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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1997
0-27892
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(COMMISSION FILE NUMBER)
SIPEX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-6135748
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(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NUMBER)
2 LINNELL CIRCLE 01821
BILLERICA, MASSACHUSETTS ----------
--------------------------------- (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(978) 667-8700
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(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates of the
registrant at March 10, 1998 was approximately $624,296,787 based upon $35.125
per share, the last reported sale price of the Common Stock on The Nasdaq
National Market on that date. The number of shares of the registrant's Common
Stock outstanding at March 10, 1998 was 17,773,574.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement relating to the Company's Annual
Meeting of Shareholders to be held on May 28, 1998 are incorporated by reference
into Part III hereof.
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PART I
ITEM 1. BUSINESS:
THE COMPANY
SIPEX Corporation (the "Company" or "Sipex") designs, manufactures, markets
and sells innovative, high performance, high value-added analog integrated
circuits. The Company sells its products to OEM customers either directly
through its direct sales force or with the assistance of a network of
independent sales representatives, or indirectly through independent
distributors. The Company designs, manufactures, markets and sells products
across the analog semiconductor market and has targeted high-growth sectors that
it believes are especially compatible with its design and process capabilities
- -- data communications and telecommunications, battery powered/portable products
and industrial controls/instrumentation. The Company's products have been
incorporated into a broad range of electronic systems and products by more than
3,000 customers worldwide.
STRATEGY
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. Sipex serves the broad
analog signal processing market with the following product lines -- interface
circuits, low power and high voltage circuits, electroluminescence circuits,
data converters and power management circuits. The Company utilizes multiple
process technologies to manufacture these products.
In addition to and complementing its strategy of teaming with market
leaders, the Company offers a broad base of manufacturing process technologies
through its own foundry and third-party semiconductor foundries. This enables
the Company to design products for its customers utilizing the optimum process
technology for each application. By combining creative design techniques with a
broad base of process technologies, the Company can develop innovative, high
performance analog circuits that support its customers' requirements. The
Company has also focused on leveraging its specialized dielectrically isolated
("DI") bipolar complementary metal oxide semiconductor ("BiCMOS") technology,
which the Company believes is particularly well-suited to the low power, low
voltage requirements of battery powered/portable products.
The Company's customers, none of which accounted for more than ten percent
of net sales in 1996 or 1997, include Cisco Systems, Inc., Hewlett-Packard Co.,
Motorola, Inc., Philips N.V., Siemens Corporation, Newbridge Networks Corp.,
3Com Corp., U.S. Robotics Corp. and Pairgain Technologies Inc. in the data
communications/telecommunications markets; Cidco, Inc., Elo Touchsystems,
Federal Express Corp., Texas Instruments Incorporated, Timex Corporation,
International Business Machines Corp., Sharp Corp., Mitsubishi Corp. and
Dassault Aviation S.A. in the low power analog and high voltage application
areas; and Andover Controls Corp., LTX Corporation and Honeywell, Inc. in the
industrial controls market.
MARKETS
The Company serves a broad range of markets including data communications,
telecommunications, battery powered/portable products, industrial
controls/instrumentation, military and aerospace. The Company believes that its
design and manufacturing process capabilities can address customers' needs in
terms of product features and functionality, integration and overall solution
cost. By working closely and partnering with established market leaders within
these areas, the Company has been able to identify and meet its partners'
complex analog 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
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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. The Company's products are principally
networking products, electroluminescence products, power management products and
data converter products. In addition, the Company supplies precision high-
reliability assembled products principally to commercial customers supplying
products for aerospace and military applications.
Networking Products. Interface products act as an intermediary to transfer
signals between or within electronic systems. A simple example of an interface
application is a personal computer connected to a printer via the RS-232 serial
interface standard. The computer sends information through the connecting cable
which is received by the printer, and additional information can be sent back to
the computer. Serial interface is used 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
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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
design wins with many industry leaders in the WAN equipment market. In addition
to expanding its line of programmable serial interface products, the Company's
future interface product strategy includes developing with industry leaders
products involving higher speed interfaces supporting high speed data
communications, video communications and telecommunications interface
requirements.
In addition to its SP300 and SP500 families of multi-protocol transceiver
products, the Company also offers the SP200 and SP400 series of single protocol
serial interface transceiver products, primarily targeted to the personal
computer and peripherals and industrial controls markets.
Electroluminescence 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 ("Timex"), developed a proprietary
electroluminescent ("EL") driver device, which provides the enabling technology
for the Timex Indiglo(TM) Watch. This custom integrated circuit creates a 100V
AC signal from a 3V DC battery within the watch to light the backlight material.
The Company is exploiting this technology and its design-specific resources to
offer low power and high voltage products to a wide variety of market segments,
including providing backlighting solutions for pagers, cell-phones and hand-held
electronic equipment markets. Pursuant to a license agreement with Timex, the
Company pays a royalty to Timex based on sales of the Company's EL products.
The Company intends to continue its focus in this area on high volume
commercial/consumer markets, in which the attributes of the DI BiCMOS
fabrication process or the Company's design capabilities can add value for the
customer.
Data Converter Products. Data converter products are incorporated into
systems that translate real world (analog) events into digital data which can be
manipulated by a microprocessor. The Company's analog-to-digital and
digital-to-analog products are components that allow microprocessors to monitor
real world conditions, and then control responses to the conditions monitored.
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.
Power Management Products. The Company's power management products
specialize in the areas of voltage control and measurement, voltage conversion
and battery charging. The purpose of these products is to monitor the power
supplied to digital circuits such as microprocessors and random access memory
("RAM") in battery operated systems. As the main battery voltage to the system
is slowly decreased by usage, a backup battery takes over to keep power to the
system long enough so that the microprocessor instructions and RAM are saved and
powered down in a safe state. If there is no activity from the microprocessor
during a period of time, the microprocessor is reset so that it starts-up at a
known state in case of errors during power-up, power-down, and intermittent
power losses. Any power glitches or faults that can cause harm to the system or
data loss at any time can be minimized by implementing a microprocessor
supervisory circuit. Any portable equipment that uses microprocessors, micro
controllers, or memory in the system will require some kind of detection
circuitry to monitor the power supply and battery output.
Aerospace and Military Products. The Company's precision high reliability
assembled products are sold to commercial customers engaged in various aerospace
and military programs. Customers incorporating the
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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 1995, 1996 and 1997, sales of high reliability
products for military applications accounted for approximately 20%, 11% and 8%,
respectively, of the Company's net sales.
SALES, SUPPORT AND DISTRIBUTION
The Company sells its products to OEM customers either directly through its
direct sales force or with the assistance of a network of independent sales
representatives, or indirectly through independent distributors. The Company is
seeking to broaden its customer base by increasing sales through its distributor
network. In 1997, the Company added additional national distributors and
increased domestic and international distributor sales to approximately 48.0% of
net sales in 1997 from approximately 42.0% in 1996 and 39.6% in 1995.
The Company's direct sales force consists of sales managers and field
application engineers who provide technical and applications support to
customers, independent sales representatives and distributors. The sales staff
and field application engineers are located at the Company's Billerica,
Massachusetts headquarters and in field sales offices in Munich, Paris, Tokyo,
the United Kingdom and California. The Company's sales staff and field
application engineers also manage, train and support the Company's network of
distributors and representatives.
In North America, the Company sells its products through 20 independent
sales representative organizations having a total of 35 offices, and 5
distributors having a total of 157 sales locations. These independent entities
are selected for their ability to provide effective field sales, marketing
communications and technical support to the Company's customers. The Company has
entered into Representative or Distributor Agreements with each of its
independent distributors and sales representatives. These agreements typically
provide for the independent distributor to act as a non-exclusive distributor
for one or more products within a specific territory and also permits sales
representatives to act as an exclusive or a non-exclusive sales representative
in appropriate circumstances. The Company maintains a separate price list for
products sold to distributors, which typically reflects discounts from the
prices charged to customers in direct sales transactions. Sales representatives
directly solicit orders for the Company's products, which the Company fills
directly with the customer, generating a commission from the Company to the
sales representative. On a semi-annual basis, distributors are permitted to
return for credit, against purchases of an equivalent dollar value of products,
up to 10% of their total purchases during the most recent six-month period.
Outside North America, the Company sells its products through 39
distributors having a total of 148 sales locations. International sales in 1995,
1996 and 1997 were approximately $10.6 million, $12.1 million and $19.6 million,
respectively, representing 35.4%, 32.5%, and 38.2% of net sales, respectively.
The Company is seeking to appoint additional distributors internationally to
further expand its geographical markets. In connection with its international
sales, the Company is subject to the normal risks of conducting business
internationally, including exchange rate fluctuations. To date, the Company has
not hedged the risks associated with fluctuations in exchange rates but may
undertake such transactions in the future. The Company currently does not have a
policy relating to hedging.
BACKLOG
At December 31, 1997, the Company's product backlog was approximately $24.8
million, compared to $24.0 million at December 31, 1996. The Company generally
includes in backlog all orders scheduled for delivery within one year. However,
the Company's business, and to a large extent the entire semiconductor industry,
is characterized by short-term orders and shipment schedules. The Company
generally permits orders to be canceled or rescheduled without significant
penalty to the customers. As a result, the quantities of the Company's products
to be delivered and their delivery schedules may be revised by customers to
reflect changes in their needs. Since backlog can be canceled or rescheduled,
the Company's backlog at any time is not necessarily indicative of future
revenues.
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RESEARCH AND DEVELOPMENT
The Company believes that continued introduction of new products in its
target markets is essential to its growth. As performance demands have increased
the complexity of analog circuits, the design and development process has become
a multi-disciplinary effort, requiring diverse competencies to achieve
customers' desired performance. The Company supports its key designers with an
infrastructure of product and test engineers who perform various support
functions and allow the designer to focus on the core elements of the design.
In 1995, 1996 and 1997, the Company spent approximately $4.4 million, $4.7
million and $5.4 million, respectively, on research and development,
representing 14.7%, 12.7% and 10.6%, respectively, of net sales for such
periods. The Company expects that expenditures in support of research and
development activity will continue to increase in absolute dollars in the near
future.
The Company's ability to compete depends, in part, upon its continued
introduction of technologically innovative products on a timely basis. The
Company's research and development efforts are directed primarily at designing
and introducing new products and technologies. The Company continually upgrades
its internal technology while also working with foundries to develop new
technologies for new generations of products. In addition, the Company
continually refines its manufacturing practices and technology to improve the
yields of its products.
Currently, the Company's major development programs include expanding its
proprietary product offerings of electroluminescent drivers and programmable
dual and multi-mode transceivers, analog-to-digital converters,
digital-to-analog converters, power management, and other application-specific
products.
MANUFACTURING
The Company manufactures semiconductor wafers for its dielectric isolation
complementary bipolar products in its own facility to optimize the performance
of these products and maintain a high degree of manufacturing control. The
Company's manufacturing facilities in Milpitas, California include a four-inch
wafer fabrication facility and a clean room. The Company's facilities have been
certified as ISO-9001 compliant. In March 1998, the Company entered into an
Operating Lease Agreement for the construction and lease of a 60,000 square foot
facility in Milpitas, California which is expected to be completed in the first
quarter of 1999. This facility will provide expanded capacity for the
manufacture of wafers.
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 38.9%
of the Company's net sales in 1995, approximately 41.2% in 1996 and
approximately 38.7% in 1997, 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 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 100 percent final testing and inspection prior to shipment to
customers.
The Company's commercial products are assembled by a variety of
subcontractors in Malaysia, Indonesia, Thailand and other locations in Asia, all
of which have been certified as ISO-9002 compliant.
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These subcontractors may also be subject to capacity, yield and quality problems
or may have difficulty obtaining critical raw materials, which could result in
disruptions in the supply of assembled products. The Company's reliance on
third-party foundries and independent subcontractors involves a number of other
risks, including reduced control over delivery schedules, quality assurance and
costs. The occurrence of any supply or other problems resulting from such risks
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company manufactures its precision high reliability assembled products
in Billerica, Massachusetts. The Company is in conformance with stringent
quality and reliability requirements for military and aerospace applications.
From time to time, the overall semiconductor industry has experienced
significant growth, which creates industry-wide capacity shortages and extended
lead times for contract assembly, raw wafers, capital equipment, foundry wafers
and various other products and services that are critical to the Company's
performance. The Company is seeking to establish and maintain critical
inventories and alternate sources to minimize the impact of its vendors'
capacity limitations and to date has not experienced material shortages or
delays. However, there can be no assurance that there will not be future
shortages of key services that will materially and adversely affect the
Company's business, financial condition and results of operations.
The manufacturing processes utilized by the Company are highly complex and
are continuously being modified in an effort to improve yields and product
performance. Process changes can result in interruptions in production or
significantly reduced yields. In addition, yields can be affected by minute
impurities in the environment or other problems that occur in the complex
manufacturing process. Many of these problems are difficult to diagnose and
time-consuming or expensive to remedy. From time to time, the Company has
experienced yield variances. In particular, new process technologies or new
products can be subject to especially wide variations in manufacturing yields
and efficiency. There can be no assurance that yield variances previously
experienced by the Company will not recur or that the Company and its
independent foundries will not experience other manufacturing problems that
result in product introduction or delivery delays. Although previous
fluctuations in yield variances have not materially affected the Company's
business, financial condition or results of operations, there can be no
assurance that future yield variances and resulting delays would not materially
and adversely affect the Company's business and results of operations.
The Company is subject to a variety of federal, state and local
governmental regulations related to the use, storage, discharge and disposal of
toxic, volatile or otherwise hazardous chemicals used in its manufacturing
process. Although the Company believes that its activities conform to presently
applicable environmental regulations, the failure to comply with present or
future regulations could result in fines being imposed on the Company,
suspension of production or a cessation of operations. Increasing public
attention has been focused on the environmental impact of semiconductor
manufacturing operations, and there can be no assurance that regulatory changes
or changes in regulatory interpretation or enforcement will not render
compliance more difficult and costly. Any failure of the Company to control the
use of, or adequately restrict the discharge of, hazardous substances, or
otherwise comply with environmental regulations, could subject it to significant
future liabilities. In addition, although the Company believes that its past
operations conformed with then applicable environmental laws and regulations,
there can be no assurance that the Company has not in the past violated
applicable laws or regulations, which violations could result in remediation or
other liabilities, or that past use or disposal of environmentally sensitive
materials in conformity with then existing environmental laws and regulations
will not result in remediation or other liabilities under current or future
environmental laws or regulations.
