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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1996
0-27892
(COMMISSION FILE NUMBER)
SIPEX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Massachusetts 04-6135748
(State of Incorporation) (IRS employer identification number)
22 Linnell Circle 01821
Billerica, Massachusetts (ZIP Code)
(Address of principal executive offices)
(508) 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 nonaffiliates of the
registrant at March 21, 1997 was approximately $205,371,465 based upon $31.125
per share, the last reported sale price of the Common Stock on The Nasdaq
National Market. The number of shares of the registrant's Common Stock
outstanding at March 21, 1997 was 8,653,626.
Documents incorporated by reference:
Portions of the Company's Proxy Statement relating to the Company's
Special Meeting in Lieu of Annual Meeting of Shareholders to be held
on May 30, 1997 are incorporated by reference into Part III hereof.
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PART I
ITEM 1. BUSINESS:
THE COMPANY
SIPEX Corporation (the "Company" or "Sipex") designs, manufactures, markets
and sells innovative, high performance, high value-added analog integrated
circuits. Between 1990 and 1994, the Company transitioned from a supplier of
analog hybrid products and integrated circuits for military applications to a
supplier of analog integrated circuits for commercial applications. The Company
sells its products to OEM customers either directly through its direct sales
force or with the assistance of a network of independent sales representatives,
or indirectly through independent distributors. The Company designs,
manufactures, markets and sells products across the analog semiconductor market
and has targeted three high-growth sectors that it believes are especially
compatible with its design and process capabilities -- data communications and
telecommunications, battery powered/portable products and industrial
controls/instrumentation. The Company's products have been incorporated into a
broad range of electronic systems and products by more than 3,000 customers
worldwide.
The Company's strategy is to develop long-term partnering relationships
with leaders in targeted market sectors. This enables the Company to identify
applications and to provide innovative, cost-effective solutions to meet
customers' needs over the life cycles of their products. Having identified and
met the specific needs of market leaders with innovative analog solutions, the
Company is then able to migrate these solutions into standard products that meet
the needs of a wide variety of market participants. Sipex serves the broad
analog signal processing market and its target market sectors with three primary
product lines -- interface circuits, low power and high voltage circuits and
data converters. The Company utilizes multiple process technologies to
manufacture these circuits.
In addition to and complementing its strategy of teaming with market
leaders, the Company offers a broad base of manufacturing process technologies
through its own foundry and third-party semiconductor foundries. This enables
the Company to design products for its customers utilizing the optimum process
technology for each application. By combining creative design techniques with a
broad base of process technologies, the Company can develop innovative, high
performance analog circuits that support its customers' requirements. The
Company has also focused on leveraging its specialized dielectrically isolated
("DI") bipolar complementary metal oxide semiconductor ("BiCMOS") technology,
which the Company believes is particularly well-suited to the low power, low
voltage requirements of battery powered/portable products.
The Company's customers, none of which accounted for more than ten percent
of net sales in 1995 or 1996, include Digital Equipment Corporation,
Hewlett-Packard Co., Motorola, Inc., Philips N.V., Siemens Corporation, Silicon
Graphics Inc., 3Com Corp., U.S. Robotics Corp. and Pairgain Technologies, Inc.
in the data communications/telecommunications markets; Federal Express Corp.,
Texas Instruments Incorporated, Timex Corporation, International Business
Machines Corp., Sharp Corp., Mitsubishi Corp. and Dassault Aviation S.A. in the
low power analog application areas; and Andover Controls Corp., LTX Corporation
and Honeywell Inc. in the industrial controls market.
MARKETS
The Company serves a broad range of markets for analog integrated circuits,
including the data processing, communications, consumer, industrial and
military/aerospace markets. The Company has currently targeted three high-growth
areas -- data communications and telecommunications, battery powered/portable
products, and industrial controls/instrumentation -- in which it believes that
its design and manufacturing process capabilities can address customers' needs
in terms of product features and functionality, integration and overall solution
cost. By working closely and partnering with established market leaders within
these areas, the Company has been able to identify and meet its partners'
complex analog circuit requirements with tailored products that are developed in
conjunction with the customer's own product design team, thus allowing the
Company to address the customer's needs as the customer identifies them. Having
addressed the particular needs of market leaders, the Company is then able to
migrate these solutions into standard products available to other equipment or
device suppliers.
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Data Communications and Telecommunications. The convergence of data
processing and communications technology through the deployment of data and
voice networks has enabled OEM networking equipment suppliers to achieve
dramatic growth in recent years. Within LANs and WANs, a variety of peripheral
devices are linked into the network, including printers, disk drives, and
scanners. Analog integrated circuits are required at each connection among
computers, peripherals and networking interconnect equipment, such as hubs,
routers and bridges. Since no predominant standard has emerged for the serial
interfaces among peripherals, computers and the network equipment linking them,
WAN and LAN systems OEMs must have the ability to support most of the popular
interface standards to maintain compatibility. Wireless communications such as
cellular phones, two-way pagers, or digital radios require analog-to-digital and
digital-to-analog converter products to receive and transmit signals. The
Company believes that trends toward greater connectivity of computers and
peripherals into networks, the interconnection of remote networks, the emergence
of the Internet as both a communications network and a business tool, as well as
the integration of data, video and telecommunications networks will continue.
Battery Powered/Portable Products. The rapid growth of sales of portable
products, including computers, hand-held electronic devices, cellular and
portable telephones, pagers and consumer electronic devices and products has
created market opportunities for analog semiconductor devices which can operate
efficiently at low voltages. Battery-powered devices require many of the same
kinds of analog circuits as non-portable equipment, including transceivers,
converters and amplifiers, but these circuits must be functional and efficient
at the low voltages supplied by their power source. Further, battery powered
devices often require high voltage functionality -- such as the ability to drive
an electroluminescent device for a light source for the portable product --which
requires complex analog circuitry. The Company believes that analog
semiconductor manufacturers that can provide solutions which enable portable
equipment and products manufacturers to add functionality and reliability to
their products with low battery usage will be able to expand their markets
substantially.
Industrial Controls/Instrumentation. The detection and measurement of
analog information such as light, sound, temperature, pressure, position,
velocity, acceleration, angle, angular velocity and speed in industrial
controls, medical equipment, automated test equipment and other measurement
systems have been a traditional focus of analog circuits. As systems grow more
complex and information is processed at higher rates, there is a corresponding
requirement for higher speed analog circuits to process the information in
analog format, as well as for analog-to-digital and digital-to-analog conversion
for digital processing of the information contained.
PRODUCTS AND CUSTOMERS
The Company offers a broad range of innovative, high performance, high
value-added analog integrated circuits. Since 1992, the Company has introduced
146 high performance analog integrated circuit products, including 34 in 1996.
The Company's products, are principally focused in three product lines
- --interface products, low power and high voltage products and data converter
products. In addition, the Company supplies precision high-reliability assembled
products principally to commercial customers supplying products for aerospace
and military applications.
Interface Products. Interface products act as an intermediary 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, hand-held
instrumentation, medical equipment, test equipment and industrial controls.
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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 multiplicity 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. The Company's
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. The
Company's 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. The Company's SP300 series of interface transceivers each support two
protocols, such as RS-232 and AppleTalk, while the Company's SP500 Series is the
industry's first fully integrated transceiver, supporting up to eight of the
most popular serial interface standards for WAN interfaces. The Company
introduced the SP500 Series of products in 1994 and since that time has secured
designs with many industry leaders in the WAN equipment market. In addition to
expanding its line of programmable serial interface products, the Company's
future interface product strategy includes developing with industry leaders
products involving higher speed interfaces supporting high speed data
communications, video communications and telecommunications interface
requirements.
In addition to its SP300 and SP500 families of multi-protocol transceiver
products, the Company 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.
Low Power and High Voltage Products. The Company has targeted the battery
powered/portable products market to leverage its design expertise and the
process capability provided by the Company's internal 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. The Company's designers, in
cooperation with Timex Corporation, developed a proprietary electroluminescent
("EL") driver device, which provides the enabling technology for the Timex
Indiglo Watch. This custom integrated circuit creates a 100V AC signal from a 3V
DC battery within the watch to light the backlight material. The Company is
exploiting this technology and its design-specific resources to offer low power
and high voltage products to a wide variety of market segments, including
providing backlighting solutions for pagers, cell-phones and hand-held
electronic equipment markets.
The Company intends to continue its focus in this area on high volume
commercial/consumer markets, in which the attributes of the DI BiCMOS
fabrication process or the Company'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. The Company'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.
