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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 30, 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
-----------------
(Name of small business issuer as specified in its charter)
MASSACHUSETTS 04-2 57335
------------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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 registrant was required to file such
reports); and (2) has been subject to such filing requirements for the past 90
days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 6,864,366
outstanding shares of the issuer's only class of common equity, Common Stock,
$0.01 par value, on August 8, 2005.
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TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet as of June 30, 2005. 1
Unaudited Condensed Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 2005 and 2004.......... 2
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 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.............................. 12
Item 3. Controls and Procedures............................................ 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........ 24
Item 3. Defaults Upon Senior Securities.................................... 24
Item 4. Submission of Matters to a Vote of Security Holders................ 24
Item 5. Other Information.................................................. 24
Item 6. Exhibits........................................................... 24
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30,
2005
-----------
ASSETS
Current assets
Cash and cash equivalents $7,576,064
Restricted cash 989,463
-----------
8,565,527
Accounts receivable - trade, net 3,452,945
Inventories, net 2,401,547
Prepaid expenses and other current assets 582,334
-----------
Total current assets 15,002,353
Net property and equipment 5,706,048
Intangible and other assets (less accumulated amortization
of $653,361) 694,752
Available-for-sale investments at quoted market value 886,420
Restricted cash - long-term 199,821
Deposit - related party 191,250
-----------
Total assets $22,680,644
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligation $ 415,947
Current portion of capital lease obligation - related party 620,999
Accounts payable 2,242,510
Accrued liabilities 1,894,762
Accrued lease obligation - related party 217,411
Advances on contracts in progress 2,020,093
-----------
Total current liabilities 7,411,722
-----------
Long-term portion of capital lease obligation 235,082
Long-term portion of capital lease obligation - related party 1,924,696
Deferred compensation 886,420
Unearned purchase discount 1,216,183
-----------
Total long-term liabilities 4,262,381
-----------
Total liabilities 11,674,103
-----------
Commitments and Contingencies:
Stockholders' equity
Common stock, $0.01 par value; 20,000,000 shares authorized;
6,856,616 shares issued and outstanding 68,566
Additional paid-in capital 9,468,506
Retained earnings 1,468,320
Accumulated other comprehensive income 1,149
-----------
Total stockholders' equity 11,006,541
-----------
Total liabilities and stockholders' equity $22,680,644
===========
See accompanying notes to condensed consolidated financial statements.
1
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net sales and revenues
Contract research, service and
license revenues $ 2,809,657 $ 2,748,874 $ 5,541,671 $ 5,331,062
Sales of goods 4,537,458 1,508,991 5,984,959 3,957,069
------------ ------------ ------------ ------------
Total net sales and revenues 7,347,115 4,257,865 11,526,630 9,288,131
------------ ------------ ------------ ------------
Costs and expenses
Cost of contract research, service
and licenses 2,157,660 2,113,125 4,275,465 4,119,373
Cost of goods sold 4,291,820 1,388,027 5,710,580 3,308,604
Selling, general and administrative
expenses 2,057,026 2,030,134 3,886,605 4,088,956
Internal research and development
expenses 340,873 377,340 658,069 730,625
------------ ------------ ------------ ------------
Total costs and expenses 8,847,379 5,908,626 14,530,719 12,247,558
------------ ------------ ------------ ------------
Gain on sale of licenses 6,319,600 3,000,000 6,319,600 3,000,000
------------ ------------ ------------ ------------
Earnings from operations 4,819,336 1,349,239 3,315,511 40,573
Other expense, net (121,184) (70,529) (197,801) (139,918)
------------ ------------ ------------ ------------
Earnings (loss) before income taxes 4,698,152 1,278,710 3,117,710 (99,345)
Income tax expense -- -- -- --
------------ ------------ ------------ ------------
Net earnings (loss) $ 4,698,152 $ 1,278,710 $ 3,117,710 $ (99,345)
============ ============ ============ ============
Earnings (loss) per share of common
stock - basic $ 0.69 $ 0.19 $ 0.45 $ (0.01)
============ ============ ============ ============
Earnings (loss) per share of common
stock - diluted $ 0.67 $ 0.18 $ 0.44 $ (0.01)
============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding -
basic 6,856,616 6,789,206 6,855,783 6,777,368
============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding -
diluted 7,042,492 7,062,623 7,045,315 6,777,368
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
2
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
----------------------------
2005 2004
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 3,117,710 $ (99,345)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 1,245,007 1,244,451
Gain on sale of licenses (6,319,600) (3,000,000)
Deferred compensation (23,407) --
Unearned purchase discount (54,128) (73,901)
Changes in assets and liabilities:
Restricted cash (379,574) (7,655)
Accounts receivable, net 774,933 95,969
Inventories 322,891 (557,573)
Prepaid expenses and other current assets (27,920) 335,955
Accounts payable, accrued liabilities and other liabilities 445,982 (316,021)
Deposit - related party (22,500) (168,750)
Advances on contracts in progress (578,653) (378,438)
----------- -----------
Net cash used in operating activities (1,499,259) (2,925,308)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of licenses 6,319,600 3,000,000
Additions to property and equipment (166,719) (197,014)
Restricted cash - long term 17,979 --
Increase in intangible and other assets (5,117) (305,045)
----------- -----------
