-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QY0BJVZZaIHM/xrC+4MUDQcONa1VXcimCjhWRTbqOLIK1ucTGBNpPRoU4EzAEGIz ua5bTUd/6zZ2a3yIT5waZA== 0001072613-05-002014.txt : 20050815 0001072613-05-002014.hdr.sgml : 20050815 20050815164324 ACCESSION NUMBER: 0001072613-05-002014 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050815 DATE AS OF CHANGE: 20050815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPIRE CORP CENTRAL INDEX KEY: 0000731657 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 042457335 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-12742 FILM NUMBER: 051027309 BUSINESS ADDRESS: STREET 1: ONE PATRIOTS PARK CITY: BEDFORD STATE: MA ZIP: 01730-2396 BUSINESS PHONE: 6172756000 MAIL ADDRESS: STREET 2: ONE PATRIOTS PARK CITY: BEDFORD STATE: MA ZIP: 01730-2396 10QSB 1 form10-qsb_13750.txt FORM 10-QSB FOR QUARTER ENDED JUNE 30, 2005 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2005; or |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to ________ Commission file number: 0-12742 SPIRE CORPORATION ----------------- (Name of small business issuer as specified in its charter) MASSACHUSETTS 04-2 57335 ------------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) ONE PATRIOTS PARK BEDFORD, MASSACHUSETTS 01730-2396 --------------------------------- (Address of principal executive offices) 781-275-6000 ------------ (Issuer's telephone number) Securities registered under Section 12(g) of the Act: COMMON STOCK, $0.01 PAR VALUE; REGISTERED ON THE NASDAQ STOCK MARKET -------------------------------------------------------------------- (Title of class) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. There were 6,864,366 outstanding shares of the issuer's only class of common equity, Common Stock, $0.01 par value, on August 8, 2005. ================================================================================ TABLE OF CONTENTS Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited Condensed Consolidated Balance Sheet as of June 30, 2005. 1 Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2005 and 2004.......... 2 Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004.................... 3 Notes to Unaudited Condensed Consolidated Financial Statements..... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 12 Item 3. Controls and Procedures............................................ 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings.................................................. 23 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........ 24 Item 3. Defaults Upon Senior Securities.................................... 24 Item 4. Submission of Matters to a Vote of Security Holders................ 24 Item 5. Other Information.................................................. 24 Item 6. Exhibits........................................................... 24 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SPIRE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) JUNE 30, 2005 ----------- ASSETS Current assets Cash and cash equivalents $7,576,064 Restricted cash 989,463 ----------- 8,565,527 Accounts receivable - trade, net 3,452,945 Inventories, net 2,401,547 Prepaid expenses and other current assets 582,334 ----------- Total current assets 15,002,353 Net property and equipment 5,706,048 Intangible and other assets (less accumulated amortization of $653,361) 694,752 Available-for-sale investments at quoted market value 886,420 Restricted cash - long-term 199,821 Deposit - related party 191,250 ----------- Total assets $22,680,644 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of capital lease obligation $ 415,947 Current portion of capital lease obligation - related party 620,999 Accounts payable 2,242,510 Accrued liabilities 1,894,762 Accrued lease obligation - related party 217,411 Advances on contracts in progress 2,020,093 ----------- Total current liabilities 7,411,722 ----------- Long-term portion of capital lease obligation 235,082 Long-term portion of capital lease obligation - related party 1,924,696 Deferred compensation 886,420 Unearned purchase discount 1,216,183 ----------- Total long-term liabilities 4,262,381 ----------- Total liabilities 11,674,103 ----------- Commitments and Contingencies: Stockholders' equity Common stock, $0.01 par value; 20,000,000 shares authorized; 6,856,616 shares issued and outstanding 68,566 Additional paid-in capital 9,468,506 Retained earnings 1,468,320 Accumulated other comprehensive income 1,149 ----------- Total stockholders' equity 11,006,541 ----------- Total liabilities and stockholders' equity $22,680,644 =========== See accompanying notes to condensed consolidated financial statements. 1 SPIRE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------ ------------------------------ 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Net sales and revenues Contract research, service and license revenues $ 2,809,657 $ 2,748,874 $ 5,541,671 $ 5,331,062 Sales of goods 4,537,458 1,508,991 5,984,959 3,957,069 ------------ ------------ ------------ ------------ Total net sales and revenues 7,347,115 4,257,865 11,526,630 9,288,131 ------------ ------------ ------------ ------------ Costs and expenses Cost of contract research, service and licenses 2,157,660 2,113,125 4,275,465 4,119,373 Cost of goods sold 4,291,820 1,388,027 5,710,580 3,308,604 Selling, general and administrative expenses 2,057,026 2,030,134 3,886,605 4,088,956 Internal research and development expenses 340,873 377,340 658,069 730,625 ------------ ------------ ------------ ------------ Total costs and expenses 8,847,379 5,908,626 14,530,719 12,247,558 ------------ ------------ ------------ ------------ Gain on sale of licenses 6,319,600 3,000,000 6,319,600 3,000,000 ------------ ------------ ------------ ------------ Earnings from operations 4,819,336 1,349,239 3,315,511 40,573 Other expense, net (121,184) (70,529) (197,801) (139,918) ------------ ------------ ------------ ------------ Earnings (loss) before income taxes 4,698,152 1,278,710 3,117,710 (99,345) Income tax expense -- -- -- -- ------------ ------------ ------------ ------------ Net earnings (loss) $ 4,698,152 $ 1,278,710 $ 3,117,710 $ (99,345) ============ ============ ============ ============ Earnings (loss) per share of common stock - basic $ 0.69 $ 0.19 $ 0.45 $ (0.01) ============ ============ ============ ============ Earnings (loss) per share of common stock - diluted $ 0.67 $ 0.18 $ 0.44 $ (0.01) ============ ============ ============ ============ Weighted average number of common and common equivalent shares outstanding - basic 6,856,616 6,789,206 6,855,783 6,777,368 ============ ============ ============ ============ Weighted average number of common and common equivalent shares outstanding - diluted 7,042,492 7,062,623 7,045,315 6,777,368 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. 2 SPIRE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ---------------------------- 2005 2004 ----------- ----------- Cash flows from operating activities: Net income (loss) $ 3,117,710 $ (99,345) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 1,245,007 1,244,451 Gain on sale of licenses (6,319,600) (3,000,000) Deferred compensation (23,407) -- Unearned purchase discount (54,128) (73,901) Changes in assets and liabilities: Restricted cash (379,574) (7,655) Accounts receivable, net 774,933 95,969 Inventories 322,891 (557,573) Prepaid expenses and other current assets (27,920) 335,955 Accounts payable, accrued liabilities and other liabilities 445,982 (316,021) Deposit - related party (22,500) (168,750) Advances on contracts in progress (578,653) (378,438) ----------- ----------- Net cash used in operating activities (1,499,259) (2,925,308) ----------- ----------- Cash flows from investing activities: Proceeds from sale of licenses 6,319,600 3,000,000 Additions to property and equipment (166,719) (197,014) Restricted cash - long term 17,979 -- Increase in intangible and other assets (5,117) (305,045) ----------- ----------- Net cash provided by investing activities 6,165,743 2,497,941 ----------- ----------- Cash flows from financing activities: Principal payment on capital lease obligations (197,336) (184,033) Principal payment on capital lease obligations - related parties (250,652) (171,480) Exercise of stock options 20,701 132,443 ----------- ----------- Net cash used in financing activities (427,287) (223,070) ----------- ----------- Net increase (decrease) in cash and cash equivalents 4,239,197 (650,437) Cash and cash equivalents, beginning of period 3,336,867 5,999,091 ----------- ----------- Cash and cash equivalents, end of period $ 7,576,064 $ 5,348,654 =========== =========== Cash paid during the period for: Interest $ 11,235 $ 31,077 =========== =========== Interest - related party $ 103,060 $ 109,771 =========== =========== Income taxes $ 110,064 $ -- =========== ===========
See accompanying notes to condensed consolidated financial statements. 3 SPIRE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2005 1. DESCRIPTION OF THE BUSINESS The Company develops, manufactures and markets highly-engineered products and services in four principal business areas: biomedical, solar equipment, solar systems and optoelectronics bringing to bear expertise in materials technologies across all four business areas. In the biomedical area, the Company provides value-added surface treatments to manufacturers of orthopedic and other medical devices that enhance the durability, antimicrobial characteristics or other material characteristics of their products; develops and markets hemodialysis catheters and related devices for the treatment of chronic kidney disease and performs sponsored research programs into practical applications of advanced biomedical and biophotonic technologies. In the solar equipment area, the Company develops, manufactures and markets specialized equipment for the production of terrestrial photovoltaic modules from solar cells. The Company's equipment has been installed in more than 150 factories in 43 countries. In the solar systems area, the Company provides custom and building integrated photovoltaic modules, stand alone emergency power backup and electric power grid-connected distributed power generation systems employing photovoltaic technology developed by the Company. In the optoelectronics area, the Company provides compound semiconductor foundry services on a merchant basis to customers involved in biomedical/biophotonic instruments, telecommunications and defense applications. Services include compound semiconductor wafer growth, other thin film processes and related device processing and fabrication services. The Company also provides materials testing services and performs services in support of sponsored research into practical applications of optoelectronic technologies. 2. INTERIM FINANCIAL STATEMENTS In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company's financial position as of June 30, 2005 and the results of its operations and cash flows for the three and six months ended June 30, 2005 and 2004. The results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2005. The accounting policies followed by the Company are set forth in Footnote 2 to the Company's consolidated financial statements in its annual report on Form 10-KSB for the year ended December 31, 2004. Certain prior period accounts have been reclassified to conform with current presentation. 3. ACCOUNTS RECEIVABLE/ADVANCES ON CONTRACTS IN PROGRESS Net accounts receivable, trade consists of the following: June 30, 2005 ---------- Amounts billed $3,333,925 Retainage 34,869 Accrued revenue 271,723 ---------- 3,640,517 Less: Allowance for sales returns and doubtful accounts (187,572) ---------- Net accounts receivable $3,452,945 ========== Advances on contracts in progress $2,020,093 ========== 4 SPIRE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) JUNE 30, 2005 Accrued revenue represents revenues recognized on contracts for which billings have not been presented to customers as of the balance sheet date. These amounts are billed and generally collected within one year. Retainage represents revenues on certain United States government sponsored research and development contracts. These amounts, which usually represent 15% of the Company's research fee on each applicable contract, are not collectible until a final cost review has been performed by government auditors. Included in retainage are amounts expected to be collected after one year, which totaled $35,000 at June 30, 2005. All other accounts receivable are expected to be collected within one year. All contracts with United States government agencies have been audited by the government through December 2002. The Company has not incurred significant losses or adjustments as a result of government audits. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to pay amounts due. Bad debts are written off against the allowance when identified. In addition, the Company maintains an allowance for potential future product returns and rebates related to current period revenues. The Company analyzes the rate of historical returns when evaluating the adequacy of the allowance for sales returns and allowances. Returns and rebates are charged against the allowance when incurred. Advances on contracts in progress represent contracts for which billings have been presented to the customer but revenue has not been recognized. 4. INVENTORIES Inventories consist of the following: June 30, 2005 ---------- Raw materials $1,435,527 Work in process 728,167 Finished goods 237,853 ---------- $2,401,547 ========== 5. EARNINGS (LOSS) PER SHARE The following table provides a reconciliation of the denominators of the Company's reported basic and diluted earnings (loss) per share computations for the periods ended: Three Months Six Months Ended June 30, Ended June 30, -------------------- -------------------- 2005 2004 2005 2004 --------- --------- --------- --------- Weighted average number of common and common equivalent shares outstanding - basic 6,856,616 6,789,206 6,855,783 6,777,368 Add: Net additional common shares upon assumed exercise of common stock options 185,876 273,417 189,532 -- --------- --------- --------- --------- Adjusted weighted average common and common equivalents shares outstanding - diluted 7,042,492 7,062,623 7,045,315 6,777,368 ========= ========= ========= ========= For the three and six months ended June 30, 2005, 84,568 and 84,535 shares, respectively, and for the three and six months ended June 30, 2004, 80,069 and 67,815 shares, respectively, of common stock issuable relative to stock options 6 SPIRE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) JUNE 30, 2005 had exercise prices per share that exceeded the average market price of the Company's common stock and were excluded from the calculation of diluted shares since their inclusion would be anti-dilutive. For the six months ended June 30, 2004, 263,234 shares of common stock issuable relative to stock options were excluded from the calculation of dilutive shares since the inclusion of such shares would be anti-dilutive due to the Company's net loss position in the period. 6. OPERATING SEGMENTS AND RELATED INFORMATION The following table presents certain operating division information in accordance with the provisions of SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information."
Solar Solar Total Equipment Systems Biomedical Optoelectronics Company ---------------------------------------------------------------------- For the three months ended June 30, 2005 Net sales and revenues $2,437,322 $1,522,541 $2,785,042 $ 602,210 $7,347,115 Earnings (loss) from operations 2,643,812 (75,764) 2,891,836 (640,548) 4,819,336 For the three months ended June 30, 2004 Net sales and revenues $ 813,024 $ 510,550 $2,323,307 $ 610,984 $4,257,865 Earnings (loss) from operations (506,278) (152,209) 2,592,041 (584,315) 1,349,239 For the six months ended June 30, 2005 Net sales and revenues $3,379,315 $1,575,991 $5,278,138 $1,293,186 $11,526,630 Earnings (loss) from operations 2,253,706 (471,695) 2,754,426 (1,220,926) 3,315,511 For the six months ended June 30, 2004 Net sales and revenues $1,974,691 $1,787,871 $4,180,699 $1,344,870 $9,288,131 Earnings (loss) from operations (669,203) (62,059) 1,768,006 (996,171) 40,573
Earnings from operations for the solar equipment and biomedical segments include gains on the sale of licenses of $3,319,600 and $3,000,000, respectively, for the three and six months ended June 30, 2005. These gains are more fully described in Footnote 12. The following table shows net sales and revenues by geographic area (based on customer location):
Three Months Ended June 30, Six Months Ended June 30, -------------------------------------------- -------------------------------------------- 2005 % 2004 % 2005 % 2004 % ----------- ----- ----------- ----- ----------- ----- ----------- ----- Foreign $ 2,650,000 36% $ 910,000 21% $ 3,277,000 29% $ 1,151,000 12% United States 4,697,000 64% 3,348,000 79% 8,250,000 71% 8,137,000 88% ----------- ----- ----------- ----- ----------- ----- ----------- ----- $ 7,347,000 100% $ 4,258,000 100% $11,527,000 100% $ 9,288,000 100% =========== ===== =========== ===== =========== ===== =========== =====
Revenues from contracts with United States government agencies for the three months ended June 30, 2005 and 2004 were $788,000 and $819,000, or 11% and 19% of consolidated net sales and revenues, respectively. Revenues from contracts with United States government agencies for the six months ended June 30, 2005 and 2004 were $1,681,000 and $1,465,000, or 15% and 16% of consolidated net sales and revenues, respectively. Four customers accounted for approximately 51% for the three months ended June 30, 2005 and one customer accounted for approximately 15% of the Company's gross sales during the three months ended June 30, 2004. One customer accounted for approximately 15% for the six months ended June 30, 2005 and two customers accounted for approximately 6 SPIRE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) JUNE 30, 2005 24% of the Company's gross sales during the six months ended June 30, 2004. One customer represented approximately 11% of trade account receivables at June 30, 2005. 7. INTANGIBLE AND OTHER ASSETS Patents amounted to $511,720, net of accumulated amortization of $584,254, at June 30, 2005. Licenses amounted to $155,893, net of accumulated amortization of $69,107, at June 30, 2005. Patent cost is primarily composed of cost associated with securing and registering patents that the Company has been awarded or that have been submitted to, and the Company believes will be approved by, the government. These costs are capitalized and amortized over their useful lives or terms, ordinarily five years, using the straight-line method. There are no expected residual values related to these patents. For disclosure purposes, the table below includes future amortization expense for patents owned by the Company as well as $420,318 of estimated amortization expense related to patents that remain pending. Estimated amortization expense for the periods ending December 31, is as follows: Amortization Year Expense ---- ---------- 2005 $83,496 2006 164,518 2007 157,366 2008 130,319 2009 and beyond 131,914 -------- $667,613 ======== Also included in other assets are $27,139 of refundable deposits made by the Company. 8. AVAILABLE-FOR-SALE INVESTMENTS Available-for-sale securities consist of the following: June 30, 2005 -------- Equity investments $559,538 Government bonds 168,701 Cash and money market funds 158,181 -------- $886,420 ======== These investments have been classified as available-for-sale and are reported at fair value, with unrealized gains and losses included in accumulated other comprehensive loss, net of related tax effect. As of June 30, 2005, the unrealized gain on these marketable securities was approximately $2,000. 9. NOTES PAYABLE AND CREDIT ARRANGEMENTS The Company has a $2,000,000 Loan Agreement (the "Agreement") with Citizens Bank of Massachusetts (the "Bank"). The Agreement provides Standby Letter of Credit guarantees for certain foreign and domestic customers, which are 100% secured with cash. At June 30, 2005, the Company had approximately $1,189,000 of restricted cash associated with outstanding Letters of Credit. Standby Letters of Credit under this Agreement bear interest at 1%. The Agreement also provides the Company with the ability to convert to a $2,000,000 revolving line of credit, based upon eligible accounts receivable and certain conversion covenants. Loans under this revolving line of credit bear interest at the Bank's prime rate, as determined, plus 1/2% (6.75% at June 30, 2005.) At June 30, 2005, the Company had not exercised its conversion option and no amounts were outstanding under the revolving line of credit. A commitment fee of .25% is charged on the unused portion of the borrowing base. On June 29, 2005, the Company entered into a Second Amendment to extend the expiration date of the Agreement to June 27, 2006. The Agreement contains covenants including certain financial reporting 7 SPIRE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) JUNE 30, 2005 requirements. At June 30, 2005, the Company was in compliance with its financial reporting requirements and cash balance covenants. 10. STOCK-BASED COMPENSATION The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148") which is an amendment of SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), and continues to apply Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock plans. If the Company had elected to recognize compensation cost for all of the plans based upon the fair value at the grant dates for awards under those plans, consistent with the method prescribed by SFAS 123, net earnings (loss) and earnings (loss) per share would have been changed to the pro forma amounts indicated below.
