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11.4.2003: Meldung: Annual Report Spire Corp. (WKN 870534)
OVERVIEW
The Company develops, manufactures and markets highly-engineered solar electric module manufacturing equipment and systems and provides biomedical processing services and devices. The Company is a leading supplier in the design
and manufacture of specialized equipment for the production of terrestrial photovoltaic modules from solar cells, with its equipment installed in more than 140 factories and in 42 countries. The Company"s value-added biomedical processing services offer surface treatments to enhance the durability or the antimicrobial characteristics of orthopedic and other medical devices. The Company also markets two hemodialysis catheter devices for the treatment of chronic kidney disease.
The Company"s net sales and revenues for the year ended December 31, 2002 increased 5%, compared to the year ended December 31, 2001. The increase was due to higher implant processing volumes and growth in government funding of our research and development efforts.
Sales in the Company"s Spire Solar business unit decreased 13% during 2002 as compared to 2001, due to excess capacity within the industry and lower than expected investment in solar module manufacturing equipment.
Revenues of the Company"s subsidiary, Spire Biomedical, Inc., increased 42% during 2002, as compared to 2001 due to the increased demand for the Company"s implant process services and increased government funding of our research and development efforts.
Operating results in any particular quarter will depend upon product mix, as well as the timing of shipments of higher priced products from the Company"s equipment line and delivery of solar systems. Export sales, which amounted to 17% of net sales and revenues for the year ended December 31, 2002, continue to constitute a significant portion of the Company"s net sales and revenues.
RESULTS OF OPERATIONS
The following table sets forth certain items as a percentage of net sales and revenues for the periods presented:
Year Ended December 31,
------------------------
2002 2001 2000
------ ------ ------
Net sales and revenues 100.0% 100.0% 100.0%
Cost of sales and revenues 71.6 74.1 71.9
------ ------ ------
Gross profit 28.4 25.9 28.1
Selling, general and administrative expenses 38.9 36.8 40.3
Internal research and development 2.3 5.0 2.3
------ ------ ------
Loss from operations (12.9) (16.7) (14.6)
Gain on sale of assets 30.6 -- --
------ ------ ------
Earnings (loss) before income taxes 17.8 (16.7) (10.8)
Income tax expense (benefit) 2.4 (0.5) (4.6)
------ ------ ------
Net earnings (loss) 15.5% (15.3)% (6.2)%
====== ====== ======
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
NET SALES AND REVENUES
Net sales and revenues increased $670,000 or 5% for the year ended December 31, 2002 to $14,822,000, compared to $14,152,000 for the year ended December 31, 2001. The increase was primarily the result of strong demand for the Company"s ion beam-based processes. Contract research, service and license revenues increased $1,075,000 or 20% to $6,453,000 for the year ended December 31, 2002 compared to $5,378,000 for 2001. Sales of goods decreased $405,000 or 5% to $8,369,000 for 2002, compared to $8,774,000 for 2001. The decline was due primarily to excess capacity within the industry and lower than expected investment in solar module manufacturing equipment. The following table categorizes the Company"s net sales and revenues for the periods presented:
Year Ended December 31,
---------------------------
2002 2001 Change
------------ ------------ ----------
Contract research, service
and license revenues $ 6,453,000 $ 5,378,000 20%
Sales of goods 8,369,000 8,774,000 (5%)
------------ ------------
Net sales and revenues $ 14,822,000 $ 14,152,000 5%
============ ============
COST OF SALES AND REVENUES
The cost of contract research, service and license revenues increased $285,000 to $3,749,000, and decreased to 58% of related revenues, for the year ended December 31, 2002, compared to $3,464,000 or 64% of related revenues for the year ended December 31, 2001. The decrease was due primarily to the increased volume for the medical implant services. Cost of goods sold decreased $260,000 to $6,875,000, and increased to 82% of related sales, for the year ended December 31, 2002, compared to $7,135,000 or 81% of related sales, for the year ended December 31, 2001. The increase in total cost of sales was a result primarily of increased sales of the Company"s ion-beam based process, which has high gross margins.