The Company and approximately sixty other potentially responsible parties
("PRPs") received a Notice of Potential Liability from the United States
Environmental Protection Agency in June 1993 concerning the Shaffer Landfill
Operable Unit of the Iron Horse Park Superfund Site (the "Site") located in
Billerica, Massachusetts. In January 1995, federal and Massachusetts
governmental authorities filed suit against ten of the PRPs, alleging
responsibility for remediation and other costs. The ten PRPs named in the
lawsuit, together with a number of other PRPs not named, but not currently
including the Company, have been engaged in settlement discussions with such
authorities. If the PRP group and the governmental agencies reach a
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negotiated settlement regarding the clean-up of the Site, there is no assurance
that the Company would join such a settlement. The Company believes that it has
strong defenses to liability; however, there can be no assurance that the
Company will not be pursued with respect to alleged liability for contamination
of the Site. The Company anticipates that it would vigorously defend against any
such claims. There can be no assurance, however, that any such defenses of any
such claims would be successful.
The future costs in connection with the Site are currently indeterminable
due to such factors as the unknown timing and extent of any future remedial
actions which may be required, the extent of any liability of the Company and of
other potentially responsible parties, and the financial resources of the other
potentially responsible parties.
PATENTS AND INTELLECTUAL PROPERTY
The Company seeks to protect its proprietary technology through patents and
trade secret protection. Currently, the Company holds six United States patents
expiring on various dates between the years 1999 and 2015 and has additional
pending United States patent applications, although there can be no assurance
that any patents will result from these applications. While the Company intends
to continue to seek patent coverage for its products and manufacturing
technology where appropriate, the Company believes that its success depends more
heavily on the technical expertise and innovative abilities of its personnel
than on its patent position. Accordingly, the Company also relies on trade
secrets and confidential technological know-how in the conduct of its business.
There can be no assurance that the Company's patents or applicable trade secret
laws will provide adequate protection for the Company's technology against
competitors who may develop or patent similar technology or reverse engineer the
Company's products. In addition, the laws of certain territories in which the
Company's products are or may be developed, manufactured or sold, including
Asia, Europe and Latin America, may not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States.
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 except as disclosed
below, 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 certain products, expend
significant resources to develop non-infringing technology or obtain licenses to
the infringing technology. There can be no assurance that licenses will be
available on reasonable commercial terms, or at all, with respect to disputed
third-party technology. In the event of a successful claim against the Company
and the Company's failure to obtain a license or 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.
In January 1998, the Company received notice of patent infringement from
the Lemelson Medical, Education and Research Foundation Limited Partnership (the
"Lemelson Foundation") alleging that the Company's activities violate certain
patents issued to the late Jerome H. Lemelson. The Lemelson Foundation has
offered to license the patents at issue. The Company is investigating the claims
made, and has requested further information from the Lemelson Foundation. At
present, the Company has not yet been able to determine whether it is infringing
any valid patents of the Lemelson Foundation.
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.,
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Linear Technology Corp. and Maxim Integrated Products, Inc. Although foreign
companies active in the semiconductor market have not traditionally focused on
the high performance analog market, many foreign companies have the financial
and other resources to participate successfully in these markets, and there can
be no assurance that they will not become formidable competitors in the future.
The Company believes that its ability to compete successfully depends on a
number of factors, including the ability to develop and introduce new products
rapidly, product innovation, product quality and reliability, product
performance, the breadth of its product line, price, technical service and
support, adequacy of manufacturing quality and capacity and sources of raw
materials, efficiency of production, delivery capabilities and protection of the
Company's products by intellectual property laws. The Company believes that
product innovation, quality, reliability, performance and the ability to
introduce products rapidly are more important competitive factors than price in
its target markets because the Company competes primarily at the stage when
system manufacturers design analog products into their systems. At the design-in
stage, there is less price competition, particularly when there is only one
source for the product. The Company believes that, by virtue of its analog
expertise and rigorous design methodology, it competes favorably in the areas of
rapid product introduction, product innovation, quality, reliability and
performance, but it may be at a disadvantage in comparison to larger companies
with broader product lines, greater technical and financial resources and
greater service and support capabilities.
EMPLOYEES
At December 31, 1997, the Company had 277 full-time employees. The Company
believes that its future success will depend, in part, on its ability to attract
and retain qualified technical and manufacturing personnel. This is particularly
important in the areas of product design and development, where competition for
skilled personnel is intense. None of the Company's employees is subject to a
collective bargaining agreement, and the Company has never experienced a work
stoppage. The Company believes that its relations with its employees are good.
ITEM 2. FACILITIES:
The Company leases approximately 47,600 square feet located in Billerica,
Massachusetts for manufacturing, research and development, and administration.
In addition, the Company leases approximately 30,500 square feet in Milpitas,
California and approximately 12,500 square feet in San Jose, California for
manufacture of its DI products. The Company also leases approximately 2,200
square feet for each of its sales offices in Munich, Paris, Tokyo and the United
Kingdom. The Company is currently planning a 17,000 square foot expansion of its
Billerica facility and in March 1998, the Company entered into an Operating
Lease Agreement for the construction and lease of a 60,000 square foot facility
in Milpitas, California.
ITEM 3. LEGAL PROCEEDINGS:
The Company is not a party to any material legal proceedings. See also Item
1 "Business -- Patents and Intellectual Property".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1997.
EXECUTIVE OFFICERS
Mr. Donegan joined the Company in April 1985 as Chairman of the Board,
Chief Executive Officer and President of the Company. Mr. Donegan currently
serves as a Director Of Genesis Microchip, Inc., a manufacturer of video
semiconductors. Before joining the Company, Mr. Donegan held the position of
Group Vice President of the Electronic Components Group at Midland Ross
Corporation. Prior to Midland Ross Corporation, Mr. Donegan was Vice President
and General Manager at Cameron & Barkley and Company. Prior to working at
Cameron & Barkley and Company, Mr. Donegan spent ten years with the General
Electric Company in various manufacturing positions.
8
<PAGE> 10
Mr. DiPietro joined the Company in December 1983 as Chief Financial Officer
and Treasurer. He was appointed Vice President of Finance in January 1985,
Senior Vice President in June 1985 and Executive Vice President in November
1996. From November 1979 to November 1983, Mr. DiPietro served as a Controller
at Digital Equipment Corp.
Mr. Chow joined the Company in October 1988 as Director of Interface
Engineering. He was appointed Senior Vice President of Interface Products in
August 1994. From March 1982 to October 1988, Mr. Chow was President and Chief
Executive Officer of Barvon BiCMOS Technology, Inc. ("Barvon"), a company Mr.
Chow founded in 1982 and which was acquired by SIPEX in October 1988. Prior to
founding Barvon, he served as Director of Engineering at Universal
Semiconductor, Inc. from 1979 to 1982. From 1972 to 1979, Mr. Chow was a Design
Manager at Intersil, Inc. and Senior Design Engineer at Fairchild Semiconductor.
Mr. Cohen has been the Company's Senior Vice President of Technology since
joining the Company in July 1988. Prior to joining SIPEX, Mr. Cohen was a
Division Manager at the Charles Stark Draper Laboratory, formerly the
Instrumentation Laboratory of the Massachusetts Institute of Technology. He has
been a member of several government advisory panels and has designed and
developed numerous circuits and systems.
Mr. Dhuyvetter joined the Company in January 1987. In 1994, he was
appointed Vice President, Application Specific Products and in 1997 he was
appointed Senior Vice President, Low Power Analog Products. He joined the
Company after serving in various engineering positions at Phillips Corporation.
While at Phillips, Mr. Dhuyvetter was awarded three patents in the field of
communications signal processing.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock has been listed for quotation on the Nasdaq
National Market under the symbol SIPX since the Company's initial public
offering of Common Stock on April 2, 1996. The table below sets forth the high
and low sale price of the Company's Common Stock on the Nasdaq National Market
for each of the fiscal quarters of the years ended December 31, 1997 and 1996.
On August 18, 1997, the Company effected a two for one stock split. All share
and per share amounts affected by this split contained in this table have been
retroactively adjusted for all periods presented.
<TABLE>
<CAPTION>
FISCAL QUARTER
-------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
1997
High................................................... 18 5/8 18 1/2 34 1/2 37
Low.................................................... 13 7/8 11 17 3/8 23 1/2
1996
High................................................... -- 10 3/4 12 1/8 17 5/8
Low.................................................... -- 5 3/8 6 3/4 10 1/8
</TABLE>
On December 31, 1997, there were approximately 63 shareholders of record.
The Company believes that the number of beneficial holders of Common Stock
exceeds 1,200. The last reported sale price of the Common Stock on March 10,
1998 was $35.125 per share. The Company has never declared or paid a cash
dividend on its capital stock. The Company currently intends to retain all of
its earnings to finance future growth and therefore, does not anticipate paying
any cash dividends on its common stock in the foreseeable future.
9
<PAGE> 11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA:
The selected financial data set forth below has been derived from the
audited consolidated financial statements of the Company. This information
should be read in conjunction with the consolidated financial statements and
notes thereto set forth elsewhere herein.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA*:
Net sales.................................. $27,533 $22,823 $29,979 $37,311 $51,210
Gross profit............................... 5,148 4,592 10,900 15,873 24,540
Income (loss) from operations.............. (3,340) (4,340) (971) 4,484 10,829
Income (loss) before taxes................. (3,709) (4,802) (1,775) 4,431 12,270
Net income (loss).......................... (3,721) (4,709) (1,803) 4,277 13,245
Net income (loss) per common share --
basic.................................... $ (0.40) $ (0.50) $ (0.19) $ 0.32 $ 0.76
Net income (loss) per common share --
assuming dilution........................ $ (0.40) $ (0.50) $ (0.19) $ 0.29 $ 0.71
Weighted average common shares outstanding
-- basic................................. 9,362 9,362 9,366 13,284 17,427
Weighted average common shares outstanding
-- assuming dilution..................... 9,515 9,515 9,519 14,700 18,581
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................ $ 7,115 $ 5,942 $ 7,307 $49,920 $59,403
Total assets............................... 14,590 13,360 15,870 57,649 $72,982
Long-term debt............................. 6,761 9,613 11,930 43 8
Total shareholders' equity (deficit)....... 4,726 (67) (1,884) 53,409 67,868
</TABLE>
* All share data reflects 2 for 1 stock split effected through a 100% dividend
on August 18, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
The following discussion and analysis is qualified by reference to, and
should be read in conjunction with, the consolidated financial statements of
SIPEX Corporation.
OVERVIEW
SIPEX Corporation (the "Company") designs, manufactures and markets high
performance and high value added analog integrated circuits using standard
BiCmos and dielectrically isolated BiCmos technologies. Analog integrated
circuits address a wide range of real-world signal processing applications
associated with such naturally occurring physical phenomena as temperature,
pressure, weight, position, light and sound. These circuits play a fundamental
and important role in coupling the real world to the digital computer and vice
versa. The Company's products include single, dual and multi-protocol interface
circuits, data converters, electroluminescent driver circuits, low power and
high voltage application specific circuits and power management products.
10
<PAGE> 12
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>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 63.6 57.5 52.1
----- ----- -----
Gross profit................................................ 36.4 42.5 47.9
Operating expenses:
Research and development............................... 14.7 12.7 10.6
Marketing and selling.................................. 14.2 12.1 10.2
General and administrative............................. 6.3 5.7 6.0
Write-off of intangible assets......................... 4.4 -- --
----- ----- -----
Total operating expenses.................................... 39.6 30.5 26.8
----- ----- -----
Income (loss) from operations............................... (3.2) 12.0 21.1
Other income/(expense), net................................. (2.7) (0.1) 2.8
----- ----- -----
Income (loss) before income taxes........................... (5.9) 11.9 23.9
===== ===== =====
</TABLE>
Fiscal Year Ended December 31, 1997 compared to Fiscal Year Ended December 31,
1996
Net Sales. The Company derives its revenues principally from product
sales. Net sales increased 37.3% to $51.2 million for the year ended December
31, 1997 compared to $37.3 million for the year ended December 31, 1996. The
increase in net sales was primarily due to higher unit sales resulting from
increased market acceptance of the Company's proprietary networking,
electroluminescence and application specific products. Domestic sales increased
by 25.7% and international sales increased by 61.3% in 1997 as compared to the
same period in 1996.
Gross Profit. The Company's cost of sales consists primarily of costs
associated with the manufacture and delivery of the Company's products from its
production facilities, as well as the Company's sub-contract wafer fabrication
and assembly contractors. Gross profit as a percentage of net sales, or gross
margin, increased to 47.9% in 1997 as compared to 42.5% in 1996. The
improvements in 1997 over 1996 were primarily due to the absorption of certain
fixed costs over the increased sales volume and due to increased market
acceptance of the Company's proprietary and application specific products.
Research and Development. Research and development expenses consist
primarily of salaries and benefits of employees involved in product development
and fees for product development services provided by consultants. The Company
expended 10.6% of net sales in 1997 for the development and introduction of new
products as compared to 12.7% in 1996. In absolute dollars, research and
development increased 15.3% to $5.4 million in 1997 over the $4.7 million
incurred in 1996. The increased spending was due to salary and other expenses
related to the hiring of additional engineering personnel, outside consulting
fees and mask set expenses relating to new product development. The Company
expects research and development expenses to continue to increase in absolute
terms in the near future.
Marketing and Selling. Marketing and selling expenses consist principally
of salaries, commissions, travel expenses of direct sales and marketing
personnel and costs associated with marketing and advertising programs.
Marketing and selling expenses decreased as a percentage of net sales to 10.2%
or $5.2 million in 1997 from 12.1% or $4.6 million in 1996, but increased 14.6%
in absolute dollars in 1997 over the same period in 1996. The increase in 1997
was due primarily to higher costs associated with marketing and advertising of
new products and increased commissions.
General and Administrative. General and administrative expenses consist
primarily of personnel costs for administration, finance, human resource and
general management, including legal and auditing expenses.
11
<PAGE> 13
General and administrative expenses increased to 6.0% of net sales in 1997 from
5.7% in 1996. In absolute dollars, general and administrative expenses increased
to $3.0 million in fiscal 1997 from $2.1 million in 1996. The increase in 1997
was due primarily to increased professional related expenses and travel.
Other Income, Net. Other income, net consists primarily of interest earned
on investments, net of any interest expense incurred. Other income (expense),
net increased to $1,400,000 of income in 1997 from ($53,000) of expense in 1996
primarily as a result of interest income earned on proceeds of the Company's two
public offerings as well as interest earned on increased cash flow from
operations in 1997.
