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 March 31, 2007
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 1-33403
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
incorporation or organization)
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(IRS Employer
Identification No.) |
233 South Hillview Drive,
Milpitas, California 95035
(Address of principal executive offices, including zip code)
(408) 934-7500
(Registrants telephone number, including area code)
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 þ No o
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.
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, $0.01 par value, as of May
7, 2007 was 18,727,741.
SIPEX CORPORATION
FORM 10-Q
THREE MONTHS ENDED MARCH 31, 2007
INDEX
2
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
SIPEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
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March 31, 2007 |
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December 30, 2006 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
8,135 |
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$ |
13,041 |
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Restricted cash |
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350 |
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350 |
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Short-term investment securities |
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399 |
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2,388 |
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Accounts receivable, less allowances of $609 and $551, respectively |
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4,432 |
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6,222 |
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Accounts receivable, related party, less allowances of $428 and $306, respectively |
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2,865 |
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949 |
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Inventories |
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15,790 |
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15,586 |
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Prepaid expenses and other current assets |
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1,383 |
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1,641 |
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Total current assets |
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33,354 |
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40,177 |
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Property, plant, and equipment, net |
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19,686 |
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19,113 |
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Restricted cash noncurrent |
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57 |
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57 |
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Other assets |
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204 |
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202 |
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Total assets |
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$ |
53,301 |
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$ |
59,549 |
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LIABILITIES AND STOCKHOLDERS DEFICIT |
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Current liabilities: |
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Current portion of long-term bank borrowing |
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$ |
667 |
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$ |
667 |
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Current portion of lease financing obligation |
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205 |
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191 |
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Accounts payable |
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8,518 |
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10,331 |
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Accrued expenses |
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7,509 |
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7,185 |
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Accrued restructuring costs |
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1,346 |
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1,728 |
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Deferred income, related party |
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5,689 |
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5,543 |
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Deferred income, other |
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2,459 |
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2,555 |
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Total current liabilities |
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26,393 |
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28,200 |
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Long-term bank borrowing |
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1,167 |
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1,333 |
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Long-term lease financing obligation |
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12,096 |
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12,152 |
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Long-term accrued restructuring costs |
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139 |
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Convertible senior notes |
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26,025 |
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25,826 |
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Other long-term liabilities |
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23 |
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24 |
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Total liabilities |
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65,704 |
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67,674 |
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Commitment and contingencies (Note 15) |
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Stockholders deficit: |
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Preferred stock, $0.01 par value, 1,000 shares authorized;
no shares issued or outstanding |
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Common stock, $0.01 par value, 60,000 shares authorized;
18,687 and 18,390 shares issued and outstanding at March 31, 2007
and December 30, 2006, respectively |
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187 |
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184 |
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Additional paid-in capital |
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236,806 |
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234,785 |
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Accumulated deficit |
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(249,377 |
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(243,075 |
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Accumulated other comprehensive loss |
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(19 |
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(19 |
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Total stockholders deficit |
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(12,403 |
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(8,125 |
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Total liabilities and stockholders deficit |
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$ |
53,301 |
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$ |
59,549 |
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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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March 31, 2007 |
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April 1, 2006 |
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Net sales |
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$ |
8,758 |
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$ |
9,303 |
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Net sales, related party |
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8,101 |
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8,551 |
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Total net sales |
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16,859 |
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17,854 |
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Cost of sales |
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7,073 |
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10,178 |
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Cost of sales, related party |
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5,347 |
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7,871 |
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Total cost of sales |
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12,420 |
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18,049 |
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Gross profit (loss) |
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4,439 |
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(195 |
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Operating expenses: |
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Research and development |
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3,686 |
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5,496 |
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Marketing and selling |
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3,293 |
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3,656 |
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General and administrative |
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2,968 |
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4,021 |
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Restructuring and other |
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63 |
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307 |
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Total operating expenses |
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10,010 |
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13,480 |
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Loss from operations |
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(5,571 |
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(13,675 |
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Other income (expense): |
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Interest income |
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131 |
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49 |
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Interest expense |
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(834 |
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(183 |
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Other, net |
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1 |
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42 |
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Total other expense, net |
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(702 |
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(92 |
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Loss before income tax expense |
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(6,273 |
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(13,767 |
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Income tax expense |
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17 |
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32 |
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Net loss |
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$ |
(6,290 |
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$ |
(13,799 |
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Net loss per common share basic and diluted |
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$ |
(0.34 |
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$ |
(0.78 |
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Weighted average common shares outstanding basic and diluted |
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18,547 |
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17,775 |
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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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March 31, 2007 |
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April 1, 2006 |
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Operating activities: |
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Net loss |
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$ |
(6,290 |
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$ |
(13,799 |
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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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904 |
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933 |
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Depreciation and amortization |
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518 |
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7,499 |
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Provision for inventories |
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4 |
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123 |
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Reversal of provision for purchase commitments on excess inventories |
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(44 |
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Provision for restructuring charges |
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3 |
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307 |
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Loss on disposal of fixed assets |
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9 |
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Amortization of discount and issuance costs on convertible notes |
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199 |
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Provision for uncollectible receivables and sales returns and allowances |
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282 |
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153 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(408 |
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(1,529 |
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Inventories |
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(156 |
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21 |
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Prepaid expenses and other current assets |
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350 |
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(304 |
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Other assets |
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(2 |
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(7 |
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Accounts payable |
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(2,015 |
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2,492 |
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Accrued expenses |
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356 |
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(934 |
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Accrued restructuring costs |
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(522 |
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(100 |
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Deferred income |
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50 |
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437 |
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Other long-term liabilities |
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(1 |
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(2 |
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Net cash used in operating activities |
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(6,772 |
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(4,701 |
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Investing activities: |
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Proceeds from maturity of short-term investment securities |
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2,383 |
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Purchase of short-term investment securities |
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(394 |
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Purchase of property, plant, and equipment |
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(891 |
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(122 |
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Net cash provided by (used in) investing activities |
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1,098 |
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(122 |
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Financing activities: |
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Proceeds from issuance of common stock under employee stock option plans |
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976 |
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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 bank borrowing |
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(3,000 |
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Repayment of long-term bank borrowing |
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(166 |
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Net proceeds from lease financing obligation |
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12,578 |
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Repayment of lease financing obligation |
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(42 |
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(113 |
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Net cash provided by financing activities |
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768 |
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9,465 |
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Increase (decrease) in cash and cash equivalents |
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(4,906 |
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4,642 |
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Cash and cash equivalents at beginning of period |
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13,041 |
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1,969 |
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Cash and cash equivalents at end of period |
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$ |
8,135 |
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$ |
6,611 |
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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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$ |
1 |
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$ |
2 |
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Interest |
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$ |
144 |
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$ |
173 |
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Supplemental disclosure of non-cash investing and financing activities: |
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Purchase of property, plant and equipment not paid at end of period |
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$ |
371 |
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$ |
152 |
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Receivable from exercise of stock options |
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$ |
92 |
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$ |
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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 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 the Companys ICs are
cellular phones, base stations, computers, DVD players, and digital cameras. The Companys products are sold
either directly or through an international network of manufacturers representatives and
distributors. The Company is a global company with operations in Asia, Europe and North America.
In an effort to achieve significant cost savings, in the third quarter of 2005, the Company
decided to close down the Milpitas wafer fabrication facility and transfer its 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. (Episil), in Taiwan. Definitive agreements regarding this transfer were
entered into in February 2006, and the closure of the Milpitas fabrication facility was
completed in early October 2006. In December 2006, the Company announced a workforce reduction plan
that was implemented in response to its transitioning to a fabless semiconductor company,
de-emphasizing optical products, reducing dependency on commodity products and with the goal of
improving its cost structure.
On May 7, 2007, Sipex entered into a definitive merger agreement with Exar Corporation to
combine the two companies. Under the terms of the agreement, which was approved by the Boards of
Directors of both companies, Sipex stockholders will receive 0.6679 of a share of Exar for each
share of Sipex. Exar stockholders will own approximately 67.6% and Sipex stockholders will own
approximately 32.4% of Exar after completion of the transaction, which assumes conversion to common
stock of Sipexs outstanding convertible senior notes and related warrants.
Fiscal Year
The Companys fiscal year is the 52 or 53 weeks ending on the last Saturday in December.
Fiscal 2007 and fiscal 2006 are 52-week fiscal years. The first quarter of fiscal year 2007 and
2006 included 91 days from December 31, 2006 to March 31, 2007 and January 1, 2006 to April 1,
2006, respectively.
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 condensed financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant inter-company accounts and transactions have been
eliminated in consolidation.
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 30, 2006. The results of operations for the three
months ended March 31, 2007 are not necessarily indicative of the operating results to be expected
for the full fiscal year or future operating periods.
6
Reverse Stock Split
On January 30, 2007, Sipexs stockholders at a special meeting of stockholders approved a
1-for-2 reverse stock split. The reverse split became effective at 1:31 p.m. Pacific Standard Time
on February 23, 2007. The par value of the common stock was not affected by the reverse stock split
and remains at $0.01 per share. Consequently, the aggregate par value of the issued common stock
was reduced by reclassifying the par value amount of the eliminated shares of common stock to
additional paid-in capital in the Companys condensed balance sheets. The Company has paid cash in
lieu of any fractional shares to which a holder of common stock would otherwise be entitled as a
result of the reverse stock split. The number of authorized shares of common stock remains
unchanged. All shares and per share amounts, including all common stock equivalents (stock options,
warrants and convertible notes) have been adjusted in the condensed consolidated financial
statements and in the notes to condensed consolidated financial statements for all periods
presented to reflect the reverse stock split.
