e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 1, 2006
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-27892
Sipex Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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04-6135748 |
(State or other jurisdiction of
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(IRS Employer |
incorporation or organization)
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Identification No.) |
233 South Hillview Drive,
Milpitas, California 95035
(Address of principal executive offices, including zip code)
Registrants telephone number, including area code:
(408) 934-7500
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 o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act (Check one :).
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No þ
Number of shares outstanding of the registrants common stock, $0.01 par value, as of the
latest practicable date.
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Class
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Outstanding at September 15, 2006 |
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Common Stock
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35,550,378 |
SIPEX CORPORATION
FORM 10-Q
THREE MONTHS ENDED APRIL 1, 2006
INDEX
2
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
SIPEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
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April 1, 2006 |
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December 31, 2005 |
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Current assets: |
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Cash and cash equivalents |
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$ |
6,611 |
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$ |
1,969 |
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Restricted cash |
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571 |
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500 |
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Accounts receivable, less allowances of $699 and $820, respectively |
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5,301 |
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3,735 |
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Accounts receivable, related party, less allowances of $428 and
$529, respectively (Note 5) |
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2,821 |
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3,011 |
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Inventories |
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13,256 |
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13,400 |
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Prepaid expenses and other current assets |
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1,604 |
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1,300 |
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Total current assets |
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30,164 |
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23,915 |
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Property, plant and equipment, net |
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18,481 |
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25,803 |
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Restricted cash noncurrent |
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429 |
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500 |
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Other assets |
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231 |
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224 |
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Total assets |
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$ |
49,305 |
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$ |
50,442 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Short-term borrowing |
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$ |
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$ |
3,000 |
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Current portion of lease financing obligation |
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151 |
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Accounts payable |
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9,950 |
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7,394 |
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Accrued expenses |
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6,348 |
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7,282 |
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Accrued restructuring costs |
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1,734 |
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1,407 |
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Deferred income, related party |
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5,939 |
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5,707 |
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Deferred income, other |
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2,715 |
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2,510 |
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Total current liabilities |
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26,837 |
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27,300 |
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Long-term accrued restructuring costs |
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464 |
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584 |
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Long-term lease financing obligation |
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12,314 |
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Other long-term liabilities |
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35 |
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37 |
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Total liabilities |
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39,650 |
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27,921 |
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Commitments and contingencies (Note 14) |
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Stockholders equity: |
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Preferred stock, $0.01 par value, 1,000 shares authorized
and no shares issued or outstanding |
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Common stock, $0.01 par value, 60,000 shares authorized; 35,550
shares issued and outstanding at April 1, 2006 and December 31, 2005 |
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355 |
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355 |
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Additional paid-in capital |
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224,959 |
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224,026 |
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Accumulated deficit |
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(215,640 |
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(201,841 |
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Accumulated other comprehensive loss |
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(19 |
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(19 |
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Total stockholders equity |
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9,655 |
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22,521 |
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Total liabilities and stockholders equity |
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$ |
49,305 |
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$ |
50,442 |
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See accompanying notes to condensed consolidated financial statements
3
SIPEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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For the Three Months Ended |
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April 1, 2006 |
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April 2, 2005 |
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Net sales |
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$ |
9,303 |
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$ |
11,807 |
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Net sales, related party (Note 5) |
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8,551 |
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7,920 |
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Total net sales |
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17,854 |
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19,727 |
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Cost of sales |
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10,178 |
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9,346 |
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Cost of sales, related party |
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7,871 |
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5,004 |
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Total cost of sales |
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18,049 |
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14,350 |
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Gross profit (loss) |
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(195 |
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5,377 |
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Operating expenses: |
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Research and development |
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5,496 |
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3,852 |
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Marketing and selling |
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3,656 |
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2,577 |
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General and administrative |
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4,021 |
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4,086 |
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Restructuring |
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307 |
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12 |
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Total operating expenses |
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13,480 |
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10,527 |
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Loss from operations |
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(13,675 |
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(5,150 |
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Other income (expense): |
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Interest income |
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49 |
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85 |
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Interest expense |
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(183 |
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(12 |
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Other income, net |
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42 |
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47 |
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Total other income (expense), net |
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(92 |
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120 |
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Loss before income tax expense |
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(13,767 |
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(5,030 |
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Income tax expense |
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32 |
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12 |
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Net loss |
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$ |
(13,799 |
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$ |
(5,042 |
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Net loss per common share basic and diluted |
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$ |
(0.39 |
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$ |
(0.14 |
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Weighted average common shares outstanding
basic and diluted |
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35,550 |
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35,525 |
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See accompanying notes to condensed consolidated financial statements
4
SIPEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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For the Three Months Ended |
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April 1, 2006 |
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April 2, 2005 |
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Operating activities: |
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Net loss
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$ |
(13,799 |
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$ |
(5,042 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Stock-based compensation expense |
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933 |
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Depreciation and amortization |
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7,499 |
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1,538 |
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Provision for inventories |
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123 |
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644 |
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Provision for restructuring charges |
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307 |
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12 |
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Loss on disposal of fixed assets |
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9 |
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Provision for uncollectible receivables and sales returns and allowances |
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153 |
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434 |
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Consulting services provided by related party |
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17 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(1,529 |
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644 |
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Inventories |
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21 |
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(1,854 |
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Prepaid expenses and other current assets |
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(304 |
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297 |
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Other assets |
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(7 |
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18 |
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Accounts payable |
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2,492 |
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(2,747 |
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Accrued expenses |
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(934 |
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33 |
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Accrued restructuring costs |
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(100 |
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(129 |
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Deferred income |
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437 |
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(492 |
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Other long term liabilities |
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(2 |
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20 |
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Net cash used in operating activities |
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(4,701 |
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(6,607 |
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Investing activities: |
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Proceeds from maturity of short-term investment securities |
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249 |
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Purchase of short-term investment securities |
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(596 |
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Purchase of property, plant and equipment |
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(122 |
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(156 |
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Net cash used in investing activities |
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(122 |
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(503 |
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Financing activities: |
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Proceeds from issuance of common stock under employee stock plans |
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683 |
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Proceeds from borrowing related party |
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7,000 |
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Repayment of borrowing related party |
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(7,000 |
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Repayment of short-term borrowing |
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(3,000 |
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Net proceeds from long-term lease financing obligation |
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12,578 |
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Repayment of long-term lease financing obligation |
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(113 |
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Net cash provided by financing activities |
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9,465 |
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683 |
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Increase (decrease) in cash and cash equivalents |
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4,642 |
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(6,427 |
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Cash and cash equivalents at beginning of period |
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1,969 |
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15,523 |
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Cash and cash equivalents at end of period |
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$ |
6,611 |
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$ |
9,096 |
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Supplemental cash flow information: |
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Cash paid during the period for: |
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Income taxes |
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$ |
2 |
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$ |
1 |
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Interest |
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$ |
173 |
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$ |
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Supplemental disclosure of non-cash investing activities: |
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Purchase of property, plant and equipment not paid at end of period |
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$ |
152 |
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$ |
37 |
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See accompanying notes to condensed consolidated financial statements
5
SIPEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Description of Business and Basis of Presentation
Description of Business
Based in Milpitas, California, Sipex Corporation (Sipex or the Company) was incorporated
in May 1965 under the laws of the State of Massachusetts. The state of incorporation was changed
from Massachusetts to Delaware in October 2003. Sipex designs, manufactures and markets high
performance, analog integrated circuits or ICs that primarily are used by original equipment
manufacturers, or OEMs, operating in the computing, consumer electronics, communications and
networking infrastructure markets. Some of the end product applications that contain Sipexs ICs
are cellular phones, base stations, computers, DVD players, and digital cameras. Sipexs products
are sold either directly or through an international network of manufacturers representatives and
distributors.
The Companys wafer fabrication facility in Milpitas, California, along with a number of
third-party contractors, fabricate, package and test its ICs. In an effort to achieve significant
cost savings, in the third quarter of 2005 Sipex decided to close down the Milpitas wafer
fabrication facility and transfer the IC manufacturing processes from there to a wafer fabrication
facility operated by Hangzhou Silan Integrated Circuit Co., Ltd. (Silan) in Hangzhou, China and a
wafer fabrication facility operated by Episil Technologies, Inc. in Taiwan. Definitive agreements
regarding this transfer were entered into in February 2006, and the transition is expected to be
substantially completed by the end of September 2006.
The Basis of Presentation and Significant Accounting Policies
The accompanying interim unaudited condensed consolidated financial statements have been
prepared by Sipex without audit and reflect all adjustments, consisting only of normal recurring
adjustments which are, in the opinion of management, necessary for a fair presentation of the
Companys financial position, results of operations and cash flows for the interim periods
presented. The statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (generally accepted accounting principles) for interim
financial information and in accordance with the instructions to Form 10-Q and Article 10-01 of
Regulation S-X. Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for annual consolidated financial statements.
The consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Sipex GmbH and Sipex Nippon. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Sipexs fiscal year includes 52 or 53 weeks which ends on the Saturday closest to
December 31. The first quarter of fiscal year 2006 included 91 days from January 1, 2006 to April
1, 2006, and the first quarter of fiscal year 2005 included 91 days from January 2, 2005 to April
2, 2005.
These unaudited interim financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2005. The results of operations for the three months
ended April 1, 2006 are not necessarily indicative of the operating results to be expected for the
full fiscal year or future operating periods.
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin (SAB) 104,
Revenue Recognition. SAB 104 requires that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or
services rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably
assured.
6
Prior to January 2, 2005, the Company entered into arrangements that were not within the
original contractual distributor agreements in that the Company allowed return rights and other
concessions beyond the levels provided in the distributor agreements. As a result, Company
management concluded it is unable to reasonably estimate sales returns for arrangements with its
distributor; accordingly, sales and related cost of sales on shipments to distributors are deferred
until the resale to the end customer.
Sales to Future Electronics Inc. (Future), a distributor and related party (See Note 5), are
made under an agreement that provides protection against price reductions of Sipexs products in
Futures inventory. In addition, Future has stock rotation rights. Pursuant to these stock
rotation rights, Future was permitted on a quarterly basis to return for credit up to 10% of its
total purchases during the most recent three-month period. This credit has been reduced to 5%
applicable to all purchases made by Future from Sipex starting April 1, 2006. Additionally, the
Company is providing Future with a 2% scrap allowance also effective April 1, 2006. As the price
of products sold to Future is not fixed or determinable until resold by Future to the end customer,
Sipex is using sell-through revenue recognition and deferring recognition of such sales and related
cost of goods sold until the product is sold by Future to its customers.
Under sell-through revenue accounting, accounts receivable are recognized and inventory is
relieved upon shipment to the distributor as title to the inventory is transferred upon shipment,
at which point the Company has a legally enforceable right to collection under normal terms. The
associated sales and cost of sales are deferred by recording deferred income (gross profit margin
on these sales) as shown on the face of the consolidated balance sheet. When the related product
is sold by the Companys distributors to their end customers, Sipex recognizes previously deferred
income as sales and cost of sales.
