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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended January 1, 2005
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from     to
 Commission File Number 0-27892
 SIPEX CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware
(State of Incorporation)
    
    04-6135748
(IRS employer identification number)233 South Hillview Drive, Milpitas, California
(Address of principal executive offices)
    
    95035
(Zip Code)
 Registrants telephone number, including area code: (408) 934-7500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Name of exchange on which registered: None
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EXPLANATORY NOTE




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TABLE OF CONTENTS
 PagePart IItem 1.
    
    Business
    
    1Item 1A.
    
    Risk Factors
    
    9Item 1B.
    
    Unresolved Staff Comments
    
    17Item 2.
    
    Properties
    
    17Item 3.
    
    Legal Proceedings
    
    18Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    19Part IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    21Item 6.
    
    Selected Financial Data
    
    23Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    23Item 7A.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    38Item 8.
    
    Financial Statements and Supplementary Data
    
    40Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    73Item 9A.
    
    Controls and Procedures
    
    73Item 9B.
    
    Other Information
    
    79Part IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    79Item 11.
    
    Executive Compensation
    
    81Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    85Item 13.
    
    Certain Relationships and Related Transactions
    
    88Item 14.
    
    Principal Accounting  Fees and Services
    
    90Part IVItem 15.
    
    Exhibits, and Financial Statement Schedules
    
    91Signatures
    
    92EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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FORWARD-LOOKING STATEMENTS
  
 PART I
 
 Item 1. Business:
   Investigation and Restatement
   
    
    transactions identified through interviews;
    
    transactions identified through email searches;
    
    aged accounts receivables;
    
    credit memos and sales returns;
    
    period-end transactions;
    
    non-recurring transactions;
    
    cut-off of revenue; and
    
    return reserves.
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Impact of the Restatement on Our SEC Filings
   2




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Delisting from the Nasdaq Global Market
    Availability of Reports and Other Information
  Company Overview
   Recent Developments
   3




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Change in Fiscal Year
  Semiconductor Industry Background
    Sipexs Business Strategy
  Sipex Markets, Applications and Products
   4




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Power
Management Products
  Interface
Products
  Optical
Storage Products
   Sales, Distribution and Marketing
  5




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Customers
  6




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Backlog
  Manufacturing
    Product Quality Assurance and Reliability
  Patents, Licenses and Trademarks
  7




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Research and Development
    Competition
   Employees
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Item 1A. Risk Factors
 Our quarterly and annual operating results are volatile and difficult to predict and may cause our
stock price to fluctuate.
  
    
    the cyclical nature of the semiconductor industry;
    
    the volatility of the optical device market;
    
    competitive pressures on selling prices;
    
    the mix of product sales, as our margins vary across product lines;
    
    the timing and cancellation of customer orders;
    
    the effect the timing of sales by our resellers may have on our reported results as a result of
our sell-through revenue recognition policies;
    
    our ability to maintain and expand our distributor relationships;
    
    our ability to design and manufacture products to meet customers and distributors specifications and expectations;
    
    our ability to introduce new products and technologies on a timely basis;
    
    market acceptance of our products and our customers products;
    
    the introduction of products and technologies by our competitors;
    
    the level of orders received that can be shipped in a quarter;
    
    delays in shipments from our fabrication plant to assembly houses;
    
    the availability of foundry capacity, raw materials and assembly and test capacity;
    
    our ability to manufacture and have manufactured for us, the correct mix to respond to orders on
hand and new orders received in the future;
    
    fluctuations in yields;
    
    changes in product mix;
    
    the level of future product returns;
    
    the timing of investments in research and development, including tooling expenses associated with
product development, process improvements and production;
    
    costs associated with increased regulation of corporate governance and disclosure and risks of
non-compliance with such regulation; and
    
    the overall economic conditions in the United States and abroad.
    Our management has identified certain material weaknesses in the design and operation of our
internal controls, which, if not adequately addressed, could result
in accounting errors and call into
question the accuracy of our financial results.
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§
    
    Entity-level control activities were not appropriately designed and operating
effectively to ensure a control environment that emphasized the
establishment of, adherence to, or adequate communication regarding appropriate internal
control for all aspects of our operations;§
    
    Internal controls over revenue recognition were not maintained adequately with respect to
(i) lack of communication and review of significant revenue transactions, (ii) entering into arrangements
that were not within the original contractual distributor agreements related to return rights and
other concessions, (iii) improper sales cut-off procedures at
our German subsidiary, (iv) lack of sufficient
evidence of pre-sale evaluation of the reasonableness of customer
collection capabilities, (v) lack of sufficient evidence of
customer delivery and acceptance, (vi) improper recognition of revenues
related to engineering service contracts; and§
    
    During the final closing steps of the restatement process related to preparation of our
financial statements for the year ended January 1, 2005, our
internal control procedures did not operate effectively to update significant estimates based upon the best available information at that time.
The principal estimates needing updating related to valuation of excess and obsolete inventories.
   We may need to obtain a significant amount of additional capital in the future and may not be able
to secure adequate funds on a timely basis or on terms acceptable to us.
     We are
not currently listed on a national exchange or on the Nasdaq Global
Market or Nasdaq Capital
Market, and can offer no assurance that we will ever be listed.
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There is a risk that the SEC could levy fines against us, or declare us to be out of compliance
with applicable laws, rules and regulations.
  We may not successfully transfer our manufacturing processes to Silan in China and Episil in Taiwan.
   We may experience difficulties in developing and introducing new or enhanced products necessitated
by technological advances.
  
    
    accurate new product definition;
    
    timely completion and introduction of new product designs;
    
    availability of foundry capacity;
    
    achievement of manufacturing yields; and
    
    market acceptance of our products and our customers products.
  The introduction of our new products may be delayed in order to test for and resolve design flaws.
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We depend on distributors who sell directly to OEMs and the loss of one or more of our significant
distributors could have a material adverse effect on our business.
  We may not successfully expand our sales and distribution channels.
  We derive a substantial portion of our revenues from Future Electronics, a related party, and our
revenues would likely decline significantly if Future elected not to make, cancel, reduce or defer
purchases of our products.
   Affiliates of Future, our largest shareholder and distributor, beneficially own a significant
percentage of our common stock, which will allow them to significantly influence matters requiring
stockholder approval and could either discourage or entirely facilitate a potential acquisition of
our Company.
  12




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Occasionally we enter into agreements that expose us to potential damages that exceed the value of
the agreement
  We may face significant risks related to our international operations.
  
    
    unexpected changes in legal and regulatory requirements;
    
    changes in tariffs;
    
    exchange rates and other barriers;
    
    political and economic instability;
    
    difficulties in accounts receivable collection;
    
    difficulties in managing distributors or representatives;
    
    difficulties in staffing and managing international operations;
    
    difficulties in protecting our intellectual property overseas;
    
    the seasonality of sales; and
    
    potentially adverse tax consequences.
  Our inability to meet any increase in demand could reduce our market share.
  If we are unable to compete effectively with existing or new competitors, we will experience fewer
customer orders, reduced revenues, reduced gross margins and lost market share.
  
    
    accurately identify emerging technological trends and demand for product features and performance characteristics;
    
    develop and maintain competitive products;
    
    enhance our products by adding innovative features that differentiate our products from those of our competitors;
    
    bring products to market on a timely basis at competitive prices;
    
    respond effectively to new technological changes or new product announcements by others;
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
    
    increase device performance and improve manufacturing yields;
    
    adapt products and processes to technological changes; and
    
    adopt and/or set emerging industry standards.
  The implementation of a new management information system may disrupt our business.
  A failure of our information systems would adversely impact our ability to process orders for and
manufacture products.
  We have only limited protection for our proprietary technology.
   Our future success depends on retaining our key personnel and attracting and retaining additional
highly qualified employees.
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We have recently experienced significant changes in senior management and our corporate
organization.
  Product defects or compatibility problems with our products could damage our reputation, decrease
market acceptance of our technology, cause us to replace defective or incompatible products at a
substantial cost and result in potentially costly litigation.
  
    
    cause delays in product introductions and shipments;
    
    result in increased costs and diversion of development resources;
    
    result in increased product returns and cause us to incur costs due to unusable inventory
or replacement of defective or incompatible products; or
    
    require design modifications.
  Our manufacturing processes are very complex, which may result in manufacturing difficulties.
  We rely on outside foundries to supply certain of our wafers and those foundries may not produce at
acceptable levels.
  
    
    lack of adequate wafer supply;
    
    limited control over delivery schedules;
    
    unavailability of or delays in obtaining access to key process technologies; and
    
    limited control over quality assurance, manufacturing yields and production costs.
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Our ability to meet current demand or any increase in demand for our products may be limited by our
ability to test our semiconductor wafers.
  Our wafer fabrication facility and the facilities of certain of our significant customers and third
party wafer suppliers are located in areas susceptible to earthquakes and other natural disasters.
  We rely on outside suppliers to assemble, test and ship product to our customers
    The requirement that we expense employee stock options will have a material effect on our results
of operations in future periods.
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We have incurred and will continue to incur increased costs as a result of being a public company.
  We must comply with significant environmental regulations, employment tax regulations, employment
practices and other governmental regulations which are difficult and expensive.
  Our stock price has been volatile and could continue to remain volatile.
 .
 
 Item 1B. Unresolved Staff Comments:
 None.
 
 Item 2. Properties:
  Approximate
    
    Owned Or
    
    LeaseFacility Size
    
    Leased: Land
    
    ExpirationLocation
    
    Description
    
    (Square Feet)
    
    Area Owned
    
    DateMilpitas, CA
    
    Manufacturing/Design Center/General Office
    
    
    95,700
    
    
    Owned
    
    
    *Billerica, MA
    
    Design Center/General Office
    
    
    64,260
    
    
    Leased
    
    
    1/30/2008Munich, Germany
    
    General Office
    
    
    2,740
    
    
    Leased
    
    
    3/31/2010Tokyo, Japan
    
    General Office
    
    
    2,500
    
    
    Leased
    
    
    1/31/2007Zaventem, Belgium
    
    Design Center/General Office
    
    
    9,540
    
    
    Leased
    
    
    9/30/2009Shenzhen, China
    
    General Office
    
    
    1,310
    
    
    Leased
    
    
    4/25/2005Shanghai, China
    
    General Office
    
    
    1,670
    
    
    Leased
    
    
    11/19/2007Taipei, Taiwan
    
    General Office
    
    
    2,600
    
    
    Leased
    
    
    3/31/2006Pointe-Claire, Quebec, Canada
    
    General Office
    
    
    1,720
    
    
    Leased
    
    
    1/31/2006Ipoh, Perak, Malaysia
    
    Warehouse
    
    
    2,630
    
    
    Leased
    
    6-month notice
 
 *
    
    The property was sold and leased back on March 9, 2006 with an expiration date of March 31, 2011.
See Note 16 to consolidated financial statements related to subsequent events. 17




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Item 3. Legal Proceedings:
 Class Action
Securities Litigation
 Keller v. Sipex Corporation, et al., Coil
Partners LLC v. Sipex Corporation, et al., Levy v. Sipex Corporation, et al., Jacobson v. Sipex Corporation, et al.,
  Levy Keller In re Sipex Corporation Securities Litigation
  Stockholder
Derivative Litigation
 Lie v. McBurnie, et al Nagdev v. Maghribi, et al
  Lie Sipex Derivative Cases
  18




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Government Investigation
  DiPietro v. Sipex
   
 Item 4. Submission of Matters to a Vote of Security Holders:
  Executive Officers of Sipex
  Name, Age & Position
    
    Business ExperienceRalph Schmitt  Age 45
Chief Executive Officer and
Director
    
    Mr. Schmitt joined Sipex in June 2005 as chief executive officer and
member of the board of directors. Mr. Schmitt received his BSEE from
Rutgers University and began his career as a computer and
communications system hardware designer. Prior to joining Sipex, Mr.
Schmitt was the vice president of sales and marketing at Cypress
Semiconductor Corporation. Mr. Schmitt had also served on the boards
of Cypress subsidiaries, Silicon Light Machines and Cypress
Microsystems, and on the board of Azanda Networks. He also currently
serves on the board of StarGen, Inc., a privately held company.Clyde R. Wallin Age 53
Chief Financial Officer and

Senior Vice President of Finance
    
    Mr. Wallin joined Sipex in April 2004 as chief financial officer and
senior vice president of Finance. Previously, from October 2002 to
April 2004, Mr. Wallin served as chief financial officer of iWatt,
Inc., a private analog semiconductor company. Prior to iWatt, from
September 2000 to October 2002, Mr. Wallin was the chief financial
officer for Kendin Communications, which was acquired by Micrel, Inc.,
and after this acquisition Mr. Wallin continued with Micrel, Inc. Mr.
Wallin earned a Bachelors of Science in Economics from the University
of Oregon and an MBA in Finance from the University of Chicago.
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Name, Age & Position
    
