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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2000
[ ] 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 5, 2001 was approximately $225,100,000 based upon $10.00 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 5, 2001 was 22,513,751.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain portions of information from the
Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held
on May 18, 2001.
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PART I
ITEM 1. BUSINESS:
COMPANY OVERVIEW
Sipex Corporation is a semiconductor company that designs, manufactures and
markets precision, high performance, high value-added analog integrated
circuits. Virtually all of Sipex products are components. 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. Our products are incorporated by original equipment manufacturers
(OEM's) in a wide range of equipment for use in: telecommunications, networking,
computers, industrial instrumentation, and high performance consumer products.
Our products have been incorporated into a broad range of electronic systems and
products by more than 4,700 customers worldwide.
ANALOG INDUSTRY
Integrated circuits ("ICs") 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 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 the
fourth quarter of 2000, Sipex adopted an end-of-life strategy for the
discontinuance of its line of assembled and ASSP products which were supplied
principally to commercial customers.
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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, cell phones, digital still cameras, and
handheld data terminals.
In addition to expanding our line of programmable serial interface
products, our future interface product strategy includes working with industry
leaders to develop products involving higher speed interfaces supporting high
speed data communications, video communications and telecommunications interface
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.
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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. The power management portfolio expanded
this year with the introduction of switching regulator and controller products.
These products are targeted at two key applications: (i) portable power
applications which is driven by efficiency and low cost, and (ii) distributed
power systems where we believe there is a growing demand for high power, low
voltage solutions.
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. In the fourth quarter of 2000, Sipex
adopted an end-of-life strategy for the discontinuance of its line of assembled
products which were supplied principally to commercial customers for aerospace
and military applications. Sipex is not currently designing new products for the
military market.
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The following table identifies the list of current applications for Sipex's
products, identified by end market:
MARKET USER APPLICATION
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Networking/Data Communication............ Workstations
Notebook PCs
Desktop PCs
Printers
Point-of-sale Terminals
Cable and Analog Modems
Fax Machines
Bridges
Routers
Switches
Access Devices
Servers
Consumer................................. Personal Digital Assistants (PDAs)
Watches
Clocks
Remote Controls
Keypads
Digital Cameras
MP3 Players
Two-way 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
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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 51.8%, 28.8% and
34.9% of net sales in 2000, 1999 and 1998, 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 Munich, Belgium, Taipei, Tokyo, Shenzhen 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 19 independent sales
representative organizations having approximately 43 offices, and 1 distributor
having approximately 111 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. Sales to certain distributors are made under agreement to provide
protection against price reduction to the distributor for their inventory of
Sipex products. 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 paid by us to the sales representative. On a semi-annual
basis, distributors are permitted to return for credit against product purchases
of an equivalent dollar value, up to 10% of their total purchases during the
most recent six-month period.
Outside North America, Sipex sells its products through approximately 26
distributors with an aggregate of approximately 173 sales locations.
International sales in 2000, 1999 and 1998 were approximately $61.1 million,
$45.4 million and $38.4 million, respectively, representing 53.3%, 50.5% and
41.8% of total net sales, respectively. In connection with international sales,
substantially all sales are denominated in U.S. dollars. 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 end customers, none of which accounted for more than ten percent of net
sales in 2000 or 1999, 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. For the year ended
December 31, 2000, Motorola, Inc. was the most significant direct end customer
which accounted for approximately 4.1% of Sipex net sales.
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BACKLOG
Our product backlog was approximately $49.1 million at December 31, 2000
compared to $36.0 million at December 31, 1999. 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 indicated in our fourth
quarter of 2000 results and press releases. 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 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 completed construction of an additional 35,200 square feet to its
Milpitas facility and is currently scheduled to close its Fremont facility in
the first quarter of 2001 upon completion of the transition of manufacturing
into the Milpitas facility.
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 30.2% of Sipex's
net sales in 2000, approximately 35.8% in 1999 and approximately 28.3% in 1998.
In the third and fourth quarters of 1999, our allocation of wafers produced
by one third-party foundry was significantly reduced. This shortage continued
for most of 2000, resulting in an increased cost of these wafers. We are
transitioning production of these wafers into our new facility in Milpitas.
During 2000, the ramp-up of this facility was slower than anticipated. We have
qualified certain products to begin production in our facility and are
continuing the process for the remaining devices. 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
which have been certified as ISO-9002, QS 9000, and ISO 14000. Following
assembly, the packaged units are either returned to Sipex for final testing and
inspection or are tested and inspected offshore before 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 and through 2000, could
have a negative impact on our business revenues and results of operations.
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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 are
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 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 which could 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 2001 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 which it considers
material, 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 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 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
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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, to Maxim Integrated Products for
certain interface product sales and to the Lemelson Medical, Education and
Research Foundation.
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 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 2000, 1999 and 1998, Sipex spent approximately $13.2 million, $10.6
million and $8.4 million, respectively, on research and development,
representing, 11.5%, 11.8% and 9.1%, 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 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.
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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 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, 2000, we had 597 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 is located in Billerica, Massachusetts.
Information regarding our 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 63,280 Leased 01/31/2008
General Office
Milpitas, CA Manufacturing 56,000 Leased 07/01/2004
Milpitas, CA General Office 35,200 Owned
San Jose, CA Manufacturing 12,500 Leased 12/31/2004
Providence, RI General Office 1,300 Leased 10/31/2001
Fremont, CA Warehouse 14,200 Leased 05/07/2001
Fremont, CA* Manufacturing 10,300 Leased 11/30/2001
Grass Valley, CA General Office 650 Leased 03/14/2002
Munich, Germany General Office 1,600 Leased 02/28/2003
Tokyo, Japan General Office 2,500 Leased 01/31/2003
Zaventem, Belgium General Office 6,000 Leased 09/30/2009
Shenzhen, China General Office 2,670 Leased 10/31/2001
Taipei, Taiwan General Office 1,400 Leased 06/30/2001
- ---------------
* Facility planned to be exited on March 15, 2001 and estimated exit costs have
been accrued for at December 31, 2000.
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, 2000.
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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, 2000.
NAME, AGE & POSITION BUSINESS EXPERIENCE
-------------------- -------------------
James E. Donegan -- Age 55 Chairman, Chief Mr. Donegan joined the Company in April 1985
Executive Officer and Director as Chairman of the Board, Chief Executive
Officer and President of 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 53 Executive Vice Mr. DiPietro joined Sipex in December 1983
President, Finance, Chief Financial as Chief Financial Officer and Treasurer. He
Officer, Treasurer and Clerk was appointed Vice 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 40 President and Chief Mr. Parks joined Sipex in June 1999 as
Operating Officer President and 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 52 Senior Vice Mr. Chow joined Sipex in October 1988. He
President, Chief Technology Officer was appointed Senior Vice President of
Interface Products in August 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., a company Mr. Chow founded
in 1982.