For non-distributor customers, the Company recognizes revenue when title to the product is
transferred to the customers, which occurs upon shipment or delivery, depending upon the terms of
the customer order, provided that persuasive evidence of a sales arrangement exists, the price is
fixed and determinable, title has transferred, collection of the resulting receivables is
reasonably assured, there are no customer acceptance requirements, and there are no remaining
significant obligations. Provisions for returns and allowances for non-distributor customers are
provided for at the time product sales are recognized. An allowance for sales returns and
allowances for customers is recorded based on historical experience or specific identification of
an event necessitating an allowance.
From time to time, Sipex develops custom products for various customers under engineering
service contracts culminating in delivery of known functional development samples. The Company
recognizes revenue under these agreements upon delivery of known functional development samples as
delivery of such represents the culmination of utility of the contract to the customer and agreed
to milestones. Sipex recognizes the costs associated with these contracts as research and
development expenses due to the uncertain nature of the development efforts until delivery of the
known functional development samples. Certain of these engineering service contracts include
payments in advance of delivery of known functional development samples. These payments are
recorded in deferred income, other, until the time of delivery of the functional samples.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided by using the
straight-line method over their expected useful lives. In November 2005, based on a previous
decision to close the Companys wafer fabrication operation located at its Milpitas, California
headquarters facility, the Company decided to sell this facility. As a result of the decision, the
Company reduced the remaining estimated depreciation life for its headquarters building and related
improvements from 25 years to approximately four months (See Note 12 regarding the lease financing
obligation for Sipexs headquarters facility). This change resulted in an increase in depreciation
expense of $6.7 million (including $4.5 million included in cost of sales) recorded in the first
quarter of 2006.
Note 2 Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections. SFAS No. 154
establishes new standards on accounting for changes in accounting principles. Pursuant to the new
rules, all such changes must be accounted for by retrospective application to the financial
statements of prior periods unless it is impracticable to do so. The Statement is effective for
accounting changes and error corrections made in fiscal years beginning after December 15, 2005,
with early adoption permitted for changes and corrections made in years beginning after May 2005.
Adoption of SFAS No. 154 did not have a material impact on the Companys consolidated financial
position, results of operations or cash flows.
7
In November 2005, the FASB issued FASB Staff Position (FSP) Nos. FAS 115-1 and FAS 124-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (FSP
115-1), which replaces the measurement and recognition guidance set forth in the Emerging Issues
Task Force (EITF) Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, and codifies certain existing guidance on investment
impairment. FSP 115-1 clarifies that an investor should recognize an impairment loss no later than
when the impairment is deemed other-than-temporary, even if a decision to sell the security has not
been made, and also provides guidance on the subsequent accounting for an impaired debt security.
FSP 115-1 also requires certain disclosures about unrealized losses that have not been recognized
as other-than-temporary impairments. The guidance in FSP 115-1 amends SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities and is effective for reporting periods beginning
after December 15, 2005. The Company adopted the provisions of FSP 115-1 beginning on January 1,
2006, and the adoption did not have a material impact on the Companys financial condition or
results of operations.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments, an amendment of FASB Statements No. 133 and 140. SFAS No. 155 will be effective for
the Company beginning in the first quarter of 2007. The Statement permits interests in hybrid
financial instruments that contain an embedded derivative that would otherwise require bifurcation,
to be accounted for as a single financial instrument at fair value, with changes in fair value
recognized in earnings. This election is permitted on an instrument-by-instrument basis for all
hybrid financial instruments held, obtained, or issued as of the adoption date. The Company is
assessing the impact of the Statement.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48) as an interpretation of FASB Statement No. 109, Accounting for Income Taxes
(SFAS 109). This Interpretation clarifies the accounting for uncertainty in income taxes
recognized by prescribing a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. This Interpretation also provides guidance on de-recognition of tax benefits previously
recognized and additional disclosures for unrecognized tax benefits, interest and penalties. The
evaluation of a tax position in accordance with this Interpretation begins with a determination as
to whether it is more likely than not that a tax position will be sustained upon examination based
on the technical merits of the position. A tax position that meets the more-likely-than-not
recognition threshold is then measured at the largest amount of benefit that is greater than 50
percent likely of being realized upon ultimate settlement for recognition in the financial
statements. FIN 48 is effective no later than fiscal years beginning after December 15, 2006, and
is required to be adopted by the Company in the first quarter of its fiscal year 2007. The Company is
currently assessing the impact of the adoption of FIN 48.
On
September 13, 2006, the Securities and Exchange Commission (the
SEC) issued Staff Accounting Bulletin No. 108 (SAB 108),
Considering the Effects of Prior Year Misstatements when Qualifying Misstatements in Current Year
Financial Statements, which provides interpretive guidance on the consideration of the effects of
prior year misstatements in quantifying current year misstatements for the purpose of a materiality
assessment. SAB 108 is effective for companies with fiscal years ending after November 15, 2006
and is required to be adopted by the Company in its fiscal year ending December 30, 2006. However,
early application is encouraged in any report for an interim period of the first fiscal year ending
after November 15, 2006, filed after the publication of this guidance. The Company is currently
assessing the impact of the adoption of SAB 108.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. This Statement
applies under other accounting pronouncements that require or permit fair value measurements, the
FASB having previously concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, this Statement does not require any new fair value
measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. This Statement is required
to be adopted by the Company in the first quarter of its fiscal year 2008. The Company is currently
assessing the impact of the adoption of this Statement.
Note 3 Stock-Based Compensation
Prior to 2006, the Companys stock-based employee compensation plans were accounted for under
the recognition and measurement provisions of Accounting Principles Board Opinion No. 25 (APB
25), Accounting for Stock Issued to Employees and related interpretations. The Company also
provided the required pro forma disclosures as required by SFAS No. 123, Accounting for
Stock-based Compensation. The ESPP qualified as a non-compensatory plan under APB 25; therefore,
no compensation cost was recorded in relation to the discount offered to employees for purchases
made under the ESPP.
Effective January 1, 2006, the Company adopted SFAS No. 123R using the modified-prospective
transition method. Under this transition method, stock compensation cost recognized beginning
January 1, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but
not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based
payments granted or modified on or subsequent to January 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of SFAS No. 123R. In addition, compensation cost
to be recognized under SFAS No. 123R considers an estimate of options which will be forfeited.
8
Sipex currently maintains six option plans. These are the 1996 Stock Option Plan, 1996
Non-Employee Director Stock Option Plan, the 1997 Stock Option Plan, the 1999 Stock Option Plan,
the 2000 Non-Qualified Stock Option Plan and the 2002 Nonstatutory Stock Option Plan under which
1.2 million, 300,000, 1.2 million, 1.2 million, 1.0 million and 2.0 million shares were reserved
for issuance, respectively. The plans generally allow for options which vest ratably over five
years from the date of grant for options granted before May 2002 and four years for options granted
after April 2002. These options expire ten years from the date of grant. In October 2002, the
Board of Directors voted to reduce the number of shares available for issuance under the 1996 Stock
Option Plan, 1996 Non-Employee Director Stock Option Plan and the 2000 Non-qualified Stock Option
Plan to 551,942, 82,000 and 671,990, respectively. In addition to the six stock option plans, as
of April 1, 2006, approximately 3,578,000 shares of Sipexs common stock have been reserved for
issuance pursuant to options which have been granted to employees outside of the option plans.
These stock options are subject to the similar terms as those under the six stock option plans.
Approximately 6,980,000 stock options were outstanding as of April 1, 2006 for all plans.
As the Company was not current with its filing with the SEC, employees who terminated from the Company during this period had been unable to
exercise their stock options during the contractual 90 days of post-termination exercise period.
The Company made a decision effective February 1, 2006 to extend the post-termination exercise
period for former employees with 126,000 vested stock options for the three months ended April 1,
2006 until the earlier of 1) such date that is ninety (90) days after the date that the former
employees are able to freely exercise the options pursuant to a registration statement on Form S-8
filed by the Company or 2) December 31, 2006. As a result, the Company recorded stock-based
compensation relating to such extension totaling $17,000 for the three months ended April 1, 2006.
A summary of the Companys stock option plan activities for the three months ended April 1,
2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Number |
|
|
Weighted |
|
|
Average |
|
|
Aggregate |
|
|
|
of |
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Exercise |
|
|
Contractual |
|
|
Value |
|
|
|
(in thousands) |
|
|
Price |
|
|
Term (in years) |
|
|
(in thousands) |
|
Outstanding at December 31, 2005 |
|
|
6,517 |
|
|
$ |
2.87 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
645 |
|
|
$ |
2.20 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(182 |
) |
|
$ |
3.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at April 1, 2006 |
|
|
6,980 |
|
|
$ |
2.80 |
|
|
|
8.11 |
|
|
$ |
6,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to
vest at April 1, 2006 |
|
|
6,298 |
|
|
$ |
2.86 |
|
|
|
8.02 |
|
|
$ |
6,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at April 1, 2006 |
|
|
2,730 |
|
|
$ |
3.58 |
|
|
|
6.83 |
|
|
$ |
2,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting for Stock-Based Compensation Under SFAS No. 123R, stock-based compensation
expenses for stock option grants are based on the fair value calculated from a stock option pricing
model on the date of grant. The Company has utilized the Black-Scholes single option pricing model
to determine the fair value for stock option grants. The weighted average fair value (computed
using the Black-Scholes single option pricing model) of options granted during the three months
ended April 1, 2006 was $1.70 per share. There were no exercises of stock options during the three
months ended on April 1, 2006. The fair value of stock option grants issued is recognized as
compensation expense on a straight-line basis over the requisite service period, which is the
vesting period of the grants. Compensation expense recognized is shown in the operating activities
section of the condensed consolidated statements of cash flows. In addition, SFAS No. 123R requires
the cash flows resulting from the tax benefits from tax deductions in exercise of the compensation
cost recognized (excess tax benefits) to be classified as financing cash flows.
9
Prior to adopting SFAS No. 123R, the Company accounted for stock option grants under the
recognition and measurement provisions of APB 25. No compensation expense was recognized when the
exercise price of the Companys employee stock options equaled the market price of the underlying
stock on the date of the grant. Compensation expense associated with the option repricing in 2005
was recorded up to the date of adoption of SFAS No. 123R until the options were exercised,
cancelled, or otherwise expired, and the expense or benefit for the increase or decrease,
respectively, in the fair market value of the Companys common stock in excess of the options
exercise price was recognized immediately for vested options and was recognized over the vesting
period using an accelerated method for unvested employee options.
The fair value of the Companys stock options granted was estimated at the date of grant using
the Black-Scholes single option pricing model with the following weighted-averaged assumptions:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
April 1, 2006 |
|
April 2, 2005 |
Expected life of options |
|
6 years |
|
4 years |
Volatility |
|
|
92 |
% |
|
|
75 |
% |
Risk-free interest rate |
|
|
4.5 |
% |
|
|
3.7 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
The Company has elected to use the Simplified Method outlined in SAB 107 to determine the
expected term of its stock option grants. The calculation of expected term for previous SFAS No.
