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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2003;
or
|_| 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: 0-12742
SPIRE CORPORATION
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(Name of small business issuer as specified in its charter)
MASSACHUSETTS 04-2 57335
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE PATRIOTS PARK
BEDFORD, MASSACHUSETTS 01730-2396
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(Address of principal executive offices)
(781) 275-6000
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(Issuer's telephone number)
Securities registered under Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE; REGISTERED ON THE NASDAQ STOCK MARKET
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(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the issuer was required to file such
reports); and (2) has been subject to such filing requirements for the past 90
days. Yes |X| No |_|
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. There were 6,765,660
outstanding shares of the issuer's only class of common equity, Common Stock,
$0.01 par value, on July 31, 2003.
Transitional Small Business Disclosure Format (Check One):
Yes |_| No |X|
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SPIRE CORPORATION
FORM 10-QSB
FOR THE PERIOD ENDED JUNE 30, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2003 and
December 31, 2002 (unaudited) ..................................... 1
Condensed Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 2003 and 2002 ........................... 2
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2003 and 2002 (unaudited) .......................... 3
Notes to Condensed Consolidated Financial Statements .............. 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................. 8
Item 3. Controls and Procedures ........................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 14
Item 2. Changes in Securities ............................................. 14
Item 3. Defaults Upon Senior Securities ................................... 14
Item 4. Submission of Matters to a Vote of Security Holders ............... 14
Item 5. Other Information ................................................. 14
Item 6. Exhibits and Reports on Form 8-K .................................. 15
SIGNATURES ................................................................. 16
EXHIBITS
CERTIFICATIONS
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
Current assets
--------------
Cash and cash equivalents $ 10,954,398 $ 7,798,716
Restricted cash 102,857 --
------------ ------------
Total cash 11,057,255 7,798,716
------------ ------------
Accounts receivable, trade:
Amounts billed 3,019,576 3,574,851
Retainage 54,958 67,715
Unbilled costs 341,462 634,958
------------ ------------
3,415,996 4,277,524
Less allowance for doubtful accounts (318,109) (349,443)
------------ ------------
Net accounts receivable 3,097,887 3,928,081
------------ ------------
Inventories 1,823,905 2,220,587
Deferred tax asset 116,000 116,000
Prepaid expenses and other current assets 851,138 988,500
------------ ------------
Total current assets 16,946,185 15,051,884
------------ ------------
Property and equipment 22,872,204 15,604,809
Less accumulated depreciation and amortization (13,614,619) (13,132,220)
------------ ------------
Net property and equipment 9,257,585 2,472,589
------------ ------------
Patents (less accumulated amortization, $505,700 in 2003 and $499,505 in 2002) 328,601 241,313
Other assets 8,325 6,324
------------ ------------
336,926 247,637
------------ ------------
$ 26,540,696 $ 17,772,110
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Current portion of capital lease obligation unrelated party $ 390,771 $ --
Current portion of capital lease obligation related party 644,199 --
Accounts payable 1,723,073 1,852,332
Accrued liabilities 1,305,618 1,616,585
Income taxes payable 957,000 --
Other current liabilities 464,663 --
Advances on contracts in progress 1,000,161 1,058,852
------------ ------------
Total current liabilities 6,485,485 4,527,769
------------ ------------
Long-term portion of capital lease obligation unrelated party 934,849 --
Long-term portion of capital lease obligation related party 3,004,120 --
Other liabilities 604,862 --
Unearned purchase discount 1,465,657 1,469,123
Stockholders' equity
--------------------
Common stock, $0.01 par value; shares authorized 20,000,000;
issued 6,761,660 shares in 2003 and 6,755,660 shares in 2002 67,617 67,557
Additional paid-in capital 9,258,576 9,246,421
Retained earnings 4,719,530 2,461,240
------------ ------------
Total stockholders' equity 14,045,723 11,775,218
------------ ------------
$ 26,540,696 $ 17,772,110
============ ============
See accompanying notes to condensed consolidated financial statements
1
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales and revenues
----------------------
Contract research and service revenues $ 1,922,671 $ 1,725,103 $ 3,514,735 $ 3,365,753
Sales of goods 1,832,250 2,836,348 3,199,279 4,522,215
------------ ------------ ------------ ------------
Total sales and revenues 3,754,921 4,561,451 6,714,014 7,887,968
------------ ------------ ------------ ------------
Costs and expenses
------------------
Cost of contract research and services 1,217,159 970,071 2,216,490 2,160,296
Cost of goods sold 1,722,079 2,177,870 3,009,816 3,568,979
Selling, general and administrative expenses 1,536,068 1,343,297 2,893,134 2,639,991
Internal research and development 284,744 78,771 380,841 134,989
------------ ------------ ------------ ------------
Total costs and expenses 4,760,050 4,570,009 8,500,281 8,504,255
------------ ------------ ------------ ------------
Gain on sale of license 5,000,000 -- 5,000,000 --
Earnings (loss) from operations 3,994,871 (8,558) 3,213,733 (616,287)
-------------------------------
Interest income (expense), net (5,883) 10,099 1,558 13,137
------------ ------------ ------------ ------------
Earnings (loss) before income taxes 3,988,988 1,541 3,215,291 (603,150)
Income tax expense 957,000 100 957,000 100
------------ ------------ ------------ ------------
