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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] 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)
MASSACHUSETTS 04-6135748
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NUMBER)
22 LINNELL CIRCLE, BILLERICA, MASSACHUSETTS 01821
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(978) 667-8700
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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 [X] No [ ]
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. [ ]
The aggregate market value of Common Stock held by non-affiliates of the
registrant at March 6, 2000 was approximately $674,000,000 based upon $36.0625
per share, the last reported sale price of the Common Stock on The Nasdaq
National Market on that date. The number of shares of the registrant's Common
Stock outstanding at March 6, 2000 was 21,893,189.
DOCUMENTS INCORPORATED BY REFERENCE
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PART I
ITEM 1. BUSINESS:
COMPANY OVERVIEW
Sipex Corporation designs, manufactures and markets innovative, high
performance, high value-added analog integrated circuits. Sipex sells its
products across the analog semiconductor market and has targeted high-growth
sectors that it believes are especially compatible with its design and process
capabilities. Applications for our products include: telecommunications,
cellular telephones, networking products, computers, computer peripherals,
notebook and desktop computers, industrial instrumentation, aerospace and
military. Our products have been incorporated into a broad range of electronic
systems and products by more than 4,500 customers worldwide.
RECENT ACQUISITION
On November 23, 1999, Sipex completed a merger with Calogic through the
issuance of approximately 3,300,000 shares of its common stock. The merger was a
tax-free stock-for-stock transaction accounted for as a pooling of interests.
Additionally in a separate transaction we issued 300,000 shares for the purchase
of the minority interest in a subsidiary of Calogic, which was accounted for
using the purchase method of accounting and resulted in approximately $3.8
million of goodwill. As a result of the acquisition, Sipex is able to offer a
broader range of power management products in both its existing and new markets
and expects to realize cost savings from the elimination of redundant activities
and increased operating efficiencies.
ANALOG INDUSTRY
Integrated circuits, ("IC's"), are the building blocks of all electronic
products today. Analog circuits process "real world" signals which monitor,
condition, amplify or transform continuous analog signals associated with
physical conditions such as temperature, force, speed and pressure, the
frequency and wave length of which vary continuously. Analog circuits also
provide voltage regulation and power control to electronic systems, especially
in handheld battery powered systems.
We believe that the analog/linear integrated circuit market offers certain
advantages compared to the digital market. The life cycles of products in the
analog integrated circuit market tend to be longer and customer pricing is less
volatile than in the digital market. The capital requirements for analog/linear
IC manufacturers are lower than those in the digital IC area. In addition, there
has been less foreign competition in the analog/linear IC business which is
likely a result of its smaller market size as compared with the digital IC area.
Unlike products in the digital IC market, the value in the analog IC product is
usually the result of design innovation utilizing a variety of manufacturing
process technologies to address specific customer applications, many of which
are in so-called "niche" markets.
The Semiconductor Industry. The semiconductor industry is characterized by
rapid technological change, price erosion, cyclical market patterns, occasional
shortages of materials, capacity constraints, variations in manufacturing
efficiencies, and significant expenditures for capital equipment and product
development. Furthermore, new product introductions and patent protection of
existing products are critical for future sales growth and sustained
profitability. Although we believe that the high performance segment of the
linear circuit market is generally less affected by price erosion, cyclical
market patterns and significant expenditures for capital equipment and product
development than other semiconductor market sectors, future operating results
may reflect substantial period to period fluctuations due to these or other
factors.
PRODUCTS AND MARKETS
Requirements for lower power and higher operating frequencies are driving
innovation in analog/linear circuitry. Another significant trend in the
marketplace is the need to reduce the size and weight of components,
particularly for portable and handheld applications in which these features are
critical. As a
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result, more and more functions are designed onto a single chip, requiring both
advancements in design and improvements in process technology.
Sipex offers a broad range of innovative, high performance, high
value-added analog integrated circuits. Sipex's products are generally broken
down into the following categories: networking products, power management
products, electroluminescent products, and data converter products. In addition,
Sipex supplies precision high-reliability assembled products principally to
commercial customers for aerospace and military applications.
Sipex believes that its design and manufacturing process capabilities can
address customers' needs with regard to product features and functionality,
integration and overall solution cost. By working closely and partnering with
established market leaders within these areas, Sipex has been able to identify
and meet its partners' complex analog IC requirements with tailored products
that are developed in conjunction with the customer's own product design team,
thus allowing Sipex to address the customer's needs as the customer identifies
them. Having addressed the particular needs of market leaders, Sipex is then
able to migrate these solutions into standard products available to other
equipment or device suppliers.
OUR MAJOR PRODUCT CATEGORIES
Sipex produces a wide range of products for a variety of customers and
markets. We emphasize standard products to address larger markets and to reduce
the risk of dependency upon a single customer's requirements. We target the high
performance segment of the linear circuit market. The high performance segment
of the analog IC market consists of innovative, proprietary, niche products
which are often tailored for specific applications and differ from commodity
analog products in terms of uniqueness, feature set, electrical performance
(speed, precision, power, etc.), and system-level integration.
Networking Products. Interface products act as intermediaries to transfer
signals between or within electronic systems. A simple example of an interface
application is a personal computer connected to a printer via the RS-232 serial
interface standard. The computer sends information through the connecting cable
which is received by the printer, and additional information can be sent back to
the computer. Serial interface is used in many market segments including
computers, peripherals, data communications, telecommunications, handheld
instrumentation, medical equipment, test equipment and industrial controls.
In the networking area in particular, serial interface products are of
critical importance because diverse equipment and peripherals must be linked
together to permit data communications across local or remote locations. Because
a multiple of communications standards address the diverse requirements of wide
area networking, WAN equipment providers must provide compatibility in their
equipment with different communications standards. WAN equipment OEMs
traditionally addressed this need for systems compatibility through multiple and
often redundant board-level approaches, containing analog circuit designs made
up of many discrete interface drivers and receivers, along with switches,
jumpers or relays to steer the appropriate signals to the connector. Our
solution was to develop the first single-chip multi-protocol interface
transceiver circuit. These circuits are programmable and dynamically support
signals compliant with up to eight different serial interface standards. Our
products provide network suppliers with the ability to replace multiple chip and
discrete device configurations with a single chip solution, allowing systems
designers to reduce space and power requirements in their equipment. Our SP300
series of interface transceivers each support two protocols -- the RS-232 and
the RS-485. Additionally, our SP500 series was the industry's first fully
integrated transceiver, supporting up to eight of the most popular serial
interface standards for WAN interfaces. As +3V based microprocessor systems have
become more common, we have introduced families of +3V RS-232 and RS-485. The
main product features include fully compliant operation at +3V power supply with
+/-15kV of ESD protection. The products are mainly sold into battery powered
portable products that have a need to interface to peripheral equipment;
including laptop computers, PDAs, and handheld data terminals.
In addition to expanding its line of programmable serial interface
products, Sipex's future interface product strategy includes developing with
industry leaders products involving higher speed interfaces supporting high
speed data communications, video communications and telecommunications interface
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requirements. Sipex also offers the SP200 and SP400 series of single protocol
serial interface transceiver products, primarily targeted to the personal
computer and peripherals and industrial controls markets.
Power Management Products. Our power management products specialize in the
areas of voltage control and measurement, voltage conversion and battery
charging. The purpose of these products is to monitor the power supplied to
digital circuits such as microprocessors and random access memory ("RAM") in
battery operated systems. As the main battery voltage to the system is slowly
decreased by usage, a backup battery takes over to keep power to the system long
enough so that the microprocessor instructions and RAM are saved and powered
down in a safe state. If there is no activity from the microprocessor during a
period of time, the microprocessor is reset so that it starts-up at a known
state in case of errors during power-up, power-down, and intermittent power
losses. Any power glitches or faults that can cause harm to the system or data
loss at any time can be minimized by implementing a microprocessor supervisory
circuit. Any portable equipment that uses microprocessors, microcontrollers, or
memory in the system will require some kind of detection circuitry to monitor
the power supply and battery output.
Electroluminescent and Application Specific Standard Products. Sipex has
targeted the battery powered/portable products market to leverage its design
expertise and the process capability provided by Sipex's internal dielectric
isolation ("DI") wafer fabrication production line. The DI process allows single
chip designs to operate efficiently with both very low voltage (1V) and very
high voltage (160V) without interference or breakdown between adjacent circuits.
Sipex designers, in cooperation with Timex Corporation ("Timex"), developed a
proprietary electroluminescent ("EL") driver device, which provides the enabling
technology for the Timex(R) watches with INDIGLO(R) night-light. This custom
integrated circuit creates a 100V AC signal from a 3V DC battery within the
watch to light the backlight material. Using this technology, under license from
Timex, Sipex is providing backlighting solutions for pagers, cell phones and
handheld electronic equipment manufacturers. Sipex intends to continue its focus
in this area on high volume commercial/consumer markets, in which the attributes
of the DI fabrication process or Sipex's design capabilities can add value for
the customer.
Data Converter Products. Data converter products are incorporated into
systems that translate real world (analog) events into digital data which can be
manipulated by a microprocessor. Sipex's analog-to-digital and digital-to-analog
products are components that allow microprocessors to monitor real world
conditions, and then control responses to the conditions monitored. The main
focus of Sipex's product offerings has been high performance 12-bit
analog-to-digital and digital-to-analog converters. Sipex believes that the data
converter marketplace for 12-bit products is highly fragmented, and design wins
are characterized by long life cycles. The primary markets served by Sipex are
industrial controls, instrumentation and test equipment. Sipex expects sales of
data converter products to decline in future years as Sipex continues to focus
resources on its target markets.
Aerospace and Assembled Products. Sipex's precision high-reliability
assembled products are sold to commercial customers engaged in various aerospace
and military programs. Sipex is not currently designing new products for the
military market. Sipex expects sales of products for military applications to
continue to decline in the future as Sipex continues to focus its resources on
its target markets in the commercial sector.
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The following table identifies the list of current applications for Sipex's
products, identified by end market:
MARKET USER APPLICATION
- ------ ----------------
Networking/Data Communication...................... Workstations
Notebook PCs
Desktop PCs
Printers
Point-of-sale Terminals
Modems
Fax Machines
Bridges
Routers
Frame Relay
Servers
Consumer........................................... Personal Digital Assistants (PDA's)
Watches
Clocks
Remote Controls
Keypads
Cameras
Radios
Telecommunications................................. Cellular Phones
Cordless Phones
Satellites
Base Stations
Pagers
PBX Switches
Global Positioning Systems
Industrial Controls & Instrumentation.............. Test Equipment
Robotics
Data Recorders
Analyzers
Meters
Factory Automation
Automotive Instrumentation
Aerospace/Military................................. Satellites
Missile Systems
Engine Controls
Braking Systems
Aircraft
SALES AND DISTRIBUTION
We sell our products to OEM customers either directly through a direct
sales force and with the assistance of a network of independent sales
representatives, or indirectly through independent distributors. We continually
seek to broaden our customer base by increasing sales through our distributor
network. Domestic and international distributor sales were 28.8%, 34.9% and
35.4% of net sales in 1999, 1998 and 1997 respectively.
Our direct sales force consists of sales managers and field application
engineers who provide technical and applications support to customers,
independent sales representatives and distributors. The sales staff and field
application engineers are located at our Billerica, Massachusetts headquarters
and in field sales offices in
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Munich, Paris, Belgium, Taiwan, Tokyo and California. Our sales staff and field
application engineers also manage, train and support our network of distributors
and representatives.
In North America, Sipex sells its products through 20 independent sales
representative organizations having approximately 40 offices, and one
distributor having approximately 110 sales locations. These independent entities
are selected for their ability to provide effective field sales, marketing
communications and technical support to Sipex's customers. Sipex has entered
into Sales Representative or Distributor Agreements with each of its independent
sales representatives and its distributor. These agreements typically provide
for the independent distributor to act as a non-exclusive distributor for one or
more products within a specific territory and also permit sales representatives
to act as an exclusive or a non-exclusive sales representative in appropriate
circumstances. Sipex maintains a separate price list for products sold to
distributors, which typically reflects discounts from the prices charged to
customers in direct sales transactions. Sales representatives directly solicit
orders for Sipex's products, which Sipex fills directly with the customer,
generating a commission from Sipex to the sales representative. On a semi-annual
basis, distributors are permitted to return for credit, against purchases of an
equivalent dollar value of products, up to 10% of their total purchases during
the most recent six-month period.
Outside North America, Sipex sells its products through approximately 25
distributors having 150 sales locations. International sales in 1999, 1998 and
1997 were approximately $45.4 million, $38.4 million and $33.2 million,
respectively, representing 50.5%, 41.8% and 44.1% of net sales, respectively. In
connection with its international sales, Sipex is subject to the normal risks of
conducting business internationally, including exchange rate fluctuations. To
date, Sipex has not hedged the risks associated with fluctuations in exchange
rates but may undertake such transactions in the future. Sipex currently does
not have a policy relating to hedging.
CUSTOMERS
Our customer base is comprised of merchant manufacturers, electronics
distributors and customers with captive manufacturing operations. The captive
manufacturers use our products as integral components in their equipment and
systems. In certain cases, we sell our products to a subcontract-assembly
company specified by the captive manufacturer. The merchant manufacturers
typically function as original equipment manufacturers ("OEMs") as well as
suppliers of sub-systems to other OEMs.
Our customers, none of which accounted for more than ten percent of net
sales in 1999 or 1998, include Cisco Systems, Hewlett-Packard, Nortel, Alcatel,
Lucent Technologies, ADC Telecommunications, Dell, Lexmark, Schlumberger, Xerox,
Symbol, 3Com, and IBM in the networking/data communications markets; Timex,
3Com, Casio, ETA Swatch, Seiko, Sharp, and Handspring in the consumer markets;
Motorola, Garmin, Hyundai, L.G. Information Systems, Samsung, NEC and Cidco in
the telecommunications markets; and Andover Controls, Siemens and Honeywell in
the industrial controls market. Customers incorporating our high reliability
assembled products in military applications include Honeywell, Raytheon, Snecma,
BF Goodrich, Space Systems/Loral and Lockheed Martin.
BACKLOG
Our product backlog was approximately $36.0 million at December 31, 1999
compared to $31.1 million at December 31, 1998. We generally include in backlog
all orders scheduled for delivery within one year. However, our business, and to
a large extent the entire semiconductor industry, is characterized by short-term
orders and shipment schedules. Sipex generally permits 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.
MANUFACTURING
Sipex has wafer fabrication facilities in Milpitas and Fremont, California
and has assembly operations in Billerica, Massachusetts. Sipex's wafer
fabrication facility located in Milpitas commenced manufacturing
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operations in the second half of 1999. The Milpitas wafer fabrication facility
is used to produce both four-inch and six-inch diameter wafers for use in the
production of Sipex's devices. Sipex's facilities have been certified as
ISO-9001 compliant. Sipex has commenced construction of an additional 35,000
square feet to its Milpitas facility. This new six-inch wafer fabrication
addition is expected to be completed by the end of 2000. When completed, this
addition will double the current Milpitas wafer fabrication capacity. Sipex also
added approximately 20,000 square feet to its Billerica facility for additional
final testing of devices.
