded to
additional paid-in capital) based upon their estimated fair values at the date of issuance using
the Black-Scholes option pricing model. The First Note paid a 5.75% coupon and was convertible
after one year into Sipex
common stock at a conversion price of $7.50 per share. Following the one year anniversary of
the issuance of the First Note, the Company could require the conversion of the First Note in
installments if for a period of time Sipex common stock traded at a price in excess of 150% of the
conversion price of $7.50. The private placement also included a warrant to purchase 900,000 shares
of Sipex common stock exercisable for a two-year period beginning on the one-year anniversary of
the date of issuance. The exercise price for the warrant was $2.9458. The First Note was secured by
a Deed of Trust on the Companys land and building at Milpitas, California.
On June 20, 2003, Sipex sold a convertible secured note (the Second Note) to an affiliate of
Future of $10.3 million (net of issuance costs of $216,000). The Second Note paid a 1.5% coupon
rate per annum. The principal amount of the Second Note was contingently convertible into a maximum
of 3.0 million shares of Sipex common stock at a conversion price of $3.52 per share, subject to
Future attaining predetermined annual and/or cumulative sales levels over a three-year period.
Accordingly, in accordance with EITF Issue No. 01-1, Accounting for a Convertible Instrument
Granted or Issued to a Non-employee for Goods or Services or a Combination of Goods or Services and
Cash, the Company was required to recognize non-cash charges against net sales for the fair value
of these conversion rights earned by Future each period relative to the sales target. The fair
46
value of the conversion rights has been measured pursuant to SFAS No. 123, Accounting for
Stock-Based Compensation and EITF Issue No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
The Second Note was secured by a Deed of Trust on the Companys land and building at Milpitas,
California as well as all other assets of the Company, except for the Companys intellectual
property. In connection with the issuance of the Second Note, the Company entered into a
standstill agreement with affiliates of Future, pursuant to which these security holders agreed not
to acquire more than 35% of our stock on a fully diluted basis. Also, Sipex entered into a voting
agreement with an affiliate of Future, pursuant to which this security holder agreed that the
additional shares of the Companys common stock issuable upon conversion of the Second Note (i)
will not be voted or (ii) will be voted in the same proportion as the votes cast by all other
stockholders of Sipex.
During the fourth quarter of 2003, Sipex entered into an agreement with the affiliates of
Future to convert the First Note and Second Note into common stock subject to obtaining regulatory
approval. In connection with the agreement the Company accelerated the conversion rights of the
Second Note and received $3.0 million and forgiveness of interest on both notes of $411,000. As a
consequence, non-cash charges of $14.1 million have been recognized as a reduction to sales in 2003
representing the fair value of the conversion rights earned by Future as well as the net cost from
terminating the sales incentive feature of the Second Note (thereby vesting the conversion rights).
As of December 31, 2003, affiliates of Future held approximately 8.1 million shares of Sipexs
common shares or approximately 29%. Upon the regulatory approval in February 2004, the affiliates
of Future exercised their conversion rights to exchange both the First Note and the Second Note for
4.6 million of common shares of Sipex, bringing their ownership to approximately 39%. As a result
of the conversion, all the related collateral and sales incentives had been waived.
During February 2004, the affiliates of Future exercised the conversion rights to convert
their notes into Sipex common stock for an additional 4.6 million shares, bringing their ownership
up to 12.7 million shares, or approximately 39% of the
Companys outstanding capital stock. On August 5,
2004, the affiliates of Future exercised a warrant to purchase 900,000 shares of Sipex common stock
at $2.9458 per share. The warrant was issued to the affiliates of Future in conjunction with the
$12 million convertible note issued in 2002, which was converted into Sipex common stock in
February 2004. In connection with the warrant exercise, Sipex agreed to modify the standstill
restrictions on the affiliates of Future to enable them to hold the lesser of (i) 49% of the
Companys issued and outstanding voting capital stock and (ii) 42.5% of the Companys issued and
outstanding voting capital stock, measured on a Fully Diluted Basis, as defined using the
following equation: The numerator includes all voting capital stock and securities convertible into
or exercisable for voting capital stock held by the affiliates of Future and the denominator is the
greater of (i) all shares of the Companys voting capital stock outstanding or issuable upon the
exercise or conversion of vested securities convertible into or exercisable for voting capital
stock and (ii) 40,000,000 (as adjusted for stock dividends, splits or like transactions). On
August 9, 2004, the affiliates purchased 2.5 million shares of Sipex common stock in the open
market. As of January 1, 2005 and December 31, 2005, the affiliates of Future held 16.3 million
shares, or 46% of the Companys outstanding capital stock.
As discussed in Note 16, on January 19, 2006, Sipex announced the completion of a $7.0 million
private loan financing in which the Company issued a 9% secured note with convertible interest due January
19, 2008 to the affiliates of Future, which could provide these affiliates with the opportunity to
obtain additional shares of Sipex common stock. The loan was repaid in March 2006.
Also as discussed in Note 16, on May 16, 2006, Sipex placed $30.0 million of its 5.5%
Convertible Senior Notes (the 2006 Notes) due 2026 and related warrants in a private placement
transaction to accredited investors in reliance on Regulation D under the Securities Act. Rodfre
Holdings LLC (Rodfre), an affiliate of Alonim Investments Inc. (Alonim), Sipexs largest
stockholder, and an affiliate of Future, purchased 50% of the 2006 Notes or $15.0 million aggregate
principal amount being placed in this offering. The 2006 Notes will mature on May 18, 2026 and bear
interest at an annual rate of 5.5% payable semi-annually on May 15 and November 15 of each year,
beginning on November 15, 2006. A more detailed description of the terms of these 2006 Notes is
described in Note 16 relating to subsequent events.
Sipex recorded
interest expense related to the debt with Future totaling $90,000 and
$1.0 million for the years ended January 1, 2005 and
December 31, 2003, respectively. No interest expense was
recorded for the year ended December 31, 2005 as both convertible
notes were extinguished and converted into
4.6 million of the Companys common shares as of
February 18, 2004.
Employee Advances
Included in other current assets is approximately $39,000 and $5,000 due from employees at
December 31, 2005 and January 1, 2005, respectively, which consist mainly of amounts due to Sipex
related to hiring and relocation costs. These amounts are normally forgiven over employees
service periods as agreed upon between each employee and Sipex.
47
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided by using the
straight-line method over their expected useful lives:
|
|
|
|
|
Useful Lives |
Building and improvements
|
|
30 years (see Note 5) |
Machinery and equipment
|
|
3-10 years (see Note 3) |
Furniture, fixtures and office equipment
|
|
3-7 years |
Leasehold improvements
|
|
Lesser of 10 years or lease term |
Restricted Cash
Restricted cash consists of $1.0 million held in a certificate of deposit as a guarantee of
payment to fulfill the terms of a software license agreement. The agreement expires on January 1,
2008.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
Sipex reviews 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 cost to sell
(See Note 3).
Foreign Currency Translation
Prior to the third quarter of 2004, the functional currencies of the Companys foreign
subsidiaries are the local currencies. Effective beginning the third quarter of 2004, based on the
Companys reassessment of economic facts and circumstances of its foreign subsidiaries, the
functional currencies of the Companys foreign subsidiaries were changed to the U.S. dollar. Gains
and losses from transactions denominated in currencies other than the functional currencies of the
Company and its subsidiaries are included in operating expenses in the consolidated statements of
operations.
Income Taxes
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 bases and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using statutory 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 earnings in the period that includes the enactment date.
Stock-Based Compensation
As allowed by SFAS No. 123, Accounting for Stock-Based Compensation, amended by SFAS No.
148, Accounting for Stock-Based Compensation Transition and Disclosure, Sipex accounts for its
employee stock option plans and employee stock purchase plan, using the intrinsic value method
under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.
In general, as the exercise price of all options granted under these plans is equal to the market
price of the underlying common stock on the grant date, no stock-based employee compensation
expense is recognized. In certain situations, under these plans, options to purchase shares of
common stock may be granted at less than fair market value, which results in compensation expense
equal to the difference between the market value on the date of grant and the purchase price. This
expense is then recognized over the vesting period of the options and included in consolidated
statement of operations.
48
The table below sets out the pro forma amounts of net loss and net loss per share that would
have resulted for all fiscal years presented, if Sipex accounted for its employee stock plans under
the fair value recognition provisions of SFAS No. 123 (in thousands, except per-share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net loss as reported |
|
$ |
(38,107 |
) |
|
$ |
(22,748 |
) |
|
$ |
(39,807 |
) |
Add employee stock-based compensation expense from accelerated
stock option vesting and other employee stock option compensation
included in reported net loss |
|
|
60 |
|
|
|
51 |
|
|
|
61 |
|
Less employee stock-based compensation expense determined
under fair value method |
|
|
(5,107 |
) |
|
|
(7,969 |
) |
|
|
(6,371 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(43,154 |
) |
|
$ |
(30,666 |
) |
|
$ |
(46,117 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted as reported |
|
|
(1.07 |
) |
|
|
(0.69 |
) |
|
|
(1.41 |
) |
Basic and diluted pro forma |
|
|
(1.21 |
) |
|
|
(0.93 |
) |
|
|
(1.64 |
) |
On September 6, 2005, the Company informed the employees that certain options would be
repriced to the then current market price of the Companys stock which was $1.90 per share. The
repricing applied to all options with an exercise price that was over $1.90 per share but excluded
options granted to the Companys CEO and board of directors. The repricing affected 2,455,966 stock
options shares for 235 employees. The incremental employee compensation cost of the repricing was
approximately $1.1 million calculated using the Black-Scholes stock option pricing model. The
incremental employee compensation costs are included in the pro forma amounts above to the extent
of vested options and the remaining cost will be recognized over the remaining vesting periods of
the related options.
For the purpose of computing pro forma net loss, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used
to value the stock option shares are stated below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
Expected life of options |
|
4 years |
|
4 years |
|
5 years |
Volatility |
|
|
86 |
% |
|
|
61 |
% |
|
|
100 |
% |
Risk-free interest rate |
|
|
3.9 |
% |
|
|
3.4 |
% |
|
|
3.0 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average fair value of options granted during 2005, 2004 and 2003 was $1.15,
$2.88, and $3.83, respectively.
No shares were issued under the Companys Employee Stock Option Plan (ESPP) during 2005. The
fair value of each ESPP share issued during 2004 and 2003 was estimated on the date of grant using
the Black-Scholes option-pricing model based on the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
Expected life of options |
|
0.5 year |
|
0.5 year |
Volatility: |
|
|
|
|
|
|
|
|
First purchase period |
|
|
61 |
% |
|
|
115 |
% |
Second purchase period |
|
|
60 |
% |
|
|
75 |
% |
Risk-free interest rate |
|
|
2.0 |
% |
|
|
1.0 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
The weighted average fair values of the ESPP shares issued were $1.37 and $1.35 for the first and
second purchase periods of 2004, respectively, and $1.75 and $5.90 for the first and second
purchase periods of 2003, respectively.
Effect of Recent Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46). This interpretation provides guidance on the identification of
entities controlled through means other than voting rights. FIN 46 specifies how a business
enterprise should evaluate its interests in a variable interest entity to determine whether to
consolidate
49
that entity. A variable interest entity must be consolidated by its primary
beneficiary if the entity does not effectively disperse risks among the parties involved. In
December 2003 the FASB issued FIN 46R which defers the implementation date for the Company to the
year ending January 1, 2005. As the Company does not have an interest in a variable interest
entity, it did not have a material impact on the Companys consolidated financial position, results
of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 149 was effective for contracts entered into or modified after June
30, 2003. The adoption of SFAS No. 149 did not have a material impact on the Companys
consolidated financial position, results of operations or cash flows.
On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. SFAS No. 150 requires issuers to classify as
liabilities (or assets in some circumstance) three classes of freestanding financial instruments
that embody obligations for the issuer. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. The Company adopted the provisions of SFAS No.
150 on June 29, 2003, and the adoption did not have an effect on its consolidated financial
position, results of operations or cash flows.
In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition (SAB No. 104), which codifies, revises and rescinds certain sections of SAB No.
101, Revenue Recognition, in order to make this interpretive guidance consistent with
current authoritative accounting and auditing guidance and SEC rules and regulations. The
changes noted in SAB No. 104 did not have a material effect on the Companys consolidated results
of operations, consolidated financial position or cash flows.
In March 2004, the FASB issued EITF Issue No. 03-1, or EITF 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments which provided new
guidance for assessing impairment losses on investments. Additionally, EITF 03-1 includes new
disclosure requirements for investments that are deemed to be temporarily impaired. The disclosure
requirements are effective for annual periods ending after June 15, 2004. The adoption of EITF 03-1
did not have a material impact on the Companys consolidated financial statements.
In October 2004, the FASB approved EITF Issue 04-10 Determining Whether to Aggregate
Operating Segments That Do Not Meet the Quantitative Thresholds which addresses an issue in the
application of paragraph 19 of SFAS No. 131, Disclosures about Segments of an Enterprise and
related information. EITF 04-10 is effective for fiscal years ending after September 15, 2005. The
adoption of this issue did not have a material impact to the disclosures relating to the Companys
consolidated financial statements.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an Amendment of ARB No. 43,
Chapter 4. The amendments made by SFAS No. 151 are intended to improve financial reporting by
clarifying those abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges and by requiring the allocation
of fixed production overheads to inventory based on the normal capacity of the production
facilities. The guidance is effective for inventory costs incurred beginning on January 1, 2006.
The adoption of SFAS No. 151 did not have a material impact on Sipexs consolidated financial
statements.
In December 2004, the FASB issued SFAS 123R (revised 2004), Share-Based Payment. SFAS 123R
is a revision of FASB 123 and supersedes APB No. 25. SFAS 123R establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments for good or
services or incurs liabilities in exchange for goods or services that are based on the
fair value of the entitys equity instruments. SFAS 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment transactions.
SFAS 123R requires an entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award over the period during
which an employee is required to provide service for the award. The grant-date fair value of
employee share options and similar instruments must be estimated using option-pricing models
adjusted for the unique characteristics of those instruments unless observable market prices for
the same or similar instruments are available. In addition, SFAS 123R requires a public entity to
measure the cost of employee services received in exchange for an award of liability instruments
based on its current fair value and that the fair value of that award will be re-measured
subsequently at each reporting date through the settlement date. The effective date of SFAS 123R
for Sipex is January 1, 2006. Due to the anticipated increase in stock compensation expense, Sipex
expects the adoption to have a significant impact on the Companys consolidated results of
operations.
50
In December 2004, the FASB staff issued FSP FAS 109-1, Application of FASB Statement No. 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by
the American Jobs Creation Act of 2004 (the FSP) to provide guidance on the application of
Statement 109 to the provision within the American Jobs Creation Act of 2004 (the Act) that
provides tax relief to U.S. domestic manufacturers. The FSP states that the manufacturers
deduction provided for under the Act should be accounted for as a special deduction in accordance
with Statement 109 and not as a tax rate reduction. A special deduction is accounted for by
recording the benefit of the deduction in the year in which it can be taken in the Companys tax
return, rather than by adjusting deferred tax assets and liabilities in the period of the Acts
enactment (which would have been done if the deduction on qualified production activities were
treated as a change in enacted tax rates). The FSP was effective upon issuance. The adoption of the
FSP did not have a material impact on the Companys consolidated financial position or results of
operations.
In December 2004,
the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment
of APB No. 29, Accounting for Nonmonetary Transactions. SFAS No. 153 requires exchanges of
productive assets to be accounted for at fair value, rather than at carryover basis, unless (1)
neither the asset received nor the asset surrendered has a fair value that is determinable within
reasonable limits, or (2) the transactions lack commercial substance. SFAS No. 153 is effective
for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The
adoption of the standard did not have a material effect on the Companys consolidated financial
statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS
No. 154 establishes new standards on accounting for changes in accounting principles. Pursuant to
the new rules, all such changes must be accounted for by retrospective application to the financial
statements of prior periods unless it is impracticable to do so. The Statement is effective for
accounting changes and error corrections made in fiscal years beginning after December 15, 2005,
with early adoption permitted for changes and corrections made in years beginning after May 2005.
The adoption of SFAS No. 154 did not have a material impact on the Companys consolidated financial
position, results of operations or cash flows.
In November 2005, the FASB issued FSP Nos. FAS 115-1 and FAS 124-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments (FSP 115-1), which
replaces the measurement and recognition guidance set forth in EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments, and codifies certain
existing guidance on investment impairment. FSP 115-1 clarifies that an investor should recognize
an impairment loss no later than when the impairment is deemed other-than- temporary, even if a
decision to sell the security has not been made, and also provides guidance on the subsequent
accounting for an impaired debt security. FSP 115-1 also requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary impairments. The guidance
in FSP 115-1 amends SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities and is effective for reporting periods beginning after December 15, 2005. Sipex adopted
the provisions of FSP 115-1 beginning on January 1, 2006, and the adoption did not have a material
impact on its consolidated financial condition or results of operations.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments, an amendment of FASB Statements No. 133 and 140. SFAS No. 155 will be effective for
the Company beginning in the first quarter of 2007. The statement permits interests in hybrid
financial instruments that contain an embedded derivative that would otherwise require bifurcation,
to be accounted for as a single financial instrument at fair value, with changes in fair value
recognized in earnings. This election is permitted on an instrument-by-instrument basis for all
hybrid financial instruments held, obtained, or issued as of the adoption date. The Company is
assessing the impact of the statement.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48) as an interpretation of FASB Statement No. 109, Accounting for Income
Taxes (SFAS 109). This Interpretation clarifies the accounting for uncertainty in income taxes
recognized by prescribing a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. This Interpretation also provides guidance on de-recognition of tax benefits previously
recognized and additional disclosures for unrecognized tax benefits, interest and penalties. The
evaluation of a tax position in accordance with this Interpretation begins with a determination as
to whether it is more likely than not that a tax position will be sustained upon examination based
on the technical merits of the position. A tax position that meets the more-likely-than-not
recognition threshold is then measured at the largest amount of benefit that is greater than 50
percent likely of being realized upon ultimate settlement for recognition in the financial
statements. FIN 48 is effective no later than fiscal years beginning after December 15, 2006, and
is required to be adopted by the Company in the first quarter of fiscal year 2007. The Company is
currently assessing the impact of the adoption of FIN 48.
