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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, 2003; or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ______________
Commission file number: 0-12742
SPIRE CORPORATION
-----------------
(Name of small business issuer as specified in its charter)
MASSACHUSETTS 04-2 57335
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
ONE PATRIOTS PARK, BEDFORD, MASSACHUSETTS 01730-2396
----------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(781) 275-6000
--------------
(Issuer's telephone number, including area code)
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 6,756,660
outstanding shares of the issuer's only class of common equity, Common Stock,
$0.01 par value, on May 1, 2003.
Transitional Small Business Disclosure Format (Check One): Yes [_] No [X]
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SPIRE CORPORATION
FORM 10-QSB
FOR THE YEAR ENDED MARCH 31, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements ........................................... 1
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations ............... 6
Item 3. Legal Proceedings ............................................... 10
Item 4. Controls and Procedures ......................................... 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................ 11
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 7,487,808 $ 7,798,716
Restricted cash 29,857 --
------------ ------------
Total cash 7,517,665 7,798,716
------------ ------------
Accounts receivable, trade:
Amounts billed 3,124,833 3,574,851
Retainage 54,958 67,715
Unbilled costs 231,440 634,958
------------ ------------
3,411,231 4,277,524
Less allowance for doubtful accounts (280,065) (349,443)
------------ ------------
Net accounts receivable 3,131,166 3,928,081
------------ ------------
Inventories 2,318,831 2,220,587
Deferred tax asset 116,000 116,000
Prepaid expenses and other current assets 661,137 988,500
------------ ------------
Total current assets 13,744,799 15,051,884
------------ ------------
Property and equipment 15,831,763 15,604,809
Less accumulated depreciation and amortization (13,317,102) (13,132,220)
------------ ------------
Net property and equipment 2,514,661 2,472,589
------------ ------------
Patents (less accumulated amortization, $501,312
in 2003 and $499,505 in 2002) 258,405 241,313
Other assets 8,325 6,324
------------ ------------
266,730 247,637
------------ ------------
$ 16,526,190 $ 17,772,110
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,649,396 $ 1,852,332
Accrued liabilities 1,327,267 1,616,585
Advances on contracts in progress 1,081,047 1,058,852
------------ ------------
Total current liabilities 4,057,710 4,527,769
------------ ------------
Unearned purchase discount 1,465,656 1,469,123
Stockholders' equity
Common stock, $0.01 par value; shares
authorized 20,000,000; issued 6,756,660
shares in 2003 and 6,755,660 shares in 2002 67,567 67,557
Additional paid-in capital 9,247,726 9,246,421
Retained earnings 1,687,531 2,461,240
------------ ------------
Total stockholders' equity 11,002,824 11,775,218
------------ ------------
$ 16,526,190 $ 17,772,110
============ ============
See accompanying notes to condensed consolidated financial statements
1
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-------------------------------
2003 2002
----------- -----------
Net sales and revenues
Contract research and service revenues $ 1,592,064 $ 1,640,650
Sales of goods 1,367,029 1,685,867
----------- -----------
Total sales and revenues 2,959,093 3,326,517
----------- -----------
Costs and expenses
Cost of contract research and services 999,331 1,185,394
Cost of goods sold 1,287,737 1,395,941
Selling, general and administrative expenses 1,357,066 1,296,694
Internal research and development 96,097 56,218
----------- -----------
Total costs and expenses 3,740,231 3,934,247
----------- -----------
Loss from operations (781,138) (607,730)
-----------
Interest income, net 7,429 3,038
----------- -----------
Loss before income taxes (773,709) (604,692)
----------- -----------
Net loss $ (773,709) $ (604,692)
-------- =========== ===========
Loss per share of common stock - basic and diluted $ (0.11) $ (0.09)
-------------------------------------------------- =========== ===========
Weighted average number of common and common
equivalent shares outstanding - basic and diluted 6,756,582 6,732,660
=========== ===========
See accompanying notes to condensed consolidated financial statements.
