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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-27892
SIPEX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-6135748
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NUMBER)
22 LINNELL CIRCLE, BILLERICA, MASSACHUSETTS 01821
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(978) 667-8700
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates of the
registrant at March 22, 1999 was approximately $226,761,517 based upon $12.5625
per share, the last reported sale price of the Common Stock on The Nasdaq
National Market on that date. The number of shares of the registrant's Common
Stock outstanding at March 22, 1999 was 18,050,668.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain portions of information from the
Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held
on May 28, 1999.
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PART I
ITEM 1. BUSINESS:
COMPANY OVERVIEW
SIPEX Corporation (the "Company" or "SIPEX") designs, manufactures, markets
and sells innovative, high performance, high value-added analog integrated
circuits. The Company sells its products across the analog semiconductor market
and has targeted high-growth sectors that it believes are especially compatible
with its design and process capabilities. Markets for the Company's products are
networking/data communications, consumer electronics, telecommunications,
industrial controls and instrumentation, and aerospace and military. The
Company's products have been incorporated into a broad range of electronic
systems and products by more than 3,500 customers worldwide.
ANALOG INDUSTRY
Integrated circuits, ("IC's"), are the building blocks of all electronic
products today. Analog circuits process "real world" signals which measure
physical conditions such as temperature, force, speed and pressure, the
frequency and wave length of which vary continuously.
The Company believes that the analog/linear integrated circuit market
offers certain advantages compared to the digital market. The life cycles of
products in the analog integrated circuit market tend to be longer and customer
pricing is less volatile than in the digital market. The capital requirements
for analog/linear IC manufacturers are lower than those in the digital IC area.
In addition, foreign competition to date has been less interested in the
analog/linear IC business because the markets are smaller. Unlike products in
the digital IC market, the value in the analog IC product is usually the result
of design innovation utilizing a variety of manufacturing process technologies
to address specific customer applications, many of which are in so-called
"niche" markets.
PRODUCTS AND MARKETS
Requirements for lower power and higher operating frequencies are driving
innovation in analog/linear circuitry. Another significant trend in the
marketplace is the need to reduce the size and weight of components,
particularly for portable and handheld applications in which these features are
critical. As a result, more and more functions are designed onto a single chip,
requiring both advancements in design and improvements in process technology.
The Company offers a broad range of innovative, high performance, high
value-added analog integrated circuits. The Company's products are principally
networking products, electroluminescence products, power management 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.
The Company 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 IC 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.
THE COMPANY'S MAJOR PRODUCT CATEGORIES
Networking 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
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in many market segments including computers, peripherals, data communications,
telecommunications, hand-held instrumentation, medical equipment, test equipment
and industrial controls.
In the networking area in particular, serial interface products are of
critical importance because diverse equipment and peripherals must be linked
together to permit data communications across local or remote locations. Because
a 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 the RS-485, while the Company's SP500 Series was
the industry's first fully integrated transceiver, supporting up to eight of the
most popular serial interface standards for WAN interfaces. As 3V based
microprocessor systems have become more common, SIPEX has introduced families of
3V RS-232 and RS-485. The main product features include fully compliant
operation at 3V power supply with +/-15kV of ESD protection. The products are
mainly sold into battery powered portable products that have a need to interface
to peripheral equipment; including laptop computers, PDAs, and hand held data
terminals.
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. 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.
Electroluminescence and Application Specific Standard 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 dielectric isolation ("DI") wafer fabrication production line. The DI
process allows single chip designs to operate efficiently with both very low
voltage (1V) and very high voltage (160V) without interference or breakdown
between adjacent circuits. The Company's designers, in cooperation with Timex
Corporation ("Timex"), developed a proprietary electroluminescent ("EL") driver
device, which provides the enabling technology for the Indiglo(R) night-light.
This custom integrated circuit creates a 100V AC signal from a 3V DC battery
within the watch to light the backlight material. Using this technology, the
Company is providing backlighting solutions for pagers, cell-phones and handheld
electronic equipment manufacturers. The Company intends to continue its focus in
this area on high volume commercial/consumer markets, in which the attributes of
the DI 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.
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 by the Company are industrial controls, instrumentation and test
equipment. The Company expects sales of data converter products to decline in
future years as Sipex continues to focus resources on its target markets.
Power Management Products. The Company's power management products
specialize in the areas of voltage control and measurement, voltage conversion
and battery charging. The purpose of these products is to
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monitor the power supplied to digital circuits such as microprocessors and
random access memory ("RAM") in battery operated systems. As the main battery
voltage to the system is slowly decreased by usage, a backup battery takes over
to keep power to the system long enough so that the microprocessor instructions
and RAM are saved and powered down in a safe state. If there is no activity from
the microprocessor during a period of time, the microprocessor is reset so that
it starts-up at a known state in case of errors during power-up, power-down, and
intermittent power losses. Any power glitches or faults that can cause harm to
the system or data loss at any time can be minimized by implementing a
microprocessor supervisory circuit. Any portable equipment that uses
microprocessors, microcontrollers, or memory in the system will require some
kind of detection circuitry to monitor the power supply and battery output.
Aerospace and Assembled Products. The Company's precision high reliability
assembled products are sold to commercial customers engaged in various aerospace
and military programs. The Company is not currently designing new products for
the military market. The Company expects sales of products for military
applications to continue to decline in the future as the Company continues to
focus its resources on its target markets in the commercial sector.
The following table identifies the list of current applications for the
Company's products, identified by end market:
MARKET USER APPLICATION
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Networking/Data Communications..... Workstations
Notebook PCs
Desktop PCs
Printers
POS Terminals
Modems
Fax Machines
Bridges
Routers
Frame Relay
Servers
Consumer........................... PDAs
Watches
Clocks
Remote Controls
Key Pads
Cameras
Radios
Automotive
Telecommunications................. Cellular Phones
Cordless Phones
Satellites
Base Stations
Pagers
PBX
Global Positioning Systems
Industrial Controls &
Instrumentation.................... Test Equipment
Robotics
Data Recorders
Analyzers
Meters
Factory Automation
Automotive
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MARKET USER APPLICATION
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Aerospace/Military................. Satellites
Missile Systems
Engine Controls
Braking Systems
Aircraft
SALES AND DISTRIBUTION
The Company sells its products to OEM customers either directly through its
direct sales force and 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. Domestic and international distributor sales were approximately 46%,
48% and 42% of net sales in 1998, 1997 and 1996 respectively.
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,
the United Kingdom 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, Sipex sells its products through 19 independent sales
representative organizations having a total of 40 offices, and 3 distributors
having a total of 140 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. Sipex 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 permit 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, Sipex sells its products through 33 distributors
having a total of 154 sales locations. International sales in 1998, 1997 and
1996 were approximately $24.0 million, $19.6 million, and $12.1 million,
respectively, representing 36.6%, 38.2%, and 32.5% of net sales, respectively.
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.
CUSTOMERS
The Company's customer base is comprised of merchant manufacturers,
electronics distributors, and customers with captive manufacturing operations.
The captive manufacturers use the Company's products as integral components in
their equipment and systems. In certain cases, the Company sells its products to
a subcontract-assembly company specified by the captive manufacturer. The
merchant manufacturers typically function as original equipment manufacturers
("OEMs") as well as suppliers of sub-systems to other OEMs.
The Company's customers, none of which accounted for more than ten percent
of net sales in 1998, or 1997, include Cisco Systems, Inc., Hewlett-Packard Co.,
Motorola, Inc., Cabletron Systems, Inc., Lucent Technologies, Inc., Newbridge
Networks Corp., 3Com Corp., and Pairgain Technologies, Inc. in the
networking/data communications markets; Cidco, Inc., Elo Touchsystems, Federal
Express Corp., Timex
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Corporation, International Business Machines Corp., Sharp Corp., Mitsubishi
Corp. and Dassault Aviation S.A. in the consumer and communications markets; and
Andover Controls Corp., Siemens Corporation and Honeywell, Inc. in the
industrial controls market. Customers incorporating the Company's high
reliability assembled products for military applications include Honeywell,
Inc., Raytheon Company and Lockheed Martin Corp.
BACKLOG
The Company's product backlog was approximately $25.6 million at December
31, 1998 compared to $24.8 million in 1997. 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. Sipex 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.