51
Note 3. Restructuring and Impairment of Fixed Assets
Below is a summary of the activities related to restructuring and impairment of fixed assets
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
Restructuring |
|
|
Fixed Asset |
|
|
|
Facility |
|
|
Costs |
|
|
Costs |
|
|
Impairment |
|
Accrual balance, December 31, 2002 |
|
$ |
|
|
|
$ |
755 |
|
|
$ |
755 |
|
|
$ |
|
|
Incurred in 2003 |
|
|
1,043 |
|
|
|
|
|
|
|
1,043 |
|
|
|
|
|
Charges utilized |
|
|
(110 |
) |
|
|
(425 |
) |
|
|
(535 |
) |
|
|
|
|
Deferred rent adjustment |
|
|
137 |
|
|
|
|
|
|
|
137 |
|
|
|
|
|
Adjustments to accrual |
|
|
|
|
|
|
(330 |
) |
|
|
(330 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual balance, December 31, 2003 |
|
|
1,070 |
|
|
|
|
|
|
|
1,070 |
|
|
|
|
|
Incurred in 2004 |
|
|
1,826 |
|
|
|
32 |
|
|
|
1,858 |
|
|
|
|
|
Charges utilized |
|
|
(1,004 |
) |
|
|
(32 |
) |
|
|
(1,036 |
) |
|
|
|
|
Deferred rent adjustment |
|
|
15 |
|
|
|
|
|
|
|
15 |
|
|
|
|
|
Adjustments to accrual |
|
|
(60 |
) |
|
|
|
|
|
|
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual balance, January 1, 2005 |
|
|
1,847 |
|
|
|
|
|
|
|
1,847 |
|
|
|
|
|
Incurred in 2005 |
|
|
105 |
|
|
|
766 |
|
|
|
871 |
|
|
|
9,377 |
|
Charges utilized |
|
|
(726 |
) |
|
|
|
|
|
|
(726 |
) |
|
|
(9,377 |
) |
Sub-lease income received |
|
|
293 |
|
|
|
|
|
|
|
293 |
|
|
|
|
|
Adjustments to accrual |
|
|
(264 |
) |
|
|
(30 |
) |
|
|
(294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual balance, December 31, 2005 |
|
$ |
1,255 |
|
|
$ |
736 |
|
|
$ |
1,991 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
In October of 2003, the Company established a restructuring reserve of $1.0 million for the
unused portion of its Billerica, Massachusetts facility. Accrued restructuring costs of future
lease payments with associated costs as of December 31, 2003 for this facility included short-term
portion of $498,000 and long-term portion of $572,000, respectively.
During the third quarter of 2004, Sipex entered into a sublease arrangement for a portion of
the facility and decided to relocate the remaining personnel to Milpitas, California. This resulted
in Sipex incurring $1.9 million of an additional restructuring accrual which reflected the
Companys plan to move the majority of remaining operations to Milpitas, California and consisted
of $1.4 million for future lease payments, $447,000 write-off of leasehold improvements and $32,000
for severance payments to 12 employees.
During the year ended January 1, 2005, the Company utilized $1.0 million of restructuring
reserves, which primarily included $447,000 of write-off of leasehold improvements, and $463,000 of
lease costs associated with the unused portion of the Companys Billerica facility. The Company made
additional adjustments to the restructuring for changes to the lease obligation totaling $60,000.
For the year ended January 1, 2005, the balance of the restructuring accrual principally consisted
of facility lease costs, and is expected to be paid over the next three years. The balance as of
the year ended January 1, 2005 was $1.8 million, of which $566,000 was the short-term portion and
$1.3 million was long-term portion.
On August 29, 2005, the Board of Directors of Sipex approved a plan to close its wafer
fabrication operations located in Milpitas, California and transfer the fabrication to Silan in
China to reduce costs and improve operating efficiencies. As a result, the Company recognized total
restructuring charges of approximately $871,000 in the second half of 2005 including severance and
retention benefits totaling $766,000 for approximately 70 employees and other exit costs of
$105,000. The Company currently anticipates that the facility closure activities will be
substantially completed by the end of third quarter of 2006. In addition, during the third quarter
of 2005, Sipex decided not to transfer the remaining operations in Billerica to Milpitas that was
52
originally anticipated to be completed by the end of 2005. The adjustment to restructuring accrual
of $294,000 during 2005 primarily included exiting costs of $213,000, offset by sublease income of
$293,000 and $195,000 recorded in the third quarter of 2005 as a reduction to future lease payment
obligation for not transferring such remaining operations in Billerica. Sublease income is recorded
on a cash basis due to uncertainty of collectibility. The restructuring accrual balance as of
December 31, 2005 consisted of short-term portion of $1.4 million and long-term portion of
$584,000. The $2.0 million restructuring accrual balance included $1.2 million of facility lease
costs to be paid out over the next two years and the remaining portion to be paid out in less than
a year.
Impairment
In the second quarter of 2005, Sipex recognized a $9.4 million impairment charge for its
long-lived assets. Based on changes in the planned use for its wafer fabrication assets, the
Company performed an impairment evaluation in accordance with SFAS No. 144. Sipex determined that
the appropriate grouping for this impairment evaluation was the wafer fabrication assets taken
together and the associated cash flows for these assets. These assets were evaluated on a
held-for-use basis as the Company was required to operate its wafer fabrication facility until new
wafer fabrication partner processes were qualified. As the carrying value exceeded the
undiscounted cash flows of the wafer fabrication assets for the period of planned use by the
Company, an impairment charge was recorded for the difference between the carrying value and the
fair value of the wafer fabrication assets which management determined with the assistance of an
independent appraisal firm. While the Company subsequently agreed to sell a substantial portion
of its wafer fabrication machinery and equipment to Silan by the end of the third quarter of 2006,
its wafer fabrication assets remain in use and Sipex will continue to record depreciation expense
based on the estimated remaining useful life at the time of impairment.
Note 4. Inventories
Inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Raw materials |
|
$ |
223 |
|
|
$ |
482 |
|
Work-in-process |
|
|
10,297 |
|
|
|
9,512 |
|
Finished goods |
|
|
2,880 |
|
|
|
3,147 |
|
|
|
|
|
|
|
|
|
|
$ |
13,400 |
|
|
$ |
13,141 |
|
|
|
|
|
|
|
|
Note 5. Property, Plant and Equipment
Property, plant and equipment are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Land |
|
$ |
5,957 |
|
|
$ |
5,957 |
|
Building and improvements |
|
|
23,614 |
|
|
|
25,641 |
|
Machinery and equipment |
|
|
13,503 |
|
|
|
35,068 |
|
Furniture, fixtures and office equipment |
|
|
6,926 |
|
|
|
10,145 |
|
Leasehold improvements |
|
|
326 |
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
50,326 |
|
|
|
77,211 |
|
Less accumulated depreciation and amortization |
|
|
24,523 |
|
|
|
31,893 |
|
|
|
|
|
|
|
|
|
|
$ |
25,803 |
|
|
$ |
45,318 |
|
|
|
|
|
|
|
|
In November 2005, based on the previous decision to close the Companys wafer fabrication
operation located at its Milpitas, California headquarters facility, the Company decided to sell
this facility. As a result of a decision, the Company reduced the remaining estimated depreciation
life for its headquarters building and related improvements from 25 years to approximately four
months (See Note 16 regarding the sale and leaseback arrangement
for Sipexs headquarters facility). This change resulted in an increase in depreciation expense recorded in the fourth quarter
of 2005 of $6.5 million (including $4.3 million included in cost of sales).
53
Note 6. Accrued Expenses
Accrued expenses are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Accrued compensation and benefits |
|
$ |
2,959 |
|
|
$ |
2,177 |
|
Accrued audit fees |
|
|
2,607 |
|
|
|
1,643 |
|
Accrued royalties |
|
|
185 |
|
|
|
711 |
|
Accrued commissions |
|
|
309 |
|
|
|
318 |
|
Accrued warranty |
|
|
87 |
|
|
|
228 |
|
Accrued legal fees |
|
|
365 |
|
|
|
158 |
|
Other |
|
|
770 |
|
|
|
620 |
|
|
|
|
|
|
|
|
|
|
$ |
7,282 |
|
|
$ |
5,855 |
|
|
|
|
|
|
|
|
Note 7. Short-Term Borrowing
On July 21, 2005, Sipex entered into a Loan and Security Agreement (the Agreement) with
Silicon Valley Bank, which has expired on July 20, 2006 (See Note 16 for amendments including
extension of expiration through September 30, 2006). The Agreement, as amended, provides for a
secured revolving line of credit with aggregate borrowings up to $5,000,000 limited to the
available borrowing base (eligible accounts receivable as defined in the Agreement) plus $500,000.
Available borrowings are further reduced by letters of credit which may be issued under the
Agreement on behalf of the Company. Borrowings under the revolving line of credit bear an interest
rate equal to the banks prime rate (7.25% as of December 31, 2005) plus one percent (1.00%).
Under the Agreement, Sipex has granted the bank a security interest in all presently existing
and later acquired collateral, including but not limited to goods, equipment, inventory, contract
rights, and financial assets with the exception of Sipexs headquarters property in Milpitas,
California, which was sold in March 2006. In respect to financial covenants, the agreement
requires the Company to maintain a minimum liquidity ratio for each month ended not less than
1.50:1.00 which is calculated as the sum of (i) unrestricted cash and cash equivalents and
consolidated accounts divided by (ii) the outstanding borrowings from the bank. In addition, Sipex
was required to maintain a minimum amount of tangible net worth (as defined in the Agreement) (See
Note 16 for amendments with Silicon Valley Bank).
As of December 31, 2005, $3.0 million of borrowings were outstanding under the Agreement. The
borrowings were subsequently repaid in January 2006. However,
the Company violated the tangible net worth covenant at
December 31, 2005.
Note 8. Income Taxes
In the accompanying statements of operations, Loss before income tax expense (benefit)
includes the following components for the years ended December 31, 2005, January 1, 2005 and
December 31, 2003 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Domestic |
|
$ |
(37,910 |
) |
|
$ |
(23,019 |
) |
|
$ |
(39,583 |
) |
Foreign |
|
|
(5 |
) |
|
|
138 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income
tax expense
(benefit) |
|
$ |
(37,915 |
) |
|
$ |
(22,881 |
) |
|
$ |
(39,489 |
) |
|
|
|
|
|
|
|
|
|
|
54
Total federal, state and foreign income tax expense (benefit), consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
Deferred |
|
|
Current |
|
|
Total |
|
|
Deferred |
|
|
Current |
|
|
Total |
|
|
Deferred |
|
|
Current |
|
|
Total |
|
Federal |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
State |
|
|
|
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
(14 |
) |
|
$ |
(14 |
) |
|
|
|
|
|
|
16 |
|
|
$ |
16 |
|
Foreign |
|
|
|
|
|
|
188 |
|
|
|
188 |
|
|
|
|
|
|
|
(119 |
) |
|
$ |
(119 |
) |
|
|
|
|
|
|
302 |
|
|
$ |
302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
expense (benefit) |
|
$ |
|
|
|
$ |
192 |
|
|
$ |
192 |
|
|
$ |
|
|
|
$ |
(133 |
) |
|
$ |
(133 |
) |
|
$ |
|
|
|
$ |
318 |
|
|
$ |
318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The actual tax expense (benefit) differs from the expected statutory tax expense as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Tax benefit at statutory rate |
|
$ |
(13,270 |
) |
|
$ |
(8,008 |
) |
|
$ |
(13,821 |
) |
State income tax, net of federal income tax expense (benefit) |
|
|
4 |
|
|
|
(14 |
) |
|
|
16 |
|
Non-deductible expenses |
|
|
40 |
|
|
|
39 |
|
|
|
4,959 |
|
Foreign taxes on branch income and tax rate differential |
|
|
188 |
|
|
|
(119 |
) |
|
|
302 |
|
Tax credits |
|
|
(928 |
) |
|
|
(491 |
) |
|
|
(633 |
) |
Losses not benefited/change in valuation allowance |
|
|
14,158 |
|
|
|
8,460 |
|
|
|
9,495 |
|
|
|
|
|
|
|
|
|
|
|
Actual tax expense (benefit) |
|
$ |
192 |
|
|
$ |
(133 |
) |
|
$ |
318 |
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities at December 31, 2005 and January 1, 2005 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Current deferred tax assets: |
|
|
|
|
|
|
|
|
Inventories, primarily write-downs not currently deductible |
|
$ |
5,049 |
|
|
$ |
4,497 |
|
Accounts receivable |
|
|
503 |
|
|
|
648 |
|
Deferred revenue |
|
|
3,064 |
|
|
|
3,632 |
|
Accrued expenses and reserves not currently deductible |
|
|
2,659 |
|
|
|
2,170 |
|
|
|
|
|
|
|
|
Total current deferred tax assets before valuation allowance |
|
|
11,275 |
|
|
|
10,947 |
|
|
|
|
|
|
|
|
|
|
Valuation allowance current |
|
|
(11,275 |
) |
|
|
(10,947 |
) |
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
|
63,468 |
|
|
|
58,015 |
|
Tax credit carryforwards |
|
|
5,232 |
|
|
|
4,305 |
|
|
|
|
|
|
|
|
Total noncurrent deferred tax assets before valuation allowance |
|
|
68,700 |
|
|
|
62,320 |
|
|
|
|
|
|
|
|
|
|
Valuation allowance noncurrent |
|
|
(67,810 |
) |
|
|
(54,824 |
) |
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Fixed assets, due to differences in depreciation |
|
|
(890 |
) |
|
|
(7,496 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
At December 31, 2005, the Company has U.S. net operating loss carry forwards of approximately
$173.6 million, which are available to offset future Federal taxable income. These losses expire
during the years 2006 through 2025. As of December 31, 2005, a substantial amount of the net
operating loss carry forwards are subject to annual limitations as a result of IRC Section 382
ownership changes, which have occurred in prior years.
55
At December 31, 2005, the Company has Massachusetts and California net operating loss carry
forwards of approximately $139.4 million and $39.4 million, respectively. The Massachusetts net
operating loss will expire during the years 2006 though 2010, while the California net operating
loss will expire from 2012 through 2015.
The valuation allowance increased by $13.3 million, $9.6 million and $7.4 million for the
years ended 2005, 2004 and 2003, respectively. In assessing the net realizable value of deferred
tax assets, management considers whether it is more likely than not that some portion of all of the
deferred tax assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in which those temporary
differences become taxable. Management considers the scheduled reversals of deferred tax
liabilities, projected future taxable income over the periods which the deferred tax assets are
deductible. Based upon these considerations, management believes that it is more likely than not that the deferred tax assets at
December 31, 2005 will not be realized in the future. At December 31, 2005, approximately $8.0 million
of the valuation allowance is attributable to stock compensation expense for tax purposes, that tax
benefit of which, when realized, will be credited to stockholders equity.
As of December 31, 2005, the Company also has federal and California research and development
credit carry forwards of approximately $2.8 million and $3.0 million respectively. The federal
credit will expire from 2010 to 2025 and the California credit may be carried forward indefinitely.
The Company also has approximately $2.1 million of California manufacturers investment credit
carry forwards, which expire from 2007 to 2013, and $0.1 million of Massachusetts investment tax
credit carry forwards, which may be carried forward indefinitely.
United States federal income taxes have not been provided for the undistributed earnings of
the Companys foreign subsidiaries. These undistributed earnings aggregated $0.4 million at
December 31, 2005, and it is the Companys intention that such undistributed earnings be
permanently reinvested offshore. The Company would be subject to additional United States taxes if
these earnings were repatriated. Determination of the amount of unrecognized deferred income tax
liability related to these earnings is not practicable.
On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the Act).
Among other provisions, the Act includes a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad. The Company currently does not intend to repatriate foreign earnings under
the Act. It is not anticipated that the other provisions of the Act will have a material impact on
the Companys effective tax rate.
Note 9. Stockholders Equity
On June 20, 2003, Sipex sold the Second Note to an affiliate of Future $10.3 million (net of
issuance costs of $216,000). The Second Note paid a 1.5% coupon rate per annum. The principal
amount of the Second Note was contingently convertible into a maximum of 3.0 million shares of
Sipex common stock at a conversion price of $3.52 per share, subject to Future attaining
predetermined annual and/or cumulative sales levels over a three-year period. Accordingly, in
accordance with EITF Issue No. 01-1, the Company was required to recognize non-cash charges against
net sales for the fair value of these conversion rights earned by Future each period relative to
the sales target. The fair value of the conversion rights has been measured pursuant to SFAS No.
123, and EITF Issue No. 96-18. During the fourth quarter of 2003, Sipex entered into an agreement
with the affiliates of Future to convert the First Note and Second Note into common stock, subject
to obtaining regulatory approval. The Company recorded $17.5 million to the additional paid-in
capital in connection with the fair value of debt conversion rights due to the acceleration of the
conversion rights of the Second Note.
In February 2004, the affiliates of Future exercised the conversion rights to convert the
First Note and the Second Note into an aggregate of 4.6 million shares of our common stock. A total
of $22.6 million of principal portion of long-term debt, net of $1.2 million in unamortized
discount and $0.2 million in unamortized issuance cost, was extinguished. On August 5, 2004, the
affiliates of Future exercised the outstanding warrant to purchase 900,000 shares of Sipexs common
stock at an exercise price of $2.9458 per share for a total of $2,651,000.
Sipex currently maintains six stock option plans. They are the 1996 Stock Option Plan, 1996
Non-Employee Director Stock Option Plan, 1997 Stock Option Plan, the 1999 Stock Option Plan, the
2000 Non-Qualified Stock Option Plan and the 2002 Nonstatutory Stock Option Plan which had 1.2
million, 300,000, 1.2 million, 1.2 million, 1.0 million and 2.0 million shares reserved for
issuance, respectively. The plans generally allow for options which vest ratably over five years
from the date of grant for options granted before May 2002 and four years for options granted after
April 2002. These options expire ten years from the date of grant. In October 2002, the board of
directors voted to reduce the number of shares available for issuance under the 1996 Stock Option
Plan, 1996 Non-Employee Director Stock Option Plan and the 2000 Non-qualified Stock Option Plan to
56
551,942, 82,000 and 671,990, respectively. As of December
31, 2005, in addition to the six stock option plans, approximately 2,943,000 stock options have
been granted to employees outside of the option plans. These stock options are subject to the
similar terms as those under the six stock option plans. Approximately 6,517,000 stock options were
outstanding as of December 31, 2005 for all plans. As of December 31, 2005, 709,764 stock options
were available for grant under all plans.
