UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Form 10-K/A

(Amendment No. 1)

 

 

Commission File Number 1-33403

 

 

 

 

SIPEX CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Registrant’s 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:

The Nasdaq Capital Market

 

 

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 þ     No o

 

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 registrant’s 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 registrant’s most recently completed second fiscal quarter (July 1, 2006) was approximately $57,570,000 based upon the last reported price on the Pink Sheets of $5.98 per share. The number of shares outstanding reflects a 1-for-2 reverse stock split effected by the Registrant on February 23, 2007.

 

The number of shares of the registrant’s common stock outstanding on April 12, 2007 was approximately 18,687,000 shares.

 

 

TABLE OF CONTENTS

 

EXPLANATORY NOTE

 

This Amendment No. 1 on Form 10-K (the “Amended Report”) amends the original Annual Report on Form 10-K of Sipex Corporation for the fiscal year ended December 30, 2006, filed with the Securities and Exchange Commission, or the SEC, on March 30, 2007 (the “Original Report”), to add certain information required by the following items of Form 10-K:

 

 

We hereby amend Items 10, 11, 12, 13 and 14 of Part III of our Original Report by deleting the text of such Items 10, 11, 12, 13 and 14 in their entirety and replacing them with the information provided below under the respective headings. The Amended Report does not affect any other items in our Original Report. As a result of this amendment, we are also filing the certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 as exhibits to this Amended Report.

 

Except as otherwise expressly stated for the items amended in this Amended Report, this Amended Report continues to speak as of the date of the Original Report and we have not updated the disclosure contained herein to reflect events that have occurred since the filing of the Original Report. Accordingly, this Amended Report should be read in conjunction with our Original Report and our other filings made with the SEC subsequent to the filing of the Original Report.

 

Directors

 

The board of directors is divided into three classes. Directors are elected to each class for a three-year term. Thomas Redfern and John Arnold are the Class I Directors; Ralph Schmitt and Brian Hilton are the Class II Directors; and Dan Casey, Pierre Guilbault and Alan Krock are the Class III Directors.

 

 

Mr. Redfern has been a director of Sipex since 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. Redfern serves on the Compensation Committee and Corporate Governance and Nominating Committee.

 

Mr. Arnold has been a director of Sipex since 2004. 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. Arnold serves as Chairman of the Audit Committee and is on the Nominating and Corporate Governance Committee.

 

Mr. Hilton is chairman of the board of directors and has been a director since 2004 and has over 35 years of experience in the semiconductor industry. Most recently, Mr. Hilton was president of Avnet Electronics Marketing, a global electronics distributor. In this role, Mr. Hilton was responsible for building Avnet’s Asian business and expanding their presence in Europe, the Middle East and Africa. Prior to Avnet, Mr. Hilton spent 30 years at Motorola Inc., reaching the position of corporate VP and director of worldwide sales and marketing for Motorola’s Semiconductor Products Sector (SPS). Mr. Hilton serves on the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee.

 

Mr. Schmitt is Chief Executive Officer and has been a director since 2005. 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 VP of Sales and Marketing at Cypress where he was responsible for the transformation of the organization and strategy from a product-based to a market-based approach. Throughout his careers he has had considerable market exposure to the Asian market place as well as broad end markets including wireless, wireline, computation, consumer and industrial. Mr. Schmitt also served on the boards of Cypress subsidiaries, Silicon Light Machines and Cypress Microsystems, and on the boards of privately held companies like Azanda Networks and Stargen.

 

Mr. Casey was appointed to the board of directors in September 2006. He is currently an Executive Vice President with Future Electronics, an affiliate of Sipex’s largest stockholder and its largest distributor. He has been with Future for 14 years and during that time has been posted in London, where he managed Future’s European operations and in Singapore, where he managed Future’s Asian operations. He is currently responsible for International Operations and is based out of Future’s head office in Montreal, Canada. Prior to Future Electronics, he was President of a division of ABB, Canada. He was employed at ABB for over 13 years.

 

Mr. Guilbault was appointed to the board of directors in September 2006. He has been with Future Electronics, an affiliate of Sipex’s largest stockholder and its largest distributor, since 2002 as Executive Vice President and CFO. Prior to joining Future, he was Executive Vice President and CFO of Steinberg, Inc., Executive Vice President and CFO of My Virtual Model, Inc. and Executive Vice President and CFO of Motion International, Inc.

 

Mr. Krock was appointed to the board of directors in September 2006. He was a Vice President and CFO of PMC-Sierra, Inc. Prior to PMC-Sierra, Mr. Krock was the Vice President and CFO at Integrated Device Technology, Inc., where he managed all aspects of IDT’s financial and administrative functions. He also served as IDT’s Vice President and Corporate Controller and oversaw domestic and worldwide financial reporting and systems. Prior to joining IDT, Mr. Krock was Corporate Controller for Rohm USA and a senior manager at Price Waterhouse, now PricewaterhouseCoopers, in the United States and Australia. Mr. Krock brings a wealth of experience to our board of directors in the areas of current public financial requirements, mergers and acquisitions.

 

There are no family relationships between any directors or executive officer.

