================================================================================
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 March 31, 2005;
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 04-257335
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(State or other jurisdiction (I.R.S. Employer
of 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 6,856,616
outstanding shares of the issuer's only class of common equity, Common Stock,
$0.01 par value, on May 3, 2005.
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
Unaudited Condensed Consolidated Balance Sheet as of
March 31, 2005 ...................................................... 1
Unaudited Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2005 and 2004 .................. 2
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2005 and 2004 ................. 3
Notes to Unaudited Condensed Consolidated Financial Statements ...... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 10
Item 3. Controls and Procedures ............................................ 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................. 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ....... 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 ........................................................... 20
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31,
2005
------------
ASSETS
Current assets
Cash and cash equivalents $ 1,229,650
Restricted cash 1,555,354
------------
2,785,004
Accounts receivable - trade, net 3,925,423
Inventories, net 3,946,789
Prepaid expenses and other current assets 475,682
------------
Total current assets 11,132,898
Net property and equipment 6,176,439
Intangible and other assets (less accumulated amortization of $631,739 in 2005) 748,936
Available-for-sale investments at quoted market value 824,906
Restricted cash - long-term 217,800
Deposit - related party 168,750
------------
Total assets $ 19,269,729
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligation $ 408,752
Current portion of capital lease obligation - related party 559,062
Accounts payable 2,303,260
Accrued liabilities 1,707,151
Accrued lease obligation - related party 345,812
Advances on contracts in progress 3,034,843
------------
Total current liabilities 8,358,880
------------
Long-term portion of capital lease obligation 341,806
Long-term portion of capital lease obligation - related party 2,197,345
Deferred compensation 824,906
Unearned purchase discount 1,232,108
------------
Total long-term liabilities 4,596,165
------------
Total liabilities 12,955,045
------------
Commitments and Contingencies:
Stockholders' equity
Common stock, $0.01 par value; shares authorized 20,000,000;
issued 6,856,616 shares in 2005 68,566
Additional paid-in capital 9,468,506
Accumulated deficit (3,229,832)
Accumulated other comprehensive income 7,444
------------
Total stockholders' equity 6,314,684
------------
Total liabilities and stockholders' equity $ 19,269,729
============
See accompanying notes to condensed consolidated financial statements.
1
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------
2005 2004
------------ ------------
Net sales and revenues
----------------------
Contract research, service and license revenues $ 2,732,014 $ 2,582,188
Sales of goods 1,447,501 2,448,078
------------ ------------
Total net sales and revenues 4,179,515 5,030,266
------------ ------------
Costs and expenses
------------------
Cost of contract research, services and licenses 2,117,805 2,006,248
Cost of goods sold 1,418,760 1,920,577
Selling, general and administrative expenses 1,829,579 2,058,822
Internal research and development expenses 317,196 353,285
------------ ------------
Total costs and expenses 5,683,340 6,338,932
------------ ------------
Loss from operations (1,503,825) (1,308,666)
--------------------
Interest expense, net (76,617) (69,389)
------------ ------------
Loss before income taxes (1,580,442) (1,378,055)
Income tax expense -- --
------------ ------------
Net loss $ (1,580,442) $ (1,378,055)
-------- ============ ============
Loss per share of common stock - basic and diluted $ (0.23) $ (0.20)
-------------------------------------------------- ============ ============
Weighted average number of common and common equivalent
shares outstanding - basic and diluted 6,854,931 6,765,660
============ ============
See accompanying notes to condensed consolidated financial statements.
2
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------
2005 2004
------------ ------------
Cash flows from operating activities:
-------------------------------------
Net loss $ (1,580,442) $ (1,378,055)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 623,100 636,006
Deferred compensation (17,112) --
Unearned purchase discount (38,203) (53,490)
Changes in assets and liabilities:
Restricted cash (945,465) (5,592)
Accounts receivable, net 302,455 712,620
Inventories (1,222,351) (109,375)
Prepaid expenses and other current assets 78,732 (80,627)
Accounts payable, accrued liabilities and other liabilities 447,522 477,131
Advances on contracts in progress 436,097 (983,964)
------------ ------------
Net cash used in operating activities (1,915,667) (785,346)
------------ ------------
Cash flows from investing activities:
-------------------------------------
Additions to property and equipment (36,825) (90,785)
Increase in intangible and other assets (37,679) (158,198)
------------ ------------
Net cash used in investing activities (74,504) (248,983)
------------ ------------
Cash flows from financing activities:
-------------------------------------
Principal payment on capital lease obligations - related parties (39,940) (91,214)
Principal payment on capital lease obligations (97,807) (79,415)
Exercise of stock options 20,701 --
------------ ------------
Net cash used in financing activities (117,046) (170,629)
------------ ------------
Net decrease in cash and cash equivalents (2,107,217) (1,204,958)
Cash and cash equivalents, beginning of period 3,336,867 5,999,091
------------ ------------
Cash and cash equivalents, end of period $ 1,229,650 $ 4,794,133
============ ============
Cash paid during the period for:
Interest $ 28,380 $ 18,021
============ ============
Interest - related party $ 16,310 $ 55,584
============ ============
Income taxes paid (received) $ -- $ --
============ ============
See accompanying notes to condensed consolidated financial statements.
