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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 September 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
-----------------
(Name of small business issuer as specified in its charter)
MASSACHUSETTS 04-2 57335
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE PATRIOTS PARK
BEDFORD, MASSACHUSETTS 01730-2396
---------------------------------
(Address of principal executive offices)
781-275-6000
------------
(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 |_| No |X|
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 December 31, 2003.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
2003 (Unaudited) and December 31, 2002 ......................... 1
Unaudited Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 2003 and
2002 .......................................................... 2
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2003 and 2002 .......... 3
Notes to Unaudited Condensed Consolidated Financial
Statements ..................................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 11
Item 3. Controls and Procedures ........................................ 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 20
Item 2. Changes in Securities ......................................... 20
Item 3. Defaults Upon Senior Securities ................................ 20
Item 4. Submission of Matters to a Vote of Security Holders ............. 20
Item 5. Other Information .............................................. 20
Item 6. Exhibits and Reports on Form 8-K ............................... 20
SIGNATURES .............................................................. 21
EXHIBITS
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ ------------
(UNAUDITED)
ASSETS
Current assets
--------------
Cash and cash equivalents $ 8,501,010 $ 7,798,716
Restricted cash 520,690 --
------------ ------------
Total cash 9,021,700 7,798,716
------------ ------------
Accounts receivable, trade:
Amounts billed 2,927,037 3,574,851
Retainage 54,958 67,715
Unbilled costs 389,622 634,958
------------ ------------
3,371,617 4,277,524
Less allowance for doubtful accounts (288,244) (349,443)
------------ ------------
Net accounts receivable 3,083,373 3,928,081
------------ ------------
Inventories 1,680,156 2,220,587
Deferred tax asset 373,000 116,000
Prepaid expenses and other current assets 661,563 988,500
------------ ------------
Total current assets 14,819,792 15,051,884
------------ ------------
Property and equipment 23,132,372 15,604,809
Less accumulated depreciation and amortization (14,136,828) (13,132,220)
------------ ------------
Net property and equipment 8,995,544 2,472,589
------------ ------------
Intangible assets (less accumulated amortization,
$518,469 in 2003 and $499,505 in 2002) 381,651 241,313
Other assets 8,325 6,324
------------ ------------
Total other assets 389,976 247,637
------------ ------------
Total assets $ 24,205,312 $ 17,772,110
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Current portion of capital lease obligation $ 361,754 $ --
Current portion of capital lease obligation -
related party (Note 9) 326,213 --
Accounts payable 1,057,641 1,852,332
Accrued liabilities 1,836,532 1,392,585
Income taxes payable 11,000 224,000
Accrued lease obligation - related party 464,663 --
Advances on contracts in progress 1,281,565 1,058,852
------------ ------------
Total current liabilities 5,339,368 4,527,769
------------ ------------
Long-term portion of capital lease obligation 950,849 --
Long-term portion of capital lease obligation -
related party (Note 9) 2,954,465 --
Accrued lease obligation - related party 486,565 --
Unearned purchase discount 1,448,828 1,469,123
------------ ------------
11,180,075 5,996,892
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 3,699,044 2,461,240
------------ ------------
Total stockholders' equity 13,025,237 11,775,218
------------ ------------
Total liabilities and stockholders' equity $ 24,205,312 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales and revenues
Contract research, service and license revenues $ 2,229,682 $ 1,468,085 $ 5,748,365 $ 4,814,791
Sales of goods 1,843,631 2,728,589 5,038,962 7,269,850
------------ ------------ ------------ ------------
Net sales and revenues 4,073,313 4,196,674 10,787,327 12,084,641
------------ ------------ ------------ ------------
Costs and expenses
Cost of contract research, services and licenses 1,767,086 862,806 4,022,325 3,023,103
Cost of goods sold 1,548,622 1,890,515 4,558,418 5,459,493
Internal research and development 388,197 66,642 767,542 201,631
Selling, general and administrative expenses 2,001,110 1,342,653 4,883,240 3,982,644
------------ ------------ ------------ ------------
Total costs and expenses 5,705,015 4,162,616 14,231,525 12,666,871
------------ ------------ ------------ ------------
Gain on sale of license -- -- 4,989,150 --
------------ ------------ ------------ ------------
Earnings (loss) from operations (1,631,702) 34,058 1,544,952 (582,230)
Interest income (expense), net (68,065) 1,221 (82,148) 14,358
------------ ------------ ------------ ------------
Earnings (loss) before income taxes (1,699,767) 35,279 1,462,804 (567,872)
Income tax benefit (expense) 450,000 100 (225,000) --
------------ ------------ ------------ ------------
Net earnings (loss) $ (1,249,767) $ 35,379 $ 1,237,804 $ (567,872)
============ ============ ============ ============
Earnings (loss) per share of common stock - basic $ (0.18) $ 0.01 $ 0.18 $ (0.08)
============ ============ ============ ============
Earnings (loss) per share of common stock - diluted $ (0.18) $ 0.01 $ 0.18 $ (0.08)
============ ============ ============ ============
Weighted average number of common and common equivalent
shares outstanding - basic 6,761,660 6,757,585 6,757,971 6,736,835
============ ============ ============ ============
Weighted average number of common and common equivalent
shares outstanding - diluted 6,761,660 6,801,098 6,834,731 6,736,835
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
2
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
2003 2002
------------ ------------
Cash flows from operating activities
Net income (loss) $ 1,237,804 $ (567,872)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,023,492 587,771
Gain on sale of license (4,989,150) --
Changes in assets and liabilities, excluding business acquisition:
Restricted cash (520,690) --
Accounts receivable, net 1,125,149 (547,802)
Inventories 586,648 (524,461)
Prepaid expenses and other current assets 146,077 (89,743)
Accounts payable, income taxes payable and accrued liabilities (1,166,585) 855,143
Unearned purchase discount (20,295) --
Other assets (2,001) 3,887
Advances on contracts in progress 222,713 316,071
------------ ------------
Net cash provided by (used in) operating activities (2,356,838) 32,994
------------ ------------
Cash flows from investing activities
Proceeds from sale of license 4,989,150 --
Additions to property and equipment (831,217) (113,226)
Acquisition of business (Note 9) (724,969) --
Increase in patent costs (159,221) (136,817)
------------ ------------
Net cash provided by (used in) investing activities 3,273,743 (250,043)
------------ ------------
Cash flows from financing activities
Net payments on short-term debt -- (875,000)
Principal payment of capital lease obligations (109,719) --
Principal payment on capital lease obligations - related party (117,107) --
Exercise of stock options 12,215 44,695
------------ ------------
Net cash used in financing activities (214,611) (830,305)
------------ ------------
Net increase (decrease) in cash and cash equivalents 702,294 (1,047,354)
Cash and cash equivalents, beginning of period 7,798,716 5,582,884
------------ ------------
Cash and cash equivalents, end of period $ 8,501,010 $ 4,535,530
============ ============
Supplemental disclosures of cash flow and non-cash flow information
Acquisition of Bandwidth Semiconductor:
Assets acquired $ 3,708,748 $ --
Liabilities assumed (including related party obligation of $1,069,525) (2,983,779) --
------------ ------------
Cash paid 724,969 --
Non-cash financing activities:
Capital lease obligation for building - related party $ 3,390,397 $ --
------------ ------------
Cash paid during the period for:
Interest $ 34,769 $ 44,464
============ ============
Interest - related party $ 81,281 $ --
============ ============
Income taxes $ 662,000 $ --
============ ============
See accompanying notes to condensed consolidated financial statements.