MANUFACTURING
SIPEX 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 California include a four-inch wafer
fabrication facility and a clean room. The Company's facilities have been
certified as ISO-9001 compliant. In March 1998, the Company entered into an
Operating Lease Agreement for the construction and lease of a 56,000 square foot
wafer fabrication facility and office space in Milpitas, California which is
expected to be completed in the first quarter of 1999. This facility will
provide expanded capacity for the manufacture of wafers and is expected to be
operational in the third quarter of 1999. Although the Company expects the new
fabrication facility to be completed in the first quarter of 1999 and be
operational in the third quarter, there can be no assurance that the Company
will meet this timetable and the Company may experience unexpected delays in
this process.
SIPEX broadens its manufacturing capabilities by using third-party
foundries to produce junction isolation BiCMOS processed wafers and CMOS
processed wafers. The use of third-party foundries enables 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 35.6%
in 1998 of the Company's net sales, approximately 38.7% in 1997 and
approximately 41.2% in 1996, and are expected to remain a significant percentage
of net sales 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 tests integrated circuits or "die" on the wafers produced by
the Company and its foundries for compliance with performance specifications
before assembly. 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. Following assembly, the
packaged units are returned to the Company for 100 percent final testing and
inspection prior to shipment to customers. 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.
The Company's subcontractors may also be subject to capacity, yield and
quality problems or may have difficulty obtaining critical raw materials, which
could result in disruptions in the supply of assembled products. 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 occurrences 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.
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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 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 Company.
PRODUCT QUALITY ASSURANCE AND RELIABILITY
The Company is committed to customer satisfaction and continuous
improvement in all aspects its business. This is accomplished through a
comprehensive quality and reliability system founded on documented procedures.
The Company uses quality tools such as statistical process control,
cross-functional teaming, and advanced statistical analysis in its
qualification, production processes, and improvement activities. The Company
maintains strong relationships with its subcontractors and routinely qualifies
suppliers to established standards. The Company is ISO-9001 Registered and has
continuously maintained conformance to MIL-PRF-38534.
PATENTS, LICENSES AND TRADEMARKS
The Company seeks to protect its proprietary technology through patents and
trade secret protection. Currently, Sipex holds a number of patents expiring on
various dates between the years 1999 and 2018 and has additional pending United
States patent applications, although there can be no assurance that any patents
will result from these applications. While 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.
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
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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.
Pursuant to license agreements, the Company pays a royalty to Timex
Corporation for certain electroluminescent product sales and to Maxim Integrated
Products for certain interface product sales. The Company continues to receive
royalty payments from Analog Devices Incorporated for certain licensed interface
products.
In October 1998, the Company entered into a royalty bearing license
agreement with the Lemelson Medical, Education and Research Foundation, Limited
Partnership, ("the Lemelson Foundation") by which the Company acquired the right
to use the technology claimed in issued patents and pending patent applications
owned by the Lemelson Foundation. The agreement not only permits the Company to
use the patented technology for the life of the licensed patents but also
provides a covenant not to sue for any use of the patented technology by the
Company which may have occurred before the license agreement was entered into.
RESEARCH AND DEVELOPMENT
SIPEX believes that continued introduction of new products in its target
markets is essential to its growth. As performance demands have increased the
complexity of analog circuits, the design and development process has become a
multi-disciplinary effort, requiring diverse competencies to achieve customers'
desired performance. 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.
In 1998, 1997 and 1996, the Company spent approximately $6.7 million, $5.4
million and $4.7 million, respectively, on research and development,
representing, 10.2%, 10.6% and 12.7% respectively, of net sales for such
periods. The Company expects that expenditures in support of research and
development activity will continue to 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 yields
of its products.
COMPETITION
The Company competes in the high performance segment of the analog
integrated circuit market. The analog integrated circuit segment of the
semiconductor industry is intensely competitive, and many major semiconductor
companies presently compete or could compete 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 include 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.
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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.
SEASONAL ASPECTS
None.
ENVIRONMENTAL REGULATION
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.
EMPLOYEES
At December 31, 1998, the Company had 299 full-time employees. 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.
ITEM 2. PROPERTIES:
The Company's corporate office and principal manufacturing facility are
located in Billerica, Massachusetts. Information regarding the principal plants
and properties appears below:
APPROXIMATE OWNED OR LEASE
FACILITY SIZE LEASED: LAND EXPIRATION
LOCATION DESCRIPTION (SQUARE FEET) AREA OWNED DATE
- -------- -------------- ------------- ------------ ----------
Billerica, Massachusetts............ Manufacturing 66,600 Leased 01/31/2008
General Office
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APPROXIMATE OWNED OR LEASE
FACILITY SIZE LEASED: LAND EXPIRATION
LOCATION DESCRIPTION (SQUARE FEET) AREA OWNED DATE
- -------- -------------- ------------- ------------ ----------
Milpitas, California(1)............. Manufacturing 30,500 Leased 04/30/2002
General Office
Milpitas, California(2)............. Manufacturing 56,000 Leased 07/01/2004
General Office
San Jose, California................ Manufacturing 12,500 Leased 12/31/2000
Munich, Germany..................... General Office 2,500 Leased 02/28/2003
Hampshire, England.................. General Office 360 Leased 07/05/2000
Tokyo, Japan........................ General Office 1,800 Leased 01/31/2001
Zaventem, Belgium................... General Office 3,000 Leased 02/28/2001
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(1) This facility will be closed during 1999.
(2) In March 1998, the Company entered into an Operating Lease Agreement for the
construction and lease of a 56,000 square foot wafer fabrication facility
and office space in Milpitas, California which is expected to be completed
in the first quarter of 1999 and is expected to be fully qualified in the
third quarter of 1999.
ITEM 3. LEGAL PROCEEDINGS:
The Company is not a party to any material legal proceedings. See also
"Item 1 -- Business Patents, Licenses and Trademarks".
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, 1998.
EXECUTIVE OFFICERS OF SIPEX
Information relating to the executive officers of the Company is set forth
below. All officers held office as of December 31, 1998.
NAME, AGE & POSITION BUSINESS EXPERIENCE
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James E. Donegan -- Age 53............... Mr. Donegan joined the Company in April 1985 as
Chairman, President and Chief Chairman of the Board, Chief Executive Officer and
Executive Officer and Director President of the Company. Mr. Donegan currently serves
as a Director of Genesis Microchip, Inc., a
manufacturer of video semiconductors. Before joining
the Company, Mr. Donegan held the position of Group
Vice President of the Electronic Components Group at
Midland Ross Corporation.
Frank R. DiPietro -- Age 51.............. Mr. DiPietro joined the Company in December 1983 as
Executive Vice President, Finance, Chief Financial Officer and Treasurer. He was
Chief Financial Officer, Treasurer appointed Vice President of Finance in January 1985,
and Clerk 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.
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NAME, AGE & POSITION BUSINESS EXPERIENCE
- -------------------- -------------------
Raymond W.B. Chow -- Age 50.............. Mr. Chow joined the Company in October 1988. He was
Senior Vice President, Chief appointed Senior Vice President of Interface Products
Technology Officer in August 1994 and Chief Technology Officer in July
29, 1998. From March 1982 to October 1988, Mr. Chow
was President and Chief Executive Officer of Barvon
BiCMOS Technology, Inc. ("Barvon"), a company Mr. Chow
founded in 1982.
Yener Gurler -- Age 59................... Mr. Gurler joined the Company in August 1992 as Fab
Senior Vice President, Operations Manager. He was appointed Vice President, Fab
Operations in 1997 and Senior Vice President,
Operations in 1998. He joined the Company from
Universal Semiconductor where he held the position of
Vice President, Operations.
Timothy Dhuyvetter -- Age 46............. Mr. Dhuyvetter joined the Company in January 1987. In
Senior Vice President 1994, he was appointed Vice President, Application
Specific Products and in 1997 he was appointed Senior
Vice President, Low Power Analog Products. He joined
the Company after serving in various engineering
positions at Philips Corporation. While at Philips,
Mr. Dhuyvetter was awarded three patents in the field
of communications signal processing.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
QUARTERLY STOCK MARKET DATA
DEC. 31, 1998 SEPT. 26, 1998 JUNE 27, 1998 MARCH 28, 1998
------------- -------------- ------------- --------------
FISCAL 1998
Stock price range per share:
High................................... 37.438 23.875 35.750 38.188
Low.................................... 18.625 17.250 18.188 25.250
DEC. 31, 1997 SEPT. 26, 1997 JUNE 27, 1997 MARCH 28, 1997
------------- -------------- ------------- --------------
FISCAL 1997
Stock price range per share:
High................................... 37.000 34.500 18.500 18.625
Low.................................... 23.500 17.375 11.000 13.875
- ---------------
* All share data reflects 2 for 1 stock split effected through a 100% dividend
on August 18, 1997.