Income Taxes. The Company recorded an income tax benefit of ($975,000) for
1997 and income tax expense of $154,000 for 1996, resulting in an effective
income tax benefit of (7.9%) in 1997 compared to an effective tax rate of 3.5%
in 1996. These effective rates differed from the statutory rates due to the
Company's utilization of its net operating loss carryforwards which were
previously reserved and additionally in 1997 to the reduction of a portion of
the valuation allowance for future tax benefits expected to be realized in the
future. See also Notes To the Consolidated Financial Statements.
Fiscal Year Ended December 31, 1996 compared to Fiscal Year End December 31,
1995
Net Sales. Net sales increased 24.5% to $37.3 million in 1996 from $30.0
million in 1995. The increase in net sales was principally due to the growing
acceptance of the Company's proprietary interface and low power commercial
products. The increase in net sales was primarily due to higher unit sales
resulting from increased market acceptance of the Company's proprietary and
application specific products. Domestic and international sales increased 30%
and 14.3%, respectively, in 1996 as compared to the same period in 1995.
Gross Profit. Gross profit as a percentage of net sales, or gross margin,
increased to 42.5% in 1996 from 36.4% in 1995. The improvements in 1996 over
1995 were primarily due to the absorption of certain fixed costs over the
increased sales volume and due to increased market acceptance of the Company's
proprietary and application specific products.
Research and Development. Research and development expenses increased 7.4%
to $4.7 million in 1996 from $4.4 million in 1995 and decreased as a percentage
of net sales to 12.7% in 1996 from 14.7% in 1995. The increased spending was due
to salary and other expenses related to hiring of additional engineering
personnel, outside consulting fees and mask set expenses relating to new product
development.
Marketing and Selling. Marketing and selling expenses increased 7.2% to
$4.6 million in 1996 from $4.2 million in 1995, but decreased as a percentage of
net sales to 12.1% in 1996 from 14.2% in 1995. The increase in 1996 was
primarily due to higher costs associated with marketing and advertising of new
products and increased commissions.
General and Administrative. General and administrative expenses increased
10.8% to $2.1 million in 1996 and decreased as a percentage of net sales to 5.7%
in 1996 from 6.3% in 1995. The increase in 1996 was due primarily to increased
travel and professional related expenses.
Write-off of Intangible Assets. As a result of the acquisition of certain
businesses involved in the development and design of custom and standard
products with military applications, the Company had intangible assets of $1.4
million as of December 31, 1994 which were being amortized on a straight line
basis over ten years. In the quarter ended July 1, 1995, the Company wrote-off
the unamortized balance of intangible assets. The Company wrote-off this amount
as a result of its increased focus on commercial products and review of actual
and expected revenues and cash flows from specific military products related to
the acquired technology. These amounts are included in 1995 results.
Other Expense, Net. These expenses decreased to $53,000 in 1996 from
$805,000 in 1995. The decrease in 1996 was primarily due to the repayment of the
revolving line of credit and subordinated notes to affiliates and interest
income earned on the Company's two public offering proceeds which offset
interest expense.
12
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
In April 1996, the Company raised net proceeds of approximately $18.0
million by issuing common stock in its initial public offering. In November
1996, the Company raised net proceeds of approximately $33.0 million from the
issuance of common stock. The proceeds will be primarily used for capital
equipment relating to expansion of facilities and general corporate purposes
including working capital. A portion of the April 1996 proceeds were applied to
pay the $7.5 million in outstanding borrowings to Generale Bank and $4.8 million
of indebtedness to affiliates.
At December 31, 1997, the Company had working capital of $59.4 million and
available funds of $40.0 million consisting of cash, cash equivalents and
short-term U.S. Government-backed investments. Up to $35,000,000 of this amount
was pledged in March 1998 as security for a lease which the Company entered into
for the construction and lease of a new facility in Milpitas, California. Net
cash generated in operating activities was $8.2 million, ($60,000) and
($893,000) in 1997, 1996 and 1995, respectively. Net cash provided by operating
activities in 1997 consisted primarily of $13.2 million of net income partially
offset by a $4.3 million increase in accounts receivable and a $2.4 million
increase in inventories.
In 1996 and 1995, the use of cash supported research and development costs
associated with its commercial products and sales and marketing expenses. Net
cash used in 1996 was due primarily to a $4.2 million increase in inventory and
a $1.3 million decrease in accounts payable offset by $4.3 million of net income
and a $500,000 reduction in accounts receivable. In 1995, cash used was due to a
$1.8 million net loss, a $1.2 million increase in accounts receivable and a $2.0
million increase in inventory partially offset by $2.3 million in depreciation
and amortization and a $1.7 million increase in liabilities.
Net cash used in investing activities for property, plant and equipment
were $6.5 million, $1.9 million and $1.2 million in 1997, 1996 and 1995,
respectively. The growth in 1997 investment related to the expansion of wafer
manufacturing in San Jose, California and equipment upgrades in all facilities.
Net cash provided by financing activity was $802,000, $39.1 million and
$2.2 million in 1997, 1996 and 1995, respectively. In 1997, $982,000 was
provided by the issuance of common stock on the exercise of options pursuant to
the Company's stock plans offset partially by the repayments of approximately
$180,000 of capital lease obligations. In 1996, $51.0 million was provided by
the issuance of common stock in two public offerings offset partially by the
repayments of approximately $12.0 million of long-term debt. In 1995, cash
provided by financing activities was primarily the result of proceeds from
long-term debt and the issuance of subordinated debts to affiliates.
At December 31, 1997, the Company had U.S. net operating loss carryforwards
of approximately $32,923,000, which are available to offset future Federal
taxable income. These losses expire during the years 2002 through 2010. In
addition, the Company had Massachusetts and California net operating loss
carryforwards of approximately $5,571,000 and $2,165,000, respectively, which
are available to offset future Massachusetts and California taxable income.
These state losses expire in the years 1999 through 2000. The tax benefit of
utilization of approximately $9,000,000 of these net operating loss
carryforwards will result in an increase in additional paid-in capital when
realized. As of December 31, 1997, utilization of these net operating loss
carryforwards is subject to an annual limitation of approximately $7,400,000 as
a result of an ownership change which occurred on September 30, 1996.
The Company anticipates that the available funds and cash provided from
operations will be sufficient to meet cash and working capital requirements
through at least the end of 1998.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Under this concept, all revenues,
expenses, gains and losses recognized during the period are included in income,
regardless of whether they are considered to be results of operations of the
period. SFAS 130, which becomes effective for the Company in its year ending
13
<PAGE> 15
December 31, 1998, is not expected to have a material impact on the consolidated
financial statements of the Company.
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes standards for the way that public business enterprises report
selected information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports to shareholders. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. SFAS 131, which becomes effective for the Company in its
year ending December 31, 1998, is currently not expected to have a material
impact on the Company's consolidated financial statements and footnote
disclosures.
FACTORS AFFECTING FUTURE OPERATING RESULTS
From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities and
Exchange Commission (including statements in this Form 10-K) may contain
statements which are not historical facts, so called "forward-looking
statements", and are made pursuant to the safe harbor provision of the Private
Securities Litigation Reform Act of 1995 and releases of the Securities and
Exchange Commission. In particular, certain statements contained in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations which are not historical facts (including, but not limited to,
statements concerning anticipated availability of capital for working capital
and for capital expenditures) constitute "forward-looking" statements. The
Company's actual future results may differ significantly from those stated in
any forward-looking statements. Factors that may cause such differences include,
but are not limited to, the factors discussed below and the other risks
discussed in the Company's Prospectuses dated April 2, 1996 and October 31, 1996
included in its Registration Statements on Form S-1 (Reg. Nos. 333-1328 and
333-14639, respectively) and from time to time in the Company's other filings
with the Securities and Exchange Commission.
SUPPLY AND MANUFACTURING RISKS
The Company currently relies on three outside foundries to supply fully
processed semiconductor wafers. There are significant risks associated with
reliance on outside foundries, including the lack of assured wafer supply and
control over delivery schedules, the unavailability of or delays in obtaining
access to key process technologies and limited control over quality assurance,
manufacturing yields and production costs. The Company is also subject to
significant manufacturing risks including yield variances which the Company or
its outside foundries may experience.
INTELLECTUAL PROPERTY RIGHTS
The Company relies on certain intellectual property protections to preserve
its intellectual property rights. Any invalidation of these intellectual
property rights or lengthy and expensive defense of these rights could have a
material adverse effect on the Company.
DEPENDENCE ON NEW PRODUCTS
The Company's success will depend upon its ability to develop new
semiconductor devices for existing and new markets, to introduce such products
in a timely manner and to have such products selected for design into new
products of its customers. Successful product development and introduction
depends on a number of factors, including accurate new product definition,
timely completion and introduction of new product designs, availability of
foundry capacity, achievement of manufacturing yields and market acceptance of
the Company's and its customers' products.
COMPETITION; THE SEMICONDUCTOR INDUSTRY
The Company competes with several domestic semiconductor companies, most of
which have substantially greater financial, technical, manufacturing, marketing,
distribution and other resources and broader
14
<PAGE> 16
product lines than the Company. The Company believes that its ability to compete
successfully depends on a number of factors, including the breadth of its
product line, the ability to develop and introduce new products rapidly, product
innovation, product quality and reliability, product performance, price,
technical service and support, adequacy of manufacturing quality and capacity
and sources of raw materials, efficiency of production, delivery capabilities
and protection of the Company's products by intellectual property laws. The
semiconductor industry has been highly cyclical and is subject to significant
economic downturns at various times, characterized by diminished product demand,
accelerated erosion of average selling prices and production over-capacity. The
Company may experience substantial period-to-period fluctuation in future
operating results due to general semiconductor industry conditions and overall
economic conditions.
INTERNATIONAL SALES
The Company derives a significant portion of its net sales from
international sales, including Asia, which are subject to certain risks,
including unexpected changes in legal and regulatory requirements, changes in
tariffs, exchange rates and other barriers, political and economic instability,
difficulties in accounts receivable collection, difficulties in managing
distributors or representatives, difficulties in staffing and managing
international operations, difficulties in protecting the Company's intellectual
property overseas, seasonality of sales and potentially adverse tax
consequences. There can be no assurance that recent economic troubles in certain
Asian countries will not have a material adverse effect on the Company's
business, results of operations and financial condition.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could materially and adversely affect net sales and
profitability from period-to-period, including competitive pressures on selling
prices; the timing and cancellation of customer orders; availability of foundry
capacity and raw materials; fluctuations in yields; changes in product mix; the
Company's ability to introduce new products and technologies on a timely basis;
introduction of products and technologies by the Company's competitors; market
acceptance of the Company's and its customers' products; the level of orders
received which can be shipped in a quarter; the timing of investments in
research and development, including tooling expenses associated with product
development, process improvements and production; and the cyclical nature of the
semiconductor industry. Due to the absence of substantial noncancellable
backlog, the Company typically plans its production and inventory levels based
on internal forecasts of customer demand, which are highly unpredictable and can
fluctuate substantially. Because the Company is continuing to increase its
operating expenses for personnel and new product development and for inventory
in anticipation of increasing sales levels, operating results would be adversely
affected if increased sales are not achieved. In addition, the Company is
limited in its ability to reduce costs quickly in response to any revenue
shortfalls. As a result of the foregoing or other factors, the Company may
experience material fluctuations in future operating results on a quarterly or
annual basis which could materially and adversely affect its business, financial
condition and operating results.
Historically, the Company has also experienced quarterly fluctuations in
net sales and gross profit, principally arising from the amount and timing of
orders of products for military applications. These sales generally result in
lower gross margins than sales of commercial products. The Company anticipates a
continuing decline in sales of products for military applications as part of its
transition from a supplier of product with military applications to a supplier
of commercial products. Should sales of these products decline more rapidly than
the Company anticipates in the near future, such decline could have the effect
of causing further fluctuations in quarterly or annual operating results.
STOCK PRICE VOLATILITY
The trading price of the Company's common stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in operating results,
announcements of technological innovations or new products by the Company or its
competitors, general conditions in the semiconductor manufacturing and
electronic markets, changes in earnings estimates by analysts, or other events
or factors. In addition, the public stock
15
<PAGE> 17
markets have experienced extreme price and trading volume volatility in recent
months. This volatility has significantly affected the market prices of
securities of many technology companies for reasons frequently unrelated to the
operating performance of the specific companies. These broad market fluctuations
may adversely affect the market price of the Company's common stock.
YEAR 2000 ISSUE
The Company has recently commenced a Year 2000 date conversion project to
assess the possible impact of Year 2000 issues on its business. The Company is
looking at (a) its internal information and operating systems, (b) possible
effects on the Company of third parties' failure to fix their own Year 2000
Issues, and (c) whether any material contingencies may exist related to products
sold by the Company. The Company expects that these assessments will enable it
to develop plans for any required changes, testing and implementation; to make
estimates of likely time involved, and costs of any required changes; and to
determine whether Year 2000 issues are likely to have a material impact on
future financial results or financial condition.
16
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The Company's Consolidated Financial Statements and related Independent
Auditors' Report are presented in the following pages.
Independent Auditors' Report
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1996 and 1997
Consolidated Statements of Operations for the year ended December 31,
1995, 1996 and 1997
Consolidated Statements of Shareholders' Equity (Deficit) for the year
ended December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the year ended December 31,
1995, 1996 and 1997
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Not applicable.
17
<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
The information required by this item, with respect to the directors of the
registrant and the filing of reports under Section 16(a) of the Securities
Exchange Act of 1934, is incorporated by reference from the Company's definitive
proxy statement in connection with its Annual Meeting of Shareholders to be held
on May 28, 1998, to be filed with the Commission not later than 120 days after
the close of the fiscal year ended December 31, 1997, in the table under the
captions "Election of Directors" and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934."
ITEM 11. EXECUTIVE COMPENSATION:
The information required by this item is incorporated by reference from the
Company's definitive proxy statement in connection with its Annual Meeting of
Shareholders to be held on May 28, 1998, to be filed with the Commission not
later than 120 days after the close of the fiscal year ended December 31, 1997,
under the caption "Compensation and Other Information Concerning Directors and
Officers."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT:
The information required by this item is incorporated by reference from the
Company's definitive proxy statement in connection with its Annual Meeting of
Shareholders to be held on May 28, 1998, to be filed with the Commission not
later than 120 days after the close of the fiscal year ended December 31, 1997,
in the tables under the captions "Principal Shareholders" and "Election of
Directors."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
The information required by this item is incorporated by reference from the
Company's definitive proxy statement in connection with its Annual Meeting of
Shareholders to be held on May 28, 1998, to be filed with the Commission not
later than 120 days after the close of the fiscal year ended December 31, 1997,
under the caption "Certain Transactions."