Net earnings (loss) $ 3,031,988 $ 1,441 $ 2,258,291 $ (603,250)
------------------- ============ ============ ============ ============
Earnings (loss) per share of common stock - basic $ 0.44 $ 0.00 $ 0.33 $ (0.09)
------------------------------------------------- ============ ============ ============ ============
Earnings (loss) per share of common stock - diluted $ 0.43 $ 0.00 $ 0.33 $ (0.09)
--------------------------------------------------- ============ ============ ============ ============
Weighted average number of common and common
equivalent shares outstanding - basic 6,761,660 6,735,757 6,759,127 6,735,757
============ ============ ============ ============
Weighted average number of common and common
equivalent shares outstanding - diluted 6,994,558 6,868,102 6,867,475 6,735,757
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
2
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
------------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 2,258,291 $ (603,250)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 488,514 398,707
Gain on sale of license (5,000,000) --
Changes in assets and liabilities:
Accounts receivable, net 1,110,633 (1,019,093)
Inventories 442,899 (662,729)
Prepaid expenses and other current assets 213,503 (7,558)
Accounts payable and accrued liabilities 116,107 1,295,791
Unearned purchase discount (3,466) --
Other assets (2,001) 5,812
Advances on contracts in progress (58,691) 485,769
------------ ------------
Net cash provided by (used in) operating activities (434,211) (106,551)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of license 5,000,000 --
Additions to property and equipment (411,442) (87,965)
Acquisition of business - Note 8 (724,969)
Increase in patent costs (93,402) (106,909)
------------ ------------
Net cash provided by (used in) investing activities 3,770,187 (194,874)
------------ ------------
Cash flows from financing activities:
Net payments on short-term debt -- (875,000)
Principal payment of capital lease obligations (89,652) --
Exercise of stock options 12,215 34,674
------------ ------------
Net cash provided by (used in) financing activities (77,437) (840,326)
------------ ------------
Net increase (decrease) in cash and cash equivalents 3,258,539 (1,141,751)
Cash and cash equivalents and restricted cash, beginning of period 7,798,716 5,582,884
------------ ------------
Cash and cash equivalents and restricted cash, end of period $ 11,057,255 $ 4,441,133
============ ============
Supplemental disclosures of cash flow information:
Non cash financing:
Capital lease obligation for building $ 3,700,000 $ --
============ ============
Cash paid during the period for:
Interest $ 26,663 $ 30,238
============ ============
Income taxes $ 435,000 $ 100
============ ============
See accompanying notes to condensed consolidated financial statements.
3
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2003
1. DESCRIPTION OF THE BUSINESS
The Company develops, manufactures and markets highly-engineered solar
electric module manufacturing equipment and systems and provides biomedical
processing services and devices. The Company is a leading supplier in the design
and manufacture of specialized equipment for the production of terrestrial
photovoltaic modules from solar cells, with its equipment installed in more than
140 factories and in 42 countries. The Company's value-added biomedical
processing services offer surface treatments to enhance the durability or the
antimicrobial characteristics of orthopedic and other medical devices. The
Company's biomedical products business markets hemodialysis catheter devices for
the treatment of chronic kidney disease. The Company also produces custom
compound semiconductor wafers and devices used in biomedical instruments,
telecommunications and defense applications.
2. INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to fairly
present the Company's financial position as of June 30, 2003 and the results of
operations for the three and six months ended June 30, 2003 and 2002 and cash
flows for the six months ended June 30, 2003 and 2002. The results of operations
for the three and six months ended June 30, 2003 are not necessarily indicative
of the results to be expected for the fiscal year ending December 31, 2003.
The accounting policies followed by the Company are set forth in Note 2
to the Company's consolidated financial statements in its annual report on Form
10-KSB for the year ended December 31, 2002.
3. INVENTORIES
Inventories consist of the following:
June 30, December 31,
2003 2002
---------- ----------
Raw materials $ 787,796 $ 662,384
Work in process 701,239 1,324,345
Finished goods 334,870 233,858
---------- ----------
$1,823,905 $2,220,587
---------- ----------
4. NET EARNINGS (LOSS) PER SHARE
The following table provides a reconciliation of the denominators of the
Company's reported basic and diluted net earnings (loss) per share computations
for the periods ended:
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- --------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Weighted average number of common
shares outstanding - basic 6,761,660 6,735,757 6,759,127 6,735,757
Add net additional common shares upon
exercise of common stock options 232,898 139,550 108,348 --
--------- --------- --------- ---------
Adjusted weighted average common
shares outstanding - diluted 6,994,558 6,875,307 6,867,475 6,735,757
--------- --------- --------- ---------
At June 30, 2002, 239,062 shares of common stock issuable under stock
options, were not included in the calculation of diluted earnings per share
because their effect would be antidilutive.
4
5. OPERATING SEGMENTS AND RELATED INFORMATION
The following table presents certain operating segment information in
accordance with the provisions of SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information."
The revenues for Bandwidth Semiconductor have been included in the
optoelectronics segment along with the biophotonics lifesciences segment
previously disclosed. The acquisition of Bandwidth took place on May 23, 2003.
The revenues from that date through the end of the quarter ended June 30, 2003
were included in the segment disclosures.