123 disclosure fair value estimates was based solely on an analysis of historical exercises of
stock options. The Company believes that using the Simplified Method provides a better estimate
of future exercise patterns. Stock volatility is based upon the Companys historical stock price
volatility. The Company considered historical volatility of a period generally commensurate with
the expected or contractual term, as applicable, of the share option. The Company continues to use
the risk-free rate based on the U.S. Treasury yield curve in effect at the time of grant for the
expected term of the option to be valued. The Company does not currently intend to pay cash
dividends. Therefore, the Company has assumed a dividend yield of zero.
As part of the requirements of SFAS No. 123R, the Company is required to estimate potential
forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of
forfeitures will be adjusted over the requisite service period to the extent that actual
forfeitures differ, or are expected to differ, from such estimates. Changes in estimated
forfeitures will be recognized in the period of change and will also impact the amount of stock
compensation expenses to be recognized in future periods.
The following table shows total employee and non-employee stock-based compensation expense
recognized in the condensed consolidated statement of operations for the three months ended April
1, 2006, pursuant to SFAS No. 123R (in thousands):
|
|
|
|
|
|
|
For the Three |
|
|
|
Months Ended |
|
|
|
April 1, 2006 |
|
Cost of sales |
|
$ |
127 |
|
Research and development |
|
|
338 |
|
Marketing and selling |
|
|
190 |
|
General and administrative |
|
|
278 |
|
|
|
|
|
Stock-based compensation expense before income tax effect |
|
|
933 |
|
Less income tax effect |
|
|
|
|
|
|
|
|
Stock-based compensation expense after income tax effect |
|
$ |
933 |
|
|
|
|
|
As a result of adopting SFAS No. 123R on January 1, 2006, the Companys loss before income taxes and net loss for
the three months ended April 1, 2006 include $891,000 of employee stock-based compensation expense.
At April 1, 2006, there was a total of $5.7 million unrecognized compensation cost, net of estimated forfeitures, related to
non-vested stock option awards which is expected to be recognized over a weighted-average period of approximately 33 months.
10
Pro forma information under SFAS No. 123 for periods prior to the adoption of SFAS No.
123R has not been restated to reflect the effects of implementing SFAS No. 123R. For purposes of
this pro forma disclosure, the value of stock options was estimated using the Black-Scholes single
option pricing valuation approach with forfeitures recognized as they occur. The following table
illustrates the effect on net loss and net loss per share as if the Company had applied the fair
value recognition provisions of SFAS No. 123 to stock options granted under the Companys stock
option plans for the three months ended April 2, 2005 (in thousands, except per-share amounts):
|
|
|
|
|
|
|
For the Three |
|
|
|
Months Ended |
|
|
|
April 2, 2005 |
|
Net loss, as reported |
|
$ |
(5,042 |
) |
Add stock-based compensation included in
reported net loss |
|
|
|
|
Less stock-based compensation expense determined
under the fair value method for all awards |
|
|
(1,235 |
) |
|
|
|
|
Pro forma net loss |
|
$ |
(6,277 |
) |
|
|
|
|
|
|
|
|
|
Net loss per share: |
|
|
|
|
Basic and diluted as reported |
|
$ |
(0.14 |
) |
Basic and diluted pro forma |
|
$ |
(0.18 |
) |
There were no purchases of common stock made under the Companys Employee Stock Purchase Plan
in the first quarter of 2006 and 2005.
Note 4 Net Loss Per Share
Basic net loss per share is based upon the weighted average number of common shares
outstanding. Diluted net loss per share is based upon the weighted average number of common and
common equivalent shares outstanding assuming dilution. Common equivalent shares, consisting of
outstanding stock options, convertible debt and warrants, are included in the per share
calculations where the effect of their inclusion would be dilutive. As the Company had a net loss
for the three months ended April 1, 2006 and April 2, 2005, the weighted average number of common
shares outstanding equals the weighted average number of common and common equivalent shares
assuming dilution.
Approximately 6,980,000 stock options were outstanding with an average exercise price of $2.80
per share as of April 1, 2006 compared to approximately 5,405,000 stock options with an average
exercise price of $5.74 per share at April 2, 2005.
Note 5 Related Party Transactions
Future is a related party as its affiliates own approximately 16.3 million shares or 46% of
Sipexs outstanding common stock as of April 1, 2006. Sipex has a distribution agreement that
provides for Future to act as the Companys sole distributor for certain products within North
America and Europe. Sales to Future are made under an agreement that provides protection against
price reduction for its inventory of Sipexs products. The Company recognizes revenue on sales to
Future under the distribution agreement when Future sells the products to end customers. Future has
historically accounted for a significant portion of the Companys revenues. It is the Companys
largest distributor worldwide and accounted for 44% of its total net sales for the year ended
December 31, 2005; and 48% and 40% of its total net sales for the three months ended April 1, 2006
and April 2, 2005, respectively. The Company anticipates that sales of its products to Future will
continue to account for a significant portion of its revenues.
From time to time, Future provides services and/or incurs expenses on behalf of the Company.
The fair value of the un-reimbursed expenses and uncompensated services rendered by Future has been
recorded in the Companys condensed consolidated financial statements as capital contributions
totaled $17,000 for the three months ended April 2, 2005. There were no un-reimbursed expenses or
uncompensated services rendered by Future for the three months ended April 1, 2006.
11
On January 19, 2006, Sipex completed a $7.0 million private loan financing in which the
Company issued a 9% secured note with convertible interest due January 19, 2008 to the affiliates
of Future, which could provide these affiliates with the opportunity to obtain additional shares of
Sipexs common stock. The loan was repaid in March 2006 using the proceeds from the sale of the Companys Hillview
facility (See Note 12). For the three months ended April 1, 2006,
Sipex incurred interest expense totaling $86,000 related to the $7.0 million note with Future.
As discussed in Note 15, on May 16, 2006, Sipex placed $30.0 million of its 5.5% Convertible
Senior Notes (2006 Notes) due 2026 and related warrants in a private placement transaction to
accredited investors in reliance on Regulation D under the Securities Act of 1933, as amended (the
Securities Act). Rodfre Holdings LLC (Rodfre), an affiliate of Alonim Investments Inc., Sipexs
largest stockholder, and an affiliate of Future, purchased 50% of the 2006 Notes or $15.0 million
aggregate principal amount being placed in this offering. The 2006 Notes will mature on May 18,
2026 and bear interest at an annual rate of 5.5% payable semi-annually on May 15 and November 15 of
each year, beginning on November 15, 2006.
On September 8, 2006, Sipex appointed two executive vice presidents working for Future to its
Board of Directors. The Board has determined that both new directors are not independent within the
meaning of Rule 4200(a) (15) of the NASDAQ Manual by virtue of their relationships with Future
Electronics. Accordingly, the Board does not expect to appoint them to any standing committees of
the Board. In connection with their appointment as directors, both new directors have agreed to
recuse themselves from any Board discussions that relate to transactions between Sipex and Future.
Note 6 Restructuring
The Company has established a restructuring reserve relating to the unused portion of its
leased facility in Billerica, Massachusetts. For the three months ended April 1, 2006, the Company
utilized $181,000 restructuring reserves, which was primarily lease costs associated with the
unused portion of our Billerica facility. Since the third quarter of 2005, in conjunction with the
Companys decision to close down the Milpitas wafer fabrication facility and the transfer of the IC
manufacturing processes to China and Taiwan, Sipex has accrued additional restructuring costs for
severance and retention payments and other exit costs. For the three months ended April 1, 2006,
the Company incurred an additional restructuring cost of $265,000 for retention payments. Below is
a summary of the activities related to restructuring costs for the three months ended April 1, 2006
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
Employee |
|
|
Restructuring |
|
|
|
Facility Costs |
|
|
Costs |
|
|
Costs |
|
Accrual balance, December 31, 2005 |
|
$ |
1,255 |
|
|
$ |
736 |
|
|
$ |
1,991 |
|
Incurred in 2006 |
|
|
|
|
|
|
265 |
|
|
|
265 |
|
Charges utilized |
|
|
(181 |
) |
|
|
|
|
|
|
(181 |
) |
Sub-lease income received |
|
|
81 |
|
|
|
|
|
|
|
81 |
|
Adjustments to accrual |
|
|
(3 |
) |
|
|
45 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
Accrual balance, April 1, 2006 |
|
$ |
1,152 |
|
|
$ |
1,046 |
|
|
$ |
2,198 |
|
|
|
|
|
|
|
|
|
|
|
Note 7 Comprehensive Loss
Comprehensive income (loss) is the total of net income (loss) and all other revenue, expenses,
gains and losses recorded directly in equity. The Companys other comprehensive loss consists of
foreign currency translation adjustments. The comprehensive loss equals to the net loss for the
three months ended April 1, 2006 and April 2, 2005 as there were no foreign currency translation
adjustments and no significant tax effect on the components of other comprehensive loss for such
periods.
Note 8 Inventories
Inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 1, 2006 |
|
|
December 31, 2005 |
|
Raw materials |
|
$ |
285 |
|
|
$ |
223 |
|
Work-in-process |
|
|
9,579 |
|
|
|
10,297 |
|
Finished goods |
|
|
3,392 |
|
|
|
2,880 |
|
|
|
|
|
|
|
|
Total |
|
$ |
13,256 |
|
|
$ |
13,400 |
|
|
|
|
|
|
|
|
12
Note 9 Accrued Expenses
Accrued expenses are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 1, 2006 |
|
|
December 31, 2005 |
|
Accrued compensation and benefits |
|
$ |
2,969 |
|
|
$ |
2,959 |
|
Accrued audit fees |
|
|
1,793 |
|
|
|
2,607 |
|
Accrued commissions |
|
|
373 |
|
|
|
309 |
|
Accrued royalties |
|
|
312 |
|
|
|
185 |
|
Accrued legal fees |
|
|
197 |
|
|
|
365 |
|
Other |
|
|
704 |
|
|
|
857 |
|
|
|
|
|
|
|
|
Total |
|
$ |
6,348 |
|
|
$ |
7,282 |
|
|
|
|
|
|
|
|
Note 10 Borrowing Arrangements
On July 21, 2005, Sipex entered into a Loan and Security Agreement (the Agreement) with
Silicon Valley Bank, which has expired on July 20, 2006 (See Note 15 for amendments including
extension of expiration through September 30, 2006). The Agreement, as amended, provides for a
secured revolving line of credit with aggregate borrowings up to $5,000,000 limited to the
available borrowing base (eligible accounts receivable as defined in the Agreement) plus $500,000.
Available borrowings are further reduced by letters of credit which may be issued under the
Agreement on behalf of the Company. Borrowings under the revolving line of credit bore an interest
rate equal to the banks prime rate plus two percent (2.00%) as of April 1, 2006. Under the
Agreement, Sipex has granted the bank a security interest in all presently existing and later
acquired collateral, including but not limited to goods, equipment, inventory, contract rights, and
financial assets with the exception of Sipexs headquarters property in Milpitas, California, which
was sold in March 2006 (See Note 12). On March 9, 2006, Sipex entered into a sale and leaseback
transaction with Mission West Properties, L.P. for its headquarters facility, located at 233 South
Hillview Drive in Milpitas, California. Sipex has provided a security deposit of $1,265,000 in the
form of an irrevocable standby letter of credit issued to Mission West Properties, L.P. under its
$5,000,000 line of credit with Silicon Valley Bank. In respect to financial covenants, the
Agreement requires the Company to maintain a minimum liquidity ratio for each month ended not less than 1.50:1.00 which is calculated as
the sum of (i) unrestricted cash and cash equivalents and consolidated accounts divided by (ii) the
outstanding borrowings from the bank. In addition, Sipex was required to maintain a minimum amount
of tangible net worth (as defined in the Agreement). As of
April 1, 2006, the unused
portion of the line of credit was $3,735,000. The Company violated the tangible net worth covenant at April
1, 2006. The violation was subsequently waived by Silicon Valley Bank on August 1, 2006.