Net income per share amounts are based on the weighted average common and
common equivalent shares outstanding during the quarter. Therefore, the total of
net income per share for the four quarters may differ slightly from net income
per share for the year.
On December 31, 1998, there were approximately 63 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 22 1999
was $12.5625 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.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA:
Selected financial data for the last five years appear below:
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
OPERATING RESULTS
Net Sales................................ $65,557 $51,210 $37,311 $29,979 $22,823
Gross Profit............................. 33,344 24,540 15,873 10,900 4,592
As a % of net sales................. 50.9% 47.9% 42.5% 36.4% 20.1%
Depreciation and amortization............ 1,895 1,468 986 2,298 1,416
Research & Development expenses.......... 6,717 5,448 4,725 4,399 2,960
Income (loss) from operations............ 15,217 10,829 4,484 (970) (4,340)
Income (loss) before taxes............... 17,029 12,270 4,431 (1,775) (4,802)
Net income............................... 19,830 13,245 4,277 (1,802) (4,709)
As a % of net sales................. 30.2% 25.9% 11.5% (6.0)% (20.6)%
Net income (loss) per common share --
basic.................................. 1.11 0.76 0.32 (0.19) (0.50)
Net income (loss) per common share --
assuming dilution...................... $ 1.06 $ 0.71 $ 0.29 $ (0.19) $ (0.50)
FINANCIAL DATA
Cash/short-term investments.............. $25,792 $39,985 $37,474 $ 257 $ 176
Restricted cash equivalents and
securities............................. 24,261 -- -- -- --
Total assets............................. 99,496 72,982 57,649 15,870 13,360
Working capital.......................... 53,296 59,403 49,920 7,307 5,942
Current ratio............................ 8.85 12.63 12.89 2.25 2.56
Capital expenditures..................... 4,573 6,505 1,852 1,214 444
Shareholders' equity (deficit)........... 92,710 67,868 53,409 (1,884) (67)
- ---------------
* All data reflects 2 for 1 stock split effected through a 100% dividend on
August 18, 1997
(1) After classifying restricted cash equivalents and securities amounting to
$24.3 million to long-term assets in connection with the pledge of
securities as collateral to a new lease agreement.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
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 circuits and power management products.
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For the periods indicated, the following table sets forth the percentage of
net sales represented by the respective line items in the Company's consolidated
statements of operations.
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 49.1 52.1 57.5
----- ----- -----
Gross profit................................................ 50.9 47.9 42.5
Operating expenses:
Research and development.................................. 10.2 10.6 12.7
Marketing and selling..................................... 10.0 10.2 12.1
General and administrative................................ 5.7 6.0 5.7
Facility Exit Costs....................................... 1.7 -- --
----- ----- -----
Total operating expenses.................................... 27.7 26.8 30.5
----- ----- -----
Income from operations...................................... 23.2 21.1 12.0
Other income/(expense), net................................. 2.8 2.8 (0.1)
----- ----- -----
Income before income taxes.................................. 26.0 23.9 11.9
===== ===== =====
Fiscal Year Ended December 31, 1998 compared to Fiscal Year Ended December 31,
1997
Net sales increased 28.0% to $65.6 million for the year ended December 31,
1998 compared to $51.2 million for the year ended December 31, 1997. The
increase in net sales was primarily due to higher unit shipments resulting from
continued introductions of new products and increased market acceptance of the
Company's proprietary and second source products. The average selling price for
the Company's products declined slightly during the year. Approximately 37% of
the Company's net sales was derived from international customers in 1998 vs. 38%
in 1997. Geographically, the Company experienced sales growth of 31% in the U.S.
and 23% internationally, primarily in Europe. Sales to Japan and the Rest of the
World, primarily the Pacific Rim countries, increased 8% over the prior year.
International sales were lower as a percentage of net sales in 1998 vs. 1997 due
to prolonged weakness in the Asian markets.
Gross profit was $33.3 million or 50.9% of net sales in 1998 vs. $24.5
million in 1997. The improvements in 1998 over 1997 were primarily due to the
absorption of certain fixed costs over a larger sales base, manufacturing
efficiencies and increased market acceptance of the Company's proprietary and
application specific standard products. This was partially offset by the
slightly lower average selling price for the Company's products.
Research and development ("R&D") expenses were $6.7 million and $5.4
million in 1998 and 1997 or 10.2% and 10.6% of net sales, respectively. The
increase in R&D expense in 1998 as compared to 1997 was due primarily to an
increase in staffing, particularly design engineering personnel and higher
spending for development mask sets and test wafers.
Marketing and selling expenses were $6.6 million and $5.2 million in 1998
and 1997 or 10.0% and 10.2% of net sales, respectively. The increase in
marketing and selling expenses in 1998 over 1997 was due primarily to an
increase in staffing, particularly sales personnel, and an increase in
commission cost associated with sales.
General and administrative expenses were $3.7 million and $3.0 million in
1998 and 1997 or 5.7% and 6.0% of net sales, respectively. The increase in
general administration expense was due primarily to increased legal and other
related professional expenses. The increase is also the result of a write-off of
a customer account receivable.
The facility exit costs of $1.1 million represent the estimated cost of the
closure of the current manufacturing facility in Milpitas, California and the
sales office in France. The charge for property, plant and equipment represents
the write-down to the net realizable value of less efficient and duplicate
machinery and equipment not
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needed in the combined restructured manufacturing operations. Severance and
other employee related costs were included for a reduction of one employee
related to the facility relocation from France to Belgium.
Other income, net was $1.8 million and $1.4 million in 1998 and 1997,
respectively. The year over year increase in other income was due primarily to
higher interest income arising from increases in cash, cash equivalent and
short-term investments which grew $10.1 million and $2.5 million in 1998 and
1997, respectively.
The Company recorded an income tax benefit of ($2.8) million for 1998 and
income tax benefit of ($975,000) for 1997, resulting in an effective income tax
benefit rate of (16.4%) in 1998 compared to an effective rate of (7.9%) in 1997.
These effective rates differed from the statutory rate due to the Company's
utilization of its net operating loss carryforwards which were previously
reserved, and additionally, to the reduction of a portion of the valuation
allowance for future tax benefits expected to be realized in the future. See
also Notes to the Consolidated Financial Statements.
Fiscal Year Ended December 31, 1997 compared to Fiscal Year Ended December 31,
1996
Net sales increased 37.3% to $51.2 million for the year ended December 31,
1997 compared to $37.3 million for the year ended December 31, 1996. 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 sales increased by 25.7% and international sales
increased by 61.3% in 1997 as compared to the same period in 1996.
Gross profit as a percentage of net sales, or gross margin, increased to
47.9% in 1997 as compared to 42.5% in 1996. The improvements in 1997 over 1996
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.
The Company expended 10.6% of net sales in 1997 for the development and
introduction of new products as compared to 12.7% in 1996. In absolute dollars,
research and development increased 15.3% to $5.4 million in 1997 over the $4.7
million incurred in 1996. 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.
Marketing and selling expenses decreased as a percentage of net sales to
10.2% or $5.2 million in 1997 from 12.1% or $4.6 million in 1996, but increased
14.6% in absolute dollars in 1997 over the same period in 1996. The increase in
1997 was due primarily to higher costs associated with marketing and advertising
of new products and increased commissions.
General and administrative expenses increased to 6.0% of net sales in 1997
from 5.7% in 1996. In absolute dollars, general and administrative expenses
increased to $3.0 million in fiscal 1997 from $2.1 million in 1996. The increase
in 1997 was due primarily to increased travel and professional related expenses.
Other income (expense), net increased to $1,400,000 of income in 1997 from
($53,000) of expense in 1996 primarily as a result of interest income earned on
proceeds of the Company's two public offerings as well as interest earned on
increased cash flow from operations in 1997.
The Company recorded income tax benefit of ($975,000) for 1997 and income
tax expense of $154,000 for 1996 resulting in an effective tax rate of (7.9%) in
1997 compared to an effective tax rate of 3.5% in 1996. These effective rates
differed from the statutory rates due to the Company's utilization of its net
operating loss carryforwards which were previously reserved and additionally in
1997 to the reduction of a portion of the valuation allowance for future tax
benefits expected to be realized in the future. See also Notes to the
Consolidated Financial Statements.