 

Executive Officers

 

Certain information required by this item concerning executive officers is set forth in Part I of the Original Report under the caption “Executive Officers of Sipex” and is incorporated herein by reference.

 

Section 16 (A) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers, directors and persons who beneficially own more than 10% of Sipex’s common stock to file initial reports of ownership and reports of changes in ownership with SEC on Forms 3, 4 and 5. Such persons are required by the SEC regulations to furnish Sipex with copies of all Section 16(a) forms filed by such persons.

 

Based on a review of the copies of these reports received by Sipex and written representations from certain reporting persons that they have complied with the relevant filing requirements, Sipex believes that all filing requirements have been complied with on a timely basis for the fiscal year ended December 30, 2006, except for one late filing of a Form 4 for each of Alonim Investments, Inc., Alan Krock, Daniel Casey, Pierre Guilbault, and Richard Hawron, due to administrative error.

 

Corporate Governance

 

Director Independence

 

On February 26, 2004 and September 8, 2006, the board of directors undertook a review of the independence of its directors and considered whether any director had a material relationship with Sipex or its management that could compromise their ability to exercise independent judgment in carrying out his responsibilities. As a result of this review, the board of directors affirmatively determined that Messrs. Arnold and Redfern were independent of Sipex and its management under the corporate governance standards of the Nasdaq Capital Market. Upon the appointment of Mr. Schmitt as a director, the board of directors determined that his status as an employee of Sipex did not qualify him as “independent directors” under the corporate governance standards of the Nasdaq Capital Market. On September 8, 2006, the board of directors determined that Mr. Casey and Mr. Guilbault do not qualify as “independent directors” under the corporate governance standards of the Nasdaq Capital Market, due to their relationship with Future Electronics, Sipex’s largest distributor and the exclusive distributor of its products in North America and Europe, and an affiliate of Alonim Investments, Inc., Sipex’s largest stockholder. On September 8, 2006, the board of directors determined that Mr. Krock is independent of Sipex and its management under the corporate governance standards of the Nasdaq Capital Market.

 

Committees of the Board of Directors and Meetings Held

 

We have three standing committees: a compensation committee, a corporate governance and nominating committee and an audit committee. Each committee has adopted a written charter, all of which are available on Sipex’s website at www.sipex.com. Each of the directors attended at least 90% of the meetings of the board of directors and applicable committee meetings during fiscal 2006.

 

The following table sets forth the three standing committees of the board of directors, the members of each committee during the last fiscal year and the number of meetings held by each committee.

 

 

Compensation Committee

 

Mr. Redfern and Mr. Olmer were members of the Compensation Committee during fiscal 2006. Mr. Hilton was added to this committee on September 8, 2006. Mr. Olmer left the Compensation Committee on November 30,

2006. None of the Compensation Committee members were employees of Sipex and all of them are independent within the meaning of the corporate governance standards of the Nasdaq Capital Market.

 

The compensation committee is involved and aware of the compensation of our employees. The Compensation Committee administers Sipex’s employee benefit plans, including 1997 Stock Option Plan, 1999 Stock Option Plan, 2000 Non-Qualified Stock Option Plan, 2002 Non-statutory Stock Option Plan and 2006 Equity Incentive Plan.

 

Corporate Governance and Nominating Committee

 

The Corporate Governance and Nominating Committee was established on February 26, 2004. Mr. Arnold, Mr. McBurnie and Mr. Redfern were initially appointed as the members. Mr. McBurnie left the committee and Mr. Hilton joined the committee in 2006. None of the present members of the Corporate Governance and Nominating Committee members are employees of Sipex and Mr. Arnold, Mr. Hilton and Mr. Redfern are independent within the meaning of the corporate governance standards of the Nasdaq Capital Market.

 

The corporate governance and nominating committee makes recommendations to the board of directors regarding nominees for the board, monitors the size and composition of the board, assists the board with review and consideration of developments in corporate governance practices and performs such other duties as the board of directors shall from time to time prescribe.

 

Audit Committee

 

The Audit Committee members in 2005 were Mr. Consoli, who was chairman of the committee, Mr. Hilton and Mr. Arnold. Mr. Consoli resigned from the Audit Committee in 2006 and Mr. Redfern was added to this committee in September 2006 and resigned in November 2006. Mr. Krock was added in November 2006 to the audit committee. In 2006, after Mr. Consoli resigned from the Audit Committee, Mr. Arnold became the chairman of the committee. None of the Audit Committee members are employees of Sipex and all of them are independent within the meaning of the rules of the SEC and the corporate governance standards of the Nasdaq Capital Market.

 

Pursuant to Section 407 of the Sarbanes-Oxley Act of 2002, the board of directors has determined that John Arnold is qualified as an audit committee financial expert as defined in Regulation S-K, Item 407 of the Securities Exchange Act of 1934. Mr. John Arnold is independent as defined in Regulation S-K, Item 407, of the Securities Exchange Act of 1934.