18
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
(a) The following documents are filed as part of this Annual Report on Form
10-K:
1. Consolidated Financial Statements. The following consolidated financial
statements of the Company and Independent Auditors' Report are incorporated in
Item 8 of this report.
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1996 and 1997
Consolidated Statements of Operations for the Year Ended December 31, 1995,
1996 and 1997
Consolidated Statements of Shareholders' Equity (Deficit) for the Year
Ended December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the Year Ended December 31, 1995,
1996 and 1997
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules. Consolidated financial
statement schedules have been omitted because the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or the notes thereto.
3(a). The exhibits listed in the Exhibit Index immediately preceding the
Exhibits are filed as a part of this Annual Report on Form 10-K.
3(b). Reports on Form 8-K: No reports on Form 8-K were filed by the Company
during the fiscal quarter ended December 31, 1997.
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SIPEX CORPORATION
By: /s/ JAMES E. DONEGAN
----------------------------------
James E. Donegan
Chairman of the Board of
Directors, Chief Executive
Officer, President and Clerk
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ JAMES E. DONEGAN Chairman of the Board of
- --------------------------------------------------- Directors, Chief Executive
James E. Donegan Officer, President (principal
executive officer) and Clerk March 23, 1998
/s/ FRANK R. DIPIETRO Executive Vice President, Chief
- --------------------------------------------------- Financial Officer and Treasurer
Frank R. DiPietro (principal financial officer and
accounting officer) March 23, 1998
/s/ DANIEL DEROUX Director
- ---------------------------------------------------
Daniel Deroux March 23, 1998
/s/ MANFRED LOEB Director
- ---------------------------------------------------
Manfred Loeb March 23, 1998
/s/ LIONEL H. OLMER Director
- ---------------------------------------------------
Lionel H. Olmer March 23, 1998
/s/ JOHN L. SPRAGUE Director
- ---------------------------------------------------
John L. Sprague March 23, 1998
/s/ DR. STEWARD S. FLASCHEN Director
- ---------------------------------------------------
Dr. Steward S. Flaschen March 23, 1998
/s/ DR. WILLY SANSEN Director
- ---------------------------------------------------
Dr. Willy Sansen March 23, 1998
</TABLE>
20
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C>
3.1 Restated Articles of Organization of the Company, as amended
(filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File No. 333-1328, and incorporated
herein by reference).
3.2 Restated By-Laws of the Company, as amended (filed as
Exhibit 3.2 to the Company's Registration Statement on Form
S-1, File No. 333-1328, and incorporated herein by
reference).
4.2 Form of Indemnification Agreement for directors and officers
(filed as Exhibit 4.2 to the Company's Registration
Statement on Form S-1, File No. 333-1328, and incorporated
herein by reference).
10.1 1988 Non-Statutory Stock Option Plan (filed as Exhibit 10.1
to the Company's Registration Statement on Form S-1, File
No. 333-1328, and incorporated herein by reference).
10.2 1991 Non-Statutory Stock Option Plan (filed as Exhibit 10.2
to the Company's Registration Statement on Form S-1, File
No. 333-1328, and incorporated herein by reference).
10.3 1993 Stock Option and Incentive Plan (filed as Exhibit 10.3
to the Company's Registration Statement on Form S-1, File
No. 333-1328, and incorporated herein by reference).
10.4 1994 Stock Option and Incentive Plan (filed as Exhibit 10.4
to the Company's Registration Statement on Form S-1, File
No. 333-1328, and incorporated herein by reference).
10.5 1996 Incentive Stock Option Plan (filed as Exhibit 10.5 to
the Company's Registration Statement on Form S-1, File No.
333-1328, and incorporated herein by reference).
10.6 1996 Non-Employee Director Stock Option Plan (filed as
Exhibit 10.6 to the Company's Registration Statement on Form
S-1, File No. 333-1328, and incorporated herein by
reference).
10.7 1996 Employee Stock Purchase Plan (filed as Exhibit 10.7 to
the Company's Registration Statement on Form S-1, File No.
333-1328, and incorporated herein by reference).
10.8 Agreement of Lease, dated January 31, 1996, between the
Company and ATC Billerica Corporation pertaining to 22
Linnell Circle, Billerica, Massachusetts (filed as Exhibit
10.8 to the Company's Registration Statement on Form S-1,
File No. 333-1328, and incorporated herein by reference).
10.9 Lease Agreement, as amended, dated June 12, 1986, between
the Company and Greenback Associates (filed as Exhibit 10.9
to the Company's Registration Statement on Form S-1, File
No. 333-1328, and incorporated herein by reference).
10.10 Employment Agreement, dated January 1, 1988, between the
Company and James E. Donegan (filed as Exhibit 10.10 to the
Company's Registration Statement on Form S-1, File No.
333-1328, and incorporated herein by reference).
10.11 Employment Agreement, dated January 1, 1988, between the
Company and Frank R. DiPietro (filed as Exhibit 10.11 to the
Company's Registration Statement on Form S-1, File No.
333-1328, and incorporated herein by reference).
10.12 Employment Agreement, dated January 1, 1996, between the
Company and Raymond W.B. Chow (filed as Exhibit 10.12 to the
Company's Registration Statement on Form S-1, File No.
333-1328, and incorporated herein by reference).
</TABLE>
21
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C>
10.13 Employment Agreement, dated July 18, 1988, between the
Company and Sanford Cohen (filed as Exhibit 10.13 to the
Company's Registration Statement on Form S-1, File No.
333-1328, and incorporated herein by reference).
10.14 Form of Sales Representative Agreement (filed as Exhibit
10.15 to the Company's Registration Statement on Form S-1,
File No. 333-1328, and incorporated herein by reference).
10.15 Form of Distributor Agreement (filed as Exhibit 10.16 to the
Company's Registration Statement on Form S-1, File No.
333-1328, and incorporated herein by reference).
10.16 1997 Incentive Stock Option Plan (filed as Appendix A to the
Company's definitive Proxy Statement for the Special Meeting
In Lieu Of Annual Meeting Of Shareholders held May 30,
1997).
10.17 Promissory Note dated July 31, 1997 by and between the
Company and Timothy J. Dhuyvetter (filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997 and incorporated
herein by reference).
10.18 Pledge and Security Agreement dated July 31, 1997 by and
between the Company and Timothy J. Dhuyvetter (filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1997 and
incorporated herein by reference).
10.19* License Agreement between Timex Corporation and SIPEX
Corporation dated July 1, 1997.
11.1 Computation of earnings per share.
21.1 Subsidiaries of the Company (filed as Exhibit 21.1 to the
Company's Registration Statement on Form S-1, File No.
333-1328, and incorporated herein by reference).
23.1 Consent of KPMG Peat Marwick LLP, independent accountants.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Confidential treatment as to certain portions has been requested pursuant to
Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended.
22
<PAGE> 24
SIPEX CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1996 and 1997... F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997.......................... F-4
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1995, 1996, and 1997..... F-5
Consolidated Statements of Cash Flows for the year ended
December 31, 1995, 1996 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
The Board Of Directors and Shareholders
SIPEX Corporation
We have audited the accompanying consolidated balance sheets of SIPEX
Corporation (the Company) as of December 31, 1996 and 1997 and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for each of the years in the three year period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SIPEX
Corporation as of December 31, 1996 and 1997 and the consolidated results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Boston, Massachusetts
February 13, 1998
F-2
<PAGE> 26
SIPEX CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 15,114,538 $ 23,886,793
Short-term investment securities.......................... 22,358,992 16,098,556
Accounts receivable, less allowances of $255,000 and
$596,000 at December 31, 1996 and 1997, respectively... 4,810,162 8,693,271
Inventories............................................... 11,624,830 13,988,374
Deferred income taxes..................................... -- 1,342,999
Prepaid expenses.......................................... 208,296 499,008
------------ ------------
Total current assets................................... 54,116,818 64,509,001
Property, plant, and equipment, net......................... 3,312,552 8,345,348
Other assets................................................ 219,524 127,405
------------ ------------
Total assets...................................... $ 57,648,894 $ 72,981,754
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 189,720 $ 45,118
Accounts payable.......................................... 2,570,888 2,771,244
Accrued expenses.......................................... 1,436,372 2,289,877
------------ ------------
Total current liabilities.............................. 4,196,980 5,106,239
Long-term debt.............................................. 42,940 7,904
------------ ------------
Total liabilities................................. 4,239,920 5,114,143
------------ ------------
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized and no shares issued or outstanding at
December 31, 1996 and 1997............................. -- --
Common stock, $.01 par value, 40,000,000 shares authorized
and 17,068,398 and 17,711,422 shares issued and
outstanding at December 31, 1996 and 1997,
respectively........................................... 85,342 177,114
Additional paid-in capital................................ 96,471,596 97,586,345
Accumulated deficit....................................... (43,304,185) (30,058,981)
Cumulative translation adjustment......................... 156,221 163,133
------------ ------------
Total shareholders' equity............................. 53,408,974 67,867,611
------------ ------------
Total liabilities and shareholders' equity........ $ 57,648,894 $ 72,981,754
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 27
SIPEX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales............................................. $29,978,525 $37,310,910 $51,209,737
Cost of sales......................................... 19,078,986 21,437,878 26,670,273
----------- ----------- -----------
Gross profit................................ 10,899,539 15,873,032 24,539,464
Operating expenses:
Research and development............................ 4,399,490 4,724,652 5,448,183
Marketing and selling............................... 4,244,872 4,551,842 5,215,424
General and administrative.......................... 1,905,849 2,112,290 3,047,118
Write-off of intangible assets...................... 1,319,970 -- --
----------- ----------- -----------
Total operating expenses.................... 11,870,181 11,388,784 13,710,725
----------- ----------- -----------
Income (loss) from operations......................... (970,642) 4,484,248 10,828,739
Other income (expense):
Interest income (expense), net...................... (909,894) 144,430 2,012,222
Other, net.......................................... 105,144 (197,390) (570,757)
----------- ----------- -----------
(804,750) (52,960) 1,441,465
----------- ----------- -----------
Income (loss) before income taxes..................... (1,775,392) 4,431,288 12,270,204
Income tax expense (benefit).......................... 27,287 154,169 (975,000)
----------- ----------- -----------
Net Income(loss)...................................... $(1,802,679) $ 4,277,119 $13,245,204
=========== =========== ===========
Net income (loss) per common share -- basic........... $ (0.19) $ 0.32 $ 0.76
=========== =========== ===========
Net Income (loss) per common share -- assuming
dilution............................................ $ (0.19) $ 0.29 $ 0.71
=========== =========== ===========
Weighted average common shares outstanding -- basic... 9,366,492 13,284,026 17,427,068
=========== =========== ===========
Weighted average common shares -- assuming dilution... 9,519,454 14,699,912 18,581,062
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 28
SIPEX CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------------- ADDITIONAL CUMULATIVE SHAREHOLDERS'
NUMBER OF $.01 PAR PAID-IN ACCUMULATED TRANSLATION EQUITY
SHARES VALUE CAPITAL DEFICIT ADJUSTMENT (DEFICIT)
---------- -------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994..... 4,681,186 $ 46,812 $45,466,202 $(45,778,625) $198,223 $ (67,388)
Acquisition of treasury stock.... (3,378) (34) (1,316) (1,350)
Issuance of common stock under
option plans................... 7,498 75 2,772 2,847
Net loss......................... (1,802,679) (1,802,679)
Currency translation
adjustment..................... (15,401) (15,401)
---------- -------- ----------- ------------ -------- -----------
Balance at December 31, 1995..... 4,685,306 46,853 45,467,658 (47,581,304) 182,822 (1,883,971)
========== ======== =========== ============ ======== ===========
Issuance of common stock under
option plans................... 238,178 2,382 92,893 95,275
Issuance of common stock through
public offerings............... 3,610,715 36,107 50,911,045 50,947,152
Net income....................... 4,277,119 4,277,119
Currency translation
adjustments.................... (26,601) (26,601)
---------- -------- ----------- ------------ -------- -----------
Balance at December 31, 1996..... 8,534,199 $ 85,342 $96,471,596 $(43,304,185) $156,221 $53,408,974
========== ======== =========== ============ ======== ===========
Issuance of common stock under
option plans................... 407,307 4,073 1,202,448 1,206,521
2:1 split effected through a 100%
stock dividend................. 8,769,916 87,699 (87,699) 0
Net income....................... 13,245,204 13,245,204
Currency translation
adjustment..................... 6,912 6,912
---------- -------- ----------- ------------ -------- -----------
Balance at December 31, 1997..... 17,711,422 $177,114 $97,586,345 $(30,058,981) $163,133 $67,867,611
========== ======== =========== ============ ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 29
SIPEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net income (loss)................................. $(1,802,679) $ 4,277,119 $ 13,245,204
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating
activities:
Allowance for receivables...................... 166,000 8,326 283,279
Depreciation and amortization.................. 2,297,550 985,990 1,467,706
Changes in assets and liabilities:
(Increase) decrease in accounts receivable... (1,248,355) 499,383 (4,271,068)
(Increase) decrease in inventories........... (1,951,792) (4,240,764) (2,370,709)
Increase in prepaid expenses................. (74,598) (66,308) (210,289)
Increase in deferred taxes................... -- -- (1,342,999)
Decrease in other assets..................... 3,818 57,290 43,225
Increase (decrease) in accounts payable...... 1,274,176 (1,330,303) 242,500
Increase (decrease) in accrued expenses...... 442,646 (250,975) 1,131,936
----------- ------------ ------------
Net cash (used in) provided by operating
activities................................... $ (893,234) $ (60,242) $ 8,218,785
----------- ------------ ------------
Investing activities:
Proceeds from maturity of investment securities... -- 2,962,754 76,500,000
Purchase of investment securities................. -- (25,321,746) (70,239,564)
Purchase of property, plant, and equipment........ (1,213,760) (1,852,166) (6,505,140)
----------- ------------ ------------
Net cash used in investing activities.......... (1,213,760) (24,211,158) (244,704)
----------- ------------ ------------
Financing activities:
Proceeds from issuance of common stock, net....... 1,497 51,042,427 982,010
Proceeds from (payments of) long-term debt........ 786,819 (11,709,710) --
Payment of capital lease and other debt
obligations.................................... (105,074) (197,431) (179,638)
Proceeds from issuance of subordinated debt....... 1,509,710 -- --
----------- ------------ ------------
Net cash provided by financing activities...... 2,192,952 39,135,286 802,372
----------- ------------ ------------
Effect of foreign currency exchange rate changes on
cash and cash equivalents......................... (4,392) (6,697) (4,199)
----------- ------------ ------------
Increase in cash and cash equivalents............... 81,566 14,857,189 8,772,255
Cash and cash equivalents at beginning of period.... 175,783 257,349 15,114,538
----------- ------------ ------------
Cash and cash equivalents at end of period.......... $ 257,349 $ 15,114,538 $ 23,886,793
=========== ============ ============
Supplemental cash flow disclosure:
Cash paid during the period for:
Income taxes................................... $ 11,755 $ 78,169 $ 36,800
Interest....................................... $ 817,697 $ 427,735 $ 11,535
=========== ============ ============
Supplemental disclosure of non-cash investing
activities:
Acquisition of assets under capital lease
obligations.................................... $ 252,080 $ 12,463 $ 27,508
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 30
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996, AND 1997
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
SIPEX Corporation (the "Company") designs, manufacturers and markets high
performance and high value added standard analog integrated circuits and
application specific circuits. Applications for the Company's products include
telecommunications, personal computers and peripherals, battery powered handheld
devices, cellular telephones, test equipment, factory automation, networking,
process controls and satellites. The Company operates in the analog segment of
the semiconductor industry.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of SIPEX
Corporation and all of its wholly owned subsidiaries. All intercompany accounts
and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment. Revenue
from engineering service contracts is recorded as performance or other
contractually specified milestones are attained. Additionally, the Company
accrues for estimated sales returns upon shipment.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of 90 days or
less to be cash equivalents. Short-term investments consist of U.S. Government
securities and municipal bond obligations. The Company's investments in debt
securities were classified as available-for-sale which means that although the
Company principally holds securities until maturity, they may be sold under
certain circumstances.