Three Months Six Months Ended June 30, Ended June 30, ------------------------ ------------------------ 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Net earnings (loss), as reported $4,698,152 $1,278,710 $3,117,710 $ (99,345) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (76,882) (80,424) (158,658) (158,888) ---------- ---------- ---------- ---------- Pro forma net earnings (loss) $4,621,270 $1,198,286 $2,959,052 $ (258,233) ---------- ---------- ---------- ---------- Earnings (loss) per share: Basic - as reported $ 0.69 $ 0.19 $ 0.45 $ (0.01) ========== ========== ========== ========== Basic - pro forma $ 0.67 $ 0.18 $ 0.43 $ ( 0.04) ========== ========== ========== ========== Diluted - as reported $ 0.67 $ 0.18 $ 0.44 $ (0.01) ========== ========== ========== ========== Diluted - pro forma $ 0.66 $ 0.17 $ 0.42 $ ( 0.04) ========== ========== ========== ==========
The per-share weighted-average fair value of stock options granted during the quarters ended June 30, 2005 and 2004 was $2.91 and $4.73, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: Expected Risk-Free Expected Expected Year Dividend Yield Interest Rate Option Life Volatility Factor ---- -------------- ------------- ----------- ----------------- 2005 -- 3.94% 5 years 76.6% 2004 -- 3.83% 5 years 78.2% For the quarter ended June 30, 2005, 69,250 stock options were granted. In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, SHARE-BASED PAYMENT. SFAS No. 123R requires companies to expense the value of employee stock option and similar awards. SFAS No. 123R is effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. As of the effective date, the Company will be required to expense all awards granted, modified, cancelled or repurchased as well as the portion of prior awards for which the requisite service has not been rendered, based on the grant-date fair value of those awards as calculated for pro forma disclosures under SFAS No. 123. The adoption of SFAS No. 123R's fair value method will have an impact on the Company's results of operations. The Company is currently in the process of determining the effects on its financial position, results of operations and cash flows that will result from the adoption of SFAS No. 123R. 8 SPIRE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) JUNE 30, 2005 11. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) includes certain changes in equity that are excluded from net earnings (loss) and consists of the following:
For the Three Months For the Six Months Ended June 30, Ended June 30, ----------------------- ----------------------- 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Net earnings (loss) $4,698,152 $1,278,710 $3,117,710 $ (99,345) Other comprehensive loss: Net unrealized loss on available for sale marketable securities, net of tax (6,295) -- (23,407) -- ---------- ---------- ---------- ---------- Total comprehensive income (loss) $4,691,857 $1,278,710 $3,094,303 $ (99,345) ========== ========== ========== ==========
12. SALE OF LICENSES In October 2002, the Company sold an exclusive patent license for a hemodialysis split-tip catheter to Bard Access Systems, Inc. ("Bard"), a wholly owned subsidiary of C. R. Bard, Inc., in exchange for $5,000,000 upon the execution of the agreement, with another $5,000,000 due upon the earlier to occur of: (a) the date of the first commercial sale of a licensed product by Bard; or (b) no more than 18 months after signing. The agreement further provided for two additional contingent cash payments of $3,000,000 each upon the completion of certain milestones by Bard in 2004 and 2005. Bard has the right to cancel the agreement at any time subsequent to the second payment. During the year ended December 31, 2002, the Company recorded the initial payment under the agreement, resulting in a gain of $4,464,929, net of direct costs. Due to the potential length of time between the first and second payments and the cancellation provisions within the agreement, the Company did not record the potential remaining payments at that time. During June 2003, in accordance with the agreement, the Company received notification from Bard of the first commercial sale, collected the $5,000,000 payment due and recorded a gain of $4,989,150, net of direct costs. In June 2004, the Company received the first contingent milestone payment and recorded a gain of $3,000,000. In June 2005, the Company received the second and final contingent milestone payment and recorded a gain of $3,000,000. There were no direct costs associated with these payments. These gains have been recorded in the accompanying unaudited condensed consolidated statements of operations for three and six months ended June 30, 2005 and 2004, respectively. In conjunction with the sale, the Company received a sublicense, which permits the Company to continue to manufacture and market hemodialysis catheters for the treatment of chronic kidney disease. In addition, the Company granted Bard a right of first refusal should the Company seek to sell the catheter business. On May 26, 2005, the Company entered into a global consortium agreement (the "Agreement") with Nisshinbo Industries, Inc. (Nisshinbo) for the development, manufacturing, and sales of solar photovoltaic module manufacturing equipment. Under the terms of the Agreement, Nisshinbo purchased a license to manufacture and sell the Company's module manufacturing equipment for an upfront fee plus additional royalties based on ongoing equipment sales over a ten-year period. In addition, the Company and Nisshinbo agreed, but are not obligated, to pursue joint research and development, product improvement activities and sales and marketing efforts. On June 27, 2005, the Company received JPY 400,000,000 from the sale of this permanent license. The Company has determined the fair value of the license and royalty based on an appraisal. As a result, a $3,319,600 gain has been recognized as a gain on sale of license in the accompanying unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2005. In addition, approximately $13,000 of royalty income was recognized during the quarter. As of June 30, 2005, JPY 400,000,000 was held in a Japanese yen account. This yen account has been reflected in cash and cash equivalents in the accompanying unaudited condensed consolidated balance sheet utilizing the closing yen/dollar exchange rate as of June 30, 2005. As a result, a $62,845 currency transaction loss was incurred and reflected in Other expense, net in the accompanying unaudited condensed consolidated statement of operations for the three and six months ended June 30, 2005. On July 1, the Company entered into a 30-day Forward Plus Contract with its Bank for the conversion of the majority of its Yen account into United States dollars at a predetermined exchange rate range. This contract effectively capped the Company's exchange rate at 113.25 while allowing the Company to benefit from decreases in the yen / dollar exchange rate to a 109.25 limit. If the rate dropped below this limit at the expiration date of the contract, 9 SPIRE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) JUNE 30, 2005 the Company would have to convert the yen at the 113.25 rate. On August 3, 2005, the Company converted JPY 350,000,000 into $3,139,295 and the contract expired. The Company believes that the sale of these licenses does not reflect the day-to-day operations of the Company. Therefore, the net proceeds received have been classified under investing activities in the unaudited condensed consolidated statements of cash flows for the six months ended June 30, 2005 and June 30, 2004, respectively. 13. NASDAQ LISTING On April 6, 2005, the Company received a letter from the Nasdaq Listing Qualifications Panel (the "Nasdaq Panel") indicating that the Company is no longer in compliance with the $10,000,000 minimum stockholders' equity requirement for continued listing set forth in Nasdaq Marketplace Rule 4450(a)(3) (the "Rule"). The Nasdaq Panel requested that the Company provide, by April 13, 2005, the Company's plan to achieve and sustain compliance with this requirement. On April 13, 2005, the Company presented such plan to the Nasdaq Panel. On April 25, 2005, the Company received a letter from the Nasdaq Panel informing the Company that the Nasdaq Panel was remanding this case to the Nasdaq Staff. The Nasdaq Panel indicated that it believes that the Nasdaq Staff is the appropriate body to review and evaluate the Company's plan of compliance, following its normal procedures and processes. On April 27, 2005, the Nasdaq Staff issued a Determination letter reiterating the Nasdaq Panel's April 6, 2005 finding that the Company is no longer in compliance with the Rule, and that the Nasdaq Staff will review the Company's eligibility for continued National Market listing. The Nasdaq Staff requested that the Company provide a plan to achieve and sustain compliance with Nasdaq listing standards. On May 12, 2005, the Company submitted such a plan to the Nasdaq Staff. On May 24, 2005, the Nasdaq Staff requested additional information from the Company regarding certain projected nonrecurring license sales that were expected to occur during the second quarter of 2005. On June 3, 2005, the Company submitted a revised plan to achieve compliance with the Rule incorporating the subject license sales. On June 6, 2005, the Company received a letter from the Nasdaq Staff stating that the Company provided a definitive plan evidencing its ability to achieve and sustain compliance with the Rule, and as such, granted the Company an extension of time to achieve compliance. The terms of the extension required the Company to file a Form 8-K providing an update on the Company's listing status. The Company made such filing on August 5, 2005. The license sales completed during the three months ended June 30, 2005 are described in Footnote 12 above. As a result of these transactions, the Company believes that it has regained compliance with the Rule as of June 30, 2005. Nasdaq will continue to monitor the Company's ongoing compliance with the Rule. If the Company were to receive a written notification of delisting from Nasdaq, it could appeal the decision to a Nasdaq Listing Qualifications Panel. If such an appeal were unsuccessful, the Company could apply to list the Company's common stock on the Nasdaq SmallCap Market. Although the Company believes it has regained compliance with the Rule as of June 30, 2005, in order to avoid future listing problems with respect to the Nasdaq National Market, the Company may still decide to apply to transfer the listing of its common stock to the Nasdaq SmallCap Market. 14. COMMITMENTS AND CONTINGENCIES Agreement with BP Solarex - ------------------------- On October 8, 1999, the Company entered into an Agreement with BP Solarex ("BPS") in which BPS agreed to purchase certain production equipment built by the Company, for use in the Company's Chicago factory ("Spire Solar Chicago") and in return the Company agreed to purchase solar cells of a minimum of two megawatts per year over a five-year term for a fixed fee from BPS (the "Purchase Commitment"). BPS has the right to reclaim the equipment should the Company not meet its obligations in the Purchase Commitment. The proceeds from the sale of the production equipment purchased by BPS have been classified as an unearned purchase discount in the accompanying unaudited condensed consolidated balance sheet. The Company will amortize this discount as a reduction to cost of sales as it purchases solar cells from BPS. During the quarter ended September 30, 2003, the Company and BPS retroactively amended the agreement 10 SPIRE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) JUNE 30, 2005 to include all purchases of solar modules, solar systems, inverter systems and other system equipment purchased by the Company from BPS in the purchase commitment calculation. Amortization of the purchase discount amounted to $54,128 for the six months ended June 30, 2005. The production equipment has been classified as a component of fixed assets in the accompanying unaudited condensed consolidated balance sheet. Depreciation amounted to $136,256 for the six months ended June 30, 2005. In addition, the agreement contains a put option for BPS to have the Company create a separate legal entity for Spire Solar Chicago and for BPS to convert the value of the equipment and additional costs, as defined, into equity of the new legal entity. The percentage ownership in the joint venture would be determined based on the cumulative investments by BPS and the Company. The amended agreement also allows the Company to terminate the agreement on 30 days notice in consideration for a termination payment based on the aggregate amount of Spire purchases of BPS products and the fair market value of the production equipment purchased by BPS at the time of the termination election. The Company is currently exploring various options with regard to this agreement including a potential purchase of the production equipment. As of June 30, 2005 a definitive decision has not been made in this matter Legal Matters - ------------- From time to time, the Company is subject to legal proceedings and claims arising from the conduct of its business operations. The Company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on its financial position, results of operations, or cash flows. The Company has been named as a defendant in 58 cases filed from August 2001 to July 2003 in state courts in Texas by persons claiming damages from the use of allegedly defective mechanical heart valves coated by a process licensed by the Company to St. Jude Medical, Inc., the valve manufacturer, which has also been named as a defendant in the cases. In June 2003, a judge in a state court in Harris County, Texas agreed to grant the Company's motion for summary judgment based upon the principle of federal preemption with regard to 57 of those cases and to order that the cases against the Company be dismissed with prejudice. An order to this effect was signed in late July 2003. The remaining case is still pending, and due to aspects of its fact situation is not subject to the principle of federal preemption. From August 2003 to date, a total of seven new cases were filed against the Company in courts in Harris County. Activity with regard to these cases is likely to occur only after the disposition of the original 57 cases is finally settled. The plaintiffs whose cases were dismissed have filed appeals with the Texas appellate court. In June 2005, the Texas Court of Appeals upheld the summary judgment granted by the lower court. Attorneys for the Company anticipate that the plaintiffs may file a motion for rehearing, and an appeal with the Texas Supreme Court is also possible. Attorneys who represent the Company with respect to these cases in Texas do not believe at this time that the actions of a federal district court judge in Minnesota in denying St. Jude Medical's request for summary judgment will materially affect the Company's position in the Texas complaints. During the second quarter of 2005 a suit was filed by Arrow International, Inc. against Spire Biomedical, Inc., a wholly owned subsidiary of the Company, alleging patent infringement by the Company. The complaint claims one of the Company's catheter products induces and contributes to infringement when medical professionals insert it. The Company has responded to the complaint denying all allegations and has filed certain counterclaims. The Company intends to vigorously defend this matter. In the opinion of management, an unfavorable outcome of this matter could have a material adverse effect on the Company's financial position as well as its results of operations and cash flows. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SECTION AND OTHER PARTS OF THIS REPORT CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS AND TIMING DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED OR REFERRED TO IN THIS REPORT AND IN ITEM 6 OF THE ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 2004. MANAGEMENT'S DISCUSSION AND ANALYSIS INCLUDES THE FOLLOWING SECTIONS: o Overview; o Results of Operations; o Three and Six Months Ended June 30, 2005 Compared to Three and Six Months Ended June 30, 2004; o Liquidity and Capital Resources; o Recent Accounting Pronouncements; o Impact of Inflation and Changing Prices; o Foreign Currency Fluctuation; o Related Party Transactions; o Critical Accounting Policies; and o Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements. Overview - -------- The Company develops, manufactures and markets highly-engineered products and services in four principal business areas: biomedical, solar equipment, solar systems and optoelectronics bringing to bear expertise in materials technologies across all four business areas. In the biomedical area, the Company provides value-added surface treatments to manufacturers of orthopedic and other medical devices that enhance the durability, antimicrobial characteristics or other material characteristics of their products; develops and markets hemodialysis catheters and related devices for the treatment of chronic kidney disease and performs sponsored research programs into practical applications of advanced biomedical and biophotonic technologies. In the solar equipment area, the Company develops, manufactures and markets specialized equipment for the production of terrestrial photovoltaic modules from solar cells. The Company's equipment has been installed in more than 150 factories in 43 countries. In the solar systems area, the Company provides custom and building integrated photovoltaic modules, stand alone emergency power backup and electric power grid-connected distributed power generation systems employing photovoltaic technology developed by the Company. In the optoelectronics area, the Company provides compound semiconductor foundry services on a merchant basis to customers involved in biomedical/biophotonic instruments, telecommunications and defense applications. Services include compound semiconductor wafer growth, other thin film processes and related device processing and fabrication services. The Company also provides materials testing services and performs services in support of sponsored research into practical applications of optoelectronic technologies. Operating results will depend upon product mix, as well as the timing of shipments of higher priced products from the Company's solar equipment line and delivery of solar systems. Export sales were 29% of net sales and revenues in 2005 and are expected to continue to constitute a significant portion of the Company's net sales and revenues. 12 Results of Operations - --------------------- The following table sets forth certain items as a percentage of net sales and revenues for the periods presented:
Three Months Six Months Ended June 30, Ended June 30, --------------- --------------- 2005 2004 2005 2004 ---- ---- ---- ---- Net sales and revenues 100% 100% 100% 100% Cost of sales and revenues (87) (82) (86) (80) ---- ---- ---- ---- Gross profit 13 18 14 20 Selling, general and administrative expenses (48) (34) (44) (28) Internal research and development (9) (6) (8) (5) Gain on sale of licenses 86 71 55 32 ---- ---- ---- ---- Earnings from operations 66 32 29 -- Other expense, net (2) (2) (2) (1) ---- ---- ---- ---- Earnings (loss) before income taxes 64 30 27 (1) Income tax expense -- -- -- -- ---- ---- ---- ---- Net earnings (loss) 64% 30% 27% (1%) ==== ==== ==== ====