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.
Prior to January 1, 2004, 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 is permitted on a quarterly basis to return for credit up to 5% of its
total purchases during the most recent three-month period.
Additionally, the Company is providing Future a quarterly scrap allowance credit against
accounts receivable for up to 2% of the most recent three-month purchases when they provide the
evidence of destruction of inventory of Sipexs products up to this quarterly amount. 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 samples 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.
7
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 September 2005, the Company tested its Milpitas corporate headquarters facility for
impairment given an appraisal indicated that the carrying amount might not be recoverable. The
headquarters facility housed the wafer fabrication operations as well as the sales and marketing
department, the research and development department and the corporate administration functions. The
Milpitas corporate headquarters facility does not have identifiable cash flows that are largely
independent of the cash flows of other assets and liabilities of the Company. Accordingly, the
Milpitas corporate headquarters facility, which includes all assets located at the Milpitas
facility except for the wafer fabrication asset grouping, is included in the asset grouping which
includes all assets and liabilities of the Company. No impairment loss was recognized given the
carrying value of all assets and liabilities of the Company was less than the fair value,
determined based on the quoted market value of the Company.
In November 2005, the Board of Directors approved the sale of the Companys Milpitas corporate
headquarters facility. As a result of this decision, the Company reduced the remaining estimated
depreciable life for its headquarters building and related improvements from 25 years to
approximately four months (See Note 12 regarding the sale and leaseback arrangement for Sipexs
headquarters facility), or through March 2006, the date the Company expected the sale leaseback of
the Milpitas corporate headquarters facility would qualify as a sale. 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. For the first quarter of 2007, no such additional
depreciation was recorded.
In March 2006, the Company revised the remaining depreciable life of the Milpitas corporate
headquarters facility when it was determined that the sale leaseback did not qualify as a sale
transaction and was required to be accounted for as a financing transaction.
Note 2. Recent Accounting Pronouncements
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 adoption of
SFAS No. 155 did not have a material impact on the Companys financial statements.
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. Sipex adopted FIN 48 in the first quarter of 2007, which resulted in no material
impact on the Companys financial statements (See Note 7).
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
8
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.
In December 2006, the FASB staff issued FSP EITF Issue No. 00-19-2, Accounting for
Registration Payment Arrangements which specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a registration payment arrangement, whether
issued as a separate agreement or included as a provision of a financial instrument or other
agreement, should be separately recognized and measured in accordance with FASB Statement No. 5,
Accounting for Contingencies. This FSP shall be effective immediately for registration payment
arrangements and the financial instruments subject to those arrangements that are entered into or
modified subsequent to the date of issuance of this FSP. For registration payment arrangements and
financial instruments subject to those arrangements that were entered into prior to the issuance of
this FSP, this guidance shall be effective for financial statements issued for fiscal years
beginning after December 15, 2006, and interim periods within those fiscal years. The Company
adopted this FSP in its first quarter of 2007. The adoption did not have a material impact on the
Companys financial statements (See Note 4).
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an amendment of FASB Statement No. 115. SFAS No. 159
permits companies to measure many financial instruments and certain other items at fair value at
specified election dates. Unrealized gains and losses on these items will be reported in earnings
at each subsequent reporting date. The fair value option may be applied instrument by instrument
(with a few exceptions), is irrevocable and is applied only to entire instruments and not to
portions of instruments. SFAS No. 159 is effective for fiscal years beginning after November 15,
2007. 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
Stock Based Compensation Plans
The Company currently maintains five option plans. They are the 1997 Stock Option Plan, 1999
Stock Option Plan, 2000 Non-Qualified Stock Option Plan, 2002 Non-statutory Stock Option Plan and
2006 Equity Incentive Plan under which 0.6 million, 0.6 million, 0.3 million, 1.0 million and 0.8
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 2000 Non-qualified Stock Option Plan to 335,995. Approximately 3,742,000 stock
options were outstanding as of March 31, 2007 for all plans. As of March 31, 2007, approximately
645,000 stock options were available for grant under all plans.
The Company also has an Employee Stock Purchase Plan (ESPP) under which eligible employees
may purchase shares of the Companys common stock through periodic payroll deductions of up to 10%
of total compensation at the lesser of (i) 85% of the average market price of the common stock on
the first business day of the six-month payment period and (ii) 85% of the average market price of
the common stock on the last business day of the six-month payment period. The Companys ESPP is
considered compensatory under the provisions of SFAS 123R.
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 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 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
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.
Valuation Assumptions
Valuation Method The Company estimates the fair value of stock options granted by using the
Black Scholes valuation model.
Expected Term The Company has elected to use the Simplified Method outlined in SAB 107 to
determine the expected term of its stock option grants.
Volatility 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.
Risk Free Interest Rate 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.
Dividend Yield The Company does not currently intend to pay cash dividends. Therefore, the
Company has assumed a dividend yield of zero.
The fair value of the Companys stock-based awards to employees was estimated using the
following weighted-average assumptions for the grants made in the three months ended March 31, 2007
and April 1, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Plans |
|
ESPP |
|
|
March 31, 2007 |
|
April 1, 2006 |
|
March 31, 2007 |
|
April 1, 2006 |
Expected life of options |
|
6 years |
|
|
6 years |
|
|
6 months |
|
|
|
N/A |
|
Volatility |
|
|
85 |
% |
|
|
92 |
% |
|
|
46 |
% |
|
|
N/A |
|
Risk-free interest rate |
|
|
4.7 |
% |
|
|
4.5 |
% |
|
|
5.1 |
% |
|
|
N/A |
|
Dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A |
|
Weighted average fair value options granted |
|
$ |
6.88 |
|
|
$ |
3.40 |
|
|
$ |
2.76 |
|
|
|
N/A |
|
Stock-Based Compensation Expense
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 March
31, 2007 and April 1, 2006, pursuant to SFAS No. 123R (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
Cost of sales |
|
$ |
111 |
|
|
$ |
127 |
|
Research and development |
|
|
231 |
|
|
|
338 |
|
Marketing and selling |
|
|
258 |
|
|
|
190 |
|
General and administrative |
|
|
304 |
|
|
|
278 |
|
|
|
|
|
|
|
|
Stock-based compensation expense before income tax effect |
|
|
904 |
|
|
|
933 |
|
Less income tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense after income tax effect |
|
$ |
904 |
|
|
$ |
933 |
|
|
|
|
|
|
|
|
At March 31, 2007, there was approximately $219,000 of total compensation cost capitalized in
inventory.
10
At March 31, 2007, there was a total of $6.5 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.
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 March 31, 2007 and April 1, 2006 included
approximately $904,000 and $891,000, respectively, of employee stock-based compensation expense.
Stock Options Activities
The following is a summary of option activity for the Companys stock option plans for the
three months ended March 31, 2007 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Number |
|
|
Weighted |
|
|
Average |
|
|
Aggregate |
|
|
|
of |
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Options |
|
|
Exercise |
|
|
Contractual |
|
|
Value |
|
|
|
(in thousands) |
|
|
Price |
|
|
Term (in years) |
|
|
(in thousands) |
|
Outstanding at December 30, 2006 |
|
|
3,761 |
|
|
$ |
5.88 |
|
|
|
7.81 |
|
|
$ |
17,518 |
|
Granted |
|
|
381 |
|
|
$ |
9.24 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(297 |
) |
|
$ |
3.60 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(103 |
) |
|
$ |
6.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
3,742 |
|
|
$ |
6.39 |
|
|
|
7.86 |
|
|
$ |
12,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
March 31, 2007 |
|
|
3,508 |
|
|
$ |
6.41 |
|
|
|
7.80 |
|
|
$ |
12,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2007 |
|
|
1,752 |
|
|
$ |
6.77 |
|
|
|
6.81 |
|
|
$ |
6,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is calculated as the difference between the exercise price
of the underlying options and the quoted price of the Companys common stock that were in-the-money at March
31, 2007 and April 1, 2006. During the three months ended March 31, 2007, the aggregate intrinsic
value of options exercised under the Companys stock option plans was $1.7 million. For the three
months ended April 1, 2006, there was no aggregate intrinsic value as no stock options were
exercised during that period.
There were no purchases of common stock made under the Companys Employee Stock Purchase Plan
in the first quarter of 2007 and 2006. As of March 31, 2007, approximately 122,000 shares were
available for issuance under the Plan.
Note
4. Stockholders Deficit
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 March 31, 2007 and April 1, 2006, the
weighted average number of common shares outstanding equals the weighted average number of common
and common equivalent shares assuming dilution.