On January 19, 2006, Sipex announced the completion of a $7.0 million private loan financing
in which Sipex issued a 9% secured note with convertible interest due January 19, 2008 to an
affiliate of Future (See Note 5). The note was secured by a deed of trust on the Companys
headquarters property located in Milpitas, California. Accrued interest on the Note was convertible
into Sipexs common stock at the option of the holder on January 19, 2007 and January 19, 2008. The
conversion price would be the volume weighted average price for sales of the common stock during
the 20 trading days prior to the date of conversion. The holder of the note could require repayment
of the note in the event of a change of control of Sipex or the sale of the property subject to the
deed of trust. The note was subject to customary events of default. Interest on the note accrued
at 9% compounded quarterly and payable at maturity. The note was subsequently paid off in cash in
March 2006.
Note 11 Accrued Warranty
Products are sold with warranties ranging from one to two years depending upon the customers.
Reserve requirements are recorded in the period of sale and are based on an assessment of the
products sold with warranty and historical warranty costs incurred. The Company also assesses its
pre-existing warranty obligations and may adjust the amounts based on actual experience or changes
in future expectations.
13
The following table summarizes the activities in the warranty reserve for the three months
ended April 1, 2006 and April 2, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
April 1, 2006 |
|
|
April 2, 2005 |
|
Beginning accrued warranty |
|
$ |
87 |
|
|
$ |
228 |
|
Warranty claims |
|
|
(2 |
) |
|
|
(16 |
) |
Accruals for the period |
|
|
(35 |
) |
|
|
(45 |
) |
|
|
|
|
|
|
|
Ending accrued warranty |
|
$ |
50 |
|
|
$ |
167 |
|
|
|
|
|
|
|
|
Note 12 Lease Financing Obligation
On March 9, 2006, the Company entered into an Agreement for Purchase and Sale of Real
Property with Mission West Properties L.P. The agreement provides for the sale of the Companys
headquarters facility, located at 233 South Hillview Drive in Milpitas, California (the Hillview
facility), to Mission West Properties L.P. for a price of $13.4 million in cash. The Company
incurred commission and selling costs of $822,000 related to this transaction. The Hillview
facility primarily consists of two buildings with approximately 95,690 total square feet (which
includes 20,000 square feet of Class 10 clean room), approximately 293 on-site surface parking
spaces, and the underlying land with improvements and all fixtures attached thereto.
Simultaneously, the Company entered into a Standard Form Lease agreement to lease back the Hillview
facility from Mission West Properties L.P. The lease term is 60 months with average lease payments
of approximately $1.4 million per year. Further, the Company will have an option to extend the
lease for an additional five years when the current term expires.
The Company provided a security deposit of $1.3 million in the form of an irrevocable standby
letter of credit issued to Mission West Properties, L.P. under its $5.0 million revolving line of
credit with Silicon Valley Bank. The security deposit is held as security for the faithful
performance by Sipex for all of the terms, covenants, and conditions prescribed under the lease
agreement. Accordingly, the Company has accounted for this sale and leaseback transaction as a
financing transaction shown on the condensed consolidated balance sheet as lease financing
obligation. With the initial obligation recorded at $12.6 million which represents net proceeds
from the sale of the Hillview facility, no gain or loss was recorded upon the sale. The effective
interest rate for the lease financing obligation is 9.3% which approximates the Companys estimated
borrowing rate. Depreciation for the Hillview facility is recorded over the straight-line method
for the remaining useful life.
Future minimum lease payments for the lease financing obligation as of April 1, 2006 are as
follows (in thousands):
Fiscal year ending December
|
|
|
|
|
2006 (remaining 9 months) |
|
$ |
985 |
|
2007 |
|
|
1,329 |
|
2008 |
|
|
1,368 |
|
2009 |
|
|
1,408 |
|
2010 |
|
|
1,449 |
|
Thereafter |
|
|
11,454 |
|
|
|
|
|
Total minimum lease payments |
|
|
17,993 |
|
Less: amount representing interest |
|
|
5,528 |
|
|
|
|
|
Present value of minimum lease payments |
|
|
12,465 |
|
Less: current portion of lease financing obligation |
|
|
151 |
|
|
|
|
|
Long-term lease financing obligation |
|
$ |
12,314 |
|
|
|
|
|
14
Note 13 Segment Information and Major Customers
The Companys Chief Executive Officer (CEO) is considered to be the Companys chief
operating decision maker. The Company has organized its operations based on a single operating
segment: the development and delivery of high performance analog integrated circuits that are used
primarily by original equipment manufacturers operating in the computing, communications and
networking infrastructure markets. The CEO reviews financial information presented on a
consolidated basis accompanied by disaggregated information about revenues by product family and
geographic region for purposes of making operating decisions and assessing financial performance.
The disaggregated revenue information reviewed on a product family basis by the CEO includes the
interface, power management and optical storage families along with other legacy product families.
The disaggregated sales information reviewed on a product line basis by the CEO is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
April 1, 2006 |
|
|
April 2, 2005 |
|
Interface |
|
$ |
10,651 |
|
|
$ |
9,925 |
|
Power Management |
|
|
4,586 |
|
|
|
4,701 |
|
Optical Storage |
|
|
2,611 |
|
|
|
5,101 |
|
Other* |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
17,854 |
|
|
$ |
19,727 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes Legacy and other discontinued products. |
Although Sipex has operations in Malaysia, China, Taiwan, Japan, Germany, Belgium and Canada,
substantially all of the Companys long-lived assets reside in the United States.
The Company markets its products primarily from its operations in the United States.
International sales are made primarily to customers in Asia and Europe. Information regarding the
Companys net sales derived from products shipped to different geographic regions is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
April 1, 2006 |
|
|
April 2, 2005 |
|
United States |
|
$ |
3,841 |
|
|
$ |
3,862 |
|
United Kingdom |
|
|
3,264 |
|
|
|
2,904 |
|
Japan |
|
|
2,881 |
|
|
|
5,578 |
|
China |
|
|
2,867 |
|
|
|
1,522 |
|
Singapore |
|
|
2,609 |
|
|
|
2,039 |
|
Taiwan |
|
|
1,111 |
|
|
|
2,030 |
|
Asia, other than Japan, China, Taiwan, &
Singapore |
|
|
711 |
|
|
|
344 |
|
Rest of the world |
|
|
570 |
|
|
|
1,448 |
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
17,854 |
|
|
$ |
19,727 |
|
|
|
|
|
|
|
|
Information on major customers which accounted for 10% or more of the Companys total net
sales and total gross accounts receivable is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total Net Sales |
|
% of Total Gross |
|
|
For the Three Months Ended |
|
Accounts Receivable |
|
|
April 1, 2006 |
|
April 2, 2005 |
|
April 1, 2006 |
|
December 31, 2005 |
Future, a related party |
|
|
48 |
% |
|
|
40 |
% |
|
|
35 |
% |
|
|
44 |
% |
Microtek, Inc. |
|
|
* |
|
|
|
23 |
% |
|
|
* |
|
|
|
* |
|
Komatsu |
|
|
12 |
% |
|
|
* |
|
|
|
12 |
% |
|
|
* |
|
15
Note 14 Commitments and Contingencies
Commitments
On August 21, 2003, Sipex announced an exclusive sourcing agreement with PolarFab, a US-based
semiconductor foundry. The Company is under an obligation to make minimum purchase commitments
based on quarterly rolling forecasts extending out to one year. The Company has also agreed to
purchase no less than 50% of the rolling forecast on an ongoing basis through the term of this
agreement. The initial term of the agreement is five years with renewals on a negotiated basis. As
of April 1, 2006, the minimum purchase commitment with PolarFab was approximately $2.6 million for
the following twelve months.
On July 2, 2004, the Company entered into an agreement to use certain licensed tools for
circuit design and development as well as maintenance support for a total future payment commitment
of $2.5 million over the next three and one-half years. The contract requires the Company to
deposit 75% of the total commitment in a certificate of deposit account. As of April 1, 2006,
restricted cash consisted of $1.0 million held in a certificate of deposit as a guarantee of
payment to fulfill the terms of a software license agreement which is included in the condensed
consolidated balance sheet. The agreement expires on January 1, 2008.
On December 20, 2005, Sipex entered into an agreement to use a fast simulator software tool
for improvement of its product development. A commitment of future payments including maintenance
support fees totaled $467,000 to be paid over the next three years. The agreement expires on
December 19, 2008.
On February 27, 2006, Sipex entered into a definitive Master Agreement with Silan. This
transaction is related to closing the Companys wafer fabrication operations located in Milpitas,
California and that Sipex and Silan would work together to enable Silan to manufacture
semiconductor wafers using the Companys process technology. The Master Agreement includes a
Process Technology Transfer and License Agreement which contemplates the transfer of eight (8) of
the Companys processes and related product manufacturing to Silan. Once Sipex confirms to Silan
that the process qualification wafers and product qualification wafers (under a Wafer Transfer
Agreement) conform to the Companys specifications, Silan shall commence commercial manufacturing
for the Company. Subject to the Companys option to suspend in whole or in part, there is a
purchase commitment under the Wafer Supply Agreement obligating Sipex to purchase from Silan an
average of at least one thousand (1,000) equivalent wafers per week, calculated on a quarterly
basis, for two years. As of April 1, 2006, Silan has not conformed to the Companys specifications
relating to the process qualification wafers and product qualification wafers.
Contingencies
Under the terms and conditions of the Companys sales agreements, Sipex has offered limited
intellectual property indemnification to its customers. The indemnity limits the time within which
an indemnification claim can be made and the amount of the claim. It is not possible to determine
the maximum potential amount due to the limited history of prior indemnification claims and the
unique facts and circumstances involved in each particular situation. Historically, payments made
by the Company for this type of claim have not had a material impact on its operating results or
financial position, and the Company is not aware of any significant claims or potential claims
under the agreements.
16
Pending Litigation
The Company is also subject to legal proceedings, claims, and litigation arising in the course
of business. The Company defends itself vigorously against any such claims. The outcome of
unresolved matters related to the Companys legal proceedings, claims, and litigation is currently
not determinable, and an unfavorable outcome could have a material adverse effect on the Companys
consolidated financial position, results of operations, or cash flows.