Liquidity and Capital Resources
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
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$33.0 million from the issuance of common stock. The proceeds primarily are 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, 1998, the Company had working capital of $58 million and
available funds of $25.8 million consisting of cash and cash equivalents and
investment securities. The Company has pledged up to $35 million for cash and
cash equivalents and investment securities as security for a lease which the
Company entered into for the construction and lease of a new wafer fabrication
facility in Milpitas, California. The facility is expected to be completed in
the first quarter of 1999. The Company has classified the amount pledged as
retricted long-term assets on the consolidated balance sheet at December 31,
1998. Net cash provided by (used in) operating activities was ($14.6) million,
$8.2 million, and ($60,000) in 1998, 1997 and 1996, respectively. Net cash used
in operating activities in 1998 consisted primarily of $19.8 million of net
income partially offset by a $4.3 million increase in accounts receivable, 2.7
million increase in inventories and $6.9 million increase in deferred taxes, and
a $24.3 million increase in restricted cash associated with the pledge discussed
above. In 1997, net cash provided by operating activities consisted primarily of
$13.2 million of net income partially offset by a $4.3 million increase in
accounts receivable, $2.4 million increase in inventories and $1.3 million
increase in deferred assets. In 1996, the use of cash supported research and
development costs associated with the Company's products and sales and marketing
expenses. Net cash used in 1996 was due primarily to a $4.2 million increase in
inventories and a $1.3 million decrease in accounts payable offset by $4.3
million of net income and $500,000 reduction in accounts receivable.
Net cash used in investing activities for property, plant and equipment was
$4.6 million, $6.5 million and $1.9 million in 1998, 1997 and 1996,
respectively. The growth in 1998 capital investment related to the expansion of
wafer manufacturing in San Jose, California and equipment upgrades in all
facilities.
Net cash provided by financing activities was $5.1 million, $802,000 and
$39.1 million in 1998, 1997 and 1996, respectively. In 1998, $5.1 million was
provided by the issuance of common stock on the exercise of options pursuant to
the Company's stock plans offset partially by the repayments of $45,000 of
capital lease obligations. In 1997, $982,000 was provided by the issuance of
common stock on the exercise of options or pursuant to the Company's stock plans
offset partially by the repayments of approximately $180,000 of capital lease
obligations. In 1996, $51.0 million was provided by the issuance of common stock
in two public offerings offset partially by the repayments of approximately
$12.0 million of long-term debt.
At December 31, 1998, the Company has U.S. net operating loss carryforwards
of approximately $24.4 million, which are available to offset future Federal
taxable income. These losses expire during the years 2005 through 2010. The tax
benefit of utilization of approximately $8.6 million of these net operating loss
carryforwards will result in an increase in additional paid-in capital when
realized. As of December 31, 1998, utilization of these net operating loss
carryforwards is subject to an annual limitation of approximately $7,400,000 as
a result of such an ownership change which occurred on September 30, 1996.
The Company anticipates that the available funds and cash provided from
operations will be sufficient to meet cash and working capital requirements for
the foreseeable future.
New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") recently issued Statement
of Financial Standards Number 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging, requiring
recognition of all derivatives as either assets or liabilities in the statement
of financial position measured at fair value. This statement is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. The effects
of adopting SFAS 133 is not expected to have a material impact on the Company's
financial condition, results of operations or cash flows.
The AICPA Accounting Standards Executive Committee recently issued
Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This statement requires that
certain costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software, and is
effective for fiscal years
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beginning after December 15, 1998. The statement also requires that costs
related to the preliminary project stage and post implementation/operations
stage in an internal-use computer software development project be expensed as
incurred. The Company will comply with the provisions of SOP 98-1 in fiscal
1999. The adoption of this SOP is not expected to have a material impact on the
Company's financial position or results of operations
The AICPA Accounting Standards Executive Committee recently issued SOP
98-5, Reporting on the Costs of Start-Up Activities. This Statement requires
that costs incurred during start-up activities, including organization costs, be
expensed as incurred, and is effective for fiscal years beginning after December
15, 1998. The Company will comply with the provisions of SOP 98-5 in fiscal
1999. The adoption of this SOP is expected to have no impact on the Company's
financial position or results of operations.
Factors Affecting Future 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 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
other filings with the Securities and Exchange Commission.
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.
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.
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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, including Asia, which are subject to certain risks,
including unexpected changes in legal and regulatory requirements, changes in
tariffs, exchange rates and other barriers, political and economic instability,
difficulties in accounts receivable collection, difficulties in managing
distributors or representatives, difficulties in staffing and managing
international operations, difficulties in protecting the Company's intellectual
property overseas, seasonality of sales and potentially adverse tax
consequences. There can be no assurance that recent economic troubles in certain
Asian countries will not have a material adverse effect on the Company's
business, results of operations and financial condition.
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.
Year 2000 Readiness Disclosure Statement
The Year 2000 issue results from computer programs written using two digits
rather than four to define the applicable year. Any of the Company's internal
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the Year 2000. This could result in a system
failure or
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miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has assessed its information technology systems and non-IT
systems (such as building security, voice mail, telephone and other systems
containing embedded microprocessors) and has determined the nature and extent of
the work required, if any, to make these internal systems Year 2000 compliant.
In the third quarter of fiscal 1998, the Company selected new enterprise and
manufacturing software systems which are Year 2000 compliant and began
implementation of these systems in the fourth quarter of 1998. Implementation is
scheduled to be fully complete by September 1999. The Company's business is
dependent upon its information systems which are an integral part of all major
business processes. As the Company progresses through the implementation of
these critical operational and logistical modules, there is a risk that these
implementations could be delayed, could experience difficulties or in fact may
not be successful and could adversely affect future results of operations and
cash flows. The Company's current enterprise and manufacturing system is being
upgraded to become Year 2000 compliant in the second quarter of 1999 and will
remain in place until the new system is fully operational. In addition, the
Company's semiconductor manufacturing and payroll systems are being updated and
are expected to be Year 2000 compliant by September 1999. Future expenditures on
the general upgrade of internal computer systems are estimated to be $2 million,
a portion of which would be to become Year 2000 compliant. The majority of these
expenditures will be capitalized in 1999 to the extent in which they relate to
the costs of implementation of new systems. Year 2000 remediation costs will be
expensed as incurred.
The Company has conducted a written survey of its foundries and other
suppliers of products and services with which it has a material relationship in
order to identify and assess their Year 2000 readiness and compliance, and any
negative impacts that any non-compliance could have on the Company. Based upon
the survey responses, the Company found all of these principal suppliers to be
Year 2000 compliant. Although management believes the Company's systems will be
Year 2000 compliant, the failure of the Company's suppliers to address the Year
2000 issue could result in disruption to the Company's operations and have a
significant adverse impact on its results of operations, the extent of which the
Company has not yet estimated. In addition, the Company continues to work with
its customers to identify potential Year 2000 issues with its customers'
products. Many of the Company's key customers are Fortune 500 companies, are
sensitive to Year 2000 issues and are expected to be Year 2000 compliant.
However, the Company continues to survey its customers and monitor their
progress in ensuring Year 2000 compliance. The Company is not actively engaged
in preparing contingency plans in the event that key customers or suppliers fail
to become Year 2000 compliant. However, the Company, in the ordinary course of
business, seeks to expand its customer base to lessen dependence on any one
customer for a significant portion of its revenues, and seeks second sources of
supply for its key products and services where appropriate.
At this time, the Company believes that its most reasonably likely worst
case Year 2000 scenario is that it will be unable to successfully complete the
implementation of its enterprise and manufacturing systems discussed above.
However, the Company has developed contingency plans for this risk and continues
to develop further contingency plans for both mission critical and non-mission
critical systems as it identifies the Year 2000 risks.
Various statements in this discussion of Year 2000 issues are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements include statements of the
Company's expectations, statements with regard to schedules and expected
completion dates and statements regarding expected Year 2000 compliance. These
forward-looking statements are subject to various risk factors which may
materially affect the Company's efforts to achieve Year 2000 compliance. These
risk factors include the inability of the Company to complete the plans and
modifications that it has identified, the wide variety of information systems
and components, both hardware and software, that must be evaluated, the variety,
number and complexity of equipment used in the Company's operations and the
large number of vendors and customers with which the Company interacts. The
Company's assessments of the effects of Year 2000 on the Company are based, in
part, upon information received from third parties and the Company's reasonable
reliance on that information. Therefore, the risk that inaccurate information is
supplied by third parties upon which the Company reasonably relied must be
considered as a risk factor that might affect the
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Company's Year 2000 efforts. The Company is attempting to reduce the risks by
utilizing an organized approach, extensive testing, and allowance of ample
contingency time to address issues identified by tests.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
The Company owns financial instruments that are sensitive to market risks
as part of its investment portfolio. The investment portfolio is used to
preserve the Company's capital until it is required to fund operations,
including the Company's research and development activities. None of these
market-risk sensitive instruments are held for trading purposes. The Company
does not own derivative financial instruments in its investment portfolio. The
investment portfolio contains instruments that are subject to the risk of a
decline in interest rates.