Net cash provided by investing activities 6,165,743 2,497,941
----------- -----------
Cash flows from financing activities:
Principal payment on capital lease obligations (197,336) (184,033)
Principal payment on capital lease obligations - related parties (250,652) (171,480)
Exercise of stock options 20,701 132,443
----------- -----------
Net cash used in financing activities (427,287) (223,070)
----------- -----------
Net increase (decrease) in cash and cash equivalents 4,239,197 (650,437)
Cash and cash equivalents, beginning of period 3,336,867 5,999,091
----------- -----------
Cash and cash equivalents, end of period $ 7,576,064 $ 5,348,654
=========== ===========
Cash paid during the period for:
Interest $ 11,235 $ 31,077
=========== ===========
Interest - related party $ 103,060 $ 109,771
=========== ===========
Income taxes $ 110,064 $ --
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 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 June 30, 2005 and the results of
its operations and cash flows for the three and six months ended June 30, 2005
and 2004. The results of operations for the three and six months ended June 30,
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 Footnote 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:
June 30,
2005
----------
Amounts billed $3,333,925
Retainage 34,869
Accrued revenue 271,723
----------
3,640,517
Less: Allowance for sales returns and doubtful accounts (187,572)
----------
Net accounts receivable $3,452,945
==========
Advances on contracts in progress $2,020,093
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4
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 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 June 30, 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:
June 30,
2005
----------
Raw materials $1,435,527
Work in process 728,167
Finished goods 237,853
----------
$2,401,547
==========
5. 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 Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Weighted average number of
common and common
equivalent shares outstanding -
basic 6,856,616 6,789,206 6,855,783 6,777,368
Add: Net additional common
shares upon assumed exercise of
common stock options 185,876 273,417 189,532 --
--------- --------- --------- ---------
Adjusted weighted average
common and common
equivalents shares outstanding -
diluted 7,042,492 7,062,623 7,045,315 6,777,368
========= ========= ========= =========
For the three and six months ended June 30, 2005, 84,568 and 84,535
shares, respectively, and for the three and six months ended June 30, 2004,
80,069 and 67,815 shares, respectively, of common stock issuable relative to
stock options
6
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2005
had exercise prices per share that exceeded the average market price of the
Company's common stock and were excluded from the calculation of diluted shares
since their inclusion would be anti-dilutive. For the six months ended June 30,
2004, 263,234 shares 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 the
period.
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 June 30, 2005
Net sales and revenues $2,437,322 $1,522,541 $2,785,042 $ 602,210 $7,347,115
Earnings (loss) from operations 2,643,812 (75,764) 2,891,836 (640,548) 4,819,336
For the three months ended June 30, 2004
Net sales and revenues $ 813,024 $ 510,550 $2,323,307 $ 610,984 $4,257,865
Earnings (loss) from operations (506,278) (152,209) 2,592,041 (584,315) 1,349,239
For the six months ended June 30, 2005
Net sales and revenues $3,379,315 $1,575,991 $5,278,138 $1,293,186 $11,526,630
Earnings (loss) from operations 2,253,706 (471,695) 2,754,426 (1,220,926) 3,315,511
For the six months ended June 30, 2004
Net sales and revenues $1,974,691 $1,787,871 $4,180,699 $1,344,870 $9,288,131
Earnings (loss) from operations (669,203) (62,059) 1,768,006 (996,171) 40,573
Earnings from operations for the solar equipment and biomedical segments
include gains on the sale of licenses of $3,319,600 and $3,000,000,
respectively, for the three and six months ended June 30, 2005. These gains are
more fully described in Footnote 12.
The following table shows net sales and revenues by geographic area (based
on customer location):
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------------- --------------------------------------------
2005 % 2004 % 2005 % 2004 %
----------- ----- ----------- ----- ----------- ----- ----------- -----
Foreign $ 2,650,000 36% $ 910,000 21% $ 3,277,000 29% $ 1,151,000 12%
United States 4,697,000 64% 3,348,000 79% 8,250,000 71% 8,137,000 88%
----------- ----- ----------- ----- ----------- ----- ----------- -----
$ 7,347,000 100% $ 4,258,000 100% $11,527,000 100% $ 9,288,000 100%
=========== ===== =========== ===== =========== ===== =========== =====
Revenues from contracts with United States government agencies for the
three months ended June 30, 2005 and 2004 were $788,000 and $819,000, or 11% and
19% of consolidated net sales and revenues, respectively.
Revenues from contracts with United States government agencies for the six
months ended June 30, 2005 and 2004 were $1,681,000 and $1,465,000, or 15% and
16% of consolidated net sales and revenues, respectively.
Four customers accounted for approximately 51% for the three months ended
June 30, 2005 and one customer accounted for approximately 15% of the Company's
gross sales during the three months ended June 30, 2004. One customer accounted
for approximately 15% for the six months ended June 30, 2005 and two customers
accounted for approximately
6
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2005
24% of the Company's gross sales during the six months ended June 30, 2004. One
customer represented approximately 11% of trade account receivables at June 30,
2005.
7. INTANGIBLE AND OTHER ASSETS
Patents amounted to $511,720, net of accumulated amortization of $584,254,
at June 30, 2005. Licenses amounted to $155,893, net of accumulated amortization
of $69,107, at June 30, 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 $420,318 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 $83,496
2006 164,518
2007 157,366
2008 130,319
2009 and beyond 131,914
--------
$667,613
========
Also included in other assets are $27,139 of refundable deposits made by
the Company.