OVERALL The Company's total net sales and revenues for the six months ended June 30, 2005 ("2005") increased 24% compared to the six months ended June 30, 2004 ("2004"). The increase was attributable to the solar business unit and the biomedical business unit. These increases were partially offset by a decrease within the optoelectronics business unit. SOLAR BUSINESS UNIT Sales in the Company's solar business unit increased 32% during 2005 as compared to 2004 primarily due to a 109% increase in solar equipment sales resulting from the timing of the delivery of equipment partially offset by a 12% decrease in solar systems sales and an 18% decrease in revenue from government funded research and development activities associated with the cost sharing agreement with the Department of Energy National Renewable Energy Laboratory ("NREL"). BIOMEDICAL BUSINESS UNIT Revenues of the Company's biomedical business unit increased 26% during 2005 as compared to 2004 as a result of a 95% increase in revenue from Spire's line of hemodialysis catheters and a 32% increase in revenue from Spire's government-funded research and development activities. OPTOELECTRONICS BUSINESS UNIT Sales in the Company's optoelectronics business unit decreased 4% during 2005. Three and Six Months Ended June 30, 2005 Compared to Three and Six Months Ended - ------------------------------------------------------------------------------- June 30, 2004 - ------------- NET SALES AND REVENUES The following table categorizes the Company's net sales and revenues for the periods presented: Three Months Ended June 30, Increase/(Decrease) ---------------------- --------------------- 2005 2004 $ % ---------- ---------- ---------- --------- Contract research, service and license revenues $2,810,000 $2,749,000 $ 61,000 2% Sales of goods 4,537,000 1,509,000 3,028,000 201% ---------- ---------- ---------- Net sales and revenues $7,347,000 $4,258,000 $3,089,000 73% ========== ========== ========== 13 The 2% increase in contract research, service and license revenues for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004 is primarily attributable to an increased demand for Spire's biomedical processing services and an increase in research and development activities both partially offset by a decrease in Bandwidth foundry services. Biomedical processing services revenues increased 5% due to increased demand for Spire's IONGUARD implant services. Revenues from research and development activities increased 1% in 2005 as compared to 2004 primarily due to an increase in the number of contracts associated with funded research and development activities partially offset by a decrease in revenue from activities associated with our cost sharing agreement with NREL. The 201% increase in sales of goods for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004 was primarily due to increases in solar equipment and solar systems revenues and, to a lesser extent, an increase in biomedical product sales. Solar equipment and solar system revenues increased 316% and 198%, respectively, as compared to 2004 primarily due to the timing and delivery of customer orders. The 2005 results include the sale of two photovoltaic module production lines in 2005 versus none in 2004 and the completion of a large solar system installation in Chicago. Biomedical product sales increased 78% in 2005 as compared to 2004 as a result of increased demand for Spire's line of hemodialysis catheters. The following table categorizes the Company's net sales and revenues for the periods presented: Six Months Ended June 30, Increase/(Decrease) ----------------------- --------------------- 2005 2004 $ % ----------- ---------- ---------- --------- Contract research, service and license revenues $ 5,542,000 $5,331,000 $ 211,000 4% Sales of goods 5,985,000 3,957,000 2,028,000 51% ----------- ---------- ---------- Net sales and revenues $11,527,000 $9,288,000 $2,239,000 24% =========== ========== ========== The 4% increase in contract research, service and license revenues for the six months ended June 30, 2005 as compared to the six months ended June 30, 2004 is primarily attributable to an increase in research and development activities partially offset by decreases in Bandwidth foundry services. Revenues from Spire's research and development activities increased 18% in 2005 as compared to 2004 primarily due to an increase in the number of contracts associated with funded research and development partially offset by a decrease in revenue from activities associated with our cost sharing agreement with NREL. Revenues from Bandwidth foundry services decreased 4% in 2005 compared to 2004 due to the timing and delivery of customer orders. The 51% increase in sales of goods for the six months ended June 30, 2005 as compared to the six months ended June 30, 2004 was primarily due to increases in solar equipment revenues and biomedical product sales partially offset by a decrease in solar system revenue. Solar equipment revenues increased 108% in 2005 as compared to 2004 due to the timing and delivery of customer orders. The 2005 results include the sale of two photovoltaic module production lines in 2005 versus none in 2004. Biomedical product sales increased 95% in 2005 as compared to 2004 as a result of increased demand for Spire's line of hemodialysis catheters. Solar systems revenues decreased 12% in 2005 as compared to 2004 primarily due to the timing and delivery of customer orders. COST OF SALES AND REVENUES The following table categorizes the Company's cost of sales and revenues for the periods presented, stated in dollars and as a percentage of related sales and revenues: Increase/ Three Months Ended June 30, (Decrease) -------------------------------- ---------------- 2005 % 2004 % $ % ---------- --- ---------- --- ---------- ---- Cost of contract research, services and licenses $2,158,000 77% $2,113,000 77% $ 45,000 2% Cost of goods sold 4,292,000 94% 1,388,000 92% 2,904,000 209% ---------- ---------- ---------- Net cost of sales and revenues $6,450,000 87% $3,501,000 82% $2,949,000 84% ========== ========== ========== The $45,000 (2%) increase in cost of contract research and service revenues in 2005 is primarily due to a 7% increase in the cost of the Company's research and development activities associated with its 1% increase in revenues. Cost of contract research, services and licenses as a percentage of revenue remained relatively unchanged as the cost increases discussed above were substantially offset by margin improvement within biomedical processing services. 14 The $2,904,000 (209%) increase in cost of goods sold is primarily due to an 128% increase in Spire's solar equipment direct costs resulting from its 316% increase in revenues discussed above and increases in solar systems and biomedical products unit's direct costs resulting from its 198% and 78% increase in revenues, respectively. The increase in cost of goods sold as a percentage of revenue is the result of sales mix and lower than expected contribution margins in the solar systems revenues. COST OF SALES AND REVENUES
Six Months Ended June 30, Increase/(Decrease) ------------------------------------------------- ---------------------- 2005 % 2004 % $ % ------------ ------- ------------ ------- ------------ ------- Cost of contract research, services and licenses $ 4,275,000 77% $ 4,119,000 77% $ 156,000 4% Cost of goods sold 5,711,000 95% 3,309,000 84% 2,402,000 73% ------------ ------------ ------------ Net cost of sales and revenues $ 9,986,000 86% $ 7,428,000 80% $ 2,558,000 34% ============ ============ ============
The $156,000 (4%) increase in cost of contract research and service revenues in 2005 is primarily due to a 40% increase in the cost of the Company's research and development activities associated with its 18% increase in revenues. Cost of contract research, services and licenses as a percentage of revenue remained relatively unchanged as the cost increases discussed above were substantially offset by margin improvement within biomedical processing services. The $2,402,000 (73%) increase in cost of goods sold is primarily due to an increase in Spire's solar equipment direct costs resulting from its 108% increase in revenues discussed above, to a lesser extent, an increase in biomedical products unit's direct costs resulting from its 95% increase in revenues discussed above. The increase in cost of goods sold as a percentage of revenue is the result of lower than expected contribution margins in the solar equipment and solar systems segments. The effect of these lower than expected contribution margins was partially offset by an improved contribution margin in our biomedical product line. OPERATING EXPENSES The following table categorizes the Company's operating expenses for the periods presented, stated in dollars and as a percentage of related sales and revenues:
Three Months Ended June 30, Increase/(Decrease) ------------------------------------------------- ---------------------- 2005 % 2004 % $ % ------------ ------- ------------ ------- ------------ ------- Selling, general and administrative $ 2,057,000 28% $ 2,030,000 48% $ 27,000 1% Internal research and development 341,000 5% 377,000 9% (36,000) (10%) ------------ ------------ ------------ Operating expenses $ 2,398,000 33% $ 2,407,000 57% $ (9,000) 0% ============ ============ ============
INTERNAL RESEARCH AND DEVELOPMENT The decrease in research and development costs was primarily a result of the Company's reduced effort in the "next generation" solar energy module manufacturing equipment under a cost-sharing contract with the Department of Energy National Renewable Energy Laboratory ("NREL"). The decrease in research and development expenses as a percentage of sales and revenues was primarily due to the increase in sales and revenue. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the three months ended June 30, 2005 increased by $27,000. The increase was primarily due to increased legal and sales and marketing costs, which were partially offset by a reduction in insurance expense for the quarter. The decrease in selling, general and administrative expenses as a percentage of sales and revenues is primarily due to the increase in sales and revenue. 15 The following table categorizes the Company's operating expenses for the periods presented, stated in dollars and as a percentage of related sales and revenues:
Six Months Ended June 30, Increase/(Decrease) ------------------------------------------------- ---------------------- 2005 % 2004 % $ % ------------ ------- ------------ ------- ------------ ------- Selling, general and administrative $ 3,887,000 34% $ 4,089,000 44% $ (202,000) (5%) Internal research and development 658,000 6% 731,000 8% (73,000) (10%) ------------ ------------ ------------ Operating expenses $ 4,545,000 39% $ 4,820,000 52% $ (275,000) (6%) ============ ============ ============
INTERNAL RESEARCH AND DEVELOPMENT The decrease in research and development costs was primarily a result of the Company's reduced effort in the "next generation" solar energy module manufacturing equipment under a cost-sharing contract with the Department of Energy National Renewable Energy Laboratory ("NREL"). The decrease in research and development expenses as a percentage of sales and revenues was primarily due to the increase in sales and revenue partially offset by the decrease in research and development costs described above. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES The decrease was due primarily to decreased cost associated with legal and audit expenses in connection with compliance requirements and, to a lesser extent, decreased insurance costs. These decreases were partially offset by increased cost associated with sales and marketing efforts of the Company's biomedical product line and solar business units. The decrease in selling, general and administrative expenses as a percentage of sales and revenues was primarily due to the increase in sales and revenues and, to a lesser extent, the decrease in selling, general and administrative costs discussed above. OTHER EXPENSE, NET The Company earned $9,000 and $14,000 of interest income for the three months ended June 30, 2005 and 2004, respectively. The Company incurred interest expense of $67,000 and $84,000 for the three months ended June 30, 2005 and 2004, respectively. The interest expense is primarily associated with interest incurred on capital leases associated with the semiconductor foundry. The Company earned $18,000 and $34,000 of interest income for the six months ended June 30, 2005 and 2004, respectively. The Company incurred interest expense of $153,000 and $174,000 for the six months ended June 30, 2005 and 2004, respectively. The interest expense is primarily associated with interest incurred on capital leases associated with the semiconductor foundry. During the second quarter of 2005, the Company recorded $63,000 of currency transaction loss related to the sale of a solar technology license. INCOME TAXES The Company did not record an income tax provision for the three and six months ended June 30, 2005 and 2004 as earnings (loss) before income is expected to be substantially offset by net operating loss carryforwards of approximately $3.5 million. A valuation allowance was provided against the deferred tax assets generated in 2004. NET EARNINGS (LOSS) The Company reported net earnings for the three months ended June 30, 2005 of $4,698,000, compared to net earnings of $1,279,000 in 2004. The increase in net earnings in 2005 versus 2004 is primarily due to the gain on the sale of a license to our solar technology. The Company reported net earnings for the six months ended June 30, 2005 of $3,118,000, compared to a net loss of $99,000 in 2004. The increase in net earnings in 2005 versus 2004 is primarily due to the gain on the sale of a license to our solar technology. 16 Liquidity and Capital Resources - ------------------------------- Increase/(Decrease) June 30, December 31, ---------------------- 2005 2004 $ % ---------- ---------- ---------- ---------- Cash and cash equivalents $7,576,000 $3,337,000 $4,239,000 127% Working capital 7,591,000 3,996,000 3,595,000 90% Cash and cash equivalents increased primarily due to the proceeds from sale of licenses partially offset by cash used in operations and, to a lesser extent, investments in patents and licenses and payments on capital leases. The Company has historically funded its operating cash requirements using operating cash flow and proceeds from the sale and licensing of technology. The Company's liquidity position benefited as a result of a cash receipt of $3,000,000 in 2005 and 2004 arising from the sale of a hemodialysis patent license to Bard Access Systems. The Company received its final payment of $3,000,000 in June 2005. In addition, the Company received JPY 400,000,000 (approximately $3.7 million) in June 2005 due to the sale of a license to our solar technology. The Company has a $2,000,000 Loan Agreement (the "Agreement") with Citizens Bank of Massachusetts (the "Bank"). The Agreement provides Standby Letter of Credit guarantees for certain foreign and domestic customers, which are 100% secured with cash. At June 30, 2005, the Company had $1,189,000 of restricted cash associated with outstanding Letters of Credit. Standby Letters of Credit under this Agreement bear interest at 1%. The Agreement also provides the Company with the ability to convert to a $2,000,000 revolving line of credit, based upon eligible accounts receivable and certain conversion covenants. Loans under this revolving line of credit bear interest at the Bank's prime rate as determined plus 1/2% (6.75% at June 30, 2005.) At June 30, 2005, the Company had not exercised its conversion option and no amounts were outstanding under the revolving line of credit. A commitment fee of .25% is charged on the unused portion of the borrowing base. On June 29, 2005, the Company entered into a Second Amendment to extend the expiration date of the Agreement to June 27, 2006. The Agreement contains covenants including certain financial reporting requirements. At June 30, 2005, the Company was in compliance with its financial reporting requirements and cash balance covenants. To date, there are no material commitments by the Company for capital expenditures. At June 30, 2005, the Company's retained earnings were $1,468,000, compared to an accumulated deficit of $1,649,000 as of December 31, 2004. Working capital as of June 30, 2005 increased 90% to $7,591,000, compared to $3,996,000 as of December 31, 2004. The Company believes it has sufficient resources to finance its current operations for the foreseeable future from operating cash flow and working capital. Impact of Inflation and Changing Prices - --------------------------------------- Historically, the Company's business has not been materially impacted by inflation. Manufacturing equipment and solar systems are generally quoted, manufactured and shipped within a cycle of approximately nine months, allowing for orderly pricing adjustments to the cost of labor and purchased parts. The Company has not experienced any negative effects from the impact of inflation on long-term contracts. The Company's service business is not expected to be seriously affected by inflation because its procurement-production cycle typically ranges from two weeks to several months, and prices generally are not fixed for more than one year. Research and development contracts usually include cost escalation provisions. Foreign Currency Fluctuation - ---------------------------- The Company sells only in U.S. dollars, generally against an irrevocable confirmed letter of credit through a major United States bank. Therefore the Company is not directly affected by foreign exchange fluctuations on its current orders. However, fluctuations in foreign exchange rates do have an effect on the Company's customers' access to U.S. dollars and on the pricing competition on certain pieces of equipment that the Company sells in selected markets. The Company received Japanese yen in exchange for the sale of a license to its solar technology. In addition, purchases made and royalties received under the Company's consortium agreement with its Japanese partner will be in Japanese yen. The Company does not believe that foreign exchange fluctuations will materially affect its operations. 17 Related Party Transactions - -------------------------- The Company subleases 74,000 square-feet in a building leased by Mykrolis Corporation, who in turn leases the building from a Trust of which Roger G. Little, Chairman of the Board, Chief Executive Officer and President of the Company, is sole trustee and principal beneficiary. The Company believes that the terms of the third-party sublease are commercially reasonable. The 1985 sublease originally was for a period of ten years, was extended for a five-year period expiring on November 30, 2000 and was further extended for a five-year period expiring on November 30, 2005. The agreement provides for minimum rental payments plus annual increases linked to the consumer price index. Rent expense under this sublease for the quarter ended June 30, 2005 was $571,000. In connection with this sublease, the Company is invoiced and pays certain trust related expenses, including building maintenance and insurance. The Company invoices the Trust on a monthly basis and the Trust reimburses the Company for all such costs. No amounts were due from the Trust as of June 30, 2005. In conjunction with the acquisition of Bandwidth by the Company, the Company released Bandwidth from the lease agreement that had existed between Bandwidth and the Company. In November 2001, Bandwidth, under its previous owner, abandoned the space being subleased from the Company in Bedford, Massachusetts, to move to a new building and wafer fabrication lab in Hudson, New Hampshire. At that time, there were 48 months left on the lease. Subsequent to the move to Hudson, New Hampshire, Bandwidth was unable to sublease the Bedford, Massachusetts space, and was paying the Company for the unused space. In conjunction with the acquisition of Bandwidth in May 2003, the Company released Bandwidth from the remaining lease payments. However, the Company continues to be obligated to Mykrolis Corporation for the entire amount of the remaining lease agreement. As a result, the present value of the remaining lease obligation associated with the unused space was recorded as an assumed liability of $1,247,241 in the purchase accounting. As of June 30, 2005, the remaining lease obligation is $217,411, which is reflected as "accrued lease obligation - related party" in the June 30, 2005 unaudited condensed consolidated balance sheet. The difference between the actual rent payment and the discounted rent payment will be accreted to the consolidated statements of operations as interest expense. Interest of 4.75% has been assumed on this obligation. For the six months ended June 30, 2005, interest expense was approximately $9,000. Also in conjunction with the acquisition of Bandwidth by the Company, SPI-Trust, a Trust of which Roger G. Little, Chairman of the Board, Chief Executive Officer and President of the Company, is sole trustee and principal beneficiary, purchased from Stratos (Bandwidth's former owner) the building that Bandwidth occupies in Hudson, New Hampshire for $3.7 million. Subsequently, the Company entered into a lease for the building (90,000 square feet) with SPI-Trust whereby the Company will pay $4.1 million to the SPI-Trust over an initial five-year term expiring in 2008 with a Company option to extend for five years. In addition to the rent payments, the lease obligates the Company to keep on deposit with SPI-Trust the equivalent of three months rent ($191,250 as of June 30, 2005.) The lease agreement does not provide for a transfer of ownership at any point. Interest costs were assumed at 7%. For the six months ended June 30, 2005, interest expense was approximately $94,000. This lease has been classified as a related party capital lease and a summary of payments (including interest) follows:
RATE PER YEAR SQUARE FOOT ANNUAL RENT MONTHLY RENT SECURITY DEPOSIT --------------------------- ----------- ----------- ------------ ---------------- June 1, 2003 - May 31, 2004 $ 6.00 $ 540,000 $ 45,000 $135,000 June 1, 2004 - May 31, 2005 7.50 675,000 56,250 168,750 June 1, 2005 - May 31, 2006 8.50 765,000 63,750 191,250 June 1, 2006 - May 31, 2007 10.50 945,000 78,750 236,250 June 1, 2007 - May 31, 2008 13.50 1,215,000 101,250 303,750 ----------- $ 4,140,000 ===========
At June 30, 2005, $621,000 and $1,925,000 are reflected as the current and long-term portions of capital lease obligation - related party, respectively, on the unaudited condensed consolidated balance sheet. Critical Accounting Policies - ---------------------------- The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among the significant estimates affecting our consolidated financial statements are those relating to revenue recognition, reserves for doubtful accounts and sales returns and allowances, reserve for excess and 18 obsolete inventory, impairment of long-lived assets, acquisition accounting, income taxes, and warranty reserves. We regularly evaluate our estimates and assumptions based upon historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent actual results differ from those estimates, our future results of operations may be affected. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Refer to Footnote 2 of our notes to consolidated financial statements in our annual report on Form 10-KSB for the year ended December 31, 2004 for a description of our accounting policies for income taxes and warranties. REVENUE RECOGNITION The Company derives its revenues from three primary sources: (1) commercial products including, but not limited to, solar energy manufacturing equipment, solar energy systems and hemodialysis catheters; (2) biomedical and semiconductor processing services; and (3) United States government funded research and development contracts. We generally recognize product revenue upon shipment of products provided there are no uncertainties regarding customer acceptance, persuasive evidence of an arrangement exists, the sales price is fixed or determinable, and collectibility is reasonably assured. These criteria are generally met at the time of shipment when the risk of loss and title passes to the customer or distributor, unless a consignment arrangement exists. Revenue from consignment arrangements is recognized based on product usage indicating sales are complete. Gross sales reflect reductions attributable to customer returns and various customer incentive programs including pricing discounts and rebates. Product returns are permitted in certain sales contracts and an allowance is recorded for returns based on the Company's history of actual returns. Certain customer incentive programs require management to estimate the cost of those programs. The allowance for these programs is determined through an analysis of programs offered, historical trends, expectations regarding customer and consumer participation, sales and payment trends, and experience with payment patterns associated with similar programs that had been previously offered. If sufficient history to make reasonable and reliable estimates of returns or rebates does not exist, revenue associated with such practices is deferred until the return period lapses or a reasonable estimate can be made. This deferred revenue will be recognized as revenue when the distributor reports to us that it has either shipped or disposed of the units (indicating that the possibility of return is remote). The Company's OEM capital equipment solar energy business builds complex customized machines to order for specific customers. Substantially all of these orders are sold on a FOB Bedford, Massachusetts (or EXW Factory) basis. It is the Company's policy to recognize revenues for this equipment as the product is shipped to the customer, as customer acceptance is obtained prior to shipment and the equipment is expected to operate the same in the customer's environment as it does in the Company's environment. When an arrangement with the customer includes future obligations or customer acceptance, revenue is recognized when those obligations are met or customer acceptance has been achieved. The Company's solar energy systems business installs solar energy systems on customer-owned properties on a contractual basis. Generally, revenue is recognized once the systems have been installed and the title is passed to the customer. For arrangements with multiple elements, the Company allocates fair value to each element in the contract and revenue is recognized upon delivery of each element. If the Company is not able to establish fair value of undelivered elements, all revenue is deferred. The Company recognizes revenues and estimated profits on long-term government contracts on the accrual basis where the circumstances are such that total profit can be estimated with reasonable accuracy and ultimate realization is reasonably assured. Profit estimates are revised periodically based upon changes and facts, and any losses on contracts are recognized immediately. Some of the contracts include provisions to withhold a portion of the contract value as retainage until such time as the United States government performs an audit of the cost incurred under the contract. The Company's policy is to take into revenue the full value of the contract, including any retainage, as it performs against the contract since the Company has not experienced any substantial losses as a result of audits performed by the United States government. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, including fixed assets and intangible assets, are continually monitored and are evaluated at least annually for impairment. The determination of recoverability is based on an estimate of undiscounted cash flows expected to result from the use of an asset and its eventual disposition. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance. Our estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, technological changes, economic conditions, changes to our business model or changes in our operating performance. If the sum of the undiscounted cash flows (excluding interest) is less than 19 the carrying value, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. ACQUISITION ACCOUNTING Through its acquisition, the Company has accumulated assets the valuation of which involves estimates based on fair value assumptions. Estimated lives assigned to the assets acquired in a business purchase also involve the use of estimates. These matters that are subject to judgments and estimates are inherently uncertain, and different amounts could be reported using different methodologies. Management uses its best estimate in determining the appropriate values and estimated lives to reflect in the consolidated financial statements, using historical experience, market data, and all other available information. Contractual Obligations, Commercial Commitments and Off-Balance Sheet - --------------------------------------------------------------------- Arrangements - ------------ The following table summarizes the Company's gross contractual obligations at June 30, 2005 and the maturity periods and the effect that such obligations are expected to have on its liquidity and cash flows in future periods:
PAYMENTS DUE BY PERIOD -------------------------------------------------------------- LESS THAN 2 - 3 4 - 5 MORE THAN CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS - ---------------------------------- ---------- ---------- ---------- ---------- ---------- PURCHASE OBLIGATIONS $3,144,000 $2,617,000 $ 527,000 $ -- -- CAPITAL LEASES: Unrelated party capital lease $ 714,000 $ 437,000 $ 277,000 $ -- -- Related party capital lease 2,850,000 780,000 2,070,000 -- -- OPERATING LEASES: Unrelated party operating leases $ 193,000 $ 63,000 $ 108,000 $ 22,000 -- Related party operating lease 507,000 507,000 -- -- --
Purchase obligations include all open purchase orders outstanding regardless of whether they are cancelable or not. Capital lease obligations outlined above include both the principal and interest components of these contractual obligations. Included in the related party operating lease is the accrued lease obligation in the amount of $217,000. On October 8, 1999, the Company entered into an Agreement with BP Solarex ("BPS") in which BPS agreed to purchase certain production equipment built by the Company, for use in the Company's Chicago factory ("Spire Solar Chicago") and in return the Company agreed to purchase solar cells of a minimum of two megawatts per year over a five-year term for a fixed fee from BPS (the "Purchase Commitment"). BPS has the right to reclaim the equipment should the Company not meet its obligations in the Purchase Commitment. The proceeds from the sale of the production equipment purchased by BPS have been classified as an unearned purchase discount in the accompanying unaudited condensed consolidated balance sheet. The Company will amortize this discount as a reduction to cost of sales as it purchases solar cells from BPS. During the quarter ended September 30, 2003, the Company and BPS retroactively amended the agreement to include all purchases of solar modules, solar systems, inverter systems and other system equipment purchased by the Company from BPS in the purchase commitment calculation. Amortization of the purchase discount amounted to $54,128 for the six-months ended June 30, 2005. The production equipment has been classified as a component of fixed assets in the accompanying unaudited condensed consolidated balance sheet. Depreciation amounted to $136,256 for the six months ended June 30, 2005. In addition, the agreement contains a put option for BPS to have the Company create a separate legal entity for Spire Solar Chicago and for BPS to convert the value of the equipment and additional costs, as defined, into equity of the new legal entity. The percentage ownership in the joint venture would be determined based on the cumulative investments by BPS and the Company. The amended agreement also allows the Company to terminate the agreement on 30 days notice in consideration for a termination payment based on the aggregate amount of Spire purchases of BPS products and the fair market value of the production equipment purchased by BPS at the time of the termination election. The Company is currently exploring 20 various options with regard to this agreement including a potential purchase of the production equipment. As of June 30, 2005 a definitive decision has not been made. In October 2002, the Company sold an exclusive patent license for a hemodialysis split-tip catheter to Bard Access Systems, Inc. ("Bard"), a wholly owned subsidiary of C. R. Bard, Inc., in exchange for $5,000,000 upon the execution of the agreement, with another $5,000,000 due upon the earlier to occur of: (a) the date of the first commercial sale of a licensed product by Bard; or (b) no more than 18 months after signing. The agreement further provided for two additional contingent cash payments of $3,000,000 each upon the completion of certain milestones by Bard in 2004 and 2005. Bard has the right to cancel the agreement at any time subsequent to the second payment. During the year ended December 31, 2002, the Company recorded the initial payment under the agreement, resulting in a gain of $4,464,929, net of direct costs. Due to the potential length of time between the first and second payments and the cancellation provisions within the agreement, the Company did not record the potential remaining payments at that time. During June 2003, in accordance with the agreement, the Company received notification from Bard of the first commercial sale, collected the $5,000,000 payment due and recorded a gain of $4,989,150, net of direct costs. In June 2004, the Company received the first contingent milestone payment and recorded a gain of $3,000,000. In June 2005, the Company received the second and final contingent milestone payment and recorded a gain of $3,000,000. There were no direct costs associated with these payments. These gains have been recorded in the accompanying unaudited condensed consolidated statements of operations for three and six months ended June 30, 2005 and 2004, respectively. In conjunction with the sale, the Company received a sublicense, which permits the Company to continue to manufacture and market hemodialysis catheters for the treatment of chronic kidney disease. In addition, the Company granted Bard a right of first refusal should the Company seek to sell the catheter business. On May 26, 2005, the Company entered into a global consortium agreement (the "Agreement") with Nisshinbo Industries, Inc. (Nisshinbo) for the development, manufacturing, and sales of solar photovoltaic module manufacturing equipment. Under the terms of the Agreement, Nisshinbo purchased a license to manufacture and sell the Company's module manufacturing equipment for an upfront fee plus additional royalties based on ongoing equipment sales over a ten-year period. In addition, the Company and Nisshinbo agreed, but are not obligated, to pursue joint research and development, product improvement activities and sales and marketing efforts. On June 27, 2005, the Company received JPY 400,000,000 from the sale of this permanent license. The Company has determined the fair value of the license and royalty based on an appraisal. As a result, a $3,319,600 gain has been recognized as a gain on sale of license in the accompanying unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2005. In addition, approximately $13,000 of royalty income was recognized during the quarter. As of June 30, 2005, JPY 400,000,000 was held in a Japanese yen account. This yen account has been reflected in cash and cash equivalents in the accompanying unaudited condensed consolidated balance sheet utilizing the closing yen/dollar exchange rate as of June 30, 2005. As a result, a $62,845 currency transaction loss was incurred and reflected in Other expense, net in the accompanying unaudited condensed consolidated statement of operations for the three and six months ended June 30, 2005. On July 1, the Company entered into a 30-day Forward Plus Contract with its Bank for the conversion of the majority of its Yen account into United States dollars at a predetermined exchange rate range. This contract effectively capped the Company's exchange rate at 113.25 while allowing the Company to benefit from decreases in the yen / dollar exchange rate to a 109.25 limit. If the rate dropped below this limit at the expiration date of the contract, the Company would have to convert the yen at the 113.25 rate. On August 3, 2005, the Company converted JPY 350,000,000 into $3,139,295 and the contract expired. The Company believes that the sale of these licenses does not reflect the day-to-day operations of the Company. Therefore, the net proceeds received have been classified under investing activities in the unaudited condensed consolidated statements of cash flows for the six months ended June 30, 2005 and June 30, 2004, respectively. Outstanding letters of credit totaled $1,189,000 at June 30, 2005. The letters of credit principally secure performance obligations, and allow holders to draw funds up to the face amount of the letter of credit if the Company does not perform as contractually required. These letters of credit expire through 2007 and are 100% secured by cash. 21 ITEM 3. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures - ------------------------------------------------ As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Chief Executive Officer and President and the Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures as of March 31, 2005. In designing and evaluating the Company's disclosure controls and procedures, the Company and its management recognize that there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their desired control objectives. Additionally, in evaluating and implementing possible controls and procedures, the Company's management was required to apply its reasonable judgment. Furthermore, in the course of this evaluation, management considered certain internal control areas, including those discussed below, in which we have made and are continuing to make changes to improve and enhance controls. Based upon the required evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that as of June 30, 2005 the Company's disclosure controls and procedures were effective (at the "reasonable assurance" level mentioned above) to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. From time to time, the Company and its management have conducted and will continue to conduct further reviews and, from time to time put in place additional documentation, of the Company's disclosure controls and procedures, as well as its internal control over financial reporting. The Company may from time to time make changes aimed at enhancing their effectiveness, as well as changes aimed at ensuring that the Company's systems evolve with, and meet the needs of, the Company's business. These changes may include changes necessary or desirable to address recommendations of the Company's management, its counsel and/or its independent auditors, including any recommendations of its independent auditors arising out of their audits and reviews of the Company's financial statements. These changes may include changes to the Company's own systems, as well as to the systems of businesses that the Company has acquired or that the Company may acquire in the future and will, if made, be intended to enhance the effectiveness of the Company's controls and procedures. The Company is also continually striving to improve its management and operational efficiency and the Company expects that its efforts in that regard will from time to time directly or indirectly affect the Company's disclosure controls and procedures, as well as the Company's internal control over financial reporting. As disclosed in our quarterly report on Form 10-QSB/A Amendment Number 2 for the quarterly period ended June 30, 2003, as amended (the "Second Quarter Form 10-QSB"), in connection with the initial filing of the Second Quarter Form 10-QSB, which was initially submitted prior to the completion of the required SAS 100 Review by the Company's independent auditors, the Audit Committee engaged outside counsel to conduct an investigation into the events surrounding the preparation and filing of the Second Quarter Form 10-QSB. Based on the results of that investigation, outside counsel concluded that weaknesses existed in the Company's disclosure controls and procedures and proposed an action plan designed to strengthen the Company's disclosure controls and procedures. The Audit Committee, the Board of Directors and management have begun to adopt and implement certain of those recommendations in order to strengthen the Company's disclosure controls and procedures. As disclosed in our annual report on Form 10-KSB for the year ended December 31, 2003, the Company's independent auditor, Vitale, Caturano & Company, Ltd. ("VCC") advised management and the Audit Committee by a letter dated March 18, 2004 that, in connection with its audit of the Company's consolidated financial statements for the year ended December 31, 2003, it noted certain matters involving internal control and its operation that it considered to be a material weakness under standards established by the American Institute of Certified Public Accountants. Reportable conditions are matters coming to an independent auditors' attention that, in their judgment, relate to significant deficiencies in the design or operation of internal control and could adversely affect the organization's ability to record, process, summarize, and report financial data consistent with the assertions of management in the financial statements. Further, a material weakness is a reportable condition in which the design or operation of one or more internal control components does not reduce to a relatively low level the risk that errors or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. VCC advised management and the Audit Committee that it considered the following to constitute material weaknesses in internal control and operations: (i) the Company's failure to adequately staff its finance group with the appropriate level of experience to effectively control the increased level of transaction activity, address the complex accounting matters and manage the increased financial reporting complexities resulting from, among other things, 22 the acquisition of Bandwidth, the implementation of a new financial reporting system and the investigation surrounding the filing and eventual restatement of the Company's Form 10-QSB, as amended, for the quarter ended June 30, 2003 and (ii) the Company's current monthly close process does not mitigate the risk that material errors could occur in the books, records and financial statements, and does not ensure that those errors would be detected in a timely manner by the Company's employees in the normal course of performing their assigned functions. The matter noted in clause (i) above was similar to the material weakness noted by our former independent auditor (as disclosed in prior SEC filings). VCC noted that these matters were considered by it during its audit and did not modify the opinion expressed in its independent auditor's report dated March 18, 2004. On March 24, 2005, VCC issued a letter advising management and the Audit Committee, that, in connection with its audit of the Company's consolidated financial statements for the year ended December 31, 2004, it continued to note certain matters involving internal control and its operation previously outlined in their March 18, 2004 letter that it considered to be a material weakness under standards established by the American Institute of Certified Public Accountants. VCC noted that the Company had implemented several of the specific recommendations in their March 18, 2004 letter including, but not exclusive of: o An improved reconciliation process; o A disciplined and timely close process on a monthly basis; and o Detailed reviews of monthly close packages by the appropriate levels of management. However, VCC also noted that improvements still need to be made in the reconciliation and documentation and information flow processes. In addition, VCC noted that while an internal assessment of the finance staff has been made and certain roles and responsibilities have been defined, the appropriate level of staffing within the finance department will not be alleviated until such time as the full finance team is assembled. The Company concurs with VCC's finding noted above and is continuing to make changes in its internal controls and procedures. The Company is also continually striving to improve its management and operational efficiency and expects that its efforts in that regard will from time to time directly or indirectly affect the Company's controls and procedures, including its internal control over financial reporting. The Company has reorganized the accounting staff and expects to hire additional professionals in the near term. In addition, the Company has completed compliance training and will continue to arrange for additional training for its finance staff. Changes in Internal Control Over Financial Reporting - ---------------------------------------------------- There was no change in the Company's internal control over financial reporting that occurred during the first and second fiscal quarters of 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time, the Company is subject to legal proceedings and claims arising from the conduct of its business operations. The Company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on its financial position, results of operations, or cash flows. The Company has been named as a defendant in 58 cases filed from August 2001 to July 2003 in state courts in Texas by persons claiming damages from the use of allegedly defective mechanical heart valves coated by a process licensed by the Company to St. Jude Medical, Inc., the valve manufacturer, which has also been named as a defendant in the cases. In June 2003, a judge in a state court in Harris County, Texas agreed to grant the Company's motion for summary judgment based upon the principle of federal preemption with regard to 57 of those cases and to order that the cases against the Company be dismissed with prejudice. An order to this effect was signed in late July 2003. The remaining case is still pending, and due to aspects of its fact situation is not subject to the principle of federal preemption. From August 2003 to date, a total of seven new cases were filed against the Company in courts in Harris County. Activity with regard to these cases is likely to occur only after the disposition of the original 57 cases is finally settled. The plaintiffs whose cases were dismissed have filed appeals with the Texas appellate court. In June 2005, the Texas Court of Appeals upheld the summary judgment granted by the lower court. Attorneys for the Company anticipate that the plaintiffs may file a motion for 23 rehearing, and an appeal with the Texas Supreme Court is also possible. Attorneys who represent the Company with respect to these cases in Texas do not believe at this time that the actions of a federal district court judge in Minnesota in denying St. Jude Medical's request for summary judgment will materially affect the Company's position in the Texas complaints. During the second quarter of 2005 a suit was filed by Arrow International, Inc. against Spire Biomedical, Inc., a wholly owned subsidiary of the Company, alleging patent infringement by the Company. The complaint claims one of the Company's catheter products induces and contributes to infringement when medical professionals insert it. The Company has responded to the complaint denying all allegations and has filed certain counterclaims. The Company intends to vigorously defend this matter. In the opinion of management, an unfavorable outcome of this matter could have a material adverse effect on the Company's financial position as well as its results of operations and cash flows. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 17, 2005, the Company held a Special Meeting in Lieu of Annual Meeting of Stockholders. The number of directors was fixed at eight, leaving one vacancy, Udo Henseler, David R. Lipinski, Mark C. Little, Roger G. Little, Michael J. Magliochetti, Guy L. Mayer and Roger W. Redmond were elected to the Board of Directors to hold office until the 2006 annual meeting of the stockholders. The results for Proposal Number 1 were as follows:
SHARES SHARES VOTING AGAINST SHARES BROKER NOMINEE VOTING FOR OR AUTHORITY WITHHELD ABSTAINING NON-VOTES ----------------------- ---------- --------------------- ---------- ---------- Udo Henseler 6,060,970 77,165 -- -- David R. Lipinski 5,708,462 429,673 -- -- Mark C. Little 5,726,562 411,573 -- -- Roger G. Little 5,725,762 412,373 -- -- Michael J. Magliochetti 6,078,070 60,065 -- -- Guy L. Mayer 6,078,470 59,665 -- -- Roger W. Redmond 6,078,270 59,865 -- --
ITEM 5. OTHER INFORMATION a. None b. None ITEM 6. EXHIBITS 10(n) Development, Manufacturing, and Sales Consortium Agreement between Nisshinbo Industries, Inc. and Spire Corporation, with an effective date of 16 May 2005.* 31.1 Certification of the Chairman of the Board, Chief Executive Officer and President pursuant to ss.302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer pursuant to ss.302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chairman of the Board, Chief Executive Officer and President pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002. - ------------ * Portions of this Exhibit have been omitted pursuant to a request for confidential treatment. 24 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Spire Corporation Dated: August 15, 2005 By: /s/ Roger G. Little ------------------------------ Roger G. Little Chairman of the Board, Chief Executive Officer and President Dated: August 15, 2005 By: /s/ James F. Parslow ------------------------------ James F. Parslow Chief Financial Officer 25 EXHIBIT INDEX ------------- Exhibit Description - ------- ----------- 10(n) Development, Manufacturing, and Sales Consortium Agreement between Nisshinbo Industries, Inc. and Spire Corporation, with an effective date of 16 May 2005.* 31.1 Certification of the Chairman of the Board, Chief Executive Officer and President pursuant to ss.302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of the Chief Financial Officer pursuant to ss.302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of the Chairman of the Board, Chief Executive Officer and President pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002 * Portions of this Exhibit have been omitted pursuant to a request for confidential treatment. 26 EX-10.N 2 exh10-n_13750.txt AGREEMENT BETWEEN SPIRE AND NISSHINBO EXHIBIT 10(n) ------------- Confidential Treatment Requested as to certain information contained in this Exhibit 10(n) and filed separately with the Securities and Exchange Commission. DEVELOPMENT, MANUFACTURING, AND SALES CONSORTIUM AGREEMENT THIS CONSORTIUM AGREEMENT is made, with the effective date of 16 May 2005 (hereinafter "Effective Date") by and between: NISSHINBO INDUSTRIES, INC. (hereinafter "Nisshinbo") a corporation organized under the laws of Japan, with its principal office at 2-31-11, Ningyo-cho, Nihonbashi, Chuo-ku, Tokyo 103-8650, Japan, and, SPIRE CORPORATION, (hereinafter "Spire") a corporation organized under the laws of the Commonwealth of Massachusetts in the United States of America, with its principal office at One Patriots Park, Bedford, MA 01730-2396, U.S.A. Each a "Party" (such term to include each Party's respective affiliates and subsidiaries), and together the "Parties." WHEREAS: (A) Nisshinbo is a company registered in Japan and organized for the business purpose of, among other things, the fabrication of general manufacturing equipment. (B) Spire is a company registered in the Commonwealth of Massachusetts and organized for the business purpose of, among other things, the fabrication of equipment used to manufacture solar photovoltaic modules. (C) Nisshinbo wishes to obtain a firm position in the market for solar photovoltaic module manufacturing equipment by cooperating with a leading entity in that industry. (D) Spire wishes to form a relationship with a party who has a reputation for building quality fabrication and factory equipment with whom it may cooperate to improve its technical expertise, manufacturing capability, and sales capability. (E) The Parties have concluded that their individual capabilities and requirements are sufficiently congruent to form a Consortium so that they may collaborate to promote their individual and joint interests. (F) This Agreement sets forth the respective rights and obligations of the Parties with respect to the Consortium. 1 ARTICLE 1. DEFINITIONS - ---------------------- 1.1 "Agreement" shall mean this Consortium Agreement and all of its appendices and exhibits that are attached hereto as may be amended from time to time in accordance with its terms. 1.2 "Consortium" shall mean the cooperative relationship between the Parties hereto for the purpose of their joint development of technology, their joint management of efficiently coordinated marketing and sales efforts, and the utilization of their joint fabrication capabilities in the solar photovoltaic module manufacturing equipment industry for mutual and individual benefit. 1.3. "Technology" shall mean the methods of engineering, designing, manufacturing, testing, repairing and servicing the solar photovoltaic module manufacturing equipment and its components, processes and associated parts which are currently used, or under development, or as will be developed during the Term by the Parties, including without limitation: a. "Existing Technology" shall mean all the Technology that Spire has acquired (whether directly or indirectly) as of the Effective Date in respect of the Equipment listed in Exhibit No.1. b. "Developing Technology" shall mean all the Technology that Spire has under development as at the Effective Date in respect of the Equipment listed in Exhibit No. 1. c. "New Technology" shall mean all the Technology that each Party will acquire (whether directly, indirectly, jointly or severally) during the Term as from the Effective Date, which excludes the Existing and Developing Technology. d. "Revolutionary Technology" shall mean all the Technology that each Party will acquire (whether directly, indirectly, jointly or severally) during the Term as from the Effective Date where the motivating concept behind the Technology fundamentally departs from what the Parties currently use. 1.3.2 "Nisshinbo Existing Technology" shall mean any change, enhancement and improvement that has been made to the Existing Technology by Nisshinbo as sub-licensee to a previous licensee of Spire and that has already been in commercial use. *** 1.4 "Territory" shall mean the world, *** *** Represents text omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission. 2 1.5 "Equipment" shall mean all units of solar photovoltaic module manufacturing equipment and their components, processes and associated parts that use Technology as defined in Article 1.3.1 and regardless of which Party manufactures it. 1.6 "Customer(s)" shall mean the end users to whom the Parties shall sell the Equipment during the Term. 1.7 "Program(s)" shall mean an effort, whether undertaken by either Party individually or both Parties collectively, during the Term, in which advancements or improvements in the Technology are deliberately sought. 1.8 "Management Team" shall mean the group of management personnel representing each of the Parties and who shall take joint responsibility for the operation and administration of this Agreement. The Management Team will consist of two representatives and two alternates nominated by each Party. 1.9 "Term" shall mean the period during which this Agreement is in effect. 1.10 "Third Party(ies)" shall mean, for the purposes of this Agreement, all unrelated sales agents, sales representatives, distributors, systems integrators, service subcontractors or other such similar persons. ARTICLE 2. SCOPE AND PURPOSE OF AGREEMENT - ----------------------------------------- 2.1 The purpose of this Agreement is for the Parties to create and utilize a cooperative relationship that employs the strengths, capabilities and goals of each Party to their joint advantage. The Parties will, therefore, collaborate in the development of the Equipment and possibly other equipment which they will together endeavor to sell throughout the Territory in accordance with their respective obligations under this Agreement. Spire will bring to this relationship its long experience in engineering and building the Equipment as well as marketing and selling such Equipment; Nisshinbo will bring to the relationship its long experience at building precision equipment in general as well as marketing and selling such Equipment. Each Party contributes certain marketing and sales strengths with respect to certain customers. The Parties shall provide all reasonable cooperation to each other in good faith in the best interest of the Consortium in order to promote the successful performance of these principal objectives and shall refrain from any action or conduct, which may work contrary to such objectives. 2.2 The scope of this Agreement is limited to the joint development, engineering, manufacturing, marketing and sales of the Equipment, which shall include, for the avoidance of doubt, activities that encompass development (including improvement), design, manufacture, operation, service and repair, marketing and sales. Activities *** Represents text omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission. 3 that do not relate to the photovoltaic module manufacturing equipment industry are outside the scope of this Agreement. 2.3 This Agreement is entered into solely for the purposes stated in this Agreement. This Agreement is mutually exclusive to each Party and except as provided for in Article 2.4 below neither Party may enter into the same or similar agreements with any other Party. 