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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2005 or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number: 0-12742
SPIRE CORPORATION
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(Name of small business issuer as specified in its charter)
MASSACHUSETTS 04-2 57335
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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, including area code)
Securities registered under Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE; REGISTERED ON THE NASDAQ NATIONAL MARKET
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(Title of class)
Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. [_]
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 [_]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [_]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
The issuer's revenues for its most recent fiscal year: $22,422,000.
The aggregate market value of the voting stock held by non-affiliates of
the issuer based on the last sale price of such stock as reported by The Nasdaq
National Market on March 1, 2006, was approximately $46,186,000.
The number of shares outstanding of the issuer's common stock, as of March
1, 2006, was 7,247,987.
Transitional Small Business Disclosure Format (Check One): Yes [_] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Special Meeting in Lieu
of 2006 Annual Meeting of Stockholders to be held on May 18, 2006, are
incorporated by reference in Part III of this Report.
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SPIRE CORPORATION
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 2005
TABLE OF CONTENTS
PART I
Item 1. Description of Business .......................................... 1
Item 2. Description of Property .......................................... 12
Item 3. Legal Proceedings ................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders .............. 12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters ......... 13
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 13
Item 7. Financial Statements ............................................. 24
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ......................................... 48
Item 8A. Controls and Procedures .......................................... 48
Item 8B. Other Information ................................................ 48
PART III
Item 9. Directors and Executive Officers of the Registrant;
Compliance with Section 16(a) of the Exchange Act ................ 48
Item 10. Executive Compensation ........................................... 49
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters ....................... 49
Item 12. Certain Relationships and Related Transactions ................... 49
Item 13. Exhibits ......................................................... 49
Item 14. Principal Accountant Fees and Services ........................... 50
FORWARD-LOOKING STATEMENTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE
"EXCHANGE ACT", WHICH STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THESE
STATEMENTS RELATE TO OUR FUTURE PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS.
THESE STATEMENTS MAY BE IDENTIFIED BY THE USE OF WORDS SUCH AS "MAY", "COULD",
"WOULD", "SHOULD", "WILL", "EXPECTS", "ANTICIPATES", "INTENDS", "PLANS",
"BELIEVES", "ESTIMATES" AND SIMILAR EXPRESSIONS. OUR ACTUAL RESULTS AND TIMING
OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THESE
STATEMENTS. FACTORS THAT COULD CONTRIBUTE TO THESE DIFFERENCES INCLUDE BUT ARE
NOT LIMITED TO, THOSE DISCUSSED UNDER "RISK FACTORS", "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", AND ELSEWHERE IN
THIS REPORT. THE CAUTIONARY STATEMENTS MADE IN THIS REPORT SHOULD BE READ AS
BEING APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS
REPORT.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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Spire Corporation ("Spire" or the "Company") is a Massachusetts corporation
incorporated in 1969. Our principal offices are located at One Patriots Park,
Bedford, Massachusetts, and our phone number is (781) 275-6000. Our SEC filings
are available through our website, www.spirecorp.com. Our common stock trades on
the Nasdaq National Market under the symbol "SPIR".
PRINCIPAL PRODUCTS AND SERVICES
Overview
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The Company develops, manufactures and markets highly-engineered products
and services in four principal business areas: solar equipment, solar systems,
biomedical and optoelectronics, generally bringing to bear expertise in
materials technologies, surface science and thin films across all four business
areas. In some cases, such as IONGUARD(R) processing of orthopedic devices,
commercial services are well established, while in other cases,
commercialization is just beginning.
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 approximately
170 factories in 43 countries.
In the solar systems area, the Company provides custom and building
integrated photovoltaic (BIPV) modules, stand-alone emergency power back up and
electric power grid-connected distributed power generation systems employing
photovoltaic technology developed by the Company.
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 optoelectronics area, the Company provides custom compound
semiconductor foundry and fabrication services on a merchant basis to customers
involved in biomedical/biophotonics 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.
Solar Equipment
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Solar photovoltaics, the direct conversion of sunlight into electricity, is
an important source of distributed power that can be employed locally or
connected to a power grid. Spire believes that it is one of the world's leading
suppliers of the manufacturing equipment and technology needed to manufacture
solar photovoltaic power systems. Spire's individual items of manufacturing
equipment and its SPI-LINETM integrated turnkey wafer, cell, and module
production lines are designed to
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meet the needs of a broad range of customers ranging from small manufactures
relying on mostly manual processes to the largest photovoltaic manufacturing
companies in the world.
Spire equipment spans the full process for fabricating photovoltaic modules
including:
o Sorting solar cells into performance groups (current groups at load
voltage);
o Assembling and soldering strings of cells interconnected with metal
ribbons or "tabs";
o Completing the module circuit by soldering bus ribbons to connect the
strings together;
o Cutting polymer, fiberglass, and back cover to length and assembling
them with the glass and module circuit in preparation for
encapsulation;
o Laminating the module assembly and curing the encapsulating polymer;
o Final assembly, including edge trimming, installing an edge gasket and
frame, and attaching a junction box;
o Performing a high voltage isolation test to guarantee voltage
isolation between the cell circuit and the module frame; and
o Electrically testing the module performance by measuring a
current-voltage curve under simulated sunlight.
The fabrication of photovoltaic modules uses solar cells and module
materials as input and produces functional PV modules, ready for use. The
Company provides the necessary equipment and training for implementing these
process steps as individual equipment items and as fully integrated production
lines.
Spire Solar Systems
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Spire Solar Chicago was the principal business unit of the Company's solar
systems business segment until September 30, 2005. Spire Solar Chicago provided
clients in the Chicago metropolitan area with grid-connected distributed
photovoltaic ("PV") systems and custom modules to meet their demand for solar
electricity. The business was a vertically integrated manufacturing and system
design company whose team of experienced professionals offers complete project
management, installation coordination, and customer service.
Through collaboration with the City of Chicago Department of Environment
and Commonwealth Edison ("ComEd"), a subsidiary of Exelon Corporation, Spire
Solar Chicago developed approximately $12 million in PV systems. In addition,
the State of Illinois had a renewable energy subsidy program that funded up to
60% of the total cost for an installed PV system. Spire Solar Chicago provided
its customers with grant application services, as well as utility interconnect
service, to take advantage of this subsidy program. Spire Solar Chicago had a
business relationship with BP Solarex ("BPS") for acquisition of manufacturing
materials and had assisted BPS in its local systems design until September 30,
2005. On August 16, 2005, the Company entered into a Settlement and Contract
Termination Agreement (the "Termination Agreement") with BPS effective September
30, 2005. Under the terms of the Termination Agreement, the Company and BPS
agreed to terminate their relationship including an existing purchase commitment
that the Company had executed previously. In exchange for release of the
purchase commitment, the Company paid BPS $275,000 and retained ownership of the
production equipment. The unamortized unearned purchase discount as of the
effective date was approximately $1,205,000 and the net book value of the
production equipment was approximately $287,000. As result of this action, Spire
reevaluated the recoverability of the long-lived assets associated with this
segment as part of its third quarter review. Based on cash flow projections for
the Solar System segment, the Company determined that the production equipment
was impaired and should be written-off.
The Company has recorded an approximate $593,000 gain from these actions,
which is reflected as a gain on extinguishment of purchase commitment in the
accompanying consolidated statement of operations for the year ended December
31, 2005. The components of this gain are outlined below:
Unearned purchase discount $ 1,205,000
Net book value of production equipment (287,000)
Payment to extinguish purchase commitment (275,000)
Accrued relocation costs (50,000)
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Gain on extinguishment of purchase commitment $ 593,000
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The Company continues to pursue the PV system product line through its
Bedford, Chicago and Florida operations primarily focused on the building
integrated photovoltaic market.
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Spire Biomedical
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Spire Biomedical is both a manufacturer of medical devices and a provider
of advanced medical device surface treatment processes. Spire Biomedical's
medical device business develops, manufactures, and sells premium products for
vascular access in chronic kidney disease patients. Spire Biomedical's surface
treatment business modifies the surfaces of medical devices to improve their
performance.
Spire Biomedical's line of long-term hemodialysis catheters is defined to
combine high level performance with increased catheter placement options. The
Company's proprietary catheter products provide higher flow at lower pressures
and superior kink-resistance. Its patented separated distal tip design minimizes
recirculation and provides a wider margin of functionality compared to
conventional staggered tip designs. The Company believes that these key features
present the renal care community with attractive value and performance for
patient care.
The Company offers its medical customers a family of process services
utilizing ion beam technologies to enhance both the surface characteristics and
the performance of medical devices. The Company's advanced surface modification
technology services employ proprietary Ion Implantation and Ion Beam Assisted
Deposition ("IBAD") techniques to improve the performance of medical components.
Spire's customized surface treatments meet a variety of needs, including reduced
friction, wear and abrasion, infection resistance, enhanced tissue and bone
growth, increased thromboresistance, conductivity, improved radiopacity and the
improvement of other performance characteristics. Spire-treated products
currently include orthopedic prostheses (such as replacement hips, knees,
elbows), catheters, guidewires, ear-nose-throat devices, vascular grafts, and
other specialty medical devices.
Bandwidth Semiconductor
-----------------------
Bandwidth Semiconductor, the principal business unit of the Company's
optoelectronics business segment, operates in a state-of-the-art semiconductor
foundry and fabrication facility in Hudson, New Hampshire equipped with the most
advanced and sophisticated metal-organic chemical vapor deposition ("MOCVD") and
fabrication equipment. Our fabrication facility has been designed to have the
flexibility to engage in quick-turn research and prototyping as well as for
economical full-rate volume production services in three primary areas: MOCVD
epitaxial wafers, device foundry services, and thin film circuits.
Our MOCVD epitaxial wafer services include a wide range of compound
semiconductor (chiefly gallium arsenide and indium phosphide-based compounds)
epitaxial structures fabricated to our customers' designs or in some cases to
our own designs. We recognize that time-to-market is critical to our customers'
success, so we strive to provide the fastest turnaround times possible.
Bandwidth Semiconductor has a number of standard structures available to meet
many device needs and speed prototype development. Our epitaxial engineers work
closely with customers to develop and improve proprietary structures for
specific applications. Typical applications include: Vertical Cavity Surface
Emitting Lasers ("VCSEL"), optical waveguides, high power edge emitting lasers,
photocathodes, high electron mobility transistors ("HEMT"), field effect
transistors ("FET"), "PIN" photodetectors, avalanche photo-detectors ("APD") and
other gallium arsenide-on-silicon, lattice mismatched indium gallium arsenide
photodetectors, strained quantum well and other compound semiconductor material
structures.
Our foundry services can take compound semiconductor wafers up to 4 inches
in diameter through processing, on-wafer test, and die separation. We can use
customer-supplied photomasks or develop a new set of masks for an entire process
sequence. We design the process steps and conditions to meet the desired device
characteristics and implement the process in our fabrication facility, saving
our customers development time and providing a source of proprietary devices
without the expense of a dedicated internal fabrication. Typical OEM devices we
have fabricated include single-element photodetectors, photodetector arrays,
VCSELs, edge-emitting lasers, thermo-photovoltaic ("TPV") cells and
communications-quality light emitting diodes ("LED").
Our thin film circuit services include the fabrication of custom
structures, chip resistors and resistor arrays to customer orders using thin
film technology on alumina ceramic, aluminum nitride, ferrite, glass, quartz,
sapphire and silicon substrates using a variety of metals and alloys.
PRINCIPAL DISTRIBUTION METHODS
The Company's products and services are sold primarily by its direct,
internal sales staff with four notable exceptions: in certain offshore markets,
the
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Company's solar equipment is sold via independent sales representatives, the
Company's hemodialysis catheter products are sold via independent distributors,
proposals for sponsored research and development work are prepared by the
Company's scientists and researchers, and, in certain locations, the Company has
granted exclusive licenses to third parties to sell their products.
PHYSICIAN RELATIONSHIPS
We have engaged certain physicians to serve as consultants to the Company.
These physicians enter into written contracts that specify their duties and fix
their compensation for periods of one or more years. The compensation for these
consultants is the result of arm's length negotiations and generally depends
upon competitive factors in the local market, the physician's professional
qualifications and the specific duties and responsibilities of the physician.
COMPETITIVE CONDITIONS
The markets in which the Company operates are highly competitive and
characterized by changes due to technological improvements and developments. The
Company competes with many other manufacturers and service providers in each of
its product and service areas; many of these competitors have greater resources
and sales. Additionally, the Company's products and services compete with
products and services utilizing alternative technologies. For example, the
Company's solar photovoltaic systems compete with other forms of renewable
energy such as wind, solar thermal, and geo-thermal. Price, service and product
performance are significant elements of competition in the sale of each of the
Company's products. The Company believes that there are considerable barriers to
entry into the markets it serves, including a significant investment in
specialized capital equipment and product design and development, and the need
for a staff with sophisticated scientific and technological knowledge.
SOURCES AND AVAILABILITY OF RAW MATERIALS
Principal raw materials purchased by the Company include polymer
extrusions, molded plastic parts, silicon photovoltaic cells, compound
semiconductor wafer substrates, high purity industrial gases, custom metal
welded structures, fasteners, position sensors, electrical motors, electrical
power conditioning inverters, and electrical controls. All of these items are
available from several suppliers and the Company generally relies on more than
one supplier for each item. There has been increased demand for semiconductor
grade silicon during the past year. To date, the Company has not experienced any
adverse effects as a result of this increased demand. However, the shortage in
semiconductor grade silicon could have an adverse effect on the ordering
patterns of our solar equipment customers.
SOURCES AND AVAILABILITY OF MANUFACTURING SERVICES
The Company employs an outsourcing-model supply chain in its biomedical
products business by which certain manufacturing services, such as polymer
extrusion, assembly, packaging and sterilization, are obtained from third party
contractors. The Company has identified multiple potential sources for the
services it requires; however, certain elements of the supply chain currently
involve only one qualified contractor. As sales volume expands, the Company
plans to reassess its supply chain to eliminate potential "bottlenecks" and
reduce dependence on sole-source, single site contract services.
DEPENDENCE ON MAJOR CUSTOMERS
During the year ended December 31, 2005, no customer accounted for more
than 10% of consolidated net sales and revenues.
KEY LICENSES AND PATENTS, GOVERNMENT RIGHTS TO INTELLECTUAL PROPERTY
In October 2002, the Company sold an exclusive patent license for its
hemodialysis split-tip catheter to Bard Access Systems, Inc. ("Bard"), a wholly
owned subsidiary of C.R. Bard, Inc., in exchange for $5 million upon the
execution of the agreement, with another $5 million due upon the attainment of
certain milestones no later than 18 months after signing, and a total of $6
million upon achievement of certain milestones by Bard through 2005. In June
2005, the Company received the final contingent payment of $3 million. In
connection with the sale, the Company also received a sublicense that permits
the Company to continue to manufacture and market hemodialysis catheters for the
treatment of chronic kidney disease.
On May 26, 2005, the Company entered into a global consortium agreement
(the "Consortium Agreement") with Nisshinbo Industries, Inc. ("Nisshinbo") for
the development, manufacturing, and sales of solar photovoltaic module
manufacturing equipment. Under the terms of the Consortium Agreement, Nisshinbo
purchased a license to manufacture
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and sell the Company's module manufacturing equipment for an upfront fee plus
additional royalties based on ongoing equipment sales over a ten-year period. In
addition, the Company and Nisshinbo agreed, but are not obligated, to pursue
joint research and development, product improvement activities and sales and
marketing efforts. On June 27, 2005, the Company received JPY 400,000,000
(approximately $3.7 million) from the sale of this permanent license. The
Company has determined the fair value of the license and royalty based on an
appraisal. As a result, a $3,319,600 gain has been recognized as a gain on sale
of license in the accompanying consolidated statement of operations for the year
ended December 31, 2005. The balance of $350,000 was determined to represent an
advanced royalty payment and was recorded as an advance on contracts in
progress. This amount is being accreted as royalty income over the ten year
license period on a straight line basis. Approximately $86,000 of royalty income
was recognized during the year ended December 31, 2005.
Through over 30 years of research and development, the Company has
accumulated extensive scientific and technological expertise. The Company
protects its technological advances as trade secrets, in part through
confidentiality agreements with employees, consultants and third parties. The
Company also seeks and enforces patents as appropriate. The Company currently
has 34 issued United States patents, one of which is jointly owned, eleven
patents pending in the United States, and five foreign patents pending, all of
which cover elements of its materials and processing technologies.
The United States government retains the right to obtain a patent on any
invention developed under government contracts as to which the Company does not
seek and obtain a patent, and may require the Company to grant a third party
license of such invention if steps to achieving practical application of the
invention have not been taken. The United States government also retains a
non-exclusive, royalty-free, non-transferable license to all technology
developed under government contracts, whether or not patented, for government
use, including use by other parties to United States government contracts.
Furthermore, the Company's United States government contracts prohibit the
Company from granting exclusive rights to use or sell any inventions unless the
grantee agrees that any product using the invention will be manufactured
substantially in the United States.
GOVERNMENT REGULATION OF MEDICAL PRODUCTS
The Company's hemodialysis catheters and accessory products require the
approval of the United States Food & Drug Administration ("FDA") prior to sale
within the United States. Sales within the European Union ("EU") require the CE
Mark certification and sales within Canada require a medical device license
issued by Health Canada.
Within the United States, the process requires that a pre-market
notification (the "510(k) Submission") be made to the FDA to demonstrate that
the device is as safe and effective, substantially equivalent to a legally
marketed device that is not subject to pre-market approval. FDA guidance
documents are used to prepare the 510(k) Submission. Applicants must compare
this device to one or more similar devices commercially available in the United
States, known as the "predicate" device(s), and make and support their
substantial equivalency claims. Applicants must submit descriptive data and
performance data to establish that the device is substantially equivalent to a
predicate device. In some instances, data from human clinical trials must also
be submitted in support of a 510(k) Submission. If so, the data must be
collected in a manner that conforms to specific requirements in accordance with
federal regulations. The FDA must issue a 510(k) letter order finding
substantial equivalence before commercial distribution can occur. Upon receipt
of the 510(k) application by the FDA, up to a 90-day response period is allowed
before the FDA must respond.