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:
December 31, December 31,
2002 % 2001 %
--------------------------------------
Cost of contract research,
service and license revenues $ 3,749,000 58% $ 3,464,000 64%
Cost of goods sold 6,875,000 82% 7,135,000 81%
------------ ------------
Total cost of sales and revenues $ 10,624,000 72% $ 10,599,000 75%
============ ============
INTERNAL RESEARCH AND DEVELOPMENT
Internal research and development for the year ended December 31, 2002 decreased $366,000 or 52% to $337,000, compared to $703,000 for the year ended December 31, 2001. The decrease was primarily a result of the Company"s reduced investment in new product development since the introduction of two hemodialysis catheter devices for the treatment of chronic kidney disease during the year ended December 31, 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended December 31, 2002 increased $564,000 to $5,775,000, and increased to 39% of sales and revenues, compared to $5,211,000 or 37% of sales and revenues for the year ended December 31, 2001. Selling, general and administrative expenses increased as a percentage of sales primarily as a result of increased sales and marketing efforts associated with the introduction of two new catheter devices and a one time administrative expense associated with the sale of the Company"s hemodialysis patent license to Bard Access Systems.
INTEREST
The Company earned $77,000 in interest income for the year ended December 31, 2002 from the investment of the proceeds from the sale of the license in short- term debt securities, compared to $276,000 for the year ended December 31, 2001. The Company incurred interest expense of $59,000 in 2002 and $94,000 in 2001, of which zero was capitalized in 2002 and $4,000 in 2001 related to internally constructed assets.
INCOME TAXES
The Company recorded a net tax expense of $332,000 for the year ended December 31, 2002, compared to a tax benefit of $13,000 for the year ended December 31, 2001. At December 31, 2002, the Company had a gross deferred tax asset of $804,000, against which a valuation allowance of $688,000 had been applied.
NET INCOME (LOSS)
The Company reported net income for the year ended December 31, 2002 of $2,237,000, compared to a net loss of $2,163,000 for the year ended December 31, 2001. Net income for the year included a gain on the sale of a license of $4,465,000 from the sale the Company"s hemodialysis patent license to Bard Access Systems. The terms included an initial $5,000,000 payment and possible additional payments of up to $11,000,000.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
NET SALES AND REVENUES
Net sales and revenues increased $1,267,000 or 10% for the year ended December 31, 2001 to $14,152,000, compared to $12,885,000 for the year ended December 31, 2000. Contract research, service and license revenues decreased
$2,482,000 or 32% to $5,378,000 for the year ended December 31, 2001 compared to $7,860,000 for 2000. Sales of goods increased $3,749,000 or 75% to $8,774,000 for 2001, compared to $5,025,000 for 2000 due primarily to the growth in the photovoltaic industry, and a growth in sales from the Company"s Chicago facility. The following table categorizes the Company"s net sales and revenues for the periods presented:
Year Ended December 31,
---------------------------
2001 2000 Change
------------ ------------ ----------
Contract research, service
and license revenues $ 5,378,000 $ 7,860,000 (32%)
Sales of goods 8,774,000 5,025,000 75%
------------ ------------
Net sales and revenues $ 14,152,000 $ 12,885,000 10%
============ ============
COST OF SALES AND REVENUES
The cost of contract research, service and license revenues decreased $1,163,000 to $3,464,000, and increased to 64% of related revenues, for the year ended December 31, 2001, compared to $4,627,000 or 59% of related revenues for the year ended December 31, 2000. Cost of contract research, service and license revenues decreased in dollars due to a lower volume. Cost of goods sold increased $2,440,000 to $7,135,000, and decreased to 81% of related sales, for the year ended December 31, 2001, compared to $4,642,000 or 92% of related sales, for the year ended December 31, 2000. The increase in total cost of sales and revenues was primarily caused by higher volume of sales.
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:
December 31, December 31,
2001 % 2000 %
--------------------------------------
Cost of contract research,
service and license revenues $ 3,464,000 64% $ 4,627,000 59%
Cost of goods sold 7,135,000 81% 4,642,000 92%
------------ ------------
Total cost of sales and revenues $ 10,599,000 75% $ 9,269,000 72%
============ ============
INTERNAL RESEARCH AND DEVELOPMENT
Internal research and development for the year ended December 31, 2001 increased $403,000 or 134% to $703,000, compared to $300,000 for the year ended December 31, 2000. The increase was primarily due to the Company"s investment in the development of a catheter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended December 31, 2001 increased $16,000 to $5,211,000, and decreased to 37% of sales and revenues, compared to $5,195,000 or 40% of sales and revenues for the year ended December 31, 2000. Selling, general and administrative expenses decreased as a percentage of sales primarily as a result of higher sales volume.
