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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 2004; or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______ to _______
Commission file number: 0-12742
SPIRE CORPORATION
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(Name of small business issuer as specified in its charter)
MASSACHUSETTS 04-2457335
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE PATRIOTS PARK
BEDFORD, MASSACHUSETTS 01730-2396
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(Address of principal executive offices)
781-275-6000
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(Issuer's telephone number)
Securities registered under Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE; REGISTERED ON THE NASDAQ STOCK MARKET
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(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the issuer was required to file such
reports); and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [_]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. There were 6,765,660
outstanding shares of the issuer's only class of common equity, Common Stock,
$0.01 par value, on May 4, 2004.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
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TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet as of March 31, 2004.. 1
Unaudited Condensed Consolidated Statements of Operations for
the Three Months Ended March 31, 2004 and 2003 ..................... 2
Unaudited Condensed Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 2004 and 2003 ..................... 3
Notes to Unaudited Condensed Consolidated Financial Statements ..... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 9
Item 3. Controls and Procedures ........................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 18
Item 2. Changes in Securities ............................................ 18
Item 3. Defaults Upon Senior Securities ................................... 18
Item 4. Submission of Matters to a Vote of Security Holders ............... 18
Item 5. Other Information ................................................. 18
Item 6. Exhibits and Reports on Form 8-K .................................. 18
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31,
2004
------------
ASSETS
Current assets
--------------
Cash and cash equivalents $ 4,794,133
Restricted cash 668,481
------------
5,462,614
Net accounts receivable, trade 3,527,717
Inventories 1,540,364
Refundable income taxes 529,410
Deferred income taxes 231,864
Prepaid expenses and other current assets 468,550
------------
Total current assets 11,760,519
------------
Property and equipment 23,699,549
Less accumulated depreciation and amortization (15,344,877)
------------
Net property and equipment 8,354,672
------------
Patents and other assets, net 567,770
------------
Total assets $ 20,682,961
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Current portion of capital lease obligation $ 381,195
Current portion of capital lease obligation - related party 447,386
Accounts payable 1,647,098
Accrued liabilities 1,798,031
Current portion of accrued lease obligation - related party 498,651
Advances on contracts in progress 195,829
------------
Total current liabilities 4,968,190
------------
Long-term portion of capital lease obligation 750,558
Long-term portion of capital lease obligation - related party 2,675,835
Accrued lease obligation - related party 345,812
Deferred income taxes 147,864
Unearned purchase discount 1,376,392
------------
Total long-term liabilities 5,296,461
------------
Total liabilities 10,264,651
------------
Commitments and Contingencies:
------------------------------
Stockholders' equity
--------------------
Common stock, $0.01 par value; shares authorized 20,000,000;
issued 6,765,660 shares in 2004 67,657
Additional paid-in capital 9,258,536
Retained earnings 1,092,117
------------
Total stockholders' equity 10,418,310
------------
Total liabilities and stockholders' equity $ 20,682,961
============
See accompanying notes to condensed consolidated financial statements
1
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------
2004 2003
------------ ------------
Net sales and revenues
----------------------
Contract research and service revenues $ 2,582,188 $ 1,592,064
Sales of goods 2,448,078 1,367,029
------------ ------------
Total sales and revenues 5,030,266 2,959,093
------------ ------------
Costs and expenses
------------------
Cost of contract research and services 2,006,248 999,331
Cost of goods sold 1,920,577 1,287,737
Selling, general and administrative expenses 2,058,822 1,357,066
Internal research and development expenses 353,285 96,097
------------ ------------
Total costs and expenses 6,338,932 3,740,231
------------ ------------
Loss from operations (1,308,666) (781,138)
--------------------
Interest (expense) income, net (69,389) 7,429
------------ ------------
Loss before income taxes (1,378,055) (773,709)
Income tax (benefit) expense -- --
------------ ------------
Net loss $ (1,378,055) $ (773,709)
-------- ============ ============
Loss per share of common stock - basic and diluted $ (0.20) $ (0.11)
-------------------------------------------------- ============ ============
Weighted average number of common and common equivalent shares
outstanding - basic and diluted 6,765,660 6,756,582
============ ============
See accompanying notes to condensed consolidated financial statements.
2
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------
2004 2003
------------ ------------
Cash flows from operating activities:
-------------------------------------
Net loss $ (1,378,055) $ (773,709)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 636,006 186,680
Changes in assets and liabilities:
Restricted cash (5,592) --
Accounts receivable, net 712,620 796,915
Inventories (109,375) (98,244)
Prepaid expenses and other current assets (74,217) 327,363
Refundable income taxes (6,410) --
Accounts payable, accrued liabilities and other liabilities 477,131 (492,254)
Unearned purchase discount (53,490) (3,467)
Advances on contracts in progress (983,964) 22,195
------------ ------------
Net cash used in operating activities (785,346) (34,521)
------------ ------------
Cash flows from investing activities:
-------------------------------------
Additions to property and equipment (90,785) (226,954)
Increase in patent costs and other assets (158,198) (20,891)
------------ ------------
Net cash used in investing activities (248,983) (247,845)
------------ ------------
Cash flows from financing activities:
-------------------------------------
Principal payments on capital lease obligation (91,214) --
Principal payments on capital lease obligation - related party (79,415) --
Exercise of stock options -- 1,315
------------ ------------
Net cash provided by (used in) financing activities (170,629) 1,315
------------ ------------
Net decrease in cash and cash equivalents (1,204,958) (281,051)
Cash and cash equivalents, beginning of period 5,999,091 7,798,716
------------ ------------
Cash and cash equivalents, end of period $ 4,794,133 $ 7,517,665
============ ============
Supplemental disclosures of cash flow information:
--------------------------------------------------
Cash paid during the period for:
Interest $ 18,021 $ 15,478
============ ============
Interest - related party $ 55,584 $ --
============ ============
Income taxes $ -- $ 435,000
============ ============
See accompanying notes to condensed consolidated financial statements.
