<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-14639
3,000,000 SHARES
[LOGO]
COMMON STOCK
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Of the 3,000,000 shares of Common Stock offered hereby, 1,000,000 shares
are being sold by SIPEX Corporation ("Sipex" or the "Company") and 2,000,000
shares are being sold by the Selling Shareholders. See "Principal and Selling
Shareholders." The Company will not receive any proceeds from the sale of shares
by the Selling Shareholders. The Company's Common Stock is quoted on the Nasdaq
National Market under the symbol "SIPX." On October 30, 1996, the last reported
sale price of the Company's Common Stock was $26.50 per share.
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS COMPANY(1) SHAREHOLDERS
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<S> <C> <C> <C> <C>
Per Share............... $24.00 $1.23 $22.77 $22.77
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Total(2)................ $72,000,000 $3,690,000 $22,770,000 $45,540,000
=================================================================================================
(1) Before deducting expenses of the offering estimated at $450,000, all of
which are payable by the Company.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of Common Stock solely to cover
over-allotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares to the public at the Price to
Public shown above. If the option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $82,800,000, $4,243,500 and $33,016,500, respectively. See
"Underwriting."
</TABLE>
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The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about November 5,
1996.
ALEX. BROWN & SONS
INCORPORATED
UBS SECURITIES
ADAMS, HARKNESS & HILL, INC.
THE DATE OF THIS PROSPECTUS IS OCTOBER 31, 1996.
<PAGE> 2
[PICTURES AND CAPTIONS]
[Graphics depicting different Sipex product applications and applicable Sipex
products as applied to file servers, frame relay switches, printers, CSU/DSUs,
PC/Workstations and Fax/Modems.]
Sipex and the Sipex logo are trademarks of the Company. Indiglo is a
registered trademark of Indiglo Corporation, a subsidiary of Timex Corporation.
This Prospectus also includes trade names, trademarks and registered trademarks
of companies other than Sipex.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND OTHER SELLING
GROUP MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE
WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE> 3
PROSPECTUS SUMMARY
This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that such statements are only expectations
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus, including the matters set forth under the
caption "Risk Factors," which could cause actual results to differ materially
from those indicated in such forward-looking statements. The following summary
is qualified in its entirety by the more detailed information, including "Risk
Factors," and Financial Statements and Notes thereto, appearing elsewhere in
this Prospectus.
THE COMPANY
Sipex designs, manufactures, markets and sells innovative, high
performance, high value-added analog integrated circuits. The analog
semiconductor market has been reported by industry sources to represent
approximately $16.6 billion in sales in 1995, an increase of approximately 23%
over 1994. Industry sources project growth rates for this market of 13% to 17%
over the next five years, to greater than $30 billion in sales in the year 2000.
The growth in this market is being driven by the increasing demand for
microprocessor-based electronic equipment including telecommunications and data
communications networks such as LANs and WANs, personal computers, consumer
electronics and scientific instrumentation. While the Company designs,
manufactures, markets and sells products across these broad, high-growth
markets, it has currently targeted three high-growth sectors that it believes
are especially compatible with its design and process capabilities -- data
communications and telecommunications, battery powered/portable products and
industrial controls/instrumentation.
The Company's strategy is to develop long-term partnering relationships
with leaders in targeted market sectors. This enables the Company to identify
applications and to provide innovative, cost-effective solutions to meet
customers' needs over the life cycles of their products. Having identified and
met the specific needs of market leaders with innovative analog solutions, the
Company is then able to migrate these solutions into standard products that meet
the needs of a wide variety of market participants. Sipex serves the broad
analog signal processing market and its target market sectors with three primary
product lines -- interface circuits, low power application-specific analog
circuits and data converters. The Company utilizes multiple process technologies
to manufacture these circuits.
In addition to and complementing its strategy of teaming with market
leaders, the Company offers a broad base of manufacturing process technologies
through its own foundry and third-party semiconductor foundries. This enables
the Company to design products for its customers utilizing the optimum process
technology for each application. By combining creative design techniques with a
broad base of process technologies, the Company can develop innovative, high
performance analog circuits that support its customers' requirements. The
Company has also focused on leveraging its specialized dielectrically isolated
BiCMOS technology, which the Company believes is particularly well-suited to the
low power, low voltage requirements of battery powered/portable products.
In 1990, the Company began a transition from a supplier of analog hybrid
products and integrated circuits for military applications to a supplier of
analog integrated circuits for commercial applications. The Company's net sales
of commercial products has grown from $9.4 million in 1991 to $24.0 million in
1995 and accounted for $24.2 million in the nine months ended September 28,
1996, representing 34.6%, 80.1% and 89.0% of total net sales, respectively. The
Company believes that the percentage of its net sales represented by sales of
commercial products will continue to increase in the future.
The Company sells its products to OEM customers either directly through its
direct sales force or with the assistance of a network of independent sales
representatives, or indirectly through independent distributors. The Company's
products have been incorporated into a broad range of electronic systems and
products by more than 2,400 customers worldwide. In 1995 and the nine months
ended September 28, 1996, international sales represented 35.4% and 34.2%,
respectively, of the Company's net sales. The Company's customers, none of which
accounted for more than ten percent of net sales in 1995 or in the nine months
ended September 28, 1996, include Digital Equipment Corporation, Hewlett-Packard
Co.,
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Motorola, Inc., Philips N.V., Siemens Corporation and Silicon Graphics Inc. in
the data communications/telecommunications markets; Federal Express Corp., Texas
Instruments Incorporated, Timex Corporation and Dassault Aviation S.A. in the
low power analog application areas; and Andover Controls Corp., LTX Corporation
and Honeywell Inc. in the industrial controls market.
Sipex was incorporated in Massachusetts in May 1965 under the name Hybrid
Systems Inc. In 1987, the Company changed its name to SIPEX Corporation. The
Company's executive offices are located at 22 Linnell Circle, Billerica,
Massachusetts 01821, and its telephone number is (508) 667-8700.
THE OFFERING
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<S> <C>
Common Stock offered by the Company.............. 1,000,000 shares
Common Stock offered by the Selling
Shareholders................................... 2,000,000 shares
Common Stock to be outstanding after the
offering....................................... 7,980,846 shares(1)
Use of proceeds.................................. For working capital and other general
corporate purposes.
Nasdaq National Market symbol.................... SIPX
</TABLE>
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(1) Based upon the number of shares of Common Stock outstanding as of September
28, 1996. Excludes 867,009 shares of Common Stock issuable upon the exercise
of options outstanding on that date at a weighted average exercise price of
$3.49 per share, of which options to purchase 233,831 shares were then
exercisable. See "Management -- Stock Plans."
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<TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, -----------------------------
--------------------------------------------------- SEPTEMBER 30, SEPTEMBER 28,
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales:
Commercial products........... $ 9,414 $11,101 $11,899 $13,958 $24,008 $16,922 $24,180
Products with military
applications................ 17,763 17,530 15,634 8,865 5,971 4,991 2,989
------- ------- ------- ------- ------- ------- -------
Total....................... 27,177 28,631 27,533 22,823 29,979 21,913 27,169
Gross profit.................... 1,130 4,667 5,148 4,592 10,900 7,859 11,333
Income (loss) from operations... (7,290) (3,502) (3,340) (4,340) (970) (1,473) 3,017
Net income (loss)............... (7,998) (4,136) (3,721) (4,709) (1,802) (2,034) 2,606
Net income (loss) per common and
common equivalent share(1).... $ (1.69) $ (0.87) $ (0.78) $ (0.99) $ (0.38) $ (0.43) $ 0.38
Weighted average common stock
and common stock equivalents
outstanding................... 4,746 4,758 4,758 4,758 4,760 4,754 6,862
<CAPTION>
SEPTEMBER 28, 1996
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ACTUAL AS ADJUSTED(2)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital....................................................... $15,909 38,229
Total assets.......................................................... 23,731 46,051
Long-term debt, net of current portion................................ 78 78
Shareholders' equity.................................................. 18,997 41,317
<FN>
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(1) Calculated on the basis described in Note 1 of Notes to Consolidated
Financial Statements.
(2) Adjusted to reflect the sale by the Company of 1,000,000 shares of Common
Stock offered hereby at the public offering price of $24.00 per share and
the application of the estimated net proceeds therefrom at the closing of
this offering after deducting underwriting discounts and commissions and
estimated offering expenses. See "Use of Proceeds."
</TABLE>
Except as otherwise noted, all information contained in this Prospectus (i)
assumes no exercise of the Underwriters' over-allotment option; and (ii)
reflects a four into one reverse stock split of the Company's Common Stock
effective on February 12, 1996. See "Description of Capital Stock,"
"Underwriting" and Note 7 of Notes to Consolidated Financial Statements.
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RISK FACTORS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the risk factors set forth below and elsewhere in this Prospectus. In addition
to the other information in this Prospectus, the following factors should be
carefully considered in evaluating the Company and its business before
purchasing the shares of Common Stock offered hereby.
History of Operating Losses; Accumulated Deficit. The Company has not been
profitable in any of its last five fiscal years. As of September 28, 1996, the
Company had an accumulated deficit of $45.0 million. For 1994 and 1995, the
Company incurred net losses of approximately $4.7 million and $1.8 million,
respectively, although the Company was profitable in the third and fourth
quarters of 1995 and each of the first three quarters of 1996. There can be no
assurance that the Company will achieve or maintain profitability in the future.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Consolidated Financial Statements.
Potential Fluctuations in Operating Results. The Company's quarterly and
annual operating results are affected by a wide variety of factors that could
materially and adversely affect net sales and profitability from period to
period, including competitive pressures on selling prices; the timing and
cancellation of customer orders; availability of foundry capacity and raw
materials; fluctuations in yields; changes in product mix; the Company's ability
to introduce new products and technologies on a timely basis; introduction of
products and technologies by the Company's competitors; market acceptance of the
Company's and its customers' products; the level of orders received which can be
shipped in a quarter; the timing of investments in research and development,
including tooling expenses associated with product development, process
improvements and production; and the cyclical nature of the semiconductor
industry. Sudden shortages of raw materials or production capacity constraints
can lead producers to allocate available supplies or capacity to customers with
resources greater than those of the Company, which could impair the Company's
ability to meet its production obligations. Historically, average selling prices
in the semiconductor industry have decreased over the life of a product, and as
a result, the average selling prices of the Company's products may be subject to
pricing pressures in the future. The Company's business is characterized by
short-term orders and shipment schedules, and the Company generally permits
orders to be canceled or rescheduled without significant penalty to the
customer. 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. From time to time, in response to anticipated long lead times to
obtain inventory and materials from its foundries, the Company may order in
advance of anticipated customer demand, which might result in excess inventory
levels if expected orders fail to materialize or other factors render the
customer's product less marketable. 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Backlog."
Historically, the Company has also experienced quarterly fluctuations in
net sales and gross profit, principally arising from the amount and timing of
orders of products for military applications. These sales generally resulted in
lower gross margins than sales of commercial products. The Company anticipates a
continuing decline in sales of products for military applications as part of its
transition from a supplier of products with military applications to a supplier
of commercial products. Should sales of these products decline more rapidly than
the Company anticipates in the near future, such decline could have the effect
of causing further fluctuations in quarterly or annual operating results. See
"Risk Factors -- Declining Sales for Military Applications" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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Dependence on Outside Third-Party Foundries. The Company's bipolar
complementary metal oxide semiconductor ("BiCMOS") and complementary metal oxide
semiconductor ("CMOS") products, which collectively represented approximately
26%, 39% and 44% of the Company's net sales in 1994, 1995 and the nine months
ended September 28, 1996, respectively, are manufactured using fully processed
semiconductor wafers supplied primarily by United Microelectronics Corporation
in Taiwan, and Orbit Semiconductor, Inc. and Calogic Corporation, each of which
are located in California. The Company believes that it will remain dependent on
third-party foundries in the future. There are certain significant risks
associated with the Company's reliance on outside foundries, including the lack
of assured fully processed 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. In addition, the manufacture of integrated circuits is a highly complex
and technologically demanding process. Although the Company has undertaken to
diversify its sources of fully processed semiconductor wafer supply and works
closely with its outside foundries to minimize the likelihood of reduced
manufacturing yields, the Company's third-party foundries have from time to time
experienced lower than anticipated manufacturing yields, particularly in
connection with the introduction of new products and the installation and
start-up of new process technologies. There can be no assurance that the
Company's outside foundries will not experience lower than expected
manufacturing yields in the future, which could materially and adversely affect
the Company's business, financial condition and operating results.
The Company purchases fully processed semiconductor wafers from outside
foundries pursuant to purchase orders and does not have a guaranteed level of
production capacity at any of its foundries, although the Company has not
experienced any capacity constraints to date. The Company provides the foundries
with rolling forecasts of its production requirements; however, the ability of
each foundry to provide wafers to the Company is limited by the foundry's
available capacity. Therefore, the Company's foundry suppliers could choose to
prioritize capacity for other customers or uses or reduce or eliminate
deliveries to the Company on short notice. Accordingly, there is no assurance
that the Company's third-party foundries will allocate sufficient capacity to
satisfy the Company's requirements. The Company has qualified, or is in the
process of qualifying, a secondary source for each of its outside foundries.
Notwithstanding the availability of secondary sources to the Company, any sudden
reduction or elimination of any primary source or sources of fully processed
wafers could result in a material delay in the shipment of the Company's
products. There can be no assurance that material disruptions in supply will not
occur in the future. In the event of any such disruption, if the Company's
alternative manufacturing sources were unable quickly to produce fully processed
wafers with acceptable manufacturing yields, the Company's business, financial
condition and operating results would be materially and adversely affected. See
"Business -- Manufacturing."
Manufacturing Risks. The Company is subject to significant manufacturing
risks. The Company utilizes its own wafer manufacturing facility to produce
products utilizing the Company's dielectric isolation complementary bipolar
processes. Approximately 27% and 25% of the Company's net sales came from such
products in 1995 and the nine months ended September 28, 1996, respectively. The
Company's business and results of operations would be materially and adversely
affected if it were to experience any significant disruption in the operation of
its facilities. 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 adversely affected
by minute impurities in the environment or other problems that occur in the
complex manufacturing process. Many of these problems are difficult to diagnose
and time-consuming or expensive to remedy. From time to time, 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 the Company and its third-party
foundries will not experience yield variances or 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
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Company's business, financial condition and results of operations. The Company
is also subject to the risks associated with the shortage of raw materials such
as unprocessed wafers and packages used in the manufacture or assembly of the
Company's products. See "Business -- Manufacturing."
Dependence on New Products; Risk of Product Development Delays. The
Company's success depends 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.
The development of these new devices is highly complex and from time to time the
Company has experienced delays in completing the development of new products.
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. The Company's success also depends upon its ability to accurately
specify and certify the conformance of its products to applicable standards and
to develop its products in accordance with customer requirements. The Company's
research and development efforts are directed primarily at designing new
products and technologies. Currently, the Company's major development programs
include expanding its proprietary product offerings of electroluminescent
drivers and programmable dual and multi-mode transceivers, as well as
simultaneously sampling analog-to-digital converters. There can be no assurance
that the Company will be able to adjust to changing market conditions as quickly
and cost-effectively as necessary to compete successfully. Furthermore, there
can be no assurance that the Company will be able to introduce new products in a
timely and cost-effective manner or in sufficient quantities to meet customer
demand or that such products will achieve market acceptance.
The Company's new products are generally incorporated into a customer's
products or systems at the design stage. However, customer decisions to use the
Company's products, which can often require significant expenditures by the
Company without any assurance of success, often precede the generation of volume
sales, if any, by a year or more. Moreover, the value of any design win will
largely depend upon the commercial success of the customer's product and on the
extent to which the design of the customer's products accommodates components
manufactured by the Company's competitors. There can be no assurance that the
Company will continue to achieve design wins, that the products manufactured by
the Company's customers will be introduced in a timely manner or that such
systems will achieve market acceptance. The Company's or its customers' failure
to develop and introduce new products successfully and in a timely manner could
materially and adversely affect the Company's business, financial condition and
operating results in future periods.
Patents and Intellectual Property Claims. The Company's success depends in
part on its ability to obtain patents and licenses and to preserve other
intellectual property rights covering its products and development and testing
tools. To that end, the Company has obtained certain domestic patents and
intends to continue to seek patents on its inventions when appropriate. The
process of seeking patent protection can be time consuming and expensive and
there can be no assurance that patents will issue from currently pending or
future applications or that the Company's existing patents or any new patents
that may be issued will be sufficient in scope or strength to provide meaningful
protection or any commercial advantage to the Company. There can be no assurance
that foreign intellectual property laws will protect the Company's intellectual
property rights. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate the Company's products or
design around any patents issued to the Company. The Company may be subject to
or may initiate interference proceedings in the patent office, which can demand
significant financial and management resources. Although the Company is not
aware of any pending or threatened patent litigation, from time to time, the
Company may be notified that it is infringing certain patents and other
intellectual property rights of others and the Company has been subject to such
claims in the past. Litigation, which could result in substantial cost to and
diversion of resources of the Company, may be necessary to enforce patents or
other intellectual property rights of the Company or to defend the Company
against claimed infringement of the rights of others. 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. No
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<PAGE> 9
assurance can be given that licenses will be obtainable on acceptable terms, or
at all, or that damages for infringement will not be assessed or that litigation
will not occur. The failure to obtain necessary licenses or other rights or
litigation arising out of any such claims could have a material adverse effect
on the Company's business, financial condition and operating results. See
"Business -- Patents and Intellectual Property."
Competition. 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 also competes indirectly with the in-house
design staffs of certain of its customers, which often provide alternative
solutions to individual analog systems requirements. In addition, although
foreign companies have not traditionally focused on the high performance analog
market, a number of foreign companies have the financial and other resources to
participate successfully in these markets, and there can be no assurance that
they will not become formidable competitors in the future. The Company believes
that its ability to compete successfully depends on a number of factors,
including the 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. There can be no assurance that the Company will be
able to compete successfully in the future. See "Business -- Competition."
International Sales. In 1993, 1994, 1995 and the nine months ended
September 28, 1996, international sales accounted for approximately 24%, 26%,
35% and 34%, respectively, of the Company's net sales. The Company anticipates
that international sales will continue to account for a significant percentage
of its revenues. A significant portion of the Company's net sales will therefore
be subject to risks associated with international sales, 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. Although the Company's sales to date
have been principally denominated in United States dollars, the value of the
United States dollar in relation to foreign currencies may also adversely affect
the Company's sales to international customers. To the extent that the Company
expands its international operations or changes its pricing practices to
denominate prices in foreign currencies, the Company will be exposed to
increased risks of currency 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. There can be no assurance that any hedging techniques
implemented by the Company would be successful or that the Company's business,
financial condition or results of operations would not be materially and
adversely affected by exchange rate fluctuations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Consolidated
Financial Statements.
Declining Sales for Military Applications. In 1994, 1995 and the nine
months ended September 28, 1996, sales of products for military applications
accounted for approximately 39%, 20% and 11% of the Company's net sales,
respectively. The Company is not currently designing new products for the
military market as the Company continues to focus its resources on its target
commercial markets, and the Company expects sales of products for military
applications to continue to decline in the future. If the decline in sales of
these products is more rapid than the Company anticipates, then such decline
could have a material adverse effect on the Company's business, financial
condition and results of operations in the near future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Markets."
The Semiconductor Industry. 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
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substantial period-to-period fluctuations in future operating results due to
general semiconductor industry conditions and overall economic conditions.
Dependence on Key Personnel. The Company's success depends to a
significant extent upon the continued service of its executive officers and
other key management and technical personnel, and on its ability to continue to
attract, retain and motivate qualified personnel, such as experienced analog
circuit designers. The competition for such employees is intense. Although the
Company has entered into employment agreements with each of its executive
officers, which contain limited covenants not to compete with Sipex, and has
also entered into agreements with its other key personnel containing limited
covenants not to compete with Sipex, there can be no assurance that the Company
will be able to retain its executive officers and other key personnel. The loss
of the services of one or more of the Company's design engineers, executive
officers or other key personnel or the Company's inability to recruit
replacements for such personnel or to otherwise attract, retain and motivate
qualified personnel could have a material adverse effect on the Company's
business, financial condition and operating results. See "Business -- Employees"
and "Management."
Management of Growth. Due to the level of technical and marketing
expertise necessary to support its existing and new customers, the Company must
attract highly qualified and well-trained personnel. There may be only a limited
number of persons with the requisite skills to serve in these positions and it
may become increasingly difficult for the Company to hire such personnel. Future
expansion by the Company may also significantly strain the Company's management,
manufacturing, financial and other resources. There can be no assurance that the
Company's systems, procedures, controls and existing space will be adequate to
support the Company's operations. Failure to manage the Company's growth
properly could have a material adverse effect on the Company's business,
financial condition and operating results.
Rapid Technological Change. The markets for the Company's products are
characterized by rapid technological change and frequent new product
introductions. There can be no assurance that the Company's analog products or
the process technologies utilized by the Company will not become obsolete. In
addition, as digital integrated circuits have become faster and their processing
capacity has expanded, digital circuits have increasingly been used to perform
functions in electronic systems that were previously performed with analog
technologies. There can be no assurance that further advances in digital
processing power will not eventually supplant analog technologies in those new
applications, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
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.
The Company and approximately sixty other potentially responsible parties
("PRPs") received a Notice of Potential Liability from the United States
Environmental Protection Agency in June 1993 concerning the Shaffer Landfill
Operable Unit of the Iron Horse Park Superfund Site (the "Site") located in
Billerica, Massachusetts. In January 1995, federal and Massachusetts
governmental authorities filed suit
10
<PAGE> 11
against ten of the PRPs, alleging responsibility for remediation and other
costs. The ten PRPs named in the lawsuit, together with a number of other PRPs
not named, but not currently including the Company, have been engaged in
settlement discussions with such authorities. If the PRP group and the
governmental agencies reach a negotiated settlement regarding the clean-up of
the Site, there is no assurance that the Company would join such a settlement.
The Company believes that it has strong defenses to liability; however, there
can be no assurance that the Company will not be pursued with respect to alleged
liability for contamination of the Site. The Company anticipates that it would
vigorously defend against any such claims. There can be no assurance, however,
that any such defenses of any such claims would be successful. See
"Business -- Manufacturing."