11
A reconciliation of basic weighted average common shares with diluted weighted average shares
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
Weighted average common shares outstanding basic |
|
|
18,547 |
|
|
|
17,775 |
|
Net effect of dilutive potential common shares outstanding based
on the treasury stock method using the average market price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted |
|
|
18,547 |
|
|
|
17,775 |
|
|
|
|
|
|
|
|
Antidilutive potential common shares excluded from the weighted average common shares
outstanding for net loss per share calculation are as follows (in thousands, except per-share
information):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
April 1, 2006 |
Option shares outstanding |
|
|
3,742 |
|
|
3,490 |
Weighted average exercise price of option shares outstanding |
|
$ |
6.39 |
|
$ |
5.60 |
Convertible notes of $30.0 million issued on May 18, 2006
(conversion price at $5.36) |
|
|
5,597 |
|
|
|
Warrants issued on May 18, 2006 with the above convertible
notes (exercise price at $6.432) |
|
|
420 |
|
|
|
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 the net loss for the three
months ended March 31, 2007 and April 1, 2006 as there were no foreign currency translation
adjustments and no tax effect on the components of other comprehensive loss for such periods.
Stockholders Deficit
In the first quarter of 2007, the Company adopted FSP EITF Issue No. 00-19-2, Accounting for
Registration Payment Arrangements, which specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a registration payment arrangement, whether
issued as a separate agreement or included as a provision of a financial instrument or other
agreement, should be separately recognized and measured in accordance with FASB Statement No. 5,
Accounting for Contingencies. As a result of the adoption, the Companys beginning balance for
accumulated deficit and the derivative liability were increased by $12,000. A reconciliation of the
activity in the stockholders deficit accounts for the quarter ended March 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
Number of |
|
|
|
|
|
|
Additional Paid- |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
Shares |
|
|
$0.01 Par Value |
|
|
in Capital |
|
|
Deficit |
|
|
Loss |
|
|
Equity (Deficit) |
|
Balances at December 30, 2006 |
|
|
18,390 |
|
|
$ |
184 |
|
|
$ |
234,785 |
|
|
$ |
(243,075 |
) |
|
$ |
(19 |
) |
|
$ |
(8,125 |
) |
|
Cumulative
effect of adoption of FSP EITF Issue No. 00-19-2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
|
|
|
|
|
|
(12 |
) |
Net loss and comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,290 |
) |
|
|
|
|
|
|
(6,290 |
) |
Issuance of common stock under employee stock option plans |
|
|
297 |
|
|
|
3 |
|
|
|
1,065 |
|
|
|
|
|
|
|
|
|
|
|
1,068 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
956 |
|
|
|
|
|
|
|
|
|
|
|
956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31, 2007 |
|
|
18,687 |
|
|
$ |
187 |
|
|
$ |
236,806 |
|
|
$ |
(249,377 |
) |
|
$ |
(19 |
) |
|
$ |
(12,403 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5. Related Party Transactions
Future is a related party and its affiliates own approximately 8.6 million shares or 46% of
Sipexs outstanding common stock as of March 31, 2007. 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 48% of its total net sales for the three months
ended March 31, 2007 and April 1, 2006.
12
From time to time, Future provides services and/or incurs expenses on behalf of the Company.
The fair value of the unreimbursed expenses and uncompensated services rendered by Future has been
recorded in the Companys condensed consolidated financial statements as capital contributions. For
the three months ended March 31, 2007 and April 1, 2006, there were no such un-reimbursed expenses
or uncompensated services rendered by Future.
In addition, Sipex incurred expense to Future totaling approximately $2,000 for marketing
promotional materials, temporary accounting services and used furniture sold to the Company for the
three months ended March 31, 2007. No such expenses were recorded for the three months ended April
1, 2006.
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. 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 13, on May 16, 2006, Sipex placed $30.0 million of its 5.5% Redeemable
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 December 21, 2006,
Rodfre paid $2.7 million to exercise its warrant for 419,776 shares of Sipex common stock at $6.432
per share. As of March 31, 2007, the affiliates of Future held 8.6 million shares, or 46% of the
Companys outstanding common stock.
Interest expense incurred by Sipex relating to the $15.0 million portion of 2006 Notes sold to
Rodfre totaled $380,000 for the three months ended March 31, 2007.
On September 8, 2006, Sipex appointed two executive vice presidents of 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.
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.
On March 29, 2007, the Company entered into a Securities Purchase Agreement with Rodfre to
provide an unsecured promissory note facility of up to $10.0 million. This facility expires, and
the borrowings and accrued interest under any notes issued under this facility are due and payable,
on June 30, 2008, or upon certain other events such as a change of control. Borrowings under this
promissory note facility bear interest of 9% per annum subject to an increased interest rate of up
to 20% in case of default or after maturity. This promissory note facility is subordinate to the
Companys Loan and Security Agreement with Silicon Valley Bank and to its 5.5% Redeemable
Convertible Senior Notes due 2026. No borrowing was made under the promissory note facility in the
first quarter of 2007.
13
Note 6. Restructuring and Other
Below is a summary of the activities related to restructuring (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
Employee |
|
|
Restructuring |
|
|
|
Facility Costs |
|
|
Costs |
|
|
Costs |
|
Accrual balance, December 30, 2006 |
|
$ |
993 |
|
|
$ |
874 |
|
|
$ |
1,867 |
|
Incurred in 2007 |
|
|
|
|
|
|
8 |
|
|
|
8 |
|
Charges utilized |
|
|
(209 |
) |
|
|
(384 |
) |
|
|
(593 |
) |
Sub-lease income received |
|
|
69 |
|
|
|
|
|
|
|
69 |
|
Adjustments to accrual |
|
|
18 |
|
|
|
(23 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
Accrual balance, March 31, 2007 |
|
$ |
871 |
|
|
$ |
475 |
|
|
$ |
1,346 |
|
|
|
|
|
|
|
|
|
|
|
In the addition to the restructuring costs incurred above, in the first quarter of 2007, the
Company incurred $60,000 of facility costs related to the unused fabrication portion of the
Companys headquarters facility in Milpitas, California, due to the transfer of wafer fabrication
to Silan.
During the three months ended March 31, 2007, for the unused portion of the Billerica facility
initiated in October 2003, the Company utilized the restructuring accrual totaling $188,000 which
primarily consisted of lease costs. Adjustments to the accrual for the Billerica facility primarily
related to sub-lease income of $69,000 recorded on a cash basis due to the uncertainty of
collectibility.
During the three months ended March 31, 2007, for a workforce reduction plan initiated in the
fourth quarter of 2006, the Company utilized $384,000. For facility costs related to the Milpitas
wafer fabrication closure, restructuring charges utilized for the three months ended March 31,
2007, totaling $21,000, was for facility decontamination.
As of March 31, 2007, the balance of the restructuring accrual primarily consisted of employee
severance costs, contract termination costs and facility lease costs. These costs are expected to
be paid over the next 12 months. The balance of the accrual as of March 31, 2007 totaled $1.3
million, all of which was the short-term portion.
Note 7. Income Tax
The
Company adopted the provisions of Financial Standards Accounting Board Interpretation No.
48, Accounting for Uncertainty in Income Taxes, (FIN 48) an interpretation of FASB
Statement No.
109 (SFAS 109) on December 31, 2006. As a result of the implementation of FIN 48, the Company
recognized no material adjustment in the liability for unrecognized income tax benefits. At the
adoption date of December 31, 2006, the Company had approximately
$2.4 million of unrecognized tax
benefits, all of which would affect its effective tax rate if
recognized before consideration of changes in valuation allowance. At March 31, 2007, the
Company had $2.5 million of unrecognized tax benefits. In addition, the Company recognizes
interest and penalties related to uncertain tax positions in income tax expense. At the adoption
date of December 31, 2006, the Company had approximately $53,000 of accrued interest and penalties for
uncertain tax positions primarily from its foreign operations. For the three months ended March 31,
2007, the Company accrued $4,000 of interest and penalties related to its uncertain tax positions.
At
December 30, 2006, the Company had approximately $207.4 million, $73.6 million, and $131.7
million of federal, California, and Massachusetts net operating loss carryforwards, respectively.
The Company believes it has had multiple ownership changes, as defined by Section 382 of the
Internal Revenue Code (IRC), due to significant stock transactions in previous years that will
limit the future realization of its net operating loss carryforwards. Based on estimates prepared
to date, the Company believes Section 382 could result in the forfeiture of approximately $75.4
million of net operating loss carryforwards for federal income tax purposes and $31.5 million of
net operating loss carryforwards for Massachusetts income tax purposes. Management believes there
could also be an impact on the Companys ability to utilize California net operating loss
carryforwards as a result of Section 382. As the
Companys analysis is incomplete, these estimates are uncertain. The net operating loss
carryforwards begin to expire in 2007 for federal and Massachusetts purposes and 2012 for
California purposes.
As of
December 30, 2006, the Company had research and development tax credit carryforwards of
approximately $3.1 million, $3.5 million, and $0.1 million which can be used to reduce future
federal, California, and Massachusetts income taxes, respectively. Federal research and development
tax credit carryforwards will expire beginning in fiscal 2010 through 2026. California and
Massachusetts research and development tax credits will carry forward indefinitely. In addition,
based on estimates prepared to date, the Company believes that $2.0 million of the federal research
tax credit carryforwards could be subject to forfeiture due to Section 382 ownership changes under
IRC Section 383.
14
As
of December 30, 2006, the Company had unused California manufacturers investment credits
of approximately $2.1 million, which will expire beginning in fiscal 2007 through 2013. Management
believes there could also be an impact on the Companys ability to utilize the California
manufacturers investment credits as a result of Section 382.