Since 1991, the Company has introduced over 30 new converter integrated
circuits. The main focus of the Company's product offerings has been high
performance 12-bit analog-to-digital and digital-to-analog converters. The
Company 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 are industrial controls, instrumentation and test
equipment. Future growth areas for new products involve higher speed 12-bit
analog-to-digital converters targeted for telecommunications applications.
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Precision High Reliability Products. The Company's precision high
reliability assembled products are sold to commercial customers engaged in
various space and military programs.
Customers incorporating the Company's high reliability assembled products
for military applications include Texas Instruments Incorporated, Raytheon
Company and Lockheed Martin Corp. The Company is not currently designing new
products for the military market. The Company expects sales of products for
military applications to decline in the future as the Company continues to focus
its resources on its target markets in the commercial sector. In 1994, 1995 and
1996, sales of high reliability products for military applications accounted for
approximately 39%, 20% and 11%, respectively, of the Company's net sales.
SALES, SUPPORT AND DISTRIBUTION
The Company sells its products to OEM customers either directly through its
direct sales force or with the assistance of a network of independent sales
representatives, or indirectly through independent distributors. The Company is
seeking to broaden its customer base by increasing sales through its distributor
network. In 1996, the Company added additional national distributors and
increased domestic and international distributor sales to approximately 42% of
net sales in 1996 from approximately 39.6% in 1995 and 14.2% in 1994.
The Company's 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 the Company's Billerica,
Massachusetts headquarters and in field sales offices in Munich, Paris, Tokyo
and California. The Company's sales staff and field application engineers also
manage, train and support the Company's network of distributors and
representatives.
In North America, the Company sells its products through 20 independent
sales representative organizations having a total of 36 offices, and 5
distributors having a total of 145 sales locations. These independent entities
are selected for their ability to provide effective field sales, marketing
communications and technical support to the Company's customers. The Company has
entered into Representative or Distributor Agreements with each of its
independent distributors and sales representatives. 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 permits sales
representatives to act as an exclusive or a non-exclusive sales representative
in appropriate circumstances. The Company 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 the Company's products, which the Company fills
directly with the customer, generating a commission from the Company to the
sales representative. On a semi-annual basis, distributors are permitted to
return for credit, against purchases of an equivalent dollar value of products,
up to 10% of their total purchases during the most recent six-month period.
Outside North America, the Company sells its products through 32
distributors having a total of 83 sales locations. International sales in 1994,
1995 and 1996 were approximately $5.8 million, $10.6 million and $12.1 million,
respectively, representing 25.6%, 35.4% and 32.5% of net sales, respectively.
The Company is seeking to appoint additional distributors internationally to
further expand its geographical markets. In connection with its international
sales, the Company is subject to the normal risks of conducting business
internationally, including exchange rate fluctuations. To date, the Company has
not hedged the risks associated with fluctuations in exchange rates but may
undertake such transactions in the future. The Company currently does not have a
policy relating to hedging.
In 1994, Raytheon Company represented 10.3% of net sales. No customer
accounted for 10% or more of net sales in 1995 or in 1996.
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BACKLOG
At December 31, 1996, the Company's product backlog was approximately $24.0
million, compared to $23.1 million at December 31, 1995. The Company generally
includes in backlog all orders scheduled for delivery within one year. However,
the Company's business, and to a large extent the entire semiconductor industry,
is characterized by short-term orders and shipment schedules. The Company
generally permits orders to be canceled or rescheduled without significant
penalty to the customers. As a result, the quantities of the Company's 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,
the Company's backlog at any time is not necessarily indicative of future
revenues.
RESEARCH AND DEVELOPMENT
The Company believes that continued introduction of new products in its
target markets is essential to its growth. The Company has assembled a team of
highly skilled analog design engineers, averaging more than ten years of analog
design experience. 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. The Company 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.
At December 31, 1996, the Company had 53 employees engaged in research,
development and manufacturing engineering. In 1994, 1995 and 1996, the Company
spent approximately $3.0 million, $4.4 million and $4.7 million, respectively,
on research and development, representing 13.0%, 14.7% and 12.7%, respectively,
of net sales for such periods. The Company expects that expenditures in support
of research and development activity will increase in absolute dollars in the
near future.
The Company's ability to compete depends, in part, upon its continued
introduction of technologically innovative products on a timely basis. The
Company's research and development efforts are directed primarily at designing
and introducing new products and technologies. The Company continually upgrades
its internal technology while also working with foundries to develop new
technologies for new generations of products. In addition, the Company
continually refines its manufacturing practices and technology to improve the
yields of its products.
Currently, the Company's major development programs include expanding its
proprietary product offerings of electroluminescent drivers and programmable
dual and multi-mode transceivers, analog-to-digital converters,
digital-to-analog converters, as well as application-specific products.
MANUFACTURING
The Company manufactures semiconductor wafers for its dielectric isolation
complementary bipolar products in its own facility to optimize the performance
of these products and maintain a high degree of manufacturing control. The
Company's manufacturing facilities in Milpitas, California include a four-inch
wafer fabrication facility and a clean room. The Company's facilities have been
certified as ISO-9001 compliant.
The Company 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 the Company 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. The Company uses three different third-party foundries to
supply fully processed semiconductor wafers for its junction isolation BiCMOS
and CMOS products, all of which foundries have been certified as IS0-9001
compliant. Sales of these products collectively represented approximately 25.6%
of the Company's net sales in 1994, approximately 38.9% in 1995 and
approximately 41.2% in 1996, and are expected to remain a significant percentage
of net sales
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in the future. The Company believes it has good long-term relationships with its
third-party foundry suppliers and such relationships are stable. The Company has
qualified or is in the process of qualifying second-source foundries for each of
its current third-party foundries in order to continue to be able to support its
customers' product needs and to reduce the Company's dependence on any single
foundry. However, any sudden demand for increased amounts of semiconductor
devices or elimination of existing sources of fully processed semiconductor
wafers could result in material delays in the shipment of the Company's
products.
The Company tests integrated circuits or "die" on the wafers produced by
the Company and its foundries for compliance with performance specifications
before assembly. Following assembly, the packaged units are returned to the
Company for final testing and inspection prior to shipment to customers. The
Company then performs 100 percent final testing on all circuits using advanced
automated test equipment to ensure that the circuits satisfy specified
performance levels.
The Company's commercial products are assembled by a variety of
subcontractors in Malaysia, Indonesia, Thailand and other locations in Asia, all
of which have been certified as ISO-9002 compliant. These 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. The Company'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
occurrence of any supply or other problems resulting from such risks could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company manufactures its precision high reliability assembled products
in Billerica, Massachusetts. The Company is in conformance with stringent
quality and reliability requirements for military and aerospace applications.
From time to time, the overall semiconductor industry has experienced
significant growth, which creates 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 the Company's
performance. The Company is seeking to establish and maintain critical
inventories and alternate sources to minimize the impact of its vendors'
capacity limitations and to date has not experienced material shortages or
delays. However, there can be no assurance that there will not be future
shortages of key services that will materially and adversely affect the
Company's business, financial condition and results of operations.
The manufacturing processes utilized by the Company are highly complex and
are continuously being modified in an effort to improve yields and product
performance. Process changes can result in interruptions in production or
significantly reduced yields. In addition, yields can be affected by minute
impurities in the environment or other problems that occur in the complex
manufacturing process. Many of these problems are difficult to diagnose and
time-consuming or expensive to remedy. From time to time, the Company 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 the Company will not recur or that the Company and its
independent foundries will not experience other manufacturing problems that
result in product introduction or delivery delays. Although previous
fluctuations in yield variances have not materially affected the Company's
business, financial condition or results of operations, there can be no
assurance that future yield variances and resulting delays would not materially
and adversely affect the Company's business and results of operations. The
Company is also subject to the risks associated with the shortage of raw
materials such as unprocessed wafers and packages used in the manufacture or
assembly of the Company's products.
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The Company 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 the Company 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 the Company,
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 will not render
compliance more difficult and costly. Any failure of the Company to control the
use of, or adequately restrict the discharge of, hazardous substances, or
otherwise comply with environmental regulations, could subject it to significant
future liabilities. In addition, although the Company believes that its past
operations conformed with then applicable environmental laws and regulations,
there can be no assurance that the Company 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.
The Company and approximately sixty other potentially responsible parties
("PRPs") received a Notice of Potential Liability from the United States
Environmental Protection Agency in June 1993 concerning the Shaffer Landfill
Operable Unit of the Iron Horse Park Superfund Site (the "Site") located in
Billerica, Massachusetts. In January 1995, federal and Massachusetts
governmental authorities filed suit against ten of the PRPs, alleging
responsibility for remediation and other costs. The ten PRPs named in the
lawsuit, together with a number of other PRPs not named, but not currently
including the Company, have been engaged in settlement discussions with such
authorities. If the PRP group and the governmental agencies reach a negotiated
settlement regarding the clean-up of the Site, there is no assurance that the
Company would join such a settlement. The Company believes that it has strong
defenses to liability; however, there can be no assurance that the Company will
not be pursued with respect to alleged liability for contamination of the Site.