 

In discharging its duties, the audit committee performs the following functions, among others: (i) reviews and approves the scope of the annual audit, non-audit services to be performed by the independent auditors and the independent auditors’ audit and non-audit fees; (ii) appoints and, as appropriate, replaces the independent auditors, pre-approves all audit and non-audit services of the independent auditors and assesses the qualifications and independence of the independent auditors; (iii) reviews the performance of our internal audit function, our auditing, accounting and financial reporting procedures and independent auditors; (iv) reviews the general scope of our accounting, financial reporting, annual audit and internal audit programs and matters relating to internal control systems; (v) monitors our compliance with related legal and regulatory requirements; (vi) retains, when necessary and appropriate, independent legal, accounting or other advisors, (vii) meets independently with our independent auditors and senior management; (viii) reviews and discusses with management periodic and annual reports prepared by us for filings with the SEC, including making a recommendation to our board of directors that the audited financial statements of Sipex be included in our Annual Report on Form 10-K filed with the SEC; and (ix) reviews the results of the annual audit and interim financial statements, audit independent issues and the adequacy of the written audit committee charter adopted by the board of directors.

 

Policy for Director Recommendations and Nominations

 

The Corporate Governance and Nominating Committee considers candidates for board of directors membership suggested by board of directors members, management and stockholders of Sipex. It is the policy of the Corporate Governance and Nominating Committee to consider recommendations for candidates to the board of directors from our stockholders. A stockholder that desires to recommend a candidate for election to the board of

directors should direct the recommendation in written correspondence by letter to Sipex, attention of the Corporate Secretary, with the following information:

 

 

The Corporate Governance and Nominating Committee will consider persons recommended by Sipex’s stockholders in the same manner as a nominee recommended by the board of directors, board members or management.

 

In addition, a stockholder may nominate a person directly for election to the board of directors at an Annual Meeting of our Stockholders provided they meet the requirements set forth in our Bylaws.

 

Where the Corporate Governance and Nominating Committee has either identified a prospective nominee or determines that an additional or replacement director is required, the Corporate Governance and Nominating Committee may take such measures that it considers appropriate in connection with its evaluation of a director candidate, including candidate interviews, inquiry of the person or persons making the recommendation or nomination, engagement of an outside search firm to gather additional information, or reliance on the knowledge of the members of the Committee, the board or management. In its evaluation of director candidates, including the members of the board of directors eligible for re-election, the Corporate Governance and Nominating Committee considers a number of factors, including the following:

 

 

The Corporate Governance and Nominating Committee has also specified the following minimum qualifications that it believes must be met by a nominee for a position on the board of directors:

 

 

In connection with its evaluation, the Corporate Governance and Nominating Committee determine whether it will interview potential nominees. After completing the evaluation and review, the Corporate Governance and Nominating Committee makes a recommendation to the full board of directors as to the persons who should be nominated to the board of directors and the board of directors determines and approves the nominees after considering the recommendation and report of the Corporate Governance and Nominating Committee.

 

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 5.05 of Form 8-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 Capital Market and the rules of the SEC.

 

 

 

This Compensation Discussion and Analysis discusses the compensation policies and programs for our named executive officers, the process for reviewing and determining amounts paid to those officers and the governance oversight behind the decisions we have made in 2006.

 

Our named executive officers for 2006 were as follows:

 

 

  Compensation Philosophy

 

Our executive compensation program is designed to help us attract, motivate and retain qualified executives by providing a market competitive compensation opportunity where rewards are significantly linked to individual and corporate performance while ensuring that the interests of our executives are closely linked to those of our stockholders.

 

Our programs are designed to provide appropriate incentives to maximize the value created for our stockholders as reflected by our short- and long-term financial and operating performance. We have reflected this by including those metrics as part of our annual incentive plan and through our use of stock options as the primary equity vehicle to align executive equity compensation with long-term stock appreciation. We strive to establish performance objective criteria, evaluate results and establish each component of pay for our decision makers based upon company and individual performance.

 

In order to meet these objectives, we have chosen the following components for our executive compensation program to reflect Sipex’s compensation philosophy:

 

 

 

We strive to have a balanced approach to our executive compensation program with each pay element designed to play a specific integrated role. Our mix of pay allocated to base salary, cash incentive opportunities and equity is based upon the typical practices found in our industry and rewards for the achievement of strategic goals and objectives, with an emphasis on returning to profitability.

 

In 2006, we did not achieve our key goals. Accordingly, our named executives voluntarily recommended that they not be considered for annual salary increases and were awarded no bonus payouts for 2006 results. Consistent with our emphasis on equity compensation, stock option grants were made to all the named executive officers excluding CEO in order to provide an incentive to move towards profitability as well as to serve as a retention tool.

 

Corporate Governance

 

Compensation Committee Authority

 

Executive officer compensation is administered by the Compensation Committee of the board of directors, which is composed of two independent members, Mr. Hilton who is the Compensation Committee chairman and Mr. Redfern. Mr. Hilton joined this committee in September 2006. Prior to Mr. Hilton’s joining the committee, the committee consisted of Mr. Olmer and Mr. Redfern. Both Mr. Hilton and Mr. Redfern approved the 2006 compensation arrangements described in this compensation discussion and analysis. Mr. Pierre Guilbault, a non-independent director representing Sipex’s largest shareholder, is an observer to this Committee. Mr. Guilbault’s role is to provide input, opinion and perspective of a major shareholder, but the Committee is in no way bound to act on Mr. Guilbault’s recommendations, and he does not have approval over or voting power on the Committee. Our board of directors appoints the committee members and delegates to the Compensation Committee the following responsibilities and authority, among other matters:

 

 

 

Our board of directors has determined that Mr. Hilton and Mr. Redfern are independent under the listing standards of the Nasdaq Capital Market, the SEC rules and the relevant securities laws, and that each member is an “outside director” as defined in Section 162(m) of the Internal Revenue Code of 1986, as amended.