3
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
1. DESCRIPTION OF THE BUSINESS
The Company develops, manufactures and markets highly-engineered products
and services in four principal business areas: biomedical, solar equipment,
solar systems and optoelectronics, generally bringing to bear expertise in
materials technologies, surface science and thin films 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.
The Company develops, custom 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
42 countries. The Company also manufactures and markets solar photovoltaic
systems suitable both for stand alone emergency power backup and for
interconnection into the electric power grid.
In the optoelectronics area, the Company provides compound semiconductor
foundry and fabrication services on a merchant basis to customers involved in
biomedical/biophotonic instruments, telecommunications and defense applications.
Services include compound semiconductor wafer growth, other thin film processes
and related device processing and fabrication services. The Company also
provides materials testing services and performs services in support of
sponsored research into practical applications of optoelectronic technologies.
2. INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to fairly
present the Company's financial position as of March 31, 2004 and the results of
operations and cash flows for the three months ended March 31, 2004 and 2003.
The results of operations for the three months ended March 31, 2004 are not
necessarily indicative of the results to be expected for the fiscal year ending
December 31, 2004.
The accounting policies followed by the Company are set forth in Note 2
to the Company's consolidated financial statements in its annual report on Form
10-KSB for the year ended December 31, 2003.
3. NEW ACCOUNTING STANDARD
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46") which requires the
consolidation of variable interest entities by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. In December 2003, the FASB issued FASB
Interpretation No. 46R, "Consolidation of Variable Interest Entities" ("FIN
46R"). FIN 46R superseded FIN 46 and defers the effective date for small
business filers until the first reporting period that ends after December 15,
2004 (fourth quarter of 2004). The Company adopted of FIN 46R on January 1, 2004
and adoption did not have a material impact on the Company's financial position
or results of operations.
4
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(UNAUDITED)
MARCH 31, 2004
4. ACCOUNTS RECEIVABLE/ADVANCES ON CONTRACTS IN PROGRESS
Net accounts receivable, trade consists of the following:
MARCH 31,
2004
----------
Amounts billed $2,162,503
Retainage 37,505
Unbilled costs 1,516,131
----------
3,716,139
Less: Allowance for sales returns and doubtful accounts (188,422)
----------
Net accounts receivable $3,527,717
==========
Unbilled costs on contracts in progress represent revenues recognized on
contracts for which billings have not been presented to customers as of 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 $38,000 at March 31, 2004. 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 2000. The Company has not incurred significant
losses 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.
5. INVENTORIES
Inventories consist of the following: MARCH 31,
2004
----------
Raw materials $1,023,965
Work in process 279,736
Finished goods 236,663
----------
$1,540,364
==========
6. LOSS PER SHARE
The following table provides a reconciliation of the denominators of the
Company's reported basic and diluted loss per share computations for the periods
ended:
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
---------- ----------
Weighted average number of common shares outstanding - basic 6,765,660 6,756,582
Add: Net additional common shares upon exercise of common
stock options -- --
---------- ----------
Adjusted weighted average common shares outstanding - diluted 6,765,660 6,756,582
========== ==========
5
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(UNAUDITED)
MARCH 31, 2004
At March 31, 2004 and 2003, 251,407 and 22,679 shares, respectively, of
common stock issuable relative to stock options were excluded from the
calculation of dilutive shares since the inclusion of such shares would be
anti-dilutive due to the Company's net loss position in both periods. In
addition, at March 31, 2004 and 2003, 54,615 and 604,702 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.
7. 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", which was adopted in 1998.
The results for Bandwidth Semiconductor have been combined with the
Company's Biophotonics Lifesciences segment which has been renamed the
Optoelectronics segment. The acquisition of Bandwidth Semiconductor took place
on May 23, 2003.
SOLAR SOLAR TOTAL
EQUIPMENT SYSTEMS BIOMEDICAL OPTOELECTRONICS COMPANY
------------ ------------ ------------ ------------ ------------
For the Three Months Ended March 31, 2004
-----------------------------------------
Net sales and revenues $ 1,161,667 $ 1,277,321 $ 1,857,392 $ 733,886 $ 5,030,266
Earnings (loss) from operations (162,924) 90,150 (824,036) (411,856) (1,308,666)
For the Three Months Ended March 31, 2003
-----------------------------------------
Net sales and revenues $ 1,243,361 $ -- $ 1,635,585 $ 80,147 $ 2,959,093
Loss from operations (67,313) (400,442) (303,501) (9,882) (781,138)
The following table shows net sales and revenues by geographic area
(based on customer location) for the quarter ended March 31:
2004 % 2003 %
------------ ----- ------------ -----
Foreign $ 236,000 5% $ 1,253,000 42%
United States 4,794,000 95% 1,706,000 58%
------------ ----- ------------ -----
$ 5,030,000 100% $ 2,959,000 100%
============ ===== ============ =====
Revenues from contracts with United States government agencies for the
quarter ended March 31, 2004 and 2003 were $721,000 and $697,000, or 14% and 24%
of consolidated net sales and revenues, respectively.