Benefits of the Offering to Existing Shareholders; Control by Tractebel
S.A. Tractebel S.A., together with Telfin S.A., its wholly-owned subsidiary,
beneficially owns 3,928,986 shares of Common Stock or 56.3% of the Common Stock
outstanding prior to this offering. Tractebel S.A. and Telfin S.A. are selling
an aggregate of 2,000,000 shares of Common Stock in this offering. Upon the
closing of this offering, Tractebel S.A. will beneficially own approximately
24.2% of the outstanding Common Stock (22.9% if the Underwriters' over-allotment
option is exercised in full). Accordingly, Tractebel S.A. will have voting power
to influence the outcome of matters (including the election of a majority of the
Board of Directors, and any merger, consolidation or sale of all or
substantially all of the Company's assets) submitted to the shareholders for
approval and also will have influence over the management and affairs of the
Company. As a result of such influence, certain transactions may be difficult to
effect without the approval of Tractebel S.A. These transactions include proxy
contests, mergers involving the Company, tender offers, open-market purchase
programs or other purchases of Common Stock that could give shareholders of the
Company the opportunity to realize a premium over the then-prevailing market
price for their shares of Common Stock. See "Principal and Selling Shareholders"
and "Description of Capital Stock -- Massachusetts Law and Certain Provisions of
the Company's Restated Articles of Organization and Restated By-Laws;
Anti-Takeover Effects."
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 electronics 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. See "Price
Range of Common Stock" and "Underwriting."
Dilution. The public offering price is substantially higher than the book
value per share of the currently outstanding Common Stock. Investors purchasing
shares of Common Stock in this offering will therefore suffer immediate and
substantial dilution of $18.08 per share in the net tangible book value of the
Common Stock from the public offering price of $24.00 per share. See "Dilution."
Anti-Takeover Effect of Certain Charter and Restated By-Law
Provisions. The Company's Restated Articles of Organization and Restated
By-Laws contain provisions that may make it more difficult for a third-party to
acquire, or may discourage acquisition bids for, the Company. These provisions
could limit the price that certain investors might be willing to pay in the
future for shares of the Company's Common Stock. In addition, shares of the
Company's Preferred Stock may be issued in the future without further
stockholder approval and upon such terms and conditions, and having such rights,
privileges and preferences, as the Board of Directors may determine. The rights
of the holders of Common Stock will be subject to, and may be materially and
adversely affected by, the rights of any holders of Preferred Stock that may be
issued in the future, including preferential rights with respect to voting,
payment of dividends or distributions upon liquidation. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third-party to acquire, or discouraging a
third-party from acquiring, a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue any shares of Preferred
Stock. Finally, the Company's Restated By-Laws contain an election by the
Company not to be
11
<PAGE> 12
governed by the Massachusetts Control Share Acquisition statute. In general,
this statute provides that any stockholder of a corporation subject to this
statute who acquires beneficial ownership of 20% or more of the outstanding
voting stock of a corporation may not vote such stock unless the holders of a
majority of the capital stock (excluding the interested shares) of a corporation
so authorize. If the Board of Directors were to amend the Company's Restated
By-Laws to permit the Company to be governed by this statute, the price that
certain investors may be willing to pay for the Company's Common Stock may be
limited. See "Description of Capital Stock -- Massachusetts Law and Certain
Provisions of the Company's Restated Articles of Organization and Restated
By-Laws; Anti-Takeover Effects."
Shares Eligible for Future Sale. Sales of a substantial number of shares
of Common Stock in the public market following the offering (pursuant to Rule
144 under the Securities Act of 1933, as amended (the "Securities Act") or
otherwise), as well as the issuance of shares upon exercise of employee stock
options, could adversely affect the prevailing market price of the Common Stock
and impair the Company's ability to raise additional capital through the sale of
equity securities. The Company and all of its executive officers and directors,
who will hold in the aggregate 21,500 shares of Common Stock and exercisable
options to purchase 181,495 shares of Common Stock after the offering, have
agreed that they will not, without the prior written consent of Alex. Brown &
Sons Incorporated, offer, sell, contract to sell, transfer or otherwise dispose
of, directly or indirectly, any shares of the Common Stock, or any securities
convertible into, or exercisable or exchangeable for, Common Stock or warrants
or other rights to purchase Common Stock, prior to the expiration of 90 days
from the date of the consummation of the offering, except, with respect to the
Company, (i) shares of Common Stock issued pursuant to the exercise of
outstanding options and (ii) options granted to its employees, officers and
directors under its existing employee stock option plans so long as none of such
options become exercisable during said 90 day period. Tractebel S.A. will hold
1,928,986 shares of Common Stock after the offering, and has agreed that it will
not, without the prior written consent of Alex. Brown & Sons Incorporated,
offer, sell, contract to sell, transfer or otherwise dispose of, directly or
indirectly, any shares of Common Stock, or any securities convertible into, or
exercisable or exchangeable for, Common Stock or warrants or other rights to
purchase Common Stock, prior to the expiration of 90 days from the date of the
consummation of this offering. See "Shares Eligible for Future Sale."
12
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered by the Company hereby are estimated to be $22,320,000
($32,566,500 if the Underwriters' over-allotment option is exercised in full)
after deducting underwriting discounts and commissions and estimated offering
expenses. The Company will not receive any proceeds from the sale of shares of
Common Stock by the Selling Shareholders. See "Principal and Selling
Shareholders."
The Company intends to use the net proceeds of this offering primarily for
working capital and other general corporate purposes, including potential
acquisitions. The Company may in the future use a portion of the net proceeds to
make acquisitions of businesses, products or technologies intended to broaden
the Company's current product offerings, although there can be no assurance that
any such acquisition will be made. The Company has no present plans, agreements
or commitments and is not currently engaged in any negotiations with respect to
any such transaction. The amounts actually expended by the Company for working
capital purposes will vary significantly depending upon a number of factors,
including future revenue growth, the amount of cash generated by the Company's
operations and the progress of the Company's product development efforts.
Pending the uses described above, the net proceeds will be invested in
short-term, interest-bearing, investment-grade instruments.
PRICE RANGE OF COMMON STOCK
<TABLE>
The Common Stock of the Company has been included for quotation on the
Nasdaq National Market under the symbol "SIPX" since the Company's initial
public offering of Common Stock on April 2, 1996. Prior to that time, there was
no public market for the Common Stock. The following tables set forth the high
and low closing prices for the Common Stock for the periods indicated as
reported by the Nasdaq National Market:
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996:
Second Quarter (commencing April 2, 1996)............................ $21.50 $10.75
Third Quarter........................................................ $24.25 $13.50
Fourth Quarter (commencing October 1, 1996 through October 30,
1996)............................................................... $27.50 $20.75
</TABLE>
On October 30, 1996, the last reported sale price was $26.50 per share. As
of October 1, 1996, there were 107 holders of record of the Company's Common
Stock. The Company believes that there are more than 300 beneficial owners of
the Company's Common Stock.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common 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.
13
<PAGE> 14
CAPITALIZATION
<TABLE>
The following table sets forth as of September 28, 1996 (i) the actual
capitalization of the Company, and (ii) the actual capitalization of the Company
as adjusted to reflect the issuance and sale by the Company of the 1,000,000
shares of Common Stock offered hereby after deducting underwriting discounts and
commissions and estimated offering expenses, and receipt of the net proceeds
therefrom. See "Use of Proceeds." This table should be read in conjunction with
the Company's Consolidated Financial Statements and the Notes thereto included
elsewhere in this Prospectus.
<CAPTION>
SEPTEMBER 28, 1996
---------------------------
ACTUAL AS ADJUSTED
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt................................. $ 201 $ 201
======== ========
Long-term debt, less current portion.............................. 78 78
Shareholders' equity:
Preferred Stock, $.01 par value, 1,000,000 shares authorized, no
shares issued or outstanding................................. -- --
Common Stock, $.01 par value, 40,000,000 shares authorized,
6,980,846 shares issued and outstanding (actual); 7,980,846
shares issued and outstanding (as adjusted)(1)............... 70 80
Additional paid-in capital........................................ 63,734 86,044
Accumulated deficit............................................... (44,975) (44,975)
Cumulative translation adjustment................................. 168 168
-------- --------
Total shareholders' equity...................................... 18,997 41,317
-------- --------
Total capitalization.................................... $ 19,075 $ 41,395
======== ========
<FN>
- ---------------
(1) Excludes 867,009 shares of Common Stock issuable upon exercise of options
outstanding as of September 28, 1996 at a weighted average exercise price of
$3.49 per share, of which options to purchase 233,831 shares were then
exercisable. See "Management -- Stock Plans" and Note 7 of Notes to
Consolidated Financial Statements.
</TABLE>
14
<PAGE> 15
DILUTION
<TABLE>
The net tangible book value of the Company's Common Stock as of September
28, 1996 was $19.0 million, or $2.72 per share. Net tangible book value per
share represents the amount of the Company's shareholders' equity, less
intangible assets, divided by 6,980,846 shares of Common Stock deemed
outstanding as of September 28, 1996. Net tangible book value dilution per share
represents the difference between the amount per share paid by purchasers of
shares of Common Stock in the offering made hereby and the pro forma net
tangible book value per share of Common Stock immediately after completion of
this offering. After giving effect to the sale of 1,000,000 shares of Common
Stock offered by the Company hereby and the application of the estimated net
proceeds therefrom, the pro forma net tangible book value of the Company as of
September 28, 1996 would have been $41.3 million or $5.92 per share. This
represents an immediate increase in pro forma net tangible book value of $3.20
per share to existing shareholders and an immediate dilution in net tangible
book value of $18.08 per share to purchasers of Common Stock in this offering,
as illustrated in the following table:
<S> <C> <C>
Public offering price per share.................................... $24.00
Net tangible book value per share at September 28, 1996.......... $2.72
Increase per share attributable to new investors................. 3.20
-----
Pro forma net tangible book value per share after this offering.... 5.92
------
Net tangible book value dilution per share to new investors........ $18.08
======
</TABLE>
As of September 28, 1996, there were 867,009 shares of Common Stock
issuable upon the exercise of outstanding options at a weighted average exercise
price of $3.49 per share, of which options to purchase 233,831 shares were then
exercisable. To the extent these options are exercised, there will be further
dilution to new investors. See "Management -- Stock Plans" and Note 7 of Notes
to Consolidated Financial Statements.
15
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The Consolidated Balance
Sheet Data at December 31, 1995 and the Consolidated Statement of Operations
Data for the year ended December 31, 1995 have been derived from the
Consolidated Financial Statements for such year, which have been audited by KPMG
Peat Marwick LLP, independent auditors. The Consolidated Balance Sheet Data as
of December 31, 1991, 1992 and 1993 and the Consolidated Statements of
Operations Data for each of the two years in the period ended December 31, 1992
are derived from the Company's Consolidated Financial Statements for such years,
which are not included herein, all of which have been audited by Ernst & Young
LLP, independent auditors. The Consolidated Statements of Operations Data for
the year ended December 31, 1993 are derived from the Consolidated Statements of
Operations for such year which has been audited by Ernst & Young LLP,
independent auditors, whose report appears elsewhere herein. The Consolidated
Balance Sheet Data at December 31, 1994 and Consolidated Statements of
Operations Data for the year then ended are derived from the Consolidated
Financial Statements of the Company which are included elsewhere herein and have
been audited by Ernst & Young LLP, independent auditors. Ernst & Young LLP's
report on the Consolidated Financial Statements for the year ended December 31,
1994, which appears elsewhere herein, contains an explanatory paragraph
regarding the Company's ability to continue as a going concern as described in
Note 1 of Notes to Consolidated Financial Statements. The Consolidated Balance
Sheet Data as of September 28, 1996 and the Consolidated Statement of Operations
Data for each of the nine months ended September 30, 1995 and September 28, 1996
have been derived from unaudited Consolidated Financial Statements included
elsewhere in this Prospectus and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations for the periods presented.
Results for the nine months ended September 28, 1996 are not necessarily
indicative of the results to be expected for the full year.
16
<PAGE> 17
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
YEAR ENDED DECEMBER 31, SEPTEMBER
--------------------------------------------------- 30, SEPEMBER 28,
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales:
Commercial products......... $ 9,414 $11,101 $11,899 $13,958 $24,008 $ 16,922 $ 24,180
Products with military
applications.............. 17,763.. 17,530 15,634 8,865 5,971 4,991 2,989
------- ------- ------- ------- ------- -------- --------
Total..................... 27,177 28,631 27,533 22,823 29,979 21,913 27,169
------- ------- ------- ------- ------- -------- --------
Cost of sales.................... 26,047 23,964 22,385 18,231 19,079 14,054 15,836
------- ------- ------- ------- ------- -------- --------
Gross profit................ 1,130 4,667 5,148 4,592 10,900 7,859 11,333
Operating expenses:
Research and development.... 1,865 2,077 2,357 2,960 4,399 3,316 3,439
Marketing and selling....... 4,657 4,139 4,174 4,078 4,245 3,194 3,349
General and
administrative............ 1,898 1,953 1,957 1,894 1,906 1,502 1,528
Write-off of intangible
assets.................... -- -- -- -- 1,320 1,320 --
------- ------- ------- ------- ------- -------- --------
Total operating
expenses............... 8,420 8,169 8,488 8,932 11,870 9,332 8,316
------- ------- ------- ------- ------- -------- --------
Income (loss) from operations.... (7,290) (3,502) (3,340) (4,340) (970) (1,473) 3,017
Other expense, net............... (563) (760) (369) (462) (805) (544) (327)
------- ------- ------- ------- ------- -------- --------
Income (loss) before income
taxes.......................... (7,853) (4,262) (3,709) (4,802) (1,775) (2,017) 2,690
Income tax expense (benefit)..... 145 (126) 12 (93) 27 17 84
------- ------- ------- ------- ------- -------- --------
Net income (loss)........... $(7,998) $(4,136) $(3,721) $(4,709) $(1,802) $ (2,034) $ 2,606
======= ======= ======= ======= ======= ======== ========
Net income (loss) per common and
common equivalent share(1)..... $ (1.69) $ (0.87) $ (0.78) $ (0.99) $ (0.38) $ (0.43) $ 0.38
======= ======= ======= ======= ======= ======== ========
Weighted average common stock and
common stock equivalents
outstanding.................... 4,746 4,758 4,758 4,758 4,760 4,754 6,862
======= ======= ======= ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
--------------------------------------------------- 28,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................. $12,033 $ 9,908 $ 7,115 $ 5,942 $ 7,307 $ 15,909
Total assets..................... 23,558 19,771 14,590 13,360 15,870 23,731
Long-term debt, net of current
portion........................ -- -- 161 213 220 78
Long-term debt to affiliates..... 12,500 12,400 6,600 9,400 11,710 --
Total shareholders' equity
(deficit)...................... 7,640 3,382 4,726 (67) (1,884) 18,997
</TABLE>
- ---------------
(1) Calculated on the basis described in Note 1 of Notes to Consolidated
Financial Statements.
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides an analysis of the Company's financial
condition and results of operations and should be read in conjunction with the
"Selected Consolidated Financial Data" and the Notes thereto and the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus. This discussion contains trend analysis and other forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth below and
elsewhere in this Prospectus, particularly under the caption "Risk Factors."
OVERVIEW
The Company was organized and commenced operations in 1965. Between 1965
and 1988, the Company developed, manufactured and marketed standard and
semi-custom analog-to-digital and digital-to-analog products utilizing hybrid
technology, primarily for the military market. Hybrid products are multi-chip
circuits consisting of two or more integrated circuits and other components
connected together on a substrate in a single package. In 1988, the Company
acquired substantially all of the assets of Barvon BiCMOS Technology, Inc.,
which designed and marketed custom and standard monolithic products for the
commercial markets. In 1989, the Company ceased designing new standard hybrid
products, although the Company continues to serve the military markets with
existing hybrid products. The Company expects revenue from the military and
hybrid products to continue to decline in the future.
During 1990, in response to declining orders of products with military
applications, the Company developed a strategy to transition from a supplier of
products with military applications to a supplier of commercial products. To
implement this strategy, from 1990 through 1995 the Company increased its
research and development expenses in order to develop new commercial products.
The Company also realigned its marketing and selling expenses during this period
by increasing staff and promotional expenses as management focused efforts on
the marketing and sales of the Company's commercial products while decreasing
certain sales efforts relating to products with military applications. From 1990
through 1994, the Company incurred substantial losses as it continued to invest
in new products for commercial applications and sales of products with military
applications declined more rapidly than the Company anticipated. The Company
believes that the percentage of its net sales represented by sales of commercial
products will continue to increase in the future. The tables below present the
Company's net sales of commercial products and products with military
applications and net sales of such products as a percentage of total net sales
for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------------------
--------------------------------------------------- SEPTEMBER 30, SEPTEMBER 28,
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales:
Commercial products................. $ 9,414 $11,101 $11,899 $13,958 $24,008 $16,922 $24,180
Products with military
applications...................... 17,763 17,530 15,634 8,865 5,971 4,991 2,989
------- ------- ------- ------- ------- ------- -------
Total......................... $27,177 $28,631 $27,533 $22,823 $29,979 $21,913 $27,169
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------------------
--------------------------------------------------- SEPTEMBER 30, SEPTEMBER 28,
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Percentage of Net Sales:
Commercial products................. 34.6% 38.8% 43.2% 61.2% 80.1% 77.2% 89.0%
Products with military
applications...................... 65.4 61.2 56.8 38.8 19.9 22.8 11.0
----- ----- ----- ----- ----- ----- -----
Total......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== ===== =====
</TABLE>
18
<PAGE> 19
RESULTS OF OPERATIONS
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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
YEAR ENDED DECEMBER 31, SEPTEMBER
------------------------- 30, SEPTEMBER 28,
1993 1994 1995 1995 1996
----- ----- ----- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................... 81.3 79.9 63.6 64.1 58.3
----- ----- ----- ----- -----
Gross profit....................... 18.7 20.1 36.4 35.9 41.7
Operating expenses:
Research and development......... 8.6 13.0 14.7 15.1 12.7
Marketing and selling............ 15.2 17.9 14.2 14.6 12.3
General and administrative....... 7.1 8.3 6.3 6.8 5.6
Write-off of intangible assets... -- -- 4.4 6.1 --
----- ----- ----- ----- -----
Total operating expenses........... 30.9 39.2 39.6 42.6 30.6
----- ----- ----- ----- -----
Income (loss) from operations...... (12.2) (19.1) (3.2) (6.7) 11.1
Other expense, net................. (1.3) (2.0) (2.7) (2.5) (1.2)
----- ----- ----- ----- -----
Income (loss) before income
taxes............................ (13.5) (21.1) (5.9) (9.2) 9.9
Income tax expense (benefit)....... 0.1 (0.4) 0.1 0.1 0.3
----- ----- ----- ----- -----
Net income (loss).................. (13.6)% (20.7)% (6.0)% (9.3)% 9.6%
===== ===== ===== ===== =====
</TABLE>
Nine Months Ended September 28, 1996 compared to Nine Months Ended September
30, 1995
Net Sales. The Company derives its revenues principally from product
sales. Net sales increased 24.0% to $27.2 million in the nine months ended
September 28, 1996 from $21.9 million in the nine months ended September 30,
1995. The increase in net sales was due primarily to higher unit sales resulting
from increased market acceptance of the Company's proprietary standard and
application specific products both domestically and internationally.
Gross Profit. The Company's cost of sales consists primarily of costs
associated with the manufacture and delivery of the Company's products from its
production facilities, as well as the Company's sub-contract wafer fab and
assembly contractors. Gross profit as a percentage of net sales, or gross
margin, increased to 41.7% in the nine months ended September 28, 1996 from
35.9% for the nine months ended September 30, 1995. The increase in gross profit
resulted primarily from the absorption of certain fixed costs over the increased
sales volume and from increased market acceptance of the Company's proprietary
standard and application specific products.
Research and Development. Research and development expenses consist
primarily of salaries and benefits of employees involved in product development
and fees for product development services provided by consultants. Research and
development expenses increased 3.7% to $3.4 million in the nine months ended
September 28, 1996 from $3.3 million in the nine months ended September 30, 1995
and decreased as a percentage of net sales in the nine months ended September
28, 1996 to 12.7% from 15.1% for the nine months ended September 30, 1995. The
increase in these expenses was due to salary and other expenses relating to the
hiring of additional engineering personnel, outside consulting fees, and
additional mask set expense. The Company expects research and development
expenses to increase in absolute terms in the near future.
Marketing and Selling. Marketing and selling expenses consist principally
of salaries, commissions, travel expenses of direct sales and marketing
personnel and costs associated with marketing and advertising programs.
Marketing and selling expenses increased 4.9% to $3.3 million in the nine months
ended September 28, 1996 from $3.2 million in the nine months ended September
30, 1995 and decreased as a percentage of net sales to 12.3% in the nine months
ended September 28, 1996 from 14.6% for the
19
<PAGE> 20
nine months ended September 30, 1995. The increase in absolute terms was
primarily due to higher costs associated with commissions, marketing and
advertising programs.
General and Administrative. General and administrative expenses consist
primarily of personnel costs for administration, finance, human resource and
general management, including legal and auditing expenses. General and
administrative expenses remained essentially constant at $1.5 million in the
nine months ended September 28, 1996 as compared to the nine months ended
September 30, 1995 and decreased as a percentage of net sales to 5.6% in the
nine months ended September 28, 1996 from 6.8% for the nine months ended
September 30, 1995.
Write-off of Intangible Assets. As a result of the acquisition of certain
businesses involved in the development and design of custom and standard
products with military applications, the Company had intangible assets of $1.4
million as of December 31, 1994 which were being amortized on a straight line
basis over ten years. In 1995, the Company wrote-off the unamortized balance of
these intangible assets as a result of the Company's increased focus on
commercial products and review of actual and expected revenues and cash flows
from specific military products related to the acquired technology.
Other Expense, Net. Other expense, net, consists primarily of interest on
outstanding subordinated indebtedness to affiliates and borrowings under the
Company's bank credit facility. The decrease in the nine months ended September
28, 1996 to $327,000 from $544,000 for the nine months ended September 30, 1995
was due primarily to the retirement of the Company's revolving line of credit
and subordinated notes to affiliates, and interest income earned on the
remaining proceeds from the Company's April 1996 initial public offering.
Income Tax Expense. The Company recorded income tax expense of $84,000 for
the nine months ended September 28, 1996, an effective rate of 3.1%. This amount
differed from the statutory rate of 34.0% due to the Company's partial
utilization of its net operating loss carryforwards.
Year Ended December 31, 1995 compared to Year Ended December 31, 1994
Net Sales. Net sales increased 31.4% to $30.0 million in 1995 from $22.8
million in 1994. The increase in net sales was principally due to the growing
acceptance of the Company's proprietary interface and low power commercial
products. Commercial product sales increased 72.0% to $24.0 million in 1995
compared to $14.0 million in 1994, while sales of products with military
applications decreased 32.6% to $6.0 million in 1995 compared to $8.9 million in
1994.
