EXHIBIT 99.1
------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Spire Corporation:
We have audited the balance sheets of Bandwidth Semiconductor, LLC as of
December 31, 2002 and 2001, and the related statements of operations and
member's deficit, and cash flows for each of the years in the two year period
ended December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Bandwidth
Semiconductor, LLC as of December 31, 2002 and 2001, and the results of its
operations and its cash flows for each of the years in the two-year period ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America.
/s/ KPMG LLP
Boston, Massachusetts
August 22, 2003
1
BANDWIDTH SEMICONDUCTOR, LLC
BALANCE SHEETS
December 31,
March 31, ---------------------------------
2003 2002 2001
------------ ------------ ------------
(Unaudited)
ASSETS
Current assets
- --------------
Cash $ -- $ 8,885 $ --
Accounts receivable, net of allowance for doubtful accounts
of $48,661, $127,534 and $88,486, respectively 365,538 713,123 547,670
Inventories 74,204 97,116 461,442
Prepaid expenses and other current assets 122,713 117,925 193,894
------------ ------------ ------------
Total current assets 562,455 937,049 1,203,006
------------ ------------ ------------
Property, plant and equipment, at cost: 9,288,230 9,244,667 9,385,404
Less: Accumulated depreciation and amortization (2,218,232) (1,927,165) (937,305)
------------ ------------ ------------
Property, plant, and equipment, net 7,069,998 7,317,502 8,448,099
------------ ------------ ------------
Total assets $ 7,632,453 $ 8,254,551 $ 9,651,105
============ ============ ============
LIABILITIES AND MEMBER'S DEFICIT
Current liabilities
- -------------------
Current portion of capital lease obligation $ 403,954 $ 401,282 $ 390,771
Accounts payable 264,544 368,833 1,403,102
Accrued expenses 195,712 163,085 274,427
Accrued restructuring 1,437,734 1,564,439 2,163,090
------------ ------------ ------------
Total current liabilities 2,301,944 2,497,639 4,231,390
------------ ------------ ------------
Due to parent 27,558,517 26,871,800 21,577,615
Capital lease obligation, net of current portion 1,021,653 1,123,649 1,524,931
------------ ------------ ------------
Total liabilities 30,882,114 30,493,088 27,333,936
------------ ------------ ------------
Member's deficit:
- -----------------
Contributed capital 12,962,605 12,962,605 12,962,605
Accumulated deficit (36,212,266) (35,201,142) (30,645,436)
------------ ------------ ------------
Total member's deficit (23,249,661) (22,238,537) (17,682,831)
------------ ------------ ------------
Total liabilities and member's deficit $ 7,632,453 $ 8,254,551 $ 9,651,105
============ ============ ============
The accompanying notes are an integral part of these financial statements.
2
BANDWIDTH SEMICONDUCTOR, LLC
STATEMENTS OF OPERATIONS AND MEMBER'S DEFICIT
Three Months Ended March 31, Years Ended December 31,
--------------------------------- ---------------------------------
2003 2002 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Revenues
- --------
Revenues $ 434,235 $ 484,180 $ 2,194,103 $ 2,239,810
Revenues - parent company -- 9,890 9,890 392,158
------------ ------------ ------------ ------------
Total revenues 434,235 494,070 2,203,993 2,631,968
------------ ------------ ------------ ------------
Costs and expenses
- ------------------
Cost of revenues 624,651 867,841 3,820,978 4,717,056
Selling, general and administrative expense 145,218 225,081 641,378 1,110,437
Selling, general and administrative
expense - related party 543,302 -- 1,265,487 --
Research and development 112,059 270,056 655,416 3,047,698
Fixed asset impairment charge -- -- -- 8,742,408
Goodwill impairment charge -- -- -- 8,712,207
Restructuring charge -- -- -- 3,351,196
------------ ------------ ------------ ------------
Total costs and expenses 1,425,230 1,362,978 6,383,259 29,681,002
------------ ------------ ------------ ------------
Loss from operations (990,995) (868,908) (4,179,266) (27,049,034)
- --------------------
Interest expense, net (20,129) (22,365) (87,033) (29,903)
Interest expense - related party -- (225,537) (339,450) (709,956)
Other income, net -- 43 50,043 56,289
------------ ------------ ------------ ------------
Net loss $ (1,011,124) $ (1,116,767) $ (4,555,706) $(27,732,604)
- -------- ============ ============ ============ ============
Member's equity (deficit), beginning of period $(22,238,537) $(17,682,831) $(17,682,831) $ 10,049,773
============ ============ ============ ============
Member's deficit, end of period $(23,249,661) $(18,799,598) $(22,238,537) $(17,682,831)
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
3
BANDWIDTH SEMICONDUCTOR, LLC
STATEMENTS OF CASH FLOWS
Three Months Ended March 31, Years Ended December 31,
--------------------------------- ---------------------------------