On October 10, 2002, the Company made a Tender Offer to exchange options to purchase an
aggregate of 2,495,052 shares of the Companys common stock, whether vested or unvested, that have
been granted under its 1996 Incentive Stock Option Plan, 1997 Stock Option Plan, 2000 Non-Qualified
Stock Option Plan, 2002 Nonstatutory Stock Option Plan and certain stand-alone Option Plans that
have exercise prices greater than $7.50 per share and that are held by eligible employees. The
option exchange offer, including all withdrawal rights, expired at 5 p.m. Pacific Time on Friday,
November 8, 2002. Pursuant to the terms and conditions of the option exchange offer, a total of 59
eligible optionees participated in the option exchange program. On November 11, 2002, the Company
accepted for cancellation options to purchase 570,174 shares of its common stock. Subject to the
terms and conditions of the offer, the Company granted new options to purchase 245,054 shares of
its common stock on May 12, 2003 in exchange for the options tendered and accepted. The exercise
price of the new options was the fair market value of the Companys common stock on the new grant
date of $3.95 per share. The new options are vested as to 25% of the shares on the date of the new
grant and thereafter will vest as to 25% of the shares on each subsequent anniversary of the new
option grant date.
On August 29, 2005, Sipexs Board of Directors approved the repricing of the employee stock
options outstanding under its stock option plans, effective as of the close of business on
September 6, 2005 with the exception that options granted pursuant to the Sipex Corporation 1999
Stock Plan and options granted to Sipexs current CEO and directors would not be repriced. In
addition, outstanding options with current exercise prices below the fair market value of Sipexs
common stock at the close of business on September 6, 2005 will also not be subject to the
repricing. As such, approximately 2,456,000 options held by 235 employees, with a weighted-average
exercise price of $6.22 were modified on September 6, 2005 to lower the option exercise price to
$1.90 which equals to the fair market value of Sipexs common stock at the close of business as
disclosed on the Pink Sheets on that date. No other changes were made to the terms of the
repriced stock options. Compensation expense associated with the option repricing will be recorded
until the options are exercised, cancelled, or otherwise expired and the expense or benefit for the
increase or decrease, respectively, in the fair market value of the
Companys common stock in excess of the
options exercise price is recognized immediately for vested options and is recognized over the
vesting period using an accelerated method for unvested employee options. For the year ended
December 31, 2005, no compensation expense was recorded related to the repriced options as Sipex
stock price at the end of the year was lower than the exercise price of the repriced options.
Management anticipates that the variable accounting associated with the repriced options will cease
upon the adoption of SFAS No. 123R, effective January 1, 2006.
During 2005 Sipex recorded $60,000 in stock based compensation expense due to the extension of
the exercise period on a stock option granted to a former executive
at the time of termination. During 2004, the Company
recorded $44,000 in stock compensation resulting primarily from the accelerated vesting of stock
options to former executives at the time of termination. During 2003, the Company recorded $61,000
in stock compensation resulting primarily from the accelerated vesting of stock options to former
executives at the time of termination.
In January 1996, the Board of Directors approved the 1996 Employee Stock Purchase Plan,
pursuant to which Sipex is authorized to issue up to 500,000 shares of common stock to its
full-time employees, nearly all of whom are eligible to participate. In October 2002, the Board of
Directors voted to reduce the number of shares available for issuance under the 1996 Employee Stock
Purchase Plan to 400,000 shares. On May 27, 2004, the
Companys stockholders approved an increase of
300,000 shares of common stock reserved for grant under such
Plan. Under the terms of the Plan, employees can choose to have up to 10
percent of their annual base earnings withheld each year to purchase Sipexs common stock. The
purchase price of stock is 85 percent of the lower of its beginning-of-period or end-of-period
market price. As of January 1, 2005, approximately 244,000 shares were available for issuance under
the Plan, out of which 200,000 shares are not registered.
57
A summary of the status of Sipexs stock option activity for the years ended December 31,
2005, January 1, 2005 and December 31, 2003 is presented below (in thousands, except per-share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding at beginning of year |
|
|
5,452 |
|
|
$ |
5.98 |
|
|
|
6,570 |
|
|
$ |
5.51 |
|
|
|
6,458 |
|
|
$ |
7.35 |
|
Granted |
|
|
2,817 |
|
|
|
1.85 |
|
|
|
1,645 |
|
|
|
5.65 |
|
|
|
2,335 |
|
|
|
5.22 |
|
Exercised |
|
|
(156 |
) |
|
|
2.96 |
|
|
|
(1,377 |
) |
|
|
3.08 |
|
|
|
(272 |
) |
|
|
4.72 |
|
Forfeited |
|
|
(1,596 |
) |
|
|
5.07 |
|
|
|
(1,386 |
) |
|
|
6.22 |
|
|
|
(1,951 |
) |
|
|
11.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
6,517 |
|
|
$ |
2.87 |
|
|
|
5,452 |
|
|
$ |
5.98 |
|
|
|
6,570 |
|
|
$ |
5.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at year-end |
|
|
2,599 |
|
|
$ |
3.63 |
|
|
|
2,322 |
|
|
$ |
6.44 |
|
|
|
1,908 |
|
|
$ |
6.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value
of options granted |
|
|
|
|
|
$ |
1.15 |
|
|
|
|
|
|
$ |
2.88 |
|
|
|
|
|
|
$ |
3.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about Sipexs stock options outstanding at December 31,
2005 (in thousands, except number of years and per-share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
|
|
|
Average |
|
Range of |
|
|
Number of |
|
|
Contractual |
|
|
Exercise |
|
|
Number of |
|
|
Exercise |
|
Exercise Prices |
|
|
Shares |
|
|
Life |
|
|
Price |
|
|
Shares |
|
|
Price |
|
$ |
1.00 |
- |
$ |
1.68 |
|
|
|
700 |
|
|
8.62 years |
|
$ |
1.44 |
|
|
|
236 |
|
|
$ |
1.18 |
|
$ |
1.70 |
- |
$ |
1.70 |
|
|
|
1,306 |
|
|
8.86 years |
|
$ |
1.70 |
|
|
|
303 |
|
|
$ |
1.70 |
|
$ |
1.72 |
- |
$ |
1.88 |
|
|
|
475 |
|
|
9.71 years |
|
$ |
1.78 |
|
|
|
205 |
|
|
$ |
1.79 |
|
$ |
1.90 |
- |
$ |
1.90 |
|
|
|
2,391 |
|
|
7.35 years |
|
$ |
1.90 |
|
|
|
1,222 |
|
|
$ |
1.90 |
|
$ |
1.91 |
- |
$ |
4.40 |
|
|
|
681 |
|
|
9.46 years |
|
$ |
2.44 |
|
|
|
53 |
|
|
$ |
4.30 |
|
$ |
4.46 |
- |
$ |
8.65 |
|
|
|
701 |
|
|
8.28 years |
|
$ |
6.36 |
|
|
|
377 |
|
|
$ |
6.15 |
|
$ |
8.68 |
- |
$ |
21.25 |
|
|
|
216 |
|
|
5.54 years |
|
$ |
12.14 |
|
|
|
156 |
|
|
$ |
13.34 |
|
$ |
21.50 |
- |
$ |
21.50 |
|
|
|
3 |
|
|
2.55 years |
|
$ |
21.50 |
|
|
|
3 |
|
|
$ |
21.50 |
|
$ |
28.31 |
- |
$ |
28.31 |
|
|
|
15 |
|
|
4.55 years |
|
$ |
28.31 |
|
|
|
15 |
|
|
$ |
28.31 |
|
$ |
28.75 |
- |
$ |
28.75 |
|
|
|
29 |
|
|
4.59 years |
|
$ |
28.75 |
|
|
|
29 |
|
|
$ |
28.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,517 |
|
|
8.20 years |
|
$ |
2.87 |
|
|
|
2,599 |
|
|
$ |
3.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10. Accrued Warranty
Products are sold with warranties ranging from one to two years depending upon the customers.
Reserve requirements are recorded in the period of sale and are based on an assessment of the
products sold with warranty and historical warranty costs incurred. The Company also assesses its
pre-existing warranty obligations and may adjust the amounts based on actual experience or changes
in future expectations.
Changes in Sipexs warranty liability during the years are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
Beginning balance |
|
$ |
228 |
|
|
$ |
195 |
|
Warranty claims |
|
|
(60 |
) |
|
|
(192 |
) |
Accruals for the period |
|
|
(81 |
) |
|
|
225 |
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
87 |
|
|
$ |
228 |
|
|
|
|
|
|
|
|
Note 11. Employee Benefit Plan
The Company has a defined contribution 401(k) retirement plan, covering substantially all
employees. Sipex discontinued its 50% match for contributions made by employees up to 6% of their
annual compensation in 2002 and started to contribute again in 2003. During 2004 Sipex
discontinued the 50% match again. In July 2005, the Company
reinstated the 401(k)
58
matching plan
whereby the Company matches 50% of employee contribution of up to 3% of their annual
compensation (or maximum of 1.5% of annual salary). Sipex can also make a discretionary
contribution to the plan. Employee contributions vest immediately and employer contributions vest
ratably over five years. Participants are entitled, upon termination or retirement, to their vested
portion of retirement fund assets which are held by a corporate trustee. During 2005, 2004 and
2003, employer contributions to the plan were approximately $106,000, $137,000 and $220,000,
respectively.
Note 12. Commitments and Contingencies
Sipex leases facilities under operating leases expiring through 2010. Rent expense was
approximately $636,000, $600,000 and $900,000 for the years ended December 31, 2005, January 1,
2005 and December 31, 2003, respectively. During 2005, the Company received approximately $293,000
in sublease income from two tenants at its facility in Billerica, MA. The amount received was
recorded as a reduction to the restructuring expense.
Minimum lease payments under operating leases are approximately as follows (in thousands):
|
|
|
|
|
Year Ending |
|
|
|
|
2006 |
|
$ |
1,105 |
|
2007 |
|
|
917 |
|
2008 |
|
|
330 |
|
2009 |
|
|
222 |
|
2010 |
|
|
12 |
|
|
|
|
|
Total |
|
$ |
2,586 |
|
|
|
|
|
On August 21, 2003, Sipex announced an exclusive sourcing agreement with PolarFab, a US-based
semiconductor foundry. The Company is under obligation to make minimum purchase commitments based
on quarterly rolling forecasts extending out to one year. The Company has also agreed to purchase
no less than 50% of the rolling forecast on an ongoing basis through the term of this agreement.
The initial term of the agreement is five years with renewals on a negotiated basis. As of
December 31, 2005, the minimum purchase commitment with PolarFab was approximately $2.3 million for
the following twelve months.
On July 2, 2004, the Company entered into an agreement to use certain licensed tools for
circuit design and development as well as maintenance support for a total future payment commitment
of $2.5 million over the next three and one-half years. The contract requires the Company to
deposit 75% of the total commitment in a certificate of deposit account. As of
December 31, 2005, this commitment had a balance of $1.4 million with a corresponding deposit of
$1.0 million in restricted cash, which is included in the accompanying consolidated balance sheet.
On
December 20, 2005, Sipex entered into an agreement to use a fast
simulator software tool for improvement of its product development. A
commitment of future payments including maintenance support fees
totaled $467,000 to be paid over the next three years. The agreement
expires on December 19, 2008.
Legal Proceedings
The
Company is also subject to legal proceedings, claims, and litigation arising in the
course of business. The Company defends itself vigorously against any
such claims. The outcome of unresolved matters related to the
Companys legal proceedings, claims, and litigation is currently not determinable, and
an unfavorable outcome could have a material adverse effect on the Companys consolidated financial
position, results of operations, or cash flows.
Class Action Securities Litigation
Beginning on or about January 24, 2005, four securities class action suits were filed against
Sipex and certain of its current and former officers and directors. All complaints were filed in
the United States District Court for the Northern District of California, San Francisco. The
captions of the cases were as follows: Keller v. Sipex Corporation, et al., (05-CV-00331) (WHA),
Coil Partners LLC v. Sipex Corporation, et al., (05-CV-00392) (WHA), Levy v. Sipex Corporation, et
al., (05-CV-00505) (WHA), and Jacobson v. Sipex Corporation, et al., (05-CV-00712) (WHA).
The securities class action suits were filed on behalf of the purchasers of Sipexs common
stock in various class periods, beginning on or about April 10, 2003 and ending on January 20,
2005. The plaintiffs in these cases alleged, among other things, violations of sections 10(b) and
20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and sought
unspecified monetary damages and other relief against all defendants. Specifically, the complaints
alleged that Sipex and the individual defendants made false or misleading public statements
regarding its financial results during the class periods.
59
On March 25, 2005, four lead plaintiff motions were filed asking the Court to consolidate the
class actions. Prior to the hearing on the lead plaintiff motions, the Levy and Keller plaintiffs
voluntarily agreed to dismiss their complaints. On May 12, 2005, the Court consolidated the
remaining cases under the caption In re Sipex Corporation Securities Litigation, Master File No.
05-CV-00392. Defendants Clyde Ray Wallin and Doug McBurnie were voluntarily dismissed from the
action on August 16, 2005, and defendant Phil Kagel was granted a motion to dismiss on November 17,
2005.
On January 18, 2006, the Court preliminarily approved the settlement of the class action
lawsuit. The settlement provides for a payment of $6.0 million to the plaintiffs which was entirely
funded by proceeds from the Companys directors and officers insurance policy. The specific
terms for distribution of the settlement fund to class members were disclosed in a notice which was
sent to the class members. On April 6, 2006, the United States District Court for the Northern
District of California, San Francisco, approved the final settlement of the securities class action
lawsuit.
Stockholder
Derivative Litigation
On February 8, 2005, a putative stockholder derivative suit was filed in the Superior Court of
the State of California, County of San Mateo, on behalf of Sipex against certain of the Companys
current and former officers and directors for alleged fiduciary duty violations, gross negligence,
unjust enrichment and breach of contract (Lie v. McBurnie, et al., CIV444748). On March 25, 2005,
a second putative stockholder derivative suit was filed in the Superior Court of the State of
California, County of Santa Clara, on behalf of Sipex against certain of the Companys current and
former officers and directors for alleged fiduciary duty violations, abuse of control, gross
mismanagement, waste of corporate assets and unjust enrichment (Nagdev v. Maghribi, et al.,
105CV038114).
The derivative complaints are based on similar facts and events as those alleged in the
securities class actions complaints. Specifically, the complaints allege that the individual
defendants deliberately damaged Sipex by, among other things, causing Sipex to improperly recognize
and report revenue, causing the Company to issue false and misleading statements about its
financial results, exposing Sipex to liability for securities fraud, and damaging its reputation.
On April 22, 2005, defendants in the Lie derivative action filed a petition with the Judicial
Council of California to coordinate the cases in Santa Clara County Superior Court. The petition
was granted on July 13, 2005 and the actions had since been coordinated and consolidated before
Judge Komar in Santa Clara Superior Court, under the consolidated caption, Sipex Derivative Cases,
Judicial Council Coordination Proceeding No. 4431, Lead Case No. 1-05-CV-038114.
On January 23, 2006, the Court approved the settlement of the stockholder derivative action.
The settlement provided for a payment of $300,000 to the plaintiffs, pursuant to the terms of the
settlement agreement, and the adoption of certain corporate governance measures and the payment of
attorneys fees and expenses to the derivative plaintiffs counsel, all of which were funded
entirely by proceeds from Sipexs directors and officers insurance policy.
Government Investigation
On February 18, 2005, Sipex announced that the Securities and Exchange Commission (the SEC)
had commenced a formal investigation into the same matters as those that were the subject of the
Companys previously announced internal investigation into the Companys financial and
transactional records with regard to revenue recognition for the years ended December 31, 2003 and
January 1, 2005. The investigation is ongoing.
DiPietro v. Sipex
In April 2003, Plaintiff Frank DiPietro (former CFO of Sipex Corp.) brought an action against
Sipex for his severance benefits. Sipex counterclaimed for approximately $150,000 which was owed
under a promissory note signed by Mr. DiPietro. In August 2004, Sipex filed two motions for
summary judgment (one for Mr. DiPietros claims against it and one for its counterclaim against Mr.
DiPietro under the promissory note). In June 2005, the Middlesex Superior Court granted both of
Sipexs Motions for Summary Judgment. As a result, Mr. DiPietro was ordered to pay Sipex $149,486
plus costs and interest which has now appreciated to approximately $204,000 as of June 2006.
Interest is added to this amount at twelve (12%) percent per year. Mr. DiPietro filed a notice of
appeal on July 19, 2005. In addition, the court has required Mr. DiPietro to post a bond in the
amount of $150,000.
60
Other Contingencies
Under the terms and conditions of the Companys sales agreements, Sipex has offered limited
intellectual property indemnification to its customers. The indemnity limits the time within which
an indemnification claim can be made and the amount of the claim. It is not possible to determine
the maximum potential amount due to the limited history of prior indemnification claims and the
unique facts and circumstances involved in each particular situation. Historically, payments made
by the Company for this type of claim have not had a material impact on its operating results or
financial position, and the Company is not aware of any significant claims or potential claims under the agreements.