Gross Profit. Gross profit as a percentage of net sales increased to 36.4%
in 1995 from 20.1% in 1994. The increase in gross profit resulted primarily from
an increase in higher margin sales of commercial products, in particular
proprietary products, higher volume within the Company's wafer fab facility and
lower production costs associated with off-shore assembly.
Research and Development. Research and development expenses increased
48.6% to $4.4 million in 1995 from $3.0 million in 1994 and increased as a
percentage of net sales to 14.7% in 1995 from 13.0% in 1994. The increase in
research and development expenses resulted primarily from approximately $1.0
million in additional salary and benefit expenses related to employment of
additional staff and from approximately $400,000 of additional expenses related
to engineering prototyping and pre-production activities undertaken in
connection with the development of new proprietary commercial products,
including dual- and multi-protocol interface products.
Marketing and Selling. Marketing and selling expenses increased 4.1% to
$4.2 million in 1995 from $4.1 million in 1994, but decreased as a percentage of
net sales to 14.2% in 1995 from 17.9% in 1994. The increase in expenses related
to the employment of additional direct sales and marketing personnel were offset
by a reduction in international expenses relating to a consolidation of
subsidiaries and increased selling through distributors.
General and Administrative. General and administrative expenses remained
constant at $1.9 million in 1995 and decreased as a percentage of net sales to
6.3% in 1995 from 8.3% in 1994. Increased costs associated with recruitment of
personnel and enhancement of management information systems were offset by
reductions in amortization resulting from the Company's write-off of intangible
assets.
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<PAGE> 21
Write-off of Intangible Assets. As a result of the acquisition of certain
businesses involved in the development and design of custom and standard
products with military applications, the Company had intangible assets of $1.4
million as of December 31, 1994 which were being amortized on a straight line
basis over ten years. In 1995, the Company wrote-off the unamortized balance of
these intangible assets as a result of the Company's increased focus on
commercial products and review of actual and expected revenues and cash flows
from specific military products related to the acquired technology.
Other Expense, Net. Other expense, net, increased to $805,000 in 1995 from
$462,000 in 1994. The increase in 1995 was primarily due to increases in amounts
of subordinated indebtedness to affiliates outstanding and increased borrowings
under the bank credit facility.
Year Ended December 31, 1994 compared to Year Ended December 31, 1993
Net Sales. Net sales decreased 17.1% to $22.8 million in 1994 from $27.5
million in 1993. This decrease was primarily attributable to the reduction in
revenue from sales of products with military applications as the Company
continued its transition to become a supplier of commercial products. Commercial
product revenue increased 17.3% to $14.0 million in 1994 from $11.9 million in
1993, while sales of products with military applications decreased 43.3% to $8.9
million in 1994 from $15.6 million in 1993.
Gross Profit. Gross profit as a percentage of net sales increased to 20.1%
in 1994 from 18.7% in 1993. The increase in gross profit resulted primarily from
a decrease in lower margin sales of products with military applications and an
increase in higher margin sales of proprietary commercial products.
Research and Development. Research and development expenses increased
25.6% to $3.0 million in 1994 from $2.4 million in 1993 and increased as a
percentage of net sales to 13.0% in 1994 from 8.6% in 1993. This increase
resulted primarily from approximately $400,000 of additional salary and benefit
expenses related to increased staffing and from approximately $200,000 of
additional expenses related to engineering prototyping and pre-production
activities undertaken in connection with the development of new proprietary
commercial products, including dual- and multi-protocol interface products.
Marketing and Selling. Marketing and selling expenses decreased 2.3% to
$4.1 million in 1994 from $4.2 million in 1993 and increased as a percentage of
net sales to 17.9% in 1994 from 15.2% in 1993. The reduction in absolute terms
reflects management's decision to contain marketing and selling expenses in 1994
as a result of anticipated lower sales during the transition from sales of
products with military applications to sales of commercial products.
General and Administrative. General and administrative expenses decreased
3.2% to $1.9 million in 1994 from $2.0 million in 1993, but increased as a
percentage of net sales to 8.3% in 1994 from 7.1% in 1993. The reduction in
absolute terms reflects management's decision to implement reductions in
personnel in 1994.
Other Expense, Net. Other expense, net, increased to $462,000 in 1994 from
$369,000 in 1993. The increase in 1994 was primarily due to higher interest
expense resulting from increases in amounts of subordinated indebtedness to
affiliates outstanding and increased borrowings under the bank credit facility.
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<PAGE> 22
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited quarterly results of
operations of the Company for each of the last two quarters of 1994, the four
quarters of 1995 and the first three quarters of 1996. The Company believes that
this information has been prepared on the same basis as the audited Consolidated
Financial Statements and that all necessary adjustments, consisting only of
normal recurring adjustments, have been included in the amounts stated below to
present fairly the selected quarterly information when read in conjunction with
the audited Consolidated Financial Statements and the Notes thereto included
elsewhere in this Prospectus. The quarterly operating results are not
necessarily indicative of future results of operations. See "Risk
Factors -- Potential Fluctuations in Operating Results."
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------
OCT. 1, DEC. 31, APR. 1, JULY 1, SEP. 30, DEC. 31, MAR. 30, JUN. 29, SEPT. 28,
1994 1994 1995 1995 1995 1995 1996 1996 1996
------- -------- ------- ------- -------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales....................... $ 4,682 $7,095 $6,294 $ 7,737 $7,882 $8,066 $8,523 $9,117 $ 9,529
Cost of sales................... 4,189 4,696 4,126 4,945 4,983 5,025 5,162 5,313 5,360
------- ------- ------ ------ ------- ------ ------ ------ ------
Gross profit.................. 493 2,399 2,168 2,792 2,899 3,041 3,361 3,804 4,169
Operating expenses:
Research and development...... 731 862 1,184 1,118 1,014 1,083 1,018 1,136 1,285
Marketing and selling......... 989 1,086 1,070 1,032 1,092 1,051 1,111 1,121 1,116
General and administrative.... 464 454 565 494 442 405 483 512 534
Write-off of intangible
assets...................... -- -- -- 1,320 -- -- -- -- --
------- ------- ------ ------ ------- ------ ------ ------ ------
Total operating expenses.... 2,184 2,402 2,819 3,964 2,548 2,539 2,612 2,769 2,935
------- ------- ------ ------ ------- ------ ------ ------ ------
Income (loss) from operations... (1,691) (3) (651 ) (1,172) 351 502 749 1,035 1,234
Other expense, net.............. (125) (114) (152 ) (163) (229) (261) (251) (79) 1
------- ------- ------ ------ ------- ------ ------ ------ ------
Income (loss) before income
taxes......................... (1,816) (117) (803 ) (1,335) 122 241 498 956 1,235
Income tax expense (benefit).... (36) (2) 5 5 7 10 16 33 35
------- ------- ------ ------ ------- ------ ------ ------ ------
Net income (loss)........... $(1,780) $ (115) $ (808 ) $(1,340) $ 115 $ 231 $ 482 $ 923 $ 1,200
======= ======= ====== ====== ======= ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------------
OCT. 1, DEC. 31, APR. 1, JULY 1, SEP. 30, DEC. 31, MAR. 30, JUN. 29, SEPT. 28,
1994 1994 1995 1995 1995 1995 1996 1996 1996
------- -------- ------- ------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PERCENTAGE OF NET SALES:
Net sales...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................. 89.5 66.2 65.6 63.9 63.2 62.3 60.6 58.3 56.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit................. 10.5 33.8 34.4 36.1 36.8 37.7 39.4 41.7 43.8
Operating expenses:
Research and development..... 15.6 12.1 18.8 14.5 12.9 13.4 11.9 12.5 13.5
Marketing and selling........ 21.1 15.3 17.0 13.3 13.8 13.1 13.0 12.3 11.7
General and administrative... 9.9 6.4 8.9 6.4 5.6 5.0 5.7 5.6 5.6
Write-off of intangible
assets..................... -- -- -- 17.1 -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses... 46.6 33.8 44.7 51.3 32.3 31.5 30.6 30.4 30.8
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations................... (36.1) 0.0 (10.3) (15.2) 4.5 6.2 8.8 11.3 13.0
Other expense, net............. (2.7) (1.6) (2.4) (2.1) (2.9) (3.2) (2.9) (0.8) 0.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income
taxes........................ (38.8) (1.6) (12.7) (17.3) 1.5 3.0 5.9 10.5 13.0
Income tax expense (benefit)... (0.8) 0.0 0.1 0.0 0.1 0.1 0.2 0.4 0.4
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss).......... (38.0)% (1.6)% (12.8)% (17.3)% 1.4% 2.9% 5.7% 10.1% 12.6%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Increases in net sales during the six quarters ended September 28, 1996
primarily reflect sales of new proprietary commercial products and product
enhancements. Net sales increased in the quarter ended December 31, 1994 as
compared to the previous quarter primarily as a result of increased sales of
interface, low power analog and data converter products. Sales of products with
military applications also increased during the quarter ended December 31, 1994
as customers placed final orders for certain of the Company's
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<PAGE> 23
products. Gross profit increased in the quarter ended December 31, 1994 as
compared to the previous quarter as the Company sold more higher margin
commercial products and increased prices for products with military
applications. Net sales decreased in the quarter ended April 1, 1995 as compared
to the previous quarter primarily due to lower sales of the Company's products
with military applications.
Research and development expenses increased in absolute terms and as a
percentage of net sales in the quarter ended April 1, 1995 as compared to the
previous quarter as a result of expenses associated with new product engineering
wafers, mask sets and additional staffing. In the quarter ended July 1, 1995,
the Company wrote-off the unamortized balance of intangible assets associated
with the acquisition of certain businesses involved in the development and
design of custom and standard products with military applications. The Company
wrote-off this amount as a result of its increased focus on commercial products
and review of actual and expected revenues and cash flows from specific military
products related to the acquired technology.
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. 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. Historically, the Company has also experienced quarterly
fluctuations in net sales and gross profit, principally arising from the amount
and timing of orders of products for military applications. These sales
generally resulted in lower gross margins than sales of commercial products. The
Company anticipates a continuing decline in sales of products for military
applications as part of its transition from a supplier of products with military
applications to a supplier of commercial products. Should sales of these
products decline more rapidly than the Company anticipates in the near future,
such decline could have the effect of causing further fluctuations in quarterly
or annual operating results. 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. See "Risk
Factors -- Potential Fluctuations in Operating Results" and "-- Declining Sales
for Military Applications."
LIQUIDITY AND CAPITAL RESOURCES
Since 1991, the Company has financed its operations and met its capital
requirements primarily through cash flow from operations, loans from affiliates
of Tractebel S.A. and a $7.5 million Revolving Credit Agreement with Generale
Bank, which is an affiliate of Sipex by virtue of common ownership. As of
September 28, 1996, the Company had cash and cash equivalents of $3.7 million.
On April 8, 1996, the Company received $19.1 million in gross proceeds from its
initial public offering before deducting expenses of the offering estimated at
$800,000. A portion of such proceeds was applied to pay $7.5 million in
outstanding borrowings to Generale Bank and $4.8 million of indebtedness to
affiliates. The Company subsequently terminated its revolving credit facility,
and is evaluating replacement bank credit facilities.
Cash used in operating activities was $2.2 million, $893,000 and $1.8
million in 1994, 1995 and the nine months ended September 28, 1996,
respectively, while cash of $1.3 million was provided by operating activities in
1993. In 1995 and 1994, the use consisted primarily of net operating losses in
support of research and development costs associated with its commercial
products and sales and marketing expenses, and in the nine months ended
September 28, 1996, the use consisted primarily of increased inventories.
Depreciation and amortization expenses totaled approximately $761,000 in the
nine
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<PAGE> 24
months ended September 28, 1996, approximately $2.3 million in 1995 and $1.4
million in 1994. Accounts receivable increased approximately $49,000 in the nine
months ended September 28, 1996, and increased approximately $1.3 million and
$325,000 in 1995 and 1994, respectively. In addition, inventories increased
approximately $4.4 million in the nine months ended September 28, 1996 and $2.0
million in 1995 in support of increased net sales and decreased approximately
$580,000 in 1994.
Cash used in investing activities for property, plant and equipment was
$373,000, $444,000 and $1.2 million in 1993, 1994 and 1995, respectively and
$1.2 million for the nine months ended September 28, 1996. The Company spent
$234,000, $233,000 and $252,000 in 1993, 1994 and 1995, respectively to acquire
assets from capital lease obligations. These capital expenditures totaled
approximately $607,000, $676,000 and $1.5 million during 1993, 1994 and 1995.
Cash provided by financing activities was $2.7 million and $2.2 million in
1994 and 1995, respectively, and $6.4 million in the nine months ended September
28, 1996 while cash of $1.1 million was used in financing activities in 1993. In
1994 and 1995, cash provided by financing activities was primarily the result of
proceeds from long-term debt and the issuance of subordinated notes to
affiliates. In the nine months ended September 28, 1996, cash provided by
financing activities was primarily the result of proceeds from the Company's
April 1996 initial public offering.
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $42.0 million for federal income tax purposes expiring in the
years 2000 to 2010. In September 1996, a "change in ownership" of the Company
occurred which will result in an annual limitation on the use of its net
operating loss carryforwards pursuant to the "change in ownership" provisions of
Section 382 of the Internal Revenue Code. The Company currently anticipates that
this limitation will not materially impact its utilization of its net operating
loss carryforwards through the year ending December 31, 1997.
The Company believes that cash generated from operations, its current cash
balances and the net proceeds to the Company from this offering will fund
necessary capital expenditures and provide adequate working capital for at least
the next 18 months.
New Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 123, "Accounting for Stock-Based Compensation," which
established financial accounting and reporting standards for stock-based
employee compensation plans. Companies are encouraged, rather than required, to
adopt a new method that accounts for stock compensation awards based on their
fair value using an option pricing model. Companies that do not adopt this new
method will be required to make pro forma footnote disclosures of net income as
if the fair value-based method of accounting required by SFAS No. 123 had been
applied. The Company adopted SFAS No. 123 beginning in fiscal year 1996.
Adoption of this pronouncement did not have a material impact on the Company's
financial position or results of operations because the Company intends to make
pro forma footnote disclosures in its financial statements as of and for the
year ending December 31, 1996 instead of adopting the new accounting method.
24
<PAGE> 25
BUSINESS
The following discussion contains trend analysis and other forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth below and
elsewhere in this Prospectus, particularly under the caption "Risk Factors."
THE COMPANY
Sipex designs, manufactures, markets and sells innovative, high
performance, high value-added analog integrated circuits. The analog
semiconductor market has been reported by industry sources to represent
approximately $16.6 billion in sales in 1995, an increase of approximately 23%
over 1994. Industry sources project growth rates for this market of 13% to 17%
over the next five years, to greater than $30 billion in sales in the year 2000.
The growth in this market is being driven by the increasing demand for
microprocessor-based electronic equipment including telecommunications and data
communications networks such as LANs and WANs, personal computers, consumer
electronics and scientific instrumentation. While the Company designs,
manufactures, markets and sells products across these broad, high-growth
markets, it has currently targeted three high-growth sectors that it believes
are especially compatible with its design and process capabilities -- data
communications and telecommunications, battery powered/portable products and
industrial controls/instrumentation.
The Company's strategy is to develop long-term partnering relationships
with leaders in targeted market sectors. This enables the Company to identify
applications and to provide innovative, cost-effective solutions to meet
customers' needs over the life cycles of their products. Having identified and
met the specific needs of market leaders with innovative analog solutions, the
Company is then able to migrate these solutions into standard products that meet
the needs of a wide variety of market participants. Sipex serves the broad
analog signal processing market and its target market sectors with three primary
product lines -- interface circuits, low power application-specific analog
circuits and data converters. The Company utilizes multiple process technologies
to manufacture these circuits.
In addition to and complementing its strategy of teaming with market
leaders, the Company offers a broad base of manufacturing process technologies
through its own foundry and third-party semiconductor foundries. This enables
the Company to design products for its customers utilizing the optimum process
technology for each application. By combining creative design techniques with a
broad base of process technologies, the Company can develop innovative, high
performance analog circuits that support its customers' requirements. The
Company has also focused on leveraging its specialized dielectrically isolated
BiCMOS technology, which the Company believes is particularly well-suited to the
low power, low voltage requirements of battery powered/portable products.
In 1990, the Company began a transition from a supplier of analog hybrid
products and integrated circuits for military applications to a supplier of
analog integrated circuits for commercial applications. The Company's net sales
of commercial products has grown from $9.4 million in 1991 to $24.0 million in
1995 and accounted for $24.2 million in the nine months ended September 28,
1996, representing 34.6%, 80.1% and 89.0% of total net sales, respectively. The
Company believes that the percentage of its net sales represented by sales of
commercial products will continue to increase in the future.
The Company sells its products to OEM customers either directly through its
direct sales force or with the assistance of a network of independent sales
representatives, or indirectly through independent distributors. The Company's
products have been incorporated into a broad range of electronic systems and
products by more than 2,400 customers worldwide. In 1995 and the nine months
ended September 28, 1996, international sales represented 35.4% and 34.2%,
respectively, of the Company's net sales. The Company's customers, none of which
accounted for more than ten percent of net sales in 1995 or the nine months
ended September 28, 1996, include Digital Equipment Corporation, Hewlett-Packard
Co., Motorola, Inc., Philips N.V., Siemens Corporation and Silicon Graphics Inc.
in the data communications/telecommunications markets; Federal Express Corp.,
Texas Instruments Incorporated, Timex
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<PAGE> 26
Corporation and Dassault Aviation S.A. in the low power analog application
areas; and Andover Controls Corp., LTX Corporation and Honeywell Inc. in the
industrial controls market.
INDUSTRY BACKGROUND
Semiconductor devices have permeated a wide range of industries, expanding
from the computer industry to communications, consumer products, automotive,
industrial equipment and many other industries. In general, semiconductor
devices can be grouped in two broad categories, based on the type of electrical
signals processed: digital and analog. Digital semiconductor devices, such as
microprocessors and memory devices, are comprised of discrete logic elements
that operate in two logic states, corresponding to on-off electrical signals.
Analog semiconductor devices have the ability to interpret continuous signals
that vary over a given operating range, and therefore can process real world
properties and events such as temperature, pressure, sound, color and light. An
example of an analog semiconductor device is an audio amplifier that accepts a
voice input from a microphone and outputs an amplified signal to a speaker.
Other analog circuits amplify, filter, transmit and modulate continuous analog
signals associated with physical properties. Certain analog devices, such as an
analog-to-digital converter, incorporate some amount of digital circuitry to
translate real world properties or events, such as the analog voltage output
from a temperature sensor, into a digital signal, which can then be manipulated
by a digital semiconductor device, such as a microprocessor. As the use of
analog and digital integrated circuits continues to converge in applications,
analog circuits will increasingly include some digital circuit technology in
integrated devices.
The proliferation of digital semiconductor devices in industrial, business
and consumer products has caused a corresponding increase in the demand for
analog semiconductors to interface to real world analog inputs. Further, while
digital processors have supplanted analog products in certain applications,
advances in digital circuit technology have enabled many new and varied
applications in the data processing, communications and instrumentation markets
for high performance analog circuits with higher speed, greater precision and
lower power consumption. In the data processing market, there is increasing
demand for analog interface circuits for peripheral components, including
printers and modems, as well as analog circuits that operate at the low voltage
and low power levels required by portable computers and other battery-powered
devices. Moreover, the convergence of telecommunications and computers has
created a need for devices that enable data, video and voice transmission
throughout local- and wide-area networks, as well as devices that are
incorporated into equipment for emerging applications such as Internet access,
video-on-demand and picture phones. Further, in the test and measurement
equipment and scientific and medical instrumentation markets, there is an
increasing demand for analog circuits to process and control real world events,
including automated test systems required for production and evaluation of
semiconductors, circuit boards or electronic systems and advanced medical
diagnostic instruments.
The increasing demand for high performance microprocessor-based electronics
in equipment ranging from personal computers to scientific instrumentation to
telecommunication and data communication networks has driven both analog and
digital semiconductor suppliers to create integrated circuit designs that
incorporate higher levels of integration in order to reduce space and power
requirements, lower cost and provide greater functionality. The analog
semiconductor market has been reported by industry sources to represent
approximately $16.6 billion in sales in 1995, an increase of approximately 23%
over 1994. Industry sources project growth rates for this market of 13% to 17%
over the next five years, to greater than $30 billion in sales in 2000.
The analog integrated circuit market is distinguished by the following
characteristics:
- Complex design requirements -- The successful development of analog
integrated circuits is generally more dependent on design techniques
rather than on achieving small feature sizes and high densities. Analog
circuits operate over a wide range of voltages, which limits the minimum
feature sizes that can be used in their design and implementation. For
example, a 12-bit analog-to-digital converter with a 5 volt input range
can convert analog input signals as low as 0.001 volt and as high as 5
volts. The nature of high precision analog circuits requires designs
having desirable isolation, grounding, noise rejection and voltage
breakdown features. Typically, designers of analog
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<PAGE> 27
circuits must take into account complex interrelationships between the
manufacturing process, the physical layout of the circuit elements and
the packaging of the end product, all of which can significantly affect
performance. Moreover, the high performance characteristics required by
new and emerging applications for analog circuits involve increasingly
advanced designs, which require skilled analog designers, innovative
design strategies and rigorous design methodologies. The number of design
engineers who have the training, creativity and experience to design
complex analog circuits is limited.
- Long Product Life Cycles -- Analog integrated circuit products generally
have longer life cycles than digital integrated circuit products. Because
of the specialized requirements of analog circuit design, as well as the
relatively lower cost of analog integrated circuit products in proportion
to overall systems cost, technology changes in analog semiconductor
design and manufacturing have been more gradual or evolutionary than in
the digital semiconductor device market. Therefore, electronic equipment
designers have focused more on modifying, enhancing or revising the
digital portion of their products, while retaining proven analog
solutions over successive product generations.
- Broad Product Mix -- The analog integrated circuit market is
characterized by a wider range of application-specific solutions than the
digital integrated circuit market. The requirements of customers' system
designs are highly varied. Systems designers must consider such factors
as the power supply, the interaction of analog circuits with real world
attributes, environmental interference and the size of the circuit board.
These elements all affect analog circuit performance. Therefore, in order
to meet the specific and varied requirements of customers, analog
integrated circuit suppliers generate a larger number of products, which
tend to generate, on average, relatively smaller unit sales per product
than digital products.