INTEREST
The Company earned $276,000 in interest income for the year ended December 31, 2001 from the investment of the proceeds from the sale of the optoelectronics assets in short-term debt securities, compared to $488,000 for the year ended December 31, 2000. The Company incurred interest expense of $94,000 in 2001 and $18,000 in 2000, of which $4,000 was capitalized in 2001 and $11,000 in 2000 related to internally constructed assets.
INCOME TAXES
The Company recorded $13,000 of tax benefit for the year ended December 31, 2001, compared to a tax benefit of $598,000 for the year ended December 31, 2000. At December 31, 2001, the Company had a gross deferred tax asset of expenses of $1,707,000, against which a valuation allowance of $1,638,000 was applied. Gross deferred tax liability of $69,000 was applied against the net deferred tax asset.
NET LOSS
The Company reported a net loss for the year ended December 31, 2001 of $2,163,000, compared to net loss of $800,000 for the year ended December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has been able to fund its operating cash requirements using proceeds from sales of assets, operations and available lines of credit. On July 25, 2000, the Company entered into a new revolving credit agreement (the "Agreement") with Silicon Valley Bank. The Agreement was amended in January 2002 in connection with the Company"s inability to satisfy certain financial covenants, and the line of credit was extended until April 2002. The Company has negotiated an amendment to extend the agreement until April 23, 2003. The Company is in the process of reviewing its options and anticipates extending the current line of credit. The agreement provides for a $2 million revolving credit facility, based upon eligible accounts receivable requirements. The line of credit provides the Company with resources for general working capital purposes and Standby Letter of Credit Guarantees for foreign customers. The line of credit is secured by all assets of the Company. At December 31, 2002 and 2001, interest on the line of credit was at the Bank"s prime rate plus 1/2 percent (4.25% in 2002 and 5.25% in 2001). The line of credit contains covenants including provisions relating to profitability and net worth. The Company was in compliance with all such covenants as of December 31, 2002. Borrowings on the line of credit are classified as current liabilities. As of December 31, 2002, the Company had no outstanding debt under this revolving credit facility.
The Company believes it has sufficient resources to finance its current operations for the foreseeable future through working capital and available lease arrangements. Cash and cash equivalents increased $2,216,000 to $7,799,000 at December 31, 2002 from $5,583,000 at December 31, 2001. To date, there are no material commitments by the Company for capital expenditures. At December 31, 2002, the Company"s retained earnings were $2,461,000, compared to retained earnings of $225,000 as of December 31, 2001. Working capital as of December 31, 2002 increased 47% to $10,524,000, compared to $6,759,000 as of December 31, 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. This statement is effective for exit or disposal activities initiated after December 31, 2002. The Company"s adoption of SFAS No. 146 did not have a material impact on its financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor"s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 will be effective for any guarantees that are issued or modified after December 31, 2002. The disclosure requirements will be effective for the Company"s second quarter of fiscal 2003. Management does not expect the adoption of FIN 45 to have a material impact on the Company"s financial position or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure - an Amendment of SFAS 123 ("SFAS No. 148")." SFAS No. 148 provides additional transition guidance for those entities that elect to voluntarily adopt the provisions of SFAS No. 123, "Accounting for Stock Based Compensation." Furthermore, SFAS No. 148 mandates new disclosures in both interim and year-end financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The adoption of SFAS No. 148 did not have a material impact on the Company"s financial position or results of operation.
IMPACT OF INFLATION AND CHANGING PRICES
Historically, the Company"s business has not been materially impacted by inflation. Manufacturing equipment and solar systems are generally quoted, manufactured and shipped within a cycle of approximately nine months, allowing for orderly pricing adjustments to the cost of labor and purchased parts. The Company has not experienced any negative effects from the impact of inflation on
long-term contracts. The Company"s service business is not expected to be seriously affected by inflation because its procurement-production cycle typically ranges from two weeks to several months, and prices generally are not fixed for more than one year. Research and development contracts usually include cost escalation provisions.