    Business ExperienceRick C. Hawron  Age 52
Senior Vice President

Worldwide Sales
    
    Mr. Hawron joined Sipex in February 2004 as senior vice president of
worldwide sales. Prior to joining Sipex, Mr. Hawron was the corporate
vice president at Future Electronics Inc. Mr. Hawron was employed by
Future Electronics Inc. for 27 years in various capacities around the
globe, including vice president and managing director for Europe.Ed Lam  Age 46
Senior Vice President

Marketing and Business Development
    
    Mr. Lam is senior vice president of marketing and business
development. He joined Sipex in September 2005, and has over 20 years
of analog semiconductor industry experience with National
Semiconductor Corporation. Mr. Lam earned his BSEE from San Francisco
State University.Joel Camarda  Age 57
Senior Vice President of Operations
    
    Mr. Camarda joined Sipex in November 2005 as senior vice president of
operations. Mr. Camarda started his career as a senior manufacturing
engineer for National Semiconductor Corporation and later worked for
companies including Rockwell and Cypress Semiconductor Corporation.
Mr. Camarda has over 30 years of semiconductor industry experience.
Prior to joining Sipex, Mr. Camarda worked for Kulicke &
Soffa (K&S) Industries, where he served as the vice president of
operations for their test products division. Prior to K&S, he worked
for Silicon Storage Technology, Inc. Mr. Camarda earned his BS in
Engineering from New York Universitys School of Engineering.Lee Cleveland  Age 43
Senior Vice President of Engineering
    
    Mr. Cleveland joined Sipex in September of 2003. Mr. Cleveland was
promoted to senior vice president of engineering, effective October 1,
2005. Mr. Cleveland has held various technical and management
positions at AMD and Sipex. Mr. Cleveland graduated from UC Berkeley
with a degree in Electrical Engineering.
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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities:
 Delisting from the Nasdaq Global Market
 et seq.
   Quarterly Stock Market Data
 Fiscal 2004
    
    Jan. 1, 2005
    
    Oct. 2, 2004
    
    July 3, 2004
    
    April 3, 2004Stock price range per share:High
    
    $
    5.90
    
    
    $
    5.75
    
    
    $
    6.54
    
    
    $
    9.41Low
    
    
    4.40
    
    
    
    3.80
    
    
    
    4.75
    
    
    
    6.27
 Fiscal 2003
    
    Dec. 31, 2003
    
    Sept. 27, 2003
    
    June 28, 2003
    
    March 29, 2003Stock price range per share:High
    
    $
    10.76
    
    
    $
    9.29
    
    
    $
    5.17
    
    
    $
    3.70Low
    
    
    7.50
    
    
    
    4.68
    
    
    
    2.82
    
    
    
    2.23
 .
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Item 6. Selected Financial Data:
  Years Ended2004
    
    2003
    
    2002
    
    2001
    
    2000(Restated) (1)Operating Results:Net sales
    
    $
    75,453
    
    
    $
    36,535
    ***
    
    $
    66,260
    
    
    $
    72,062
    
    
    $
    114,620Gross profit (loss)
    
    
    11,796
    
    
    
    (9,068
    )***
    
    
    (8,488
    )
    
    
    (2,536
    )
    
    
    35,742As a % of net sales
    
    
    15.6
    %
    
    
    (24.8
    )%
    
    
    (12.8
    )%
    
    
    (3.5
    )%
    
    
    31.2
    %Depreciation and amortization
    
    
    6,559
    
    
    
    7,587
    
    
    
    7,675
    
    
    
    6,662
    
    
    
    4,273Research & development expenses
    
    
    14,710
    
    
    
    13,252
    
    
    
    12,944
    
    
    
    12,858
    
    
    
    13,159Income (loss) from operations
    
    
    (23,066
    )
    
    
    (38,495
    )
    
    
    (47,455
    )
    
    
    (32,928
    )
    
    
    3,473Income (loss) before income taxes
    
    
    (22,881
    )
    
    
    (39,489
    )
    
    
    (47,542
    )
    
    
    (32,282
    )
    
    
    5,540Net income (loss)
    
    
    (22,748
    )
    
    
    (39,807
    )
    
    
    (79,276
    )
    
    
    (19,692
    )
    
    
    3,917As a % of net sales
    
    
    (30.1
    )%
    
    
    (109.0
    )%
    
    
    (119.6
    )%
    
    
    (27.3
    )%
    
    
    3.4
    %Net income (loss) per common share  basic
    
    $
    (0.69
    )
    
    $
    (1.41
    )
    
    $
    (2.92
    )
    
    $
    (0.82
    )
    
    $
    0.18Net income (loss) per common share 
diluted
    
    $
    (0.69
    )
    
    $
    (1.41
    )
    
    $
    (2.92
    )
    
    $
    (0.82
    )
    
    $
    0.16Balance Sheets and Financial Data:Cash and cash equivalents
    
    $
    15,523
    
    
    $
    18,338
    
    
    $
    6,489
    
    
    $
    4,874
    
    
    $
    1,732Short-term investment securities
    
    
    249
    
    
    
    2,994
    
    
    
    9,980
    
    
    
    
    
    
    
    Restricted cash equivalents and securities
    
    
    1,838
    
    
    
    
    
    
    
    
    
    
    
    
    *
    
    
    36,750Total assets
    
    
    88,066
    
    
    
    101,296
    
    
    
    98,786
    **
    
    
    145,127
    
    
    
    148,768Long-term debt
    
    
    
    
    
    
    21,323
    
    
    
    10,455
    
    
    
    7,396
    
    
    
    7,057Working capital
    
    
    14,346
    
    
    
    24,468
    
    
    
    27,775
    
    
    
    36,260
    
    
    
    44,845Current ratio
    
    
    1.5
    
    
    
    2.0
    
    
    
    3.0
    
    
    
    4.7
    
    
    
    3.5Purchase of property, plant and equipment
    
    
    1,921
    
    
    
    2,024
    
    
    
    4,108
    
    
    
    40,441
    *
    
    
    19,467Stockholders equity
    
    
    60,080
    
    
    
    54,233
    
    
    
    74,520
    
    
    
    127,822
    
    
    
    122,797
 
 (1)
    
    See Note 2 to Consolidated Financial Statements for further details.*
    
    In June 2001, Sipex purchased the land, building and equipment of its Milpitas manufacturing facility for $35.0 million which was
formerly under lease. Proceeds for the buyout were provided through the liquidation of $36.8 million of restricted cash that had
previously secured the lease of the facility and equipment.**
    
    The 2002 decrease in total assets was mainly due to the establishment of a 100% valuation allowance of $31.9 million for
deferred tax assets, the disposition of machinery and equipment with a net book value of $6.7 million and $3.0 million
write-off of goodwill.***
    
    The decrease in net sales in 2003 was primarily due to
non-cash charges as a reduction to sales of $14.1 million in 2003 reflecting the fair value
of conversion rights related to the 2003 convertible note issued to Future, a related party
(See Note 3 to our consolidated financial statements regarding Related Parties), and $12.6
million representing the initial impact for the revenue values of our products in the distribution channel
upon conversion to sell-through accounting (See Note 3 to our consolidated financial
statements regarding Revenue Recognition). In addition, the 2003
gross loss increased by $1.8 million as a result of the
conversion to sell-through accounting. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations:
  Overview
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
        24




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Critical Accounting Policies and Estimates
   Revenue Recognition .
     25




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Sales Returns and Allowances-Distributors other than Future.
 Valuation of Inventories.
 Restructuring and Impairment.
  26




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Income Taxes.
 Results of Operations
  Years Ended2004
    
    
    2003
    
    
    2002Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    84.4
    
    
    
    124.8
    
    
    
    112.8Gross profit (loss)
    
    
    15.6
    
    
    
    (24.8
    )
    
    
    (12.8
    )Operating expenses:Research and development
    
    
    19.5
    
    
    
    36.3
    
    
    
    19.5Marketing and selling
    
    
    11.4
    
    
    
    20.3
    
    
    
    12.2General and administrative
    
    
    13.0
    
    
    
    22.0
    
    
    
    12.2Restructuring
    
    
    2.3
    
    
    
    1.9
    
    
    
    3.2Impairment of fixed assets
    
    
    
    
    
    
    
    
    
    
    7.2Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    4.5Total operating expenses
    
    
    46.2
    
    
    
    80.5
    
    
    
    58.8Loss from operations
    
    
    (30.6
    )
    
    
    (105.3
    )
    
    
    (71.6
    )Other income (expense), net
    
    
    0.3
    
    
    
    (2.7
    )
    
    
    (0.1
    )Loss before income taxes
    
    
    (30.3
    )%
    
    
    (108.0
    )%
    
    
    (71.7
    )%
 Fiscal Year Ended January 1, 2005 compared to Fiscal Year Ended December 31, 2003
 Net Sales
 27




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(a)
    
    Interface product net sales in 2004 increased by $23.0 million or 139% over 2003 due
primarily to the allocation of non-cash charges against sales of $11.0 million relating to
the fair value of conversion rights, and $6.5 million for conversion to the sell-through
accounting attributed to this product line in 2003. The increase attributable to higher
product demand amounted to $5.5 million.(b)
    
    Net sales of our power management product line increased $11.5 million, or 118%
primarily as a result of the allocation of the 2003 non-cash charges of $2.3 million and
$1.2 million relating to the conversion rights and conversion to sell-though accounting,
respectively, and $8.0 million attributable to sales growth .(c)
    
    Sales of our optical storage products increased $6.2 million, or 80%. The increase was
primarily due to the impact of the 2003 non-cash charge of $1.1 million relating to the
conversion to sell-through accounting methodology and a $5.1 million increase attributable
to the growth in demand for the new products introduced in 2003, particularly in Japan.(d)
    
    Sales of our legacy and EL product lines decreased by approximately $1.8 million. In
the third quarter of 2002, we sold the hybrid product family to SatCon Electronics Inc,
which resulted in no net sales for that product line in 2003. In addition, we discontinued
producing the electroluminescent display driver product family by the first quarter of
2003. In 2004, total sales in these product areas decreased by approximately $6.3 million
but was partially offset by a $3.8 million impact of the 2003 non-cash charge relating to
the conversion to sell-through methodology and an $0.8 million allocation of the 2003
non-cash charge relating to the conversion rights.
    Gross Profit (Loss) .
 28




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Research and Development.
 Marketing and Selling.
 General and Administrative.
 Restructuring .
  29




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##### Table of Contents



RestructuringCostsAccrual balance December 31, 2002
    
    $
    755Incurred in 2003
    
    
    1,043Charges utilized
    
    
    (535
    )Deferred rent adjustment
    
    
    137Adjustments to accrual
    
    
    (330
    )Accrual balance, December 31, 2003
    
    
    1,070Incurred in 2004
    
    
    1,858Charges utilized
    
    
    (1,036
    )Deferred rent adjustment
    
    
    15Adjustments to accrual
    
    
    (60
    )Accrual balance, January 1, 2005
    
    $
    1,847
 Other Income (Expense), Net.
 Income Tax Expense.
 Fiscal Year Ended December 31, 2003 compared to Fiscal Year Ended December 31, 2002
 Net Sales
  (a)
    
    Interface product net sales in 2003 decreased by $13.4 million or 45% from 2002 due
primarily to the negative impact of non-cash charges against sales of $11.0 million
relating to the fair value of conversion rights, and $6.5 million for conversion to
sell-through accounting attributed to this product line in 2003. These non-recurring
charges to sales offset the $4.1 million growth in net sales for this product line.(b)
    
    Net sales of our power management product line declined by $6.1 million, or 39%
primarily as a result of the 2003 non-cash charges of $2.3 million and $1.2 million
relating to the conversion rights and conversion to sell-through accounting,
respectively, attributed to this product line. Otherwise, net sales for this product in
2003 were down by $2.6 million compared to the prior year.(c)
    
    Net sales of legacy product lines, hybrid and EL declined by $15.2 million or 86%
compared to 2002. The decrease resulted primarily from our strategy to discontinue these
product lines and includes $3.8 million negative impact of the non-recurring non-cash
charges relating to the conversion to sell through methodology and an $0.8 million
allocation of the 2003 non-cash charge relating to the conversion rights.
 30




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Gross Profit (Loss) .
  Research and Development.
 Marketing and Selling.
 General and Administrative.
 Restructuring and Fixed Asset Impairment .
 31




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##### Table of Contents



Fixed AssetRestructuring
    
    
    ImpairmentCosts
    
    
    CostsAccrual balance December 31, 2001
    
    $
    
    
    
    $
    Incurred 2002
    
    
    2,857
    
    
    
    4,718Charges utilized
    
    
    (1,371
    )
    
    
    (4,718
    )Adjustments to accrual
    
    
    (731
    )
    
    
    Accrual balance December 31, 2002
    
    
    755
    
    
    
    Incurred in 2003
    
    
    1,043
    
    
    
    Charges utilized
    
    
    (535
    )
    
    
    Deferred rent adjustment
    
    
    137
    
    
    
    Adjustments to accrual
    
    
    (330
    )
    
    
    Accrual balance, December 31, 2003
    
    $
    1,070
    
    
    $
    
  32




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Impairment of Goodwill .
 Other Income (Expense), Net.
 Income Tax Expense.
 Financial Condition, Liquidity and Capital Resources
      33