Yener Gurler -- Age 61 Senior Vice Mr. Gurler joined Sipex in August 1992 as
President, Operations Fab Manager. 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, 2000 SEPT. 30, 2000 JULY 1, 2000 APRIL 1, 2000
------------- -------------- ------------ -------------
FISCAL 2000
Stock price range per share:
High................................... 45.125 49.672 34.938 44.813
Low.................................... 15.875 23.000 20.063 17.688
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
On December 31, 2000, there were approximately 291 shareholders of record.
Sipex believes that the number of beneficial holders of common stock exceeds
3,300. The last reported sale price of the common stock on March 5, 2001 was
$10.00 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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA:
Selected financial data for the last five years appear below (in thousands,
except per share data):
YEARS ENDED DECEMBER 31,
------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- ------- -------
OPERATING RESULTS
Net sales............................. $114,620 $ 89,820 $ 91,961 $75,289 $64,044
Gross profit.......................... 36,490 32,593 39,773 29,951 22,924
As a % of net sales................. 31.8% 36.3% 43.2% 39.8% 35.8%
Depreciation and amortization......... 4,649 2,528 2,392 1,961 1,505
Research & development expenses....... 13,159 10,623 8,407 6,951 6,516
Income from operations................ 3,473 2,321 15,438 9,901 4,897
Income before taxes................... 5,540 3,680 16,588 10,488 4,247
Net income............................ 3,917 6,099 19,429 11,418 4,179
As a % of net sales................. 3.4% 6.8% 21.1% 15.2% 6.5%
Net income per common
share -- basic...................... 0.18 0.28 0.92 0.55 0.25
Net income per common
share -- assuming dilution.......... 0.16 0.28 0.88 0.52 0.23
FINANCIAL DATA
Cash/short-term investments........... $ 1,732 $ 7,089 $ 25,791 $39,986 $37,146
Restricted cash equivalents and
securities.......................... 36,750 36,750 24,356 -- --
Total assets.......................... 148,768 119,795 107,689 84,348 73,259
Working capital....................... 44,845 42,037 50,478 54,377 51,361
Current ratio......................... 3.5 3.9 3.9 4.1 4.1
Capital expenditures.................. 19,467 9,214 4,700 6,834 2,932
Shareholders' equity.................. 122,797 105,101 89,772 65,331 56,348
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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).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
OVERVIEW
Sipex Corporation is a semiconductor company that designs, manufactures and
markets precision high performance and high value added analog integrated
circuits using standard BiCMOS, bipolar, 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 serial interface circuits, linear and switching power management
products, data converters, and electroluminescent driver circuits.
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.
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 68.2 63.7 56.8
----- ----- -----
Gross profit................................................ 31.8 36.3 43.2
Operating expenses:
Research and development.................................. 11.5 11.8 9.1
Marketing and selling..................................... 9.4 10.9 9.7
General and administrative................................ 8.4 8.8 6.4
Merger related costs...................................... -- 1.3 --
Facility exit costs....................................... (0.5) 0.9 1.2
----- ----- -----
Total operating expenses.................................... 28.8 33.7 26.4
----- ----- -----
Income from operations...................................... 3.0 2.6 16.8
Other income, net........................................... 1.8 1.5 1.2
----- ----- -----
Income before income taxes.................................. 4.8 4.1 18.0
===== ===== =====
Fiscal Year Ended December 31, 2000 compared to Fiscal Year Ended December 31,
1999
Net sales increased 27.6% to $114.6 million for the year ended December 31,
2000 compared to $89.8 million for the year ended December 31, 1999. The
increase in net sales was primarily due to greater demand for our products and
increased design wins. The increase in sales was offset by $5.1 million for a
change in the timing of recognizing revenue on sales to certain distributors and
$1.7 million for additional reserves for distributor returns necessitated by the
elimination of certain distributors. The $5.1 million is the result of changing
the timing of recognizing revenue from when the product is shipped to certain
distributors to when the distributor sells the Company's product through to the
OEM. We made this change effective October 1, 2000 when we concluded we could no
longer reasonably estimate reserves for returns and price concessions due to a
change in our relationship with these certain distributors. At December 31,
2000, there was approximately $4.5 million of inventory shipped into
distribution for which revenue was recognized prior to October 1, 2000 that will
reduce sell-through revenue in the first quarter of 2001. Demand in fiscal year
2000 started out strong and declined in the fourth quarter due to a cyclical
downturn in the industry. As a result of the reduced demand, the Company took
order cancellations of approximately $8.0 million in the fourth quarter of 2000
from its distributors. Approximately 53% of Sipex's net sales were derived from
international
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customers in 2000 compared to 51% in 1999. Geographically, in 2000, Sipex
experienced sales growth of 38% in Japan and the Pacific Rim countries, 28%
growth in Europe and 20% growth in the U.S.
Gross profit was $36.5 million or 31.8% of net sales in 2000 compared to
$32.6 million or 36.3% of net sales in 1999. The 4.5% reduction in gross profit
as a percentage of net sales in 2000 from 1999 was primarily due to continued
high wafer pricing from subcontract manufacturers, lower capacity utilization,
additional reserves for distributor returns of $1.7 million necessitated by the
elimination of certain distributors in the fourth quarter and a $3.1 million
increase in inventory reserves mainly due to an end-of-life strategy for our
legacy product lines, assembled products and ASSP, adopted in the fourth quarter
of 2000.
Research and development ("R&D") expenses were $13.2 million and $10.6
million in 2000 and 1999, respectively, or 11.5% and 11.8% of net sales,
respectively. The increase in R&D expense in 2000 as compared to 1999 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 $10.8 million and $9.7 million in 2000
and 1999, respectively, or 9.4% and 10.9% of net sales, respectively. The dollar
increase in marketing and selling expenses in 2000 over 1999 was due primarily
to an increase in staffing, particularly sales personnel in our Asian operations
and field application engineering.
General and administrative expenses were $9.6 million and $7.9 million in
2000 and 1999, respectively, or 8.4% and 8.8% of net sales, respectively. The
dollar increase in general administration expense was due primarily to increased
staffing, legal, accounting and other related professional expenses.