Historically, the business strategy of major analog integrated circuit
manufacturers has been design-driven, that is, to identify opportunities for
incorporating analog integrated circuits into system product designs, and then
design, manufacture and distribute families of standard products generally
meeting anticipated market needs. This strategy, which permits the manufacturer
to introduce broad families of products, has been implemented by introducing
products that contain only that functionality that is expected to appeal to a
wide range of potential customers, rather than functions that optimize
performance of any specific customer's system. During the customer's "design-in"
stage (the time when the electronic systems or product designer evaluates
alternative components for implementing the product's architecture), the major
analog manufacturers may be offering the customer's system designer standard
analog integrated circuits that are generic solutions for their specific analog
needs. Sipex believes that significant market opportunities exist by targeting
application-specific solutions within emerging markets, and working with leading
edge participants in those markets to meet the customer's specific needs in
terms of features, functionality, integration, cost, and time to market.
STRATEGY
The Company's principal business objective is to be a leading supplier of
innovative, high performance analog semiconductor products that are targeted for
a wide variety of applications in high growth markets. In particular, the
Company seeks to develop proprietary products that solve specific problems for
system level companies that serve these high growth markets. The Company pursues
this objective by following the strategies listed below:
- ESTABLISH AND LEVERAGE CUSTOMER ALLIANCES WITH MARKET LEADERS
The Company focuses its product development and marketing efforts by
establishing long-term relationships with leading companies in
high-growth markets. The Company seeks to establish alliances with
market leaders having large volume requirements for analog solutions,
whose circuit needs can be met utilizing one or more of the Company's
process technologies. By teaming with industry leaders early in their
design-in stage, Sipex can identify their specific system level needs
and therefore design analog solutions that more precisely fit the
customers' exact requirements. By this "customer-centric" process, Sipex
seeks to position itself as a
27
<PAGE> 28
customer's supplier of choice with a proprietary product. Having
identified and met the specific needs of market leaders with innovative
analog solutions, the Company is then able to migrate its proprietary
circuit designs and accumulated market expertise to create standard
product families that will meet the needs of additional customers.
- OFFER A BROAD BASE OF PROCESS TECHNOLOGIES
The Company believes that customers' needs can best be served by
offering multiple manufacturing process capabilities. By having a broad
process technology base, Sipex is able to design its products utilizing
the optimum process technology for each application, thereby maximizing
the cost/performance equation for its customers. The Company has
established strategic relationships with outside foundries, as well as
maintained an internal foundry, to enable it to provide multiple
manufacturing process alternatives. The Company utilizes its expertise
in analog wafer foundry management, yield improvement and process
enhancements to control existing internal and external wafer fabrication
processes and to develop new leading edge processes for future products.
- MAINTAIN TECHNOLOGICAL LEADERSHIP
The Company believes that design expertise, creativity and experience,
coupled with broad and deep process technology capabilities, are
essential to market success. By investing in continued research and
development, the Company is able to add to its accumulated proprietary
technology and know-how in the design of innovative, high performance
analog circuits. For example, the Company has been able to penetrate the
high-growth LAN and WAN markets as a result of its investment in the
enabling technology for its SP500 series of highly integrated,
proprietary multi-protocol serial interface transceivers. Once a core
design (such as the SP500) has been developed, the Company can rapidly
introduce additional products utilizing the common core of enabling
technology, based on customer and market feedback.
- LEVERAGE LOW POWER ANALOG CAPABILITY
The Company possesses a specialized dielectrically isolated ("DI")
BiCMOS technology, which is well-suited for circuit applications
requiring low power and low operating voltage as well as high output
voltages. Few circuit manufacturers offer this technology. Demand for
low power, low voltage circuits is driven by the growth of battery
powered/portable applications. Sipex has, in conjunction with Timex
Corporation, developed a line of electroluminescent ("EL") driver
circuits for certain of Timex's watch lines, including the Indiglo
watch. The Company is leveraging this technology by providing EL lamp
drivers across various markets for a variety of other backlight
applications, including cellular phones, pagers, personal digital
assistants and other hand-held electronic devices.
- PROVIDE STRONG PRODUCT AND APPLICATIONS TECHNICAL SUPPORT
Since the core of the Company's strategy is customer-focused design
activity, the Company believes that strong technical support for its
customers and its sales personnel is critical to success. To provide
this support, the Company maintains a marketing and applications staff
of electrical engineers with in-depth market knowledge of analog
products. These engineers work closely with customers at the critical
"design-in" stage and maintain continuing relationships throughout the
customer's product life cycles. The Company is then able, as soon as one
design is completed and in production, to work with the customer's
systems engineers on future circuits to support their next generation of
systems. Sipex believes it differentiates itself from other suppliers by
its continuing close relationships with its customers at all stages of
the design and manufacturing process.
MARKETS
The Company serves a broad range of markets for analog integrated circuits,
including the data processing, communications, consumer, industrial and
military/aerospace markets. Within and across these broad markets, the Company
has currently targeted three high-growth areas -- data communications and
telecommunications, battery powered/portable products, and industrial
controls/instrumentation -- in
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which it believes that its design and manufacturing process capabilities can
address customers' needs in terms of product features and functionality,
integration and overall solution cost. By working closely and partnering with
established market leaders within these areas, the Company has been able to
identify and meet its partners' complex analog circuit requirements with
tailored products that are developed in conjunction with the customer's own
product design team, thus allowing the Company to address the customer's needs
as the customer identifies them. Having addressed the particular needs of market
leaders, the Company is then able to migrate these solutions into standard
products available to other equipment or device suppliers.
Data Communications and Telecommunications
The convergence of data processing and communications technology through
the deployment of data and voice networks has enabled OEM networking equipment
suppliers to achieve dramatic growth in recent years. Within LANs and WANs, a
variety of peripheral devices are linked into the network, including printers,
disk drives, and scanners. Analog integrated circuits are required at each
connection among computers, peripherals and networking interconnect equipment,
such as hubs, routers and bridges. Since no predominant standard has emerged for
the serial interfaces among peripherals, computers and the network equipment
linking them, WAN and LAN systems OEMs must have the ability to support most of
the popular interface standards to maintain compatibility. Wireless
communications such as cellular phones, two-way pagers, or digital radios
require analog-to-digital and digital-to-analog converter products to receive
and transmit signals. The Company believes that trends toward greater
connectivity of computers and peripherals into networks, the interconnection of
remote networks, the emergence of the Internet as both a communications network
and a business tool, as well as the integration of data, video and
telecommunications networks will continue.
Battery Powered/Portable Products
The rapid growth of sales of portable products, including computers,
hand-held electronic devices, cellular and portable telephones, pagers and
consumer electronic devices and products has created market opportunities for
analog semiconductor devices which can operate efficiently at low voltages.
Battery-powered devices require many of the same kinds of analog circuits as
non-portable equipment, including transceivers, converters and amplifiers, but
these circuits must be functional and efficient at the low voltages supplied by
their power source. Further, battery powered devices often require high voltage
functionality -- such as the ability to drive an electroluminescent device for a
light source for the portable product -- which requires complex analog
circuitry. The Company believes that analog semiconductor manufacturers that can
provide solutions which enable portable equipment and products manufacturers to
add functionality and reliability to their products with low battery usage will
be able to expand their markets substantially.
Industrial Controls/Instrumentation
The detection and measurement of analog information such as light, sound,
temperature, pressure, position, velocity, acceleration, angle, angular velocity
and speed in industrial controls, medical equipment, automated test equipment
and other measurement systems have been a traditional focus of analog circuits.
As systems grow more complex and information is processed at higher rates, there
is a corresponding requirement for higher speed analog circuits to process the
information in analog format, as well as for analog-to-digital and
digital-to-analog conversion for digital processing of the information
contained.
PRODUCTS AND CUSTOMERS
The Company offers a broad range of innovative, high performance, high
value-added analog integrated circuits. Since 1992, the Company has introduced
more than 100 high performance analog integrated circuit products. The Company's
products, which in 1995 were sold to more than 2,400 customers, are principally
focused in three product lines -- interface products, low power analog 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.
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Interface Products
Interface products act as an intermediary to transfer signals between or
within electronic systems. A simple example of an interface application is a
personal computer connected to a printer via the RS-232 serial interface
standard. The computer sends information through the connecting cable which is
received by the printer, and additional information can be sent back to the
computer. Serial interface is used in many market segments including computers,
peripherals, data communications, telecommunications, hand-held instrumentation,
medical equipment, test equipment and industrial controls.
In the networking area in particular, serial interface products are of
critical importance because diverse equipment and peripherals must be linked
together to permit data communications across local or remote locations. Because
a multiplicity of communications standards address the diverse requirements of
wide area networking, WAN equipment providers must provide compatibility in
their equipment with different communications standards. WAN equipment OEMs
traditionally addressed this need for systems compatibility through multiple and
often redundant board-level approaches, containing analog circuit designs made
up of many discrete interface drivers and receivers along with switches, jumpers
or relays to steer the appropriate signals to the connector. The Company's
solution was to develop the first single-chip multi-protocol interface
transceiver circuit. These circuits are programmable and dynamically support
signals compliant with up to eight different serial interface standards. The
Company's products provide network suppliers with the ability to replace
multiple chip and discrete device configurations with a single chip solution,
allowing systems designers to reduce space and power requirements in their
equipment. The Company's SP300 series of interface transceivers each support two
protocols, such as RS-232 and AppleTalk, while the Company's SP500 Series is the
industry's first fully integrated transceiver, supporting up to eight of the
most popular serial interface standards for WAN interfaces. The Company
introduced the SP500 Series of products in 1994 and since that time has secured
designs with many industry leaders in the WAN equipment market. In addition to
expanding its line of programmable serial interface products, the Company's
future interface product strategy includes developing with industry leaders
products involving higher speed interfaces supporting high speed data
communications, video communications and telecommunications interface
requirements. The diagram below demonstrates the semiconductor device and board
space savings possible with the Company's SP500 Series programmable series
transceivers.
[LOGO]
[Graphic depicting how Sipex single chip product can replace competitor's
multiple chip products.]
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In addition to its SP300 and SP500 families of multi-protocol transceiver
products, the Company also offers the SP200 and SP400 series of single protocol
serial interface transceiver products, primarily targeted to the personal
computer and peripherals and industrial controls markets.
The following is a representative list of current applications and
customers for the Company's serial interface products:
<TABLE>
<CAPTION>
INDUSTRY APPLICATION SELECTED CUSTOMERS
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------
Data Communications/
Telecommunications CD Player Philips N.V.
Communications Controller Hewlett-Packard Co.
Internetworking Product Sync Research, Inc.
Frame Relay Toshiba Corporation
Hub/Router Digital Equipment Corp.
Hub/Router Samsung Group
Multiplexer Racal-Datacom
Portable Telephone AT&T Corp.
PBX Siemens Corporation
WANport AS400 International Business Machines
WAN Server U.S. Robotics Inc.
- ---------------------------------------------------------------------------------------------------
Computers/Workstations/
Mainframes/Peripherals Computer Motherboard Eastman Kodak Company
Fault Tolerant Computer Motorola, Inc.
Hand-held Organizer Psion Plc
PC Modem Zoom Telephonics, Inc.
Point-of-Sale Machine VeriFone, Inc.
Printer Seiko/Epson
Workstation Silicon Graphics Inc.
</TABLE>
Low Power Analog Products
The Company has targeted the battery powered/portable products market to
leverage its design expertise and the process capability provided by the
Company's internal DI wafer fabrication production line. The DI process allows
single chip designs to operate efficiently with both very low voltage (1V) and
very high voltage (160V) without interference or breakdown between adjacent
circuits. The Company's designers, in cooperation with Timex Corporation,
developed a proprietary EL driver device, which provides the enabling technology
for the Timex Indiglo Watch. This custom integrated circuit creates a 100V AC
signal from a 3V DC battery within the watch to light the backlight material.
The Company is exploiting this technology and its design-specific resources to
offer low power analog products to a wide variety of market segments, including
providing backlighting solutions to the cellular phone and hand-held electronic
equipment markets.
Since 1993, the Company has shipped over 10 million low power analog
semiconductor devices. The Company intends to continue its focus in this area on
high volume commercial/consumer markets, in which the attributes of the DI
BiCMOS fabrication process or the Company's design capabilities can add value
for the customer.
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<TABLE>
The following is a representative list of current applications and
customers for the Company's low power analog products:
<CAPTION>
- -------------------------------------------------------------------------------------------------------
INDUSTRY APPLICATION SELECTED CUSTOMERS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Electroluminescent Backlighting
Products Watch Timex Corporation
Hand-Held Organizer Texas Instruments
Incorporated
Pager Inventel Systemes
Portable Point-of-Sale System Federal Express Corp.
- -------------------------------------------------------------------------------------------------------
Consumer/Commercial Avionics Dassault Aviation S.A.
Bar Code Scanner Welch Allyn, Inc.
Jet Engine Control Division Electronique de la
Snecma
Oven Control Robertshaw Control Co.
Touch Screen Elo Touch Systems
- -------------------------------------------------------------------------------------------------------
Medical Patient Monitoring Medico Industries, Inc.
- -------------------------------------------------------------------------------------------------------
</TABLE>
Data Converter Products
Data converter products are incorporated into systems that translate real
world (analog) events into digital data which can be manipulated by a
microprocessor. The Company's analog-to-digital and digital-to-analog products
are components that allow microprocessors to monitor real world conditions, and
then control responses to the conditions monitored. Since 1991, the Company has
introduced over 30 new converter integrated circuits. The main focus of the
Company's product offerings has been high performance 12-bit analog-to-digital
and digital-to-analog converters. The Company believes that the data converter
marketplace for 12-bit products is highly fragmented, and design wins are
characterized by long life cycles. The primary markets served are industrial
controls, instrumentation and test equipment. Future growth areas for new
products involve higher speed 12-bit analog-to-digital converters targeted for
telecommunications applications.
<TABLE>
The following is a representative list of current applications and
customers for the Company's data converter products:
<CAPTION>
- -------------------------------------------------------------------------------------------------------
INDUSTRY APPLICATION SELECTED CUSTOMERS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Industrial Controls Environmental Control Andover Controls Corp.
Motor Control Mitsubishi
Temperature Control Honeywell Inc.
- -------------------------------------------------------------------------------------------------------
Instrumentation Medical Instrumentation Marquette Electronics, Inc.
Medical Instrumentation Siemens Corporation
- -------------------------------------------------------------------------------------------------------
Test Equipment Digital IC Tester LTX Corporation
Linear IC Tester Megatest Corp.
- -------------------------------------------------------------------------------------------------------
</TABLE>
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Precision High Reliability Products
The Company's precision high reliability assembled products are sold to
commercial customers engaged in various space and military programs. The
following represent selected commercial aerospace applications and customers for
the Company's precision high reliability assembled products:
<TABLE>
<CAPTION>
PROJECT APPLICATION CUSTOMER
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------
Milstar Current Control Loral Corp.
Ariane Launcher Current Control Matra Inc.
NASA Thematic Mapper Signal Conditioning Hughes Aircraft
U.S. Space Shuttle Thrust Control Honeywell Inc.
</TABLE>
Customers incorporating the Company's high reliability assembled products
for military applications include Texas Instruments Incorporated, Raytheon
Company and Lockheed Martin Corp. The Company is not currently designing new
products for the military market. The Company expects sales of products for
military applications to decline in the future as the Company continues to focus
its resources on its target markets in the commercial sector. In 1994, 1995 and
the nine months ended September 28, 1996, sales of high reliability products for
military applications accounted for approximately 39%, 20% and 11%,
respectively, of the Company's net sales. See "Risk Factors -- Declining Sales
for Military Applications" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
CUSTOMER APPLICATIONS
The Company's products have been incorporated into a broad range of
electronic systems and products by more than 2400 customers. The following
examples of current customer applications illustrate the value of the Company's
customer-focused product development strategy:
SILICON GRAPHICS INC. requested that the Company enhance one of its
dual protocol designs for use in the SGI Indy workstation. The Company
developed its SP303 device, which allows that workstation to communicate
with either PC peripherals or Apple Macintosh peripherals via a serial
port. The single-chip SP303 replaces four discrete components, saving board
space while maintaining the same functionality. By customizing one of its
standard products, the Company was able to satisfy the customer's specific
requirements while simultaneously creating another new proprietary standard
product. Since the introduction of the SP303, Sipex has continued working
on next generation transceivers for Silicon Graphics' newest workstations.
Silicon Graphics is also a customer for the SP503 programmable transceiver,
incorporating that product into a WAN adapter box.
SYNC RESEARCH, INC. develops and markets wide area internetworking
products for large IBM-centric networked customers worldwide who deploy SNA
networks along with internetworked LANs. Sync Research has designed the
Company's SP503 product into the FrameNode (named a 1994 Hot Product of the
Year by Data Communications magazine). FrameNode supports users in banking
and financial services, insurance, transportation, manufacturing, federal
and state government, telecommunications, and other industries. The SP503
significantly reduces circuit board space and offers software control of
the serial port.
TEXAS INSTRUMENTS INCORPORATED designs and manufactures hand-held
organizers which display information on electroluminescent backlit LED
screens. The Company's SP4422 electroluminescent driver chip has been
designed into the latest models of the Texas Instruments Data Bank
organizers. The device converts the 3V battery voltage into the necessary
100V AC signal needed to drive the backlight panel. The SP4422 greatly
reduces the size of the discrete circuit and operates on a fraction of the
power.
TIMEX CORPORATION works closely with Sipex in the continued
development of its popular Indiglo watch series and other projects. The
electroluminescent backlighting material used in the Indiglo watch requires
a very high voltage power supply, even though the watch battery is limited
to 3 volts. The Company's DI bipolar and CMOS process technology enabled
Sipex design engineers to achieve a very low power, 3V DC to 100V AC
voltage converter circuit, referred to as an EL driver. Due to the success
of its initial collaboration with Timex, the Company has designed and
manufactured
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<PAGE> 34
four new EL driver circuits with Timex. The Company recognized the market
potential for the EL drivers and now includes the devices in the Company's
standard product offering.
SALES, SUPPORT AND DISTRIBUTION
The Company sells its products to OEM customers either directly through its
direct sales force or with the assistance of a network of independent sales
representatives, or indirectly through independent distributors. The Company is
seeking to broaden its customer base by increasing sales through its distributor
network, a sales channel that the Company believes offers significant growth
potential. In 1995, the Company added additional national distributors and
increased domestic and international distributor sales to approximately 39.6% of
net sales in 1995 from approximately 14.2% in 1994. In the nine months ended
September 28, 1996, the Company added an additional North American distributor
and further increased its percentage of total sales through its distributor
network to 41.3%.
The Company's direct sales force consists of sales managers and field
application engineers who provide technical and applications support to
customers, independent sales representatives and distributors. The sales staff
and field application engineers are located at the Company's Billerica,
Massachusetts headquarters and in field sales offices in Munich, Paris, Tokyo
and California. The Company's sales staff and field application engineers also
manage, train and support the Company's network of distributors and
representatives.
In North America, the Company sells its products through 19 independent
sales representative organizations having a total of 39 offices, and 5
distributors having a total of 134 sales locations. These independent entities
are selected for their ability to provide effective field sales, marketing
communications and technical support to the Company's customers. The Company has
entered into Representative or Distributor Agreements with each of its
independent distributors and sales representatives. These agreements typically
provide for the independent distributor to act as a non-exclusive distributor
for one or more products within a specific territory and also permits sales
representatives to act as an exclusive or a non-exclusive sales representative
in appropriate circumstances. The Company maintains a separate price list for
products sold to distributors, which typically reflects discounts from the
prices charged to customers in direct sales transactions. Sales representatives
directly solicit orders for the Company's products, which the Company fills
directly with the customer, generating a commission from the Company to the
sales representative. On a semi-annual basis, distributors are permitted to
return for credit, against purchases of an equivalent dollar value of products,
up to 10.0% of their total purchases during the most recent six-month period.
Outside North America, the Company sells its products through 26
distributors having a total of 58 sales locations. International sales in 1994,
1995 and the nine months ended September 28, 1996 were approximately $5.8
million, $10.6 million and $9.3 million, respectively, representing 25.6%, 35.4%
and 34.2% of net sales, respectively, for such periods. The Company is seeking
to appoint additional distributors internationally to further expand its
geographical markets. In connection with its international sales, the Company is
subject to the normal risks of conducting business internationally, including
exchange rate fluctuations. To date, the Company has not hedged the risks
associated with fluctuations in exchange rates but may undertake such
transactions in the future. The Company currently does not have a policy
relating to hedging. See "Risk Factors -- International Sales."
In 1993 and 1994, Raytheon Company represented 27.4% and 10.3%,
respectively, of net sales for such periods. No customer accounted for 10.0% or
more of net sales in 1995 or in the nine months ended September 28, 1996.
BACKLOG
At September 28, 1996, the Company's product backlog was approximately
$23.9 million, compared to $23.1 million at December 31, 1995. The Company
generally includes in backlog all orders scheduled for delivery within one year.
However, the Company's business, and to a large extent the entire semiconductor
industry, is characterized by short-term orders and shipment schedules. The
Company generally permits
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<PAGE> 35
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.
TECHNOLOGY
Design Methodology
The Company's designers utilize a consistent and standardized design
approach that is intended to shorten the product development cycle, while
preserving and re-using fundamental building blocks that have been previously
proven. This disciplined approach decreases the time-to-market for new products
and makes maximum use of previously designed, manufactured and evaluated
intellectual property of the Company. The Company believes that the repeated
application of common design elements to new products promotes quality, speeds
products to market and increases the shared knowledge across the Company's
professional engineering staff. Product designs are implemented using a standard
complement of hardware and software design tools that facilitates the orderly
development of products. The Company has developed proprietary circuit element
models that allow accurate simulation of circuit designs and often permit the
successful implementation of circuits in first-pass silicon, thereby decreasing
design cycles and time to market.
In order to maximize the number of new product introductions per design,
the Company often relies on a "mosaic" or array approach to standard products.
This approach permits several products to be introduced by tailoring the
interconnections between the silicon and the package leads. The Company also
utilizes proprietary laser trimming at the wafer level to derive multiple
products from a single design.
Process Technologies
The Company utilizes multiple semiconductor processes and technologies in
order to implement its designs in a manner that closely matches technical
requirements with customers' cost objectives. The range of technologies utilized
by the Company permits well engineered, tailored, proprietary and cost-effective
solutions. The Company uses BiCMOS, dielectrically isolated BiCMOS, and
dielectrically isolated complementary bipolar technologies to implement its
designs. In addition, proprietary thin film materials are used in conjunction
with these technologies to offer differentiating capabilities and solutions.