2
SPIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-------------------------------
2003 2002
----------- -----------
Cash flows from operating activities:
Net loss $ (773,709) $ (604,692)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 186,680 197,631
Changes in assets and liabilities:
Accounts receivable, net 796,915 249,324
Inventories (98,244) (94,962)
Prepaid expenses and other current assets 327,363 (5,483)
Accounts payable and accrued liabilities (492,254) 342,558
Unearned purchase discount (3,467) --
Advances on contracts in progress 22,195 (359,151)
----------- -----------
Net cash used in operating activities (34,521) (274,775)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (226,954) (63,996)
Increase in patent costs (18,890) (17,197)
Other assets (2,001) 11,329
----------- -----------
Net cash used in investing activities (247,845) (69,864)
----------- -----------
Cash flows from financing activities:
Net payments on short-term debt -- (875,000)
Exercise of stock options 1,315 --
----------- -----------
Net cash provided by (used in) financing activities 1,315 (875,000)
----------- -----------
Net decrease in cash and cash equivalents (281,051) (1,219,639)
Cash and cash equivalents and restricted cash, beginning of period 7,798,716 5,582,884
----------- -----------
Cash and cash equivalents and restricted cash, end of period $ 7,517,665 $ 4,363,245
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 15,478 $ 20,095
=========== ===========
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, 2003
(1) 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, 2003 and the results of
operations for the three months ended March 31, 2003 and 2002 and cash flows for
the three months ended March 31, 2003 and 2002. The results of operations for
the three months ended March 31, 2003 are not necessarily indicative of the
results to be expected for the fiscal year ending December 31, 2003.
The accounting policies followed by the Company are set forth in Note 2 to
the Company's consolidated financial statements in its annual report on Form
10-KSB for the year ended December 31, 2002.
(2) INVENTORIES
Inventories consist of the following:
March 31, December 31,
2003 2002
------------ ------------
Raw materials $ 730,268 $ 662,384
Work in process 1,340,566 1,324,345
Finished goods 247,997 233,858
------------ ------------
$ 2,318,831 $ 2,220,587
------------ ------------
(3) 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,
---------------------------
2003 2002
------------ ------------
Weighted average number of common shares outstanding - basic 6,756,582 6,732,660
Add net additional common shares upon exercise of common stock options -- --
------------ ------------
Adjusted weighted average common shares outstanding - diluted 6,756,582 6,732,660
------------ ------------
At March 31, 2003 and 2002, 214,086 and 124,630 shares of common stock
issuable under stock options, respectively, were not included in the calculation
of diluted earnings per share because their effect would be antidilutive.
(4) 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.
Solar Solar Spire Biophotonics Total
Equipment Systems Biomedical Life Sciences Company
----------- ----------- ---------- ------------- ----------
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)
For the Three Months Ended March 31, 2002
-----------------------------------------
Net sales and revenues $1,155,869 $ 702,971 $1,254,987 $212,690 $3,326,517
Loss from operations (142,817) (290,565) (171,070) (3,278) (607,730)
4
(5) OTHER INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 142 ("SFAS 142"), Goodwill and
Other Intangible Assets. The Company adopted SFAS 142 as of January 1, 2002.
SFAS 142 requires goodwill and intangible assets with indefinite lives to no
longer be amortized, but instead be tested for impairment at least annually.
With the adoption of SFAS 142, the Company reassessed the useful lives and
residual values of all acquired intangible assets to make any necessary
amortization period adjustments. Based on that assessment, no adjustments were
made to the amortization period or residual values of other intangible assets.
Other intangible assets amounted to $258,405 (net of accumulated
amortization of $501,312) and $241,313 (net of accumulated amortization of
$499,505) at March 31, 2003 and December 31, 2002, respectively. These
intangible assets primarily consist of patents that the Company has been awarded
and are amortized over the shorter of their useful lives or their terms,
principally five years. There are no expected residual values related to these
intangible assets. Estimated fiscal year amortization expense is as follows:
Year Amortization Expense
---- --------------------
2003 $ 7,229
2004 51,489
2005 48,875
2006 45,009
2007 44,448
Patent costs are capitalized and amortized over five years using the
straight-line method. The patent cost is primarily comprised of cost associated
with securing and registering a patent.