In the fourth quarter of 1999, management of Sipex and the Board of
Directors approved a plan to close certain manufacturing facilities in
California, which were acquired through the merger with Calogic, and accounted
for as a pooling-of-interests. Total estimated costs of $1.9 million associated
with the closure of the Calogic facilities included facility related costs of
$930,000, costs of the write-down to net realizable value of less efficient and
duplicate machinery and equipment of $300,000 and facilities exit costs related
to severance of $640,000. All of these costs were accrued as of December 31,
1999 and were estimated to be paid by the end of 2000, except for lease costs
which were expected to be paid over a two-year period until the closed
facilities could be subleased.
The following table summarizes the activity in facility exit costs from the
date of the original approval of the plan in the fourth quarter of 1999 through
December 31, 2000 (in thousands):
ACCRUAL BALANCE INCURRED ADJUSTMENTS ACCRUAL BALANCE
12/31/99 2000 TO ACCRUAL 12/31/00
--------------- -------- ----------- ---------------
People related costs............. $ 640 $(507) $ -- $133
Facility related costs........... 930 (332) (225) 373
Equipment related costs.......... 300 -- (300) --
------ ----- ----- ----
$1,870 $(839) $(525) $506
====== ===== ===== ====
In accordance with the plan, Sipex has closed the Calogic manufacturing,
sales and administration facility in Pleasanton, California and as of December
31, 2000 has incurred all people related costs and is incurring the lease costs
for the closed facility as originally planned, with the exception of one
building which was subleased unexpectedly. However, the slower than anticipated
ramp-up of our new Milpitas wafer fabrication facility during 2000 delayed the
transition of manufacturing of the Calogic products to our new facility and
hence delayed the closure of the Calogic Fremont wafer fabrication facility,
which will be closed by the end of the first quarter of 2001. The delay in the
closure of the Fremont facility reduced facility costs by shortening the period
in which the leased fabrication facility would be vacant. Consequently, we
reduced the facility related portion of the accrual to adjust for the unexpected
sublease and the delay in closing this facility. Additionally, the equipment
related accrual was adjusted to reflect the continued use of the fab machinery
and equipment resulting from the delay in the closure of the fab. As of December
31, 2000, $506,000 of the restructuring accrual remains which is estimated to be
paid by the end of the first quarter of 2001, except for lease termination costs
which we expect to incur through the end of the second quarter of 2001.
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15
Other income, net was $2.1 million and $1.4 million in 2000 and 1999,
respectively. The increase in other income was due primarily to lower interest
expense due to the payoff of Calogic bank obligations in December 1999.
We recorded an income tax expense of $1.6 million for 2000 compared to an
income tax benefit of $2.4 million for 1999, resulting in an effective income
tax expense rate of 29.3% in 2000 compared to an effective tax benefit rate of
65.7% in 1999. The 2000 effective rate differs from the statutory rate due to
federal research credits and state tax credits including California
manufacturer's investment tax credit. The 1999 effective rates differed from the
statutory rate due to the reduction of the valuation allowance for net operating
loss carryforwards utilized and deferred tax benefits expected to be realized in
the future.
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.
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 and administrative expenses were 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 consisted 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
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 operations to our newly completed facility in Milpitas, California. Total
estimated costs of $1.9 million associated with the closure of the facilities
includes $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, we have 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. Additionally, the Company
recorded $640,000 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
14
16
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. In the third quarter of 1999, the Company realized net
proceeds of $1.1 million from the unanticipated sale of the tangible assets of
our semiconductor wafer fab located in Milpitas, California which had been
written off as part of facility exit costs. This recovery of $1.1 million has
been recorded as a credit to facility exit costs on the statement of operations
for 1999 resulting in the reporting of net facility exit costs for 1999 of
approximately $817,000.
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 65.7% 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.
Liquidity and Capital Resources
At December 31, 2000, Sipex had working capital of $44.8 million and
available funds of $1.7 million consisting of cash and cash equivalents. 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 our 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 sheets
at December 31, 2000 and 1999. Net cash used in operating activities was $1.0
million, $3.6 million, and $10.4 million in 2000, 1999 and 1998, respectively.
Net cash used in operating activities in 2000 resulted primarily from an $8.3
million increase in accounts receivable, a $10.2 million increase in inventories
and a $3.2 million increase in deferred income tax assets and was partially
offset by net income of $3.9 million and an increase in accounts payable of $3.9
million. The significant increase in the Company's inventories consists mainly
of the buildup of the wafer work-in-process due to the ramp-up of the new wafer
fabrication facility in Milpitas. The increase in accounts receivable over the
prior year is mainly the result of the increased sales level in 2000. The
increase in accounts payable over the prior year is mainly the result of
inventory purchases and capital expenditures in 2000. In 1999, net cash used in
operating activities resulted primarily from a $2.3 million increase in
inventories, $6.7 million increase in deferred income tax assets and a $12.4
million increase in restricted cash associated with the pledge discussed above
which was partially offset by net income of $6.1 million and a $1.2 decrease in
accounts receivable.
Net cash used in investing activities for property, plant and equipment was
$19.5 million, $9.2 million and $4.7 million in 2000, 1999 and 1998,
respectively. The growth in 2000 capital investment related principally to the
expansion of our wafer manufacturing facility in Milpitas, California and the
purchase of machinery and equipment for the facility which was financed
substantially through our bank line of credit.
Net cash provided by (used in) financing activities was $15.3 million,
($5.9) million and $1.0 million in 2000, 1999 and 1998, respectively. In 2000,
$8.7 million was provided by the issuance of common stock upon the exercise of
options or pursuant to the Company's stock plans and $7.1 million receipts from
long term debt which was partially offset by the repayment of approximately
$413,000 of debt obligations. In 1999, $654,000 was provided by the issuance of
common stock upon the exercise of options or pursuant to Sipex's stock plans,
offset by the repayment of $6.6 million of debt obligations. In 1998, $1.6
million was provided by the issuance of common stock upon the exercise of
options or pursuant to the Company's stock plans offset partially by the
repayment of approximately $578,000 of other debt obligations.
At December 31, 2000, Sipex has U.S. net operating loss carryforwards of
approximately $33.7 million, which are available to offset future Federal
taxable income. These losses expire during the years 2005 through 2020. As of
December 31, 2000, utilization of $22.7 million of the net operating loss
carryforwards is subject to
15
17
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, bank loans and cash provided
from operations will be sufficient to meet cash and working capital requirements
for the foreseeable future. At December 31, 2000, Sipex was in default of the
quick ratio covenant on its bank line of credit, which was waived by the lender.
Sipex has negotiated with the bank for an increased line of credit with new
covenants.
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.
Capital Requirements
In order to remain competitive, Sipex must continue to make significant
investments in facilities and capital equipment. Accordingly, Sipex may seek
additional equity or debt financing from time to time and cannot be certain that
additional financing will be available on favorable terms, if at all. Moreover,
any future equity or convertible debt financing will decrease the percentage of
equity ownership of existing stockholders and may result in dilution, depending
on the price at which the equity is sold or the debt is converted.