3
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2005
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 150 factories in 43 countries.
In the solar systems area, the Company provides custom and building
integrated photovoltaic modules, stand alone emergency power backup and electric
power grid-connected distributed power generation systems employing photovoltaic
technology developed by the Company.
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 March 31, 2005 and the results of
operations and cash flows for the three months ended March 31, 2005 and 2004.
The results of operations for the three months ended March 31, 2005 are not
necessarily indicative of the results to be expected for the fiscal year ending
December 31, 2005.
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, 2004.
Certain prior period accounts have been reclassified to conform with
current presentation.
3. ACCOUNTS RECEIVABLE/ADVANCES ON CONTRACTS IN PROGRESS
Net accounts receivable, trade consists of the following:
March 31,
2005
------------
Amounts billed $ 3,759,672
Retainage 34,869
Accrued revenue 285,840
------------
4,080,381
Less: Allowance for sales returns and doubtful accounts (154,958)
------------
Net accounts receivable $ 3,925,423
============
Advances on contracts in progress $ 3,034,843
============
4
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
MARCH 31, 2005
Accrued revenue represents revenues recognized on contracts for which
billings have not been presented to customers as of the balance sheet date.
These amounts are billed and generally collected within one year.
Retainage represents revenues on certain United States government
sponsored research and development contracts. These amounts, which usually
represent 15% of the Company's research fee on each applicable contract, are not
collectible until a final cost review has been performed by government auditors.
Included in retainage are amounts expected to be collected after one year, which
totaled $35,000 at March 31, 2005. All other accounts receivable are expected to
be collected within one year.
All contracts with United States government agencies have been audited
by the government through December 2002. The Company has not incurred
significant losses or adjustments as a result of government audits.
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to pay amounts due. Bad
debts are written off against the allowance when identified. In addition, the
Company maintains an allowance for potential future product returns and rebates
related to current period revenues. The Company analyzes the rate of historical
returns when evaluating the adequacy of the allowance for sales returns and
allowances. Returns and rebates are charged against the allowance when incurred.
Advances on contracts in progress represent contracts for which billings
have been presented to the customer but revenue has not been recognized.
4. INVENTORIES
Inventories consist of the following:
March 31,
2005
------------
Raw materials $ 992,261
Work in process 2,713,315
Finished goods 241,213
------------
$ 3,946,789
============
5. LOSS PER SHARE
The following table provides a reconciliation of the denominators of the
Company's reported basic and diluted loss per share computations for the periods
ended:
Three Months Ended March 31,
-----------------------------
2005 2004
------------ ------------
Weighted average number of common and common
equivalent shares outstanding - basic 6,854,931 6,765,660
Add: Net additional common shares upon assumed
exercise of common stock options -- --
------------ ------------
Adjusted weighted average common and common
equivalents shares outstanding - diluted 6,854,931 6,765,660
============ ============
At March 31, 2005 and 2004, 193,267 and 251,407 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 due to the Company's net loss position in both periods. In
addition, at March 31, 2005 and 2004, 78,250 and 54,615 shares respectively, of
common stock issuable relative to stock options had exercise prices per share
that exceeded the average market price of the Company's common stock and were
excluded from the calculation of the diluted shares since their inclusion would
be anti-dilutive.
5
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
MARCH 31, 2005
6. 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."
Solar Solar Total
Equipment Systems Biomedical Optoelectronics Company
------------------------------------------------------------------------------------
For the three months ended March 31, 2005
-----------------------------------------
Net sales and revenues $ 941,993 $ 53,450 $ 2,493,096 $ 690,976 $ 4,179,515
Loss from operations (390,106) (395,931) (137,410) (580,378) (1,503,825)
For the three months ended March 31, 2004
-----------------------------------------
Net sales and revenues $ 1,161,667 $ 1,277,321 $ 1,857,392 $ 733,886 $ 5,030,266
Earnings (loss) from operations (162,924) 90,150 (824,036) (411,856) (1,308,666)
The following table shows net sales and revenues by geographic area
(based on customer location):
Three Months Ended March 31,
----------------------------------------------------------
2005 % 2004 %
---------- ---------- ---------- ----------
Foreign $ 627,000 15% $ 241,000 5%
United States 3,553,000 85% 4,789,000 95%
---------- ---------- ---------- ----------
$4,180,000 100% $5,030,000 100%
========== ========== ========== ==========
Revenues from contracts with United States government agencies for the
three months ended March 31, 2005 and 2004 were $878,000 and $721,000 or 21% and
14% of consolidated net sales and revenues, respectively.