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34




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35




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##### Table of Contents



Contractual Obligations
  Less Than
    
    
    1 - 3
    
    
    3 - 5
    
    
    More ThanTotal
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsRestructuring liability (1)
    
    $
    2,065
    
    
    $
    596
    
    
    $
    1,410
    
    
    $
    59
    
    
    $
    Operating leases (2)
    
    
    2,119
    
    
    
    698
    
    
    
    831
    
    
    
    576
    
    
    
    14Purchase commitment- PolarFab
    
    
    3,654
    
    
    
    3,654
    
    
    
    
    
    
    
    
    
    
    
    Purchase commitment- Cadence Design
    
    
    2,100
    
    
    
    700
    
    
    
    1,400
    
    
    
    
    
    
    
    Other (3)
    
    
    696
    
    
    
    596
    
    
    
    100
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    10,634
    
    
    $
    6,244
    
    
    $
    3,741
    
    
    $
    635
    
    
    $
    14
 
 (1)
    
    Represents estimated lease payments with related costs for the unused portion of our
Billerica, MA facility.(2)
    
    Excludes the lease payments related to restructuring facility at Billerica, MA that are
included in (1) above.(3)
    
    Includes licensing and testing services with various vendors. Effect of Recent Accounting Pronouncements
    36




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Accounting for Income Taxes
  37




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Accounting for Uncertainty in Income
Taxes Accounting for Income Taxes
 
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk
 Market Risk
  Interest Rate Risk
   38




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Foreign Currency Exchange Risk
  39




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data:
  PageReport of Deloitte & Touche LLP, Independent Registered Public
Accounting Firm
    
    41Report of KPMG LLP, Independent Registered Public Accounting Firm
    
    42Consolidated Balance Sheets as of January 1, 2005 and December
31, 2003 (restated)
    
    43Consolidated Statements of Operations for the years ended
January 1, 2005, December 31, 2003 (restated) and 2002
    
    44Consolidated Statements of Stockholders Equity and
Comprehensive Income (Loss) for the years ended January 1,
2005, December 31, 2003 (restated) and 2002
    
    45Consolidated Statements of Cash Flows for the years ended
January 1, 2005, December 31, 2003 (restated) and 2002
    
    46Notes to consolidated financial statements
    
    47
  40




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     Internal Control- Integrated
Framework
  
 41




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 42




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SIPEX CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except per-share data)
 January 1, 2005
    
    
    December 31, 2003(Restated)(See Note 2)ASSETSCurrent assets:Cash and cash
equivalents
    
    $
    15,523
    
    
    $
    18,338Restricted cash
    
    
    613
    
    
    
    Short-term investment
securities
    
    
    249
    
    
    
    2,994Accounts receivable,
less allowances of
$1,143 and $331, respectively
    
    
    7,597
    
    
    
    8,248Accounts receivable, related party, less
allowance of $271 and $12, respectively
    
    
    2,311
    
    
    
    2,120Inventories
    
    
    13,141
    
    
    
    16,404Prepaid expenses and
other current assets
    
    
    1,604
    
    
    
    1,498Total current
assets
    
    
    41,038
    
    
    
    49,602Property, plant, and
equipment, net
    
    
    45,318
    
    
    
    51,283Restricted cash -
noncurrent
    
    
    1,225
    
    
    
    Other assets
    
    
    485
    
    
    
    411Total assets
    
    $
    88,066
    
    
    $
    101,296LIABILITIES AND
STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    10,863
    
    
    $
    11,352Accrued expenses
    
    
    5,855
    
    
    
    4,496Accrued restructuring
costs
    
    
    566
    
    
    
    498Deferred income,
related party
    
    
    5,874
    
    
    
    4,805Deferred income, other
    
    
    3,534
    
    
    
    3,983Total current
liabilities
    
    
    26,692
    
    
    
    25,134Long-term accrued
restructuring costs
    
    
    1,281
    
    
    
    572Long-term debt, related
party
    
    
    
    
    
    
    21,323Long-term deferred rent
    
    
    13
    
    
    
    34Total liabilities
    
    
    27,986
    
    
    
    47,063Commitment and
contingencies (Note 12)Stockholders equity:Preferred stock, $0.01
par value, 1,000 shares
authorized
and no shares
issued or
outstanding
    
    
    
    
    
    
    Common stock, $0.01 par
value, 60,000 shares
authorized;
35,394 and 28,426 shares issued and
outstanding at January 1, 2005
and December 31,
2003, respectively
    
    
    354
    
    
    
    284Additional paid-in
capital
    
    
    223,479
    
    
    
    194,942Accumulated deficit
    
    
    (163,734
    )
    
    
    (140,986
    )Accumulated other
comprehensive loss
    
    
    (19
    )
    
    
    (7
    )Total
stockholders
equity
    
    
    60,080
    
    
    
    54,233Total liabilities and
stockholders equity
    
    $
    88,066
    
    
    $
    101,296
  43




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SIPEX CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per-share data)
 Years EndedJanuary 1, 2005
    
    
    December 31, 2003
    
    
    December 31, 2002(Restated)(See Note 2)Net sales
    
    $
    46,219
    
    
    $
    28,760
    
    
    $
    66,260Net sales, related party (net of $14,131 reduction in 2003 for
debt conversion rights  see Note 3)
    
    
    29,234
    
    
    
    7,775
    
    
    
    Total net sales
    
    
    75,453
    
    
    
    36,535
    
    
    
    66,260Cost of sales
    
    
    41,250
    
    
    
    26,426
    
    
    
    74,748Cost of sales, related party
    
    
    22,407
    
    
    
    19,177
    
    
    
    63,657
    
    
    
    45,603
    
    
    
    74,748Gross profit (loss)
    
    
    11,796
    
    
    
    (9,068
    )
    
    
    (8,488
    )Operating expenses:Research and development
    
    
    14,710
    
    
    
    13,252
    
    
    
    12,944Marketing and selling
    
    
    8,570
    
    
    
    7,408
    
    
    
    8,104General and administrative
    
    
    9,784
    
    
    
    8,054
    
    
    
    8,091Restructuring
    
    
    1,798
    
    
    
    713
    
    
    
    2,126Impairment of fixed assets
    
    
    
    
    
    
    
    
    
    
    4,718Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    2,984Total operating expenses
    
    
    34,862
    
    
    
    29,427
    
    
    
    38,967Loss from operations
    
    
    (23,066
    )
    
    
    (38,495
    )
    
    
    (47,455
    )Other income (expense):Interest income
    
    
    176
    
    
    
    122
    
    
    
    Interest expense
    
    
    (194
    )
    
    
    (1,135
    )
    
    
    (260
    )Other, net
    
    
    203
    
    
    
    19
    
    
    
    173Total other income (expense), net
    
    
    185
    
    
    
    (994
    )
    
    
    (87
    )Loss before income tax expense (benefit)
    
    
    (22,881
    )
    
    
    (39,489
    )
    
    
    (47,542
    )Income tax expense (benefit)
    
    
    (133
    )
    
    
    318
    
    
    
    31,734Net loss
    
    $
    (22,748
    )
    
    $
    (39,807
    )
    
    $
    (79,276
    )Net loss per common share  basic and diluted
    
    $
    (0.69
    )
    
    $
    (1.41
    )
    
    $
    (2.92
    )Weighted average common shares outstanding  basic and diluted
    
    
    32,936
    
    
    
    28,137
    
    
    
    27,191
  44




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SIPEX CORPORATION
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
  AccumulatedCommon Stock

    
    
    
    Additional
    
    
    
    
    
    
    Other
    
    
    Total$0.01 Par
    
    
    Paid-in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersNumber of Shares
    
    
    Value
    
    
    Capital
    
    
    Deficit
    
    
    Income (Loss)
    
    
    EquityBalances at December 31, 2001
    
    
    24,844
    
    
    $
    248
    
    
    $
    149,447
    
    
    $
    (21,903
    )
    
    $
    30
    
    
    $
    127,822Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (79,276
    )
    
    
    
    
    
    
    (79,276
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100
    )
    
    
    (100
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (79,376
    )Issuance of common stock under stock option
plans
    
    
    88
    
    
    
    1
    
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    501Issuance of common stock under stock
purchase plan
    
    
    99
    
    
    
    1
    
    
    
    396
    
    
    
    
    
    
    
    
    
    
    
    397Private placement issuance of common stock(net of issuance costs of $2.0 million)
    
    
    3,000
    
    
    
    30
    
    
    
    23,492
    
    
    
    
    
    
    
    
    
    
    
    23,522Warrant issuance
    
    
    
    
    
    
    
    
    
    
    1,621
    
    
    
    
    
    
    
    
    
    
    
    1,621Compensation from acceleration of stock
option vesting
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    33Balances at December 31, 2002
    
    
    28,031
    
    
    
    280
    
    
    
    175,489
    
    
    
    (101,179
    )
    
    
    (70
    )
    
    
    74,520Net loss (Restated, see Note 2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,807
    )
    
    
    
    
    
    
    (39,807
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    63Comprehensive loss (Restated, see Note 2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,744
    )Issuance of common stock under stock option
plans
    
    
    272
    
    
    
    3
    
    
    
    1,289
    
    
    
    
    
    
    
    
    
    
    
    1,292Issuance of common stock under stock
purchase plan
    
    
    123
    
    
    
    1
    
    
    
    359
    
    
    
    
    
    
    
    
    
    
    
    360Fair value of debt conversion rights
    
    
    
    
    
    
    
    
    
    
    17,542
    
    
    
    
    
    
    
    
    
    
    
    17,542Compensation from acceleration of stock
option vesting
    
    
    
    
    
    
    
    
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    61Consulting services provided by related
party (see Note 3) (Restated, see Note 2)
    
    
    
    
    
    
    
    
    
    
    202
    
    
    
    
    
    
    
    
    
    
    
    202Balances at December 31, 2003 (Restated, see
Note 2)
    
    
    28,426
    
    
    
    284
    
    
    
    194,942
    
    
    
    (140,986
    )
    
    
    (7
    )
    
    
    54,233Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,748
    )
    
    
    
    
    
    
    (22,748
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    (12
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,760
    )Issuance of common stock under stock option
plans
    
    
    1,377
    
    
    
    14
    
    
    
    4,230
    
    
    
    
    
    
    
    
    
    
    
    4,244Issuance of common stock under stock
purchase plan
    
    
    91
    
    
    
    1
    
    
    
    425
    
    
    
    
    
    
    
    
    
    
    
    426Issuance of common stock on conversion of
notes
payable, net of discount and issuance costs
    
    
    4,600
    
    
    
    46
    
    
    
    21,089
    
    
    
    
    
    
    
    
    
    
    
    21,135Issuance of common stock on exercise of
warrants
    
    
    900
    
    
    
    9
    
    
    
    2,642
    
    
    
    
    
    
    
    
    
    
    
    2,651Compensation from acceleration of stock
option vesting
    
    
    
    
    
    
    
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    44Other compensation for employee stock options
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    7Consulting services provided by related
party (see Note 3)
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    100Balances at January 1, 2005
    
    
    35,394
    
    
    $
    354
    
    
    $
    223,479
    
    
    $
    (163,734
    )
    
    $
    (19
    )
    
    $
    60,080
  45




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SIPEX CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Years EndedJanuary 1, 2005
    
    
    December 31, 2003
    
    
    December 31, 2002(Restated)(See Note 2)Operating activities:Net loss
    
    $
    (22,748
    )
    
    $
    (39,807
    )
    
    $
    (79,276
    )Adjustments to reconcile net loss to net cash used in
operating activities:Fair value of debt conversion rights
    
    
    
    
    
    
    14,131
    
    
    
    Decrease in deferred income taxes
    
    
    
    
    
    
    
    
    
    
    31,851Stock compensation expense
    
    
    51
    
    
    
    61
    
    
    
    33Depreciation and amortization
    
    
    6,559
    
    
    
    7,587
    
    
    
    7,675Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    2,984Provision for inventories
    
    
    8,628
    
    
    
    2,948
    
    
    
    5,395Provision for restructuring charges
    
    
    1,798
    
    
    
    713
    
    
    
    2,126Forgiveness of interest on notes payable
    
    
    
    
    
    
    411
    
    
    
    (Gain) loss on disposal of fixed assets
    
    
    
    
    
    
    1,144
    
    
    
    (123
    )Impairment of fixed assets
    
    
    
    
    
    
    
    
    
    
    4,718Amortization of discount and issuance costs on notes payable
    
    
    57
    
    
    
    360
    
    
    
    76Provision for uncollectible receivables and sales returns and allowances
    
    
    1,323
    
    
    
    157
    
    
    
    2,084Consulting services provided by related party
    
    
    100
    
    
    
    202
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (863
    )
    
    
    (3,247
    )
    
    
    1,604Inventories
    
    
    (5,365
    )
    
    
    (4,959
    )
    
    
    5,507Prepaid expenses and other current assets
    
    
    115
    
    
    
    1,948
    
    
    
    (1,575
    )Other assets
    
    
    (278
    )
    
    
    (44
    )
    
    
    (89
    )Accounts payable
    
    
    391
    
    
    