Fluctuations in Operating Results
Sipex's expense levels are based, in part, on expectations of future
revenues and are, to a large extent, fixed in the short term. Sipex's future
revenues are difficult to predict and at times in the past Sipex has failed to
achieve revenue expectations. Sipex may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. If revenue levels are
below expectations for any reason, operating results are likely to be harmed.
Because Sipex is continuing to increase operating expenses for personnel and new
product
16
18
development and for inventory in anticipation of increasing sales levels,
operating results would be harmed if increased sales are not achieved. In
addition, Sipex is limited in its ability to reduce costs quickly in response to
any revenue shortfalls.
Supply and Manufacturing Risks
Sipex's manufacturing processes 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 that could result in product introduction or delivery delays. In
addition, yields can be adversely affected by minute impurities in the
environment or other problems that occur in the complex manufacturing process.
Many of these problems are difficult to diagnose and time-consuming or expensive
to remedy. From time to time Sipex has experienced yield variances. Sipex cannot
be assured that its foundry or those of its suppliers will not experience yield
variances or other manufacturing problems that result in delayed product
introduction or delivery delays.
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. The occurrence of any of these problems would
negatively impact Sipex's business and results of operations.
In the past, Sipex has experienced decreased allocations of wafer supplies
from some of its suppliers which reduced its capacity to ship products, and
thus, recognize revenue. Additionally, any sudden reduction or elimination of
any primary source or sources of fully processed wafers could result in a
material delay in Sipex's shipment of products. If any other delays or shortages
occur in the future Sipex's revenues and business will be harmed.
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. The new facility is a
sophisticated, highly complex, state-of-the-art factory. Actual production rates
depend upon the reliable operation and effective integration of a variety of
hardware and software components. Sipex cannot be sure that all of these
components will be fully functional or successfully integrated within the
currently projected schedule or that the facility will achieve the forecasted
yield targets. Sipex has experienced and may continue to 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. In
addition, the amount of capital expenditures required to bring the facility to
full operating capacity could be greater than currently anticipated. Higher
costs to bring the facility to full operating capacity will reduce margins and
could harm our business and results of operations.
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 or Enhanced Products
Sipex's future success will depend, in part, upon its ability to anticipate
changes, to enhance its current products and to develop and introduce new
products that keep pace with technological advancements and address the
increasingly sophisticated needs of its customers. Sipex's products may be
rendered obsolete if Sipex fails to anticipate or react to change, and, as a
result, revenues and cash flow may be negatively impacted. Sipex's success
depends on its ability to develop new semiconductor devices for existing and new
markets, to introduce these products in a timely manner and to have these
products selected for design into new products of customers. The development of
these new devices is highly complex and from time to time Sipex has experienced
delays in completing the development of new products. Successful product
develop-
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ment 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 Sipex's customer's products.
Sipex's success also depends upon the ability to accurately specify and
certify the conformance of its products to applicable standards and to develop
its products in accordance with its customer's requirements. Sipex cannot be
sure that it will be able to adjust to changing market conditions as quickly and
cost-effectively as necessary to compete successfully. Furthermore, Sipex cannot
be sure that it will be able to introduce new products in a timely and
cost-effective manner or in sufficient quantities to meet customer demand or
that these products will achieve market acceptance.
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 economic
troubles in any geographic portion of the world will not have a material adverse
effect on Sipex's business, results of operations and financial condition.
Stock Price Volatility
The trading price of Sipex's common stock is subject to wide fluctuations
in response to quarter-to-quarter variations in operating results, announcements
of technological innovations or new products by 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.
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.
18
20
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'
Reports are presented in the following pages.
Independent Auditors' Reports
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended December 31, 2000,
1999 and 1998
Consolidated Statements of Shareholders' Equity and Comprehensive Income for
the years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31, 2000,
1999 and 1998
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
The information required by this item, with respect to the directors of the
registrant and the filing of reports under Section 16(a) of the Securities
Exchange Act of 1934, is incorporated by reference from the Company's definitive
proxy statement in connection with its Annual Meeting of Shareholders to be held
on May 18, 2001, to be filed with the Commission not later than 120 days after
the close of the fiscal year ended December 31, 2000, in the table under the
captions "Election of Directors" and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934."
ITEM 11. EXECUTIVE COMPENSATION:
The information required by this item is incorporated by reference from the
Company's definitive proxy statement in connection with its Annual Meeting of
Shareholders to be held on May 18, 2001, to be filed with the Commission not
later than 120 days after the close of the fiscal year ended December 31, 2000,
under the caption "Compensation and Other Information Concerning Directors and
Officers."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The information required by this item is incorporated by reference from the
Company's definitive proxy statement in connection with its Annual Meeting of
Shareholders to be held on May 18, 2001, to be filed with the Commission not
later than 120 days after the close of the fiscal year ended December 31, 2000,
in the tables under the caption "Security Ownership of Certain Beneficial Owners
and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
The information required by this item is incorporated by reference from the
Company's definitive proxy statement in connection with its Annual Meeting of
Shareholders to be held on May 18, 2001, to be filed with the Commission not
later than 120 days after the close of the fiscal year ended December 31, 2000,
under the caption "Certain Transactions."
19
21
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 Reports of Independent Accountants
are incorporated in Item 8 of this report.
Independent Auditors' Reports
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Operations for the Years Ended December
31, 2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the Years Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended December
31, 2000, 1999 and 1998
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: No reports on Form 8-K were filed by the
Company during the fiscal quarter ended December 31, 2000.
20
22
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
March 15, 2001 By: /s/ JAMES E. DONEGAN
------------------------------------
James E. Donegan
Chairman of the Board of Directors,
Chief Executive Officer
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 15, 2001
- --------------------------------------------------- Directors, Chief Executive
James E. Donegan Officer (principal executive
officer)
/s/ FRANK R. DIPIETRO Executive Vice President, March 15, 2001
- --------------------------------------------------- Finance, Chief Financial
Frank R. Dipietro Officer, Treasurer and Clerk
(principal financial and
accounting officer)
/s/ MANFRED LOEB Director March 15, 2001
- ---------------------------------------------------
Manfred Loeb
/s/ DOUGLAS M. MCBURNIE Director March 15, 2001
- ---------------------------------------------------
Douglas M. McBurnie
/s/ LIONEL H. OLMER Director March 15, 2001
- ---------------------------------------------------
Lionel H. Olmer
/s/ WILLY SANSEN Director March 15, 2001
- ---------------------------------------------------
Dr. Willy Sansen
/s/ JOHN L. SPRAGUE Director March 15, 2001
- ---------------------------------------------------
John L. Sprague
21
23
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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)
22
24
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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 (previously filed as
an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998 and incorporated herein by
reference)
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
and incorporated herein by reference)
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, 2000 by and between the
Company and Frank R. DiPietro (filed herewith)
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)
10.22 Business Loan Agreement with Comerica Bank (filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended July 1, 2000, and incorporated herein by
reference)
10.23 2000 Non-Qualified Stock Option Plan (filed herewith)
11.1 Computation of earnings per share (filed herewith)
21.1 Subsidiaries of the Company (filed herewith)
23.1 Consent of KPMG LLP, independent auditors
23.2 Consent of Sallmann, Yang & Alameda
- ---------------
* Confidential treatment as to certain portions has been requested pursuant to
Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended.