(6) STOCK-BASED COMPENSATION
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" ("SFAS 148") which is an amendment of
SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), and
continues to apply Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock plans. If the Company had elected to
recognize compensation cost for all of the plans based upon the fair value at
the grant dates for awards under those plans, consistent with the method
prescribed by SFAS 123, net income and earnings per share would have been
changed to the pro forma amounts indicated below.
The per-share weighted-average fair value of stock options granted during
the quarter ended March 31, 2003 and 2002 was $2.46 and $3.50, 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
---- --------------- ------------- ----------- -----------------
2003 -- 3.81% 5 years 83.4%
2002 -- 5.28% 5 years 90.7%
The Company applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its options under SFAS No.
123, the Company's net income (loss) would have been reduced (increased) to the
pro forma amounts indicated below.
5
2003 2002
--------- ---------
Net loss as reported $(773,709) $(604,692)
Loss per share of common stock - diluted, as reported $ (0.11) $ (0.09)
Net loss pro forma $(859,124) $(657,103)
Loss per share of common stock - diluted, pro forma $ (0.13) $ (0.10)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SECTION AND OTHER PARTS OF THIS REPORT CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS AND TIMING DESCRIBED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DESCRIBED OR REFERRED TO IN THIS REPORT AND IN ITEM 6 OF THE ANNUAL REPORT
ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 2002.
Overview
--------
The Company develops, manufactures and markets highly-engineered solar
electric module manufacturing equipment and systems and provides biomedical
processing services and devices. The Company is a leading supplier in the design
and manufacture of specialized equipment for the production of terrestrial
photovoltaic modules from solar cells, with its equipment installed in more than
140 factories and in 42 countries. The Company's value-added biomedical
processing services offer surface treatments to enhance the durability or the
antimicrobial characteristics of orthopedic and other medical devices. The
Company also markets two hemodialysis catheter devices for the treatment of
chronic kidney disease.
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,
---------------------------
2003 2002
-------- --------
Net sales and revenues 100% 100%
Cost of sales and revenues 77 78
-------- --------
Gross profit 23 22
Selling, general and administrative expenses 46 39
Internal research and development 3 2
-------- --------
Loss from operations (26) (18)
Loss before income taxes (26) (18)
-------- --------
Net loss (26%) (18%)
-------- --------
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
-------------------------------------------------------------------------------
NET SALES AND REVENUES
Net sales and revenues decreased $368,000 or 11% for the three months ended
March 31, 2003 to $2,959,000, compared to $3,327,000 for the three months ended
March 31, 2002. Contract research and service revenues decreased $49,000 or 3%
to $1,592,000 for the three months ended March 31, 2003 compared to $1,641,000
for 2002. Sales of goods decreased $319,000 or 19% to $1,367,000 for the three
months ended March 31, 2003, compared to $1,686,000 for 2002.
6
The following table categorizes the Company's net sales and revenues for
the periods presented:
Three Months Ended March 31,
--------------------------------
2003 2002 %Change
---------- ---------- -------
Contract research and service revenues $1,592,000 $1,641,000 (3%)
Sales of goods 1,367,000 1,686,000 (19%)
---------- ----------
Net sales and revenues $2,959,000 $3,327,000 (11%)
---------- ----------
The decrease in contract research and service revenues for the three month
period ended March 31, 2003 is attributable to a decline in United States
government research and development contracts associated with the Company's
former Optoelectronics division. The decrease was offset by strong demand for
the Company's biomedical processing services. The decrease in sales of goods for
the three month period ended March 31, 2003 is primarily due to zero solar
systems revenue. During the quarter, the Solar Systems group was unable to
secure building permits for its client to enable the delivery of the systems.
The Company does not anticipate encountering permit issues in future quarters.
The decrease was offset by an increase in revenue associated with the sale of
the Company's hemodialysis split-tip catheter, which had not been launched at
March 31, 2002.