Three customers accounted for approximately 51% and two customers
accounted for approximately 51% of the Company's gross sales during the
three-months ended March 31, 2004 and 2003, respectively. The two largest
account receivable balances represented approximately 23% of trade account
receivables at March 31, 2004.
6
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(UNAUDITED)
MARCH 31, 2004
8. OTHER INTANGIBLE ASSETS
Patents amounted to $559,445 net of accumulated amortization of $553,173
at March 31, 2004. Patent cost is primarily composed of cost associated with
securing and registering patents that the Company has been awarded or that have
been submitted to, and the Company believes will be approved by the government.
These costs are capitalized and amortized over their useful lives or terms,
ordinarily five years, using the straight-line method. There are no expected
residual values related to these patents. For disclosure purposes, the table
below includes future amortization expense for patents owned by the Company as
well as $285,370 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
---- ------------
2004 $ 92,152
2005 126,794
2006 121,958
2007 121,146
2008 97,395
------------
$ 559,445
============
9. STOCK-BASED COMPENSATION
The Company has adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- Transition and Disclosure" ("SFAS 148") which is an amendment of SFAS No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"), and continues to apply
Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for its stock plans. If the Company had elected to recognize
compensation cost for all of the plans based upon the fair value at the grant
dates for awards under those plans, consistent with the method prescribed by
SFAS 123, net loss and loss per share would have been changed to the pro forma
amounts indicated below.
THREE MONTHS ENDED MARCH 31,
------------------------------
2004 2003
------------ ------------
Net loss, as reported $ (1,378,055) $ (773,709)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects 70,313 85,415
------------ ------------
Pro forma net loss $ (1,448,368) $ (859,124)
============ ============
Loss per share:
Basic - as reported $ (0.20) $ (0.11)
============ ============
Basic - pro forma $ (0.21) $ (0.13)
============ ============
Diluted - as reported $ (0.20) $ (0.11)
============ ============
Diluted - pro forma $ (0.21) $ (0.13)
============ ============
7
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(UNAUDITED)
MARCH 31, 2004
The per-share weighted-average fair value of stock options granted during
the quarter ended March 31, 2004 and 2003 was $5.12 and $2.46, 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
---- -------------- ------------- ----------- -----------------
2004 -- 3.83% 5 years 79.5%
2003 -- 3.81% 5 years 83.4%
For the quarter ended March 31, 2004, 30,000 stock options were granted.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SECTION AND OTHER PARTS OF THIS REPORT CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS AND TIMING DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED OR REFERRED TO IN THIS REPORT AND IN ITEM 6 OF THE ANNUAL REPORT
ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 2003. MANAGEMENT'S DISCUSSION AND
ANALYSIS INCLUDES THE FOLLOWING SECTIONS:
o OVERVIEW;
o RESULTS OF OPERATIONS;
o THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS
ENDED MARCH 31, 2003;
o LIQUIDITY AND CAPITAL RESOURCES;
o RECENT ACCOUNTING PRONOUNCEMENTS;
o IMPACT OF INFLATION AND CHANGING PRICES;
o FOREIGN CURRENCY FLUCTUATION;
o RELATED PARTY TRANSACTIONS;
o CRITICAL ACCOUNTING POLICIES; AND
o CONTRACTUAL OBLIGATIONS, COMMERCIAL COMMITMENTS AND OFF-BALANCE
SHEET ARRANGEMENTS.
Overview
--------
The Company develops, manufactures and markets highly-engineered products
and services in four principal business areas: biomedical, solar equipment,
solar systems and optoelectronics bringing to bear expertise in materials
technologies across all four business areas.
In the biomedical area, the Company provides value-added surface
treatments to manufacturers of orthopedic and other medical devices that enhance
the durability, antimicrobial characteristics or other material characteristics
of their products; develops and markets hemodialysis catheters and related
devices for the treatment of chronic kidney disease and performs sponsored
research programs into practical applications of advanced biomedical and
biophotonic technologies.
In the solar equipment area, the Company develops, manufactures and
markets specialized equipment for the production of terrestrial photovoltaic
modules from solar cells. The Company's equipment has been installed in more
than 150 factories in 42 countries.
In the solar systems area, the Company provides electric power
grid-connected distributed power generation systems employing photovoltaic
technology.
In the optoelectronics area, the Company provides compound semiconductor
foundry services on a merchant basis to customers involved in
biomedical/biophotonic instruments, telecommunications and defense applications.
Services include compound semiconductor wafer growth, other thin film processes
and related device processing and fabrication services. The Company also
provides materials testing services and performs services in support of
sponsored research into practical applications of optoelectronic technologies.