The Company currently holds all required approvals and certifications to
market its hemodialysis catheters and accessory products in the USA, EU and
Canada. The Company is committed to maintaining these critical approvals and
certifications and the stringent quality requirements applicable to the
development, testing, manufacturing, labeling, marketing and distribution of
these products.
GOVERNMENT REGULATION OF CONTRACTS
The Company's United States government contracts are subject to a large
number of federal regulations and oversight requirements. Compliance with the
array of government regulations requires extensive record keeping and the
maintenance of complex policies and procedures relating to all aspects of the
Company's business, as well as to work performed for the Company by any
subcontractors. The Company believes that it has put in place systems and
personnel to ensure compliance with all such federal regulations and oversight
requirements. All contracts with United States government agencies have been
audited by the government through December 2003. The governmental audits for the
years ended December 31, 2005 and 2004 have not yet been performed. The Company
has not incurred substantial losses as a result of these incurred cost audits.
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RESEARCH AND DEVELOPMENT
The Company's policy is to support as much of its research and development
as possible through government contract funding, which it recognizes as revenue.
Revenues from the Company's research and development contracts funded by the
United States government, and their percent of consolidated net sales and
revenues were $3,233,000, or $14%, and $2,837,000, or 16%, for the years ended
December 31, 2005 and 2004, respectively.
The Company's contracts with the United States government grant to the
Company proprietary rights in any technology developed pursuant to such
contracts and grant to the United States government a non-exclusive license to
utilize the technology for its benefit. The United States government retains the
right to obtain the patent on any inventions made under these contracts as to
which patent protection is not sought and obtained by the Company. The Company's
rights to technology developed under contracts with private companies vary,
depending upon negotiated terms.
The Company's internally funded research and development expenditures were
$1,346,000 and $1,406,000 for the years ended 2005 and 2004, respectively.
ENVIRONMENTAL QUALITY
Compliance with federal, state and local provisions regulating the
discharge of materials into the environment has not materially affected the
Company's capital expenditures, earnings or its competitive position. Currently
there are no lawsuits related to the environment or material administrative
proceedings pending against the Company.
EMPLOYEES
At December 31, 2005, the Company had approximately 118 employees, of whom
114 worked full time. The Company also from time to time employs part-time
employees and hires independent contractors. The Company's employees are not
represented by any collective bargaining agreement, and the Company has never
experienced a work stoppage. The Company believes that its employee relations
are good.
RISK FACTORS
In addition to the other information in this Form 10-KSB, the following
risk factors inherent in and affecting the business of the Company should be
considered. The descriptions in this Form 10-KSB contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
and the timing of certain events may differ materially 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
below and in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and above in "Business."
Overview
--------
We believe that our continued success will depend upon our ability to
create or acquire scientifically advanced technology, apply our technology
cost-effectively across product lines and markets, develop or acquire
proprietary products, attract and retain skilled development personnel, obtain
patent or other protection for our products, obtain required regulatory
approvals, manufacture and successfully market our products either directly or
through outside distributors and sales representatives and supply sufficient
inventory to meet customer demand. There can be no assurance that we will
realize financial benefit from our technology development and application
efforts, that we will continue to be successful in identifying, developing and
marketing new products or enhancing our existing products, or that products or
technologies developed by others will not render our products or technologies
non-competitive or obsolete.
WE HAVE EXPERIENCED LOSSES FROM OPERATIONS, BEFORE THE SALE OF CERTAIN
TECHNOLOGY LICENSES, FOR SEVERAL QUARTERS, AND WE EXPECT THAT OUR OPERATING
RESULTS WILL FLUCTUATE IN THE FUTURE.
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We have experienced losses from operations, before the sale of certain
technology licenses, in each of the past two full years. These losses have
resulted in an accumulated deficit of approximately $1.6 million as of December
31, 2005. While our revenues have steadily increased since fiscal 2000, they are
still not sufficient to cover our operating expenses, and we anticipate that we
may sustain future losses from operations as a result. Future fluctuations in
operating results may also be caused by a number of factors, many of which are
outside our control. Additional factors that could affect our future operating
results include the following:
o Availability of raw materials required to perform the manufacturing or
services we provide, particularly in the silicon wafer and solar cell
markets;
o Delays, postponements or cancellations of orders and shipments of our
products, particularly in our solar equipment and solar systems
businesses where individual order sizes may be large and thus may
represent a significant portion of annual revenue;
o Changes in our receipt of license fees, milestone payments, and
royalty payments relating to our intellectual property, some receipts
of which are based on the attainment of milestones and licensee sales
that are beyond our control;
o Loss of major customers, particularly as a result of customers
changing their own product designs in such ways as reduce or eliminate
the need for the manufacturing services we provide;
o Reductions in the selling prices of our products and services as a
result of competitive pressures;
o Delays in introducing and gaining physician acceptance for new
products and product improvements, particularly in our biomedical
products business;
o Disruption in the distributor sales channels by which we bring our
biomedical products to market;
o Variation in capacity, capacity utilization and manufacturing yields
within the third party medical contract manufacturing service
providers that constitute the supply chain for our biomedical products
that, in turn, cause variation in our ability to timely ship our
products;
o Increased competition from current and future competitors;
o Variation in the timing of customer orders and inventory levels at our
customers, particularly within our biomedical manufacturing services
business; and
o Termination of existing grants with government agencies or delays in
funding of grants awarded.
If we are unable to reach and sustain profitability from our operations, we
risk depleting our working capital balances and our business may not continue as
a going concern. In addition, we may need to raise additional capital in order
to sustain our operations. There can be no assurance that we will be able to
raise such funds if they are required.
OUR ABILITY TO EXPAND REVENUE AND SUSTAIN PROFITABILITY DEPENDS SUBSTANTIALLY ON
THE STABILITY AND GROWTH OF THE VARIOUS MARKETS FOR OUR PRODUCTS AND SERVICES.
SHOULD WE BE UNABLE TO EXPAND OUR REVENUE, OUR ABILITY TO REACH AND SUSTAIN
PROFITABILITY WOULD BE IMPAIRED.
o The world demand for photovoltaic manufacturing equipment depends on
sustained expansion in the demand for decentralized power sources,
especially in developing countries, and on domestic and foreign
government funding of initiatives to invest in solar energy as an
alternative to the burning of fossil fuels and other energy production
methods. There can be no assurance that government funding for such
initiatives will be available, or that solar energy will prove to be a
cost-effective alternative to other energy sources and thus gain
acceptance where traditional energy sources continue to be available.
Should demand for solar photovoltaic power sources not increase,
demand for new photovoltaic manufacturing equipment would not
materialize and our business would be adversely affected.
o Most of our research and development revenues are generated by
contracts with the United States government. There can be no assurance
that the United States government will fund our research and
development projects at the same level as it has in the past. Should
federal research funding priorities change, and should we be unable to
adjust our research focus to reflect the shift, our business could be
adversely affected.
o Our solar systems business unit is dependent on continued and
increased order activity from the development of other industrial and
residential sales opportunities. Should we be unable to capture a
significant stream of new solar system installation projects from a
more diverse group of project sponsors, our solar systems business
could be adversely affected.
7
o The growth of our biomedical products business depends on increased
physician acceptance of our hemodialysis catheter products, our
ability to manage the production of higher unit volumes of catheter
products and our ability to effectively distribute those products.
Should our hemodialysis catheters not gain market acceptance or should
we not be able to meet demand for our products, our biomedical
products business could be adversely affected.
o The growth of our biomedical services business depends upon our
customers' ability to serve demand for the end-use items, such as
orthopedic prostheses, on which our services are performed and thus is
substantially beyond our control.
o Our ability to expand our biomedical business depends upon our ability
to introduce new products and services. The marketing of new
biomedical products requires pre-approval of government regulatory
authorities, the completion of which can be lengthy and more costly
than originally planned.
o The growth of our optoelectronics business depends upon growth in
demand for compound semiconductor wafers from manufacturers of
microwave and optoelectronic circuits and sensors that, in turn, are
used in diverse biomedical, telecommunications and aerospace products.
Should these end-use markets not experience anticipated levels of
growth and, in the case of telecommunications uses, experience a
recovery from currently depressed business levels, our optoelectronics
business could be adversely affected.
WE HAVE NOT CONSISTENTLY COMPLIED WITH NASDAQ'S MARKETPLACE RULES FOR CONTINUED
LISTING, WHICH EXPOSES US TO THE RISK OF DELISTING FROM THE NASDAQ NATIONAL
MARKET.
Our stock is currently listed on the Nasdaq National Market. In August
2003, we received notice from Nasdaq that the Company was not in compliance with
Nasdaq's Marketplace Rules as a result of filing its second quarter Form 10-QSB
prior to the completion of the review by the Company's independent auditors and,
accordingly, was subject to possible delisting. The Company subsequently filed
all reports and was able to maintain its continued listing on the Nasdaq
National Market.
In April 2005, the Company received notice from Nasdaq that it was not in
compliance with the minimum stockholders' equity level of $10,000,000 required
for continued listing on the Nasdaq National Market. Following the submission of
a plan of compliance and making later filings showing this deficiency no longer
existed, Nasdaq subsequently notified the Company that it had achieved
compliance with the $10,000,000 stockholders' equity threshold during 2005 and
the matter was closed. However, as of December 31, 2005, the Company was not in
compliance with the minimum stockholders' equity threshold. As a result, the
Company did not meet Standard No. 1 for continued listing on the Nasdaq National
Market. However, the Company believes that it does meet Standard No. 2 for
continued listing on the Nasdaq National Market as the market value of its
listed securities currently exceeds $50,000,000 and it meets all of the other
requirements of Standard No. 2. In order to remain in compliance with Standard
No. 2, the Company's market value of listed securities cannot fall below
$50,000,000 for ten consecutive trading days at any point. If the Company fails
to maintain compliance with these rules and its common stock is delisted from
the Nasdaq National Market, there could be a number of negative implications,
including reduced liquidity in the common stock as a result of the loss of
market efficiencies associated with the Nasdaq National Market, the loss of
federal preemption of state securities laws, the potential loss of confidence by
suppliers, customers and employees, as well as the loss of analyst coverage and
institutional investor interest, fewer business development opportunities and
greater difficulty in obtaining financing.
OUR BUSINESS RELIES IN PART ON A LIMITED NUMBER OF CUSTOMERS, AND UNFAVORABLE
DEVELOPMENTS IN RELATION TO A MAJOR CUSTOMER MAY ADVERSELY AFFECT OUR REVENUES,
OPERATING RESULTS AND CASH FLOWS.
While no customer accounted for more than 10% of consolidated net sales and
revenues in fiscal 2005, in the past we have had such customers and may have
them again in the future. If an unfavorable development were to occur with
respect to any significant customer it would likely have a material adverse
affect on our business, financial condition, operating results, cash flows and
future prospects.
WE SELL OUR PRODUCTS AND SERVICES AGAINST ESTABLISHED COMPETITORS, AND ENTITIES
NOW OPERATING IN RELATED MARKETS MAY ENTER OUR MARKETS. SOME OF OUR CURRENT AND
POTENTIAL COMPETITORS HAVE GREATER FINANCIAL AND TECHNICAL RESOURCES THAN OURS.
SHOULD WE BE UNABLE TO OFFER OUR CUSTOMERS PRODUCTS AND SERVICES THAT REPRESENT
ATTRACTIVE PRICE VERSUS VALUE, OUR BUSINESS WOULD SUFFER.
8
Although we believe that there are considerable barriers to entry into the
markets we serve, including a significant investment in specialized capital
equipment, product design and development, and the need for a staff with
sophisticated scientific and technological knowledge, there can be no assurance
that new or existing entities would not seek to enter our markets or that we
would be able to compete effectively against such entities.
o In our biomedical products business, our hemodialysis catheter
products directly compete against the already established product
offerings of larger competitors. Although we believe that our catheter
products offer significant advantages, widespread physician acceptance
of these products in preference to the more established products of
competitors cannot be assured.
o In our optoelectronics business, our manufacturing services may
compete against the internal manufacturing capabilities of our
customers. Although we believe that we offer significant advantages in
terms of timely response, reduced total cost and reduced capital
investment over the captive fabrication facilities of our customers,
customers may elect to maintain their internal capabilities despite
economic incentives to outsource these services from us.
IF WE ARE UNABLE TO DEVELOP AND INTRODUCE NEW PRODUCTS SUCCESSFULLY OR TO
ACHIEVE MARKET ACCEPTANCE OF OUR NEW PRODUCTS, OUR OPERATING RESULTS WOULD BE
ADVERSELY AFFECTED.
We compete in markets characterized by technological advances and
improvements in manufacturing efficiencies. Our ability to operate profitably
depends in large part on our timely access to, or development of, technological
advances, and on our ability to use those advances to improve existing products,
develop new products and manufacture those products efficiently. There can be no
assurance that we will realize financial benefit from our development programs,
will continue to be successful in identifying, developing and marketing new
products or enhancing our existing products, or that products or technologies
developed by others will not render our products or technologies non-competitive
or obsolete. The failure to introduce new or enhanced products on a timely and
cost competitive basis, or to attain market acceptance for commercial products,
could have a material adverse effect on our business, results of operations or
financial condition.
IF WE ARE NOT SUCCESSFUL IN PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS, OUR
ABILITY TO COMPETE MAY BE HARMED.
We rely on a combination of patent, copyright, trademark and trade secret
protections as well as confidentiality agreements and other methods, to protect
our proprietary technologies and processes. For example, we enter into
confidentiality agreements with our employees, consultants and business
partners, and control access to and distribution of our proprietary information.
We have been issued 34 United States patents, one of which is jointly owned, and
have a number of pending patent applications. However, despite our efforts to
protect our intellectual property, we cannot assure that:
o The steps we take to prevent misappropriation or infringement of our
intellectual property will be successful;
o Any existing or future patents will not be challenged, invalidated or
circumvented;
o Any pending patent applications or future applications will be
approved;
o Others will not independently develop similar products or processes to
ours or design around our patents; or
o Any of the measures described above would provide meaningful
protection.
A failure by us to meaningfully protect our intellectual property could
have a material adverse effect on our business, financial condition, operating
results and ability to compete. In addition, effective patent, copyright,
trademark and trade secret protection may be unavailable or limited in certain
countries.
WE DEPEND ON OTHERS, PARTICULARLY ON AGENCIES OF THE UNITED STATES GOVERNMENT,
FOR FUNDING OUR RESEARCH AND DEVELOPMENT EFFORT.
Substantially all of our research and development work is funded by
agencies of the United States government either directly or via their
contractors. Loss of outside funding may materially adversely affect our ability
to further develop our proprietary technologies and to apply these technologies
to our current products and products under development. If we are unable to
maintain our current level of such funding for any reason, we would need to
generate funds for such research from other sources, reduce our research and
development effort or increase our internal funding for research and
development. An increase in internally funded research and development would
have a negative impact on our profitability.
9
Additionally, the process of bidding for, obtaining, retaining and
performing United States government contracts is subject to a large number of
United States government regulations and oversight requirements. Compliance with
these government regulations requires extensive record keeping and the
maintenance of complex policies and procedures relating to all aspects of our
business, as well as to work performed for us by any subcontractors. Any failure
to comply with applicable regulations, or to require our subcontractors so to
comply, could result in a variety of adverse consequences, ranging from remedial
requirements to termination of contracts, reimbursement of fees, reduction of
fees on a going forward basis and prohibition from obtaining future United
States government contracts. While we believe that we have in place systems and
personnel to ensure compliance with all United States government regulations
relating to contracting, we cannot assure that we will at all times be in
compliance or that any failure to comply will not have a material adverse effect
on our business, results of operations or financial condition.
THE U.S. GOVERNMENT HAS CERTAIN RIGHTS RELATING TO OUR INTELLECTUAL PROPERTY.
The United States government retains the right to obtain a patent on any
invention developed under government contracts as to which the Company does not
seek and obtain a patent, and may require the Company to grant a third party
license of such invention if steps to achieving practical application of the
invention have not been taken. The United States government also retains a
non-exclusive, royalty-free, non-transferable license to all technology
developed under government contracts, whether or not patented, for government
use, including use by other parties to United States government contracts.
Furthermore, the Company's United States government contracts prohibit the
Company from granting exclusive rights to use or sell any inventions unless the
grantee agrees that any product using the invention will be manufactured
substantially in the United States.
WE DEPEND ON THIRD-PARTY CONTRACTORS TO MANUFACTURE SUBSTANTIALLY ALL OF OUR
CURRENT BIOMEDICAL PRODUCTS.
We depend on third-party subcontractors in the U.S. for the manufacturing,
assembly and packaging of our biomedical products. Any difficulty in obtaining
parts or services from these subcontractors could affect our ability to meet
scheduled product deliveries to customers, which could in turn have a material
adverse effect on our customer relationships, business and financial results.
Several significant risks are associated with reliance on third-party
subcontractors, including:
o The lack of assured product supply and the potential for product
shortages;
o Reduced control over inventory located at contractors' premises;
o Limited control over delivery schedules, manufacturing yields,
production costs;
o Direct control over product quality; and
o The temporary or permanent unavailability of, or delays in obtaining,
access to key process technologies.
OUR SUCCESS DEPENDS ON OUR ABILITY TO HIRE AND RETAIN QUALIFIED TECHNICAL
PERSONNEL, AND IF WE ARE UNABLE TO DO SO, OUR PRODUCT DEVELOPMENT EFFORTS AND
CUSTOMER RELATIONS WILL SUFFER.
Our products require sophisticated manufacturing, research and development,
marketing and sales, and technical support. Our success depends on our ability
to attract, train and retain qualified technical personnel in each of these
areas. Competition for personnel in all of these areas is intense and we may not
be able to hire or retain sufficient personnel to achieve our goals or support
the anticipated growth in our business. The market for the highly trained
personnel we require is very competitive, due to the limited number of people
available with the necessary technical skills and understanding of our products
and technology. If we fail to hire and retain qualified personnel, our product
development efforts and customer relations will suffer.
WE ARE SUBJECT TO ENVIRONMENTAL LAWS AND OTHER LEGAL REQUIREMENTS THAT HAVE THE
POTENTIAL TO SUBJECT US TO SUBSTANTIAL LIABILITY AND INCREASE OUR COSTS OF DOING
BUSINESS.