3
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2003
1. DESCRIPTION OF THE BUSINESS
The Company develops, manufactures and markets highly-engineered
products and services in four principal business areas: Biomedical, Solar
Equipment, Solar Systems and Optoelectronics bringing to bear expertise in
materials technologies across all four business areas.
In the biomedical area, the Company provides value-added surface
treatments to manufacturers of orthopedic and other medical devices that enhance
the durability, antimicrobial characteristics or other material characteristics
of their products; develops and markets hemodialysis catheters and related
devices for the treatment of chronic kidney disease and performs sponsored
research programs into practical applications of advanced biomedical and
biophotonic technologies.
In the solar equipment area, the Company develops, manufactures and
markets specialized equipment for the production of terrestrial photovoltaic
modules from solar cells. The Company's equipment has been installed in more
than 140 factories and in 42 countries.
In the solar systems area, the Company provides electric power
grid-connected distributed power generation systems employing photovoltaic
technology.
In the Optoelectronics area, the Company provides compound semiconductor
foundry services on a merchant basis to customers involved in
biomedical/biophotonic instruments, telecommunications and defense applications.
Services include compound semiconductor wafer growth, other thin film processes
and related device processing and fabrication services. The Company also
provides materials testing services and performs services in support of
sponsored research into practical applications of optoelectronic technologies.
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 September 30, 2003 and December
31, 2002 and the results of operations for the three and nine months ended
September 30, 2003 and 2002 and cash flows for the nine months ended September
30, 2003 and 2002. The results of operations for the three and nine months ended
September 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:
September 30, December 31,
2003 2002
------------ ------------
Raw materials $ 790,152 $ 662,384
Work in process 676,251 1,324,345
Finished goods 213,753 233,858
------------ ------------
$ 1,680,156 $ 2,220,587
------------ ------------
4
4. EARNINGS (LOSS) PER SHARE
The following table provides a reconciliation of the denominators of the
Company's reported basic and diluted earnings (loss) per share computations for
the periods ended:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Weighted average number of common
shares outstanding - basic 6,761,660 6,757,585 6,757,971 6,736,835
Add net additional common shares upon
exercise of common stock options -- 43,513 76,760 --
------------ ------------ ------------ ------------
Adjusted weighted average common
shares outstanding - diluted 6,761,660 6,801,098 6,834,731 6,736,835
------------ ------------ ------------ ------------
For the three and nine months ended September 30, 2003, 228,147 and
425,563 shares, respectively, of common stock issuable relative to stock options
were excluded from the calculation of dilutive shares since the inclusion of
such shares would be anti-dilutive. Of those amounts, 55,000 and 425,563 shares,
for the three and nine months ended September 30, 2003, respectively, had
exercise prices per share that exceeded the average market price of the
Company's common stock for those periods.
For the three and nine months ended September 30, 2002, 520,033 and
397,907 shares, respectively, of common stock issuable relative to stock options
were excluded from the calculation of dilutive shares since the inclusion of
such shares would be anti-dilutive. Of those amounts, 489,600 and 309,832
shares, for the three and nine months ended September 30, 2002, respectively,
had exercise prices per share that exceeded the average market price of the
Company's common stock for those periods.
5. OPERATING SEGMENTS AND RELATED INFORMATION
The following table presents certain operating division information in
accordance with the provisions of SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information."
The results for Bandwidth Semiconductor have been combined with the
Company's Biophotonics Lifesciences segment which has been renamed the
Optoelectronics segment. The acquisition of Bandwidth Semiconductor took place
on May 23, 2003.
Solar Solar Spire Total
Equipment Systems Biomedical Optoelectronics Company
------------ ------------ ------------ ------------ ------------
For the three months ended September 30, 2003
---------------------------------------------
Net sales and revenues $ 1,350,568 $ 384,941 $ 1,602,605 $ 735,199 $ 4,073,313
Loss from operations (242,167) (365,679) (666,049) (357,807) (1,631,702)
For the three months ended September 30, 2002
---------------------------------------------
Net sales and revenues $ 1,685,154 $ 831,173 $ 1,612,140 $ 68,207 $ 4,196,674
Earnings (loss) from operations 60,597 41,474 (47,536) (20,477) 34,058
For the nine months ended September 30, 2003
--------------------------------------------
Net sales and revenues $ 3,545,152 $ 1,195,138 $ 4,908,928 $ 1,138,109 $ 10,787,327
Earnings (loss) from operations (797,813) (911,741) 3,754,826 (500,320) 1,544,952
For the nine months ended September 30, 2002
--------------------------------------------
Net sales and revenues $ 3,728,013 $ 3,305,784 $ 4,552,602 $ 498,242 $ 12,084,641
Earnings (loss) from operations (397,784) 145,577 (350,706) 20,683 (582,230)
5
6. OTHER INTANGIBLE ASSETS
In July 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets. The Company adopted SFAS 142 as of January 1, 2002. SFAS 142
requires goodwill and intangible assets with indefinite lives to no longer be
amortized, but instead be tested for impairment at least annually. With the
adoption of SFAS 142, the Company reassessed the useful lives and residual
values of all acquired intangible assets to make any necessary amortization
period adjustments. Based on that assessment, no adjustments were made to the
amortization period or residual values of other intangible assets.