Results of Operations
---------------------
The following table sets forth certain items as a percentage of net sales
and revenues for the periods presented:
THREE MONTHS ENDED MARCH 31,
--------------------------
2004 2003
---------- ----------
Net sales and revenues 100% 100%
Cost of sales and revenues 78 77
---------- ----------
Gross profit 22 23
Selling, general and administrative expenses 41 46
Internal research and development 7 3
---------- ----------
Loss from operations (26) (26)
Interest (expense) income, net (1) --
---------- ----------
Loss before income taxes (27) (26)
---------- ----------
Net loss (27%) (26%)
========== ==========
9
The Company's total net sales and revenues for the three-months ended
March 31, 2004 ("2004") increased 70% compared to the three-months ended March
31, 2003 ("2003"). The increase was attributable to an increase in solar systems
in 2004 (43%), the acquisition of Bandwidth Semiconductor, LLC ("Bandwidth") in
May 2003 (25%), and to a lesser extent, increases in biomedical processing
services and devices (10%). These increases were partially offset by a decrease
in solar equipment sales (8%).
Sales in the Company's solar business unit increased 102% during 2004 as
compared to 2003 primarily due to a $1,277,000 increase in solar systems sales
during 2004 versus zero in 2003. This increase was due to the temporary
permitting challenges in the metro Chicago area we experienced in 2003 that we
did not encounter in 2004. The increase in solar systems was partially offset by
a 20% decrease in equipment sales in 2004 of the Company's solar energy
manufacturing equipment as compared to 2003. Sales in 2004 consisted primarily
of two assemblers as compared to the shipment of a 5 megawatt SPI-LINETM turnkey
photovoltaic module production line to Huangshan Ho Tin Solar Technology
Development Ltd. located in China in 2003, under a large contract.
Revenues of the Company's biomedical business unit increased 6% during
2004, as compared to 2003 as a result of a 35% increase in revenue from our
IONGUARD(R) implant process services and an 11% increase in revenue from our
line of hemodialysis catheters. These increases were partially offset by a 30%
decrease in revenue from our government-funded research and development
activities primarily due to lower average funding per contract.
Sales in the Company's optoelectronics business unit were $734,000 in
2004 versus zero in 2003, due to the May 23, 2003 acquisition of Bandwidth
Semiconductor, LLC ("Bandwidth").
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 only 5% of net sales and revenues
in 2004 but are expected to continue to constitute a significant portion of the
Company's net sales and revenues.
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
-------------------------------------------------------------------------------
NET SALES AND REVENUES
The following table categorizes the Company's net sales and revenues for the
periods presented:
THREE MONTHS ENDED MARCH 31, INCREASE/(DECREASE)
-------------------------- --------------------
2004 2003 $ %
---------- ---------- ---------- ----
Contract research and
service revenues $2,582,000 $1,592,000 $ 990,000 62%
Sales of goods 2,448,000 1,367,000 1,081,000 79%
---------- ---------- ----------
Net sales and revenues $5,030,000 $2,959,000 $2,071,000 70%
========== ========== ==========
The 62% increase in contract research and service revenues for 2004 is
primarily attributable to the acquisition of Bandwidth (46%) on May 23, 2003
and, to a lesser extent, an increase in biomedical processing services (18%) and
research and development activities (1%). Revenue from our biomedical processing
services increased 35% in 2004 compared to 2003 as a result of continued strong
demand for our IONGUARD implant services. These increases were partially offset
by a decrease in royalty fees (-3%).
The 79% increase in sales of goods in 2004 was primarily due to an
increase in solar systems revenues (93%), and to a lesser extent, an increase in
biomedical product sales (2%) both offset by a decrease in solar equipment sales
(16%). The increase in solar system revenues was primarily due to zero revenue
in 2003 resulting from the temporary permitting challenges we experienced in
2003 that were not repeated in 2004. Biomedical product sales increased 10% in
2004 as compared to 2003 as a result of increased demand for our line of
hemodialysis catheters. The decrease in solar equipment sales was primarily
attributable to the sale of two assemblers in 2004 as compared to the shipment
of a 5 megawatt SPI-LINE turkey production line in 2003, which resulted in a 20%
decrease in 2004 solar equipment sales.
10
COST OF SALES AND REVENUES
The following table categorizes the Company's cost of sales and revenues
for the periods presented, stated in dollars and as a percentage of related
sales and revenues:
THREE MONTHS ENDED MARCH 31, INCREASE/(DECREASE)
--------------------------------------- ------------------
2004 % 2003 % $ %
---------- ----- ---------- ----- ---------- -----
Cost of contract research and services $2,006,000 78% $ 999,000 63% $1,007,000 101%
Cost of goods sold 1,921,000 78% 1,288,000 94% 633,000 49%
---------- ---------- ----------
Net cost of sales and revenues $3,927,000 78% $2,287,000 77% $1,640,000 72%
========== ========== ==========
The $1,007,000 increase in cost of contract research and service revenues
in 2004 is primarily due to increased factory overhead and direct costs of
$852,000, or 85%, associated with the Company's semiconductor foundry and a
$217,000, or 35%, increase in biomedical processing services costs associated
with its 35% increase in revenues. These increases were partially offset by a
decrease in biomedical research and development costs as a result of the 30%
decrease in research and development revenues. The increase in cost of contract
research and services as a percentage of revenues is the direct result of the
Bandwidth acquisition, which recorded a (-17%) gross margin in 2004.
The decrease in cost of goods sold as a percentage of revenue is the
result of a higher sales volume and increased absorption of fixed costs
associated with the Company's Chicago facility.
