================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-QSB
_______________
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 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 04-2457335
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE PATRIOTS PARK
BEDFORD, MASSACHUSETTS 01730-2396
--------------------------------------------------------------------------------
(Address of principal executive offices)
781-275-6000
--------------------------------------------------------------------------------
(Issuer's telephone number)
Securities registered under Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE; REGISTERED ON THE NASDAQ STOCK MARKET
--------------------------------------------------------------------
(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 a shell company (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 7,207,987
outstanding shares of the issuer's only class of common equity, Common Stock,
$0.01 par value, on November 4, 2005.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
================================================================================
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION ----
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet
as of September 30, 2005 ..................................... 1
Unaudited Condensed Consolidated Statements of Operations for
the Three and Nine Months Ended September 30, 2005 and 2004.... 2
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 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 ......................................... 13
Item 3. Controls and Procedures ....................................... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................ 24
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 ..................................................... 25
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30,
2005
------------
ASSETS
Current assets
--------------
Cash and cash equivalents $ 5,372,446
Restricted cash 900,649
------------
6,273,095
Accounts receivable - trade, net 2,828,522
Inventories, net 3,618,182
Prepaid expenses and other current assets 584,918
------------
Total current assets 13,304,717
Net property and equipment 4,891,799
Intangible and other assets (less accumulated amortization of 689,280
$ 674,577)
Available-for-sale investments at quoted market value 969,927
Restricted cash - long-term 199,821
Deposit - related party 191,250
------------
Total assets $ 20,246,794
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Current portion of capital lease obligation $ 549,748
Current portion of capital lease obligation - related party 677,193
Accounts payable 825,943
Accrued liabilities 2,220,482
Accrued lease obligation - related party 87,480
Advances on contracts in progress 2,395,359
------------
Total current liabilities 6,756,205
------------
Long-term portion of capital lease obligation --
Long-term portion of capital lease obligation - related party 1,720,944
Deferred compensation 969,927
Unearned purchase discount --
------------
Total long-term liabilities 2,690,871
------------
Total liabilities 9,447,076
------------
Commitments and Contingencies:
------------------------------
Stockholders' equity
--------------------
Common stock, $0.01 par value; 20,000,000 shares authorized;
7,202,899 shares issued and outstanding 72,029
Additional paid-in capital 10,678,792
Retained earnings 39,698
Accumulated other comprehensive income 9,199
------------
Total stockholders' equity 10,799,718
------------
Total liabilities and stockholders' equity $ 20,246,794
============
See accompanying notes to condensed consolidated financial statements.
1
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net sales and revenues
----------------------
Contract research, service and
license revenues $ 3,172,940 $ 2,290,456 $ 8,714,611 $ 7,621,518
Sales of goods 1,309,160 1,437,047 7,294,120 5,394,116
------------ ------------ ------------ ------------
Total net sales and revenues 4,482,100 3,727,503 16,008,731 13,015,634
------------ ------------ ------------ ------------
Costs and expenses
------------------
Cost of contract research,
service and licenses 2,359,714 1,791,787 6,635,179 5,911,160
Cost of goods sold 1,268,977 1,353,809 6,979,557 4,662,413
Selling, general and
administrative expenses 2,400,309 1,994,725 6,286,914 6,083,681
Internal research and
development expenses 411,749 308,531 1,069,818 1,039,156
------------ ------------ ------------ ------------
Total costs and expenses 6,440,749 5,448,852 20,971,468 17,696,410
------------ ------------ ------------ ------------
Gain on extinguishment of purchase
commitment 593,313 -- 593,313 --
Gain on sale of licenses -- -- 6,319,600 3,000,000
------------ ------------ ------------ ------------
Earnings (loss) from operations (1,365,336) (1,721,349) 1,950,176 (1,680,776)
-------------------------------
Other expense, net (63,287) (77,084) (261,088) (217,002)
------------ ------------ ------------ ------------
Earnings (loss) before income taxes (1,428,623) (1,798,433) 1,689,088 (1,897,778)
Income tax benefit (expense) -- -- -- --
------------ ------------ ------------ ------------
Net earnings (loss) $ (1,428,623) $ (1,798,433) $ 1,689,088 $ (1,897,778)
------------------- ============ ============ ============ ============
Earnings (loss) per share of common
-----------------------------------
stock - basic $ (0.20) $ (0.26) $ 0.24 $ (0.28)
------------- ============ ============ ============ ============
Earnings (loss) per share of common
-----------------------------------
stock - diluted $ (0.20) $ (0.26) $ 0.24 $ (0.28)
--------------- ============ ============ ============ ============
Weighted average number of common
and common equivalent shares
outstanding - basic 6,983,556 6,835,928 6,898,381 6,797,073
============ ============ ============ ============
Weighted average number of common
and common equivalent shares
outstanding - diluted 6,983,556 6,835,928 7,172,985 6,797,073
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
2
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------
2005 2004
------------ ------------
Cash flows from operating activities:
-------------------------------------
Net income (loss) $ 1,689,088 $ (1,897,778)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 1,914,932 1,887,218
Gain on sale of licenses (6,319,600) (3,000,000)
Gain on extinguishment of purchase commitment (593,313) --
Deferred compensation (15,357) --
Unearned purchase discount (64,754) (108,889)
Changes in assets and liabilities:
Restricted cash (290,760) 43,192
Accounts receivable, net 1,399,356 811,760
Inventories (893,744) (875,276)
Prepaid expenses and other current assets (30,504) 44,301
Accounts payable, accrued liabilities and other liabilities (824,800) (642,509)
Deposit - related party (22,500) (168,750)
Advances on contracts in progress (203,387) (80,663)
------------ ------------
Net cash used in operating activities (4,255,343) (3,987,394)
------------ ------------
Cash flows from investing activities:
-------------------------------------
Proceeds from sale of licenses 6,319,600 3,000,000
Additions to property and equipment (288,419) (334,756)
Payment to extinguish purchase commitment (275,000) --
Restricted cash - long term 17,979 --
Increase in intangible and other assets (20,861) (493,439)
------------ ------------
Net cash provided by investing activities 5,753,299 2,171,805
------------ ------------
Cash flows from financing activities:
-------------------------------------
Principal payment on capital lease obligations (298,617) (278,492)
Principal payment on capital lease obligations - related parties (398,210) (287,859)
Proceeds from exercise of stock options 1,234,450 156,867
------------ ------------
Net cash provided by (used in) financing activities 537,623 (409,484)
------------ ------------
Net increase (decrease) in cash and cash equivalents 2,035,579 (2,225,073)
Cash and cash equivalents, beginning of period 3,336,867 5,999,091
------------ ------------
Cash and cash equivalents, end of period $ 5,372,446 $ 3,774,018
============ ============
Cash paid (received) during the period for:
Interest $ 37,899 $ 61,552
============ ============
Interest - related party $ 148,821 $ 162,137
============ ============
Income taxes $ 150,064 $ (193,600)
============ ============
See accompanying notes to condensed consolidated financial statements.