2.4 Notwithstanding Article 2.3, either Party may enter into any agreement with a Third Party from their respective Focus Territory in accordance with the following provisions: (a) If any Party wishes to enter into an agreement under this Article 2.4, that Party must give full disclosure of the identity of the Third Party and the nature and scope of such agreement to the other Party and the Management Team. (b) The Management Team shall review all disclosures and take each such request to appoint a Third Party into consideration. The Parties are required to withhold any action in respect of such Third Party until the Management Team has (within 14 days of such disclosure) reached a decision regarding the same. (c) The Management Team shall approve such Third Party appointment with or without limitation, or reject such Third Party appointment. The Management Team's decision shall be final and binding on the Parties hereto. (d) This Article does not apply to any existing Third Party relationship, as per Article 8.3, as of the Effective Date. Both Parties will disclose all such existing appointments to the other Party. However, any renewal or extension of these agreements will be subject to this Article. ARTICLE 3. LICENSE TO EXISTING AND DEVELOPING TECHNOLOGY - -------------------------------------------------------- 3.1 Upon execution of this Agreement and for the consideration provided herein, Spire grants to Nisshinbo an exclusive license, subject to the qualification stated in Article 3.2, to use the Existing and Developing Technology to manufacture, market, sell, operate, service and repair the Equipment anywhere in the Territory during the Term, provided that this license shall not preclude Spire from individually using the Existing and Developing Technology to manufacture, market, sell, operate, service and repair the Equipment in the Territory. Nisshinbo shall not sub-license any of its rights granted under this Article 3.1 without the written approval of Spire. 3.2 To the extent that the Existing and Developing Technology is funded or sponsored by U.S. Government, Spire may be required to license it to other parties subject to certain U.S. Government regulations. Spire may grant limited licenses of the Existing and Developing Technology to other parties for the purpose of subcontracting the manufacture of some or all of the Equipment. No such license will be granted that may conflict with the general license granted under Article 3.1 of this Agreement. If any purported grant is found by the Management Team and/or competent authority to conflict with this Agreement, such grant shall be considered void and will be repudiated without affecting the validity of the general license granted under Article 3.1. 4 3.3 The Parties acknowledge that the Existing and Developing Technology is the property of Spire. 3.4 Following the expiration or termination of this Agreement for any reason set forth in Articles 11 and 12, and upon all payments being satisfied as described in Articles 6, 11 (in case of Nisshinbo's rejection for any reason to enter into a new consortium agreement only), and 12 (in case of termination for material breach or convenience of Nisshinbo only), Spire shall grant Nisshinbo a perpetual, royalty-free, non-exclusive right to use all of the Existing and Developing Technology for any purpose anywhere in the Territory. ARTICLE 4. LICENSE TO NEW AND REVOLUTIONARY TECHNOLOGY - ------------------------------------------------------ 4.1 Where Nisshinbo made less investment into the New and Revolutionary Technology than that made by Spire, Spire shall own the New and Revolutionary Technology and, for the consideration provided herein, Spire hereby grants to Nisshinbo a non-exclusive license to use Spire's New and Revolutionary Technology to manufacture, market, sell, operate, service and repair the Equipment anywhere in the Territory during the Term. 4.2 Where Spire made less investment into the New and Revolutionary Technology than that made by Nisshinbo, Nisshinbo shall own the New and Revolutionary Technology and, for the consideration provided herein, Nisshinbo hereby grants to Spire a non-exclusive license to use Nisshinbo's New and Revolutionary Technology to manufacture, market, sell, operate, service and repair the Equipment anywhere in the Territory during the Term. 4.3 In case that each Party has made an equivalent investment into the New and Revolutionary Technology, both Parties shall jointly own the New and Revolutionary Technology and shall have full rights to use the New and Revolutionary Technology in the Territory. Upon termination or expiration of this Agreement, both Parties shall be able to use all jointly owned New and Revolutionary Technology to manufacture, market, sell, operate, service and repair the Equipment in the Territory. However, for a period of five (5) years after the termination or expiration of this Agreement, no sublicense or transfer of the subject Technology may occur, except in the event one Party wishes to exit the solar photovoltaic module manufacturing equipment business where it will have the full right to sell or assign the New and Revolutionary Technology, however it must first offer the New and Revolutionary Technology under consideration to the other Party before offering to a third party. 4.4 Upon termination or expiration of this Agreement, all granted licenses to New and Revolutionary Technology that originated from Individual Programs shall be void. The Party that owns the subject Technology as determined by Articles 4.1 and 4.2 shall have full rights to such New and Revolutionary Technology. However, any time prior to termination or expiration, each Party shall have the right to buy a fully paid up royalty free license to the other Party's Individual Programs subject to the sublicense and transfer conditions imposed in this Agreement upon the payment of an mutually 5 agreeable commensurate investment by the non-owning Party. Thereafter the subject New and Revolutionary Technology shall be jointly owned by the Parties in accordance with Article 4.3. 4.5 Upon termination or expiration of this Agreement, all granted licenses to New and Revolutionary Technology that originated from Joint Programs where the level of investment was unequal, shall be void and then the owning Party shall grant to the other Party a perpetual royalty-bearing, non-exclusive, non-sublicenseable license to use subject New and Revolutionary Technology to manufacture, market, sell, operate, service and repair the Equipment in the Territory. The Parties shall execute a new agreement under similar terms as contained in this Agreement. However, at any time prior to termination or expiration, each Party having the right to buy a fully paid up royalty-free license to the other Party's Joint Programs subject to the sublicense and transfer conditions imposed in this Agreement upon the payment of an mutually agreeable commensurate investment by the non-owning Party. Thereafter the subject New and Revolutionary Technology shall be jointly owned by the Parties in accordance with Article 4.3. ARTICLE 5. OTHER LICENSES GRANTED - --------------------------------- 5.1 Each Party hereby grants to the other limited rights in the use of that Party's primary trademarks and any other relevant trademark belonging to it throughout the Term for uses relating to the purpose of this Agreement. A list of all such trademarks is included in Exhibit No. 4. 5.2 Each Party hereby grants to the other rights in the use of all copyrighted materials that have been written and/or published by such Party for the operation, repair, servicing and marketing and sales of the Equipment. The fees and expenses for translating such copyright materials into a Party's own language shall be borne by the Party intending to make use of such copyright materials. The Party that originally created such copyright materials in its own language assumes no liability for any damages that result from any mistranslation by the Party seeking to make use of such copyright materials. 5.3 Each unit of Equipment contracted after the Effective Date shall, as soon as possible thereafter, bear the name of the manufacturer of the unit and an identification motif of the Consortium: such motif to be located in the same area as the manufacturer's name. The Parties shall agree to confirm the form and location of such identification motif as soon as practicable after the Effective Date. 5.4 The Parties may create a specific brand to refer to the Equipment sold by either Party under this Agreement. This brand and its trademark representation will be the joint property of both Parties in any jurisdiction in which it is registered, and all such costs to create such brand and register any associated trademark shall be the Parties' joint responsibility. 6 ARTICLE 6. SCHEDULE OF PAYMENTS - ------------------------------- 6.1 As soon as possible on or after the Effective Date, but no later than fifteen (15) business days following the Effective Date, Nisshinbo shall pay Spire Four Hundred Million Japanese Yen (JPY400,000,000). This payment shall be made via wire transfer into Spire's account at Citizens Bank of Massachusetts, the account details to be provided separately. The payment due under this Article 6.1 shall be net of all exchange fees, i.e. such fees to be borne by Spire with the exception of any wire transfer fee(s) which shall be borne by Nisshinbo. This payment is made in consideration of the License granted hereunder in respect of the Existing and Developing Technology as detailed in Article 3. 6.2 Not more than one (1) calendar month following the end of each of the forty (40) quarters of the Term, Nisshinbo shall pay to Spire a *** royalty that is equal to *** of the Nisshinbo invoice price ("*** Royalty") for every unit of Equipment (excluding Equipment using the Revolutionary Technology) that is shipped according to the negotiated INCOTERM to the Customer(s) or Third Party(ies) outside of Japan, or finally accepted by Japanese Customer(s) or Third Party(ies), during that quarter. The invoice price includes training, installation, initial spare parts, any integrated systems, advanced functions or other similar add-ons, but excludes any ancillary mechanisms purchased or obtained by Nisshinbo from third parties (e.g. curing furnace) and any non-integrated apparatus unrelated to the Equipment itself (e.g. conveyer). For the purpose of this Agreement, the invoice price is net of all shipping charges, taxes, and duties. Nisshinbo shall report to Spire at the conclusion of each quarter (but not more than ten (10) business days after), details of what Equipment was shipped to which Customer(s) or Third Party(ies) and what Equipment having been previously shipped was finally accepted by the Customer(s) and Third Party(ies) and the revenue accrued with each shipment/final acceptance. For this reason, notwithstanding the usual practice Nisshinbo uses when quoting prices to its Customer(s) or Third Party(ies), Nisshinbo shall provide final invoice price information in this report sufficiently detailed to demonstrate the amount of payments that Nisshinbo is required to make for that quarter under this Article. The *** Royalty shall be denominated in Japanese Yen. For avoidance of doubt, Nisshinbo shall not be required to pay the *** Royalty for the Equipment using the Revolutionary Technology. Also, the *** Royalty shall be accrued only for the Term (i.e. for the ten (10) years period from the Effective Date subject to the early termination based on Article 12) and, thereafter, Nisshinbo shall not be obliged to pay the *** Royalty, except that the Royalty payments provided for in this Article and that provided in Article 6.3 below shall be payable, in the final year of the Term (as a result of expiration or termination), on all orders received by either Party, whether or not shipped or finally accepted during the Term. 6.3 Not more than one (1) calendar month after the end of each forty (40) quarters of the Term, Nisshinbo shall pay to Spire the *** Royalty plus a *** on all Equipment which incorporate elements of the Developing Technology and/or the New Technology in which Nisshinbo has not fully shared costs, for each unit of Equipment shipped (as used in Article 6.2) to a Customer or Third Party(ies) during that quarter. *** In any case where Nisshinbo has made an investment in the development costs for such Developing or New Technology, whether already accrued by Spire or are projected for *** Represents text omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission. 7 the completion of a Project as defined herein, that is equal to the amount paid by Spire or that will be paid by Spire, *** In any case where Nisshinbo has made a partial investment in such Developing or New Technology, but not to the extent where such investment is equal to that amount paid, or to be paid, by Spire, then *** The obligation to pay the *** under this Article 6.3 is binding upon Spire in any case where Equipment sold by Spire has incorporated a New Technology into which Nisshinbo made more investment than that made by Spire, and such payment of the *** shall be made on the same calculation principle as stated herein. The *** under this Article 6.3 is denominated in the currency of the Party making the payment. 6.4 In case that each Party has made an equivalent investment into the New Technology, the both Parties shall jointly own the New Technology and shall have full rights to use the New Technology in the Territory and no *** shall be due either Party. Where Nisshinbo made less investment into the New Technology than Spire's, Spire shall own the New Technology and grant Nisshinbo a license of it in accordance with to Article 4.1 and Nisshinbo shall pay the *** as determined by Article 6.3. When Spire made less investment into the New Technology than that made by Nisshinbo, Nisshinbo shall own the New Technology and grant Spire a license in accordance with to Article 4.2 and Spire shall pay the *** as determined by Article 6.3. 6.5 Any Revolutionary Technology in which each Party has made an equivalent investment shall be jointly owned and neither Party shall be required to make any royalty payments as provided for in this Article 6 to each other. However, in any case where the investments made by the Parties are not equivalent, a Party making the majority investment shall own the Revolutionary Technology and grant a license to the other Party as per Articles 4.1 and 4.2, provided however that, in such case, the *** Royalty shall not be required and only the *** shall be required in accordance with Article 6.3. 6.6 Either Party shall have the right, at any time in the first quarter of each year of the Term, and the first quarter after expiration or termination for any reason to conduct an audit of the relevant financial and accounting records of the other during regular business hours and with reasonable notice to that Party. Such audit will be conducted at the sole expense of the auditing Party, but with the reasonable cooperation of the audited Party, except that in any case where the auditing Party detects a discrepancy of greater than five (5) percent of the invoice price described by Article 6.2, then the audited Party shall pay all associated costs of such audit. 6.7 Neither Party shall withhold any funds for the payment of taxes from any of the payments made pursuant to the provisions of this Article unless required under the taxation law of the U.S. or Japan, as the case may be. Any Party doing so as required by law shall furnish a clear accounting of all such withholdings, and shall assist the other as necessary to avoid double tax liability in their own jurisdiction by furnishing documentation as may be required. 6.8 In case one Party purchases Equipment from the other Party, no royalty payment under Article 6 shall be due from that Party to the other. *** Represents text omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission. 8 ARTICLE 7. COLLABORATION AND JOINT ACTIVITIES - --------------------------------------------- SECTION A. RESEARCH AND DEVELOPMENT; TECHNOLOGY GENERATION - ---------------------------------------------------------- 7.A.1. The objective of the collaboration anticipated by this Agreement, to the maximum extent practical, is to advance the state of the art of high yield, low cost solar photovoltaic module manufacturing. The Parties shall fulfill this objective by the following means set forth in this Section: (a) Existing and Developing Technology Transfer (Initial): Within thirty (30) days from the Effective Date, Spire, being the source of the Technology, shall prepare and deliver in documentary form, all essential information regarding the Equipment and all other such equipment and components which constitute the Existing and Developing Technology, all of which will be furnished in the English language, and using the English system of measurement unless originally or already prepared in the metric system. Thereafter, Nisshinbo may dispatch as many of its technical staff as it sees fit (but for the purposes of administration and logistics, not greater than five (5) staff at one time) to Spire's facility for review and evaluation of the Existing and Developing Technology of Spire and any of Nisshinbo Existing Technology. All such staff of Nisshinbo shall have a competence in the English commensurate with the needs of a technical interchange, or Nisshinbo shall provide such skilled translators/interpreters as it deems necessary. Each Party shall bear its own costs to support this activity. This review and evaluation meeting shall last approximately two to three days. (b) Subsequent Technology Review Meetings: On approximately *** basis, the Parties shall meet to engage in further technology review, an event that may be referred to as the *** Technology Development and Planning Review Meeting. This meeting will primarily be conducted by and for the engineering staffs of both Parties, and their function shall be to make recommendations to the Management Team, which will make all of the substantive decisions in accordance with Article 2. The focus of each such subsequent meeting shall be for each Party to inform the other of every incremental improvement in the state of the art that the Parties have made in the preceding year, to share information on gains made in know-how; to discuss innovative ideas and to summarize progress and future plans made on any Program or Programs in which the Parties are jointly engaged. Except as stated at the beginning of this paragraph, the frequency, timing, and location of all such *** Development and Planning Review Meetings shall be decided by the Management Team. (c) Technology Development and Planning (other activities): The Management Team shall establish, and may modify from time to time, other technology development and planning events, such as, but not necessarily limited to, the nature and frequency of communications between the engineering staffs of the Parties. *** Represents text omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission. 