Note 13. Valuation and Qualifying Accounts
The Company had the following activities for the allowance for sales returns and allowances
and bad debt reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
|
Returns and |
|
|
Bad Debt |
|
|
Total A/R |
|
|
|
Allowances |
|
|
Reserves |
|
|
Allowances |
|
Balances at December 31, 2002 |
|
$ |
653 |
|
|
$ |
292 |
|
|
$ |
945 |
|
Provisions |
|
|
249 |
|
|
|
(92 |
) |
|
|
157 |
|
Deductions |
|
|
(759 |
) |
|
|
|
|
|
|
(759 |
) |
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2003 |
|
|
143 |
|
|
|
200 |
|
|
|
343 |
|
Provisions |
|
|
1,355 |
|
|
|
(32 |
) |
|
|
1,323 |
|
Charged to other account |
|
|
350 |
|
|
|
|
|
|
|
350 |
|
Deductions |
|
|
(489 |
) |
|
|
(113 |
) |
|
|
(602 |
) |
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2005 |
|
|
1,359 |
|
|
|
55 |
|
|
|
1,414 |
|
Provisions |
|
|
1,173 |
|
|
|
311 |
|
|
|
1,484 |
|
Charged to other account |
|
|
53 |
|
|
|
|
|
|
|
53 |
|
Deductions |
|
|
(1,485 |
) |
|
|
(117 |
) |
|
|
(1,602 |
) |
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005 |
|
$ |
1,100 |
|
|
$ |
249 |
|
|
$ |
1,349 |
|
|
|
|
|
|
|
|
|
|
|
The increases in sales returns and allowances in 2005 and 2004 primarily reflect added
provisions for general and specific future returns and allowances from customers as well as price
reductions on the Companys products sold to Future, a related party, under an exclusive
distribution agreement.
Note 14. Segment Information and Major Customers
The Companys Chief Executive Officer (CEO) is considered to be the Companys chief operating
decision maker. The Company has organized its operations based on a single operating segment: the
development and delivery of high performance analog integrated circuits that are used primarily by
original equipment manufacturers operating in the computing, communications and networking
infrastructure markets. The CEO reviews financial information presented on a consolidated basis
accompanied by disaggregated information about revenues by product family and geographic region for
purposes of making operating decisions and assessing financial performance. The disaggregated
revenue information reviewed on a product family basis by the CEO includes the interface, power
management and optical storage families along with other legacy product families.
61
The disaggregated information reviewed on a product line basis by the CEO is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Interface |
|
$ |
38,477 |
|
|
$ |
39,622 |
|
|
$ |
16,589 |
|
Power Management |
|
|
19,027 |
|
|
|
21,223 |
|
|
|
9,731 |
|
Optical Storage |
|
|
14,620 |
|
|
|
13,824 |
|
|
|
7,674 |
|
Other* |
|
|
550 |
|
|
|
784 |
|
|
|
2,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
72,674 |
|
|
$ |
75,453 |
|
|
$ |
36,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Mainly Legacy and other discontinued products. |
Although Sipex has operations in Malaysia, China, Taiwan, Japan, Germany, Canada and Belgium,
substantially all the Companys long-lived assets reside in the United States.
The Company markets its products primarily from its operations in the United States.
International sales are made primarily to customers in Asia and Europe. Information regarding the
Companys net sales derived from products shipped to different geographic regions is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Japan |
|
$ |
16,859 |
|
|
$ |
18,520 |
|
|
$ |
10,129 |
|
United States |
|
|
14,704 |
|
|
|
15,203 |
|
|
|
5,214 |
|
United Kingdom |
|
|
11,137 |
|
|
|
9,220 |
|
|
|
2,080 |
|
Singapore |
|
|
9,381 |
|
|
|
9,391 |
|
|
|
2,814 |
|
China |
|
|
8,606 |
|
|
|
7,085 |
|
|
|
4,367 |
|
Taiwan |
|
|
6,253 |
|
|
|
8,654 |
|
|
|
5,783 |
|
Asia, other than Japan, Taiwan, Singapore, and China |
|
|
1,604 |
|
|
|
1,997 |
|
|
|
1,126 |
|
France |
|
|
1,421 |
|
|
|
2,473 |
|
|
|
1,217 |
|
Germany |
|
|
1,413 |
|
|
|
1,550 |
|
|
|
1,615 |
|
Rest of the World |
|
|
1,296 |
|
|
|
1,360 |
|
|
|
2,190 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
72,674 |
|
|
$ |
75,453 |
|
|
$ |
36,535 |
|
|
|
|
|
|
|
|
|
|
|
Major
customers who accounted for 10% or more as a percentage of total gross accounts
receivable are as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Future Electronics Inc., a related party |
|
|
44 |
% |
|
|
23 |
% |
Microtek, Inc. |
|
|
|
* |
|
|
23 |
% |
Major
customers who accounted for 10% or more as a percentage of total net sales are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
Future Electronics Inc., a related party |
|
|
44 |
% |
|
|
39 |
% |
|
|
21 |
% |
Microtek, Inc. |
|
|
10 |
% |
|
|
17 |
% |
|
|
22 |
% |
62
Note 15. Quarterly Data (Unaudited)
Following are summaries of quarterly consolidated operating results and per share data for the
years ended December 31, 2005 and January 1, 2005. Net loss per share is based on the weighted
average common and common equivalent shares outstanding during the quarter. Therefore, the total of
net loss per share for the four quarters, when added from the following
table, may differ from the per share net loss for the respective total years reported elsewhere in
this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
December 31, 2005 |
|
October 1, 2005 |
|
July 2, 2005 |
|
April 2, 2005 |
|
|
(in thousands, except per share data) |
Fiscal 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
17,242 |
|
|
$ |
17,373 |
|
|
$ |
18,332 |
|
|
$ |
19,727 |
|
Gross profit |
|
|
501 |
(2) |
|
|
4,626 |
|
|
|
3,245 |
|
|
|
5,377 |
|
Net loss |
|
|
(11,693 |
)(2) |
|
|
(5,161 |
) |
|
|
(16,211 |
)(1) |
|
|
(5,042 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share basic
and diluted |
|
|
(0.33 |
) |
|
|
(0.15 |
) |
|
|
(0.46 |
) |
|
|
(0.14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
January 1, 2005 |
|
October 2, 2004 |
|
July 3, 2004 |
|
April 3, 2004 |
|
|
(in thousands, except per share data) |
Fiscal 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
20,598 |
|
|
$ |
20,195 |
|
|
$ |
16,509 |
|
|
$ |
18,151 |
|
Gross profit (loss) |
|
|
(409 |
) |
|
|
4,771 |
|
|
|
4,355 |
|
|
|
3,079 |
|
Net loss |
|
|
(9,744 |
) |
|
|
(4,625 |
) |
|
|
(3,137 |
) |
|
|
(5,242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share basic
and diluted |
|
|
(0.28 |
) |
|
|
(0.14 |
) |
|
|
(0.09 |
) |
|
|
(0.17 |
) |
|
|
|
(1) |
|
As described in Note 3, in the second quarter of 2005, the Company recognized a $9.4
million impairment charge for its long-lived assets, based upon changes in the planned use
for its wafer fabrication assets. |
|
(2) |
|
As described in Note 5, in the fourth quarter of 2005, the Company reduced the
remaining estimated depreciation life for its headquarters building and related
improvements from 25 years to approximately four months based upon its decision to sell
the facility, resulting in an increase in depreciation expense of $6.5 million (including
$4.3 million included in cost of sales). |
Note 16. Subsequent Events
On January 19, 2006, Sipex announced the completion of a $7.0 million private loan financing
in which Sipex issued a 9% secured note with convertible interest due January 19, 2008 to an
affiliate of Future. The Note was secured by a deed of trust on our headquarters property located
in Milpitas, California. Accrued interest on the Note was convertible into Sipexs common stock at
the option of the holder on January 19, 2007 and January 19, 2008. The conversion price would be
the volume weighted average price for sales of the common stock during the 20 trading days prior to
the date of conversion. The holder of the note can require repayment of the note in the event of a
change of control of Sipex or the sale of the property subject to the deed of trust. The note was
subject to customary events of default. Interest on the note accrued at 9% compounded quarterly
and payable at maturity.
On January 19, 2006, Sipex entered into an Amendment No. 3 to the Loan and Security Agreement
with Silicon Valley Bank dated July 21, 2005 (amended by Amendment No. 1 dated October 7, 2005 and
Amendment No. 2 dated November 10, 2005). In connection with the $7.0 million private loan
financing transaction mentioned above, Amendment No. 3 modified the Loan and Security Agreement to
permit the granting of a lien on Sipexs headquarters property in Milpitas, California, the sale of
the property and to make additional conforming changes. Amendment No. 3 also raises the interest
rate to the prime rate plus 2% from the prime rate plus 1%. The note holder and Silicon Valley Bank
also entered into a subordination agreement that sets out the inter-creditor arrangements between
the two lenders.
On February 27, 2006, Sipex entered into a definitive Master Agreement with Silan. This
transaction is related to the transaction Sipex announced in its Form 8-K filed on September 2,
2005, which reported that the Board of Directors of Sipex had approved a plan to close its wafer
fabrication operations located in Milpitas, California and that Sipex and Silan would work together
to enable Silan to manufacture semiconductor wafers using Sipexs process technology. The Master
Agreement includes a Production Equipment Sale Agreement, Process Technology Transfer and License
Agreement, Wafer Supply Agreement and Product License Agreement covering fabrication equipment
sales, process technology transfers and related licensing, foundry manufacturing and product
licenses, respectively. The initial term of the agreement is five years with renewals on a
negotiated basis. As part of this arrangement, Sipex will receive a payment of $1.2 million by
letter of credit upon delivery of certain manufacturing equipment to Silan. In addition, Silan will
pay Sipex a Process Technology Transfer Fee of $0.3 million.
The Process Technology Transfer and License Agreement contemplates the transfer of eight (8)
of Sipexs processes to Silan. After this transfer, Silan will commence the implementation of
these processes. Silan will deliver process qualification wafers to Sipex. Process qualification
shall be deemed to have occurred when Sipex confirms to Silan that the process qualification wafers
conform to Sipexs specifications. Once Sipex confirms to Silan that the process qualification
wafers
63
conform to Sipexs specifications, Silan shall manufacture and deliver product qualification
wafers to Sipex. If such product qualification wafers
achieve product qualification, Sipex shall notify Silan thereof and the relevant Sipex product
shall be deemed to be qualified and Silan shall commence the commercial manufacture and supply of
such Sipex product. Subject to Sipexs option to suspend in whole or in part its purchase
commitment if Silan fails to meet any requirements under the wafer supply agreement, Sipex shall
order an average of at least one thousand (1000) equivalent wafers per week, calculated on a
quarterly basis, for two years.
On March 9, 2006, Sipex entered into an Agreement for Purchase and Sale of Real Property with
Mission West Properties L.P. The agreement provides for the sale of Sipexs headquarters facility,
located at 233 South Hillview Drive in Milpitas, California, (the Hillview facility) to Mission
West Properties L.P. for a price of $13.4 million in cash. The Hillview facility primarily consists
of two buildings with approximately 95,690 total square feet (which includes 20,000 square feet of
Class 10 clean room), approximately 293 on-site surface parking spaces, and the underlying land
with improvements and all fixtures attached thereto. Simultaneously, Sipex entered into a Standard
Form Lease agreement to lease back the Hillview facility from Mission West Properties L.P. The
lease term is 60 months with average lease payments of approximately $1.4 million per year. In
addition, Sipex has provided a security deposit of $1,265,000 in the form of an irrevocable standby
letter of credit issued to Mission West Properties, L.P. under its $5.0 million line of credit with
Silicon Valley Bank. The security deposit is held as security for the faithful performance by Sipex
for all of the terms, covenants, and conditions prescribed under the lease agreement. Further,
Sipex will have an option to extend the lease for an additional five years when the current term
expires. This sale and leaseback arrangement is expected to be accounted for as a financing obligation as a
result of the Companys continuing involvement in the arrangement.
The proceeds from the sale of the Companys Hillview facility were used to pay off and
terminate the $7.0 million private loan entered into on January 19, 2006, pursuant to a loan
financing (noted above) with an affiliate of Future in which it issued a 9% Secured Note With Convertible
Interest due January 19, 2008.
On May 18, 2006 the Company issued $30.0 million of 5.5% Convertible Senior Notes due 2026 in
a private placement. Rodfre purchased 50% of the 2006 Notes or $15,000,000 aggregate principal
amount being placed in this offering. The remainder of the 2006 Notes was purchased by other
accredited investors. Sipex intends to use the net proceeds from the private placement for general
corporate purposes.
The 2006 Notes will mature on May 18, 2026 and bear interest at an annual rate of 5.5% payable
semi-annually on May 15 and November 15 of each year, beginning on November 15, 2006. Sipex may pay
interest in cash or, solely at its option, in shares of its common stock. However, Sipex may only
make interest payments in shares of its common stock if certain conditions are met in the
Indenture, including, among other things, that a registration statement related to shares issuable
under the terms of the 2006 Notes and related warrants as noted below has been declared effective
and is available for the resale of any such interest shares, or other exemption from federal
securities laws is available for the resale of such interest shares, and that Sipexs common stock
is listed on the Nasdaq Global Market, the New York Stock Exchange or another national exchange. In
addition, common stock used to pay any such interest will be valued at ninety percent (90%) of the
market price of the common stock as of two days prior to the date of payment of such interest.
As Sipex was not current in its SEC filings by August 15, 2006, Sipex will pay additional
interest on the 2006 Notes at an annual rate of 1.5% for the period beginning August 15, 2006
through the date that the Companys filings become current. In addition, if Sipexs common stock is
not listed on the Nasdaq Global Market, the New York Stock Exchange or another national exchange or
automated quotation system by December 31, 2006, Sipex will pay additional interest on the 2006
Notes at an annual rate of 1.5% for the period beginning December 31, 2006 through the date that
its common stock becomes listed for trading on one of the national exchanges.
The 2006 Notes are convertible into Sipexs common stock at any time prior to maturity,
initially at a conversion price of $2.68 per share, subject to adjustment upon certain events,
including, among other things, dividends, stock splits and recapitalizations. If fully converted,
the principal amount of the 2006 Notes would convert into 11,194,030 shares of the Companys common
stock.
At any time prior to maturity, the Company may elect to automatically convert some or all of
the 2006 Notes into shares of Sipexs common stock if the daily closing price of its common stock
exceeds one hundred fifty percent (150%) of the then applicable conversion price (initially $4.02
per share) for 20 trading days during any 30 trading-day period ending within 5 days of the notice
of automatic conversion and either (a) a registration statement covering the resale of the common
stock issued upon conversion is effective and available for use from the date Sipex notifies the
holder of the 2006 Notes of the automatic conversion and Sipex reasonably expects such registration
statement to remain effective through and including the earlier of the date of the automatic
conversion or the last date on which the registration statement registering the resale of such
common stock is required to be kept effective under the terms of the registration rights agreement,
or (b) the common stock to be issued upon conversion may be sold pursuant to Rule 144(k) under the
Securities Act.
64
At any time on or after May 21, 2009, Sipex may redeem some or all of the 2006 Notes at 100%
of the principal amount plus accrued and unpaid interest to, but excluding, the redemption date. If
Sipex elects to redeem the 2006 Notes, it will provide notice of redemption to the holders of the
2006 Notes not less than 20 days and not more than 90 days before the redemption date.
The holders of the 2006 Notes may require Sipex to repurchase the 2006 Notes for cash on May
15, 2011, May 15, 2016 or May 15, 2021, at a price equal to 100% of the principal amount plus
accrued and unpaid interest, if any, to, but excluding, the applicable repurchase date.
Upon a change of control or a termination of trading that occurs after such time as Sipexs
common stock has been listed for trading on the Nasdaq Global Market, the New York Stock Exchange
or other national automated quotation system or securities exchange, the holders of the 2006 Notes
may require Sipex to repurchase the 2006 Notes in cash at a price equal to 100% of the principal
amount of the 2006 Notes plus accrued and unpaid interest, if any, to, but excluding, the
applicable repurchase date.
The 2006 Notes contains certain covenants applicable to Sipex, including a covenant
restricting the amount of indebtedness that Sipex can incur that is senior or pari passu with the
2006 Notes to an aggregate principal amount of $7.5 million, unless such restriction is waived by
holders of over 66 2/3% of the principal amount of the 2006 Notes then outstanding.
In conjunction with the issuance of the 2006 Notes, the Company issued warrants to purchase an
aggregate of 1,679,104 shares of its common stock to the Investors. Each warrant is exercisable for
one share of Sipexs common stock at an initial exercise price of $3.216 per share, subject to
adjustment upon certain events, including, among other things, dividends, stock splits and
recapitalizations. The warrants are exercisable (in whole or in part) at any time on or before May
18, 2011, unless earlier terminated by Sipex.
At any time after May 18, 2009, Sipex may terminate the warrants if the closing price of its
common stock exceeds 200% of the exercise price for at least 20 trading days during any 30
trading-day period. The warrants will expire 90 days after the mailing date of the notice of
termination. Any unexercised warrants with exercise prices below the then current fair market value
as of the date of termination will automatically be deemed exercised in full pursuant to a cashless
exercise. Each of the Warrants will expire at 5:00 p.m., New York City time, on May 18, 2011,
earlier terminated as described above.
As part of the 2006 Note agreements, Sipex also entered into a Registration Rights Agreement
(the Registration Rights Agreement), pursuant to which Sipex has agreed to file with the SEC a
registration statement covering the resale of the 2006 Notes, the Warrants and the shares of
Sipexs common stock issuable upon conversion of the 2006 Notes and exercise of the Warrants no
later than August 15, 2006 and to have the registration statement declared effective no later than
December 31, 2006. Since Sipex did not file the registration statement by August 15, 2006, Sipex will be required to pay certain registration delay payments, as
calculated in the Registration Rights Agreement, with respect to solely the 2006 Notes.
Upon issuance of the 2006 Notes, it is expected that a beneficial conversion feature will be
recorded which will result in an increase in additional paid-in capital with a corresponding
increase to debt discount to be amortized as interest expense. The Company is in the process of
estimating the value of the beneficial conversion feature.
In connection with the issuance of the $30.0 million 2006 Notes, on May 18, 2006, Sipex
entered into Amendment No. 4 to the Loan and Security Agreement with Silicon Valley Bank dated July
21, 2005 (as amended by Amendment No. 1 dated October 7, 2005, Amendment No. 2 dated November 10,
2005 and Amendment No. 3 dated January 19, 2006). Amendment No. 4 modifies the Loan and Security
Agreement to permit the transaction and the scheduled cash interest payments.