 

The Compensation Committee meets at least monthly and met twenty-three (23) times in 2006. Monthly meetings provide the forum for approval of equity grants which are generally considered on a monthly basis. Additional meetings in 2006 were conducted to discuss and approve matters related to determination and approval of non-executive retention bonuses, executive stock option grants, new-hire stock option awards, and changes to the equity plan and other equity grant amendments to non-executive employees. Our CEO, general counsel, and stock administrator were in attendance at the majority of the meetings and our vice president of human resources has attended as requested. Our CEO did not attend the Compensation Committee meetings when the matters of his compensation were discussed.

 

Compensation Review Process

 

Our Compensation Committee is responsible for reviewing and approving all compensation decisions as they relate to our executive officers as well as recommending changes to our equity plan and practices to the board of directors.

 

The Compensation Committee prepares a written performance evaluation for our CEO, with input from the board of directors, by utilizing the Harvard Business Review’s description of five key tasks (define the business, recruit the team, arrange financing, set the culture and shape the product strategy) of reviewing performance of the CEO, who then responses to the Committee in a written statement.

 

Management’s Role in Compensation Decisions

 

Our CEO prepares recommendations regarding annual adjustments in base salary, achievement of bonus awards and whether stock option grants should be made for the executive team (except the CEO). The CEO’s recommendations are reviewed with the Compensation Committee for approval. The recommendations take into account a variety of interrelated factors including achievement of our financial and operating performance goals, individual performance and contribution to company successes, market competitive pressures, business conditions, the status of current equity grants with regards to vesting and retention value, and the recommendations’ potential financial impact to Sipex.

 

Recommendations regarding changes to the CEO’s compensation follow the same methodology as that of other named officers; however, his performance is evaluated and recommendations regarding any changes in compensation arrangements are independently prepared by the Compensation Committee. The Compensation Committee reviews these recommendations and approves any changes to the CEO’s compensation arrangements.

Recommendations are then submitted for the final approval by the board of directors and require approval by the majority of the independent directors.

 

Sources of Competitive Data

 

We believe it is in our shareholders’ best interests to ensure our executive compensation plans are competitive with those of other companies seeking to attract similar levels of talent and experience. Our last formal competitive executive pay study was conducted in 2002 and utilized market data from Radford survey (AON Consulting) and compared our compensation to those reported by the following company groupings:

 

 

Based on the market data obtained, in 2002 we developed market competitive salary ranges for all positions, including the executives. Since that time, these ranges were updated annually based on the market median movement of salary structures as reported by the Radford survey.

 

Elements of Executive Compensation and Decisions Made in 2006

 

Base Salary Adjustments

 

Executive salaries are established upon hire based on a number of factors including the individuals’ current pay levels, relevant experience, expected contribution, and the competitive marketplace as referenced under the Sources of Competitive Data. We target our executive salaries to a range based on market median to the 75^th percentile, but exceptions are sometimes made based on our needs to attract certain executives with special skills and qualifications.

 

Base salaries are reviewed annually and adjustments are made to recognize and reward individual contributions and performance, and recognize the impact of the position within our organizational structure as well as to reflect competitive market forces necessary to retain our executive talent. Any base salary adjustment is considered in connection with our profitability and what it can afford.

 

As a result of Sipex’s performance in 2006, our named executives did not receive salary increases. The Compensation Committee believes their current base salaries are appropriately set according to our philosophy and in line with our financial results for the year. Thus far, no changes to the executive salaries have been made in 2007.

 

Cash Incentives and Total Cash Compensation

 

Cash incentives are designed to motivate our executives to meet our quarterly and annual financial and operating goals and to reward the achievement of these goals. Consistent with our pay for performance culture, annual bonus payouts are not guaranteed, and are based on Sipex’s performance and the achievements of our executives. The actual bonus payment awards for the named executives are determined by the Compensation Committee and approved by the board of directors. Ultimately, our overall profitability dictates whether bonuses are paid, and to what extent, regardless of whether specific objectives have been achieved.

 

However, in 2005, the CEO recommended and the Compensation Committee approved that a 2^nd Half 2005 Executive Bonus Program be established. Under this plan, no profitability component was established in order to allow Sipex to provide a reward to our executives in recognition of their efforts in restructuring and turning around our company. The objectives, and related weightings, established for the second half of 2005 were:

 

 

 

Each executive received a target bonus opportunity as defined by a percentage of their base salaries. These targets were based on the market data obtained from the Radford survey.

 

It was determined by the CEO and recommended to, and approved by the board of directors, that executives had achieved 65% of their objectives at the end of fiscal 2005, which resulted in bonus payouts for all named executives of 65% of their target bonus amounts.

 

The following table outlines the 2005 target bonus levels, target bonus amounts and the actual payments received. Mr. Schmitt’s target opportunity was voluntary reduced due to higher than forecasted losses during that period.