Sipex broadens its manufacturing capabilities by using third-party
foundries to produce junction isolation BiCMOS processed wafers and CMOS
processed wafers. The use of third-party foundries enables Sipex to focus on its
design strengths and minimize fixed costs and capital expenditures while
providing access to diverse manufacturing technologies without bearing the full
risk of obsolescence. Sipex uses three different third-party foundries to supply
fully processed semiconductor wafers for its junction isolation BiCMOS and CMOS
products; all of these foundries have been certified as ISO-9001 compliant.
Sales of these products collectively represented approximately 35.8% of Sipex's
net sales in 1999, approximately 28.3% in 1998 and approximately 26.0% in 1997.
In the third and fourth quarters of 1999, our allocation of wafers produced
by a third-party foundry was significantly reduced. This shortage continued
until the end of December and shipments and revenue were lower during these
periods due to the reduced allocations. We are transitioning production of these
wafers into our new facility in Milpitas. The qualification of this process will
be complete in the first quarter of 2000 with production expected to begin in
the second quarter of 2000.
Our basic process technologies include silicon gate complementary
metal-oxide semiconductor ("CMOS") and BiCMOS processes. We also have two
complementary bipolar processes. Our bipolar processes provide switching
characteristics required for many linear circuit functions. The CMOS and BiCMOS
processes are typically used in circuits where high voltage, high power and low
noise are necessary.
Sipex tests integrated circuits or "die" on the wafers produced by Sipex
and its foundries for compliance with performance specifications before
assembly. Sipex's commercial products are assembled by a variety of
subcontractors in Malaysia, Indonesia, Thailand and other locations in Asia, all
of which have been certified as ISO-9002 compliant. Following assembly, the
packaged units are returned to Sipex for 100 percent final testing and
inspection prior to shipment to customers. Sipex manufactures its precision
high-reliability assembled products in Billerica, Massachusetts. Sipex is in
conformance with stringent quality and reliability requirements for military and
aerospace applications.
Sipex's subcontractors may also be subject to capacity, yield and quality
problems or may have difficulty obtaining critical raw materials, which could
result in disruptions in the supply of assembled products. Sipex's reliance on
third-party foundries and independent subcontractors involves a number of other
risks, including reduced control over delivery schedules, quality assurance and
costs. The occurrences of any supply or other problems such as the wafer
shortages Sipex experienced in the second half of 1999, could have a negative
impact on our business revenues and results of operations.
From time to time, the overall semiconductor industry has experienced
significant growth which has created industry-wide capacity shortages and
extended lead times for contract assembly, raw wafers, capital equipment,
foundry wafers and various other products and services that are critical to
Sipex's performance. Sipex is seeking to establish and maintain critical
inventories and alternate sources to minimize the impact of its vendors'
capacity limitations. However, there may be future shortages of key services
that harm Sipex's business and results of operations.
The manufacturing processes utilized by Sipex 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. In addition, yields can be 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
time-consuming or expensive to remedy. From time to time, Sipex has experienced
yield variances. 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 yield variances previously experienced
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by Sipex will not recur or that Sipex and its independent foundries will not
experience other manufacturing problems that result in delays of product
introduction or delivery. Although previous fluctuations in yield variances have
not materially affected Sipex's business, financial condition or results of
operations, there can be no assurance that future yield variances and resulting
delays would not negatively affect Sipex's business and results of operations.
Sipex received a Notice of Potential Liability from the Environmental
Protection Agency ("EPA") in June 1993 concerning a landfill identified as a
Superfund Site. Sipex has denied any liability and believes the ultimate outcome
of this matter will not have a material impact on Sipex.
PRODUCT QUALITY ASSURANCE AND RELIABILITY
Sipex is committed to customer satisfaction and continuous improvement in
all aspects of its business. This is accomplished through a comprehensive
quality and reliability system founded on documented procedures. Sipex uses
quality tools such as statistical process control, cross-functional teaming, and
advanced statistical analysis in its qualification, production processes, and
improvement activities. Sipex maintains strong relationships with its
subcontractors and routinely qualifies suppliers to established standards. Sipex
is ISO-9001 Registered and has continuously maintained conformance to
MIL-PRF-38534.
PATENTS, LICENSES AND TRADEMARKS
Sipex seeks to protect its proprietary technology through patents and trade
secret protection. Currently, Sipex holds a number of patents expiring on
various dates between the years 2000 and 2018 and has additional pending United
States patent applications, although there can be no assurance that any patents
will result from these applications. While Sipex intends to continue to seek
patent coverage for its products and manufacturing technology where appropriate,
Sipex believes that its success depends more heavily on the technical expertise
and innovative abilities of its personnel than on its patent position.
Accordingly, Sipex also relies on trade secrets and confidential technological
know-how in the conduct of its business. There can be no assurance that Sipex's
patents or applicable trade secret laws will provide adequate protection for
Sipex's technology against competitors who may develop or patent similar
technology or reverse engineer Sipex's products. In addition, the laws of
certain territories in which Sipex's products are or may be developed,
manufactured or sold, including Asia, Europe and Latin America, may not protect
Sipex's products and intellectual property rights to the same extent as the laws
of the United States.
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. Although Sipex is not
aware of any pending or threatened patent litigation, there can be no assurance
that third parties will not assert claims against Sipex with respect to existing
or future products or technologies and Sipex has been subject to such claims in
the past. In the event of litigation to determine the validity of any
third-party claims, such litigation, whether or not determined in favor of
Sipex, could result in significant expense to Sipex and divert the efforts of
Sipex's and management personnel from productive tasks. In the event of an
adverse ruling in such litigation, Sipex might be required to discontinue the
use of certain processes, cease the manufacture, use and sale of infringing
products, expend significant resources to develop non-infringing technology or
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
Sipex and Sipex's failure to develop or license a substitute technology at a
reasonable cost, Sipex's business, financial condition and results of operations
would be materially and adversely affected.
Pursuant to license agreements, Sipex pays a royalty to Timex Corporation
for certain electroluminescent product sales and to Maxim Integrated Products
for certain interface product sales. Sipex continues to receive royalty payments
from Analog Devices Incorporated for certain licensed interface products.
RESEARCH AND DEVELOPMENT
Sipex believes that continued introduction of new products in its target
markets is essential to its growth. As performance demands have increased the
complexity of analog circuits, the design and development
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process has become a multi-disciplinary effort, requiring diverse competencies
to achieve customers' desired performance. Sipex supports its key designers with
an infrastructure of product and test engineers who perform various support
functions and allow the designer to focus on the core elements of the design.
In 1999, 1998 and 1997, Sipex spent approximately $10.6 million, $8.4
million and $7.0 million, respectively, on research and development,
representing, 11.8%, 9.1% and 9.2%, respectively, of net sales for these
periods. Sipex expects that expenditures in support of research and development
activity will continue to increase in absolute dollars in the near future.
Sipex's ability to compete depends in part upon its continued introduction
of technologically innovative products on a timely basis. Sipex's research and
development efforts are directed primarily at designing and introducing new
products and technologies. Sipex continually upgrades its internal technology
while also working with foundries to develop new technologies for new
generations of products. In addition, Sipex continually refines its
manufacturing practices and technology to improve yields of its products.
COMPETITION
We compete in the high performance segment of the analog integrated circuit
market. The analog integrated circuit segment of the semiconductor industry is
intensely competitive, and many major semiconductor companies presently compete
or could compete with us in some capacity. Our primary competitors have
substantially greater financial, technical, manufacturing, marketing,
distribution and other resources and broader product lines than us. Our current
primary competitors in the high-performance segment of the analog circuit market
include Analog Devices, Linear Technology, Semtech, Micrel Semiconductor,
National Semiconductor and Maxim Integrated Products. Although foreign companies
active in the semiconductor market have not traditionally focused on the high
performance analog market, many foreign companies have the financial and other
resources to participate successfully in these markets, and may become
formidable competitors in the future.
We believe that our ability to compete successfully depends on a number of
factors, including the ability to develop and introduce new products rapidly,
product innovation, product quality and reliability, product performance, the
breadth of our product line, price, technical service and support, manufacturing
quality and capacity, supply of raw materials, efficiency of production,
delivery capabilities and protection of the Company's intellectual property. We
believe that product innovation, quality, reliability, performance and the
ability to introduce products rapidly are more important competitive factors
than price in our target markets because we compete primarily at the stage when
system manufacturers design analog products into their systems. At the design-in
stage, there is less price competition, particularly when there is only one
source for the product. We believe that, by virtue of our analog expertise and
rigorous design methodology, we compete favorably in the areas of rapid product
introduction, product innovation, quality, reliability and performance, but it
may be at a disadvantage in comparison to larger companies with broader product
lines, greater technical and financial resources and greater service and support
capabilities.
ENVIRONMENTAL REGULATION
Sipex is subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in its manufacturing process.
Although Sipex believes that its activities conform to presently applicable
environmental regulations, the failure to comply with present or future
regulations could result in fines being imposed on Sipex, suspension of
production or a cessation of operations. Increasing public attention has been
focused on the environmental impact of semiconductor manufacturing operations,
and there can be no assurance that regulatory changes or changes in regulatory
interpretation or enforcement may render compliance more difficult and costly.
Any failure of Sipex to control the use of, or adequately restrict the discharge
of hazardous substances, or otherwise comply with environmental regulations,
could subject Sipex to significant future liabilities. In addition, although
Sipex believes that its past operations conformed with then applicable
environmental laws and regulations, there can be no assurance that Sipex has not
in the past violated applicable laws or regulations, which violations could
result in remediation or other liabilities, or that past use or disposal of
environmentally
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sensitive materials in conformity with then existing environmental laws and
regulations will not result in remediation or other liabilities under current or
future environmental laws or regulations.
EMPLOYEES
At December 31, 1999, we had 435 full-time employees. 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 is subject to a collective
bargaining agreement and we have never experienced a work stoppage. We believe
that our relations with our employees are good.
ITEM 2. PROPERTIES:
The Company's corporate office and principal manufacturing facility is
located in Billerica, Massachusetts. Information regarding the principal plants
and properties appears below:
APPROXIMATE OWNED OR LEASE
FACILITY SIZE LEASED: LAND EXPIRATION
LOCATION DESCRIPTION (SQUARE FEET) AREA OWNED DATE
- -------- -------------- ------------- ------------ ----------
Billerica, MA Manufacturing 66,600 Leased 01/31/2008
General Office
Milpitas, CA* General Office 20,000 Leased 04/30/2002
Milpitas, CA Manufacturing 56,000 Leased 07/01/2004
General Office
San Jose, CA Manufacturing 12,500 Leased 12/31/2000
Providence, RI General Office 680 Leased 10/31/2001
Pleasanton, CA* Manufacturing 7,700 Leased 03/31/2001
General Office
Fremont, CA Warehouse 14,200 Leased 05/07/2001
Fremont, CA* General Office 5,000 Leased 04/30/2001
Fremont, CA Manufacturing 10,300 Leased 08/31/2000
Fremont, CA* Manufacturing 10,300 Leased 08/31/2000
Fremont, CA Manufacturing 5,200 Leased 01/31/2001
General Office
Fremont, CA* General Office 5,160 Leased 04/30/2001
Munich, Germany General Office 2,500 Leased 02/28/2003
Tokyo, Japan General Office 1,800 Leased 01/31/2001
Zaventem, Belgium General Office 6,000 Leased 09/30/2009
Taipei, Taiwan General Office 485 Leased 06/30/2000
- ---------------
* Facility planned to be exited and estimated costs have been accrued for at
December 31, 1999.
ITEM 3. LEGAL PROCEEDINGS:
Sipex may become involved in various legal actions arising in the ordinary
course of business. Sipex is currently not a party to any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters were submitted to a vote of Sipex's security holders during the
quarter ended December 31, 1999.
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EXECUTIVE OFFICERS OF SIPEX
Information relating to the executive officers of Sipex is set forth below.
All officers held office as of December 31, 1999.
NAME, AGE & POSITION BUSINESS EXPERIENCE
- -------------------- -------------------
James E. Donegan -- Age 54 Mr. Donegan joined the Company in April 1985 as Chairman
Chairman, Chief Executive Officer and of the Board, Chief Executive Officer and President of
Director Sipex. Mr. Donegan currently serves as a Director of
Genesis Microchip Inc., a manufacturer of video
semiconductors. Before joining Sipex, Mr. Donegan held
the position of Group Vice President of the Electronic
Components Group at Midland Ross Corp.
Frank R. DiPietro -- Age 52 Mr. DiPietro joined Sipex in December 1983 as Chief
Executive Vice President, Finance, Chief Financial Officer and Treasurer. He was appointed Vice
Financial Officer, Treasurer and Clerk President of Finance in January 1985, Senior Vice
President in June 1985 and Executive Vice President in
November 1996. From November 1979 to November 1983, Mr.
DiPietro served as a Controller at Digital Equipment
Corp.
Stephen Parks -- Age 39 Mr. Parks joined Sipex in June, 1999 as President and
President and Chief Operating Officer Chief Operating Officer. From September 1995 to June
1999, Mr. Parks held the position of Business Unit
Director at Cherry Semiconductor for the Computer and
Industrial Business Unit. From 1982 to 1995, Mr. Parks
worked for AT&T Microelectronics (now Lucent
Technologies) where he held a variety of management
positions in Engineering and Marketing.
Raymond W.B. Chow -- Age 51 Mr. Chow joined Sipex in October 1988. He was appointed
Senior Vice President, Chief Technology Senior Vice President of Interface Products in August
Officer 1994 and Chief Technology Officer in July 1998. From
March 1982 to October 1988, Mr. Chow was President and
Chief Executive Officer of Barvon BiCMOS Technology,
Inc. ("Barvon"), a company Mr. Chow founded in 1982.
Yener Gurler -- Age 60 Mr. Gurler joined Sipex in August 1992 as Fab Manager.
Senior Vice President, Operations He was appointed Vice President, Fab Operations in 1997
and Senior Vice President, Operations in 1998. He joined
Sipex from Universal Semiconductor where he held the
position of Vice President, Operations.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS:
QUARTERLY STOCK MARKET DATA
DEC. 31, 1999 OCT. 2, 1999 JULY 3, 1999 APRIL 3, 1999
------------- -------------- ------------- --------------
FISCAL 1999
Stock price range per share:
High................................ 24.563 22.063 21.750 36.188
Low................................. 9.813 12.188 11.438 9.375
DEC. 31, 1998 SEPT. 26, 1998 JUNE 27, 1998 MARCH 28, 1998
------------- -------------- ------------- --------------
FISCAL 1998
Stock price range per share:
High................................ 37.438 23.875 35.750 38.188
Low................................. 18.625 17.250 18.188 25.250
On December 31, 1999, there were approximately 63 shareholders of record.
Sipex believes that the number of beneficial holders of Common Stock exceeds
1,200. The last reported sale price of the Common Stock on March 6, 2000 was
$36.0625 per share. Sipex has never declared or paid a cash dividend on its
capital stock. Sipex currently intends to retain all of its earnings to finance
future growth and therefore, does not anticipate paying any cash dividends on
its common stock in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On October 21, 1999, we agreed to acquire Calogic pursuant to an Agreement
and Plan of Reorganization between us and Calogic. Pursuant to the Agreement and
Plan of Reorganization, on November 23, 1999, we issued 3,299,999 shares of
common stock to the Calogic shareholders in exchange for all of the outstanding
shares of Calogic capital stock.