23
25
SIPEX CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE
----
Independent Auditors' Reports............................... F-2 - F-3
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2000 and
1999................................................... F-4
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998....................... F-5
Consolidated Statements of Shareholders' Equity and
Comprehensive Income for the years ended December 31,
2000, 1999 and 1998.................................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998....................... F-7
Notes to Consolidated Financial Statements................ F-8 - F-18
F-1
26
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, 2000 and 1999 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, 2000. 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 year then ended reflect the pooling-of-interests
transaction with Calogic as described in Note 2 to the consolidated financial
statements. We did not audit the 1999 financial statements of Calogic, which
statements reflect total net sales constituting 28.7 percent, of the related
consolidated total net 1998 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 for the year ended December 31,
1998, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. 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 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, 2000 and 1999 and the consolidated results of their operations and
their cash flows for each of the years in the three-year period ended December
31, 2000, in conformity with generally accepted accounting principles in the
United States of America.
/s/ KPMG LLP
Boston, Massachusetts
February 9, 2001
F-2
27
INDEPENDENT AUDITORS' REPORT
To the Board Of Directors and Shareholders
Calogic and Subsidiary
Fremont, California
We have audited the consolidated statements of income, accumulated deficits
and cash flows of Calogic and Subsidiary for the year ended June 30, 1999. 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 results of the operations of
Calogic and Subsidiary and its cash flows for the year ended June 30, 1999 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
28
SIPEX CORPORATION
CONSOLIDATED BALANCE SHEETS
YEARS ENDED DECEMBER 31,
------------------------
2000 1999
---------- ----------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,732 $ 1,355
Short-term investment securities.......................... -- 5,734
Accounts receivable, less allowances of $2,889 and $1,280
in 2000 and 1999, respectively......................... 20,688 14,002
Inventories............................................... 33,324 23,128
Deferred income taxes -- current.......................... 5,515 10,428
Prepaid expenses and other current assets................. 1,504 2,084
-------- --------
Total current assets.............................. 62,763 56,731
Restricted cash equivalents and securities.................. 36,750 36,750
Property, plant, and equipment, net......................... 32,993 17,834
Intangible assets (net of accumulated amortization)......... 3,360 3,739
Deferred income taxes....................................... 12,713 4,575
Other assets................................................ 189 166
-------- --------
Total assets...................................... $148,768 $119,795
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ -- $ 413
Accounts payable.......................................... 10,583 6,661
Accrued expenses.......................................... 5,372 7,620
Deferred income........................................... 1,963 --
-------- --------
Total current liabilities......................... 17,918 14,694
Long-term debt.............................................. 7,057 --
Other long-term liabilities................................. 996 --
-------- --------
Total liabilities................................. 25,971 14,694
-------- --------
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
22,502 and 21,768 shares issued and outstanding at
December 31, 2000 and 1999, respectively............... 225 218
Additional paid-in capital................................ 124,897 110,951
Accumulated deficit....................................... (2,211) (6,128)
Accumulated other comprehensive income.................... (114) 60
-------- --------
Total shareholders' equity........................ 122,797 105,101
-------- --------
Total liabilities and shareholders' equity........ $148,768 $119,795
======== ========
See accompanying notes to consolidated financial statements
F-4
29
SIPEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales................................................... $114,620 $89,820 $91,961
Cost of sales............................................... 78,130 57,227 52,188
-------- ------- -------
Gross profit...................................... 36,490 32,593 39,773
Operating expenses:
Research and development.................................. 13,159 10,623 8,407
Marketing and selling..................................... 10,765 9,719 8,931
General and administrative................................ 9,618 7,945 5,859
Merger related costs...................................... -- 1,168 --
Facility exit costs....................................... (525) 817 1,138
-------- ------- -------
Total operating expenses.......................... 33,017 30,272 24,335
-------- ------- -------
Income from operations...................................... 3,473 2,321 15,438
Other income (expense):
Interest income, net...................................... 2,568 2,489 1,589
Other, net................................................ (501) (1,130) (439)
-------- ------- -------
Total other income................................ 2,067 1,359 1,150
-------- ------- -------
Income before income taxes.................................. 5,540 3,680 16,588
Income tax expense (benefit)................................ 1,623 (2,419) (2,841)
-------- ------- -------
Net income.................................................. $ 3,917 $ 6,099 $19,429
======== ======= =======
Net income per common share -- basic........................ $ 0.18 $ 0.28 $ 0.92
======== ======= =======
Net income per common share -- assuming dilution............ $ 0.16 $ 0.28 $ 0.88
======== ======= =======
Weighted average common shares outstanding -- basic......... 22,133 21,403 21,131
======== ======= =======
Weighted average common shares outstanding -- assuming
dilution.................................................. 23,749 21,981 22,022
======== ======= =======
See accompanying notes to consolidated financial statements
F-5
30
SIPEX CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
COMMON STOCK ACCUMULATED
-------------------- ADDITIONAL OTHER TOTAL
NUMBER OF $.01 PAR PAID-IN ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES VALUE CAPITAL DEFICIT INCOME EQUITY
--------- -------- ---------- ----------- ------------- -------------
(IN THOUSANDS)
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 entity............. -- -- -- 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
Net income..................... -- -- -- 3,917 -- 3,917
Foreign currency translation
adjustments.................. -- -- -- -- (174) (174)
--------
Comprehensive income......... 3,743
Issuance of common stock under
option plans................. 715 7 8,354 -- -- 8,361
Issuance of common stock under
stock purchase plan.......... 19 -- 326 -- -- 326
Tax effect of exercises of
stock options................ -- -- 5,266 -- -- 5,266
------ ---- -------- -------- ----- --------
Balance at December 31, 2000... 22,502 $225 $124,897 $ (2,211) $(114) $122,797
====== ==== ======== ======== ===== ========
See accompanying notes to consolidated financial statements
F-6
31
SIPEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- --------- ---------
(IN THOUSANDS)
Operating activities:
Net income................................................ $ 3,917 $ 6,099 $ 19,429
Adjustments to reconcile net income to net cash used in
operating activities:
Adjustment to conform year end of pooled entity......... -- 1,009 --
Allowance for receivables............................... 1,609 617 435