The
Company has recorded a 100% valuation allowance against its net
deferred tax assets, due to the uncertainty regarding the magnitude
of the Section 382 and 383 limitations as well as uncertainty
concerning future taxable income.
Sipexs income
tax expense primarily relates to its foreign operations as the
Company continues to incur
losses from domestic operations. The Company recorded income tax expense of $17,000 and $32,000
for the three months ended March 31, 2007 and April 1, 2006, respectively.
Note 8. Inventories
Inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
December 30, 2006 |
|
Raw materials |
|
$ |
466 |
|
|
$ |
768 |
|
Work-in-process |
|
|
11,348 |
|
|
|
10,518 |
|
Finished goods |
|
|
3,976 |
|
|
|
4,300 |
|
|
|
|
|
|
|
|
Total |
|
$ |
15,790 |
|
|
$ |
15,586 |
|
|
|
|
|
|
|
|
Note 9. Accrued Expenses
Accrued expenses are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
December 30, 2006 |
|
Accrued compensation and benefits |
|
$ |
3,427 |
|
|
$ |
2,815 |
|
Accrued provision for purchase commitment on excess inventories |
|
|
1,007 |
|
|
|
1,417 |
|
Accrued interest and related derivative liability |
|
|
889 |
|
|
|
679 |
|
Accrued audit fees |
|
|
563 |
|
|
|
574 |
|
Accrued commissions |
|
|
350 |
|
|
|
444 |
|
Accrued income taxes |
|
|
343 |
|
|
|
340 |
|
Accrued warranty |
|
|
342 |
|
|
|
259 |
|
Accrued legal fees |
|
|
160 |
|
|
|
251 |
|
Accrued royalties |
|
|
45 |
|
|
|
19 |
|
Other |
|
|
383 |
|
|
|
387 |
|
|
|
|
|
|
|
|
|
|
$ |
7,509 |
|
|
$ |
7,185 |
|
|
|
|
|
|
|
|
Note 10. Borrowing Arrangements
On July 21, 2005, Sipex entered into a Loan and Security Agreement (the Agreement), as
amended, with Silicon Valley Bank, which has an expiration date of September 29, 2007. The
Agreement 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 $2,000,000. 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 bear an interest rate, chosen by the Company, either at the banks prime rate or LIBOR rate
(depending upon the interest period of one, two or three months selected by Sipex) plus 2.75%.
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
15
$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 quarter ended not less than 2.50:1.00 which is calculated as the sum of (i) unrestricted cash
and cash equivalents, short-term marketable securities and 50% of consolidated accounts divided by
(ii) the outstanding borrowings from the bank. In addition, Sipex is required to maintain a minimum
amount of tangible net worth (as defined in the Agreement) as of the last day of each quarter.
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 the Companys ability to dispose of assets, change its 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 its obligations under the agreement. As of March 31, 2007, the unused
portion of the line of credit was $3,735,000.
As part of the Agreement, in addition to the $5,000,000 secured revolving line of credit,
Sipex can borrow under the term loans from September 28, 2006 to December 31, 2006 in an aggregate
amount not to exceed $2,000,000. Interest accrues from the date of each term loan at a fixed rate
of 9.25%. Each term loan shall be payable in thirty-six (36) equal monthly installments of
principal plus accrued interest. When repaid or prepaid, the term loan may not be re-borrowed. As
of March 31, 2007, $1,834,000 was outstanding under the term loan, of which $667,000 was the
short-term portion and $1,167,000 was the long-term portion. If Sipex is unable to satisfy the
financial covenant requirements and is unable to obtain a waiver from the bank, the Company may be
required to repay the outstanding borrowing amounts and/or classify such amounts as short-term bank
borrowing. For the three months ended March 31, 2007, the interest expense incurred for the loan
was approximately $44,000.
On March 29, 2007, the Company entered into a Securities Purchase Agreement with Rodfre,
an affiliate of Future. This agreement creates a promissory note facility that provides that from
time to time the Company may issue to Rodfre up to $10.0 million of 9% Unsecured Junior Notes
in exchange for cash equal to the principal amounts of each note. The notes have customary events
of default, including defaults upon failure to pay interest or principal amounts when due, breach
of covenants (with a 15-day grace period), breach of representations and warranties, default on
other indebtedness in excess of $1.0 million, or upon insolvency events. The holders of the notes
will also have the option of demanding repayment of any outstanding amounts owed pursuant to the
notes within 30 days of a change of control of Sipex. As of March 31, 2007, there was no borrowing
against the promissory note facility.
Note 11. Accrued Warranty
The Companys 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.
Changes in Sipexs warranty liability for the three months ended March 31, 2007 and April 1,
2006 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
Beginning accrued warranty |
|
$ |
259 |
|
|
$ |
87 |
|
Warranty claims |
|
|
(16 |
) |
|
|
(2 |
) |
Accruals for the period |
|
|
99 |
|
|
|
(35 |
) |
|
|
|
|
|
|
|
Ending accrued warranty |
|
$ |
342 |
|
|
$ |
50 |
|
|
|
|
|
|
|
|
16
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 $0.8 million. The Hillview facility primarily consists of
two connected buildings with approximately 95,700 total square feet (which includes 20,000 square
feet of Class 10 clean room), 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 the Companys $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 at that time. 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 March 31, 2007 are as
follows (in thousands):
|
|
|
|
|
Fiscal year ending December |
|
|
|
|
|
|
|
|
|
2007 (remaining 9 months) |
|
$ |
1,002 |
|
2008 |
|
|
1,368 |
|
2009 |
|
|
1,408 |
|
2010 |
|
|
1,449 |
|
2011 |
|
|
11,453 |
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
|
16,680 |
|
Less: amount representing interest |
|
|
4,379 |
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments |
|
|
12,301 |
|
Less: current portion of lease financing obligation |
|
|
205 |
|
|
|
|
|
Long-term lease financing obligation |
|
$ |
12,096 |
|
|
|
|
|
For the three months ended March 31, 2007, interest expense totaled $286,000 for the lease
financing obligation.
Note 13. Convertible Senior Notes
Terms and Conditions
On May 18, 2006, Sipex issued $30.0 million of 5.5% Redeemable 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 was purchased by other accredited investors. The Company intends to use
the net proceeds of approximately $29.0 million 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
17
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 Capital Market Exchange, 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 $5.36 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 5,597,015 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
$8.04 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.
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 Capital Market Exchange, 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 contain 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 addition, an event of default would
occur under the 2006 Notes for a number of reasons, including the Companys failure to pay when due
any principal, interest or late charges on the 2006 Notes, the default and acceleration of
indebtedness with the Companys bank and other lenders in amounts greater than $2.5 million,
certain events of bankruptcy and its breach or failure to perform certain representations and
obligations under the 2006 Notes. Upon the occurrence of an event of default, the Companys
obligations under the 2006 Notes may become due and payable in accordance with the terms thereof.
Further, the holders of the 2006 Notes have imposed dividend restriction on Sipex.
In conjunction with the issuance of the 2006 Notes, the Company issued warrants to
purchase an aggregate of 839,552 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 $6.432
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. On December 21, 2006, Rodfre paid
$2.7 million to exercise its warrant for 419,776 of Sipex common stock at $6.432 per share. As of
March 31, 2007, the affiliates of Future held 8.6 million shares, or 46% of the Companys
outstanding capital stock.
18
At any time after May 18, 2009, Sipex may terminate the remaining 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. Such 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 unexercised 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 incurred additional
interest on the 2006 Notes at an annual rate of 1.5% for the period beginning August 16, 2006 and
ending on September 21, 2006, the date that the Companys filings became current. In addition,
Sipexs common stock was not listed on the Nasdaq Capital Market Exchange, 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. The Companys common stock was traded on Nasdaq Capital Market Exchange on
April 11, 2007.
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, up to an annual rate of 1.2%, as
calculated in the Registration Rights Agreement, solely with respect to the 2006 Notes.
The aforementioned additional interest and registration delay payments are collectively
referred as the penalties (the penalties). The Company incurred such penalties and recorded
additional interest expense of $183,000 for the three months ended March 31, 2007.
Valuation of the 2006 Notes, Beneficial Conversion Feature, Warrants and
Penalties
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.
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 No. 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios and EITF Issue No. 00-27, Application of Issue No. 98-5 to Certain Convertible
Instruments in accounting for the 2006 Notes, the accompanying warrants and the value of the
beneficial conversion feature. Pursuant to EITF Issue No. 05-04 The Effect of a Liquidated Damages
Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock,,
the Company combined the obligation to make registration delay payments and other interest penalty
payments related to listing of the Companys stock with the convertible senior notes for accounting
purposes. Furthermore, these penalty obligations have been bifurcated from the combined instruments
and accounted for as a derivative. The $134,000 derivative liability for the penalties recorded
represents the estimated fair value of such obligation as of the date of issuance of the 2006 Notes
relating to the 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 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, is being amortized as
part of interest expense over a five-year period. The Company reduced additional paid-in-capital by
$71,000 related to warrant issuance costs.