2003 2002 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (1,011,124) $ (1,116,767) $ (4,555,706) $(27,732,604)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 291,067 304,830 1,219,321 2,198,436
Fixed asset impairment -- -- -- 8,742,408
Goodwill impairment -- -- -- 8,712,207
Loss on abandonment of assets -- -- -- 950,471
Gain on sale of assets -- -- (50,043) --
Changes in assets and liabilities:
Accounts receivable, net 347,585 24,740 (165,453) 84,544
Inventories 22,912 103,962 364,326 (341,316)
Prepaid expenses and other current assets (4,788) 126,786 75,969 (89,570)
Accounts payable (104,289) (889,805) (1,034,269) 367,828
Accrued expenses 32,627 (47,453) (111,342) 150,690
Accrued restructuring (126,705) (195,874) (598,651) 2,163,090
Deferred revenue -- -- -- (126,000)
------------ ------------ ------------ ------------
Net cash used in operating activities (552,715) (1,689,581) (4,855,848) (4,919,816)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment (43,563) (153,025) (153,025) (11,744,709)
Proceeds from sale of property and equipment -- 8,070 114,344 --
------------ ------------ ------------ ------------
Net cash used in investing activities (43,563) (144,955) (38,681) (11,744,709)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Net payments on capital lease obligation (99,324) (96,722) (390,771) (127,969)
Net borrowings from parent 686,717 1,931,258 5,294,185 16,603,105
------------ ------------ ------------ ------------
Net cash provided by financing activities 587,393 1,834,536 4,903,414 16,475,136
------------ ------------ ------------ ------------
Net increase (decrease) in cash (8,885) -- 8,885 (189,389)
Cash, beginning of period 8,885 -- -- 189,389
------------ ------------ ------------ ------------
Cash, end of period $ -- $ -- $ 8,885 $ --
============ ============ ============ ============
Supplemental non-cash financing activities:
Equipment purchased under capital lease -- -- -- 2,043,671
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 20,129 $ 22,366 $ 87,033 $ 31,299
============ ============ ============ ============
Income taxes $ -- $ -- $ -- $ --
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
BANDWIDTH SEMICONDUCTOR, LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002 (UNAUDITED) AND DECEMBER 31, 2002 AND 2001
1. DESCRIPTION OF THE BUSINESS
On May 23, 2003, Spire Corporation ("Spire") acquired from Stratos
Lightwave, Inc. ("Stratos") all the ownership interest of Bandwidth
Semiconductor, LLC ("the Company" or "Bandwidth"), a Delaware limited liability
company, located in Hudson, New Hampshire. Bandwidth is a compound semiconductor
foundry providing material and device fabrication services to defense,
telecommunications and biomedical instrument industries.
Prior to December 30, 1999, the Company had been Spire's optoelectronics
division, until it was sold to Stratos for a total of $12,950,000 in cash. On
May 23, 2003, the Company was re-acquired by Spire. Spire now owns 100% of the
ownership interest of the Company. Prior to the acquisition, the Company was a
wholly owned subsidiary of Stratos.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The Company's financial statements for the periods ended March 31, 2003 and
2002 and December 31, 2002 and 2001, have been carved out from the consolidated
financial statements of Stratos, using the historical results of operations and
cash flows and historical basis of the assets and liabilities of the business.
The financial statements also include interest expense on the outstanding loan
balance to Stratos prior to June 2002 and a corporate expense allocation to the
Company from Stratos beginning June 2002. The Company incurred interest expense
of $339,450 and $709,956 on this intercompany loan for the years ended December
31, 2002 and 2001, respectively. Interest was determined at the prime rate on
the then outstanding intercompany loan balance each month. In June 2002, the
interest charge was discontinued and a corporate allocation charge was
established utilizing a percentage of sales, net inventory and net fixed assets
formula. As a result, the Company recorded $1,265,487 of corporate charge
expense in 2002. These charges have been reflected in selling, general and
administrative expenses. These allocations are representative of centralized
accounting, treasury, information technology, human resources, sales and
marketing, legal, real estate and other corporate services. The Company
considers the expense allocations to be reasonable reflections of the
utilization of the services provided to it or the benefits received by it. The
financial statements reflect the operations, cash flows and assets and
liabilities of the Company on a stand-alone basis. Stratos plans to fund the
operations of the Company for the foreseeable future. Therefore, the amounts due
to the parent have been classified as long-term in the accompanying Balance
Sheets.