8. AVAILABLE-FOR-SALE INVESTMENTS
Available-for-sale securities consist of the following:
June 30,
2005
--------
Equity investments $559,538
Government bonds 168,701
Cash and money market funds 158,181
--------
$886,420
========
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 June 30, 2005, the
unrealized gain on these marketable securities was approximately $2,000.
9. NOTES PAYABLE AND CREDIT ARRANGEMENTS
The Company has 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. At June 30, 2005, the Company had approximately $1,189,000 of
restricted cash associated with outstanding Letters of Credit. Standby Letters
of Credit under this Agreement bear interest at 1%. The Agreement also provides
the Company with the ability to convert to a $2,000,000 revolving line of
credit, based upon eligible accounts receivable and certain conversion
covenants. Loans under this revolving line of credit bear interest at the Bank's
prime rate, as determined, plus 1/2% (6.75% at June 30, 2005.) At June 30, 2005,
the Company had not exercised its conversion option and no amounts were
outstanding under the revolving line of credit. A commitment fee of .25% is
charged on the unused portion of the borrowing base. On June 29, 2005, the
Company entered into a Second Amendment to extend the expiration date of the
Agreement to June 27, 2006. The Agreement contains covenants including certain
financial reporting
7
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2005
requirements. At June 30, 2005, the Company was in compliance with its financial
reporting requirements and cash balance covenants.
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 earnings (loss) and earnings (loss) per share would have been
changed to the pro forma amounts indicated below.
Three Months Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net earnings (loss), as reported $4,698,152 $1,278,710 $3,117,710 $ (99,345)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (76,882) (80,424) (158,658) (158,888)
---------- ---------- ---------- ----------
Pro forma net earnings (loss) $4,621,270 $1,198,286 $2,959,052 $ (258,233)
---------- ---------- ---------- ----------
Earnings (loss) per share:
Basic - as reported $ 0.69 $ 0.19 $ 0.45 $ (0.01)
========== ========== ========== ==========
Basic - pro forma $ 0.67 $ 0.18 $ 0.43 $ ( 0.04)
========== ========== ========== ==========
Diluted - as reported $ 0.67 $ 0.18 $ 0.44 $ (0.01)
========== ========== ========== ==========
Diluted - pro forma $ 0.66 $ 0.17 $ 0.42 $ ( 0.04)
========== ========== ========== ==========
The per-share weighted-average fair value of stock options granted during
the quarters ended June 30, 2005 and 2004 was $2.91 and $4.73, 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 -- 3.94% 5 years 76.6%
2004 -- 3.83% 5 years 78.2%
For the quarter ended June 30, 2005, 69,250 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.
8
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2005
11. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes certain changes in equity that are
excluded from net earnings (loss) and consists of the following:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net earnings (loss) $4,698,152 $1,278,710 $3,117,710 $ (99,345)
Other comprehensive loss:
Net unrealized loss on available
for sale marketable securities,
net of tax (6,295) -- (23,407) --
---------- ---------- ---------- ----------
Total comprehensive income (loss) $4,691,857 $1,278,710 $3,094,303 $ (99,345)
========== ========== ========== ==========
12. SALE OF LICENSES
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. 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 milestone payment and recorded a gain of $3,000,000. In June 2005,
the Company received the second and final contingent milestone payment and
recorded a gain of $3,000,000. There were no direct costs associated with these
payments. These gains have been recorded in the accompanying unaudited condensed
consolidated statements of operations for three and six months ended June 30,
2005 and 2004, respectively.
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 a right of first refusal should the Company seek to sell the catheter
business.
On May 26, 2005, the Company entered into a global consortium agreement
(the "Agreement") with Nisshinbo Industries, Inc. (Nisshinbo) for the
development, manufacturing, and sales of solar photovoltaic module manufacturing
equipment. Under the terms of the Agreement, Nisshinbo purchased a license to
manufacture and sell the Company's module manufacturing equipment for an upfront
fee plus additional royalties based on ongoing equipment sales over a ten-year
period. In addition, the Company and Nisshinbo agreed, but are not obligated, to
pursue joint research and development, product improvement activities and sales
and marketing efforts. On June 27, 2005, the Company received JPY 400,000,000
from the sale of this permanent license. The Company has determined the fair
value of the license and royalty based on an appraisal. As a result, a
$3,319,600 gain has been recognized as a gain on sale of license in the
accompanying unaudited condensed consolidated statements of operations for the
three and six months ended June 30, 2005. In addition, approximately $13,000 of
royalty income was recognized during the quarter.
As of June 30, 2005, JPY 400,000,000 was held in a Japanese yen account.
This yen account has been reflected in cash and cash equivalents in the
accompanying unaudited condensed consolidated balance sheet utilizing the
closing yen/dollar exchange rate as of June 30, 2005. As a result, a $62,845
currency transaction loss was incurred and reflected in Other expense, net in
the accompanying unaudited condensed consolidated statement of operations for
the three and six months ended June 30, 2005. On July 1, the Company entered
into a 30-day Forward Plus Contract with its Bank for the conversion of the
majority of its Yen account into United States dollars at a predetermined
exchange rate range. This contract effectively capped the Company's exchange
rate at 113.25 while allowing the Company to benefit from decreases in the yen /
dollar exchange rate to a 109.25 limit. If the rate dropped below this limit at
the expiration date of the contract,
9
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2005
the Company would have to convert the yen at the 113.25 rate. On August 3, 2005,
the Company converted JPY 350,000,000 into $3,139,295 and the contract expired.