    2,256
    
    
    
    2,114Accrued expenses
    
    
    1,374
    
    
    
    1,063
    
    
    
    642Accrued restructuring costs
    
    
    (608
    )
    
    
    (535
    )
    
    
    (1,371
    )Deferred income
    
    
    620
    
    
    
    7,405
    
    
    
    391Long-term deferred rent
    
    
    (21
    )
    
    
    34
    
    
    
    Net cash used in operating activities
    
    
    (8,867
    )
    
    
    (8,172
    )
    
    
    (15,234
    )Investing activities:Proceeds from maturity of short-term investment securities
    
    
    9,000
    
    
    
    19,000
    
    
    
    5,000Purchase of short-term investment securities
    
    
    (6,255
    )
    
    
    (12,014
    )
    
    
    (14,980
    )Purchase of property, plant, and equipment
    
    
    (1,921
    )
    
    
    (2,024
    )
    
    
    (4,108
    )Proceeds from sale of machinery and equipment
    
    
    20
    
    
    
    
    
    
    
    2,013Restricted cash  increase
    
    
    (1,838
    )
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (994
    )
    
    
    4,962
    
    
    
    (12,075
    )Financing activities:Proceeds from issuance of common stock under employee stock plans
    
    
    4,449
    
    
    
    1,652
    
    
    
    898Net proceeds from issuance of common stock through private placement
    
    
    
    
    
    
    
    
    
    
    23,522Net proceeds from issuance of note payable and related warrants
    
    
    
    
    
    
    10,344
    
    
    
    12,000Proceeds from exercise of warrants
    
    
    2,651
    
    
    
    
    
    
    
    Legal fees for conversion of convertible debt to common stock
    
    
    (42
    )
    
    
    
    
    
    
    Proceeds from related party for acceleration of conversion rights
    
    
    
    
    
    
    3,000
    
    
    
    Payments of line of credit
    
    
    
    
    
    
    
    
    
    
    (7,396
    )Net cash provided by financing activities
    
    
    7,058
    
    
    
    14,996
    
    
    
    29,024Effect of foreign currency exchange rate changes on cash and
cash equivalents
    
    
    (12
    )
    
    
    63
    
    
    
    (100
    )Increase (decrease) in cash and cash equivalents
    
    
    (2,815
    )
    
    
    11,849
    
    
    
    1,615Cash and cash equivalents at beginning of period
    
    
    18,338
    
    
    
    6,489
    
    
    
    4,874Cash and cash equivalents at end of period
    
    $
    15,523
    
    
    $
    18,338
    
    
    $
    6,489Supplemental cash flow information:Cash paid (refunded) during the period for:Income taxes
    
    $
    13
    
    
    $
    143
    
    
    $
    (205
    )Interest
    
    $
    5
    
    
    $
    522
    
    
    $
    81Supplemental disclosure of non-cash investing and financing activities:Purchase of property, plant and equipment not paid at end of period
    
    $
    113
    
    
    $
    993
    
    
    $
    Conversion of convertible debt to common stock
    
    $
    21,177
    
    
    $
    
    
    
    $
    Receivable from exercise of stock options
    
    $
    221
    
    
    $
    
    
    
    $
    
  46




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##### Table of Contents



SIPEX CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1. Description of Business
   .
 Note 2. Restatement
     47




---



##### Table of Contents



As PreviouslyReported
    
    
    Restated
    
    
    Net AdjustmentCondensed Consolidated Statement of OperationsNet sales
    
    $
    41,625
    
    
    $
    28,760
    
    
    $
    (12,865
    )Net sales, related party
    
    
    7,787
    
    
    
    7,775
    
    
    
    (12
    )Total net sales
    
    
    49,412
    
    
    
    36,535
    
    
    
    (12,877
    )Cost of sales
    
    
    36,847
    
    
    
    26,426
    
    
    
    (10,421
    )Cost of sales, related party
    
    
    16,957
    
    
    
    19,177
    
    
    
    2,220Total cost of sales
    
    
    53,804
    
    
    
    45,603
    
    
    
    (8,201
    )Gross loss
    
    
    (4,392
    )
    
    
    (9,068
    )
    
    
    (4,676
    )Research and development
    
    
    13,054
    
    
    
    13,252
    
    
    
    198Marketing and selling
    
    
    7,430
    
    
    
    7,408
    
    
    
    (22
    )General and administrative
    
    
    7,946
    
    
    
    8,054
    
    
    
    108Restructuring
    
    
    737
    
    
    
    713
    
    
    
    (24
    )Total operating expenses
    
    
    29,167
    
    
    
    29,427
    
    
    
    260Loss from operations
    
    
    (33,559
    )
    
    
    (38,495
    )
    
    
    (4,936
    )Total other expense, net
    
    
    (746
    )
    
    
    (994
    )
    
    
    (248
    )Income tax expense
    
    
    318
    
    
    
    318
    
    
    
    Net loss
    
    $
    (34,623
    )
    
    $
    (39,807
    )
    
    $
    (5,184
    )Net loss per common share   basic and diluted
    
    $
    (1.23
    )
    
    $
    (1.41
    )
    
    $
    (0.18
    )
 As PreviouslyReported
    
    Restated
    
    Net AdjustmentCondensed Consolidated Balance SheetCash and cash equivalents
    
    $
    18,185
    
    
    $
    18,338
    
    
    $
    153Accounts receivable, net
    
    
    8,793
    
    
    
    8,248
    
    
    
    (545
    )Accounts receivable, related party, net
    
    
    2,054
    
    
    
    2,120
    
    
    
    66Inventories
    
    
    15,956
    
    
    
    16,404
    
    
    
    448Prepaid expenses and other current assets
    
    
    1,434
    
    
    
    1,498
    
    
    
    64Total current assets
    
    
    49,416
    
    
    
    49,602
    
    
    
    186Property, plant and equipment, net
    
    
    51,778
    
    
    
    51,283
    
    
    
    (495
    )Other assets
    
    
    410
    
    
    
    411
    
    
    
    1Total assets
    
    
    101,604
    
    
    
    101,296
    
    
    
    (308
    )Accounts payable
    
    
    11,340
    
    
    
    11,352
    
    
    
    12Accrued expenses
    
    
    4,087
    
    
    
    4,496
    
    
    
    409Accrued restructuring costs
    
    
    422
    
    
    
    498
    
    
    
    76Deferred income, related party
    
    
    4,636
    
    
    
    4,805
    
    
    
    169Deferred income, other
    
    
    
    
    
    
    3,983
    
    
    
    3,983Total current liabilities
    
    
    20,485
    
    
    
    25,134
    
    
    
    4,649Long-term restructuring costs
    
    
    535
    
    
    
    572
    
    
    
    37Long-term deferred rent
    
    
    
    
    
    
    34
    
    
    
    34Total liabilities
    
    
    42,343
    
    
    
    47,063
    
    
    
    4,720Additional paid-in capital
    
    
    194,786
    
    
    
    194,942
    
    
    
    156Accumulated deficit
    
    
    (135,802
    )
    
    
    (140,986
    )
    
    
    (5,184
    )Total stockholders equity
    
    
    59,261
    
    
    
    54,233
    
    
    
    (5,028
    )Total liabilities and stockholders equity
    
    
    101,604
    
    
    
    101,296
    
    
    
    (308
    )
 48




---



##### Table of Contents



As PreviouslyReported
    
    Restated
    
    Net AdjustmentCondensed Consolidated Statement of Cash FlowsNet cash used in operating activities
    
    
    (7,332
    )
    
    
    (8,172
    )
    
    
    (840
    )Net cash provided by investing activities
    
    
    3,969
    
    
    
    4,962
    
    
    
    993Increase in cash and cash equivalents
    
    
    11,696
    
    
    
    11,849
    
    
    
    153
  Net sales
    
    
    Cost of sales
    
    
    Gross lossReasons for AdjustmentsImpact from change to sell-through accounting
    
    
    (a
    )
    
    $
    (11,688
    )
    
    $
    (8,049
    )
    
    $
    (3,639
    )Sales cut-off corrections at German subsidiary
    
    
    (b
    )
    
    
    (497
    )
    
    
    (394
    )
    
    
    (103
    )Correction for timing of sales recognition when collectibility not assured
    
    
    (c
    )
    
    
    (365
    )
    
    
    (299
    )
    
    
    (66
    )Reversal of an undocumented sale
    
    
    (d
    )
    
    
    (172
    )
    
    
    
    
    
    
    (172
    )Corrections to properly record manufacturing personnel costs
    
    
    (e
    )
    
    
    
    
    
    
    236
    
    
    
    (236
    )Reclassifications to properly reflect manufacturing related depreciation
    
    
    (f
    )
    
    
    
    
    
    
    267
    
    
    
    (267
    )Deferral of engineering service contract revenue
    
    
    (g
    )
    
    
    (112
    )
    
    
    
    
    
    
    (112
    )Other adjustments
    
    
    
    
    
    
    (43
    )
    
    
    38
    
    
    
    (81
    )Total adjustments
    
    
    
    
    
    $
    (12,877
    )
    
    $
    (8,201
    )
    
    $
    (4,676
    )
 
 (a)
    
    Sales from distributors were deferred and recognized in subsequent periods due to
converting from the ship-to basis to the sell-through basis of accounting for revenue (See
Note 3  Revenue Recognition). This change resulted in a decrease in net sales of $11.7
million and a decrease of $8.0 million in cost of sales from that which was previously
reported for sales and cost of sales through the distribution channel. The net change
includes an initial impact of $12.6 million for the reversal of sales and $10.8 million for
the related cost of sales recognized prior to January 1, 2003.(b)
    
    Represents a $497,000 reduction in net sales to correct sales cut-off errors of the Companys
German subsidiary with a corresponding reduction in cost of sales of $394,000.(c)
    
    Represents a $365,000 reduction in net sales related to a customer when collectibility of
revenue was not reasonably assured at the time of shipment. Revenue related to these
shipments was subsequently recognized as cash payments were received and $266,000 of revenue
value related to these shipments has not been collected or recognized as revenue.(d)
    
    Represents a $172,000 permanent reduction in net sales for a sales transaction with unlimited
return rights which was erroneously recognized at the time of shipment. There was no impact
on cost of sales as the cost of the product shipped was previously written down to zero.(e)
    
    Represents a $236,000 increase in cost of sales related to recognition of manufacturing
personnel costs not previously accrued.(f)
    
    Represents a $267,000 increase in cost of sales related to depreciation expense previously
incorrectly classified as research and development expense.(g)
    
    Represents a $112,000 reduction in net sales for deferral of revenues associated with
engineering service contracts previously recognized as revenue prior to delivery of known
functional development samples. Note 3. Summary of Significant Accounting Policies
 Basis of Presentation
   49




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##### Table of Contents



Revenue Recognition
       50




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##### Table of Contents



Sales Returns and Allowances-Distributors other than Future
  Research and Development
  Net Loss Per Share
   2004
    
    2003
    
    2002Weighted
average common shares outstanding  basic
    
    
    32,936
    
    
    
    28,137
    
    
    
    27,191Net effect of dilutive potential common shares outstanding based
on the treasury stock method using the average market price
    
    
    
    
    
    
    
    
    
    
    Weighted
average common shares outstanding  diluted
    
    
    32,936
    
    
    
    28,137
    
    
    
    27,191
  January 1, 2005
    
    December 31, 2003
    
    December 31, 2002Option shares outstanding
    
    
    5,452
    
    
    
    6,570
    
    
    
    6,458Weighted average exercise price of option shares outstanding
    
    $
    5.98
    
    
    $
    5.51
    
    
    $
    7.33Convertible note of $12.0 million issued on September 27, 2002 (conversion price at
$7.50)
    
    
    
    
    
    
    1,600
    
    
    
    1,600Convertible note of $10.6 million issued on June 20, 2003 (conversion price at $3.52)
    
    
    
    
    
    
    3,000
    
    
    
    Warrants issued on September 27, 2002 (exercise price at $2.9458)
    
    
    
    
    
    
    900
    
    
    
    900
 Concentration of Credit Risk
  51




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##### Table of Contents



Concentration of Other Risks
  Fair Values of Financial Assets and Financial Liabilities
  Short-term Investments
  Inventories
  Valuation of Inventories
  Related Parties
  52




---



##### Table of Contents



53




---



##### Table of Contents



Employee Advances
  Property, Plant and Equipment
  Useful LivesBuilding and improvements
    
    30 years (see Note 5)Machinery and equipment
    
    3-10 years (see Note 3)Furniture, fixtures and office equipment
    
    3-7 yearsLeasehold improvements
    
    Lesser of 10 years or lease term
 Restricted Cash
  Goodwill
  Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
  54




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##### Table of Contents



Foreign Currency Translation
  Income Taxes
  Stock-Based Compensation
   2004
    
    
    2003
    
    
    2002Net loss as reported
    
    $
    (22,748
    )
    
    $
    (39,807
    )
    
    $
    (79,276
    )Add employee stock-based compensation expense from accelerated
stock option vesting and other employee stock compensation
included in reported net loss
    
    
    51
    
    
    
    61
    
    
    