INTERNAL RESEARCH AND DEVELOPMENT
Internal research and development for 2004 increased $257,000, or 268%,
to $353,000, compared to $96,000 for 2003. The increase was primarily a result
of the Company's continued investment in its semiconductor foundry and the "next
generation" solar energy module manufacturing equipment under a cost-sharing
contract with the Department of Energy National Renewable Energy Laboratory
("NREL").
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 2004 increased $702,000
to $2,059,000, and decreased to 41% of sales and revenues, compared to
$1,357,000 or 46% of sales and revenues for 2003. This increase was due
primarily to increased costs associated with legal and auditing expenses in
connection with increased compliance requirements, increased sales and marketing
efforts associated with the Company's biomedical contracts and the addition of
Bandwidth. The decrease in selling, general and administrative expenses as a
percentage of sales and revenues was due to higher revenues associated with the
Company's Chicago and semiconductor foundry operation in 2004 as compared to
2003 partially offset by the cost increases outlined above.
INTEREST
The Company earned $20,000 of interest income in 2004, compared to
$23,000 of interest income in 2003. The Company incurred interest expense of
$89,000 in 2004 compared to $15,000 in 2003. The interest expense for 2004 is
primarily due to interest incurred on capital leases associated with the
semiconductor foundry.
NET LOSS
The Company reported a net loss in 2004 of $1,378,000, compared to a net
loss of $774,000 in 2003. While revenue increased in the quarter, the breakeven
point of the Company rose with the increased fixed costs associated with the
Company's semiconductor foundry.
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents decreased $1,205,000 to $4,794,000 as of March
31, 2004 primarily due to cash used in operations.
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 cash receipts of
11
$5,000,000 in each of the years ended December 31, 2003 and 2002 arising from
the sale of a hemodialysis patent license to Bard Access Systems. The license
sale agreement provides for the Company to receive two additional contingent
cash payments of $3,000,000 each upon the completion of certain milestones by
Bard Access Systems during 2004 and 2005. There can be no assurance that these
milestones will be attained and attainment is beyond the control of the Company.
On June 23, 2003, the Company entered into a Loan Agreement (the
"Agreement") with Citizens Bank of Massachusetts (the "Bank"). The Agreement
provides Standby Letter of Credit Guarantees for foreign customers and is 100%
secured with cash. At March 31, 2004, the Company had $668,000 of restricted
cash associated with letters of credit. 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 other conversion covenants. Loans under
this Agreement bear interest at the Bank's prime rate as determined (4.25% at
March 31, 2004.) A commitment fee of .25% is charged on any unused portion of
the borrowing base. The Agreement contains covenants including certain financial
reporting requirements. At March 31, 2004, the Company was in compliance with
its financial reporting requirements and cash balance covenants. The Agreement
expires on June 30, 2004. Letters of Credit issued with an expiration beyond
June 30, 2004 are required to be 100% secured by cash. At March 31, 2004, the
Company had not exercised its conversion option and no amounts were outstanding
under the revolving line of credit.
To date, there are no material commitments by the Company for capital
expenditures. At March 31, 2004, the Company's retained earnings were
$1,092,000, compared to retained earnings of $2,470,000 as of December 31, 2003.
Working capital as of March 31, 2004 decreased 17% to $6,792,000, compared to
$8,182,000 as of December 31, 2003.
The Company believes it has sufficient resources to finance its current
operations for the foreseeable future through working capital.
Recent Accounting Pronouncements
--------------------------------
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46") which requires the
consolidation of variable interest entities by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. In December 2003, the FASB issued FASB
Interpretation No. 46R, "Consolidation of Variable Interest Entities" ("FIN
46R"). FIN 46R superseded FIN 46 and defers the effective date for small
business filers until the first reporting period that ends after December 15,
2004 (fourth quarter of 2004). The Company adopted of FIN 46R on January 1, 2004
and adoption did not have a material impact on the Company's financial position
or results of operations.
Impact of Inflation and Changing Prices
---------------------------------------
Historically, the Company's business has not been materially impacted by
inflation. Manufacturing equipment and solar systems are generally quoted,
manufactured and shipped within a cycle of approximately nine months, allowing
for orderly pricing adjustments to the cost of labor and purchased parts. The
Company has not experienced any negative effects from the impact of inflation on
long-term contracts. The Company's service business is not expected to be
seriously affected by inflation because its procurement-production cycle
typically ranges from two weeks to several months, and prices generally are not
fixed for more than one year. Research and development contracts usually include
cost escalation provisions.
Foreign Currency Fluctuation
----------------------------
The Company sells only in U.S. dollars, generally against an irrevocable
confirmed letter of credit through a major United States bank. Therefore the
Company is not directly affected by foreign exchange fluctuations on its current
orders. However, fluctuations in foreign exchange rates do have an effect on the
Company's customers' access to U.S. dollars and on the pricing competition on
certain pieces of equipment that the Company sells in selected markets.
Related Party Transactions
--------------------------
The Company subleases 74,000 square feet in a building leased by Mykrolis
Corporation, who in turn leases the building from a Trust of which Roger G.