One customer accounted for approximately 12% and three customers
accounted for approximately 51% of the Company's gross sales during the three
months ended March 31, 2005 and 2004, respectively. One customer represented 21%
of trade account receivables at March 31, 2005.
7. INTANGIBLE AND OTHER ASSETS
Patents amounted to $553,644, net of accumulated amortization of
$575,043, at March 31, 2005. Licenses amounted to $168,304, net of accumulated
amortization of $56,696, at March 31, 2005. Patent cost is primarily composed of
cost associated with securing and registering patents that the Company has been
awarded or that have been submitted to, and the Company believes will be
approved by, the government. These costs are capitalized and amortized over
their useful lives or terms, ordinarily five years, using the straight-line
method. There are no expected residual values related to these patents. For
disclosure purposes, the table below includes future amortization expense for
patents owned by the Company as well as $382,714 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
--------------- ----------
2005 $ 134,125
2006 171,044
2007 163,893
2008 136,877
2009 and beyond 116,009
----------
$ 721,948
==========
6
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
MARCH 31, 2005
Also included in other assets are $26,988 of refundable deposits made by
the Company.
8. AVAILABLE-FOR-SALE INVESTMENTS
Available-for-sale securities consist of the following:
March 31,
2005
----------
Equity investments $ 557,028
Government bonds 163,319
Cash and money market funds 104,559
----------
$ 824,906
==========
These investments have been classified as available-for-sale and are
reported at fair value, with unrealized gains and losses included in accumulated
other comprehensive loss, net of related tax effect. As of March 31, 2005, the
unrealized gain on these marketable securities was approximately $10,000.
9. NOTES PAYABLE AND CREDIT ARRANGEMENTS
On June 23, 2003, the Company entered into a $2,000,000 Loan Agreement
(the "Agreement") with Citizens Bank of Massachusetts (the "Bank"). The
Agreement provides Standby Letter of Credit Guarantees for certain foreign and
domestic customers which are 100% secured with cash. The Agreement had an
original expiration date of June 30, 2004 and was amended in June 2004 to extend
the expiration date to June 28, 2005. The amendment also suspended the
Agreement's revolving line of credit conversion feature for one year. At March
31, 2005, the Company had $1,773,000 of restricted cash associated with
outstanding Letters of Credit. Standby Letters of Credit under this Agreement
bear interest at 1%. A commitment fee of .25% is charged on the unused portion
of the borrowing base. The Agreement contains covenants including certain
financial reporting requirements. At March 31, 2005, the Company was not in
compliance with one of its covenants due to its noncompliance with Nasdaq
Marketplace Rule 4450(a)(3) for continued listing on the Nasdaq National Market
as discussed in Footnote 12. The Company has received a waiver of compliance
relative to this matter from the Bank.
10. 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 loss and loss per share would have been changed to the pro forma
amounts indicated below.
Three Months Ended March 31,
------------------------------
2005 2004
------------ ------------
Net loss, as reported $ (1,580,442) $ (1,378,055)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (81,776) (70,313)
------------ ------------
Pro forma net loss $ (1,662,218) $ (1,448,368)
============ ============
Loss per share:
Basic - as reported $ (0.23) $ (0.20)
============ ============
Basic - pro forma $ (0.24) $ (0.21)
============ ============
Diluted - as reported $ (0.23) $ (0.20)
============ ============
Diluted - pro forma $ (0.24) $ (0.21)
============ ============
7
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
MARCH 31, 2005
The per-share weighted-average fair value of stock options granted
during the quarters ended March 31, 2005 and 2004 was $3.17 and $5.12,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
Expected Risk-Free Expected Expected
Year Dividend Yield Interest Rate Option Life Volatility Factor
---- -------------- ------------- ----------- -----------------
2005 -- 4.50% 5 years 77.3%
2004 -- 3.83% 5 years 79.5%
For the quarter ended March 31, 2005, 6,250 stock options were granted.
In December 2004, the Financial Accounting Standards Board issued SFAS
No. 123R, SHARE-BASED PAYMENT. SFAS No. 123R requires companies to expense the
value of employee stock option and similar awards. SFAS No. 123R is effective as
of the beginning of the first interim or annual reporting period that begins
after December 15, 2005. As of the effective date, the Company will be required
to expense all awards granted, modified, cancelled or repurchased as well as the
portion of prior awards for which the requisite service has not been rendered,
based on the grant-date fair value of those awards as calculated for pro forma
disclosures under SFAS No. 123. The adoption of SFAS No. 123R's fair value
method will have an impact on the Company's results of operations. The Company
is currently in the process of determining the effects on its financial
position, results of operations and cash flows that will result from the
adoption of SFAS No. 123R.