Other intangible assets amounted to $381,651 (net of accumulated
amortization of $518,469) and $234,813 (net of accumulated amortization of
$486,579) at September 30, 2003 and December 31, 2002, respectively. These
intangible assets primarily consist of patents that the Company had been awarded
and are amortized over their useful lives or their terms, ordinarily five years.
There are no expected residual values related to these intangible assets. For
disclosure purposes, the table below includes amortization expense for patents
owned by the Company as well as $50,000 of estimated amortization expense
related to patents that remain pending. Estimated amortization expense for the
periods ending December 31, is as follows:
Amortization
Year Expense
----------------------------------
2003 $14,729
2004 61,459
2005 58,875
2006 55,009
2007 54,448
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.
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net earnings (loss), as reported $ (1,249,767) $ 35,379 $ 1,237,804 $ (567,872)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects 85,021 82,395 254,585 216,282
------------ ------------ ------------ ------------
Pro forma net earnings (loss) $ (1,334,788) $ (47,016) $ 983,219 $ (784,154)
------------ ------------ ------------ ------------
Earnings (loss) per share:
Basic - as reported $ (0.18) $ 0.00 $ 0.18 $ (0.08)
------------ ------------ ------------ ------------
Basic - pro forma $ (0.20) $ (0.01) $ 0.15 $ (0.12)
------------ ------------ ------------ ------------
Diluted - as reported $ (0.18) $ 0.00 $ 0.18 $ (0.08)
------------ ------------ ------------ ------------
Diluted - pro forma $ (0.20) $ (0.01) $ 0.14 $ (0.12)
------------ ------------ ------------ ------------
For the quarter ended September 30, 2003, zero stock options were
granted.
6
The per-share weighted-average fair value of stock options granted
during the quarter ended September 30, 2002 was $2.25, 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%
8. ACQUISITION AND RELATED PARTY TRANSACTION
On May 23, 2003, the Company acquired from Stratos Lightwave, Inc.
("Stratos") all of the ownership interests of Bandwidth Semiconductor, LLC
("Bandwidth"), a Delaware limited liability company, located in Hudson, New
Hampshire. 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, until it was sold to Stratos for a total of
$12,950,000 in cash. On May 23, 2003, Bandwidth was re-acquired by the Company.
The Company now owns 100% of the ownership interest of Bandwidth and the results
of operations have been included herein since the date of the acquisition. Prior
to the acquisition, Bandwidth was a wholly owned subsidiary of Stratos.
The total purchase price was $724,969 in cash plus related acquisition
costs of $150,000 and liabilities assumed of $2,983,779. In connection with the
acquisition, 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 also included
the release and forgiveness from all future obligations of Bandwidth and Stratos
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, that is now vacant.
The Company's acquisition of Bandwidth did not include the building in Hudson,
New Hampshire occupied by Bandwidth.
The total purchase price of $3,858,748 was preliminarily allocated based
on management's estimated fair value of the assets acquired and liabilities
assumed, is summarized is as follows:
Current assets $ 402,796
Property and equipment 3,305,952
Reactor capital lease (1,359,022)
Accrued lease obligation - related party (1,069,525)
Other liabilities (555,232)
------------
Total cash paid $ 724,969
------------
The allocation of the purchase price is subject to revision, based on the final
valuation of the assets acquired. The Company is in the process of obtaining an
independent appraisal of the assets.
In conjunction with the acquisition of Bandwidth by the Company,
SPI-Trust, a Trust of which Roger G. Little, Chairman of the Board, Chief
Executive Officer and President of the Company, is sole trustee and principal
beneficiary, purchased from Stratos, the building that Bandwidth occupies for
$3.7 million. Subsequently, the Company entered into a lease for the building
(90,000 square-feet) Bandwidth occupies in Hudson, New Hampshire with SPI-Trust
whereby the Company will pay $4.1 million to the SPI-Trust over an initial five
year term expiring in 2008 with an option to extend for five years. The lease
agreement does not provide for a transfer of ownership at any point. This lease
has been classified as a related party capital lease and a summary of payments
follows:
Rate Per
Year Square Foot Annual Rent Monthly Rent
------ ------------ ------------ ------------
Year 1 $ 6.00 $ 540,000 $ 45,000
Year 2 7.50 675,000 56,250
Year 3 8.50 765,000 63,750
Year 4 10.50 945,000 78,750
Year 5 13.50 1,215,000 101,250
------------
$ 4,140,000
------------
7
The following pro forma information assumes that the acquisition of Bandwidth
had been completed as of the beginning of 2003 and 2002, respectively
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue $ 4,073,313 $ 4,733,626 $ 11,393,936 $ 13,659,027
Net loss $ (1,249,767) $ (1,140,596) $ (341,972) $ (4,604,278)
Loss per share $ (0.18) $ (0.17) $ (0.05) $ (0.68)
The pro forma financial information is not necessarily indicative of the
results to be expected in future quarters as a result of the acquisition of
Bandwidth.
9. COMMITMENTS
Property Under Capital Leases and Lease Commitments
---------------------------------------------------
At September 30, 2003, 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 capitalized costs and carrying value of the property
under capital leases were as follows:
2003
------------
Unrelated party capital lease:
Equipment $ 773,170
Less accumulated amortization (51,545)
------------
$ 721,625
------------
2003
------------
Related party capital lease:
Hudson, New Hampshire building $ 3,390,397
Less accumulated amortization (226,026)
------------
$ 3,164,371
------------
At September 30, 2003, future minimum lease payments for the period
ended December 31, 2003 are as follows:
Unrelated Party Related Party
Unrelated Party Related Party Operating Operating
Capital Lease Capital Lease Leases Lease
------------ ------------ ------------ ------------
2003 $ 109,233 $ 157,965 $ 83,236 $ 266,499
2004 436,932 618,750 209,819 1,065,997
2005 436,932 727,500 162,852 977,164
2006 495,655 870,000 159,246 --
2007 -- 1,102,500 5,639 --
2008 -- 495,260 -- --
------------ ------------ ------------ ------------
Total minimum lease payments 1,478,752 3,971,975 $ 620,792 $ 2,309,660
------------ ------------
Less amount representing interest (166,149) (691,299)
------------ ------------
Present value of minimum lease payments 1,312,603 3,280,676
Less current portion (361,754) (326,213)
------------ ------------
Long-term portion of capital lease
obligation $ 950,849 $ 2,954,463
------------ ------------
8
Unrelated Party Capital Lease
-----------------------------
In September 2001, Bandwidth Semiconductor, LLC ("Bandwidth") entered
into an agreement with GE Capital Leasing Corp, for the lease of a reactor for
its 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. After
the initial three-year period ending in September 2004, the lease allows for an
additional two-year extension. The Company expects to extend the lease term for
the additional two years to September 2006. The lease includes a residual value
guarantee of $204,000 at the end of extended period.