Investment Rate Risk -- The Company's investment portfolio includes debt
instruments that are primarily United Stated government bonds of less than one
year in duration. These bonds are subject to interest rate risk, and could
decline in value if interest rates fluctuate. The Company's investment portfolio
also consists of certain commercial paper which is also subject to interest rate
risk. Due to the short duration and conservative nature of these instruments,
the Company does not believe that it has a material exposure to interest rate
risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The Company's Consolidated Financial Statements and related Independent
Auditors' Report are presented in the following pages.
Independent Auditors' Report
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Operations for the year ended December 31, 1998,
1997 and 1996
Consolidated Statements of Shareholders' Equity for the year ended December
31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the year ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
The information required by this item, with respect to the directors of the
registrant and the filing of reports under Section 16(a) of the Securities
Exchange Act of 1934, is incorporated by reference from the Company's definitive
proxy statement in connection with its Annual Meeting of Shareholders to be held
on May 28, 1999, to be filed with the Commission not later than 120 days after
the close of the fiscal year ended December 31, 1998, in the table under the
captions "Election of Directors" and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934."
ITEM 11. EXECUTIVE COMPENSATION:
The information required by this item is incorporated by reference from the
Company's definitive proxy statement in connection with its Annual Meeting of
Shareholders to be held on May 28, 1999, to be filed with the Commission not
later than 120 days after the close of the fiscal year ended December 31, 1998,
under the caption "Compensation and Other Information Concerning Directors and
Officers."
18
20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The information required by this item is incorporated by reference from the
Company's definitive proxy statement in connection with its Annual Meeting of
Shareholders to be held on May 28, 1999, to be filed with the Commission not
later than 120 days after the close of the fiscal year ended December 31, 1998,
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 Annual Meeting of
Shareholders to be held on May 28, 1999, to be filed with the Commission not
later than 120 days after the close of the fiscal year ended December 31, 1998,
under the caption "Certain Transactions."
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, 1998 and 1997
Consolidated Statements of Operations for the Year Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the Year Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Year Ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules. Consolidated
financial statement schedules have been omitted because the required
information is not present or not present in amounts sufficient to require
submission of the schedule, or because the information required is included
in the consolidated financial statements or the notes thereto.
3(a). The exhibits listed in the Exhibit Index immediately preceding
the Exhibits are filed as a part of this Annual Report on Form 10-K.
3(b). Reports on Form 8-K: No reports on Form 8-K were filed by the
Company during the fiscal quarter ended December 31, 1998.
19
21
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 Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- ---- ----- ----
/s/ JAMES E. DONEGAN Chairman of the Board of March 29, 1999
- --------------------------------------------------- Directors, President, Chief
James E. Donegan Executive Officer, (principal
executive officer) and Director
/s/ FRANK R. DIPIETRO Executive Vice President, Chief March 29, 1999
- --------------------------------------------------- Financial Officer, Treasurer
Frank R. DiPietro (principal financial officer
and accounting officer) and
Clerk
/s/ DANIEL DEROUX Director March 29, 1999
- ---------------------------------------------------
Daniel Deroux
/s/ MANFRED LOEB Director March 29, 1999
- ---------------------------------------------------
Manfred Loeb
/s/ LIONEL H. OLMER Director March 29, 1999
- ---------------------------------------------------
Lionel H. Olmer
/s/ JOHN L. SPRAGUE Director March 29, 1999
- ---------------------------------------------------
John L. Sprague
/s/ DR. STEWARD S. FLASCHEN Director March 29, 1999
- ---------------------------------------------------
Dr. Steward S. Flaschen
/s/ WILLY SANSEN Director March 29, 1999
- ---------------------------------------------------
Dr. Willy Sansen
20
22
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
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).............
21
23
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
10.13 Form of Sales Representative Agreement (filed as Exhibit
10.15 to the Company's Registration Statement on Form S-1,
File No. 333-1328, and incorporated herein by reference)....
10.14 Form of 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).............
10.15 1997 Incentive Stock Option Plan (filed as Appendix A to the
Company's definitive Proxy Statement for the Special Meeting
In Lieu Of Annual Meeting Of Shareholders held May 30,
1997).......................................................
10.16 Promissory Note dated December 4, 1998 by and between the
Company and Timothy J. Dhuyvetter...........................
10.17 Pledge and Security Agreement dated December 4, 1998 by and
between the Company and Timothy J. Dhuyvetter...............
10.18 Promissory Note dated December 14, 1998 by and between the
Company and Frank R. DiPietro...............................
10.19 Pledge and Security Agreement dated December 14, 1998 by and
between the Company and Frank R. DiPietro...................
10.20* License Agreement between Timex Corporation and SIPEX
Corporation dated July 1, 1997 (previously filed as an
exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated 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...
27.1 Financial Data Schedule.....................................
- ---------------
* Confidential treatment as to certain portions has been requested pursuant to
Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended.
22
24
SIPEX CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE
-------
Independent Auditors' Report................................ F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1998 and
1997................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996....................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1998, 1997, and 1996.......... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996....................... F-6
Notes to Consolidated Financial Statements................ F-7-F16
F-1
25
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, 1998 and 1997 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three year period ended December 31, 1998. 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, 1998 and 1997 and the consolidated results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
Boston, Massachusetts
February 12, 1999
F-2
26
SIPEX CORPORATION
CONSOLIDATED BALANCE SHEETS
1998 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 17,809,720 $ 23,886,793
Short-term investment securities.......................... 7,981,581 16,098,556
Accounts receivable, less allowances of $449,000 and
$596,000 at December 31, 1998 and 1997, respectively... 12,861,527 8,693,271
Inventories............................................... 16,682,194 13,988,374
Deferred income taxes -- current.......................... 3,522,660 1,342,999
Prepaid expenses and other current assets................. 1,224,924 499,008
------------ ------------
Total current assets.............................. 60,082,606 64,509,001
Property, plant, and equipment, net......................... 10,305,590 8,345,348
Restricted cash equivalents and securities.................. 24,261,229 --
Deferred income taxes....................................... 4,741,000 --
Other assets................................................ 105,859 127,405
------------ ------------
Total assets...................................... $ 99,496,284 $ 72,981,754
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 7,719 $ 45,118
Accounts payable.......................................... 3,560,634 2,771,244
Accrued expenses.......................................... 3,218,031 2,289,877
------------ ------------
Total current liabilities......................... 6,786,384 5,106,239
Long-term debt.............................................. -- 7,904
------------ ------------
Total liabilities................................. 6,786,384 5,114,143
------------ ------------
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized and no shares issued or outstanding at
December 31, 1998 and 1997............................. -- --
Common stock, $.01 par value, 40,000,000 shares authorized
and 17,979,812 and 17,711,422 shares issued and
outstanding at December 31, 1998 and 1997,
respectively........................................... 179,798 177,114
Additional paid-in capital................................ 102,704,228 97,586,345
Accumulated deficit....................................... (10,228,627) (30,058,981)
Accumulated Other Comprehensive Income.................... 54,501 163,133
------------ ------------
Total shareholders' equity........................ 92,709,900 67,867,611
------------ ------------
Total liabilities and shareholders' equity........ $ 99,496,284 $ 72,981,754
============ ============
See accompanying notes to consolidated financial statements
F-3
27
SIPEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
1998 1997 1996
----------- ----------- -----------
Net sales........................................... $65,556,856 $51,209,737 $37,310,910
Cost of sales....................................... 32,213,107 26,670,273 21,437,878
----------- ----------- -----------
Gross profit.............................. 33,343,749 24,539,464 15,873,032
Operating expenses:
Research and development.......................... 6,716,739 5,448,183 4,724,652