The Company anticipates that it would vigorously defend against any such claims.
There can be no assurance, however, that any such defenses of any such claims
would be successful.
The future costs in connection with the Site are currently indeterminable
due to such factors as the unknown timing and extent of any future remedial
actions which may be required, the extent of any liability of the Company and of
other potentially responsible parties, and the financial resources of the other
potentially responsible parties.
PATENTS AND INTELLECTUAL PROPERTY
The Company seeks to protect its proprietary technology through patents and
trade secret protection. Currently, the Company holds five United States patents
expiring on various dates between the years 1999 and 2015 and has additional
pending United States patent applications, although there can be no assurance
that any patents will result from these applications. While the Company intends
to continue to seek patent coverage for its products and manufacturing
technology where appropriate, the Company believes that its success depends more
heavily on the technical expertise and innovative abilities of its personnel
than on its patent position. Accordingly, the Company also relies on trade
secrets and confidential technological know-how in the conduct of its business.
There can be no assurance that the Company's patents or applicable trade secret
laws will provide adequate protection for the Company's technology against
competitors who may develop or patent similar technology or reverse engineer the
Company's products. In addition, the laws of certain territories in which the
Company's products are or may be developed, manufactured or sold, including
Asia, Europe and Latin America, may not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States.
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The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. Although the Company is
not aware of any pending or threatened patent litigation, there can be no
assurance that third parties will not assert claims against the Company with
respect to existing or future products or technologies and the Company has been
subject to such claims in the past. In the event of litigation to determine the
validity of any third-party claims, such litigation, whether or not determined
in favor of the Company, could result in significant expense to the Company and
divert the efforts of the Company's technical and management personnel from
productive tasks. In the event of an adverse ruling in such litigation, the
Company might be required to discontinue the use of certain processes, cease the
manufacture, use and sale of infringing products, expend significant resources
to develop non-infringing technology or obtain licenses to the infringing
technology. There can be no assurance that licenses will be available on
reasonable commercial terms, or at all, with respect to disputed third-party
technology. In the event of a successful claim against the Company and the
Company's failure to develop or license a substitute technology at a reasonable
cost, the Company's business, financial condition and results of operations
would be materially and adversely affected.
COMPETITION
The analog integrated circuit segment of the semiconductor industry is
intensely competitive, and many major semiconductor companies presently compete
or could compete in some segment of the Company's market. The Company's primary
competitors have substantially greater financial, technical, manufacturing,
marketing, distribution and other resources and broader product lines than
Sipex. The Company's current primary competitors in the high-performance segment
of the analog circuit market are Analog Devices, Inc., Linear Technology Corp.
and Maxim Integrated Products, Inc. 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 there can be no assurance that
they will not become formidable competitors in the future.
The Company believes that its 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 its product line, price, technical service and
support, adequacy of manufacturing quality and capacity and sources of raw
materials, efficiency of production, delivery capabilities and protection of the
Company's products by intellectual property laws. The Company believes that
product innovation, quality, reliability, performance and the ability to
introduce products rapidly are more important competitive factors than price in
its target markets because the Company competes 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. The Company believes that, by virtue of its analog
expertise and rigorous design methodology, it competes favorably in the areas of
rapid product introduction, product innovation, quality, reliability and
performance, but it may be at a disadvantage in comparison to larger companies
with broader product lines, greater technical and financial resources and
greater service and support capabilities.
EMPLOYEES
At December 31, 1996, the Company had 247 full-time employees, including
167 in manufacturing, 34 in research and development, 24 in sales and marketing
and 22 in finance and administration. The Company believes that its future
success will depend, in part, on its 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 the Company's employees is subject to a collective
bargaining agreement, and the Company has never experienced a work stoppage. The
Company believes that its relations with its employees are good.
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ITEM 2. FACILITIES:
The Company leases approximately 47,600 square feet located in Billerica,
Massachusetts for manufacturing, research and development, and administration.
In addition, the Company leases approximately 30,500 square feet in Milpitas,
California and approximately 12,500 square feet in San Jose, California for
manufacture of its DI products. The Company also leases approximately 2,200
square feet for each of its sales offices in Munich, Paris and Tokyo. The
Company believes that its current facilities are adequate to meet its current
requirements for the near term.
ITEM 3. LEGAL PROCEEDINGS:
The Company is 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 the Company's security holders
during the quarter ended December 31, 1996.
EXECUTIVE OFFICERS
Mr. Donegan joined the Company in April 1985 as Chairman of the Board,
Chief Executive Officer and President of the Company. Before joining the
Company, Mr. Donegan held the position of Group Vice President of the Electronic
Components Group at Midland Ross Corporation. Prior to Midland Ross Corporation,
Mr. Donegan was Vice President and General Manager at Cameron & Barkley and
Company. Prior to working at Cameron & Barkley and Company, Mr. Donegan spent
ten years with the General Electric Company in various manufacturing positions.
Mr. DiPietro joined the Company in December 1983 as Chief Financial Officer
and Treasurer. He 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.
Mr. Chow joined the Company in October 1988 as Director of Interface
Engineering. He was appointed Senior Vice President of Interface Products in
August 1994. From March 1982 to October 1988, Mr. Chow was President and Chief
Executive Officer of Barvon BiCMOS Technology, Inc. ("Barvon"), a company Mr.
Chow founded in 1982 and which was acquired by SIPEX in October 1988. Prior to
founding Barvon, he served as Director of Engineering at Universal
Semiconductor, Inc. from 1979 to 1982. From 1972 to 1979, Mr. Chow was a Design
Manager at Intersil, Inc. and Senior Design Engineer at Fairchild Semiconductor.
Mr. Cohen has been the Company's Senior Vice President of Technology since
joining the Company in July 1988. Prior to joining SIPEX, Mr. Cohen was a
Division Manager at the Charles Stark Draper Laboratory, formerly the
Instrumentation Laboratory of the Massachusetts Institute of Technology. He has
been a member of several government advisory panels and has designed and
developed numerous circuits and systems.
Mr. Lambert joined the Company in July 1990 as Director of Wafer
Fabrication. He was appointed Senior Vice President of Semiconductor Operations
in January 1991 and Senior Vice President of Operations in May, 1991. He joined
the Company after serving as Director of Operations at Cherry Semiconductor.
10
11
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock has been listed for quotation on the Nasdaq
National Market under the symbol SIPX since the Company's initial public
offering of Common Stock on April 2, 1996. The table below sets forth the high
and low sale price of the Company's Common Stock on the Nasdaq National Market
for each of the fiscal quarters of 1996.
Fiscal Quarter
------------------------------------------------------
First Second Third Fourth
(Commencing
April 2, 1996)
------------ --------------- ------------ ----------
1996
High - 21 1/2 24 1/4 35 1/4
Low - 10 3/4 13 1/2 20 1/4
On March 21, 1997 there were approximately 77 shareholders of record. The
Company believes that the number of beneficial holders of Common Stock exceeds
1,200. The last reported sale price of the Common Stock on March 21, 1997 was
$31.125 per share. The Company has never declared or paid a cash dividend on its
capital stock. The Company 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.
11
12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA:
The selected financial data set forth below has been derived from the
audited consolidated financial statements of the Company. This information
should be read in conjunction with the consolidated financial statements and
notes thereto set forth elsewhere herein.
For the Years Ended December 31,
--------------------------------------------------------
(in thousands, except per share data)
STATEMENTS OF OPERATIONS DATA: 1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Net sales $28,631 $27,533 $22,823 $29,979 $37,311
Gross profit 4,667 5,148 4,592 10,900 15,873
Income (loss) from operations (3,502) (3,340) (4,340) (970) 4,484
Income (loss) before income taxes (4,262) (3,709) (4,802) (1,775) 4,431
Net income (loss) (4,136) (3,721) (4,709) (1,802) 4,277
Net income (loss) per common and
common equivalent share $ (0.87) $ (0.78) $ (0.99) $ (0.38) $ 0.58
Weighted average common and common
equivalent shares outstanding 4,758 4,758 4,758 4,760 7,350
December 31,
--------------------------------------------------------
(in thousands)
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital $ 9,908 $ 7,115 $ 5,942 $ 7,307 $49,920
Total assets 19,771 14,590 13,360 15,870 57,649
Long-term debt 12,400 6,761 9,613 11,930 43
Total shareholders' equity (deficit) 3,382 4,726 (67) (1,884) 53,409
12
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
The following discussion and analysis is qualified by reference to, and
should be read in conjunction with, the consolidated financial statements of
SIPEX Corporation.