Our properties and business operations are subject to a wide variety of
federal, state, and local environmental, health and safety laws and other legal
requirements, including those relating to the storage, use, discharge and
disposal of toxic, volatile or otherwise hazardous substances used in our
manufacturing processes. We cannot assure that these legal requirements will not
impose on us the need for additional capital expenditures or other requirements.
If we fail to obtain required permits or otherwise fail to operate within these
or future legal requirements, we may be required to pay substantial penalties,
suspend our operations or make costly changes to our manufacturing processes or
facilities. Although we believe that we are in compliance and have complied with
all applicable legal requirements, we may also be required to incur additional
costs to comply with current or future legal requirements.
10
OUR INTERNATIONAL SALES SUBJECT US TO RISKS THAT COULD ADVERSELY AFFECT OUR
REVENUE AND OPERATING RESULTS.
Sales to customers located outside the U.S. have historically accounted for
a significant percentage of our revenue (approximately 33% in 2005) and we
anticipate that such sales will continue to be a significant percentage of our
revenue. International sales involve a variety of risks and uncertainties,
including risks related to:
o Reliance on strategic alliance partners such as representatives and
licensees;
o Compliance with changing foreign regulatory requirements and tax laws;
o Reduced protection for intellectual property rights in some countries;
o Longer payment cycles to collect accounts receivable in some
countries;
o Political instability;
o Economic downturns in international markets; and
o Changing restrictions imposed by United States export laws.
Failure to successfully address these risks and uncertainties could
adversely affect our international sales, which could in turn have a material
and adverse effect on our results of operations and financial condition.
THE USE OF OUR CATHETER AND OTHER MEDICAL RELATED PRODUCTS ENTAILS A RISK OF
PHYSICAL INJURY; THE DEFENSE OF CLAIMS ARISING FROM SUCH RISK MAY EXCEED OUR
INSURANCE COVERAGE AND DISTRACT OUR MANAGEMENT.
The use of orthopedic and other medical devices may entail a risk of
physical injury to patients. To the extent we have been involved in the design
and manufacturing of these products, we may be exposed to potential product
liability and other damage claims. Furthermore, the use of our photovoltaic
module manufacturing equipment could result in operator injury. Except for those
cases brought against us in which it is alleged that we engaged in the
manufacture and sale of defective heart valves with other defendants, no other
claims of product liability or other damages have been initiated against us. We
maintain product liability and umbrella insurance coverage; however, there can
be no assurance that any product liability claim assessed against us would not
exceed our insurance coverage, or that insurance coverage would continue to be
available. While we typically obtain agreements of indemnity from manufacturers
of biomedical products for which we provide manufacturing services, there can be
no assurance that any such indemnity agreements will be enforceable or that such
manufacturers will have adequate funds to meet their obligations under such
agreements. The cost of defending a product liability, negligence or other
action, and/or assessment of damages in excess of insurance coverage, could have
a material adverse effect on our business, results of operations, or financial
condition.
OUR COMPANY IS SUBJECT TO CONTROL BY PRINCIPAL STOCKHOLDER.
Roger G. Little, the founder, Chairman of the Board, Chief Executive
Officer and President of the Company, controls approximately 31% of the
Company's outstanding Common Stock. As a result, Mr. Little is in a position to
exert significant influence over actions of the Company which require
stockholder approval and generally to direct the affairs of the Company,
including potential acquisitions, sales and changes in control of the Company.
WE DO NOT PAY DIVIDENDS AND WE MAY NOT PAY DIVIDENDS IN THE FUTURE.
We have paid no cash dividends since the Company's inception. We anticipate
retaining any future earnings for reinvestment in operations and do not
anticipate that dividends will be paid in the foreseeable future. Thus, the
return on investment should be expected to depend on changes in the market price
of our common stock.
THE MARKET PRICE FOR OUR COMMON STOCK HAS BEEN VOLATILE AND FUTURE VOLATILITY
COULD CAUSE THE VALUE OF INVESTMENTS IN THE COMPANY TO FLUCTUATE.
Our stock price has experienced significant volatility. While our revenues
have increased since 2000, we expect that uncertainty regarding demand for our
products will cause our stock price to continue to be volatile. In addition, the
value of your investment could decline due to the impact of any of the following
factors, among others, upon the market price of our common stock:
o Additional changes in investment analysts' estimates of our revenues
and operating results;
o Our failure to meet investment analysts' performance expectations; and
o Changes in market valuations of other companies in the biomedical,
alternative energy or semiconductor industries.
11
In addition, many of the risks described elsewhere in this section could
materially and adversely affect our stock price, as discussed in those risk
factors. U.S. financial markets have recently experienced substantial price and
volume volatility. Fluctuations such as these have affected and are likely to
continue to affect the market price of our common stock.
ITEM 2. DESCRIPTION OF PROPERTY
-------------------------------
Our corporate headquarters are located at One Patriots Park, Bedford,
Massachusetts. This 77,000 square foot facility is leased and contains our
administrative offices, sales and marketing offices, research and development
facilities and the manufacturing facilities of the Company's biomedical and
solar equipment and systems businesses. The lease expires in November 2007. We
lease an approximately 90,000 square foot facility located at 25 Sagamore Park
Road, Hudson, New Hampshire that contains a semiconductor wafer growth and
fabrication facility and administrative offices used primarily by our
Optoelectronics business unit including Bandwidth Semiconductor. The lease
expires in May 2008. In addition, the Company leased approximately 16,750 square
feet of factory and warehouse space located at the Chicago Center for Green
Technology, 445 North Sacramento Boulevard, Chicago, Illinois, that contained
administrative offices, sales and marketing offices and manufacturing facilities
for its solar systems business including Spire Solar Chicago. The lease
terminated in November 2005 and the Chicago operation was relocated to 2,115 sq.
ft. at 629 West Cermak, Chicago, Illinois. The Company believes that its
facilities are suitable for their present intended purposes and adequate for the
Company's current level of operations.
ITEM 3. LEGAL PROCEEDINGS
-------------------------
From time to time, the Company is subject to legal proceedings and claims
arising from the conduct of its business operations. The Company does not expect
the outcome of these proceedings, either individually or in the aggregate, to
have a material adverse effect on its financial position, results of operations,
or cash flows.
The Company has been named as a defendant in 58 cases filed from August
2001 to July 2003 in state courts in Texas by persons claiming damages from the
use of allegedly defective mechanical heart valves coated by a process licensed
by the Company to St. Jude Medical, Inc., the valve manufacturer, which has also
been named as a defendant in the cases. In June 2003, a judge in a state court
in Harris County, Texas agreed to grant the Company's motion for summary
judgment based upon the principle of federal preemption with regard to 57 of
those cases and to order that the cases against the Company be dismissed with
prejudice. An order to this effect was signed in late July 2003. The remaining
case is still pending, and due to aspects of its fact situation is not subject
to the principle of federal preemption. From August 2003 to date, a total of
seven new cases were filed against the Company in courts in Harris County.
Activity with regard to these cases is likely to occur only after the
disposition of the original 57 cases is finally settled. The plaintiffs whose
cases were dismissed have filed appeals with the Texas appellate court. In June
2005, the Texas Court of Appeals upheld the summary judgment granted by the
lower court. Attorneys for the Company anticipate that the plaintiffs may file a
motion for rehearing, and an appeal with the Texas Supreme Court is also
possible. Attorneys who represent the Company with respect to these cases in
Texas do not believe at this time that the actions of a federal district court
judge in Minnesota in denying St. Jude Medical's request for summary judgment
will materially affect the Company's position in the Texas complaints.
During the second quarter of 2005 a suit was filed by Arrow International,
Inc. against Spire Biomedical, Inc., a wholly owned subsidiary of the Company,
alleging patent infringement by the Company. The complaint claims one of the
Company's catheter products induces and contributes to infringement when medical
professionals insert it. The Company has responded to the complaint denying all
allegations and has filed certain counterclaims. The Company intends to
vigorously defend this matter. The parties are engaged in the discovery process.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
No matters were submitted to a vote of the Company's security holders in
the fourth quarter of 2005.
12
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
----------------------------------------------------------------
MARKET INFORMATION
The Company's Common Stock, $0.01 par value ("Common Stock"), is traded on
the Nasdaq National Market under the symbol "SPIR." The following chart sets
forth the high and low bid prices for the Common Stock for the periods shown:
High Bid Low Bid
-------- -------
2005
First Quarter $ 6.18 $ 4.32
Second Quarter 8.99 3.68
Third Quarter 11.95 6.28
Fourth Quarter 11.24 6.56
2004
First Quarter $ 6.57 $ 4.51
Second Quarter 7.62 4.80
Third Quarter 5.79 3.95
Fourth Quarter 5.80 4.11
These prices do not reflect retail mark-ups, mark-downs or commissions and
may not reflect actual transactions. The closing price of the Common Stock on
March 1, 2006 was $9.84, and on that date, there were 192 stockholders of
record. The number of holders does not include individuals or entities who
beneficially own shares but whose shares are held of record by a broker or
clearing agency, but does include each such broker or clearing agency as one
recordholder.
DIVIDENDS
The Company did not pay any cash dividends during 2005 or 2004 and
currently does not intend to pay dividends in the foreseeable future so that we
may reinvest our earnings in the development of our business. The payment of
dividends in the future will be at the discretion of the Board of Directors.
ITEM 6. 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 WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), WHICH
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO OUR
FUTURE PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THESE STATEMENTS MAY BE
IDENTIFIED BY THE USE OF WORDS SUCH AS "MAY", "COULD", "WOULD", "SHOULD",
"WILL", "EXPECTS", "ANTICIPATES", "INTENDS", "PLANS", "BELIEVES", "ESTIMATES",
AND SIMILAR EXPRESSIONS. 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 FACTORS DESCRIBED BELOW AND
ABOVE IN "RISK FACTORS" AND "BUSINESS." THE FOLLOWING DISCUSSION AND ANALYSIS OF
THE COMPANY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN
LIGHT OF THOSE FACTORS AND IN CONJUNCTION WITH, THE COMPANY'S ACCOMPANYING
CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO.
OVERVIEW
Spire Corporation (the "Company") develops, manufactures and markets
highly-engineered products and services in four principal business areas: solar
equipment, solar systems, biomedical and optoelectronics bringing to bear
expertise in materials technologies across all four business areas, discussed
below.
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 approximately
170 factories in 43 countries.
13
In the solar systems area, the Company provides custom and building
integrated photovoltaic modules, stand alone emergency power backup and electric
power grid-connected distributed power generation systems employing photovoltaic
technology developed by the Company.
In the 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 optoelectronics area, the Company provides compound semiconductor
foundry services on a merchant basis to customers involved in
biomedical/biophotonic instruments, telecommunications and defense applications.
Services include compound semiconductor wafer growth, other thin film processes
and related device processing and fabrication services. The Company also
provides materials testing services and performs services in support of
sponsored research into practical applications of optoelectronic technologies.
Operating results will depend upon product mix, as well as the timing of
shipments of higher priced products from the Company's solar equipment line and
delivery of solar systems. Export sales, which amounted to 33% of net sales and
revenues for 2005, continue to constitute a significant portion of the Company's
net sales and revenues.
RESULTS OF OPERATIONS
The following table sets forth certain items as a percentage of net sales
and revenues for the periods presented:
Year Ended December 31,
-----------------------
2005 2004
-------- --------
Net sales and revenues 100% 100%
Cost of sales and revenues (85) (85)
-------- --------
Gross profit 15 15
Selling, general and administrative expenses (38) (47)
Internal research and development expenses (6) (8)
Gain on extinguishment of purchase commitment 3 --
Gain on sales of licenses 28 18
-------- --------
Earnings (loss) from operations 2 (22)
Other expense, net (2) (2)
-------- --------
Earnings (loss) before income taxes -- (24)
Income tax expense (benefit) -- --
-------- --------
Net earnings (loss) -- % (24)%
======== ========
OVERALL
The Company's total net sales and revenues for the year ended December 31,
2005 ("2005") increased 30% compared to the year ended December 31, 2004
("2004"). The increase was attributable to increases within all business units.
SOLAR BUSINESS UNIT
Sales in the Company's solar business unit increased 57% during 2005 as
compared to 2004 primarily due to a 289% increase in solar equipment sales
resulting from the volume and timing of the delivery of equipment partially
offset by a 47% decrease in solar systems sales.
BIOMEDICAL BUSINESS UNIT
Revenues of the Company's biomedical business unit increased 19% during
2005 as compared to 2004 as a result of a 47% increase in revenue from Spire's
line of hemodialysis catheters and a 34% increase in revenue from Spire's
research and development activities.
14
OPTOELECTRONICS BUSINESS UNIT
Sales in the Company's optoelectronics business unit increased 3% during
2005.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
---------------------------------------------------------------------
Net Sales and Revenues
----------------------
The following table categorizes the Company's net sales and revenues for
the periods presented:
Year Ended December 31, Increase/(Decrease)
------------------------- -------------------
2005 2004 $ %
----------- ----------- -----------
Contract research, service and
license revenues $11,151,000 $10,273,000 $ 878,000 9%
Sales of goods 11,271,000 7,005,000 4,266,000 61%
----------- ----------- -----------
Net sales and revenues $22,422,000 $17,278,000 $ 5,144,000 30%
=========== =========== ===========
The 9% increase in contract research, service and license revenues for the
year ended December 31, 2005 as compared to the year ended December 31, 2004 is
primarily attributable to an increase in research and development activities.
Revenues from the Company's research and development activities increased 34% in
2005 as compared to 2004 primarily due to an increase in the number and dollar
value of contracts associated with government and third party funded research
and development.
The 61% increase in sales of goods for the year ended December 31, 2005 as
compared to the year ended December 31, 2004 was primarily due to an increase in
solar equipment revenues and, to a lesser extent, an increase in biomedical
product sales. These increases were partially offset by a decrease in solar
system revenue. Solar equipment revenues increased 289% in 2005 as compared to
2004 due to the volume and timing of the delivery of equipment. The 2005 results
include the sale of four photovoltaic module production lines in 2005 versus
none in 2004. Biomedical product sales increased 47% in 2005 as compared to 2004
as a result of increased demand for the Company's line of hemodialysis
catheters. Solar systems revenues decreased 47% in 2005 as compared to 2004 due
to a decline in customer orders primarily resulting from decreased funding under
agreements with Commonwealth Edison, a subsidiary of Exelon Corporation and the
City of Chicago. These agreements terminated on December 31, 2004 and December
15, 2003, respectively.
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:
Years Ended December 31, Increase/(Decrease)
------------------------------------- -------------------
2005 % 2004 % $ %
----------- --- ----------- --- -----------
Cost of contract research,
services and licenses $ 8,779,000 79% $ 8,264,000 80% $ 515,000 6%
Cost of goods sold 10,322,000 92% 6,355,000 91% 3,967,000 62%
----------- ----------- -----------
Net cost of sales and revenues $19,101,000 85% $14,619,000 85% $ 4,482,000 31%
=========== =========== ===========
The $515,000 (6%) increase in cost of contract research, services and
licenses in 2005 is primarily due to a 45% increase in the cost of the Company's
research and development activities associated with its 34% increase in revenues
and a 10% increase in Bandwidth costs associated with its 3% increase in
revenues. Bandwidth's costs increased more than its revenues primarily due to
product mix. These increases were partially offset by an 11% decrease in the
cost of the Company's biomedical processing services versus only a 1% decrease
in revenues. Cost of contract research, services and licenses as a percentage of
revenue decreased 1% primarily due to margin improvement within the biomedical
processing services product line partially offset by lower margins within the
biomedical research and development product line and Bandwidth segment.
The $3,967,000 (62%) increase in cost of goods sold is primarily due to an
186% increase in the Company's solar equipment direct costs resulting from its
289% increase in revenues and, to a lesser extent, a 30% increase in the
15
biomedical products unit's direct costs resulting from its 47% increase in
revenues. These increases were partially offset by a 21% decrease in the cost of
the Company's solar systems business resulting from its 47% decrease in
revenues. The 1% increase in cost of goods sold as a percentage of revenue is
primarily the result of lower than expected contribution margins in the solar
systems segment and a higher percentage of solar equipment sales, which have
historically generated lower margins. These effects were substantially offset by
improved contribution margins in the Company's solar equipment and biomedical
products group.
OPERATING EXPENSES
The following table categorizes the Company's operating expenses for the
periods presented, stated in dollars and as a percentage of sales and revenues:
Years Ended December 31, Increase/(Decrease)
-------------------------------- -------------------
2005 % 2004 % $ %
---------- --- ---------- --- ---------- ---
Selling, general and administrative $8,539,000 38% $8,097,000 47% $ 442,000 5%
Internal research and development 1,346,000 6% 1,406,000 8% (60,000) (4%)
---------- ---------- ----------
Operating expenses $9,885,000 44% $9,503,000 55% $ 382,000 4%
========== ========== ==========
INTERNAL RESEARCH AND DEVELOPMENT EXPENSES
The decrease in internal research and development expenses in 2005 versus
2004 was primarily due to decreased development efforts within the solar
equipment and biomedical services groups. These decreases were substantially
offset by increased development efforts within the biomedical products group.
The decrease in internal research and development expenses as a percentage of
sales and revenues was primarily due to the increase in sales and revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The increase in selling, general and administrative expenses in 2005 versus
2004 was due primarily to increased cost associated with sales and marketing
efforts of the Company's Bandwidth, biomedical products and solar equipment
product lines due to the 30% increase in net sales and revenues and increased
building and building related expense. These increases were partially offset by
decreased cost associated with general business insurance. The decrease in
selling, general and administrative expenses as a percentage of sales and
revenues was primarily due to the increase in sales and revenues partially
offset by the dollar increase in selling, general and administrative costs
discussed above.
OTHER EXPENSE, NET
The Company earned $74,000 and $52,000 of interest income for the years
ended December 31, 2005 and 2004, respectively. The Company incurred interest
expense of $274,000 and $328,000 for the years ended December 31, 2005 and 2004,
respectively. The interest expense is primarily associated with interest
incurred on capital leases associated with the semiconductor foundry.
For the year ended December 31, 2005, the Company recorded $104,000 of
currency transaction loss related to the conversion of a Japanese Yen account
into U.S. dollars.