19
For the three months ended March 31, 2007, Sipex recorded a net interest expense
reduction of approximately $115,000, which included $183,000 penalties, primarily due to early than
expected listing of Sipexs common stock on the Nasdaq Capital Market Exchange resulting in a
downward revaluation of the estimated future payments of the derivative liability. The estimated
total future payment of the derivative liability as of March 31, 2007 was $182,000, in accordance
with the FSP EITF Issue No. 00-19-2, Accounting for Registration Payment Arrangements.
For the three months ended March 31, 2007, the Company recorded interest expense of $612,000
under the effective interest method which included $413,000 for interest at 5.5% and $199,000 for
amortization of discounts and debt issuance costs.
Note 14. 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 family basis by the CEO is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
Interface |
|
$ |
9,901 |
|
|
$ |
10,651 |
|
Power Management |
|
|
5,386 |
|
|
|
4,586 |
|
Optical Storage |
|
|
1,551 |
|
|
|
2,611 |
|
Other* |
|
|
21 |
|
|
|
6 |
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
16,859 |
|
|
$ |
17,854 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes Legacy and other discontinued products |
Although Sipex has operations in Malaysia, China, Taiwan, Japan, South Korea, Germany, Canada
and Belgium, substantially all the Companys operations and 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 |
|
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
United States |
|
$ |
3,467 |
|
|
$ |
3,841 |
|
Japan |
|
|
1,871 |
|
|
|
2,881 |
|
China |
|
|
2,651 |
|
|
|
2,867 |
|
Singapore |
|
|
2,827 |
|
|
|
2,609 |
|
United Kingdom |
|
|
2,856 |
|
|
|
3,264 |
|
South Korea |
|
|
1,438 |
|
|
|
222 |
|
Taiwan |
|
|
917 |
|
|
|
1,111 |
|
Rest of the world |
|
|
832 |
|
|
|
1,059 |
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
16,859 |
|
|
$ |
17,854 |
|
|
|
|
|
|
|
|
20
Major customers who accounted for 10% or more as a percentage of total gross accounts
receivable are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
December 30, 2006 |
Future Electronics Inc., a related party |
|
|
40 |
% |
|
|
15 |
% |
Jetronic Technology |
|
|
* |
|
|
|
11 |
% |
Major customers who accounted for 10% or more as a percentage of total net sales are as
follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
April 1, 2006 |
Future Electronics Inc., a related party |
|
|
48 |
% |
|
|
48 |
% |
Komatsu |
|
|
* |
|
|
|
12 |
% |
Note 15. 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 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 March
31, 2007, the minimum purchase commitment with PolarFab was approximately $2.0 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 March 31, 2007, the
deposit amount was at $350,000, which is included in the accompanying condensed balance sheet as
restricted cash.
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 was 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 March 31, 2007, Silan had not conformed to the Companys specifications
relating to the process qualification wafers and product qualification wafers.
21
In May 2006, Sipex entered into a private label agreement with BCD Semiconductor Manufacturing
Limited (BCD). The Company is obligated to purchase parts no less than one-third of the amount of
the rolling six-month forecast. As of March 31, 2007, the minimum purchase commitment with BCD was
$3,000 for the next six months.
In June of 2006, Sipex entered into an agreement for verification software tools used for
IC design. A commitment of future payments including maintenance support fees totaled $489,000 to
be paid over the next three years. The agreement expires in June 2009.
As of March 31, 2007, Sipex had future wafer purchase commitments totaling approximately
$1.3 million with Episil for non-cancelable purchase orders issued. Currently, the Company does not
have a minimum purchase agreement with Episil.
Legal Proceedings
The Company is subject to legal proceedings, claims, and litigation arising in the
ordinary course of business including those described below. The Company defends itself vigorously
against any such claims. The outcome of certain of these matters below 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.
DiPietro v. Sipex
In April 2003, Plaintiff Frank DiPietro (former CFO of Sipex) 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 $227,000 as of March 31, 2007.
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. On December 12, 2006, Sipex appeared before the Appeals Court, for oral arguments. Sipex
expects to learn of the Courts decision within the next three to nine months.
Sipex v. Lestina
On or about October 26, 2006, Sipex initiated an arbitration proceeding before the
American Arbitration Association against one of its distributors, Lestina International. Sipexs
Demand For Arbitration alleges that Lestina breached the Distributor Agreement between Sipex and
itself by, inter alia, failing to make timely payments on invoices resulting in a $281,667 unpaid
balance, plus interest, owing to Sipex. The Demand also seeks attorneys fees and costs of suit.
On or about January 15, 2007, Lestina filed an Answer denying the allegations of Sipexs
Demand and, at the same time, filed its Cross-Complaint for Damages against Sipex in the same
arbitration proceeding. In the Cross-Complaint, Lestina asserts, inter alia, that Sipex breached
the Distributor Agreement by failing to fulfill all outstanding orders placed by Lestina prior to
that Agreements termination, and that Sipex committed other acts constituting interference with
Lestinas contractual relations and negligent misrepresentation. Lestina seeks damages in an amount
according to proof at trial, attorneys fees and costs.
The arbitration is in its early stages, no discovery has taken place. The arbitration
hearing has been set to commence on July 25, 2007. The Company believes that its claims against
Lestina have merit and that Sipex has meritorious defenses to the claims alleged by Lestina in the
Cross-Complaint, and the Company intends to defend against those claims vigorously.
Note 16 Subsequent Events
The Companys common stock was approved for listing on the Nasdaq Capital Market Exchange and
started to trade on the opening of the market on April 11, 2007 under the symbol SIPX.
22
On May 7, 2007, the Company entered into an Agreement and Plan of Merger (the Merger
Agreement) by and among Exar Corporation, a Delaware corporation (Exar), Side Acquisition Corp.,
a Delaware corporation and a wholly owned subsidiary of Exar (Merger Sub), and Sipex. Pursuant to
the Merger Agreement and subject to the terms and conditions set forth therein, Merger Sub will be
merged with and into Sipex (the Merger), with Sipex becoming the surviving corporation and a
wholly owned subsidiary of Exar. At the Effective Time (as defined in the Merger Agreement) of the
Merger, each issued and outstanding share of common stock, par value $0.01 per share, of Sipex
(Sipex Common Stock) will be converted into the right to receive 0.6679 (the Exchange Ratio) of
a share of common stock, par value $0.0001 per share, of Exar (Exar Common Stock).
Certain affiliates of Sipex have entered into a voting agreement (the Sipex Voting
Agreement) with Exar pursuant to which, among other things, they have agreed to vote in favor of
the Merger all shares of Sipex Common Stock which they are entitled to vote, unless the Merger
Agreement is terminated. Certain affiliates of Exar also have entered into a voting agreement (the
Exar Voting Agreement) with Sipex pursuant to which, among other things, they have agreed to vote
in favor of the issuance of Exar Common Stock as merger consideration for the Merger all shares of
Exar Common Stock to which they are entitled to vote, unless the Merger Agreement is terminated.
In addition, Exar and Sipex will file a proxy statement/prospectus and other documents concerning
the proposed merger transaction with the SEC.
The transaction has been
structured as a stock-for-stock reverse triangular merger whereby a wholly owned subsidiary of Exar
will merge with and into Sipex, with Sipex surviving the merger as a wholly-owned subsidiary of
Exar. The companies expect the transaction to close by the third calendar quarter of 2007. The
transaction is subject to the approval of stockholders from both companies as well as customary
closing conditions and regulatory approvals.
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 with Item 1A of Part II in this
document, and in our Annual Report on Form 10-K for the year ended December 30, 2006. 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.
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.
23
The following discussion should be read together with our consolidated financial statements
and the related notes contained elsewhere in this quarterly report on Form 10-Q.
Significant Developments
In May 2007, we announced that we entered into a definitive merger agreement with Exar
Corporation to combine the two companies. Under the terms of the agreement, which was approved by
the boards of directors of both companies, Sipex stockholders will receive 0.6679 of a share of
Exar for each share of Sipex. Exar stockholders will own approximately 67.6% and Sipex
stockholders will own approximately 32.4% of Exar after completion of the transaction, which
assumes conversion to common stock of Sipexs outstanding convertible senior notes and related
warrants. Ralph Schmitt, Sipex chief executive officer, will become the chief executive officer of
Exar. Interim chief executive officer and chairman of Exar, Richard L. Leza, will continue as
chairman of the board of directors.
Under the terms of the agreement, the transaction is expected to be tax-free to the
stockholders of both companies for U.S. federal income tax purposes. The transaction has been
structured as a stock-for-stock reverse triangular merger whereby a wholly owned subsidiary of Exar
will merge with and into Sipex, with Sipex surviving the merger as a wholly-owned subsidiary of
Exar. The transaction is subject to the approval of stockholders from both companies as well as
customary closing conditions and regulatory approvals. The companies expect the transaction to
close by the third calendar quarter of 2007.
In April 2007, we announced that we had received notification that our common stock was
approved for listing on the Nasdaq Capital Market Exchange. Sipex common stock began trading under
the symbol SIPX upon the opening of the market on April 11, 2007.