Related Party Capital Lease
---------------------------
In conjunction with the acquisition of Bandwidth by the Company, a Trust
of which Roger G. Little, Chairman of the Board, Chief Executive Officer and
President of the Company, is sole trustee and principal beneficiary, purchased
the building that Bandwidth occupies from Stratos, the parent company, for $3.7
million. The Company's Bandwidth Semiconductor division entered into a lease for
the building it occupies from the Trust. 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 increasing monthly
payments each year, through September 2008 for total payments of $4.1 million.
Interest costs were assumed at 7%. The lease does not provide for a transfer of
ownership at anytime.
Unrelated Party Operating Leases
--------------------------------
Unrelated party operating leases primarily consist of leases for copiers
and the telephone system.
Related Party Operating Lease
-----------------------------
The Company subleases 74,000 square-feet in a building leased by
Mykrolis Corporation, who in turn leases the building from a Trust of which
Roger G. Little, Chairman of the Board, Chief Executive Officer and President of
the Company, 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. Rent expense
under this sublease for the nine months ended September 30, 2003 was $589,000,
net of $211,000 of sublet income received from Bandwidth prior to its
acquisition.
In conjunction with the acquisition of Bandwidth by the Company, the
Company released Bandwidth from the lease agreement that had existed between
Bandwidth and the Company. In November 2001, Bandwidth, under its previous
owner, abandoned the space being subleased from the Company in Bedford,
Massachusetts, to move to the new building and wafer fabrication lab in Hudson,
New Hampshire. At that time, there were 48 months left on the lease. Subsequent
to the move to Hudson, New Hampshire, Bandwidth was unable to sublease the
Bedford, Massachusetts space, and was paying the Company for the unused space.
In conjunction with the acquisition of Bandwidth in May 2003, the Company
released Bandwidth from the remaining lease payments. However, the Company
continues to be obligated to Mykrolis Corporation for the entire amount of the
remaining lease agreement. As a result the present value of the remaining lease
obligation associated with the unused space was recorded as an assumed liability
of $1,069,525. As of September 30, 2003, the remaining lease obligation is
$951,228. The difference between the actual rent payment and the discounted rent
payment will be accreted to the income statement as interest expense which is
reflected in the Company's balance sheet as of September 30, 2003 as an "accrued
lease obligation - related party".
Total rent expense under operating leases was approximately $1,045,000
for the nine months ended September 30, 2003. Rent expense was offset by the
rental income from Bandwidth under the sublease agreement between the Company
and Bandwidth, prior to the date Bandwidth was re-acquired.
Agreement with BP Solarex
-------------------------
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 (Spire Solar
Chicago) and in return the Company agreed to purchase solar cells of a minimum
of two megawatts per year over a five-year term for a fixed fee from BPS (the
"Purchase Commitment"). BPS has the right to reclaim the equipment should the
Company not meet its obligations in the Purchase Commitment. 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
9
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 $16,829
and $20,295 for the three and nine month periods ended September 30, 2003,
respectively.
In addition, the agreement contains a put option for BPS to have Spire
create a separate legal entity for Spire Solar Chicago and for BPS to convert
the value of the equipment and additional costs, as defined, into equity of the
new legal entity. The percentage ownership in the joint venture would be
determined based on the cumulative investments by BPS and Spire.
During the quarter ended September 30, 2003, the Company and BPS
retroactively amended the agreement to include all purchases of solar modules,
solar systems, inverter systems and other system equipment purchased by Spire
from BPS in the purchase commitment calculation. As a result, amortization of
the purchase discount amounted to $16,829 during the quarter ended September 30,
2003.
The amended agreement also allows Spire to terminate the agreement on 30
days notice in consideration for a termination payment based on the aggregate
amount of Spire purchases of BPS products and the fair market value of the
production equipment purchased by BPS at the time of the termination election.
As of September 30, 2003, Spire has no intention of terminating the agreement.
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. ("Bard"), 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 upon the earlier to
occur of: (a) the date of the first commercial sale of a licensed product by
Bard; or (b) no more than 18 months after signing. The agreement further
provides for additional payments of $3 million each on the first and second
payment, if the agreement has not been canceled. Bard has the right to cancel
the agreement at any time subsequent to the second payment. During the three
months ended December 31, 2002, the Company recorded the initial payment under
the agreement, resulting in a gain of $4,464,929, net of direct costs. Due to
the potential length of time between the first and second payments and the
cancellation provisions within the agreement, the Company did not record the
potential remaining payments at that time. During June 2003, in accordance with
the agreement, the Company received notification from Bard of the first
commercial sale, collected the $5 million payment due and recorded gain of
$4,989,150, net of direct costs. This gain is recorded in the accompanying
unaudited condensed consolidated statement of earnings for the nine months ended
September 30, 2003. The Company believes that the sale of the license does not
reflect the day-to-day operations of the Company. Therefore, the net proceeds
received has been classified under investing activities in the unaudited
condensed consolidated statement of cash flows for the nine months ended
September 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 first refusal should the Company seek to sell the
Catheter business.
10
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 DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED 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.