(b) FISCAL YEAR
The financial statements reflect a change in fiscal year end to conform to
Spire's December 31 fiscal year end. Prior to the acquisition, the Company's
fiscal year end was the last Saturday in April.
(c) UNAUDITED INTERIM INFORMATION
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to fairly present the Company's
financial position as of March 31, 2003 and the results of operations and cash
flows for the three months ended March 31, 2003 and 2002. The results of
operations for the three months ended March 31, 2003 are not necessarily
indicative of the results to be expected for the fiscal year ending December 31,
2003. The three-month period ended March 31, 2002 includes interest expense of
$225,537 based on the outstanding loan balance between the Company and Stratos.
The three-month period ended March 31, 2003 includes corporate charges of
$543,302 from Stratos to the Company.
(d) ACCOUNTS RECEIVABLE
Accounts receivable are stated at the amount management expects to collect
from outstanding balances. An allowance for doubtful accounts is provided for
those accounts receivable considered to be uncollectible based upon historical
experience and management's evaluation of outstanding accounts receivable at the
respective balance sheet dates. Bad debts are written off against the allowance
when identified.
5
BANDWIDTH SEMICONDUCTOR, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 2003 AND 2002(UNAUDITED) AND DECEMBER 31, 2002 AND 2001
(e) REVENUE RECOGNITION
We generally recognize 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. The Company handles
returns by replacing, repairing or issuing credit for defective products when
returned.
(f) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The Company provides for estimated obsolescence or unmarketable
inventory based upon assumptions about future demand and market conditions.
(g) PROPERTY AND EQUIPMENT
Property, plant and equipment are depreciated on the straight-line method
over the estimated useful lives of the assets, assuming a half-year of
depreciation for the year the asset is placed in service. Following is a listing
of the estimated useful lives used by the Company:
Asset Classification Estimated Useful Life
---------------------------- ---------------------------------------
Building and improvements 20 and 33 years
Machinery and equipment 3 to 5 years
Furniture and fixtures 5 years
Leasehold improvements Lesser of 10 years or remaining life
of facility lease
Depreciation and amortization expense relating to property, plant and
equipment was $291,067, $304,830, $1,219,321 and $1,819,926 for the three months
ended March 31, 2003 and 2002 and for the years ended December 31, 2002 and
2001, respectively.
(h) INCOME TAXES
The Company is a limited liability corporation and therefore does not
reflect any income taxes in its financial statements.
(i) RESEARCH AND DEVELOPMENT COSTS
Costs associated with the development of new products are charged to
expense when incurred. Total research and development costs incurred for the
three months ended March 31, 2003 and 2002, and for the years ended December 31,
2002 and 2001 were $112,059, $270,056, $655,416 and $3,047,698, respectively.
(j) ADVERTISING
The Company expenses all advertising costs when incurred.
(k) USE OF ESTIMATES
The preparation of the financial statements require management of the
Company to make a number of estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
(l) LONG-LIVED ASSETS
The Company periodically reviews long-lived assets when there is an
indicator of impairment. When an indicator of impairment is present, the Company
evaluates the carrying value of property, plant, and equipment and intangibles,
including goodwill, in relation to the operating performance and future
undiscounted cash flows of the underlying businesses. The Company adjusts the
net carrying value of the underlying assets if the sum of the expected future
undiscounted cash flows is less than carrying value.
6
BANDWIDTH SEMICONDUCTOR, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 2003 AND 2002(UNAUDITED) AND DECEMBER 31, 2002 AND 2001
(m) NEW ACCOUNTING STANDARDS
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets" ("SFAS 144"). The standard provides
guidance on measuring impairment of long-lived assets and applying discontinued
operations accounting upon adoption. The Company's adoption of SFAS 144 did not
have a material impact on its financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at the date of
commitment to an exit or disposal plan. SFAS 146 is effective for exit or
disposal activities initiated after December 31, 2002. The Company 's adoption
of SFAS 146 did not have a material impact on its financial statements.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock Based Compensation - Transition and
Disclosure - an Amendment of SFAS 123" ("SFAS 148"). SFAS 148 provides
additional transition guidance for those entities that elect to voluntarily
adopt the provisions of SFAS 123, "Accounting for Stock Based Compensation."