11. COMPREHENSIVE LOSS
Comprehensive loss includes certain changes in equity that are excluded
from net loss and consists of the following:
For the three months ended
March 31,
------------------------------
2005 2004
------------ ------------
Net Loss $ (1,580,442) $ (1,378,055)
Other Comprehensive Loss:
Net Unrealized gains on available for sale
marketable securities, net of tax (17,112) --
------------ ------------
Total comprehensive loss $ (1,597,554) $ (1,378,055)
============ ============
12. SUBSEQUENT EVENTS
On April 6, 2005, the Company received a letter from the Nasdaq Listing
Qualifications Panel (the "Nasdaq Panel") indicating that the Company is no
longer in compliance with the $10,000,000 minimum stockholders' equity
requirement for continued listing set forth in Nasdaq Marketplace Rule
4450(a)(3). The Nasdaq Panel requested that the Company provide, by April 13,
2005, the Company's plan to achieve and sustain compliance with this
requirement. On April 13, 2005, the Company presented such plan to the Nasdaq
Panel.
On April 25, 2005, the Company received a letter from the Nasdaq Panel
informing the Company that the Nasdaq Panel was remanding this case to the
Nasdaq Staff. The Nasdaq Panel indicated that it believes that the Nasdaq Staff
is the appropriate body to review and evaluate the Company's plan of compliance,
following its normal procedures and processes.
On April 27, 2005, the Nasdaq Staff issued a Determination letter
reiterating the Nasdaq Panel's April 6th finding that the Company is no longer
in compliance with the $10,000,000 minimum stockholders' equity requirement for
continued
8
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
MARCH 31, 2005
listing set forth in Nasdaq Marketplace Rule 4450(a)(3), and that the Nasdaq
Staff will review the Company's eligibility for continued National Market
listing. The Nasdaq Staff requested that the Company provide, on or before May
12, 2005, a plan to achieve and sustain compliance with Nasdaq listing
standards. On May 12, 2005, the Company submitted such plan to the Nasdaq Staff.
If, after conclusion of its review, Nasdaq determines that the Company has not
presented a sufficient plan to achieve and sustain compliance, it will provide
written notification that the Company's common stock will be delisted. If the
Company were to receive such a written notification, it could appeal the
decision to a Nasdaq Listing Qualifications Panel. If such an appeal were
unsuccessful, the Company could apply to list the Company's common stock on the
Nasdaq SmallCap Market.
9
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, 2004. MANAGEMENT'S DISCUSSION AND
ANALYSIS INCLUDES THE FOLLOWING SECTIONS:
o Overview;
o Results of Operations;
o Three Months Ended March 31, 2005 Compared to Three Months Ended March
31, 2004;
o Liquidity and Capital Resources;
o Recent Accounting Pronouncements;
o Impact of Inflation and Changing Prices;
o Foreign Currency Fluctuation;
o Related Party Transactions;
o Critical Accounting Policies; and
o Contractual Obligations, Commercial Commitments and Off-Balance Sheet
Arrangements.
Overview
--------
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 150 factories in 43 countries.
In the solar systems area, the Company provides custom and building
integrated photovoltaic modules, stand alone emergency power backup and electric
power grid-connected distributed power generation systems employing photovoltaic
technology developed by the Company.
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.
Operating results will depend upon product mix, as well as the timing of
shipments of higher priced products from the Company's solar equipment line and
delivery of solar systems. Export sales were 15% of net sales and revenues in
2005 and are expected to continue to constitute a significant portion of the
Company's net sales and revenues.
10
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
March 31,
-----------------------
2005 2004
-------- --------
Net sales and revenues 100% 100%
Cost of sales and revenues 85 78
-------- --------
Gross profit 15 22
Selling, general and administrative expenses 44 41
Internal research and development 7 7
-------- --------
Loss from operations (36) (26)
Interest expense, net 2 1
-------- --------
Loss before income taxes (38) (27)
Income tax expense (benefit) -- --
-------- --------
Net loss (38%) (27%)
======== ========
OVERALL
The Company's total net sales and revenues for the three months ended
March 31, 2005 ("2005") decreased 17%. The decrease was primarily attributable
to the solar business unit and, to a lesser extent, the optoelectronics business
unit. These decreases were partially offset by an increase within the biomedical
business unit.
SOLAR BUSINESS UNIT
Sales in the Company's solar business unit decreased 59% during 2005 as
compared to 2004 primarily due to a 96% decrease in solar systems sales
resulting from the timing of the delivery of systems and, to a lesser extent, a
15% decrease in solar equipment sales.
BIOMEDICAL BUSINESS UNIT
Revenues of the Company's biomedical business unit increased 34% during
2005 as compared to 2004 as a result of a 77% increase in revenue from Spire's
government-funded research and development activities and a 124% increase in
revenue from Spire's line of hemodialysis catheters. These increases were
partially offset by a 9% decrease in revenue from Spire's IONGUARD(R) implant
process services.