In February 2007, we announced that we filed an amendment to our certificate of incorporation
to affect a previously approved reverse stock split on a one for two (1:2) basis. The reverse
stock split took effect on Friday,
February 23, 2007. As a result of the reverse stock split, each two shares of our currently
issued and outstanding common stock as of the close of business on February 23, 2007 were
automatically converted into and reconstituted as one share of new common stock. The number of
shares of Sipexs common stock issued and outstanding after this reverse split was therefore
reduced from approximately 37,107,586 shares to approximately 18,553,793 shares post reverse stock
split, as of the end of business on February 23, 2007. The number of shares of common stock
issuable upon exercise of our outstanding options and warrants, or upon conversion of our
outstanding senior secured convertible promissory notes was also reduced proportionately. No
fractional shares were issued in connection with the reverse stock split. Any fractional shares
that resulted from the reverse stock split of outstanding shares were exchanged for cash at a value
of $4.613 per share, the average of the closing prices of our common stock, for the ten trading
days ended February 15, 2007. We executed the reverse split to meet the Nasdaq Capital Market
Exchange minimum $5 per share listing requirement.
In December 2006, we announced a workforce reduction plan that was implemented in response to
our transitioning to a fabless semiconductor company, de-emphasizing optical products, reducing
dependency on commodity products and with the goal of improving our cost structure. As a result,
we recorded total restructuring costs of $1.1 million related to employee severance compensation,
including $0.1 million for vesting acceleration of stock options in lieu of a severance payment for
a senior executive officer. Of the $1.1 million, $0.1 million was paid during December 2006 and
approximately $0.4 million was paid during the first quarter of 2007. Our current business plans
focus our product development and marketing programs toward a greater emphasis on our power
management and interface products as we believe these products align greater development synergies
and provide greater opportunities for growth and profitability in contrast to other areas such as
our optical products.
Business Overview
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.
24
We focus on several key areas to drive operating and financial performance, including product
mix, new product introductions, cost reductions, manufacturing yield improvements and productivity.
All of these key areas are interrelated and important in achieving improved gross margins.
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 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, typically have lower
product margins. By contrast, our advanced power management product offerings, such as white LED
(light emitting diode) drivers, and our Power Bloxtm family, are newer
products, and contribute typically higher product margins. Many interface products are commodity
products as well, but overall the product family typically has more moderate margins, because of
our higher margin multi-protocol interface products and our newer low-voltage interface products.
Optical storage product margins are typically within range of our average product margin. The
products in this family are typically proprietary, but alternative suppliers have introduced
competitive solutions.
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 in October 2006, we completed the shut-down of our Milpitas,
California wafer fabrication facility. We believe that this transition to an outsourced or
fabless manufacturing model will improve the overall margins of our interface and certain of our
commodity market power management products which we historically manufactured at the Milpitas
facility. However, because of this transition away from a fixed cost structure in a captive wafer
fab, we may 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 improvements and test time reductions.
New product introductions represent a key driver of opportunities to improve our product
margins. New products are typically proprietary in nature and therefore command a stronger market
position and we typically have higher product margins. In the first quarter of 2007, we introduced
10 new products, 4 of which were proprietary in nature. We continuously strive to improve our
product mix toward higher margin products by eliminating older legacy products and by focusing on
increasing sales of our newer products introduced in our three core product families.
25
Results of Operations
For the periods indicated, the following table sets forth the percentages of net sales
represented by the respective line items in our consolidated statements of operations for the three
months ended March 31, 2007 and the comparable period of the prior year.
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
Net sales |
|
|
100.0 |
% |
|
|
100.00 |
% |
Cost of sales |
|
|
73.7 |
|
|
|
101.1 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
26.3 |
|
|
|
(1.1 |
) |
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
21.8 |
|
|
|
30.8 |
|
Marketing and selling |
|
|
19.5 |
|
|
|
20.5 |
|
General and administrative |
|
|
17.6 |
|
|
|
22.5 |
|
Restructuring and other |
|
|
0.4 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
59.3 |
|
|
|
75.5 |
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(33.0 |
) |
|
|
(76.6 |
) |
Other income (expense), net |
|
|
(4.2 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(37.2 |
)% |
|
|
(77.1 |
)% |
|
|
|
|
|
|
|
Net Sales. The table in Note 14 to our condensed consolidated financial statements shows
details of our net sales by product family and geographic location for the first quarter of 2007
and the comparable period of 2006.
Net sales decreased by 5.6% to $16.9 million for the quarter ended March 31, 2007, as compared
to $17.9 million for the quarter ended April 1, 2006. The decrease in net sales was primarily due
to a $1.1 million decrease in net sales for the optical storage product family and a $0.8 million
decrease in net sales for the interface product family, partially offset by a $0.8 million increase
in net sales for the power management product family. The decline in net sales of our optical
product family was driven by a reduction in unit volume shipments as certain product programs
approached the end of their product life cycles. The decrease in net sales for the interface
product family was driven by a decrease in unit volume shipments as well as a decline in average
selling prices for this product family. The decline in average selling prices was driven by
pricing pressures in the commodity related interface products, while the unit volume decline was
driven by declines in demand across the general analog market. The net sales increase in our power
management product family was driven by unit volume increases of our proprietary power products,
somewhat offset by declines in average selling prices.
Geographically
during the first quarter of 2007, international net sales were $13.4 million, or
79% of total net sales, as compared to $14.0 million, or 78%, in the first quarter of 2006. In the
first quarter of 2007, sales in Japan declined by $1.0 million or 35%. This decline was
principally driven by a decline in revenues for the optical storage product family. In Asia, other
than Japan, net sales increased by $1.0 million, or 15%, related to the growth in the power
management product family, principally in South Korea. Net sales in Europe and the rest of the
world
decreased by $0.6 million, or 15%, from the comparable period in 2006. Domestic net sales
decreased by $0.4 million, or 10%, from the comparable period in 2006.
Gross Profit (Loss). Gross profit increased
to $4.4 million in the first quarter of 2007, or
26.3% of net sales, as compared to a gross loss of $(0.2) million, or
(1.1)%, in the first quarter of
2006. The increase 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. In
addition, the increase in gross profit was principally attributable to: 1) a $0.5 million increase
in our standard gross profit due to our shift to a lower cost fabless manufacturing model, and 2) a
$0.8 million reduction in unfavorable manufacturing overhead spending variances. These increases in
gross profit were partially offset by approximately $1.0 million of unfavorable manufacturing yield
and price variances and an approximately $0.4 million reduction in shipment of inventory that was
previously written-down to zero net book value and other inventory write-down.
Research and Development. Research and development expenses in the first quarter of 2007 were
$3.7 million compared to $5.5 million in the first quarter of 2006. The $1.8 million decline was
primarily due to recording $1.1 of depreciation expense in the first quarter of 2006 related to the
Milpitas, California facility after determination that
26
the facility had a shorter economic useful
life to Sipex. In addition, the reduction was driven by approximately $0.6 million decrease in
spending for prototype wafers, product development costs and outside design services and a $0.1
million reduction in stock-based compensation expenses. As a percentage of net sales, research and
development expenses were 21.8% in the first quarter of 2007 and 30.8% in the comparable period of
the prior year. This percentage reduction was due to the reductions in spending noted above.
Marketing and Selling. Marketing and selling expenses were $3.3 million in the first quarter
of 2007 compared to $3.7 million in the first quarter of 2006. The $0.4 million decline was
primarily due to recording $0.3 million of depreciation expense in the first quarter of 2006
related to the Milpitas, California facility after determination that the facility had a shorter
economic useful life to Sipex. In addition, the reduction was driven by approximately $150,000 of
lower sales commissions, travel and other selling costs, offset by approximately $50,000 of
additional sales office rent and foreign office set-up legal fees. Marketing and selling expenses
were 19.5% of net sales in the first quarter of 2007 and 20.5% of net sales in the comparable
period of the prior year. This percentage reduction was due to the reductions in spending noted
above.
General and Administrative. General and administrative expenses were $3.0 million in the
first quarter of 2007 compared to $4.0 million in the first quarter of 2006. The $1.0 million
decline was primarily due to recording $0.7 million of depreciation expense in the first quarter of
2006 related to the Milpitas, California facility after determination that the facility had a
shorter economic useful life to Sipex. In addition, the reduction was driven by approximately
$191,000 of lower facility costs, approximately $65,000 of lower legal expenses, approximately
$63,000 of lower insurance costs, and approximately $28,000 of lower salaries, other compensation
and fringe benefit spending. General and administrative expenses were 17.6% of net sales in the
first quarter of 2007 and 22.5% of net sales in the comparable period of the prior year. This
percentage reduction was due to the reductions in spending noted above.
Restructuring and other. During the quarter ended March 31, 2007, we incurred
additional restructuring and other costs of approximately $63,000, primarily representing facility
costs related to the unused fabrication portion of our headquarters facility in Milpitas,
California, due to the transfer of wafer fabrication to Silan.
Other Income (Expense), Net. Other income (expense), net was $(0.7) million of net other
expense in the first quarter of 2007 compared to $(0.1) million of net other expense in the first
quarter of 2006. The increase in net other expense was primarily attributable to $0.8 million of
interest expense, $0.5 million of which related to the convertible senior notes issued in May 2006
and $0.3 million of which related to the lease financing obligation executed in March 2006. The
interest expense was partially offset by $0.1 million of interest income attributable to our
interest bearing cash equivalents and short-term investments from the proceeds of the convertible
senior notes.