On August 1, 2006, Sipex entered into Amendment No. 5 to the Loan and Security Agreement with
Silicon Valley Bank dated July 21, 2005 (as amended by Amendment No. 1 dated October 7, 2005,
Amendment No. 2 dated November 10, 2005, Amendment No. 3 dated January 19, 2006 and Amendment No. 4
dated May 18, 2006). Amendment No. 5 modifies the Loan and Security Agreement to: (1) extend the
maturity date from July 20, 2006 to September 30, 2006, (2) delete entirely the Tangible Net Worth
covenant contained in Section 6.7(b) and waive Sipexs non-compliance with such covenant for the
periods ended April 1, 2006 and July 1, 2006 and (3) lower the interest rate to the prime rate from
the prime rate plus 2%.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure:
Not Applicable.
65
Item 9A. Controls and Procedures:
Evaluation of Disclosure Controls and Procedures for year ended December 31, 2005
For
the year ended December 31, 2005, we evaluated the design and operating effectiveness of our
disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer (CEO)
and Chief Financial Officer (CFO) concluded that, because of the material weaknesses in our
internal control over financial reporting described in our 2004 Annual Report on Form 10-K, our
disclosure controls and procedures as defined in Rule 13a-15(e) were not effective. To address the
material weaknesses in our internal control over financial reporting described below, we performed
additional manual procedures and analysis and other post-closing procedures in order to prepare the
consolidated financial statements included in this 2005 annual report
on Form 10-K. We
believe that the consolidated financial statements contained in this report present fairly our
financial condition, results of operations, and cash flows for the fiscal years covered thereby in
all material respects in accordance with generally accepted
accounting principles.
The
material weaknesses in our internal control over financial reporting
as of January 1, 2005 identified by our management related to the
design and operation of controls in the following areas: (i) entity
level controls, (ii) revenue accounting, and (iii) financial closing
processuse of estimates.
Internal Control over Financial Reporting
For the year ended December 31, 2005, we were not an accelerated filer, and therefore we are
not required to make the annual report over financial reporting required by Item 308(a) of
Regulation S-K and our independent registered public accounting
firm are not required to issue a separate attestation on
managements assessment of our internal control over financial reporting under Item 308(b).
66
Changes in Internal Control over Financial Reporting
During
fiscal year 2005, our management continued significant efforts to establish a framework to improve
internal controls over financial reporting, particularly as they related to the findings of the
independent investigation conducted by our audit committee in 2005. We committed considerable
resources to the design, implementation, documentation, and testing of our internal controls.
Additional efforts were required to address certain internal control deficiencies.
Subsequent
to January 1, 2005 and prior to the fourth quarter of fiscal
year 2005, our management and the board of directors have taken the
steps below to improve internal controls related to previously
identified material weaknesses; however, the nature and significance of the material weaknesses may prevent
successful remediation of all material weaknesses for fiscal year 2006.
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Our new CEO, Ralph Schmitt, was hired in June 2005; |
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We implemented annual ethics training for all employees and we have engaged a
compliance firm to ensure that all employees read, understand and confirm critical
accounting and ethics policies. All employees must now annually reaffirm our Code of
Conduct, legal compliance policy and whistleblower procedures; |
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We increased management oversight by expanding our disclosure process to include all
senior managers and sales and marketing personnel with responsibility for responding to
issues raised during the financial reporting process and we require certifications from
all executive management and key sales and marketing personnel; |
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Our key financial managers made periodic visits to our distributors to emphasize the
terms of the distribution agreements and the revenue reporting requirements of Sipex as a
public company; |
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We adopted sell-through revenue recognition for our sales to distributors. As part of
this adoption, we have engaged an outside company to conduct inventory cycle counts on a
rotating basis at all of our distributors warehouses to verify quantities. In addition,
the distributors have been advised that the terms of the distribution agreement are
binding and any changes to those terms must be approved in writing by both our CEO and CFO. Finally, we implemented more stringent policies and procedures regarding revenue
accounting and oversight of contractual arrangements by requiring the review and approval
from our CEO and CFO on non-standard sales terms and conditions of a significant nature; |
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We implemented a process for formal revenue recognition training sessions for key
finance, sales and marketing personnel; |
67
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We improved the documentation, communication and periodic review of our accounting
policies throughout our domestic and international locations for consistency and
compliance with generally accepted accounting principles; |
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We enhanced the training and education for our international finance and accounting
personnel and new hire additions to the worldwide finance team; and |
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We re-engineered the sales administration function so that all finance-related
activities are performed by the finance staff. The finance department assumed
responsibility for the customer credit issuance and tracking process and the external
sales representative commission calculation. |
During
2006, our management took the following additional steps to address
the material weaknesses that existed as of January 1, 2005:
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We conducted a formal review of the foreign locations in which we are doing
business, evaluated the appropriate and necessary legal and tax structure for these
foreign locations and then implemented such structure and the related internal controls
to ensure compliance with local laws and regulations. |
Inherent Limitation on the Effectiveness of Internal Controls
The effectiveness of any system of internal control over financial reporting is subject to
inherent limitations, including the risk of exercise of judgment in designing, implementing, operating, and
evaluating the controls and procedures, and the inability to
eliminate the risk of misconduct completely.
Accordingly, any system of internal control over financial reporting can only provide reasonable,
not absolute assurances. In addition, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate. We
intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our
business, but we cannot assure that such improvements will be sufficient to provide us with
effective internal control over financial reporting.
Item 9B. Other Information
None
PART III
Item 10. Directors and Executive Officers of the Registrant:
The board of directors is divided into three classes. Each class serves a three-year term.
Each Class II directors term will expire at the Annual Meeting of Stockholders to be held in 2007.
Each Class I director is serving a term ending at the Annual Meeting of Stockholders to be held in
November 2006. In addition, the Class III directors, whose term would have expired at the 2005
Annual Meeting, had we been able to hold such meeting, will likewise expire at the Annual Meeting
of Stockholders being held in November, 2006. All directors will hold office until their successors
have been duly elected and qualified or until his or her earlier resignation or removal.
As of July 1, 2006, Douglas M. McBurnie and Thomas P. Redfern were the Class I Directors;
Brian Hilton, Lionel H. Olmer, and John D. Arnold were the Class II Directors; and Ralph Schmitt
and Joseph Consoli were the Class III Directors.
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Nominee or Directors Name and |
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Year Nominee or Director First |
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Year Term Will |
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Class of |
Became a Director |
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Age |
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Position(s) Held |
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Expire |
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Director |
CONTINUING DIRECTORS: |
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Joseph Consoli (2002) |
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62 |
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Director |
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2005 |
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III |
Douglas M. McBurnie (2000) |
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63 |
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Director |
|
2006 |
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I |
Thomas P. Redfern (2003) |
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66 |
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Director |
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2006 |
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I |
Ralph Schmitt (2005) |
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45 |
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Director |
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2005 |
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III |
John D. Arnold (2004) |
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52 |
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Director |
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2007 |
|
II |
Brian Hilton (2004) |
|
63 |
|
Chairman of the Board |
|
2007 |
|
II |
Lionel H. Olmer (1988) |
|
71 |
|
Director |
|
2007 |
|
II |
68
Mr. Consoli has been a director with us since September 2002 and serves as chairman of the
audit committee. Our board of directors has determined that Mr. Consoli is independent within the
meaning of the rules of the SEC and the corporate governance
standards of the Nasdaq Global Market
and is qualified as an audit committee financial expert within the meaning of the rules of the SEC.
Mr. Consoli retired in April 1991. Prior to his retirement, Mr. Consoli held executive positions
in finance and operations at technology companies including vice president of finance and treasurer
of Seagate Technology Inc., a manufacturer of computer hard drives; vice president of finance and
CFO and member of the Office of the President of Equatorial Communications Co., a satellite
communications company; vice president of Granger Associations and general manager of its
International Telecommunications Division after serving as vice president of finance and CFO;
treasurer of Memorex Corp., a consumer electronics and computer products company; vice president of
finance and CFO of Precision Monolithics, Inc., a semiconductor company; and group controller and
as director of Corporate Development of Fairchild Semiconductor, a semiconductor company.
Mr. Redfern has been a director with us since May 2003. From 1989 through 2001, Mr. Redfern
was with National Semiconductor, a manufacturer of semiconductor products, in various technical and
management roles in the field of analog product development and circuit design. In particular, Mr.
Redfern guided product development in the Interface and Peripheral Group, Audio/Video Group and the
Analog Products Group. Before his retirement from National Semiconductor in 2001, Mr. Redfern was a
fellow and a technical advisor in the Analog Products Group. Prior to National Semiconductor, Mr.
Redfern served for seven years as the director of MOS Design at Linear Technology, a manufacturer
of linear integrated circuits.
Mr. McBurnie has been a director with us since July 2000 and was chairman of the board from
June 2002 to August 2005. Mr. McBurnie also served as our acting chief executive officer from June
2002 to August 2002 and from December 2004 to June 2005. Mr. McBurnie was formerly senior vice
president, computer, consumer & network products group, of VLSI Technology. From June 1994 to
August 1997, Mr. McBurnie was with National Semiconductor, where he was senior vice president and
general manager of its communications and consumer group. Previously, Mr. McBurnie was vice
president and general manager of National Semiconductors local area network division. Prior to
joining National Semiconductor, he held key executive positions at a number of Silicon Valley
companies, including Xidex Corporation, a manufacturer of data storage media, Precision
Monolithics, Inc., a semiconductor company, and Fairchild Semiconductor, a semiconductor company.
Mr. McBurnie also served as a member of the board of directors of Oryx Technology Corporation from
May 1997 until May 2003.
Mr. Olmer has been a director with us since 1988 and serves as chairman of the compensation
committee. Mr. Olmer has also served as a member of the audit committee. From 1981 to 1985, he
served as Undersecretary of Commerce for International Trade in the Reagan Administration. From
1985 until July 2002, Mr. Olmer was a partner in the law firm of Paul, Weiss, Rifkind, Wharton &
Garrison LLP, focusing on international trade, investment and technology transfer law. Since July
2002, Mr. Olmer has been Of Counsel to Paul, Weiss, Rifkind, Wharton & Garrison LLP.
Mr. Arnold has been a director with us since January 2004 and has served as a member of the
audit committee since. He has been in private law practice since 1988, primarily representing
technology companies with relationships with Asian investors and/or manufacturers. Prior to 1988,
Mr. Arnold was employed with the law firms of Wilson, Sonsini, Goodrich & Rosati in Palo Alto,
California and Foley & Lardner in Milwaukee, Wisconsin. Mr. Arnold is also a member of the board of
directors of Measurement Specialties Inc.
Mr. Hilton has been a director with us since July 2004. On August 11, 2005, we announced the
appointment of Brian Hilton as our chairman of the board of directors. Mr. Hilton has over 35 years
of experience in the semiconductor industry. Most recently, Hilton was president of Avnet
Electronics Marketing, a global electronics distributor. In this role, Hilton was responsible for
building Avnets Asian business and expanding their presence in Europe, the Middle East and Africa.
Prior to Avnet, Hilton spent 30 years at Motorola Inc., reaching the position of corporate VP and
director of worldwide sales and marketing for Motorolas Semiconductor Products Sector.
Mr. Schmitt has been a director with us since June 2005. Mr. Schmitt is the chief executive
officer and member of the board of directors. Mr. Schmitt received his BSEE from Rutgers University
and began his career as a computer and communications system hardware designer. Prior to joining
Sipex, Mr. Schmitt was the vice president of sales and marketing at Cypress Semiconductor
Corporation. Mr. Schmitt had also served on the boards of Cypress subsidiaries, Silicon Light
Machines and Cypress
Microsystems, and on the board of Azanda Networks. He also currently serves on the board of
StarGen, Inc., a privately held company.
There are no family relationships between any director or executive officer.
69
Board of Directors Committees
We have a standing compensation committee, corporate governance and nominating committee, as
well as an audit committee. Each committee has adopted a written charter, all of which are
available on Sipexs website at www.sipex.com.
Compensation Committee
The compensation committee of the board of directors consists of directors Olmer and Redfern.
Each of the current members of the committee is independent within the meaning of the Nasdaq
director independence standards, as currently in effect. This committee reviews and evaluates the
compensation and benefits of all of our officers, reviews general policy matters relating to
compensation and benefits of our employees and makes recommendations concerning these matters to
the board of directors. The compensation committee administers our 1996 Incentive Stock Option
Plan, 1996 Non-Employee Director Stock Option Plan, 1996 Employee Stock Purchase Plan, 1997 Stock
Option Plan, 1999 Stock Option Plan, the 2000 Non-qualified Stock Option Plan and the 2002
Nonstatutory Stock Option Plan.
Corporate Governance and Nominating Committees
In
2004 and 2005, the corporate governance and nominating committee of
the board of directors consisted of
directors Arnold, McBurnie, and Redfern. Currently the corporate
governance and nominating committee of the board of directors consists
of directors Arnold and
Redfern. Each of the current members of the committee is
independent within the meaning of the Nasdaq director independence standards, as currently in
effect. The corporate governance and nominating committee was established February 26, 2004. The
corporate governance and nominating committee make recommendations to the board of directors
regarding nominees for the board, monitor the size and composition of the board, assist the board
with review and consideration of developments in corporate governance practices and perform such
other duties as the board of directors shall from time to time prescribe.
Audit Committee
The audit committee of the board of directors consists of directors Arnold, Consoli and
Hilton. Each of the current members of the committee is independent within the meaning of the
Nasdaq director independence standards, as currently in effect. The board of directors has
determined that director Mr. Consoli is an audit committee financial expert as defined in the SEC
rules. Mr. Consoli serves as chairman of the audit committee.
Pursuant to the audit committee charter, the audit committee reviews, acts and reports to our
board of directors on various auditing and accounting matters, including the appointment of our
independent auditors, the scope of our annual audits, fees to be paid to our independent auditors,
the performance of our independent auditors, the sufficiency of our internal controls and our
accounting and financial management practices.
The audit committee also meets with our independent auditors in an executive session, without
the presence of our management, on a quarterly basis, following completion of their quarterly
reviews and annual audit and prior to our earnings announcements, to review the results of their
work.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers,
directors and persons who own more than ten percent of a registered class of our equity securities
(collectively, Reporting Persons), to file reports of ownership on Forms 3, 4 and 5 with us and
the SEC. Based solely on our review of copies of such forms received by us or written
representations from certain Reporting Persons, we believe that all our officers, directors and
greater than ten percent stockholders complied with all filing requirements applicable to them with
respect to transactions during fiscal years ended January 1, 2005 and December 31, 2005, but for
the exception of one late filing of Form 3 for each Edward Lam and Richard Hawron, one late filing
of Form 4 for Alonim, Kevin Plouse, Joseph Rauschmayer and Clyde Wallin, and two late filings of
Form 4s for Richard Hawron, due to administrative errors.
Code of Business Conduct and Ethics
The board of directors has adopted a Code of Business Conduct and Ethics that is applicable to
all of our employees, officers and directors, including our senior executive and financial
officers. In addition, the board of directors adopted a Code of Ethics for our principal executive
officer and senior financial officers. Each code is intended to deter wrongdoing and promote
ethical conduct among our directors, executive officers and employees. Each code is available on
our corporate website at www.sipex.com. We intend to satisfy the disclosure requirements under
Item 10 of Form 10-K regarding amendment to, or waiver from, each code for any executive officer or
director by posting such information on our website at www.sipex.com, provided such method of
disclosure is then in compliance with the rules of the Nasdaq Global Market and the rules of the
SEC.
Item 11. Executive Compensation
The following table sets forth certain information concerning the annual and long-term
compensation for each individual that served as chief executive officer during fiscal 2005 and our
three next most highly compensated executive officers whose compensation exceeded $100,000 in
fiscal 2005 for services rendered in all capacities for the years indicated. These individuals are
also referred to as the Named Executive Officers.
70
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Long Term |
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Compensation - |
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Securities |
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Fiscal |
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Annual Compensation |
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Underlying Options |
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All Other Compensation |
Name and Principal Position |
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Year |
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Salary |
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Bonus (2) |
|
(1) |
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(3) |
Ralph Schmitt (4) |
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2005 |
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|
$ |
200,000 |
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|
$ |
65,000 |
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|
1,000,000 |
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$ |
7,288 |
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Chief Executive Officer and President |
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2004 |
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2003 |
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Douglas McBurnie (5) |
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2005 |
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$ |
199,032 |
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10,000 |
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$ |
19,454 |
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Acting Chief Executive |
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2004 |
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$ |
20,192 |
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107,500 |
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$ |
21,542 |
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Officer and President |
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2003 |
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7,500 |
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$ |
17,500 |
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Clyde R. Wallin (6) |
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2005 |
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$ |
201,442 |
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$ |
52,000 |
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200,000 |
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$ |
12,359 |
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Senior Vice President of Finance and
Chief Financial Officer |
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2004 |
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$ |
138,671 |
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50,000 |
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$ |
3,723 |
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2003 |
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Richard Hawron (7) |
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2005 |
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$ |
315,021 |
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150,000 |
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$ |
101,848 |
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Senior Vice President of Worldwide
Sales |
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2004 |
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$ |
77,884 |
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100,000 |
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$ |
38,179 |
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2003 |
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Lee E. Cleveland(8) |
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2005 |
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$ |
205,769 |
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$ |
52,000 |
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300,000 |
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$ |
4,000 |
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Senior Vice President of Engineering |
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2004 |
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$ |
203,846 |
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$ |
3,158 |
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2003 |
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$ |
60,769 |
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$ |
1,575 |
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Edward Lam (9) |
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2005 |
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$ |
77,269 |
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$ |
37,700 |
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425,000 |
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$ |
4,088 |
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Senior Vice President of Marketing
and Business Development |
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2004 |
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|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joel J. Camarda (10) |
|
|
2005 |
|
|
$ |
32,538 |
|
|
$ |
17,600 |
|
|
|
250,000 |
|
|
$ |
1,693 |
|
Senior Vice President of Operations |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph Rauschmeyer (11) |
|
|
2005 |
|
|
$ |
118,497 |
|
|
|
|
|
|
|
|
|
|
$ |
126,794 |
|
Senior Vice President of Operations |
|
|
2004 |
|
|
$ |
234,423 |
|
|
|
|
|
|
|
50,000 |
|
|
$ |
11,738 |
|
|
|
|
2003 |
|
|
$ |
230,000 |
|
|
|
|
|
|
|
50,000 |
|
|
$ |
5,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin Plouse (12) |
|
|
2005 |
|
|
$ |
64,746 |
|
|
|
|
|
|
|
|
|
|
$ |
4,489 |
|
Senior Vice President of Business
Development |
|
|
2004 |
|
|
$ |
224,230 |
|
|
|
|
|
|
|
|
|
|
$ |
11,819 |
|
|
|
|
2003 |
|
|
$ |
220,000 |
|
|
|
|
|
|
|
50,000 |
|
|
$ |
5,244 |
|
|
|
|
(1) |
|
We did not grant any restricted stock awards, grant any stock appreciation rights or make any long term
incentive payments during fiscal years 2003, 2004 or 2005. |
|
(2) |
|
Bonuses are reported in year earned even if actually paid in subsequent year. |
|
(3) |
|
Includes contributions made by us for the Named Executive Officers to our Tax Deferred Savings Plan, insurance
premiums, housing assistance,
severance payments, directors fees, severance payments and directors fees. |
|
(4) |
|
Mr. Schmitt joined us in June 2005 |
|
(5) |
|
Mr. McBurnie assumed the role of Acting President and CEO from December 2004 to August 2005. |
|
(6) |
|
Mr. Wallin joined us in April 2004. Includes 200,000 option shares repriced on September 6, 2005. This option
was originally granted on April 5, 2004. See Option Reprice Program and Report of the Board of Directors
on the Option Reprice Program. |
|
(7) |
|
Mr. Hawron joined us in February 2004 and received housing assistance in 2005. Includes 50,000 option
shares repriced on September 6, 2005. This option was originally granted on December 17, 2004. See Option
Reprice Program and Report of the Board of Directors on the Option Reprice Program. |
|
(8) |
|
Mr. Cleveland joined in September 2002 and was promoted to Senior VP of Engineering in October 2005.