Overview
SIPEX Corporation (the "Company") designs, manufactures and markets high
performance and high value added analog integrated circuits using standard
BiCmos and dielectrically isolated BiCmos technologies. Analog integrated
circuits address a wide range of real-world signal processing applications
associated with such naturally occurring physical phenomena as temperature,
pressure, weight, position, light and sound. These circuits play a fundamental
and important role in coupling the real world to the digital computer and vice
versa. The Company's products include single, dual and multi-protocol interface
circuits, data converters, electroluminescent driver circuits, low power and
high voltage application specific products. The Company was organized and
commenced operations in 1965. Between 1965 and 1988, the Company developed,
manufactured and marketed standard and semi-custom analog-to-digital and
digital-to-analog products utilizing hybrid technology, primarily for the
military market.
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,
-----------------------
1994 1995 1996
---- ---- ----
Net sales ................................... 100.0% 100.0% 100.0%
Cost of sales ............................... 79.9 63.6 57.5
----- ----- -----
Gross profit ................................ 20.1 36.4 42.5
Operating expenses:
Research and development .............. 13.0 14.7 12.7
Marketing and selling ................. 17.9 14.2 12.1
General and administrative ............ 8.3 6.3 5.7
Write-off of intangible assets ........ - 4.4 -
----- ----- -----
Total operating expenses ................ 39.2 39.6 30.5
----- ----- -----
Income (loss) from operations ........... (19.1) (3.2) 12.0
Other expense, net ...................... (2.0) (2.7) (0.1)
----- ----- -----
Income (loss) before income taxes ....... (21.1) (5.9) 11.9
===== ===== =====
Fiscal Year Ended December 31, 1996 compared to Fiscal Year Ended December 31,
1995
Net Sales. The Company derives its revenues principally from product sales.
Net sales increased 24.5% to $37.3 million for the year ended December 31, 1996
compared to $30.0 million for the year ended December 31, 1995. The increase in
net sales was primarily due to higher unit sales resulting from increased market
acceptance of the Company's proprietary and application specific products.
Domestic and international sales increased 30% and 14.3%, respectively, in
1996 as compared to the same period in 1995.
Gross Profit. The Company's cost of sales consists primarily of costs
associated with the manufacture and delivery of the Company's products from its
production facilities, as well as the Company's sub-contract wafer fabrication
and assembly contractors. Gross profit as a percentage of net sales, or gross
margin, increased to 42.5% in 1996 as compared to 36.4% in 1995. The
improvements in 1996 over 1995 were primarily due to the absorption of certain
fixed costs over the increased sales volume and due to increased market
acceptance of the Company's proprietary and application specific products.
13
14
Research and Development. Research and development expenses consist
primarily of salaries and benefits of employees involved in product development
and fees for product development services provided by consultants. The Company
expended 12.7% of net sales in 1996 for the development and introduction of new
products as compared to 14.7% in 1995. In absolute dollars, research and
development increased 7.4% to $4.7 million in 1996 over the $4.4 million
incurred in 1995. The increased spending was due to salary and other expenses
related to the hiring of additional engineering personnel, outside consulting
fees and mask set expenses relating to new product development. The Company
expects research and development expenses to continue to increase in absolute
terms in the near future.
Marketing and Selling. Marketing and selling expenses consist principally
of salaries, commissions, travel expenses of direct sales and marketing
personnel and costs associated with marketing and advertising programs.
Marketing and selling expenses decreased as a percentage of net sales to 12.1%
or $4.6 million in 1996 from 14.2% or $4.2 million in 1995, but increased 7.2%
in absolute dollars in 1996 over the same period in 1995. The increase in 1996
was due primarily to higher costs associated with marketing and advertising of
new products and increased commissions.
General and Administrative. General and administrative expenses consist
primarily of personnel costs for administration, finance, human resource and
general management, including legal and auditing expenses. General and
administrative expenses decreased to 5.7% of net sales in 1996 from 6.3% in
1995. In absolute dollars, general and administrative expenses increased 10.8%
to $12.1 million in fiscal 1996 from $1.9 million in 1995. The increase in 1996
was due primarily to increased travel and professional related expenses.
Write-off of Intangible Assets. As a result of the acquisition of certain
businesses involved in the development and design of custom and standard
products with military applications, the Company had intangible assets of $1.4
million as of December 31, 1994 which were being amortized on a straight line
basis over ten years. In the quarter ended July 1, 1995, the Company wrote-off
the unamortized balance of intangible assets. The Company wrote-off this amount
as a result of its increased focus on commercial products and review of actual
and expected revenues and cash flows from specific military products related to
the acquired technology. These amounts are included in 1995 results.
Other Expense, Net. Other expense, net consists primarily of interest on
subordinated indebtedness to affiliates and borrowings under the Company's bank
credit facility. For 1996, decrease in other expense, net was due primarily to
the repayment of the revolving line of credit and subordinated notes to
affiliates and interest income earned on the Company's two public offering
proceeds which offset interest expense.
Income Taxes. The Company recorded income tax expense of $154,000 for 1996
and $27,000 for 1995, an effective rate of 4.0% and 1.0%, respectively. These
effective rates differed from the statutory rate of 34% due to the Company's
utilization of its net operating loss carryforwards.
Fiscal Year Ended December 31, 1995 compared to Fiscal Year End December 31,
1994
Net Sales. Net sales increased 31.4% to $30.0 million in 1995 from $22.8
million in 1994. The increase in net sales was principally due to the growing
acceptance of the Company's proprietary interface and low power commercial
products. Commercial product sales increased 72.0% to $24.0 million in 1995
compared to $14.0 million in 1994, while sales of products with military
applications decreased 32.6% to $6.0 million in 1995 compared to $8.9 million in
1994.
Gross Profit. Gross profit as a percentage of net sales, or gross margin,
increased to 36.4% in 1995 from 20.1% in 1994. The increase in gross profit
resulted primarily from an increase in higher margin sales of commercial
products, in particular proprietary products, higher volume within the Company's
wafer fabrication facility and lower production costs associated with off-shore
assembly.
14
15
Research and Development. These expenses increased 48.6% to 4.4 million in
1995 from $3.0 million in 1994 and increased as a percentage of net sales to
14.7% in 1995 from 13.0% in 1994. The increase in research and development
expenses resulted primarily from approximately $1.0 million in additional salary
and benefit expenses related to employment of additional staff and from
approximately $400,000 of additional expenses related to engineering prototyping
and pre-production activities undertaken in connection with the development of
new proprietary commercial products, including dual- and multi-protocol
interface products.
Marketing and Selling. Marketing and selling expenses increased 4.1% to
$4.2 million in 1995 from $4.1 million in 1994, but decreased as a percentage of
net sales to 14.2% in 1995 from 17.9% in 1994. The increase in expenses related
to the employment of additional direct sales and marketing personnel were offset
by a reduction in international expenses relating to a consolidation of
subsidiaries and increased selling through distributors.
General and Administrative. General and administrative expenses remained
constant at $1.9 million in 1995 and decreased as a percentage of net sales to
6.3% in 1995 from 8.3% in 1994. Increased costs associated with recruitment of
personnel and enhancement of management information systems were offset by
reductions in amortization resulting from the Company's write-off of intangible
assets.
Write-off of Intangible Assets. In 1995, the Company wrote-off the
unamortized balance of these intangible assets as a result of the Company's
increased focus on commercial products and review of actual and expected
revenues and cash flows from specific military products related to the acquired
technology.
Other Expense, Net. These expenses increased to $805,000 in 1995 from
$462,000 in 1994. The increase in 1995 was primarily due to increases in amounts
of subordinated indebtedness to affiliates outstanding and increased borrowings
under the bank credit facility.
Liquidity and Capital Resources
From fiscal 1994 through fiscal 1996, the Company has financed its
operations and met its capital requirements primarily through cash flow from
operations, loans from affiliates of Tractebel S.A. and a $7.5 million Revolving
Credit Agreement with Generale Bank. In April 1996, the Company raised net
proceeds of approximately $18.0 million by issuing common stock in its initial
public offering. In November 1996, the Company raised net proceeds of
approximately $33.0 million from the issuance of common stock. The proceeds will
be primarily used for capital equipment relating to expansion of facilities and
general corporate purposes including working capital. A portion of the April
1996 proceeds were applied to pay the $7.5 million in outstanding borrowings to
Generale Bank and $4.8 million of indebtedness to affiliates.