Class Action Securities Litigation
Beginning on or about January 24, 2005, four securities class action suits were filed against
Sipex and certain of its current and former officers and directors. All complaints were filed in
the United States District Court for the Northern District of California, San Francisco. The
captions of the cases were as follows: Keller v. Sipex Corporation, et al., (05-CV-00331) (WHA),
Coil Partners LLC v. Sipex Corporation, et al., (05-CV-00392) (WHA), Levy v. Sipex Corporation, et
al., (05-CV-00505) (WHA), and Jacobson v. Sipex Corporation, et al., (05-CV-00712) (WHA).
The securities class action suits were filed on behalf of the purchasers of Sipexs common
stock in various class periods, beginning on or about April 10, 2003 and ending on January 20,
2005. The plaintiffs in these cases alleged, among other things, violations of sections 10(b) and
20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated there-under,
and sought unspecified monetary damages and other relief against all defendants. Specifically, the
complaints alleged that Sipex and the individual defendants made false or misleading public
statements regarding its financial results during the class periods.
On March 25, 2005, four lead plaintiff motions were filed asking the Court to consolidate the
class actions. Prior to the hearing on the lead plaintiff motions, the Levy and Keller plaintiffs
voluntarily agreed to dismiss their complaints. On May 12, 2005, the Court consolidated the
remaining cases under the caption In re Sipex Corporation Securities Litigation, Master File No.
05-CV-00392. Defendants Clyde Ray Wallin and Doug McBurnie were voluntarily dismissed from the
action on August 16, 2005, and defendant Phil Kagel was granted a
motion to dismiss on November 17, 2005.
On January 18, 2006, the Court preliminarily approved the settlement of the class action
lawsuit. The settlement provides for a payment of $6.0 million to the plaintiffs and will be
entirely funded by proceeds from the Companys directors and officers insurance policy. The
specific terms for distribution of the settlement fund to class members were disclosed in a notice
which was sent to the class members. On April 6, 2006, the United States District Court for the
Northern District of California, San Francisco, approved the final settlement of the securities
class action lawsuit.
Stockholder Derivative Litigation
On February 8, 2005, a putative stockholder derivative suit was filed in the Superior Court of
the State of California, County of San Mateo, on behalf of Sipex against certain of the Companys
current and former officers and directors for alleged fiduciary duty violations, gross negligence,
unjust enrichment and breach of contract (Lie v. McBurnie, et al., CIV444748). On March 25, 2005,
a second putative stockholder derivative suit was filed in the Superior Court of the State of
California, County of Santa Clara, on behalf of Sipex against certain of the Companys current and
former officers and directors for alleged fiduciary duty violations, abuse of control, gross
mismanagement, waste of corporate assets and unjust enrichment (Nagdev v. Maghribi, et al.,
105CV038114).
The derivative complaints are based on similar facts and events as those alleged in the
securities class actions complaints. Specifically, the complaints allege that the individual
defendants deliberately damaged Sipex by, among other things, causing Sipex to improperly recognize
and report revenue, causing the Company to issue false and misleading statements about its
financial results, exposing Sipex to liability for securities fraud, and damaging its reputation.
On April 22, 2005, defendants in the Lie derivative action filed a petition with the Judicial
Council of California to coordinate the cases in Santa Clara County Superior Court. The petition
was granted on July 13, 2005 and the actions had since been coordinated and consolidated before
Judge Komar in Santa Clara Superior Court, under the consolidated caption, Sipex Derivative Cases,
Judicial Council Coordination Proceeding No. 4431, Lead Case No. 1-05-CV-038114.
17
On January 23, 2006, the Court approved the settlement of the stockholder derivative action.
The settlement provided for a payment of $300,000 to the plaintiffs, pursuant to the terms of the
settlement agreement, and the adoption of certain corporate governance measures and the payment of
attorneys fees and expenses to the derivative plaintiffs counsel, all of which were funded
entirely by proceeds from Sipexs directors and officers insurance policy.
Government Investigation
On February 18, 2005, Sipex announced that the Securities and Exchange Commission (the SEC)
had commenced a formal investigation into the same matters as those that were the subject of the
Companys previously announced internal investigation into the Companys financial and
transactional records with regard to revenue recognition for the years ended December 31, 2003 and
January 1, 2005. On September 20, 2006, the Company received a notification from the staff of the
SEC that the investigation has been terminated, and no enforcement has been recommended to the SEC with respect to the Company.
DiPietro v. Sipex
In April 2003, Plaintiff Frank DiPietro (former CFO of Sipex Corp.) brought an action against
Sipex for his severance benefits. Sipex counterclaimed for approximately $150,000 which was owed
under a promissory note signed by Mr. DiPietro. In August 2004, Sipex filed two motions for
summary judgment (one for Mr. DiPietros claims against it and one for its counterclaim against Mr.
DiPietro under the promissory note). In June 2005, the Middlesex Superior Court granted both
Sipexs Motions for Summary Judgment. As a result, Mr. DiPietro was ordered to pay Sipex $149,486
plus costs and interest which has now appreciated to approximately $204,000 as of June 2006.
Interest is added to this amount at twelve (12%) percent per year. Mr. DiPietro filed a notice of
appeal on July 19, 2005. In addition, the court has required Mr. DiPietro to post a bond in the
amount of $150,000.
Note 15 Subsequent Events
On May 18, 2006, Sipex issued $30.0 million of 5.5% Convertible Senior Notes due 2026 (2006
Notes) in a private placement. Rodfre, an affiliate of Future, purchased 50% of the 2006 Notes or
$15.0 million aggregate principal amount being sold in this offering. The remainder of the 2006
Notes were purchased by other accredited investors. The Company intends to use the net proceeds
from the private placement for general corporate purposes.
The 2006 Notes will mature on May 18, 2026 and bear interest at an annual rate of 5.5% payable
semi-annually on May 15 and November 15 of each year, beginning on November 15, 2006. Sipex may pay
interest in cash or, solely at its option, in shares of its common stock. However, Sipex may only
make interest payments in shares of its common stock if certain conditions in the Indenture are
met, including, among other things, that a registration statement related to shares issuable under
the terms of the 2006 Notes and related warrants as noted below has been declared effective and is
available for the resale of any such interest shares, or other exemption from federal securities
laws is available for the resale of such interest shares, and that Sipexs common stock is listed
on the Nasdaq Global Market, the New York Stock Exchange or another national exchange. In addition,
common stock used to pay any such interest will be valued at ninety percent (90%) of the market
price of the common stock as of two days prior to the date of payment of such interest.
The 2006 Notes are convertible into Sipexs common stock at any time prior to maturity,
initially at a conversion price of $2.68 per share, subject to adjustment upon certain events,
including, among other things, dividends, stock splits and recapitalizations. If fully converted,
the principal amount of the 2006 Notes would convert into 11,194,030 shares of the Companys common
stock.
At any time prior to maturity, the Company may elect to automatically convert some or all of
the 2006 Notes into shares of Sipexs common stock if the daily closing price of its common stock
exceeds one hundred fifty percent (150%) of the then applicable conversion price (initially $4.02
per share) for 20 trading days during any 30 trading-day period ending within 5 days of the notice
of automatic conversion and either (a) a registration statement covering the resale of the common
stock issued upon conversion is effective and available for use from the date Sipex notifies the
holder of the 2006 Notes of the automatic conversion and Sipex reasonably expects such registration
statement to remain effective through and including the earlier of the date of the automatic
conversion or the last date on which the registration statement registering the resale of such
common stock is required to be kept effective under the terms of the registration rights agreement,
or (b) the common stock to be issued upon conversion may be sold pursuant to Rule 144(k) under the
Securities Act.
18
At any time on or after May 21, 2009, Sipex may redeem some or all of the 2006 Notes at 100%
of the principal amount plus accrued and unpaid interest to, but excluding, the redemption date. If
Sipex elects to redeem the 2006 Notes, it will provide notice of redemption to the holders of the
2006 Notes not less than 20 days and not more than 90 days before the redemption date.
The holders of the 2006 Notes may require Sipex to repurchase the 2006 Notes for cash on May
15, 2011, May 15, 2016 or May 15, 2021, at a price equal to 100% of the principal amount plus
accrued and unpaid interest, if any, to, but excluding, the applicable repurchase date.
Upon a change of control or a termination of trading that occurs after such time as Sipexs
common stock has been listed for trading on the Nasdaq Global Market, the New York Stock Exchange
or other national automated quotation system or securities exchange, the holders of the 2006 Notes
may require Sipex to repurchase the 2006 Notes in cash at a price equal to 100% of the principal
amount of the 2006 Notes plus accrued and unpaid interest, if
any, to, but excluding the applicable repurchase date.
The 2006 Notes contains certain covenants applicable to Sipex, including a covenant
restricting the amount of indebtedness that Sipex can incur that is senior or pari passu with the
2006 Notes to an aggregate principal amount of $7.5 million, unless such restriction is waived by
holders of over 66 2/3% of the principal amount of the 2006 Notes then outstanding.
In conjunction with the issuance of the 2006 Notes, the Company issued warrants to purchase an
aggregate of 1,679,104 shares of its common stock to the accredited investors. Each warrant is exercisable for
one share of Sipexs common stock at an initial exercise price of $3.216 per share, subject to
adjustment upon certain events, including,
among other things, dividends, stock splits and recapitalizations. The warrants are
exercisable (in whole or in part) at any time on or before May 18, 2011, unless earlier terminated
by Sipex.
At any time after May 18, 2009, Sipex may terminate the warrants if the closing price of its
common stock exceeds 200% of the exercise price for at least 20 trading days during any 30
trading-day period. The warrants will expire 90 days after the mailing date of the notice of
termination. Any unexercised warrants with exercise prices below the then current fair market value
as of the date of termination will automatically be deemed exercised in full pursuant to a cashless
exercise. Each of the warrants will expire at 5:00 p.m., New York City time, on May 18, 2011,
unless earlier terminated as described above.
As Sipex was not current in its SEC filings by August 15, 2006, Sipex will pay additional
interest on the 2006 Notes at an annual rate of 1.5% for the period beginning August 16, 2006
through the date that the Companys filings become current. In addition, if Sipexs common stock is
not listed on the Nasdaq Global Market, the New York Stock Exchange or another national exchange or
automated quotation system by December 31, 2006, Sipex will pay additional interest on the 2006
Notes at an annual rate of 1.5% for the period beginning January 1, 2007 through the date that its
common stock becomes listed for trading on one of the national exchanges.
As part of the 2006 Note agreements, Sipex also entered into a Registration Rights Agreement
(the Registration Rights Agreement), pursuant to which Sipex has agreed to file with the SEC a
registration statement covering the resale of the 2006 Notes, the warrants and the shares of
Sipexs common stock issuable upon conversion of the 2006 Notes and exercise of the warrants no
later than August 15, 2006 and to have the registration statement declared effective no later than
December 31, 2006. Since Sipex did not file the registration statement by August 15, 2006, Sipex
will be required to pay certain registration delay payments, as calculated in the Registration
Rights Agreement, with respect to solely the 2006 Notes.
The 2006 Notes were initially recorded during the second quarter of 2006 at $25.4 million
representing their face values of $30.0 million, less estimated fair values of the freestanding
warrants ($1.6 million), beneficial conversion feature of the 2006 Notes ($1.6 million),
derivatives liability relating to the additional interest expense and registration delay penalties
($134,000), and debt issuance costs ($1.2 million). The difference between the initial recorded
value and the face value of the 2006 Notes is being amortized to interest expense using the
effective interest method through May 2011. The effective interest rate is 9.5% which approximates
the Companys estimated borrowing rate.