Furthermore, SFAS 148 mandates new disclosures in both interim and year-end
financial statements of the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The adoption
of SFAS 148 did not have a material impact on the Company's financial position
or results of operation.
3. INVENTORIES
Inventories consist of the following:
December 31,
March 31, --------------------------
2003 2002 2001
---------- ---------- ----------
(Unaudited)
Raw materials $ 74,204 $ 97,116 $ 380,530
Work in process -- -- 37,776
Finished goods -- -- 43,136
---------- ---------- ----------
$ 74,204 $ 97,116 $ 461,442
========== ========== ==========
4. PROPERTY, PLANT AND EQUIPMENT
Property and equipment consists of the following:
December 31,
March 31, --------------------------
2003 2002 2001
---------- ---------- ----------
(Unaudited)
Building and improvements $4,165,194 $4,165,194 $4,165,194
Machinery and equipment
(including reactor) 4,878,464 4,878,464 5,001,496
Furniture and fixtures 145,926 145,926 145,926
Computer equipment 55,083 55,083 55,083
Construction in progress 43,563 -- 17,705
---------- ---------- ----------
$9,288,230 $9,244,667 $9,385,404
========== ========== ==========
7
BANDWIDTH SEMICONDUCTOR, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 2003 AND 2002(UNAUDITED) AND DECEMBER 31, 2002 AND 2001
5. PROPERTY UNDER CAPITAL LEASES AND LEASE COMMITMENTS
In September 2001, Bandwidth Semiconductor, LLC ("Bandwidth") entered into
an agreement with GE Capital Leasing Corp, for the lease of a reactor for its
wafer production line. The lease is accounted for as a capital lease. At
inception, $2,043,671 was recorded as equipment; however, as part of the
restructuring at the end of 2001, an impairment charge of $877,117 pertaining to
the gross value of the reactor ($789,405 on a net book value basis) was recorded
as a component of the fixed asset-impairment charge discussed further in Note 7.
Under the lease agreement, the Company is making monthly payments of $36,412.
After the initial three-year period ending in September 2004, the lease allows
for an additional two-year extension. The Company expects to extend the lease
term for the additional two years to September 2006. The lease includes a
residual value guarantee of $204,367 at the end of extended period. Accordingly,
the Company is accruing an additional $3,400 per month so that the full amount
of the residual guarantee will have been accrued at the end of the lease in
September 2006.
The components of property under capital leases were as follows:
December 31,
March 31, --------------------------
2003 2002 2001
---------- ---------- ----------
(Unaudited)
Equipment $1,166,554 $1,166,554 $1,166,554
Less: Accumulated
amortization (408,294) (349,966) (116,655)
---------- ---------- ----------
$ 758,260 $ 816,588 $1,049,899
========== ========== ==========
A schedule of future minimum lease payments under capital and
non-cancelable operating leases as of December 31, 2002 is as follows:
Capital Operating
Leases Leases
------------ ------------
2003 $ 436,932 $ 528,000
2004 436,932 528,000
2005 436,932 484,000
2006 291,288 --
------------ ------------
Total minimum lease payments 1,602,084 $ 1,540,000
============
Less: Amount representing interest (77,153)
------------
1,524,931
Less: Current portion of capital
lease obligation (401,282)
------------
Long-term capital lease obligation $ 1,123,649
============
Total rent expense under operating leases was approximately $533,891 in
2001. As a part of the restructuring (Note 6), the Company abandoned the space
leased in Bedford, Massachusetts in November 2001 and accrued for the remaining
future lease obligation associated with this vacant space. Therefore, there was
no operating lease expense in the year ended December 31, 2002 and the quarters
ended March 31, 2003 and 2002.
6. RESTRUCTURING CHARGE
During fiscal year 2001, the Company moved its facility from the leased
space in Bedford, Massachusetts to a newly built wafer fabrication facility in
Hudson, New Hampshire. As a result, the Company abandoned the leased space in
Bedford, Massachusetts and recorded a $2,068,000 reserve for its remaining
future lease obligation associated with this vacant space. In addition, the
Company abandoned fixed assets in Bedford primarily related to leasehold
improvements and machinery and equipment, which resulted in a charge of
$1,006,760.