    33Less employee stock-based compensation determined
under fair value method
    
    
    (7,969
    )
    
    
    (6,371
    )
    
    
    (10,985
    )Pro forma net loss
    
    $
    (30,666
    )
    
    $
    (46,117
    )
    
    $
    (90,228
    )Net loss per shareBasic and diluted  as reported
    
    
    (0.69
    )
    
    
    (1.41
    )
    
    
    (2.92
    )Basic and diluted  pro forma
    
    
    (0.93
    )
    
    
    (1.64
    )
    
    
    (3.32
    )
  2004
    
    2003
    
    2002Expected life of options
    
    4 years
    
    5 years
    
    6 yearsVolatility
    
    
    61
    %
    
    
    100
    %
    
    
    247
    %Risk-free interest rate
    
    
    3.4
    %
    
    
    3.0
    %
    
    
    4.0
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
 55




---



##### Table of Contents



2004
    
    2003
    
    2002Expected life of options
    
    0.5 year
    
    0.5 year
    
    0.5 yearVolatility:First purchase period
    
    
    61
    %
    
    
    115
    %
    
    
    75
    %Second purchase period
    
    
    60
    %
    
    
    75
    %
    
    
    180
    %Risk-free interest rate
    
    
    2.0
    %
    
    
    1.0
    %
    
    
    4
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
  Effect of Recent Accounting Pronouncements
       56




---



##### Table of Contents



57




---



##### Table of Contents



Reclassifications
  Note 4. Restructuring and Impairment of Fixed Assets
  58




---



##### Table of Contents



Fixed AssetRestructuring
    
    
    ImpairmentCosts
    
    
    CostsAccrual balance December 31, 2001
    
    $
    
    
    
    $
    Incurred 2002
    
    
    2,857
    
    
    
    4,718Charges utilized
    
    
    (1,371
    )
    
    
    (4,718
    )Adjustments to accrual
    
    
    (731
    )
    
    
    Accrual balance December 31, 2002
    
    
    755
    
    
    
    Incurred in 2003
    
    
    1,043
    
    
    
    Charges utilized
    
    
    (535
    )
    
    
    Deferred rent adjustment
    
    
    137
    
    
    
    Adjustments to accrual
    
    
    (330
    )
    
    
    Accrual balance, December 31, 2003
    
    
    1,070
    
    
    
    Incurred in 2004
    
    
    1,858
    
    
    
    Charges utilized
    
    
    (1,036
    )
    
    
    Deferred rent adjustment
    
    
    15
    
    
    
    Adjustments to accrual
    
    
    (60
    )
    
    
    Accrual balance, January 1, 2005
    
    $
    1,847
    
    
    $
    
 General
   Restructuring
   59




---



##### Table of Contents



Impairment
  Note 5. Inventories
  2004
    
    
    2003Raw materials
    
    $
    482
    
    
    $
    425Work-in-process
    
    
    9,512
    
    
    
    8,836Finished goods
    
    
    3,147
    
    
    
    7,143$
    13,141
    
    
    $
    16,404
 Note 6. Property, Plant and Equipment
  2004
    
    
    2003Land
    
    $
    5,957
    
    
    $
    5,957Building and improvements
    
    
    25,641
    
    
    
    25,561Machinery and equipment
    
    
    35,068
    
    
    
    37,057Furniture, fixtures and office equipment
    
    
    10,145
    
    
    
    10,832Leasehold improvements
    
    
    400
    
    
    
    1,85677,211
    
    
    
    81,263Less accumulated depreciation and amortization
    
    
    31,893
    
    
    
    29,980$
    45,318
    
    
    $
    51,283
 60




---



##### Table of Contents



Note 7. Accrued Expenses
  2004
    
    
    2003Accrued compensation and benefits
    
    $
    2,177
    
    
    $
    1,848Accrued audit fees
    
    
    1,643
    
    
    
    343Accrued royalties
    
    
    711
    
    
    
    817Accrued commissions
    
    
    318
    
    
    
    318Accrued warranty
    
    
    228
    
    
    
    195Accrued legal fees
    
    
    158
    
    
    
    219Other
    
    
    620
    
    
    
    756$
    5,855
    
    
    $
    4,496
 Note 8. Income Taxes
  2004
    
    
    2003
    
    
    2002Domestic
    
    $
    (23,019
    )
    
    $
    (39,583
    )
    
    $
    (47,581
    )Foreign
    
    
    138
    
    
    
    94
    
    
    
    39Loss before income
tax expense
(benefit)
    
    $
    (22,881
    )
    
    $
    (39,489
    )
    
    $
    (47,542
    )
  2004
    
    
    2003
    
    
    2002Deferred
    
    
    Current
    
    
    Total
    
    
    Deferred
    
    
    Current
    
    
    Total
    
    
    Deferred
    
    
    Current
    
    
    TotalFederal
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    26,457
    
    
    $
    (353
    )
    
    $
    26,104State
    
    
    
    
    
    
    (14
    )
    
    
    (14
    )
    
    
    
    
    
    
    16
    
    
    
    16
    
    
    
    5,394
    
    
    
    30
    
    
    
    5,424Foreign
    
    
    
    
    
    
    (119
    )
    
    
    (119
    )
    
    
    
    
    
    
    302
    
    
    
    302
    
    
    
    
    
    
    
    206
    
    
    
    206Income tax
expense (benefit)
    
    $
    
    
    
    $
    (133
    )
    
    $
    (133
    )
    
    $
    
    
    
    $
    318
    
    
    $
    318
    
    
    $
    31,851
    
    
    $
    (117
    )
    
    $
    31,734
  2004
    
    
    2003
    
    
    2002Tax benefit at statutory rate
    
    $
    (8,008
    )
    
    $
    (13,821
    )
    
    $
    (16,639
    )State income tax, net of federal income tax expense
(benefit)
    
    
    (14
    )
    
    
    16
    
    
    
    3,526Non-deductible expenses
    
    
    39
    
    
    
    4,959
    
    
    
    13Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    1,045Foreign taxes on branch income and tax rate differential
    
    
    (119
    )
    
    
    302
    
    
    
    12Tax credits
    
    
    (491
    )
    
    
    (633
    )
    
    
    (258
    )Losses not benefited/change in valuation allowance
    
    
    8,461
    
    
    
    9,495
    
    
    
    44,035Actual tax expense (benefit)
    
    $
    (133
    )
    
    $
    318
    
    
    $
    31,734
 61




---



##### Table of Contents



2004
    
    
    2003Current deferred tax assets:Inventories, primarily writedowns not currently deductible
    
    $
    4,497
    
    
    $
    1,661Accounts receivable
    
    
    648
    
    
    
    148Deferred revenue
    
    
    3,632
    
    
    
    3,315Accrued expenses and reserves not currently deductible
    
    
    2,170
    
    
    
    840Total current deferred tax assets before valuation allowance
    
    
    10,947
    
    
    
    5,964Valuation allowance  current
    
    
    (10,947
    )
    
    
    (5,964
    )Noncurrent deferred tax assets:Net operating loss carryforwards
    
    
    58,015
    
    
    
    53,897Tax credit carryforwards
    
    
    4,305
    
    
    
    3,868Total noncurrent deferred tax assets before valuation allowance
    
    
    62,320
    
    
    
    57,765Valuation allowance  noncurrent
    
    
    (54,824
    )
    
    
    (50,244
    )Deferred tax liabilities:Fixed assets, due to differences in depreciation
    
    
    (7,496
    )
    
    
    (7,521
    )Net deferred tax assets
    
    $
    
    
    
    $
    
      62




---



##### Table of Contents



Note 9. Stockholders Equity
       63




---



##### Table of Contents



2004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of year
    
    
    6,570
    
    
    $
    5.51
    
    
    
    6,458
    
    
    $
    7.35
    
    
    
    4,995
    
    
    $
    13.64Granted
    
    
    1,645
    
    
    
    5.65
    
    
    
    2,335
    
    
    
    5.22
    
    
    
    4,273
    
    
    
    4.00Exercised
    
    
    (1,377
    )
    
    
    3.08
    
    
    
    (272
    )
    
    
    4.72
    
    
    
    (88
    )
    
    
    (5.69
    )Forfeited
    
    
    (1,386
    )
    
    
    6.22
    
    
    
    (1,951
    )
    
    
    11.37
    
    
    
    (2,722
    )
    
    
    (13.95
    )Outstanding at end of year
    
    
    5,452
    
    
    $
    5.98
    
    
    
    6,570
    
    
    $
    5.51
    
    
    
    6,458
    
    
    $
    7.33Options exercisable at year-end
    
    
    2,322
    
    
    $
    6.44
    
    
    
    1,908
    
    
    $
    6.83
    
    
    
    1,733
    
    
    $
    11.87Weighted average fair value of options granted
    
    
    
    
    
    $
    2.88
    
    
    
    
    
    
    $
    3.83
    
    
    
    
    
    
    $
    3.99
  Options Outstanding
    
    
    Options ExercisableWeightedAverageRemaining
    
    
    Weighted
    
    
    
    
    
    
    WeightedRange of
    
    Number of
    
    
    Contractual
    
    
    Average
    
    
    Number of
    
    
    AverageExercise Prices
    
    Shares
    
    
    Life
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise Price$1.00 - $1.70
    
    
    628
    
    
    9.16 years
    
    $
    1.47
    
    
    
    394
    
    
    $
    1.42$2.34 - $2.99
    
    
    711
    
    
    8.77 years
    
    $
    2.85
    
    
    
    326
    
    
    $
    2.86$3.03 - $4.39
    
    
    579
    
    
    8.08 years
    
    $
    3.53
    
    
    
    354
    
    
    $
    3.36$4.40 - $4.57
    
    
    596
    
    
    9.95 years
    
    $
    4.48
    
    
    
    
    
    
    $
    $4.58 - $6.00
    
    
    855
    
    
    8.49 years
    
    $
    5.63
    
    
    
    299
    
    
    $
    5.92$6.05 - $6.87
    
    
    558
    
    
    6.99 years
    
    $
    6.35
    
    
    
    282
    
    
    $
    6.28$7.11 - $8.65
    
    
    565
    
    
    8.74 years
    
    $
    8.08
    
    
    
    120
    
    
    $
    7.93$8.68 - $11.13
    
    
    597
    
    
    7.43 years
    
    $
    9.32
    
    
    
    256
    
    
    $
    9.65$12.13 - $34.56
    
    
    361
    
    
    5.25 years
    
    $
    17.68
    
    
    
    289
    
    
    $
    18.07$35.19 - $35.19
    
    
    2
    
    
    3.13 years
    
    $
    35.19
    
    
    
    2
    
    
    $
    35.195,452
    
    
    8.26 years
    
    $
    5.98
    
    
    
    2,322
    
    
    $
    6.44
 Note 10. Accrued Warranty
  64




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2004
    
    
    2003Beginning balance
    
    $
    195
    
    
    $
    69Warranty claims
    
    
    (192
    )
    
    
    (195
    )Accruals for the period
    
    
    225
    
    
    
    321Ending balance
    
    $
    228
    
    
    $
    195
 Note 11. Employee Benefit Plan
  Note 12. Commitments and Contingencies
   Year Ending2005
    
    $
    1,2062006
    
    
    1,0692007
    
    
    9562008
    
    
    3712009
    
    
    254Thereafter
    
    
    14Total
    
    $
    3,870
    Legal Proceedings
  65




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##### Table of Contents



Class Action Securities Litigation
     Stockholder
Derivative Litigation
     66




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##### Table of Contents



Government Investigation
  DiPietro v. Sipex
  Other Contingencies
  Note 13. Valuation and Qualifying Accounts
  Sales Returnsand
    
    
    Bad Debt
    
    
    Total A/RAllowances
    
    
    Reserves
    
    
    AllowancesBalances at December 31, 2001
    
    $
    2,000
    
    
    $
    444
    
    
    $
    2,444Provisions
    
    
    2,034
    
    
    
    50
    
    
    
    2,084Deductions
    
    
    (3,381
    )
    
    
    (202
    )
    
    
    (3,583
    )Balances at December 31, 2002
    
    
    653
    
    
    
    292
    
    
    
    945Provisions
    
    
    249
    
    
    
    (92
    )
    
    
    157Deductions
    
    
    (759
    )
    
    
    
    
    
    
    (759
    )Balances at December 31, 2003
    
    
    143
    
    
    
    200
    
    
    
    343Provisions
    
    
    1,355
    
    
    
    (32
    )
    
    
    1,323Additions charged to other accounts
    
    
    350
    
    
    
    
    
    
    
    350Deductions
    
    
    (489
    )
    
    
    (113
    )
    
    
    (602
    )Balances at January 1, 2005
    
    $
    1,359
    
    
    $
    55
    
    
    $
    1,414
  67




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##### Table of Contents



Note 14. Segment Information and Major Customers
   2004
    
    
    2003
    
    
    2002Interface
    
    $
    39,622
    
    
    $
    16,589
    
    
    $
    29,986Power Management
    
    
    21,223
    
    
    
    9,731
    
    
    
    15,870Optical Storage
    
    
    13,824
    
    
    
    7,674
    
    
    
    2,641Other*
    
    
    784
    
    
    
    2,541
    
    
    
    17,763Total net sales
    
    $
    75,453
    
    
    $
    36,535
    
    
    $
    66,260
 
 *
    
    Mainly Legacy and other discontinued products.   2004
    
    
    2003
    
    
    2002Japan
    
    $
    18,520
    
    
    $
    10,129
    
    
    $
    6,048United States
    
    
    15,203
    
    
    
    5,214
    
    
    
    15,088Singapore
    
    
    9,391
    
    
    
    2,814
    
    
    
    5,698United Kingdom
    
    
    9,220
    
    
    
    2,080
    
    
    
    4,558Taiwan
    
    
    8,654
    
    
    
    5,783
    
    
    
    13,749China
    
    
    7,085
    
    
    
    4,367
    
    
    
    4,452France
    
    
    2,473
    
    
    
    1,217
    
    
    
    9,650Asia, other than
Japan, Singapore,
Taiwan and China
    
    
    1,997
    
    
    
    1,126
    
    
    
    2,251Germany
    
    
    1,550
    
    
    
    1,615
    
    
    
    1,512Rest of the World
    
    
    1,360
    
    
    
    2,190
    
    
    
    3,254Total net sales
    
    $
    75,453
    
    
    $
    36,535
    
    
    $
    66,260
 68




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2004
    
    2003Future Electronics Inc., a related party
    
    
    23
    %
    
    
    20
    %Microtek, Inc.
    