BiCMOS Technology
The Company designs the majority of its monolithic standard products
utilizing BiCMOS processes. These processes merge the best characteristics of
bipolar transistors for analog and linear functional implementation, with those
of CMOS devices for digital and logic synthesis. This technology provides a
mixed mode semiconductor process in which the attributes of low power,
silicon-efficient digital CMOS are beneficially merged with higher bandwidth,
higher voltage bipolar devices to produce composite circuits that are efficient,
integrated silicon subsystems. The Company uses these processes for its
interface and converter standard products as well as for several custom and
application-specific standard products.
Dielectrically Isolated Bipolar Technology
The Company uses this complementary bipolar technology primarily for high
performance applications where high speed high voltage or very low voltages are
required to satisfy the circuit requirement. This technology permits more robust
designs while increasing certain desirable attributes such as breakdown voltage,
signal amplification and bandwidth. The technology further permits the
incorporation of a proprietary family of laser trimmable thin film materials,
enhancing further the capabilities of this process, and permitting high
performance analog signal processing circuits to be devised and manufactured.
The technology has been used to design custom products for both commercial and
military customers. The Company further manufactures for its own use, and for
resale in selected cases, unprocessed dielectrically isolated silicon wafers.
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<PAGE> 36
Dielectrically Isolated Bipolar and BiCMOS Technology
The Company uses this technology to integrate the benefits of low power
BiCMOS processes for digital logic synthesis, and both low- and high-voltage,
high-performance bipolar devices for linear function implementations. This
mixed-mode technology has resulted in efficient silicon solutions for several
target markets, including watches, pagers and controllers. The technology merges
the divergent requirements of low power and low operating voltage as well as
high output voltages which must be delivered to a load. This technology is
currently used in implementing the family of battery operated EL drivers
introduced by the Company.
RESEARCH AND DEVELOPMENT
The Company believes that continued introduction of new products in its
target markets is essential to its growth. The Company has assembled a team of
highly skilled analog design engineers, averaging more than ten years of analog
design experience. As performance demands have increased the complexity of
analog circuits, the design and development process has become a
multi-disciplinary effort, requiring diverse competencies to achieve customers'
desired performance. The Company supports its key designers with an
infrastructure of product and test engineers who perform various support
functions and allow the designer to focus on the core elements of the design.
At September 28, 1996, the Company had 53 employees engaged in research,
development and manufacturing engineering. In 1993, 1994, 1995 and the nine
months ended September 28, 1996, the Company spent approximately $2.4 million,
$3.0 million, $4.4 million and $3.4 million, respectively, on research and
development, representing 8.6%, 13.0%, 14.7% and 12.7%, respectively, of net
sales for such periods. The Company expects that expenditures in support of
research and development activity will increase in absolute terms in the near
future.
The Company's ability to compete depends, in part, upon its continued
introduction of technologically innovative products on a timely basis. The
Company's research and development efforts are directed primarily at designing
and introducing new products and technologies. The Company continually upgrades
its internal technology while also working with foundries to develop new
technologies for new generations of products. In addition, the Company
continually refines its manufacturing practices and technology to improve the
yields of its products.
Currently, the Company's major development programs include expanding its
proprietary product offerings of electroluminescent drivers and programmable
dual and multi-mode transceivers, as well as simultaneously sampling
analog-to-digital converters.
MANUFACTURING
The Company manufactures semiconductor wafers for its dielectric isolation
complementary bipolar products in its own facility to optimize the performance
of these products and maintain a high degree of manufacturing control. The
Company's manufacturing facilities in Milpitas, California include a four-inch
wafer fabrication facility and a clean room. The Company's facilities have been
certified as ISO-9001 compliant.
The Company broadens its manufacturing capabilities by using third-party
foundries to produce junction isolation BiCMOS processed wafers and CMOS
processed wafers. The use of third-party foundries enables the Company to focus
on its design strengths and minimize fixed costs and capital expenditures while
providing access to diverse manufacturing technologies without bearing the full
risk of obsolescence. The Company uses three different third-party foundries to
supply fully processed semiconductor wafers for its junction isolation BiCMOS
and CMOS products, all of which foundries have been certified as IS0-9001
compliant. Sales of these products collectively represented approximately 25.6%
of the Company's net sales in 1994, approximately 38.9% in 1995 and
approximately 43.9% in the nine months ended September 28, 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 has qualified
or is in the process of qualifying second-source foundries for each of its
current third-party foundries in order to continue to be able to support its
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customers' product needs and to reduce the Company's dependence on any single
foundry. However, any sudden demand for increased amounts of semiconductor
devices or elimination of existing sources of fully processed semiconductor
wafers could result in material delays in the shipment of the Company's
products.
The Company tests integrated circuits or "die" on the wafers produced by
the Company and its foundries for compliance with performance specifications
before assembly. Following assembly, the packaged units are returned to the
Company for final testing and inspection prior to shipment to customers. The
Company then performs 100 percent final testing on all circuits using advanced
automated test equipment to ensure that the circuits satisfy specified
performance levels.
The Company's commercial products are assembled by a variety of
subcontractors in Malaysia, Thailand and other locations in Asia, all of which
have been certified as ISO-9002 compliant. These subcontractors may also be
subject to capacity, yield and quality problems or may have difficulty obtaining
critical raw materials, which could result in disruptions in the supply of
assembled products. The Company's reliance on third-party foundries and
independent subcontractors involves a number of other risks, including reduced
control over delivery schedules, quality assurance and costs. The occurrence of
any supply or other problems resulting from such risks could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors -- Dependence on Outside Third-Party Foundries."
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 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. See "Risk Factors -- The Semiconductor Industry."
The manufacturing processes utilized by the Company are highly complex and
are continuously being modified in an effort to improve yields and product
performance. Process changes can result in interruptions in production or
significantly reduced yields. In addition, yields can be affected by minute
impurities in the environment or other problems that occur in the complex
manufacturing process. Many of these problems are difficult to diagnose and
time-consuming or expensive to remedy. From time to time, the Company has
experienced yield variances. In particular, new process technologies or new
products can be subject to especially wide variations in manufacturing yields
and efficiency. There can be no assurance that yield variances previously
experienced by the Company will not recur or that the Company and its
independent foundries will not experience other manufacturing problems that
result in product introduction or delivery delays. Although previous
fluctuations in yield variances have not materially affected the Company's
business, financial condition or results of operations, there can be no
assurance that future yield variances and resulting delays would not materially
and adversely affect the Company's business and results of operations. The
Company is also subject to the risks associated with the shortage of raw
materials such as unprocessed wafers and packages used in the manufacture or
assembly of the Company's products. See "Risk Factors -- Manufacturing Risks."
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
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there can be no assurance that regulatory changes or changes in regulatory
interpretation or enforcement will not render compliance more difficult and
costly. Any failure of the Company to control the use of, or adequately restrict
the discharge of, hazardous substances, or otherwise comply with environmental
regulations, could subject it to significant future liabilities. In addition,
although the Company believes that its past operations conformed with then
applicable environmental laws and regulations, there can be no assurance that
the Company has not in the past violated applicable laws or regulations, which
violations could result in remediation or other liabilities, or that past use or
disposal of environmentally sensitive materials in conformity with then existing
environmental laws and regulations will not result in remediation or other
liabilities under current or future environmental laws or regulations.
The Company and approximately sixty other potentially responsible parties
("PRPs") received a Notice of Potential Liability from the United States
Environmental Protection Agency in June 1993 concerning the Shaffer Landfill
Operable Unit of the Iron Horse Park Superfund Site (the "Site") located in
Billerica, Massachusetts. In January 1995, federal and Massachusetts
governmental authorities filed suit against ten of the PRPs, alleging
responsibility for remediation and other costs. The ten PRPs named in the
lawsuit, together with a number of other PRPs not named, but not currently
including the Company, have been engaged in settlement discussions with such
authorities. If the PRP group and the governmental agencies reach a negotiated
settlement regarding the clean-up of the Site, there is no assurance that the
Company would join such a settlement. The Company believes that it has strong
defenses to liability; however, there can be no assurance that the Company will
not be pursued with respect to alleged liability for contamination of the Site.
The Company anticipates that it would vigorously defend against any such claims.
There can be no assurance, however, that any such defenses of any such claims
would be successful.
The future costs in connection with the Site are currently indeterminable
due to such factors as the unknown timing and extent of any future remedial
actions which may be required, the extent of any liability of the Company and of
other potentially responsible parties, and the financial resources of the other
potentially responsible parties. See "Risk Factors -- Environmental Regulation."
PATENTS AND INTELLECTUAL PROPERTY
The Company seeks to protect its proprietary technology through patents and
trade secret protection. Currently, the Company holds four United States patents
expiring on various dates between the years 1999 and 2014 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. See "Risk Factors -- Patents and Intellectual Property Claims."
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. Although the Company is
not aware of any pending or threatened patent litigation, there can be no
assurance that third parties will not assert claims against the Company with
respect to existing or future products or technologies and the Company has been
subject to such claims in the past. In the event of litigation to determine the
validity of any third-party claims, such litigation, whether or not determined
in favor of the Company, could result in significant expense to the Company and
divert the efforts of the Company's technical and management personnel from
productive tasks. In the event of an adverse ruling in such litigation, the
Company might be required to discontinue the use of certain processes, cease the
manufacture, use and sale of infringing products, expend significant resources
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<PAGE> 39
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. See "Risk Factors -- Patents and
Intellectual Property Claims."
COMPETITION
The analog integrated circuit segment of the semiconductor industry is
intensely competitive, and many major semiconductor companies presently compete
or could compete in some segment of the Company's market. The Company's primary
competitors have substantially greater financial, technical, manufacturing,
marketing, distribution and other resources and broader product lines than
Sipex. The Company's current primary competitors in the high-performance segment
of the analog circuit market are Analog Devices, Inc., Linear Technology Corp.
and Maxim Integrated Products, Inc. As the Company expands its product line, it
expects that competition will increase with these and other domestic and foreign
companies. Although foreign companies active in the semiconductor market have
not traditionally focused on the high performance analog market, many foreign
companies have the financial and other resources to participate successfully in
these markets, and there can be no assurance that they will not become
formidable competitors in the future.
The Company believes that its ability to compete successfully depends on a
number of factors, including the ability to develop and introduce new products
rapidly, product innovation, product quality and reliability, product
performance, the breadth of its product line, price, technical service and
support, adequacy of manufacturing quality and capacity and sources of raw
materials, efficiency of production, delivery capabilities and protection of the
Company's products by intellectual property laws. The Company believes that
product innovation, quality, reliability, performance and the ability to
introduce products rapidly are more important competitive factors than price in
its target markets because the Company competes primarily at the stage when
system manufacturers design analog products into their systems. At the design-in
stage, there is less price competition, particularly when there is only one
source for the product. The Company believes that, by virtue of its analog
expertise and rigorous design methodology, it competes favorably in the areas of
rapid product introduction, product innovation, quality, reliability and
performance, but it may be at a disadvantage in comparison to larger companies
with broader product lines, greater technical and financial resources and
greater service and support capabilities. See "Risk Factors -- Competition."
EMPLOYEES
At September 28, 1996, the Company had 239 full-time employees, including
161 in manufacturing, 34 in research and development, 23 in sales and marketing
and 21 in finance and administration. The Company believes that its future
success will depend, in part, on its ability to attract and retain qualified
technical and manufacturing personnel. This is particularly important in the
areas of product design and development, where competition for skilled personnel
is intense. None of the Company's employees is subject to a collective
bargaining agreement, and the Company has never experienced a work stoppage. The
Company believes that its relations with its employees are good.
FACILITIES
The Company leases approximately 47,600 square feet located in Billerica,
Massachusetts for manufacturing, research and development, and administration.
See "Certain Transactions." In addition, the Company leases approximately 30,500
square feet in Milpitas, California and approximately 12,500 square feet in San
Jose, California for manufacture of its DI products. The Company also leases
approximately 2,200 square feet for each of its sales offices in Munich, Paris
and Tokyo. The Company believes that its current facilities are adequate to meet
its current requirements for the near term.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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<PAGE> 40
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company as of October 1, 1996
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- --- ---------------------------------------------
<S> <C> <C>
James E. Donegan........................ 51 Chairman of the Board, President, Chief
Executive Officer and Clerk
Frank R. DiPietro....................... 48 Senior Vice President, Treasurer and Chief
Financial Officer
Raymond W. B. Chow...................... 48 Senior Vice President of Interface Products
Sanford Cohen........................... 58 Senior Vice President of Technology
A. Neal Lambert......................... 54 Senior Vice President of Operations
Daniel Deroux........................... 60 Director
Steward S. Flaschen..................... 70 Director(1)
Manfred Loeb............................ 69 Director(1)
Lionel H. Olmer......................... 60 Director(2)
John L. Sprague......................... 65 Director(1)(2)
Philippe van Marcke..................... 51 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until their successors are duly elected and qualified.
There are no family relationships among any of the executive officers or
directors of the Company.
Each director holds office until that director's successor has been duly
elected and qualified. The Company's Board of Directors is divided into three
classes. Messrs. Loeb and van Marcke serve in the class whose term expires in
1997; Messrs. Sprague and Olmer serve in the class whose term expires in 1998;
and Messrs. Donegan and Deroux serve in the class whose term expires in 1999.
Upon expiration of the term of each class of directors, directors comprising
such class will be elected for a three-year term at the annual meeting of
shareholders in the year in which such term expires.
Mr. Donegan joined the Company in April 1985 as Chairman of the Board,
Chief Executive Officer and President of the Company. Before joining the
Company, Mr. Donegan held the position of Group Vice President of the Electronic
Components Group at Midland Ross Corporation. Prior to Midland Ross, Mr. Donegan
was Vice President and General Manager at Cameron & Barkley and Company. Prior
to working at Cameron & Barkley and Company, Mr. Donegan spent ten years with
the General Electric Company in various manufacturing positions.
Mr. DiPietro joined the Company in December 1983 as Chief Financial Officer
and Treasurer. He was appointed Vice President of Finance in January 1985 and
Senior Vice President in June 1985. From November 1979 to November 1983, Mr.
DiPietro served as a Controller at Digital Equipment Corp.
Mr. Chow joined the Company in October 1988 as Director of Interface
Engineering. He was appointed Senior Vice President of Interface Products in
August 1994. From March 1982 to October 1988, Mr. Chow was President and Chief
Executive Officer of Barvon BiCMOS Technology, Inc. ("Barvon"), a company Mr.
Chow founded in 1982 and which was acquired by Sipex in October 1988. Prior to
founding Barvon, he served as Director of Engineering at Universal
Semiconductor, Inc. from 1979 to 1982. From 1972 to 1979, Mr. Chow was a Design
Manager at Intersil, Inc. and Senior Design Engineer at Fairchild Semiconductor.
Mr. Cohen has been the Company's Senior Vice President of Technology since
joining the Company in July 1988. Prior to joining Sipex, Mr. Cohen was a
Division Manager at the Charles Stark Draper Laboratory,
40
<PAGE> 41
formerly the Instrumentation Laboratory of the Massachusetts Institute of
Technology. He has been a member of several government advisory panels and has
designed and developed numerous circuits and systems.
Mr. Lambert joined the Company in July 1990 as Director of Wafer
Fabrication. He was appointed Senior Vice President of Semiconductor Operations
in January 1991 and Senior Vice President of Operations in May 1994. He joined
the Company after serving as Director of Operations at Cherry Semiconductor.
Mr. Deroux has been a director of the Company since 1992. From 1963 to
1993, he served Tractebel S.A. in various positions, most recently as the Chief
Executive Officer of the Electricity and Gas International Division of Tractebel
S.A. Since 1993, Mr. Deroux has served as the Managing Director of American
Tractebel Corporation, an affiliate of Tractebel S.A.
Dr. Flaschen has been a director of the Company since August 1996. From
1986 to the present, Dr. Flaschen has served as President of Flaschen and
Davies, a management consulting firm. In addition, Dr. Flaschen is Chairman of
the Board of Directors of TranSwitch Corporation, a digital and mixed-signal
semiconductor company, Chairman of the Board of Telco Systems, a
telecommunications company, a director of Ascent Logic Corp., a systems software
company, and an Independent General Partner of Merrill Lynch Venture Capital.
Mr. Loeb has been a director of the Company from 1982 to 1987 and from 1992
to the present. From 1983 to December 1992, he served as the Executive Director
of Tractebel S.A. and Chief Executive Officer of the Electricity and Gas
International Division of Tractebel S.A. Since 1993, Mr. Loeb has served as an
Advisor Director of Tractebel S.A. and Chairman of American Tractebel
Corporation. In addition to serving as a director of the Company, Mr. Loeb
currently serves as a director of Telfin S.A., an affiliate of Tractebel S.A.
Mr. Olmer has been a director of the Company since 1988. From 1985 until
the present, he has been a partner in the law firm of Paul, Weiss, Rifkind,
Wharton & Garrison, concentrating on international trade law. In addition to
serving as a director of the Company, Mr. Olmer currently serves as a director
of Dresser Industries, a manufacturer of products and provider of services for
the hydrocarbon energy industry.
Dr. Sprague has been a director of the Company since 1993. He has been the
president of John L. Sprague Associates, Inc., a consulting firm, since 1988. In
addition to serving as a director of the Company, Dr. Sprague currently serves
as a director of Aerovox, Inc., a manufacturer of electronic components, and
Allmerica Financial Corporation, a financial services company.
Mr. van Marcke has been a director of the Company since May 1994. For more
than five years prior to the date hereof, Mr. van Marcke served in various
management positions with American Tractebel Corporation and since 1993 as its
president. In addition to serving as director of the Company, Mr. van Marcke
serves as a director of American Tractebel Corporation.
DIRECTOR COMMITTEES AND COMPENSATION
Director Committees
The Audit Committee, established in January 1996, consists of Messrs. Olmer
and Sprague. The Audit Committee will review with the Company's independent
auditors the scope and timing of their audit services and any other services
they are asked to perform, the auditor's report on the Company's Consolidated
Financial Statements following completion of their audit and the Company's
policies and procedures with respect to internal accounting and financial
controls. In addition, the Audit Committee will make annual recommendations to
the Board of Directors for the appointment of independent auditors for the
ensuing year.
The Compensation Committee consists of Messrs. Loeb and Drs. Sprague and
Flaschen. The Compensation Committee will review and evaluate the compensation
and benefits of all officers of the Company, review general policy matters
relating to compensation and benefits of employees of the Company and make
recommendations concerning these matters to the Board of Directors. The
Compensa-
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<PAGE> 42
tion Committee administers the Company's 1988 Non-Statutory Stock Option Plan,
1991 Non-Statutory Stock Option Plan, 1993 Stock Option and Incentive Plan, 1994
Stock Option and Incentive Plan, the Company's 1996 Incentive Stock Option Plan,
1996 Non-Employee Director Stock Option Plan and 1996 Employee Stock Purchase
Plan. See "-- Stock Plans."
Director Compensation
Each of the Company's non-employee directors receives $500 for each board
meeting held by the Company, whether or not such director attends the meeting,
and an additional $1,000 for each meeting attended. The Company's non-employee
directors are also reimbursed expenses for each board meeting attended.
The Company's 1996 Non-Employee Director Stock Option Plan was adopted by
the Board of Directors on January 26, 1996 and approved by the Company's
shareholders on February 12, 1996. On the commencement of this plan, Messrs.
Deroux, Loeb, Olmer, Sprague, and van Marcke were each automatically granted a
non-qualified option to purchase 10,000 shares of the Common Stock at an
exercise price of $9.50 per share. Upon joining the Board of Directors on August
28, 1996, Dr. Flaschen was automatically granted a non-qualified option to
purchase 5,000 shares of the Common Stock at an exercise price of $17.13 per
share. See "-- Stock Plans."
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth certain information
relating to compensation earned by the Company's Chief Executive Officer and
each of the four other most highly compensated executive officers of the Company
whose total salary and bonus exceeded $100,000 (collectively, the "Named
Executive Officers") for services rendered in all capacities to the Company for
the year ended December 31, 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION(1)
---------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
---------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) (2)($)
- -------------------------------------------- --------- -------- --------------- ------------
<S> <C> <C> <C> <C>
James E. Donegan............................ 226,800 25,000 -- 7,298
Chairman, Chief Executive Officer
and President
Frank R. DiPietro........................... 150,000 20,000 -- 2,869
Senior Vice President, Treasurer and
Chief Financial Officer
Raymond W. B. Chow.......................... 145,000 15,000 -- 3,737
Senior Vice President of Interface
Products
Sanford Cohen............................... 145,000 0 -- 5,572
Senior Vice President of Technology
A. Neal Lambert............................. 130,000 15,000 -- 2,300
Senior Vice President of Operations
</TABLE>
- ---------------
(1) The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive payments during fiscal
1995.
(2) Consists of contributions made by the Company on behalf of the Named
Executive Officers to the Company's Tax Deferred Savings Plan and, in the
case of Messrs. Donegan, DiPietro and Cohen, insurance premiums paid by the
Company.
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<PAGE> 43
OPTION EXERCISES AND UNEXERCISED OPTION HOLDINGS
The following table provides information regarding unexercised stock
options held as of December 31, 1995 by each of the Named Executive Officers.
None of the Named Executive Officers were granted stock options during the year
ended December 31, 1995. No options were exercised by any of the Named Executive
Officers during the fiscal year ended December 31, 1995.
AGGREGATE OPTION EXERCISES AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR-END (#) OPTIONS AT YEAR-END($)(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James E. Donegan....................... 119,396 48,599 1,086,504 442,251
Frank R. DiPietro...................... 42,000 48,000 382,200 436,800
Raymond W. B. Chow..................... 20,000 73,750 182,000 671,125
Sanford Cohen.......................... 22,000 43,000 200,200 391,300
A. Neal Lambert........................ 22,000 43,000 200,200 391,300
</TABLE>
- ---------------
(1) There was no public trading market for the Common Stock as of December 31,
1995. Accordingly, these values have been calculated on the basis of a price
of $9.50 per share, the price per share in the Company's initial public
offering, which was completed in April 1996, less the applicable exercise
price.