Marketing and selling............................. 6,552,306 5,215,424 4,551,842
General and administrative........................ 3,719,893 3,047,118 2,112,290
Facility exit costs............................... 1,138,000 -- --
----------- ----------- -----------
Total operating expenses.................. 18,126,938 13,710,725 11,388,784
----------- ----------- -----------
Income from operations.............................. 15,216,811 10,828,739 4,484,248
Other income (expense):
Interest income (expense), net.................... 2,262,880 2,012,222 144,430
Other, net........................................ (450,820) (570,757) (197,390)
----------- ----------- -----------
1,812,060 1,441,465 (52,960)
----------- ----------- -----------
Income before income taxes.......................... 17,028,871 12,270,204 4,431,288
Income tax expense (benefit)........................ (2,801,483) (975,000) 154,169
----------- ----------- -----------
Net Income.......................................... $19,830,354 $13,245,204 $ 4,277,119
=========== =========== ===========
Net income per common share -- basic................ $ 1.11 $ 0.76 $ 0.32
=========== =========== ===========
Net Income per common share -- assuming dilution.... $ 1.06 $ 0.71 $ 0.29
=========== =========== ===========
Weighted average common shares
outstanding -- basic.............................. 17,831,451 17,427,068 13,284,026
=========== =========== ===========
Weighted average common shares -- assuming
dilution.......................................... 18,722,018 18,581,062 14,699,912
=========== =========== ===========
See accompanying notes to consolidated financial statements
F-4
28
SIPEX CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK TOTAL
--------------------- ADDITIONAL OTHER SHAREHOLDERS'
NUMBER OF $.01 PAR PAID-IN ACCUMULATED COMPREHENSIVE EQUITY
SHARES VALUE CAPITAL DEFICIT INCOME (DEFICIT)
---------- -------- ------------ ------------ ------------- -------------
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
Comprehensive Income:
Net income............................ -- -- -- 4,277,119 -- 4,277,119
Other comprehensive income:
Foreign 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
========== ======== ============ ============ ========= ===========
Issuance of common stock under
option plans.......................... 407,307 4,073 976,448 -- -- 980,521
Tax effect of exercises of stock
options............................... -- -- 226,000 -- -- 226,000
2:1 split............................... 8,769,916 87,699 (87,699) -- -- --
Comprehensive Income:
Net income............................ -- -- -- 13,245,204 -- 13,245,204
Other comprehensive income:
Foreign currency translation
adjustments....................... -- -- -- -- 6,912 6,912
---------- -------- ------------ ------------ --------- -----------
Balance at December 31, 1997............ 17,711,422 $177,114 $ 97,586,345 $(30,058,981) $ 163,133 $67,867,611
========== ======== ============ ============ ========= ===========
Issuance of common stock under
option plans.......................... 251,091 2,511 1,332,823 -- -- 1,335,334
Issuance of common stock under stock
purchase plan......................... 17,299 173 282,632 -- -- 282,805
Tax effect of exercises of stock
options............................... -- -- 3,502,428 -- -- 3,502,428
Comprehensive Income:
Net income............................ -- -- -- 19,830,354 -- 19,830,354
Other comprehensive income:
Foreign currency translation
adjustments....................... -- -- -- -- (108,632) (108,632)
---------- -------- ------------ ------------ --------- -----------
Balance at December 31, 1998............ 17,979,812 $179,798 $102,704,228 $(10,228,627) $ 54,501 $92,709,900
========== ======== ============ ============ ========= ===========
See accompanying notes to consolidated financial statements
F-5
29
SIPEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------- ------------ ------------
Operating activities:
Net income........................................ $ 19,830,354 $ 13,245,204 $ 4,277,119
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Allowance for receivables...................... 89,133 283,279 8,326
Depreciation and amortization.................. 1,894,568 1,467,706 985,990
Loss on disposal of capital assets............. 717,915 -- --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable... (4,257,389) (4,271,068) 499,383
Increase in inventories...................... (2,693,820) (2,370,709) (4,240,764)
Increase in prepaid expenses................. (725,916) (210,289) (66,308)
Increase in deferred taxes................... (6,920,661) (1,342,999) --
Decrease in other assets..................... 21,546 43,225 57,290
Increase (decrease) in accounts payable...... 789,390 242,500 (1,330,303)
Increase (decrease) in accrued expenses...... 928,154 1,131,936 (250,975)
Increase in restricted cash equivalents and
securities................................ (24,261,229) -- --
------------- ------------ ------------
Net cash (used in) provided by operating
activities.............................. $ (14,587,955) $ 8,218,785 $ (60,242)
------------- ------------ ------------
Investing activities:
Proceeds from maturity of investment securities... 426,397,842 76,500,000 2,962,754
Purchase of investment securities................. (418,280,868) (70,239,564) (25,321,746)
Purchase of property, plant, and equipment........ (4,572,725) (6,505,140) (1,852,166)
------------- ------------ ------------
Net cash used in (provided by) investing
activities.............................. 3,544,250 (244,704) (24,211,158)
------------- ------------ ------------
Financing activities:
Proceeds from issuance of common stock, net....... 5,120,567 982,010 51,042,427
Payments of long-term debt........................ (7,904) -- (11,709,710)
Payment of capital lease and other debt
obligations.................................... (37,399) (179,638) (197,431)
------------- ------------ ------------
Net cash provided by financing
activities.............................. 5,075,264 802,372 39,135,286
------------- ------------ ------------
Effect of foreign currency exchange rate changes on
cash and cash equivalents......................... (108,632) (4,199) (6,697)
------------- ------------ ------------
(Decrease) increase in cash and cash equivalents.... (6,077,073) 8,772,255 14,857,189
Cash and cash equivalents at beginning of period.... 23,886,793 15,114,538 257,349
------------- ------------ ------------
Cash and cash equivalents at end of period.......... $ 17,809,720 $ 23,886,793 $ 15,114,538
============= ============ ============
Supplemental cash flow disclosure:
Cash paid during the period for:
Income taxes................................... $ 394,800 $ 36,800 $ 78,169
Interest....................................... $ 2,935 $ 11,535 $ 427,735
============= ============ ============
Supplemental disclosure of non-cash investing
activities:
Acquisition of assets under capital lease
obligations.................................... $ -- $ 27,508 $ 12,463
============= ============ ============
See accompanying notes to consolidated financial statements
F-6
30
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, 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 sells its products across the analog semiconductor
market and has targeted high-growth sectors that it believes are especially
compatible with its design and process capabilities. The Company's product lines
are networking/data communications consumer electronics, industrial controls,
instrumentation, power management and aerospace and military.
Basis of Presentation
The consolidated financial statements include the accounts of SIPEX
Corporation and all of its wholly owned subsidiaries. All intercompany accounts
and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue from product sales is recognized at the time of shipment. Revenue
from engineering service contracts is recorded as performance or as other
contractually specified milestones are attained. Additionally, the Company
accrues for estimated sales returns upon shipment.
Cash Equivalents and Short-Term Investments
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of 90 days or
less to be cash equivalents. Short-term investments consist of U.S. Government
and municipal bond obligations. The company's investments in debt securities
were classified as held to maturity which means that the Company has the ability
and intent to hold securities until maturity.
Concentration of Credit Risk
Financial instruments of the Company consist of cash, short-term
securities, accounts receivable, accounts payable and capitalized leases. The
carrying amounts of these financial instruments approximate their fair value.
Inventories
Inventories are stated at the lower of cost or market. Costs are determined
using the first-in, first-out method.
F-7
31
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided
by using the straight-line method over their useful lives as follows:
USEFUL LIVES
------------
Machinery and Equipment................................. 2-10 years
Furniture, fixtures and office equipment................ 5-10 years
Leasehold improvements.................................. Lease term
Impairment of Long-lived Assets and Long-lived Assets to be Disposed of
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the asset exceed the fair value of
the asset. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less cost to sell.
Foreign Currency Translation
Foreign currency assets and liabilities are translated into dollars at
current rates, and revenues, costs and expenses are translated at average rates
during each reporting period. Gains or losses resulting from foreign currency
transactions are included in earnings currently, while those resulting from
translation of financial statements are shown as a separate component of other
comprehensive income in the statement of shareholders' equity. 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.
Net Income Per Share
Basic income per share is based upon the weighted average number of common
shares outstanding. Income per share assuming dilution is based upon the
weighted average number of common and common equivalent shares outstanding
assuming dilution. Dilutive potential common shares outstanding at December 31,
1998, 1997 and 1996 were approximately 1,850,000, 1,700,000 and 1,600,000,
respectively.