Depreciation and amortization........................... 4,649 2,528 2,392
Loss on disposal of capital assets...................... 38 51 722
Changes in assets and liabilities:
(Increase) decrease in accounts receivable............ (8,295) 1,228 (4,281)
Increase in inventories............................... (10,196) (2,268) (371)
Decrease (increase) in prepaid expenses............... 580 (1,051) (348)
Increase in deferred taxes............................ (3,225) (6,739) (6,921)
(Increase) decrease in other assets................... (23) 203 (201)
Increase in accounts payable.......................... 3,922 214 477
Increase in accrued expenses.......................... 3,018 6,923 2,504
Increase in deferred income........................... 1,963 -- --
Increase in other long-term liabilities............... 996 -- --
Increase in restricted cash equivalents and
securities......................................... -- (12,394) (24,263)
-------- --------- ---------
Net cash used in operating activities.............. (1,047) (3,580) (10,426)
-------- --------- ---------
Investing activities:
Proceeds from maturity of investment securities........... 5,734 119,506 426,399
Purchase of investment securities......................... -- (117,259) (418,281)
Purchase of property, plant, and equipment................ (19,467) (9,214) (4,700)
-------- --------- ---------
Net cash (used in) provided by investing
activities....................................... (13,733) (6,967) 3,418
-------- --------- ---------
Financing activities:
Proceeds from issuance of common stock.................... 8,687 654 1,618
Proceeds from (payments of) long-term debt................ 7,057 (1,300) (920)
Payment of capital lease and other debt obligations....... (413) (5,268) 342
-------- --------- ---------
Net cash provided by (used in) financing
activities....................................... 15,331 (5,914) 1,040
-------- --------- ---------
Effect of foreign currency exchange rate changes on cash and
cash equivalents.......................................... (174) 6 (109)
-------- --------- ---------
Increase (decrease) in cash and cash equivalents............ 377 (16,455) (6,077)
Cash and cash equivalents at beginning of period............ 1,355 17,810 23,887
-------- --------- ---------
Cash and cash equivalents at end of period.................. $ 1,732 $ 1,355 $ 17,810
======== ========= =========
Supplemental cash flow information:
Cash paid during the period for:
Income taxes............................................ $ 475 $ 580 $ 394
======== ========= =========
Interest................................................ $ 27 $ 583 $ 797
======== ========= =========
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 $ --
======== ========= =========
Tax benefit from disposition of stock acquired through
stock options........................................... $ 5,266 $ 3,792 $ 3,502
======== ========= =========
See accompanying notes to consolidated financial statements
F-7
32
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Sipex Corporation (the "Company") designs, manufacturers and markets
precision 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 and power management. In the fourth quarter
of 2000, the Company adopted an end-of-life strategy for its aerospace and
military product lines which are being discontinued.
Basis of Presentation
The consolidated financial statements include the accounts of Sipex
Corporation and all of its wholly owned subsidiaries. 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
Beginning in the fourth quarter of 2000, the Company began deferring
revenue on shipments to the Company's largest distributor until the product is
resold by the distributor to the end user (sell-through) because the arrangement
with this distributor includes returns and price concessions which the Company
can no longer reasonably estimate. For all other product sales, revenue is
recognized at the time of shipment. For product sales recognized at the time of
shipment, the Company accrues for estimated sales returns and price concessions
upon shipment. Revenue from engineering service contracts is recorded as
performance is completed.
Short-Term Investments
Short-term investments consist of U.S. Government securities. 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 Equivalents and Securities
Restricted cash equivalents and 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 that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-term
investments and accounts receivable. Cash equivalents consist of deposits with,
or guaranteed by, major commercial banks, the maturities of which are three
months or less from date of purchase. With respect to accounts receivable, the
Company performs periodic credit evaluations of the financial condition of its
customers and typically does not require collateral from them. Management
F-8
33
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assesses the need for allowances for potential credit losses by considering the
credit risk of specific customers, historical trends and other information.
Fair values of financial assets and financial liabilities
The carrying values of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities approximate their
fair values due to the relatively short periods to maturity of the instruments.
Long-term debt approximates fair value due to the interest rate being based on
the bank's base rate.
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
------------
Buildings................................................... 30 years
Machinery and equipment..................................... 5-10 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
F-9
34
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
A reconciliation of basic weighted average common shares with weighted
average shares assuming dilution is as follows (in thousands):
2000 1999 1998
------ ------ ------
Weighted average common shares outstanding -- basic...... 22,133 21,403 21,131
Net effect of dilutive potential common shares
outstanding based on the treasury stock method using
the average market price............................... 1,616 578 891
------ ------ ------
Weighted average common shares -- assuming dilution...... 23,749 21,981 22,022
Antidilutive potential common shares excluded from the
computation above...................................... 175 2,000 1,000
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 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
Company's statements of operations and cash flows for its fiscal year ended
December 31, 1998 are combined with Calogic's statements of operations and cash
flows for the fiscal year ended June 30, 1999. 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.
F-10
35
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 (in thousands):
YEARS ENDED
DECEMBER 31,
------------------
1999 1998
------- -------
Net sales:
Sipex.................................................. $60,520 $65,557
Calogic................................................ 29,300 26,404
Combined............................................... $89,820 $91,961
Net income:
Sipex.................................................. $ 2,620 $19,831
Calogic................................................ 3,479 (402)
Combined............................................... $ 6,099 $19,429
3. FACILITY EXIT COSTS
In the fourth quarter of 1999, management of Sipex and the Board of
Directors approved a plan to close certain manufacturing facilities in
California, which were acquired through the merger with Calogic and accounted
for as a pooling-of-interests. Total estimated costs of $1.9 million associated
with the closure of the Calogic facilities included facility related costs of
$930,000, costs of the write-down to net realizable value of less efficient and
duplicate machinery and equipment of $300,000 and facilities exit costs related
to severance of $640,000. All of these costs were accrued as of December 31,
1999 and were estimated to be paid by the end of 2000 except for lease costs
which were expect to be paid over a two-year period until the closed facilities
could be subleased.