The Company believes that the sale of these licenses does not reflect the
day-to-day operations of the Company. Therefore, the net proceeds received have
been classified under investing activities in the unaudited condensed
consolidated statements of cash flows for the six months ended June 30, 2005 and
June 30, 2004, respectively.
13. NASDAQ LISTING
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 "Rule"). 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 6, 2005 finding that the Company is no
longer in compliance with the Rule, and that the Nasdaq Staff will review the
Company's eligibility for continued National Market listing. The Nasdaq Staff
requested that the Company provide a plan to achieve and sustain compliance with
Nasdaq listing standards. On May 12, 2005, the Company submitted such a plan to
the Nasdaq Staff.
On May 24, 2005, the Nasdaq Staff requested additional information from the
Company regarding certain projected nonrecurring license sales that were
expected to occur during the second quarter of 2005. On June 3, 2005, the
Company submitted a revised plan to achieve compliance with the Rule
incorporating the subject license sales. On June 6, 2005, the Company received a
letter from the Nasdaq Staff stating that the Company provided a definitive plan
evidencing its ability to achieve and sustain compliance with the Rule, and as
such, granted the Company an extension of time to achieve compliance. The terms
of the extension required the Company to file a Form 8-K providing an update on
the Company's listing status. The Company made such filing on August 5, 2005.
The license sales completed during the three months ended June 30, 2005 are
described in Footnote 12 above. As a result of these transactions, the Company
believes that it has regained compliance with the Rule as of June 30, 2005.
Nasdaq will continue to monitor the Company's ongoing compliance with the
Rule. If the Company were to receive a written notification of delisting from
Nasdaq, 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. Although the Company
believes it has regained compliance with the Rule as of June 30, 2005, in order
to avoid future listing problems with respect to the Nasdaq National Market, the
Company may still decide to apply to transfer the listing of its common stock to
the Nasdaq SmallCap Market.
14. COMMITMENTS AND CONTINGENCIES
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 unaudited condensed consolidated balance
sheet. 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
10
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JUNE 30, 2005
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
$54,128 for the six months ended June 30, 2005. The production equipment has
been classified as a component of fixed assets in the accompanying unaudited
condensed consolidated balance sheet. Depreciation amounted to $136,256 for the
six months ended June 30, 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.
The Company is currently exploring various options with regard to this agreement
including a potential purchase of the production equipment. As of June 30, 2005
a definitive decision has not been made in this matter
Legal Matters
-------------
From time to time, the Company is subject to legal proceedings and claims
arising from the conduct of its business operations. The Company does not expect
the outcome of these proceedings, either individually or in the aggregate, to
have a material adverse effect on its financial position, results of operations,
or cash flows.
The Company has been named as a defendant in 58 cases filed from August
2001 to July 2003 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 57 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 2003. The remaining
case is still pending, and due to aspects of its fact situation is not subject
to the principle of federal preemption. From August 2003 to date, a total of
seven new cases were filed against the Company in courts in Harris County.
Activity with regard to these cases is likely to occur only after the
disposition of the original 57 cases is finally settled. The plaintiffs whose
cases were dismissed have filed appeals with the Texas appellate court. In June
2005, the Texas Court of Appeals upheld the summary judgment granted by the
lower court. Attorneys for the Company anticipate that the plaintiffs may file a
motion for rehearing, and an appeal with the Texas Supreme Court is also
possible. Attorneys who represent the Company with respect to these cases in
Texas do not believe at this time that the actions of a federal district court
judge in Minnesota in denying St. Jude Medical's request for summary judgment
will materially affect the Company's position in the Texas complaints.
During the second quarter of 2005 a suit was filed by Arrow International,
Inc. against Spire Biomedical, Inc., a wholly owned subsidiary of the Company,
alleging patent infringement by the Company. The complaint claims one of the
Company's catheter products induces and contributes to infringement when medical
professionals insert it. The Company has responded to the complaint denying all
allegations and has filed certain counterclaims. The Company intends to
vigorously defend this matter. In the opinion of management, an unfavorable
outcome of this matter could have a material adverse effect on the Company's
financial position as well as its results of operations and cash flows.
11
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 and Six Months Ended June 30, 2005 Compared to Three and Six
Months Ended June 30, 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 29% 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.
12
Results of Operations
---------------------
The following table sets forth certain items as a percentage of net sales
and revenues for the periods presented:
Three Months Six Months
Ended June 30, Ended June 30,
--------------- ---------------
2005 2004 2005 2004
---- ---- ---- ----
Net sales and revenues 100% 100% 100% 100%
Cost of sales and revenues (87) (82) (86) (80)
---- ---- ---- ----
Gross profit 13 18 14 20
Selling, general and administrative expenses (48) (34) (44)
(28)
Internal research and development (9) (6) (8)
(5)
Gain on sale of licenses 86 71 55 32
---- ---- ---- ----
Earnings from operations 66 32 29 --
Other expense, net (2) (2) (2) (1)
---- ---- ---- ----
Earnings (loss) before income taxes 64 30 27 (1)
Income tax expense -- -- -- --
---- ---- ---- ----
Net earnings (loss) 64% 30% 27% (1%)
==== ==== ==== ====
OVERALL
The Company's total net sales and revenues for the six months ended June
30, 2005 ("2005") increased 24% compared to the six months ended June 30, 2004
("2004"). The increase was attributable to the solar business unit and the
biomedical business unit. These increases were partially offset by a decrease
within the optoelectronics business unit.