OPTOELECTRONICS BUSINESS UNIT
Sales in the Company's optoelectronics business unit decreased 6% during
2005.
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
-------------------------------------------------------------------------------
NET SALES AND REVENUES
The following table categorizes the Company's net sales and revenues for
the periods presented:
Three Months Ended March 31, Increase/(Decrease)
----------------------------- ------------------------------
2005 2004 $ %
------------ ------------ ------------ ------------
Contract research, service and license revenues $ 2,732,000 $ 2,582,000 $ 150,000 6%
Sales of goods 1,448,000 2,448,000 (1,000,000) (41%)
------------ ------------ ------------ ------------
Net sales and revenues $ 4,180,000 $ 5,030,000 $ (850,000) (17%)
============ ============ ============ ============
The 6% increase in contract research, service and license revenues for
the three months ended March 31, 2005 as compared to the three months ended
March 31, 2004 is primarily attributable to an increase in research and
development
11
activities offset by decreases in biomedical processing services and Bandwidth
foundry services. Revenues from Spire's research and development activities
increased 50% in 2005 as compared to 2004 primarily due to an increase in the
number of contracts associated with funded research and development partially
offset by a decrease in revenue from activities associated with our cost sharing
agreement with NREL. Revenue from Spire's biomedical processing services
decreased 9% in 2005 compared to 2004 as a result of reduced demand for Spire's
IONGUARD implant services. Revenues from Bandwidth foundry services decreased 6%
in 2005 compared to 2004 due to the timing and delivery of customer orders.
The 41% decrease in sales of goods for the three months ended March 31,
2005 as compared to the three months ended March 31, 2004 was primarily due to a
decrease in solar systems revenues and, to a lesser extent, a decrease in solar
equipment revenues. These decreases were partially offset by increases in
biomedical product sales. Solar systems and solar equipment sales decreased 96%
and 15% in 2005 as compared to 2004 primarily due to the timing and delivery of
customer orders. Biomedical product sales increased 124% in 2005 as compared to
2004 as a result of increased demand for Spire's line of hemodialysis catheters.
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 March 31, Increase/(Decrease)
----------------------------------------------- ---------------------
2005 % 2004 % $ %
---------- ----- ---------- ----- ---------- -----
Cost of contract research, services
and licenses $2,118,000 78% $2,006,000 78% $ 112,000 6%
Cost of goods sold 1,419,000 98% 1,921,000 78% (502,000) (26%)
---------- ---------- ----------
Net cost of sales and revenues $3,537,000 85% $3,927,000 78% $ (390,000) (10%)
========== ========== ==========
The $112,000 (6%) increase in cost of contract research and service
revenues in 2005 is primarily due to a 51% increase in the cost of the Company's
research and development activities associated with its 50% increase in
revenues. In addition, Bandwidth's costs increased 14% despite a 6% decrease in
revenues primarily due to the contract mix. Partially offsetting these increases
was an 8% decrease in costs associated with biomedical processing services
resulting from its 9% decrease in revenues. Cost of contract research, services
and licenses as a percentage of revenue remained relatively unchanged as the
cost increases discussed above were substantially offset by margin improvement
within biomedical processing services.
The $502,000 (26%) decrease in cost of goods sold is primarily due to an
83% decrease in Spire's solar systems direct costs resulting from its 96%
decrease in revenues discussed above. This decrease was partially offset by a
46% increase in biomedical products unit's direct costs resulting from its 124%
increase in revenues. The increase in cost of goods sold as a percentage of
revenue is the result of the decrease in solar systems sales discussed above
offset by improved contribution margins in biomedical products due to the
increase in revenues discussed above.
OPERATING EXPENSES
The following table categorizes the Company's operating expenses for the
periods presented, stated in dollars and as a percentage of related sales and
revenues:
Three Months Ended March 31, Increase/(Decrease)
----------------------------------------------- ---------------------
2005 % 2004 % $ %
---------- ----- ---------- ----- ---------- -----
Selling, general and administrative $1,830,000 44% $2,059,000 41% $ (229,000) (11%)
Internal research and development 317,000 8% 353,000 7% (36,000) (10%)
---------- ---------- ----------
Operating expenses $2,147,000 51% $2,412,000 48% $ (265,000) (11%)
========== ========== ==========
12
INTERNAL RESEARCH AND DEVELOPMENT
The decrease in research and development costs was primarily a result of
the Company's reduced effort in the "next generation" solar energy module
manufacturing equipment under a cost-sharing contract with the Department of
Energy National Renewable Energy Laboratory ("NREL"). The increase in research
and development expenses as a percentage of sales and revenues was primarily due
to the decrease in sales and revenue partially offset by the decrease in
research and development costs described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The decrease was due primarily to decreased cost associated with legal
and audit expenses in connection with compliance requirements partially offset
by increased cost associated with sales and marketing efforts of the Company's
biomedical products and solar business units. The increase in selling, general
and administrative expenses as a percentage of sales and revenues was primarily
due to the decrease in sales and revenue partially offset by the decrease in
selling, general and administration costs discussed above.