At December 31, 1996, the Company had working capital of $49.9 million and
available funds of $37.1 million consisting of cash, cash equivalents and
short-term U.S. Government-backed investments. Net cash used in operating
activities was $398,000, $893,000 and $2.2 million in 1996, 1995 and 1994,
respectively. Net cash used in operating activities in 1996 consisted primarily
of a $4.2 million increase in inventories and $1.3 million decrease in accounts
payable partially offset by net income of $4.3 million.
In 1995 and 1994, the use consisted primarily of net operating losses in
support of research and development costs associated with its commercial
products and sales and marketing expenses. Depreciation and amortization
expenses totaled approximately $2.3 million in 1995 and $1.4 million in 1994
offset by increases in accounts receivable of approximately $1.2 million and
$325,000 in 1995 and 1994, respectively. In addition, inventories increased
approximately $2.0 million in 1995 in support of increased net sales and
decreased approximately $580,000 in 1994.
15
16
Net cash used in investing activities for property, plant and equipment
were $1.9 million, $1.2 million and $444,000 in 1996, 1995 and 1994,
respectively. The Company spent $252,000 and $233,000 in 1995 and 1994 to
acquire assets from capital lease obligations. These capital expenditures
totaled approximately $1.5 million and $676,000 during 1995 and 1994.
Net cash provided by financing activity was $39.1 million, $2.2 million and
$2.7 million in 1996, 1995 and 1994, respectively. In 1996, $51.0 million was
provided by the issuance of common stock offset partially by the repayments of
approximately $12.0 million of long-term debt. In 1995 and 1994, cash provided
by financing activities was primarily the result of proceeds from long-term debt
and the issuance of subordinated debts to affiliates.
At December 31, 1996, the Company has U.S. net operating loss carryforwards
of approximately $39,700,000, which are available to offset future Federal
taxable income. These losses expire during the years 2000 through 2010. In
addition, the Company has Massachusetts and California net operating loss
carryforwards of approximately $7,550,000 and $4,280,000, respectively, which
are available to offset future Massachusetts and California taxable income.
These state losses expire in the years 1997 through 2000. The tax benefit of
utilization of approximately $3,300,000 of these net operating loss
carryforwards will result in an increase in additional paid-in capital when
realized. As of December 31, 1996, utilization of these net operating loss
carryforwards is subject to an annual limitation of approximately $7,000,000 as
a result of an ownership change which occurred on September 30, 1996.
The Company anticipates that the available funds and cash generated from
operations will be sufficient to meet cash and working capital requirements
through at least the end of 1997.
New Accounting Pronouncement
Effective January 1, 1996 the Company adopted SFAS No. 123 "Accounting for
Stock-Based Compensation". The Company accounts for its Employees Stock Option
and Employee Stock Purchase Plans in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees" as allowed by SFAS No. 123. The
Company intends to continue using APB No. 25 for determining net income and will
provide pro forma disclosure as required. See Note 7 to the consolidated
financial statements.
Factors Affecting Future Operating Results
From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities and
Exchange Commission (including statements 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. The
Company'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 the Company's Prospectuses dated April 2, 1996 and October 31, 1996
included in its Registration Statements on Form S-1 (Reg. Nos. 333-1328 and
333-14639, respectively) and from time to time in the Company's other filings
with the Securities and Exchange Commission.
16
17
Supply and Manufacturing Risks
The Company 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 Company is also subject to
significant manufacturing risks including yield variances which the Company or
its outside foundries may experience.
Intellectual Property Rights
The Company 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 have a
material adverse effect on the Company.
Dependence on New Products
The Company's success will depend upon its ability to develop new
semiconductor devices for existing and new markets, to introduce such products
in a timely manner and to have such products selected for design into new
products of its customers. Successful product development and introduction
depends on a number of factors, including accurate new product definition,
timely completion and introduction of new product designs, availability of
foundry capacity, achievement of manufacturing yields and market acceptance of
the Company's and its customers' products.
Competition; The Semiconductor Industry
The Company 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 the Company. The
Company 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 the Company'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. The Company may experience substantial
period-to-period fluctuation in future operating results due to general
semiconductor industry conditions and overall economic conditions.
International Sales
The Company derives a significant portion of its net sales from
international sales 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 the Company's intellectual property overseas, seasonality of sales
and potentially adverse tax consequences.
17
18
Potential Fluctuations in Operating Results
The Company'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; the
Company's ability to introduce new products and technologies on a timely basis;
introduction of products and technologies by the Company's competitors; market
acceptance of the Company's and its customers' products; the level of orders
received which can be shipped in a quarter; 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, the Company typically plans its production and inventory levels based
on internal forecasts of customer demand, which are highly unpredictable and can
fluctuate substantially. Because the Company 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, the Company is
limited in its ability to reduce costs quickly in response to any revenue
shortfalls. As a result of the foregoing or other factors, the Company may
experience material fluctuations in future operating results on a quarterly or
annual basis which could materially and adversely affect its business, financial
condition and operating results.
Historically, the Company has also experienced quarterly fluctuations in
net sales and gross profit, principally arising from the amount and timing of
orders of products for military applications. These sales generally result in
lower gross margins than sales of commercial products. The Company anticipates a
continuing decline in sales of products for military applications as part of its
transition from a supplier of product with military applications to a supplier
of commercial products. Should sales of these products decline more rapidly than
the Company anticipates in the near future, such decline could have the effect
of causing further fluctuations in quarterly or annual operating results.
Stock Price Volatility
The trading price of the Company's common stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in operating results,
announcements of technological innovations or new products by the Company 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 the Company's common stock.
18
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The Company's Consolidated Financial Statements and related Reports of
Independent Accountants are presented in the following pages.
Independent Auditors' Reports
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1995 and 1996
Consolidated Statements of Operations for the year ended
December 31, 1994, 1995 and 1996
Consolidated Statements of Shareholders' Equity (Deficit) for the year
ended December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for the year ended
December 31, 1994, 1995 and 1996
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE:
Not applicable.
19
20
SIPEX CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE
----
Independent Auditors' Reports 21
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1995 and 1996 23
Consolidated Statements of Operations for the year ended
December 31, 1994, 1995 and 1996 24
Consolidated Statements of Shareholders' Equity (Deficit)
for the year ended, December 31, 1994, 1995, and 1996 25
Consolidated Statements of Cash Flows for the year ended
December 31, 1994, 1995 and 1996 26
Notes to Consolidated Financial Statements 27
20
21
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, 1995 and 1996 and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for each of the years in the two year period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SIPEX
Corporation as of December 31, 1995 and 1996 and the consolidated results of
their operations and their cash flows for each of the years in the two year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
/S/ KPMG Peat Marwick LLP
Boston, Massachusetts
February 13, 1997
21
22
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Sipex Corporation
We have audited the accompanying consolidated statements of operations,
shareholders' equity (deficit), and cash flows of Sipex Corporation (the
Company) for the year ended December 31, 1994. 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 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 audit provides a reasonable basis
for our opinion.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated February 3, 1995,
which report contained an explanatory paragraph regarding the Company's ability
to continue as a going concern. The Company, as discussed in Note 7, has
completed issuances of its common stock, resulting in net proceeds of
approximately $51 million. Therefore, the conditions that raised substantial
doubt about whether the Company will continue as a going concern no longer
exist.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Sipex Corporation for the year ended December 31, 1994 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
February 3, 1995, except
for Note 7, as to which the
date is November 5, 1996
22
23
SIPEX CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
1995 1996
------------ ------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 257,349 $ 14,786,897
Short-term investment securities - 22,358,992