FOREIGN EXCHANGE FLUCTUATION
The Company sells its products and services only in United States dollars, generally against an irrevocable confirmed letter of credit through a major United States bank. Therefore, the Company is not directly affected by foreign exchange fluctuations on its current orders. However, fluctuations in foreign exchange rates do have an effect on the Company"s customers" access to United States dollars and on the pricing competition on certain pieces of equipment that the Company sells in selected markets.
RELATED PARTY TRANSACTIONS
The Company subleases 74,000-square-feet in a building from Mykrolis Corporation, which leases the building from a Trust of which Roger G. Little, Chairman of the Board, Chief Executive Officer and President, is sole trustee and principal beneficiary. The Company believes that the terms of the sublease are commercially reasonable. The 1985 sublease originally was for a period of ten years, was extended for a five-year period expiring on November 30, 2000 and was further extended for a five-year period expiring on November 30, 2005. The agreement provides for minimum rental payments plus annual increases linked to the consumer price index. Total rent expense under this sublease was $1,024,000 in 2002. This amount does not take into account rent received by the Company for subleasing approximately 22,000-square-feet of its 74,000 square feet to the purchaser of the Company"s optoelectronics business.
CRITICAL ACCOUNTING POLICY - REVENUE RECOGNITION
The Company derives its revenues from three primary sources: (1) sales of solar energy manufacturing equipment and solar energy systems; (2) biomedical processing services; and (3) United States government funded research and development contracts.
The Company"s OEM capital equipment solar energy business builds complex customized machines to order for specific customers. Substantially all of these orders are sold on a FOB Bedford, Massachusetts (or EXW Factory) basis . It is the Company"s policy to recognize revenues for this equipment as the product is shipped to the customer, as customer acceptance is obtained prior to shipment and the equipment is expected to operate the same in the customer"s environment as it does in the Company"s environment. When an arrangement with the customer includes future obligations or customer acceptance, revenue is recognized when those obligations are met or customer acceptance has been achieved. The Company"s solar energy systems business installs solar energy systems on customer-owned properties on a contractual basis. Generally, revenue is recognized once the systems have been installed and the title is passed to the customer. For arrangements with a number of elements, the Company allocates fair value to each element based on rates quoted in the contract and revenue is recognized upon delivery of the element. The Company"s biomedical subsidiary performs surface engineering services for various medical device manufacturers on a contractual basis. The Company recognizes revenue as the products are shipped back to the customer. The Company recognizes revenues and estimated profits on long term government contracts on a percentage of completion method of accounting using a cost to cost methodology. Profit estimates are revised periodically based upon changes and facts, and any losses on contracts are recognized immediately. Some of the contracts include provisions to withhold a portion of the contract value as retainage until such time as the United States government performs an audit of the cost incurred under the contract. The Company"s policy is to take into revenue the full value of the contract, including any retainage, as it performs against the contract since the Company has not experienced any substantial losses as a result of an audit performed by the United States government.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes the Company"s contractual obligations at December 31, 2002 and the maturity periods and the effect that such obligations are expected to have on its liquidity and cash flows in future periods:
Payments Due by Period
---------------------------------------------------------------
Less than After
Contractual Obligation Total 1 Year 1 - 3 Years 4 - 5 Years 5 Years
------------------------------- ----------- ----------- ----------- ----------- -----------
Non-cancelable operating leases $ 4,492,000 $ 1,105,000 $ 2,221,000 $ 1,166,000 $ --
BPS minimum required purchase 6,000,000 2,000,000 2,000,000 2,000,000 --
----------- ----------- ----------- ----------- -----------
Total commercial commitments $10,492,000 $ 3,105,000 $ 4,221,000 $ 3,166,000 --
=========== =========== =========== =========== ===========
On October 8, 1999, the Company entered into an Agreement with BP Solarex ("BPS") in which BPS agreed to purchase certain production equipment built by the Company, for use in the Company"s Chicago factory and in return the Company agreed to purchase solar cells of a minimum of two megawatts per year over a five- year term. BPS has the right to repossess the equipment should the Company not purchase its committed quantity. The proceeds from the sale of the production equipment purchased by BPS have been classified as an unearned purchase discount in the accompanying balance sheet. The Company will amortize this discount as a reduction to cost of sales as it purchases solar cells from BPS. Amortization of the purchase discount amounted to $8,978 during the year ended December 31, 2002. The Company is currently negotiating with BPS to include purchases other than solar cells to reduce the purchase discount.