Little, Chairman of the Board, Chief Executive Officer and President of the
Company, is sole trustee and principal beneficiary. The Company believes that
the terms of the third-party sublease are commercially reasonable. The 1985
sublease originally was for a period of ten years, was extended for a five-year
period expiring on November 30, 2000 and was further extended for a five-year
12
period expiring on November 30, 2005. The agreement provides for minimum rental
payments plus annual increases linked to the consumer price index. Rent expense
under this sublease for the quarter ended March 31, 2004 was $267,000. In
connection with this sublease, the Company is invoiced and pays certain Trust
related expenses, including building maintenance and insurance. The Company
invoices the Trust on a monthly basis and the Trust reimburses the Company for
all such costs.
In conjunction with the acquisition of Bandwidth by the Company, the
Company released Bandwidth from the lease agreement that had existed between
Bandwidth and the Company. In November 2001, Bandwidth, under its previous
owner, abandoned the space being subleased from the Company in Bedford,
Massachusetts, to move to a new building and wafer fabrication lab in Hudson,
New Hampshire. At that time, there were 48 months left on the lease. Subsequent
to the move to Hudson, New Hampshire, Bandwidth was unable to sublease the
Bedford, Massachusetts space, and was paying the Company for the unused space.
In conjunction with the acquisition of Bandwidth in May 2003, the Company
released Bandwidth from the remaining lease payments. However, the Company
continues to be obligated to Mykrolis Corporation for the entire amount of the
remaining lease agreement. As a result, the present value of the remaining lease
obligation associated with the unused space was recorded as an assumed liability
of $1,247,241 in the purchase accounting. As of March 31, 2004, the remaining
lease obligation is $844,463, which is reflected as "accrued lease obligation -
related party" in the March 31, 2004 consolidated balance sheet. The amount due
beyond one year has been reflected in long-term liabilities. 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 quarter ended March 31, 2004,
interest expense was $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 and President of the Company, is sole trustee and principal
beneficiary, purchased from Stratos 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. The lease agreement does
not provide for a transfer of ownership at any point. This lease has been
classified as a related party capital lease and a summary of payments (including
interest) follows:
Rate Per
Year Square Foot Annual Rent Monthly Rent
------ ----------- ----------- ------------
Year 1 $ 6.00 $ 540,000 $ 45,000
Year 2 7.50 675,000 56,250
Year 3 8.50 765,000 63,750
Year 4 10.50 945,000 78,750
Year 5 13.50 1,215,000 101,250
-----------
$ 4,140,000
-----------
At March 31, 2004, $447,386 and $2,675,835 are reflected as the current
and long-term portions of capital lease obligation - related party,
respectively, in the March 31, 2004 consolidated balance sheet. Interest costs
were assumed at 7%. Interest expense of $56,000 related to this obligation was
recorded in the quarter ended March 31, 2004 consolidated statement of
operations.
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, impairment of
long-lived assets, acquisition accounting, income taxes, and warranties. We
regularly evaluate our estimates and assumptions based upon historical
experience and various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. To the extent actual results differ from those estimates, our
future results of operations may be affected. We believe the following critical
accounting policies affect our more significant judgments and estimates used in
the preparation of our consolidated financial statements. 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, 2003 for a description of our accounting
policies for income taxes and warranties.
13
REVENUE RECOGNITION
The Company derives its revenues from three primary sources: (1)
commercial products including, but not limited to, solar energy manufacturing
equipment, solar energy systems and hemodialysis catheters; (2) biomedical and
semiconductor processing services; and (3) United States government funded
research and development contracts.
We generally recognize product revenue upon shipment of products provided
there are no uncertainties regarding customer acceptance, persuasive evidence of
an arrangement exists, the sales price is fixed or determinable, and
collectibility is reasonably assured. These criteria are generally met at the
time of shipment when the risk of loss and title passes to the customer or
distributor, unless a consignment arrangement exists. Revenue from consignment
arrangements is recognized based on product usage indicating sales are complete.
Gross sales reflect reductions attributable to customer returns and various
customer incentive programs including pricing discounts and rebates. Product
returns are permitted in certain sales contracts and an allowance is recorded
for returns based on the Company's history of actual returns. Certain customer
incentive programs require management to estimate the cost of those programs.
The allowance for these programs is determined through an analysis of programs
offered, historical trends, expectations regarding customer and consumer
participation, sales and payment trends, and experience with payment patterns
associated with similar programs that had been previously offered. If sufficient
history to make reasonable and reliable estimates of returns or rebates does not
exist, revenue associated with such practices is deferred until the return
period lapses or a reasonable estimate can be made. This deferred revenue will
be recognized as revenue when the distributor reports to us that it has either
shipped or disposed of the units (indicating that the possibility of return is
remote.)
The Company's OEM capital equipment solar energy business builds complex
customized machines to order for specific customers. Substantially all of these
orders are sold on a FOB Bedford, Massachusetts (or EXW Factory) basis. It is
the Company's policy to recognize revenues for this equipment as the product is
shipped to the customer, as customer acceptance is obtained prior to shipment
and the equipment is expected to operate the same in the customer's environment
as it does in the Company's environment. When an arrangement with the customer
includes future obligations or customer acceptance, revenue is recognized when
those obligations are met or customer acceptance has been achieved. The
Company's solar energy systems business installs solar energy systems on
customer-owned properties on a contractual basis. Generally, revenue is
recognized once the systems have been installed and the title is passed to the
customer. For arrangements with multiple elements, the Company allocates fair
value to each element in the contract and revenue is recognized upon delivery of
the element.