19
The estimated fair value of the warrants of $1.6 million is accounted for as a freestanding
warrant. The Company also recorded the $1.6 million estimated value of the beneficial conversion
feature of the 2006 Notes. The Company applied the guidance from Emerging Issues Task Force, EITF
Issue 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios and EITF Issue 00-27, Application of Issue 98-5 to
Certain Convertible Instruments in accounting for the 2006 Notes, the accompanying warrants and
the value of the beneficial conversion feature. The $134,000 derivative liability for interest and
penalties recorded represents the estimate fair value of such obligation as of the date of issuance
of the 2006 Notes relating to additional interest and penalties to be incurred in the event certain
regulatory filings are not made in a timely manner and in the event of non-timely listing of the
stock on an exchange. The fair value of the freestanding warrants and the estimated value of the
beneficial conversion feature were recorded to increase the additional paid-in capital while the
estimated fair value of the interest and penalties was recorded as a derivative liability.
The issuance costs totaled $1.3 million of which $1.2 million related to debt issuance costs
and $71,000 related to warrant issuance costs. The $1.2 million, which includes placement agent
fees of $900,000 on the $15.0 million of the 2006 Notes not sold to Future, will be amortized as
part of interest expense over a 5-year period. The Company reduced additional paid-in-capital by
$71,000 related to warrant issuance costs.
In connection with the issuance of the $30.0 million 2006 Notes, on May 18, 2006, Sipex
entered into Amendment No. 4 to the Loan and Security Agreement with Silicon Valley Bank dated July
21, 2005 (as amended by Amendment No. 1 dated October 7, 2005, Amendment No. 2 dated November 10,
2005 and Amendment No. 3 dated January 19, 2006). Amendment No. 4 modifies the Loan and Security
Agreement to permit the 2006 Note transaction and the scheduled cash interest payments.
On August 1, 2006, Sipex entered into Amendment No. 5 to the Loan and Security Agreement with
Silicon Valley Bank dated July 21, 2005 (as amended by Amendment No. 1 dated October 7, 2005,
Amendment No. 2 dated November 10, 2005, Amendment No. 3 dated January 19, 2006 and Amendment No. 4
dated May 18, 2006). Amendment No. 5 modifies the Loan and Security Agreement to: (1) extend the
maturity date from July 20, 2006 to September 30, 2006, (2) delete entirely the Tangible Net Worth
covenant contained in Section 6.7(b) and waive Sipexs non-compliance with such covenant for the
periods ended April 1, 2006 and July 1, 2006 and (3) lower the interest rate to the prime rate from
the prime rate plus 2%.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This section and other parts of this Form 10-Q contain forward-looking statements that involve
risks and uncertainties. The statements that are not purely historical are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange
Act, including, without limitation, statements regarding our expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in this Form 10-Q are
based on information available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. These statements involve known and unknown risks, uncertainties
and other factors, which may cause our actual results to differ materially from those implied by
the forward-looking statements. In some cases, you can identify forward-looking statements by
terminology such as may, will, should, expects, plans, anticipates, believes,
intends, estimates, predicts, potential, or continue or the negative of these terms or
other comparable terminology. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot offer any assurance of future results, levels
of activity, performance or achievements. Moreover, neither any other person nor we assume
responsibility for the accuracy and completeness of such statements. Important factors that may
cause actual results to differ from expectations include those discussed in Risk Factors
beginning on Item 1A of Part II in this document. The terms Sipex, the Company, we, us,
its and our as used in this Form 10-Q refer to Sipex Corporation and its subsidiaries and its
predecessors as a combined entity, except where the context requires otherwise.
20
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Exchange Act, are also
available on our website at www.sipex.com/investor when such reports are available on the website
of the Securities and Exchange Commission, or the SEC. The public may read and copy any materials
filed by us with the SEC at the SECs Public Reference Room at 100 F Street, NE, Washington, DC
20549. The public may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and
information statements and other information regarding issuers that file electronically with the
SEC at http://www.sec.gov. The contents of these websites are not incorporated into this filing.
Further, our references to the Uniform Resource Locators (URLs) for these websites are intended to
be inactive textual references only.
Overview
In conjunction with our previously announced internal investigation and restatement (as
described in our annual report on Form 10-K for the year ended December 31, 2005), we were not in
compliance with Nasdaqs Marketplace Rule 4310(c)(14) because we did not timely file the annual
report on Form 10-K for the year ended January 1, 2005 and quarterly report on Form 10-Q for the
three months ended April 2, 2005. On June 21, 2005, a Nasdaq Listing Qualifications Panel, or the
Panel, notified us that the Panel had denied our request for continued inclusion on the Nasdaq
Global Market. Our common stock was delisted from the Nasdaq Global Market effective with the
beginning of trading on June 23, 2005.
During the first quarter of 2006, two significant transactions were completed. First, in
February, we completed and signed definitive agreements with Hangzhou Silan Integrated Circuit Co.,
Ltd., or Silan, in Hangzhou, China to transfer the IC manufacturing processes from our Milpitas
wafer fabrication facility to Silans facilities. This transfer is expected to be substantially
completed by the end of September 2006. Silan, along with a wafer fab operated by Episil
Technologies, Inc. in Taiwan, will bring us to our new fabless manufacturing model, where we expect
to achieve significant cost savings. However, there can be no assurance that the expected savings
will be realized. Second, in March, we sold our headquarters facility in Milpitas, California,
for net proceeds of $12.6 million in cash. Simultaneously, we entered into a lease back agreement
for the facility. The lease term is 60 months with average lease payments of approximately $1.4
million per year. In addition, we provided a security deposit of $1,265,000 in the form of an
irrevocable standby letter of credit under our $5.0 million line of credit with Silicon Valley
Bank. The sale and leaseback arrangement has been accounted for as a financing obligation as a
result of our continuing involvement in the arrangement. A portion of the proceeds from the sale
of the facility was used to pay off and terminate the $7.0 million private loan with an affiliate
of Future Electronics Inc., or Future, entered into in January 2006.
We design, manufacture and market, high performance, analog ICs that are used primarily by
OEMs, operating in the computing, consumer, communications and networking infrastructure markets.
Some of the end product applications that contain our ICs are cellular phones, base stations,
computers, DVD players, and digital cameras. Our products fall into three major product families:
power management, interface and optical storage.
We focus on several key areas to drive operating and financial performance, including product
mix, new product introductions, capacity utilization, cost reductions and productivity. All of
these key areas are interrelated and important in achieving improved gross margin.
Product mix between our three product families and the sale of new products within each of our
product families can significantly impact overall gross margin. Power management product gross
margins have a wide range depending on the mix of sales within this product family. The very high
volume commodity products sold into the Asian market, such as power regulators, have generally
lower margins. By contrast, our advanced power management product offerings, such as white LED
(light emitting diode) drivers, and our Power Blox family, are newer products, and contribute
typically higher margins. Interface products typically have more moderate margins, due to the
multi-protocol family and the new low voltage interface products. Optical storage product gross
margins are typically within range of our average margin. The products in this line are typically
proprietary, but alternative suppliers often introduce competitive solutions.
21
Capacity utilization of our wafer fabrication facility in Milpitas, California was
historically an important factor in driving gross margin improvement. In the past, a large portion
of our fabrication cost structure was fixed, such as depreciation and payroll expense for process
engineering and manufacturing support, and this structure provided for lower per unit costs as the
volume of completed wafers increased. In the third quarter of 2005, we decided to outsource all of
our wafer fabrication operations and to begin shutting down the Milpitas, California facility. We
expect this transition to be substantially completed by the end of the third quarter of 2006. We
believe that this transition will improve the margins of our interface products and certain of our
commodity market power management products which we historically manufactured at the Milpitas
facility; however, because of this transition away from the fixed cost structure, we will not
recognize the same decrease in per unit manufacturing costs as production volumes increase.
Cost reductions and productivity improvements are required in order to remain competitive in
our marketplace. Cost reductions are achieved in several ways, such as re-designing the products
to shrink the size of the die providing more individual products per wafer produced. This
generates increased output without adding significant incremental cost. Other cost reductions and
productivity improvements come through product assembly and test yield improvement and test time
reduction.
Results of Operations
The table below presents the statements of operations for the three months ended April 1, 2006
and April 2, 2005, as a percentage of net sales:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
April 1, 2006 |
|
|
April 2, 2005 |
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
101.1 |
|
|
|
72.7 |
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
(1.1 |
) |
|
|
27.3 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
30.8 |
|
|
|
19.5 |
|
Marketing and selling |
|
|
20.5 |
|
|
|
13.1 |
|
General and administrative |
|
|
22.5 |
|
|
|
20.7 |
|
Restructuring |
|
|
1.7 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
75.5 |
|
|
|
53.4 |
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(76.6 |
) |
|
|
(26.1 |
) |
Other income (expense), net |
|
|
(0.5 |
) |
|
|
0.6 |
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(77.1 |
)% |
|
|
(25.5 |
)% |
|
|
|
|
|
|
|
Net Sales
Net sales for the first quarter of 2006 were $17.9 million, a decrease of 9.5% from our sales
of $19.7 million for the same period in 2005. The decrease was primarily due to lower sales of
optical storage products, partly offset by an increase in the sales of interface products. Sales
of optical storage products during the first quarter of 2006 decreased by $2.5 million, or 49% from
the prior years quarter mainly as a result of the winding down of programs at a key customer in
Japan.
Geographically, sales of products in Japan decreased by 48% to $2.9 million in the first
quarter of 2006 compared to $5.6 million in the year ago period. This decrease was primarily driven
by lower demand for optical storage products. Net sales in China and Singapore increased as a result of higher sales of
interface and power management products in these geographies. These increases were partially offset by a decline
in net sales in Taiwan.
22
Gross Profit (Loss)
Our gross loss was (1%) of net sales, or ($0.2) million in the first quarter of 2006 compared
to a gross profit of 27% of net sales or $5.4 million during the first quarter of 2005. The
decrease was primarily attributable to recording $4.5 million of increased depreciation during the
first quarter of 2006 related to the Milpitas, California facility after the determination in
November 2005 that the facility had a shorter economic useful life to Sipex. The remaining decrease
was attributable to the decline in product revenues, principally optical storage, and the related
gross profit. In addition, during the first quarter of 2006, inventories with an original cost of
$0.4 million, which had been previously written down to zero, were sold.
Research and Development
Research and development expenses were $5.5 million and $3.9 million for the first quarter of
2006 and 2005, respectively. The increase resulted primarily from an increase in depreciation
expense of $1.1 million as a result of increased depreciation related to the Milpitas, California
facility after determination that the facility had a shorter economic useful life to Sipex and
higher stock-based compensation expense. As a percentage of net sales, research and development
expenses increased to 30.8% for the first quarter of 2006 as compared to 19.5% for the same quarter
in 2005. This percentage increase was primarily attributable to the increase in depreciation
expense and stock-based compensation expense combined with the decline is net sales year over year.