In relation to the move, the Company had initially increased its workforce
by approximately 28 employees in anticipation of the workload associated with
the move and to keep up with the projected demand. However, during the time the
building and wafer fabrication factory were under construction, the defense,
telecommunications and biomedical industries were experiencing sharp declines,
resulting in significantly lower revenues, backlog and new order volume than
planned. Therefore, in the fourth quarter of 2001, 23 employees were laid off.
8
BANDWIDTH SEMICONDUCTOR, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 2003 AND 2002(UNAUDITED) AND DECEMBER 31, 2002 AND 2001
The Company recorded a restructuring charge in 2001 based upon estimates of
the cost of severance benefits for affected employees, lease exit costs,
impairment of certain fixed assets, and other costs related to the new facility.
Substantially all amounts accrued for these actions were expected to be paid
within one year except for the lease obligations that will be recorded over its
remaining life.
The following table summarizes the activity in the restructuring accrual
reflected in the accompanying balance sheet for the three months ended March 31,
2003, and for the years ended December 31, 2002 and 2001:
Total
Facility Restructuring
Severance Fixed assets Closure Costs Accrual
------------ ------------ ------------ ------------
Restructuring charge recorded in 2001 $ 276,436 $ 1,006,760 $ 2,068,000 $ 3,351,196
Cash payments in 2001 (181,346) -- -- (181,346)
Non-cash charges in 2001 -- (1,006,760) -- (1,006,760)
------------ ------------ ------------ ------------
December 31, 2001 balance $ 95,090 $ -- $ 2,068,000 $ 2,163,090
============ ============ ============ ============
Restructuring charge accrued in 2002 $ -- $ -- $ -- $ --
Cash payments in 2002 (95,090) -- (503,561) (598,651)
------------ ------------ ------------ ------------
December 31, 2002 balance $ -- $ -- $ 1,564,439 $ 1,564,439
============ ============ ============ ============
Cash payments in 2003 (unaudited) $ -- $ -- $ (126,705) $ (126,705)
------------ ------------ ------------ ------------
March 31, 2003 balance (unaudited) $ -- $ -- $ 1,437,734 $ 1,437,734
============ ============ ============ ============
7. ASSET IMPAIRMENTS - FIXED ASSETS
During the year ended December 31, 2001, the Company recorded an $8,742,408
charge for the impairment of the manufacturing facility and related wafer
fabrication machinery and equipment at the Hudson, New Hampshire facility. Of
this amount $5,460,507 was attributable to land, building and building
improvements and $3,281,901 related to primarily machinery and equipment,
including the $789,405 net book value impairment related to the reactor lease
discussed in Note 5. This impairment charge was based on a recoverability
analysis prepared by management as a result of the dramatic downturn in the
market for the defense industry, wireless communications products and biomedical
instrumentation and the related impact on the then-current and projected
business outlook of the Company. The Company allocated the impairment
proportionately to the fixed assets impaired to establish a new cost basis.
When the Company was acquired by Stratos, the intention was to vacate the
existing leased space in Bedford, Massachusetts and build a new wafer
fabrication facility. The Company began the build out of the Hudson, New
Hampshire facility in 2000 and the new building was completed in the fourth
quarter of 2001. During the time the building and wafer fabrication factory were
under construction, the defense, telecommunications and biomedical industries
were experiencing sharp declines, resulting in significantly lower revenues,
backlog and new order volume than planned. Management believed these factors
indicated that the value of the Hudson, New Hampshire facility may be impaired
and that an impairment analysis should be performed.
In performing the analysis for recoverability, management estimated the
future cash flows expected to result from the manufacturing activities at the
Hudson, New Hampshire facility over the estimated expected life of the assets.
The estimated future cash flows were based on the significantly reduced volume
projected by management given the downturn in the industries that the Company
serves. Since the estimated undiscounted cash flows were less than the carrying
values (approximately $17 million based on historical cost) of the related
assets, it was concluded that an impairment loss should be recognized. The
impairment charge was determined by comparing the estimated fair value of the
related assets to their carrying value.
The Company believes the assumptions used in the discounted cash flow model
represented a reasonable estimate of the fair value of the assets. The
write-down established a new cost basis for the impaired assets.