Summary Results
---------------
The following table sets forth certain items as a percentage of the
Company's net sales and revenues for the periods presented:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2003 2002 2003 2002
------ ------ ------ ------
Net sales and revenues 100% 100% 100% 100%
Cost of sales and revenues 81 66 79 70
------ ------ ------ ------
Gross profit 19 34 21 30
Internal research and development 10 2 7 2
Gain on sale of license -- -- (46) --
Selling, general and administrative expenses 49 32 45 33
------ ------ ------ ------
Earnings (loss) from operations (40) 1 15 (5)
Interest expense (2) -- (1) --
------ ------ ------ ------
Earnings (loss) before income taxes (42) 1 14 (5)
Income tax benefit 11 -- 2 --
------ ------ ------ ------
Net earnings (loss) (31%) 1% 12% (5%)
====== ====== ====== ======
Three and Nine Months Ended September 30, 2003 Compared to Three and Nine Months
--------------------------------------------------------------------------------
Ended September 30, 2002
------------------------
NET SALES AND REVENUES
The following table categorizes the Company's net sales and revenues for
the periods presented:
Three Months Ended September 30,
----------------------------------------------
2003 2002 % Change
------------ ------------ ------------
Contract research, service and license revenues $ 2,230,000 $ 1,468,000 52%
Sales of goods 1,843,000 2,729,000 (32%)
------------ ------------
Net sales and revenues $ 4,073,000 $ 4,197,000 (3%)
============ ============
Total net sales and revenues decreased $124,000 or 3% for the three
months ended September 30, 2003 to $4,073,000, compared to $4,197,000, for the
three months ended September 30, 2002. Contract research, service and license
revenues increased $762,000 or 52% to $2,230,000 for the three months ended
September 30, 2003 compared to $1,468,000 for the three months ended September
30, 2002. Sales of goods decreased $886,000 or 32% to $1,843,000 for 2003,
compared to $2,729,000 for 2002.
The increase in the contract research, service and license revenues is a
result of increased demand for optoelectronics services, principally
semiconductor foundry services at the Bandwidth Semiconductor unit offset in
part by decreased demand for the Company's biomedical processing services. The
decrease in sales of goods for the three month period ended September 30, 2003
is primarily due to decreased shipments of solar PV systems and to decreased
shipments of solar PV manufacturing equipment offset in part by increased sales
of biomedical catheter products.
11
The following table categorizes the Company's net sales and revenues for
the periods presented:
Nine Months Ended September 30,
----------------------------------------------
2003 2002 % Change
------------ ------------ ------------
Contract research, service and license revenues $ 5,748,000 $ 4,815,000 19%
Sales of goods 5,039,000 7,270,000 (31%)
------------ ------------
Net sales and revenues $ 10,787,000 $ 12,085,000 (11%)
============ ============
Net sales and revenues decreased $1,298,000 or 11% for the nine months
ended September 30, 2003 to $10,787,000, compared to $12,085,000 for the nine
months ended September 30, 2002. Contract research, service and license revenues
increased $933,000 or 19% to $5,748,000 for the nine months ended September 30,
2003 compared to $4,815,000 for 2002. Sales of goods decreased $2,231,000 or 31%
to $5,039,000 for 2003, compared to $7,270,000 for 2002.
The increase in contract research, service and license revenues for the
nine month period ended September 30, 2003 is attributed primarily to increased
demand for optoelectronics services, principally semiconductor foundry services
at the Bandwidth Semiconductor unit offset in part by a decrease in the demand
for the Company's biomedical processing services. The decrease in sales of goods
for the nine month period ended September 30, 2003 is primarily due to decreased
shipments of solar PV systems and to decreased shipments of solar PV
manufacturing equipment offset in part by increased sales of biomedical catheter
products.
COST OF SALES AND REVENUES
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 September 30,
----------------------------------------------------------------
2003 % 2002 %
------------ ------------ ------------ ------------
Cost of contract research, service and license revenues $ 1,767,000 79% $ 863,000 59%
Cost of goods sold 1,549,000 84% 1,891,000 69%
------------ ------------ ------------ ------------
Total cost of sales and revenues $ 3,316,000 81% $ 2,754,000 66%
============ ============
The cost of total sales and revenues increased $562,000 to $3,316,000,
and increased to 81% of net sales and revenues, for the quarter ended September
30, 2003, compared to $2,754,000 or 66% of net cost of sales and revenues for
the quarter ended September 30, 2002. The cost of contract research, service and
license revenues increased $904,000 to $1,767,000, increasing to 79% of related
revenues for the three months ended September 30, 2003, compared to $863,000 or
59% of related revenues for the three months ended September 30, 2002. The
increase is due to a change in the service mix. Cost of goods sold decreased
$342,000 to $1,549,000, but increased to 84% of related sales, for the three
months ended September 30, 2003, compared to $1,891,000 or 69% of related sales
for the three months ended September 30, 2002 due to reduced production unit
volume in both solar PV systems and solar PV manufacturing equipment.
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:
Nine Months Ended September 30,
----------------------------------------------------------------
2003 % 2002 %
------------ ------------ ------------ ------------
Cost of contract research, service and license revenues $ 4,022,000 70% $ 3,023,000 63%
Cost of goods sold 4,559,000 90% 5,460,000 75%
------------ ------------
Total cost of sales and revenues $ 8,581,000 80% $ 8,483,000 70%
============ ============
The cost of total sales and revenues increased $99,000 to $8,581,000,
and increased to 80% of net sales and revenues, for the nine months ended
September 30, 2003, compared to $8,483,000 or 70% of cost of total sales and
revenues for the nine months ended September 30, 2002. The cost of contract
research, service and license revenues increased $999,000 to $4,022,000, while
increasing to 70% of related revenues for the nine months ended September 30,
2003, compared to $3,023,000 or 63% of related revenues for the nine months
ended September 30, 2002. The increase is due to higher volume of sales of
services and a shift in service mix. Cost of goods sold decreased $900,000 to
$4,559,000, but increased to 90% of related sales, for the nine months ended
September 30, 2003, compared to $5,460,000 or 75% of related sales for the nine
months ended September 30, 2002, due to reduced production unit volume in both
solar PV systems and solar PV manufacturing equipment.
12
INTERNAL RESEARCH AND DEVELOPMENT
Internal research and development for the three months ended September
30, 2003 increased $321,000 or 479% to $388,000, compared to $67,000 for the
three months ended September 30, 2002, as the Company continued its investment
in the catheter development program and development of the "next generation" of
solar manufacturing equipment.