Marketing and Selling
Marketing and selling expenses were $3.7 million and $2.6 million for the first quarter of
2006 and 2005, respectively. The increase was primarily attributable to higher salaries driven by
additional sales and marketing personnel compared to the corresponding period of 2005, increased
depreciation expense of $0.3 million related to the Milpitas, California facility after
determination that the facility had a shorter economic useful life to Sipex, higher stock-based
compensation expense and higher sales commissions. As a percentage of net sales, marketing and
sales were higher in the first quarter of 2006 compared to the corresponding period of 2005, or
20.5% and 13.1%, respectively. These percentages were primarily driven by the aforementioned
higher depreciation and stock-based compensation expense combined with the decline in net sales
year over year.
General and Administrative
General and administrative expenses were $4.0 million and $4.1 million for the first quarter
of 2006 and 2005, respectively. General and administrative expenses were essentially flat from the
prior year as higher salaries, driven by additional finance personnel compared to the corresponding
period of 2005, increased depreciation expense of $0.7 million related to the Milpitas, California
facility after determination that the facility had a shorter economic useful life to Sipex and
higher stock-based compensation expense was offset by lower legal and forensic accounting fees
related to the internal investigation that led to the restatement of the Companys prior years
financial statements. As a percentage of sales, general and administrative expense increased from
20.7% in the first quarter of 2005 to 22.5% in the first quarter of 2006 driven principally by the
decline in net sales year over year.
Restructuring
Restructuring costs were $307,000 and $12,000 for the first quarter of 2006 and 2005,
respectively. The increase was primarily attributable to personnel retention costs incurred for the
closure of the wafer fabrication facility located in Milpitas, California. The restructuring
accrual balance as of April 1, 2006 of $2.2 million included $1.0 million of facility lease costs
for Billerica to be paid out over the next two years. The remaining balance included severance and
retention payments as well as other exit costs to be paid out in the next three quarters.
Other Income (expense), Net
Other income (expense), net, was ($92,000) and $120,000 in the first quarter of 2006 and 2005,
respectively. The net change was primarily attributable to interest expense related to the $7.0
million borrowing from the affiliates of Future in January 2006 which was repaid in March 2006, the
$3.0 million bank borrowing against our revolving line of credit which was paid off in January
2006, and the $12.6 million lease financing obligation.
23
Income Tax Expense
Income tax expense consisted principally of accruals for income taxes relating to our
international locations. The amounts totaled $32,000 and $12,000 during the first quarter of 2006
and 2005, respectively.
Liquidity and Capital Resources
As of April 1, 2006, we had available funds of $6.6 million consisting of cash and cash
equivalents as compared to $2.0 million at December 31, 2005.
Net cash used in operations was $4.7 million for the three months ended April 1, 2006. The
cash used in operations resulted primarily from the $13.8 million net loss partially offset by $9.0
million of non-cash expenses and $0.1 million of combined changes in assets and liabilities. The
principal non-cash expenses included: 1) $7.5 million of depreciation, of which $6.7 million was
attributable to increased depreciation related to the Milpitas, California facility after
determination that the facility had a shorter economic useful life to us, 2) $0.9 million of
stock-based compensation expense, and 3) $0.3 million of restructuring charges related to severance
and retention payments and other exit costs associated with our decision to close down the Milpitas
wafer fabrication facility. The cash provided from the change in assets and liabilities of $0.1
million primarily resulted from a $1.5 million increase in accounts receivable on lower net sales
offset by a $2.5 million increase in accounts payable when inventories were essentially flat. Net
cash used in operations was $6.6 million for the three months ended April 2, 2005, resulting
primarily from the $5.0 million net loss, which was partially offset by $2.6 million non-cash
expenses that were included in net loss. The cash used in the change in assets and liabilities of
$4.2 million was primarily driven by a $2.7 million reduction in accounts payable along with a $1.9
million increase in inventories.
Net cash used in investing activities was $122,000 relating to purchases of fixed assets for
the three months ended April 1, 2006. In addition to these cash payments for purchases of
property, plant and equipment, we also acquired $152,000 of property, plant and equipment during
the first quarter of 2006 for which cash payments had not yet been made as of April 1, 2006. Net
cash used in investing activities was $0.5 million for the three months ended April 2, 2005, driven
primarily by $0.6 million for purchases of short-term investment securities, and by $0.2 million
for purchases of property, plant and equipment, and partially offset by proceeds of $0.2 million
from maturity of short-term investment securities.
Net cash provided by financing activities for the three months ended April 1, 2006 was $9.5
million. On March 9, 2006, the Company entered into a sale and leaseback transaction for the
Hillview facility for a sale price of $13.4 million in cash. The brokers fees and related selling
expenses totaled approximately $0.8 million. The Company used a portion of these funds to pay off
and terminate the $7.0 million private loan and related interest, entered into on January 19, 2006,
pursuant to a Securities Purchase Agreement in which it issued a 9% Secured Note With Convertible
Interest Due January 19, 2008 to Rodfre Holdings LLC, or Rodfre, an affiliate of Alonim Investments
Inc. A portion of the $7.0 million loan was used to pay off the short-term borrowing of $3.0
million under a revolving line of credit with Silicon Valley Bank. Net cash provided by financing
activities for the three months ended April 2, 2005 was $0.7 million resulting from the issuance of
stock under the employee stock plans.
On July 21, 2005, we entered into a Loan and Security Agreement, with Silicon Valley Bank, and
this agreement was subsequently amended on October 7, 2005, November 10, 2005, January 19, 2006,
May 18, 2006, and August 1, 2006. The agreement currently provides for a secured revolving line of
credit with an aggregate principal amount of up to $5,000,000, which may be used to borrow
revolving loans or to issue lines of credit on our behalf. As of April 1, 2006, the unused portion
of our line of credit was $3,735,000 and we were in default of certain covenants under the related
agreement. The default was subsequently waived by Silicon Valley Bank on August 1, 2006. We have
granted to Silicon Valley Bank a security interest in all presently existing and later acquired
collateral, including but not limited to goods, equipment, inventory, contract rights, and
financial assets, in order to secure the obligations and duties under such loan and security
agreement. Advances accrue interest on the outstanding principal balance at an annual rate equal to Silicon Valley Banks prime
rate. The agreement matures on September 30, 2006 at which time all outstanding advances must be repaid, and all
outstanding letters of credit must be cash collateralized. The agreement requires us to comply
with a minimum liquidity ratio. It also required us to retain a minimum tangible net worth.
However, the latest amendment dated August 1, 2006, has modified the agreement to delete the
requirement for a minimum tangible net worth and waive our non-compliance with the financial
covenant on tangible net worth for the periods ended April 1, 2006 and July 1, 2006. The agreement
contains additional affirmative covenants, including, among others, covenants regarding the payment
of taxes and other obligations, maintenance of insurance, reporting requirements and compliance
with applicable laws and regulations. In addition, the agreement contains negative covenants
limiting our ability to dispose of assets, change our business plans, be acquired or beneficially
owned, merge or consolidate, incur indebtedness, grant liens, make investments, pay dividends,
repurchase stock, and pay subordinated debt. The agreement contains events of default that include,
among others, non-payment of principal, interest or fees, inaccuracy of representations and
warranties, violations of covenants, bankruptcy and insolvency events, any material adverse change,
material judgments, cross defaults to certain other indebtedness and seizure of assets. The
occurrence of an event of default will increase the applicable rate of interest by 5.0 % and would,
unless waived by Silicon Valley Bank, result in the immediate payment of all of our obligations
under the agreement.
24
On January 19, 2006, we announced the completion of a $7.0 million private loan financing in
which we issued a 9% secured note with convertible interest due January 19, 2008 to Rodfre, an
affiliate of Future. The note was secured by a deed of trust on our headquarters property located
in Milpitas, California. The holder of the note could require repayment of the loan in the event
of, among other things, the sale of the property subject to the deed of trust.
On March 9, 2006, we entered into an Agreement for Purchase and Sale of Real Property with
Mission West Properties L.P. The agreement provides for the sale of Sipexs Hillview facility to
Mission West Properties L.P. for a price of $13.4 million in cash (net proceeds of $12.6 million).
We used the proceeds from the sale of our Hillview facility to pay
off and terminate the $7.0 million loan with Future.
The remaining balance of $6.4 million from the sale of the property will be used for operating
activities.
Simultaneously with the sale of the Hillview property, we entered into a Standard Form Lease
agreement to lease back the facility from Mission West Properties L.P. The lease term is 60
months. In addition, we have provided a security deposit of $1,265,000 in the form of an
irrevocable standby letter of credit issued to Mission West Properties, L.P. under our line of
credit with Silicon Valley Bank. The security deposit is held as security for our faithful
performance of the terms, covenants, and conditions prescribed under the lease agreement.
On May 16, 2006 we placed $30.0 million of 5.5% Convertible Senior Notes due 2026, or the 2006
Notes, in a private placement. The 2006 Notes bear interest of 5.5% per year, payable
semi-annually on May 15 and November 15 of each year, commencing on November 15, 2006, and mature
on May 16, 2026. The 2006 Notes are convertible into common stock at any time at a fixed conversion
price of $2.68 per share. If fully converted, the principal amount of the 2006 Notes would convert
into approximately 11,194,030 shares of our common stock. At any time following the effectiveness
of a registration statement related to the resale of the common stock issuable upon the conversion
of the 2006 Notes, we may, subject to certain conditions, elect to automatically convert the 2006
Notes into common stock if the average price of our common stock exceeds 150% of the conversion
price for at least 20 trading days during any consecutive 30 trading-day period, ending within 5
days of the notice of automatic conversion. We have the right to redeem the 2006 Notes at par plus
accrued interest at anytime after May 15, 2009 and the purchasers have the right to require us to
repurchase the 2006 Notes at par plus accrued interest on May 15 in 2011, 2016 and 2021.
The 2006 Notes provide that since we were not current in our SEC filings by August 15, 2006,
we will pay additional interest on the 2006 Notes at an annual rate of 1.5% for the period
beginning August 16, 2006 through the date that our filings become current. In addition, if our
common stock is not listed on the Nasdaq Global Market, the New York Stock Exchange or another
national exchange or automated quotation system by December 31, 2006, we will pay additional
interest on the 2006 Notes at an annual rate of 1.5% for the period beginning January 1, 2007
through the date that our common stock becomes listed for trading on one of the national exchanges.
Likewise, the Registration Rights Agreement entered into in connection with the 2006 Notes provides
that since we have not filed a registration statement for the shares of our common stock issuable
upon conversion of the 2006 Notes or exercise of the warrants issued in connection with the 2006
Notes as of August 15, 2006, we will pay additional payments to the noteholders equal to a per
annum rate of 0.8% times the principal amount of the Notes for the period beginning on August 16, 2006 through the date that the
registration statement is filed; provided, however, that we may face increased payments if the filing of the
registration statement is delayed by over 60 days, or if the registration statement is not declared
effective by December 31, 2006.
A more detailed description of the terms of the 2006 Notes is presented in Note 15 to our
condensed consolidated financial statements included in this 10-Q filing and in our Form 8-K filing
with the SEC on May 22, 2006.