The Company's biomedical subsidiary and semiconductor foundry and
fabrication unit perform specialty material processing services for various
manufacturers on a contractual basis. The Company recognizes revenue as the
processed products are shipped to the customer.
The Company recognizes revenues and estimated profits on long-term
government contracts on a percentage-of-completion method of accounting using a
cost-to-cost methodology. Profit estimates are revised periodically based upon
changes and facts, and any losses on contracts are recognized immediately. Some
of the contracts include provisions to withhold a portion of the contract value
as retainage until such time as the United States government performs an audit
of the cost incurred under the contract. The Company's policy is to take into
revenue the full value of the contract, including any retainage, as it performs
against the contract since the Company has not experienced any substantial
losses as a result of 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.
14
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 March 31, 2004 and the maturity periods and the effect that such
obligations are expected to have on its liquidity and cash flows in future
periods:
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------------------
LESS THAN 2 - 3 4 - 5 MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
---------------------------------- ------------ ------------ ------------ ------------ ------------
PURCHASE OBLIGATIONS $ 2,307,000 $ 2,196,000 $ 111,000 $ -- $ --
CAPITAL LEASES:
Unrelated party capital lease $ 1,260,000 $ 437,000 $ 823,000 $ -- $ --
Related party capital lease 3,679,000 652,000 1,665,000 1,362,000 --
OPERATING LEASES:
Unrelated party operating leases $ 312,000 $ 152,000 $ 147,000 $ 13,000 $ --
Related party operating lease 1,777,000 977,000 800,000 -- --
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 $844,463.
On October 8, 1999, the Company entered into an Agreement with BP Solarex
("BPS") in which BPS agreed to purchase certain production equipment built by
the Company, for use in the Company's Chicago factory ("Spire Solar Chicago")
and in return the Company agreed to purchase solar cells of a minimum of two
megawatts per year over a five-year term for a fixed fee from BPS (the "Purchase
Commitment"). BPS has the right to reclaim the equipment should the Company not
meet its obligations in the Purchase Commitment. The proceeds from the sale of
the production equipment purchased by BPS have been classified as an unearned
purchase discount in the accompanying consolidated balance sheet. The Company
will amortize this discount as a reduction to cost of sales as it purchases
solar cells from BPS. During the quarter ended September 30, 2003, the Company
and BPS retroactively amended the agreement to include all purchases of solar
modules, solar systems, inverter systems and other system equipment purchased by
the Company from BPS in the purchase commitment calculation. Amortization of the
purchase discount amounted to $53,000 for the quarter ended March 31, 2004.
In addition, the agreement contains a put option for BPS to have the
Company create a separate legal entity for Spire Solar Chicago and for BPS to
convert the value of the equipment and additional costs, as defined, into equity
of the new legal entity. The percentage ownership in the joint venture would be
determined based on the cumulative investments by BPS and the Company.
The amended agreement also allows the Company to terminate the agreement
on 30 days notice in consideration for a termination payment based on the
aggregate amount of Spire purchases of BPS products and the fair market value of
the production equipment purchased by BPS at the time of the termination
election. As of March 31, 2004, the Company has no intention of terminating the
agreement.
In October 2002, the Company sold an exclusive patent license for a
hemodialysis split-tip catheter to Bard Access Systems, Inc. ("Bard"), a wholly
owned subsidiary of C. R. Bard, Inc., in exchange for $5,000,000 upon the
execution of the agreement, with another $5,000,000 due upon the earlier to
occur of: (a) the date of the first commercial sale of a licensed product by
Bard; or (b) no more than 18 months after signing. The agreement further
provides for two additional contingent cash payments of $3,000,000 each upon the
completion of certain milestones by Bard during the next two years. Bard has the
15
right to cancel the agreement at any time subsequent to the second payment.
There can be no assurances that these milestones will be attained and attainment
is beyond the control of the Company. During the year ended December 31, 2002,
the Company recorded the initial payment under the agreement, resulting in a
gain of $4,464,929, net of direct costs. Due to the potential length of time
between the first and second payments and the cancellation provisions within the
agreement, the Company did not record the potential remaining payments at that
time. During June 2003, in accordance with the agreement, the Company received
notification from Bard of the first commercial sale, collected the $5,000,000
payment due and recorded a gain of $4,989,150, net of direct costs.