    
    23
    %
    
    
    24
    %Prohubs International
    
    
    
    *

    
    
    11
    %
 
 *
    
    Less than 10%  2004
    
    2003
    
    2002Future Electronics Inc., a related party
    
    
    39
    %
    
    
    21
    %
    
    
    24
    %Microtek, Inc.
    
    
    17
    %
    
    
    22
    %
    
    
    
    *%Snecma
    
    
    
    *
    
    
    
    *
    
    
    14
    %
 
 *
    
    Less than 10% Note 15. Quarterly Data ( Unaudited)
  Quarters EndedJan. 1,2005
    
    October 2, 2004
    
    July 3, 2004
    
    April 3, 2004Previously
    
    
    
    
    
    Previously
    
    
    
    
    
    PreviouslyFiscal 2004
    
    
    
    
    
    Reported
    
    Restated
    
    Reported
    
    Restated
    
    Reported
    
    Restated(in thousands, except per share data)Net sales
    
    $
    20,598
    
    
    $
    18,782
    
    
    $
    20,195
    
    
    $
    15,736
    
    
    $
    16,509
    
    
    $
    18,097
    
    
    $
    18,151Gross profit (loss)
    
    
    (409
    )
    
    
    4,774
    
    
    
    4,771
    
    
    
    4,123
    
    
    
    4,355
    
    
    
    4,548
    
    
    
    3,079Net loss
    
    
    (9,744
    )
    
    
    (5,302
    )
    
    
    (4,625
    )
    
    
    (3,685
    )
    
    
    (3,137
    )
    
    
    (3,741
    )
    
    
    (5,242
    )Net loss per common share  basic and diluted
    
    
    (0.28
    )
    
    
    (0.16
    )
    
    
    (0.14
    )
    
    
    (0.11
    )
    
    
    (0.09
    )
    
    
    (0.12
    )
    
    
    (0.17
    )
 Quarters EndedDecember 31, 2003
    
    September 27, 2003
    
    June 28, 2003
    
    March 29, 2003Previously
    
    
    
    
    
    Previously
    
    
    
    
    
    Previously
    
    
    
    
    
    PreviouslyFiscal 2003
    
    Reported
    
    Restated
    
    Reported
    
    Restated
    
    Reported
    
    Restated
    
    Reported
    
    Restated(in thousands, except per share data)Net sales
    
    $
    4,207

    (2)
    
    $
    3,631
    
    
    $
    15,198
    (2)
    
    $
    14,736
    
    
    $
    14,891
    
    
    $
    13,858
    
    
    $
    15,117
    
    
    $
    4,310
    (1)Gross profit (loss)
    
    
    (7,850
    )
    
    
    (8,450
    )
    
    
    2,261
    
    
    
    1,888
    
    
    
    1,380
    
    
    
    1,132
    
    
    
    (182
    )
    
    
    (3,638
    )(1)Net loss
    
    
    (17,095
    )
    
    
    (17,480
    )
    
    
    (4,653
    )
    
    
    (5,150
    )
    
    
    (5,652
    )
    
    
    (5,904
    )
    
    
    (7,222
    )
    
    
    (11,273
    )Net loss per common share  basic and diluted
    
    
    (0.60
    )
    
    
    (0.62
    )
    
    
    (0.17
    )
    
    
    (0.18
    )
    
    
    (0.20
    )
    
    
    (0.21
    )
    
    
    (0.26
    )
    
    
    (0.40
    )
 
 (1)
    
    As indicated in Note 3 under revenue recognition, due to the change in estimate to
defer recognition of sales and related cost of sales for transactions with distributors,
the Company recorded a reduction in net sales and gross margin of $12.6 million and $1.8
million, respectively, in the first quarter of 2003.(2)
    
    As indicated in Note 3 under related parties, non-cash charges of $1.2 million and
$12.9 million were recorded as a reduction in net sales in the third quarter and fourth
quarters of 2003, respectively, representing the fair value of conversion rights earned by
Future. Note 16. Subsequent Events
  69




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71




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72




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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure:
  
 Item 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures for year ended January 1, 2005
  73




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Managements Report on Internal Control over Financial Reporting
     Entity-Level Controls
  Revenue Accounting
 Revenue Recognition When Right
of Return Exists
 74




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Financial Closing Process  Use of Estimates
   Changes in Internal Control over Financial Reporting
   
    
    Our new CEO, Ralph Schmitt, was hired in June 2005;
    
    We implemented annual ethics training for all employees and we have engaged a
compliance firm to ensure that all employees read, understand and confirm critical
accounting and ethics policies. All employees must now annually reaffirm our Code of
Conduct, legal compliance policy and whistleblower procedures;
    
    We increased management oversight by expanding our disclosure process to include all
senior managers and sales and marketing personnel with responsibility for responding to
issues raised during the financial reporting process and we require certifications from
all executive management and key sales and marketing personnel;
    
    Our key financial managers made periodic visits to our distributors to emphasize the
terms of the distribution agreements and the revenue reporting requirements of Sipex as a
public company;
    
    We adopted sell-through revenue recognition for our sales to distributors. As part of
this adoption, we have engaged an outside company to conduct inventory cycle counts on a
rotating basis at all of our distributors warehouses to verify quantities. In addition,
the distributors have been advised that the terms of the distribution agreement are
binding and any changes to those terms must be approved in writing by both our CEO and
CFO. Finally, we implemented more stringent policies and procedures regarding revenue
accounting and oversight of contractual arrangements by requiring the review and approval
from our CEO and CFO on non-standard sales terms and conditions of a significant nature;
    
    We implemented a process for formal revenue recognition training sessions for key
finance, sales and marketing personnel;
    
    We improved the documentation, communication and periodic review of our accounting
policies throughout our domestic and international locations for
consistency and compliance with generally accepted accounting principles;
    
    We enhanced the training and education for our international finance and accounting
personnel and new hire additions to the worldwide finance team;
    
    We re-engineered the sales administration function so that all finance-related
activities are performed by the finance staff. The finance department assumed
responsibility for the customer credit issuance and tracking process and the external
sales representative commission calculation; and
  75




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Inherent Limitation on the Effectiveness of Internal Controls
  76




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      Entity-Level ControlsThe Company did not maintain a control environment that emphasized the establishment of,
adherence to, or adequate communication regarding appropriate internal control for all aspects of
its operations. Specifically, management concluded that the Company did not have adequate controls
with respect to: (i) effective and continuous communication of its commitment to ethical business
practices and standards, (ii) establishment and monitoring of the structure and controls over
foreign subsidiaries and locations and (iii) monitoring and communication of agreements with third
parties due to ineffective delegation of authority and responsibility. Based on the deficiencies
noted in the design and operating effectiveness of the Companys control environment, management
determined that the Company had an ineffective control environment. Additionally, due to the
deficiencies noted above, management determined that the monitoring function and dissemination of
information and communication did not operate effectively. These deficiencies constitute a
material weakness in the control environment, monitoring, and information and communication
components of COSO. Each of these deficiencies individually constitutes a material weakness.
These material weaknesses increase the likelihood of potential material errors in the Companys
financial reporting.
 77




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Revenue AccountingThe Company did not design adequate controls to provide reasonable assurance that revenue was
recorded and disclosed in accordance with generally accepted accounting principles, specifically
SAB 104, and SFAS 48, Revenue Recognition When Right of Return Exists, and recorded in the
appropriate period. These deficiencies resulted in errors due to the
following: (i) lack of communication and review of significant revenue
transactions, (ii) entering into arrangements that were not within the original contractual
distributor agreements related to return rights and other
concessions, (iii) improper sales cut-off
procedures at its German subsidiary, (iv) lack of sufficient evidence of pre-sale evaluation of the
reasonableness of customer collection capabilities, (v) lack of sufficient evidence of customer delivery
and acceptance and (vi) improper recognition of revenues related to engineering service
contracts. As a result of certain items above, the Company was unable to reasonably
estimate sales returns reserves for distributor customers resulting in the Company adopting a
sell-through revenue recognition for sales to all distributors; accordingly, the Company also
determined that it did not have the necessary internal control procedures in place for recognizing
revenues under a sell-through methodology as of January 1, 2005.Overall, given the magnitude of the revenue adjustments
recorded and the potential for misstatements to occur as a result of internal control deficiencies
in revenue accounting that existed as of January 1, 2005, there is more than a remote likelihood
that a material misstatement in the Companys interim or annual financial statements could occur
and would not be prevented or detected by its internal controls over financial reporting.Financial Closing Process  Use of EstimatesDuring the final closing steps of the restatement process related to preparation of the
Companys financial statements for the year ended January 1, 2005, the Companys internal
control procedures did not operate effectively to update significant estimates based upon the
best available information at that time. The principal estimates needing updating related to
valuation of excess and obsolete inventories. The estimate updating process was impacted by the
extended time frame required to prepare the restated financial statements for 2003 and the first
three fiscal quarters of 2004. Prior to the completion of the Companys financial statements
referred to above, there was a material adjustment to the financial statements to update the
valuation estimates for excess and obsolete inventories.
       78




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Item 9B. Other Information
  
 PART III
 
 Item 10. Directors and Executive Officers of the Registrant:
   Nominee or Directors Name andYear Nominee or Director First
    
    
    
    
    
    Year Term Will
    
    Class ofBecame a Director
    
    Age
    
    Position(s) Held
    
    Expire
    
    DirectorCONTINUING DIRECTORS:Joseph Consoli (2002)
    
    62
    
    Director
    
    2005
    
    IIIDouglas M. McBurnie (2000)
    
    63
    
    Director
    
    2006
    
    IThomas P. Redfern (2003)
    
    66
    
    Director
    
    2006
    
    IRalph Schmitt (2005)
    
    45
    
    Director
    
    2005
    
    IIIJohn D. Arnold (2004)
    
    52
    
    Director
    
    2007
    
    IIBrian Hilton (2004)
    
    63
    
    Chairman of the Board
    
    2007
    
    IILionel H. Olmer (1988)
    
    71
    
    Director
    
    2007
    
    II
 Mr. Consoli
 Mr. Redfern
 Mr. McBurnie
 79




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Mr. Olmer
 Mr. Arnold
 Mr. Hilton
 Mr. Schmitt
  Board of Directors Committees
  Compensation Committee
  Corporate Governance and Nominating Committees
  80




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Audit Committee
    Section 16(a) Beneficial Ownership Reporting Compliance
  Code of Business Conduct and Ethics
  
 Item 11. Executive Compensation:
  81




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Long-termCompensation -SecuritiesFiscal
    
    Annual Compensation
    
    Underlying
    
    All OtherName and Principal Position
    
    Year
    
    Salary
    
    Bonus (2)
    
    Options (1)
    
    Compensation (3)Walid Maghribi (4)
    
    
    2004
    
    
    $
    337,885
    
    
    
    
    
    
    
    
    
    
    $
    7,603Former Chief Executive Officer
and President
    
    
    2003
    
    
    $
    350,000
    
    
    
    
    
    
    
    400,000
    
    
    $
    5,9262002
    
    
    $
    121,254
    
    
    
    
    
    
    
    1,700,000
    
    
    $
    2,802Douglas McBurnie (5)
    
    
    2004
    
    
    $
    20,192
    
    
    
    
    
    
    
    107,500
    
    
    $
    21,542Acting Chief Executive Officer
and President
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    7,500
    
    
    $
    17,5002002
    
    
    $
    77,308
    
    
    
    
    
    
    
    
    
    
    $
    9,681Richard Hawron (6)
    
    
    2004
    
    
    $
    77,884
    
    
    
    
    
    
    
    150,000
    
    
    $
    38,179Senior Vice President of
Worldwide Sales
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Kevin Plouse (7)
    