9
BANDWIDTH SEMICONDUCTOR, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 2003 AND 2002(UNAUDITED) AND DECEMBER 31, 2002 AND 2001
8. ASSET IMPAIRMENTS - GOODWILL
In March 2002, the Company recorded a charge for the impairment of goodwill
associated with its acquisition by Stratos. Since the operating results and
forecasted future operating results of this business were substantially less
than had been anticipated at the time of the Company's acquisition, Stratos
believed that the value of the goodwill may be impaired and that an impairment
analysis should be performed. In accordance with the Company's policy,
management assessed the recoverability of goodwill using a cash flows projection
based on the remaining amortization period. Based on this projection, the
cumulative cash flows over the remaining amortization period were insufficient
to recover the goodwill. Therefore, an impairment loss of $8,712,207 was
recognized.
9. LEGAL MATTERS
In the ordinary course of business, the Company may be involved in a
variety of legal proceedings. In the opinion of management, there is no
proceeding pending or threatened that in the event of an adverse decision would
result in a material adverse change in the financial condition or results of the
operations of the Company.
In October 2001, Stratos and the Company commenced litigation against Spire
Corporation in the Circuit Court for Cook County, Illinois alleging various
claims arising out of an Asset Purchase Agreement dated November 18, 1999
("Agreement") between Spire, Methode and Methode Massachusetts, Inc. ("MMI").
Pursuant to the Agreement, Spire transferred the assets and certain liabilities
of Spire's optoelectronics business to MMI's transferee, now known as Bandwidth.
Methode transferred its rights and obligations under the Agreement to its
subsidiary, Stratos, which subsequently was spun-off by MMI as an independent
public company. Stratos and the Company claimed that Spire misrepresented
certain facts including the value of certain contracts and the financial
condition of the optoelectronics business. Stratos and the Company alleged
damages in excess of $500,000 and sought declaratory relief under an escrow
agreement with LaSalle Bank to satisfy their claims. An escrow account had been
established as security for payment of the Company's obligations to Methode
under the Agreement. In November 2001, Spire filed a lawsuit against Methode,
Stratos and Bandwidth in Middlesex Superior Court in Massachusetts. Spire
alleged that Stratos had made unlawful claims against the funds in escrow, which
in turn had resulted in the bank's refusal to pay Spire over $600,000 of the
escrow funds. In February 2003, Spire, Methode and Stratos concluded a
settlement of all outstanding claims between them, which involved the payment of
most of the disputed escrow funds to Spire.
10. SUBSEQUENT EVENT
On May 23, 2003, Spire acquired from Stratos all the ownership interest of
the Company. The total purchase price was $954,351 in cash, including related
acquisition costs of $229,385 plus liabilities assumed of $3,044,244. Spire's
acquisition of the Company did not include the purchase of the building in
Hudson, New Hampshire occupied by the Company. Spire assumed a capital lease
with GE Capital that the Company had entered into to finance the purchase of a
wafer production reactor. The consideration from Spire to Stratos also included
the release and forgiveness from all future obligations of the Company and
Stratos in connection with a Sublease Agreement with Spire dated December 29,
1999 and expiring on November 30, 2005 for approximately 21,275 square-feet of
space previously occupied by Bandwidth in Bedford, Massachusetts, that is now
vacant. Liabilities assumed includes $1,430,311 related to the reactor lease and
$1,247,241 related to the Bedford, Massachusetts space.
In conjunction with the acquisition of the Company by Spire, a Trust of
which Roger G. Little, Chairman of the Board, Chief Executive Officer and
President of Spire, is sole trustee and principal beneficiary ("SPI-Trust"),
purchased the building that the Company occupies in Hudson, New Hampshire from
Stratos, for $3.7 million. Subsequently, Spire entered into a lease for the
building (90,000 square feet) with SPI-Trust whereby Spire will pay $4.1 million
to the SPI-Trust over an initial five-year term expiring in 2008 with an option
to extend for five years. The lease agreement does not provide for a transfer of
ownership at any point. A summary of payments is as follows:
Year Rate Per Square Foot Annual Lease Cost Monthly Rent
------ -------------------- ----------------- ------------
Year 1 $6.00 $ 540,000 $45,000
Year 2 7.50 675,000 56,250
Year 3 8.50 765,000 63,750
Year 4 10.50 945,000 78,750
Year 5 13.50 1,215,000 101,250
10