COST OF SALES AND REVENUES
The total cost of sales and revenues decreased $294,000 to $2,287,000 to
77% of total net sales and revenues, for the quarter ended March 31, 2003,
compared to $2,581,000 or 78% of total net cost of sales and revenues for the
quarter ended March 31, 2002. The cost of contract research and service revenues
decreased $186,000 to $999,000 decreasing to 63% of related revenues for the
three months ended March 31, 2003, compared to $1,185,000 or 72% of related
revenues for the three months ended March 31, 2002. The decrease is a result of
a shift in mix towards the Company's biomedical processing services. Cost of
good sold decreased $108,000 to $1,288,000, and increased to 94% of related
sales, for the three months ended March 31, 2003, compared to $1,396,000 or 83%
of related sales for the three months ended March 31, 2002. The increase in cost
of goods as percentage of related sales is a result of the fixed cost associated
with the Company's hemodialysis split-tip catheter.
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,
--------------------------------
2003 % 2002 %
---------- --- ---------- ---
Cost of contract research and service revenues $ 999,000 63% $1,185,000 72%
Cost of goods sold 1,288,000 94% 1,396,000 83%
---------- ----------
Total cost of sales and revenues $2,287,000 77% $2,581,000 78%
---------- ----------
INTERNAL RESEARCH AND DEVELOPMENT
Internal research and development for the three months ended March 31, 2003
increased $40,000 or 71% to $96,000, compared to $56,000 for the three months
ended March 31, 2002, as the Company continued its investment in the catheter
development program.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
March 31, 2003 increased $60,000 to $1,357,000, and increased to 46% of sales
and revenues, compared to $1,297,000 or 39% of sales and revenues for the three
months ended March 31, 2002. The increase in selling, general and administrative
expenses as a percentage of sales and revenues are due to lower revenues in 2003
as compared to the three months ended March 31, 2002.
INTEREST
The Company earned $23,000 of interest income for the quarter ended March
31, 2003, compared to $23,000 of interest income for the quarter ended March 31,
2002. The Company incurred interest expense of $15,000 for the quarter ended
March 31, 2003 of which none was capitalized, compared to $20,000 in the first
quarter of 2002 of which none was capitalized.
7
NET LOSS
The Company reported a net loss for the quarter ended March 31, 2003 of
$774,000, compared to a net loss of $605,000 for the quarter ended March 31,
2002. The loss for the quarter is attributed to the Company's continued
investment in its catheter product as well as zero revenue for solar systems in
the quarter.
Liquidity and Capital Resources
-------------------------------
To date, the Company has been able to fund its operating cash requirements
using proceeds from the licensing of technology, operations, and available lines
of credit. At March 31, 2003 the agreement with Silicon Valley Bank provided a
$2 million revolving credit facility, based upon eligible accounts receivable
requirements. The line of credit provided the Company with resources for general
working capital purposes and Standby Letter of Credit Guarantees for foreign
customers. The Company had negotiated an amendment to extend the agreement until
April 23, 2003. The Company has decided not to renew the line with Silicon
Valley Bank. At March 31, 2003 and 2002, interest on the line of credit was at
the Bank's prime rate plus 1/2 percent. The line of credit contains covenants
including provisions relating to profitability and net worth. The Company was in
compliance with all such covenants as of March 31, 2003.
The Company has entered into a Letter of Credit Agreement with Citizens
Bank of Massachusetts. The Agreement provides Standby Letter of Credit
Guarantees for foreign customers and is 100% secured with cash. At March 31,
2003, the Company had $30,000 of restricted cash associated with the line of
credit. It is the Company's intention to utilize this line while it negotiates
and closes on a new revolving credit agreement with Citizens Bank. The Company
anticipates closing on the new credit agreement by May 31, 2003.
The Company believes it has sufficient resources to finance its current
operations for the foreseeable future through working capital. Cash and cash
equivalents decreased $281,000 to $7,518,000 at March 31, 2003 from $7,799,000
at December 31, 2002. To date, there are no material commitments by the Company
for capital expenditures. At March 31, 2003, the Company's retained earnings
were $1,688,000, compared to retained earnings of $2,461,000 as of December 31,
2002. Working capital as of March 31, 2003 decreased 8% to $9,687,000, compared
to $10,524,000 as of December 31, 2002.