SOLAR BUSINESS UNIT
Sales in the Company's solar business unit increased 32% during 2005 as
compared to 2004 primarily due to a 109% increase in solar equipment sales
resulting from the timing of the delivery of equipment partially offset by a 12%
decrease in solar systems sales and an 18% decrease in revenue from government
funded research and development activities associated with the cost sharing
agreement with the Department of Energy National Renewable Energy Laboratory
("NREL").
BIOMEDICAL BUSINESS UNIT
Revenues of the Company's biomedical business unit increased 26% during
2005 as compared to 2004 as a result of a 95% increase in revenue from Spire's
line of hemodialysis catheters and a 32% increase in revenue from Spire's
government-funded research and development activities.
OPTOELECTRONICS BUSINESS UNIT
Sales in the Company's optoelectronics business unit decreased 4% during
2005.
Three and Six Months Ended June 30, 2005 Compared to Three and Six Months Ended
-------------------------------------------------------------------------------
June 30, 2004
-------------
NET SALES AND REVENUES
The following table categorizes the Company's net sales and revenues for
the periods presented:
Three Months
Ended June 30, Increase/(Decrease)
---------------------- ---------------------
2005 2004 $ %
---------- ---------- ---------- ---------
Contract research, service and
license revenues $2,810,000 $2,749,000 $ 61,000 2%
Sales of goods 4,537,000 1,509,000 3,028,000 201%
---------- ---------- ----------
Net sales and revenues $7,347,000 $4,258,000 $3,089,000 73%
========== ========== ==========
13
The 2% increase in contract research, service and license revenues for the
three months ended June 30, 2005 as compared to the three months ended June 30,
2004 is primarily attributable to an increased demand for Spire's biomedical
processing services and an increase in research and development activities both
partially offset by a decrease in Bandwidth foundry services. Biomedical
processing services revenues increased 5% due to increased demand for Spire's
IONGUARD implant services. Revenues from research and development activities
increased 1% in 2005 as compared to 2004 primarily due to an increase in the
number of contracts associated with funded research and development activities
partially offset by a decrease in revenue from activities associated with our
cost sharing agreement with NREL.
The 201% increase in sales of goods for the three months ended June 30,
2005 as compared to the three months ended June 30, 2004 was primarily due to
increases in solar equipment and solar systems revenues and, to a lesser extent,
an increase in biomedical product sales. Solar equipment and solar system
revenues increased 316% and 198%, respectively, as compared to 2004 primarily
due to the timing and delivery of customer orders. The 2005 results include the
sale of two photovoltaic module production lines in 2005 versus none in 2004 and
the completion of a large solar system installation in Chicago. Biomedical
product sales increased 78% in 2005 as compared to 2004 as a result of increased
demand for Spire's line of hemodialysis catheters.
The following table categorizes the Company's net sales and revenues for
the periods presented:
Six Months
Ended June 30, Increase/(Decrease)
----------------------- ---------------------
2005 2004 $ %
----------- ---------- ---------- ---------
Contract research, service and
license revenues $ 5,542,000 $5,331,000 $ 211,000 4%
Sales of goods 5,985,000 3,957,000 2,028,000 51%
----------- ---------- ----------
Net sales and revenues $11,527,000 $9,288,000 $2,239,000 24%
=========== ========== ==========
The 4% increase in contract research, service and license revenues for the
six months ended June 30, 2005 as compared to the six months ended June 30, 2004
is primarily attributable to an increase in research and development activities
partially offset by decreases in Bandwidth foundry services. Revenues from
Spire's research and development activities increased 18% 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. Revenues from
Bandwidth foundry services decreased 4% in 2005 compared to 2004 due to the
timing and delivery of customer orders.
The 51% increase in sales of goods for the six months ended June 30, 2005
as compared to the six months ended June 30, 2004 was primarily due to increases
in solar equipment revenues and biomedical product sales partially offset by a
decrease in solar system revenue. Solar equipment revenues increased 108% in
2005 as compared to 2004 due to the timing and delivery of customer orders. The
2005 results include the sale of two photovoltaic module production lines in
2005 versus none in 2004. Biomedical product sales increased 95% in 2005 as
compared to 2004 as a result of increased demand for Spire's line of
hemodialysis catheters. Solar systems revenues decreased 12% in 2005 as compared
to 2004 primarily due to the timing and delivery of customer orders.
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:
Increase/
Three Months Ended June 30, (Decrease)
-------------------------------- ----------------
2005 % 2004 % $ %
---------- --- ---------- --- ---------- ----
Cost of contract research,
services and licenses $2,158,000 77% $2,113,000 77% $ 45,000 2%
Cost of goods sold 4,292,000 94% 1,388,000 92% 2,904,000 209%
---------- ---------- ----------
Net cost of sales and
revenues $6,450,000 87% $3,501,000 82% $2,949,000 84%
========== ========== ==========
The $45,000 (2%) increase in cost of contract research and service revenues
in 2005 is primarily due to a 7% increase in the cost of the Company's research
and development activities associated with its 1% increase 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.