CONCENTRATION OF CREDIT RISK
Financial instruments of the Company consist of cash, short-term
securities, accounts receivable, accounts payable and capitalized leases. The
carrying amounts of these financial instruments approximate their fair value.
INVENTORIES
Inventories are stated at the lower of cost or market. Costs are determined
using the first-in, first-out method.
F-7
<PAGE> 31
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is provided
by using the straight-line method over their useful lives as follows:
<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.
FOREIGN CURRENCY TRANSLATION
Foreign currency assets and liabilities are translated into dollars at
current rates, and revenues, costs and expenses are translated at average rates
during each reporting period. Gains or losses resulting from foreign currency
transactions are included in earnings currently, while those resulting from
translation of financial statements are shown as a separate component of
shareholders' equity. Such transaction gains and losses are immaterial for all
periods presented.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in earnings in the period that includes the
enactment date.
NET INCOME (LOSS) PER SHARE
Basic income (loss) per share is based upon the weighted average number of
common shares outstanding. Income per share is based upon the weighted average
number of common and common equivalent shares outstanding assuming dilution.
Dilutive potential common shares outstanding at December 31, 1995, 1996 and 1997
were approximately 159,000, 1,600,000 and 1,700,000, respectively.
2. INVENTORIES
Inventories were as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Raw materials................................. $ 5,142,409 $ 6,424,191
Work-in-process............................... 3,626,720 4,236,586
Finished goods................................ 2,855,701 3,327,597
----------- -----------
$11,624,830 $13,988,374
=========== ===========
</TABLE>
F-8
<PAGE> 32
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment were as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Machinery and equipment....................... $24,465,817 $29,470,964
Furniture, fixtures and office equipment...... 1,324,588 2,351,873
Leasehold improvements........................ 2,020,794 2,274,898
----------- -----------
$27,811,199 $34,097,735
Less accumulated depreciation and
amortization................................ 24,498,647 25,752,387
----------- -----------
$ 3,312,552 $ 8,345,348
=========== ===========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses were as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Accrued compensation and benefits............. $ 687,485 $ 1,138,680
Accrued commissions........................... 390,220 335,049
Accrued royalties............................. 234,125 419,000
Accrued taxes................................. -- 160,000
Other......................................... 124,542 237,148
----------- -----------
$ 1,436,372 $ 2,289,877
=========== ===========
</TABLE>
5. LONG-TERM DEBT
The Company's long-term debt is summarized as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Capital lease obligations..................... $ 224,965 $ 53,022
Other......................................... 7,695 --
----------- -----------
$ 232,660 $ 53,022
Less current portion.......................... 189,720 45,118
----------- -----------
$ 42,940 $ 7,904
=========== ===========
</TABLE>
Equipment held under capital leases were as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Cost.......................................... $ 743,335 $ 770,843
Less: Accumulated depreciation............... 451,486 646,723
----------- -----------
$ 291,849 $ 124,120
=========== ===========
</TABLE>
F-9
<PAGE> 33
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of principal payments on capital lease
obligations:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
1998................................................... $ 49,165
1999................................................... 9,772
2000................................................... --
--------
$ 58,937
========
</TABLE>
6. INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 1995,
1996 and 1997 was allocated as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- -----------
<S> <C> <C> <C>
Income from continuing operations............... $ 27,287 $ 154,169 $ (975,000)
Shareholders' equity for compensation expense
for tax purposes in excess of amounts
recognized for financial statement purposes... -- -- (226,000)
-------- --------- -----------
$ 27,287 $ 154,169 $(1,201,000)
======== ========= ===========
</TABLE>
Total federal, state and foreign income tax expense (benefit), consists of
the following:
<TABLE>
<CAPTION>
1995 1996 1997
---------------------------- ------------------------------------ -------------------------
DEFERRED CURRENT TOTAL DEFERRED CURRENT TOTAL DEFERRED CURRENT
-------- ------- ------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal.............. $ -- $ -- $ -- $ -- $ 1,762,027 $ 1,762,027 $(1,342,999) $ 4,145,342
Loss carryforward.... -- -- -- $(1,618,158) $(1,618,158) -- (3,887,363)
State................ -- (3,365) (3,365) -- 463,411 463,411 -- 932,013
Loss carryforward.... -- -- -- (453,111) (453,111) -- (838,993)
Foreign.............. -- 30,652 30,652 -- -- -- -- --
-------- ------- ------- -------- ----------- ----------- ----------- -----------
$ -- $27,287 $27,287 $ -- $ 154,169 $ 154,169 $(1,342,999) $ 350,999
======== ======= ======= ======== =========== =========== =========== ===========
<CAPTION>
1997
-----------
TOTAL
-----------
<S> <C>
Federal.............. $ 2,819,343
Loss carryforward.... (3,887,363)
State................ 932,013
Loss carryforward.... (838,993)
Foreign.............. --
-----------
$ (975,000)
===========
</TABLE>
The actual tax expense (benefit) differs from the "expected" tax expense as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)................ $(603,633) $ 1,506,638 $ 4,294,571
State income tax, net of federal income tax benefit and
utilization of loss carryforward....................... (2,221) 6,798 60,463
Alternative minimum tax.................................. -- 19,304 --
Intangibles amortization................................. 269,213 --
Non-deductible expenses.................................. -- 22,377 125,100
Non-deductible foreign losses............................ -- 116,666 (10,594)
Change in valuation allowance for loss carryforward...... 345,890 -- (1,325,999)
Utilization of net operating losses...................... -- (1,618,158) (3,887,363)
Utilization of R&D credits............................... (230,273)
Other.................................................... 18,038 100,544 (905)
--------- ----------- -----------
$ 27,287 $ 154,169 $ (975,000)
========= =========== ===========
</TABLE>
F-10
<PAGE> 34
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portion of the deferred tax assets and liabilities at December 31, 1996 and 1997
are presented below:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards....................... $ 14,628,395 $ 12,000,949
Tax credit carryforwards, including alternative minimum
tax.................................................. 739,582 1,127,455
Inventories, primarily non-deductible reserves......... 361,729 409,141
Accounts receivable, primarily allowances.............. 102,190 245,337
Accrued expenses, principally provisions not currently
deductible........................................... 248,463 182,142
Fixed assets, due to differences in depreciation....... 1,401,659 1,285,328
------------ ------------
Total gross deferred tax assets................... 17,482,018 15,250,352
Valuation allowance.................................... (17,482,018) (13,907,353)
------------ ------------
Net deferred taxes................................ $ -- $ (1,342,999)
============ ============
</TABLE>
At December 31, 1997, the Company has U.S. net operating loss carryforwards
of approximately $32,923,000, which are available to offset future Federal
taxable income. These losses expire during the years 2002 through 2010. As of
December 31, 1997, utilization of these net operating loss carryforwards is
subject to an annual limitation of approximately $7,400,000 as a result of an
ownership change which occurred on September 30, 1996. In addition, the Company
has Massachusetts and California net operating loss carryforwards of
approximately $5,571,000 and $2,165,000, respectively, which are available to
offset future Massachusetts and California taxable income. These state losses
expire during the years 1999 through 2002. The Federal tax benefit from the
utilization of approximately $9,000,000 of net operating loss carryforwards will
result in an increase in additional paid-in capital when recognized.
The Company also has general business tax credit carryforwards for Federal
and State income tax purposes of approximately $1,100,000 which are available to
reduce future Federal and State income taxes. The general business credits
expire during the years 2001 through 2012.
The valuation allowance for deferred tax assets as of December 31, 1996 and
1997 was $17,482,018 and $12,870,105, respectively. Based on the Company's level
of net income and projected future earnings, the Company believes that it is
more likely than not that a portion of the deferred tax asset at December 31,
1997 will be realized in the future.
7. SHAREHOLDERS' EQUITY
Effective April 8, 1996, the number of authorized shares of Common Stock
was increased pursuant to an Amended and Restated Articles of Organization and
the Board of Directors were authorized to issue up to 1,000,000 shares of
preferred stock with terms to be established by the Board at the time of
issuance. In addition, the Company's shareholders' approved a 1 for 4 reverse
split of its issued and outstanding Common Stock. Effective August 18, 1997, the
Company approved a 2 for 1 split of its issued and outstanding common stock. All
shares and per share data presented in the accompanying consolidated financial
statements have been restated to reflect the change in number of authorized and
outstanding shares of Common Stock.
On April 8, 1996 and November 5, 1996, the Company closed the sale, through
an initial and secondary public offering, of 2,160,715 and 1,450,000 shares of
Common Stock, respectively. The proceeds to the Company from the offerings were
$19.1 million and $33.0 million before deducting expenses from the offerings of
approximately $800,000 and $450,000, respectively.
The Company currently maintains six stock option plans. The 1991
Non-Statutory Plan, 1993 Incentive Stock Option Plan, 1994 Stock Option and
Incentive Plan, 1996 Stock Option Plan, 1996 Non-Employee Director Stock Option
Plan and the 1997 Stock Option Plan have had 744,308, 265,818, 1,187,900,
1,200,000,
F-11
<PAGE> 35
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
300,000 and 1,200,000 shares reserved for issuance, respectively. All plans
allow for options which vest ratably over five years from the date of grant and
expire ten years from the date of grant. Options for 1,535,110 shares are
outstanding as of December 31, 1997 under these plans.
In January 1996, the Board Of Directors approved the 1996 Employee Stock
Purchase Plan, pursuant to which the Company is authorized to issue up to
500,000 shares of Common Stock to its full-time employees, nearly all of whom
are eligible to participate. Under the terms of the Plan, employees can choose
each year to have up to 10 percent of their annual base earnings withheld to
purchase the Company's Common Stock. The purchase price of stock is 85 percent
of the lower of its beginning-of-period or end-of-period market price. Under the
Plan, the Company sold 17,740 shares to employees since inception of the plan.
The Company applies APB Opinion 25 and related interpretations in
accounting for these plans. Accordingly, no compensation cost has been
recognized. Had compensation cost been determined pursuant to SFAS No. 123, the
Company's net income (loss) and net income (loss) per share would have been
adjusted to the pro forma amounts indicated in the table below. The effects on
pro forma net income (loss) obtained from applying SFAS No. 123 may not be
representative of the effects on reported net income for future years.
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss)................ As Reported $(1,802,679) $4,277,119 $13,245,204
Pro forma (1,804,437) 3,583,713 11,948,012
Net income (loss)................ As Reported (0.19) 0.32 0.76
per share - basic.............. Pro forma (0.19) 0.27 0.69
Net income (loss)................ As Reported (0.19) 0.29 0.71
per share - assuming........... Pro forma (0.19) 0.24 0.64
dilution
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995, 1996 and 1997 respectively; no dividend
yield; expected volatility of 45 percent and expected option lives of six years.
The risk free interest rate assumed was 7.0 percent for 1995 and 1996 and 5.65
percent for 1997. The weighted-average fair value of options granted during
1995, 1996 and 1997 was $0.11, $6.00 and $9.54, respectively.
A summary of the status of the Company's stock option plans as of December
31, 1995 1996 and 1997 and changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
1995 1996 1997
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year............................ 1,586,294 $0.23 1,625,410 $ 0.23 1,922,475 $ 0.21
Granted........................... 159,350 0.20 880,304 10.09 639,260 18.19
Exercised......................... (14,974) 0.20 (476,372) 0.20 (622,414) 1.33
Forfeited......................... (105,260) 0.20 (106,867) 1.58 (404,211) 10.30
--------- ----- --------- ------ --------- ------
Outstanding at end of year........ 1,625,410 $0.23 1,922,475 $ 4.65 1,535,110 $10.19
========= ===== ========= ====== ========= ======
Options exercisable at year-end... 576,962 $0.23 425,192 $ 0.21 116,006 $ 2.71
========= ===== ========= ====== ========= ======
</TABLE>
F-12
<PAGE> 36
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the Company's stock
options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
------------------------------------- -----------------
NUMBER WEIGHTED AVERAGE NUMBER
OUTSTANDING AT REMAINING EXERCISABLE AT
EXERCISE PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE DECEMBER 31, 1997
--------------- ----------------- ---------------- -----------------
<S> <C> <C> <C>
$ 0.20 445,400 6.88 81,312
4.75 68,000 8.12 4,000
5.50 4,250 1.13 4,250
7.19 80,000 8.58 0
7.375 105,000 8.54 11,400
7.75 52,000 8.64 4,000
8.56 10,000 8.66 2,000
12.44 256,620 9.34 0
13.63 147,940 8.91 9,044
15.00 95,990 9.41 0
16.81 51,200 9.13 0
21.25 40,000 9.55 0
21.50 10,000 9.55 0
23.625 10,000 9.58 0
23.63 70,640 9.58 0
24.00 1,800 9.60 0
33.00 86,270 9.83 0
--------- -------
1,535,110 116,006
========= =======
</TABLE>
8. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution retirement plan (401(k)) covering
substantially all employees. The Company matches 50% of the contributions made
by employees up to 6% of their annual compensation. The Company can also make a
discretionary contribution to the plan. Employee contributions vest immediately,
and employer contributions vest ratably over five years. Participants are
entitled, upon termination or retirement, to their vested portion of retirement
fund assets which are held by a corporate trustee. During 1995, 1996 and 1997,
Company contributions to the plan were $171,000, $173,000 and $201,000,
respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company leases facilities under operating leases expiring through 2000.