    
    2004
    
    
    $
    224,230
    
    
    
    
    
    
    
    
    
    
    $
    11,819Senior Vice President of Business
Development
    
    
    2003
    
    
    $
    220,000
    
    
    
    
    
    
    
    50,000
    
    
    $
    5,2442002
    
    
    $
    57,538
    
    
    
    
    
    
    
    300,000
    
    
    $
    2,293Joseph Rauschmeyer (8)
    
    
    2004
    
    
    $
    234,423
    
    
    
    
    
    
    
    50,000
    
    
    $
    11,738Senior Vice President of Operations
    
    
    2003
    
    
    $
    230,000
    
    
    
    
    
    
    
    50,000
    
    
    $
    5,2882002
    
    
    $
    53,077
    
    
    
    
    
    
    
    350,000
    
    
    $
    1,879Clyde R. Wallin (9)
    
    
    2004
    
    
    $
    138,671
    
    
    
    
    
    
    
    250,000
    
    
    $
    3,723Senior Vice President of Finance
and Chief Financial Officer
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Phillip Kagel (10)
    
    
    2004
    
    
    $
    67,976
    
    
    
    
    
    
    
    
    
    
    $
    115,540Executive Vice President of
Finance and Chief Financial
Officer
    
    
    2003
    
    
    $
    194,711
    
    
    
    
    
    
    
    225,000
    
    
    $
    5,0472002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    We did not grant any restricted stock awards, grant any stock appreciation rights or
make any long term incentive payments during fiscal years 2002, 2003 and 2004.(2)
    
    Bonuses are reported in year earned even if actually paid in subsequent year.(3)
    
    Includes contributions made by us on behalf of the Named Executive Officers to our Tax
Deferred Savings Plan, insurance premiums, housing assistance, severance payment and
director fees.(4)
    
    Mr. Maghribi joined us in August 2002 and departed in December 2004.(5)
    
    Mr. McBurnie assumed the role of Acting President and CEO from June through
September of 2002 and again in December of 2004.(6)
    
    Mr. Hawron joined us in May 2004.(7)
    
    Mr. Plouse joined us in September 2002 and departed in April 2005.(8)
    
    Mr. Rauschmayer joined us in September 2002 and departed September 2005.(9)
    
    Mr. Wallin joined us in April 2004.(10)
    
    Mr. Kagel joined us in February 2003 and departed in April 2004. 82




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Option Grants in Last Fiscal Year
  Individual GrantsPercent of
    
    
    
    
    
    
    
    
    
    Potential RealizableTotal Options
    
    
    
    
    
    
    
    
    
    Value at Assumed AnnualNumber of Securities
    
    Granted to
    
    
    
    
    
    
    
    
    
    Rates of Stock PriceUnderlying
    
    Employees in
    
    Exercise or
    
    
    
    
    
    Appreciation for OptionOptions
    
    Fiscal 2004
    
    Base Price per
    
    Expiration
    
    Terms ($)(4)Name
    
    Granted (#)(1)
    
    Year (%)(2)
    
    Share ($)(3)
    
    Date
    
    5%
    
    10%Walid H. Maghribi
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Phillip A. Kagel
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Richard Hawron
    
    
    100,000
    
    
    
    6.8
    
    
    $
    8.61
    
    
    
    2/2/2014
    
    
    $
    541,478
    
    
    $
    1,372,21250,000
    
    
    
    3.4
    
    
    $
    4.46
    
    
    
    12/17/2014
    
    
    $
    140,243
    
    
    $
    355,405Kevin W. Plouse
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Joseph T. Rauschmayer
    
    
    50,000
    
    
    
    3.4
    
    
    $
    4.40
    
    
    
    12/20/2014
    
    
    $
    138,357
    
    
    $
    350,623Clyde Raymond Wallin
    
    
    200,000
    
    
    
    13.7
    
    
    $
    6.48
    
    
    
    4/05/2014
    
    
    $
    815,047
    
    
    $
    2,065,49050,000
    
    
    
    3.4
    
    
    $
    4.40
    
    
    
    12/20/2014
    
    
    $
    138,357
    
    
    $
    350,623
 
 (1)
    
    These options will vest at a rate of 25% of the shares subject to the option on the
anniversary of the grant date, so that the option will be fully exercisable four (4) years
from the grant date.(2)
    
    A total of 1,462,500 options were granted to employees (including the Named Executive Officers)
in fiscal year 2004.(3)
    
    All options were granted at fair market value on the date of the grant.(4)
    
    Amounts reported in these columns represent amounts that may be realized upon exercise of
the options immediately prior to the expiration of their term assuming the specified compound
rates of appreciation (5% and 10%) on the market value of our common stock on the date of
option grant over the term of the options. These numbers are calculated based on rules
promulgated by the SEC and do not reflect our estimate of future stock price growth. Actual
gains, if any, on stock option exercises and common stock holdings are dependent on the timing
of such exercise and the future performance of our common stock. There can be no assurance
that the rates of appreciation assumed in this table can be achieved or that the amounts
reflected will be received by the individuals. 83




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##### Table of Contents



Option Exercises and Fiscal Year-End Values
   Value ofUnexercised In-Number of Securities
    
    the-MoneyShares
    
    
    
    
    
    Underlying Unexercised
    
    Options at Year-Acquired on
    
    Value
    
    Options at Year-End
    
    End (1)Name
    
    Exercise
    
    Realized (2)
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableWalid H. Maghribi
    
    
    1,126,248
    
    
    $
    1,617,868
    
    
    
    435,210
    
    
    
    
    
    
    $
    308,870
    
    
    
    Joseph T.
Rauschmayer
    
    
    
    
    
    
    
    
    
    
    209,375
    
    
    
    240,625
    
    
    $
    586,688
    
    
    $
    470,312Kevin W. Plouse
    
    
    
    
    
    
    
    
    
    
    181,250
    
    
    
    168,750
    
    
    $
    285,188
    
    
    $
    221,813Douglas McBurnie
    
    
    
    
    
    
    
    
    
    
    127,375
    
    
    
    122,625
    
    
    $
    398,400
    
    
    $
    39,375Lionel Olmer
    
    
    
    
    
    
    
    
    
    
    50,623
    
    
    
    26,375
    
    
    $
    34,825
    
    
    $
    21,800Phillip A. Kagel
    
    
    128,500
    
    
    $
    396,473
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Joseph Consoli
    
    
    
    
    
    
    
    
    
    
    15,625
    
    
    
    21,875
    
    
    $
    44,200
    
    
    $
    31,175Thomas P. Redfern
    
    
    
    
    
    
    
    
    
    
    5,625
    
    
    
    24,375
    
    
    
    
    
    
    $
    2,175Clyde R. Wallin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    
    
    
    $
    14,000Richard Hawron
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,000
    
    
    
    
    
    
    $
    11,000John D. Arnold
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    $
    2,175Brian Hilton
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,500
    
    
    
    
    
    
    
    
 
 (1)
    
    Value is based on the difference between the option exercise price and the fair market
value of our common Stock on January 1, 2005, multiplied by the number of shares underlying
the options.(2)
    
    Value is based on the difference between the option exercise price and the reported
sales price of the shares. Executive Employment and Severance Agreements
    84




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##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters:
  85




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##### Table of Contents



Total Amount and Nature ofName and Address of Beneficial Owner (1)
    
    Beneficial Ownership
    
    Percent of ClassAlonim Investments, Inc.(2)
    
    
    16,296,200
    
    
    
    46.0
    %237 Hymus
Blvd.

Montreal (Pointe-Claire), Quebec H9R 5C7

CanadaKennedy Capital Management, Inc.(3)
    
    
    3,195,154
    
    
    
    9.0
    %10829 Olive
Blvd.

St. Louis, MO 63141Wasatch Advisors, Inc.(4)
    
    
    1,899,690
    
    
    
    5.4
    %150 Social Hall Avenue, 4th Floor,

Salt Lake city, UT 84111Dimensional Fund Advisors(5)
    
    
    1,749,910
    
    
    
    4.9
    %1299 Ocean Avenue, 11th Floor

Santa Monica, CA 90401Walid Maghribi (6)
    
    
    346,633
    
    
    
    1.0
    %Douglas M. McBurnie (7)
    
    
    242,375
    
    
    
    
    *Joseph R. Rauschmayer (8)
    
    
    242,541
    
    
    
    
    *Kevin Plouse (9)
    
    
    221,750
    
    
    
    
    *Lionel H. Olmer (10)
    
    
    52,623
    
    
    
    
    *Lee Cleveland (11)
    
    
    50,000
    
    
    
    
    *Clyde R. Wallin (12)
    
    
    50,000
    
    
    
    
    *Richard Hawron (13)
    
    
    45,000
    
    
    
    
    *Joseph Consoli (14)
    
    
    15,625
    
    
    
    
    *John Arnold (15)
    
    
    11,625
    
    
    
    
    *Thomas P. Redfern (16)
    
    
    5,625
    
    
    
    
    *Philip A. Kagel (17)
    
    
    
    
    
    
    
    *Brian Hilton
    
    
    
    
    
    
    
    *All directors and executive officers as a group
(11 persons)
    
    
    1,283,797
    
    
    
    3.5
    %
 
 *
    
    Less than 1% of Common Stock(1)
    
    Unless otherwise indicated, to our knowledge, each person listed above has sole voting
and investment power with respect to the shares and maintains a mailing address at: c/o
SIPEX Corporation, 233 South Hillview Drive, Milpitas, CA 95035.(2)
    
    Based solely on information provided in a Schedule 13G/A filed with the SEC on October
20, 2004, Alonim had sole dispositive power of 16,296,200 shares and sole voting power of
16,296,200 shares.(3)
    
    Based solely on information provided in a Schedule 13G filed with the SEC on February
5, 2005, Kennedy Capital Management, Inc. had sole dispositive power of 3,195,154 shares.(4)
    
    Based solely on information provided in a Schedule 13G filed with the SEC on February
14, 2005, Wasatch Advisors, Inc. and had sole dispositive power of 1,899,690 shares, and
sole voting power of 1,899,690 shares.(5)
    
    Based solely on information provided in a Schedule 13G/A filed with the SEC on February
9, 2005, Dimensional Fund Advisors Inc. had sole dispositive power of 1,749,910 shares and
sole voting power of 1,749,910 86




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##### Table of Contents



(6)
    
    Based on information provided in a Form 4 filed with the SEC on May 18, 2004. Any
subsequent transactions were not required to be reported on a Form 4 pursuant to Section
16b-a of the SEC, and to the best of our knowledge were same-day sale transactions and did
not change the number of shares owned. Also includes 302,633 shares issuable pursuant to
stock options which are exercisable prior to March 2, 2005.(7)
    
    Includes 227,375 shares issuable pursuant to stock options which are exercisable prior
to March 2, 2005.(8)
    
    Based on information provided in a Form 4 filed with the SEC on May 24, 2004. Also
includes 238,541 shares issuable pursuant to stock options which are exercisable prior to
March 2, 2005.(9)
    
    Based on information provided in a Form 4 filed with the SEC on June 14, 2004. Also
includes 206,250 shares issuable pursuant to stock options which are exercisable prior to
March 2, 2005.(10)
    
    Based on information provided in a Form 4 filed with the SEC on September 27, 2000.
Also includes 50,623 shares issuable pursuant to stock options which are exercisable prior
to March 2, 2005.(11)
    
    Includes 50,000 shares issuable for Mr. Cleveland pursuant to stock options which are
exercisable prior to March 2, 2005.(12)
    
    Includes 50,000 shares issuable for Mr. Wallin pursuant to stock options which are
exercisable prior to March 2, 2005.(13)
    
    Based on information provided in a Form 3 filed with the SEC on May 11, 2004. Also
includes 25,000 shares issuable pursuant to stock options which are exercisable prior to
March 2, 2005.(14)
    
    Includes 15,625 shares issuable pursuant to stock options which are exercisable prior
to March 2, 2005.(15)
    
    Based on information provided in a Form 4 filed with the SEC on March 3, 2004. Also
includes 5,625 shares issuable for Mr. Arnold pursuant to stock options which are
exercisable prior to March 2, 2005.(16)
    
    Includes 5,625 shares issuable for Mr. Redfern pursuant to stock options which are
exercisable prior to March 2, 2005. Securities Authorized for Issuance Under Equity Compensation Plans
  (a)
    
    
    (b)
    
    
    (c)Number of securitiesremaining available forNumber of securities to be
    
    
    Weighted-average
    
    
    future issuance underissued upon exercise of
    
    
    exercise price of
    
    
    equity compensation plansoutstanding options,
    
    
    outstanding options,
    
    
    (excluding securitiesPlan Category
    
    warrants and rights
    
    
    warrants and rights
    
    
    reflected in column (a))Equity compensation plans
approved by security holders
    
    
    3,974,730
    
    
    $
    6.59
    
    
    
    321,464Equity compensation plans not
approved by stockholders
    
    
    1,477,601
    
    
    $
    4.35
    
    
    
    Total
    
    
    5,452,331
    
    
    $
    5.98
    
    
    
    321,464
  2000 Non-Qualified Stock Option Plan
  87




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##### Table of Contents



2002 Nonstatutory Stock Option Plan
    
 Item 13. Certain Relationships and Related Transactions:
 Future Electronics Inc.
    88




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##### Table of Contents



89




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##### Table of Contents



Item 14. Principal Accounting Fees and Services
   Deloitte & Touche LLP
    
    2004
    
    
    2003Audit fees (1)
    
    $
    2,384
    
    
    $
    921Audit related fees (2)
    
    
    
    
    
    
    Tax fees (3)
    
    
    
    
    
    
    All other Fees (4)
    
    
    7
    
    
    
    3Total
    
    $
    2,391
    
    
    $
    924
 
 (1)
    
    Audit fees are for professional services rendered in connection with the audit of our annual financial
statements and the review of our quarterly financial statements.(2)
    
    Deloitte & Touche LLP did not perform any audit related services for both fiscal years of 2004 and 2003.(3)
    
    Deloitte & Touche LLP did not perform any tax services during the fiscal years of 2004 or 2003.(4)
    
    All other fees are for professional services rendered other than audit, audit-related or tax fees. For
the fiscal year of 2004, the fees were primarily for a Form S-8 filing. The fees for the fiscal year of
2003 were primarily for Sarbanes-Oxley readiness. 90




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##### Table of Contents



Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Auditors
  
 PART IV
 
 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K:
  1.
    