Solar Solar Total
Equipment Systems Biomedical Optoelectronics Company
----------- ----------- ----------- ----------- -----------
For the three months ended June 30, 2003
----------------------------------------
Net sales and revenues $ 951,224 $ 810,197 $ 1,670,737 $ 322,763 $ 3,754,921
Earnings (loss) from operations (488,333) (145,620) 4,724,379 (95,555) 3,994,871
For the three months ended June 30, 2002
----------------------------------------
Net sales and revenues $ 886,991 $ 1,771,640 $ 1,685,475 $ 217,345 $ 4,561,451
Earnings (loss) from operations (338,253) 217,229 104,973 7,493 (8,558)
For the six months ended June 30, 2003
--------------------------------------
Net sales and revenues $ 2,194,585 $ 810,197 $ 3,306,322 $ 402,910 $ 6,714,014
Earnings (loss) from operations (552,524) (546,062) 4,417,756 (105,437) 3,213,733
For the six months ended June 30, 2002
--------------------------------------
Net sales and revenues $ 2,042,860 $ 2,474,610 $ 2,940,463 $ 430,035 $ 7,887,968
Earnings (loss) from operations (481,070) (73,335) (66,098) 4,216 (616,287)
6. INTANGIBLE ASSETS
Intangible assets amounted to $328,601 (net of accumulated amortization
of $505,700) and $241,313 (net of accumulated amortization of $499,505) at June
30, 2003 and December 31, 2002, respectively. These intangible assets primarily
consist of patents that the Company has been awarded and are amortized over the
shorter of their useful lives or their terms, principally five years. There are
no expected residual values related to these intangible assets. Included in the
amortization expense estimates is $50,000 of patents pending expenses which
relate to costs incurred toward securing patents, but have not yet been granted.
Estimated fiscal year amortization expense is as follows:
Year Amortization Expense
---- --------------------
2003 $14,729
2004 61,489
2005 58,875
2006 55,009
2007 54,448
Patent costs are capitalized and amortized over five years using the
straight-line method. The patent cost is primarily composed of cost associated
with securing and registering a patent.
7. STOCK-BASED COMPENSATION
The Company has adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" ("SFAS 148") which is an amendment of
SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), and
continues to apply Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock plans. If the Company had elected to
recognize compensation cost for all of the plans based upon the fair value at
the grant dates for awards under those plans, consistent with the method
prescribed by SFAS 123, net income and earnings per share would have been
changed to the pro forma amounts indicated below.
5
The per-share weighted-average fair value of stock options granted
during the quarter ended June 30, 2003 and 2002 was $9,562 and $555,188,
respectively, on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions:
Year Expected Dividend Yield Risk-Free Interest Rate Expected Option Life Expected Volatility Factor
---------- ----------------------- ----------------------- -------------------- --------------------------
2003 -- 3.33% 5 years 81.67%
2002 -- 4.93% 5 years 88.50%
The Company applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its options under SFAS No.
123, the Company's net income (loss) would have been reduced (increased) to the
pro forma amounts indicated below.
2003 2002
------------- -------------
Net earnings as reported $ 3,031,988 $ 1,441
Earnings per share of common stock - diluted, as reported $ 0.43 $ 0.00
Net earnings (loss) pro forma $ 2,947,359 $ (79,026)
Earnings (loss) per share of common stock - diluted, pro forma $ 0.42 $ (0.01)
8. ACQUISITION
On May 23, 2003, the Company acquired from Stratos Lightwave, Inc.
("Stratos") all the ownership interest of Bandwidth Semiconductor, LLC, a
Delaware limited liability company ("Bandwidth") located in Hudson, New
Hampshire. Bandwidth is a wholly owned subsidiary of the Company. Bandwidth is a
compound semiconductor foundry providing material and device fabrication
services to defense, telecommunications and biomedical instrument industries.
Prior to December 30, 1999, Bandwidth had been the Company's
Optoelectronics division, which had been sold to Methode Electronics, Inc.
("Methode"). In 2000, Methode spun off Stratos in an initial public offering. On
May 23, 2003, 100 percent of the ownership interest of Bandwidth were acquired
by Spire. Spire owns 100% of the ownership interest of Bandwidth. Prior to the
acquisition, Bandwidth was a wholly owned subsidiary of Stratos.
The Company paid $724,969 in cash, the Company's acquisition of
Bandwidth did not include the following "excluded assets": various forms of cash
held by Bandwidth and the building in Hudson, New Hampshire occupied by
Bandwidth. The Company assumed an unrelated party capital lease with GE Capital
that Bandwidth had entered into to finance the purchase of a wafer production
reactor. The consideration from the Company to Stratos included the release and
forgiveness from all future obligations of Bandwidth, Stratos and Methode in
connection with a Sublease Agreement with the Company dated December 29, 1999
and expiring on November 30, 2005 for approximately 21,275 square-feet of space
previously occupied by Bandwidth in Bedford, Massachusetts.
The total purchase price of $724,969, was allocated to the present value
of the future payments and the estimated fair value, of the assets acquired and
liabilities assumed, is summarized as follows:
Current assets $ 402,796
Property and equipment 3,155,952
Liabilities (2,833,779)
Total $ 724,969
In conjunction with the acquisition of Bandwidth by Spire, a Trust of
which Roger G. Little, Chairman of the Board, Chief Executive Officer and
President, is sole trustee and principal beneficiary, purchased the building
that Bandwidth occupies from Stratos, the parent company. Subsequently,
Bandwidth Semiconductor entered into a lease for the building it occupies in
Hudson, New Hampshire with SPI-Trust. The lease is for an initial five-year term
expiring in 2008 with option to extend for five years. It has been classified as
a related party capital lease. The following table summarizes Bandwidth's lease
obligations to SPI-Trust at June 30, 2003.