 

 

These bonus payments were made in January 2006 and are reported in the Summary Compensation Table.

 

A new bonus plan, the Key Employee Incentive Plan (“KEIP”), was designed in 2006 to closely link actual rewards to achievement of key financial and operating goals. However, this plan has not been finalized and approved by the Compensation Committee. It has been designed to payout only when we achieves profitability and then to the extent that the specific, quantifiable objectives are achieved. Because we did not expect to achieve profitability in 2006, the plan was not finalized or approved by the Compensation Committee. It is our intent to gain approval for finalize this plan as we approaches profitability.

 

Equity Grants

 

Stock options, serving as our long-term incentive pay element, are granted to align interests of our executives and stockholders and provide a reward for increases in share value. By issuing stock options, the executives only receive value if our stock price rises above that of the options’ strike price which is set at the fair market value as of the closing price of the shares on the date of grant. We have not utilized discounted options where the strike price is below that of the share price on the date of grant, as this approach of providing a built-in-value at grant would be counter to our pay-for-performance culture.

 

Consistent with our philosophy of paying for performance, no executive is entitled to an automatic annual equity grant. Recommendations regarding the number of stock options to be granted take into account each executive’s contribution to Sipex’s performance, their ability to influence future performance, relative role of the position within our organizations structure, their current equity holdings and the extent to which prior grants are

vested, current in-the-money gains, competitive market practices, financial impact on our profitability and dilution of our stockholders.

 

Generally, our stock option awards to all employees, including our named executive officers, are scheduled to vest in equal amounts over four years; 25% is vested on the first year’s anniversary date of the grant then 1/48^th of the award vests monthly thereafter in each case subject to continued service through the applicable service date. Options awarded expire ten years from the date of the grant. Pursuant to Sipex’s stock option plan agreements, in the event of a change in control, and if the existing options are not assumed by the acquiring company, then participants become fully vested in all option awards that will be exercisable for fifteen days from receiving a notice of this event.

 

We do not have a set annual policy related to the timing and size of employee stock options grants. In December of 2006, all named executives with the exception of Mr. Schmitt and Mr. Hawron received options to purchase additional shares. Mr. Wallin, Mr. Lam, Mr. Schaeffer, Mr. Cleveland and Mr. Camarda received options to purchase 25,000 shares and Mr. Chalmers and Mr. Hudon received the options to purchase 12,500 shares. These grants were recommended by the CEO based on several factors including the total pool of shares approved for equity grants by the Compensation Committee and board of directors, the level of the executive as it related to other levels in the organization and the executives’ current stock option holdings. These grants were reflective of our emphasis on equity compensation and the desire to provide the executive team with an incentive to continue their efforts in restructuring Sipex and improving its performance. The absence of adjustments to cash compensation in 2006 was also considered.

 

In addition, Mr. Wallin, our CFO, received an additional grant in January 2006 of 62,500 stock options. The board of directors, upon the recommendation of the CEO granted 62,500 stock options to Mr. Wallin to bring Mr. Wallin’s equity level position in line with the other new senior executive officers of Sipex.

 

We do not have equity ownership requirements for our executives nor for our outside directors.

 

Executive Benefits and Perquisites

 

With the exception of one housing allowance arrangement (paid to Mr. Hawron whose employment terminated in January 2007) to assist in his commuting expenses between the U.S. and Canada, our executive officers do not receive any other benefits or perquisites beyond those broadly offered to other employees. No additional benefits, perquisites or supplemental payments were made in 2006 nor are anticipated in 2007.

 

Our employees receive medical, dental, vision, life and disability insurance benefits, eligibility to participate in a flexible spending account and to receive company’s contributions under 401(k) Tax Deferred Saving Plan and an Employee Stock Purchase Plan.

 

Employment Agreements and Post Employment Termination Benefits

 

Consistent with practices typical for our industry, and to mitigate some of the risk associated with joining a company in the historically volatile semiconductor industry, Sipex provides employment agreements to certain key officers that contain post-employment termination benefits, including termination benefits connected with change in control events. All agreements provide for “at will” employment and describe the role, base salary, annual bonus opportunity and initial equity grants made to each executive. They also include Sipex’s standard Confidential Information and Invention Assignment Agreement which protects Sipex’s proprietary property and knowledge. Additionally, the definition of a change in control is an event that changes 60% or more of the voting power of shares, changes composition of the board of directors by a more than half over a two year period or the sale or disposition of most of Sipex’s assets.

 

Individual provisions for the named executives vary based on arms-length, individually negotiated terms stated in their offer letter agreements and are summarized below:

 

Mr. Schmitt, June 7, 2005 — Provides that Mr. Schmitt will serve as chief executive officer and a member of the board of directors. His initial base salary was set at $400,000 with a target annual bonus opportunity of $400,000.

 

The agreement also provides for salary continuation for 12 months in the event of involuntary termination without cause prior to a change in control or more than 12 months after a change in control. In addition, had the involuntary termination without cause occurred within the first year of the agreement, 25% of the shares subject to outstanding stock option awards would have vested and became exercisable for 12 months following the termination.