The Company develops, manufactures and markets highly-engineered solar electric module manufacturing equipment and systems and provides biomedical processing services and devices. The Company is a leading supplier in the design
and manufacture of specialized equipment for the production of terrestrial photovoltaic modules from solar cells, with its equipment installed in more than 140 factories and in 42 countries. The Company"s value-added biomedical processing services offer surface treatments to enhance the durability or the antimicrobial characteristics of orthopedic and other medical devices. The Company also markets two hemodialysis catheter devices for the treatment of chronic kidney disease.
The Company"s net sales and revenues for the year ended December 31, 2002 increased 5%, compared to the year ended December 31, 2001. The increase was due to higher implant processing volumes and growth in government funding of our research and development efforts.
Sales in the Company"s Spire Solar business unit decreased 13% during 2002 as compared to 2001, due to excess capacity within the industry and lower than expected investment in solar module manufacturing equipment.
Revenues of the Company"s subsidiary, Spire Biomedical, Inc., increased 42% during 2002, as compared to 2001 due to the increased demand for the Company"s implant process services and increased government funding of our research and development efforts.
Operating results in any particular quarter will depend upon product mix, as well as the timing of shipments of higher priced products from the Company"s equipment line and delivery of solar systems. Export sales, which amounted to 17% of net sales and revenues for the year ended December 31, 2002, continue to constitute a significant portion of the Company"s net sales and revenues.
RESULTS OF OPERATIONS
The following table sets forth certain items as a percentage of net sales and revenues for the periods presented:
Year Ended December 31,
------------------------
2002 2001 2000
------ ------ ------
Net sales and revenues 100.0% 100.0% 100.0%
Cost of sales and revenues 71.6 74.1 71.9
------ ------ ------
Gross profit 28.4 25.9 28.1
Selling, general and administrative expenses 38.9 36.8 40.3
Internal research and development 2.3 5.0 2.3
------ ------ ------
Loss from operations (12.9) (16.7) (14.6)
Gain on sale of assets 30.6 -- --
------ ------ ------
Earnings (loss) before income taxes 17.8 (16.7) (10.8)
Income tax expense (benefit) 2.4 (0.5) (4.6)
------ ------ ------
Net earnings (loss) 15.5% (15.3)% (6.2)%
====== ====== ======
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
NET SALES AND REVENUES
Net sales and revenues increased $670,000 or 5% for the year ended December 31, 2002 to $14,822,000, compared to $14,152,000 for the year ended December 31, 2001. The increase was primarily the result of strong demand for the Company"s ion beam-based processes. Contract research, service and license revenues increased $1,075,000 or 20% to $6,453,000 for the year ended December 31, 2002 compared to $5,378,000 for 2001. Sales of goods decreased $405,000 or 5% to $8,369,000 for 2002, compared to $8,774,000 for 2001. The decline was due primarily to excess capacity within the industry and lower than expected investment in solar module manufacturing equipment. The following table categorizes the Company"s net sales and revenues for the periods presented:
Year Ended December 31,
---------------------------
2002 2001 Change
------------ ------------ ----------
Contract research, service
and license revenues $ 6,453,000 $ 5,378,000 20%
Sales of goods 8,369,000 8,774,000 (5%)
------------ ------------
Net sales and revenues $ 14,822,000 $ 14,152,000 5%
============ ============
COST OF SALES AND REVENUES
The cost of contract research, service and license revenues increased $285,000 to $3,749,000, and decreased to 58% of related revenues, for the year ended December 31, 2002, compared to $3,464,000 or 64% of related revenues for the year ended December 31, 2001. The decrease was due primarily to the increased volume for the medical implant services. Cost of goods sold decreased $260,000 to $6,875,000, and increased to 82% of related sales, for the year ended December 31, 2002, compared to $7,135,000 or 81% of related sales, for the year ended December 31, 2001. The increase in total cost of sales was a result primarily of increased sales of the Company"s ion-beam based process, which has high gross margins.