Rent expense was approximately $450,000, $498,000 and $619,000 for the years
ended December 31, 1995, 1996 and 1997, respectively.
The following is a schedule of future minimum lease commitments under
operating leases with terms in excess of one year at December 31, 1997:
<TABLE>
<CAPTION>
CALENDAR YEAR
- -------------
<S> <C>
1998............................................. $ 708,108
1999............................................. 708,171
2000............................................. 736,930
----------
$2,153,209
==========
</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
F-13
<PAGE> 37
SIPEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liability and believes the ultimate outcome of this matter will not have a
material impact on the consolidated financial statements.
Also, the Company is party to various claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of management, all
such matters are without merit or are of such kind, or involve such amounts,
that unfavorable disposition would not have a material effect on the
consolidated results of operations and cash flows of the Company.
10. EXPORT SALES AND MAJOR CUSTOMERS
Revenues by geographic area are summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
United States....................... $19,368,000 $25,183,000 $31,649,000
Europe.............................. 7,408,000 7,925,000 9,475,000
Far East............................ 1,867,000 2,417,000 5,143,000
Japan............................... 1,336,000 1,786,000 4,943,000
----------- ----------- -----------
$29,979,000 $37,311,000 $51,210,000
=========== =========== ===========
</TABLE>
11. SUBSEQUENT EVENT (UNAUDITED)
In March, 1998, the Company entered into a five-year operating lease
agreement, including a one-year construction period, with one five year renewal
option for the construction and lease of a wafer manufacturing facility,
including all necessary machinery and equipment ("the facility"). The total cost
of the facility is limited to $40,000,000. The lease provides for a substantial
residual value guarantee by the Company at the end of the initial lease term and
includes a purchase option equal to the total cost of the facility. The lease
provides for monthly lease payments which are estimated to be $160,000. At the
end of the lease term, the Company is obligated to purchase the facility or
remarket it for the benefit of the lessor. The Company expects the fair market
value of the facility, subject to the purchase option or sale to a third party,
to substantially reduce or eliminate the Company's payment under the residual
value guarantee. The residual value guarantee relative to the assets to be
leased will approximate 85% of their total cost.
F-14
<PAGE> 1
EXHIBIT 10.19
LICENSE AGREEMENT
BETWEEN
TIMEX CORPORATION
AND
SIPEX CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
RECITALS.................................................................................................1
1. DEFINITIONS...........................................................................................1
1.1 "Average Unit Selling Price"......................................................................1
1.2 "Contract Year"...................................................................................1
1.3 "Developments"....................................................................................1
1.4 "Net Sales".......................................................................................1
1.5 "Products"........................................................................................1
1.6 "Territory".......................................................................................2
1.7 "Affiliate".......................................................................................2
2. GRANT OF RIGHTS.......................................................................................2
2.1 The License.......................................................................................2
2.2 Rights Reserved To Licensor.......................................................................2
2.3 Best Efforts......................................................................................2
2.4 Indiglo Trademark.................................................................................2
2.5 Authorization To Make Or Sell Bare Die El Circuits Not Included In Definition
Of Products .....................................................................................3
3. LIMITATION ON RIGHTS GRANTED..........................................................................3
4. DURATION OF AGREEMENT.................................................................................3
5. OWNERSHIP AND PROTECTION OF INTELLECTUAL PROPERTY.....................................................4
5.1 Ownership Of Intellectual Property................................................................4
5.2 Infringement......................................................................................4
6. PAYMENTS AND REPORTS..................................................................................4
6.1 Royalty...........................................................................................4
6.2 Excess Returns....................................................................................5
6.3 Sale Date.........................................................................................5
6.4 Late Payments.....................................................................................5
6.5 Statements........................................................................................5
7. BOOKS AND RECORDS.....................................................................................6
7.1 Separate Books And Records........................................................................6
7.2 Unique Style Numbers..............................................................................6
7.3 Right To Examine..................................................................................6
8. INSURANCE.............................................................................................7
8.1 Requirements......................................................................................7
8.2 Territory For Insurance...........................................................................7
9. INDEMNIFICATION, REPRESENTATIONS AND WARRANTIES.......................................................7
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
9.1 Licensee Indemnification..........................................................................7
9.2 Licensor Indemnification..........................................................................7
9.3 Defense Of Claims.................................................................................7
9.4 Indemnity Unaffected..............................................................................8
9.5 Notification Of Claims And Consumer Complaints....................................................8
9.6 Licensor Representations..........................................................................8
9.7 No Legal Impediments..............................................................................8
9.8 Mutual Representations............................................................................8
9.9. Compliance With Law..............................................................................8
9.10 Disclaimer.......................................................................................8
10. CONFIDENTIAL INFORMATION AND ADVERTISING.............................................................8
10.1 Confidentiality..................................................................................8
10.2 Advertising......................................................................................9
11. TERMINATION..........................................................................................9
11.1 Other Rights Unaffected..........................................................................9
11.2 Events Of Termination............................................................................9
11.3. Rights Personal................................................................................10
11.4. Obligations At Expiration Or Termination.......................................................10
11.4.1. Termination Of Rights.....................................................................10
11.4.2. Wind-Down Of Licensee's Product Sales.....................................................10
11.4.3. No Liability..............................................................................10
11.4.4 Accrued And Surviving Obligations..........................................................11
12. NOTICES AND COMMUNICATIONS..........................................................................11
13. INTERPRETATION......................................................................................12
14. GOVERNING LAW.......................................................................................12
15. RELATIONSHIP OF THE PARTIES.........................................................................12
16. WAIVER AND INTEGRATION..............................................................................12
17. SURVIVAL............................................................................................13
18. SEVERABILITY........................................................................................13
19. BINDING AGREEMENT...................................................................................13
20. EXHIBITS............................................................................................13
21. TAXES...............................................................................................13
22. FORCE MAJEURE.......................................................................................13
23. PRIORITY OF SUPPLY..................................................................................14
SIGNATURES .............................................................................................15
</TABLE>
ii
<PAGE> 4
LIST OF EXHIBITS
EXHIBIT TITLE PAGE(S)
A PATENT
iii
<PAGE> 5
LICENSE AGREEMENT
BETWEEN TIMEX CORPORATION
AND SIPEX CORPORATION
This AGREEMENT (this "Agreement") is made and entered into as of July 1,
1997 (the "Effective Date") by and between TIMEX CORPORATION, a Delaware
corporation with its principal place of business at Park Road Extension,
Middlebury, Connecticut (LICENSOR) and SIPEX CORPORATION, a Massachusetts
corporation with its principal place of business at 22 Linnell Circle,
Billerica, Massachusetts (LICENSEE).
WHEREAS, the parties hereto are parties to a certain License Agreement
dated as of July 1, 1995 (the "Original License Agreement") pursuant to which
LICENSOR granted to LICENSEE a license to use the United States Letter Patent
for an IC Circuit known as the "EL Driver Circuit" that is identified in EXHIBIT
A attached hereto, which is owned by LICENSOR (the "Patent"); and
WHEREAS, LICENSOR and LICENSEE desire to terminate the Original License
Agreement and replace it with this Agreement;
NOW, THEREFORE, in consideration of the mutual promises contained herein
and other good and valuable consideration the receipt of which is hereby
acknowledged, the parties agree to the following:
1. DEFINITIONS
1.1 "AVERAGE UNIT SELLING PRICE" - shall mean the result obtained by
dividing the aggregate Net Sales for the quarter in question by the aggregate
number of units or Products sold during such quarter.
1.2 "CONTRACT YEAR" - Each year of the Term of this Agreement as set forth
in Section 4.
1.3 "DEVELOPMENTS" - any discoveries, inventions, improvements, variations
or modifications based on the Patent or derivations of the Patent.
1.4 "NET SALES" - "Net Sales" are actual invoiced billings for Products
sold and/or all other receivables of any kind whatsoever received in payment for
the Products by LICENSEE or any parent, subsidiary or Affiliate of LICENSEE,
less returns actually received, provided, however, that invoiced charges for
transportation of Products within the Territory and duties which are separately
identified on the sales invoice are not included in "Net Sales".
1.5 "PRODUCTS" - (a) Packaged EL Driver Circuits that use or incorporate
the inventions of the Patent or any Developments (as defined in Section 5.1
below) owned by LICENSOR and (b) Bare Die EL Driver Circuits that use or
incorporate the inventions of the
1
<PAGE> 6
Patent. "Products" as used herein does not include Bare Die EL Driver Circuits
that use or incorporate Developments (as defined in Section 5.1 below).
1.6 "TERRITORY"- Worldwide.
1.7 "AFFILIATE" - with respect to a party hereto, a corporation or other
business entity or any successor thereto which controls, is under common control
with or is controlled by such party. For purposes of this Section 1.7, the terms
"controls," "control," and "controlled" mean the ownership, direct or indirect,
of more than fifty percent (50%) of the voting securities of such corporation or
an equivalent voting or other ownership interest in such other business entity.
2. GRANT OF RIGHTS
2.1 THE LICENSE: LICENSOR hereby grants LICENSEE a non-exclusive
non-transferable license in and under the Patent and any Developments owned by
LICENSOR to make, have made, use and sell Products in the Territory in
accordance with the provisions of this Agreement, and to develop and make
prototypes of Bare Die EL Driver Circuits that incorporate Developments provided
that Bare Die EL Driver Circuits incorporating Developments shall not be sold
without obtaining Licensor's prior consent pursuant to Section 2.5.
2.2 RIGHTS RESERVED TO LICENSOR: No rights are granted or implied by this
Agreement under any patents of any country other than the patents specifically
identified on Exhibit A hereto. All rights other than those expressly granted to
LICENSEE are reserved to LICENSOR, including but not limited to the right to
use, license and sublicense the Patent in connection with the manufacture and
sale of Products of any and all types and descriptions, provided, however, that
should LICENSOR license another to manufacture Products during the Term on more
favorable royalty terms than those set forth herein, LICENSOR and LICENSEE shall
in good faith negotiate comparable royalty terms.
2.3 BEST EFFORTS: LICENSEE shall use its best efforts to exploit the
License throughout the Territory.
2.4 INDIGLO TRADEMARK: Nothing contained herein shall be construed as a
license to use the INDIGLO trademark or any other trademark owned by LICENSOR.
If asked, LICENSEE shall advise its customers that they are not authorized to
use the INDIGLO trademark in any way in advertising, selling, marketing or
otherwise promoting the Products or goods in which Products are a component.
LICENSEE may refer customers who are interested in using the INDIGLO trademark
to LICENSOR. Should LICENSEE introduce to LICENSOR any person who desires to
license the INDIGLO trademark for use in connection with products that
incorporate the Products, and should LICENSOR enter into a license agreement
with such person authorizing the use of the INDIGLO trademark on such products,
LICENSOR will pay LICENSEE a "finder's fee" equal to [ * ]% of any royalties
received by LICENSOR from such person on products that incorporate Products and
bear the INDIGLO trademark during the first
- ----------
* Confidential portion has been omitted pursuant to a request for confidential
treatment and has been filed separately with the Commission
2
<PAGE> 7
year after such Products are made commercially available. LICENSOR will make
this payment within 90 days following the end of the one-year period that
commences when said products are first made commercially available by such
person.
2.5 AUTHORIZATION TO MAKE OR SELL BARE DIE EL CIRCUITS NOT INCLUDED IN
DEFINITION OF PRODUCTS: LICENSEE may from time to time seek authorization from
LICENSOR to sell certain parties certain Bare Die EL Circuits that are not
included in definition of Products. Any such request shall be in writing and
shall include a description of the Circuit to be made and sold, the identity of
the buyer, the intended use of the Circuit by the buyer, and the expected sales
volume. Should LICENSOR be willing to authorize such sales, LICENSOR shall
provide such authorization to LICENSEE in writing, signed by a duly authorized
representative of LICENSOR, and the provisions of this Agreement shall apply as
if such sales were sales of Products as defined herein. LICENSOR shall in any
event respond to LICENSEE's request for authorization within 30 days following
receipt of such request. Nothing herein shall be construed to restrict
LICENSEE's right to make and sell circuits or other Products that do not
incorporate the inventions of any patents or other intellectual property owned
by LICENSOR.
3. LIMITATION ON RIGHTS GRANTED
LICENSEE has no right to grant any sublicense, concession, right or
privilege relating to the Patent or any Developments owned by LICENSOR or
otherwise to dispose of all or any part of its interest in this Agreement or any
rights under this Agreement. This license is not to be deemed transferable or
assignable by LICENSEE either directly or by operation of law for any reason;
provided, however, that notwithstanding the foregoing, LICENSEE may assign this
Agreement (including, without limitation, an assignment by operation of law) to
a successor in interest of all or substantially all of the assets or business of
LICENSEE other than any competitor of LICENSOR; provided that any such successor
in interest shall agree to become a party to and to be bound by the provision of
this Agreement in the place and stead of LICENSEE. LICENSOR may assign this
Agreement to any Affiliate.
4. DURATION OF AGREEMENT
The "Term" of this Agreement shall commence on the Effective Date and
expire on [ * ]; provided however, that either party hereto shall have the right
in its sole discretion to terminate this Agreement effective as of [ * ]. The
First Contract Year of the Term shall commence on the Effective Date and expire
on December 31, 1997. Each subsequent Contract Year of the Term shall commence
on January 1st of each year and expire on December 31st of such year.