Recent Accounting Pronouncements
--------------------------------
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of commitment to an exit or disposal
plan. SFAS 146 is effective for exit or disposal activities initiated after
December 31, 2002. The Company 's adoption of SFAS 146 did not have a material
impact on its financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 will be effective for any guarantees that are
issued or modified after December 31, 2002. The disclosure requirements will be
effective for the Company's second quarter of fiscal 2003. Management does not
expect the adoption of FIN 45 to have a material impact on the Company's
financial position or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock Based Compensation - Transition and
Disclosure - an Amendment of SFAS 123" ("SFAS 148"). SFAS 148 provides
additional transition guidance for those entities that elect to voluntarily
adopt the provisions of SFAS 123, "Accounting for Stock Based Compensation."
Furthermore, SFAS 148 mandates new disclosures in both interim and year-end
financial statements of the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The adoption
of SFAS 148 did not have a material impact on the Company's financial position
or results of operation.
8
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. FIN 46 is effective for all new variable interest entities
created or acquired after January 31, 2003. For variable interest entities
created or acquired prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period beginning after June 15, 2003
(third quarter of fiscal 2003). The Company does not expect that the adoption of
FIN 46 will have a material impact on our results of operations and financial
condition.
Impact of Inflation and Changing Prices
---------------------------------------
Historically, the Company's business has not been materially impacted by
inflation. Manufacturing equipment and solar systems are generally quoted,
manufactured and shipped within a cycle of approximately nine months, allowing
for orderly pricing adjustments to the cost of labor and purchased parts. The
Company has not experienced any negative effects from the impact of inflation on
long-term contracts. The Company's service business is not expected to be
seriously affected by inflation because its procurement-production cycle
typically ranges from two weeks to several months, and prices generally are not
fixed for more than one year. Research and development contracts usually include
cost escalation provisions.
Foreign Exchange Fluctuation
----------------------------
The Company sells its products and services only in United States 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 United
States 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 from Mykrolis
Corporation, which leases the building from a Trust of which Roger G. Little,
Chairman of the Board, Chief Executive Officer and President, is sole trustee
and principal beneficiary. The Company believes that the terms of the sublease
are commercially reasonable. The 1985 sublease originally was for a period of
ten years, was extended for a five-year period expiring on November 30, 2000 and
was further extended for a five-year period expiring on November 30, 2005. The
agreement provides for minimum rental payments plus annual increases linked to
the consumer price index. Total rent expense under this sublease was $263,000 in
2003. This amount does not take into account rent received by the Company for
subleasing approximately 22,000-square-feet of its 74,000-square-feet to the
purchaser of the Company's optoelectronics business.
Critical Accounting Policy - Revenue Recognition
------------------------------------------------
The Company derives its revenues from three primary sources: (1) sales of
solar energy manufacturing equipment and solar energy systems; (2) biomedical
processing services; and (3) United States government funded research and
development contracts.
The Company's OEM capital equipment solar energy business builds complex
customized machines to order for specific customers. Substantially all of these
orders are sold on a FOB Bedford, Massachusetts (or EXW Factory) basis. It is
the Company's policy to recognize revenues for this equipment as the product is
shipped to the customer, as customer acceptance is obtained prior to shipment
and the equipment is expected to operate the same in the customer's environment
as it does in the Company's environment. When an arrangement with the customer
includes future obligations or customer acceptance, revenue is recognized when
those obligations are met or customer acceptance has been achieved. The
Company's solar energy systems business installs solar energy systems on
customer-owned properties on a contractual basis. Generally, revenue is
recognized once the systems have been installed and the title is passed to the
customer. For arrangements with a number of elements, the Company allocates fair
value to each element based on rates quoted in the contract and revenue is
recognized upon delivery of the element. The Company's biomedical subsidiary
performs surface engineering services for various medical device manufacturers
on a contractual basis. The Company recognizes revenue as the products are
shipped back to the customer. The Company recognizes revenues and estimated
profits on long term
9
government contracts on a percentage of completion method of accounting using a
cost to cost methodology. Profit estimates are revised periodically based upon
changes and facts, and any losses on contracts are recognized immediately. Some
of the contracts include provisions to withhold a portion of the contract value
as retainage until such time as the United States government performs an audit
of the cost incurred under the contract. The Company's policy is to take into
revenue the full value of the contract, including any retainage, as it performs
against the contract since the Company has not experienced any substantial
losses as a result of an audit performed by the United States government.