INCOME TAXES
The Company did not record an income tax provision for years ended December
31, 2005 and 2004 as earnings (loss) before income taxes is expected to be
substantially offset by net operating loss carryforwards of approximately $6.2
million. A valuation allowance was provided against the deferred tax assets
generated in 2005 and 2004 due to uncertainty regarding the realization of the
net operating loss in the future. At December 31, 2005, the Company had gross
deferred tax assets of $3,372,000, against which a valuation allowance of
$2,182,000 had been applied. Gross deferred tax liabilities of $190,000 were
applied against the net deferred tax asset.
NET EARNINGS (LOSS)
The Company reported net earnings for the year ended December 31, 2005 of
$44,000, compared to a net loss of $4,120,000 in 2004. The increase in net
earnings in 2005 versus 2004 is primarily due to the $3.3 million gain on the
sale
16
of a license to the Company's solar technology and, to a lesser extent, the 30%
increase in sales and revenues and the $593,000 gain on extinguishment of
purchase commitment. These increases were partially offset by the increase in
selling, general and administrative expenses discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Increase
December 31, December 31, -----------------
2005 2004 $ %
------------ ------------ ---------- ----
Cash and cash equivalents $3,630,000 $3,337,000 $ 293,000 9%
Working capital 5,270,000 3,996,000 1,274,000 32%
Cash and cash equivalents increased primarily due to the proceeds from sale
of licenses and proceeds from the exercise of stock options substantially offset
by cash used in operations and, to a lesser extent, investments in property and
equipment and payments on capital leases.
The Company has historically funded its operating cash requirements using
operating cash flow and proceeds from the sale and licensing of technology. The
Company's liquidity position benefitted as a result of cash receipts of
$3,000,000 in both 2005 and 2004, arising from the sale of a hemodialysis patent
license to Bard Access Systems. The Company received its final $3,000,000
payment under this arrangement in June 2005. In addition, the Company received
JPY 400,000,000 (approximately $3.7 million) in June 2005 from the sale of a
license to the Company's solar technology.
The Company has a $2,000,000 Loan Agreement (the "Agreement") with Citizens
Bank of Massachusetts (the "Bank"). The Agreement provides Standby Letter of
Credit guarantees for certain foreign and domestic customers, which are 100%
secured with cash. At December 31, 2005, the Company had $926,000 of restricted
cash associated with outstanding Letters of Credit. Standby Letters of Credit
under this Agreement bear interest at 1%. The Agreement also provides the
Company with the ability to convert to a $2,000,000 revolving line of credit,
based upon eligible accounts receivable and certain conversion covenants. Loans
under this revolving line of credit bear interest at the Bank's prime rate as
determined plus 1/2% (7.75% at December 31, 2005.) At December 31, 2005, the
Company had not exercised its conversion option and no amounts were outstanding
under the revolving line of credit. A commitment fee of .25% is charged on the
unused portion of the borrowing base. On June 29, 2005, the Company entered into
a Second Amendment to extend the expiration date of the Agreement to June 27,
2006. The Agreement contains covenants including certain financial reporting
requirements. At December 31, 2005, the Company was in compliance with its
financial reporting requirements and cash balance covenants.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to pay amounts due. The Company
actively pursues collection of past due receivables as the circumstances
warrant. Customers are contacted to determine the status of payment and senior
accounting and operations management are included in these efforts as is deemed
necessary. A specific reserve will be established for past due accounts over 60
days and over a specified amount, when it is probable that a loss has been
incurred and the Company can reasonably estimate the amount of the loss. The
Company does not record an allowance for government receivables and invoices
backed by letters of credit as realizeability is reasonably assured. Bad debts
are written off against the allowance when identified. There is no dollar
threshold for account balance write-offs. While rare, a write-off is only
recorded when all efforts to collect the receivable have been exhausted and only
in consultation with the appropriate business line manager.
To date, there are no material commitments by the Company for capital
expenditures. At December 31, 2005, the Company's accumulated deficit was
$1,605,000, compared to accumulated deficit of $1,649,000 as of December 31,
2004.
The Company has incurred significant operating losses in 2005 and 2004.
Loss from operations, before gain on sales of licenses and extinguishment of
purchase commitment, were $6.6 million and $6.8 million in 2005 and 2004,
respectively. These losses from operations have resulted in an operating cash
loss (net income (loss) excluding gain on sales of licenses plus or minus
non-cash adjustments) of approximately $4.5 million in each of 2005 and 2004,
respectively. The Company has funded these operating cash losses from cash
receipts of $6.7 million and $3.0 million in 2005 and 2004, respectively,
related to the sale of certain licenses to its medical products and solar
technologies. As of December 31, 2005, the Company had cash and cash equivalents
of $3.6 million. While the Company believes it has inherent assets and
technology that it could sell or license in the near term, there is no guarantee
that the Company would be able to sell or license those assets on a timely basis
and at appropriate values that would allow the Company to continue to fund its
operating losses. The Company has developed several plans to mitigate cash
losses, if required, including potential cost reduction efforts and outside
financing. As a result, the Company believes it has sufficient resources to
continue as a going concern for the foreseeable future.
17
CONTRACTUAL OBLIGATIONS, COMMERCIAL COMMITMENTS AND OFF-BALANCE SHEET
ARRANGEMENTS.
The following table summarizes the Company's gross contractual
obligations at December 31, 2005 and the maturity periods and the effect that
such obligations are expected to have on its liquidity and cash flows in future
periods:
Payments Due by Period
-------------------------------------------------------------
Less than 2 - 3 4 - 5 More Than
Contractual Obligations Total 1 Year Years Years 5 Years
---------------------------------- ---------- ---------- ---------- ---------- ----------
PURCHASE OBLIGATIONS $ 410,000 $ 384,000 $ 26,000 $ -- $ --
CAPITAL LEASES:
Unrelated party capital lease $ 496,000 $ 496,000 $ -- $ -- $ --
Related party capital lease 2,468,000 870,000 1,598,000 -- --
OPERATING LEASES:
Unrelated party operating leases $ 283,000 $ 118,000 $ 136,000 $ 29,000 $ --
Related party operating lease 2,380,000 1,242,000 1,138,000 -- --
Purchase obligations include all open purchase orders outstanding
regardless of whether they are cancelable or not.
Capital lease obligations outlined above include both the principal and
interest components of these contractual obligations.
On October 8, 1999, the Company entered into an agreement with BP Solarex
("BPS") in which BPS agreed to purchase certain production equipment built by
the Company, for use in the Company's Chicago factory ("Spire Solar Chicago")
and in return the Company agreed to purchase solar cells of a minimum of two
megawatts per year over a five-year term for a fixed fee from BPS (the "Purchase
Commitment"). BPS had the right to reclaim the equipment if the Company failed
to meet its obligations in the Purchase Commitment. The proceeds from the sale
of the production equipment purchased by BPS were classified as an unearned
purchase discount in the Company's consolidated balance sheets in prior periods.
The Company had amortized this discount as a reduction to cost of sales as it
purchased materials from BPS. In 2003 the Company and BPS retroactively amended
the agreement to include all purchases of solar modules, solar systems, inverter
systems and other system equipment purchased by the Company from BPS in the
purchase commitment calculation. Amortization of the purchase discount amounted
to approximately $65,000 and $160,000 for the years ended December 31, 2005 and
2004, respectively. The production equipment had been classified as a component
of fixed assets. Depreciation amounted to approximately $211,000 for the year
ended December 31, 2005.
In addition, the agreement contained a put option for BPS to have the
Company create a separate legal entity for Spire Solar Chicago and for BPS to
convert the value of the equipment and additional costs, as defined, into equity
of the new legal entity. The percentage ownership in the joint venture would be
determined based on the cumulative investments by BPS and the Company. The
amended agreement also allowed the Company to terminate the agreement on 30 days
notice in consideration for a termination payment based on the aggregate amount
of Spire purchases of BPS products and the fair market value of the production
equipment purchased by BPS at the time of the termination election.
On August 16, 2005, the Company entered into a Settlement and Contract
Termination Agreement (the "Termination Agreement") with BPS effective September
30, 2005. Under the terms of the Termination Agreement, the Company and BPS
agreed to terminate the amended agreement including the Purchase Commitment. In
exchange for release of the purchase commitment, the Company paid BPS $275,000
and retained ownership of the production equipment. The unamortized unearned
purchase discount as of the effective date was approximately $1,205,000 and the
net book value of the production equipment was approximately $287,000. As result
of this action, Spire reevaluated the recoverability of the long-lived assets
associated with this segment as part of its third quarter review. Based on cash
flow projections for the Solar System segment, the Company determined that the
production equipment was impaired and should be written-off.
18
The Company has recorded an approximate $593,000 gain from these actions,
which is reflected as a gain on extinguishment of purchase commitment in the
accompanying consolidated statement of operations for the year ended December
31, 2005. The components of this gain are outlined below:
Unearned purchase discount $ 1,205,000
Net book value of production equipment (287,000)
Payment to extinguish purchase commitment (275,000)
Accrued relocation costs (50,000)
-----------
Gain on extinguishment of purchase commitment $ 593,000
===========
In October 2002, the Company sold an exclusive patent license for a
hemodialysis split-tip catheter to Bard Access Systems, Inc. ("Bard"), a wholly
owned subsidiary of C. R. Bard, Inc., in exchange for $5,000,000 upon the
execution of the agreement, with another $5,000,000 due upon the earlier to
occur of: (a) the date of the first commercial sale of a licensed product by
Bard; or (b) no more than 18 months after signing. The agreement further
provided for two additional contingent cash payments of $3,000,000 each upon the
completion of certain milestones by Bard in 2004 and 2005. Bard had the right to
cancel the agreement at any time subsequent to the second payment. During the
year ended December 31, 2002, the Company recorded the initial payment under the
agreement, resulting in a gain of $4,464,929, net of direct costs. Due to the
potential length of time between the first and second payments and the
cancellation provisions within the agreement, the Company did not record the
potential remaining payments at that time. During June 2003, in accordance with
the agreement, the Company received notification from Bard of the first
commercial sale, collected the $5,000,000 payment due and recorded a gain of
$4,989,150, net of direct costs. In June 2004, the Company received the first
contingent milestone payment and recorded a gain of $3,000,000. In June 2005,
the Company received the second and final contingent milestone payment and
recorded a gain of $3,000,000. There were no direct costs associated with these
payments. These gains have been recorded in the accompanying consolidated
statements of operations for the years ended December 31, 2005 and 2004,
respectively.
In conjunction with the sale, the Company received a sublicense, which
permits the Company to continue to manufacture and market hemodialysis catheters
for the treatment of chronic kidney disease. In addition, the Company granted
Bard a right of first refusal should the Company seeks to sell the catheter
business.
On May 26, 2005, the Company entered into a global consortium agreement
(the "Consortium Agreement") with Nisshinbo Industries, Inc. ("Nisshinbo") for
the development, manufacturing, and sales of solar photovoltaic module
manufacturing equipment. Under the terms of the Consortium Agreement, Nisshinbo
purchased a license to manufacture and sell the Company's module manufacturing
equipment for an upfront fee plus additional royalties based on ongoing
equipment sales over a ten-year period. In addition, the Company and Nisshinbo
agreed, but are not obligated, to pursue joint research and development, product
improvement activities and sales and marketing efforts. On June 27, 2005, the
Company received JPY 400,000,000 (approximately $3.7 million) from the sale of
this permanent license. The Company has determined the fair value of the license
and royalty based on an appraisal. As a result, a $3,319,600 gain has been
recognized as a gain on sale of license in the accompanying consolidated
statement of operations for the year ended December 31, 2005. The balance of
$350,000 was determined to represent an advanced royalty payment and was
recorded as an advance on contracts in progress. This amount is being accreted
as royalty income over the ten year license period on a straight line basis.
Approximately $86,000 of royalty income was recognized during the year ended
December 31, 2005.
As of June 30, 2005, JPY 400,000,000 was held in a Japanese yen account.
The Company converted JPY 350,000,000 into $3,139,295 on August 3, 2005
resulting in an approximate $17,000 currency translation loss. The Company
continues to maintain a Japanese yen account (approximately JPY 33,738,000 as of
December 31, 2005.) As of December 31, 2005, approximately $287,000 has been
reflected in cash and cash equivalents in the accompanying consolidated balance
sheet utilizing the closing yen/dollar exchange rate as of December 31, 2005.
Total currency translation loss for the year ended December 31, 2005 of $104,039
is reflected in other expense, net in the accompanying consolidated statement of
operations.
Outstanding letters of credit totaled $926,000 at December 31, 2005. The
letters of credit principally secure performance obligations, and allow holders
to draw funds up to the face amount of the letter of credit if the Company does
not perform as contractually required. These letters of credit expire through
2007 and are 100% secured by cash.
19
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued FASB Statement No. 151, "Inventory Costs
- an Amendment of ARB No. 43, Chapter 4" ("FAS 151"). FAS 151 amends ARB 43,
Chapter 4, to clarify that abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials (spoilage) should be recognized as
current-period charges. In addition, this Statement requires that allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of this Statement are
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The adoption of the provisions of FAS 151 is not expected to have a
material impact on the Company's financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123R, SHARE-BASED PAYMENT. SFAS
No. 123R requires companies to expense the value of employee stock option and
similar awards. SFAS No. 123R is effective as of the beginning of the first
interim or annual reporting period that begins after December 15, 2005. As of
the effective date, the Company will be required to expense all awards granted,
modified, cancelled or repurchased as well as the portion of prior awards for
which the requisite service has not been rendered, based on the grant-date fair
value of those awards as calculated for pro forma disclosures under SFAS No.
123. SFAS No. 123R permits public companies to adopt its requirements using one
of two methods: A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the requirements of
SFAS No. 123R for all share-based payments granted after the effective date and
(b) based on the requirements of SFAS No. 123 for all awards granted to
employees prior to the effective date of SFAS No. 123R that remain unvested on
the effective date. A "modified retrospective" method includes the requirements
of the modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under SFAS No. 123 for
purposes of pro forma disclosures either (a) all prior periods presented or (b)
prior interim periods of the year of adoption. SFAS No. 123R also requires the
benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will reduce net operating
cash flows and increase net financing cash flows in periods after adoption. The
Company estimates that the adoption of SFAS No. 123R's fair value method will
result in an approximate $285,000 expense in 2006 based on current assumptions
and options currently outstanding.
In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes
and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes
and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements" ("FAS 154"). FAS 154 provides guidance on the accounting for and
reporting of accounting changes and error corrections. It establishes, unless
impracticable, retrospective application as the required method for reporting a
change in accounting principle in the absence of explicit transition
requirements specific to the newly adopted accounting principle. FAS 154 also
provides guidance for determining whether retrospective application of a change
in accounting principle is impracticable and for reporting a change when
retrospective application is impracticable. The provisions of this Statement are
effective for accounting changes and corrections of errors made in fiscal
periods beginning after December 15, 2005. The adoption of the provisions of FAS
154 is not expected to 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. The
Company received Japanese yen in exchange for the sale of a license to its solar
technology. In addition, purchases made and royalties received under the
Company's Consortium Agreement with its Japanese partner will be in Japanese
yen. The Company does not believe that foreign exchange fluctuations will
materially affect its operations.
20
RELATED PARTY TRANSACTIONS
The Company subleased 77,000 square-feet in a building leased by Mykrolis
Corporation, who in turn leased the building from SPI-Trust, a Trust of which
Roger Little, Chairman of the Board, Chief Executive Officer and President of
the Company, is the sole trustee and principal beneficiary. 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 sublease agreement provided for minimum
rental payments plus annual increases linked to the consumer price index. Rent
expense under this sublease for the year ended December 31, 2005 and 2004 was
$1,093,000 and $1,151,000, respectively. In connection with this sublease, the
Company was invoiced and paid certain SPI-Trust related expenses, including
building maintenance and insurance. The Company invoiced SPI-Trust on a monthly
basis and SPI-Trust reimbursed the Company for all such costs.
On November 11, 2005, the Company entered into an Extension of Lease
Agreement (the "Lease Extension") directly with SPI-Trust the term of which
commenced on December 1, 2005. The Lease Extension is for a period of two years
and maintains the rental payments at the now current rental rate over the two
(2) year period. All other terms of the Lease Extension are substantially the
same as were in effect under the former lease and sublease agreements. The
Company assumed certain responsibilities of Mykrolis, the tenant under the
former lease, as a result of the Lease Extension including payment of all
building and real estate related expenses associated with the ongoing operations
of the property. The Company will allocate a portion of these expenses to
SPI-Trust based on pre-established formulas utilizing square footage and actual
usage where applicable. These allocated expenses will be invoiced monthly and be
paid utilizing a SPI-Trust escrow account of which the Company has sole
withdrawal authority. SPI-Trust is required to maintain three (3) months of its
anticipated operating costs within this escrow account. The Company believes
that the terms of the Lease Extension are commercially reasonable. Rent expense
under the Lease Extension for the year ended December 31, 2005 was approximately
$103,000. Approximately $9,000 was due from SPI-Trust as of December 31, 2005
for building related costs.
In conjunction with the acquisition of Bandwidth by the Company, the
Company released Bandwidth from a 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
continued 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. This lease obligation terminated in
November 2005. The difference between the actual rent payment and the discounted
rent payment was accreted to the consolidated statements of operations as
interest expense. Interest of 4.75% had been assumed on this obligation. For the
year ended December 31, 2005, interest expense was approximately $11,000.
Also in conjunction with the acquisition of Bandwidth by the Company,
SPI-Trust, a Trust of which Roger G. Little, Chairman of the Board, Chief
Executive Officer and President of the Company, is sole trustee and principal
beneficiary, purchased from Stratos Lightwave, Inc. (Bandwidth's former owner)
the building that Bandwidth occupies in Hudson, New Hampshire for $3.7 million.