3
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2005
1. DESCRIPTION OF THE BUSINESS
Spire Corporation (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 September 30, 2005 and the
results of its operations and cash flows for the three and nine months ended
September 30, 2005 and 2004. The results of operations for the three and nine
months ended September 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:
SEPTEMBER 30,
2005
------------
Amounts billed $ 2,315,361
Retainage 34,869
Accrued revenue 643,160
------------
2,993,390
Less: Allowance for sales returns and doubtful accounts (164,868)
------------
Net accounts receivable $ 2,828,522
============
Advances on contracts in progress $ 2,395,359
============
4
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 2005
Accrued revenue represents revenue 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 September 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: SEPTEMBER 30,
2005
------------
Raw materials $ 1,554,033
Work in process 1,821,273
Finished goods 242,876
------------
$ 3,618,182
============
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 ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Weighted average number of common
and common equivalent shares
outstanding - basic 6,983,556 6,835,928 6,898,381 6,797,073
Add: Net additional common shares
upon assumed exercise of common
stock options -- -- 274,604 --
------------ ------------ ------------ ------------
Adjusted weighted average number of
common and common equivalents
shares outstanding - diluted 6,983,556 6,835,928 7,172,985 6,797,073
============ ============ ============ ============
5
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 2005
For the three and nine months ended September 30, 2005, 6,318 and 25,613
shares, respectively, and for the three and nine months ended September 30,
2004, 155,793 and 227,026 shares, respectively, of common stock issuable
relative to stock options had exercise prices per share that exceeded the
average market price of the Company's common stock and were excluded from the
calculation of diluted shares since their inclusion would be anti-dilutive. For
the three months ended September 30, 2005, 354,694 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. For the three and nine months
ended September 30, 2004, 120,777 and 96,433 shares, respectively, of common
stock issuable relative to stock options were excluded from the calculation of
dilutive shares since the inclusion of such shares would be anti-dilutive due to
the Company's net loss position in 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 September 30, 2005
---------------------------------------------
Net sales and revenues $ 907,341 $ 115,735 $ 2,683,952 $ 775,072 $ 4,482,100
Earnings (loss) from operations (483,718) 119,541 (385,830) (615,329) (1,365,336)
For the three months ended September 30, 2004
---------------------------------------------
Net sales and revenues $ 317,808 $ 748,418 $ 2,221,709 $ 439,568 $ 3,727,503
Earnings (loss) from operations (511,096) (166,696) (524,861) (518,696) (1,721,349)
For the nine months ended September 30, 2005
--------------------------------------------
Net sales and revenues $ 4,286,656 $ 1,691,726 $ 7,962,091 $ 2,068,258 $ 16,008,731
Earnings (loss) from operations 1,769,192 (352,153) 2,369,406 (1,836,269) 1,950,176
For the nine months ended September 30, 2004
--------------------------------------------
Net sales and revenues $ 2,292,499 $ 2,536,289 $ 6,402,408 $ 1,784,438 $ 13,015,634
Earnings (loss) from operations (1,180,299) (228,755) 1,243,145 (1,514,867) (1,680,776)
Earnings from operations for the solar equipment segment includes a gain
on the sale of a license of $3,319,600 for the nine months ended September 30,
2005. Earnings from operations for the biomedical segment includes a gain on the
sale of a license of $3,000,000 for the nine months ended September 30, 2005 and
2004, respectively. 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------- ---------------------------------------
2005 % 2004 % 2005 % 2004 %
----------- ----- ----------- ----- ----------- ----- ----------- -----
Foreign $ 1,088,000 24% $ 359,000 10% $ 4,365,000 27% $ 1,510,000 12%
United States 3,394,000 76% 3,369,000 90% 11,644,000 73% 11,506,000 88%
----------- ----- ----------- ----- ----------- ----- ----------- -----
$4,482,000 100% $3,728,000 100% $16,009,000 100% $13,016,000 100%
=========== ===== =========== ===== =========== ===== =========== =====
Revenues from contracts with United States government agencies for the
three months ended September 30, 2005 and 2004 were $876,000 and $588,000, or
20% and 16% of consolidated net sales and revenues, respectively.
6
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 2005
Revenues from contracts with United States government agencies for the
nine months ended September 30, 2005 and 2004 were $2,557,000 and $2,053,000, or
16% and 16% of consolidated net sales and revenues, respectively.