On November 23, 1999, we also issued an aggregate of 300,000 shares of
common stock to the minority shareholders of Alpha Semiconductor which was a
majority owned subsidiary of Calogic.
The shares issued to the former Calogic and Alpha Semiconductor
shareholders were issued in reliance on the exemptions for non-public offerings
provided by Rule 506 and section 4(2) of the Securities Act of 1933 and
constitute "restricted securities" under Rule 144 of the Securities Act. The
provisions of Rule 144 permit limited resale of "restricted securities," subject
to mandatory holding periods, volume limitations and other restrictions.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA:
Selected financial data for the last five years appear below (in thousands,
except per share data):
The financial data has been adjusted to reflect the combined operations of
Sipex Corporation and Calogic as a result of the November, 1999 merger which was
recorded as a pooling of interests (see Note 2 to Consolidated Financial
Statements).
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997* 1996* 1995*
-------- -------- ------- ------- -------
OPERATING RESULTS
Net sales.............................. $ 89,820 $ 91,961 $75,289 $64,044 $59,038
Gross profit........................... 32,593 39,773 29,951 22,924 18,553
As a % of net sales.................. 36.3% 43.2% 39.8% 35.8% 31.4%
Depreciation and amortization.......... 2,528 2,392 1,961 1,505 2,667
Research & development expenses........ 10,623 8,407 6,951 6,516 6,126
Income (loss) from operations.......... 2,321 15,438 9,901 4,897 (62)
Income (loss) before taxes............. 3,680 16,588 10,488 4,247 (1,213)
Net income............................. 6,099 19,429 11,418 4,179 (1,448)
As a % of net sales.................. 6.8% 21.1% 15.2% 6.5% (2.5)%
Net income per common share -- basic... 0.28 0.92 0.55 0.25 (0.07)
Net income per common share -- assuming
dilution............................. 0.28 0.88 0.52 0.23 (0.07)
FINANCIAL DATA
Cash/short-term investments............ $ 7,089 $ 25,791 $39,986 $37,146 $ 345
Restricted cash equivalents and
securities........................... 36,750 24,356 -- -- --
Total assets........................... 119,795 107,689 84,348 73,259 34,732
Working capital........................ 42,037 50,478 54,377 51,361 9,364
Current ratio.......................... 3.9 3.9 4.1 4.1 1.6
Capital expenditures................... 9,214 4,700 6,834 2,932 1,893
Shareholders' equity................... 105,101 89,772 65,331 56,348 1,242
- ---------------
* All data reflects 2 for 1 stock split effected through a 100% dividend on
August 18, 1997
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
OVERVIEW
Sipex designs, manufactures and markets high performance and high value
added analog integrated circuits using standard BiCMOS and dielectrically
isolated BiCMOS technologies. Analog integrated circuits address a wide range of
real-world signal processing applications associated with such naturally
occurring physical phenomena as temperature, pressure, weight, position, light
and sound. These circuits play a fundamental and important role in coupling the
real world to the digital computer and vice versa. Sipex's products include
single, dual and multi-protocol interface circuits, power management products,
data converters, electroluminescent driver circuits, low power and high voltage
application specific circuits.
On November 23, 1999, Sipex completed its acquisition of Calogic. In
connection with the transaction, the Company issued approximately 3.6 million
shares of its common stock. The merger was accounted for as a
pooling-of-interests. Accordingly, Sipex's consolidated financial statements
have been restated to include the accounts and operations of Calogic for all
periods presented. Sipex recorded combined merger-related transactions costs of
$1.2 million primarily for professional services, such as investment banking,
legal, and accounting fees.
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For the periods indicated, the following table sets forth the percentage of
net sales represented by the respective line items in the Company's consolidated
statements of operations, adjusted to reflect the merger of Calogic as a
pooling-of-interests for all periods presented.
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
----- ----- -----
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 63.7 56.8 60.2
----- ----- -----
Gross profit................................................ 36.3 43.2 39.8
Operating expenses:
Research and development.................................. 11.8 9.1 9.2
Marketing and selling..................................... 10.9 9.7 10.0
General and administrative................................ 8.8 6.4 7.4
Merger related costs...................................... 1.3 -- --
Facility exit costs....................................... 0.9 1.2 --
----- ----- -----
Total operating expenses.................................... 33.7 26.4 26.6
----- ----- -----
Income from operations...................................... 2.6 16.8 13.2
Other income, net........................................... 1.5 1.2 .8
----- ----- -----
Income before income taxes.................................. 4.1 18.0 14.0
===== ===== =====
Fiscal Year Ended December 31, 1999 compared to Fiscal Year Ended December 31,
1998
Net sales decreased 2.3% to $89.8 million for the year ended December 31,
1999 compared to $92.0 million for the year ended December 31, 1998. The
decrease in net sales was primarily due to the lower than planned deliveries of
sub-contracted wafers announced by our primary third-party wafer supplier in
September of 1999. The average selling price for the Company's products also
declined slightly during the year. Approximately 51% of Sipex's net sales were
derived from international customers in 1999 compared to 42% in 1998.
Geographically, in 1999, Sipex experienced sales growth of 25% in Japan and the
Pacific Rim countries and an additional 6% growth in Europe while sales declined
17% in the U.S.
Gross profit was $32.6 million or 36.3% of net sales in 1999 compared to
$39.8 million or 43.2% of net sales in 1998. The 6.9% reduction in 1999 from
1998 was primarily due to the lack of absorption of certain fixed costs over a
reduced sales base caused by the closing of our original Milpitas wafer
fabrication facility and the commencing of our new Milpitas wafer fabrication
facility. Additionally, we received significant price increases from one of our
subcontract wafer manufacturers. We expect that we will begin processing these
wafers in the new Milpitas wafer fabrication facility in the second quarter of
2000.
Research and development ("R&D") expenses were $10.6 million and $8.4
million in 1999 and 1998, respectively, or 11.8% and 9.1% of net sales,
respectively. The increase in R&D expense in 1999 as compared to 1998 was due
primarily to process development as well as an increase in staffing,
particularly design engineering personnel and higher spending for development of
mask sets and test wafers.
Marketing and selling expenses were $9.7 million and $8.9 million in 1999
and 1998, respectively, or 10.9% and 9.7% of net sales, respectively. The
increase in marketing and selling expenses in 1999 over 1998 was due primarily
to an increase in staffing, particularly sales personnel.
General and administrative expenses were $7.9 million and $5.9 million in
1999 and 1998, respectively, or 8.8% and 6.4% of net sales, respectively. The
increase in general administration expense was due primarily to increased
staffing, legal and other related professional expenses. Included in the general
and administrative costs were charges for sales and marketing restructuring of
$400,000.
Facility exit costs for 1999 consist of $1.9 million estimated costs of
closing several of the manufacturing facilities acquired as a result of the
Calogic acquisition that are duplicate facilities, offset by $1.1 million from
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the sale in the third quarter of 1999 of the tangible assets of our
semiconductor wafer fab located in Milpitas California, a portion of which had
been written down in the fourth quarter of 1998. In the fourth quarter of 1999,
the management of Sipex and its Board of Directors approved a plan to close its
California manufacturing facilities which were acquired through the merger with
Calogic. As part of the plan, we will be vacating these leased facilities and
moving those operations to our newly completed facility in Milpitas, California.
Total estimated costs of $1.9 million associated with the closure of the
facilities includes $932,000 of rent, real estate taxes, and utility costs which
will be paid over an estimated two year period after the buildings are vacated
and until they can be subleased or the lease terminates. Additionally, we have
recorded $296,000 as a charge to current operations for the write-down to net
realizable value of less efficient and duplicate machinery and equipment not
needed in the combined restructured manufacturing operations. Additionally, the
Company recorded $643,000 of facility exit costs related to employee severance.
In 1998, the facility exit costs of $1.1 million represented the estimated cost
of the closure of the manufacturing facility in Milpitas, California and the
sales office in France. The charge for property, plant and equipment represents
the write-down to the net realizable value of less efficient and duplicate
machinery and equipment not needed in the combined restructured manufacturing
operations. Severance and other employee related costs totaling $200,000 were
also included relating to the closing of an international office.
Other income, net was $1.4 million and $1.2 million in 1999 and 1998,
respectively. The increase in other income was due primarily to higher interest
income arising from increased yields on cash, cash equivalents and investments.
We recorded an income tax benefit of $2.4 million for 1999 compared to an
income tax benefit of $2.8 million for 1998, resulting in an effective income
tax benefit rate of 66% in 1999 compared to an effective rate of 17.1% in 1998.
These effective rates differed from the statutory rate due to our utilization of
net operating loss carryforwards which were previously reserved, and
additionally, to the reduction of the valuation allowance for future tax
benefits expected to be realized in the future.
Fiscal Year Ended December 31, 1998 compared to Fiscal Year Ended December 31,
1997
Net sales increased 22.1% to $92.0 million for the year ended December 31,
1998 compared to $75.3 million for the year ended December 31, 1997. The
increase in net sales was primarily due to higher unit shipments resulting from
continued introductions of new products and increased market acceptance of our
proprietary and second source products. The average selling price for our
products declined slightly during the year. Approximately 42% of our net sales
were derived from international customers in 1998 compared to 44% in 1997.
Geographically, in 1998, Sipex experienced sales growth of 33% in Europe, 27% in
the U.S. and 8% in Japan and the Pacific Rim countries.
Gross profit was $39.8 million or 43.2% of net sales in 1998 as compared to
$30.0 million or 39.8% of net sales in 1997. The improvements in 1998 over 1997
were primarily due to the absorption of certain fixed costs over a larger sales
base, manufacturing efficiencies and increased market acceptance of our
proprietary and application specific standard products. This was partially
offset by the slightly lower average selling price for our products.
Research and development ("R&D") expenses were $8.4 million and $7.0
million in 1998 and 1997 or 9.1% and 9.2% of net sales, respectively. The
increase in R&D expense in 1998 as compared to 1997 was due primarily to an
increase in staffing, particularly design engineering personnel and higher
spending for development of mask sets and test wafers.
Marketing and selling expenses were $8.9 million and $7.5 million in 1998
and 1997, respectively, or 9.7% and 10.0% of net sales, respectively. The
increase in marketing and selling expenses in 1998, as compared to 1997, was due
primarily to an increase in staffing, particularly sales personnel, and an
increase in commission cost associated with sales.
General and administrative expenses were $5.9 million and $5.6 million in
1998 and 1997, respectively, or 6.4% and 7.4% of net sales, respectively. The
increase in general and administrative expense was due primarily
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to increased legal and other related professional expenses. The increase is also
the result of a write-off of an account receivable.
The facility exit costs of $1.1 million represent the estimated cost of the
closure of the manufacturing facility in Milpitas, California and the sales
office in France. The charge for property, plant and equipment represents the
write-down to the net realizable value of less efficient and duplicate machinery
and equipment not needed in the combined restructured manufacturing operations.
Severance and other employee related costs were also included relating to the
closing of an international office.
Other income, net was $1.2 million and $587,000 in 1998 and 1997,
respectively. The increase in other income was due primarily to higher interest
income resulting from increases in cash, cash equivalents and investments.
We recorded an income tax benefit of $2.8 million for 1998 and an income
tax benefit of $930,000 for 1997, resulting in an effective income tax benefit
rate of 17.1% in 1998 compared to an effective rate of 8.9% in 1997. These
effective rates differed from the statutory rate due to our utilization of net
operating loss carryforwards which were previously reserved, and additionally,
to the reduction of a portion of the valuation allowance for tax benefits
expected to be realized in the future.
Liquidity and Capital Resources
At December 31, 1999, Sipex had working capital of $42.0 million and
available funds of $7.1 million consisting of cash and cash equivalents and
investment securities. Sipex has pledged up to $36.8 million of cash and cash
equivalents and investment securities as security for a lease which Sipex
entered into for the construction and lease of a new wafer fabrication facility
in Milpitas, California. The facility was completed in the first quarter of
1999. Sipex has classified the amount pledged as restricted long-term assets on
the consolidated balance sheet at December 31, 1999. Net cash provided by (used
in) operating activities was ($7.4) million, ($13.9) million, and $9.0 million
in 1999, 1998 and 1997, respectively. Net cash used in operating activities in
1999 resulted primarily from a $2.3 million increase in inventories, $6.7
million increase in deferred taxes and a $12.4 million increase in restricted
cash associated with the pledge discussed above and was partially offset by net
income of $6.1 million and a $1.6 million decrease in accounts receivable. In
1998, net cash used in operating activities resulted primarily from $24.3
million in restricted cash associated with the pledge discussed above, a $3.9
million increase in accounts receivable, $371,000 increase in inventories and
$6.9 million increase in deferred taxes which was partially offset by net income
of $19.4 million.
Net cash used in investing activities for property, plant and equipment was
$9.2 million, $4.7 million and $6.8 million in 1999, 1998 and 1997,
respectively. The growth in 1999 capital investment related to the expansion of
our wafer manufacturing in San Jose, California, equipment upgrades in all
facilities and $2.3 million relating to upgrading Sipex's information systems
infrastructure.
Net cash (used in) provided by financing activities was ($2.1) million,
$4.5 million and $609,000 in 1999, 1998 and 1997, respectively. In 1999, $4.4
million was provided by the issuance of common stock on the exercise of options
pursuant to the Company's stock plans offset by the repayment of $6.6 million of
debt obligations. In 1998, $5.1 million was provided by the issuance of common
stock on the exercise of options pursuant to Sipex's stock purchase plans offset
partially by the repayment of approximately $578,000 of debt obligations. In
1997, $1.2 million was provided by the issuance of common stock on the exercise
of options or pursuant to the Company's stock purchase plans offset partially by
the repayment of approximately $1.3 million of capital lease and other debt
obligations.
At December 31, 1999, Sipex has U.S. net operating loss carryforwards of
approximately $21.0 million, which are available to offset future Federal
taxable income. These losses expire during the years 2005 through 2010. As of
December 31, 1999, utilization of these net operating loss carryforwards is
subject to an annual limitation of approximately $7.4 million as a result of an
ownership change which occurred on September 30, 1996.
Sipex anticipates that the available funds and cash provided from
operations will be sufficient to meet cash and working capital requirements for
the foreseeable future.
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Factors Affecting Future Results
From time to time, information provided by Sipex, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including in this Form 10-K) may contain statements which
are not historical facts, so called "forward-looking statements", and are made
pursuant to the safe harbor provision of the Private Securities Litigation
Reform Act of 1995 and releases of the Securities and Exchange Commission. In
particular, certain statements contained in the Management's Discussion and
Analysis of Financial Condition and Results of Operations which are not
historical facts (including, but not limited to, statements concerning
anticipated availability of capital for working capital and for capital
expenditures) constitute "forward-looking" statements. Sipex's actual future
results may differ significantly from those stated in any forward-looking
statements. Factors that may cause such differences include, but are not limited
to, the factors discussed below and the other risks discussed in Sipex's other
filings with the Securities and Exchange Commission.