 

If involuntary termination without cause had occurred within 12 months following a change in control, severance payments provide for salary continuation for 12 months and full acceleration of all unvested stock option awards that will be exercisable for 12 months following the termination.

 

The agreement also states that all options will become unexercisable in the event of termination for cause, which is defined as failure to perform duties, acts of dishonesty or fraud, conviction of a crime, violation of state or federal laws, breach of obligations or confidentiality or termination of the business.

 

Mr. Wallin, April 5, 2004 — Provides that Mr. Wallin receive an initial base salary of $200,000. In the event of involuntary termination without cause, severance arrangements provide for salary continuation for 6 months.

 

In the event a termination for good reason occurs in connection with a change in control, Mr. Wallin severance arrangements provide for salary continuation for 6 months and full acceleration of all unvested stock option awards that will be exercisable for 12 months.

 

Had the involuntary termination for good reason or without cause occurred within the first two years of the agreement, in addition to the salary continuation for 6 months, 50% of the shares subject to outstanding stock option awards would have become exercisable.

 

“Good Reason” is defined in Mr. Wallin’s agreement as one of the following:

 

 

Mr. Lam, August 24, 2005 — Provides that Mr. Lam receive an initial base salary of $287,000 and the opportunity to participate in the annual bonus plan once we returned to profitability.

 

In the event of involuntary termination without cause prior to a change in control or more than 12 months after a change in control, it provides for severance benefits of salary continuation for 12 months. In addition, had the termination occurred within the first year of the agreement, 25% of the shares subject to outstanding stock option awards would have become exercisable.

 

In the event of involuntary termination without cause within 12 months following change in control, it provides for severance benefits of salary continuation for 12 months and acceleration of 50% of unvested stock option awards that will be exercisable for 12 months.

 

Mr. Cleveland, August 13, 2004 — Provides for an initial base salary of $200,000 annually and a maximum payout under the bonus plan of 50% of base salary.

 

At December 31, 2006, other than those offered to a broad employee population, there were no severance benefits that would have been available to Mr. Cleveland.

 

Mr. Hawron did not have termination provisions in his offer letter. His employment terminated on January 19, 2007. He did not receive severance payments; however, the vesting of his stock options was fully accelerated.

 

While not explicitly stated in the executives’ offer letter agreements, it is implied by our past practices that in addition to the provisions described above, these executives are entitled to receive COBRA continuation for the period of time during which the salary continuation occurs.

 

We have implemented these programs in order to ensure we are able to continue to attract and retain top talent as well as ensure that during the uncertainty associated with involuntary termination not for cause or a Change in

Control of Sipex, the executives remain focused on their responsibilities and ensure a maximum return for the stockholders.

 

Our equity plan incorporates provisions for change of control as well as voluntary and involuntary termination associated with death, disability or misconduct. These provisions apply to all participants. Our executives are entitled to only those additional benefits not available to other plan participants as described in their employment agreements. The provisions were developed to be competitive with high technology industry practices. Full definitions regarding the specific provisions and triggering events are outlined in our equity plans.

 

Tables depicting the post termination compensation arrangements for our named executive officers are included in the Executive Compensation section below.

 

 

In designing our compensation programs, Sipex takes into consideration the accounting and tax effect that each element will or may have on Sipex and the named executives. We aims to keep the expense related to our compensation programs as a whole within our affordability levels. We recognize a charge to earnings for accounting purposes when stock options are granted. We also considered the fact that our 401(k) Plan provides tax-advantaged retirement planning vehicles for our executives.

 

We do not provide our named executives with a gross-up or other reimbursement for tax amounts the executive might pay pursuant to Section 280G of the Internal Revenue Code. Section 280G and related Internal Revenue Code sections provide that executive officers, directors who hold significant stockholder interests and certain other service providers could be subject to significant additional taxes if they receive payments or benefits in connection with a change in control that exceeds certain limits, and that we could lose a deduction on the amounts subject to the additional tax.

 

In addition, under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), Sipex cannot deduct, for federal income tax purposes, compensation in excess of $1,000,000 paid to certain executive officers. This deduction limitation does not apply, however, to compensation that constitutes “qualified performance-based compensation” within the meaning of Section 162(m) of the Code. We have considered the limitations on deductions imposed by Section 162(m) of the Code, and it is our intention that, for so long as it is consistent with its overall compensation objective, substantially all executive compensation is designed to be “qualified performance-based compensation” and therefore tax deductible under Section 162(m). All of our executive compensation expenses were deductible in 2006.

 

     Compensation Committee Report

 

The Compensation Committee has reviewed the Compensation Discussion and Analysis and discussed its analysis with management. Based on its review and discussions with management, the Compensation Committee recommended to our board of directors that the Compensation Discussion and Analysis be included in Sipex’s 2007 Annual Report on Form 10-K, as amended and the proxy statement for Sipex’s 2007 annual meeting of stockholders. This report is approved by the following independent directors, who comprise the committee:

 

Mr. Brian Hilton (Chairman)

Mr. Tom Redfern

 

     Executive Compensation

 

     Summary Compensation Table

 

The following table sets forth information concerning the compensation of our chief executive officer, chief financial officer and three most highly paid executive officers who served in such capacities during the fiscal year ending December 31, 2006, our named executive officers:

 

 

 

 

  All Other Compensation Table

 

The following table describes each component of the All Other Compensation column in the Summary Compensation Table.