Accounts receivable, less allowances of $240,000 and
$255,000 at December 31, 1995 and 1996,
respectively 5,233,724 5,137,803
Inventories 7,414,386 11,624,830
Prepaid expenses 225,121 208,296
------------ ------------
Total current assets 13,130,580 54,116,818
Property, plant, and equipment, net 2,448,108 3,312,552
Other assets 291,006 219,524
------------ ------------
Total assets $ 15,869,694 $ 57,648,894
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Current portion of long-term debt $ 209,437 $ 189,720
Accounts payable 3,921,715 2,570,888
Accrued expenses 1,692,149 1,436,372
------------ ------------
Total current liabilities 5,823,301 4,196,980
Long-term debt 11,930,364 42,940
------------ ------------
Total liabilities 17,753,665 4,239,920
------------ ------------
Shareholders' equity (deficit):
Preferred stock, $.01 par value, no shares
authorized, issued or outstanding at December 31,
1995; 1,000,000 shares authorized and no shares
issued or outstanding at December 31, 1996 - -
Common stock, $.01 par value, 40,000,000 shares
authorized and 4,685,306 and 8,534,199 shares
issued and outstanding at December 31, 1995
and 1996, respectively 46,853 85,342
Additional paid-in capital 45,467,658 96,471,596
Accumulated deficit (47,581,304) (43,304,185)
Cumulative translation adjustment 182,822 156,221
------------ ------------
Total shareholders' equity (deficit) (1,883,971) 53,408,974
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 15,869,694 $ 57,648,894
============ ============
See accompanying notes to consolidated financial statements
23
24
SIPEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
---------------------------------------------
1994 1995 1996
----------- ----------- ------------
Net sales $22,822,678 $29,978,525 $37,310,910
Cost of sales 18,230,488 19,078,986 21,437,878
----------- ----------- -----------
Gross profit 4,592,190 10,899,539 15,873,032
Operating expenses:
Research and development 2,960,329 4,399,490 4,724,652
Marketing and selling 4,077,855 4,244,872 4,551,842
General and administrative 1,894,023 1,905,849 2,112,290
Write-off of intangible assets - 1,319,970 -
----------- ----------- -----------
Total operating expenses 8,932,207 11,870,181 11,388,784
----------- ----------- -----------
Income (loss) from operations (4,340,017) (970,642) 4,484,248
Other income (expense):
Interest income (expense), net (605,152) (909,894) 144,430
Other, net 143,277 105,144 (197,390)
----------- ----------- -----------
(461,875) (804,750) (52,960)
----------- ----------- -----------
Income (loss) before income taxes (4,801,892) (1,775,392) 4,431,288
Income tax expense (benefit) (93,171) 27,287 154,169
----------- ----------- -----------
Net income (loss) $(4,708,721) $(1,802,679) $ 4,277,119
=========== =========== ===========
Net income (loss) per common and
common equivalent share $ (0.99) $ (0.38) $ 0.58
=========== =========== ===========
Weighted average common stock and
common stock equivalents outstanding 4,757,671 4,759,727 7,349,956
=========== =========== ===========
See accompanying notes to consolidated financial statements
24
25
SIPEX CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock Total
--------------------- Additional Cumulative Shareholders'
Number of $.01 Par Paid-in Accumulated Translation Equity
Shares Value Capital Deficit Adjustment (Deficit)
--------- -------- ----------- ------------ ---------- -----------
Balance at
December 31, 1993 4,681,186 $46,812 $45,466,202 $(41,069,904) $ 282,898 $ 4,726,008
Net loss (4,708,721) (4,708,721)
Currency translation adjustment (84,675) (84,675)
--------- ------- ----------- ------------ --------- -----------
Balance at
December 31, 1994 4,681,186 46,812 45,466,202 (45,778,625) 198,223 (67,388)
Acquisition of treasury stock (3,378) (34) (1,316) (1,350)
Issuance of common stock under
option plans 7,498 75 2,772 2,847
Net loss (1,802,679) (1,802,679)
Currency translation adjustment (15,401) (15,401)
--------- ------- ----------- ------------ --------- -----------
Balance at
December 31, 1995 4,685,306 46,853 45,467,658 (47,581,304) 182,822 (1,883,971)
Issuance of common stock under
option plans 238,178 2,382 92,893 95,275
Issuance of common stock
through public offerings 3,610,715 36,107 50,911,045 50,947,152
Net income 4,277,119 4,277,119
Currency translation adjustments (26,601) (26,601)
--------- ------- ----------- ------------ --------- -----------
Balance at
December 31, 1996 8,534,199 $85,342 $96,471,596 $(43,304,185) $ 156,221 $53,408,974
========= ======= =========== ============ ========= ===========
See accompanying notes to consolidated financial statements
25
26
SIPEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------------
1994 1995 1996
------------- ------------ ------------
Operating activities:
Net income (loss) $(4,708,721) $(1,802,679) $ 4,277,119
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Loss (gain) on sale of machinery and equipment 84,901 - -
Allowance for receivables 110,000 166,000 8,326
Depreciation and amortization 1,415,845 2,297,550 985,990
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (325,206) (1,248,355) 171,742
(Increase) decrease in inventories 580,358 (1,951,792) (4,240,764)
(Increase) decrease in prepaid expenses 42,099 (74,598) (66,308)
Decrease in other assets 54,547 3,818 57,290
Increase (decrease) in accounts payable 844,894 1,274,176 (1,330,303)
Increase (decrease) in accrued expenses (263,802) 442,646 (250,975)
----------- ----------- ------------
Net cash used in operating activities (2,165,085) (893,234) (387,883)
Investing activities:
Proceeds from maturity of investment securities - - 2,962,754
Purchase of investment securities - - (25,321,746)
Purchase of property, plant, and equipment (443,644) (1,213,760) (1,852,166)
----------- ----------- ------------
Net cash used in investing activities (443,644) (1,213,760) (24,211,158)
Financing activities:
Proceeds from issuance of common stock, net - 1,497 51,042,427
Proceeds from (payments of) long-term debt 1,613,162 786,819 (11,709,710)
Payment of capital lease and other debt obligations (154,595) (105,074) (197,431)
Proceeds from issuance of subordinated debt 1,200,000 1,509,710 -
----------- ----------- ------------
Net cash provided by financing activities 2,658,567 2,192,952 39,135,286
Effect of foreign currency exchange rate changes on
cash and cash equivalents (154,574) (4,392) (6,697)
----------- ----------- ------------
Increase (decrease) in cash and cash equivalents (104,736) 81,566 14,529,548
Cash and cash equivalents at beginning of period 280,519 175,783 257,349
----------- ----------- ------------
Cash and cash equivalents at end of period $ 175,783 $ 257,349 $ 14,786,897
=========== =========== ============
Supplemental cash flow disclosure:
Cash paid during the period for:
Income taxes 15,126 11,755 78,169
Interest $ 406,176 $ 817,697 $ 427,735
=========== =========== ============
Supplemental disclosure of non-cash investing activities:
Acquisition of assets under capital lease obligations $ 232,581 $ 252,080 $ 12,463
=========== =========== ============
See accompanying notes to consolidated financial statements
26
27
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, AND 1996
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
SIPEX Corporation (the "Company") designs, manufacturers and markets high
performance and high value added standard analog integrated circuits.
Applications for the Company's products include telecommunications, including
personal computers and peripherals, battery powered handheld devices, cellular
telephones, test equipment, factory automation networking, process controls and
satellites. The Company operates in the analog segment of the semiconductor
industry.
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
Revenue from product sales is recognized at the time of shipment. Revenue
from engineering service contracts is recorded as performance or other
contractually specified milestones are reached. Additionally, the Company
accrues for estimated sales returns upon shipment.
Cash Equivalents and Short-Term Investments
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. Short-term investments consist of U.S.
Government obligations and Municipal Bond obligations collateralized by U.S.
Government obligations with original maturities beyond three months and those
that will mature within one year.
At the time of investment purchase and at each balance sheet date, the
Company determines the appropriate classification of its investments in debt and
equity securities. At December 31, 1996, all of the Company's investments in
debt securities were classified as available-for-sale which means that although
the Company principally holds securities until maturity, they may be sold under
certain circumstances. The short-term investments at December 31, 1996, which
consist of debt securities, were carried at amortized cost which approximates
fair market value. The amortized cost of these debt securities is adjusted for
amortization of premium and accretion of discounts to maturity. Such
amortization is included in Interest Income.
27
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentration of Credit Risk
Financial instruments of the Company consist of cash, short term
securities, accounts receivable, accounts payable and bank indebtedness. The
carrying amount of these financial instruments approximate their fair value. Due
to the Company's credit evaluation and collection process, bad debt expenses
have been insignificant. Credit risk with respect to trade receivables is
limited because a large number of geographically diverse customers make up the
Company's customer base, thus spreading the credit risk. Total amounts written
off during 1994 and 1995 were $171,000 and $7,000, respectively. While a
significant portion of the Company's revenues are made through domestic and
international distributors, including five distributors which account for 19% of
sales in 1996, no single customer has accounted for greater than 10% of net
revenues in 1996 or 1995. In 1994, Raytheon Company represented 10.3% of net
sales. The Company places its investments with government entities and high
credit quality financial institutions and limits the amount of credit exposure
to any one financial institution.
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 and accelerated methods over their useful lives as
follows:
Useful Lives
------------
Machinery and Equipment 2-10 years
Furniture, fixtures and office equipment 5-10 years
Building and leasehold improvements Lease term
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If it is determined that the carrying amount of an asset cannot
be fully recovered, an impairment loss is recognized.