INTEREST EXPENSE, NET
The Company earned $9,000 and $20,000 of interest income for the
quarters ended March 31, 2005 and 2004, respectively. The Company incurred
interest expense of $86,000 and $89,000 for the quarters ended March 31, 2005
and 2004, respectively. The interest expense is primarily associated with
interest incurred on capital leases associated with the semiconductor foundry.
INCOME TAXES
The Company did not record an income tax benefit for the three months
ended March 31, 2005. A valuation allowance has been provided against the
current period tax benefit due to uncertainty regarding the realization of the
net operating loss in the future.
NET LOSS
The Company reported a net loss for the three months ended March 31,
2005 of $1,580,000, compared to a net loss of $1,378,000 in 2004. The net loss
increased $202,000 primarily due to the 17% decrease in revenues discussed above
partially offset by the $265,000 reduction in operating expenses discussed
above.
Liquidity and Capital Resources
-------------------------------
Increase/(Decrease)
March 31, December 31, -----------------------
2005 2004 $ %
------------ ------------ ------------ -----
Cash and cash equivalents $ 1,230,000 $ 3,337,000 $ (2,107,000) (63%)
Working capital 2,774,000 3,996,000 $ (1,222,000) (31%)
Cash and cash equivalents decreased primarily due to cash used in
operations and, to a lesser extent, investments in patents and licenses and
payments on capital leases.
The Company has historically funded its operating cash requirements
using operating cash flow and proceeds from the sale and licensing of
technology. The Company's liquidity position benefited as a result of a cash
receipt of $3,000,000 in 2004 and $5,000,000 in 2003 arising from the sale of a
hemodialysis patent license to Bard Access Systems. The license sale agreement
provides for the Company to receive one additional contingent cash payment of
$3,000,000 upon the completion of certain milestones by Bard Access Systems in
2005. There can be no assurance that these milestones will be attained and
attainment is beyond the control of the Company.
On June 23, 2003, the Company entered into a $2,000,000 Loan Agreement
(the "Agreement") with Citizens Bank of Massachusetts (the "Bank"). The
Agreement provides for Standby Letter of Credit Guarantees for certain foreign
and domestic customers which are 100% secured with cash. The Agreement had an
original expiration date of June 30, 2004 and was amended in June 2004 to extend
the expiration date to June 28, 2005. The amendment also suspended the
Agreement's revolving line of credit conversion feature for one year. At March
31, 2005, the Company had $1,773,000 of
13
restricted cash associated with outstanding Letters of Credit. Standby Letters
of Credit under this Agreement bear interest at 1%. A commitment fee of .25% is
charged on the unused portion of the borrowing base. The Agreement contains
covenants including certain financial reporting requirements. At March 31, 2005,
the Company was not in compliance with one of its covenants due to its
noncompliance with Nasdaq Marketplace Rule 4450(a)(3) for continued listing on
the Nasdaq National Market as discussed in Footnote 12. The Company has received
a waiver of compliance relative to this matter from the Bank.
To date, there are no material commitments by the Company for capital
expenditures. At March 31, 2005, the Company's accumulated deficit was
$3,230,000, compared to an accumulated deficit of $1,649,000 as of December 31,
2004. Working capital as of March 31, 2005 decreased 31% to $2,774,000, compared
to $3,996,000 as of December 31, 2004.
The Company believes it has sufficient resources to finance its current
operations for the foreseeable future from operating cash flow, working capital
and the license payment described above.
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 Currency 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 third-party 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 quarter ended March 31, 2005 was $287,000. In
connection with this sublease, the Company is invoiced and pays certain trust
related expenses, including building maintenance and insurance. The Company
invoices the Trust on a monthly basis and the Trust reimburses the Company for
all such costs. No amounts were due from the Trust as of March 31, 2005.
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 a 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 $1,247,241 in the purchase accounting. As of March 31, 2005, the remaining
lease obligation is $345,812, which is reflected as "accrued lease obligation -
related party" in the March 31, 2005 consolidated balance sheet. The difference
between the actual rent payment and the discounted rent payment will be accreted
to the consolidated statements of operations as interest expense. Interest of
4.75% has been assumed on this obligation. For the three months ended March 31,
2005, interest expense was approximately, $5,000.