Income Tax Expense. Our income tax expense primarily relates to our foreign operations as we
continue to incur losses from domestic operations. In the first quarter of 2007, we recorded an
income tax provision of $17,000, compared to a provision of $32,000 in the first quarter of 2006.
Notwithstanding our net operating losses, we did not record a tax benefit as we believed that it
was more likely than not, considering the level of historical taxable income and expectations for
future taxable income, that the operating loss would not be utilized in the future.
Financial Condition, Liquidity and Capital Resources
As of March 31, 2007, we had cash, cash equivalents and short-term investments, of $8.5
million as compared to $15.4 million at December 30, 2006. The decrease of $6.9 million was
principally due to our net cash outflows from operations of $6.8 million as well as our cash
payments for capital expenditures of $0.9 million. These outflows were partially offset by net cash
inflows from financing activities of $0.8 million which consisted principally of proceeds from
issuance of common stock under our employee stock option plans.
Operating Activities
Net cash used in operating activities of $6.8 million in the first quarter of 2007 resulted
primarily from a $6.3 million net loss and the unfavorable impact of a $2.3 million net change in
assets and liabilities, partially offset by $1.9 million of non-cash adjustments to net loss. The
changes in assets and liabilities primarily included a reduction in accounts payable and the
restructuring accrual of $2.0 million and $0.5 million, respectively, along with an increase in
inventory of $0.2 million, an increase in accounts receivable of $0.4 million, partially offset by
a increase in accrued expenses of $0.4 million, and a reduction in prepaid expenses and other
current assets of
27
$0.4 million, respectively. Non-cash adjustments primarily comprised stock-based
compensation expense of $0.9 million, $0.5 million of depreciation and amortization expense, a $0.3
million provision for uncollectible receivables and sales returns and allowances, and $0.2 million
for amortization of the discount and issuance costs on the convertible notes.
Accounts receivable, net of allowances, was $7.3 million and $7.2 million as of March 31, 2007
and December 30, 2006, respectively. The allowances for accounts receivable increased to $1.0
million at the end of the first quarter of 2007, up from $0.9 million at the end of 2006. The
increase in allowances was primarily due to receivables allowances for pricing adjustments and
product return provisions for distributors.
In 2005, we began the transfer of our manufacturing processes to foundries operated by Silan
in China and Episil in Taiwan in conjunction with the planned closure of our Milpitas, California
wafer fabrication facility in 2006. The transfer has been a complicated and time-consuming process
that has been met with significant unforeseen complications that delayed the integration transfer
and required additional allocation of our resources. We incurred approximately $0.4 million of
manufacturing process transfer and qualification costs, as reflected in cost of sales, in both the
first quarters of 2007 and 2006. We anticipate that we will continue to incur similar costs in the
future until the processes are fully transferred and in full production volumes. We cannot
guarantee that additional unforeseen integration issues will not arise in the future related to the
integration that could cause additional delays which could materially adversely affect our ability
to timely produce our products.
In addition, we may be unable to achieve all or any of the expected benefits of the
relationship within the anticipated time-frames. The anticipated synergies between Sipex and Silan
or Episil may not be as significant as originally expected. We may be unable to qualify the
manufacturing processes and wafer testing following the transfer from Sipex to Silan or Episil or
the qualification process may take significantly longer than currently expected. This could result
in additional operating costs, loss of customers, and business disruption.
Investing Activities
Net cash provided investing activities in the first quarter of 2007 was $1.1 million, as
compared to net cash used in investing activities of $0.1 million in the first quarter of 2006.
The net cash provided in the first quarter of 2007 consisting of $2.4 million of proceeds from
maturities of short-term securities, was partially offset by $0.9 million of capital expenditures
and $0.4 million of purchases of short-term investment securities.
Financing Activities
Net cash provided by financing activities in the first quarter of 2007 was $0.8 million,
resulting primarily from $1.0 million of proceeds from the issuance of common stock under employee
stock option plans, offset by $0.2 million of repayments of long-term borrowings.
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, August 1, 2006 and September 28, 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. 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, decided by us, either equal to Silicon Valley Banks prime rate or LIBOR
rate (depending upon the interest period of one, two or three months selected by us) plus 2.75%. In
addition to the $5,000,000 secured revolving line of credit, we can borrow under term loans in an
aggregate amount not to exceed $2,000,000. Each term loan shall be in an amount not less than
$500,000. The number of term loans shall not exceed two (2). Interest accrues from the date of each
term loan at a rate of 9.25%. Each term loan shall be payable in thirty-six (36) equal monthly
installments of principal plus accrued interest. When repaid or prepaid, the term loan may not be
re-borrowed. As of March 31, 2007, the unused portion of our line of credit was $3,735,000, and
$1,834,000 was outstanding under the term loan.
The agreement with Silicon Valley Bank has been extended to September 29, 2007 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 of 2.50:1.00 at
each fiscal quarter end. It also requires us to retain a minimum tangible net worth as of the last
day of each fiscal quarter. The liquidity ratio is
28
calculated as the sum of (i) Sipexs
unrestricted cash and cash equivalents, short-term marketable securities and 50% of consolidated
Accounts divided by (ii) the Obligations as defined in the agreement. Sipex must maintain, as of
the last day of each fiscal quarter set forth below, a tangible net worth of at least the amount
set forth below for each fiscal quarter ending date:
|
|
|
Fiscal Quarter Ending |
|
Minimum Tangible Net Worth (Deficit) |
September 30, 2006 |
|
$600,000 |
December 30, 2006 |
|
($5,500,000) |
March 31, 2007 |
|
($10,000,000) |
June 30, 2007 |
|
($13,000,000) |
Each fiscal quarter thereafter |
|
($13,000,000) plus 50% of any positive net income (with no adjustment for losses) and 50% of any new equity raised |
For purposes of this calculation, up to $5,000,000 in an aggregate amount of non-cash charges
relating to inventory write-downs and/or restructuring charges may be added to tangible net worth.
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. As of March 31, 2007, total
borrowing with Silicon Valley Bank was $1.8 million, of which $0.6 million was the short-term
portion and $1.2 million was the long-term portion. If we are unable to satisfy the financial
covenant requirements and to obtain a waiver from the bank, we may be required to repay the
outstanding borrowing amounts and/or classify such amounts as short-term bank borrowing.
On March 29, 2007, we entered into a Securities Purchase Agreement with Rodfre, an affiliate
of Future, our largest distributor worldwide and an affiliate of our largest stockholder (Alonim
Investment Inc.), to provide an unsecured promissory note facility of up to $10.0 million. This
facility expires, and the borrowings and accrued interest under any notes issued under this
facility are due and payable, on June 30, 2008, or upon certain other events such as a change of
control. Borrowings under this promissory note facility bear interest of 9% per annum subject to
an increased interest rate of up to 20% in case of default or after maturity. This promissory note
facility is subordinate to our Loan and Security Agreement with Silicon Valley Bank and to our 5.5%
Redeemable Convertible Senior Notes due 2026. No borrowing was made under the promissory note
facility in the first quarter of 2007.
Our net loss for the
quarter ended March 31, 2007 and the years ended December 30, 2006 and December 31, 2005
was $6.3 million, $41.2 million and $38.1 million, respectively. Our net cash used in operating
activities for the quarter ended March 31, 2007 and the years ended December 30, 2006 and
December 31, 2005 were $6.8 million, $27.9 million and $17.4 million, respectively.
We had $8.5 million of cash, cash equivalents and short-term investments as of March 31, 2007
and certain borrowing arrangements as noted herein. As more fully described under Significant Developments
and Business Overview sections above,
we have undertaken a number of initiatives over the past 18 months to reduce our operating and
capital expenditures and reduce our operating cash requirements to be more in line with our
revenues. These initiatives have included our transition to an outsourced or fabless
manufacturing model and the workforce reduction plan implemented in the fourth quarter of 2006.
Based on our current plans and business conditions, we believe that our existing cash, cash
equivalents and short-term investments together with available borrowings under our bank line of
credit and unsecured promissory note facility will be sufficient to meet our liquidity and capital
spending requirements for at least the next twelve months. In addition, if desirable or necessary,
we may seek to raise additional capital through the sale of debt or equity. We cannot assure,
however, that future borrowings and capital resources will be available on favorable terms or at
all. In addition, pursuant to the terms of our merger agreement with Exar, we would need Exars
consent to issue debt or equity securities or to incur indebtedness for borrowed money. Our cash
flows are highly dependent on demand for our products, timing of orders and shipments with key
customers and our ability to manage our working capital, especially inventory and accounts
receivable, as well as controlling our production and operating costs in line with our revenue.
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.
29
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 30, 2006.
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 30, 2006
except the adoption of FIN 48
Accounting for Uncertainty in Income Taxes (See Note 7).