Sipex's 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 competitive pressures on selling
prices; the timing and cancellation of customer orders; availability of foundry
capacity and raw materials; fluctuations in yields; changes in product mix;
Sipex's ability to introduce new products and technologies on a timely basis;
introduction of products and technologies by Sipex's competitors; market
acceptance of Sipex's and its customers' products; the level of orders received
which can be shipped in a quarter; the ability of Sipex to manufacture in the
correct mix to respond to orders on hand and new orders received in the future;
the timing of investments in research and development, including tooling
expenses associated with product development, process improvements and
production; and the cyclical nature of the semiconductor industry. Due to the
absence of substantial noncancellable backlog, Sipex typically plans its
production and inventory levels based on internal forecasts of customer demand,
which are highly unpredictable and can fluctuate substantially. Because Sipex is
continuing to increase its operating expenses for personnel and new product
development and for inventory in anticipation of increasing sales levels,
operating results would be adversely affected if increased sales are not
achieved. In addition, Sipex is limited in its ability to reduce costs quickly
in response to any revenue shortfalls. As a result of the foregoing or other
factors, Sipex may experience material fluctuations in future operating results
on a quarterly or annual basis which could substantially harm its business,
financial condition and operating results.
Supply and Manufacturing Risks
In an effort to reduce Sipex's reliance on outside fabricators for its
wafers, Sipex has built an in-house fabrication facility in Milpitas,
California. Sipex is in the process of bringing wafer production in-house and
transitioning certain products to the new fab. Sipex may experience unexpected
delays and problems in qualifying and ramping up production at this new
facility. The failure of Sipex to implement the new fab successfully and in a
timely fashion may impact future revenue growth and operating results.
Sipex currently relies on three outside foundries to supply fully processed
semiconductor wafers. There are significant risks associated with reliance on
outside foundries, including the lack of assured wafer supply and control over
delivery schedules, the unavailability of or delays in obtaining access to key
process technologies and limited control over quality assurance, manufacturing
yields and production costs. Sipex is also subject to significant manufacturing
risks including yield variances which Sipex or its outside foundries may
experience. The occurrence of any of these problems would negatively impact
Sipex's business and results of operations.
Expected Benefits from the Merger with Calogic
Sipex completed the merger with Calogic with the expectation that the
merger would result in certain benefits, including:
- cost savings related to the elimination of redundant activities;
- the opportunity to generate revenue from new customers;
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- operating efficiencies such as combined managerial, sales, marketing and
technological expertise and personnel; and
- other synergies due to the strategic fit and compatibility of the two
companies, including their common equipment platforms and information
systems.
We may not realize any of the anticipated benefits of the merger.
Integrating Calogic's operations and personnel with our business has been and
continues to be a complex and difficult process. Achieving the benefits of the
merger will depend upon the successful integration of Calogic's business in an
efficient and timely manner. The integration of Calogic with our operations
could require additional costs and expenses as well as demands on management
personnel. The diversion of the attention of our management and any difficulties
encountered in the process of combining our companies could cause the disruption
of, or a loss of momentum in our activities. Further, we may experience
customer, supplier or employee attrition as a result of the merger. We cannot
assure you that the merger will be accretive to net income at any point in the
future.
Intellectual Property Rights
Sipex relies on certain intellectual property protections to preserve its
intellectual property rights. Any invalidation of these intellectual property
rights or lengthy and expensive defense of these rights could negatively impact
Sipex's business and results of operations.
Dependence on New Products
Sipex's success will depend upon its ability to develop new semiconductor
devices for existing and new markets, to introduce such products in a timely
manner and to have such products selected for design into new products of its
customers. Successful product development and introduction depends on a number
of factors, including accurate new product definition, timely completion and
introduction of new product designs, availability of foundry capacity,
achievement of manufacturing yields and market acceptance of Sipex's and its
customers' products.
Competition: The Semiconductor Industry
Sipex competes with several domestic semiconductor companies, most of which
have substantially greater financial, technical, manufacturing, marketing,
distribution and other resources and broader product lines than Sipex. Sipex
believes that its ability to compete successfully depends on a number of
factors, including the breadth of its product line, the ability to develop and
introduce new products rapidly, product innovation, product quality and
reliability, product performance, price, technical service and support, adequacy
of manufacturing quality and capacity and sources of raw materials, efficiency
of production, delivery capabilities and protection of Sipex's products by
intellectual property laws. The semiconductor industry has been highly cyclical
and is subject to significant economic downturns at various times, characterized
by diminished product demand, accelerated erosion of average selling prices and
production over-capacity. Sipex may experience substantial period-to-period
fluctuation in future operating results due to general semiconductor industry
conditions and overall economic conditions.
International Sales
Sipex derives a significant portion of its net sales from international
sales, including Asia, which are subject to certain risks, including unexpected
changes in legal and regulatory requirements, changes in tariffs, exchange rates
and other barriers, political and economic instability, difficulties in accounts
receivable collection, difficulties in managing distributors or representatives,
difficulties in staffing and managing international operations, difficulties in
protecting Sipex's intellectual property overseas, seasonality of sales and
potentially adverse tax consequences. There can be no assurance that recent
economic troubles in certain Asian countries will not have a material adverse
effect on Sipex's business, results of operations and financial condition.
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Stock Price Volatility
The trading price of Sipex's common stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in operating results,
announcements of technological innovations or new products by Sipex or its
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. 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 Sipex's common stock.
Year 2000 Readiness Disclosure Statement
Sipex did not experience any interruption to its business activities or
incur any impairment to its financial condition or results of operations as a
result of passing into calendar year 2000. Sipex will continue to monitor its
own internal systems and products to determine the impact, if any, of problems
associated with the Year 2000.
To date, Year 2000 costs are not considered by Sipex to be material to the
Company's financial condition nor has Sipex incurred any significant unplanned
expenditures to address or remediate Year 2000 problems.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
Sipex owns financial instruments that are sensitive to market risks as part
of its investment portfolio. The investment portfolio is used to preserve
Sipex's capital until it is required to fund operations, including Sipex's
research and development activities. None of these market-risk sensitive
instruments are held for trading purposes. Sipex does not own derivative
financial instruments in its investment portfolio. The investment portfolio
contains instruments that are subject to the risk of a decline in interest
rates.
Investment Rate Risk -- Sipex's investment portfolio includes debt
instruments that are primarily United States government bonds of less than one
year in duration. These bonds are subject to interest rate risk, and could
decline in value if interest rates fluctuate. Sipex's investment portfolio also
consists of certain commercial paper which is also subject to interest rate
risk. Due to the short duration and conservative nature of these instruments,
Sipex does not believe that it has a material exposure to interest rate risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Sipex's Consolidated Financial Statements and related Independent Auditors'
Report are presented in the following pages.
Independent Auditors' Reports
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Shareholders' Equity and Comprehensive Income for
the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
DIRECTOR'S NAME AND
YEAR DIRECTOR YEAR TERM CLASS OF
FIRST BECAME A DIRECTOR AGE POSITION(S) HELD WILL EXPIRE DIRECTOR
----------------------- --- ---------------- ----------- --------
Steward S. Flaschen (1996)............. 74 Director 2000 I
Manfred Loeb (1982-1987; 1992)......... 72 Director 2000 I
Lionel H. Olmer (1988)................. 65 Director 2001 II
John L. Sprague (1993)................. 70 Director 2001 II
Willy M. C. Sansen (1997).............. 57 Director 2001 II
James E. Donegan (1985)................ 54 Chairman of the Board and Chief 2002 III
Executive Officer
Dr. Flaschen has been a Director of the Company since August 1996. From
1986 to the present, Dr. Flashen has served as President of Flaschen and Davies,
a management consulting firm. In addition, Dr. Flaschen is Chairman of the Board
of Directors of TranSwitch Corporation, a digital and mixed-signal semiconductor
company, Chairman of the Board of Telco Systems, a telecommunications company
and an Independent General Partner of Merrill Lynch Partners II.
Mr. Loeb has been a director of the Company from 1982 to 1987 and from 1992
to the present. From 1983 to December 1992, he served as the Executive Director
of Tractebel S.A. and Chief Executive Officer of the Electricity and Gas
International Division of Tractebel S.A. Since 1993, Mr. Loeb has served as an
Advisor Director of Tractebel S.A. and Chairman of Tractebel, Inc. (USA). In
addition to serving as a director of the Company, Mr. Loeb currently serves as a
director of Telfin S.A., an affiliate of Tractebel S.A.
Mr. Olmer has been a director of the Company since 1988. From 1981 to 1985,
he served as Undersecretary of Commerce for International Trade in the Reagan
Administration. From 1985 until the present, he has been a partner in the law
firm of Paul, Weiss, Rifkind, Wharton & Garrison, concentrating on international
trade law.
Dr. Sansen has been a director of the Company since July 1997. He has been
a full professor at the Katholieke University Leuven in Belgium since 1981. He
currently heads the Medical and Integrated Circuits and Sensors Division of the
Electrical Engineering Department. Dr. Sansen is the author of six electronics
books and more than three hundred papers and is currently a Fellow at the
Katholieke University Leuven Institute of Electrical and Electronics
Engineering, and past chairman of the Electrical Engineering Department of
Katholieke University Leuven.
Dr. Sprague has been a director of the Company since 1993. He has been the
president of John L. Sprague Associates, Inc., a consulting firm, since 1988. In
addition to serving as a director of the Company, Dr. Sprague currently serves
as a director of Aerovox, Inc., a manufacturer of electronic components,
Allmerica Financial Corporation, a financial services company, and California
Micro Devices, a manufacturer of electronic components. Dr. Sprague has also
been a partner of the CEO Perspective Group since December 1998.
Mr. Donegan joined the Company in April 1985 as Chairman of the Board,
Chief Executive Officer and President of the Company. Before joining the
Company, Mr. Donegan held the position of Group Vice President of the Electronic
Components Group at Midland Ross Corporation. Prior to Midland Ross Corporation,
Mr. Donegan was Vice President and General Manager at Cameron & Barkley and
Company. Prior to working at Cameron & Barkley and Company, Mr. Donegan spent
ten years with the General Electric Company in various manufacturing positions.
Mr. Donegan currently serves as a Director of Genesis Microchip, Inc., a
manufacturer of video semiconductors.
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21
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, directors and persons who own more than ten percent of a
registered class of the Company's equity securities (collectively, "Reporting
Persons"), to file reports of ownership on Forms 3, 4 and 5 with the Securities
and Exchange Commission and the Company. Based on the Company's review of copies
of such forms and written representations from the Reporting Persons, the
Company believes that all its officers, directors and greater than ten percent
shareholders complied with all filing requirements applicable to them with
respect to transactions during fiscal year 1999.
ITEM 11. EXECUTIVE COMPENSATION:
The following table sets forth certain information concerning the annual
and long-term compensation for services in all capacities to the Company for the
fiscal years ended December 31, 1997, 1998 and 1999, of those persons who were,
during this time (i) the chief executive officer and (ii) the other four most
highly compensated executive officers of the Company (such five officers
collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION(1)
----------------------- --------------------- ALL OTHER
FISCAL SECURITIES UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR YEAR SALARY($) BONUS($)(2) OPTIONS(#) ($)(3)
-------------------------------- ------ --------- ----------- --------------------- ------------
James E. Donegan..................... 1999 $249,923 $200,000 150,000 $15,205
Chairman and Chief Executive 1997 165,000 79,300 -- 6,065
Officer 1997 240,000 130,690 100,000 12,677
Stephen E. Parks (4)................. 1999 128,846 175,000 325,000 53,061(5)
President and Chief Operating
Officer
Frank R. DiPietro.................... 1999 199,135 200,000 100,000 9,741
Executive Vice President of 1998 176,442 100,000 50,000 6,152
Finance, Treasurer, Chief 1997 165,000 79,300 -- 6,065
Financial Officer and Clerk
and Clerk
Raymond W.B. Chow.................... 1999 182,235 100,000 100,000 3,771
Senior Vice President and Chief 1998 175,480 80,000 50,000 4,739
Technology Officer 1997 160,000 74,200 -- 4,739
Yener Gurler......................... 1999 156,202 125,000 100,000 3,771
Senior Vice President of Operations 1998 136,115 65,000 50,000 4,325
- ---------------
(1) The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive payments during fiscal
years 1997, 1998 or 1999.
(2) Bonuses are reported in year earned even if actually paid in subsequent
year.
(3) Consists of contributions made by the Company on behalf of the Named
Executive Officers to the Company's Tax Deferred Savings Plan, and insurance
premiums paid by the Company.
(4) Salary for Mr. Parks for 1999 is for the period from his date of hire, June
22, 1999.
(5) Includes $51,041 for relocation costs.
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22
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth stock options granted during the year ended
December 31, 1999 to the Named Executive Officers. No stock appreciation rights
("SARs") were granted during the year ended December 31, 1999.
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------- VALUE AT ASSUMED
NUMBER PERCENT OF ANNUAL RATES OF
OF TOTAL OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OR OPTION TERMS($)(3)
OPTIONS IN FISCAL BASE PRICE PER -----------------------
NAME GRANTED(#) YEAR(%)(1) SHARE($)(2) EXPIRATION DATE 5% 10%
- ----------------------- ---------- ------------- -------------- --------------- ---------- ----------
James E. Donegan....... 75,000(4) 3.5% $15.5625 8/10/09 $ 734,038 $1,860,000
75,000(5) 3.5% $13.0625 12/1/09 $ 616,120 $1,561,370
Stephen E. Parks....... 325,000(6) 15.2% $15.5625 8/10/09 $3,180,831 $8,060,851
Frank R. DiPietro...... 50,000(4) 2.3% $15.5625 8/10/09 $ 489,359 $1,240,131
50,000(5) 2.3% $13.0625 12/1/09 $ 410,747 $1,040,913
Raymond W.B. Chow...... 50,000(4) 2.3% $15.5625 8/10/09 $ 489,359 $1,240,131
50,000(5) 2.3% $13.0625 12/1/09 $ 410,747 $1,040,913
Yener Gurler........... 50,000(4) 2.3% $15.5625 8/10/09 $ 489,359 $1,240,131
50,000(5) 2.3% $13.0625 12/1/09 $ 410,747 $1,040,913
- ---------------
(1) A total of 2,138,105 options were granted to employees (including the Named
Executive Officers) in fiscal year 1999.
(2) All options were granted at fair market value on the date of the grant.
(3) 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 the Company's Common Stock on the date of option grant
over the term of the options. These numbers are calculated based on rules
promulgated by the Securities and Exchange Commission and do not reflect the
Company's estimate of future stock price growth. Actual gains, if any, on
stock option exercises and Common Stock holdings are dependent on the timing
of such exercise and the future performance of the Company's 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.
(4) These options will vest in equal annual increments over five years beginning
8/10/00.
(5) These options will vest in equal annual increments over five years beginning
12/1/00.
(6) These options will vest as to 30,000 options, on June 22, 2000, as to 65,000
options on each of June 22, 2001, June 22, 2002, June 22, 2003 and June 22,
2004, and as to 35,000 opt ions on June 22, 2005.