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:
December 31, December 31,
2002 % 2001 %
--------------------------------------
Cost of contract research,
service and license revenues $ 3,749,000 58% $ 3,464,000 64%
Cost of goods sold 6,875,000 82% 7,135,000 81%
------------ ------------
Total cost of sales and revenues $ 10,624,000 72% $ 10,599,000 75%
============ ============
INTERNAL RESEARCH AND DEVELOPMENT
Internal research and development for the year ended December 31, 2002 decreased $366,000 or 52% to $337,000, compared to $703,000 for the year ended December 31, 2001. The decrease was primarily a result of the Company"s reduced investment in new product development since the introduction of two hemodialysis catheter devices for the treatment of chronic kidney disease during the year ended December 31, 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended December 31, 2002 increased $564,000 to $5,775,000, and increased to 39% of sales and revenues, compared to $5,211,000 or 37% of sales and revenues for the year ended December 31, 2001. Selling, general and administrative expenses increased as a percentage of sales primarily as a result of increased sales and marketing efforts associated with the introduction of two new catheter devices and a one time administrative expense associated with the sale of the Company"s hemodialysis patent license to Bard Access Systems.
INTEREST
The Company earned $77,000 in interest income for the year ended December 31, 2002 from the investment of the proceeds from the sale of the license in short- term debt securities, compared to $276,000 for the year ended December 31, 2001. The Company incurred interest expense of $59,000 in 2002 and $94,000 in 2001, of which zero was capitalized in 2002 and $4,000 in 2001 related to internally constructed assets.
INCOME TAXES
The Company recorded a net tax expense of $332,000 for the year ended December 31, 2002, compared to a tax benefit of $13,000 for the year ended December 31, 2001. At December 31, 2002, the Company had a gross deferred tax asset of $804,000, against which a valuation allowance of $688,000 had been applied.
NET INCOME (LOSS)
The Company reported net income for the year ended December 31, 2002 of $2,237,000, compared to a net loss of $2,163,000 for the year ended December 31, 2001. Net income for the year included a gain on the sale of a license of $4,465,000 from the sale the Company"s hemodialysis patent license to Bard Access Systems. The terms included an initial $5,000,000 payment and possible additional payments of up to $11,000,000.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
NET SALES AND REVENUES
Net sales and revenues increased $1,267,000 or 10% for the year ended December 31, 2001 to $14,152,000, compared to $12,885,000 for the year ended December 31, 2000. Contract research, service and license revenues decreased
$2,482,000 or 32% to $5,378,000 for the year ended December 31, 2001 compared to $7,860,000 for 2000. Sales of goods increased $3,749,000 or 75% to $8,774,000 for 2001, compared to $5,025,000 for 2000 due primarily to the growth in the photovoltaic industry, and a growth in sales from the Company"s Chicago facility. The following table categorizes the Company"s net sales and revenues for the periods presented:
Year Ended December 31,
---------------------------
2001 2000 Change
------------ ------------ ----------
Contract research, service
and license revenues $ 5,378,000 $ 7,860,000 (32%)
Sales of goods 8,774,000 5,025,000 75%
------------ ------------
Net sales and revenues $ 14,152,000 $ 12,885,000 10%
============ ============
COST OF SALES AND REVENUES
The cost of contract research, service and license revenues decreased $1,163,000 to $3,464,000, and increased to 64% of related revenues, for the year ended December 31, 2001, compared to $4,627,000 or 59% of related revenues for the year ended December 31, 2000. Cost of contract research, service and license revenues decreased in dollars due to a lower volume. Cost of goods sold increased $2,440,000 to $7,135,000, and decreased to 81% of related sales, for the year ended December 31, 2001, compared to $4,642,000 or 92% of related sales, for the year ended December 31, 2000. The increase in total cost of sales and revenues was primarily caused by higher volume of sales.
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:
December 31, December 31,
2001 % 2000 %
--------------------------------------
Cost of contract research,
service and license revenues $ 3,464,000 64% $ 4,627,000 59%
Cost of goods sold 7,135,000 81% 4,642,000 92%
------------ ------------
Total cost of sales and revenues $ 10,599,000 75% $ 9,269,000 72%
============ ============
INTERNAL RESEARCH AND DEVELOPMENT
Internal research and development for the year ended December 31, 2001 increased $403,000 or 134% to $703,000, compared to $300,000 for the year ended December 31, 2000. The increase was primarily due to the Company"s investment in the development of a catheter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended December 31, 2001 increased $16,000 to $5,211,000, and decreased to 37% of sales and revenues, compared to $5,195,000 or 40% of sales and revenues for the year ended December 31, 2000. Selling, general and administrative expenses decreased as a percentage of sales primarily as a result of higher sales volume.