9 7.A.2. The Parties shall purposefully advance the state of the art in high yield, low cost solar photovoltaic manufacturing by conducting research and development Programs to promote the generation of the New Technology, as set forth below: (a) Joint Programs: During the *** of the Term and as needed from time to time thereafter, the Management Team may establish, from time to time, a development goal of mutual interest. The Management Team shall establish a budget for Joint Programs, assemble a Program development team, determine the criteria for success and monitor its progress. Such Programs are funded by a negotiated cost share approach between the Parties, in which the cost share may be equivalent or something less than equivalent. The Management Team shall decide on a method to ensure that all Programs costs are properly validated and accounted. If the costs are shared by the Parties on an equivalency basis, then rights in the results of such Joint Programs shall be perpetually jointly-owned with no further obligation upon either Party to make payment to the other, otherwise they shall treated the same way as any other New Technology according to Articles 4 and 6. (b) Individual Programs: The management of each Party may separately embark on Programs after first having proposed them to the Management Team. If the other Party does not conclude that the development goal is relevant, then the Party proposing such goal may pursue it individually. The ownership of all such New Technology generated by these individual Programs vests solely with the Party conducting the individual Program. In such instances, the other Party shall obtain a license to use any New Technology according to Article 4 and the royalty rate shall be determine according to Article 6. If after initiation of Individual Program, the other Party chooses to invest into a specific Individual Program, the Parties shall determine a level of investment that is mutually satisfactory and thereafter the Individual Program shall be converted into a Joint Program with each Party being considered as have made an equal investment for purposes of determining ownership and the application of Articles 4 and 6. (c) Sponsorship from Sources other than the Parties New Technology originating with research and development performed by a Party but sponsored by a third source other than the Parties, and where the performing Party is allowed some or all of the rights to the resulting technology, then a share of such rights may be acquired by the other Party by paying a portion of the valuation of such results, based upon an assessment made jointly by the Parties, and in accordance with the requirements of the agreement made with the sponsor. 7.A.3. The Parties may also enhance the technological base of the Equipment or other equipment which is or may be used in the manufacture of solar photovoltaic modules by acquiring licenses to third party technology. In such case, one Party shall act as the primary licensee, but shall seek to secure a sublicense for the other Party on terms no less favorable than those enjoyed by the Party acting as the licensee. The negotiation of any license under these circumstances shall be subject to the approval of the Management Team. All payments due and payable to any third party licensor *** Represents text omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission. 10 would be payable by each Party in proportion to the degree to which either Party finds the technology from a third or outside party useful. 7.A.4. The Existing Technology, Developing Technology, New Technology, and Revolutionary Technology may be represented by intellectual property in various forms. While most of the Technology is, or likely to be in the form of know-how or trade secrets, to the extent any of it may be subject to statutory protection, i.e. an invention for which a patent may be obtained, it shall be the decision of the inventing Party as to whether a patent is obtained, and any such protection shall be obtained at the expense of that Party. The patent thus obtained is the sole property of the Party responsible for the invention, subject to the license and rights allocations set forth above. Patents of such inventions may be obtained in any number of jurisdictions by either Party at its expense or at the expense of both Parties. In all cases, anything herein to the contrary notwithstanding, the principle of ownership and rights to any intellectual property whether or not represented by a patentable invention shall rest with the degree of investment made by either or both Parties and not the expense made by one Party or the other in securing any statutory protection. The general principle for managing allegations of infringement by third parties is stated Article 9.5 below. SECTION B. SALES AND MARKETING - ------------------------------ 7.B.1. The Parties hereto are obligated to cooperate where necessary to the exploit the international market for solar photovoltaic module manufacturing equipment and technology. Each Party shall capitalize its own sales and marketing efforts, which may range freely throughout the Territory. However, the Parties shall be guided by the general provisions set forth below: (a) *** *** Represents text omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission. 11 (b) Use of Sales and Marketing Literature: During the Term, each Party shall design and publish its own sales and marketing literature, except that all such literature shall acknowledge the existence of the relationship with the other Party. Such notice shall be sufficiently prominent so that it may be noticeable with casual perusal. Such notice will refrain from implying the existence of a separate legal entity created by the Parties' relationship. Marketing literature published for this purpose shall be used within each Party's ***. The Parties shall furnish each other with a small quantity of their sales and marketing literature whenever created or revised. Sales and Marketing literature thus created and published shall be done at the individual expense of each Party. In addition to sales and marketing literature created by each Party for use in their ***, the Parties shall jointly prepare and publish sales and marketing literature that presents the experience of both Parties and of the Consortium in a unified and mutually advantageous format. The Parties may use this sales and marketing literature for all global, neutral and joint marketing endeavors. The cost of such sales and marketing literature shall be shared by the Parties based on the volume of literature that each Party uses. SECTION C. EQUIPMENT MANUFACTURING - ---------------------------------- 7.C.1. During the Term, each Party intends to manufacture the Equipment for contract awards within its ***. Additionally, the *** Represents text omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission. 12 Parties may manufacture units of Equipment for each other. Under such circumstances, each Party shall not offer such Equipment to the other at any price other than that which they would ordinarily consider to be its most favorable price, i.e. that which would be the lowest possible commercial price for which they sell Equipment to a third party (but not below such price). No royalty payments from either Party to the other as provided for in Article 6 shall be due and payable in this case. During the Term, each Party shall provide after sales service and repair to all Equipment sold under contract awards that it executed, and each Party is responsible for supporting its standard Equipment warranty. The foregoing notwithstanding, either Party may request the other Party for assistance and/or support for its after sales service requirements, the cost of which the requesting Party shall bear. SECTION D. MANAGEMENT TEAM 7.D.1. The Management Team shall consist of two management persons appointed by Spire and two management persons appointed by Nisshinbo. The Management Team shall provide oversight to the Parties' Activities and act in a manner consistent with the interests of the Consortium. The Management Team will not be required to provide a decision-making function on ordinary matters under consideration by each Party individually, but exists for the purpose of providing a unified strategic business approach for the Consortium, and act, when necessary, as the final authority for decisions affecting the Consortium's business endeavors. 7.D.2. In the event that the two Parties cannot otherwise agree, sales inquiries, purchase and sales agreements, purchase orders and other transactions with prospective and current Customers *** which Party shall supply the prospective or current customer with its stated requirements. ARTICLE 8. NATURE OF RELATIONSHIP - --------------------------------- 8.1 This Agreement shall not be construed as creating any new legal entity based upon the joint activities of the Parties. The Parties and all of their activities remain legally separate from one another. 8.2 This Agreement does not authorize either Party to act as an agent or representative of the other. No such authority shall be implied by this Agreement, and to the extent any such authority is extended from one Party to the other during the Term it shall be done by a separate express instrument to that effect. 8.3 By virtue of the warranties made in Article 9 either Party may retain any existing Third Party relationship as of the Effective Date (beyond those existing between vendor and customer, and except as where specified in Article 9 in the solar photovoltaic module manufacturing equipment industry. 8.4 During the Term, neither Party may enter into any relationship (regardless of how it is made) that will place that Party in breach of the warranties in Article 9. *** Represents text omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission. 13 8.5 During the Term, the Parties may elect to convert this Consortium into an incorporated joint venture. The Parties shall accomplish this by mutual consent, and the failure of one Party or the other to agree to negotiate the terms of such joint venture shall not be a permissible cause for termination of this Agreement nor for any request for arbitration. Should the Parties agree to the conversion of this Agreement into a joint venture, this document shall remain in force until the date the joint venture is established. ARTICLE 9. WARRANTIES AND REPRESENTATIONS - ----------------------------------------- 9.1 The Parties hereto warrant and represent that they are duly-constituted organizations organized for the purpose of conducting business for a profit in the jurisdictions stated in the heading paragraph to this Agreement. They further warrant and represent that, by the time this Agreement becomes effective, and to the best of their knowledge and belief, the Parties have full authority to enter into the relationship contemplated by this Agreement without permission from any other entity, public or private. 9.2 The Parties hereto warrant and represent that, to the best of their knowledge and belief, no obligation created by any provision of this Agreement will conflict with any other obligation of any other binding undertaking made with any public or private third party. 9.3 The Parties hereto warrant and represent that, during the Term, they will not enter into any other relationship, however made, in which a provision of that relationship conflicts with any provision of this Agreement. 9.4 The Parties hereto warrant and represent that during the Term, that, to the best of their ability, they will not engage in any activity, or fail to any take action, that will violate the implied fiduciary duty each Party has toward the other under this Agreement or be prejudicial to the interests of the other Party. 9.5 The Parties hereto warrant and represent that, to the best of their knowledge and belief, they are not now infringing upon the intellectual property rights of any third party; they further warrant and represent that they will not knowingly do so during the Term, and, should either Party determine, or be informed that a third party alleges, that it is infringing upon third party intellectual property rights, it shall advise and consult with the other Party on the most expedient method to manage any such infringement allegation. 9.6 The Parties hereto warrant and represent that, to the best of their knowledge and belief, they are compliant with every relevant law, statute, and administrative regulation in every jurisdiction in which they do business, and, in no way diminishing the scope of this Article, in particular the Parties warrant and represent that they are compliant with the U.S. Foreign Corrupt Practices Act, and shall comply with the equivalent Japanese law. The Parties further warrant and represent that they will engage in reasonable due diligence actions to insure continued compliance with all such relevant laws, statutes, and administrative regulations. If either Party's economic benefits are adversely and materially affected by the promulgation of any new laws or regulations in either Party's home jurisdiction, or by the amendment or interpretation of any existing law or regulation, then the Parties shall promptly consult with each 14 other and use their best efforts to implement any adjustments necessary to maintain each Party's economic benefits such as are derived from this Agreement on a basis no less favorable than the economic benefit it would have derived if such laws or regulations had not been promulgated, amended, or so interpreted. ARTICLE 10. INDEMNIFICATIONS - ---------------------------- 10.1 The Parties agree that each Party shall have the obligation to indemnify and hold the other Party harmless in any circumstance where the indemnified Party is a subject of any claim, controversy, assertion of damages, action or suit, including, but not limited to, intellectual property infringement ("Liability") from a third party which arises from the negligent actions or misconduct of the indemnifying Party, and any such fines or penalties as may be levied against the indemnified Party. Such obligation may be mitigated or void in instances where, and to the extent, that the indemnified Party engaged in negligent actions or misconduct of its own accord which has contributed to the Liability. 10.2 The Parties represent to each other that they are adequately insured by a reputable insurance carrier for general liability claims made against either Party by a third party. Each Party agrees that it will maintain such insurance for the Term, including any extensions thereto, and shall name the other Party as an additional insured. Each Party shall notify the other at the earliest possible date in the event of cancellation or non-renewal for whatever reason. ARTICLE 11. TERM - ---------------- 11.1 This Agreement shall have a term of ten (10) years from the Effective Date and shall expire at the end of the ten (10) years period. 11.2 Not later than one-hundred and eighty (180) days prior to the end of the Term, the Parties shall indicate to each other in writing whether or not they intend to negotiate a successor consortium agreement. If both Parties agree that a new consortium agreement should be negotiated, then the Parties to proceed with such negotiations promptly and in good faith. Such successor consortium agreement shall have a term of five (5) years. 11.3 In the event Nisshinbo should decline to enter into a new mutually acceptable consortium agreement, Nisshinbo shall pay to Spire an amount equivalent to the sum of all the payments made by it to Spire under Articles 6.2 and 6.3 during the period from May 16, 2013 to May 15, 2015. ARTICLE 12. TERMINATION - ----------------------- 12.1 Either Party to this Agreement may terminate it for the reasons stated below, after first attempting to resolve any such issues with the Management Team, with the appropriate notice and as set forth below: 15 (a) for material breach. The Parties shall regard egregious and/or repeated failure of a Party to fulfill its obligations under this Agreement to constitute a material breach, but not any event of FORCE MAJEURE so long as such event has not ended. Any failure to perform the obligations under this Agreement shall be resolved by the Management Term. In any instance where one Party has materially breached this Agreement, the other Party shall allow the breaching Party a period of sixty (60) days beginning from the date of the notice of termination to affect a cure of such breach. If at the end of the sixty-day period, the breaching Party has not affected a wholly satisfactory cure, the other Party may allow, at its discretion, the breaching Party the final thirty (30) day period to affect a cure satisfactory to the other Party. Any Party breaching this Agreement without having affected a cure shall be obligated to pay the appropriate termination fee as provided for in Article 12.2. (b) for bankruptcy. In any instance where an involuntary bankruptcy proceeding is filed against either Party, the Party subject to such proceeding is required to inform the other within ten (10) days of having been received notice of such filing. The other Party may terminate upon thirty (30) days notice if such involuntary proceeding is not dismissed within ninety (90) days from the date it was filed. (c) for convenience. Either Party may terminate this Agreement for its convenience. The Party terminating this Agreement must give not less than one hundred eighty (180) days notice of such termination to the other Party. 12.2 Except as provided in Article 12.3 below, where this Agreement is actually terminated by either Party based on Article 12.1 (a) or (c), a penalty shall be paid by the breaching Party to the other Party (in case of Article 12.1 (a)), or by the terminating Party to the other Party (in case of Article 12.1 (c)), in accordance with the schedule below, such that if: (a) Nisshinbo is the breaching or terminating Party, it shall pay to Spire a penalty equal to *** for each year remaining in the Term, with amounts for fractional years prorated. Such penalty shall be at no time less than the equivalent of the sum of the payments paid by Nisshinbo to Spire during the two year period immediately past under Articles 6.2 and 6.3. (b) Spire is the breaching or terminating Party; it shall pay to Nisshinbo a penalty equal to *** for each year remaining in the Term, with amounts for fractional years prorated. 12.3 Should either Party dissolve the business unit engaged in the activities contemplated under this Agreement, or be forced out of business due to a FORCE MAJEURE circumstance as defined in Article 16.9 below or otherwise cease to engage in this the solar photovoltaic module manufacturing equipment business or all business activities, no penalty shall be due and owing to the other Party under this Article, unless the Party should re-enter the subject matter business with a period of five (5) years from having exited it, in which case that Party shall pay the other the original penalty as provided for hereunder plus a premium equal to *** of its value. 12.4 In the event of termination or expiration of this Agreement, Articles 3, 4, 6, 10, and 14 shall survive. *** Represents text omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission. 