Subsequently, the Company entered into a lease for the building (90,000 square
feet) with SPI-Trust whereby the Company will pay $4.1 million to the SPI-Trust
over an initial five-year term expiring in 2008 with a Company option to extend
for five years. In addition to the rent payments, the lease obligates the
Company to keep on deposit with SPI-Trust the equivalent of three months rent
($191,250 as of December 31, 2005.) The lease agreement does not provide for a
transfer of ownership at any point. Interest costs were assumed at 7%. For the
year ended December 31, 2005, interest expense was approximately $179,000. This
lease has been classified as a related party capital lease and a summary of
payments (including interest) follows:
Rate Per Security
Year Square Foot Annual Rent Monthly Rent Deposit
--------------------------- ----------- ------------ ------------ ---------
June 1, 2003 - May 31, 2004 $ 6.00 $ 540,000 $ 45,000 $ 135,000
June 1, 2004 - May 31, 2005 7.50 675,000 56,250 168,750
June 1, 2005 - May 31, 2006 8.50 765,000 63,750 191,250
June 1, 2006 - May 31, 2007 10.50 945,000 78,750 236,250
June 1, 2007 - May 31, 2008 13.50 1,215,000 101,250 303,750
-----------
$ 4,140,000
===========
21
At December 31, 2005, $734,000 and $1,514,000 are reflected as the current
and long-term portions of capital lease obligation - related party,
respectively, in the consolidated balance sheet.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Among the significant estimates affecting our consolidated
financial statements are those relating to revenue recognition, reserves for
doubtful accounts and sales returns and allowances, reserve for excess and
obsolete inventory, impairment of long-lived assets, income taxes, and warranty
reserves. We regularly evaluate our estimates and assumptions based upon
historical experience and various other factors that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. To the extent actual results differ from
those estimates, our future results of operations may be affected. We believe
the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our consolidated financial statements.
Refer to Footnote 2 of our notes to consolidated financial statements for a
description of our accounting policies.
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.
The Company utilizes a distributor network to market and sell its
hemodialysis catheters domestically. The Company generally recognizes revenue
when the catheters are shipped to its distributors. 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. An analysis of the sales return and
rebate activity for the years ended December 31, 2005 and 2004, is as follows:
Rebates Returns Total
---------- --------- ---------
Balance - December 31, 2003 $ -- $ -- $ --
Provision 210,666 111,933 322,599
Utilization (154,900) (83,284) (238,184)
--------- --------- ---------
Balance - December 31, 2004 55,766 28,649 84,415
Provision 361,623 96,532 458,155
Utilization (325,789) (106,081) (431,870)
--------- --------- ---------
Balance - December 31, 2005 $ 91,600 $ 19,100 $ 110,700
========= ========= =========
o Credits for rebates are recorded in the month of the actual sale.
o Credits for returns are processed when the actual merchandise is
received by Spire.
o Substantially all rebates and returns are processed no later than
three months after original shipment by Spire.
The reserve percentage has been approximately 13% to 15% of inventory held
by distributors over the last two years. Spire performs various sensitivity
analyses to determine the appropriate reserve percentage to use. To date, actual
quarterly reserve utilization has approximated the amount provided. The total
inventory held by distributors was approximately $730,000 at December 31, 2005.
22
If sufficient history to make reasonable and reliable estimates of returns
or rebates does not exist, revenue associated with such practices is deferred
until the return period lapses or a reasonable estimate can be made. This
deferred revenue will be recognized as revenue when the distributor reports to
us that it has either shipped or disposed of the units (indicating that the
possibility of return is remote).
The Company's OEM capital equipment solar energy business builds complex
customized machines to order for specific customers. Substantially all of these
orders are sold on a FOB Bedford, Massachusetts (or EX-Works Factory) basis. It
is the Company's policy to recognize revenues for this equipment as the product
is shipped to the customer, as customer acceptance is obtained prior to shipment
and the equipment is expected to operate the same in the customer's environment
as it does in the Company's environment. When an arrangement with the customer
includes future obligations or customer acceptance, revenue is recognized when
those obligations are met or customer acceptance has been achieved. The
Company's solar energy systems business installs solar energy systems on
customer-owned properties on a contractual basis. Generally, revenue is
recognized once the systems have been installed and the title is passed to the
customer. For arrangements with multiple elements, the Company allocates fair
value to each element in the contract and revenue is recognized upon delivery of
each element. If the Company is not able to establish fair value of undelivered
elements, all revenue is deferred.
The Company recognizes revenues and estimated profits on long-term
government contracts on the accrual basis where the circumstances are such that
total profit can be estimated with reasonable accuracy and ultimate realization
is reasonably assured. The Company accrues revenue and profit utilizing the
percentage of completion method using a cost-to-cost methodology. A percentage
of the contract revenues and estimated profits is determined utilizing the ratio
of costs incurred to date to total estimated cost to complete on a contract by
contract basis. Profit estimates are revised periodically based upon changes and
facts, and any losses on contracts are recognized immediately. Some of the
contracts include provisions to withhold a portion of the contract value as
retainage until such time as the United States government performs an audit of
the cost incurred under the contract. The Company's policy is to take into
revenue the full value of the contract, including any retainage, as it performs
against the contract since the Company has not experienced any substantial
losses as a result of audits performed by the United States government.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, including fixed assets and intangible assets, are
continually monitored and are evaluated at least annually for impairment. The
determination of recoverability is based on an estimate of undiscounted cash
flows expected to result from the use of an asset and its eventual disposition.
The estimate of cash flows is based upon, among other things, certain
assumptions about expected future operating performance. Our estimates of
undiscounted cash flows may differ from actual cash flows due to, among other
things, technological changes, economic conditions, changes to our business
model or changes in our operating performance. If the sum of the undiscounted
cash flows (excluding interest) is less than the carrying value, we recognize an
impairment loss, measured as the amount by which the carrying value exceeds the
fair value of the asset.
23
ITEM 7. FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm .................... 25
Consolidated Financial Statements:
Consolidated Balance Sheet as of December 31, 2005 ................ 26
Consolidated Statements of Operations for the
Years Ended December 31, 2005 and 2004 ............................ 27
Consolidated Statements of Stockholders' Equity and
Comprehensive Income/(Loss) for the Years Ended
December 31, 2005 and 2004 ........................................ 28
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2005 and 2004 .................................. 29
Notes to Consolidated Financial Statements ........................ 30
24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Spire Corporation:
We have audited the consolidated balance sheet of Spire Corporation and
subsidiaries as of December 31, 2005 and the related consolidated statements of
operations, stockholders' equity and comprehensive income/(loss), and cash flows
for the years ended December 31, 2005 and 2004. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America.) Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Spire Corporation
and subsidiaries as of December 31, 2005, and the results of their operations
and their cash flows for the years ended December 31, 2005 and 2004, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ VITALE, CATURANO & COMPANY, LTD.
Boston, Massachusetts
February 21, 2006
25
SPIRE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
2005
------------
ASSETS
Current assets
--------------
Cash and cash equivalents $ 3,630,163
Restricted cash - current portion 804,545
------------
4,434,708
------------
Accounts receivable - trade, net 3,696,411
Inventories, net 2,660,489
Prepaid expenses and other current assets 606,853
------------
Total current assets 11,398,461
------------
Property and equipment, net 4,515,871
------------
Intangible and other assets (less accumulated amortization of $694,826 in 2005) 670,525
Available-for-sale investments, at quoted market value (cost of $1,014,051) 1,054,785
Restricted cash - long-term 121,000
Deposit - related party 191,250
------------
Total other assets 2,037,560
------------
Total assets $ 17,951,892
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Current portion of capital lease obligation $ 446,684
Current portion of capital lease obligation - related party 734,376
Accounts payable 1,217,220
Accrued liabilities 1,971,908
Accrued lease obligation - related party --
Advances on contracts in progress 1,758,479
------------
Total current liabilities 6,128,667
------------
Long-term portion of capital lease obligation --
Long-term portion of capital lease obligation - related party 1,513,606
Deferred compensation 1,054,785
Unearned purchase discount --
------------
Total long-term liabilities 2,568,391
------------
Total liabilities 8,697,058
------------
Commitments and Contingencies
-----------------------------
Stockholders' equity
--------------------
Common stock, $0.01 par value; shares authorized 20,000,000;
7,222,987 shares issued and outstanding 72,230
Additional paid-in capital 10,763,286
Accumulated deficit (1,605,168)
Accumulated other comprehensive income, net 24,486
------------
Total stockholders' equity 9,254,834
------------
Total liabilities and stockholders' equity $ 17,951,892
============
The accompanying notes are an integral part
of these consolidated financial statements.
26
SPIRE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
----------------------------
2005 2004
------------ ------------
Net sales and revenues
----------------------
Contract research, service and license revenues $ 11,151,101 $ 10,273,191
Sales of goods 11,270,509 7,004,845
------------ ------------
Total net sales and revenues 22,421,610 17,278,036
------------ ------------
Costs and expenses
------------------
Cost of contract research, services and licenses 8,778,917 8,263,816
Cost of goods sold 10,322,157 6,355,439
Selling, general and administrative expenses 8,539,377 8,096,773
Internal research and development expenses 1,346,109 1,405,981
------------ ------------
Total costs and expenses 28,986,560 24,122,009
------------ ------------
Gain on extinguishment of purchase commitment 593,313 --
Gain on sales of licenses 6,319,600 3,000,000
------------ ------------
Earnings (loss) from operations 347,963 (3,843,973)
-------------------------------
Other expense, net (303,741) (275,589)
------------ ------------
Earnings (loss) before income taxes 44,222 (4,119,562)
Income tax benefit (expense) -- --
------------ ------------
Net income (loss) $ 44,222 $ (4,119,562)
----------------- ============ ============
Earnings (loss) per share of common stock - basic $ 0.01 $ (0.60)
------------------------------------------------- ============ ============
Earnings (loss) per share of common stock - diluted $ 0.01 $ (0.60)
--------------------------------------------------- ============ ============
Weighted average number of common and common equivalent
shares outstanding - basic 6,975,347 6,809,462
============ ============
Weighted average number of common and common equivalent
shares outstanding - diluted 7,237,129 6,809,462
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
27
SPIRE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME/(LOSS)
YEARS ENDED DECEMBER 31, 2005 AND 2004
ACCUMULATED RETAINED
COMMON STOCK ADDITIONAL OTHER EARNINGS/
--------------------------- PAID-IN COMPREHENSIVE (ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL INCOME DEFICIT) TOTAL INCOME/(LOSS)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 6,765,660 $ 67,657 $ 9,258,536 $ -- $ 2,470,172 $ 11,796,365 $ 8,932
============
Exercise of stock options 82,881 828 189,350 -- -- 190,178
Net unrealized gains on
available for sale
marketable securities,
net of tax -- -- -- 24,556 -- 24,556 $ 24,556
Net loss -- -- -- -- (4,119,562) (4,119,562) (4,119,562)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2004 6,848,541 68,485 9,447,886 24,556 (1,649,390) 7,891,537 $ (4,095,006)
============
Exercise of stock options 374,446 3,745 1,315,400 -- -- 1,319,145
Net unrealized loss on
available for sale
marketable securities,
net of tax -- -- -- (70) -- (70) $ (70)
Net income -- -- -- -- 44,222 44,222 44,222
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2005 7,222,987 $ 72,230 $ 10,763,286 $ 24,486 $ (1,605,168) $ 9,254,834 $ 44,152
============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
28
SPIRE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------
2005 2004
------------ ------------
Cash flows from operating activities:
-------------------------------------
Net income (loss) $ 44,222 $ (4,119,562)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,450,961 2,579,972
Gain on extinguishment of purchase commitment (593,313) --
Loss on disposal of license and fixed assets -- 130,269
Deferred compensation (70) 24,556
Unearned purchase discounts (64,754) (159,571)
Changes in assets and liabilities:
Restricted cash (194,656) 53,000
Accounts receivable, net 531,467 12,459
Inventories 63,949 (1,293,449)
Prepaid expenses and other current assets 97,656 118,875
Refundable income taxes (150,095) 475,908
Accounts payable, accrued liabilities and other liabilities (769,573) (51,624)
Other assets -- (217,800)
Deposit - related party (22,500) (168,750)
Advances on contracts in progress (840,267) 1,418,953
------------ ------------
Net cash provided by (used in) operating activities 553,027 (1,196,764)
------------ ------------
Cash flows from investing activities:
-------------------------------------
Additions to property and equipment (428,275) (407,455)
Payment to extinguish purchase commitment (275,000) --
Restricted cash - long term 96,800 --
Increase in intangible and other assets (22,355) (467,292)
------------ ------------
Net cash used in investing activities (628,830) (874,747)
------------ ------------
Cash flows from financing activities:
-------------------------------------
Principal payments on capital lease obligations - related parties (548,365) (406,289)
Principal payments on capital lease obligations (401,681) (374,602)
Proceeds from exercise of stock options 1,319,145 190,178
------------ ------------
Net cash proovided by (used in) financing activities 369,099 (590,713)
------------ ------------
Net increase (decrease) in cash and cash equivalents 293,296 (2,662,224)
Cash and cash equivalents, beginning of year 3,336,867 5,999,091
------------ ------------
Cash and cash equivalents, end of year $ 3,630,163 $ 3,336,867
============ ============
Supplemental disclosures of cash flow information:
--------------------------------------------------
Cash paid (received) during the year for:
Interest $ 9,265 $ 61,227
============ ============
Interest - related party $ 190,436 $ 266,879
============ ============
Income taxes paid (received) $ 150,095 $ (559,908)
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
29
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
1. DESCRIPTION OF THE BUSINESS
Spire Corporation (the "Company") develops, manufactures and markets
highly-engineered products and services in four principal business areas: solar
equipment, solar systems, biomedical and optoelectronics bringing to bear
expertise in materials technologies across all four business areas.
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
approximately 170 factories in 43 countries.
In the solar systems area, the Company provides custom and building
integrated photovoltaic modules, stand alone emergency power backup and electric
power grid-connected distributed power generation systems employing photovoltaic
technology developed by the Company.
In the 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 optoelectronics area, the Company provides compound semiconductor
foundry services on a merchant basis to customers involved in
biomedical/biophotonic instruments, telecommunications and defense applications.
Services include compound semiconductor wafer growth, other thin film processes
and related device processing and fabrication services. The Company also
provides materials testing services and performs services in support of
sponsored research into practical applications of optoelectronic technologies.
Operating results will depend upon product mix, as well as the timing of
shipments of higher priced products from the Company's solar equipment line and
delivery of solar systems. Export sales, which amounted to 33% of net sales and
revenues for 2005, continue to constitute a significant portion of the Company's
net sales and revenues.
The Company has incurred significant operating losses in 2005 and 2004.
Loss from operations, before gain on sales of licenses and extinguishment of
purchase commitment, were $6.6 million and $6.8 million in 2005 and 2004,
respectively. These losses from operations have resulted in an operating cash
loss (net income (loss) excluding gain on sales of licenses plus or minus
non-cash adjustments) of approximately $4.5 million in each of 2005 and 2004,
respectively. The Company has funded these operating cash losses from cash
receipts of $6.7 million and $3.0 million in 2005 and 2004, respectively,
related to the sale of certain licenses to its medical products and solar
technologies. As of December 31, 2005, the Company had cash and cash equivalents
of $3.6 million. While the Company believes it has inherent assets and
technology that it could sell or license in the near term, there is no guarantee
that the Company would be able to sell or license those assets on a timely basis
and at appropriate values that would allow the Company to continue to fund its
operating losses. The Company has developed several plans to mitigate cash
losses, if required, including potential cost reduction efforts and outside
financing. As a result, the Company believes it has sufficient resources to
continue as a going concern at least through December 31, 2006.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
(B) 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.
30
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2005 AND 2004
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.
The Company utilizes a distributor network to market and sell its
hemodialysis catheters domestically. The Company generally recognizes revenue
when the catheters are shipped to its distributors. 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. An analysis of the sales return and
rebate activity for the years ended December 31, 2005 and 2004, respectively, is
as follows:
Rebates Returns Total
--------- --------- ---------
Balance - December 31, 2003 $ -- $ -- $ --
Provision 210,666 111,933 322,599
Utilization (154,900) (83,284) (238,184)
--------- --------- ---------
Balance - December 31, 2004 55,766 28,649 84,415
Provision 361,623 96,532 458,155
Utilization (325,789) (106,081) (431,870)
--------- --------- ---------
Balance - December 31, 2005 $ 91,600 $ 19,100 $ 110,700
========= ========= =========
o Credits for rebates are recorded in the month of the actual sale.
o Credits for returns are processed when the actual merchandise is
received by Spire.
o Substantially all rebates and returns are processed no later than
three months after original shipment by Spire.
The reserve percentage has been approximately 13% to 15% of inventory
held by distributors over the last two years. Spire performs various sensitivity
analyses to determine the appropriate reserve percentage to use. To date, actual
quarterly reserve utilization has approximated the amount provided. The total
inventory held by distributors was approximately $730,000 at December 31, 2005.
If sufficient history to make reasonable and reliable estimates of
returns or rebates does not exist, revenue associated with such practices is
deferred until the return period lapses or a reasonable estimate can be made.
This deferred revenue will be recognized as revenue when the distributor reports
to us that it has either shipped or disposed of the units (indicating that the
possibility of return is remote).
The Company's OEM capital equipment solar energy business builds complex
customized machines to order for specific customers. Substantially all of these
orders are sold on a FOB Bedford, Massachusetts (or EX-Works Factory) basis. It
is the Company's policy to recognize revenues for this equipment as the product
is shipped to the customer, as customer acceptance is obtained prior to shipment
and the equipment is expected to operate the same in the customer's environment
as it does in the Company's environment. When an arrangement with the customer
includes future obligations or customer acceptance, revenue is recognized when
those obligations are met or customer acceptance has been achieved. The
Company's solar energy systems business installs solar energy systems on
customer-owned properties on a contractual basis. Generally, revenue is
recognized once the systems have been installed and the title is passed to the
customer. For arrangements with multiple elements, the Company allocates fair
value to each element in the contract and revenue is recognized upon delivery of
each element. If the Company is not able to establish fair value of undelivered
elements, all revenue is deferred.
The Company recognizes revenues and estimated profits on long-term
government contracts on the accrual basis where the circumstances are such that
total profit can be estimated with reasonable accuracy and ultimate realization
is
31
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2005 AND 2004
reasonably assured. The Company accrues revenue and profit utilizing the
percentage of completion method using a cost-to-cost methodology. A percentage
of the contract revenues and estimated profits is determined utilizing the ratio
of costs incurred to date to total estimated cost to complete on a contract by
contract basis. Profit estimates are revised periodically based upon changes and
facts, and any losses on contracts are recognized immediately. Some of the
contracts include provisions to withhold a portion of the contract value as
retainage until such time as the United States government performs an audit of
the cost incurred under the contract. The Company's policy is to take into
revenue the full value of the contract, including any retainage, as it performs
against the contract since the Company has not experienced any substantial
losses as a result of audits performed by the United States government.