Two customers accounted for approximately 32% and 34% of the Company's
gross sales during the three months ended September 30, 2005 and 2004,
respectively. Two customers accounted for approximately 26% and one customer
accounted for approximately 15% of the Company's gross sales during the nine
months ended September 30, 2005 and 2004, respectively. One customer represented
approximately 10% of net trade account receivables at September 30, 2005. No
customer represented more than 10% of trade account receivables at September 30,
2004.
7. INTANGIBLE AND OTHER ASSETS
Patents amounted to $537,473, net of accumulated amortization of
$593,059, at September 30, 2005. Licenses amounted to $143,482, net of
accumulated amortization of $81,518 at September 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 licenses and patents owned by the Company as well as $454,876 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 $ 111,260
2006 171,465
2007 164,314
2008 137,123
2009 and beyond 96,793
------------
$ 680,955
============
Also included in other assets are $8,325 of refundable deposits made by
the Company.
8. AVAILABLE-FOR-SALE INVESTMENTS
Available-for-sale securities consist of the following:
SEPTEMBER 30,
2005
------------
Equity investments $ 745,110
Government bonds 155,222
Cash and money market funds 69,595
------------
$ 969,927
============
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 September 30, 2005,
the net unrealized gain on these marketable securities was $17,000.
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 September 30, 2005, the Company had approximately
$1,100,000 of restricted cash associated with outstanding Letters of Credit.
Standby Letters of Credit under this Agreement bear interest at 1%. The
7
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 2005
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% (7.25% at September 30, 2005.)
At September 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 September 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 ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net earnings (loss), as reported $ (1,428,623) $ (1,798,433) $ 1,689,088 $ (1,897,778)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects (81,416) (86,411) (240,073) (245,299)
------------ ------------ ------------ ------------
Pro forma net earnings (loss) $ (1,510,039) $ (1,884,844) $ 1,449,015 $ (2,143,077)
============ ============ ============ ============
Earnings (loss) per share:
Basic - as reported $ (0.20) $ (0.26) $ 0.24 $ (0.28)
============ ============ ============ ============
Basic - pro forma $ (0.22) $ (0.28) $ 0.21 $ (0.32)
============ ============ ============ ============
Diluted - as reported $ (0.20) $ (0.26) $ 0.24 $ (0.28)
============ ============ ============ ============
Diluted - pro forma $ (0.22) $ (0.28) $ 0.20 $ (0.32)
============ ============ ============ ============
The per-share weighted-average fair value of stock options granted during
the quarters ended September 30, 2005 and 2004 was $3.25 and $3.94,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
EXPECTED RISK-FREE EXPECTED EXPECTED
YEAR DIVIDEND YIELD INTEREST RATE OPTION LIFE VOLATILITY FACTOR
---- -------------- ------------- ----------- -----------------
2005 -- 4.34% 5 years 77.4%
2004 -- 4.13% 5 years 77.1%
For the quarter ended September 30, 2005, 6,250 stock options were
granted.
8
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 2005
In December 2004, the Financial Accounting Standards Board issued SFAS
No. 123R, SHARE-BASED PAYMENT. SFAS No. 123R requires companies to expense the
value of employee stock option and similar awards. SFAS No. 123R is effective as
of the beginning of the first interim or annual reporting period that begins
after December 15, 2005. As of the effective date, the Company will be required
to expense all awards granted, modified, cancelled or repurchased as well as the
portion of prior awards for which the requisite service has not been rendered,
based on the grant-date fair value of those awards as calculated for pro forma
disclosures under SFAS No. 123. The adoption of SFAS No. 123R's fair value
method will have an impact on the Company's results of operations. The Company
is currently in the process of determining the effects on its financial
position, results of operations and cash flows that will result from the
adoption of SFAS No. 123R.
11. COMPREHENSIVE 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 ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net earnings (loss) $ (1,428,623) $ (1,798,433) $ 1,689,088 $ (1,897,778)
Other comprehensive loss:
Net unrealized gain (loss)
on available for sale
marketable securities,
net of tax 8,050 -- (15,357) --
------------ ------------ ------------ ------------
Total comprehensive income (loss) $ (1,420,573) $ (1,798,433) $ 1,673,731 $ (1,897,778)
============ ============ ============ ============
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 had 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 the nine months ended September 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 "Consortium Agreement") with Nisshinbo Industries, Inc. ("Nisshinbo") for
the development, manufacturing, and sales of solar photovoltaic module
manufacturing equipment. Under the terms of the Consortium 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
9
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 2005
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 nine months ended
September 30, 2005. In addition, approximately $34,000 of royalty income was
recognized during the nine months ended September 30, 2005.
As of June 30, 2005, JPY 400,000,000 was held in a Japanese yen account.
The Company converted JPY 350,000,000 into $3,139,295 on August 3, 2005
resulting in an approximate $17,000 currency translation loss. The Company
continues to maintain a 50,000,000 Japanese yen account. As of September 30,
2005, approximately $422,000 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 September 30, 2005. A $9,000 currency
translation loss was recognized related to the conversion of this Yen balance
into U.S. dollars and is reflected in Other expense, net on the accompanying
unaudited condensed consolidated statements of operations. Total currency
translation loss for the quarter was approximately $26,000. Total currency
translation loss for the nine months ended September 30, 2005 was approximately
$89,000.
The Company believes that the sale of these licenses does not reflect the
day-to-day operations of the Company. Accordingly, the net proceeds received
have been classified under investing activities in the unaudited condensed
consolidated statements of cash flows for the nine months ended September 30,
2005 and September 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.
On August 17, 2005, the Company received a letter from the Nasdaq Staff
indicating that the Nasdaq Staff had determined that the Company complies with
the Rule and that this matter was closed.