2. FACILITY EXIT COSTS
In the fourth quarter of 1998, Management of the Company and the Board of
Directors approved a plan to close its current manufacturing facility in
Milpitas, California and its sales office in France. As part of the plan, the
Company will be vacating the current leased facility in Milpitas and moving
operations to a new facility in Milpitas. Total estimated costs of $938,000
associated with the closure of the facility include $220,000 for rent, real
estate taxes, electricity, heat and water expenses for an estimated six month
period after the building is vacated and until it can be sub-leased or sold. The
balance of $718,000 represents a charge to
F-8
32
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
current operations for the write-down to net realizable value of less efficient
and duplicate machinery and equipment not needed in the combined restructured
manufacturing operations. Additionally, the Company's plan includes the closure
of its France sales operation and relocation of these activities to the
Company's new site in Belgium. As a result of this action, the Company recorded
$200,000 of facility exit costs related to severance and other related employee
benefit costs. The Company anticipates that substantially all of the facility
exit costs will be paid in 1999.
3. INVENTORIES
Inventories were as follows:
1998 1997
----------- -----------
Raw materials..................................... $ 7,139,528 $ 6,424,191
Work-in-process................................... 4,995,003 4,236,586
Finished goods.................................... 4,547,663 3,327,597
----------- -----------
$16,682,194 $13,988,374
=========== ===========
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment were as follows:
1998 1997
----------- -----------
Machinery and equipment........................... $33,359,092 $29,470,964
Furniture, fixtures and office equipment.......... 2,490,701 2,351,873
Leasehold improvements............................ 1,886,079 2,274,898
----------- -----------
$37,735,872 $34,097,735
Less accumulated depreciation and amortization.... 27,430,283 25,752,387
----------- -----------
$10,305,590 $ 8,345,348
=========== ===========
5. ACCRUED EXPENSES
Accrued expenses were as follows:
1998 1997
---------- ----------
Accrued compensation and benefits................... $1,434,928 $1,138,680
Accrued commissions................................. 263,376 335,049
Accrued royalties................................... 253,443 419,000
Accrued taxes....................................... 445,651 160,000
Other............................................... 820,633 237,148
---------- ----------
$3,218,031 $2,289,877
========== ==========
F-9
33
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
The Company's long-term debt is summarized as follows:
1998 1997
------ -------
Capital lease obligations................................. $7,719 $53,022
Less Current Portion...................................... 7,719 45,118
------ -------
$ -- $ 7,904
====== =======
Equipment held under capital leases were as follows:
1998 1997
-------- --------
Cost................................................... $760,843 $770,843
Less: Accumulated depreciation........................ 749,806 646,723
-------- --------
$ 11,037 $124,120
======== ========
The following is a schedule of principal payments on capital lease
obligations:
YEAR ENDING
DECEMBER 31,
------------
1999..................................................... $7,719
2000..................................................... --
2001..................................................... --
2002..................................................... --
------
$7,719
======
7. INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 1996,
1997 and 1998 was allocated as follows:
1998 1997 1996
----------- ----------- --------
Income from continuing operations............. $(2,801,482) $ (975,000) $154,169
Shareholders' equity for compensation expense
for tax purposes in excess of amounts
recognized for financial statement
purposes.................................... (3,502,428) (226,000) --
----------- ----------- --------
$(6,303,910) $(1,201,000) $154,169
=========== =========== ========
Total federal, state and foreign income tax expense (benefit), consists of
the following:
1998 1997 1996
--------------------------------------- --------------------------------------- -----------
DEFERRED CURRENT TOTAL DEFERRED CURRENT TOTAL CURRENT
----------- ----------- ----------- ----------- ----------- ----------- -----------
Federal.............. $ (839,114) $ 5,464,719 $ 4,625,606 $(1,342,999) $ 4,162,342 $ 2,819,343 $ 1,762,027
Loss carryforward.... (5,423,325) (2,598,750) (8,022,075) -- (3,887,363) (3,887,363) (1,618,158)
State................ (552,711) 1,092,699 539,988 -- 932,013 932,013 463,411
Loss carryforward.... -- -- -- -- (838,993) (838,993) (453,111)
Foreign.............. -- 55,000 55,000 -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
$(6,815,150) $ 4,013,667 $(2,801,482) $(1,342,999) $ 367,999 $ (975,000) $ 154,169
=========== =========== =========== =========== =========== =========== ===========
1996
-----------
TOTAL
-----------
Federal.............. $ 1,762,027
Loss carryforward.... (1,618,158)
State................ 463,411
Loss carryforward.... (453,111)
Foreign.............. --
-----------
$ 154,169
===========
F-10
34
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The actual tax expense (benefit) differs from the "expected" tax expense as
follows:
1998 1997 1996
----------- ----------- -----------
Computed "expected" tax expense (benefit).... $ 5,960,150 $ 4,294,571 $ 1,506,638
State income tax, net of federal income tax
benefit and utilization of loss
carryforward............................... 893,582 60,463 6,798
Alternative minimum tax...................... -- -- 19,304
Non-deductible expenses...................... 221,823 125,100 22,377
Non-deductible foreign losses................ (18,310) (10,594) 116,666
Change in valuation allowance for loss
carryforward............................... (1,650,934) (1,325,999) --
Utilization of net operating losses.......... (8,022,075) (3,887,363) (1,618,158)
Utilization of R&D credits................... (185,718) (230,273) --
Other........................................ -- (905) 100,544
----------- ----------- -----------
$(2,801,482) $ (975,000) $ 154,169
=========== =========== ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1997 are presented below:
1998 1997
----------- ------------
Current Deferred Tax Assets
Inventories, primarily non-deductible
reserves.................................... $ 661,757 $ 409,141
Accounts receivable, primarily allowances...... 180,851 245,337
Accrued expenses, principally provisions not
currently deductible........................ 441,861 182,142
Net operating loss carryforwards............... 4,181,234 --
Noncurrent Deferred Tax Assets
Net operating loss carryforwards............... 4,372,600 12,000,949
Tax credit carryforwards, including research
credits..................................... 1,534,150 1,127,455
Fixed assets, due to differences in
depreciation................................ 1,450,355 1,285,328
----------- ------------
Total deferred tax assets before valuation
allowance................................... $12,822,808 $ 15,250,352
Valuation allowance............................ (4,559,148) (13,907,353)
----------- ------------
Net deferred taxes assets.............. $ 8,263,660 $ 1,342,999
=========== ============
At December 31, 1998, the Company has U.S. net operating loss carryforwards
of approximately $24.4 million, which are available to offset future Federal
taxable income. These losses expire during the years 2005 through 2010. As of
December 31, 1998, utilization of these net operating loss carryforwards is
subject to an annual limitation of approximately $7,400,000 as a result of such
an ownership change which occurred on September 30, 1996.
The valuation allowance decreased by $9.3 million and $3.6 million during
the years ended December 31, 1998 and 1997, respectively. The Company believes
that it is more likely than not that a portion of the deferred tax assets at
December 31, 1998 will be realized in the future. The valuation allowance as of
December 31, 1998, includes the tax effect of approximately ($3.7) million
attributable to employee stock plans, the benefit of which will be recorded as
increase in paid-in capital when realized. The Company also has tax credit
carryforwards for Federal income tax purposes of approximately $1.5 million
which are available to reduce Federal income taxes. The credits expire during
the years 2001 through 2012.
F-11
35
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. 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. Effective August 18, 1997, the
Company approved a 2 for 1 split of its issued and outstanding common stock. All
shares and per share data presented in the accompanying consolidated financial
statements have been restated to reflect the change in number of authorized and
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.
The Company currently maintains six stock option plans. The 1991
Non-Statutory, 1993 Incentive Stock Option Plan, 1994 Stock Option and Incentive
Plan, 1996 Stock Option Plan, 1996 Non-Employee Director Stock Option Plan and
the 1997 Stock Option Plan have had 744,308, 265,818, 1,187,900, 1,200,000,
300,000 and 1,200,000 shares reserved for issuance, respectively. All plans
allow for options which vest ratably over five years from the date of grant and
expire ten years from the date of grant. Options for 2,024,047 shares are
outstanding as of December 31, 1998 under these plans.
In January 1996, the Board Of Directors approved the 1996 Employee Stock
Purchase Plan, pursuant to which the Company is authorized to issue up to
500,000 shares of common stock to its full-time employees, nearly all of whom
are eligible to participate. Under the terms of the Plan, employees can choose
each year to have up to 10 percent of their annual base earnings withheld to
purchase the Company's common stock. The purchase price of stock is 85 percent
of the lower of its beginning-of-period or end-of-period market price. Under the
Plan, the Company sold 34,359 shares to employees since inception of the plan.
The Company applies APB Opinion 25 and related interpretations in
accounting for these plans. Accordingly, no compensation cost has been
recognized. Had compensation cost been determined pursuant to SFAS No. 123, the
Company's net income and net income per share would have been adjusted to the
pro forma amounts indicated in the table below. The effects on pro forma net
income obtained from applying SFAS No. 123 may not be representative of the
effects on reported net income for future years.