EMPLOYMENT AGREEMENTS
The Company has entered into the following employment agreements with the
Named Executive Officers:
Mr. Donegan and the Company entered into an employment agreement on January
1, 1988. The employment agreement provides that Mr. Donegan will serve as
Chairman of the Board, President and Chief Executive Officer of the Company
until December 31, 1989 and for consecutive two-year terms thereafter unless the
Company provides at least six (6) months advance notice to the contrary prior to
expiration of any two year term; however, Mr. Donegan may voluntarily terminate
his employment and the Company may terminate his employment at any time for
cause. If the Company terminates Mr. Donegan's employment without cause, he will
be entitled to the salary and bonus benefits guaranteed under the employment
agreement until the end of the employment term. Pursuant to the employment
agreement, Mr. Donegan's salary is established annually by the Board of
Directors, but may not be less than $210,000 per year and his annual bonus may
not exceed $60,000. The amount of his annual bonus is calculated by a formula
based upon a comparison of the actual annual consolidated after-tax income or
loss of the Company to the budgeted income or loss approved by the Board of
Directors for that year. The Company must maintain a term life insurance policy
in the amount of $500,000 for Mr. Donegan's designees and a long term disability
insurance policy for up to $10,000 per month for the benefit of Mr. Donegan or
his designees. Furthermore, Mr. Donegan has agreed that he will not directly or
indirectly compete with the Company during the course of his employment and for
an additional one-year period thereafter if he voluntarily terminates his
employment or is terminated for cause.
Mr. DiPietro and the Company entered into an employment agreement on
January 1, 1988. The employment agreement provides that Mr. DiPietro will serve
as a Senior Vice President and Treasurer of the Company until December 31, 1989
and for consecutive two-year terms thereafter unless the Company provides at
least six (6) months advance notice to the contrary prior to expiration of any
two-year term; however, Mr. DiPietro may voluntarily terminate his employment or
the Company may terminate his employment for cause. If the Company terminates
Mr. DiPietro's employment without cause, he will be entitled to the salary
guaranteed under the employment agreement until the end of the employment term.
Pursuant to the employment agreement, Mr. DiPietro's salary is established
annually by the Board of
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<PAGE> 44
Directors, but may not be less than $96,500 per year. If Mr. DiPietro's
employment is terminated for any reason by either party, the employment
agreement entitles the Company to retain him as a consultant pursuant to
specific terms. Furthermore, Mr. DiPietro has agreed that he will not directly
or indirectly compete with the Company during the course of his employment and
for an additional one-year period thereafter so long as the Company is
continuing to pay either his salary or consulting fees.
Mr. Chow and the Company entered into an employment agreement on January 1,
1996. The employment agreement provides that Mr. Chow will serve as Senior Vice
President of Interface Products of the Company until December 31, 1998 and for
consecutive two-year terms thereafter unless the Company provides at least six
(6) months advance notice to the contrary prior to expiration of any two-year
term; however, Mr. Chow may voluntarily terminate his employment or the Company
may terminate his employment for cause. If the Company terminates Mr. Chow's
employment without cause, he will be entitled to the salary guaranteed under the
employment agreement until the end of the employment term and he may not
directly or indirectly compete with the Company while the Company is continuing
to pay his salary. Pursuant to the employment agreement, Mr. Chow's salary is
established annually by the Board of Directors, but may not be less than
$145,000 per year.
Mr. Cohen and the Company entered into an employment agreement on July 18,
1988. The employment agreement provides that Mr. Cohen will serve as a Senior
Vice President of the Company until August 17, 1990 and for consecutive two-year
terms thereafter unless the Company provides at least six (6) months advance
notice to the contrary prior to expiration of any two-year term; however, Mr.
Cohen may voluntarily terminate his employment or the Company may terminate his
employment for cause. If the Company terminates Mr. Cohen's employment without
cause, he will be entitled to the salary guaranteed under the employment
agreement until the earlier of one year from the date of termination or the
obtainment of substantially equivalent employment. Furthermore, Mr. Cohen has
agreed that he will not directly or indirectly compete with the Company during
such period so long as the Company is continuing to pay his salary. Pursuant to
the employment agreement, Mr. Cohen's salary is established annually by the
Board of Directors, but may not be less than $135,000 per year.
Mr. Lambert and the Company entered into an employment agreement on August
1, 1993. The employment agreement provides that Mr. Lambert will serve as Senior
Vice President -- West Coast Operations of the Company until July 31, 1995 and
for consecutive two year terms thereafter unless the Company provides at least
six (6) months advance notice to the contrary. Mr. Lambert may voluntarily
terminate his employment or the Company may terminate his employment for cause.
If the Company terminates Mr. Lambert's employment without cause, he will be
entitled to the salary guaranteed under the employment agreement until the end
of the employment term and he may not directly or indirectly compete with the
Company while the Company is continuing to pay his salary. Pursuant to the
employment agreement, Mr. Lambert's salary is established annually by the Board
of Directors, but may not be less than $120,000 per year. Mr. Lambert became
Senior Vice President of Operations in May 1994.
STOCK PLANS
1988 Non-Statutory Stock Option Plan. The Company's 1988 Non-Statutory
Stock Option Plan (the "1988 Plan") was adopted by the Board of Directors on
October 22, 1988. The 1988 Plan provides for the issuance of a maximum of 62,500
shares of Common Stock pursuant to the grant of non-qualified stock options to
employees, officers and other individuals providing services or acting as
directors of the Company. Options granted under the 1988 Plan generally vest 20%
on the date of grant and an additional 20% annually on each subsequent
anniversary of the date of grant.
As of September 28, 1996, options to purchase 500 shares of Common Stock at
an exercise price of $11.00 per share were outstanding under the 1988 Plan. The
1988 Plan is administered by the Compensation Committee of the Board of
Directors. No further options may be granted or issued under this plan.
1991 Non-Statutory Stock Option Plan. The Company's 1991 Non-Statutory
Stock Option Plan (the "1991 Plan") was adopted by the Board of Directors on
April 12, 1991. The 1991 Plan provides for the
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<PAGE> 45
issuance of a maximum of 239,245 shares of Common Stock pursuant to the grant of
non-qualified stock options in recognition of past services provided by and/or
to provide a performance incentive for certain key employees, officers and other
individuals providing services or acting as directors of the Company. Options
granted under the 1991 Plan generally vest 20% on the date of grant and an
additional 20% annually on each subsequent anniversary of the date of grant.
As of September 28, 1996, options to purchase 173,654 shares of Common
Stock at an average exercise price of $0.40 per share were outstanding under the
1991 Plan. The 1991 Plan expired on June 30, 1991 and no further options may be
granted under this plan.
1993 Stock Option and Incentive Plan. The Company's 1993 Stock Option and
Incentive Plan (the "1993 Plan") was adopted by the Board of Directors on April
22, 1993 and approved by the Company's shareholders on May 27, 1993. The 1993
Plan provides for the issuance of a maximum of 132,908 shares of Common Stock
pursuant to the grant to employees and officers of "incentive stock options"
within the meaning of the Internal Revenue Code and the grant of non-qualified
stock options to service providers and directors of the Company. Options granted
under the 1993 Plan generally vest 20% on the date of grant and an additional
20% annually on each subsequent anniversary of the date of grant.
As of September 28, 1996, options to purchase 79,500 shares of Common Stock
at an average exercise price of $0.40 per share were outstanding under the 1993
Plan. The 1993 Plan is administered by the Compensation Committee of the Board
of Directors. No further options may be granted or issued under this plan.
1994 Stock Option and Incentive Plan. The Company's 1994 Stock Option and
Incentive Plan (the "1994 Plan") was adopted by the Board of Directors on
October 3, 1994 and approved by the Company's shareholders on May 26, 1995. The
1994 Plan provides for the issuance of a maximum of 593,750 shares of Common
Stock pursuant to the grant to employees and officers of "incentive stock
options" within the meaning of the Internal Revenue Code and the grant of
non-qualified stock options to service providers and directors of the Company.
Options granted under the 1994 Plan generally vest 20% on the date of grant and
an additional 20% annually on each subsequent anniversary of the date of grant.
As of September 28, 1996, options to purchase 410,855 shares of Common
Stock at an average exercise price of $0.40 per share were outstanding under the
1994 Plan. The 1994 Plan is administered by the Compensation Committee of the
Board of Directors. No further options may be granted or issued under this plan.
1996 Incentive Stock Option Plan. The 1996 Incentive Stock Option Plan
("1996 ISO Plan") was adopted by the Board of Directors on January 26, 1996 and
approved by the Company's shareholders on February 12, 1996. The 1996 ISO Plan
provides for the grant of options to purchase shares of Common Stock of the
Company pursuant to the grant to employees and officers of "incentive stock
options" within the meaning of the Internal Revenue Code. The 1996 ISO Plan has
reserved for issuance a maximum of 600,000 shares.
As of September 28, 1996, options to purchase 152,500 shares of Common
Stock at a weighted average exercise price of $13.62 per share were outstanding
under the 1996 ISO Plan. The 1996 ISO Plan is administered by the Compensation
Committee of the Board of Directors. Subject to the provisions of the 1996 ISO
Plan, the Compensation Committee has the authority to select the optionees and
determine the terms of the incentive stock options granted, including (i) the
number of shares, (ii) option exercise terms, (iii) the duration of the option
and (iv) the time, manner and form of payments for exercise of an option. An
incentive stock option is not transferable by the optionholder except by will or
by the laws of descent and distribution. The exercise price of the grants made
under the 1996 ISO Plan cannot be less than the market price of the Common Stock
at the date of grant. Generally, no incentive stock option may be exercised more
than 90 days following termination of employment unless the termination is due
to death or disability, in which case the option is exercisable for a maximum of
180 days after such termination.
1996 Non-Employee Director Stock Option Plan. The 1996 Non-Employee
Director Stock Option Plan (the "1996 Director Option Plan") was adopted by the
Board of Directors on January 26, 1996 and
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<PAGE> 46
approved by the Company's shareholders on February 12, 1996. The 1996 Director
Option Plan provides for the grant of options to purchase a maximum of 150,000
shares of Common Stock of the Company to non-employee directors of the Company.
The 1996 Director Option Plan is administered by the Compensation Committee
of the Board of Directors. Upon the commencement of the 1996 Director Option
Plan, each director who was not also an employee of the Company and who was a
director on January 26, 1996, received an option to purchase 10,000 shares of
Common Stock. Any person who becomes a director of the Company after January 26,
1996 shall receive an option to purchase 5,000 shares of Common Stock. Options
granted under the 1996 Director Option Plan become exercisable in five equal
annual installments beginning on the first anniversary date of the grant
provided that the optionee remains a director over five years. Each non-employee
director will automatically receive, each year after his or her initial grant,
an option to purchase an additional 2,500 shares which will vest annually over
five years. All options granted under the 1996 Director Option Plan will have an
exercise price equal to the fair market value of the Common Stock on the date of
grant. The term of each option will be for a period of ten years from the date
of grant. Options may not be assigned or transferred except by will or by the
laws of descent and distribution and are exercisable to the extent vested only
while the optionee is serving as a director of the Company or within 90 days
after the optionee ceases to serve as a director of the Company (except that if
a director dies or becomes disabled while he or she is serving as a director of
the Company, the option is exercisable for a maximum of 180 days after such
death or disability). Pursuant to the 1996 Director Option Plan, Messrs. Deroux,
Loeb, Olmer, Sprague and van Marcke were each automatically granted, on January
26, 1996, a non-qualified option to purchase 10,000 shares of Common Stock at an
exercise price of $9.50 per share. Upon joining the Board of Directors, Dr.
Flaschen was automatically granted, on August 28, 1996, a non-qualified option
to purchase 5,000 shares of Common Stock at an exercise price of $17.13 per
share.
1996 Employee Stock Purchase Plan. The 1996 Employee Stock Purchase Plan
(the "1996 Purchase Plan") was adopted by the Board of Directors on January 26,
1996 and approved by the Company's shareholders on February 12, 1996. The 1996
Purchase Plan provides for the issuance of a maximum of 250,000 shares of Common
Stock pursuant to the exercise of nontransferable options granted to
participating employees.
The 1996 Purchase Plan is administered by the Compensation Committee of the
Board of Directors. All employees of the Company, except employees who own five
percent or more of the Company's stock, whose employment is 20 hours or more per
week and more than five months in any calendar year and who have completed at
least one year of employment are eligible to participate in the 1996 Purchase
Plan. Employees who own five percent or more of the Company's Common Stock and
directors who are not employees of the Company may not participate in the 1996
Purchase Plan. To participate in the 1996 Purchase Plan, an employee must
authorize the Company to deduct an amount (not less than one percent nor more
than ten percent of a participant's total cash compensation) from his or her pay
during the six-month periods commencing on January 1 and July 1 of each year
(each a "Plan Period"), but in no case shall an employee be entitled to purchase
more than 1,000 shares in any Plan Period. The exercise price for the option for
each Plan Period is 85% of the lesser of the market price of the Common Stock on
the first or last business day of the Plan Period. If an employee is not a
participant on the last day of the Plan Period, such employee is not entitled to
exercise his or her option, and the amount of his or her accumulated payroll
deductions will be refunded. An employee's rights under the 1996 Purchase Plan
terminate upon his or her voluntary withdrawal from the plan at any time or upon
termination of employment.
COMPENSATION COMMITTEE -- INTERLOCKS AND INSIDER PARTICIPATION
Prior to 1996, the Company had no Compensation Committee or any other board
committee performing similar functions. Decisions concerning compensation of
executive officers were made by the Board of Directors, which included Mr.
Donegan, the President and Chief Executive Officer of the Company. In April
1996, the Company established a Compensation Committee of its Board of
Directors, which presently consists of Messrs. Loeb and Drs. Sprague and
Flaschen.
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<PAGE> 47
TAX DEFERRED SAVINGS PLAN
The Company maintains a Tax Deferred Savings Plan (the "Savings Plan"). All
employees of the Company who have completed at least 1,000 hours of service
within the year are eligible to participate in the Savings Plan. The Savings
Plan provides that each participant may contribute from 1% to 15% of his or her
pre-tax compensation (up to a statutorily prescribed annual limit, $9,500 in
1996) to the Savings Plan. The percentage elected by certain highly compensated
participants may be required to be lower. All amounts contributed to the Savings
Plan by employee participants and earnings on these contributions are fully
vested at all times. The Company makes matching contributions of 50% of the
first 6% of a participant's contribution. Such Company contributions become
fully vested upon a participant's completion of 6 years of service. Employee
participants may elect to invest their contributions in various established
funds, which include fixed income, growth and equity funds.
CERTAIN TRANSACTIONS
On December 31, 1993, $5.0 million in principal of a promissory note and
$400,000 of interest owed by the Company to American Tractebel Corporation
("American Tractebel"), an affiliate of Tractebel S.A., was forgiven by American
Tractebel.
During 1993 and 1994, Compagnie Europeenne de Financement S.A. ("CEF"), an
affiliate of Tractebel S.A., advanced $1.8 million and $1.2 million to the
Company in exchange for an unsecured subordinated promissory note. These loans
were extended on January 29, 1996 and mature on February 28, 1997. These
borrowings bear interest at the LIBOR three month rate plus a margin of 0.75%.
At March 30, 1996, the interest rate on these loans was approximately 6.24%. The
Company repaid this debt in full in April 1996.
On April 6, 1995, American Tractebel agreed to advance up to $1.0 million
to the Company in exchange for a subordinated promissory note bearing interest
at 7.0% per annum and payable in monthly installments from May 1, 1995 through
April 30, 2000 when any outstanding amounts under the note are due. Effective
September 22, 1995, American Tractebel agreed to advance an additional $500,000
to the Company, for an aggregate advance of $1.5 million, on the same terms as
the initial $1.0 million advance. The note is secured by certain equipment owned
by the Company. The Company repaid this debt in full in April 1996.
On August 10, 1995, American Tractebel advanced $300,000 to the Company in
exchange for an unsecured subordinated promissory note bearing interest at 7.0%
per annum and due January 1, 1997. The Company repaid this debt in full in April
1996.
Pursuant to an Agreement of Lease, dated January 31, 1996, the Company
leases its Billerica facility of approximately 47,600 square feet from ATC
Billerica Corporation, an affiliate of Tractebel S.A. Under a previous lease,
the Company paid rent to ATC Billerica Corporation in the amounts of $261,600,
$216,450 and $67,393 for 1993, 1994 and 1995, respectively. Under the Agreement
of Lease, the Company will pay monthly rent of $9,917 for the first year of the
lease, which payments are subject to an annual escalation. The Agreement of
Lease expires on January 31, 2001, subject to an option of the Company to extend
such lease for an additional five-year period.
The Company's Revolving Credit Agreement with Generale Bank, as amended in
February 1996, provided for a $7.5 million line of credit due February 28, 1997,
secured by the Company's inventories and accounts receivable and bearing
interest at Generale Bank's prime rate plus a commitment fee in the amount of
0.25% per annum of the unused amount. As of March 30, 1996, the Company had
approximately $7.5 million outstanding under the line of credit. Generale Bank
is approximately 26% owned by Societe Generale de Belgique S.A., which in turn
owns approximately 40% of the outstanding capital stock of Tractebel S.A. The
Company repaid this line of credit in full in April 1996 and terminated this
agreement with Generale Bank at that time.
The Company has adopted a policy whereby all future transactions between
the Company and its officers, directors and affiliates will be on terms no less
favorable to the Company than could be obtained from unrelated third parties and
will be approved by a majority of the disinterested members of the Company's
Board of Directors.
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<PAGE> 48
PRINCIPAL AND SELLING SHAREHOLDERS
<TABLE>
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of September 28, 1996 and as adjusted
to reflect the sale of the shares offered hereby (i) by each person or entity
known by the Company to own beneficially more than 5% of the outstanding shares
of Common Stock, (ii) by each director of the Company, (iii) by each of the
Named Executive Officers and (iv) by all directors and executive officers of the
Company as a group. Unless otherwise indicated below, to the knowledge of the
Company, each person or entity listed below maintains a mailing address at c/o
SIPEX Corporation, 22 Linnell Circle, Billerica, Massachusetts 01821 and has
sole voting and investment power over the shares of Common Stock shown as
beneficially owned, except to the extent authority is shared by spouses under
applicable law.
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED
TO OFFERING(1) NUMBER OF AFTER OFFERING(1)
-------------------- SHARES --------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------ --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Tractebel S.A. and affiliate(2).......... 3,928,986 56.3% 2,000,000 1,928,986 24.2%
Place du Trone 1
1000 Brussels, Belgium
James E. Donegan(3)...................... 117,995 1.7% -- 117,995 1.5%
Frank R. DiPietro(4)..................... 20,250 * -- 20,250 *
Raymond W. B. Chow(5).................... 10,000 * -- 10,000 *
Sanford Cohen(6)......................... 5,000 * -- 5,000 *
A. Neal Lambert(7)....................... 0 -- -- 0 --
Manfred Loeb(8).......................... 3,000 * -- 3,000 *
Lionel H. Olmer(9)....................... 1,000 * -- 1,000 *
Daniel Deroux(10)........................ 1,000 -- -- 1,000 --
Steward S. Flaschen(11).................. 0 -- -- 0 --
John L. Sprague(12)...................... 0 -- -- 0 --
Philippe van Marcke(13).................. 0 -- -- 0 --
All directors and officers as a group (11
persons)(14)........................... 158,245 2.2% -- 158,245 1.9%
<FN>
- ---------------
* Less than 1.0% of the outstanding Common Stock.
(1) The number of shares of Common Stock deemed outstanding prior to this
offering includes 6,980,846 shares of Common Stock outstanding as of
September 28, 1996. The number of shares of Common Stock deemed outstanding
after this offering includes an additional 1,000,000 shares of Common Stock
which are being offered for sale by the Company.
(2) Includes 3,552,362 shares of Common Stock owned by Tractebel S.A. and
376,624 shares of Common Stock owned by Telfin S.A., an affiliate of
Tractebel S.A. Telfin S.A. is selling all of its shares of Common Stock and
Tractebel S.A. is selling 1,623,376 shares of Common Stock in this
offering.
(3) Includes 112,995 shares issuable pursuant to stock options which are
exercisable prior to November 27, 1996. Excludes 35,000 shares issuable
pursuant to stock options which are exercisable after November 27, 1996.
(4) Includes 18,500 shares issuable pursuant to stock options which are
exercisable prior to November 27, 1996. Also includes 250 shares of Common
Stock owned by Mr. DiPietro's son, as to which shares he disclaims
beneficial ownership. Excludes 55,000 shares issuable pursuant to stock
options which are exercisable after November 27, 1996.
</TABLE>
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<PAGE> 49
(5) Excludes 80,000 shares issuable pursuant to stock options which are
exercisable after November 27, 1996.
(6) Includes 5,000 shares issuable pursuant to stock options which are
exercisable prior to November 27, 1996. Excludes 40,000 shares issuable
pursuant to stock options exercisable after November 27, 1996.
(7) Excludes 40,000 shares issuable pursuant to stock options which are
exercisable after November 27, 1996.
(8) Excludes all shares held by Tractebel S.A. and Telfin S.A. with which Mr.
Loeb is affiliated and as to whose shares he disclaims beneficial ownership
of, except to the extent of any individual interest in such entities.
Excludes 10,000 shares issuable pursuant to stock options exercisable after
November 27, 1996.
(9) Excludes 10,000 shares issuable pursuant to stock options exercisable after
November 27, 1996.
(10) Excludes all shares held by Tractebel S.A. and Telfin S.A. with which Mr.
Deroux is affiliated and as to whose shares he disclaims beneficial
ownership of, except to the extent of any individual interest in such
entities. Excludes 10,000 shares issuable pursuant to stock options
exercisable after November 27, 1996.
(11) Excludes 5,000 shares issuable pursuant to stock options exercisable after
November 27, 1996.
(12) Excludes 10,000 shares issuable pursuant to stock options exercisable after
November 27, 1996.
(13) Excludes all shares held by Tractebel S.A. and Telfin S.A., with which Mr.
van Marcke is affiliated and as to whose shares he disclaims beneficial
ownership of, except to the extent of any individual interest in such
entities. Excludes 10,000 shares issuable pursuant to stock options
exercisable after November 27, 1996.
(14) Includes 136,495 shares issuable pursuant to stock options which are
exercisable prior to November 27, 1996.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 shares
of Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred
Stock, par value $.01 per share.
COMMON STOCK
As of September 28, 1996, there were 6,980,846 shares of Common Stock
outstanding and held of record by approximately 107 shareholders. Based upon the
number of shares outstanding as of that date and giving effect to the issuance
of the 1,000,000 shares of Common Stock offered by the Company, there will be
7,980,846 shares of Common Stock outstanding upon the closing of this offering.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of shareholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of the Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in this offering will be, when issued and paid for, fully
paid and nonassessable. The rights, preferences and
49
<PAGE> 50
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of Preferred
Stock which the Company may designate and issue in the future. Upon the closing
of this offering, there will be no shares of Preferred Stock outstanding.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further shareholder approval, to issue from time to
time up to an aggregate of 1,000,000 shares of Preferred Stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of the Company. The Company has no present plans to issue any
shares of Preferred Stock.