- ----------
* Confidential portion has been omitted pursuant to a request for confidential
treatment and has been filed separately with the Commission
3
<PAGE> 8
5. OWNERSHIP AND PROTECTION OF INTELLECTUAL PROPERTY
5.1 OWNERSHIP OF INTELLECTUAL PROPERTY: LICENSEE hereby acknowledges
LICENSOR's ownership of the Patent. LICENSEE and LICENSOR agree that LICENSOR
shall be the owner of any Developments developed or created by LICENSOR,
LICENSEE shall be the owner of any Developments developed or created by
LICENSEE, and LICENSOR and LICENSEE shall jointly own any Developments developed
or created jointly. LICENSEE agreed promptly to communicate any such
Developments to LICENSOR and, to the extent such Developments are owned by
LICENSOR or are jointly owned, to cause its employees to execute any documents
necessary to enable LICENSOR to obtain patents in the U.S. and foreign
countries. To the extent any such Developments are owned by LICENSEE, LICENSEE
hereby grants to LICENSOR and its Affiliates a perpetual, irrevocable,
worldwide, exclusive (subject to the rights of LICENSEE under this Agreement),
royalty-free license in and under any such Developments to make, have made and
sell watches, clocks and other horological products and horological wrist
instruments, without right of sublicense. LICENSEE further grants to LICENSOR
and its Affiliates a perpetual, irrevocable, worldwide, non-exclusive,
royalty-free right in and under such Developments to make, have made, use and
sell other products, without right of sublicense.
5.2 INFRINGEMENT: LICENSEE shall promptly give written notice to LICENSOR
of any actual or suspected infringement or misuse of the Patent or any
Developments owned by LICENSOR by any third party of which LICENSEE becomes
aware. LICENSOR shall have the right, but not the requirement, to commence legal
action regarding any misuse or infringement at its expense. LICENSEE shall
cooperate fully and promptly in any misuse or infringement action commenced by
LICENSOR as LICENSOR shall require; provided, however, that any and all costs
incurred by LICENSEE in connection with such litigation shall be borne by
LICENSOR, except that nominal or sample costs shall be borne by LICENSEE.
LICENSOR shall be entitled to seek and recover all costs, expenses and damages
resulting from any infringement or misuse of the Patent or any Developments
owned by LICENSOR, including, without limitation, sums which might otherwise be
due to LICENSEE by operation of law or otherwise, and LICENSEE shall have no
right to share in any amounts recovered by LICENSOR.
6. PAYMENTS AND REPORTS
6.1 ROYALTY:
Each quarter during the Term, LICENSEE shall pay to LICENSOR and account
for a non-refundable royalty (the "Royalty") in an amount in United States
Dollars on all of LICENSEE's sales of the Products, measured in U.S. Dollars.
Royalties shall be paid in U.S. Dollars. The Royalty payment in respect of each
quarter shall be determined by multiplying the aggregate amount of the Net Sales
of the Products sold during such quarter by the applicable Royalty rate set
forth below, which Royalty rate shall be based upon the Average Unit Selling
Price of all units of Products sold during such quarter:
4
<PAGE> 9
<TABLE>
<CAPTION>
<S> <C>
AVERAGE UNIT SELLING PRICE ROYALTY
$0.76 or higher [ * ]%
$0.66 - $0.75 [ * ]%
$0.50 - $0.65 [ * ]%
less than $0.50 [ * ]%
</TABLE>
provided, however, that LICENSEE shall pay a minimum Royalty of $[ * ] for the
First Contract Year and $[ * ] for each subsequent Contract Year. If LICENSEE's
sales on which a royalty is due hereunder are made in a foreign currency,
LICENSEE shall, with the statement of royalties, set forth the amount of such
sales in the foreign currency and the exchange rate used to convert such sales
into U.S. Dollars. LICENSEE shall use the exchange rate stated in the Wall
Street Journal on the fifteenth day of the second month of the quarter for which
the accounting is due or, if such day is not a business day, on the next
business day.
6.2 EXCESS RETURNS: In the event that during any Contract Year, returns of
the Products shall exceed ten percent (10%) of the quantity of Products shipped
during such year, LICENSEE shall pay to LICENSOR a Royalty upon any such returns
in respect of such excess quantity of returns, the amount of which shall be
determined and paid to LICENSOR as if such Products has not been returned.
6.3 SALE DATE: All Royalty payments shall accrue upon the sale of the
Products regardless of the time of collection by LICENSEE. A Product is
considered "sold" upon the date when such Product is billed, invoiced, shipped
or paid for, whichever event occurs first.
6.4 LATE PAYMENTS: If any payment is not received by LICENSOR within thirty
(30) days of the due date, LICENSEE shall pay to LICENSOR a late charge on all
overdue payments commencing five (5) days following the date upon which LICENSOR
shall give LICENSEE written notice that such payment has not been received. Such
late charge shall be calculated at an annual rate of one percent (1%) over the
prevailing prime rate of the Chase Manhattan Bank in New York, New York (or its
successor) in effect on the date on which such late payment should have been
received by the LICENSOR. This late charge represents a fair and reasonable
estimate of the costs that LICENSOR will incur by reason of late payment by
LICENSEE.
6.5 STATEMENTS:
6.5.1 Simultaneous with the submission of all payments, but regardless
of whether any payment is due, LICENSEE shall submit a report of the number,
description and invoice price of each Product sold (by Style Number), the gross
sales, the Net Sales in United States Dollars of all Products, the Average Unit
Selling Price, the Royalty amount payable, and any other information that may be
required for the relevant quarter. The payments and statements for January,
February and March of each year shall be due May 1; the payments and
- ----------
* Confidential portion has been omitted pursuant to a request for confidential
treatment and has been filed separately with the Commission
5
<PAGE> 10
statements for April, May and June shall be due August 1; the payments and
statements for July, August and September shall be due November 1; and the
payments and statements for October, November and December shall be due
February 1.
6.5.2. LICENSEE shall submit copies of its invoices and credit
memoranda upon request.
6.5.3 Receipt or acceptance by LICENSOR of any statement furnished, or
of any sums paid by LICENSEE, shall not preclude LICENSOR from questioning their
correctness at any time.
7. BOOKS AND RECORDS
7.1 SEPARATE BOOKS AND RECORDS: LICENSEE shall maintain separate and
appropriate books of account and records sufficient to reconcile the number of
units received with the number of units sold, both in accordance with United
States generally accepted accounting principles.
7.2 UNIQUE STYLE NUMBERS: The Products shall be assigned style numbers
unique from any other products which LICENSEE manufactures or sells. The style
number assigned to each Product shall be identical to the style number utilized
to identify that Product in all LICENSEE's books and records. All documents
evidencing the sale of Products shall state the style number of such products.
7.3 RIGHT TO EXAMINE: Until four (4) years after the last sale of Products
by LICENSEE, LICENSOR shall have the right, through any authorized
representative of its choice and at its sole cost and expense, on at least
twenty (20) days advance notice to LICENSEE, to examine and copy LICENSEE's
books and records relating to the sale of the Products which are appropriate to
allow LICENSOR to monitor LICENSEE's obligations under this Agreement. LICENSOR
shall have the right to examine the books and records relating to the sale of
the Products of all companies owned or controlled by LICENSEE or in which
LICENSEE is a partner. All such examinations shall be at LICENSEE's principal
place of business and during normal business hours. LICENSEE shall keep all such
books of account and records available for at least four (4) years after the
last sale of Products by LICENSEE. LICENSEE shall maintain its books and records
only at its principal place of business (defined above) and shall not remove
this information unless it has given LICENSOR thirty (30) days written notice of
the new location (which must be in the Territory). If an examination discloses
that LICENSEE has understated Net Sales or underpaid royalties for any report
period, without prejudice to any of LICENSOR's rights, LICENSEE shall pay to
LICENSOR the amount, if any, by which the actual royalties exceed royalties paid
within fifteen (15) days of receipt of notice by LICENSOR to such effect
together with the applicable late charge as provided. Further, if LICENSEE
underpays royalties by more than five percent (5%) for any Contract Year,
LICENSEE shall pay all reasonable costs, fees and expenses incurred by LICENSOR
in conducting such examination in addition to any late charges and interest
provided for in this Agreement and reasonable attorney's fees.
6
<PAGE> 11
8. INSURANCE
8.1 REQUIREMENTS: Without limiting LICENSEE's liability pursuant to the
indemnity provisions of this Agreement, LICENSEE shall maintain commercial
general liability insurance in the amount of at least US $3,000,000 (combined
single limit per occurrence) plus defense costs. This insurance shall include
broad form blanket contractual liability, products and completed operations
liability.
8.2 TERRITORY FOR INSURANCE: The insurance set forth in this section must
cover the entire Territory.
9. INDEMNIFICATION, REPRESENTATIONS AND WARRANTIES
9.1 LICENSEE INDEMNIFICATION: LICENSEE agrees to indemnify, protect, hold
harmless and defend LICENSOR, its officers, directors, agents, and employees
from and against any and all claims, suits, loss, liability, expense and damage,
including costs of suit and attorneys' fees arising out of:
9.1.1 the manufacture, labeling, sale, distribution or advertisement
of a Product;
9.1.2 any alleged defect in a Product, regardless of whether the
action is based upon negligence or strict liability, and regardless of whether
the alleged negligence of LICENSEE is characterized as "passive" or "active";
9.1.3 any violation of any warranty, representation or agreement made
by LICENSEE pertaining to a Product; and
9.1.4 the claim of any broker, finder or agent in connection with the
making of this Agreement or any transactions contemplated by this Agreement.
9.2 LICENSOR INDEMNIFICATION: LICENSOR agrees to indemnify, protect, hold
harmless and defend LICENSEE, its officers, directors, agents, and employees
from and against any and all claims, suits, loss, liability, expense and damage,
including costs of suit and attorneys' fees, arising out of any breach of
warranty or material misrepresentation on the part of LICENSOR under Section 9.6
of this Agreement.
9.3 DEFENSE OF CLAIMS: If there is a claim for which a party is
indemnified, the indemnifying party shall control all aspects of the disposition
of such claim, and the indemnified party shall cooperate fully with the
indemnifying party in connection therewith; provided, however, (1) LICENSOR
shall control all aspects of the disposition of any claims relating to the
right, title and interest in or to the Patent and any Developments owned by
LICENSOR (including infringement) and LICENSEE shall cooperate fully with
LICENSOR in connection therewith, and (2) the indemnified party shall be
entitled to defend itself with counsel of its choice, at its sole cost and
expense.
7
<PAGE> 12
9.4 INDEMNITY UNAFFECTED: Compliance by LICENSEE with the insurance
provisions of this Agreement shall not relieve LICENSEE of its duty to indemnify
LICENSOR under this section.
9.5 NOTIFICATION OF CLAIMS AND CONSUMER COMPLAINTS: If either party learns
of a claim related to this Agreement or the Patent, it shall immediately notify
the other party by telephone and in writing transmitted by overnight courier of
the subject matter and the parties and the nature of the claim. If the claim
pertains to any of LICENSEE's obligations under this Agreement, LICENSEE shall
promptly inform LICENSOR of what steps it is taking to correct the claim or
complaint whether by consumer or a government body. LICENSOR and LICENSEE shall
cooperate in the resolution of all such claims.
9.6 LICENSOR REPRESENTATIONS: LICENSOR represents and warrants that it has
applied for and obtained the Patent. LICENSOR has made no representation or
warranty, except as expressly provided, with respect to the Patent or the
Products. There are not implied warranties of merchantabilty or fitness for any
particular purpose, nor does LICENSOR warrant that Products manufactured using
the Patent will not infringe any patent or other intellectual property rights
that may be held by third parties.
9.7 NO LEGAL IMPEDIMENTS: The parties represent and warrant that: (a) they
have the full right, power and authority to enter into this Agreement and to
perform all obligations; (b) they are under no legal impediment which would
prevent their entering into this Agreement; and (c) they are financially capable
of performing their obligations.
9.8 MUTUAL REPRESENTATIONS: LICENSEE and LICENSOR each warrants and
represents that it is a corporation duly incorporated, validly existing and in
good standing under the laws of Massachusetts and Delaware, respectively.
9.9. COMPLIANCE WITH LAW: LICENSEE shall take all actions required by any
national or regional agency, government or commission to carry out the purposes
of this Agreement in compliance with applicable law. LICENSEE shall provide
LICENSOR with copies of any communications to or from any such agency,
government or commission which relates to or affects the Patent or the Products.
9.10 DISCLAIMER: EACH PARTY AGREES THAT THE OTHER SHALL NOT BE RESPONSIBLE
FOR ANY CONSEQUENTIAL, INDIRECT, INCIDENTAL, ECONOMIC OR PUNITIVE DAMAGES OF ANY
KIND EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
10. CONFIDENTIAL INFORMATION AND ADVERTISING
10.1 CONFIDENTIALITY: Each party expressly undertakes to retain in
confidence and to require it employees, agents, subcontractors and distributors
to retain in confidence the terms of this agreement and all information and
know-how transmitted to such party that the disclosing party has identified as
being proprietary or confidential or which, by the nature of the circumstances
surrounding disclosure, ought in good faith to be treated as proprietary or
8
<PAGE> 13
confidential (collectively "Confidential Information"). All written confidential
material shall be conspicuously labeled as "Confidential" or "Proprietary".
Confidential Information includes, but is not limited to, information relating
to intellectual property and to business plans, financial matters, products,
services, manufacturing processes and methods, costs, sources of supply,
strategic marketing plans, customer lists, sales, profits, pricing methods,
personnel and business relationships. Confidential Information shall not include
any information that: (a) was already known to the receiving party prior to its
relationship with the disclosing party, as established by written records; (b)
is or becomes generally available to the public other than as a result of the
receiving party's breach of an obligation of confidentiality to the disclosing
party; (c) is furnished to the receiving party by a third party who is lawfully
in possession of, and who lawfully conveys, such information; or (d) is
subsequently developed by the receiving party independently of the information
received from the disclosing party, as established by the receiving party's
written records. For purposes of this definition, the phrase "receiving party"
shall be deemed to include each company or entity controlled by or under common
control with the receiving party. Without the prior written consent of the other
party, Confidential Information shall not be disclosed by either party to any
other person or entity unless such person or entity has a duty or obligation of
confidentiality with respect to the protection and use of Confidential
Information as set forth herein, and Confidential Information shall not be
disclosed to such a person or entity except insofar as (i) such disclosure is
necessary to the exercise of its rights or obligations under this Agreement;
(ii) the receiving party needs to make such disclosure to its outside legal and
financial officers; of (iii) the disclosure is required by applicable
regulation. Any disclosure required by applicable law or regulation shall be
made in compliance with all applicable protective orders and only after the
party required to make such disclosure gives at least thirty (30) days advance
notice thereof to the other party.