The following table summarizes the activity in facility exit costs from the
date of the original approval of the plan through December 31, 2000 (in
thousands):
ACCRUAL BALANCE INCURRED ADJUSTMENTS ACCRUAL BALANCE
12/31/99 2000 TO ACCRUAL 12/31/00
--------------- -------- ----------- ---------------
People related costs............. $ 640 $(507) $ -- $133
Facility related costs........... 930 (332) (225) 373
Equipment related costs.......... 300 -- (300) 0
------ ----- ----- ----
$1,870 $(839) $(525) $506
====== ===== ===== ====
In accordance with the plan, Sipex has closed the Calogic manufacturing,
sales and administration facility in Pleasanton, California and as of December
31, 2000 has incurred all people related costs and is incurring the lease costs
for the closed facility as originally planned, with the exception of one
building which was subleased unexpectedly. However, the slower than anticipated
ramp-up of our new Milpitas wafer fabrication facility during 2000 delayed the
transition of manufacturing of the Calogic products to our new facility and
hence delayed the closure of the Calogic Fremont wafer fabrication facility,
which will be closed by the end of the first quarter of 2001. The delay in the
closure of the Fremont facility reduced facility costs by shortening the period
in which the leased fabrication facility would be vacant. Consequently, we
reduced the facility related portion of the accrual to adjust for the unexpected
sublease and the delay in closing this facility. Additionally, the equipment
related accrual was adjusted to reflect the continued use of the fab machinery
and equipment resulting from the delay in the closure of the fab. As of December
31, 2000, $506,000 of the restructuring accrual remains which is estimated to be
paid by the end of the first quarter of 2001, except for lease termination costs
which we expect to incur through the end of the second quarter of 2001.
F-11
36
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. In the third
quarter of 1999, the Company realized net proceeds of $1.1 million from the
unanticipated sale of the tangible assets of our semiconductor wafer fab located
in Milpitas, California which had been written off as part of facility exit
costs. This recovery of $1.1 million has been recorded as a credit to facility
exit costs on the statement of operations for 1999 resulting in the reporting of
net facility exit costs for 1999 of approximately $817,000.
4. INVENTORIES
Inventories were as follows (in thousands):
2000 1999
------- -------
Raw materials............................................ $ 4,167 $ 5,769
Work-in-process.......................................... 24,053 8,934
Finished goods........................................... 5,104 8,425
------- -------
$33,324 $23,128
======= =======
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment were as follows (in thousands):
2000 1999
------- -------
Building................................................. $ 4,212 $ --
Machinery and equipment.................................. 44,395 42,844
Furniture, fixtures and office equipment................. 11,078 2,913
Leasehold improvements................................... 2,623 3,380
------- -------
62,308 49,137
Less accumulated depreciation and amortization........... 29,315 31,303
------- -------
$32,993 $17,834
======= =======
6. ACCRUED EXPENSES
Accrued expenses were as follows (in thousands):
2000 1999
------ ------
Accrued compensation and benefits.......................... $2,592 $2,187
Accrued facility exit costs................................ 506 1,870
Other...................................................... 2,274 3,563
------ ------
$5,372 $7,620
====== ======
F-12
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SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE AND LONG-TERM DEBT
As of December 31, 2000, the Company had long-term debt consisting
primarily of $7.1 million borrowed under a $10.0 million line of credit at the
bank's base rate minus 0.5% (9.0% at December 31, 2000). Funds advanced under
the line are due June 1, 2002 and are collateralized by accounts receivable,
inventory and cash deposited at the bank. The loan agreement requires compliance
with certain minimum tangible net worth and financial ratios. For the year ended
December 31, 2000, the Company was not in compliance with this debt covenant by
not maintaining a quick ratio in excess of 1.0. The Company has obtained a
waiver from the lender as of December 31, 2000 and has negotiated with the bank
for an increased line of credit with new covenants. As of December 31, 1999, the
Company had notes payable consisting principally of a note payable to an officer
of Calogic.
8. INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 2000,
1999 and 1998 was allocated as follows (in thousands):
2000 1999 1998
------- ------- -------
Income from continuing operations..................... $ 1,623 $(2,419) $(2,841)
Shareholders' equity for compensation expense for tax
purposes in excess of amounts recognized for
financial statement purposes........................ (5,266) (3,792) (3,502)
------- ------- -------
Total income tax benefit.............................. $(3,643) $(6,211) $(6,343)
======= ======= =======
Total federal, state and foreign income tax expense (benefit), consists of
the following (in thousands):
2000 1999 1998
--------------------------- ---------------------------- ----------------------------
DEFERRED CURRENT TOTAL DEFERRED CURRENT TOTAL DEFERRED CURRENT TOTAL
-------- ------- ------ -------- ------- ------- -------- ------- -------
Federal..................... $2,217 $(274) $1,943 $ 57 $(29) $ 28 $ (839) $5,415 $ 4,576
Loss carryforward........... -- -- -- (885) -- (885) (5,423) (2,599) (8,022)
State....................... (313) (7) (320) (1,576) 2 (1,574) (554) 1,104 550
Loss carryforward........... -- -- -- -- -- -- -- -- --
Foreign..................... -- -- -- -- 12 12 -- 55 55
------ ----- ------ ------- ---- ------- ------- ------ -------
Total expense............... $1,904 $(281) $1,623 $(2,404) $(15) $(2,419) $(6,816) $3,975 $(2,841)
====== ===== ====== ======= ==== ======= ======= ====== =======
F-13
38
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The actual tax expense (benefit) differs from the "expected" tax expense as
follows (in thousands):
2000 1999 1998
------ ------- -------
Computed "expected" tax expense........................ $1,939 $ 1,289 $ 5,806
State income tax, net of federal income tax benefit and
change in valuation allowance........................ (201) (560) 901
FSC tax benefits....................................... -- (37) --
Non-deductible expenses................................ 71 26 227
Goodwill amortization and merger costs not
deductible........................................... 133 419 --
Change in valuation allowance.......................... -- (2,569) (1,455)
Recognition of net operating losses.................... -- (885) (8,022)
Utilization of R&D credits............................. (353) (22) (229)
Rate differential on foreign taxes and non-deductible
foreign losses....................................... 41 (34) (18)
Other.................................................. (7) (46) (51)
------ ------- -------
Actual tax expense (benefit)........................... $1,623 $(2,419) $(2,841)
====== ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2000 and
1999 are as follows (in thousands):
2000 1999
------- -------
Current deferred tax assets:
Inventories, primarily non-deductible reserves......... $ 2,811 $ 3,155
Accounts receivable, primarily allowances.............. 1,232 453
Accrued expenses, principally provisions not currently
deductible.......................................... 1,472 1,212
Net operating loss carryforwards....................... -- 5,608
Noncurrent deferred tax assets:
Net operating loss carryforwards....................... 12,028 1,748
Tax credit carryforwards............................... 3,838 2,711
Fixed assets, due to differences in depreciation....... -- 116
------- -------
Total deferred tax assets.............................. $21,381 $15,003
Noncurrent deferred tax liabilities:
Fixed assets, due to differences in depreciation....... (3,153) --
------- -------
Net deferred tax assets........................ $18,228 $15,003
======= =======
At December 31, 2000, the Company has U.S. net operating loss carryforwards
of approximately $33.7 million, which are available to offset future Federal
taxable income. These losses expire during the years 2005 through 2020. As of
December 31, 2000, utilization of $22.7 million of the 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, 2000, the Company had Federal and California research and
development credits of approximately $2.0 million and $400,000, respectively,
which will expire from 2001 to 2020. The Company also has approximately $1.7
million of California manufacturer's investment credit carryforwards and
$100,000 of Massachusetts investment tax credit carryforwards, which will expire
from 2006 to 2008.