14
Also 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 (Bandwidth's former owner) the building that
Bandwidth occupies in Hudson, New Hampshire for $3.7 million. Subsequently, the
Company entered into a lease for the building (90,000 square feet) 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 a Company option to extend for five
years. In addition to the rent payments, the lease obligates the Company to keep
on deposit with SPI-Trust the equivalent of three months rent ($168,750 as of
March 31, 2005.) The lease agreement does not provide for a transfer of
ownership at any point. Interest costs were assumed at 7%. For the three months
ended March 31, 2005, interest expense was approximately $48,000. This lease has
been classified as a related party capital lease and a summary of payments
(including interest) follows:
Rate Per Monthly Security
Year Square Foot Annual Rent Rent Deposit
--------------------------- ----------- ----------- -------- --------
June 1, 2003 - May 31, 2004 $ 6.00 $ 540,000 $ 45,000 $135,000
June 1, 2004 - May 31, 2005 7.50 675,000 56,250 168,750
June 1, 2005 - May 31, 2006 8.50 765,000 63,750 191,250
June 1, 2006 - May 31, 2007 10.50 945,000 78,750 236,250
June 1, 2007 - May 31, 2008 13.50 1,215,000 101,250 303,750
------------
$4,140,000
============
At March 31, 2005, $559,000 and $2,197,000 are reflected as the current
and long-term portions of capital lease obligation - related party,
respectively, on the consolidated balance sheet.
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 revenue recognition, reserves for
doubtful accounts and sales returns and allowances, reserve for excess and
obsolete inventory, impairment of long-lived assets, acquisition accounting,
income taxes, and warranty reserves. 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. Refer to Footnote 2 of our notes to consolidated financial
statements in our annual report on Form 10-KSB for the year ended December 31,
2004 for a description of our accounting policies for income taxes and
warranties.
REVENUE RECOGNITION
The Company derives its revenues from three primary sources: (1)
commercial products including, but not limited to, solar energy manufacturing
equipment, solar energy systems and hemodialysis catheters; (2) biomedical and
semiconductor 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 or determinable, and
collectibility is reasonably assured. These criteria are generally met at the
time of shipment when the risk of loss and title passes to the customer or
distributor, unless a consignment arrangement exists. Revenue from consignment
arrangements is recognized based on product usage indicating sales are complete.
Gross sales reflect reductions attributable to customer returns and various
customer incentive programs including pricing discounts and rebates. Product
returns are permitted in certain sales contracts and an allowance is recorded
for returns based on the Company's history of actual returns. Certain customer
incentive programs require management to estimate the cost of those programs.
The allowance for these programs is determined through an 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. If sufficient
history to make reasonable and reliable estimates of returns or rebates does not
exist, revenue associated with such practices is deferred until the return
period lapses or a reasonable estimate can be made. This
15
deferred revenue will be recognized as revenue when the distributor reports to
us that it has either shipped or disposed of the units (indicating that the
possibility of return is remote).
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 multiple elements, the Company allocates fair
value to each element in the contract and revenue is recognized upon delivery of
each element. If the Company is not able to establish fair value of undelivered
elements, all revenue is deferred.
The Company recognizes revenues and estimated profits on long-term
government contracts on the accrual basis where the circumstances are such that
total profit can be estimated with reasonable accuracy and ultimate realization
is reasonably assured. 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 audits 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 consolidated financial statements,
using historical experience, market data, and all other available information.
16
Contractual Obligations, Commercial Commitments and Off-Balance Sheet
---------------------------------------------------------------------
Arrangements
------------
The following table summarizes the Company's gross contractual
obligations at March 31, 2005 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 2 - 3 4 - 5 More Than
Contractual Obligations Total 1 Year Years Years 5 Years
---------------------------------- ---------- ---------- ---------- ---------- ----------
PURCHASE OBLIGATIONS $2,653,000 $2,425,000 $ 228,000 $ -- --
CAPITAL LEASES:
Unrelated party capital lease $ 824,000 $ 437,000 $ 387,000 $ -- --
Related party capital lease 3,139,000 863,000 2,085,000 191,000 --
OPERATING LEASES:
Unrelated party operating leases $ 221,000 $ 87,000 $ 121,000 $ 13,000 --
Related party operating lease 736,000 736,000 -- -- --
Purchase obligations include all open purchase orders outstanding
regardless of whether they are cancelable or not.
Capital lease obligations outlined above include both the principal and
interest components of these contractual obligations. Included in the related
party operating lease is the accrued lease obligation in the amount of $346,000.
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 ("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 consolidated balance sheets. The
Company will amortize this discount as a reduction to cost of sales as it
purchases solar cells from BPS. 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 the Company from BPS in the purchase commitment calculation.
Amortization of the purchase discount amounted to $38,000 for the quarter ended
March 31, 2005.
In addition, the agreement contains a put option for BPS to have the
Company 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 the Company.
The amended agreement also allows the Company 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 March 31, 2005, the Company has no intention of terminating the
agreement.