(C) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, time deposits and all highly
liquid debt instruments with an original maturities of three months or less.
These investments are carried at cost, which approximates market value.
(D) AVAILABLE-FOR-SALE INVESTMENTS
Available-for-sale securities consist of the following assets held as
part of Spire Corporation Non-Qualified Deferred Compensation Plan:
December 31,
2005
------------
Equity investments $ 778,314
Government bonds 159,613
Cash and money market funds 116,858
------------
$ 1,054,785
============
These investments have been classified as long-term available-for-sale
and are reported at fair value, with unrealized gains and losses included in
accumulated other comprehensive income, net of related tax effect. As of
December 31, 2005, the unrealized gain on these marketable securities was
approximately $41,000.
(E) INVENTORIES
Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out (FIFO) basis. Judgments and estimates are
used in determining the likelihood that goods on hands can be sold to customers.
Historical inventory usage and current revenue trends are considered in
estimating both excess and obsolete inventory. If actual product demand and
market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.
(F) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the respective assets, as follows:
Building and equipment under Lesser of 5 years or remaining life
capital lease of lease term
Machinery and equipment 5 and 7 years
Furniture and fixtures 5 years
Leasehold improvements Lesser of 10 years or remaining
life of facility lease term
Maintenance and repairs are charged to expense as incurred. Major
renewals and betterments are added to property and equipment accounts at cost.
32
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2005 AND 2004
(G) INTANGIBLE AND OTHER ASSETS
Patents amounted to $535,498, net of accumulated amortization of
$600,897, at December 31, 2005. Licenses amounted to $131,071, net of
accumulated amortization of $93,929, at December 31, 2005. Patent cost is
primarily composed of cost associated with securing and registering patents that
the Company has been awarded or that have been submitted to, and the Company
believes will be approved by, the government. License cost is composed of the
cost to acquire rights to the underlying technology or know-how. 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 and licenses owned by the Company as
well as $460,739 of estimated amortization expense related to patents that
remain pending. Estimated amortization expense for the periods ending December
31, is as follows:
Year Amortization Expense
---------- --------------------
2006 $172,638
2007 165,486
2008 138,331
2009 97,661
2010 92,453
--------------------
$666,569
====================
Also included in other assets are $3,956 of refundable deposits made by
the Company.
(H) LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". SFAS No. 144 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company measures recoverability of assets to be held and used
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. The Company
reports assets to be disposed of at the lower of the carrying amount or fair
value less costs to sell.
(I) INCOME TAXES
In accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS
109"), the Company recognizes deferred income taxes based on the expected future
tax consequences of differences between the financial statement basis and the
tax basis of assets and liabilities, calculated using enacted tax rates in
effect for the year in which the differences are expected to be reflected in the
tax return. Valuation allowances are provided if, based on the weight of
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.
(J) WARRANTY
The Company provides warranties on certain of its products and services.
The Company's warranty programs are described below:
Spire Solar Equipment warrants solar energy module manufacturing
equipment sold for a total of 360 days, the first 90 days of which include the
replacement of defective component parts and the labor to correct the defect and
the next 270 days of which include only the cost of defective component parts.
Spire Solar Systems warrants photovoltaic electric power systems sold
against defective components for 360 days to include the replacement of
defective component parts and the labor to correct the defect. Spire Solar
Systems also warrants that its photovoltaic electric power systems will achieve
a minimum of 80% of rated electrical power output for 20 years.
33
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2005 AND 2004
Spire Biomedical warrants that any of its catheter products found to be
defective will be replaced. No warranty is made that the failure of the product
will not occur, and Spire disclaims any responsibility for any medical
complications. Spire Biomedical warrants that its services only will meet the
agreed upon specifications.
Bandwidth Semiconductor, LLC ("Bandwidth") warrants that its products
will meet the agreed upon specifications.
The Company provides for the estimated cost of product warranties,
determined primarily from historical information, at the time product revenue is
recognized. Should actual product failure warranties differ from the Company's
estimates, revisions to the estimated warranty liability would be required. The
changes in the product warranties for the year ended December 31, 2005, are as
follows:
Balance at December 31, 2004 $ 50,000
Provision charged to income 29,650
Usage (29,650)
---------
Balance at December 31, 2005 $ 50,000
=========
(K) INTERNAL RESEARCH AND DEVELOPMENT COSTS
Internal research and development costs are charged to operations as
incurred. During the years ended December 31, 2005 and 2004, Company funded
research and development costs were approximately $1,346,000 and $1,406,000,
respectively. Customer funded research and development efforts are recognized as
cost of contract research, services and licenses in the accompanying
consolidated statement of operations.
(L) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per share gives effect to
all potential dilutive common shares outstanding during the period. The
computation of diluted earnings (loss) per share does not assume conversion,
exercise or contingent exercise of securities that would have an anti-dilutive
effect on earnings (loss) per share. The Company did not pay any dividends in
2005 and 2004.
(M) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income. Other comprehensive income includes certain changes in
equity that are excluded from net income (loss). At December 31, 2005,
accumulated other comprehensive income was comprised of unrealized gain of
available-for-sale investments of approximately $25,000, net of tax.
(N) STOCK-BASED COMPENSATION
The Company has adopted the disclosure provisions of SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure" which is an
amendment of SFAS No. 123 "Accounting for Stock-Based Compensation", 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 (loss) and earnings (loss) per share would
have been changed to the pro forma amounts indicated below.
34
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2005 AND 2004
For the Year Ended December 31,
------------------------------
2005 2004
------------ ------------
Net earnings (loss), as reported $ 44,222 $ (4,119,562)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards (322,434) (291,711)
------------ ------------
Pro forma net loss $ (278,212) $ (4,411,273)
============ ============
Earnings (loss) per share:
Basic - as reported $ 0.01 $ (0.60)
============ ============
Basic - pro forma $ (0.04) $ (0.65)
============ ============
Diluted - as reported $ 0.01 $ (0.60)
============ ============
Diluted - pro forma $ (0.04) $ (0.65)
============ ============
The per-share weighted-average fair value of stock options granted in
2005 and 2004 was $3.58 and $3.56, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Expected Risk-Free Expected Expected
Year Dividend Yield Interest Rate Option Life Volatility Factor
-------- -------------- ------------- ----------- -----------------
2005 -- 3.97% 7.5 years 66.6%
2004 -- 4.23% 5.0 years 78.2%
(O) TREASURY SHARES
There were no treasury shares as of December 31, 2005.
(P) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management 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 revenue and
expenses during the reporting period. Significant estimates include revenue
recognition, valuation of income tax assets and intangible assets. Actual
results could differ from those estimates.
(Q) FINANCIAL INSTRUMENTS
Financial instruments of the Company consist of cash and cash
equivalents, accounts receivable, available for sale marketable securities,
accounts payable and capital leases. The carrying amounts of these financial
instruments approximate their fair value.
(R) SHIPPING AND HANDLING COSTS
Shipping and handling costs are included in cost of goods sold.
(S) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with
current presentation.
35
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2005 AND 2004
(T) NEW ACCOUNTING STANDARDS
In November 2004, the FASB issued FASB Statement No. 151, "Inventory
Costs - an Amendment of ARB No. 43, Chapter 4" ("FAS 151"). FAS 151 amends ARB
43, Chapter 4, to clarify that abnormal amounts of idle facility expense,
freight, handling costs, and wasted materials (spoilage) should be recognized as
current-period charges. In addition, this Statement requires that allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of this Statement are
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The adoption of the provisions of FAS 151 is not expected to have a
material impact on the Company's financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123R, SHARE-BASED PAYMENT.
SFAS No. 123R requires companies to expense the value of employee stock option
and similar awards. SFAS No. 123R is effective as of the beginning of the first
interim or annual reporting period that begins after December 15, 2005. As of
the effective date, the Company will be required to expense all awards granted,
modified, cancelled or repurchased as well as the portion of prior awards for
which the requisite service has not been rendered, based on the grant-date fair
value of those awards as calculated for pro forma disclosures under SFAS No.
123. SFAS No. 123R permits public companies to adopt its requirements using one
of two methods: A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the requirements of
SFAS No. 123R for all share-based payments granted after the effective date and
(b) based on the requirements of SFAS No. 123 for all awards granted to
employees prior to the effective date of SFAS No. 123R that remain unvested on
the effective date. A "modified retrospective" method includes the requirements
of the modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under SFAS No. 123 for
purposes of pro forma disclosures either (a) all prior periods presented or (b)
prior interim periods of the year of adoption. SFAS No. 123R also requires the
benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will reduce net operating
cash flows and increase net financing cash flows in periods after adoption. The
Company estimates that the adoption of SFAS No. 123R's fair value method will
result in an approximate $285,000 expense in 2006 based on current assumptions
and options outstanding as of December 31, 2005.
In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes
and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes
and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements" ("FAS 154"). FAS 154 provides guidance on the accounting for and
reporting of accounting changes and error corrections. It establishes, unless
impracticable, retrospective application as the required method for reporting a
change in accounting principle in the absence of explicit transition
requirements specific to the newly adopted accounting principle. FAS 154 also
provides guidance for determining whether retrospective application of a change
in accounting principle is impracticable and for reporting a change when
retrospective application is impracticable. The provisions of this Statement are
effective for accounting changes and corrections of errors made in fiscal
periods beginning after December 15, 2005. The adoption of the provisions of FAS
154 is not expected to have a material impact on the Company's financial
position or results of operations.
3. ACCOUNTS RECEIVABLE / ADVANCES ON CONTRACTS IN PROGRESS
Net accounts receivable, trade consists of the following:
December 31,
2005
------------
Amounts billed $ 3,394,736
Retainage 34,869
Accrued revenue 453,740
------------
3,883,345
Less: Allowance for sales returns
and doubtful accounts (186,934)
------------
Net accounts receivable $ 3,696,411
============
Advances on contracts in progress $ 1,758,479
============
Accrued revenue represents revenues recognized on contracts for which
billings have not been presented to customers as of the balance sheet date.
These amounts are billed and generally collected within one year.
36
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2005 AND 2004
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 approximately $35,000 at December 31, 2005. All other accounts
receivable are expected to be collected within one year.
All contracts with United States government agencies have been audited
by the government through December 2003. The Company has not incurred
significant losses as a result of these incurred cost audits.
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to pay amounts due. The
Company actively pursues collection of past due receivables as the circumstances
warrant. Customers are contacted to determine the status of payment and senior
accounting and operations management are included in these efforts as is deemed
necessary. A specific reserve will be established for past due accounts over 60
days and over a specified amount, when it is probable that a loss has been
incurred and the Company can reasonably estimate the amount of the loss. The
Company does not record an allowance for government receivables and invoices
backed by letters of credit as realizeability is reasonably assured. Bad debts
are written off against the allowance when identified. There is no dollar
threshold for account balance write-offs. While rare, a write-off is only
recorded when all efforts to collect the receivable have been exhausted and only
in consultation with the appropriate business line manager.
In addition, the Company maintains an allowance for potential future
product returns and rebates related to current period revenues. The Company
analyzes the rate of historical returns when evaluating the adequacy of the
allowance for sales returns and allowances. Returns and rebates are charged
against the allowance when incurred.
Advances on contracts in progress represent contracts for which billings
have been presented to the customer but revenue has not been recognized.
4. INVENTORIES
Inventories consist of the following:
December 31,
2005
------------
Raw materials $ 1,302,117
Work in process 1,057,595
Finished goods 300,777
------------
$ 2,660,489
============
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
2005
------------
Building under capital lease $ 3,390,397
Equipment under capital lease 880,927
Machinery and equipment 13,055,807
Furniture fixtures and computer equipment 3,677,279
Leasehold improvements 1,993,738
Construction in progress 7,390
------------
23,005,538
Accumulated depreciation (18,489,667)
------------
$ 4,515,871
============
Depreciation expense relating to property and equipment was
approximately $2,366,000 and $2,457,000 for the years ended December 31, 2005
and 2004, respectively.
37
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2005 AND 2004
6. ACCRUED LIABILITIES
Accrued liabilities include the following:
December 31,
2005
------------
Accrued payroll and payroll taxes $ 620,454
Accrued legal and audit fees 90,840
Accrued other 1,260,614
------------
$ 1,971,908
============
7. NOTES PAYABLE AND CREDIT ARRANGEMENTS
The Company has a $2,000,000 Loan Agreement (the "Agreement") with
Citizens Bank of Massachusetts (the "Bank"). The Agreement provides Standby
Letter of Credit Guarantees for foreign and domestic customers, which are 100%
secured with cash. At December 31, 2005, the Company had $926,000 of restricted
cash associated with outstanding Letters of Credit. Standby Letters of Credit
under this Agreement bear interest at 1%. The Agreement also provides the
Company with the ability to convert to a $2,000,000 revolving line of credit,
based upon eligible accounts receivable and certain conversion covenants. Loans
under this revolving line of credit bear interest at the Bank's prime rate, as
determined, plus 1/2% (7.75% at December 31, 2005.) At December 31, 2005, the
Company had not exercised its conversion option and no amounts were outstanding
under the revolving line of credit. A commitment fee of .25% is charged on the
unused portion of the borrowing base. On June 29, 2005, the Company entered into
a Second Amendment to extend the expiration date of the Agreement to June 27,
2006. The Agreement contains covenants including certain financial reporting
requirements. At December 31, 2005, the Company was in compliance with its
financial reporting requirements and cash balance covenants.
8. STOCK COMPENSATION PLANS
The Company has one employee stock option plan: the 1996 Equity
Incentive Plan. This plan was approved by stockholders and provides that the
Board of Directors may grant options to purchase the Company's common stock to
key employees and directors of the Company. Incentive and non-qualified options
must be granted at least at the fair market value of the common stock or, in the
case of certain optionees, at 110% of such fair market value at the time of
grant. The options may be exercised, subject to certain vesting requirements,
for periods up to ten years from the date of issue.
Through December 31, 2005, the Company has outstanding under its 1996
Equity Incentive Plan, non-qualified stock options held by the unaffiliated
directors of the Company for the purchase of common stock at an average price of
$5.91 per share. The options may be exercised, subject to certain vesting
requirements, for periods up to ten years from the date of issue. The Company
may no longer award options under any plans other than the 1996 Equity Incentive
Plan.
A summary of the activity of these plans follows:
Weighted
Number Average
of Shares Exercise Price
------------ ------------
Options Outstanding at December 31, 2003 711,328 $ 3.44
Granted 122,750 $ 4.88
Exercised (82,881) $ 2.29
Canceled/expired (43,500) $ 3.54
------------ ------------
Options Outstanding at December 31, 2004 707,697 $ 3.82
Granted 88,000 $ 5.19
Exercised (374,446) $ 3.52
Canceled/expired (14,937) $ 3.76
------------ ------------
Options Outstanding at December 31, 2005 406,314 $ 4.38
============ ============
Options Exercisable at December 31, 2005 172,830 $ 3.90
============ ============
Options Available for Future Grant at
December 31, 2005 502,037
============
38
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2005 AND 2004
The following table summarizes information about stock options
outstanding at December 31, 2005:
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
---------------- ----------- ---------------- ---------------- ----------- ----------------
$ 1.78 to $ 3.11 44,374 4.23 years $ 2.32 40,874 $ 2.29
$ 3.12 to $ 3.90 142,058 5.95 years $ 3.89 87,629 $ 3.90
$ 3.91 to $ 4.90 153,195 8.58 years $ 4.33 25,075 $ 4.13
$ 4.91 to $ 6.36 44,187 8.44 years $ 6.07 9,252 $ 6.03
$ 6.37 to $10.74 22,500 6.47 years $ 8.58 10,000 $ 7.94
----------- -----------
406,314 7.05 years $ 4.38 172,830 $ 3.90
=========== ===========
There were 908,351 shares reserved for issuance under all plans at
December 31, 2005.
9. SALE OF LICENSES
In October 2002, the Company sold an exclusive patent license for a
hemodialysis split-tip catheter to Bard Access Systems, Inc. ("Bard"), a wholly
owned subsidiary of C. R. Bard, Inc., in exchange for $5,000,000 upon the
execution of the agreement, with another $5,000,000 due upon the earlier to
occur of: (a) the date of the first commercial sale of a licensed product by
Bard; or (b) no more than 18 months after signing. The agreement further
provided for two additional contingent cash payments of $3,000,000 each upon the
completion of certain milestones by Bard in 2004 and 2005. Bard had the right to
cancel the agreement at any time subsequent to the second payment. During the
year ended December 31, 2002, the Company recorded the initial payment under the
agreement, resulting in a gain of $4,464,929, net of direct costs. Due to the
potential length of time between the first and second payments and the
cancellation provisions within the agreement, the Company did not record the
potential remaining payments at that time. During June 2003, in accordance with
the agreement, the Company received notification from Bard of the first
commercial sale, collected the $5,000,000 payment due and recorded a gain of
$4,989,150, net of direct costs. In June 2004, the Company received the first
contingent milestone payment and recorded a gain of $3,000,000. In June 2005,
the Company received the second and final contingent milestone payment and
recorded a gain of $3,000,000. There were no direct costs associated with these
payments. These gains have been recorded in the accompanying consolidated
statements of operations for the years ended December 31, 2005 and 2004,
respectively.
In conjunction with the sale, the Company received a sublicense, which
permits the Company to continue to manufacture and market hemodialysis catheters
for the treatment of chronic kidney disease. In addition, the Company granted
Bard a right of first refusal should the Company seek to sell the catheter
business.
On May 26, 2005, the Company entered into a global consortium agreement
(the "Consortium Agreement") with Nisshinbo Industries, Inc. ("Nisshinbo") for
the development, manufacturing, and sales of solar photovoltaic module
manufacturing equipment. Under the terms of the Consortium Agreement, Nisshinbo
purchased a license to manufacture and sell the Company's module manufacturing
equipment for an upfront fee plus additional royalties based on ongoing
equipment sales over a ten-year period. In addition, the Company and Nisshinbo
agreed, but are not obligated, to pursue joint research and development, product
improvement activities and sales and marketing efforts. On June 27, 2005, the
Company received JPY 400,000,000 (approximately $3.7 million) from the sale of
this permanent license. The Company has determined the fair value of the license
and royalty based on an appraisal. As a result, a $3,319,600 gain has been
recognized as a gain on sale of license in the accompanying consolidated
statement of operations for the year ended December 31, 2005. The balance of
$350,000 was determined to represent an advanced royalty payment and was
recorded as an advance on contracts in progress. This amount is being accreted
as royalty income over the ten year license period on a straight line basis.