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
10
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 2005
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 had the right to reclaim the equipment if the
Company failed to meet its obligations in the Purchase Commitment. The proceeds
from the sale of the production equipment purchased by BPS were classified as an
unearned purchase discount in the Company's condensed consolidated balance
sheets in prior periods. The Company has amortized this discount as a reduction
to cost of sales as it purchases materials 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
approximately $65,000 and $109,000 for the nine months ended September 30, 2005
and September 30, 2004, respectively. The production equipment had been
classified as a component of fixed assets. Depreciation amounted to
approximately $211,000 for the nine months ended September 30, 2005.
In addition, the agreement contained 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 allowed 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.
On August 16, 2005, the Company entered into a Settlement and Contract
Termination Agreement (the "Termination Agreement") with BPS effective September
30, 2005. Under the terms of the Termination Agreement, the Company and BPS
agreed to terminate the amended agreement including the Purchase Commitment. In
exchange, the Company paid BPS $275,000 and retained ownership of the production
equipment. The unamortized unearned purchase discount as of the effective date
was approximately $1,205,000 and the net book value of the production equipment
was approximately $287,000. As result of this action, Spire reevaluated the
recoverability of the long-lived assets associated with this segment as part of
its third quarter review. Based on current updated cash flow projections for the
Solar System segment, the Company determined that the production equipment was
impaired and should be written-off. As a result, an impairment loss of $287,000
was recorded.
The Company has recorded an approximate $593,000 gain from these actions,
which is reflected as a Gain on extinguishment of purchase commitment in the
accompanying unaudited condensed consolidated statements of operations for the
three and nine months ended September 30, 2005. The components of this gain are
outlined below:
Unearned purchase discount $1,205,000
Net book value of production equipment (287,000)
Payment to extinguish purchase commitment (275,000)
Accrued relocation costs (50,000)
----------
Gain on extinguishment of purchase commitment $ 593,000
==========
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
11
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 2005
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. The parties are engaged in the early stages of
discovery. 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.
15. SUBSEQUENT EVENT
Related Party Operating Lease
-----------------------------
The Company subleases 77,000 square-feet in a building leased by Mykrolis
Corporation, who in turn leases the building from SPI-Trust, a Trust of which
Roger Little, Chairman of the Board, Chief Executive Officer, President and
Treasurer of the Company, is the 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 nine months ended
September 30, 2005 and 2004 was $887,000 and $809,000, respectively. In
connection with this sublease, the Company is invoiced and pays certain
SPI-Trust related expenses, including building maintenance and insurance. The
Company invoices SPI-Trust on a monthly basis and SPI-Trust reimburses the
Company for all such costs. No amounts were due from SPI-Trust as of September
30, 2005.
On November 11, 2005, the Company entered into an Extension of Lease
Agreement (the "Lease Extension") directly with SPI-Trust the term of which
commences on December 1, 2005. The Lease Extension is for a period of two years
and maintains the rental payments at the now current rental rate over the two
(2) year period. All other terms of the Lease Extension are substantially the
same as were in effect under the current lease and sublease agreements. The
Company will assume certain responsibilities of Mykrolis, the tenant under the
lease expiring on November 30, 2005, as a result of the Lease Extension
including payment of all building and real estate related expenses associated
with the ongoing operations of the property. The Company will allocate a portion
of these expenses to SPI-Trust based on pre-established formulas utilizing
square footage and actual usage where applicable. These allocated expenses will
be invoiced monthly and be paid utilizing a SPI-Trust escrow account of which
the Company has sole withdrawal authority. SPI-Trust is required to maintain
three (3) months of its anticipated operating costs within this escrow account.
The Company believes that the terms of the Lease Extension are commercially
reasonable.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-QSB, INCLUDING THIS ITEM 2, CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED, WHICH STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. READERS CAN
IDENTIFY THESE STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "MAY," "COULD,"
"SHOULD," "WOULD," "INTEND," "WILL," "EXPECT," "ANTICIPATE," "BELIEVE,"
"ESTIMATE," "CONTINUE" OR SIMILAR WORDS. 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. THE FOLLOWING DISCUSSION AND ANALYSIS OF
THE COMPANY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN
LIGHT OF THOSE FACTORS AND IN CONJUNCTION WITH THE COMPANY'S ACCOMPANYING
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO.
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 27% of net sales and revenues for
the nine months ended September 30, 2005 and are expected to continue to
constitute a significant portion of the Company's net sales and revenues.
13
Results of Operations
---------------------
The following table sets forth certain items as a percentage of net sales
and revenues for the periods presented:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net sales and revenues 100% 100% 100% 100%
Cost of sales and revenues (81) (84) (85) (81)
---------- ---------- ---------- ----------
Gross profit 19 16 15 19
Selling, general and administrative expenses (53) (54) (39) (47)
Internal research and development (9) (8) (7) (8)
Gain on extinguishment of purchase commitment 13 -- 4 --
Gain on sale of licenses -- -- 39 23
---------- ---------- ---------- ----------
Earnings (loss) from operations (30) (46) 12 (13)
Other expense, net (2) (2) (2) (2)
---------- ---------- ---------- ----------
Earnings (loss) before income taxes (32) (48) 10 (15)
Income tax expense -- -- -- --
---------- ---------- ---------- ----------
Net earnings (loss) (32%) (48%) 10% (15%)
========== ========== ========== ==========
OVERALL
The Company's total net sales and revenues for the nine months ended
September 30, 2005 ("2005") increased 23% compared to the nine months ended
September 30, 2004 ("2004"). The increase was attributable to increases within
all business units.