Foreign Currency Translation
Foreign currency assets and liabilities are translated into dollars at
current rates, and revenues, costs and expenses are translated at average rates
during each reporting period. Gains or losses resulting from foreign currency
transactions are included in earnings currently, while those resulting from
translation of financial statements are shown as a separate component of
shareholders' equity. Such transaction gains and losses are immaterial for all
periods presented.
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.
28
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Income (Loss) Per Share
Net income (loss) per share is based upon the weighted average number of
common and common equivalent shares outstanding, if dilutive and includes all
common and common equivalent shares issued at prices less than the initial
public offering price during the twelve month period prior to the initial filing
of the Registration Statement. Fully diluted income (loss) per share,
approximates primary income (loss) per share.
New Accounting Pronouncement
Effective January 1, 1996 the Company adopted SFAS No. 123 "Accounting for
Stock-Based Compensation". The Company accounts for its Employees Stock Option
and Employee Stock Purchase Plan in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees" as allowed by SFAS No. 123. The
Company intends to continue using APB No. 25 for determining net income and
provides pro forma disclosure as required. See Note 7.
2. INVENTORIES
Inventories were as follows:
1995 1996
---- ----
Raw materials $3,315,490 $ 5,142,409
Work-in-process 3,117,454 3,626,720
Finished goods 981,442 2,855,701
---------- -----------
$7,414,386 $11,624,830
========== ===========
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment were as follows:
1995 1996
---- ----
Machinery and equipment $23,084,365 $24,465,817
Furniture, fixtures and office equipment 1,328,364 1,324,588
Leasehold improvements 1,956,632 2,020,794
----------- -----------
26,369,361 27,811,199
Less accumulated depreciation and
amortization 23,921,253 24,498,647
----------- -----------
$ 2,448,108 $ 3,312,552
=========== ===========
29
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ACCRUED EXPENSES
Accrued expenses were as follows:
1995 1996
---- ----
Accrued compensation $ 614,248 $ 687,485
Accrued commissions 464,272 390,220
Accrued royalties 156,000 234,125
Accrued interest on subordinated notes to
affiliates 55,562 -
Other 402,067 124,542
---------- ----------
$1,692,149 $1,436,372
========== ==========
5. LONG TERM DEBT
The Company's long-term debt is summarized as follows:
1995 1996
---- ----
Revolving line of credit $ 7,200,000 $ -
Subordinated note payable to CEF 3,000,000 -
Subordinated notes payable to affiliate 1,509,710 -
Capital lease obligations 416,533 224,965
Other 13,558 7,695
----------- --------
12,139,801 232,660
Less current portion 209,437 189,720
----------- --------
$11,930,364 $ 42,940
=========== ========
The Company had a revolving credit agreement with Generale Bank, which is
affiliated with the Company by virtue of common ownership that provided for
a $7,500,000 line of credit bearing interest at the prime rate plus a
commitment fee in the amount of 1/4% per annum of the unused amount.
Also, the Company had received advances totaling $3,000,000 in exchange for
promissory notes payable to Compagnie Europenne de Financement S.A. (CEF),
an affiliate of Tractebel S.A. On January 29, 1996, both notes were
extended through February 28, 1997, when the amounts borrowed and the
accrued interest were payable in full.
Additionally, during 1995, American Tractebel Corporation (ATC), an
affiliate, made loans to the Company for up to $1,800,000 at an interest
rate of 7%, of which $1,509,710 was outstanding at December 31, 1995. The
amounts borrowed under the three loan agreements with Generale Bank, CEF
and ATC, plus accrued interest, were paid in full during 1996 from proceeds
of the Company's initial public offering.
30
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1995 and 1996, the Company entered into long-term capital leases for
equipment which extend through 2000, with imputed interest rates ranging
from 9% to 19%.
Equipment held under capital leases were as follows:
1995 1996
---- ----
Cost $730,872 $743,335
Less: Accumulated depreciation 247,552 451,486
-------- --------
$483,320 $291,849
======== ========
The following is a schedule of principal payments on notes payable and
capital lease obligations:
YEAR ENDING
DECEMBER 31,
------------
1997 $189,720
1998 36,359
1999 6,581
--------
$232,660
========
6. INCOME TAXES
Total federal, state and foreign income tax expense (benefit) for the years
ended December 31, 1994, 1995 and 1996, consists of the following:
1994 1995 1996
-------------------------------- --------------------------- -----------------------------
Deferred Current Total Deferred Current Total Deferred Current Total
-------- ------- ----- -------- ------- ----- -------- ------- -----
Federal $ - $ - $ - $ - $ - $ - $ - $1,762,027 $1,762,027
Loss
carryforward - - - - - - - (1,618,158) (1,618,158)
State - 12,000 12,000 - (3,365) (3,365) - 463,411 (463,411)
Loss
carryforward - - - - - - - (453,111) (453,111)
Foreign - (105,171) (105,171) - 30,652 30,652 - - -
-------------------------------- --------------------------- ------------------------------
$ - $ (93,171) $ (93,171) $ - $27,287 $27,287 $ - $ 154,169 $ 154,169
-------------------------------- --------------------------- ------------------------------
The actual tax expense (benefit) for 1994, 1995 and 1996 differs from the
"expected" tax expense (computed by applying the U.S. federal corporate tax
rate of 34% to earnings before income taxes) as follows:
31
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1994 1995 1996
---- ---- ----
Computed "expected" tax expense (benefit) $(1,632,643) $(603,633) $ 1,506,638
State income tax, net of federal income 7,920 (2,221) 6,798
tax benefit and utilization of loss
carryforward
Alternative minimum tax - - 19,304
Intangibles amortization 70,238 269,213 -
Non-deductable expenses - - 22,377
Non-deductable foreign losses - - 116,666
Increase in valuation allowance for loss 1,433,755 345,890 -
carryforward
Utilization of net operating losses - - (1,618,158)
Other 27,559 18,038 100,544
----------- --------- -----------
$ (93,171) $ 27,287 $ 154,169
=========== ========= ===========
The tax effects of temporary differences that give rise to significant
portion of the deferred tax assets and liabilities at December 31, 1995 and
1996 are presented below:
1995 1996
---- ----
Deferred tax assets
Net operating loss carryforwards $15,474,004 $14,628,395
Tax credit carryforwards, including
alternative minimum tax 720,278 739,582
Inventories, primarily non-deductible reserves 321,487 361,729
Accounts receivable, primarily allowances 96,127 102,190
Accrued expenses, principally provisions not
currently deductible 170,030 248,463
Fixed assets, due to differences in depreciation 1,512,844 1,401,659
----------- -----------
Total gross deferred tax assets 18,294,770 17,482,018
Valuation allowance (18,294,770) (17,482,018)
----------- -----------
Net deferred taxes $ - $ -
=========== ===========
The valuation allowance against deferred tax assets as of December 31,
1994 and January 1, 1994 was $18,069,749 and $16,918,860,
respectively.
32
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1996, the Company has U.S. net operating loss carryforwards
of approximately $39,700,000, which are available to offset future Federal
taxable income. These losses expire during the years 2000 through 2010. As
of December 31, 1996, utilization of these net operating loss carryforwards
is subject to an annual limitation of approximately $7,000,000 as a result
of such an ownership change which occurred on September 30, 1996. In
addition, the Company has Massachusetts and California net operating loss
carryforwards of approximately $7,550,000 and $4,280,000, respectively,
which are available to offset future Massachusetts and California taxable
income. These state losses expire during the years 1997 through 2000. The
Federal and State tax benefit of utilization of approximately $3,300,000 of
net operating loss carryforwards will result in an increase in additional
paid-in capital when realized.
The Company also has general business and alternative minimum tax credit
carryforwards for Federal income tax purposes of approximately $720,000 and
$19,000, respectively which are available to reduce future Federal income
taxes. The general business credits expire during the years 2001 through
2010. The alternative minimum tax credit may be carried forward
indefinitely.
7. SHAREHOLDERS' EQUITY
Effective April 8, 1996, the number of authorized shares of Common
Stock was increased pursuant to an Amended and Restated Articles of
Organization and the Board of Directors were authorized to issue up to
1,000,000 shares of preferred stock with terms to be established by the
Board at the time of issuance. In addition, the Company's shareholders'
approved a 1-for-4 reverse split of its issued and outstanding Common
Stock. All shares and per share data presented in the accompanying
consolidated financial statements have been restated to reflect the
increased number of authorized and decreased number of outstanding shares
of Common Stock.
On April 8, 1996 and November 5, 1996, the Company closed the sale,
through an initial and secondary public offering, of 2,160,715 and
1,450,000 shares of common stock, respectively. The proceeds to the Company
from the offerings were $19.1 million and $33.0 million before deducting
expenses from the offerings of approximately $800,000 and $450,000,
respectively.