10.2 ADVERTISING: LICENSEE shall obtain the prior written permission of
LICENSOR to use LICENSOR's name, products or trademarks in connection with any
advertisement.
11. TERMINATION
11.1 OTHER RIGHTS UNAFFECTED: Termination on any ground shall be without
prejudice to any other rights or remedies.
11.2 EVENTS OF TERMINATION: Upon the occurrence of any one of the following
events of termination, the party not responsible for such event of termination
shall have the right to terminate this Agreement and the licenses granted
hereunder effective (subject to the provisions of Section 11.4. hereof) upon the
giving of written notice of such termination to the other party;
11.2.1. If LICENSEE fails to pay the Royalty within 15 days after the
receipt of notice that LICENSOR has not received the Royalty, or knowingly
misstates any royalties and/or payments due;
11.2.2. If the other party hereto shall breach any material obligation
contained in this Agreement (other than the obligation to pay Royalties) and
shall fail to cure such breach
9
<PAGE> 14
within ninety (90) days after notice thereof (or if such breach can not be
practicably cured within such 90 day period, then within one hundred and twenty
(120) days after notice provided that the other party shall be using reasonable
efforts to cure such breach);
11.2.3. Dissolution, termination of existence, liquidation, insolvency
or business failure of the other party or the appointment of a custodian or
receiver for the other party if such appointment is not terminated or dismissed
within thirty (30) days; or
11.2.4. The filing of Federal bankruptcy proceedings of the other
party or the appointment of a receiver of substantially all of the other party's
assets, or the making by the other party of any assignment of substantially all
of its assets for the benefit of creditors, or the institution of any
proceedings against the other party under any bankruptcy law which are not
discharged in 90 days.
11.3. RIGHTS PERSONAL: The license and rights granted hereunder are
personal to the parties hereto. No assignee for the benefit of creditors,
receiver, debtor in possession, trustee in bankruptcy, sheriff or any other
officer or court charged with taking over custody of a party's assets or
business shall have any right to continue performance of this Agreement or to
exploit or in any way use the Patent if this Agreement is terminated pursuant to
subparagraphs 11.2.3 or 11.2.4 above, except as may be required by law.
11.4. OBLIGATIONS AT EXPIRATION OR TERMINATION
11.4.1. TERMINATION OF RIGHTS: Upon expiration or termination of this
Agreement for any reason, except as provided in Section 11.4.2, all rights in
the Patent granted to LICENSEE shall automatically terminate and LICENSEE shall
cease and desist from any and all manufacture of the Products, any and all sale,
distribution or disposal of the Products, and any use of the Patent.
11.4.2. WIND-DOWN OF LICENSEE'S PRODUCT SALES:Upon the expiration or
termination of this Agreement for any reason, LICENSEE shall have the right for
a period of twelve (12) months following the effective date of the expiration or
termination of this Agreement (the "Termination Date") to fill orders for
products which were outstanding on the Termination Date and to accept additional
orders for Products from customers who were existing customers of LICENSEE on
the Termination Date. Additionally, LICENSEE shall have the right to complete
the manufacture and delivery of all orders received from such existing customers
until the expiration of eighteen (18) months following the Termination Date.
LICENSEE shall continue to submit quarterly statements and payments of Royalties
in respect of all sales for Products during such period as provided in Section 6
of this Agreement. During such 18-month period, all relevant provisions of this
Agreement shall continue to apply.
11.4.3. NO LIABILITY: Upon the expiration or termination of this
Agreement, LICENSEE shall not be entitled to termination payments, compensation,
reimbursement, or damages on account of any loss of prospective profits on
anticipated sales or on account of expenditures for advertising, promotion or
for manufacturing facilities, investment, leases, or other commitments relating
to the business or goodwill of LICENSEE, including without
10
<PAGE> 15
limitation, damages claimed by reason of LICENSEE's reliance upon further
continuance of this Agreement.
11.4.4. ACCRUED AND SURVIVING OBLIGATIONS: Upon the expiration or
termination of this Agreement for any reason, nothing herein shall be construed
to release either party from any obligation that accrued or matured prior to the
Termination Date. Additionally, the following Sections of this Agreement shall
survive the expiration or termination of this Agreement: Section 5.1, Section
5.2, Section 6, Section 7.3, Section 8, Section 9, and Section 11.4.
12. NOTICES AND COMMUNICATIONS:
Any notice, communication or legal service of process is effective when
personally delivered in writing; or on the date when the notice or communication
is telexed or telecopied (with a confirmation copy to be sent by overnight mail
courier or by certified mail, return receipt requested); or the day after the
notice or communication is sent by overnight airmail courier (e.g., Federal
Express); or three (3) days after the date of mailing (by certified mail, return
receipt requested). All notices shall be sent to the parties at the Notice
Addresses listed below (or such other addresses as the parties may notify each
other in a like manner):
TO LICENSOR: Manager of Licensing
Timex Corporation
Park Road Extension
Middlebury, Connecticut 06762
Telephone: (203) 573-5000
Facsimile: (203)573-5139
WITH COPY TO: Corporate Secretary
Timex Corporation
Park Road Extension
Middlebury, Connecticut 06762
Telephone: (203) 573-5000
Facsimile: (203)573-5139
TO LICENSEE: Sipex Corporation
22 Linnell Circle
Billerica, Massachusetts 01821
Telephone: (508) 667-8700
Facsimile: (508) 671-1933
11
<PAGE> 16
WITH COPY TO: Lea B. Pendleton, Esq.
Morse, Barnes-Brown & Pendleton, P.C.
Reservoir Place
1601 Trapelo Road
Waltham, Massachusetts 02154
Telephone: (617) 622-5930
Facsimile: (617) 622-5933
13. INTERPRETATION
The License Agreement shall be interpreted to give LICENSOR maximum control
of its Patent and the usage thereof. Any uncertainty or ambiguity shall not be
construed for or against the party based on attribution of drafting to either
party. The caption headings of the sections are for convenience only and shall
not be used for interpretation.
14. GOVERNING LAW
All questions concerning this Agreement, the rights and obligations of the
parties, its enforcement, and its validity, effect, interpretation and
construction which are governed by state law shall be determined under the laws
of the State of Connecticut, excluding its choice of law provisions. All federal
or foreign law questions shall be governed by federal law or the law of the
applicable foreign jurisdiction. With respect to any claim relating to this
Agreement, the LICENSEE (a) irrevocably submits to the exclusive jurisdiction of
the courts of the State of Connecticut and the United States District Court for
the District of Connecticut, and to the jurisdiction of all courts to which an
appeal may be taken from such courts, and (b) expressly waives, to the fullest
extent it may effectively do so under applicable law, any objection which it may
at any time have to venue in such courts, that any suit, action or proceeding
therein has been brought in an inconvenient forum or that any such court lacks
jurisdiction.
15. RELATIONSHIP OF THE PARTIES
Nothing in this Agreement shall be construed to place the parties in the
relationship of legal representatives, partners, joint ventures or agents.
Neither party shall have the power to oblige or bind the other party in any
manner except as provided herein.
16. WAIVER AND INTEGRATION
The failure of a party to insist upon strict adherence to any term of this
Agreement or to object to any failure to comply with any provision of this
Agreement shall not be a waiver of that term or provision, estop that party from
enforcing that term or provision, or preclude that party from enforcing that
term or provision by estoppel or by laches. The receipt by a party of any
benefit from this Agreement (e.g., royalty payment) shall not affect waiver or
estoppel of the right of that party to enforce any section. None of the terms of
this Agreement shall be deemed to be waived or modified, including all
provisions of this section, except by an express agreement in writing, signed by
authorized representatives of both parties. This Agreement, including all
attachments, constitutes the entire agreement between the parties, and
supersedes all
12
<PAGE> 17
prior negotiations and agreements between the parties concerning its subject
matter. This writing is intended as the final, complete and exclusive statement
of the terms of the Agreement between the parties and cannot be changed or
terminated orally. The Original License Agreement is hereby terminated and
replaced by this Agreement.
17. SURVIVAL
All obligations of the parties of a continuing nature shall survive the
termination or expiration of this Agreement.
18. SEVERABILITY
If any provision of this Agreement is held by a court of competent
jurisdiction or an arbitrator to be invalid or unenforceable, the remaining
provisions of this Agreement shall remain in full force and effect and the
invalid or unenforceable provision shall be interpreted and, if necessary,
reformed by the parties in a manner to reflect as closely as possible the
intentions of the parties when entering into this Agreement and be valid and
enforceable.
19. BINDING AGREEMENT
This Agreement shall be binding on and inure to the benefit of the parties
and their respective successors, agents, Affiliates, representatives and
permitted assigns.
20. EXHIBITS
All Exhibits are incorporated into this Agreement.
21. TAXES
LICENSEE will bear all taxes, duties and other governmental charges
relating to or arising under this Agreement, including without limitation any
stamp or documentary taxes or duties, turnover, sales or use taxes, value added
taxes, excise taxes, customs or exchange or control duties or any other charges
relating to or on, any royalty payable by LICENSEE to LICENSOR hereunder, but
specifically excluding any income taxes of LICENSOR. To the extent any
withholding or other tax is imposed on any royalty payable to LICENSOR, LICENSEE
will gross up the amount of such royalty so that the net amount paid to LICENSOR
after reduction by such withholding or other tax is equal to the amount of the
royalty determined under Section 6 of this Agreement. If any withholding or
other tax is imposed by any governmental agency on any payment made pursuant to
this Agreement, LICENSEE shall obtain certified proof of said tax payment or
withholding and immediately transmit it to LICENSOR.
22. FORCE MAJEURE
Neither party shall be in default hereunder, nor shall either party be
required to fulfill its obligations hereunder by reason of its delay in the
performance of or failure to perform any of its obligations herein if such delay
or failure is caused by acts of God or other events beyond its
13
<PAGE> 18
control. If the force majeure continues for more than two (2) months, either
party may terminate this Agreement.
23. PRIORITY OF SUPPLY
LICENSEE shall give LICENSOR's and its Affiliates orders for Products
priority over orders placed by any other party, and shall not charge LICENSOR or
its Affiliates more for Products than it charges any other party.
14
<PAGE> 19
IN WITNESS WHEREOF, LICENSEE and LICENSOR have executed this Agreement as
of the Effective Date.
LICENSEE: LICENSOR:
SIPEX CORPORATION TIMEX CORPORATION
a Massachusetts Corporation a Delaware Corporation
By: /s/ Frank R. DiPietro By: /s/ Frank Sherer
------------------------- -------------------------
Title: Executive VP, CFO Title: VP
--------------------- ---------------------
Date: Date:
----------------------- -----------------------
Name: Frank R. DiPietro
15
<PAGE> 20
EXHIBIT A
PATENT
U.S. Patent No. 4,527,096 ("Kindlmann Patent")
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF SHARES USED IN COMPUTING
NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1995 1996 1997
----------- ----------- ----------
<S> <C> <C> <C>
Common shares, beginning of period 9,362,366 9,370,612 17,068,398
Common stock equivalents 0 1,395,068 1,476,472
SAB shares (1) 159,350 196,418 208,513
Treasury stock buyback (6,374) (175,618) (530,991)
Weighted average shares issued 4,112 3,913,432 358,670
========== =========== ===========
9,519,454 14,699,912 18,581,062
========== =========== ===========
</TABLE>
(1) In accordance with SEC Staff Accounting Bulletin No. 83 ("SAB" No. 83"),
issuance of Common Stock equivalents (common stock, stock options) one year
prior to the initial filing date of the registration statement at share
prices below the public offering price of $9.50 per share, are considered
to have been made in anticipation of the public offering and have been
included as if the shares were outstanding for all periods presented until
issued and outstanding using the treasury stock method.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board Of Directors and Shareholders
SIPEX Corporation
We consent to the incorporation by reference in the registration statements
(No. 333-06123 and 333-32329) on Form S-8 of SIPEX Corporation of our report
dated February 13, 1998, relating to the consolidated balance sheets of SIPEX
Corporation as of December 31, 1996 and 1997, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for each
of the years in the three-year period ended December 31, 1997, which report
appears in the December 31, 1997 annual report on Form 10-K of SIPEX
Corporation.
/S/ KPMG Peat Marwick LLP
Boston, Massachusetts
March 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND FROM THE
INTERIM CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 23,887
<SECURITIES> 16,099
<RECEIVABLES> 9,289
<ALLOWANCES> 596
<INVENTORY> 13,988
<CURRENT-ASSETS> 64,509
<PP&E> 34,098
<DEPRECIATION> 25,753
<TOTAL-ASSETS> 72,982
<CURRENT-LIABILITIES> 5,106
<BONDS> 0
0
0
<COMMON> 177
<OTHER-SE> 67,690
<TOTAL-LIABILITY-AND-EQUITY> 72,982
<SALES> 0
<TOTAL-REVENUES> 51,210
<CGS> 0
<TOTAL-COSTS> 26,670
<OTHER-EXPENSES> 12,269
<LOSS-PROVISION> 596
<INTEREST-EXPENSE> 2,012
<INCOME-PRETAX> 12,270
<INCOME-TAX> (975)
<INCOME-CONTINUING> 13,245
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,245
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.71
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995 AND FROM THE
INTERIM CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. THE EPS DATA HAS BEEN RESTATED TO REFLECT THE ADOPTION OF
SFAS 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 257
<SECURITIES> 0
<RECEIVABLES> 5,474
<ALLOWANCES> 240
<INVENTORY> 7,414
<CURRENT-ASSETS> 13,131
<PP&E> 26,369
<DEPRECIATION> 23,921
<TOTAL-ASSETS> 15,870
<CURRENT-LIABILITIES> 5,823
<BONDS> 0
0
0
<COMMON> 47
<OTHER-SE> (1,931)
<TOTAL-LIABILITY-AND-EQUITY> 15,870
<SALES> 0
<TOTAL-REVENUES> 29,979
<CGS> 0
<TOTAL-COSTS> 19,079
<OTHER-EXPENSES> 12,675
<LOSS-PROVISION> 240
<INTEREST-EXPENSE> 910
<INCOME-PRETAX> (1,775)
<INCOME-TAX> 27
<INCOME-CONTINUING> (1,803)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,803)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND FROM THE
INTERIM CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. THE EPS DATA HAS BEEN RESTATED TO REFLECT THE ADOPTION OF
SFAS 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
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0
0
<COMMON> 85
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</TABLE>