SOLAR BUSINESS UNIT
Sales in the Company's solar business unit increased 24% during 2005 as
compared to 2004 primarily due to a 120% increase in solar equipment sales
resulting from the volume and timing of the delivery of equipment partially
offset by a 33% decrease in solar systems sales.
BIOMEDICAL BUSINESS UNIT
Revenues of the Company's biomedical business unit increased 24% during
2005 as compared to 2004 as a result of a 68% increase in revenue from Spire's
line of hemodialysis catheters and a 39% increase in revenue from Spire's
government-funded research and development activities.
OPTOELECTRONICS BUSINESS UNIT
Sales in the Company's optoelectronics business unit increased 16% during
2005.
Three and Nine Months Ended September 30, 2005 Compared to Three and Nine Months
--------------------------------------------------------------------------------
Ended September 30, 2004
------------------------
NET SALES AND REVENUES
The following table categorizes the Company's net sales and revenues for
the periods presented:
THREE MONTHS ENDED
SEPTEMBER 30, INCREASE/(DECREASE)
--------------------------- ---------------------------
2005 2004 $ %
------------ ------------ ------------ ------------
Contract research, service and license revenues $ 3,173,000 $ 2,291,000 $ 882,000 39%
Sales of goods 1,309,000 1,437,000 (128,000) (9%)
------------ ------------ ------------
Net sales and revenues $ 4,482,000 $ 3,728,000 $ 754,000 20%
============ ============ ============
14
The 39% increase in contract research, service and license revenues for
the three months ended September 30, 2005 as compared to the three months ended
September 30, 2004 is primarily attributable to increases in research and
development activities and Bandwidth foundry services. Revenues from research
and development activities increased 61% in 2005 as compared to 2004 primarily
due to an increase in the dollar value and number of contracts associated with
funded research and development activities and in increase in revenue from
activities associated with our cost sharing agreement with the Department of
Energy National Renewable Energy Laboratory ("NREL"). Revenues from Bandwidth
foundry services increased 76% in 2005 compared to 2004 due to the timing and
delivery of customer orders.
The 9% decrease in sales of goods for the three months ended September
30, 2005 as compared to the three months ended September 30, 2004 was primarily
due to a decrease in solar systems revenues partially offset by increases in
solar equipment and biomedical product sales. Solar systems revenues decreased
85% as compared to 2004 primarily due to the volume and timing of customer
orders. The 2004 results included the completion of a large solar system
installation in Chicago versus none in 2005. Solar equipment revenues increased
257% as compared to 2004 primarily due to the volume and timing of equipment
sales. Biomedical product sales increased 31% 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:
NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/(DECREASE)
--------------------------- ---------------------------
2005 2004 $ %
------------ ------------ ------------ ------------
Contract research, service and license revenues $ 8,715,000 $ 7,622,000 $ 1,093,000 14%
Sales of goods 7,294,000 5,394,000 1,900,000 35%
------------ ------------ ------------
Net sales and revenues $ 16,009,000 $ 13,016,000 $ 2,993,000 23%
============ ============ ============
The 14% increase in contract research, service and license revenues for
the nine months ended September 30, 2005 as compared to the nine months ended
September 30, 2004 is primarily attributable to increases in research and
development activities and Bandwidth foundry services. Revenues from the
Company's research and development activities increased 31% in 2005 as compared
to 2004 primarily due to an increase in the number and dollar value of contracts
associated with funded research and development. Revenues from Bandwidth foundry
services increased 16% in 2005 compared to 2004 due to the timing and delivery
of customer orders.
The 35% increase in sales of goods for the nine months ended September
30, 2005 as compared to the nine months ended September 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 120% in 2005 as compared to 2004 due to the volume and timing 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
68% in 2005 as compared to 2004 as a result of increased demand for the
Company's line of hemodialysis catheters. Solar systems revenues decreased 33%
in 2005 as compared to 2004 primarily due to the volume and timing 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:
THREE MONTHS ENDED SEPTEMBER 30, INCREASE/(DECREASE)
------------------------------------------------------ ------------------------
2005 % 2004 % $ %
-------------- ------- -------------- ------- ------------- -------
Cost of contract research, services
and licenses $ 2,360,000 74% $ 1,792,000 78% $ 568,000 32%
Cost of goods sold 1,269,000 97% 1,354,000 94% (85,000) (6%)
-------------- -------------- -------------
Net cost of sales and revenues $ 3,629,000 81% $ 3,146,000 84% $ 483,000 15%
============== ============== =============
The $568,000 (32%) increase in cost of contract research, services and
licenses in 2005 is primarily due to a 64% increase in Bandwidth foundry
services associated with its 76% increase in revenues and 52% increase in the
cost of the Company's research and development activities associated with its
61% increase in revenues. Cost of contract research, services and licenses as a
percentage of revenue decreased 4% primarily due to margin improvements within
the Bandwidth segment and, to a lesser extent, margin improvement within the
biomedical processing services product line.
15
The $85,000 (6%) decrease in cost of goods sold is primarily due to a 52%
decrease in Spire's solar systems direct costs resulting from its 85% decrease
in revenues discussed above substantially offset by increases in solar equipment
and biomedical products unit's direct costs resulting from their 257% and 31%
increases in revenues, respectively. The increase in cost of goods sold as a
percentage of revenue is due to a lower than expected contribution margin in the
solar system segment substantially offset by improved contribution margins in
the solar equipment and biomedical products product lines.