Includes 300,000 option shares repriced on September 6, 2005. These options were originally granted on
September 2, 2003 and December 9, 2004. See Option Reprice Program and Report of the Board of Directors
on the Option Reprice Program. |
|
(9) |
|
Mr. Lam joined us in September 2005. |
|
(10) |
|
Mr. Camarda joined us in November 2005. |
|
(11) |
|
Mr. Rauschmayer joined us in September 2002 and departed in September 2005. |
|
(12) |
|
Mr. Plouse joined the Company in September 2002 and departed in April 2005. |
71
Option Grants in Last Fiscal Year
The following table sets forth stock options granted during the year ended December 31, 2005
to the Named Executive Officers. No stock appreciation rights (SARs) or restricted stock awards
were granted during the year ended December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Percent of Total |
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
Options Granted |
|
|
|
|
|
|
|
|
|
Potential Realizable Value at |
|
|
Underlying |
|
to Employees in |
|
Exercise or |
|
|
|
|
|
Assumed Annual Rates of Stock |
|
|
Options |
|
Fiscal 2005 |
|
Base Price per |
|
Expiration |
|
Price (4) |
Name |
|
Granted (1) |
|
Year (%)(2) |
|
Share (3) |
|
Date |
|
5% |
|
10% |
|
Ralph Schmitt |
|
|
1,000,000 |
|
|
|
19.4 |
|
|
$ |
1.70 |
|
|
|
6/27/2015 |
|
|
$ |
1,069,121 |
|
|
$ |
2,709,362 |
|
Douglas McBurnie |
|
|
10,000 |
|
|
|
0.2 |
|
|
$ |
1.88 |
|
|
|
7/18/2015 |
|
|
$ |
11,823 |
|
|
$ |
29,962 |
|
Clyde R. Wallin |
|
|
200,000 |
(5) |
|
|
3.9 |
|
|
$ |
1.90 |
|
|
|
4/5/2014 |
|
|
$ |
197,494 |
|
|
$ |
480,703 |
|
Richard Hawron |
|
|
100,000 |
|
|
|
1.9 |
|
|
$ |
1.75 |
|
|
|
10/19/2015 |
|
|
$ |
110,057 |
|
|
$ |
278,905 |
|
|
|
|
50,000 |
(6) |
|
|
1 |
|
|
$ |
1.90 |
|
|
|
12/17/2014 |
|
|
$ |
54,399 |
|
|
$ |
135,051 |
|
Lee E. Cleveland |
|
|
200,000 |
(7) |
|
|
3.9 |
|
|
$ |
1.90 |
|
|
|
9/2/2013 |
|
|
$ |
181,133 |
|
|
$ |
433,713 |
|
|
|
|
100,000 |
(8) |
|
|
1.9 |
|
|
$ |
1.90 |
|
|
|
12/9/2014 |
|
|
$ |
108,479 |
|
|
$ |
269,143 |
|
Edward M. Lam |
|
|
425,000 |
|
|
|
8.2 |
|
|
$ |
2.00 |
|
|
|
9/19/2015 |
|
|
$ |
534,560 |
|
|
$ |
1,354,681 |
|
Joel J. Camarda |
|
|
250,000 |
|
|
|
4.8 |
|
|
$ |
1.68 |
|
|
|
11/4/2015 |
|
|
$ |
264,136 |
|
|
$ |
669,372 |
|
|
|
|
(1) |
|
Unless otherwise noted, these options will vest at a rate of 25% of the
shares subject to the option on the anniversary of the grant date, so that
the option will be fully exercisable four (4) years from the grant date. |
|
(2) |
|
A total of 5,163,086 shares were granted to employees (including named
officers) in fiscal year 2005, 2,455,966 of which are the result of an
option reprice program approved by our board of directors on August 29,
2005, repriced on September 6, 2005. See Option Reprice Program and
Report of the board of directors on the Option Reprice Program.
Excluding the effect of the repricing program, the percent of the total
options granted to employees in fiscal 2005 for the named executives would
be as follows; Schmitt 36.9%, McBurnie 0.37%, Wallin 0%, Hawron 3.69%,
Cleveland 0%, Lam 15.7%, Camarda 9.23%, Rauschmeyer 0% and Plouse 0%. |
|
(3) |
|
All options were granted at the fair market value on the date of the grant. |
|
(4) |
|
Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compound rates of appreciation (5% and 10%) on
the market value of our common stock on the date of option grant over the
term of the options. These numbers are calculated based on rules
promulgated by the SEC and do not reflect our estimate of future stock
price growth. Actual gains, if any, on stock option exercises and common
ctock holdings are dependent on the timing of such exercise and the future
performance of our common stock. There can be no assurance that the rates
of appreciation assumed in this table can be achieved or that the amounts
reflected will be received by the individuals. |
|
(5) |
|
This option was granted on September 6, 2005 pursuant to an option reprice
program approved by our board of directors on August 29, 2005. All of the
shares subject to this option shall vest at a rate of 25% of the shares
subject to the option on the anniversary of the original grant date, so
that the option will be fully exercisable four (4) years from the original
grant date of April 5, 2004. See Option Reprice Program and Report of
the board of directors on the Option Reprice Program. |
|
(6) |
|
This option was granted on September 6, 2005 pursuant to an option reprice
program approved by our board of directors on August 29, 2005. All of the
shares subject to this option shall vest at a rate of 25% of the shares
subject to the option on the anniversary of the original grant date, so
that the option will be fully exercisable four (4) years from the original
grant date of December 17, 2004. See Option Reprice Program and Report
of the board of directors on the Option Reprice Program. |
|
(7) |
|
This option was granted on September 6, 2005 pursuant to an option reprice
program approved by our board of directors on August 29, 2005. All of the
shares subject to this option shall vest at a rate of 25% of the shares
subject to the option on the anniversary of the original grant date, so
that the option will be fully exercisable four (4) years from the original
grant date of September 2, 2003. See Option Reprice Program and Report
of the board of directors on the Option Reprice Program. |
|
(8) |
|
This option was granted on September 6, 2005 pursuant to an option reprice
program approved by our board of directors on August 29, 2005. All of the
shares subject to this option shall vest at a rate of 25% of the shares
subject to the option on the anniversary of the original grant date, so
that the option will be fully exercisable four (4) years from the original
grant date of December 9, 2004. See Option Reprice Program and Report
of the board of directors on the Option Reprice Program. |
72
Option Exercises and Fiscal Year-End Values
The following table sets forth information with respect to options to purchase our common
stock granted to the Named Executive Officers, including (i) the number of unexercised options
outstanding at December 31, 2005; and (ii) the value of such unexercised options at December 31,
2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
Number of Securities Underlying Unexercised |
|
Value of Unexercised In-the- |
|
|
Acquired on |
|
Value |
|
Options at Year-End (1) |
|
Money Options at Year-End (2) |
Name |
|
Exercise |
|
Realized |
|
Exercisable |
|
Unexercisable |
|
Exercisable |
|
Unexercisable |
Ralph Schmitt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000 |
|
|
|
|
|
|
|
|
|
Clyde R. Wallin |
|
|
|
|
|
|
|
|
|
|
62,500 |
|
|
|
187,500 |
|
|
|
|
|
|
|
|
|
Richard Hawron |
|
|
|
|
|
|
|
|
|
|
80,191 |
|
|
|
169,809 |
|
|
|
|
|
|
|
|
|
Lee E. Cleveland |
|
|
|
|
|
|
|
|
|
|
125,000 |
|
|
|
175,000 |
|
|
|
|
|
|
|
|
|
Edward M. Lam |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
425,000 |
|
|
|
|
|
|
|
|
|
Joel J. Camarda |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
Joseph T. Rauschmayer |
|
|
|
|
|
|
|
|
|
|
358,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin W. Plouse |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John D. Arnold |
|
|
|
|
|
|
|
|
|
|
25,000 |
|
|
|
30,000 |
|
|
|
|
|
|
|
|
|
Joseph C. Consoli |
|
|
|
|
|
|
|
|
|
|
43,750 |
|
|
|
18,750 |
|
|
|
3,150 |
|
|
|
1,050 |
|
Brian Hilton |
|
|
|
|
|
|
|
|
|
|
23,125 |
|
|
|
24,375 |
|
|
|
|
|
|
|
|
|
Douglas McBurnie |
|
|
|
|
|
|
|
|
|
|
241,625 |
|
|
|
18,375 |
|
|
|
56,000 |
|
|
|
|
|
Lionel H. Olmer |
|
|
|
|
|
|
|
|
|
|
66,748 |
|
|
|
20,250 |
|
|
|
|
|
|
|
|
|
Thomas P. Redfern |
|
|
|
|
|
|
|
|
|
|
15,625 |
|
|
|
24,375 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Pursuant to stock option agreements, all option shares must be vested to be exercised. |
|
(2) |
|
Value is based on the difference between the option exercise price and the
fair market value of our common stock on December 31, 2005, multiplied by the number of
shares underlying the options. |
73
Executive Employment and Severance Agreements
The Company has entered into the following employment agreements with the Named Executive
Officers:
Mr. Wallin entered into an employment agreement with us on or about March 26, 2004. The
employment agreement provides that Mr. Wallin serves as Chief Financial Officer of the Company. Mr.
Wallin may voluntarily terminate this employment at any time, with or without notice. We may
terminate his employment at any time, with or without notice or cause. If we terminates Mr.
Wallins employment without cause, and he executes, and does not revoke, a standard release in
favor of the us, he will be entitled to continuing payments equal to his base salary for a period
of six months. Pursuant to the employment agreement, Mr. Wallins salary is $200,000 per year. If
Mr. Wallins employment is terminated in connection with the change in control, he will be
entitled to continuing payments equal to his base salary for a period of six months and fifty (50%)
percent of any unvested Options shall immediately vest and become exercisable. The amount of his
annual bonus is at the sole discretion of the Board of Directors.
Mr. Schmitt entered into an employment agreement on with us or about June 27, 2005. The
employment agreement provides that Mr. Schmitt will serve as Chief Executive Officer and as a
member of its board of directors. Mr. Schmitt may voluntarily terminate this employment at any
time, with or without notice. Pursuant to the employment agreement, Mr. Schmitts salary is
$400,000 per year. If Mr. Schmitts employment with Sipex terminates other than (i) voluntarily,
(ii) by reason of his death or disability or (iii) for cause, prior to a change of control or more
than twelve months after a change of control, Mr. Schmitt shall be entitled to receive continuing
severance payments equal to his base salary rate, as then in effect, for a period of twelve months
from the date of his termination and he shall be entitled to receive continuing severance payments
equal to his base salary rate, as then in effect, for a period of twelve (months from the date of
his termination and all of his unvested options shall vest and become exercisable for a period of
twelve months after the date of his termination). If Mr. Schmitts employment with Sipex terminates
other than (i) voluntarily, (ii) by reason of his death or disability or (iii) for cause, within
twelve months after a change of control, Mr. Schmitt shall be entitled to receive continuing
severance payments equal to his base salary rate, as then in effect, for a period of twelve months
from the date of his termination and all of any unvested option shall vest and become exercisable
for a period of twelve months after the date of his termination.
Mr. Lam entered into an employment agreement with us or about September 18, 2005.
The employment agreement provides that Mr. Lam serves as our Senior Vice President of Marketing and
Business Development. Mr. Lam may voluntarily terminate this employment at any time, with or
without notice. Mr. Lams salary is $287,000 per year. If Mr. Lams employment with us terminates
other than voluntarily, by reason of his death or disability, or for cause prior to a change of
control or more than twelve
months after a change of control, and he signs and does not revoke a standard release of
claims with us, then he shall be entitled to receive continuing payments of severance pay at a rate
equal to his Base salary rate, as then in effect, for a period of twelve months from the date of
such termination, to be paid periodically in accordance with our normal payroll policies. In
addition, if his employment with us terminates other than voluntary, by reason of his death or
disability, or for cause prior to the one year anniversary of the Effective Date, 25% of the any
unvested options shall immediately vest and become exercisable for twelve months following his
termination. If Mr. Lams employment with us terminates other than voluntarily, by reason of his
death or disability, or for cause within twelve months after a change of control, then he shall be
entitled to (i) receive continuing payments of severance pay at a rate equal to his base salary
rate, as then in effect, for a period of twelve months from the date of such termination, to be
paid periodically and (ii) 50% of any unvested options shall vest and become exercisable for twelve
months following his termination.
74
Mr. Camarda and the Company entered into an employment agreement on or about October 7,
2005. The employment agreement provides that Mr. Camarda serves as our Senior Vice President of
Operations. Mr. Camardas salary is $235,000 per year. If Mr. Camardas employment with us
terminates other than voluntarily, by reason of his death or disability, or for cause prior to a
change of control or more than six months after a change of control, and he signs and does not
revoke a standard release of claims with us, then he shall be entitled to receive continuing
payments of severance pay at a rate equal to his Base salary rate, as then in effect, for a period
of six months from the date of such termination. In addition, if his employment with us terminates
other than voluntary, by reason of his death or disability, or for cause prior to the one year
anniversary of the Effective Date, 25% of any unvested options shall immediately vest and become
exercisable for six months following his termination. If his employment with us terminates other
than voluntarily, by reason of his death or disability, or for cause within six months after a
change of control, then he shall be entitled to (i) receive continuing payments of severance pay at
a rate equal to his base salary rate, as then in effect, for a period of six months from the date
of such termination and (ii) 50% of any unvested options shall vest and become exercisable for six
(6) months following his termination.
Option Reprice (Ten Year Option Repricings):
The following table sets forth information with respect to the individual names in the
Executive Compensation table concerning options that have been repriced in the past ten years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market |
|
Exercise |
|
|
|
|
|
Length Of |
|
|
|
|
Option/ |
|
Value At |
|
Price At |
|
New |
|
Original Option |
|
|
Date Of |
|
SAR Shares |
|
Time Of |
|
Time Of |
|
Exercise |
|
Term At Time Of |
Name |
|
Repricing |
|
Repriced |
|
Repricing |
|
Repricing |
|
Price |
|
Repricing (9/6/2005) |
Cleveland, Lee E. |
|
9/6/2005 |
|
|
200,000 |
|
|
$ |
1.9000 |
|
|
$ |
7.8000 |
|
|
$ |
1.9000 |
|
|
7 Years 361 Days |
Cleveland, Lee E. |
|
9/6/2005 |
|
|
100,000 |
|
|
$ |
1.9000 |
|
|
$ |
4.4100 |
|
|
$ |
1.9000 |
|
|
9 Years 94 Days |
Hawron, Richard |
|
9/6/2005 |
|
|
50,000 |
|
|
$ |
1.9000 |
|
|
$ |
4.4600 |
|
|
$ |
1.9000 |
|
|
9 Years 102 Days |
Wallin, Clyde R. |
|
9/6/2005 |
|
|
200,000 |
|
|
$ |
1.9000 |
|
|
$ |
6.4800 |
|
|
$ |
1.9000 |
|
|
8 Years 211 Days |
Report of the Board on the Option Reprice Program
On September 6, 2005 we repriced our outstanding employee stock options with the exception
that options granted pursuant to the Sipex Corporation 1999 Stock Plan options granted to Ralph
Schmitt, our CEO, and to our other directors were not repriced. In addition, we did not reprice
any outstanding options with previously existing exercise prices below $1.90, which was the fair
market value of our common stock at the close of business on September 6, 2005.
As a result of this repricing, approximately 2.5 million options, with an estimated
weighted-average exercise price of $6.22 were amended to provide for an exercise price of $1.90 per
share.
Our board of directors approved the repricing of options for compensatory purposes, to
motivate high levels of performance and provide an effective means of recognizing and incentivizing
employee contributions to our success. Many of our outstanding options as of the time of the
repricing had exercise prices significantly higher than the then-current price of our common stock.
The board of directors believed that, at their original exercise prices, the disparity between the
original exercise price of these options and recent market prices for our common stock did not
provide meaningful incentives to employees holding these options. Our board of directors approved
the repricing to provide our employees with the benefit of holding options that over
time may have a greater potential to increase in value, which it believes creates better
performance and retention incentives for employees and thereby increases stockholder value, and is
therefore deemed by our board of directors to be in our best interest and the best interest of our
stockholders.