Payments Due by Period
--------------------------------------------------------------------------------------------------------
Contractual Obligation Total Less than 1 Year 1 - 3 Years 4 - 5 Years After 5 Years
--------------------------- ------------------ ----------------------- -------------------- -------------------- -------------------
Related party capital lease $4,140,000 $315,000 $1,346,250 $1,972,500 $506,250
6
The following pro forma information assumes that the acquisition of Bandwidth
had been completed as of the beginning of the second quarter 2003. For
comparative purposes, the Bandwidth results of operations for the second quarter
2002 have also been included in the prior year numbers.
Three Months Ended Three Months Ended
June 30, 2003 June 30, 2002
----------- -----------
Revenue $ 3,931,395 $ 5,139,314
Net income $ 2,425,348 $(1,148,306)
Earnings per share $ 0.35 $ (0.17)
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
----------- -----------
Revenue $ 7,324,724 $ 8,959,901
Net income $ 640,526 $(2,989,604)
Earnings per share $ 0.09 $ (0.44)
9. PROPERTY UNDER CAPITAL LEASES AND LEASE COMMITMENTS
At June 30, 2003 and December 31, 2002, the Company had capital leases
in effect for a building and fabrication equipment. The Company also had
operating leases for office space and other miscellaneous items.
The components of property under capital leases were as follows:
2003 2002
----------- -----------
Unrelated party capital lease:
Emcore reactor $ 1,524,931 $ 1,915,702
Less accumulated amortization (199,311) (390,771)
----------- -----------
$ 1,325,620 $ 1,524,931
=========== ===========
2003 2002
----------- -----------
Related party capital lease:
Hudson, New Hampshire building $ 3,700,000 --
Less accumulated amortization (51,681) --
----------- -----------
$ 3,648,319 --
=========== ===========
A schedule of future minimum lease payments at June 30, 2003 follows:
Unrelated Party Related Party Operating
Capital Lease Capital Lease Leases
----------- ----------- -----------
2003 $ 238,902 $ 315,000 $ 934,228
2004 477,804 618,750 1,723,836
2005 477,804 727,500 1,526,765
2006 318,536 870,000 159,246
2007 -- 1,102,500 5,639
2008 -- 506,250 --
----------- ----------- -----------
Total minimum lease payments 1,513,046 4,140,000 4,349,714
Less amount representing interest (187,426) (491,681) --
Present value of minimum lease payments 1,325,620 3,648,319 --
Less current portion (390,771) (644,199) --
----------- ----------- -----------
$ 934,849 $ 3,004,120 $ 4,349,714
=========== =========== ===========
7
In September 2001, Bandwidth Semiconductor, LLC ("Bandwidth") entered
into an agreement with GE Capital Leasing Corp, for the lease of a reactor for
the wafer production line. The lease is accounted for as a capital lease. Under
the lease agreement, the Company is making monthly payments of $36,000 for a
period of 36 months. After the initial three-year period, the lease allows for
an additional two-year extension with monthly payments of $40,000. The Company
expects to extend the lease term for the additional two years in September 2004.
Therefore, the lease will have been amortized over the full five-year period.
In conjunction with the acquisition of Bandwidth by the Company, the
Company's Bandwidth Semiconductor division entered into a lease for the building
it occupies from a Trust of which Roger G. Little, Chairman of the Board, Chief
Executive Officer and President, is sole trustee and principal beneficiary. The
Company believes that the terms of the sublease are commercially reasonable. The
lease is for an initial five-year term expiring in 2008 with option to extend
for five years. It has been classified a capital lease; under the lease
agreement, the Company is making monthly payments of $45,000 for the first 12
months, with an increased monthly payment each year, through June 2008. Interest
costs were assumed at 7%.
Total rent expense under operating leases was approximately $739,000 for
the six months ended June 30, 2003.
10. SALE OF A LICENSE
In October 2002, the Company sold an exclusive patent license for a
hemodialysis split-tip catheter to Bard Access Systems, Inc., a wholly owned
subsidiary of C.R. Bard, Inc., in exchange for $5 million upon the execution of
the agreement, with another $5 million due no later than 18 months after
signing, and another $6 million upon achievement of certain milestones by Bard
Access Systems. The Company recorded a net gain of $4,465,000 from the proceeds
received in 2002, after reduction of direct costs, and has been recorded as a
component of earnings from operations. The second $5 million payment was
received in June 2003 and it was recorded as a net gain of $5 million during the
quarter ended June 30, 2003. In conjunction with the sale, the Company received
a sublicense, which permits the Company to continue to manufacture and market
hemodialysis catheters for the treatment of chronic kidney disease. In addition,
the Company granted Bard Access Systems a right of refusal should the Company
seek to sell the Catheter business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SECTION AND OTHER PARTS OF THIS REPORT CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS AND TIMING DESCRIBED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DESCRIBED OR REFERRED TO IN THIS REPORT AND IN ITEM 6 OF THE ANNUAL REPORT
ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 2002.