Approximately $86,000 of royalty income was recognized during the year ended
December 31, 2005.
As of June 30, 2005, JPY 400,000,000 was held in a Japanese yen account.
The Company converted JPY 350,000,000 into $3,139,295 on August 3, 2005
resulting in an approximate $17,000 currency translation loss. The Company
continues to maintain a Japanese yen account approximately JPY 33,738,000 as of
December 31, 2005. As of December 31, 2005, approximately $287,000 has been
reflected in cash and cash equivalents in the accompanying
39
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2005 AND 2004
consolidated balance sheet utilizing the closing yen/dollar exchange rate as of
December 31, 2005. Total currency translation loss for the year ended December
31, 2005 of $104,039 is reflected in other expense, net in the accompanying
consolidated statement of operations.
10. NASDAQ LISTING
On April 6, 2005, the Company received a letter from the Nasdaq Listing
Qualifications Panel (the "Nasdaq Panel") indicating that the Company is no
longer in compliance with the $10,000,000 minimum stockholders' equity
requirement for continued listing set forth in Nasdaq Marketplace Rule
4450(a)(3) (the "Rule"). The Nasdaq Panel requested that the Company provide, by
April 13, 2005, the Company's plan to achieve and sustain compliance with this
requirement. On April 13, 2005, the Company presented such plan to the Nasdaq
Panel.
On April 25, 2005, the Company received a letter from the Nasdaq Panel
informing the Company that the Nasdaq Panel was remanding this case to the
Nasdaq Staff. The Nasdaq Panel indicated that it believes that the Nasdaq Staff
is the appropriate body to review and evaluate the Company's plan of compliance,
following its normal procedures and processes.
On April 27, 2005, the Nasdaq Staff issued a Determination letter
reiterating the Nasdaq Panel's April 6, 2005 finding that the Company is no
longer in compliance with the Rule, and that the Nasdaq Staff would review the
Company's eligibility for continued National Market listing. The Nasdaq Staff
requested that the Company provide a plan to achieve and sustain compliance with
Nasdaq listing standards. On May 12, 2005, the Company submitted such a plan to
the Nasdaq Staff.
On May 24, 2005, the Nasdaq Staff requested additional information from
the Company regarding certain projected nonrecurring license sales that were
expected to occur during the second quarter of 2005. On June 3, 2005, the
Company submitted a revised plan to achieve compliance with the Rule
incorporating the subject license sales. On June 6, 2005, the Company received a
letter from the Nasdaq Staff stating that the Company provided a definitive plan
evidencing its ability to achieve and sustain compliance with the Rule, and as
such, granted the Company an extension of time to achieve compliance. The terms
of the extension required the Company to file a Form 8-K providing an update on
the Company's listing status. The Company made such filing on August 5, 2005.
The license sales completed during the three months ended June 30, 2005 are
described in Note 9 above.
On August 17, 2005, the Company received a letter from the Nasdaq Staff
indicating that the Nasdaq Staff had determined that the Company complied with
the Rule and that this matter was closed.
At December 31, 2005, the Company's stockholder's equity was $9.2
million. As a result, the Company did not meet the requirements of the Rule
under Standard No. 1 for continued listing on the Nasdaq National Market.
However, the Company believes that it does meet Standard No. 2 for continued
listing on the Nasdaq National Market as the market value of its listed
securities currently exceeds $50,000,000 and it meets all other requirements
under Standard No. 2. In order to remain in compliance with Standard No. 2, the
Company's market value of listed securities cannot fall below $50,000,000 for
ten consecutive trading days at any point.
11. INCOME TAXES
There was no income tax provision (benefit) required for 2005 and 2004.
The reconciliation between the amount computed by applying the United
States federal statutory tax rate of 34% to pretax income and the actual
provision for income (loss) taxes follows:
2005 2004
------------ ------------
Income tax expense (benefit) at statutory rate $ 15,035 $ (1,400,651)
State income taxes net of federal income tax benefit 2,781 (273,097)
Increase (decrease) in valuation allowance related
to income tax expense (20,714) 1,656,555
Permanent differences 18,206 14,658
Tax credits (14,438) --
Foreign tax credits (870) 2,435
Other -- 100
------------ ------------
Total $ -- $ --
============ ============
40
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2005 AND 2004
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities are as follows:
2005
------------
Deferred tax assets:
Accounts receivable $ 75,315
Accruals 326,123
Inventories 134,626
Net operating loss carryforwards 2,510,398
General business credit carryforwards 24,715
Alternative minimum tax credit carryforwards 267,966
Foreign tax credit 32,567
------------
Total gross deferred tax assets 3,371,710
------------
Depreciation (189,696)
------------
Total gross deferred tax liabilities (189,696)
------------
Valuation allowance (3,182,014)
------------
Net deferred tax assets $ --
============
The net change in the total valuation allowance for the period ended
December 31, 2005 was an increase of $1,024,855. Gross net operating loss
carryforwards were approximately $6.2 million as of December 31, 2005. Included
in this amount was approximately $2.3 million attributable to equity based
compensation transactions. Approximately $944,000 of the valuation allowance
will be relieved through equity if these deductions for equity based
transactions are realized.
12. COMMITMENTS
Letters of Credit
-----------------
Outstanding letters of credit totaled $926,000 at December 31, 2005. The
letters of credit principally secure performance obligations, and allow holders
to draw funds up to the face amount of the letter of credit if the Company does
not perform as contractually required. These letters of credit expire through
2007 and are 100% secured by cash..
Property Under Capital Leases and Lease Commitments
---------------------------------------------------
At December 31, 2005, the Company had capital leases in effect for a
building and fabrication equipment. The Company also had operating leases for
office space and other miscellaneous items.
The components of capitalized costs and carrying value of the property
under capital leases were as follows:
2005
------------
Unrelated party capital lease:
Equipment $ 880,927
Less: accumulated depreciation (410,458)
------------
$ 470,469
============
2005
------------
Related party capital lease:
Hudson, New Hampshire building $ 3,390,397
Less: accumulated depreciation (1,751,706)
------------
$ 1,638,691
============
41
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2005 AND 2004
At December 31, 2005, future minimum lease payments for the period ended
are as follows:
Unrelated Related Unrelated Related
Party Party Party Party
Capital Capital Operating Operating
Lease Lease Leases Lease
----------- ----------- ----------- -----------
2006 $ 495,655 $ 870,000 $ 117,633 $ 1,241,836
2007 -- 1,102,500 81,454 1,138,350
2008 -- 495,250 55,356 --
2009 -- -- 28,704 --
----------- ----------- ----------- -----------
Total minimum lease payments 495,655 2,467,750 $ 283,147 $ 2,380,186
----------- ----------- =========== ===========
Less amount representing interest (48,971) (219,768)
----------- -----------
Present value of minimum lease payments 446,684 2,247,982
Less current portion (446,684) (734,376)
----------- -----------
Long-term portion of capital lease obligation $ -- $ 1,513,606
=========== ===========
Unrelated Party Capital Lease
-----------------------------
In September 2001, Bandwidth entered into an agreement with GE Capital
Leasing Corp, for the lease of a reactor for its wafer production line. The
lease is accounted for as a capital lease. Under the lease agreement, the
Company is making monthly payments of approximately $36,000. After the initial
three-year period ending in September 2004, the lease allowed for an additional
two-year extension. In September 2004, the Company extended the lease term for
the additional two years to September 2006. The lease includes a residual value
guarantee of $204,000 at the end of the extended period. Interest costs were
assumed at 7%. For the year ended December 31, 2005, interest expense was
$35,000.
Related Party Capital Lease
---------------------------
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 Lightwave, Inc. (Bandwidth's former owner)
the building that Bandwidth occupies in Hudson, New Hampshire for $3.7 million.
Subsequently, the Company entered into a lease for the building (90,000 square
feet) with SPI-Trust whereby the Company will pay $4.1 million to the SPI-Trust
over an initial five-year term expiring in 2008 with a Company option to extend
for five years. In addition to the rent payments, the lease obligates the
Company to keep on deposit with SPI-Trust the equivalent of three months rent
($191,250 as of December 31, 2005.) The lease agreement does not provide for a
transfer of ownership at any point. Interest costs were assumed at 7%. For the
year ended December 31, 2005, interest expense was approximately $179,000. This
lease has been classified as a related party capital lease and a summary of
payments (including interest) follows:
Rate Per Security
Year Square Foot Annual Rent Monthly Rent Deposit
--------------------------- ----------- ----------- ------------ ---------
June 1, 2003 - May 31, 2004 $ 6.00 $ 540,000 $ 45,000 $ 135,000
June 1, 2004 - May 31, 2005 7.50 675,000 56,250 168,750
June 1, 2005 - May 31, 2006 8.50 765,000 63,750 191,250
June 1, 2006 - May 31, 2007 10.50 945,000 78,750 236,250
June 1, 2007 - May 31, 2008 13.50 1,215,000 101,250 303,750
-----------
$ 4,140,000
===========
Unrelated Party Operating Leases
--------------------------------
Unrelated party operating leases primarily consist of leases for copiers
and the telephone system.
42
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2005 AND 2004
Related Party Operating Lease
-----------------------------
The Company subleased 77,000 square-feet in a building leased by
Mykrolis Corporation, who in turn leased the building from SPI-Trust, a Trust of
which Roger Little, Chairman of the Board, Chief Executive Officer and President
of the Company, is the sole trustee and principal beneficiary. 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 sublease agreement provided for minimum
rental payments plus annual increases linked to the consumer price index. Rent
expense under this sublease for the year ended December 31, 2005 and 2004 was
approximately $1,093,000 and $1,151,000, respectively. In connection with this
sublease, the Company was invoiced and paid certain SPI-Trust related expenses,
including building maintenance and insurance. The Company invoiced SPI-Trust on
a monthly basis and SPI-Trust reimbursed the Company for all such costs.
On November 11, 2005, the Company entered into an Extension of Lease
Agreement (the "Lease Extension") directly with SPI-Trust the term of which
commenced on December 1, 2005. The Lease Extension is for a period of two years
and maintains the rental payments at the now current rental rate over the two
(2) year period. All other terms of the Lease Extension are substantially the
same as were in effect under the former lease and sublease agreements. The
Company assumed certain responsibilities of Mykrolis, the tenant under the
former lease, as a result of the Lease Extension including payment of all
building and real estate related expenses associated with the ongoing operations
of the property. The Company will allocate a portion of these expenses to
SPI-Trust based on pre-established formulas utilizing square footage and actual
usage where applicable. These allocated expenses will be invoiced monthly and be
paid utilizing a SPI-Trust escrow account of which the Company has sole
withdrawal authority. SPI-Trust is required to maintain three (3) months of its
anticipated operating costs within this escrow account. The Company believes
that the terms of the Lease Extension are commercially reasonable. Rent expense
under the Lease Extension for the year ended December 31, 2005 was approximately
$103,000. Approximately $9,000 was due from SPI-Trust as of December 31, 2005
for building related costs.
In conjunction with the acquisition of Bandwidth by the Company, the
Company released Bandwidth from a 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
continued 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. This lease obligation terminated in
November 2005. The difference between the actual rent payment and the discounted
rent payment was accreted to the consolidated statements of operations as
interest expense. Interest of 4.75% had been assumed on this obligation. For the
year ended December 31, 2005, interest expense was approximately $11,000.
Agreement with BP Solarex
-------------------------
On October 8, 1999, the Company entered into an agreement with BP
Solarex ("BPS") in which BPS agreed to purchase certain production equipment
built by the Company, for use in the Company's Chicago factory ("Spire Solar
Chicago") and in return the Company agreed to purchase solar cells of a minimum
of two megawatts per year over a five-year term for a fixed fee from BPS (the
"Purchase Commitment"). BPS had the right to reclaim the equipment if the
Company failed to meet its obligations in the Purchase Commitment. The proceeds
from the sale of the production equipment purchased by BPS were classified as an
unearned purchase discount in the Company's consolidated balance sheets in prior
periods. The Company had amortized this discount as a reduction to cost of sales
as it purchased materials from BPS. In 2003 the Company and BPS retroactively
amended the agreement to include all purchases of solar modules, solar systems,
inverter systems and other system equipment purchased by the Company from BPS in
the purchase commitment calculation. Amortization of the purchase discount
amounted to approximately $65,000 and $160,000 for the years ended December 31,
2005 and 2004, respectively. The production equipment had been classified as a
component of fixed assets. Depreciation amounted to approximately $211,000 for
the year ended December 31, 2005.
In addition, the agreement contained a put option for BPS to have the
Company create a separate legal entity for Spire Solar Chicago and for BPS to
convert the value of the equipment and additional costs, as defined, into equity
of the
43
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2005 AND 2004
new legal entity. The percentage ownership in the joint venture would be
determined based on the cumulative investments by BPS and the Company. The
amended agreement also allowed the Company to terminate the agreement on 30 days
notice in consideration for a termination payment based on the aggregate amount
of Spire purchases of BPS products and the fair market value of the production
equipment purchased by BPS at the time of the termination election.
On August 16, 2005, the Company entered into a Settlement and Contract
Termination Agreement (the "Termination Agreement") with BPS effective September
30, 2005. Under the terms of the Termination Agreement, the Company and BPS
agreed to terminate the amended agreement including the Purchase Commitment. In
exchange for release of the purchase commitment, the Company paid BPS $275,000
and retained ownership of the production equipment. The unamortized unearned
purchase discount as of the effective date was approximately $1,205,000 and the
net book value of the production equipment was approximately $287,000. As result
of this action, Spire reevaluated the recoverability of the long-lived assets
associated with this segment as part of its third quarter review. Based on cash
flow projections for the Solar System segment, the Company determined that the
production equipment was impaired and should be written-off.
The Company has recorded an approximate $593,000 gain from these
actions, which is reflected as a gain on extinguishment of purchase commitment
in the accompanying consolidated statement of operations for the year ended
December 31, 2005. The components of this gain are outlined below:
Unearned purchase discount $ 1,205,000
Net book value of production equipment (287,000)
Payment to extinguish purchase commitment (275,000)
Accrued relocation costs (50,000)
-----------
Gain on extinguishment of purchase commitment $ 593,000
===========
13. EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
-------------------
In 1985, the Company adopted a profit sharing plan under Section 401(k)
of the Internal Revenue Code. This plan allows employees to defer up to 17.5% of
their income up to certain dollar limits on a pretax basis through contributions
to the plan. No matching contributions have been made to the plan for the years
ended December 31, 2005 and 2004, respectively.
Deferred Compensation Plan
--------------------------
Effective January 1, 2002, the Company adopted the Spire Corporation
Non-Qualified Deferred Compensation Plan (the "Plan") for Roger Little, Chairman
of the Board, Chief Executive Officer and President of the Company (the
"Participant"). Under this Plan, the Company makes equal monthly contributions
to the Spire Corporation Non-Qualified Deferred Compensation Trust (the "Trust")
up to the annually required amount of $250,000 over 5 years. The Company records
these contributions as selling, general and administration expense when made.
The Trustee makes all investment decisions for the Trust on behalf of the
Participant. The Company has not guaranteed a return on investment for the
Participant, however, all earnings and losses on the Plan assets are borne by
the Participant. All contributions and earnings are fully vested to the
Participant when made but are subject to the Company's creditors in the event of
bankruptcy. As a result, the assets held in the Plan have been recorded as
available-for-sale investments in the consolidated balance sheet with a
corresponding liability being recorded as deferred compensation. Unrealized
gains and losses on the available-for-sale investments are recorded as
accumulated other comprehensive income within the equity section of the
consolidated balance sheet. A corresponding entry to deferred compensation is
made to increase (decrease) the amounts due the Participant resulting from the
changes in the asset value with an offsetting charge or credit to selling,
general and administrative expense. Compensation expense was approximately
$250,000 in each of the years ended December 31, 2005 and 2004.
44
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2005 AND 2004
14. EARNINGS (LOSS) PER SHARE
The following table provides a reconciliation of the denominators of the
Company's reported basic and diluted earnings (loss) per share computations for
the years ended December 31:
2005 2004
---------- ----------
Weighted average number of common and common
equivalent shares outstanding - basic 6,975,347 6,809,462
Add: Net additional common shares upon assumed
exercise of common stock options 261,782 --
---------- ----------
Weighted average number of common and common
equivalent shares - diluted 7,237,129 6,809,462
========== ==========
For the year ended December 31, 2005, 32,500 shares of common stock
issuable relative to stock options had exercise prices per share that exceeded
the average market price of the Company's common stock and were excluded from
the calculation of diluted shares since their inclusion would be anti-dilutive.
For the year ended December 31, 2004, 78,250 shares 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.
In addition, 209,959 shares of common stock issuable relative to stock options
were excluded from the calculation of dilutive shares since the inclusion of
such shares would be anti-dilutive due to the Company's net loss position.
15. LEGAL MATTERS
From time to time, the Company is subject to legal proceedings and
claims arising from the conduct of its business operations. The Company does not
expect the outcome of these proceedings, either individually or in the
aggregate, to have a material adverse effect on its financial position, results
of operations, or cash flows.
The Company has been named as a defendant in 58 cases filed from August
2001 to July 2003 in state courts in Texas by persons claiming damages from the
use of allegedly defective mechanical heart valves coated by a process licensed
by the Company to St. Jude Medical, Inc., the valve manufacturer, which has also
been named as a defendant in the cases. In June 2003, a judge in a state court
in Harris County, Texas agreed to grant the Company's motion for summary
judgment based upon the principle of federal preemption with regard to 57 of
those cases and to order that the cases against the Company be dismissed with
prejudice. An order to this effect was signed in late July 2003. The remaining
case is still pending, and due to aspects of its fact situation is not subject
to the principle of federal preemption. From August 2003 to date, a total of
seven new cases were filed against the Company in courts in Harris County.