Internal research and development for the nine months ended September
30, 2003 increased $566,000 or 280% to $768,000, compared to $202,000 for the
nine months ended September 30, 2002, as the Company continued its investment in
the catheter development program and in the development of "next generation"
solar energy module manufacturing equipment under a cost sharing contract with
the Department of Energy National Renewable Energy Laboratory.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
September 30, 2003 increased $658,000 to $2,001,000, and increased to 49% of
sales and revenues, compared to $1,343,000 or 32% of sales and revenues for the
three months ended September 30, 2002.
Selling, general and administrative expenses for the nine months ended
September 30, 2003 increased $900,000 to $4,883,000, and increased to 45% of
sales and revenues, compared to $3,983,000 or 33% of sales and revenues for the
nine months ended September 30, 2002. The increase in selling, general and
administrative expenses reflects increased sales and marketing efforts
associated with the Company's hemodialysis catheter product line as well as
additional costs for outside legal and accounting services offset in part by
cost reductions put in place in prior periods by the Company. Selling, general
and administrative expense increased as a percentage of revenue both as a result
of increased spending and decreased revenue.
INTEREST
The Company incurred net interest expense of $68,000 for the quarter
ended September 30, 2003, compared to $1,000 of interest income for the quarter
ended September 30, 2002. The Company incurred interest expense of $82,000 for
the nine months ended September 30, 2003, compared to interest income of $14,000
for the nine months ended September 30, 2002. This is primarily as a result of
interest expense incurred on capital leases by the Bandwidth Semiconductor unit
offset in part by interest earned on cash balances.
INCOME TAXES
The Company recorded a $450,000 income tax benefit for the three months
ended September 30, 2003 and a provision of $225,000 of income tax expense for
the nine months ended September 30, 2003, compared to zero income taxes for the
quarter and the nine months ended September 30, 2002. The effective tax rate was
26% for the quarter ended September 30, 2003 and 15% for the nine months ended
September 30, 2002. The effective tax rates reflect the effect of tax credit
carryforwards from prior periods and reduction of the valuation allowance.
NET EARNINGS (LOSS)
The Company reported a net loss for the quarter ended September 30, 2003
of $1,250,000, compared to a net income of $35,000 for the quarter ended
September 30, 2002. The Company reported net income of $1,238,000 for the nine
months ended September 30, 2003, compared to a net loss of $568,000 for the same
period of 2002.
The loss for the quarter is attributed to manufacturing cycles in its
photovoltaic equipment business, as well as the Company's investment in new
product and services. The Company began selling a hemodialysis catheter through
a distributor network in the second quarter of 2003 and acquired a semiconductor
foundry. The earnings for the nine months ended September 30, 2003 are
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
-------------------------------
Our financial position remains strong, with cash and cash equivalents of
$9,022,000, including $521,000 of restricted cash, at September 30, 2003.
To date, the Company has funded its operating cash requirements using
operating cash flow, proceeds from the sale and licensing of technology and
available lines of credit.
13
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
September 30, 2003, the Company had $521,000 of restricted cash associated with
letters 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 and certain other covenants.
Cash and cash equivalents increased $1,223,000 to $9,022,000, including
restricted cash of $521,000 at September 30, 2003 from $7,799,000 at December
31, 2002. To date, there are no material commitments by the Company for capital
expenditures. At September 30, 2003, the Company's retained earnings were
$3,699,000, compared to retained earnings of $2,461,000 as of December 31, 2002.
Working capital as of September 30, 2003 decreased 10% to $9,480,000, compared
to $10,524,000 as of December 31, 2002.
The Company believes it has sufficient resources to finance its current
operations for the foreseeable future from operating cash flow and from proceeds
from the sale and licensing of technology.
The following table summarizes the Company's contractual obligations at
September 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 $1,479,000 $ 109,000 $ 874,000 $ 496,000 $ --
Related party capital lease 3,972,000 158,000 1,346,000 1,973,000 495,000
Unrelated party operating leases 621,000 83,000 373,000 165,000 --
Related party operating lease 2,309,000 266,000 2,043,000 -- --
Included in the related party operating lease is the accrued lease obligation in
the amount of $951,228.
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 (Spire Solar
Chicago) and in return the Company agreed to purchase solar cells of a minimum
of two megawatts per year over a five-year term for a fixed fee from BPS (the
"Purchase Commitment"). BPS has the right to reclaim the equipment should be
Company not meet its obligations in the Purchase Commitment. 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 $16,829 and
$20,295 for the three and nine month periods ended September 30, 2003,
respectively.
In addition, the agreement contains a put option for BPS to have Spire
create a separate legal entity for Spire Solar Chicago and for BPS to convert
the value of the equipment and additional costs, as defined, into equity of the
new legal entity. The percentage ownership in the joint venture would be
determined based on the cumulative investments by BPS and Spire.
During the quarter ended September 30, 2003, the Company and BPS
retroactively amended the agreement to include all purchases of solar modules,
solar systems, inverter systems and other system equipment purchased by Spire
from BPS in the purchase commitment calculation. As a result, amortization of
the purchase discount amounted to $16,829 during the quarter ended September 30,
2003.
The amended agreement also allows Spire to terminate the agreement on 30
days notice in consideration for a termination payment based on the aggregate
amount of Spire purchases of BPS products and the fair market value of the
production equipment purchased by BPS at the time of the termination election.
As of September 30, 2003, Spire has no intention of terminating the agreement.
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
14
period beginning after September 15, 2003. The adoption of this statement is not
anticipated to have a material effect on the Company's results of operations or
financial position.
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 including
product warranties. The recognition provisions of FIN 45 will be effective for
any guarantees that are issued or modified after December 31, 2002. The adoption
of FIN 45 did not have a material impact on the Company's financial position or
results of operations.
The Company provides warranties on certain of its products and services.
The Company has historically recorded negligible warranty expenses and therefore
does not record a warranty reserve. The Company warranty programs are described
below:
Spire Solar Equipment warrants solar energy module manufacturing
equipment sold for a total of 360 days, the first 90 days of which include the
replacement of defective component parts and the labor to correct the defect and
the next 270 days of which include only the cost of defective component parts.
Spire Solar Systems warrants photovoltaic electric power systems sold
against defective components for 360 days to include the replacement of
defective component parts and the labor to correct the defect. Spire Solar
Systems also warrants that its photovoltaic electric power systems will achieve
a minimum of 80% of rated electrical power output for 20 years.