At December 31, 1993, the Company maintained three stock option plans
for its employees. During 1994, the Board of Directors authorized the
Company to cancel substantially all outstanding, unexercised, stock options
granted between October 30, 1984 and October 21, 1988 under the 1981, 1986
and 1988 plans and issued replacement options under the 1994 Plan.
The Company currently maintains five stock option plans. The 1991
Non-Statutory, 1993 Incentive Stock Option Plan, 1994 Stock Option and
Incentive Plan, 1996 Stock Option Plan and the 1996 Non-Employee Director
Stock Option Plan have had 372,154, 132,909, 593,750, 600,000 and 150,000
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. Options for 975,443 shares are outstanding as
of December 31, 1996 under the 1991 Non-Statutory, 1993 Incentive Stock
Option Plan, 1994 Stock Option and Incentive Plan, 1996 Stock Option Plan
and the 1996 Non-Employee Director Stock Option Plan, respectively.
33
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 250,000 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 6,397 shares
to employees in 1996.
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 (loss) and net income (loss) per share would have
been adjusted to the pro forma amounts indicated in the table below. The
effects on pro forma net income (loss) obtained from applying SFAS No. 123
may not be representative of the effects on reported net income (loss) for
future years. The pro forma primary and fully diluted earnings per share
are the same.
1995 1996
---- ----
Net income (loss) As Reported $(1,802,679) $4,277,119
Pro forma (1,804,437) 3,583,713
Net income (loss) As Reported (0.38) 0.58
per share Pro forma (0.38) 0.48
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 1995 and 1996 respectively;
no dividend yield; expected volatility of 45 percent; risk-free interest
rate of 7.0 percent; and expected option lives of six years. The
weighted-average fair value of options granted during 1995 and 1996 was
$0.21 and $12.00, respectively.
A summary of the status of the Company's stock option plans as of
December 31, 1994, 1995 and 1996 and changes during the years then ended is
presented below:
1994 1995 1996
----------------------------- ---------------------------- ------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
----------- ------------ ------------ ------------ ------------- ------------
Outstanding at
beginning of year 397,349 $2.56 793,147 $0.46 812,705 $ 0.46
Granted 482,851 0.40 79,675 0.40 440,152 20.18
Exercised - 0.0 (7,487) 0.40 (238,186) 0.40
Forfeited (87,053) 9.82 (52,630) 0.40 (39,228) 3.16
------- ------- --------
Outstanding at end of
year 793,147 0.46 812,705 0.46 975,443 9.29
======= ===== ======= ===== ======== ======
Options exercisable at
year-end 156,797 0.40 288,481 0.56 217,002 0.42
======= ===== ======= ===== ======== ======
34
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about the Company's stock
options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------------------
NUMBER WEIGHTED-AVG. NUMBER
OUTSTANDING AT REMAINING EXERCISABLE AT
EXERCISE PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE DECEMBER 31, 1996
- -------------------------- ---------------------- --------------------------- -----------------------
$ 0.40 550,453 7.4 216,502
9.50 55,000 9.1 0
11.00 500 3.2 500
14.375 55,000 9.6 0
14.75 55,500 9.6 0
15.50 30,000 9.7 0
17.50 3,000 9.4 0
27.25 225,990 9.9 0
8. 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 1994, 1995 and 1996, Company contributions to the
plan were $108,000, $171,000 and $173,000, respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company leases facilities under operating leases expiring through
2000. The Company leases its corporate headquarters and manufacturing
facility from ATC Billerica Corporation, an affiliate of Tractebel, S.A.,
under an operating lease for $9,917 per month for the first year of the
lease, which payments are subject to an annual escalation. The lease
expires on January 31, 2001, subject to an option of the Company to extend
for an additional five-year period. Rent expense was approximately
$639,900, $450,300 and $498,000 for the years ended December 31, 1994, 1995
and 1996, respectively.
35
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a schedule of future minimum lease commitments under
operating leases with terms in excess of one year at December 31, 1996:
CALENDAR YEAR
-------------
1997 $ 407,000
1998 341,000
1999 342,000
2000 370,000
Thereafter 20,000
----------
$1,480,000
==========
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.
10. EXPORT SALES AND MAJOR CUSTOMERS
Revenues by geographic area are summarized as follows:
1994 1995 1996
---- ---- ----
United States $16,973,109 $19,368,341 $25,182,910
Europe 4,807,315 7,407,463 7,925,000
Far East 600,742 1,867,341 2,416,717
Japan 441,512 1,335,380 1,786,283
----------- ----------- -----------
$22,822,678 $29,978,525 $37,310,910
=========== =========== ===========
36
37
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 Special Meeting in Lieu of Annual Meeting
of Shareholders to be held on May 30, 1997, to be filed with the Commission not
later than 120 days after the close of the fiscal year ended December 31, 1996,
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 Special Meeting in
Lieu of Annual Meeting of Shareholders to be held on May 30, 1997, to be filed
with the Commission not later than 120 days after the close of the fiscal year
ended December 31, 1996, 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 Special Meeting in
Lieu of Annual Meeting of Shareholders to be held on May 30, 1997, to be filed
with the Commission not later than 120 days after the close of the fiscal year
ended December 31, 1996, in the tables under the captions "Principal
Shareholders" and "Election of Directors."
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 Special Meeting in
Lieu of Annual Meeting of Shareholders to be held on May 30, 1997, to be filed
with the Commission not later than 120 days after the close of the fiscal year
ended December 31, 1996, under the caption "Certain Transactions."
37
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
(a) The following documents are filed as part of this Annual Report on Form
10-K:
1. Consolidated Financial Statements. The following consolidated financial
statements of the Company and Report of Independent Accountants are incorporated
in Item 8 of this report.
Independent Auditors' Reports
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for the Year Ended December 31, 1996,
1995 and 1994
Consolidated Statements of Shareholders' Equity (Deficit) for the Year
Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Year Ended December 31, 1996,
1995 and 1994
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 8K: No reports on Form 8-K were filed by the Company
during the fiscal quarter ended December 31, 1996.
38
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SIPEX CORPORATION
By: /s/ James E. Donegan
--------------------------------------------
James E. Donegan
Chairman of the Board of Directors,
Chief Executive Officer, President and Clerk
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 Directors, March 27, 1997
- ----------------------------- Chief Executive Officer, President
James E. Donegan (principal executive officer) and Clerk
/s/ Frank R. DiPietro Executive Vice President, Chief Financial March 27, 1997
- ----------------------------- Officer and Treasurer (principal financial
Frank R. DiPietro officer and accounting officer)
/s/ Daniel Deroux Director March 27, 1997
- -----------------------------
Daniel Deroux
/s/ Manfred Loeb Director March 27, 1997
- -----------------------------
Manfred Loeb
/s/ Lionel H. Olmer Director March 27, 1997
- -----------------------------
Lionel H. Olmer
/s/ John L. Sprague Director March 27, 1997
- -----------------------------
John L. Sprague
/s/ Dr Steward S. Flaschen Director March 27, 1997
- -----------------------------
Dr. Steward S. Flaschen
40
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
------ ----------- ----
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).
10.10 Employment Agreement, dated January 1, 1988, between the Company and
James E. Donegan (filed as Exhibit 10.10 to the
40
41
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
------ ----------- ----
Company's Registration Statement on Form S-1, File No. 333-1328, and
incorporated herein by reference).
10.11 Employment Agreement, dated January 1, 1988, between the Company and
Frank R. DiPietro (filed as Exhibit 10.11 to the Company's Registration
Statement on Form S-1, File No.333-1328, and incorporated herein by
reference).
10.12 Employment Agreement, dated January 1, 1996, between the Company and
Raymond W.B. Chow (filed as Exhibit 10.12 to the Company's
Registration Statement on Form S-1, File No. 333-1328, and
incorporated herein by reference).
10.13 Employment Agreement, dated July 18, 1988, between the Company and
Sanford Cohen (filed as Exhibit 10.13 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 (filed as Exhibit 10.15 to
the Company's Registration Statement on Form S-1, File No. 333-1328,
and incorporated herein by reference).
10.15 Form of Distributor Agreement (filed as Exhibit 10.16 to the
Company's Registration Statement on Form S-1, File No. 333-1328, and
incorporated herein by reference).
11.1 Computation of earnings per share.
21.1 Subsidiaries of the Company (filed as Exhibit 21.1 to the Company's
Registration Statement on Form S-1, File No. 333-1328, and
incorporated herein by reference).
23.1 Consent of KPMG Peat Marwick LLP, independent accountants.
23.2 Consent of Ernst & Young, LLP, independent accountants.
27.1 Financial Data Schedule.
41