Contractual Obligations and Commercial Commitments
--------------------------------------------------
The following table summarizes the Company's contractual obligations at
March 31, 2003 and the maturity periods and the effect that such obligations are
expected to have on its liquidity and cash flows in future periods:
Payments Due by Period
---------------------------------------------------------
Less than After
Contractual Obligation Total 1 Year 1 - 3 Years 4 - 5 Years 5 Years
-------------------------------- ---------- ---------- ----------- ----------- -------
Non-cancelable operating leases $3,930,000 $1,398,000 $2,416,000 $165,000 $ --
On October 8, 1999, the Company entered into an Agreement with BP Solarex
("BPS") in which BPS agreed to purchase certain production equipment built by
the Company, for use in the Company's Chicago factory and in return the Company
agreed to purchase solar cells of a minimum of two megawatts per year over a
five-year term. As of March 31, 2003, the Company is committed to purchase 23
million solar cells. BPS has the right to repossess the equipment should the
Company not purchase its committed quantity or convert into equity of Spire
Solar Chicago the initial purchase price of all equipment purchased from the
Company. The proceeds from the sale of the production equipment purchased by BPS
have been classified as an unearned purchase discount in the accompanying
balance sheet. The Company will amortize this discount as a reduction to cost of
sales as it purchases solar cells from BPS. Amortization of the purchase
discount amounted to $3,500 during the quarter ended March 31, 2003. The Company
is currently negotiating with BPS to include purchases other than solar cells to
reduce the purchase discount.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a defendant in 69 cases filed from August
2001 to date in state courts in Texas by persons claiming damages from the use
of 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. Cases involving the same basic fact situation pending
in United States District Court in Nebraska (and subsequently consolidated with
other cases in Minnesota) and in Nevada were dismissed in 2002 on jurisdictional
grounds. The plaintiffs seek damages in amounts that are not quantified at this
time. The Company believes it has adequate liability insurance coverage for
protection against adverse results of this litigation.
The Company has received a written demand from a representative of ATmicro
Solar, Ltd. alleging various claims against the Company, including the return of
monies which ATmicro paid for certain equipment which ATmicro agreed to purchase
from Spire. Spire has responded advising ATmicro that its claims are without
merit and that ATmicro's misconduct has caused Spire additional monetary
damages.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
Spire's principal executive and financial officers have established and are
maintaining disclosure controls and procedures that such officers believe are
effective. The officers' conclusion is based on their evaluation of the controls
and procedures as of March 31, 2003. The officers have designed such disclosure
controls and procedures to ensure that material information relating to the
Company and its consolidated subsidiaries is communicated to them by others
within those organizations.
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Changes in Internal Controls
----------------------------
The Company believes that there have not been significant changes in the
Company's internal controls or in other factors that could significantly affect
those controls subsequent to March 31, 2003, including any corrective action
with regard to significant deficiencies and material weaknesses.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
--------
99(a) Certifications of the Chairman of the Board, Chief Executive
Officer and President pursuant to 18 U.S.C.ss.1350 (filed herewith)
99(b) Certifications of the Financial Controller, Treasurer, and
Principal Financial and Accounting Officer pursuant to 18
U.S.C. ss. 1350 (filed herewith)
b. Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Registrant in the quarter ended
March 31, 2003.
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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
(Registrant)
Dated: May 15, 2003 By: /s/ Roger G. Little
-----------------------------------
Roger G. Little
President, Chief Executive Officer and
Chairman of the Board
Dated: May 15, 2003 By: /s/ Gregory G. Towle
-----------------------------------
Gregory G. Towle
Financial Controller and Treasurer
(Principal Financial and Accounting Officer)
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