 

 

 

 

 

Grants of Plan-Based Awards in 2006

 

The following table provides information about equity and non-equity awards granted to the named executives in 2006:

 

 

 

 

Outstanding Equity Awards at 2006 Fiscal Year-End

 

The following table provides information on the current holdings of stock option awards by the named executives. This table includes unexercised and unvested option awards. Each equity grant is shown separately for each named executive.

 

 

 

 

Unless otherwise indicated, 25% of each award vests one year from the date of grant then 1/48^th of the award on a monthly basis for the remainder of a four year period. For grants made on September 6, 2005 (Mr. Cleveland and Mr. Wallin), 25% of the award vests one year after the original grant date then 1/48^th of the award on a monthly basis thereafter.

 

Option Exercises and Stock Vested in Fiscal 2006

 

The following table provides information, for the named executives, on stock option exercises during 2006, including the number of shares acquired upon exercise and the value realized and before payment of any applicable withholding tax and broker commissions. Only Mr. Wallin exercised any of his stock option holdings during 2006.

 

 

 

 

Pension Benefits in Fiscal 2006

 

Our named executive officers received no benefits in fiscal 2006 from Sipex under any defined benefit pension plan or nonqualified, supplemental executive retirement program.

 

Nonqualified Deferred Compensation in Fiscal 2006

 

Sipex does not offer any nonqualified deferred compensation program to its executives or any employees of the company.

 

Other Potential Post-Employment Payments

 

As described in the CD&A, some of our named executives’ receive severance payments and benefits under certain termination events generally including involuntary termination and involuntary or termination without cause including in connection with a change in control event. The information below quantifies certain compensation that would become payable under existing plans and arrangements if the named executive’s employment had terminated on December 31, 2006, given the named executive’s compensation as of such date and, if applicable, based on Sipex’s closing stock price on that date. These benefits are in addition to benefits available generally to salaried employees, such as distributions under our 401(k) savings plan, disability benefits and accrued vacation pay.

 

Due to the number of factors that affect the nature and amount of any benefits provided upon the events discussed below, any actual amounts paid or distributed may be different. Factors that could affect these amounts include the timing during the year of any such event and Sipex’s stock price.

 

Termination Scenarios

 

 

 

 

 

 

 

 

 

 

 

Non-management Directors’ Compensation for Fiscal 2006

 

Our non-employee directors’ compensation program is designed in a way that helps us compensate our directors fairly, pay directors for work required for a company of Sipex’s size and scope, aligns directors’ interests with the long-term interests of shareowners with a structure that is simple, transparent and easy to understand.

 

The table below presents each element of our non-management directors’ compensation package:

 

 

The following table shows compensation information for Sipex’s current and former non-employee directors for fiscal 2006:

 

 

 

 

As of December 30, 2006, the outstanding stock option awards held by each director at December 30, 2006 were: Mr. Consoli, 36,250; Mr. Hilton; 28,750; Mr. Arnold, 32,500; Mr. Redfern, 25,000; Mr. Olmer, 55,989; Mr. McBurnie, 135,000; Mr. Krock, 16,250; Mr. Guilbault, 16,250 and Mr. Casey, 16,250.

 

In the fourth quarter of 2006, we also accelerated the vesting of 220,000 stock options for three former directors of our board upon their departures. As a result, we recorded additional $138,000 in stock-based compensation expense for the year ended December 30, 2006.

 

The following table sets forth as of March 31, 2007 information to the best of our knowledge, with respect to the beneficial ownership of Sipex’s common stock by (i) each person who is known to Sipex to be the beneficial

owner of more than five percent of its common stock, (ii) each director, or nominee for director, of Sipex, (iii) each of the executive officers named in the Summary Compensation Table under the caption “Executive Compensation Summary” below, and (iv) all directors and executive officers of Sipex 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 March 31, 2007, there were approximately 18,687,000 shares of common stock outstanding.

 

 

 

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The following table provides information as of December 30, 2006 about the securities authorized for issuance under our equity compensation plans, consisting of Stand-Alone Stock Option grant, 1997 Stock Option Plan, 1999

Stock Option Plan, 2000 Non-Qualified Stock Option Plan, 2002 Non-statutory Stock Option Plan and 2006 Equity Incentive Plan.

 

 

Above table does not include approved 1996 Employee Stock Purchase Plan in which 122,220 shares are currently available to issue.

 

Future Electronics Inc.

 

Future is a related party and its affiliates own approximately 8.6 million shares or 47% of Sipex’s outstanding common stock as of December 30, 2006. Sipex has 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 Sipex’s 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 43%, 44% and 39% of its total net sales for the years ended December 30, 2006, December 31, 2005 and January 1, 2005 respectively.

 

From time to time, Future provides services and/or incurs expenses on behalf of us. 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 $5,000, $17,000 and $100,000 for the years ended December 30, 2006, December 31, 2005 and January 1, 2005 respectively.