INTEREST
The Company earned $276,000 in interest income for the year ended December 31, 2001 from the investment of the proceeds from the sale of the optoelectronics assets in short-term debt securities, compared to $488,000 for the year ended December 31, 2000. The Company incurred interest expense of $94,000 in 2001 and $18,000 in 2000, of which $4,000 was capitalized in 2001 and $11,000 in 2000 related to internally constructed assets.
INCOME TAXES
The Company recorded $13,000 of tax benefit for the year ended December 31, 2001, compared to a tax benefit of $598,000 for the year ended December 31, 2000. At December 31, 2001, the Company had a gross deferred tax asset of expenses of $1,707,000, against which a valuation allowance of $1,638,000 was applied. Gross deferred tax liability of $69,000 was applied against the net deferred tax asset.
NET LOSS
The Company reported a net loss for the year ended December 31, 2001 of $2,163,000, compared to net loss of $800,000 for the year ended December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has been able to fund its operating cash requirements using proceeds from sales of assets, operations and available lines of credit. On July 25, 2000, the Company entered into a new revolving credit agreement (the "Agreement") with Silicon Valley Bank. The Agreement was amended in January 2002 in connection with the Company"s inability to satisfy certain financial covenants, and the line of credit was extended until April 2002. The Company has negotiated an amendment to extend the agreement until April 23, 2003. The Company is in the process of reviewing its options and anticipates extending the current line of credit. The agreement provides for a $2 million revolving credit facility, based upon eligible accounts receivable requirements. The line of credit provides the Company with resources for general working capital purposes and Standby Letter of Credit Guarantees for foreign customers. The line of credit is secured by all assets of the Company. At December 31, 2002 and 2001, interest on the line of credit was at the Bank"s prime rate plus 1/2 percent (4.25% in 2002 and 5.25% in 2001). The line of credit contains covenants including provisions relating to profitability and net worth. The Company was in compliance with all such covenants as of December 31, 2002. Borrowings on the line of credit are classified as current liabilities. As of December 31, 2002, the Company had no outstanding debt under this revolving credit facility.
The Company believes it has sufficient resources to finance its current operations for the foreseeable future through working capital and available lease arrangements. Cash and cash equivalents increased $2,216,000 to $7,799,000 at December 31, 2002 from $5,583,000 at December 31, 2001. To date, there are no material commitments by the Company for capital expenditures. At December 31, 2002, the Company"s retained earnings were $2,461,000, compared to retained earnings of $225,000 as of December 31, 2001. Working capital as of December 31, 2002 increased 47% to $10,524,000, compared to $6,759,000 as of December 31, 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. This statement is effective for exit or disposal activities initiated after December 31, 2002. The Company"s adoption of SFAS No. 146 did not have a material impact on its financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor"s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 will be effective for any guarantees that are issued or modified after December 31, 2002. The disclosure requirements will be effective for the Company"s second quarter of fiscal 2003. Management does not expect the adoption of FIN 45 to have a material impact on the Company"s financial position or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure - an Amendment of SFAS 123 ("SFAS No. 148")." SFAS No. 148 provides additional transition guidance for those entities that elect to voluntarily adopt the provisions of SFAS No. 123, "Accounting for Stock Based Compensation." Furthermore, SFAS No. 148 mandates new disclosures in both interim and year-end financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The adoption of SFAS No. 148 did not have a material impact on the Company"s financial position or results of operation.
IMPACT OF INFLATION AND CHANGING PRICES
Historically, the Company"s business has not been materially impacted by inflation. Manufacturing equipment and solar systems are generally quoted, manufactured and shipped within a cycle of approximately nine months, allowing for orderly pricing adjustments to the cost of labor and purchased parts. The Company has not experienced any negative effects from the impact of inflation on
long-term contracts. The Company"s service business is not expected to be seriously affected by inflation because its procurement-production cycle typically ranges from two weeks to several months, and prices generally are not fixed for more than one year. Research and development contracts usually include cost escalation provisions.