    Consolidated Financial Statements.The following consolidated financial statements
and Reports of Independent Registered Public Accounting Firms are incorporated in Item
8 of this report.
     
 2.
    
    Consolidated Financial Statement Schedules.Consolidated financial statement
schedules have been omitted because they are either not required or are included in the
consolidated financial statements or the notes thereto.3.
    
    Exhibit: The exhibits listed in the accompanying index to
exhibits are filed or incorporated by reference as part of this
Form 10-K.
 91




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##### Table of Contents



SIGNATURES
  SIPEX CORPORATIONBy:
    
    /s/ RALPH SCHMITTRalph SchmittChief Executive Officer and Director
  Name
    
    Title
    
    Date/s/ RALPH SCHMITT

Ralph Schmitt
    
    Chief Executive Officer and Director
(Principal Executive Officer)
    
    August 17, 2006/s/ CLYDE R. WALLIN

Clyde R. Wallin
    
    Chief Financial Officer and
Senior Vice President, Finance
(Principal Financial and Accounting Officer)
    
    August 17, 2006/s/ JOHN D. ARNOLD

John D. Arnold
    
    Director
    
    August 17, 2006/s/ JOSEPH C. CONSOLI

Joseph C. Consoli
    
    Director
    
    August 17, 2006/s/ BRIAN HILTON

Brian Hilton
    
    Chairman of the Board of Directors
    
    August 17, 2006/s/ DOUGLAS M.MCBURNIE

Douglas M. McBurnie
    
    Director
    
    August 17, 2006/s/ Lionel H. Olmer

Lionel H. Olmer
    
    Director
    
    August 17, 2006/s/ THOMAS P. REDFERN

Thomas P. Redfern
    
    Director
    
    August 17, 2006
 92




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description2.1
    
    Agreement and Plan of Reorganization dated October 21, 1999 by and among the
Company, Calogic, CAT Acquisition Corporation I and the other signatories
thereto (previously filed as Exhibit 2.1 to the Companys Form 8-K filed on
December 8, 1999 and incorporated herein by reference)2.2
    
    Amendment No. 1 to the Agreement and Plan of Reorganization dated November 23,
1999 by and among the Company, Calogic, CAT Acquisition Corporation I and the
other signatories thereto (previously filed as Exhibit 2.2 to the Companys
Form 8-K filed on December 8, 1999 and incorporated herein by reference)3.1
    
    Amended and Restated Certificate of Incorporation (incorporated herein by
reference from the Companys Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on October 28, 2003)3.2
    
    Bylaws (incorporated herein by reference from the Companys Registration
Statement on Form 8-A filed with the Securities and Exchange Commission on
October 28, 2003)4.2
    
    Form of Indemnification Agreement for directors and officers (filed as Exhibit
4.2 to the Companys Registration Statement on Form S-1, File No. 333-1328, and
incorporated herein by reference)10.1**
    
    1988 Non-Statutory Stock Option Plan (filed as Exhibit 10.1 to the Companys
Registration Statement on Form S-1, File No. 333-1328, and incorporated herein
by reference)10.2**
    
    1991 Non-Statutory Stock Option Plan (filed as Exhibit 10.2 to the Companys
Registration Statement on Form S-1, File No. 333-1328, and incorporated herein
by reference)10.3**
    
    1993 Stock Option and Incentive Plan (filed as Exhibit 10.3 to the Companys
Registration Statement on Form S-1, File No. 333-1328, and incorporated herein
by reference)10.4**
    
    1994 Stock Option and Incentive Plan (filed as Exhibit 10.4 to the Companys
Registration Statement on Form S-1, File No. 333-1328, and incorporated herein
by reference)10.5**
    
    1996 Incentive Stock Option Plan (filed as Exhibit 10.5 to the Companys
Registration Statement on Form S-1, File No. 333-1328, and incorporated herein
by reference)10.6
    
    1996 Non-Employee Director Stock Option Plan (filed as Exhibit 10.6 to the
Companys Registration Statement on Form S-1, File No. 333-1328, and
incorporated herein by reference)10.7**
    
    1996 Employee Stock Purchase Plan (filed as Exhibit 10.7 to the Companys
Registration Statement on Form S-1, File No. 333-1328, and incorporated herein
by reference)10.8**
    
    Employment Agreement dated August 19, 2002 by and between the Company and Walid
Maghribi (filed as Exhibit 99.1 to the Companys 8K filed on August 23, 2002,
and incorporated herein by reference)10.9**
    
    Employment Agreement, as of the 14th day of May, 1999, between the Company and
James E. Donegan (filed as Exhibit 10.2 to the Companys Quarterly Report on
Form 10-Q for the quarter ended July 3, 1999, and incorporated herein by
reference)10.10**
    
    Employment Agreement, as of the 14th day of May, 1999, between the Company and
Raymond W.B. Chow (filed as Exhibit 10.4 to the Companys Quarterly Report on
Form 10-Q for the quarter ended July 3, 1999, and incorporated herein by
reference)10.11
    
    Form of Sales Representative Agreement (filed as Exhibit 10.15 to the Companys
Registration Statement on Form S-1, File No. 333-1328, and incorporated herein
by reference)10.12
    
    Form of Sales Representative Agreement (previously filed as an exhibit to the
Companys annual report on Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference)10.13**
    
    1997 Incentive Stock Option Plan (filed as Appendix A to the Companys
definitive Proxy Statement for the Special Meeting In Lieu Of Annual Meeting Of
Shareholders held May 30, 1997 and incorporated herein by reference)10.14**
    
    Sipex Corporation 1999 Stock Plan (filed as Appendix A to the Companys
Definitive Proxy Statement on Schedule 14A, No. 1000-27897, and incorporated
herein by reference)10.15*
    
    License Agreement between Timex Corporation and Sipex Corporation dated July 1,
1997 (previously filed as an Exhibit to the Companys annual report on Form
10-K for the year ended December 31, 1997, and incorporated herein by
reference)




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##### Table of Contents



ExhibitNumber
    
    Description10.16**
    
    Employment Agreement, dated as of the 9th day of August, 1999 between the
Company and Stephen E. Parks (filed as Exhibit 10.1 to the Companys Quarterly
Report on Form 10-Q for the quarter ended July 3, 1999, and incorporated herein
by reference)10.17**
    
    2000 Non-Qualified Stock Option Plan (filed as an exhibit to the Companys
annual report on Form 10-K for the year ended December 31, 2000, and
incorporated herein by reference)10.18**
    
    2002 Nonstatutory Stock Option Plan (filed as Exhibit 4.3 to the Companys
Registration Statement on Form S-8, File No. 73880, and incorporated herein by
reference)10.19
    
    Deed of Reconveyance and Termination of Lease (filed as Exhibit 10.2 to the
Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2001,
and incorporated herein by reference)10.20**
    
    Employment Agreement dated February 2, 2003 by and between the Company and
Phillip A. Kagel (filed as an Exhibit to the Companys Annual report on Form
10-K for the year ended December 31, 2002, and incorporated herein by
reference)10.21**
    
    Employment Agreement dated September 11, 2002 by and between the Company and
Joseph T. Rauschmayer (filed as an Exhibit to the Companys Annual report on
Form 10-K for the year ended December 31, 2002, and incorporated herein by
reference)10.22**
    
    Employment Agreement dated August 23, 2002 by and between the Company and Kevin
Plouse (filed as an Exhibit to the Companys Annual report on Form 10-K for the
year ended December 31, 2002, and incorporated herein by reference)10.23
    
    Securities Purchase Agreement dated as of September 27, 2002, by and between
the Company and S&F Financial Holdings, Inc. (filed as Exhibit 99.2 to the
Companys 8-K filed on October 1, 2002, and incorporated herein by reference)10.24
    
    Sipex Corporation 5.75% Convertible Secured Note due 2007 (filed as Exhibit
99.3 to the Companys 8-K filed on October 1, 2002, and incorporated herein by
reference)10.25
    
    Warrant to purchase 900,000 shares of common stock issued to S&F Financial
Holdings, Inc. (filed as Exhibit 99.4 to the Companys 8-K on October 1, 2002,
and incorporated herein by reference)10.26
    
    Deed of Trust with Assignment of Rents dated as of September 27, 2002, between
the Company, First America Title Insurance Company and S&F Financial Holdings,
Inc. (filed as Exhibit 99.5 to the Companys 8-K on October 1, 2002, and
incorporated herein by reference)10.27
    
    Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by
and between the Company and Future Electronics Incorporated (filed as an
Exhibit to the Companys Annual report on Form 10-K for the year ended
December 31, 2002, and incorporated herein by reference)10.28
    
    Addendum A dated February 7, 2003 to Worldwide Authorized Distributor Market
Price Agreement dated July 22, 1993, by and between the Company and Future
Electronics Incorporated (filed as an Exhibit to the Companys Annual report on
Form 10-K for the year ended December 31, 2002, and incorporated herein by
reference)10.29
    
    Securities Purchase Agreement dated as of May 27, 2003, by and between the
Company and Alonim Investments Inc. (previously filed as Exhibit 99.1 to the
Companys Form 8-K filed on May 29, 2003 and incorporated herein by reference)10.30
    
    Form of Company Convertible Secured Note to be issued to Alonim Investments
Inc. (previously filed as Exhibit 99.1 to the Companys Form 8-K filed on May
29, 2003 and incorporated herein by reference)10.31
    
    Form of Registration and Standstill Agreement by and between the Company and
Alonim Investments Inc., and its affiliates which are signatories thereto,
namely: Future Electronics Inc., and S&F Financial Holdings Inc. (previously
filed as Exhibit 99.1 to the Companys Form 8-K filed on May 29, 2003 and
incorporated herein by reference)10.32
    
    Form of Voting Agreement by and between the Company and Alonim Investments Inc.
(previously filed as Exhibit 99.1 to the Companys Form 8-K filed on May 29,
2003 and incorporated herein by reference)10.33
    
    Form of Security Agreement by and between the Company and Alonim Investments
Inc. (previously filed as Exhibit 99.1 to the Companys Form 8-K filed on May
29, 2003 and incorporated herein by reference)10.34
    
    Form of Deed of Trust to be issued to Alonim Investments Inc. (previously filed
as Exhibit 99.1 to the Companys Form 8-K filed on May 29, 2003 and
incorporated herein by reference)10.35
    
    Modification Agreement dated as of December 23, 2003 by and among the Company
and Rodfre Lending LLC and certain of its affiliates (previously filed as
Exhibit 99.1 to the Companys Form 8-K filed on December 24, 2003)




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##### Table of Contents



ExhibitNumber
    
    Description10.36**
    
    Separation Agreement and Release as of 12/17/04 (previously filed as Exhibit
99.2 to the Companys Form 8-K filed on 12/23/04 and incorporated herein by
reference) with Mr. Maghribi the former President and Chief Executive Officer
of Sipex and a former member of the Board of Directors of Sipex10.37**
    
    Letter agreement as of 12/17/04 (previously filed as Exhibit 99.3 to the
Companys Form 8-K filed on 12/23/04 and incorporated herein by reference)
concerning the terms of Mr. McBurnies employment with Sipex21.1
    
    Subsidiaries of the Company (previously filed as an exhibit to the Companys
Annual report on Form 10-K for the year ended December 31, 2000, and
incorporated herein by reference.23.1
    
    Consent of Independent Registered
Public Accounting Firm  KPMG LLP31.1
    
    Certification of Chief Executive Officer pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 200232.1
    
    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 200232.2
    
    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
 
 *
    
    Confidential treatment as to certain portions has been requested pursuant to Rule 24b-2
promulgated under the Securities Exchange Act of 1934, as amended.**
    
    The Exhibits identified above with an asterisk (*) are management contracts or compensatory
plans or arrangements.