COST OF SALES AND REVENUES
NINE MONTHS ENDED SEPTEMBER 30, INCREASE/(DECREASE)
------------------------------------------------------ ------------------------
2005 % 2004 % $ %
-------------- ------- -------------- ------- ------------- -------
Cost of contract research, services
and licenses $ 6,635,000 76% $ 5,911,000 78% $ 724,000 12%
Cost of goods sold 6,980,000 96% 4,662,000 86% 2,318,000 50%
-------------- -------------- -------------
Net cost of sales and revenues $ 13,615,000 85% $ 10,573,000 81% $ 3,042,000 29%
============== ============== =============
The $724,000 (12%) increase in cost of contract research and service
revenues in 2005 is primarily due to a 41% increase in the cost of the Company's
research and development activities associated with its 31% increase in revenues
and a 22% increase in Bandwidth costs associated with its 16% increase in
revenues. Cost of contract research, services and licenses as a percentage of
revenue decreased 2% primarily due to margin improvement within the biomedical
processing services product line partially offset by lower margins within the
biomedical research and development product line and Bandwidth segment.
The $2,318,000 (50%) increase in cost of goods sold is primarily due to
an increase in the Company's solar equipment direct costs resulting from its
120% increase in revenues discussed above and, to a lesser extent, an increase
in biomedical products unit's direct costs resulting from its 68% increase in
revenues discussed above. The increase in cost of goods sold as a percentage of
revenue is primarily the result of lower than expected contribution margins in
the solar systems and equipment segments. The effect of these lower than
expected contribution margins was partially offset by an improved contribution
margin in the Company's biomedical products group.
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 SEPTEMBER 30, INCREASE/(DECREASE)
------------------------------------------------------ ------------------------
2005 % 2004 % $ %
-------------- ------- -------------- ------- ------------- -------
Selling, general and administrative $ 2,400,000 54% $ 1,995,000 54% $ 405,000 20%
Internal research and development 412,000 9% 309,000 8% 103,000 33%
-------------- -------------- -------------
Operating expenses $ 2,812,000 63% $ 2,304,000 62% $ 508,000 22%
============== ============== =============
INTERNAL RESEARCH AND DEVELOPMENT
The increase in research and development costs was primarily a result of
the Company's increased effort in the "next generation" solar energy module
manufacturing equipment under a cost-sharing contract with NREL. The increase in
research and development expenses as a percentage of sales and revenues was
primarily due to the increased costs associated with the NREL program partially
offset by the increase in net sales and revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
September 30, 2005 increased by $405,000. The increase was primarily due to
increased sales, marketing and compliance costs, which were partially offset by
a reduction in insurance expense for the quarter. Selling, general and
administrative expenses remained relatively flat as a percentage of sales and
revenues as the 20% increase in costs discussed above was substantially offset
by the 20% increase in net sales and revenues.
16
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:
NINE MONTHS ENDED SEPTEMBER 30, INCREASE/(DECREASE)
------------------------------------------------------ ------------------------
2005 % 2004 % $ %
-------------- ------- -------------- ------- ------------- -------
Selling, general and administrative $ 6,287,000 39% $ 6,084,000 47% $ 203,000 3%
Internal research and development 1,070,000 7% 1,039,000 8% 31,000 3%
-------------- -------------- -------------
Operating expenses $ 7,357,000 46% $ 7,123,000 55% $ 234,000 3%
============== ============== =============
INTERNAL RESEARCH AND DEVELOPMENT
The increase in research and development costs was primarily due to
increased development efforts within the biomedical products group. 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
The increase was due primarily to increased cost associated with sales
and marketing efforts of the Company's Bandwidth, biomedical products and solar
equipment product lines due to the 23% increase in net sales and revenues. These
increases were partially offset by decreased cost associated with insurance
costs. 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.
OTHER EXPENSE, NET
The Company earned $25,000 and $13,000 of interest income for the three
months ended September 30, 2005 and 2004, respectively. The Company incurred
interest expense of $62,000 and $90,000 for the three months ended September 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 $43,000 and $48,000 of interest income for the nine
months ended September 30, 2005 and 2004, respectively. The Company incurred
interest expense of $215,000 and $265,000 for the nine months ended September
30, 2005 and 2004, respectively. The interest expense is primarily associated
with interest incurred on capital leases associated with the semiconductor
foundry.
During the third quarter of 2005, the Company recorded $26,000 of
currency transaction loss related to the conversion of a Japanese Yen account
into U.S. dollars. Total currency transaction loss for the nine months ended
September 30, 2005 was $89,000.
INCOME TAXES
The Company did not record an income tax provision for the three and nine
months ended September 30, 2005 and 2004 as earnings (loss) before income taxes
is expected to be substantially offset by net operating loss carryforwards of
approximately $4.0 million. A valuation allowance was provided against the
deferred tax assets generated in 2004.
NET EARNINGS (LOSS)
The Company reported a net loss for the three months ended September 30,
2005 of $1,429,000, compared to a net loss of $1,798,000 in 2004. The decrease
in the net loss in 2005 versus 2004 is primarily due to the gain on
extinguishment of purchase commitment.
The Company reported net earnings for the nine months ended September 30,
2005 of $1,689,000, compared to a net loss of $1,898,000 in 2004. The increase
in net earnings in 2005 versus 2004 is primarily due to the gain on the sale of
a license to the Company's solar technology.