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 $5,000,000 upon the
execution of the agreement, with another $5,000,000 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
provided for two additional contingent cash payments of $3,000,000 each upon the
completion of certain milestones by Bard in 2004 and 2005. Bard has the right to
cancel the agreement at any time subsequent to the second payment. There can be
no assurances that these milestones will be attained and attainment is beyond
the control of the Company. During the year 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 $5,000,000 payment due and
recorded a gain of $4,989,150, net of direct costs. In June 2004, the Company
received the first contingent
17
milestone payment and recorded a gain of $3,000,000. There were no direct costs
associated with this payment. These gains have been recorded in the consolidated
statements of operations for the years ended December 31, 2004 and 2003,
respectively. 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 consolidated statements of
cash flows for the years ended December 31, 2004 and December 31, 2003,
respectively.
Outstanding letters of credit totaled $1,773,000 at March 31, 2005. The
letters of credit principally secure performance obligations, and allow holders
to draw funds up to the face amount of the letter of credit if the Company does
not perform as contractually required. These letters of credit expire through
2007 and are 100% secured by cash.
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 Chief Executive Officer and President and the Chief Financial Officer, of
the effectiveness of the Company's disclosure controls and procedures as of
March 31, 2005. 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 are continuing to make changes
to improve and enhance controls. Based upon the required evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that as of March 31,
2005 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 rules 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 its
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/A Amendment Number 2
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
SAS 100 Review by the Company's independent auditors, the Audit Committee
engaged outside counsel to conduct an 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 disclosed in our annual report on Form 10-KSB for the year ended
December 31, 2003, the Company's independent auditor, Vitale, Caturano &
Company, Ltd. ("VCC") advised management and the Audit Committee by a letter
dated March 18, 2004 that, in connection with its audit of the Company's
consolidated financial statements for the year ended December 31, 2003, it noted
certain matters involving internal control and its operation that it considered
to be a material weakness under standards established by the American Institute
of Certified Public Accountants. Reportable
18
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.
VCC advised management and the Audit Committee that it considered the following
to constitute material weaknesses in internal control and operations: (i) 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 resulting from, among other things, the
acquisition of Bandwidth, the implementation of a new financial reporting system
and the investigation surrounding the filing and eventual restatement of the
Company's Form 10-QSB, as amended, for the quarter ended June 30, 2003 and (ii)
the Company's current monthly close process does not mitigate the risk that
material errors could occur in the books, records and financial statements, and
does not ensure that those errors would be detected in a timely manner by the
Company's employees in the normal course of performing their assigned functions.
The matter noted in clause (i) above was similar to the material weakness noted
by our former independent auditor (as disclosed in prior SEC filings). VCC noted
that these matters were considered by it during its audit and did not modify the
opinion expressed in its independent auditor's report dated March 18, 2004.
On March 24, 2005, VCC issued a letter advising management and the Audit
Committee, that, in connection with its audit of the Company's consolidated
financial statements for the year ended December 31, 2004, it continued to note
certain matters involving internal control and its operation previously outlined
in their March 18, 2004 letter that it considered to be a material weakness
under standards established by the American Institute of Certified Public
Accountants. VCC noted that the Company had implemented several of the specific
recommendations in their March 18, 2004 letter including, but not exclusive of:
o An improved reconciliation process;
o A disciplined and timely close process on a monthly basis; and
o Detailed reviews of monthly close packages by the appropriate levels
of management.
However, VCC also noted that improvements still need to be made in the
reconciliation and documentation and information flow processes. In addition,
VCC noted that while an internal assessment of the finance staff has been made
and certain roles and responsibilities have been defined, the appropriate level
of staffing within the finance department will not be alleviated until such time
as the full finance team is assembled.
The Company concurs with VCC's finding noted above and is continuing to
make changes in its internal controls and procedures. The Company is also
continually striving to improve its management and operational efficiency and
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. The Company has reorganized the accounting
staff and expects to hire additional professionals in the near term. In
addition, the Company has completed compliance training and will continue to
arrange for additional training for its finance staff.
Changes in Internal Control Over Financial Reporting
----------------------------------------------------
There was no change in the Company's internal control over financial
reporting that occurred during the first fiscal quarter of 2005 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.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
a. None b. None
ITEM 6. EXHIBITS.
Exhibits
--------
31.1 Certification of the Chairman of the Board, Chief Executive
Officer and President pursuant to ss.302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to
ss.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 to ss.906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. ss.1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
-------------------
There was one report on Form 8-K that was filed by the Registrant in the
quarter ended March 31, 2005.
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: May 16, 2005 By: /s/ Roger G. Little
-------------------------------------
Roger G. Little
Chairman of the Board, Chief
Executive Officer and President
Dated: May 16, 2005 By: /s/ James F. Parslow
-------------------------------------
James F. Parslow
Chief Financial Officer
21