Respectfully submitted by:
Lionel Olmer
Thomas Redfern
Douglas McBurnie
Ralph Schmitt
John Arnold
Joseph Consoli
Brian Hilton
75
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters:
The following table sets forth as of December 31, 2005 information to the best of our
knowledge, with respect to the beneficial ownership of our common stock by (i) each person who is
known to us to be the beneficial owner of more than five percent of our common stock, (ii) each of
our directors, or nominees for directors, (iii) each of our executive officers named in the Summary
Compensation Table under the caption Executive Compensation Summary below, and (iv) all of our
directors and executive officers as a group. Except as otherwise indicated in the footnotes to the
table, the beneficial owners listed have sole voting and investment power (subject to community
property laws where applicable) as to all of the shares beneficially owned by them. As of December
31, 2005, there were 35,550,378 shares of common stock outstanding.
|
|
|
|
|
|
|
|
|
|
|
Total Amount and Nature of |
|
|
Name and Address of Beneficial Owner (1) |
|
Beneficial Ownership |
|
Percent of Class |
Alonim Investments, Inc. (2) |
|
|
16,296,200 |
|
|
|
45.8 |
% |
237 Hymus Blvd. Montreal (Pointe-Claire), Quebec H9R 5C7 Canada |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kennedy Capital Management, Inc.(3) |
|
|
2,718,967 |
|
|
|
7.6 |
% |
10829 Olive Blvd. St. Louis, MO 63141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wasatch Advisors, Inc.(4) |
|
|
1,899,690 |
|
|
|
5.3 |
% |
150 Social Hall Avenue, 4th Floor, Salt Lake city, UT 84111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dimensional Fund Advisors(5) |
|
|
1,782,770 |
|
|
|
5.0 |
% |
1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph T. Rauschmayer (6) |
|
|
362,854 |
|
|
|
1.01 |
% |
|
|
|
|
|
|
|
|
|
Douglas M. McBurnie (7) |
|
|
261,625 |
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
Lee E. Cleveland (8) |
|
|
141,400 |
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
Richard Hawron (9) |
|
|
125,191 |
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
Clyde R. Wallin (10) |
|
|
112,500 |
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
Lionel H. Olmer (11) |
|
|
70,722 |
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
Joseph C. Consoli (12) |
|
|
48,750 |
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
John D. Arnold (13) |
|
|
41,625 |
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
Brian Hilton (14) |
|
|
28,125 |
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
Thomas P. Redfern (15) |
|
|
20,625 |
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
Kevin W. Plouse (16) |
|
|
15,500 |
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
Ralph Schmitt |
|
|
|
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
Joel J. Camarda |
|
|
|
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
Edward M. Lam |
|
|
|
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
All directors and executive officers as
a group (11 persons) |
|
|
1,228,917 |
|
|
|
3.3 |
% |
|
|
|
* |
|
Less than 1% of Common Stock |
76
|
|
|
(1) |
|
Unless otherwise indicated, to our knowledge, each person listed above has sole voting
and investment power with respect to the shares and maintains a mailing address at:
c/o SIPEX Corporation, 233 South Hillview Drive, Milpitas, CA 95035. |
|
(2) |
|
Based solely on information provided in a Schedule 13G/A filed with the SEC
on January 26, 2006, Alonim Investments had sole dispositive power of 16,296,200
shares and sole voting power of 16,296,200 shares. |
|
(3) |
|
Based solely on information provided in a Schedule 13G filed with the SEC
on February 14, 2006, Kennedy Capital Management, Inc. had sole dispositive power
of 2,718,967 shares,and sole voting power of 2,718,967 shares. |
|
(4) |
|
Based solely on information provided in a Schedule 13G filed with the SEC
on February 14, 2005, Wasatch Advisors, Inc. and had sole dispositive power of
1,899,690 shares, and sole voting power of 1,899,690 shares. |
|
(5) |
|
Based solely on information provided in a Schedule 13G/A filed with the SEC
on February 6, 2006, Dimensional Fund Advisors Inc. had sole dispositive power
of 1,782,770 shares and sole voting power of 1,782,770. |
|
(6) |
|
Based on information provided in a Form 4 filed with the SEC on May 21, 2004.
Any subsequent transactions were not required to be reported on a Form 4 pursuant
to Section 16b-a of the SEC, and to the best of our knowledge were same-day sale transactions
and did not change the number of shares owned. Also includes 358,854 shares issuable
pursuant to stock options which are exercisable prior to March 1, 2006. |
|
(7) |
|
Based on information provided in a Form 4 filed with the SEC on November 4, 2002
Any subsequent transactions were not required to be reported on a Form 4 pursuant to Section 16b-a of the
SEC, and to the best of our knowledge were same-day sale transactions and did not change the number of
shares owned. Also includes 246,625 shares issuable pursuant to stock options which are exercisable prior
to March 1, 2006. |
|
(8) |
|
Based on information provided in a Form 4 filed with the SEC on October 1, 2005.
Also includes 125,000 shares issuable pursuant to stock options which are exercisable prior to March 1, 2006. |
|
(9) |
|
Based on information provided in a Form 3 filed with the on May 11, 2004. Also includes 105,191 shares issuable pursuant to stock options which are exercisable prior to
March 1, 2006. |
|
(10) |
|
Includes 112,500 shares issuable pursuant to stock options which are exercisable prior to March 1, 2006. |
|
(11) |
|
Based on information provided in a Form 4 filed with the SEC on September 27, 2000.
Also includes 68,722 shares issuable pursuant to stock options which are exercisable prior to March 1, 2006. |
|
(12) |
|
Includes 48,750 shares issuable pursuant to stock options which are exercisable prior to March 1, 2006. |
|
(13) |
|
Based on information provided in a Form 4 filed with the SEC on March 2, 2004. Also includes
35,625 shares issuable pursuant to stock options which are exercisable prior to March 1, 2006. |
|
(14) |
|
Includes 28,125 shares issuable pursuant to stock options which are exercisable prior to March 2, 2005. |
|
(15) |
|
Includes 20,625 shares issuable pursuant to stock options which are exercisable prior to March 2, 2005. |
|
(16) |
|
Based on information provided in a Form 4 filed with the SEC on June 14, 2004. Ay subsequent
transactions were not required to be reported on a Form 4 pursuant to Section 16b-a of the SEC, and to the
best of our knowledge were same-day sale transactions and did not change the number of shares owned. |
77
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2005 about the securities
authorized for issuance under our equity compensation plans, consisting of the 1994 Stock Option
and Incentive Plan, 1996 Stock Option Plan, 1996 Non-Employee Director Stock Option Plan, 1997
Stock Option Plan, the 1999 Stock Option Plan, the 2000 Non-Qualified Stock Option Plan and the
2002 Nonstatutory Stock Option Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
Number of securities to be |
|
|
Weighted-average |
|
|
future issuance under |
|
|
|
issued upon exercise of |
|
|
exercise price of |
|
|
equity compensation plans |
|
|
|
outstanding options, |
|
|
outstanding options, |
|
|
(excluding securities |
|
Plan Category |
|
warrants and rights |
|
|
warrants and rights |
|
|
reflected in column (a)) |
|
Equity compensation plans
approved by security holders (1) |
|
|
3,573,846 |
|
|
$ |
3.76 |
|
|
|
709,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not
approved by stockholders (1) |
|
|
2,943,274 |
|
|
$ |
1.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,517,120 |
|
|
$ |
2.87 |
|
|
|
709,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Pursuant to an option reprice program approved by the board of directors on August 29, 2005, an
aggregate of 2,455,966 option shares outstanding under our 1996, 1997, 2000 and 2002 Plans, as well
as stand alone option agreements were repriced on September 6, 2005 to $1.90 per share to provide
for exercise prices equal to the closing price of our common stock as disclosed on the Pink Sheets
on that date. The terms and conditions of the original option agreements remained unchanged. |
Above table does not include approved 1996 Employee Stock Purchase Plan in which 244,441
shares are currently available to issue, of which 200,000 shares are not registered.
2000 Non-Qualified Stock Option Plan
In April 2000, our board of directors adopted the 2000 Nonqualified Stock Option Plan pursuant
to which non-statutory stock options for up to 1,000,000 shares of common stock may be granted to
employees, consultants or advisors. The 2000 Nonqualified Stock Option Plan was filed as an exhibit
to our annual report on Form 10-K for the year ended December 31, 2000 (File No. 000-27892) as
filed with the SEC on March 23, 2001. In October 2002, our board of directors adopted an amendment
to the 2000 Nonqualified Stock Option Plan to decrease the number of shares reserved under the plan
by 328,010 shares, from 1,000,000 shares to 671,990 shares.
Our board of directors is authorized to administer the 2000 Nonqualified Stock Option Plan.
Our board of directors is authorized to adopt rules and regulations of the 2000 Nonqualified Stock
Option Plan and to interpret the provisions of the 2000 Nonqualified Stock Option Plan. Our board
of directors may amend or terminate the 2000 Nonqualified Stock Option Plan at any time. Our board
of directors has delegated to the compensation committee authority to administer certain aspects of
the 2002 Nonqualified Stock Option Plan.
Our board of directors and our compensation committee have the authority to select the
recipients of options under the 2000 Nonqualified Stock Option Plan and determine (i) the number of
shares of common stock covered by such options, (ii) the dates upon which such options become
exercisable, (iii) the exercise price of options (which may not be less than the fair market value
of the common stock on the date of grant), and (iv) the duration of the options (which may not
exceed 10 years).
2002 Nonstatutory Stock Option Plan
In September 2001, our board of directors adopted the 2002 Nonstatutory Stock Option Plan
pursuant to which non-statutory stock options for up to 1,000,000 shares of common stock may be
granted to employees, consultants or advisors. The 2002 Nonstatutory Stock Option Plan was filed
with our registration statement on Form S-8 (File No. 333-73880) as filed with the SEC on November
21, 2001. In October 2002, our board of directors adopted an amendment to the 2002 Nonstatutory
Stock Option Plan to increase the number of shares reserved under the plan by 1,000,000 shares,
from 1,000,000 shares to 2,000,000 shares.
78
Our board of directors is authorized to administer the 2002 Nonstatutory Stock Option Plan.
Our board of directors is
authorized to adopt, amend and repeal the rules and regulations of the 2002 Nonstatutory Stock
Option Plan and to interpret the provisions of the 2002 Nonstatutory Stock Option Plan. Our board
of directors may amend, suspend or terminate the 2002 Nonstatutory Stock Option Plan at any time.
Our board of directors has delegated to the compensation committee authority to administer certain
aspects of the 2002 Nonstatutory Stock Option Plan.
Our board of directors and our compensation committee have the authority to select the
recipients of options under the 2002 Nonstatutory Stock Option Plan and determine (i) the number of
shares of common stock covered by such options, (ii) the dates upon which such options become
exercisable, (iii) the exercise price of options, and (iv) the duration of the options (which may
not exceed 10 years).
Item 13. Certain Relationships and Related Transactions
Future Electronics
Future is a related party and its affiliates own approximately 16.3 million shares or 46% of
our outstanding common stock as of December 31, 2005. We have a distribution agreement that
provides for Future to act as our sole distributor for certain products within North America and
Europe. Sales to Future are made under an agreement that provides protection against price
reduction for its inventory of our products. We recognize revenue on sales to Future under the
distribution agreement when Future sells the products to end customers. Future has historically
accounted for a significant portion of our revenues. It is our largest distributor worldwide and
accounted for 44%, 39% and 21% of our total net sales for the years 2005, 2004 and 2003,
respectively. We anticipate that sales of our products to Future will continue to account for a
significant portion of its revenues.
While Future is not currently represented on the our board of directors, nor do they have
contractual rights to board representation, from time to time, Futures senior management meets
with our senior management to discuss strategic direction, sales and marketing considerations and
other issues facing us. In addition, Futures sales and marketing personnel frequently meet with
our sales and marketing staff regarding sales prospects and other concerns related to the market
for our products in a manner consistent with Futures practices with our other distribution
partners. Future has also provided information technology, accounting and other supports to us.
From time to time, Future provides services and/or incurs expenses on our behalf. The fair
value of the unreimbursed expenses and uncompensated services rendered by Future has been recorded
in our consolidated financial statements as capital contributions totaling $17,000, $100,000 and
$202,000 for the years ended December 31, 2005, January 1,
2005 and December 31, 2003, respectively. In addition, we
recorded $44,000 of reimbursement expense for marketing promotional
materials to future for the year ended December 31, 2005.
On
September 27, 2002, we sold the First Note with an attached warrant to an affiliate of
Future for an aggregate cash amount of $12.0 million. We recorded the First Note at $10.4 million
and the warrant at $1.6 million (recorded to additional paid-in capital) based upon their estimated
fair values at the date of issuance using the Black-Scholes option pricing model. The First Note
paid a 5.75% coupon and was convertible after one year into our common stock at a conversion price
of $7.50 per share. Following the one year anniversary of the issuance of the First Note, we could
require the conversion of the First Note in installments if for a period of time our common stock
traded at a price in excess of 150% of the conversion price of $7.50. The private placement also
included a warrant to purchase 900,000 shares of our common stock exercisable for a two-year period
beginning on the one-year anniversary of the date of issuance. The exercise price for the warrant
was $2.9458. The First Note was secured by a Deed of Trust on our land and building at Milpitas,
California.
On June 20, 2003, we sold the Second Note to an affiliate of Future for $10.3 million (net of
issuance costs of $216,000). The Second Note paid a 1.5% coupon rate per annum. The principal
amount of the Second Note was contingently convertible into a maximum of 3.0 million shares of our
common stock at a conversion price of $3.52 per share, subject to Future attaining predetermined
annual and/or cumulative sales levels over a three-year period. Accordingly, in accordance with
EITF Issue No. 01-1, Accounting for a Convertible Instrument Granted or Issued to a Nonemployee
for Goods or Services or a Combination of Goods or Services and Cash, we were required to
recognize non-cash charges against net sales for the fair value of these conversion rights earned
by Future each period relative to the sales target. The fair value of the conversion rights has
been measured pursuant to FASB No. 123, Accounting for Stock-Based Compensation and EITF Issue
No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. The Second Note was secured by a
Deed of Trust on our land and building at Milpitas, California as well as our all other assets,
except for our intellectual property. In connection with the issuance of the Second Note, we
entered into a standstill agreement with affiliates of Future, pursuant to which these security
holders agreed not to acquire more than 35% of our stock on a fully
diluted basis. Also, we entered into a voting agreement with an affiliate of Future, pursuant
to which this security holder agreed that the additional shares of our common stock issuable upon
conversion of the Second Note (i) will not be voted or (ii) will be voted in the same proportion as
the votes cast by our all other stockholders.
79
During
the fourth quarter of 2003, we entered into an agreement with the affiliates of
Future to convert the First Note and Second Note into common stock subject to obtaining regulatory
approval. In connection with the agreement we accelerated the conversion rights of the Second Note
and received $3.0 million and forgiveness of interest on both notes of $411,000. As a consequence,
non-cash charges of $14.1 million have been recognized as a reduction to sales in 2003 representing
the fair value of the conversion rights earned by Future as well as the net cost from terminating
the sales incentive feature of the Second Note (thereby vesting the conversion rights). As of
December 31, 2003, affiliates of Future held approximately
8.1 million shares of our common
shares or approximately 29%. Upon the regulatory approval in February 2004, the affiliates of
Future exercised their conversion rights to exchange both the First Note and the Second Note for
4.6 million of our common shares, As a result of the conversion, all the related collateral
and sales incentives had been waived. The warrant to purchase 900,000
shares of our common
stock for $2.9458 per share had not been exercised as of December 31, 2003.
During February 2004, the affiliates of Future exercised the conversion rights to convert
their notes into our common stock for an additional 4.6 million shares, bringing their ownership up
to 12.7 million shares, or approximately 39% of our outstanding capital stock. On August 5, 2004,
the affiliates of Future exercised a warrant to purchase 900,000 shares of our common stock. The
warrant was issued to the affiliates of Future in conjunction with the $12 million convertible note
issued in 2002, which was converted into our common stock in February 2004. In connection with the
warrant exercise, we agreed to modify the standstill restrictions on the affiliates of Future to
enable them to hold the lesser of (i) 49% of our issued and outstanding voting capital stock and
(ii) 42.5% of our issued and outstanding voting capital stock, measured on a Fully Diluted Basis,
as defined using the following equation: The numerator includes all voting capital stock and
securities convertible into or exercisable for voting capital stock held by the affiliates of
Future and the denominator is the greater of (i) all shares of our voting capital stock outstanding
or issuable upon the exercise or conversion of vested securities convertible into or exercisable
for voting capital stock and (ii) 40,000,000 (as adjusted for stock dividends, splits or like
transactions). On August 9, 2004, the affiliates purchased 2.5 million shares of our common stock
on the open market. As of December 31, 2005, affiliates of Future, our largest distributor, held
approximately 16.3 million shares of our common stock, or approximately 46%, of our outstanding
common stock.
We recorded interest expense related to the debt with Future totaling $90,000 and $1.0 million
for the years ended January 1, 2005 and December 31, 2003, respectively. No interest expense was recorded for the year ended December 31, 2005 as both convertible notes were extinguished and converted into
4.6 million of our common shares as of February 18, 2004.
On January 19, 2006, we announced the completion of a $7.0 million private loan financing in
which we issued a 9% secured note with convertible interest due January 19, 2008 to an affiliate of
Future. The note was secured by a deed of trust on our headquarters property located in Milpitas,
California. Accrued interest on the note was convertible into our common stock at the option of the
holder on January 19, 2007 and January 19, 2008. The conversion price would be the volume weighted
average price for sales of the common stock during the 20 trading days prior to the date of
conversion. The holder of the note could require repayment of the note in the event of a change of
control of Sipex or the sale of the property subject to the deed of trust. The note was subject to
customary events of default. Interest on the note accrued at 9% compounded quarterly and payable
at maturity. The note was repaid in March 2006. (See Note 2 to our consolidated financial
statements regarding Related Parties).