 

In addition, Sipex incurred expense to Future totaling approximately $23,000 for marketing promotional materials, temporary accounting services and used furniture sold to us for the year ended December 30, 2006. Sipex recorded $44,000 of reimbursement expense for marketing promotional materials charged by Future for the year ended December 31, 2005. For the year ended January 1, 2005, no such expenses were recorded.

 

During February 2004, the affiliates of Future exercised the conversion rights to convert their existing notes into Sipex common stock for an additional 2.3 million shares. On August 5, 2004, the affiliates of Future exercised a warrant to purchase 450,000 shares of Sipex’s common stock at $5.8916 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’s 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 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) 20,000,000 (as adjusted for stock dividends, splits or like transactions). On August 9, 2004, the affiliates purchased 1.25 million shares of Sipex’s common stock in the open market.

 

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 the affiliates of Future, which provided these affiliates with the opportunity to obtain additional shares of Sipex’s common stock. The loan was repaid in March 2006. Sipex incurred interest expense totaling $86,000 related to the $7.0 million note with Future for the year ended December 30, 2006.

 

On May 16, 2006, Sipex placed $30.0 million of its 5.5% Redeemable Convertible Senior Notes (“2006 Notes”) due 2026 and related warrants in a private placement transaction to accredited investors in reliance on Regulation D under the Securities Act of 1933, as amended (the “Securities Act”). Rodfre Holdings LLC (“Rodfre”), an affiliate of Alonim Investments, Inc., Sipex’s 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. On December 21, 2006, Rodfre paid $2.7 million to exercise its warrant for 419,776 shares of Sipex common stock at $6.432 per share. As of December 30, 2006, the affiliates of Future held 8.6 million shares, or 47% of our outstanding common stock.

 

Interest expense incurred by Sipex relating to the $15.0 million portion of 2006 Notes sold to Rodfre totaled $936,000 for the year ended December 30, 2006. No interest expense was recorded for the year ended December 31, 2005 as both convertible notes, issued in 2002 and 2003, were extinguished and converted into 2.3 million of Sipex’s common shares as of February 18, 2004. Sipex recorded interest expense related to the debt with Future totaling $90,000 for the year ended January 1, 2005.

 

On September 8, 2006, Sipex appointed two executive vice presidents working for Future to its board of directors. The board of directors has determined that both new directors are not independent within the meaning of Rule 4200(a) (15) of the Nasdaq Market Rules by virtue of their relationships with Future. Accordingly, the board of directors does not expect to appoint them to any standing committees of the board of directors. In connection with their appointment as directors, both new directors have agreed to excuse themselves from any board of directors discussions that relate to transactions between Sipex and Future.

 

On March 29, 2007, Sipex entered into a Securities Purchase Agreement with Rodfre, an affiliate of Future, Sipex’s largest distributor worldwide and an affiliate of its largest stockholder (Alonim Investment Inc.), to provide an unsecured promissory note facility of up to $10.0 million. This facility expires, and the borrowings and accrued interest under any notes issued under this facility are due and payable on June 30, 2008, or upon certain other events such as a change of control. Borrowings under this promissory note facility bear interest of 9% per annum subject to an increased interest rate of up to 20% in case of default or after maturity. This promissory note facility is subordinate to Sipex’s Loan and Security Agreement with Silicon Valley Bank and to its 5.5% Redeemable Convertible Senior Notes due 2026.

 

Director Independence

 

As discussed above, the board of directors affirmatively determined that Messrs. Arnold, Redfern, Olmer, Consoli, Krock and Hilton were independent of Sipex and its management under the corporate governance standards of the Nasdaq Capital Market. In addition, Mr. Olmer was a member of our Compensation Committee in 2006 and he was determined to be an “independent director” under the corporate governance standards of the Nasdaq Capital Market by our board of directors. Mr. Consoli was a member and chairman of the Audit Committee in 2006, and he was determined to be an “independent director” under the corporate governance standards of the Nasdaq Capital Market by our board of directors.

 

Fees Paid to Deloitte & Touche LLP

 

The aggregate fees billed or to be billed to us for the following professional services for the fiscal year ended December 30, 2006 and December 31, 2005 from Deloitte & Touche LLP are as follows (in thousands):

 

 

 

 

In considering the nature of services provided by the independent auditor, the Audit Committee determined that such services are compatible with the provision of independent audit services. The Audit Committee discussed these services with the independent auditor and our management to determine that they are permitted under the rules and regulations concerning auditor independence promulgated by the SEC to implement the Sarbanes-Oxley Act of 2002, as well as the American Institute of Certified Public Accountants.

 

Independent Auditor

 

Deloitte & Touche LLP, an independent registered public accounting firm, has been our auditor since 2003. Deloitte & Touche LLP was our independent auditing firm for fiscal year 2006.

 

The Audit Committee has not selected or appointed an independent auditing firm for the fiscal year ending December 29, 2007. The Audit Committee anticipates making this selection and appointment in the second quarter.

 

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 auditor, 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 SEC rules on auditor independence. The audit committee has determined that the services provided by Deloitte & Touche LLP as set forth herein are compatible with maintaining Deloitte & Touche LLP’s independence.

 

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 April 19, 2007.

 

SIPEX CORPORATION

 

By: 

Ralph Schmitt

Chief Executive Officer and Director