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23
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information with respect to options to
purchase the Company's Common Stock to the Named Executive Officers, including
(i) the number of shares of Common Stock purchased upon exercise of options in
the fiscal year ended December 31, 1999; (ii) the net value realized upon such
exercise; (iii) the number of unexercised options outstanding at December 31,
1999; and (iv) the value of such unexercised options at December 31, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUE
TABLE
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
SHARES UNDERLYING UNEXERCISED OPTIONS AT
ACQUIRED OPTIONS AT YEAR-END YEAR-END(2)($)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1)($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------------- ----------- ------------- ----------- -------------
James E. Donegan........... -- -- 92,490 302,000 $1,243,183 $2,675,820
Stephen Parks.............. -- -- -- 325,000 -- $2,925,000
Frank R. DiPietro.......... -- -- 76,000 172,000 $1,322,698 $1,553,370
Raymond W.B. Chow.......... 53,000 $711,838 36,000 172,000 $ 322,885 $1,452,120
Yener Gurler............... -- -- 22,000 162,000 $ 245,815 $1,484,595
- ---------------
(1) Amounts disclosed in this column do not reflect amounts actually received by
the Named Executive Officers but are calculated based on the difference
between the fair market value of the Company's Common Stock on the date of
exercise and the exercise price of the options. The Named Executive Officers
will receive cash only if and when they sell the Common Stock issued upon
exercise of the options, and the amount of cash received by such individuals
is dependent on the price of the Company's Common Stock at the time of such
sale.
(2) Value is based on the difference between the option exercise price and the
fair market value of the Company's Common Stock on December 31, 1999,
multiplied by the number of shares underlying the options.
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company has entered into the following employment agreements with the
Named Executive Officers:
Mr. Donegan and the Company entered into an employment agreement on May 14,
1999. The employment agreement provides that Mr. Donegan will serve as President
and Chief Executive Officer of the Company. Mr. Donegan may voluntarily
terminate this employment after giving the Company written notice of intent to
terminate at least thirty (30) days prior to the effective date of such
termination. The Company may terminate his employment at any time with or
without cause. If the Company terminates Mr. Donegan's employment without cause
or if Mr. Donegan terminates his employment for good reason (as defined in the
employment agreement), he will be entitled to receive a lump sum payment equal
to twenty-four months' base salary plus his highest annual bonus amount from the
three most recent years. In addition, upon a termination by the Company without
cause or a termination by Mr. Donegan for good reason, all outstanding stock
options of Mr. Donegan will become vested. Pursuant to the employment agreement,
Mr. Donegan's salary is established annually by the Board of Directors, but may
not be less than $252,000 per year. The amount of his annual bonus is at the
sole discretion of the Board of Directors. Furthermore, Mr. Donegan has agreed
that he will not directly or indirectly compete with the Company during the
course of his employment and for an additional one-year period thereafter.
Mr. DiPietro and the Company entered into an employment agreement on May
14, 1999. The employment agreement provides that Mr. DiPietro will serve as
Executive Vice President of Finance and
22
24
Chief Financial Officer of the Company. Mr. DiPietro may voluntarily terminate
this employment after giving the Company written notice of intent to terminate
at least thirty (30) days prior to the effective date of such termination. The
Company may terminate his employment at any time with or without cause. If the
Company terminates Mr. DiPietro's employment without cause if Mr. DiPietro
terminates his employment for good reason (as defined in the employment
agreement), he will be entitled to receive a lump sum payment equal to eighteen
months' base salary plus his highest annual bonus from the three most recent
years. In addition, upon a termination by the Company without cause or
termination by Mr. DiPietro for good reason, all outstanding stock options of
Mr. DiPietro will become vested. Pursuant to the employment agreement, Mr.
DiPietro's salary is established annually by the Board of Directors, but may not
be less than $183,750 per year. The amount of his annual bonus is at the sole
discretion of the Board of Directors. Furthermore, Mr. DiPietro has agreed that
he will not directly or indirectly compete with the Company during the course of
his employment and for an additional one-year period thereafter.
Mr. Chow and the Company entered into an employment agreement on May 14,
1999. The employment agreement provides that Mr. Chow will serve as Senior Vice
President and Chief Technology Officer of the Company. Mr. Chow may voluntarily
terminate this employment after giving the Company written notice of intent to
terminate at least thirty (30) days prior to the effective date of such
termination. The Company may terminate his employment at any time with or
without cause. If the Company terminates Mr. Chow's employment without cause or
Mr. Chow terminates his employment for good reason (as defined in the employment
agreement), he will be entitled to a lump sum payment equal to one years' base
salary plus his highest annual bonus amount from the three most recent years. In
addition, upon a termination by the Company for cause or a termination by Mr.
Chow for good reason, all outstanding stock options of Mr. Chow will become
vested. Pursuant to the employment agreement, Mr. Chow's salary is established
annually by the Board of Directors, but may not be less than $183,750 per year.
The amount of his annual bonus is at the sole discretion of the Board of
Directors.
Mr. Gurler and the Company entered into an employment agreement on May 16,
1999. The employment agreement provides that Mr. Gurler will serve as Senior
Vice President of Operations of the Company. Mr. Gurler may voluntarily
terminate this employment after giving the Company written notice of intent to
terminate at least thirty (30) days prior to the effective date of such
termination. The Company may terminate his employment at any time with or
without cause. If the Company terminates Mr. Gurler's employment without cause,
or Mr. Gurler terminates his employment for good reason (as defined in the
employment agreement), he will be entitled to a lump sum payment equal to one
years' base salary plus his highest annual bonus amount from the three most
recent years. In addition, upon a termination by the Company for cause or a
termination by Mr. Gurler for good reason, all outstanding stock options of Mr.
Gurler will become vested. Pursuant to the employment agreement, Mr. Gurler's
salary is established annually by the Board of Directors, but may not be less
than $157,500 per year. The amount of his annual bonus is at the sole discretion
of the Board of Directors.
Mr. Parks and the Company entered into an employment agreement on August 9,
1999. The employment agreement provides that Mr. Parks will serve as President
of Chief Operating Officer of the Company. Mr. Parks may voluntarily terminate
this employment after giving the Company written notice of intent to terminate
at least thirty (30) days prior to the effective date of such termination. The
Company may terminate his employment at any time with or without cause. If the
Company terminates Mr. Parks's employment without cause or Mr. Parks terminates
his employment for good reason (as defined in the employment agreement), he will
be entitled to a lump sum payment equal to eighteen months' base salary plus the
highest annual bonus amount from the three most recent years. Pursuant to the
employment agreement, Mr. Parks's salary is established annually by the Board of
Directors, but may not be less than $249,600 per year. The amount of his annual
bonus is at the sole discretion of the Board of Directors except that Mr. Parks'
employment agreement sets his annual bonus for 1999 at $175,000. Furthermore,
Mr. Parks has agreed that he will not directly or indirectly compete with the
Company during the course of his employment and for an additional one-year
period thereafter.
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors currently consists of
Mr. Loeb and Drs. Flaschen and Sprague, each of whom is an independent,
non-employee director. The Compensation Committee is responsible for developing
the compensation programs that relate to the Company's executive officers,
senior management and other key employees and for establishing the specific
short- and long-term compensation elements thereunder. The Compensation
Committee also oversees the general compensation structure for all of the
Company's employees. In addition, the Compensation Committee administers the
Company's 1988 Stock Plan, 1991 Stock Plan, 1993 Stock Plan, 1994 Stock Plan,
1996 Stock Plan, 1996 Director Stock Plan, 1996 Stock Purchase Plan, 1997 Stock
Plan and 1999 Stock Plan.
The Company's executive compensation program established by the
Compensation Committee is designed to provide levels of compensation in formats
that assist the Company in attracting, motivating and retaining qualified
executives by providing a competitive compensation package geared to individual
and corporate performance. The Compensation Committee strives to establish
performance criteria, evaluate performance and establish base salary, annual
bonuses and long-term incentives for the Company's key decision makers based
upon performance and is designed to provide appropriate incentives for
maximization of the Company's short- and long-term financial results for the
benefit of the Company's shareholders.
In order to meet its objectives, the Compensation Committee has chosen
three basic components for the Company's executive compensation program to meet
the Company's compensation philosophy. Base salaries, the fixed regular
component of executive compensation, are based upon (i) base salary levels among
a competitive peer group, (ii) the Company's past financial performance and
future expectations, (iii) the general and industry-specific business
environment and (iv) individual performance. Annual bonuses, which are directly
linked to the Company's yearly performance, are designed to provide additional
cash compensation based on short-term performance of certain key employees.
Stock option grants, under the long-term component of executive compensation,
are designed to incentivize and reward executive officers and key employees for
delivering value to the Company's shareholders over a longer, measurable period
of time. Historically, the Company has used the grant of stock options that vest
over some measurable period of time, currently five years, to accomplish this
objective.
Mr. Donegan is the Chief Executive Officer and Chairman of the Board of
Directors. His fiscal 1999 performance was evaluated on the basis of the factors
described above applicable to executive officers generally. His base salary was
based on a number of factors, including the base salaries of executives
performing similar functions for peer companies and his employment contract. The
annual bonus and stock option grant components of his compensation, as well as
his salary, reflect the successful completion of the Calogic acquisition, the
Company's financial performance, the continued introduction and
commercialization of new products and progress toward achieving business goals,
as well as the achievement by Mr. Donegan of other non-financial goals. In
assessing Mr. Donegan's performance for fiscal 1999, the Compensation Committee
concluded that the financial and non-financial goals on which his compensation
was based had been achieved.
In general, under Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"), the Company 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 and the regulations promulgated thereunder. The
Company has considered the limitations on deductions imposed by Section 162(m)
of the Code, and it is the Company's present intention that, for so long as it
is consistent with its overall compensation objective, substantially all tax
deductions attributable to executive compensation will not be subject to the
deduction limitations of Section 162(m) of the Code.
Respectfully submitted by the Compensation Committee:
Manfred Loeb
Steward S. Flaschen
John L. Sprague
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26
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors has established a Compensation Committee
consisting of Mr. Loeb and Drs. Flaschen and Sprague. No person who served as a
member of the Compensation Committee was, during the fiscal year ended December
31, 1999, an officer or employee of the Company or any of its subsidiaries, was
formerly an officer of the Company or any of its subsidiaries, or had any
relationship requiring disclosure herein. No executive officer of the Company
serves as a member of the board of directors or compensation committee of any
entity which has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.
COMPENSATION OF DIRECTORS
During 1999, Directors who were not employees of the Company received
$2,500 per quarter as a retainer (in 2000, the Directors will receive a $2,500
retainer per quarter), $1,000 for each meeting of the Board of Directors
attended in person, $500 for each teleconference meeting of the Board of
Directors and $1,000 for each committee meeting, unless such committee meeting
is held on the same day as a meeting of the Board of Directors in which case the
compensation is reduced to $500. No employee of the Company receives separate
compensation for services rendered as a director. All directors are reimbursed
for expenses in connection with attending Board and committee meetings.
On March 14, 1997, the Board of Directors of the Company adopted the 1997
Stock Option Plan, which was approved by the Company's shareholders at the
Special Meeting in Lieu of Annual Meeting held on May 30, 1997. Among other
provisions of the 1997 Stock Option Plan, each director, who is not also an
employee or consultant of the Company, will receive on the third Monday in July,
1997 (and on the same day each year thereafter) an option to purchase 5,000
shares of Common Stock (the "Director Options").
Each person who is not also an employee or consultant of the Company and
becomes a director after the third Monday in July, 1997 will receive, upon the
date of his or her initial election as a director, an option to purchase 5,000
shares of Common Stock. In 1999, the Company will increase this option grant
from 5,000 to 7,500 shares. The Director Options granted will vest one-fifth on
each anniversary of the date of grant and have an exercise price equal to the
fair market value of the Common Stock on the date of grant. The term of each
Director Option will be for a period of ten years from the date of grant.
Director Options will be subject to accelerated vesting under certain
circumstances and may be transferred to the extent vested. On February 17, 1999,
the Board of Directors adopted the 1999 Stock Plan, which was approved by the
Company's shareholders at the Annual Meeting held on May 28, 1999. The 1999
Stock Plan provides for 1,200,000 shares of the Company's Common Stock to be
reserved for the grant of incentive stock options to employees of the Company
and the grant of non-qualified stock options, stock awards and opportunities to
make direct purchases of stock in the Company to employees, directors, officers
and consultants of the Company. Directors are eligible to receive option grants
under the 1999 Stock Plan and the Company intends to grant options to the
Directors consistent with past practices.
The Company has purchased directors' and officers' liability insurance
covering all of the Company's directors and officers. The aggregate premium for
this insurance policy in 1999 was approximately $225,000.
STOCK PERFORMANCE GRAPH
The following performance graph compares the percentage change in the
cumulative total shareholder return on the Company's Common Stock during the
period from the Company's initial public offering on April 2, 1996 through
December 31, 1999, with the cumulative total return on (i) a group consisting of
the Company's peer corporations on a line-of-business basis (the "Peer Group")
and (ii) the Nasdaq Composite Index (Total Return). The comparison assumes $100
was invested on April 2, 1996 in the Company's Common Stock, the Peer Group and
the Nasdaq Composite Index and assumes reinvestment of dividends, if any. The
Peer Group consists of all corporations that are members of the semiconductor
industry with 3674 as their Primary Standard Industrial Classification Number.
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27
SIPEX STOCK PERFORMANCE GRAPH
SIPEX CORPORATION NASDAQ COMPOSITE INDEX
COMMON STOCK PEER GROUP (TOTAL RETURN)
----------------- ---------- ----------------------
4/2/96 $100.00 $100.00 $100.00
12/31/96 271.58 164.79 115.56
12/31/97 509.47 171.73 141.36
12/31/98 591.58 258.55 199.37
12/31/99 413.68 556.30 351.64
- ---------------
* $100 invested on April 2, 1996 in Common Stock or the appropriate index,
including reinvestment of dividends, through fiscal year ended December 31,
1999.
(1) Prior to April 2, 1996, the Company's Common Stock was not publicly traded.
Comparative data is provided only for the period since that date. This chart
is not "soliciting material," is not deemed filed with the Securities and
Exchange Commission and is not to be incorporated by reference in any
filings of the Company under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, whether made before or after
the date hereof and irrespective of any general incorporation language in
any such filing.
(2) The stock price performance shown on the graph is not necessarily indicative
of future price performance. Information used on this graph was obtained
from Media General Financial Services, Inc., a source believed to be
reliable, although the Company is not responsible for any errors or
omissions in such information.
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28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The following table sets forth as of March 6, 2000 information with respect
to the beneficial ownership of the Company's Common Stock by (i) each person who
is known to the Company to be the beneficial owner of more than five percent of
its Common Stock, (ii) each director of the Company, (iii) each of the executive
officers named in the Summary Compensation Table under the caption "Executive
Compensation Summary" herein, and (iv) all directors and executive officers of
the Company 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 6, 2000, there were 21,893,189 shares of
common stock outstanding.