MASSACHUSETTS LAW AND CERTAIN PROVISIONS OF THE COMPANY'S RESTATED ARTICLES OF
ORGANIZATION AND RESTATED BY-LAWS; ANTI-TAKEOVER EFFECTS
The Company is subject to Chapter 110F of the Massachusetts General Laws,
an anti-takeover law. Under Chapter 110F, a Massachusetts corporation with 200
or more shareholders may not engage in a "business combination" with an
"interested shareholder" for a period of three years after the date of the
transaction in which the person becomes an interested shareholder, unless (i)
prior to such date, the Board of Directors approves either the business
combination or the transaction which results in the shareholder becoming an
interested shareholder, (ii) upon consummation of the transaction which results
in the shareholder becoming an interested shareholder, the interested
shareholder owns at least 90% of the outstanding voting stock of the corporation
(excluding shares held by certain affiliates of the corporation), or (iii) on or
subsequent to such date, the business combination is approved by both the Board
of Directors and the holders of two-thirds of the outstanding voting stock of
the corporation (excluding shares held by the interested shareholder). An
"interested shareholder" is a person who, together with affiliates and
associates, owns (or at any time within the prior three years did own) 5% or
more of the outstanding voting stock of the corporation. A "business
combination" includes a merger, a stock or asset sale, and certain other
specified transactions resulting in a financial benefit to the interested
shareholder.
Massachusetts General Laws Chapter 156B, Section 50A requires that publicly
held Massachusetts corporations have a classified board of directors consisting
of three classes as nearly equal in size as possible, unless the corporation
elects not to be covered by Section 50A. The Company's Restated By-Laws, as
amended, (the "Restated By-Laws") contain provisions which give effect to
Section 50A. See "Management -- Executive Officers and Directors." The Restated
By-Laws also include a provision excluding the Company from the applicability of
Chapter 110D of the Massachusetts General Laws. Under Chapter 110D, any
shareholder of a corporation subject to this statute who acquires 20% or more of
the outstanding voting stock of a corporation subject to the statute may not
vote such stock unless shareholders holding a majority of the outstanding voting
stock (excluding the interested shares) of the corporation so authorize. The
Board of Directors may amend the Company's Restated By-Laws at any time to
subject the Company to this statute prospectively.
Massachusetts General Laws Chapter 156B, Section 67 provides that a
corporation may indemnify its directors and officers to the extent specified in
or authorized by (i) the articles of organization, (ii) a by-law adopted by the
shareholders, or (iii) a vote adopted by the holders of a majority of the shares
of stock entitled to vote on the election of directors. In all instances, the
extent to which a corporation provides indemnification to its directors and
officers under Section 67 is optional. Massachusetts General Laws Chapter 156B,
Section 67 forbids the indemnification of any person with respect to any matter
to which he shall have been adjudicated in any proceeding not to have acted in
good faith in the reasonable belief that his action was in the best interest of
the corporation. The United States Securities and Exchange Commission has
advised the Company that in its view indemnification of directors and officers
for
50
<PAGE> 51
violations of federal securities law is against public policy and is therefore,
unenforceable. If such a claim for indemnification arises in the absence of
controlling precedent overruling the Securities and Exchange Commission's view,
the Company has agreed to submit the question to a court of appropriate
jurisdiction.
The Company's Restated By-Laws indemnify the directors and officers against
liabilities arising out of legal proceedings brought against them by reason of
their status as directors and officers or by reason of their agreeing to serve,
at the request of the Company, as a director or officer of another organization.
Under the Restated By-Laws, each director and officer shall be indemnified by
the Company for all costs and expenses (including attorneys' fees), judgments,
liabilities and amounts paid in settlement of such proceedings, even if he is
not successful on the merits, if he acted in good faith in the reasonable belief
that his action was in the best interest of the Company. The Board of Directors
may authorize advancing litigation expenses to a director or officer at his
request upon receipt of an undertaking by such director or officer to repay such
expenses if it is ultimately determined that he is not entitled to
indemnification for such expense. The Restated By-Laws provide that the
directors and officers of the Company shall be indemnified by the Company to the
fullest extent authorized by Massachusetts law, as it now exists or may in the
future be amended. In addition, the Amended and Restated Articles of
Organization of the Company (the "Restated Articles") provide that the directors
of the Company will not be personally liable for monetary damages to the Company
for breaches of their fiduciary duty as directors, unless they violated their
duty of loyalty to the Company or its shareholders, acted in bad faith,
knowingly or intentionally violated the law, authorized illegal dividends or
redemptions or derived an improper personal benefit from their action as
directors.
The Restated Articles provide that any amendment to the Restated Articles,
the sale, lease or exchange of all or substantially all of the Company's
property and assets, or the merger or consolidation of the Company into or with
any other corporation may be authorized by the approval of the holders of a
majority of the shares of each class of stock entitled to vote thereon, rather
than by two-thirds as otherwise provided by statute, provided that the
transactions have been authorized by a majority of the members of the Board of
Directors and the requirement of any other applicable provisions of the Restated
Articles have been met. In addition, the Restated Articles provide that shares
of the Company's Preferred Stock may be issued in the future without shareholder
approval and upon such terms and conditions, and having such rights, privileges
and preferences, as the Board of Directors may determine. The Company's Restated
By-Laws further provide that special meetings of shareholders may only be called
by the President or a majority of the Board of Directors, or by the Clerk upon
the written request of the holders of at least 40% of the Company's outstanding
Common Stock. See " -- Preferred Stock."
The Company has entered into separate indemnification agreements with each
of its directors and executive officers, whereby the Company agreed, among other
things, (i) to indemnify them to the fullest extent permitted by the Business
Corporation Law of the Commonwealth of Massachusetts, subject to specified
limitations, against certain liabilities actually and reasonably incurred by
them in any proceeding in which they are a party that may arise by reason of
their status as directors, officers, employees or agents or may arise by reason
of their serving as such at the request of the Company for another entity and
(ii) to advance their expenses incurred as a result of any proceeding against
them as to which they could be indemnified. The Company intends to enter into
similar separate indemnification agreements with any directors or officers who
may join the Company in the future. There is no pending litigation or proceeding
involving a director, officer, employee or other agent of the Company as to
which indemnification is being sought nor is the Company aware of any pending or
threatened litigation that may result in claims for indemnification.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Boston EquiServe,
L.P., Boston, Massachusetts.
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<PAGE> 52
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public
market following the offering (pursuant to Rule 144 of the Securities Act or
otherwise), as well as the issuance of shares upon exercise of employee stock
options, could adversely affect the prevailing market price of the Common Stock
and impair the Company's ability to raise additional capital through the sale of
equity securities. The Company and all of its executive officers and directors,
who will hold in the aggregate 21,500 shares of Common Stock and exercisable
options to purchase 181,495 shares of Common Stock after the offering, have
agreed that they will not, without the prior written consent of Alex. Brown &
Sons Incorporated, offer, sell, contract to sell, transfer or otherwise dispose
of, directly or indirectly, any shares of the Common Stock, or any securities
convertible into, or exercisable or exchangeable for, Common Stock or warrants
or other rights to purchase Common Stock, prior to the expiration of 90 days
from the date of the consummation of the offering, except, with respect to the
Company, (i) shares of Common Stock issued pursuant to the exercise of
outstanding options and (ii) options granted to its employees, officers and
directors under its existing employee stock option plans so long as none of such
options become exercisable during said 90 day period. Tractebel S.A. will hold
1,972,986 shares of Common Stock after the offering, and has agreed that it will
not, without the prior written consent of Alex. Brown & Sons Incorporated, sell,
contract to sell, transfer or otherwise dispose of, directly or indirectly, any
shares of Common Stock, or any securities convertible into, or exercisable or
exchangeable for, Common Stock or warrants or other rights to purchase Common
Stock, prior to the expiration of 90 days from the date of the consummation of
this offering.
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<PAGE> 53
UNDERWRITING
<TABLE>
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated, UBS Securities LLC and Adams, Harkness & Hill,
Inc., have severally agreed to purchase from the Company and the Selling
Shareholders the following respective number of shares of Common Stock at the
public offering price less the underwriting discounts and commissions set forth
on the front cover of this Prospectus:
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated.................................................. 1,000,000
UBS Securities LLC............................................................... 1,000,000
Adams, Harkness & Hill, Inc...................................................... 1,000,000
---------
Total.......................................................................... 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
of such shares are purchased.
The Company and the Selling Shareholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of $0.70 per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $0.10 per share to
certain other dealers. After the public offering, the public offering price and
other selling terms may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 3,000,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 3,000,000 shares are being offered.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
The Company and all executive officers and directors of the Company who
will hold in the aggregate 21,500 shares of Common Stock and exercisable options
to purchase 181,495 shares of Common Stock after the offering, have agreed that
they will not, directly or indirectly, without the prior written consent of
Alex. Brown & Sons Incorporated, offer, sell, offer to sell, contract to sell,
grant any option to purchase or otherwise dispose of any shares of Common Stock
or other capital stock of the Company or any securities convertible into, or
exercisable or exchangeable for, any shares of Common Stock or other capital
stock of the Company for a period of 90 days after the date of this Prospectus.
Tractebel S.A. will hold 1,928,986 shares of Common Stock after the offering,
and has agreed that it will not, directly or indirectly, without the prior
written consent of Alex. Brown & Sons Incorporated, offer, sell, offer to sell,
contract to sell, grant any option to purchase or otherwise dispose of any
shares of Common Stock or other capital stock of the Company or any securities
convertible into, or exercisable or exchangeable for, any shares of Common Stock
or other capital stock of the Company for a period of 90 days after the date of
this Prospectus.
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<PAGE> 54
The Representatives of the Underwriters have advised the Company and the
Selling Shareholders that the Underwriters do not intend to confirm sales to any
account over which they exercise discretionary authority.
In connection with this offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market may engage in passive market making
on the Nasdaq National Market in accordance with Rule 10b-6A under the
Securities Exchange Act of 1933, as amended (the "Exchange Act") during the two
business day period before the commencement of offers or sales of the Common
Stock in this offering. The passive market making transactions must comply with
applicable volume and price limits and be identified as such. In general, a
passive market maker may display its bid at a price not in excess of the highest
independent bid for such security; if all independent bids are lowered before
the passive market maker's bid, however, such bid must then be lowered when
certain purchase limits are exceeded.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Ropes & Gray, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and for the year ended December 31, 1995, have been included herein and in
the registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent auditors, appearing elsewhere herein, and upon the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements of the Company as of December 31,
1994 and for each of the two years in the period ended December 31, 1994
included herein and in the registration statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports thereon appearing
elsewhere herein. The report of Ernst & Young LLP covering the financial
statements for the year ended December 31, 1994 contains an explanatory
paragraph that states that the Company has incurred substantial losses in each
of the last five years, had negative cash flow from operations in 1994 and has a
stockholders' deficit at December 31, 1994 and that these conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. Such consolidated financial
statements and selected financial data are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
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<PAGE> 55
CHANGE IN INDEPENDENT ACCOUNTANTS
The Company retained KPMG Peat Marwick LLP as its independent auditors and
replaced Ernst & Young LLP on September 15, 1995. The report of Ernst & Young
LLP on the Company's financial statements for the year ended December 31, 1994
contained an explanatory paragraph about the Company's ability to continue as a
going concern. Since the initial engagement of Ernst & Young LLP for the year
ended December 31, 1988 and through the date of replacement, there were no
disagreements between the Company and Ernst & Young LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure. The change in independent accountants was approved by the
Board of Directors.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed by the Company can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Judiciary Plaza, Washington,
D.C. 20549, and at the Commission's Regional Offices at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024,
Judiciary Plaza, Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding the Company; the address of such site is
http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
S-1 (including all amendments and exhibits thereto, the "Registration
Statement"), under the Securities Act of 1933, as amended, with respect to the
Common Stock offered hereby. As permitted by the rules and regulations of the
Commission, this Prospectus omits certain information contained in the
Registration Statement. For further information with respect to the Company and
the Common Stock offered hereby, reference is hereby made to the Registration
Statement and to the exhibits and schedules filed therewith as a part thereof.
Statements contained in this Prospectus regarding the contents of any agreement
or other document filed as an exhibit to the Registration Statement are not
necessarily complete, and in each instance reference is made to the copy of such
agreement filed as an exhibit to the Registration Statement. The Registration
Statement, including the exhibits and schedules thereto, may be inspected at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, DC 20549, and at certain of its
Regional Offices located at 7 World Trade Center, 13th Floor, New York, NY 10048
and 500 West Madison Street, Chicago, IL 60661. Copies of all or any part
thereof may be obtained at prescribed rates by mail from the Public Reference
Section of the Commission at 450 Fifth Street, Washington, DC 20549 upon payment
of the prescribed fees.
The Company intends to furnish to its shareholders annual reports
containing Consolidated Financial Statements audited by an independent
accounting firm and quarterly reports containing unaudited Consolidated
Financial Statements for the first three quarters of each fiscal year.
55
<PAGE> 56
SIPEX CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Independent Auditors' Reports......................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1994 and 1995 and (unaudited) September
28,
1996............................................................................. F-5
Consolidated Statements of Operations for the year ended December 31, 1993, 1994 and
1995 and (unaudited) for the nine months ended September 30, 1995 and September
28, 1996......................................................................... F-6
Consolidated Statements of Stockholders' Equity (Deficit) for the year ended
December 31, 1993, 1994 and 1995 and (unaudited) for the nine months ended
September 28, 1996............................................................... F-7
Consolidated Statements of Cash Flows for the year ended
December 31, 1993, 1994 and 1995 and (unaudited) for the nine months ended
September 30, 1995 and September 28, 1996........................................ F-8
Notes to Consolidated Financial Statements.......................................... F-9
</TABLE>
F-1
<PAGE> 57
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Sipex Corporation:
We have audited the accompanying consolidated balance sheet of Sipex
Corporation (the Company) as of December 31, 1995, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sipex
Corporation as of December 31, 1995, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Boston, Massachusetts
February 12, 1996
F-2
<PAGE> 58
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sipex Corporation
We have audited the accompanying consolidated balance sheet of Sipex Corporation
(the Company) as of December 31, 1994, and the related consolidated statements
of operations, stockholders' equity (deficit), and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
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, 1994 and the consolidated results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Sipex Corporation will continue as a going concern. As more fully described
in Note 1, the Company has incurred substantial losses in each of the last five
years, had negative cash flow from operations in 1994 and has a stockholders'
deficit at December 31, 1994. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans with regard
to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 3, 1995
F-3
<PAGE> 59
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sipex Corporation
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Sipex Corporation (the Company) for the
year ended December 31, 1993. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Sipex Corporation for the year ended December 31, 1993, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
January 31, 1994
F-4
<PAGE> 60
SIPEX CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 28,
DECEMBER 31, --------------
------------------------------ 1996
ASSETS 1994 1995 --------------
- ------------------------------------------------------- ------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 175,783 $ 257,349 $ 3,654,074
Accounts receivable, less allowances of $200,000,
$240,000 and $480,000 in 1994, 1995 and September
28, 1996, respectively............................. 4,014,249 5,233,724 5,012,414
Inventories.......................................... 5,459,208 7,414,386 11,774,333
Prepaid expenses..................................... 107,709 225,121 123,841
------------- ------------- -----------
Total current assets.......................... 9,756,949 13,130,580 20,564,662
Property, plant and equipment, net..................... 1,860,735 2,448,108 2,873,922
Intangible assets, net................................. 1,409,969 -- --
Other assets........................................... 332,569 291,006 292,221
------------- ------------- -----------
Total assets.................................. $ 13,360,222 $ 15,869,694 $ 23,730,805
============= ============= ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- -------------------------------------------------------
<S> <C> <C> <C>
Current liabilities:
Current portion of long-term debt.................... $ 83,761 $ 209,437 $ 200,521
Accounts payable..................................... 2,500,919 3,921,715 2,990,772
Accrued expenses..................................... 1,230,425 1,692,149 1,464,982
------------ ------------ --------------
Total current liabilities..................... 3,815,105 5,823,301 4,656,275
Long-term debt, net of current portion................. 212,486 220,654 77,917
Long-term debt to affiliates........................... 9,400,019 11,709,710 --
------------ ------------ --------------
Total liabilities............................. 13,427,610 17,753,665 4,734,192
------------ ------------ --------------
Stockholders' equity (deficit):
Preferred stock, $.01 par value, no shares
authorized, issued or outstanding in 1994 and 1995,
1,000,000 shares authorized and no shares issued or
outstanding at September 28, 1996.................. -- -- --
Common stock, $.01 par value, authorized 40,000,000
shares, issued and outstanding 4,681,186,
4,685,306, 6,980,846 shares in 1994, 1995 and
September 28, 1996, respectively................... 46,812 46,853 69,808
Additional paid-in capital........................... 45,466,202 45,467,658 63,734,140
Accumulated deficit.................................. (45,778,625) (47,581,304) (44,975,469)
Cumulative translation adjustment.................... 198,223 182,822 168,134
------------ ------------ --------------
Total stockholders' equity (deficit).......... (67,388) (1,883,971) 18,996,613
------------ ------------ --------------
Total liabilities and stockholders' equity
(deficit)................................... $ 13,360,222 $ 15,869,694 $ 23,730,805
============= ============= ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 61
SIPEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------------------
----------------------------------------- SEPTEMBER 30, SEPTEMBER 28,
1993 1994 1995 1995 1996
----------- ----------- ----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.................. $27,532,865 $22,822,678 $29,978,525 $21,912,327 $27,169,092
Cost of sales.............. 22,384,486 18,230,488 19,078,986 14,053,609 15,835,617
----------- ----------- ----------- ----------- -----------
Gross profit..... 5,148,379 4,592,190 10,899,539 7,858,718 11,333,475
Operating expenses:
Research and
development........... 2,357,390 2,960,329 4,399,490 3,315,698 3,438,954
Marketing and selling.... 4,174,059 4,077,855 4,244,872 3,193,752 3,348,928
General and
administrative........ 1,956,485 1,894,023 1,905,849 1,501,890 1,528,500
Write-off of intangible
assets................ -- -- 1,319,970 1,319,970 --
----------- ----------- ----------- ----------- -----------
Total operating
expenses....... 8,487,934 8,932,207 11,870,181 9,331,310 8,316,382
----------- ----------- ----------- ----------- -----------
Income (loss) from
operations............... (3,339,555) (4,340,017) (970,642) (1,472,592) 3,017,093
Other income (expense):
Interest expense......... (493,616) (605,152) (909,894) (671,140) (154,324)
Other, net............... 124,233 143,277 105,144 127,129 (172,765)
----------- ----------- ----------- ----------- -----------
(369,383) (461,875) (804,750) (544,011) (327,089)
----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes.................... (3,708,938) (4,801,892) (1,775,392) (2,016,603) 2,690,004
Income tax expense
(benefit)................ 11,594 (93,171) 27,287 17,000 84,169
----------- ----------- ----------- ----------- -----------
Net income (loss).......... $(3,720,532) $(4,708,721) $(1,802,679) $(2,033,603) $ 2,605,835
=========== =========== =========== =========== ===========
Net income (loss) per
common and common
equivalent share......... $ (0.78) $ (0.99) $ (0.38) $ (0.43) $ 0.38
=========== =========== =========== =========== ===========
Weighted average common
stock and common stock
equivalents
outstanding.............. 4,757,671 4,757,671 4,759,727 4,754,123 6,861,657
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 62
SIPEX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- TOTAL
$.01 ADDITIONAL CUMULATIVE STOCKHOLDERS'
NUMBER OF PAR PAID-IN ACCUMULATED TRANSLATION EQUITY
SHARES VALUE CAPITAL DEFICIT ADJUSTMENT (DEFICIT)
--------- ------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1992.............. 4,681,186 $46,812 $40,466,202 $(37,349,372) $218,632 $ 3,382,274
Capital contributed in
connection with debt
forgiveness................. 5,000,000 5,000,000
Net loss....................... (3,720,532) (3,720,532)
Currency translation
adjustments................. 64,266 64,266
---------- ------- ----------- ------------ -------- ----------
Balance at
December 31, 1993.............. 4,681,186 46,812 45,466,202 (41,069,904) 282,898 4,726,008
Net loss....................... (4,708,721) (4,708,721)
Currency translation
adjustment.................. (84,675) (84,675)
---------- ------- ----------- ------------ -------- ----------
Balance at
December 31, 1994.............. 4,681,186 46,812 45,466,202 (45,778,625) 198,223 (67,388)
Acquisition of treasury
stock....................... (3,378) (34) (1,316) (1,350)
Issuance of common stock under
option plans................ 7,498 75 2,772 2,847
Net loss....................... (1,802,679) (1,802,679)
Currency translation
adjustment.................. (15,401) (15,401)
---------- ------- ----------- ------------ -------- ----------
Balance at
December 31, 1995.............. 4,685,306 46,853 45,467,658 (47,581,304) 182,822 (1,883,971)
Issuance of common stock
through initial public
offering and option plans... 2,295,540 22,955 18,266,482 18,289,437
Net income..................... 2,605,835 2,605,835
Currency translation
adjustment.................. (14,688) (14,688)
---------- ------- ----------- ------------ -------- ----------
Balance at
September 28, 1996
(unaudited).................... 6,980,846 $69,808 $63,734,140 $(44,975,469) $168,134 $18,996,613
========== ======= =========== ============ ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 63
SIPEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, ----------------------------
--------------------------------------- SEPTEMBER 30, SEPTEMBER 28,
1993 1994 1995 1995 1996
----------- ----------- ----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................ $(3,720,532) $(4,708,721) $(1,802,679) $(2,033,603) $ 2,605,835
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization................ 2,068,647 1,415,845 2,297,550 2,200,131 760,878
Loss on sale of machinery and equipment...... 30,835 84,901 -- -- --
Allowance for receivables.................... 98,994 110,000 166,000 161,998 270,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable... 815,841 (325,206) (1,248,355) (1,118,410) (48,690)
(Increase) decrease in inventories........... 2,481,054 580,358 (1,951,792) (623,458) (4,359,947)
(Increase) decrease in prepaid expenses...... 14,887 42,099 (74,598) 14,535 101,278
Decrease in other assets..................... 63,814 54,547 3,818 -- --
Increase (decrease) in accounts payable...... (622,756) 844,894 1,274,176 (286,553) (930,943)
Increase (decrease) in accrued expenses...... 89,667 (263,802) 442,646 596,712 (227,167)
---------- ---------- ----------
Net cash provided by (used in) operating
activities.............................. 1,320,451 (2,165,085) (893,234) (1,088,648) (1,828,756)
Investing activities:
Purchases of property, plant and equipment....... (373,296) (443,644) (1,213,760) (590,759) (1,187,906)
---------- ---------- ----------
Net cash used in investing activities..... (373,296) (443,644) (1,213,760) (590,759) (1,187,906)
Financing activities:
Proceeds from (payments of) long-term debt....... (2,599,981) 1,613,162 786,819 1,909,691 (11,709,710)
Proceeds from issuance of common stock, net...... -- -- 1,497 (1,189) 18,289,437
Payment of capital lease obligations............. (28,807) (154,595) (105,074) (150,866) (151,653)
Payment of promissory note....................... (300,000) -- -- -- --
Proceeds from issuance of subordinated debt...... 1,800,000 1,200,000 1,509,710 -- --
---------- ---------- ----------
Net cash provided by (used in) financing
activities.............................. (1,128,788) 2,658,567 2,192,952 1,757,636 6,428,074
Effect of foreign currency exchange rate changes on
cash and cash equivalents........................ 3,985 (154,574) (4,392) (21,982) (14,687)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents... (177,648) (104,736) 81,566 56,247 3,396,725
Cash and cash equivalents at beginning of period... 458,167 280,519 175,783 175,783 257,349
---------- ---------- ----------
Cash and cash equivalents at end of period......... $ 280,519 $ 175,783 $ 257,349 $ 232,030 $ 3,654,074
========== ========== ==========
Supplemental cash flow disclosure:
Capital contribution from affiliate.............. $ 5,000,000 $ -- $ -- $ -- $ --
Cash paid during the period for:
Income taxes................................... 11,594 15,126 11,755 11,755 48,168
Interest....................................... $ 446,636 $ 406,176 $ 817,697 $ 499,496 $ 421,026
========== ========== ==========
Supplemental disclosure of non-cash investing
activities:
Acquisition of assets from capital lease
obligations.................................... $ 233,906 $ 232,581 $ 252,080 $ 1,320,000 $ --
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 64
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Sipex Corporation (the Company) is a majority-owned subsidiary of
Tractebel, S.A. (the Parent). Sipex designs, manufactures and markets a wide
variety of analog integrated circuits which are focused on niche applications
within the computer and computer networking, industrial controls, test
equipment, telecommunications and electronic product markets. The Company
operates in the analog segment of the semiconductor industry. The accompanying
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
During the last five fiscal years, the Company has incurred losses which
management believes are attributable to reductions in defense spending by the
federal government, coupled with significant continuing investments by the
Company in new product development which, if they continue to be successful,
will enable the sale of products with broader commercial application. During
this period, capital required to effect this transition has been provided by the
Parent, affiliates and a revolving line of credit from Generale Bank. At
December 31, 1994, the Company was not assured of being able to secure adequate
financing to fund operations for the coming year.