17
Liquidity and Capital Resources
-------------------------------
INCREASE/(DECREASE)
SEPTEMBER 30, DECEMBER 31, ---------------------------
2005 2004 $ %
------------ ------------ ------------ ------------
Cash and cash equivalents $ 5,372,000 $ 3,337,000 $ 2,035,000 61%
Working capital 6,549,000 3,996,000 2,553,000 64%
Cash and cash equivalents increased primarily due to the proceeds from
sale of licenses and proceeds from the exercise of stock options partially
offset by cash used in operations and, to a lesser extent, investments in
property and equipment 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 both 2005 and 2004, arising from the sale of a hemodialysis patent
license to Bard Access Systems. The Company received its final $3,000,000
payment under this arrangement in June 2005. In addition, the Company received
JPY 400,000,000 (approximately $3.7 million) in June 2005 from the sale of a
license to the Company's 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 September 30, 2005, the Company had $1,100,000 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% (7.25% at September 30, 2005.) At September
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 September 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 September 30, 2005, the Company's retained earnings were
$40,000, compared to an accumulated deficit of $1,649,000 as of December 31,
2004. Working capital as of September 30, 2005 increased 64% to $6,549,000,
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.
18
Related Party Transactions
--------------------------
The Company subleases 77,000 square-feet in a building leased by Mykrolis
Corporation, who in turn leases the building from SPI-Trust, a Trust of which
Roger Little, Chairman of the Board, Chief Executive Officer, President and
Treasurer of the Company, is the 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 nine-months ended
September 30, 2005 and 2004 was $888,000 and $809,000, respectively. In
connection with this sublease, the Company is invoiced and pays certain
SPI-Trust related expenses, including building maintenance and insurance. The
Company invoices SPI-Trust on a monthly basis and SPI-Trust reimburses the
Company for all such costs. No amounts were due from SPI-Trust as of September
30, 2005.
On November 11, 2005, the Company entered into an Extension of Lease
Agreement (the "Lease Extension") directly with SPI-Trust the term of which
commence on December 1, 2005. The Lease Extension is for a period of two years
and maintains the rental payments at the now current rental rate over the two
(2) year period. All other terms of the Lease Extension are substantially the
same as were in effect under the current lease and sublease agreements. The
Company will assume certain responsibilities of Mykrolis, the tenant under the
lease expiring on November 30, 2005, as a result of the Lease Extension
including payment of all building and real estate related expenses associated
with the ongoing operations of the property. The Company will allocate a portion
of these expenses to SPI-Trust based on pre-established formulas utilizing
square footage and actual usage where applicable. These allocated expenses will
be invoiced monthly and be paid utilizing a SPI-Trust escrow account of which
the Company has sole withdrawal authority. SPI-Trust is required to maintain 3
months of its anticipated operating costs within this escrow account. The
Company believes that the terms of the Lease Extension are commercially
reasonable.
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 September 30, 2005, the
remaining lease obligation is $87,480, which is reflected as "accrued lease
obligation - related party" in the September 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 nine months ended September 30, 2005, interest expense was
approximately $11,000.
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, President and Treasurer 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 September 30, 2005.) The lease agreement does not provide for a
transfer of ownership at any point. Interest costs were assumed at 7%. For the
nine months ended September 30, 2005, interest expense was approximately
$138,000. This lease has been classified as a related party capital lease and a
summary of payments (including interest) follows:
19
RATE PER SECURITY
YEAR SQUARE FOOT ANNUAL RENT MONTHLY RENT DEPOSIT
--------------------------- ----------- ----------- ------------ ---------
June 1, 2003 - May 31, 2004 $6.00 $ 540,000 $ 45,000 $ 135,000
June 1, 2004 - May 31, 2005 7.50 675,000 56,250 168,750
June 1, 2005 - May 31, 2006 8.50 765,000 63,750 191,250
June 1, 2006 - May 31, 2007 10.50 945,000 78,750 236,250
June 1, 2007 - May 31, 2008 13.50 1,215,000 101,250 303,750
-----------
$ 4,140,000
===========
At September 30, 2005, $677,000 and $1,721,000 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
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 EX-Works 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
20
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. The Company accrues revenue and profit utilizing the
percentage of completion method using a cost-to-cost methodology. A percentage
of the contract revenues and estimated profits is determined utilizing the ratio
of costs incurred to date to total estimated cost to complete on a contract by
contract basis. Profit estimates are revised periodically based upon changes and
facts, and any losses on contracts are recognized immediately. Some of the
contracts include provisions to withhold a portion of the contract value as
retainage until such time as the United States government performs an audit of
the cost incurred under the contract. The Company's policy is to take into
revenue the full value of the contract, including any retainage, as it performs
against the contract since the Company has not experienced any substantial
losses as a result of audits performed by the United States government.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, including fixed assets and intangible assets, are
continually monitored and are evaluated at least annually for impairment. The
determination of recoverability is based on an estimate of undiscounted cash
flows expected to result from the use of an asset and its eventual disposition.
The estimate of cash flows is based upon, among other things, certain
assumptions about expected future operating performance. Our estimates of
undiscounted cash flows may differ from actual cash flows due to, among other
things, technological changes, economic conditions, changes to our business
model or changes in our operating performance. If the sum of the undiscounted
cash flows (excluding interest) is less than the carrying value, we recognize an
impairment loss, measured as the amount by which the carrying value exceeds the
fair value of the asset.
ACQUISITION ACCOUNTING
Through its acquisition, the Company has accumulated assets the valuation
of which involves estimates based on fair value assumptions. Estimated lives
assigned to the assets acquired in a business purchase also involve the use of
estimates. These matters that are subject to judgments and estimates are
inherently uncertain, and different amounts could be reported using different
methodologies. Management uses its best estimate in determining the appropriate
values and estimated lives to reflect in the consolidated financial statements,
using historical experience, market data, and all other available information.
Contractual Obligations, Commercial Commitments and Off-Balance Sheet
---------------------------------------------------------------------
Arrangements
------------
The following table summarizes the Company's gross contractual
obligations at September 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 $ 1,967,000 $ 1,874,000 $ 93,000 $ -- $ --
CAPITAL LEASES:
Unrelated party capital lease $ 605,000 $ 605,000 $ -- $ -- $ --
Related party capital lease 2,659,000 825,000 1,834,000 -- --
OPERATING LEASES:
Unrelated party operating leases $ 300,000 $ 124,000 $ 138,000 $ 39,000 $ --
Related party operating lease 203,000 203,000 -- -- --
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 $87,000.