Results of Operations
---------------------
The following table sets forth certain items as a percentage of net
sales and revenues for the periods presented:
Three Months Ended June 30, Six Months Ended June 30,
------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales and revenues 100% 100% 100% 100%
Cost of sales and revenues 78 69 78 73
---- ---- ---- ----
Gross profit 22 31 22 27
Selling, general and administrative expenses 41 29 43 33
---- ---- ---- ----
Internal research and development 8 2 6 2
Gain on sale of license 133 -- 75 --
Earnings (loss) from operations 106 -- 48 (8)
Loss before income taxes 106 -- 48 (8)
Income tax expense 26 -- 14 --
---- ---- ---- ----
Net earnings (loss) 80% 0% 33% (8%)
---- ---- ---- ----
8
Three and Six Months Ended June 30, 2003 Compared to Three and Six Months Ended
-------------------------------------------------------------------------------
June 30, 2002
-------------
NET SALES AND REVENUES
Net sales and revenues decreased $806,000 or 18% for the three months
ended June 30, 2003 to $3,755,000, compared to $4,561,000 for the three months
ended June 30, 2002. Contract research and service revenues increased $198,000
or 11% to $1,923,000 for the three months ended June 30, 2003 compared to
$1,725,000 for 2002. Sales of goods decreased $1,004,000 or 35% to $1,832,000
for the three months ended June 30, 2003, compared to $2,836,000 for 2002.
The following table categorizes the Company's net sales and revenues for
the periods presented:
Three Months Ended June 30,
---------------------------------------
2003 2002 % Change
----------- ----------- -----------
Contract research and service revenues $1,923,000 $1,725,000 11%
Sales of goods 1,832,000 2,836,000 (35%)
----------- -----------
Net sales and revenues $3,755,000 $4,561,000 (18%)
----------- -----------
The increase in contract research and service revenues for the three
month period ended June 30, 2003 is attributable to an increase in United States
government research and development contracts, and continued strong demand for
the Company's biomedical processing services. The decrease in sales of goods for
the three month period ended June 30, 2003 is primarily due to lower than
expected solar systems revenue and low demand for the Company's manufacturing
equipment due to excess capacity in the market place. A portion of the decrease
was offset by an increase in revenue associated with the Company's hemodialysis
split-tip catheter.
Net sales and revenues decreased $1,174,000 or 15% for the six months
ended June 30, 2003 to $6,714,000, compared to $7,888,000 for the six months
ended June 30, 2002. Contract research and service revenues increased $151,000
or 4% to $3,515,000 for the six months ended June 30, 2003 compared to
$3,666,000 for 2002. Sales of goods decreased $1,323,000 or 29% to $3,199,000
for the six months ended June 30, 2003, compared to $4,522,000 for 2002.
The following table categorizes the Company's net sales and revenues for
the periods presented:
Six Months Ended June 30,
---------------------------------------
2003 2002 % Change
----------- ----------- -----------
Contract research and service revenues $3,515,000 $3,366,000 4%
Sales of goods 3,199,000 4,522,000 (29%)
----------- -----------
Net sales and revenues $6,714,000 $7,888,000 (15%)
----------- -----------
The increase in contract research and service revenues for the six month
period ended June 30, 2003 is attributed to the increase in U.S. government
research contracts and increased demand for the Company's biomedical processing
services. The decrease in sales of goods for the six month period ended June 30,
2003 is primarily due to zero revenue associated with solar systems sales for
the three month period ended March 31, 2003.
COST OF SALES AND REVENUES
The total cost of sales and revenues decreased $209,000 to $2,939,000,
and increased to 78% of total net sales and revenues, for the quarter ended June
30, 2003, compared to $3,148,000 or 69% of total net cost of sales and revenues
for the quarter ended June 30, 2002. The cost of contract research and service
revenues increased $247,000 to $1,217,000 increasing to 63% of related revenues
for the three months ended June 30, 2003, compared to $970,000 or 56% of related
revenues for the three months ended June 30, 2002. The decrease is a result of a
shift in mix towards the Company's biomedical processing services. Cost of goods
sold decreased $456,000 to $1,722,000, and increased to 94% of related sales,
for the three months ended June 30, 2003, compared to $2,178,000 or 77% of
related sales for the three months ended June 30, 2002. The increase in cost of
goods as a percentage of related sales is a result of the fixed cost associated
with the Company's manufacturing operation.
9
The following table categorizes the Company's cost of sales and revenues
for the periods presented, stated in dollars and as a percentage of related
sales and revenues:
Three Months Ended June 30,
-----------------------------------------
2003 % 2002 %
----------- ----- ----------- -----
Cost of contract research and service revenues $1,217,000 63% $ 970,000 56%
Cost of goods sold 1,722,000 94% 2,178,000 77%
----------- -----------
Total cost of sales and revenues $2,939,000 78% $3,148,000 69%
----------- -----------
COST OF SALES AND REVENUES
The total cost of sales and revenues decreased $503,000 to $5,226,000
increasing to 78% of total net sales and revenues, for the six months ended June
30, 2003, compared to $5,729,000 or 73% of total net cost of sales and revenues
for the six months ended June 30, 2002. The cost of contract research and
service revenues increased $56,000 to $2,216,000 decreasing to 63% of related
revenues for the six months ended June 30, 2003, compared to $2,160,000 or 64%
of related revenues for the six months ended June 30, 2002. The decrease is a
result of a shift in mix towards the Company's biomedical processing services.