During 1995, the Company's commercial sales increased from $14,000,000 to
$24,000,000. This increase resulted in the Company's achieving profitable
operations in the third and fourth quarters of 1995 (unaudited). However, the
ultimate success of the Company is dependent upon its ability to secure adequate
financing to fund future growth and to achieve profitable operations. The
Company believes that cash flow from operations, existing borrowing arrangements
and additional equity (see note 12) or other financing will be sufficient to
fund operations for the next eighteen months.
Revenue Recognition
Revenue from product sales is recognized at the time of shipment. Revenue
from engineering service contracts is recorded as performance or other
contractually specified milestones are reached. Additionally, the Company
accrues for estimated sales returns upon shipment.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt securities with an original maturity of three months or less
to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Costs are determined
using the first-in, first-out method.
F-9
<PAGE> 65
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996 IS UNAUDITED)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided
by using the straight-line and accelerated methods over their useful lives as
follows:
<TABLE>
<CAPTION>
USEFUL LIVES
------------
<S> <C>
Machinery and equipment......................................... 2-10 years
Furniture, fixtures and office equipment........................ 5-10 years
Building and leasehold improvements............................. Lease term
</TABLE>
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If it is determined that the carrying amount of an asset cannot
be fully recovered, an impairment loss is recognized.
Intangibles
The intangible assets pertained principally to the acquisition by the
Company of certain businesses involved in the development and design of custom
and standard products with military applications. Amortization was recorded
using the straight-line method over a period of 10 years. At December 31, 1994,
accumulated amortization totaled $2,596,508. In June 1995, the Company was
notified by its customer that the customer would not be receiving any additional
follow-on orders for the purchase of certain military products relating to the
processes acquired with the aforementioned businesses. The Company consequently
commenced a review of the net realizable value of the related intangibles
assets. In view of the significant reduction in sales and cash flows relating to
this product line, coupled with the growth in the Company's commercial product
sales which utilize a different process technology, the decision was made in
1995 to write-off the remaining book value assigned to intangible assets.
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
stockholders' equity. Such transaction gains and losses are immaterial for all
periods presented.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("FAS 109").
Pursuant to FAS 109, 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 income in the period that
includes the enactment date.
F-10
<PAGE> 66
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996 IS UNAUDITED)
Concentration of Credit Risk
Financial instruments of the Company consist of cash, accounts receivable,
accounts payable and bank indebtedness. The carrying amounts of these financial
instruments approximate their fair value. The write-offs to accounts receivable
were $171,000 and $6,000 for the years ended December 31, 1994 and 1995,
respectively.
Use of Estimates
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.
Unaudited Interim Consolidated Financial Statements
The consolidated financial statements as of and for the nine months ended
September 30, 1995 and September 28, 1996 are unaudited; however, they include
all adjustments (consisting of normal recurring adjustments) considered
necessary by management for a fair presentation of the financial position and
results of operations for these periods. The result of operations for interim
periods are not necessarily indicative of the results that may be expected for
the entire year.
Net Income (Loss) Per Share
Net income (loss) per share is based upon the weighted average number of
common and common equivalent shares outstanding (using the treasury stock
method) after certain adjustments described below. Common equivalent shares,
consisting of outstanding stock options, are included in the per share
calculations where the effect of their inclusion would be dilutive. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, all common
and common equivalent shares issued at prices less than the initial public
offering price during the twelve-month period prior to the initial filing of the
Registration Statement for the initial public offering have been included in the
calculation as if they were outstanding for all periods using the treasury stock
method and the aforementioned assumed initial public offering price. Fully
diluted income (loss) per share approximates primary income (loss) per share.
New Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 123, "Accounting for Stock-Based Compensation," which
established financial accounting and reporting standards for stock-based
employee compensation plans. Companies are encouraged, rather than required, to
adopt a new method that accounts for stock compensation awards based on their
fair value using an option pricing model. Companies that do not adopt this new
method will be required to make pro forma footnote disclosures of net income as
if the fair value-based method of accounting required by SFAS No. 123 had been
applied. The Company adopted SFAS No. 123 beginning in fiscal year 1996.
Adoption of this pronouncement did not have a material impact on the Company's
financial position or results of operations because the Company intends to make
pro forma footnote disclosures in its financial statements as of and for the
year ending December 31, 1996 instead of adopting the new accounting method.
F-11
<PAGE> 67
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996 IS UNAUDITED)
(2) INVENTORIES
Inventories were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 28,
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
Raw materials....................... $2,180,005 $3,315,490 $ 5,593,896
Work-in-process..................... 1,895,569 3,117,454 4,209,357
Finished goods...................... 1,383,634 981,442 1,971,080
---------- ---------- ----------
$5,459,208 $7,414,386 $11,774,333
========== ========== ==========
</TABLE>
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 28,
1994 1995 1996
----------- ----------- -------------
<S> <C> <C> <C>
Machinery and equipment........... $21,894,357 $23,084,365 $23,069,961
Furniture, fixtures and office
equipment....................... 1,329,663 1,328,364 2,059,773
Leasehold improvements............ 1,992,071 1,956,632 2,025,667
----------- ----------- -----------
25,216,091 26,369,361 27,155,401
Less accumulated depreciation and
amortization.................... 23,355,356 23,921,253 24,281,479
----------- ----------- -----------
$ 1,860,735 $ 2,448,108 $ 2,873,922
=========== =========== ===========
</TABLE>
(4) ACCRUED EXPENSES
Accrued expenses were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 28,
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
Accrued compensation................ $ 486,512 $ 614,248 $ 695,274
Accrued commissions................. 148,212 464,272 464,576
Accrued interest on subordinated
notes to affiliates............... -- 55,562 --
Other............................... 595,701 558,067 305,132
---------- ---------- ----------
$1,230,425 $1,692,149 $ 1,464,982
========== ========== ==========
</TABLE>
F-12
<PAGE> 68
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996 IS UNAUDITED)
(5) LONG TERM DEBT
The Company's long-term debt is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 28,
1994 1995 1996
---------- ----------- -------------
<S> <C> <C> <C>
Revolving line of credit....................... $6,400,019 $ 7,200,000 $ --
Subordinated note payable to CEF............... 3,000,000 3,000,000 --
Subordinated notes payable to affiliate........ -- 1,509,710 --
Capital lease obligations...................... 277,825 416,533 269,218
Other.......................................... 18,422 13,558 9,220
---------- ----------- ----------
9,696,266 12,139,801 278,438
Less current portion........................... 83,761 209,437 200,521
---------- ----------- ----------
$9,612,505 $11,930,364 $ 77,917
========== =========== ==========
</TABLE>
The Company has refinanced its revolving credit agreement with Generale
Bank, which is affiliated with the Company by virtue of common ownership,
effective February 29, 1996. This agreement provides for a $7,500,000 line of
credit which expires on February 28, 1997 and is secured by the Company's
inventories and accounts receivable. This line bears interest at the prime rate
plus a commitment fee in the amount of 1/4% per annum of the unused amount. The
line also prohibits the payment of cash dividends without the consent of
Generale Bank.
During 1993, the Company received advances of $1,800,000 in exchange for a
5.5% two year promissory note payable to Compagnie Europeenne de Financement
S.A. (CEF), an affiliate of the Parent. During 1994, an additional advance from
CEF of $1,200,000 was received in exchange for a 6.9% 18 month promissory note
payable. On January 29, 1996, both notes were extended through February 28,
1997, when the amounts borrowed and the accrued interest, which accrues interest
beginning January 29, 1996 at the London Interbank Offered Rate plus a margin of
3/4%, are payable in full. Early repayment is allowed with mutual consent of
both the lender and the Company without premium.
During 1993, a $5,000,000 promissory note and $400,000 in accrued interest
payable to American Tractebel Corporation (ATC), an affiliate, was forgiven.
During 1995, ATC made a loan to the Company for up to $1,500,000 at an interest
rate of 7%, of which $1,209,710 is outstanding at December 31, 1995. The loan
matures on April 30, 2000 and is secured by certain equipment owned by the
Company. Also during 1995, ATC loaned the Company $300,000, with interest at 7%
maturing on January 1, 1997. The amounts borrowed under these two loan
agreements, plus accrued interest, are payable in full upon maturity.
In 1994 and 1995, the Company entered into long-term capital leases for
equipment which extend through 2000, with imputed interest rates ranging from 9%
to 19%.
See note 12 regarding the use of proceeds from the Company's initial public
offering to repay amounts outstanding under the Company's various credit
facilities.
F-13
<PAGE> 69
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996 IS UNAUDITED)
The following is a schedule of principal payments on notes payable and
lease obligations:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
---------------------------------------------------------------
<S> <C>
1996...................................................... $ 209,437
1997...................................................... 10,674,800
1998...................................................... 38,761
1999...................................................... 7,093
2000...................................................... 1,209,710
-----------
$12,139,801
===========
</TABLE>
(6) INCOME TAXES
Total federal, state and foreign income tax expense (benefit) for the years
ended December 31, 1993, 1994 and 1995, all of which is current, consists of the
following:
<TABLE>
<CAPTION>
1993 1994 1995
------- -------- --------
<S> <C> <C> <C>
Federal............................................. $ -- $ -- $ --
State............................................... 11,594 12,000 (3,365)
Foreign............................................. -- (105,171) 30,652
-------- ---------- --------
$11,594.. $(93,171) $ 27,287
======== ========== ========
</TABLE>
The actual tax expense (benefit) for 1993, 1994 and 1995 differs from the
"expected" tax expense (computed by applying the statutory U.S. federal
corporate tax rate of 34% to earnings before income taxes) as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- ---------
<S> <C> <C> <C>
Computed "expected" tax benefit.............. $(1,261,039) $(1,632,643) $(603,633)
State income tax, net of federal income tax
benefit.................................... 7,652 7,920 (2,221)
Intangibles amortization..................... 70,238 70,238 269,213
Increase in valuation allowance for loss
carryforward............................... 1,187,639 1,433,755 345,890
Other........................................ 7,104 27,559 18,038
----------- ----------- ---------
$ 11,594 $ (93,171) $ 27,287
=========== =========== =========
</TABLE>
F-14
<PAGE> 70
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996 IS UNAUDITED)
<TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1994 and
1995 are presented below.
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 15,775,520 $ 16,214,804
Tax credit carryforwards............................. 665,602 665,602
Inventories, primarily non-deductible reserves....... 421,565 318,876
Accounts receivable, primarily allowances............ 80,252 40,232
Accrued expenses, principally provisions not
currently deductible.............................. 137,547 192,605
Fixed assets, due to differences in depreciation..... 1,692,895 1,512,702
------------ ------------
Total gross deferred tax assets.............. 18,773,381 18,944,821
Valuation allowance.................................. (18,626,780) (18,944,821)
------------ ------------
Net deferred tax assets...................... 146,601 --
Deferred tax liabilities:
Intangible assets, due to differences in
amortization...................................... (146,601) --
------------ ------------
Net deferred tax assets (liabilities)........ $ -- $ --
============ ============
</TABLE>
At December 31, 1995, the Company had U.S. net operating loss carryforwards
of approximately $42,000,000, which are available to offset future federal
taxable income through December 31, 2010. As of December 31, 1995 these loss
carryforwards could be utilized without limitation to offset future taxable
income of the Company. In September 1996, a "change in ownership" of the Company
occurred which will result in an annual limitation on the use of its net
operating loss carryforwards pursuant to the "change in ownership" provisions of
Section 382 of the Internal Revenue Code. The Company currently anticipates that
this limitation will not materially impact its utilization of its net operating
loss carryforwards through the year ending December 31, 1997. The Company also
has general business tax credit carryforwards for federal income tax purposes of
approximately $666,000 which are available to reduce future federal income taxes
through December 31, 2004.
The valuation allowance against deferred tax assets as of December 31, 1993
and January 1, 1993 was $16,918,860 and $15,627,250, respectively.
(7) STOCKHOLDERS' EQUITY
Effective upon the closing of its initial public offering of shares of
Common Stock on 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 stockholders approved a 1-for-4 reverse split
of its issued and outstanding Common Stock. All shares and per share data
presented in the accompanying consolidated financial statements have been
restated to reflect the increased number of authorized and decreased number of
outstanding shares of Common Stock.
At December 31, 1993, the Company maintained three stock option plans for
its employees. During 1994, the Board of Directors authorized the Company to
cancel substantially all outstanding, unexercised, stock options granted between
October 30, 1984 and October 21, 1988 under the 1981, 1986 and 1988 plans and
issued replacement options under the 1994 Plan.
F-15
<PAGE> 71
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996 IS UNAUDITED)
In April 1991, the Board of Directors approved the 1991 Non-Statutory Stock
Option Plan (the 1991 Plan). Options to purchase 372,154 shares of common stock
have been reserved for issuance under the 1991 Plan. Options granted under the
plan vest ratably over five years from the date of grant and expire ten years
from the date of grant. Options for 239,245 and 216,745 shares are outstanding
at December 31, 1994 and 1995, respectively, under the 1991 Plan.
In April 1993, the Board of Directors approved the 1993 Incentive Stock
Option Plan (the 1993 Plan). Options to purchase 132,909 shares of common stock
have been reserved for issuance under the 1993 Plan. The 1993 Plan allows for
the granting of incentive stock options and nonqualified stock options. Options
granted under the plan vest ratably over five years from the date of grant and
expire ten years from the date of grant. Options for 111,250 and 105,750 shares
are outstanding at December 31, 1994 and 1995, respectively, under the 1993
Plan.
In October 1994, the Board of Directors approved the 1994 Stock Option and
Incentive Plan (the 1994 Plan). Options to purchase 593,750 shares of common
stock have been reserved for issuance under the 1994 Plan. The 1994 Plan allows
for the granting of incentive stock options and nonqualified stock options which
vest ratably over five years from the date of grant and expire ten years from
the date of grant. Options for 437,850 and 485,960 shares are outstanding at
December 31, 1994 and 1995, respectively, under the 1994 Plan.
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
OPTIONS PRICE PER OPTION
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1992........................... 339,224 $ 0.40-11.00
Granted.................................................... 72,500 $ 0.40
Canceled................................................... (14,375) $ 0.40-11.00
-------
Outstanding at December 31, 1993........................... 397,349 $ 0.40-11.00
Granted.................................................... 482,851 $ 0.40
Canceled................................................... (87,053) $ 0.40-11.00
-------
Outstanding at December 31, 1994........................... 793,147 $ 0.40-11.00
Exercised.................................................. (7,487) $ 0.40
Granted.................................................... 79,675 $ 0.40
Canceled................................................... (52,630) $ 0.40
-------
Outstanding at December 31, 1995........................... 812,705 $ 0.40-11.00
Exercised.................................................. 134,833 $ 0.40
Granted.................................................... 214,162 $ 9.50-17.50
Canceled................................................... 25,025 $ 0.40-11.00
-------
Outstanding at September 28, 1996 (unaudited).............. 867,009 $ 0.40-17.50
=======
</TABLE>
In January 1996, the Board of Directors approved the 1996 Employee Stock
Purchase Plan (1996 Purchase Plan), the 1996 Incentive Stock Option Plan (1996
ISO Plan) and the 1996 Non-Employee Director Stock Option Plan (1996 Director
Option Plan), all of which became effective upon the closing of the initial
public offering. The 1996 Purchase Plan provides for the purchase of a maximum
of 250,000 shares of Common Stock by participating employees. The 1996 ISO Plan
provides for the grant of options to purchase a maximum of 600,000 shares of
Common Stock to employees and the 1996 Director Option Plan provides for the
grant of options to purchase a maximum of 150,000 shares of Common Stock to non-
F-16
<PAGE> 72
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996 IS UNAUDITED)
employee directors of the Company. 50,000 options were granted as of January 26,
1996 under the 1996 Director Option Plan at an exercise price equal to $9.50 per
share.
Options exercisable at December 31, 1995 and September 28,, 1996 were
288,481 and 233,831, respectively. The outstanding options expire at various
dates through 2006.
(8) EMPLOYEE BENEFIT PLAN
The Company has a defined contribution retirement plan (401(k)) covering
substantially all employees. The Company matches 50% of the contributions made
by employees up to 6% of their annual compensation. The Company can also make a
discretionary contribution to the plan. Employee contributions vest immediately,
and employer contributions vest ratably over five years. Participants are
entitled, upon termination or retirement, to their vested portion of the
retirement fund assets which are held by a corporate trustee. During 1993, 1994
and 1995, Company contributions to the plan were $76,000, $108,000 and $171,000,
respectively.
(9) COMMITMENTS AND CONTINGENCIES
The Company leases facilities and certain equipment under operating leases
expiring through 2000. The Company leases its corporate headquarters and
manufacturing facility from ATC Billerica Corporation, an affiliate of Tractebel
S.A., under an operating lease for $9,917 per month for the first year of the
lease, which payments are subject to an annual escalation. The lease expires on
January 31, 2001, subject to an option of the Company to extend for an
additional five-year period. Rent expense was approximately $733,000, $639,900
and $450,300 for the years ended December 31, 1993, 1994 and 1995, respectively.
The following is a schedule of future minimum lease commitments under
operating leases with terms in excess of one year at December 31, 1995:
<TABLE>
<CAPTION>
OPERATING
CALENDAR YEAR LEASES
---------------------------------------------------------------- ----------
<S> <C>
1996............................................................ $ 531,000
1997............................................................ 271,000
1998............................................................ 209,000
1999............................................................ 209,000
Thereafter...................................................... 239,000
----------
$1,459,000
==========
</TABLE>
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.
F-17
<PAGE> 73
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996 IS UNAUDITED)
(10) EXPORT SALES AND MAJOR CUSTOMERS
Revenues by geographic area are summarized as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
United States..................... $20,849,308 $16,973,109 $19,368,341
Europe............................ 5,697,428 4,807,315 7,407,463
Far East.......................... 427,070 600,742 1,867,341
Japan............................. 559,059 441,512 1,335,380
----------- ----------- -----------
$27,532,865 $22,822,678 $29,978,525
=========== =========== ===========
</TABLE>
The Company's customer base consists primarily of original equipment
manufacturers and distributors in various industries. Sales to one customer
during 1993 and 1994 were approximately $7,542,000 and $2,362,000, respectively.
No single customer constituted more than 10% of sales in 1995.
(11) DEPENDENCE ON OUTSIDE FOUNDRIES
The Company currently relies on three different third-party foundries for
their supply of fully-processed semiconductor wafers. Although a number of such
foundries exist, the interruption or termination of the Company's current
manufacturing relationships could adversely affect the Company's business.
(12) INITIAL PUBLIC OFFERING
On April 8, 1996, the Company closed the sale, through an initial public
offering, of 2,160,715 shares of Common Stock. The proceeds to the Company from
the offering were $19.1 million before deducting expenses of the offering of
approximately $800,000. Of its total proceeds, $7.5 million was used to pay down
the outstanding balance of the revolving line of credit and $4.8 million was
used to pay off subordinated notes payable to affiliates. The Company
subsequently terminated its revolving credit facility, and is evaluating
replacement bank credit facilities.
F-18
<PAGE> 74
[INSIDE BACK COVER]
[Graphic depicting Sipex product line and different serial
interface products supported by this product line.]
<PAGE> 75
===============================================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 6
Use of Proceeds..................... 13
Price Range of Common Stock......... 13
Dividend Policy..................... 13
Capitalization...................... 14
Dilution............................ 15
Selected Consolidated Financial
Data.............................. 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 18
Business............................ 25
Management.......................... 40
Certain Transactions................ 47
Principal and Selling
Shareholders...................... 48
Description of Capital Stock........ 49
Shares Eligible for Future Sale..... 52
Underwriting........................ 53
Legal Matters....................... 54
Experts............................. 54
Change in Independent Accountants... 55
Additional Information.............. 55
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
===============================================================================
===============================================================================
3,000,000 SHARES
[SIPEX LOGO]
COMMON STOCK
------------------
PROSPECTUS
------------------
ALEX. BROWN & SONS
INCORPORATED
UBS SECURITIES
ADAMS, HARKNESS & HILL, INC.
October 31, 1996
===============================================================================