On May 16, 2006, Sipex placed $30.0 million of its 5.5% Convertible Senior Notes due 2026 and
related warrants in a private placement transaction to accredited investors in reliance on
Regulation D under the Securities Act. Rodfre purchased 50% of the Convertible Senior 2006 Notes
or $15.0 million aggregate principal amount being placed in this offering. The 2006 Notes mature on
May 18, 2026 and bear interest at an annual rate of 5.5% payable semi-annually on May 15 and
November 15 of each year, beginning on November 15, 2006. We may pay interest in cash or, solely
at our option, in shares of our common stock. The 2006 Notes are convertible into our common stock
at any time prior to maturity, initially at a conversion price of $2.68 per share, subject to
adjustment upon certain events, including, among other things, dividends, stock splits and
recapitalizations. If fully converted, the principal amount of the 2006 Notes would convert into
11,194,030 shares of our common stock, out of which 5,597,015 shares would be owned by Rodfre.
As part of the foregoing transaction, we issued warrants to purchase an aggregate of 1,679,104
shares of our common stock to the investors, including warrants for 839,552 shares issued to
Rodfre. Each warrant is exercisable for one share of our common stock at an initial exercise price
of $3.216 per share, subject to adjustment upon certain events, including, among other things,
dividends, stock splits and recapitalizations. The warrants are exercisable (in whole or in part)
at any time on or before May 18, 2011, unless earlier terminated at the option of Sipex.
A more detailed description of the terms of the $30.0 million Note is described in Note 16 to
consolidated financial statements relating to subsequent events.
80
Item 14. Principal Accounting Fees and Services
Fees Paid to Deloitte & Touche LLP
Deloitte & Touche LLP, an independent registered public accounting firm, has been our auditors
since 2003. The aggregate fees billed or to be billed for the following professional services are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
Deloitte & Touche LLP |
|
2005 |
|
|
2004 |
|
Audit fees (1) |
|
$ |
1,911 |
|
|
$ |
2,384 |
|
Audit related fees (2) |
|
|
|
|
|
|
|
|
Tax fees (3) |
|
|
20 |
|
|
|
|
|
All other fees (4) |
|
|
129 |
|
|
|
7 |
|
|
|
|
|
|
|
|
Total |
|
$ |
2,060 |
|
|
$ |
2,391 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Audit fees were for professional services rendered in connection with the audit of our annual
financial statements and the review of our quarterly financial statements. |
|
(2) |
|
Deloitte & Touche LLP did not perform any audit related services in 2005 and 2004. |
|
(3) |
|
Deloitte & Touche LLP performed tax consulting services in connection with the Silan deal in 2005. |
|
(4) |
|
All other fees were for professional services rendered other than audit, audit-related or tax
fees. For 2004, the fees were primarily for a Form S-8 filing. The fees for 2005 primarily related
to our internal investigation. |
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Auditors
In accordance with the charter of our audit committee, the audit committee pre-approves all
audit and non-audit services provided by our independent auditors, including the estimated fees and
other terms of any such engagement. These services may include audit services, audit-related
services, tax services and other services. Any pre-approval is detailed as to the particular
service or category of services and is subject to a specific budget. Our audit committee considers
whether such audit or non-audit services are consistent with the SECs rules on auditor
independence. The audit committee has determined that the services provided by Deloitte & Touche as
set forth herein are compatible with maintaining Deloitte & Touches independence.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 10-K:
(a) The following documents are filed as part of this Annual Report on Form 10-K:
|
1. |
|
Consolidated
Financial Statements. The following consolidated financial statements of
the Company and Reports of Independent Registered Public Accounting Firm are incorporated in Item
8 of this report. |
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2005 and January 1, 2005
Consolidated Statements of Operations for the Years Ended December 31, 2005, January 1,
2005 and December 31, 2003
Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss) for the
Years Ended
December 31, 2005, January 1, 2005 and December 31, 2003
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, January 1,
2005 and
December 31, 2003
Notes to consolidated financial statements
|
2. |
|
Consolidated Financial Statement Schedules. Consolidated financial statements
schedules have been omitted because they are either not required or are included in the
consolidated financial statements or the notes thereto. |
|
|
3. |
|
Exhibit: The exhibits listed in the accompanying index to
exhibits are filed or incorporated by reference as part of this
Form 10-K. |
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on August 17, 2006.
|
|
|
|
|
|
SIPEX CORPORATION
|
|
|
By: |
/s/ RALPH SCHMITT
|
|
|
|
Ralph Schmitt |
|
|
|
Chief Executive Officer and Director |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
date indicated.
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Name |
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Title |
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Date |
/s/ RALPH SCHMITT
Ralph Schmitt |
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Chief Executive Officer and Director
(Principal Executive Officer)
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August 17, 2006 |
/s/ CLYDE R. WALLIN
Clyde R. Wallin |
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Chief Financial Officer and
Senior Vice President, Finance,
(Principal Financial and Accounting Officer)
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August 17, 2006 |
/s/ JOHN D. ARNOLD
John D. Arnold |
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Director
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August 17, 2006 |
/s/ JOSEPH C. CONSOLI
Joseph C. Consoli |
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Director
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August 17, 2006 |
/s/ BRIAN HILTON
Brian Hilton |
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Chairman of the Board of Directors
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August 17, 2006 |
/s/ DOUGLAS M. MCBURNIE
Douglas M. McBurnie |
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Director
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August 17, 2006 |
/s/ Lionel H. Olmer
Lionel H. Olmer |
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Director
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August 17, 2006 |
/s/ THOMAS P. REDFERN
Thomas P. Redfern |
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Director
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August 17, 2006 |
82
EXHIBIT INDEX
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Exhibit |
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Number |
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Description |
2.1
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Agreement and Plan of Reorganization dated October 21, 1999
by and among the Company, Calogic, CAT Acquisition
Corporation I and the other signatories thereto (previously
filed as Exhibit 2.1 to the Companys Form 8-K filed on
December 8, 1999 and incorporated herein by reference) |
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2.2
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Amendment No. 1 to the Agreement and Plan of Reorganization
dated November 23, 1999 by and among the Company, Calogic,
CAT Acquisition Corporation I and the other signatories
thereto (previously filed as Exhibit 2.2 to the Companys
Form 8-K filed on December 8, 1999 and incorporated herein by
reference) |
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3.1
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Amended and Restated Certificate of Incorporation
(incorporated herein by reference from the Companys
Registration Statement on Form 8-A filed with the Securities
and Exchange Commission on October 28, 2003) |
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3.2
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Bylaws (incorporated herein by reference from the Companys
Registration Statement on Form 8-A filed with the Securities
and Exchange Commission on October 28, 2003) |
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4.2
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Form of Indemnification Agreement for directors and officers
(filed as Exhibit 4.2 to the Companys Registration Statement
on Form S-1, File No. 333-1328, and incorporated herein by
reference) |
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10.1**
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1988 Non-Statutory Stock Option Plan (filed as Exhibit 10.1
to the Companys Registration Statement on Form S-1, File No.
333-1328, and incorporated herein by reference) |
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10.2**
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1991 Non-Statutory Stock Option Plan (filed as Exhibit 10.2
to the Companys Registration Statement on Form S-1, File No.
333-1328, and incorporated herein by reference) |
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10.3**
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1993 Stock Option and Incentive Plan (filed as Exhibit 10.3
to the Companys Registration Statement on Form S-1, File No.
333-1328, and incorporated herein by reference) |
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10.4**
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1994 Stock Option and Incentive Plan (filed as Exhibit 10.4
to the Companys Registration Statement on Form S-1, File No.
333-1328, and incorporated herein by reference) |
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10.5**
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1996 Incentive Stock Option Plan (filed as Exhibit 10.5 to
the Companys Registration Statement on Form S-1, File No.
333-1328, and incorporated herein by reference) |
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10.6
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1996 Non-Employee Director Stock Option Plan (filed as
Exhibit 10.6 to the Companys Registration Statement on Form
S-1, File No. 333-1328, and incorporated herein by reference) |
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10.7**
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1996 Employee Stock Purchase Plan (filed as Exhibit 10.7 to
the Companys Registration Statement on Form S-1, File No.
333-1328, and incorporated herein by reference) |
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10.8**
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Employment Agreement dated August 19, 2002 by and between the
Company and Walid Maghribi (filed as Exhibit 99.1 to the
Companys 8K filed on August 23, 2002, and incorporated
herein by reference) |
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10.9**
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Employment Agreement, as of the 14th day of May, 1999,
between the Company and James E. Donegan (filed as Exhibit
10.2 to the Companys Quarterly Report on Form 10-Q for the
quarter ended July 3, 1999, and incorporated herein by
reference) |
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10.10**
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Employment Agreement, as of the 14th day of May, 1999,
between the Company and Raymond W.B. Chow (filed as Exhibit
10.4 to the Companys Quarterly Report on Form 10-Q for the
quarter ended July 3, 1999, and incorporated herein by
reference) |
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10.11
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Form of Sales Representative Agreement (filed as Exhibit
10.15 to the Companys Registration Statement on Form S-1,
File No. 333-1328, and incorporated herein by reference) |
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10.12
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Form of Sales Representative Agreement (previously filed as
an exhibit to the Companys Annual Report on Form 10-K for
the year ended December 31, 1998 and incorporated herein by
reference) |
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10.13**
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1997 Incentive Stock Option Plan (filed as Appendix A to the
Companys definitive Proxy Statement for the Special Meeting
In Lieu Of Annual Meeting Of Shareholders held May 30, 1997
and incorporated herein by reference) |
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10.14**
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Sipex Corporation 1999 Stock Plan (filed as Appendix A to the
Companys Definitive Proxy Statement on Schedule 14A, No.
1000-27897, and incorporated herein by reference) |
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10.15*
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License Agreement between Timex Corporation and Sipex
Corporation dated July 1, 1997 (previously filed as an
Exhibit to the Companys Annual Report on Form 10-K for the
year ended December 31, 1997, and incorporated herein by
reference) |
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Exhibit |
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Number |
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Description |
10.16**
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Employment Agreement, dated as of the 9th day of August, 1999
between the Company and Stephen E. Parks (filed as Exhibit
10.1 to the Companys Quarterly Report on Form 10-Q for the
quarter ended July 3, 1999, and incorporated herein by
reference) |
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10.17**
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2000 Non-Qualified Stock Option Plan (filed as an exhibit to
the Companys Annual Report on Form 10-K for the year ended
December 31, 2000, and incorporated herein by reference) |
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10.18**
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2002 Nonstatutory Stock Option Plan (filed as Exhibit 4.3 to
the Companys Registration Statement on Form S-8, File No.
73880, and incorporated herein by reference) |
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10.19
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Deed of Reconveyance and Termination of Lease (filed as
Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001, and incorporated herein
by reference) |
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10.20**
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Employment Agreement dated February 2, 2003 by and between
the Company and Phillip A. Kagel (filed as an Exhibit to the
Companys Annual report on Form 10-K for the year ended
December 31, 2002, and incorporated herein by reference) |
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10.21**
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Employment Agreement dated September 11, 2002 by and between
the Company and Joseph T. Rauschmayer (filed as an Exhibit to
the Companys Annual report on Form 10-K for the year ended
December 31, 2002, and incorporated herein by reference) |
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10.22**
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Employment Agreement dated August 23, 2002 by and between the
Company and Kevin Plouse (filed as an Exhibit to the
Companys Annual report on Form 10-K for the year ended
December 31, 2002, and incorporated herein by reference) |
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10.23
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Securities Purchase Agreement dated as of September 27, 2002,
by and between the Company and S&F Financial Holdings, Inc.
(filed as Exhibit 99.2 to the Companys 8-K filed on October
1, 2002, and incorporated herein by reference) |
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10.24
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Sipex Corporation 5.75% Convertible Secured Note due 2007
(filed as Exhibit 99.3 to the Companys 8-K filed on October
1, 2002, and incorporated herein by reference) |
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10.25
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Warrant to purchase 900,000 shares of common stock issued to
S&F Financial Holdings, Inc. (filed as Exhibit 99.4 to the
Companys 8-K on October 1, 2002, and incorporated herein by
reference) |
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10.26
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Deed of Trust with Assignment of Rents dated as of September
27, 2002, between the Company, First America Title Insurance
Company and S&F Financial Holdings, Inc. (filed as Exhibit
99.5 to the Companys 8-K on October 1, 2002, and
incorporated herein by reference) |
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10.27
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Worldwide Authorized Distributor Market Price Agreement dated
July 22, 1993, by and between the Company and Future
Electronics Incorporated (filed as an Exhibit to the
Companys Annual report on Form 10-K for the year ended
December 31, 2002, and incorporated herein by reference) |
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10.28
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Addendum A dated February 7, 2003 to Worldwide Authorized
Distributor Market Price Agreement dated July 22, 1993, by
and between the Company and Future Electronics Incorporated
(filed as an Exhibit to the Companys Annual report on Form
10-K for the year ended December 31, 2002, and incorporated
herein by reference) |
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10.29
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Securities Purchase Agreement dated as of May 27, 2003, by
and between the Company and Alonim Investments Inc.
(previously filed as Exhibit 99.1 to the Companys Form 8-K
filed on May 29, 2003 and incorporated herein by reference) |
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10.30
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Form of Company Convertible Secured Note to be issued to
Alonim Investments Inc. (previously filed as Exhibit 99.1 to
the Companys Form 8-K filed on May 29, 2003 and incorporated
herein by reference) |
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10.31
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Form of Registration and Standstill Agreement by and between
the Company and Alonim Investments Inc., and its affiliates
which are signatories thereto, namely: Future Electronics
Inc., and S&F Financial Holdings Inc. (previously filed as
Exhibit 99.1 to the Companys Form 8-K filed on May 29, 2003
and incorporated herein by reference) |
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10.32
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Form of Voting Agreement by and between the Company and
Alonim Investments Inc. (previously filed as Exhibit 99.1 to
the Companys Form 8-K filed on May 29, 2003 and incorporated
herein by reference) |
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10.33
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Form of Security Agreement by and between the Company and
Alonim Investments Inc. (previously filed as Exhibit 99.1 to
the Companys Form 8-K filed on May 29, 2003 and incorporated
herein by reference) |
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10.34
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Form of Deed of Trust to be issued to Alonim Investments Inc.
(previously filed as Exhibit 99.1 to the Companys Form 8-K
filed on May 29, 2003 and incorporated herein by reference) |
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10.35
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Modification Agreement dated as of December 23, 2003 by and
among the Company and Rodfre Lending LLC and certain of its
affiliates (previously filed as Exhibit 99.1 to the Companys
Form 8-K filed on December 24, 2003) |
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Exhibit |
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Number |
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Description |
10.36
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Separation Agreement and Release as of 12/17/04 (previously
filed as Exhibit 99.2 to the Companys Form 8-K filed on
12/23/04 and incorporated herein by reference) with Mr.
Maghribi the former President and Chief Executive Officer of
Sipex and a former member of the Board of Directors of Sipex |
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10.37
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Letter agreement as of 12/17/04 (previously filed as Exhibit
99.3 to the Companys Form 8-K filed on 12/23/04 and
incorporated herein by reference) concerning the terms of Mr.
McBurnies employment with Sipex |
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10.38
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Letter agreement as of 6/7/05 (previously filed as Exhibit 99
to the Companys Form 8-K filed on 6/30/05 and incorporated
herein by reference) concerning the terms of the newly
appointed Chief Executive Officer Ralph Schmitt |
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10.39
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Loan and Security Agreement as of 7/21/05, (previously filed
as Exhibit 99.3 to the Companys Form 8-K filed on 7/25/05
and incorporated herein by reference) with Silicon Valley
Bank |
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10.40
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Bonus plan as of August 29, 2005, (previously filed as
Exhibit 99.1 to the Companys Form 8-K filed on 9/2/05 and
incorporated herein by reference) for an executive bonus plan
for the remainder of 2005 for certain of its officers |
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10.41
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Separation Agreement and General Release as of 9/2/05
(previously filed as Exhibit 10.1 to the Companys Form 8-K
filed on 9/2/05 and incorporated herein by reference) with
Joseph T. Rauschmayer, Senior Vice President of Operations |
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10.42
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Grant of options (previously filed in the Companys Form 8-K
filed on 9/25/05 and incorporated herein by reference) to Mr.
Wallin CFO and Mr. Hawron Sr. VP World Wide Sales |
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10.43
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Separation Agreement and General Release as of 4/26/05
(previously filed as Exhibit 10.1 to the Companys Form 8-K
filed on 9/15/05 and incorporated herein by reference) with
Kevin Plouse |
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10.44
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Letter agreement as of 9/12/05 (previously filed as Exhibit
10.1 to the Companys Form 8-K filed on 9/23/05 and
incorporated herein by reference) with Mr. Edward Lam joining
Sipex as the new Senior Vice President of Marketing and
Business Development |
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10.45
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Letter agreement as of 10/7/05 (previously filed as Exhibit
10.1 to the Companys Form 8-K filed on 10/12/05 and
incorporated herein by reference) with Joel Camarda joining
Sipex as Senior Vice President of Operations |
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10.46
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Amendment No. 1 as of 10/7/05, (previously filed as Exhibit
10.1 to the Companys Form 8-K filed on 10/7/05 and
incorporated herein by reference) to the Loan and Security
Agreement with Silicon Valley Bank, dated July 21, 2005 |
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10.47
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Amendment No. 2 as of 11/10/05, (previously filed as Exhibit
10.1 to the Companys Form 8-K filed on 11/16/05 and
incorporated herein by reference) to the Loan and Security
Agreement with Silicon Valley Bank, dated July 21, 2005 |
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21.1
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Subsidiaries of the Company (previously filed as an exhibit
to the Companys Annual report on Form 10-K for the year
ended December 31, 2000, and incorporated herein by
reference |
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31.1
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Certification of Chief Executive Officer pursuant to Section
302(a) of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certification of Chief Financial Officer pursuant to Section
302(a) of the Sarbanes-Oxley Act of 2002 |
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32.1
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Certification of Chief Executive Officer pursuant to 18 U.S.C
section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
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32.2
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Certification of Chief Financial Officer pursuant to 18 U.S.C
section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
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* |
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Confidential treatment as to certain portions has been requested pursuant to Rule 24b-2
promulgated under the Securities Exchange Act of 1934, as amended. |
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** |
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The Exhibits identified above with an asterisk (*) are management contracts or compensatory
plans or arrangements. |