Cost of good sold decreased $559,000 to $3,010,000, and increased to 94% of
related sales, for the six months ended June 30, 2003, compared to $3,569,000 or
80% of related sales for the three months ended June 30, 2002. The increase in
cost of goods as a percentage of related sales is a result of the fixed cost
associated with the Company's manufacturing operation.
The following table categorizes the Company's cost of sales and revenues
for the periods presented, stated in dollars and as a percentage of related
sales and revenues:
Six Months Ended June 30,
-----------------------------------------
2003 % 2002 %
----------- ----- ----------- -----
Cost of contract research and service revenues $2,216,000 63% $2,160,000 64%
Cost of goods sold 3,010,000 94% 3,569,000 80%
----------- -----------
Total cost of sales and revenues $5,226,000 78% $5,729,000 73%
----------- -----------
INTERNAL RESEARCH AND DEVELOPMENT
Internal research and development for the three months ended June 30,
2003 increased $206,000 or 261% to $285,000, compared to $79,000 for the three
months ended June 30, 2002, as the Company continued its investment in the
catheter development program and development of the next generation of
manufacturing equipment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
June 30, 2003 increased $193,000 to $1,536,000, and increased to 44% of sales
and revenues, compared to 1,343,000 or 29% of sales and revenues for the three
months ended June 30, 2002. The increase in selling, general and administrative
expenses as a percentage of sales and revenues are due to lower revenues in
2003, as compared to the three months ended June 30, 2002.
Selling, general and administrative expenses for the six months ended
June 30, 2003 increased $253,000 to $2,893,000, and increased to 43% of sales
and revenues, compared to $2,640,000 or 33% of sales and revenues for the six
months ended June 30, 2002.
INTEREST
The Company incurred interest expense of $6,000 for the quarter ended
June 30, 2003, compared to $10,000 of interest income for the quarter ended June
30, 2002. This is primarily as a result of interest associated with capital
leases.
NET EARNINGS (LOSS)
The Company reported a net earnings for the quarter ended June 30, 2003
of $3,032,000, compared to net earnings of $1,000 for the quarter ended June 30,
2002. The Company reported net earnings for the six months ended June 30, 2003
of $2,258,000, compared to a net loss of $603,000 for the quarter ended June 30,
2002. The earnings for the quarter are
10
attributed to the Company's income associated with a payment received relating
to the sale of a license for the Company's hemodialysis split-tip catheter.
Liquidity and Capital Resources
-------------------------------
To date, the Company has been able to fund its operating cash
requirements using proceeds from the licensing of technology, operations, and
available lines of credit. On June 23, 2003, the Company entered into a Letter
of Credit Agreement with Citizens Bank of Massachusetts. The Agreement provides
Standby Letter of Credit Guarantees for foreign customers and is 100% secured
with cash. At June 30, 2003, the Company had $103,000 of restricted cash
associated with the line of credit.
The agreement also provides the Company with the ability to convert to a
$2 million revolving credit facility, based upon eligible accounts receivable.
The Company believes it has sufficient resources to finance its current
operations for the foreseeable future through working capital. Cash and cash
equivalents increased $3,259,000 to $11,057,000 at June 30, 2003 from $7,799,000
at December 31, 2002. To date, there are no material commitments by the Company
for capital expenditures. At June 30, 2003, the Company's retained earnings were
$4,695,000, compared to retained earnings of $2,461,000 as of December 31, 2002.
Working capital as of June 30, 2003 increased 4% to $10,997,000, compared to
$10,524,000 as of December 31, 2002.
Recent Accounting Pronouncements
--------------------------------
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity",
("SFAS 150"). SFAS 150 requires issuers to classify as liabilities (or assets in
some circumstances) three classes of freestanding financial instruments that
embody obligations for the issuer. Generally, SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003 and is
otherwise effective at the beginning of the first interim period beginning after
June 15, 2003. The adoption of this statement is not anticipated to have a
material effect of Spire's results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of commitment to an exit or disposal
plan. SFAS 146 is effective for exit or disposal activities initiated after
December 31, 2002. The Company 's adoption of SFAS 146 did not have a material
impact on its financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that
upon issuance of a guarantee, a guarantor must recognize a liability for the
fair value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 will be effective for any guarantees that are
issued or modified after December 31, 2002. The disclosure requirements will be
effective for the Company's second quarter of fiscal 2003. Management does not
expect the adoption of FIN 45 to have a material impact on the Company's
financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock
Based Compensation - Transition and Disclosure - an Amendment of SFAS 123"
("SFAS 148"). SFAS 148 provides additional transition guidance for those
entities that elect to voluntarily adopt the provisions of SFAS 123, "Accounting
for Stock Based Compensation." Furthermore, SFAS 148 mandates new disclosures in
both interim and year-end financial statements of the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The adoption of SFAS 148 did not have a material impact on the
Company's financial position or results of operation.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46") which requires the
consolidation of variable interest entities by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning
11
after June 15, 2003 (third quarter of fiscal 2003). The adoption of FIN 46 did
not have a material impact on our results of operations and financial condition.