1998 1997 1996
----------- ----------- ----------
Net income................................ As Reported $19,830,354 $13,245,204 $4,277,119
Pro forma 16,801,275 11,948,012 3,583,713
Net income per share -- basic............. As Reported 1.11 0.76 0.32
Pro forma 0.94 0.69 0.27
Net income per share -- assuming As Reported
dilution................................ 1.06 0.71 0.29
Pro forma 0.90 0.64 0.24
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 1998, 1997 and 1996 respectively; no dividend
yield; expected volatility of 77 percent for 1998 and 45 percent for 1997 and
1996, and expected option lives of six years. The risk free interest rate
assumed was 4.95 percent for 1998, 5.65 percent for 1997 and 7.0 percent for
1996. The weighted-average fair value of options granted during 1998, 1997 and
1996 was $16.88, $9.54, and $6.00, respectively.
F-12
36
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock option plans as of December
31, 1998, 1997 and 1996, and changes during the years then ended, is presented
below:
1998 1997 1996
----------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
--------- -------- --------- -------- --------- --------
Outstanding at beginning of
year...................... 1,535,100 $10.19 1,922,475 $0.21 1,625,410 $ 0.23
Granted..................... 917,915 24.00 639,260 18.19 880,304 10.09
Exercised................... (251,091) 5.32 (622,414) 1.33 (476,372) 0.20
Forfeited................... (177,877) 16.14 (404,211) 10.30 (106,867) 1.58
--------- ------ --------- ----- --------- ------
Outstanding at end of
year...................... 2,024,047 16.15 1,535,110 10.19 1,922,475 4.65
========= ====== ========= ===== ========= ======
Options exercisable at
year-end.................. 252,202 7.11 116,006 2.71 425,192 0.21
========= ====== ========= ===== ========= ======
The following table summarizes information about the Company's stock
options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- -------------------
NUMBER NUMBER
OUTSTANDING WEIGHTED AVERAGE EXERCISABLE
AT DECEMBER 31, REMAINING AT DECEMBER 31,
EXERCISE PRICES 1998 CONTRACTUAL LIFE 1998
- --------------- --------------- ----------------- -------------------
$ 0.20 303,294 5.94 127,612
4.75 60,000 7.07 12,000
5.50 1,250 1.32 1,250
7.19 68,000 7.58 8,000
7.375 64,800 7.54 2,400
7.75 12,000 7.64 --
8.56 10,000 7.66 4,000
12.4375 47,782 8.34 5,766
12.44 126,982 7.91 32,800
15.00 78,930 8.41 9,786
18.25 81,145 9.57 905
19.125 150,000 9.65 --
19.50 192,025 9.35 --
21.00 38,500 8.58 --
21.25 36,000 8.55 4,000
21.50 40,000 9.30 2,000
23.625 10,000 8.58 2,000
23.63 38,500 8.58 5,798
24.00 1,800 8.60 360
25.00 130,000 9.03 --
F-13
37
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- -------------------
NUMBER NUMBER
OUTSTANDING WEIGHTED AVERAGE EXERCISABLE
AT DECEMBER 31, REMAINING AT DECEMBER 31,
EXERCISE PRICES 1998 CONTRACTUAL LIFE 1998
- --------------- --------------- ----------------- -------------------
27.25 110,511 9.82 --
28.75 1,000 9.84 --
30.125 5,000 9.86 --
30.375 10,000 9.84 --
31.375 3,000 9.90 --
33.00 42,235 8.83 8,447
34.563 36,965 9.19 --
35.188 106,224 9.13 --
--------- -------
2,024,047 252,202
========= =======
9. 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 1998, 1997 and 1996,
Company contributions to the plan were $230,000, $201,000 and $173,000,
respectively.
10. COMMITMENTS AND CONTINGENCIES
The Company leases facilities under operating leases expiring through 2008.
Rent expense was approximately $674,000, $619,000 and $498,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
The following is a schedule of future minimum lease commitments under
operating leases with terms in excess of one year at December 31, 1998:
CALENDAR YEAR
- -------------
1999.................................................... $ 2,033,000
2000.................................................... 3,062,000
2001.................................................... 2,834,000
2002.................................................... 2,612,000
2003.................................................... 2,508,000
2004.................................................... 1,484,000
2005.................................................... 464,000
2006.................................................... 464,000
2007.................................................... 464,000
2008.................................................... 39,000
-----------
$15,964,000
===========
In March, 1998 the Company entered into a five-year operating lease
agreement, including a one-year construction period, with one five year renewal
option for the construction and lease of a wafer manufacturing facility,
including all necessary machinery and equipment ("the facility"). The total cost
of the facility is
F-14
38
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
limited to $40,000,000. The lease provides for a substantial residual value
guarantee by the Company at the end of the initial lease term and includes a
purchase option equal to the total cost of the facility. As part of the lease
agreement, the Company has pledged $35 million of government debt securities and
other government backed securities as security under the lease. The lease
provides for monthly lease payments which are estimated to be $170,000. At the
end of the lease term, the Company is obligated to purchase the facility or
remarket it for the benefit of the lessor. The Company expects the fair market
value of the facility, subject to the purchase option or sale to a third party,
to substantially reduce or eliminate the Company's payment under the residual
value guarantee. The residual value guarantee relative to the assets to be
leased will approximate 85% of their total cost.
The Company received a Notice of Potential Liability from the Environmental
Protection Agency ("EPA") in June 1993 concerning a landfill identified as a
Superfund Site. The Company has denied any liability and believes the ultimate
outcome of this matter will not have a material impact on the consolidated
financial statements.
Also, the Company is party to various claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of management, all
such matters are without merit or are of such kind, or involve such amounts,
that unfavorable disposition would not have a material effect on the
consolidated financial position of the Company.
11. EXPORT SALES AND MAJOR CUSTOMERS
During 1998, the Company adopted Financial Accounting Standards Board
Statement of Financial Standards No. 131 ("SFAS 131"), "Disclosures About
Segments of an Enterprise and Related Information." The Company's operations are
classified into one reportable segment. Substantially all of the Company's
operations and long-lived assets reside in the United States although the
Company has sales operations in Germany and Japan.
Revenues by geographic area are summarized as follows:
1998 1997 1996
----------- ----------- -----------
United States..................... $41,581,000 $31,649,000 $25,183,000
Europe............................ 13,042,000 9,475,000 7,925,000
Far East.......................... 5,107,000 5,143,000 2,417,000
Japan............................. 5,827,000 4,943,000 1,786,000
----------- ----------- -----------
$65,557,000 $51,210,000 $37,311,000
=========== =========== ===========
For the years ended December 31, 1998, 1997 and 1996, no individual
customer represented more that 10% of the Company's sales.
12. QUARTERLY DATA
Following is a summary of quarterly operation results and share data.
Quarterly information shown below does not vary from amounts reported on any
Form 10-Q previously filed by the Company.
Net income per share amounts are based on the weighted average common and
common equivalent shares outstanding during the quarter. Therefore, the total of
net income per share for the four quarters may differ slightly from net income
per share for the year.
F-15
39
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTERLY RESULTS AND STOCK MARKET DATA
DEC. 31, 1998 SEPT. 26, 1998 JUNE 27, 1998 MARCH 28, 1998
------------- -------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA*)
FISCAL 1998
Net sales................................... $16,972 $16,211 $16,190 $16,184
Gross profit................................ 8,724 8,235 8,208 8,178
Net income.................................. 5,964 4,559 4,507 4,800
Net income per share -- assuming dilution... 0.32 0.25 0.24 0.26
Stock price range per share:
High...................................... 37.438 23.875 35.750 38.188
Low....................................... 18.625 17.250 18.188 25.250
DEC. 31, 1997 SEPT. 27, 1997 JUNE 28, 1997 MARCH 29, 1997
------------- -------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA*)
FISCAL 1997
Net sales................................... $14,928 $13,297 $12,005 $10,980
Gross profit................................ 7,426 6,462 5,623 5,029
Net income.................................. 5,962 3,094 2,373 1,816
Net income per share -- assuming dilution... $ 0.32 $ 0.17 $ 0.13 $ 0.10
Stock price range per share:
High...................................... 37.000 34.500 18.500 18.625
Low....................................... 23.500 17.375 11.000 13.875
- ---------------
* All share data reflects 2 for 1 stock split effected through a 100% dividend
on August 18, 1997.
F-16