F-14
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SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The valuation allowance decreased by $7.2 million during the year ended
December 31, 1999. The Company believes that it is more likely than not that the
deferred tax assets at December 31, 2000 will be realized in the future.
9. SHAREHOLDERS' EQUITY
The Company currently maintains eight 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, the 1999 Stock Plan and the 2000 Non-Qualified Stock Option
Plan have had 744,308, 265,818, 1,187,900, 1,200,000, 300,000, 1,200,000,
1,200,000 and 1,000,000 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 3,137,304 shares are outstanding as of December 31, 2000.
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 72,158 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).
2000 1999 1998
------- ------- -------
Net income...................................... As Reported $ 3,917 $ 6,099 $19,429
Pro forma (2,495) 542 16,400
Net income per share -- basic................... As Reported 0.18 0.28 0.92
Pro forma (0.11) 0.03 0.79
Net income per share -- assuming dilution....... As Reported 0.16 0.28 0.88
Pro forma (0.11) 0.02 0.75
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 2000, 1999 and 1998, respectively; no dividend
yield; expected volatility of 95 percent for 2000 and 1999, and 77 percent for
1998, and expected option lives of six years. The risk free interest rate
assumed was 5.0% for 2000, 6.25% for 1999 and 4.95% for 1998. The
weighted-average fair value of options granted during 2000, 1999 and 1998 was
$23.14, $10.91 and $16.88, respectively.
F-15
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SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock option plans as of December
31, 2000, 1999 and 1998, and changes during the years then ended, is presented
below (in thousands, except per share amounts):
2000 1999 1998
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
------ -------- ------ -------- ------ --------
Outstanding at beginning of year........ 3,675 $15.09 2,024 $16.15 1,535 $10.19
Granted............................... 432 23.15 2,138 13.54 918 24.00
Exercised............................. (715) 11.69 (169) 1.89 (251) 5.32
Forfeited............................. (255) 16.30 (318) 18.39 (178) 16.14
----- ------ ----- ------ ----- ------
Outstanding at end of year.............. 3,137 $16.87 3,675 $15.09 2,024 $16.15
===== ====== ===== ====== ===== ======
Options exercisable at year-end......... 458 $18.11 561 $13.13 252 $ 7.11
===== ====== ===== ====== ===== ======
The following table summarizes information about the Company's stock
options outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS
----------------------------- EXERCISABLE
WEIGHTED ---------------
NUMBER AVERAGE NUMBER
OUTSTANDING REMAINING EXERCISABLE
RANGE OF AT DECEMBER 31, CONTRACTUAL AT DECEMBER 31,
EXERCISE PRICES 2000 LIFE 2000
--------------- --------------- ----------- ---------------
$.02 14,186 4.29 14,186
$4.75 16,520 5.07 4,521
$7.19 - $7.56 30,000 5.57 --
$9.56 - $12.563 887,621 8.46 74,294
$13.063 - $19.50 1,568,706 8.45 238,216
$21.00 - $28.75 474,384 8.53 65,249
$30.125 - $35.188 145,887 7.09 61,413
$0.02 - $35.188 3,137,304 8.34 457,879
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 2000, 1999 and 1998,
Company contributions to the plan were approximately $468,000, $297,000, and
$230,000, respectively.
11. COMMITMENTS AND CONTINGENCIES
The Company leases facilities under operating leases expiring through 2009.
Rent expense was approximately $3.1 million, $3.0 million and $746,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.
F-16
41
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum lease payments under operating leases are approximately as follows
(in thousands):
CALENDAR YEAR
- -------------
2001................................................... $ 3,558
2002................................................... 3,325
2003................................................... 3,264
2004................................................... 1,992
2005................................................... 555
Thereafter............................................. 1,308
-------
$14,002
=======
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 financed under the lease 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 quarterly lease payments of
approximately $615,000. 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 accrues a charge to rent expense
and other long term liabilities 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 sales operations in Munich, Belgium, Taipei, Tokyo and Shenzhen.
F-17
42
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues by geographic area are summarized as follows (in thousands):
2000 1999 1998
-------- ------- -------
United States/Canada................................. $ 53,471 $44,463 $53,533
Europe............................................... 18,778 14,681 13,814
Far East............................................. 32,173 23,832 18,170
Japan................................................ 10,198 6,844 6,444
-------- ------- -------
$114,620 $89,820 $91,961
======== ======= =======
For the years ended December 31, 2000, 1999 and 1998, no individual
customer represented more than 10% of the Company's sales.
13. QUARTERLY DATA (UNAUDITED)
Following is a summary of quarterly operating results and share data.
Quarterly information shown below does not vary from amounts reported on any
Form 10-Q previously filed by the Company.
Net income (loss) per share amounts are based on the weighted average
common and common equivalent shares outstanding during the quarter. Therefore,
the total of net income (loss) 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, 2000 SEPT. 30, 2000 JULY 1, 2000 APRIL 1, 2000
------------- -------------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL 2000
Net sales................................ $20,772 $35,711 $31,401 $26,736
Gross profit............................. (233) 15,180 11,842 9,701
Net income (loss)...................... (5,184) 4,746 2,703 1,652
Net income per share -- basic............ (0.23) 0.21 0.12 0.08
Net income per share -- assuming
dilution............................... (0.23) 0.20 0.12 0.07
Stock price range per share:
High................................... 45.125 49.672 34.938 44.813
Low.................................... 15.875 23.000 20.063 17.688
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 -- basic.............. (0.04) 0.12 0.11 0.10
Net income per share -- assuming
dilution................................. (0.04) 0.12 0.10 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
F-18