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OWNERSHIP CLASS
---------------------------------------- -------------------- ----------
Manuel Del Arroz............................................ 3,156,521 14.4%
Massachusetts Financial Services Company(2)................. 2,203,751 10.1%
500 Boylston Street
Boston, MA 02116
T. Rowe Price Associates, Inc.(3)........................... 2,101,300 9.6%
100 East Pratt Street
Baltimore, Maryland 21202
Brown Investment Advisory & Trust Co.(4).................... 1,754,327 8.0%
19 South Street
Baltimore, MD 21202
West Highland Partners(5)................................... 1,460,000 6.7%
300 Drake's Landing Road, Suite 290
Greenbrae, CA 94904
Putnam Family of Funds(6)................................... 1,163,300 5.3%
One Post Office Square
Boston, MA 02109
James E. Donegan(7)......................................... 90,000 *
Frank R. DiPietro(8)........................................ 40,409 *
Raymond W.B. Chow(9)........................................ 102,325 *
Yener Gurler(10)............................................ 36,622 *
Manfred Loeb(11)............................................ 3,000 *
Lionel H. Olmer(12)......................................... 23,001 *
Steward S. Flaschen(13)..................................... 11,000 *
John L. Sprague(14)......................................... 5,000 *
Willy M.C. Sansen(15)....................................... 5,000 *
Stephen E. Parks............................................ -- *
All directors and executive officers as a group (16)........ 316,357 1.4%
- ---------------
* Less than 1% of the outstanding Common Stock
(1) Unless otherwise indicated, to the knowledge of the Company, each person
listed above maintains a mailing address at: c/o SIPEX Corporation, 22
Linnell Circle, Billerica, MA 01821.
(2) Based solely on information provided in a Schedule 13G/A filed with the
Securities and Exchange Commission, as of December 31, 1999, Massachusetts
Financial Services Company had sole dispositive power over 2,203,751 shares
and sole voting power over 1,696,941 shares.
(3) Based solely on information provided in a Schedule 13G filed with the
Securities and Exchange Commission, as of December 31, 1999, T. Rowe Price
Associates, Inc., a registered investment advisor,
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29
may be deemed to beneficially own 2,101,300 shares, have sole dispositive
power over 2,101,300 shares, and sole voting power over 443,000 shares. T.
Rowe Price New Horizons Fund, Inc. may be deemed to beneficially own,
1,200,000 shares and have sole voting power over 1,200,000 shares.
(4) Based solely on information provided in a Schedule 13G filed with the
Securities and Exchange Commission, as of December 31, 1999, Brown
Investment Advisory & Trust Company and its wholly owned subsidiary Brown
Advisory Incorporated had sole dispositive power over 777,961 and 976,366
shares, respectively and sole voting power over 498,063 and 691,532 shares,
respectively.
(5) Based solely on information provided in a Schedule 13G filed with the
Securities and Exchange Commission, as of December 31, 1999, West Highland
Capital, Inc. had shared dispositive power over 1,460,000 shares and shared
voting power over 1,460,000 shares, Estero Partners, LLC had shared
dispositive power over 1,367,387 shares and shared voting power over
1,367,387 shares, Lang H. Gerhard had shared dispositive power over
1,460,000 shares and shared voting power over 1,460,000 shares and West
Highland Partners, L.P. had shared dispositive power over 1,105,760 shares
and shared voting power over 1,105,760 shares. West Highland Capital, Inc.,
Estero Partners, LLC and Lang H. Gerhard are the general partners of West
Highland Partners, L.P., which is an investment limited partnership. Lang
H. Gerhard is the sole shareholder of West Highland Capital, Inc. and
Manager of Estero Partners, LLC.
(6) Based solely on information provided in a Schedule 13G/A filed with the
Securities and Exchange Commission, as of December 31, 1999, Putnam
Investment Management, Inc., had shared dispositive power over 1,163,300
shares. The Putnam Advisory Company, Inc. had shared dispositive power over
1,163,300 shares and shared voting power over 308,100 shares. Putnam
Investments, Inc., which is a wholly-owned subsidiary of Marsh & McLennan
Company, Inc., had shared dispositive power over 1,163,300 shares, shared
voting power over 308,100 shares and wholly owns the following two
registered investment advisers: Putnam Investment Management, Inc., which
is the investment advisor to the Putnam family of mutual funds, and The
Putnam Advisory Company, Inc., which is the investment adviser to Putnam's
institutional clients.
(7) Represents 90,000 shares issuable pursuant to stock options which are
exercisable prior to May 25, 2000.
(8) Includes 40,000 shares issuable pursuant to stock options which are
exercisable prior to May 25, 2000.
(9) Includes 46,000 shares issuable pursuant to stock options which are
exercisable prior to May 25, 2000. Includes 4,000 shares held by Mr. Chow's
children.
(10) Includes 30,000 shares issuable pursuant to stock options which are
exercisable prior to May 25, 2000.
(11) Includes 1,000 shares issuable pursuant to stock options which are
exercisable prior to May 25, 2000.
(12) Includes 21,001 shares issuable pursuant to stock options which are
exercisable prior to May 25, 2000.
(13) Represents 11,000 shares issuable pursuant to stock options which are
exercisable prior to May 25, 2000.
(14) Represents 5,000 shares issuable pursuant to stock options which are
exercisable prior to May 25, 2000.
(15) Represents 5,000 shares issuable pursuant to stock options which are
exercisable prior to May 25, 2000.
(16) Includes 249,001 shares issuable pursuant to stock options which are
exercisable prior to May 25, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Pursuant to an Agreement of Lease, dated January 31, 1996, as amended
September 15, 1997, the Company leases its Billerica facility of approximately
66,000 square feet from ATC Billerica Corporation, an affiliate of Tractebel
S.A. Under the Agreement of Lease, the Company will pay monthly rent of $28,534
for the first year of the lease, which payments are subject to an annual
escalation. The Agreement of Lease expires on January 31, 2003, subject to an
option of the Company to extend such lease for an additional five-year period.
Mr. Loeb is affiliated with Tractebel S.A.
On December 14, 1998, the Company made a loan to Frank R. DiPietro,
Executive Vice President, Treasurer and Chief Financial Officer of the Company,
in the sum of $250,000 cash. The loan was secured by a Pledge and Security
Agreement dated December 14, 1998 and was evidenced by the issuance and delivery
to
28
30
the Company of a Promissory Note bearing interest at a rate of 8% per annum,
with interest payable on a monthly basis and the principal and any remaining
interest payable to the order of the Company on December 14, 1999. On December
21, 1999, the repayment of the loan was extended through the issuance and
delivery to the Company of a promissory note bearing interest at a rate of 8%
per annum, with interest payable on a monthly basis and the principal and any
remaining interest payable to the order of the Company on December 21, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-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 Report of Independent Accountants
are incorporated in Item 8 of this report.
Independent Auditors' Reports
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules. Consolidated financial
statement schedules have been omitted because the required information is
not present or not present in amounts sufficient to require submission of
the schedule, or because the information required is included in the
consolidated financial statements or the notes thereto.
3(a). The exhibits listed in the Exhibit Index immediately preceding
the Exhibits are filed as a part of this Annual Report on Form 10-K.
3(b). Reports on Form 8-K: On December 8, 1999, the Company filed a
report on Form 8-K relating to the merger with Calogic.
29
31
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.
SIPEX CORPORATION
By: /s/ JAMES E. DONEGAN
------------------------------------
James E. Donegan
Chairman of the Board of Directors,
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 dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ JAMES E. DONEGAN Chairman of the Board of March 23, 2000
- --------------------------------------------------- Directors, Chief Executive
James E. Donegan Officer, (principal executive
officer) and Director
/s/ FRANK R. DIPIETRO Executive Vice President, March 23, 2000
- --------------------------------------------------- Finance, Chief Financial
Frank R. DiPietro Officer, Treasurer (principal
financial officer and
accounting officer) and Clerk
/s/ MANFRED LOEB Director March 23, 2000
- ---------------------------------------------------
Manfred Loeb
/s/ LIONEL H. OLMER Director March 23, 2000
- ---------------------------------------------------
Lionel H. Olmer
/s/ JOHN L. SPRAGUE Director March 23, 2000
- ---------------------------------------------------
John L. Sprague
/s/ DR. STEWARD S. FLASCHEN Director March 23, 2000
- ---------------------------------------------------
Dr. Steward S. Flaschen
/s/ WILLY SANSEN Director March 23, 2000
- ---------------------------------------------------
Dr. Willy Sansen
30
32
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
2.1 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 Company's Form 8-K filed on
December 8, 1999 and incorporated herein by reference.
2.2 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 Company's
Form 8-K filed on December 8, 1999 and incorporated herein
by reference.
3.1 Restated Articles of Organization of the Company, as amended
(filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File No. 333-1328, and incorporated
herein by reference)
3.2 Restated By-Laws of the Company, as amended (filed as
Exhibit 3.2 to the Company's Registration Statement on Form
S-1, File No. 333-1328, and incorporated herein by
reference)
4.2 Form of Indemnification Agreement for directors and officers
(filed as Exhibit 4.2 to the Company's Registration
Statement on Form S-1, File No. 333-1328, and incorporated
herein by reference)
10.1 1988 Non-Statutory Stock Option Plan (filed as Exhibit 10.1
to the Company's Registration Statement on Form S-1, File
No. 333-1328, and incorporated herein by reference)
10.2 1991 Non-Statutory Stock Option Plan (filed as Exhibit 10.2
to the Company's Registration Statement on Form S-1, File
No. 333-1328, and incorporated herein by reference)
10.3 1993 Stock Option and Incentive Plan (filed as Exhibit 10.3
to the Company's Registration Statement on Form S-1, File
No. 333-1328, and incorporated herein by reference)
10.4 1994 Stock Option and Incentive Plan (filed as Exhibit 10.4
to the Company's Registration Statement on Form S-1, File
No. 333-1328, and incorporated herein by reference)
10.5 1996 Incentive Stock Option Plan (filed as Exhibit 10.5 to
the Company's Registration Statement on Form S-1, File No.
333-1328, and incorporated herein by reference)
10.6 1996 Non-Employee Director Stock Option Plan (filed as
Exhibit 10.6 to the Company's Registration Statement on Form
S-1, File No. 333-1328, and incorporated herein by
reference)
10.7 1996 Employee Stock Purchase Plan (filed as Exhibit 10.7 to
the Company's Registration Statement on Form S-1, File No.
333-1328, and incorporated herein by reference)
10.8 Agreement of Lease, dated January 31, 1996, between the
Company and ATC Billerica Corporation pertaining to 22
Linnell Circle, Billerica, Massachusetts (filed as Exhibit
10.8 to the Company's Registration Statement on Form S-1,
File No. 333-1328, and incorporated herein by reference)
10.9 Lease Agreement, as amended, dated June 12, 1986, between
the Company and Greenback Associates (filed as Exhibit 10.9
to the Company's Registration Statement on Form S-1, File
No. 333-1328, and incorporated herein by reference)
31
33
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
10.10 Employment Agreement, as of the 14th day of May, 1999,
between the Company and James E. Donegan (filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended July 3, 1999 and incorporated herein by
reference)
10.11 Employment Agreement, as of the 14th day of May, 1999,
between the Company and Frank R. DiPietro (filed as Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended July 3, 1999, and incorporated herein by
reference)
10.12 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 Company's Quarterly Report on Form 10-Q for the
quarter ended July 3, 1999, and incorporated herein by
reference)
10.13 Form of Sales Representative Agreement (filed as Exhibit
10.15 to the Company's Registration Statement on Form S-1,
File No. 333-1328, and incorporated herein by reference)
10.14 Form of Sales Representative Agreement
10.15 1997 Incentive Stock Option Plan (filed as Appendix A to the
Company's definitive Proxy Statement for the Special Meeting
In Lieu Of Annual Meeting Of Shareholders held May 30, 1997)
10.16 Sipex Corporation 1999 Stock Plan (filed as Appendix A to
the Company's Definitive Proxy Statement on Schedule 14A,
No. 1000-27897, and incorporated herein by reference)
10.17 Promissory Note dated December 21, 1999 by and between the
Company and Frank R. DiPietro
10.18 Pledge and Security Agreement dated December 14, 1998 by and
between the Company and Frank R. DiPietro previously filed
as Exhibit 10.18 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, and incorporated
herein by reference
10.19* License Agreement between Timex Corporation and SIPEX
Corporation dated July 1, 1997 (previously filed as an
exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, and incorporated herein by
reference)
10.20 Employment Agreement, dated as of the 16th day of May, 1999
between the Company and Yener Gurler (filed as Exhibit 10.5
to the Company's Quarterly Report on Form 10-Q for the
quarter ended July 3, 1999, and incorporated herein by
reference)
10.21 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 Company's Quarterly Report on Form 10-Q
for the quarter ended July 3, 1999, and incorporated herein
by reference
11.1 Computation of earnings per share
21.1 Subsidiaries of the Company (filed as Exhibit 21.1 to the
Company's Registration Statement on Form S-1, File No.
333-1328, and incorporated herein by reference)
23.1 Consent of KPMG LLP, independent auditors
23.2 Consent of Sallman, Yang & Almeda
27.1 Financial Data Schedule
- ---------------
* Confidential treatment as to certain portions has been granted pursuant to
Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended.
32
34
SIPEX CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE
----------
Independent Auditors' Reports............................... F-2 - F-3
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1999 and
1998................................................... F-4
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997....................... F-5
Consolidated Statements of Shareholders' Equity and
Comprehensive Income for the years ended December 31,
1999, 1998, and 1997................................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997....................... F-7
Notes to Consolidated Financial Statements................ F-8 - F-17
F-1
35
INDEPENDENT AUDITORS' REPORT
The Board Of Directors and Shareholders
Sipex Corporation:
We have audited the accompanying consolidated balance sheets of Sipex
Corporation (the Company) as of December 31, 1999 and 1998 and the related
consolidated statements of operations, shareholders' equity and comprehensive
income, and cash flows for each of the years in the three year period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
The consolidated financial statements of Sipex Corporation as of December
31, 1998 and for the two-year period then ended, have been restated to reflect
the pooling-of-interests transaction with Calogic as described in Note 2 to the
consolidated financial statements. We did not audit the 1999 and 1998 financial
statements of Calogic, which statements reflect total assets constituting 7.6
percent of consolidated total assets in 1998 and total net sales constituting
28.7 percent and 32.0 percent in 1998 and 1997, respectively, of the related
consolidated total net sales. Those statements were audited by the other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Calogic as of December 31, 1998 and for each
of the years in the two-year period then ended, is based solely on the report of
the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits, and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditor,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Sipex Corporation as of
December 31, 1999 and 1998 and the consolidated results of their operations and
their cash flows for each of the years in the three year period ended December
31, 1999, in conformity with generally accepted accounting principles.
Boston, Massachusetts
February 15, 2000
F-2
36
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Calogic and Subsidiary
Fremont, California
We have audited the consolidated balance sheets of Calogic and Subsidiary
as of June 30, 1999, and the related consolidated statements of income,
accumulated deficits and cash flows for each of the years in the two-year period
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Calogic and
Subsidiary as of June 30, 1999, and the results of its operations and its cash
flows for each of the years in the two-year period then ended in conformity with
generally accepted accounting principles.