Spire Biomedical warrants that any of its catheter products found to be
defective will be replaced. No warranty is made that the failure of the product
will not occur, and Spire disclaims any responsibility for any medical
complications. Spire Biomedical warrants that its services only warrant that the
products will meet the agreed upon specifications.
Bandwidth Semiconductor warrants that its products will meet the agreed
upon specifications.
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. In December 2003, the FASB issued FASB
Interpretation No. 46R, "Consolidation of Variable Interest Entities"
("FIN46R"). FIN 46R superceded FIN46 and defers the effective date for small
business filers until the first reporting period that ends after December 15,
2004 (fourth quarter of 2004).
In September 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No.
141 requires that the purchase method of accounting be used for all business
combinations. SFAS No. 141 specifies criteria that intangible assets acquired in
a business combination must meet to be recognized and reported separately from
goodwill. SFAS No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001,
and SFAS No. 142 is effective January 1, 2002. Goodwill and intangible assets
determined to have an indefinite useful life acquired in a purchase business
combination completed after September 30, 2001, but before SFAS No. 142 is
adopted in full, are not amortized. The adoption of the SFAS No. 141 and 142 has
not had a material impact on the Company's financial position or results of
operations.
15
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 only in U.S. 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 U.S. 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 leased by
Mykrolis Corporation, who in turn leases the building from a Trust of which
Roger G. Little, Chairman of the Board, Chief Executive Officer and President of
the Company, 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. Rent expense
under this sublease for the nine months ended September 30, 2003 was $589,000,
net of $211,000 of sublet income received from Bandwidth prior to its
acquisition.
In conjunction with the acquisition of Bandwidth by the Company, the
Company released Bandwidth from the lease agreement that had existed between
Bandwidth and the Company. In November 2001, Bandwidth, under its previous
owner, abandoned the space being subleased from the Company in Bedford,
Massachusetts, to move to the new building and wafer fabrication lab in Hudson,
New Hampshire. At that time, there were 48 months left on the lease. Subsequent
to the move to Hudson, New Hampshire, Bandwidth was unable to sublease the
Bedford, Massachusetts space, and was paying the Company for the unused space.
In conjunction with the acquisition of Bandwidth in May 2003, the Company
released Bandwidth from the remaining lease payments. However, the Company
continues to be obligated to Mykrolis Corporation for the entire amount of the
remaining lease agreement. As a result the present value of the remaining lease
obligation associated with the unused space was recorded as an assumed liability
of $1,069,525. As of September 30, 2003, the remaining lease obligation is
$951,228. The difference between the actual rent payment and the discounted rent
payment will be accreted to the income statement as interest expense which is
reflected in the Company's balance sheet as of September 30, 2003 as an "accrued
lease obligation - related party".
Total rent expense under operating leases was approximately $1,045,000
for the nine months ended September 30, 2003. Rent expense was offset by the
rental income from Bandwidth under the sublease agreement between the Company
and Bandwidth, prior to the date Bandwidth was re-acquired.
Critical Accounting Policies
----------------------------
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Among the significant estimates affecting our consolidated
financial statements are those relating to long-lived assets, income taxes,
warranties. We regularly evaluate our estimates and assumptions based upon
historical experience and various other factors that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. To the extent actual results differ from
those estimates, our future results of operations may be affected. We believe
the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our consolidated financial statements.
16
REVENUE RECOGNITION
The Company derives its revenues from three primary sources: (1)
commercial products including, but not limited to solar energy manufacturing
equipment and solar energy systems; (2) biomedical processing services; and (3)
United States government funded research and development contracts.
We generally recognize product revenue upon shipment of products
provided there are no uncertainties regarding customer acceptance, persuasive
evidence of an arrangement exists, the sales price is fixed and determinable,
and collectibility is deemed probable. Gross sales reflect reductions
attributable to various customer incentive programs including pricing discounts
and rebates. Certain customer incentive programs require management to estimate
the cost of those programs. The accrued liability for these programs is
determined through analysis of programs offered, historical trends, expectations
regarding customer and consumer participation, sales and payment trends, and
experience with payment patterns associated with similar programs that had been
previously offered. 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. 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 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.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, including fixed assets and intangible assets, are
continually monitored and are evaluated at least annually for impairment. The
determination of recoverability is based on an estimate of undiscounted cash
flows expected to result from the use of an asset and its eventual disposition.
The estimate of cash flows is based upon, among other things, certain
assumptions about expected future operating performance. Our estimates of
undiscounted cash flows may differ from actual cash flows due to, among other
things, technological changes, economic conditions, changes to our business
model or changes in our operating performance. If the sum of the undiscounted
cash flows (excluding interest) is less than the carrying value, we recognize an
impairment loss, measured as the amount by which the carrying value exceeds the
fair value of the asset.
ACQUISITION ACCOUNTING
Through its acquisition, the Company has accumulated assets the
valuation of which involves estimates based on fair value assumptions. Estimated
lives assigned to the assets acquired in a business purchase also involve the
use of estimates. These matters that are subject to judgments and estimates are
inherently uncertain, and different amounts could be reported using different
methodologies. Management uses its best estimate in determining the appropriate
values and estimated lives to reflect in the financial statements, using
historical experience, market data, and all other available information.
17
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Financial Controller and Treasurer
(the Company's principal financial officer), of the effectiveness of the
Company's disclosure controls and procedures as of September 30, 2003. In
designing and evaluating the Company's disclosure controls and procedures, the
Company and its management recognize that there are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls
and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their desired control
objectives. Additionally, in evaluating and implementing possible controls and
procedures, the Company's management was required to apply its reasonable
judgment. Furthermore, in the course of this evaluation, management considered
certain internal control areas, including those discussed below, in which we
have made and our continuing to make changes to improve and enhance controls.
Based upon the required evaluation, the Chief Executive Officer and the
Financial Controller and Treasurer concluded that as of September 30, 2003 the
Company's disclosure controls and procedures were effective (at the "reasonable
assurance" level mentioned above) to ensure that information required to be
disclosed by the Company in the reports it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rule and forms.