Activity with regard to these cases is likely to occur only after the
disposition of the original 57 cases is finally settled. The plaintiffs whose
cases were dismissed have filed appeals with the Texas appellate court. In June
2005, the Texas Court of Appeals upheld the summary judgment granted by the
lower court. Attorneys for the Company anticipate that the plaintiffs may file a
motion for rehearing, and an appeal with the Texas Supreme Court is also
possible. Attorneys who represent the Company with respect to these cases in
Texas do not believe at this time that the actions of a federal district court
judge in Minnesota in denying St. Jude Medical's request for summary judgment
will materially affect the Company's position in the Texas complaints.
During the second quarter of 2005 a suit was filed by Arrow
International, Inc. against Spire Biomedical, Inc., a wholly owned subsidiary of
the Company, alleging patent infringement by the Company. The complaint claims
one of the Company's catheter products induces and contributes to infringement
when medical professionals insert it. The Company has responded to the complaint
denying all allegations and has filed certain counterclaims. The Company intends
to vigorously defend this matter. The parties are engaged in the discovery
process.
45
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2005 AND 2004
16. OPERATING SEGMENTS AND RELATED INFORMATION
The following table presents certain operating division information in
accordance with the provisions of SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information".
Solar Solar Spire Total
Equipment Systems Biomedical Optoelectronics Other Company
--------------------------------------------------------------------------------------------
December 31, 2005
-----------------
Net sales and revenues $ 7,647,709 $ 1,744,889 $ 10,578,003 $ 2,451,009 $ -- $ 22,421,610
Earnings (loss) from
operations 1,601,356 (683,537) 2,170,215 (2,740,071) -- 347,963
Identifiable assets 2,543,511 717,995 4,042,962 4,392,008 6,255,416 17,951,892
Capital expenditures 7,154 86,940 183,847 84,488 65,846 428,275
Depreciation 56,968 228,435 436,854 1,437,073 207,075 2,366,405
December 31, 2004
-----------------
Net sales and revenues $ 2,683,243 $ 3,316,955 $ 8,897,340 $ 2,380,498 $ -- $ 17,278,036
Earnings (loss) from
operations (2,086,038) (269,833) 774,706 (2,262,808) -- (3,843,973)
Identifiable assets 2,739,238 2,144,876 3,779,262 5,581,855 5,859,702 20,104,933
Capital expenditures 45,687 1,613 246,542 58,848 54,765 407,455
Depreciation 75,419 297,635 415,530 1,426,794 241,553 2,456,931
The following table shows net sales and revenues by geographic area
(based on customer location for the years ended December 31:
2005 % 2004 %
------------ ------------ ------------ ------------
Foreign $ 7,463,000 33% $ 2,524,000 15%
United States 14,959,000 67% 14,754,000 85%
------------ ------------ ------------ ------------
$ 22,422,000 100% $ 17,278,000 100%
============ ============ ============ ============
The Company's operations are focused on three primary business areas:
Spire Solar (comprised of two business units, solar equipment and solar
systems), Spire Biomedical (comprised of biomedical and biophotonics research)
and optoelectronics (comprised primarily of Bandwidth Semiconductor, LLC). Spire
Solar and Spire Biomedical operate out of the Company's facility in Bedford,
Massachusetts. Bandwidth Semiconductor LLC operates out of the Company's
facility in Hudson, New Hampshire. Each business unit is independently managed
and has separate financial results that are reviewed by the Board of Directors
and Chief Executive Officer and the chief executive officers of each operating
division.
Earnings (loss) from operations is net sales less cost of sales,
selling, general and administrative expenses and gain on sales of licenses, but
is not affected either by non-operating income or by income taxes. The Spire
Biomedical segment benefitted from a $3,000,000 gain on sale of license in each
of 2005 and 2004. The Solar Equipment segment benefitted from a $3,319,600 gain
on sale of license in 2005. In calculating earnings from operations for
individual business units, substantial administrative expenses incurred at the
operating level that are common to more than one segment are allocated on a net
sales basis. Certain corporate expenses of an operational nature are also
allocated to the divisions based on factors including occupancy, employment, and
purchasing volume. All intercompany transactions have been eliminated.
Revenues from contracts with United States government agencies for 2005
and 2004 were approximately $3,233,000 and $2,837,000, or 14% and 16% of
consolidated net sales and revenues, respectively
No customer accounted for more than 10% of gross sales during 2005. One
customer accounted for approximately 15% of the Company's gross sales during
2004. One customer represented approximately 19% and one customer represented
approximately 12% of net account receivables, trade at December 31, 2005 and
2004, respectively.
46
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
ITEM 8A. CONTROLS AND PROCEDURES
--------------------------------
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Company carried out an evaluation under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and President and the Chief Financial Officer, of
the effectiveness of the Company's disclosure controls and procedures as of
December 31, 2005. In designing and evaluating the Company's disclosure controls
and procedures, the Company and its management recognize that there are inherent
limitations to the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the circumvention or
overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their desired control objectives. Additionally, in evaluating and
implementing possible controls and procedures, the Company's management was
required to apply its reasonable judgment. Furthermore, management considered
certain matters deemed by the Company's independent auditors to constitute a
material weakness in the Company's internal control over financial reporting
described below. Based upon the required evaluation, the Chief Executive Officer
and President and the Chief Financial Officer concluded that as of December 31,
2005, due to the material weakness in internal control over financial reporting
described below, the Company's disclosure controls and procedures were not
effective 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.
On March 21, 2006, the Company's independent auditor, Vitale, Caturano &
Company, Ltd. ("VCC") issued a letter advising management and the Audit
Committee, that, in connection with its audit of the Company's consolidated
financial statements for the year ended December 31, 2005, it noted certain
matters involving internal control and its operation that it considered to be a
material weakness under standards of the Public Company Accounting Oversight
Board. VCC noted that, since its March 2005 letter, in which VCC noted material
weaknesses in the Company's internal controls in connection with its audit of
the Company's 2004 financial statements, the Company has made significant
strides over the past year to improve its internal control structure. These
include:
o An improved reconciliation process;
o A disciplined and timely monthly close process; and
o Detailed reviews of monthly close packages by the appropriate levels
of management.
However, VCC also noted that improvements still need to be made in the
reconciliation and documentation and information flow processes. In particular,
the Company lost several key individuals who were integral to the accounting
department in general and the closing process specifically. While the finance
group was able to close the books and analyze the accounts on a timely basis,
the staff was resource constrained and the established controls, policies and
procedures could not be fully implemented during the year end close. The Company
supplemented the staff with outside assistance and the Chief Financial Officer
assumed responsibility of the reconciliations of certain accounts and various
review roles. However, VCC noted that the finance department will not be
alleviated and control structure improved until such time as the full finance
team is assembled.
In addition, VCC noted that the Company does not have sufficient
internal knowledge and expertise of its enterprise reporting system, Solomon,
including technical knowledge. The Company utilizes external consultants to help
them develop reports and troubleshoot the system; however without a fully
dedicated resource, the risk of errors being generated in or by the system is
significant. VCC noted that the Company should develop a comprehensive training
program associated with the system so that employees are aware of the system and
all of its capabilities in order to obtain the efficiencies the system can
provide. The full utilization and knowledge of the ERP system is critical to the
Company's internal control over financial reporting. The Company should focus on
developing the in-house knowledge of the ERP system, either through trainings or
recruiting of an experienced information technology professional with the
requisite knowledge.
The Company concurs with VCC's findings noted above and is continuing to
make changes in its internal controls and procedures. Unfortunately, the Company
was operating without a Controller, Assistant Controller and Senior Cost
Accountant during the latter half of 2005. These positions are critical to the
oversight and review of the finance group's output. As VCC noted, the Company
supplemented those functions through the use of outside consultants and through
the Chief Financial Officer assuming certain preparation and review roles.
Unfortunately, this weakens the internal control structure as the review process
is compressed and streamlined. The Company has hired a Senior Cost Accountant
and expects to have its Assistant Controller position filled during the second
quarter of 2006. The Company has had difficulty recruiting a full time
Controller and will continue to search for a replacement. The Company has made
significant strides in its monthly closing processes and expects that its
internal controls will improve once a full finance staff is in place.
47
Changes in Internal Control Over Financial Reporting
----------------------------------------------------
There was no change in the Company's internal control over financial
reporting that occurred during the fourth fiscal quarter of 2005 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
ITEM 8B. OTHER INFORMATION
--------------------------
On March 16, 2006, Spire Corporation (the "Company") entered into a
Turn-Key Project Agreement to provide a privately owned solar firm located in
Europe (the "Purchaser"), a commercially sized multi-megawatt turn-key
Photovoltaic Cell Manufacturing Line (the "Cell Line") for $6.75 million (to be
paid over the course of two years upon the achievement of certain milestones).
The Cell Line is scheduled to ship during the fourth quarter of 2006 and is
subject to various design, manufacturing and performance specifications. This
Company is subject to certain penalty provisions if the Cell Line does not meet
agreed-upon performance criteria within a set period of time. Under this
agreement, the Company also agreed to supply the Purchaser up to 1,500,000
mono-crystalline wafers or multi-crystalline wafers (meeting certain electrical
capacity and efficiency standards) prior to the starting date of production of
cells by the Cell Line or within 60 days after shipment of the Cell Line. The
actual amount of wafers ordered and the price of such wafers is subject to the
mutual agreement of the parties, and the Purchaser may cancel this non-exclusive
arrangement at any time. The price for such wafer supply is in addition to the
purchase price for the Cell Line.
In addition, concurrently with the execution of the Turn-Key Project
Agreement, the Company and the Purchaser entered into a Wafer Supply Agreement
under which the Company agreed to supply the Purchaser up to an additional
4,500,000 wafers (meeting certain electrical capacity and efficiency standards)
during the first three quarters of 2007. The actual amount of wafers ordered and
the price of such wafers is subject to the mutual agreement of the parties, and
the Purchaser may cancel this non-exclusive arrangement at any time.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
---------------------------------------------------------------------------
SECTION 16(A) OF THE EXCHANGE ACT
---------------------------------
Information concerning the directors and executive officers of the Company
is set forth under "Election of Directors" and "Executive Officers" in the Proxy
Statement for the Special Meeting in Lieu of 2006 Annual Meeting of Stockholders
("Proxy Statement") and is incorporated herein by reference. Information
concerning compliance with Section 16(a) of the Exchange Act is set forth under
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the
Proxy Statement and is incorporated herein by reference.
The Company has adopted a Code of Business Conduct and Ethics (the "Code")
that applies to its principal executive officer, principal financial officer and
principal accounting officer or controller, as well as to directors, officers
and employees generally. The Code sets forth written standards that are
reasonably designed to deter wrongdoing and to promote (1) honest and ethical
conduct, (2) full, fair, accurate, timely and understandable disclosure in
reports and documents that the Company files with the SEC and in other public
communications made by the Company, (3) compliance with applicable governmental
laws, rules and regulations, (4) the prompt internal reporting of violations of
the Code to an appropriate person or persons identified in the Code and (5)
accountability for adherence to the Code. The Company will provide to any person
without charge, upon request, a copy of the Code. Any person wishing a copy
should write to Michael W. O'Dougherty, Clerk, Spire Corporation, One Patriots
Park, Bedford, Massachusetts 01730-2396.
A copy of the Code is incorporated by reference as an exhibit to this Form
10-KSB.
48
ITEM 10. EXECUTIVE COMPENSATION
-------------------------------
Information concerning executive compensation is set forth under
"Compensation of Officers and Directors" in the Proxy Statement and is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
---------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
Information concerning security ownership of certain beneficial owners and
management is set forth under "Ownership of Securities" in the Proxy Statement
and is incorporated herein by reference. Information regarding equity
compensation plan information is set forth under "Compensation of Officers and
Directors" in the Proxy Statement and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------
Information concerning certain relationships and related transactions is
set forth under "Certain Relationships and Related Transactions" in the Proxy
Statement and is incorporated herein by reference.
ITEM 13. EXHIBITS
-----------------
The following Exhibits are either filed herewith or are incorporated by
reference as may be indicated.
3(a) Articles of Organization as amended, incorporated by reference to
Exhibit 3(a) to the Company's Form 10-QSB for the quarter ended
June 30, 1997
3(b) By-Laws, as amended, incorporated by reference to Exhibit 3(b) to
the Company's Form 10-K for the year ended December 31, 1989
10(a) Sublease Agreement with Millipore Corporation as landlord for
facility at Bedford, Massachusetts dated November 25, 1985,
incorporated by reference to Exhibit 10(a) to the Company's Form
10-K for the year ended December 31, 1985
10(b) Amendment to Sublease Agreement with Millipore Corporation as
landlord for facility at Bedford, Massachusetts dated December
30, 1999, incorporated by reference to Exhibit 10(b) to the
Company's Form 10-KSB for the year ended December 31, 1999 ("1999
10-KSB")
10(c) Sublease Agreement with Methode Electronics, Inc. as tenant for a
portion of the facility at Bedford, Massachusetts dated December
29, 1999, incorporated by reference to Exhibit 10(c) to the 1999
10-KSB
10(d) Asset Purchase Agreement dated as of November 18, 1999 with
Methode Electronics, Inc. and Methode Massachusetts, Inc.,
incorporated by reference to Exhibit 1 to the Company's Form 8-K
dated December 29, 1999
10(e) Employment Agreement with Roger G. Little dated as of January 1,
2002, incorporated by reference to Exhibit 10(e) to the Company's
Form 10-KSB for the year ended December 31, 2001 ("2001 10-KSB")
10(f) Deferred Compensation Plan with Roger G. Little dated as of
January 1, 2002, incorporated by reference to Exhibit 10(f) to
2001 10-KSB
10(g) Spire Corporation 1985 Incentive Stock Option Plan, incorporated
by reference to Exhibit 10(d) to the Company's Form 10-K for the
year ended December 31, 1984
10(h) Spire Corporation 401(k) Profit Sharing Plan, incorporated by
reference to Exhibit 10(h) to the Company's Form 10-KSB for the
year ended December 31, 2003 ("2003 10-KSB")
10(i) Spire Corporation 1996 Equity Incentive Plan, incorporated by
reference to Appendix A to the Company's Proxy Statement dated
April 15, 2004
10(j) Purchase Agreement dated May 23, 2003 with Stratos Lightwave and
Bandwidth Semiconductor, LLC, incorporated by reference to
Exhibit 10(h) to the Company's Form 10-QSB for the quarter ended
June 30, 2003
49
10(k) Lease Agreement dated May 23, 2003 by and between Roger G.
Little, Trustee of SPI-Trust as Landlord and Spire Corporation as
Tenant, incorporated by reference to Exhibit 10(i) to the
Company's Form 10-QSB for the quarter ended June 30, 2003
10(l) Trust Agreement dated April 1, 2004 between the Company and Riggs
Bank N.A. as Trustee of the Company's 401(k) Profit Sharing Plan,
incorporated by reference to Exhibit 10(1) to the Company's Form
10-KSB for the year ended December 31, 2004 ("2004 10-KSB")
10(m) Amendment No. One dated November 18, 2004 to Employment Agreement
for Roger G. Little, incorporated by reference to Exhibit 10(m)
to the Company's 2004 10-KSB
10(n) Development, Manufacturing, and Sales Consortium Agreement
between Nisshinbo Industries, Inc. and Spire Corporation, with an
effective date of 16 May 2005, incorporated by reference to
Exhibit 10(n) to the Company's For 10-QSB for the quarter ended
June 30, 2005.*
10(o) Extension of Lease Agreement dated November 11, 2005 between
Roger G. Little, Trustee of SPI-Trust and Spire Corporation
(lease of premises, 77,037 sq. ft.) (filed herewith)
10(p) Amendment Number Four to the Spire Corporation 401(k) Profit
Sharing Plan dated November 21, 2005 (filed herewith)
14 Code of Business Conduct and Ethics incorporated by reference to
Exhibit 14 to the 2003 10-KSB
21 Subsidiaries of the Registrant incorporated by reference to
Exhibit 21 to the 2003 10-KSB
23 Consent of Independent Registered Public Accounting Firm (filed
herewith)
31.1 Certification of the Chairman of the Board, Chief Executive
Officer and President pursuant to ss.302 of the Sarbanes-Oxley
Act of 2002 (filed herewith)
31.2 Certification of the Chief Financial Officer pursuant to ss.302
of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1 Certification of the Chairman of the Board, Chief Executive
Officer and President pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to ss.906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. ss.1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
* Portions of this Exhibit have been omitted pursuant to a grant of
confidential treatment.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
-----------------------------------------------
Information concerning principal accountant fees and services is set forth
under "Disclosure of Principal Accountant Fees and Services" in the Proxy
Statement.
50
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SPIRE CORPORATION
By: /s/ Roger G. Little March 21, 2006
---------------------
Roger G. Little
Chairman of the Board, Chief
Executive Officer, and President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Roger G. Little Chairman of the Board, Chief March 21, 2006
--------------------------- Executive Officer and
Roger G. Little President
/s/ James F. Parslow Chief Financial Officer March 21, 2006
---------------------------
James F. Parslow
/s/ Udo Henseler Director March 21, 2006
---------------------------
Udo Henseler
/s/ David R. Lipinski Director March 21, 2006
---------------------------
David R. Lipinski
/s/ Mark C. Little Chief Executive Officer, March 21, 2006
--------------------------- Spire Biomedical and
Mark C. Little Director
/s/ Michael J. Magliochetti Director March 21, 2006
---------------------------
Michael J. Magliochetti
/s/ Guy L. Mayer Director March 21, 2006
---------------------------
Guy L. Mayer
/s/ Roger W. Redmond Director March 21, 2006
---------------------------
Roger W. Redmond
51
EXHIBIT INDEX
Exhibit Description
------- -----------
10(o) Extension of Lease Agreement dated November 11, 2005 between Roger G.
Little, Trustee of SPI-Trust and Spire Corporation (lease of premises,
77,037 sq. ft.)
10(p) Amendment Number Four to the Spire Corporation 401(k) Profit Sharing
Plan dated November 21, 2005
23 Consent of Independent Registered Public Accounting Firm
31.1 Certification of the Chairman of the Board, Chief Executive Officer
and President pursuant to ss.302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to ss.302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of the Chairman of the Board, Chief Executive Officer
and President pursuant to 18 U.S.C. ss.1350, as adopted pursuant to
ss.906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of
2002