SALLMANN, YANG & ALAMEDA
An Accountancy Corporation
Percy S. Yang
Certified Public Accountant
September 24, 1999, except for Note 14
dated January 14, 2000
F-3
37
SIPEX CORPORATION
CONSOLIDATED BALANCE SHEETS
1999 1998
-------- --------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,355 $ 17,810
Short-term investment securities.......................... 5,734 7,981
Accounts receivable, less allowances of $1,280 and $868 in
1999 and 1998, respectively............................ 14,002 15,847
Inventories............................................... 23,128 20,860
Deferred income taxes -- current.......................... 10,428 4,348
Prepaid expenses and other current assets................. 2,084 1,033
-------- --------
Total current assets.............................. 56,731 67,879
Restricted cash equivalents and securities.................. 36,750 24,356
Property, plant, and equipment, net......................... 17,834 11,169
Intangible assets (net of accumulated amortization)......... 3,739 --
Deferred income taxes....................................... 4,575 3,916
Other assets................................................ 166 369
-------- --------
Total assets...................................... $119,795 $107,689
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 413 $ 5,681
Current portion of long-term debt......................... -- 784
Accounts payable.......................................... 6,661 6,447
Accrued expenses.......................................... 7,620 4,489
-------- --------
Total current liabilities......................... 14,694 17,401
Long-term debt.............................................. -- 516
-------- --------
Total liabilities................................. 14,694 17,917
-------- --------
Shareholders' equity:
Preferred stock, $.01 par value, 1,000 shares authorized
and no shares issued or outstanding.................... -- --
Common stock, $.01 par value, 40,000 shares authorized and
21,768 and 21,280 shares issued and outstanding at
December 31, 1999 and 1998, respectively............... 218 213
Additional paid-in capital................................ 110,951 102,741
Accumulated deficit....................................... (6,128) (13,236)
Accumulated other comprehensive income.................... 60 54
-------- --------
Total shareholders' equity........................ 105,101 89,772
-------- --------
Total liabilities and shareholders' equity........ $119,795 $107,689
======== ========
See accompanying notes to consolidated financial statements
F-4
38
SIPEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales................................................... $89,820 $91,961 $75,289
Cost of sales............................................... 57,227 52,188 45,338
------- ------- -------
Gross profit...................................... 32,593 39,773 29,951
Operating expenses:
Research and development.................................. 10,623 8,407 6,951
Marketing and selling..................................... 9,719 8,931 7,511
General and administrative................................ 7,945 5,859 5,588
Merger related costs...................................... 1,168 -- --
Facility exit costs....................................... 817 1,138 --
------- ------- -------
Total operating expenses.......................... 30,272 24,335 20,050
------- ------- -------
Income from operations...................................... 2,321 15,438 9,901
Other income (expense):
Interest income, net...................................... 2,489 1,589 1,195
Other, net................................................ (1,130) (439) (608)
------- ------- -------
Total other income (expense)...................... 1,359 1,150 587
------- ------- -------
Income before income taxes.................................. 3,680 16,588 10,488
Income tax benefit.......................................... 2,419 2,841 930
------- ------- -------
Net income.................................................. $ 6,099 $19,429 $11,418
======= ======= =======
Net income per common share -- basic........................ $ 0.28 $ 0.92 $ 0.55
======= ======= =======
Net income per common share -- assuming dilution............ $ 0.28 $ 0.88 $ 0.52
======= ======= =======
Weighted average common shares outstanding -- basic......... 21,403 21,131 20,727
======= ======= =======
Weighted average common shares -- assuming dilution......... 21,981 22,022 21,881
======= ======= =======
See accompanying notes to consolidated financial statements
F-5
39
SIPEX CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
COMMON STOCK ACCUMULATED TOTAL
--------------------- ADDITIONAL OTHER SHAREHOLDERS'
NUMBER OF $.01 PAR PAID-IN ACCUMULATED COMPREHENSIVE EQUITY
SHARES VALUE CAPITAL DEFICIT INCOME (DEFICIT)
--------- -------- ---------- ----------- ------------- -------------
(IN THOUSANDS)
Balance at December 31, 1996.... 10,184 $102 $ 96,525 $(44,083) $156 $ 52,700
Net income...................... -- -- -- 11,418 -- 11,418
Foreign currency translation
adjustments................... -- -- -- -- 7 7
--------
Comprehensive income.......... 11,425
Issuance of common stock under
option plans.................. 407 4 976 -- -- 980
2:1 split....................... 10,420 104 (104) -- -- --
Tax effect of exercises of stock
options....................... -- -- 226 -- -- 226
------ ---- -------- -------- ---- --------
Balance at December 31, 1997.... 21,011 $210 $ 97,623 $(32,665) $163 $ 65,331
Net income...................... -- -- -- 19,429 -- 19,429
Foreign currency translation
adjustments................... -- -- -- -- (109) (109)
--------
Comprehensive income.......... 19,320
Issuance of common stock under
option plans.................. 251 3 1,333 -- -- 1,336
Issuance of common stock under
stock purchase plan........... 18 -- 283 -- -- 283
Tax effect of exercises of stock
options....................... -- -- 3,502 -- -- 3,502
------ ---- -------- -------- ---- --------
Balance at December 31, 1998.... 21,280 $213 $102,741 $(13,236) $ 54 $ 89,772
Net income...................... -- -- -- 6,099 -- 6,099
Foreign currency translation
adjustments................... -- -- -- -- 6 6
--------
Comprehensive income.......... 6,105
Issuance of common stock under
option plans.................. 169 2 318 -- -- 320
Issuance of common stock under
stock purchase plan........... 19 -- 334 -- -- 334
Purchase of minority interest... 300 3 3,766 -- -- 3,769
Adjustments to conform year end
of pooled entities............ -- -- -- 1,009 -- 1,009
Tax effect of exercises of stock
options....................... -- -- 3,792 -- -- 3,792
------ ---- -------- -------- ---- --------
Balance at December 31, 1999.... 21,768 $218 $110,951 $ (6,128) $ 60 $105,101
====== ==== ======== ======== ==== ========
See accompanying notes to consolidated financial statements
F-6
40
SIPEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
--------- --------- --------
(IN THOUSANDS)
Operating activities:
Net income................................................ $ 6,099 $ 19,429 $ 11,418
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Adjustment to conform year end of pooled entities....... 1,009 -- --
Allowance for receivables............................... 617 435 616
Depreciation and amortization........................... 2,528 2,392 1,961
Loss on disposal of capital assets...................... 51 722 2
Changes in assets and liabilities:
(Increase) decrease in accounts receivable........... 1,228 (4,281) (3,981)
Increase in inventories.............................. (2,268) (371) (2,086)
(Increase) decrease in prepaid expenses.............. (1,051) (348) 602
Increase in deferred taxes........................... (6,739) (6,921) (2,288)
(Increase) decrease in other assets.................. 203 (201) 104
Increase (decrease) in accounts payable.............. 214 477 (249)
Increase (decrease) in accrued expenses.............. 3,131 (998) 2,961
Increase in restricted cash equivalents and
securities......................................... (12,394) (24,263) (2)
--------- --------- --------
Net cash (used in) provided by operating
activities...................................... (7,372) (13,928) 9,058
--------- --------- --------
Investing activities:
Proceeds from maturity of investment securities........... 119,506 426,399 76,500
Purchase of investment securities......................... (117,259) (418,281) (70,240)
Purchase of property, plant, and equipment................ (9,214) (4,700) (6,834)
--------- --------- --------
Net cash (used in) provided by investing
activities...................................... (6,967) 3,418 (574)
--------- --------- --------
Financing activities:
Proceeds from issuance of common stock, net............... 4,446 5,120 1,207
Payments of long-term debt................................ (1,300) (920) 710
Payment of capital lease and other debt obligations....... (5,268) 342 (1,308)
--------- --------- --------
Net cash (used in) provided by financing
activities...................................... (2,122) 4,542 609
--------- --------- --------
Effect of foreign currency exchange rate changes on cash and
cash equivalents.......................................... 6 (109) 7
--------- --------- --------
(Decrease) increase in cash and cash equivalents............ (16,455) (6,077) 9,100
Cash and cash equivalents at beginning of period............ 17,810 23,887 14,787
--------- --------- --------
Cash and cash equivalents at end of period.................. $ 1,355 $ 17,810 $ 23,887
========= ========= ========
Supplemental cash flow information:
Cash paid during the period for:
Income taxes............................................ $ 580 $ 394 $ 68
Interest................................................ $ 583 $ 797 $ 901
========= ========= ========
Supplemental disclosure of non-cash investing activities:
300,000 shares of Sipex issued in exchange for all the
minority shares in a subsidiary of Calogic................ $ 3,769 $ -- $ --
========= ========= ========
Acquisition of assets under capital lease obligations..... $ -- $ -- $ 27
========= ========= ========
See accompanying notes to consolidated financial statements
F-7
41
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Sipex Corporation (the "Company") designs, manufacturers and markets high
performance and high value added standard analog integrated circuits.
Applications for the Company's products include telecommunications, including
personal computers and peripherals, battery powered handheld devices, cellular
telephones, test equipment, factory automation networking, process controls and
satellites. The Company sells its products across the analog semiconductor
market and has targeted high-growth sectors that it believes are especially
compatible with its design and process capabilities. The Company's product lines
are networking/data communications, consumer electronics, industrial controls,
instrumentation, power management and aerospace and military.
Basis of Presentation
The consolidated financial statements include the accounts of Sipex
Corporation and all of its wholly owned subsidiaries. In addition, these
financial statements have been restated for all periods presented on the basis
discussed in Note 2 to reflect the acquisition of Calogic, which was accounted
for as a pooling-of-interests. All intercompany accounts and transactions have
been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue from product sales is recognized at the time of shipment. Revenue
from engineering service contracts is recorded as performance or as other
contractually specified milestones are attained. Additionally, the Company
accrues for estimated sales returns upon shipment.
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid debt instruments purchased with an
original maturity of 90 days or less to be cash equivalents. Short-term
investments consist of U.S. Government and municipal bond obligations. The
Company's investments in debt securities were classified as held to maturity
which means that the Company has the ability and intent to hold securities until
maturity.
Restricted Cash and Cash Equivalents and Investment Securities
Restricted cash and cash equivalents and investment securities represent
amounts pledged for an operating lease which the Company entered into for the
construction and lease of a new wafer fabrication facility in Milpitas,
California. The lease agreement is for a five-year period, including a one-year
construction period.
Concentration of Credit Risk
Financial instruments of the Company consist of cash, short-term
securities, accounts receivable, accounts payable and capitalized leases. The
carrying amounts of these financial instruments approximate their fair value.
F-8
42
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market. Costs are determined
using the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided
by using the straight-line method over their useful lives as follows:
USEFUL LIVES
------------
Machinery and Equipment..................................... 2-10 years
Furniture, fixtures and office equipment.................... 5-10 years
Leasehold improvements...................................... Lease term
Intangible Assets
Intangible assets, which represents the excess of the purchase price over
the fair value of net assets acquired, are amortized on a straight-line basis
over the period expected to be benefited of ten years. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the balance over its remaining life can be recovered through undiscounted
future operating cash flows of the related acquired operation. The amount of
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability is impacted if estimated future operating
cash flows are not achieved.
Impairment of Long-lived Assets and Long-lived Assets to be Disposed of
The Company 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 cash flows expected to be generated by the asset. If such assets
are 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.
Foreign Currency Translation
Foreign currency assets and liabilities are translated into dollars at
current rates, and revenues, costs and expenses are translated at average rates
during each reporting period. Gains or losses resulting from foreign currency
transactions are included in earnings currently, while those resulting from
translation of financial statements are shown as a separate component of other
comprehensive income in the statement of shareholders' equity.
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 carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in earnings in the period that includes the
enactment date.
F-9
43
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Income Per Share
Basic income per share is based upon the weighted average number of common
shares outstanding. Income per share assuming dilution is based upon the
weighted average number of common and common equivalent shares outstanding
assuming dilution. Dilutive potential common shares outstanding at December 31,
1999, 1998 and 1997 were approximately 580,000, 1,850,000 and 1,700,000,
respectively. Options to purchase 2.0 million, 1.0 million, and 531,000 shares
of common equivalent shares were not included in the computation of net income
per share because the options exercise prices were greater than the average
market price for each respective year and inclusion of this common equivalent
shares would be anti-dilutive.
2. CALOGIC MERGER
On November 23, 1999, the Company completed its merger of Calogic. In
connection with the merger, the Company issued 3.6 million shares of its common
stock. The merger was accounted for on a pooling-of-interests basis.
Accordingly, the Company's consolidated financial statements have been restated
to include the accounts and operations of Calogic for all periods presented. The
shares issued included 300,000 shares issued in a separate transaction for the
purchase of the minority interest in a subsidiary of Calogic, which was
accounted for using the purchase method of accounting and resulted in
approximately $3.8 million of goodwill. The Company recorded combined
merger-related transaction costs of $1.2 million which was primarily for
professional services, such as investment banking, legal, and accounting fees.
The fiscal year end for Calogic is June 30. In preparing these financial
statements, the calendar 1999 financial statements of the Company were combined
with the financial statements of Calogic for the same twelve month period. Due
to the different fiscal year-ends of the Company and Calogic, prior-year
financial information for different fiscal periods have been combined. The
audited balance sheet as of December 31, 1998 combines the Company's 1998
statement of financial position with Calogic's June 30, 1999 statement of
financial position. The Company's statements of operations and cash flows for
its fiscal years ended December 31, 1998 and 1997 are combined with Calogic's
statements of operations and cash flows for the fiscal years ended June 30, 1999
and 1998. Calogic's revenue and net loss for the six-month period ended June 30,
1999 was $12.2 million and $1.0 million, respectively. An adjustment has been
made to shareholders' equity as of December 31, 1999 to eliminate the effect of
including Calogic's results of operations for the six months ended June 30,
1999, in both the years ended December 31, 1999 and 1998. Calogic's net cash
flows for the six-month period ended June 30, 1999 were $1.0 million and an
adjustment has been made in the Company's combined fiscal year 1999 statement of
cash flows.
Certain balances of Calogic's financial statements have been reclassified
to conform with the Company's fiscal statement presentation.
The following table represents a reconciliation of separate net sales and
net income previously reported by the combining companies to those presented in
the accompanying consolidated financial statements.
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
Net sales:
Sipex..................................................... $60,520 $65,557 $51,210
Calogic................................................... 29,300 26,404 24,079
Combined.................................................. $89,820 $91,961 $75,289
Net income:
Sipex..................................................... $ 2,620 $19,831 $13,245
Calogic................................................... 3,479 (402) (1,827)
Combined.................................................. $ 6,099 $19,429 $11,418
F-10
44
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. FACILITY EXIT COSTS
Facility exit costs for 1999 consist of $1.9 million of estimated costs of
closing several of the Company's manufacturing facilities offset by $1.1 million
from the sale in the fourth quarter of 1999 of the tangible assets of the
Company's semiconductor wafer fab located in Milpitas, California. In the fourth
quarter of 1999, the Management of the Company and its Board of Directors
approved a plan to close its duplicate California manufacturing facilities which
were acquired through the merger with Calogic. As part of the plan, the Company
will be vacating several California leased facilities and moving these
operations to its newly completed facility in Milpitas, California. Total
estimated costs of $1.9 million associated with the closure of the facilities
include $930,000 of rent, real estate taxes, and utility costs which will be
paid over an estimated two year period after the buildings are vacated and until
they can be subleased or the lease terminates. Additionally, the Company has
recorded $300,000 as a charge to current operations for the write-down to net
realizable value of less efficient and duplicate machinery and equipment not
needed in the combined restructured manufacturing operations. As a result of
this action, the Company recorded $640,000 of facilities exit costs related to
severance.