Impact of Inflation and Changing Prices
---------------------------------------
Historically, the Company's business has not been materially impacted by
inflation. Manufacturing equipment and solar systems are generally quoted,
manufactured and shipped within a cycle of approximately nine months, allowing
for orderly pricing adjustments to the cost of labor and purchased parts. The
Company has not experienced any negative effects from the impact of inflation on
long-term contracts. The Company's service business is not expected to be
seriously affected by inflation because its procurement-production cycle
typically ranges from two weeks to several months, and prices generally are not
fixed for more than one year. Research and development contracts usually include
cost escalation provisions.
Foreign Exchange Fluctuation
----------------------------
The Company sells its products and services only in United States
dollars, generally against an irrevocable confirmed letter of credit through a
major United States bank. Therefore, the Company is not directly affected by
foreign exchange fluctuations on its current orders. However, fluctuations in
foreign exchange rates do have an effect on the Company's customers' access to
United States dollars and on the pricing competition on certain pieces of
equipment that the Company sells in selected markets.
Related Party Transactions
--------------------------
The Company subleases 74,000-square-feet in a building from Mykrolis
Corporation, which leases the building from a Trust of which Roger G. Little,
Chairman of the Board, Chief Executive Officer and President, is sole trustee
and principal beneficiary. The Company believes that the terms of the sublease
are commercially reasonable. The 1985 sublease originally was for a period of
ten years, was extended for a five-year period expiring on November 30, 2000 and
was further extended for a five-year period expiring on November 30, 2005. The
agreement provides for minimum rental payments plus annual increases linked to
the consumer price index. Total rent expense under this sublease was $884,000 in
2003. This amount does not take into account rent received by the Company for
subleasing approximately 22,000-square-feet of its 74,000-square-feet to the
purchaser of the Company's Optoelectronics business.
The Company's Bandwidth Semiconductor division entered into a lease for
the building it occupies from a Trust of which Roger G. Little, Chairman of the
Board, Chief Executive Officer and President, is sole trustee and principal
beneficiary. The Company believes that the terms of the sublease are
commercially reasonable. The lease is for an initial five-year term expiring in
2008 with option to extend for five years. It has been classified a capital
lease and is included in Note 8.
The following table summarizes Bandwidth's lease obligations to the
Trust at June 30, 2003:
Payments Due by Period
----------------------------------------------------------------
Less than After
Contractual Obligation Total 1 Year 1-3 Years 4-5 Years 5 Years
--------------------------------- ------------ ------------ ------------ ------------ ------------
Related party capital lease $4,140,000 $315,000 $1,346,250 $1,972,500 $506,250
Critical Accounting Policy - Revenue Recognition
------------------------------------------------
The Company derives its revenues from three primary sources: (1) sales
of solar energy manufacturing equipment and solar energy systems; (2) biomedical
processing services; and (3) United States government funded research and
development contracts.
The Company's OEM capital equipment solar energy business builds complex
customized machines to order for specific customers. Substantially all of these
orders are sold on a FOB Bedford, Massachusetts (or EXW Factory) basis. It is
the Company's policy to recognize revenues for this equipment as the product is
shipped to the customer, as customer acceptance is obtained prior to shipment
and the equipment is expected to operate the same in the customer's environment
as it does in the Company's environment. When an arrangement with the customer
includes future obligations or customer acceptance, revenue is recognized when
those obligations are met or customer acceptance has been achieved. The
Company's solar energy systems business installs solar energy systems on
customer-owned properties on a contractual basis.
12
Generally, revenue is recognized once the systems have been installed and the
title is passed to the customer. For arrangements with a number of elements, the
Company allocates fair value to each element based on rates quoted in the
contract and revenue is recognized upon delivery of the element. The Company's
biomedical subsidiary performs surface engineering services for various medical
device manufacturers on a contractual basis. The Company recognizes revenue as
the products are shipped back to the customer. The Company recognizes revenues
and estimated profits on long term government contracts on a percentage of
completion method of accounting using a cost to cost methodology. Profit
estimates are revised periodically based upon changes and facts, and any losses
on contracts are recognized immediately. Some of the contracts include
provisions to withhold a portion of the contract value as retainage until such
time as the United States government performs an audit of the cost incurred
under the contract. The Company's policy is to take into revenue the full value
of the contract, including any retainage, as it performs against the contract
since the Company has not experienced any substantial losses as a result of an
audit performed by the United States government.
Contractual Obligations and Commercial Commitments
The following table summarizes the Company's contractual obligations at
June 30, 2003 and the maturity periods and the effect that such obligations are
expected to have on its liquidity and cash flows in future periods:
Payments Due by Period
----------------------------------------------------------------
Less than After
Contractual Obligation Total 1 Year 1-3 Years 4-5 Years 5 Years
--------------------------------- ------------ ------------ ------------ ------------ ------------
Unrelated party capital lease $1,513,000 $239,000 $ 956,000 $ 318,000 $ --
Related party capital lease $4,140,000 $315,000 $1,346,250 $1,972,500 $506,250
Non-cancelable operating leases $4,350,000 $934,000 $3,251,000 $ 165,000 $ --
On October 8, 1999, the Company entered into an Agreement with BP
Solarex ("BPS") in which BPS agreed to purchase certain production equipment
built by the Company, for use in the Company's Chicago factory and in return the
Company agreed to purchase solar cells of a minimum of two megawatts per year
over a five-year term. As of June 30, 2003, the Company is committed to purchase
23 million solar cells. BPS has the right to repossess the equipment should the
Company not purchase its committed quantity or convert into equity of Spire
Solar Chicago the initial purchase price of all equipment purchased from the
Company. The proceeds from the sale of the production equipment purchased by BPS
have been classified as an unearned purchase discount in the accompanying
balance sheet. The Company will amortize this discount as a reduction to cost of
sales as it purchases solar cells from BPS. Amortization of the purchase
discount amounted to $3,466 during the quarter ended June 30, 2003. The Company
is currently negotiating with BPS to include purchases other than solar cells to
reduce the purchase discount.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
Spire's principal executive and financial officers have established and
are maintaining disclosure controls and procedures that such officers believe
are effective. The officers' conclusion is based on their evaluation of the
controls and procedures as of June 30, 2003. The officers have designed such
disclosure controls and procedures to ensure that material information relating
to the Company and its consolidated subsidiaries is communicated to them by
others within those organizations.