We believe that our existing cash and cash equivalents are adequate to fund operations,
capital expenditures and research and development efforts for the next twelve months. We also
believe that our management has taken and will continue to take appropriate actions to improve
operations and obtain the necessary funds to finance our operations, capital expenditures and
research and development efforts. However in the event that we need to secure additional funds for
operations, there is no guarantee that financing will be available or that it will be on terms that
we will accept. In the long-term, management believes that the results of its recent years
restructuring activities, cost control actions and revised product line focus will eventually
result in a return to positive cash flow from operations at which time it anticipates that
additional equity or debt financing would become available for financing working capital
requirements and capital expenditure plans. However, there is no guarantee that we will return to
positive cash flow from operations or that financing, if required, will be available or that it
will be on terms that we will accept.
25
Critical Accounting Estimates and Policies
Our condensed consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of such
statements requires us to make estimates and assumptions that affect the reported amounts of
revenues and expenses during the reporting period and the reported amounts of assets and
liabilities as of the date of the financial statements. Our estimates are based on historical
experience and other assumptions that we consider to be appropriate in the circumstances. However,
actual future results may vary from our estimates.
We believe that the following accounting policies are critical as defined by the SEC,
in that they are both highly important to the portrayal of our financial condition and results, and
require difficult management judgments and assumptions about matters that are inherently uncertain.
We also have other important policies, including those related to derivative instruments and
concentration of credit risk. However, these policies do not meet the definition of critical
accounting policies because they do not generally require us to make estimates or judgments that
are difficult or subjective. These policies are discussed in the Notes to the consolidated
financial statements, which are included in our annual report on Form 10-K for the year ended
December 31, 2005.
We believe the accounting policies described below are the ones that most frequently
require us to make estimates and judgments, and therefore are critical to the understanding of our
results of operations:
|
1. |
|
revenue recognition; |
|
|
2. |
|
valuation of receivables and inventories; |
|
|
3. |
|
restructuring and fixed asset impairment; and, |
|
|
4. |
|
income taxes. |
There have been no significant changes to these policies from the disclosures noted in
our annual report on Form 10-K for the year ended December 31, 2005.
Recent Accounting Pronouncements
Please refer to Note 2 of Notes to our condensed consolidated financial statements included in
Item 1 of Part I for a discussion of the expected impact of recently issued accounting standards.
Contractual Obligations and Commitments
Our contractual obligations and commitments at December 31, 2005 totaled $7.3 million. Our
contractual obligations and commitments at April 1, 2006 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than |
|
|
1 - 3 |
|
|
3 - 5 |
|
|
More Than |
|
|
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Long-term lease financing obligation (1) |
|
$ |
6,770 |
|
|
$ |
1,301 |
|
|
$ |
2,716 |
|
|
$ |
2,753 |
|
|
$ |
|
|
Restructuring liability (2) |
|
|
1,128 |
|
|
|
614 |
|
|
|
514 |
|
|
|
|
|
|
|
|
|
Operating leases (3) |
|
|
1,938 |
|
|
|
555 |
|
|
|
535 |
|
|
|
320 |
|
|
|
528 |
|
Purchase commitment PolarFab |
|
|
2,581 |
|
|
|
2,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase commitment Cadence Design |
|
|
1,653 |
|
|
|
856 |
|
|
|
797 |
|
|
|
|
|
|
|
|
|
Other (4) |
|
|
116 |
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,186 |
|
|
$ |
6,023 |
|
|
$ |
4,562 |
|
|
$ |
3,073 |
|
|
$ |
528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Lease payments (excluding $11.2 million estimated final obligation settlement with the
lessor by returning the Hillview facility at the end of the lease term) due on our Hillview
facility in Milpitas, California under a 5-year Standard Form Lease agreement signed with
Mission West Properties L.P. on March 9, 2006. |
|
(2) |
|
Represents estimated lease payments with related costs for the unused and subleased
portions of our Billerica, MA facility. |
|
(3) |
|
Includes lease payments related to the used portion of our Billerica, MA facility. |
|
(4) |
|
Includes licensing, R&D contract and testing services with various vendors. |
As of April 1, 2006, we have no off-balance sheet arrangements as defined in Item 303(a)(4) of
the SECs Regulation S-K.
26
Item 3. Quantitative and Qualitative Disclosures about Market Risk:
Market Risk
We invest excess cash in financial investments that are sensitive to market risks as part of
our investment strategy. None of these market-sensitive instruments are held for trading purposes.
We do not own derivative financial instruments in our portfolio. The investment portfolio contains
instruments that are subject to the risk of a decline in interest rates. As required by our
investment policy, available funds are invested in a manner that assures maximum safety and
liquidity and, secondarily, maximizes yield within such constraints.
Interest Rate Risk
Our financial investments consist primarily of commercial papers and money market funds. We
believe such investments have no material exposure to interest rate risk.
Our exposure to market risk for changes in interest rates relates primarily to the increase or
decrease in the amount of interest income we can earn on our investment portfolio and interest
expense we are charged on borrowings. We do not use derivative financial instruments or engage in
hedging activities in our investment portfolio. We ensure the safety and preservation of our
invested principal funds by limiting default risks, market risk and reinvestment risk. We mitigate
default risk by investing in safe and high-credit quality securities.
We had no investment in short-term securities at April 1, 2006.
In 2005, we entered into a Loan and Security Agreement with Silicon Valley Bank which provides
us with a line of credit up to $5,000,000 and charges interest at the prime rate. However, we do
not believe that a hypothetical increase in market interest rates by 10% from current levels would
result in a material increase in our overall expenses.
On March 9, 2006, we entered into an Agreement for Purchase and Sale of Real Property with
Mission West Properties L.P. The agreement provides for the sale of our Hillview facility to
Mission West Properties L.P. for a price of $13.4 million in cash. Simultaneously, we entered into
a Standard Form Lease agreement to lease back the Hillview facility from Mission West Properties
L.P. We provided a security deposit of $1,265,000 in the form of an irrevocable standby letter of
credit issued to Mission West Properties, L.P.; accordingly, we have accounted for this sale and
leaseback transaction as a financing transaction shown on the condensed consolidated balance sheet
as lease financing obligation. An effective interest rate of 9.3%, which approximates our
estimated borrowing rate, is used to record the interest expense over the lease term of 60 months
with average lease payments of approximately $1.4 million per year. Since the interest rate of
this transaction was fixed, a hypothetical 10% increase in interest rates will not have a material
effect on our financials.
On May 16, 2006 we placed $30.0 million of 5.5% Convertible Senior Notes due 2026. Although
the rate may be increased if we do not meet certain conditions, the 2006 Notes provide for a fixed
interest rate. A more detailed description of the terms of our 2006 Notes is provided in our annual
report on Form 10-K for the year ended December 31, 2005 and in our Form 8-K filed with the SEC on
May 22, 2006. Because the interest rates of the 2006 Notes were fixed, a hypothetical 10% increase
in interest rates will not have a material effect on our financials.
Since we were not current in our SEC filings by August 15, 2006, we will pay additional
interest on the 2006 Notes at an annual rate of 1.5% for the period beginning August 16, 2006
through the date that our filings become current. In addition, if our common stock is not listed
on the Nasdaq Global Market, the New York Stock Exchange or another national exchange or automated
quotation system by December 31, 2006, we will pay additional interest on the 2006 Notes at an
annual rate of 1.5% for the period beginning January 1, 2007 through the date that our common stock
becomes listed for trading on one of the national exchanges.
27
Foreign Currency Exchange Risk
The
majority of our sales, expenses, and capital purchasing activities are transacted in
U.S. dollars. However, since a portion of our operations consists of sales activities outside of
the U.S., we enter into transactions in other currencies. We are primarily exposed to changes in
exchange rates for the euro, Japanese yen, and British pound. Currently, we have no plan to enter
into any foreign currency hedging program since the amounts involved have not been material.
Foreign currency fluctuations did not have a material impact on our consolidated financial
position, results of operations or cash flows for the first quarter ended April 1, 2006 and April
2, 2005.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We evaluated the design and operating effectiveness of our disclosure controls and procedures
as of April 1, 2006, under the supervision and with the participation of our management, pursuant
to Rule 13a-15(b) of the Exchange Act. Based on this evaluation, our Chief Executive Officer (CEO)
and Chief Financial Officer (CFO) concluded that our disclosure controls and procedures as defined
in Rule 13a-15(e) were not effective in ensuring that information required to be included in our
periodic SEC filings is recorded, processed, summarized, and reported within the time periods
specified in the Commissions rules and forms and is accumulated and communicated to our
management, including our CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure, due to certain material weaknesses in our internal controls over financial reporting
described in Managements Report On Internal Control Over Financial Reporting in Item 9A of our
annual report on Form 10-K for the year ended January 1, 2005 that have not been remediated.
Notwithstanding managements assessment that our disclosure controls and procedures as of April 1,
2006 were ineffective due to the material weaknesses that existed as of January 1, 2005, as
described in our annual report on Form 10-K for the year then ended, we believe that the condensed
consolidated financial statements contained in this report present fairly our financial condition,
results of operations and cash flows for the periods covered thereby in all material respects in
accordance with generally accepted accounting principles.
The material weaknesses in our internal control over financial reporting as of January 1, 2005
identified by our management related to the design and operation of controls in the following
areas: (i) entity level controls, (ii) revenue accounting, and (iii) financial closing process
use of estimates.
Changes in Internal Control over Financial Reporting
Our management has committed considerable resources to the design, implementation, documentation and testing of our internal controls. Our management believes that these efforts
have or are reasonably likely to have, once implemented, a material effect on our internal control
over financial reporting.
During the first quarter of fiscal 2006, there were no material changes in our internal
controls over financial reporting.
During the second fiscal quarter of 2006, our management took the following steps to address
the material weaknesses that existed as of January 1, 2005:
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|
|
We conducted a formal review of the foreign locations in which we are doing business and
evaluated the appropriate and necessary legal and tax structure for these foreign locations
and then implemented such structure and the related internal controls to ensure compliance
with local laws and regulations. |
Our management is dedicated to improving our internal controls over financial reporting and
intends to continue monitoring and upgrading our internal controls as necessary or appropriate for
our business.
28
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The information included in Note 14 of Notes to condensed consolidated financial statements
under the caption Pending Litigations in Item 1 is incorporated herein by reference.
Item 1A. Risk Factors
There have been no material changes to the risk factors set forth under Item 1A. Risk
Factors included in our annual report on Form 10-K for the year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
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Exhibit Number |
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Title |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18
U.S.C section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18
U.S.C section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 |
29
SIGNATURES
Pursuant to the requirements 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.
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|
SIPEX CORPORATION |
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|
|
|
|
|
DATE:
September 20, 2006
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/s/ Clyde R. Wallin
Clyde R. Wallin
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|
|
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Chief Financial Officer and
Senior Vice President of Finance |
|
|
|
|
(Duly Authorized Officer &
Principal Financial Officer) |
|
|
30
EXHIBIT INDEX
|
|
|
Exhibit Number |
|
Title |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18
U.S.C section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18
U.S.C section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 |
31