14
The $2,904,000 (209%) increase in cost of goods sold is primarily due to an
128% increase in Spire's solar equipment direct costs resulting from its 316%
increase in revenues discussed above and increases in solar systems and
biomedical products unit's direct costs resulting from its 198% and 78% increase
in revenues, respectively. The increase in cost of goods sold as a percentage of
revenue is the result of sales mix and lower than expected contribution margins
in the solar systems revenues.
COST OF SALES AND REVENUES
Six Months Ended June 30, Increase/(Decrease)
------------------------------------------------- ----------------------
2005 % 2004 % $ %
------------ ------- ------------ ------- ------------ -------
Cost of contract research, services
and licenses $ 4,275,000 77% $ 4,119,000 77% $ 156,000 4%
Cost of goods sold 5,711,000 95% 3,309,000 84% 2,402,000 73%
------------ ------------ ------------
Net cost of sales and revenues $ 9,986,000 86% $ 7,428,000 80% $ 2,558,000 34%
============ ============ ============
The $156,000 (4%) increase in cost of contract research and service
revenues in 2005 is primarily due to a 40% increase in the cost of the Company's
research and development activities associated with its 18% increase 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 $2,402,000 (73%) increase in cost of goods sold is primarily due to an
increase in Spire's solar equipment direct costs resulting from its 108%
increase in revenues discussed above, to a lesser extent, an increase in
biomedical products unit's direct costs resulting from its 95% increase in
revenues discussed above. The increase in cost of goods sold as a percentage of
revenue is the result of lower than expected contribution margins in the solar
equipment and solar systems segments. The effect of these lower than expected
contribution margins was partially offset by an improved contribution margin in
our biomedical product line.
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 June 30, Increase/(Decrease)
------------------------------------------------- ----------------------
2005 % 2004 % $ %
------------ ------- ------------ ------- ------------ -------
Selling, general and administrative $ 2,057,000 28% $ 2,030,000 48% $ 27,000 1%
Internal research and development 341,000 5% 377,000 9% (36,000) (10%)
------------ ------------ ------------
Operating expenses $ 2,398,000 33% $ 2,407,000 57% $ (9,000) 0%
============ ============ ============
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 decrease in research
and development expenses as a percentage of sales and revenues was primarily due
to the increase in sales and revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
June 30, 2005 increased by $27,000. The increase was primarily due to increased
legal and sales and marketing costs, which were partially offset by a reduction
in insurance expense for the quarter. The decrease in selling, general and
administrative expenses as a percentage of sales and revenues is primarily due
to the increase in sales and revenue.
15
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:
Six Months Ended June 30, Increase/(Decrease)
------------------------------------------------- ----------------------
2005 % 2004 % $ %
------------ ------- ------------ ------- ------------ -------
Selling, general and administrative $ 3,887,000 34% $ 4,089,000 44% $ (202,000) (5%)
Internal research and development 658,000 6% 731,000 8% (73,000) (10%)
------------ ------------ ------------
Operating expenses $ 4,545,000 39% $ 4,820,000 52% $ (275,000) (6%)
============ ============ ============
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 decrease in research
and development expenses as a percentage of sales and revenues was primarily due
to the increase 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 and, to a lesser
extent, decreased insurance costs. These decreases were partially offset by
increased cost associated with sales and marketing efforts of the Company's
biomedical product line and solar business units. The decrease in selling,
general and administrative expenses as a percentage of sales and revenues was
primarily due to the increase in sales and revenues and, to a lesser extent, the
decrease in selling, general and administrative costs discussed above.
OTHER EXPENSE, NET
The Company earned $9,000 and $14,000 of interest income for the three
months ended June 30, 2005 and 2004, respectively. The Company incurred interest
expense of $67,000 and $84,000 for the three months ended June 30, 2005 and
2004, respectively. The interest expense is primarily associated with interest
incurred on capital leases associated with the semiconductor foundry.
The Company earned $18,000 and $34,000 of interest income for the six
months ended June 30, 2005 and 2004, respectively. The Company incurred interest
expense of $153,000 and $174,000 for the six months ended June 30, 2005 and
2004, respectively. The interest expense is primarily associated with interest
incurred on capital leases associated with the semiconductor foundry.
During the second quarter of 2005, the Company recorded $63,000 of currency
transaction loss related to the sale of a solar technology license.
INCOME TAXES
The Company did not record an income tax provision for the three and six
months ended June 30, 2005 and 2004 as earnings (loss) before income is expected
to be substantially offset by net operating loss carryforwards of approximately
$3.5 million. A valuation allowance was provided against the deferred tax assets
generated in 2004.
NET EARNINGS (LOSS)
The Company reported net earnings for the three months ended June 30, 2005
of $4,698,000, compared to net earnings of $1,279,000 in 2004. The increase in
net earnings in 2005 versus 2004 is primarily due to the gain on the sale of a
license to our solar technology.
The Company reported net earnings for the six months ended June 30, 2005 of
$3,118,000, compared to a net loss of $99,000 in 2004. The increase in net
earnings in 2005 versus 2004 is primarily due to the gain on the sale of a
license to our solar technology.