Outstanding letters of credit totaled $668,000 at March 31, 2004. 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 in
December 2004 and are 100% secured by cash.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Company carried out an evaluation under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and President and the Financial Controller and
Treasurer, of the effectiveness of the Company's disclosure controls and
procedures as of March 31, 2004. In designing and evaluating the Company's
disclosure controls and procedures, the Company and its management recognize
that there are inherent limitations to the effectiveness of any system of
disclosure controls and procedures, including the possibility of human error and
the circumvention or overriding of the controls and procedures. Accordingly,
even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their desired control objectives. Additionally, in
evaluating and implementing possible controls and procedures, the Company's
management was required to apply its reasonable judgment. Furthermore, in the
course of this evaluation, management considered certain internal control areas,
including those discussed below, in which we have made and are continuing to
make changes to improve and enhance controls. Based upon the required
evaluation, the Chief Executive Officer and the Financial Controller and
Treasurer concluded that as of March 31, 2004 the Company's disclosure controls
and procedures were effective (at the "reasonable assurance" level mentioned
above) to ensure that information required to be disclosed by the Company in the
reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
From time to time, the Company and its management have conducted and will
continue to conduct further reviews and, from time to time put in place
additional documentation, of the Company's disclosure controls and procedures,
as well as its internal control over financial reporting. The Company may from
time to time make changes aimed at enhancing their effectiveness, as well as
changes aimed at ensuring that the Company's systems evolve with, and meet the
needs of, the Company's business. These changes may include changes necessary or
desirable to address recommendations of the Company's management, its counsel
and/or its independent auditors, including any recommendations of its
independent auditors arising out of their audits and reviews of the Company's
financial statements. These changes may include changes to the Company's own
systems, as well as to the systems of businesses that the Company has acquired
or that the Company may acquire in the future and will, if made, be intended to
enhance the effectiveness of the Company's controls and procedures. The Company
is also continually striving to improve its management and operational
efficiency and the Company expects that its efforts in that regard will from
time to time directly or indirectly affect the Company's disclosure controls and
procedures, as well as the Company's internal control over financial reporting.
As disclosed in our annual report on Form 10-KSB for the year ended
December 31, 2003, the Company's independent auditor, Vitale, Caturano and
Company, P.C. ("VCC") advised management and the Audit Committee by a letter
dated March 18, 2004 that, in connection with its audit of the Company's
consolidated financial statements for the year ended December 31, 2003, it noted
certain matters involving internal control and its operation that it considered
to be a material weakness under standards established by the American Institute
of Certified Public Accountants. Reportable conditions are matters coming to an
independent auditors' attention that, in their judgment, relate to significant
deficiencies in the design or operation of internal control and could adversely
affect the organization's ability to record, process, summarize, and report
financial data consistent with the assertions of management in the financial
statements. Further, a material weakness is a reportable condition in which the
design or operation of one or more internal control components does not reduce
to a relatively low level the risk that errors or fraud in amounts that would be
material in relation to the financial statements being audited may occur and not
be detected within a timely period by employees in the normal course of
performing their assigned functions. VCC advised management and the Audit
Committee that it considered the following to constitute material weaknesses in
16
internal control and operations: (i) the Company's failure to adequately staff
its finance group with the appropriate level of experience to effectively
control the increased level of transaction activity, address the complex
accounting matters and manage the increased financial reporting complexities
resulting from, among other things, the acquisition of Bandwidth, the
implementation of a new financial reporting system and the investigation
surrounding the filing and eventual restatement of the Company's Form 10-QSB, as
amended, for the quarter ended June 30, 2003 and (ii) the Company's current
monthly close process does not mitigate the risk that material errors could
occur in the books, records and financial statements, and does not ensure that
those errors would be detected in a timely manner by the Company's employees in
the normal course of performing their assigned functions. The matter noted in
clause (i) above was similar to the material weakness noted by our former
independent auditor (as disclosed in prior SEC filings). VCC noted that these
matters were considered by it during its audit and did not modify the opinion
expressed in its independent auditor's report dated March 18, 2004.
The Company is still in the process of assessing the findings of its
independent auditors. As noted above, however, the Company has made and is
continuing to make changes in its controls and procedures, including its
internal control over financial reporting, aimed at enhancing their
effectiveness and ensuring that the Company's systems evolve with, and meet the
needs of, the Company's business. As further noted above, the Company is also
continually striving to improve its management and operational efficiency and
the Company expects that its efforts in that regard will from time to time
directly or indirectly affect the Company's controls and procedures, including
its internal control over financial reporting. For example, the Company has
recently added to its accounting staff and expects to hire additional
professionals and the Company has arranged for additional compliance training
for its staff. On April 1, 2004, the Company hired a permanent chief financial
officer with the appropriate experience and background to manage the diverse and
complex financial issues which may arise in the Company's business. The Company
is also continuing its efforts to upgrade its information technology
capabilities and has completed the implementation of a common accounting system
at all of its business units.
Changes in Internal Control Over Financial Reporting
----------------------------------------------------
There was no change in the Company's internal control over financial
reporting that occurred during the first fiscal quarter of 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
17
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
--------
31.1 Certification of the Chairman of the Board, Chief
Executive Officer and President pursuant toss.302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant
toss.302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chairman of the Board, Chief
Executive Officer and President pursuant to 18
U.S.C.ss.1350, as adopted pursuant toss.906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to
18 U.S.C.ss.1350, as adopted pursuant toss.906 of the
Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K
-------------------
There were three reports on Form 8-K filed by the Registrant in
the quarter ended March 31, 2004:
January 7, 2004, Item 4 (Changes in Registrant's Certifying
Accountant) and Item 7 (Financial Statements and Exhibits).
January 8, 2004, Item 4 (Changes in Registrant's Certifying
Accountant).
March 26, 2004, Item 4 (Changes in Registrant's Certifying
Accountant) and Item 7 (Financial Statements and Exhibits).
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SPIRE CORPORATION
Dated: May 14, 2004 By: /s/ Roger G. Little
-------------------------------
Roger G. Little
Chairman of the Board, Chief
Executive Officer and President
Dated: May 14, 2004 By: /s/ James F. Parslow
-------------------------------
James F. Parslow
Chief Financial Officer
19