FOREIGN EXCHANGE FLUCTUATION
The Company sells its products and services only in United States dollars, generally against an irrevocable confirmed letter of credit through a major United States bank. Therefore, the Company is not directly affected by foreign exchange fluctuations on its current orders. However, fluctuations in foreign exchange rates do have an effect on the Company"s customers" access to United States dollars and on the pricing competition on certain pieces of equipment that the Company sells in selected markets.
RELATED PARTY TRANSACTIONS
The Company subleases 74,000-square-feet in a building from Mykrolis Corporation, which leases the building from a Trust of which Roger G. Little, Chairman of the Board, Chief Executive Officer and President, is sole trustee and principal beneficiary. The Company believes that the terms of the sublease are commercially reasonable. The 1985 sublease originally was for a period of ten years, was extended for a five-year period expiring on November 30, 2000 and was further extended for a five-year period expiring on November 30, 2005. The agreement provides for minimum rental payments plus annual increases linked to the consumer price index. Total rent expense under this sublease was $1,024,000 in 2002. This amount does not take into account rent received by the Company for subleasing approximately 22,000-square-feet of its 74,000 square feet to the purchaser of the Company"s optoelectronics business.
CRITICAL ACCOUNTING POLICY - REVENUE RECOGNITION
The Company derives its revenues from three primary sources: (1) sales of solar energy manufacturing equipment and solar energy systems; (2) biomedical processing services; and (3) United States government funded research and development contracts.
The Company"s OEM capital equipment solar energy business builds complex customized machines to order for specific customers. Substantially all of these orders are sold on a FOB Bedford, Massachusetts (or EXW Factory) basis . It is the Company"s policy to recognize revenues for this equipment as the product is shipped to the customer, as customer acceptance is obtained prior to shipment and the equipment is expected to operate the same in the customer"s environment as it does in the Company"s environment. When an arrangement with the customer includes future obligations or customer acceptance, revenue is recognized when those obligations are met or customer acceptance has been achieved. The Company"s solar energy systems business installs solar energy systems on customer-owned properties on a contractual basis. Generally, revenue is recognized once the systems have been installed and the title is passed to the customer. For arrangements with a number of elements, the Company allocates fair value to each element based on rates quoted in the contract and revenue is recognized upon delivery of the element. The Company"s biomedical subsidiary performs surface engineering services for various medical device manufacturers on a contractual basis. The Company recognizes revenue as the products are shipped back to the customer. The Company recognizes revenues and estimated profits on long term government contracts on a percentage of completion method of accounting using a cost to cost methodology. Profit estimates are revised periodically based upon changes and facts, and any losses on contracts are recognized immediately. Some of the contracts include provisions to withhold a portion of the contract value as retainage until such time as the United States government performs an audit of the cost incurred under the contract. The Company"s policy is to take into revenue the full value of the contract, including any retainage, as it performs against the contract since the Company has not experienced any substantial losses as a result of an audit performed by the United States government.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes the Company"s contractual obligations at December 31, 2002 and the maturity periods and the effect that such obligations are expected to have on its liquidity and cash flows in future periods:
Payments Due by Period
---------------------------------------------------------------
Less than After
Contractual Obligation Total 1 Year 1 - 3 Years 4 - 5 Years 5 Years
------------------------------- ----------- ----------- ----------- ----------- -----------
Non-cancelable operating leases $ 4,492,000 $ 1,105,000 $ 2,221,000 $ 1,166,000 $ --
BPS minimum required purchase 6,000,000 2,000,000 2,000,000 2,000,000 --
----------- ----------- ----------- ----------- -----------
Total commercial commitments $10,492,000 $ 3,105,000 $ 4,221,000 $ 3,166,000 --
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On October 8, 1999, the Company entered into an Agreement with BP Solarex ("BPS") in which BPS agreed to purchase certain production equipment built by the Company, for use in the Company"s Chicago factory and in return the Company agreed to purchase solar cells of a minimum of two megawatts per year over a five- year term. BPS has the right to repossess the equipment should the Company not purchase its committed quantity. The proceeds from the sale of the production equipment purchased by BPS have been classified as an unearned purchase discount in the accompanying balance sheet. The Company will amortize this discount as a reduction to cost of sales as it purchases solar cells from BPS. Amortization of the purchase discount amounted to $8,978 during the year ended December 31, 2002. The Company is currently negotiating with BPS to include purchases other than solar cells to reduce the purchase discount.