From time to time, the Company and its management have conducted and
will continue to conduct further reviews and, from time to time put in place
additional documentation of, the Company's disclosure controls and procedures,
as well as its internal control over financial reporting. The Company may from
time to time make changes aimed at enhancing their effectiveness, as well as
changes aimed at ensuring that the Company's systems evolve with, and meet the
needs of, the Company's business. These changes may include changes necessary or
desirable to address recommendations of the Company's management, its counsel
and/or its independent auditors, including any recommendations of our
independent auditors arising out of their audits and reviews of the Company's
financial statements. These changes may include changes to the Company's own
systems, as well as to the systems of businesses that the Company has acquired
or that the Company may acquire in the future and will, if made, be intended to
enhance the effectiveness of the Company's controls and procedures. The Company
is also continually striving to improve its management and operational
efficiency and the Company expects that its efforts in that regard will from
time to time directly or indirectly affect the Company's disclosure controls and
procedures, as well as the Company's internal control over financial reporting.
As disclosed in our quarterly report on Form 10-QSB for the quarterly
period ended June 30, 2003, as amended (the "Second Quarter Form 10-QSB"), in
connection with the initial filing of the Second Quarter Form 10-QSB, which was
initially submitted prior to the completion of the required review by the
Company's independent accountants, the Audit Committee engaged outside counsel
to conduct an internal investigation into the events surrounding the preparation
and filing of the Second Quarter Form 10-QSB. Based on the results of that
investigation, outside counsel concluded that weaknesses existed in the
Company's disclosure controls and procedures and proposed an action plan
designed to strengthen the Company's disclosure controls and procedures. The
Audit Committee, the Board of Directors and management have begun to adopt and
implement certain of those recommendations in order to strengthen the Company's
disclosure controls and procedures.
As further disclosed in the Second Quarter Form 10-QSB, subsequent to
both the initial filing of the Second Quarter Form 10-QSB and Amendment No. 1 to
the Second Quarter Form 10-QSB, the Company's former independent auditors, KPMG
LLP, advised management and the Audit Committee by a letter dated December 24,
2003 that, in connection with KPMG's review of the financial statements of the
Company for the three and six-month periods ended June 30, 2003, it noted
certain matters involving internal control and its operation that it considered
to be material weaknesses that constituted reportable conditions under standards
established by the American Institute of Certified Public Accountants.
Reportable conditions are matters coming to an independent auditors' attention
that, in their judgment, relate to significant deficiencies in the design or
operation of internal control and could adversely affect the organization's
ability to record, process, summarize, and report financial data consistent with
the assertions of management in the financial statements. Further, a material
weakness is a reportable condition in which the design or operation of one or
more internal control components does not reduce to a relatively low level the
risk that errors or fraud in amounts that would be material in relation to the
financial statements being audited may occur and not be detected within a timely
period by employees in the normal course of performing their assigned functions.
KPMG advised management and the Audit Committee that it considered the following
to constitute material weaknesses in internal control and operations: the
Company's failure to adequately staff its finance group with the appropriate
level of experience to effectively control the increased level of transaction
activity, address the complex accounting matters and manage the increased
financial reporting complexities
18
resulting from, among other things, the acquisition of Bandwidth and the
implementation of a new financial reporting system.
The Company's new independent auditors, Vitale, Caturano & Company has,
in connection with its review of the September 30, 2003 financial statements,
informed the Audit Committee that the conditions identified in the December 24,
2003 letter as material weaknesses in internal controls by KPMG are still
present.
The Company is currently assessing the findings of its independent
auditors. As noted above, however, the Company has made and is continuing to
make changes in its controls and procedures, including its internal control over
financial reporting, aimed at enhancing their effectiveness and ensuring that
the Company's systems evolve with, and meet the needs of, the Company's
business. As further noted above, the Company is also continually striving to
improve its management and operational efficiency and the Company expects that
its efforts in that regard will from time to time directly or indirectly affect
the Company's controls and procedures, including its internal control over
financial reporting. For example, the Company has recently added to its
accounting staff and expects to hire additional professionals, including a chief
financial officer, to manage the diverse and complex financial issues which may
arise in the Company's business and the Company has arranged for additional
compliance training for its staff. The Company is also continuing its efforts to
upgrade its information technology capabilities. It has completed the
implementation of a common accounting system at all of its business units and is
working to complete integration of the systems at remote sites with its
headquarters location.
Changes in Internal Control Over Financial Reporting
----------------------------------------------------
There was no change in the Company's internal control over financial
reporting that occurred during the quarterly period covered by this quarterly
report on Form 10-QSB that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
19
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 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. In August and September, a total
of seven new cases were filed against the Company in courts in Harris County.
A federal district court judge in Minnesota recently ruled against St.
Jude Medical's request for early judgment on their cases now pending. This judge
had decided that St. Jude's device is no longer FDA-approved which may affect
the concept of federal preemption and possibly the ruling made in June 2003
dismissing most of the cases pending against the Company in Harris County,
Texas.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
--------
31.1 Certification of the Chairman of the Board, Chief Executive
Officer and President pursuant toss.302 of the Sarbanes-Oxley Act
of 2002
31.2 Certification of the Financial Controller and Treasurer
(Principal Financial and Accounting Officer) pursuant toss.302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chairman of the Board, Chief Executive
Officer and President pursuant to 18 U.S.C.ss.1350, as adopted
pursuant toss.906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Financial Controller and Treasurer
(Principal Financial and Accounting Officer) pursuant to 18
U.S.C. ss.1350, as adopted pursuant toss.906 of the
Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K
-------------------
There were no reports on Form 8-K that were filed by the Registrant in
the quarter ended September 30, 2003.
20
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: January 23, 2004 By: /s/ Roger G. Little
------------------------------------
Roger G. Little
Chairman of the Board, Chief Executive
Officer and President
Dated: January 23, 2004 By: /s/ Gregory G. Towle
------------------------------------
Gregory G. Towle
Financial Controller and Treasurer
(principal financial and accounting
officer)
21
EXHIBIT INDEX
-------------
EXHIBIT
31.1 Certification of the Chairman of the Board, Chief Executive Officer and
President pursuant toss.302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Financial Controller and Treasurer (Principal
Financial and Accounting Officer) pursuant toss.302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification of the Chairman of the Board, Chief Executive Officer and
President pursuant to 18 U.S.C.ss.1350, as adopted pursuant toss.906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of the Financial Controller and Treasurer (Principal
Financial and Accounting Officer) pursuant to 18 U.S.C.ss.1350, as
adopted pursuant toss.906 of the Sarbanes-Oxley Act of 2002