21
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 had the right to reclaim the equipment if the Company failed
to meet its obligations in the Purchase Commitment. The proceeds from the sale
of the production equipment purchased by BPS were classified as an unearned
purchase discount in the Company's condensed consolidated balance sheets in
prior periods. The Company has amortized this discount as a reduction to cost of
sales as it purchases materials 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 approximately
$65,000 and $109,000 for the nine months ended September 30, 2005 and September
30, 2004, respectively. The production equipment had been classified as a
component of fixed assets. Depreciation amounted to approximately $223,000 for
the nine months ended September 30, 2005.
In addition, the agreement contained 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 allowed 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.
On August 16, 2005, the Company entered into a Settlement and Contract
Termination Agreement (the "Termination Agreement") with BPS effective September
30, 2005. Under the terms of the Termination Agreement, the Company and BPS
agreed to terminate the amended agreement including the Purchase Commitment. In
exchange, the Company paid BPS $275,000 and retained ownership of the production
equipment. The unamortized unearned purchase discount as of the effective date
was approximately $1,205,000 and the net book value of the production equipment
was approximately $287,000. As result of this action, Spire reevaluated the
recoverability of the long-lived assets associated with this segment as part of
its third quarter review. Based on current updated cash flow projections for the
Solar System segment, the Company determined that the production equipment was
impaired and should be written-off. As a result, an impairment loss of $287,000
was recorded.
The Company has recorded an approximate $593,000 gain from these actions,
which is reflected as a Gain on extinguishment of purchase commitment in the
accompanying unaudited condensed consolidated statements of operations for the
three and nine months ended September 30, 2005. The components of this gain are
outlined below:
Unearned purchase discount $ 1,205,000
Net book value of production equipment (287,000)
Payment to extinguish purchase commitment (275,000)
Accrued relocation costs (50,000)
------------
Gain on extinguishment of purchase commitment $ 593,000
============
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 had 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 nine months ended September
30, 2005 and 2004, respectively.
22
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 "Consortium Agreement") with Nisshinbo Industries, Inc. ("Nisshinbo") for
the development, manufacturing, and sales of solar photovoltaic module
manufacturing equipment. Under the terms of the Consortium 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 nine months ended September 30, 2005. In addition,
approximately $34,000 of royalty income was recognized during the nine months
ended September 30, 2005.
As of June 30, 2005, JPY 400,000,000 was held in a Japanese yen account.
The Company converted JPY 350,000,000 into $3,139,295 on August 3, 2005
resulting in an approximate $17,000 currency translation loss. The Company
continues to maintain a 50,000,000 Japanese yen account. As of September 30,
2005, approximately $422,000 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 September 30, 2005. A $9,000 currency
translation loss was recognized related to the conversion of this Yen balance
into U.S. dollars and is reflected in Other expense, net on the accompanying
unaudited condensed consolidated statements of operations. Total currency
translation loss for three months ended September 30, 2005 was approximately
$26,000. Total currency translation loss for the nine months ended September
30, 2005 was $89,000.
The Company believes that the sale of these licenses does not reflect the
day-to-day operations of the Company. Accordingly, the net proceeds received
have been classified under investing activities in the unaudited condensed
consolidated statements of cash flows for the nine months ended September 30,
2005 and September 30, 2004, respectively.
Outstanding letters of credit totaled $1,100,000 at September 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.
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, President and Treasurer and the Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures as of September 30, 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. Based upon the
required evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that as of September 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.
Changes in Internal Control Over Financial Reporting
----------------------------------------------------
There was no change in the Company's internal control over financial
reporting that occurred during the third fiscal quarter of 2005 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
23
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 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. The parties are engaged in the early stages of
discovery. 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
None.
ITEM 5. OTHER INFORMATION
On November 11, 2005, the Company entered into an Extension of Lease
Agreement (the "Lease Extension") directly with SPI-Trust the term of which
commence on December 1, 2005. The Lease Extension is for a period of two years
and maintains the rental payments at the now current rental rate over the two
(2) year period. All other terms of the Lease Extension are substantially the
same as were in effect under the current lease and sublease agreements. The
Company will assume certain responsibilities of Mykrolis, the tenant under the
lease expiring on November 30, 2005, as a result of the Lease Extension
including payment of all building and real estate related expenses associated
with the ongoing operations of the property. The Company will allocate a portion
of these expenses to SPI-Trust based on pre-established formulas utilizing
24
square footage and actual usage where applicable. These allocated expenses will
be invoiced monthly and be paid utilizing a SPI-Trust escrow account of which
the Company has sole withdrawal authority. SPI-Trust is required to maintain
three (3) months of its anticipated operating costs within this escrow account.
The Company believes that the terms of the Lease Extension are commercially
reasonable.
ITEM 6. EXHIBITS
31.1 Certification of the Chairman of the Board, Chief Executive
Officer and President pursuant to ss.302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification of the Chief Financial Officer pursuant to ss.302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chairman of the Board, Chief Executive
Officer and President pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to ss.906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act
of 2002.
25
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: November 14, 2005 By: /s/ Roger G. Little
-------------------------------
Roger G. Little
Chairman of the Board,
Chief Executive Officer
and President
Dated: November 14, 2005 By: /s/ James F. Parslow
-------------------------------
James F. Parslow
Chief Financial Officer
26
EXHIBIT INDEX
Exhibit Description
------- -----------
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