In the fourth quarter of 1998, Management of the Company and the Board of
Directors approved a plan to close its manufacturing facility in Milpitas,
California and its sales office in France. Total recorded costs of $938,000
associated with the closure of the facility included $220,000 for rent, real
estate taxes, electricity, heat and water expenses. The balance of $718,000
represented a charge to current operations for the write-down to net realizable
value of less efficient and duplicate machinery and equipment not needed in the
combined restructured manufacturing operations. Additionally, the Company's plan
included the closure of its France sales operation and relocation of these
activities to the Company's new site in Belgium. As a result of this action, the
Company recorded $200,000 of facility exit costs related to severance and other
related employee benefit costs all of which were incurred in 1999.
4. INVENTORIES
Inventories were as follows (in thousands):
1999 1998
------- -------
Raw materials............................................ $ 5,769 $ 7,321
Work-in-process.......................................... 8,934 5,447
Finished goods........................................... 8,425 8,092
------- -------
$23,128 $20,860
======= =======
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment were as follows (in thousands):
1999 1998
------- -------
Machinery and equipment.................................. $42,844 $36,993
Furniture, fixtures and office equipment................. 2,913 2,809
Leasehold improvements................................... 3,380 2,383
------- -------
$49,137 $42,185
Less accumulated depreciation and amortization........... 31,303 31,016
------- -------
$17,834 $11,169
======= =======
F-11
45
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCRUED EXPENSES
Accrued expenses were as follows:
1999 1998
------ ------
Accrued compensation and benefits.......................... $2,187 $1,836
Accrued commissions........................................ 650 455
Accrued royalties.......................................... 115 253
Accrued taxes.............................................. 366 478
Accrued facility exit costs................................ 1,879 220
Other...................................................... 2,423 1,247
------ ------
$7,620 $4,489
====== ======
7. DEBT
As of December 31, 1999, the Company had notes payable consisting
principally of a note payable to an officer of Calogic. As of December 31, 1998,
debt obligations consisted principally of Calogic's; bank line of credit of $5.0
million, various bank obligations amounting to $1.3 million and approximately
$470,000 payable to an officer of Calogic. All of the bank obligations were
paid-in-full in December 1999 with the merger.
8. INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 1999,
1998 and 1997 was allocated as follows (in thousands):
1999 1998 1997
------- ------- -------
Income from continuing operations............. $(2,419) $(2,841) $ (930)
Shareholders' equity for compensation expense
for tax purposes in excess of amounts
recognized for financial statement
purposes.................................... (3,792) (3,502) (226)
------- ------- -------
$(6,211) $(6,343) $(1,156)
======= ======= =======
Total federal, state and foreign income tax expense (benefit), consists of
the following (in thousands):
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
DEFERRED CURRENT TOTAL DEFERRED CURRENT TOTAL DEFERRED CURRENT TOTAL
-------- ------- ------- -------- ------- ------- -------- ------- -------
Federal.............. $ 57 $(29) $ 28 $ (839) $ 5,415 $ 4,576 $(1,343) $ 4,196 $ 2,853
Loss carryforward.... (885) -- (885) (5,423) (2,599) (8,022) -- (3,887) (3,887)
State................ (1,576) 2 (1,574) (554) 1,104 550 -- 934 934
Loss carryforward.... -- -- -- -- -- -- -- (830) (830)
Foreign.............. -- 12 12 -- 55 55 -- -- --
------- ---- ------- ------- ------- ------- ------- ------- -------
$(2,404) $(15) $(2,419) $(6,816) $ 3,975 $(2,841) $(1,343) $ 413 $ (930)
======= ==== ======= ======= ======= ======= ======= ======= =======
F-12
46
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The actual tax expense (benefit) differs from the "expected" tax expense as
follows (in thousands):
1999 1998 1997
------- ------- ------
Computed "expected" tax expense (benefit).............. $ 1,289 $ 5,806 $3,671
State income tax, net of federal income tax benefit and
change in valuation allowance........................ (560) 901 (55)
FSC tax benefits....................................... (37) -- --
Non-deductible expenses................................ 26 227 143
Merger costs not deductible............................ 419 -- --
Change in valuation allowance.......................... (2,569) (1,455) (592)
Recognition of net operating losses.................... (885) (8,022) (3,887)
Utilization of R&D credits............................. (22) (229) (247)
Rate differential on foreign taxes and non-deductible
foreign losses....................................... (34) (18) (11)
Other.................................................. (46) (51) 48
------- ------- ------
$(2,419) $(2,841) $ (930)
======= ======= ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1999 and
1998 are as follows (in thousands):
1999 1998
------- -------
Current deferred tax assets:
Inventories, primarily non-deductible reserves............ $ 3,155 $ 2,860
Accounts receivable, primarily allowances................. 453 307
Accrued expenses, principally provisions not currently
deductible............................................. 1,212 447
Net operating loss carryforwards.......................... 5,608 4,519
Noncurrent deferred tax assets:
Net operating loss carryforwards.......................... 1,748 4,061
Tax credit carryforwards.................................. 2,711 1,725
Fixed assets, due to differences in depreciation.......... 116 1,539
------- -------
Total deferred tax assets before valuation allowance...... $15,003 $15,458
Valuation allowance....................................... -- (7,194)
------- -------
Net deferred tax assets........................... $15,003 $ 8,264
======= =======
At December 31, 1999, the Company has U.S. net operating loss carryforwards
of approximately $21.0 million, which are available to offset future Federal
taxable income. These losses expire during the years 2005 through 2010. As of
December 31, 1999, utilization of these net operating loss carryforwards is
subject to an annual limitation of approximately $7.4 million as a result of
such an ownership change which occurred on September 30, 1996.
At December 31, 1999, the Company had federal research and development
credits of approximately $1.4 million which will expire from 2001 to 2013. The
Company also has approximately $928,000 of California manufacturer's investment
credit carryforwards, which will expire from 2006 to 2007.
The valuation allowance decreased by $7.2 million and $9.1 million during
the years ended December 31, 1999 and 1998, respectively. The Company believes
that it is more likely than not that the deferred tax assets at December 31,
1999 will be realized in the future.
F-13
47
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SHAREHOLDERS' EQUITY
Effective August 18, 1997, the Company approved a two-for-one split of its
issued and outstanding common stock. All shares and per share data presented in
the accompanying consolidated financial statements have been restated to reflect
the change in number of outstanding shares of Common Stock.
The Company currently maintains seven stock option plans. The 1991
Non-Statutory, 1993 Incentive Stock Option Plan, 1994 Stock Option and Incentive
Plan, 1996 Stock Option Plan, 1996 Non-Employee Director Stock Option Plan, 1997
Stock Option Plan and the 1999 Stock Plan have had 744,308, 265,818, 1,187,900,
1,200,000, 300,000, 1,200,000 and 1,200,000 shares reserved for issuance,
respectively. All plans allow for options which vest ratably over five years
from the date of grant and expire ten years from the date of grant. In addition
to stock options plans, 1,675,000 shares of the Company's stock has been
reserved for issuance pursuant to options which have been granted to new
employees outside of the option plans. Options for 3,675,535 shares are
outstanding as of December 31, 1999.
In January 1996, the Board of Directors approved the 1996 Employee Stock
Purchase Plan, pursuant to which the Company 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. Under the terms of the Plan, employees can choose
each year to have up to 10 percent of their annual base earnings withheld to
purchase the Company's common stock. The purchase price of stock is 85 percent
of the lower of its beginning-of-period or end-of-period market price. Under the
Plan, the Company sold 53,252 shares to employees since inception of the plan.
The Company applies APB Opinion 25 and related interpretations in
accounting for these plans. Accordingly, no compensation cost has been
recognized. Had compensation cost been determined pursuant to SFAS No. 123, the
Company's net income and net income per share would have been adjusted to the
pro forma amounts indicated in the table below. The effects on pro forma net
income obtained from applying SFAS No. 123 may not be representative of the
effects on reported net income for future years (in thousands, except per share
amounts).
1999 1998 1997
------ ------- -------
Net income.............................. As Reported $6,099 $19,429 $11,418
Pro forma 542 16,400 10,121
Net income per share -- basic........... As Reported 0.28 0.94 0.54
Pro forma 0.03 0.79 0.48
Net income per share -- assuming
dilution.............................. As Reported 0.28 0.89 0.52
Pro forma 0.02 0.75 0.46
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997 respectively; no dividend
yield; expected volatility of 95 percent for 1999, 77 percent for 1998 and 45
percent for 1997, and expected option lives of six years. The risk free interest
rate assumed was 6.25 percent for 1999, 4.95 percent for 1998 and 5.65 percent
for 1997. The weighted-average fair value of options granted during 1999, 1998
and 1997 was $10.91, $16.88 and $9.54, respectively.
F-14
48
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock option plans as of December
31, 1999, 1998 and 1997, and changes during the years then ended, is presented
below (in thousands, except per share amounts):
1999 1998 1997
------------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
------- -------- ------ -------- ------ --------
Outstanding at beginning of
year............................ 2,024 $16.15 1,535 $10.19 1,922 $ 0.21
Granted......................... 2,138 13.54 918 24.00 639 18.19
Exercised....................... (169) 1.89 (251) 5.32 (622) 1.33
Forfeited....................... (318) 18.39 (178) 16.14 (404) 10.30
------- ------ ----- ------ ----- ------
Outstanding at end of year........ 3,675 $15.09 2,024 $16.15 1,535 $10.19
======= ====== ===== ====== ===== ======
Options exercisable at year-end... 561 $13.13 252 $ 7.11 116 $ 2.71
======= ====== ===== ====== ===== ======
The following table summarizes information about the Company's stock
options outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS
----------------------------- EXERCISABLE
WEIGHTED ---------------
NUMBER AVERAGE NUMBER
OUTSTANDING REMAINING EXERCISABLE
RANGE OF AT DECEMBER 31, CONTRACTUAL AT DECEMBER 31,
EXERCISE PRICES 1999 LIFE 1999
- ----------------- --------------- ----------- ---------------
$.020 154,312 5.05 134,700
$4.75 44,000 6.07 20,001
$7.190 - $7.56 123,600 6.58 50,800
$9.56 - $12.563 1,128,698 9.21 74,422
$13.063 - $19.50 1,765,710 9.17 164,866
$21.00 - $28.75 284,995 8.12 72,827
$30.125 - $35.188 174,220 8.10 42,976
--------- -------
$0.20 - $35.188 3,675,535 8.75 560,612
========= =======
10. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution retirement plan 401(k) covering
substantially all employees. The Company matches 50% of the contributions made
by employees up to 6% of their annual compensation. The Company 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 1999, 1998 and 1997,
Company contributions to the plan were $297,000, $230,000 and $201,000,
respectively.
11. COMMITMENTS AND CONTINGENCIES
The Company leases facilities under operating leases expiring through 2008.
Rent expense was approximately $3,036,000, $746,000 and $767,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
F-15
49
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum lease payments under operating leases are approximately as follows
(in thousands):
CALENDAR YEAR
- -------------
2000..................................................... $ 5,575
2001..................................................... 5,125
2002..................................................... 4,803
2003..................................................... 4,699
2004..................................................... 3,150
Thereafter............................................... 1,863
-------
$25,215
=======
In March, 1998 the Company entered into a five-year operating lease
agreement, including a one-year construction period, with one five year renewal
option for the construction and lease of a wafer manufacturing facility,
including all necessary machinery and equipment ("the facility"). The total cost
of the facility was $35,000,000. The lease provides for a substantial residual
value guarantee by the Company at the end of the initial lease term and includes
a purchase option equal to the total cost of the facility. As part of the lease
agreement, the Company has pledged $36.8 million of government debt securities
and other government backed securities as security under the lease. The lease
provides for monthly lease payments which are estimated to be $175,000. At the
end of the lease term, the Company is obligated to purchase the facility or
remarket it for the benefit of the lessor. The Company expects the fair market
value of the facility, subject to the purchase option or sale to a third party,
to substantially reduce the Company's payment under the residual value
guarantee. The Company allows a charge to rent expense of approximately $800,000
annually over the life of the lease based upon an estimate of its expected
future obligation under the residual value guarantee. The residual value
guarantee relative to the assets to be leased is expected to approximate 85% of
their total cost.
The Company received a Notice of Potential Liability from the Environmental
Protection Agency ("EPA") in June 1993 concerning a landfill identified as a
Superfund Site. The Company has denied any liability and believes the ultimate
outcome of this matter will not have a material impact on the consolidated
financial statements.
Also, the Company is party to various claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of management, all
such matters are without merit or are of such kind, or involve such amounts,
that unfavorable disposition would not have a material effect on the
consolidated financial position of the Company.
12. EXPORT SALES AND MAJOR CUSTOMERS
During 1998, the Company adopted Financial Accounting Standards Board
Statement of Financial Standards No. 131 ("SFAS 131", "Disclosures about
Segments of an Enterprise and Related Information.") The Company's operations
are classified into one reportable segment. Substantially all of the Company's
operations and long-lived assets reside in the United States although the
Company has a sales operation in Germany.
F-16
50
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues by geographic area are summarized as follows (in thousands):
1999 1998 1997
------- ------- -------
United States......................................... $44,463 $53,533 $42,103
Europe................................................ 14,681 13,814 10,374
Far East.............................................. 23,832 18,170 17,042
Japan................................................. 6,844 6,444 5,770
------- ------- -------
$89,820 $91,961 $75,289
======= ======= =======
For the years ended December 31, 1999, 1998 and 1997, no individual
customer represented more that 10% of the Company's sales.
13. QUARTERLY DATA (UNAUDITED)
Following is a summary of quarterly operation results and share data.
Quarterly information shown below does not vary from amounts reported on any
Form 10-Q previously filed by the Company. The financial data, other than stock
price, has been adjusted to reflect the merger of Sipex and Calogic which was
recorded as a pooling of interests.
Net income per share amounts are based on the weighted average common and
common equivalent shares outstanding during the quarter. Therefore, the total of
net income per share for the four quarters may differ slightly from net income
per share for the year.
QUARTERLY RESULTS AND STOCK MARKET DATA
DEC. 31, 1999 OCT. 2, 1999 JULY 3, 1999 APRIL 3, 1999
------------- -------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL 1999
Net sales............................. $21,972 $22,437 $22,575 $22,836
Gross profit.......................... 4,506 9,158 9,884 9,045
Net income (loss)................... (924) 2,597 2,293 2,133
Net income per share -- assuming
dilution............................ (0.04) 0.12 0.11 0.10
Stock price range per share:
High................................ 24.563 22.063 21.750 36.188
Low................................. 9.813 12.188 11.438 9.375
DEC. 31, 1998 SEPT. 26, 1998 JUNE 27, 1998 MARCH 28, 1998
------------- -------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL 1998
Net sales............................. $26,560 $20,849 $21,418 $22,359
Gross profit.......................... 12,032 9,159 10,404 7,980
Net income............................ 6,786 4,345 2,367 4,944
Net income per share -- assuming
Dilution............................ 0.31 0.20 0.11 0.23
Stock price range per share:
High................................ 37.438 23.875 35.750 38.188
Low................................. 18.625 17.250 18.188 25.250
F-17