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 30, 2006 totaled $77.9 million. Our
contractual obligations and commitments at March 31, 2007 are as follows (in thousands):
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period |
|
|
|
|
|
|
|
Less Than |
|
|
1 - 3 |
|
|
3 - 5 |
|
|
More Than |
|
|
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Convertible senior notes payable (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
$ |
30,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
30,000 |
|
Interest |
|
|
33,182 |
|
|
|
1,832 |
|
|
|
3,300 |
|
|
|
3,300 |
|
|
|
24,750 |
|
Long-term lease financing obligation (2) |
|
|
5,470 |
|
|
|
1,339 |
|
|
|
2,796 |
|
|
|
1,335 |
|
|
|
|
|
Restructuring liability (3) |
|
|
628 |
|
|
|
628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases (4) |
|
|
1,497 |
|
|
|
663 |
|
|
|
551 |
|
|
|
283 |
|
|
|
|
|
Purchase commitment - PolarFab |
|
|
1,996 |
|
|
|
1,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase commitment - Episil Technology |
|
|
1,275 |
|
|
|
1,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase commitment - Cadence Design |
|
|
760 |
|
|
|
682 |
|
|
|
78 |
|
|
|
|
|
|
|
|
|
Purchase commitment - Mentor Graphics |
|
|
384 |
|
|
|
166 |
|
|
|
218 |
|
|
|
|
|
|
|
|
|
Other (5) |
|
|
571 |
|
|
|
565 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
75,763 |
|
|
$ |
9,146 |
|
|
$ |
6,949 |
|
|
$ |
4,919 |
|
|
$ |
54,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: |
|
The table above excludes the liability for unrecognized income tax benefit of
approximately $320,000 at March 31, 2007 since
we cannot predict with reasonable reliability the timing of cash settlements with the respective taxing authorities. |
|
(1) |
|
$30.0 million Convertible Senior Notes issued on May 18, 2006 due May 18, 2026 with 5.5% interest payable semi-annually
on May 15 and November 15 of each year beginning on November 15, 2006. |
|
(2) |
|
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. |
|
(3) |
|
Represents estimated lease payments with related costs for the unused and subleased portions of our Billerica, Massachusetts facility. |
|
(4) |
|
Includes lease payments related to the used portion of our facility at our Billerica, Massachusetts facility. |
|
(5) |
|
Includes licensing, R&D contract and testing services with various vendors. |
Off-Balance Sheet Arrangement
As of March 31, 2007, we had no off-balance sheet arrangements as defined in Item 303(a)
(4) of the SECs Regulation S-K except for the $1,265,000 security deposit in the form of
irrevocable standby letter of credit issued to Mission West Properties, L.P. as described under
Interest Rate Risk.
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 high quality commercial paper and money market
funds. We believe we 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 short-term investment securities of $399,000 as of March 31, 2007. Our short-term
investments consisted of highly liquid investments with original maturities at the date of purchase
of 91 days. These investments are subject to interest rate risk and will fall in value if market
interest rates increase. We believe a hypothetical
increase in market interest rates by 10% from levels at March 31, 2007, would cause the fair
value of these short-term investments to fall by an immaterial amount. Since we are not required to
sell these investments before maturity, we have the ability to avoid realizing losses on these
investments due to a sudden change in market interest rates. On the other hand, declines in the
interest rates over time will reduce our interest income.
31
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 (net proceeds of $12.6 million).
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
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% Redeemable Convertible Senior Notes due
2026. The notes provide for a fixed interest rate of 5.5%, which has been increased to, and
currently fixed at 8.2% as a result of our failure to meet certain conditions. A hypothetical 10%
increase in interest rates will not have a material effect on our financials. A more detailed
description of the terms of the 2006 Notes is provided in Note 13 to our condensed financial
statements included in this 10-Q filing, and in our Form 8-K filed with the SEC on May 22, 2006.
We have a Loan and Security Agreement with Silicon Valley Bank which provides us with a line
of credit up to $5.0 million and charges interest at the banks prime rate or LIBOR 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. As part of the agreement, in addition
to the $5.0 million secured revolving line of credit, Sipex borrowed $2.0 million under a separate
term loan during December 2006, of which $167,000 was paid in the first quarter of 2007. Interest
accrues at a fixed rate of 9.25% per annum.
We have a promissory note facility with Rodfre which provides us with the ability to
issue up to $10.0 million of promissory notes that would charge interest at the rate of 9% per
annum. Since the interest rate is fixed in the promissory notes to be issued under the facility
with Rodfre, a hypothetical 10% increase in interest rates will not have a material effect in our
expenses under this promissory note facility, nor will it have a material effect on our financials.
Foreign Currency Exchange Risk
The majority of our sales, expense, 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, British pound, Japanese yen, Canadian dollar and South Korean won.
Currently, we have no plans 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 quarters ended
March 31, 2007 and April 1, 2006.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures for Quarter Ended March 31, 2007
We evaluated the design and operating effectiveness of our disclosure controls and procedures
as of March 31, 2007, 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, or
CEO, and Chief Financial Officer, or CFO, concluded that our disclosure controls and procedures as
defined in Rule 3a-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
32
for the year ended December 30, 2006 that have not been remediated. To address the
material weaknesses in our internal control over financial reporting described below, we performed
additional manual procedures and analysis and other post-closing procedures in order to prepare the
consolidated financial statements included in this Quarterly Report on Form 10-Q. Notwithstanding
managements assessment that our disclosure controls and procedures as of March 31, 2007 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 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.
Internal Control over Financial Reporting
For the year ended December 30, 2006, we were not an accelerated filer, and therefore we were
not required to make the annual report on internal control over financial reporting required by
Item 308(a) of Regulation S-K and our independent registered public accounting firm was not
required to issue a separate attestation report on managements assessment of our internal control
over financial reporting under Item 308(b).
Changes in Internal Control over Financial Reporting
During fiscal year 2006, our management continued efforts to improve our internal controls
over financial reporting, in particular to remediate the material weaknesses reported as of January
1, 2005. Our management believes that these efforts have or are reasonably likely to have, a
material improvement on the design and effectiveness of our internal controls over financial
reporting and to remediate the material weaknesses. However, as we were not an accelerated filer,
and therefore not required to make the annual report on internal control over financial reporting
required by Item 308(a) of Regulation S-K and our independent registered public accounting firm was
not required to issue a separate report on managements assessment of our internal control over
financial reporting under Item 308(b), there can be no assurance that we have fully remediated the
material weaknesses reported as of January 1, 2005 or that our internal control over financial
reporting is effective.
During the first quarter of 2007, there were no changes in our internal control over financial
reporting that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. While there were no changes in our internal control over
financial reporting during the first quarter of 2007, our management is dedicated to improving our
internal controls over financial reporting and intends to continue to monitor and upgrade our
internal controls as necessary or appropriate for our business.
Inherent Limitation on the Effectiveness of Internal Controls
The effectiveness of any system of internal control over financial reporting is subject to
inherent limitations, including the risk of exercise of judgment in designing, implementing,
operating, and evaluating the controls and procedures, and the inability to eliminate the risk of
misconduct completely. Accordingly, any system of internal control over financial reporting can
only provide reasonable, not absolute, assurances. In addition, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or
appropriate for our business, but we cannot assure that such improvements will be sufficient to
provide us with effective internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The information included in Note 15 of Notes to condensed consolidated financial statements
under the caption Legal Proceedings in Item 1 is incorporated herein by reference.
33
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 30, 2006 except the
following:
If the proposed merger with Exar does not occur, we could be materially adversely affected.
The completion of the proposed merger with Exar is subject to the satisfaction of closing
conditions set forth in the merger agreement, including approval by the affirmative vote of a
majority of the outstanding shares of our common stock and Exars common stock and the receipt of
certain regulatory approvals. The proposed merger has resulted, and will continue to result, in
significant costs and expenses for us, including costs for legal and financial advisory services,
and our cash position may consequently continue to decline during the pendency of the merger. In
addition, the proposed merger may have negative effects on our relationships with our employees or
customers and on the operation of our business, and if the proposed merger does not close, we may
not be able to reverse any such negative effects and may otherwise be materially adversely
affected.
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
The
Company held a Special Meeting of Stockholders on January 30,
2007 for which the record date was
December 14, 2006. The number of shares issued, outstanding
and eligible to vote as of the record date was 35,785,885 for the Special Meeting of Stockholders.
The reverse stock split was not effective until February 23,
2007. Thus, the following
voting results reflect pre-reverse stock split security holder figures.
At the Special Meeting of Stockholders of Sipex, the following numbers of votes were cast for
the matter indicated:
1. To approve the grant of discretionary authority to the Board of Directors to
amend the Companys amended and restated certificate of incorporation to effect a reverse stock
split for the Companys issued common stock at any time prior to March 30, 2007, at one of the
following ratios (the exact ratio to be determined by the Board of Directors); one share for one
and one-half shares, one share for two shares, or one share for two and one-half shares.
|
|
|
|
|
FOR |
|
|
27,793,948 |
|
AGAINST |
|
|
275,229 |
|
ABSTAIN |
|
|
55,779 |
|
As a result of the votes cast at the Special Meeting of Stockholders of Sipex, this proposal
was approved by our stockholders.
Item 5. Other Information
None.
Item 6. Exhibits
|
|
|
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 |
34
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.
Date: May 15, 2007
|
|
|
|
|
|
|
SIPEX CORPORATION |
|
|
|
|
|
|
|
|
|
/s/ Clyde R. Wallin
Clyde R. Wallin
|
|
|
|
|
Chief Financial Officer and |
|
|
|
|
Senior Vice President of Finance |
|
|
|
|
(Duly Authorized Officer & |
|
|
|
|
Principal Financial Officer) |
|
|
35
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 |
36