16 ARTICLE 13. RESOLUTION OF DISPUTES - ---------------------------------- 13.1 The Parties shall make every commercially reasonable attempt to require the Management Team constituted under this Agreement to devise solutions to all disputes between the Parties, and take under advisement in good faith any recommendations made by the Management Team. 13.2 All such disputes between the Parties as cannot be resolved by the Management Team shall be referred to the International Chamber of Commerce by joint communication to that body initiated by the ranking member of the Management Team from each Party. The proceedings will be conducted by three (3) arbitrators appointed in accordance with the rules of this organization. Should the Parties meet in person, such meeting shall be held in Vancouver, British Columbia, Canada. The panel of arbitrators shall have three members who shall apply the rules of arbitration of the International Chamber of Commerce to the resolution of the dispute. All such judgments as shall be rendered by the arbitration panel shall be final and binding on the Parties. 13.3 The Parties shall not be liable in any event for any claim of indirect, incidental, special or consequential damages incurred by either Party of any Customer, including, but not limited to loss of revenue (except where due and payable under the provisions of this Agreement), loss of capital, loss of business reputation or opportunity regardless of the legal theory under which such claim may be asserted. ARTICLE 14. TREATMENT OF CONFIDENTIAL INFORMATION - ------------------------------------------------- 14.1 Each Party, which shall include its employees, directors, affiliates and subsidiaries shall be bound to the terms and conditions of the most recently executed Confidential Disclosure Agreement, as amended, which shall be attached hereto and incorporated into this Agreement as Exhibit No.5. ARTICLE 15. ASSIGNMENT - ---------------------- 15.1 This Agreement and all of its covenants, terms and conditions shall bind and inure to the benefit of the Parties hereto and their respective heirs, devisees and successors, however, the Parties agree as set forth below: (a) Neither Party may assign this Agreement, nor any of its rights and obligations hereunder to any third party without prior written permission of the other Party except for its sale of all, or substantially all of its assets or the sale of all of the equity of either Party. As provided for elsewhere herein, either Party may subcontract one or more of its obligations to be fulfilled under this Agreement according the provisions stated above but shall remain wholly responsible to the other for the nature and extent of the fulfillment of such obligation. 17 (b) Either Party may assign this Agreement together with its rights and obligations hereunder to any parent, wholly-owned subsidiary or affiliate by giving the other Party thirty (30) days prior notice of signing of such assignment. ARTICLE 16. GENERAL PROVISIONS - ------------------------------ 16.1 This Agreement with its Exhibits contains the entire agreement and understanding with regard to the subject matter hereof and supercedes any and all prior understandings, correspondence and agreements, oral and written, between the Parties. 16.2 No change, amendment or modification to or of this Agreement shall obligate or be binding upon a Party or the Parties unless made by a writing bearing the signatures of the authorized representatives of both Parties. 16.3 The titles of each of the Articles to this Agreement shall not be construed as limiting the intent of the subject matter they introduce. 16.4 This Agreement may be executed in any number of counterparts. So long as each counterpart bears the original signatures of the authorized representatives of each Party, it shall be deemed an original. 16.5 The English language version of this Agreement shall be considered the official version. Differences in the interpretation of versions written in other languages and this English version shall be resolved in favor of any interpretation based on this English language original. 16.6 No provision of this Agreement shall be deemed waived unless through a written instrument from the Party with the authority to make such waiver and signed by an individual representing the Party with such authority. No passage of time or previous waiver shall imply the existence or continuation of any waiver. 16.7 This Agreement shall be construed under the laws of England. The venue for all such proceeding as may be necessary pursuant to the provisions of this Agreement shall be held in London, England. 16.8 Each provision of this Agreement is fully severable; should a competent authority having jurisdiction over this Agreement rule that any part or provision to be unlawful or unenforceable, the Parties shall consider the balance to be effective and enforceable. The Parties shall jointly act to remove any part or portion of this Agreement found to be unlawful or unenforceable with such provisions as may effectively replace them. 16.9 Neither Party shall be held liable by the other for any delay in fulfilling any obligation hereunder where such delay results from an instance of FORCE MAJEURE. For the purpose of this Agreement, any occurrence of a force of nature, an act of God, or of any legally-constituted government authority; any incidence of strikes, riots, insurrection, terrorism, military action, any unanticipated and unavoidable breakdown of mechanical, electrical or other machinery, equipment or apparatus or any action, incidence or occurrence not stated in the foregoing but may be construed as such shall constitute an instance of FORCE MAJEURE. The Party affected shall notify the non- 18 affected Party in writing without delay, and within fifteen (15) days provide detailed information concerning such events and documents, to the extent existing or can be created, evidencing such events explaining the reasons for its inability to perform, or for its delay in the performance of, all or part of this Agreement. When the FORCE MAJeure is of such an extent that (i) the objectives of this Agreement are substantially impaired, or (ii) that a Party's performance is impaired for more than three (3) months, then the other Party may terminate this Agreement with immediate effect without any liability to either Party hereunder. 16.10 Where this Agreement shall require that notice by one Party shall be given to the other or for any other like communication between the Parties, such notice shall be in English and given by certified mail, express delivery service or via facsimile transmission, with an original copy to follow via the other two means stated above, and addressed as follows: *** *** Represents text omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission. 19 Further, and finally, the Parties acknowledge a requirement to treat with each other according to high standards of good faith and fair dealing in the exercise of all rights and the fulfillment of all obligations set forth above. IN WITNESS WHEREOF, the Parties hereto signify their acknowledgement, endorsement, and agreement of and with every covenant above and cause this Agreement to be executed by their respective authorized representatives as of the date first stated above: Nisshinbo Industries, Inc. Spire Corporation Signature: /s/ Yoshihiro Sakaki Signature: /s/ Rodger W. LaFavre ----------------------- ----------------------- Printed Name: Yoshihiro Sakaki Printed Name: Rodger W. LaFavre Its: Director of Precision Its: Chief Operating Officer Instrument & Machinery Division Date: May 26, 2005 Date: May 26, 2005 ----------------------- ----------------------- 20 EXHIBIT # 1 Spire Existing Technology includes the following: *** *** Represents text omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission. 21 Spire Developing Technology includes the following: *** *** Represents text omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission. 22 Nisshinbo Existing Technology: *** *** Represents text omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission. 23 EXHIBIT # 2 *** *** Represents text omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission. 24 EXHIBIT # 3 *** *** Represents text omitted pursuant to a request for confidential treatment. The omitted material has been filed separately with the Securities and Exchange Commission. 25 EXHIBIT #4 Trademarks SPIRE CORPORATION TRADEMARKS - ---------------------------- REGISTERED: ----------- SPIRE UNREGISTERED: ------------- SPI-CELL TEST 150 SPI-CELL TEST 1000M SPI-STRINGER 500 SPI-STRINGER 1000 SPI-ASSEMBLER 5000 SPI-VAC PIK 660 SPI-LAMINATOR 240 SPI-LAMINATOR 350 SPI-LAMINATOR 480 SPI-LAMINATOR 580 SPI-LAMINATOR 580N SPI-SUN SIMULATOR 130i SPI-SUN SIMULATOR 240A SPI-SUN SIMULATOR 240AL SPI-SUN SIMULATOR 350i SPI-SUN SIMULATOR 460i SPI-SUN SIMULATOR 660 SPI-SUN SIMULATOR 660i SPI-MODULE QA 460 SPI-FRAME PRESS 350 SPI-ARRAY TEST 800 SPI-ARRAY TEST 1000 SPI-BUFFER 350 SPI-TRIM 350 SPI-FRAME 350 SPI-BOXER 350 SPI-ARRAY TESTER 5000 NISSHINBO TRADEMARKS -------------------- REGISTERED: ----------- NISSHINBO UNREGISTERED: ------------- Lam0714S Lam1016S 26 Lam1222S Lam1522S Lam1522N Lam1722N Lam1730N Lam1734N Lam2030N Lam2034N Simulator SSS0510i Simulator SSS1010i Simulator SSS1015i Simulator Sun1116N Simulator Sun1040i 27 EXHIBIT # 5 CONFIDENTIAL DISCLOSURE AGREEMENT AGREEMENT made this 21st day of April, 2003 between Spire Corporation, One Patriots Park, Bedford, Massachusetts, 01730-2396 (hereinafter called "Spire"), and Nisshinbo Industries, Inc., Nisshinbo Mechatronics Division, 444-8560 Azukizaka 30, Miai Okazaki, Aichi Prefecture, Japan (hereinafter called "Company"). WHEREAS, Spire and Company have represented to each other that each owns, may own or is interested in receiving Proprietary Information (as defined below) pertaining to: Conception, development, design and manufacture of complex, electro-mechanical equipment and devices in general, and equipment and devices used in the photovoltaic module fabrication process in particular; data and information on costs, pricing and related subjects. WHEREAS, Spire and Company intend to exchange Proprietary Information for the following purpose(s): of development and maintenance of business relations. NOW, THEREFORE, for the good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows: 1. DEFINITION For purposes of this Agreement, "Proprietary Information" means data, reports, specifications, designs, prototypes, test results, trade secrets, processes, patentable inventions, plans or other business, financial or technical information in written, electronic magnetic or oral form (i) which is known only to the disclosing party, (or to others to whom the disclosing party has voluntarily disclosed it subject to restrictions similar to those set forth in this Agreement); (ii) as to which the disclosing party has taken reasonable precautions against disclosure; and (iii) which has been clearly labeled by the disclosing party as "confidential," "proprietary," "secret" or other term or similar import. Orally disclosed Proprietary Information shall retain its character as Proprietary Information so long as the proprietary, protected nature of the disclosed information is conveyed to the recipient: (a) orally at the same meeting or in the same conversation as the Proprietary Information is discussed and in writing within thirty (30) days of the original disclosure; or (b) in writing only, within ten (10) days of the original disclosure, in which case the recipient shall not be held liable for any disclosure of the Proprietary Information prior to it being so labeled. 2. OBLIGATION TO PROTECT PROPRIETARY INFORMATION (a) Each party agrees that if it is a recipient under this Agreement, it will not publish or otherwise disclose Proprietary Information received from the disclosing party to any third party or to any person employed by the recipient other than those who have a "need to know" in order to evaluate Proprietary Information and make the decisions contemplated by this Agreement. Any employee, consultant or other agent to whom a recipient party discloses Proprietary Information received for a disclosing party as provided in this Agreement, shall be subject to confidentiality obligations to such recipient party covering the Proprietary Information to at least the same extent as the recipient party is obligated by this Agreement. Each recipient party agrees to exercise reasonable care to protect the disclosing party's Proprietary Information and shall utilize the same procedures and systems to protect such Proprietary Information as it utilizes to protect its own Proprietary Information and other proprietary data. (b) Each party agrees to use Proprietary Information received from the other party only for the purposes described in this Agreement. (c) Immediately upon the request of the disclosing party, the recipient shall return to the disclosing party any of the disclosing party's Proprietary Information so requested without retaining any copies thereof. Upon termination of the relationship or discussions contemplated by this Agreement, all Proprietary Information shall be returned by the recipient to the disclosing party without retaining any copies thereof. 28 (d) Unless otherwise stated in writing signed by the parties, a recipient's obligation to protect Proprietary Information shall continue for five (5) years from disclosure. (e) Company further agrees that it will at no time during the five (5) years from the date written above use its access to Spire employees as an opportunity to solicit their employment elsewhere on Company's or any other party's behalf and for any purpose. 3. LIMITATIONS ON THE PARTIES' OBLIGATIONS No obligation to protect Proprietary Information shall exist under this Agreement with respect to any information which: (a) at the time of disclosure is in the public domain, (b) enters the public domain through no act or failure to act by the recipient, (c) comes into the possession of the recipient from a third party without obligation on the recipient to maintain it in confidence, or (d) at the time of disclosure to the recipient was already known to the recipient as evidenced by appropriate documentation. 4. EFFECT OF AGREEMENT All Proprietary Information remains the property of the disclosing party at all times. This Agreement does not constitute the promise or intention of either party to buy, or sell or market any products or services or to enter into any other type of arrangement or agreement. This Agreement does not constitute or imply the grant of any license or permission to use any intellectual property or Proprietary Information except to the limited extent and for the limited purposes set forth herein. 5. MISCELLANEOUS Any failure by either party to enforce its rights under this Agreement in any one instance shall not constitute a waiver of those rights in any other instance. The Parties acknowledge that a breach of this Agreement by a recipient may result in irreparable harm to the disclosing party not easily measured in monetary damages alone. Therefore, in addition to all other remedies available at law, the parties consent to the imposition of equitable remedies including injunctive relief without the necessity of proof of actual damages. This Agreement shall be governed and construed under the laws of the Commonwealth of Massachusetts. 6. TERM The term of this Agreement shall be three (3) years from the date written above, except as to the obligations set forth in paragraph 2. AGREED, by the parties whose names appear below and signed by authorized representatives, effective as of the date above. SPIRE CORPORATION Authorized Signature: /s/ R. W. LaFavre ---------------------- Printed Name: R. W. LaFavre Title: C.O.O. NISSHINBO INDUSTRIES, INC., NISSHINBO MECHATRONICS DIVISION Authorized Signature: /s/ Takashi Iwashita ---------------------- Printed Name: Takashi Iwashita Title: Executive Director 29 AMENDMENT NO. 1 TO CONFIDENTIAL DISCLOSURE AGREEMENT Effective Date: 16 May 2005 This Amendment No. 1 to the Confidential Disclosure Agreement dated 21 April, 2003 between Spire Corporation and Nisshinbo Industries, Inc. shall amend the following Articles: Article 2. Obligation to Protect Proprietary Information, paragraph (d) shall now state as set forth below. "Unless otherwise stated in writing, signed by the parties, a recipient's obligation to protect proprietary information shall continue for five (5) years from the date of the end of the term (including all renewals) of the Development, Manufacturing, and Sales Consortium Agreement between the parties hereto and effective 16 May 2005." Article 6. Term shall now state as set forth below. "The term of this Agreement shall end on the date of the end of the term (including all renewals) of the Development, Manufacturing, and Sales Consortium Agreement between the parties hereto and effective 16 May 2005." AGREED, by the parties to this Agreement whose names appear below, and are signed by their authorized representatives, effective as of the date above.
SPIRE CORPORATION NISSHINBO INDUSTRIES, INC. Authorized Signature: /s/ R. W. LaFavre Authorized Signature: /s/ Y. Sakaki ------------------- --------------------- Printed Name: R. W. LaFavre Printed Name: Y. Sakaki Title: C.O.O. Title: Director of Precision Instrument & Machinery Division
30 EX-31.1 3 exh31-1_13750.txt 302 CERTIFICATION OF THE C.E.O. EXHIBIT 31.1 ------------ CERTIFICATION PURSUANT TO SS.302 OF THE SARBANES-OXLEY ACT OF 2002 I, Roger G. Little, Chairman of the Board, Chief Executive Officer and President of Spire Corporation (the "Company"), certify that: 1. I have reviewed this quarterly report on Form 10-QSB of the Company. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report. 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and b) Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation. 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. Dated: August 15, 2005 By: /s/ Roger G. Little ------------------------------- Roger G. Little Chairman of the Board, Chief Executive Officer and President EX-31.2 4 exh31-2_13750.txt 302 CERTIFICATION OF THE C.F.O. EXHIBIT 31.2 ------------ CERTIFICATION PURSUANT TO SS.302 OF THE SARBANES-OXLEY ACT OF 2002 I, James F. Parslow, Chief Financial Officer of Spire Corporation (the "Company"), certify that: 1. I have reviewed this quarterly report on Form 10-QSB of the Company. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report. 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and b) Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation. 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. Dated: August 15, 2005 By: /s/ James F. Parslow ------------------------- James F. Parslow Chief Financial Officer EX-32.1 5 exh32-1_13750.txt 906 CERTIFICATION OF THE C.E.O. EXHIBIT 32.1 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SS.1350, AS ADOPTED PURSUANT TO SS.906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of Spire Corporation (the "Company") on Form 10-QSB (the "Report") for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof, I, Roger G. Little, Chairman of the Board, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: Augsut 15, 2005 By: /s/ Roger G. Little ------------------------------- Roger G. Little Chairman of the Board, Chief Executive Officer and President A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 6 exh32-2_13750.txt 906 CERTIFICATION OF THE C.F.O. EXHIBIT 32.2 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SS.1350, AS ADOPTED PURSUANT TO SS.906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of Spire Corporation (the "Company") on Form 10-QSB (the "Report") for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof, I, James F. Parslow, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 15, 2005 By: /s/ James F. Parslow ----------------------- James F. Parslow Chief Financial Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----