16
Liquidity and Capital Resources
-------------------------------
Increase/(Decrease)
June 30, December 31, ----------------------
2005 2004 $ %
---------- ---------- ---------- ----------
Cash and cash equivalents $7,576,000 $3,337,000 $4,239,000 127%
Working capital 7,591,000 3,996,000 3,595,000 90%
Cash and cash equivalents increased primarily due to the proceeds from sale
of licenses partially offset by 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 2005 and 2004 arising from the sale of a hemodialysis patent
license to Bard Access Systems. The Company received its final payment of
$3,000,000 in June 2005. In addition, the Company received JPY 400,000,000
(approximately $3.7 million) in June 2005 due to the sale of a license to our
solar technology.
The Company has 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. At June 30, 2005, the Company had $1,189,000 of restricted
cash associated with outstanding Letters of Credit. Standby Letters of Credit
under this Agreement bear interest at 1%. The Agreement also provides the
Company with the ability to convert to a $2,000,000 revolving line of credit,
based upon eligible accounts receivable and certain conversion covenants. Loans
under this revolving line of credit bear interest at the Bank's prime rate as
determined plus 1/2% (6.75% at June 30, 2005.) At June 30, 2005, the Company had
not exercised its conversion option and no amounts were outstanding under the
revolving line of credit. A commitment fee of .25% is charged on the unused
portion of the borrowing base. On June 29, 2005, the Company entered into a
Second Amendment to extend the expiration date of the Agreement to June 27,
2006. The Agreement contains covenants including certain financial reporting
requirements. At June 30, 2005, the Company was in compliance with its financial
reporting requirements and cash balance covenants.
To date, there are no material commitments by the Company for capital
expenditures. At June 30, 2005, the Company's retained earnings were $1,468,000,
compared to an accumulated deficit of $1,649,000 as of December 31, 2004.
Working capital as of June 30, 2005 increased 90% to $7,591,000, 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 and working
capital.
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. The
Company received Japanese yen in exchange for the sale of a license to its solar
technology. In addition, purchases made and royalties received under the
Company's consortium agreement with its Japanese partner will be in Japanese
yen. The Company does not believe that foreign exchange fluctuations will
materially affect its operations.
17
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 June 30, 2005 was $571,000. 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 June 30, 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 June 30, 2005, the remaining
lease obligation is $217,411, which is reflected as "accrued lease obligation -
related party" in the June 30, 2005 unaudited condensed 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
six months ended June 30, 2005, interest expense was approximately $9,000.
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 ($191,250 as of
June 30, 2005.) The lease agreement does not provide for a transfer of ownership
at any point. Interest costs were assumed at 7%. For the six months ended June
30, 2005, interest expense was approximately $94,000. This lease has been
classified as a related party capital lease and a summary of payments (including
interest) follows:
RATE PER
YEAR SQUARE FOOT ANNUAL RENT MONTHLY RENT SECURITY 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 June 30, 2005, $621,000 and $1,925,000 are reflected as the current and
long-term portions of capital lease obligation - related party, respectively, on
the unaudited condensed 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
18
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 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
19
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.
Contractual Obligations, Commercial Commitments and Off-Balance Sheet
---------------------------------------------------------------------
Arrangements
------------
The following table summarizes the Company's gross contractual obligations
at June 30, 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 $3,144,000 $2,617,000 $ 527,000 $ -- --
CAPITAL LEASES:
Unrelated party capital lease $ 714,000 $ 437,000 $ 277,000 $ -- --
Related party capital lease 2,850,000 780,000 2,070,000 -- --
OPERATING LEASES:
Unrelated party operating leases $ 193,000 $ 63,000 $ 108,000 $ 22,000 --
Related party operating lease 507,000 507,000 -- --
--
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 $217,000.
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 unaudited condensed consolidated balance
sheet. 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 $54,128 for the
six-months ended June 30, 2005. The production equipment has been classified as
a component of fixed assets in the accompanying unaudited condensed consolidated
balance sheet. Depreciation amounted to $136,256 for the six months ended June
30, 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.
The Company is currently exploring
20
various options with regard to this agreement including a potential purchase of
the production equipment. As of June 30, 2005 a definitive decision has not been
made.
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. 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 milestone payment and recorded a gain of $3,000,000. In June 2005,
the Company received the second and final contingent milestone payment and
recorded a gain of $3,000,000. There were no direct costs associated with these
payments. These gains have been recorded in the accompanying unaudited condensed
consolidated statements of operations for three and six months ended June 30,
2005 and 2004, respectively.
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 a right of first refusal should the Company seek to sell the catheter
business.
On May 26, 2005, the Company entered into a global consortium agreement
(the "Agreement") with Nisshinbo Industries, Inc. (Nisshinbo) for the
development, manufacturing, and sales of solar photovoltaic module manufacturing
equipment. Under the terms of the Agreement, Nisshinbo purchased a license to
manufacture and sell the Company's module manufacturing equipment for an upfront
fee plus additional royalties based on ongoing equipment sales over a ten-year
period. In addition, the Company and Nisshinbo agreed, but are not obligated, to
pursue joint research and development, product improvement activities and sales
and marketing efforts. On June 27, 2005, the Company received JPY 400,000,000
from the sale of this permanent license. The Company has determined the fair
value of the license and royalty based on an appraisal. As a result, a
$3,319,600 gain has been recognized as a gain on sale of license in the
accompanying unaudited condensed consolidated statements of operations for the
three and six months ended June 30, 2005. In addition, approximately $13,000 of
royalty income was recognized during the quarter.