Changes in Internal Controls
----------------------------
The Company believes that there have not been significant changes in the
Company's internal controls or in other factors that could significantly affect
those controls subsequent to June 30, 2003, including any corrective action with
regard to significant deficiencies and material weaknesses.
13
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named as a defendant in 69 cases filed from August
2001 to date in state courts in Texas by persons claiming damages from the use
of allegedly defective mechanical heart valves coated by a process licensed by
the Company to St. Jude Medical, Inc., the valve manufacturer, which has also
been named as a defendant in the cases. In June 2003, a judge in a state court
in Harris County, Texas agreed to grant the Company's motion for summary
judgment based upon the principle of federal preemption with regard to 68 of
those cases and to order that the cases against the Company be dismissed with
prejudice. An order to this effect was signed in late July. The Company believes
that the plaintiffs ultimately plan to appeal from the court's decision. The
remaining case is still pending, and due to aspects of its fact situation is not
subject to the principle of federal preemption.
The Company has concluded a dispute with ATmicro Solar, Ltd., a customer
of the Company. In May 2003, the customer made various claims against the
Company and had requested the return of certain funds paid for equipment it had
agreed to purchase from the Company. The Company agreed to pay $75,000 to settle
the dispute, with the execution by the parties of a full and general mutual
release.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 23, 2003, the Company held a Special Meeting in Lieu of Annual
Meeting of Stockholders.
The number of directors was fixed at eight, leaving one vacancy, Udo
Henseler, David R. Lipinski, Roger G. Little, Guy L. Mayer, Roger W. Redmond,
and John A. Tarello, were elected to the Board of Directors to hold office until
the 2004 annual meeting of the stockholders. The results for Proposal Number 1
were as follows:
Shares Shares Voting Against Shares Broker
Nominee Voting for or Authority Withheld Abstaining Non-Votes
----------------------- ------------ --------------------- ---------- ---------
Udo Henseler 5,620,740 76,040 -- --
David R. Lipinski 5,620,740 76,040 -- --
Roger G. Little 5,620,740 76,040 -- --
Michael J. Magliochetti 5,618,240 78,540 -- --
Guy L. Mayer 5,618,240 78,540 -- --
Roger W. Redmond 5,618,240 77,140 -- --
John A. Tarello 5,620,740 76,040 -- --
Proposal Number 2 was to approve an amendment to the Company's 1996
Equity Incentive Plan to increase the number of shares that may be offered
thereunder from 1,000,000 to 1,500,000. The results for Proposal Number 2 were
as follows:
Shares Shares Voting Against Shares Broker
Voting for or Authority Withheld Abstaining Non-Votes
---------- --------------------- ---------- ---------
Proposal Two 3,242,305 138,339 18,200 2,297,936
ITEM 5. OTHER INFORMATION.
None.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
--------
10(h) Purchase Agreement dated May 23, 2003 with Stratos Lightwave
and Bandwidth Semiconductor, LLC
10(i) Lease Agreement dated May 23, 2003 by and between Roger G.
Little, Trustee of SPI-Trust as Landlord and Spire Corporation
as Tenant
31.1 Certification of the Chairman of the Board, Chief Executive
Officer and President pursuant to Sarbanes-Oxleyss.302
31.2 Certification of the Financial Controller and Treasurer
(Principal Financial and Accounting Officer) pursuant to
Sarbanes-Oxley ss.302
32.1 Certification of the Chairman of the Board, Chief Executive
Officer and President pursuant to 18 U.S.C.ss.1350
32.2 Certification of the Financial Controller and Treasurer
(Principal Financial and Accounting Officer) pursuant to
18 U.S.C.ss.1350
A signed original of these written statements required by Section 906
have been provided to the Company and will be retained by the Company
and furnished to the Securities and Exchange Commission or its staff
upon request.
b. Reports on Form 8-K
-------------------
There was one report on Form 8-K that was filed by the Registrant in the
quarter ended June 30, 2003.
June 5, 2003, Item 5 Other Events and Item 7 Financial Statements and
Exhibits: Exhibit 99 News Release of the Company dated May 27, 2003.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Spire Corporation
Dated: August 19, 2003 By: /s/ Roger G. Little
----------------------------------------
Roger G. Little
President, Chief Executive Officer and
Chairman of the Board
Dated: August 19, 2003 By: /s/ Gregory G. Towle
----------------------------------------
Gregory G. Towle
Financial Controller and Treasurer
(Principal Financial and Accounting Officer)
16