As of June 30, 2005, JPY 400,000,000 was held in a Japanese yen account.
This yen account has been reflected in cash and cash equivalents in the
accompanying unaudited condensed consolidated balance sheet utilizing the
closing yen/dollar exchange rate as of June 30, 2005. As a result, a $62,845
currency transaction loss was incurred and reflected in Other expense, net in
the accompanying unaudited condensed consolidated statement of operations for
the three and six months ended June 30, 2005. On July 1, the Company entered
into a 30-day Forward Plus Contract with its Bank for the conversion of the
majority of its Yen account into United States dollars at a predetermined
exchange rate range. This contract effectively capped the Company's exchange
rate at 113.25 while allowing the Company to benefit from decreases in the yen /
dollar exchange rate to a 109.25 limit. If the rate dropped below this limit at
the expiration date of the contract, the Company would have to convert the yen
at the 113.25 rate. On August 3, 2005, the Company converted JPY 350,000,000
into $3,139,295 and the contract expired.
The Company believes that the sale of these licenses does not reflect the
day-to-day operations of the Company. Therefore, the net proceeds received have
been classified under investing activities in the unaudited condensed
consolidated statements of cash flows for the six months ended June 30, 2005 and
June 30, 2004, respectively.
Outstanding letters of credit totaled $1,189,000 at June 30, 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.
21
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 June 30,
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 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,
22
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 and second fiscal quarters of 2005 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
arising from the conduct of its business operations. The Company does not expect
the outcome of these proceedings, either individually or in the aggregate, to
have a material adverse effect on its financial position, results of operations,
or cash flows.
The Company has been named as a defendant in 58 cases filed from August
2001 to July 2003 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 57 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 2003. The remaining
case is still pending, and due to aspects of its fact situation is not subject
to the principle of federal preemption. From August 2003 to date, a total of
seven new cases were filed against the Company in courts in Harris County.
Activity with regard to these cases is likely to occur only after the
disposition of the original 57 cases is finally settled. The plaintiffs whose
cases were dismissed have filed appeals with the Texas appellate court. In June
2005, the Texas Court of Appeals upheld the summary judgment granted by the
lower court. Attorneys for the Company anticipate that the plaintiffs may file a
motion for
23
rehearing, and an appeal with the Texas Supreme Court is also possible.
Attorneys who represent the Company with respect to these cases in Texas do not
believe at this time that the actions of a federal district court judge in
Minnesota in denying St. Jude Medical's request for summary judgment will
materially affect the Company's position in the Texas complaints.
During the second quarter of 2005 a suit was filed by Arrow International,
Inc. against Spire Biomedical, Inc., a wholly owned subsidiary of the Company,
alleging patent infringement by the Company. The complaint claims one of the
Company's catheter products induces and contributes to infringement when medical
professionals insert it. The Company has responded to the complaint denying all
allegations and has filed certain counterclaims. The Company intends to
vigorously defend this matter. In the opinion of management, an unfavorable
outcome of this matter could have a material adverse effect on the Company's
financial position as well as its results of operations and cash flows.
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
On May 17, 2005, the Company held a Special Meeting in Lieu of Annual
Meeting of Stockholders.
The number of directors was fixed at eight, leaving one vacancy, Udo
Henseler, David R. Lipinski, Mark C. Little, Roger G. Little, Michael J.
Magliochetti, Guy L. Mayer and Roger W. Redmond were elected to the Board of
Directors to hold office until the 2006 annual meeting of the stockholders. The
results for Proposal Number 1 were as follows:
SHARES SHARES VOTING AGAINST SHARES BROKER
NOMINEE VOTING FOR OR AUTHORITY WITHHELD ABSTAINING NON-VOTES
----------------------- ---------- --------------------- ---------- ----------
Udo Henseler 6,060,970 77,165 -- --
David R. Lipinski 5,708,462 429,673 -- --
Mark C. Little 5,726,562 411,573 -- --
Roger G. Little 5,725,762 412,373 -- --
Michael J. Magliochetti 6,078,070 60,065 -- --
Guy L. Mayer 6,078,470 59,665 -- --
Roger W. Redmond 6,078,270 59,865 -- --
ITEM 5. OTHER INFORMATION
a. None
b. None
ITEM 6. EXHIBITS
10(n) Development, Manufacturing, and Sales Consortium Agreement between
Nisshinbo Industries, Inc. and Spire Corporation, with an effective
date of 16 May 2005.*
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.
------------
* Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment.
24
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Spire Corporation
Dated: August 15, 2005 By: /s/ Roger G. Little
------------------------------
Roger G. Little
Chairman of the Board,
Chief Executive Officer
and President
Dated: August 15, 2005 By: /s/ James F. Parslow
------------------------------
James F. Parslow
Chief Financial Officer
25
EXHIBIT INDEX
-------------
Exhibit Description
------- -----------
10(n) Development, Manufacturing, and Sales Consortium Agreement between
Nisshinbo Industries, Inc. and Spire Corporation, with an effective
date of 16 May 2005.*
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
* Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment.
26