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1998
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] For the fiscal year ended
December 31, 1998.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required] For the transition period from
to
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Commission file number: 0-12742
SPIRE CORPORATION
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(Name of Small Business Issuer in Its Charter)
MASSACHUSETTS 04-2457335
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization
ONE PATRIOTS PARK, BEDFORD, MASSACHUSETTS 01730-2396 781-275-6000
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(Address of Principal Executive Offices) (Zip Code) (Issuer's Telephone Number,
Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Not applicable Not applicable
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<S> <C>
Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, $.01 PAR VALUE, NASDAQ
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Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $14,143,000.
Based on the closing average price for the registrant's voting stock on February
26, 1999, the aggregate market value of such voting stock held by non-affiliates
of the registrant was $7,253,863.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. There were 3,243,766 shares of the
issuer's only class of common equity, Common Stock, $.01 par value, on February
26, 1999.
Transitional Small Business Disclosure Format (Check One): Yes ___ No _X_
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Special Meeting of
Stockholders in Lieu of 1999 Annual Meeting to be held on May 20, 1999 are
incorporated by reference into Part III of this Report.
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS
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This Report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results and the timing of certain events may
differ materially from the results discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below and in "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
BUSINESS DEVELOPMENT
Spire Corporation ("Spire" or the "Company"), a Massachusetts corporation
incorporated in 1969, is organized into three business areas all of which have
developed out of the Company's expertise in semiconductor technologies:
* Photovoltaics,
* Optoelectronics, and
* Biomedical.
The Company's revenues over the past three years have been between $14 and $23
million, but the sources of those revenues have varied among the Company's three
primary business areas.
BUSINESS OF ISSUER
Spire develops, manufactures and markets highly-engineered photovoltaic
module manufacturing equipment, optoelectronic products and provides biomedical
processing services. Spire is the world's leader in the design and manufacture
of specialized equipment for the production of terrestrial photovoltaic modules
from solar cells, with its equipment installed in 142 factories and in 38
countries. The Company also offers certain optoelectronic products and is
continuing to develop additional advanced optoelectronic products for
telecommunications, biomedical and electronics applications. Spire's value-added
biomedical processing services offer surface treatments to enhance the
durability or antimicrobial characteristics of orthopedic and other medical
devices.
PHOTOVOLTAICS
Photovoltaics, the technology of using solar cells to convert sunlight
directly into electricity, is a growing alternative energy production method and
an increasingly important component of world energy production, particularly in
the wireless telecommunications sector. With this technology, electricity is
produced by using photovoltaic modules, which consist of a number of solar cells
connected to each other and laminated in reliable and durable support
structures. The Company believes that it is the only company that manufactures
each piece of equipment necessary for a complete production line that fabricates
photovoltaic solar cells into modules. The Company's module manufacturing
equipment and production line configurations offer its customers a range of
manufacturing processes, from labor intensive to fully automated systems.
Spire's products include solar cell testers, cell tabbing and stringing
assemblers, laminators and sun simulator module testers, as well as turnkey
module production lines complete with comprehensive technology, training and
service support.
Spire's market leadership and international reputation for quality
manufacturing and process technology position the Company to capitalize on the
photovoltaic market. From 1993 to 1997, global usage of terrestrial photovoltaic
power increased substantially, due to such factors as rural electrification in
the developing world, the accelerated growth of wireless telecommunications,
with its need for wireless power, and increased environmental concerns
encouraging the use of renewable energy sources. Awareness and acceptance of
photovoltaics as an energy source are growing as a result of receiving
significant support from initiatives such as the PV Rooftop Program in Japan,
the Building Integration Program in Germany and the Clinton Administration's
"Million Solar Roofs Initiative." During 1998, demand for photovoltaic equipment
slowed due to global economic concerns. The Asian economic crisis, particularly
in Japan, slowed funding of government backed programs. Many European expansion
plans have also been delayed due to economic concerns. See "Risk Factors -
Dependence on Market Growth," " - Competition" and " - Dependence on Export
Sales."
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OPTOELECTRONICS
Optoelectronics involves the conversion of light to electricity, like
photovoltaics, and/or the conversion of electricity to light. Optoelectronics
uses thin film technology, such as metalorganic chemical vapor deposition
(MOCVD), to create semiconductor devices for telecommunications, biomedical and
electronics applications. In an MOCVD reactor, specialized semiconductor
materials are deposited onto substrate wafers as single-crystal thin films.
These wafers are then further processed into various semiconductor devices.
Optoelectronics technology is used, among other things, to create
components for biomedical instruments, such as semiconductor diode lasers, flat
panel displays and digital radiography; and to produce semiconductor wafers
necessary for electronic instruments such as cellular telephones. The Company
believes that the market for MOCVD deposited films and other optoelectronics
technology is expanding, driven in part by the growth in the telecommunications
industry and the medical industry. Spire's processing facilities now include
seven MOCVD reactors, housed in a Class 100 Cleanroom.
The Company currently produces several products based on its
optoelectronics technology, including:
* diode lasers, and
* compound semiconductor wafers.
The Company also has certain products under development using its
proprietary technologies. The Company believes that its current products, as
well as those under development, may have significant commercial potential. See
"Risk Factors - Technological Advances; Dependence of Future Product Development
and Market Acceptance".
BIOMEDICAL
The Biomedical division specializes in surface treatment to improve the
performance of medical devices such as heart valves, catheters, orthopedic
prostheses and vascular grafts. The Company's processes reduce friction and
wear, provide infection resistance, and enhance tissue and blood compatibility
by altering surface composition and chemistry. The Company's surface treatment
technologies include proprietary ion beam and ion-beam-assisted deposition
(IBAD) processes. As the market leader in ion-beam processing, the Company can
apply these technologies to metals, polymers and ceramics.
The Company's IONGUARD(R) ion-beam processes are chosen by the orthopedic
industry when improved prosthesis performance is demanded. Currently, only a
small percentage of orthopedic devices are treated with the Company's
proprietary processing technologies. The aging of the American population and a
trend to more active lifestyles are driving the need for more durable,
long-lived prostheses.
SPI-Argent(TM) and SPI-Argent/Implant, two of the Company's surface
treatments for infection resistance, thromboresistance, and reduced friction,
are increasingly demanded as healthcare providers recognize the need to reduce
costs by eliminating device related complications. SPI-Argent processes
incorporate elemental silver, a widely useful spectrum antimicrobial agent, into
the surfaces of medical devices for long term efficacy and performance.
GENERAL INFORMATION
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RESEARCH AND DEVELOPMENT
The Company's policy is to support as much of its research and
development as possible through government contract funding, which it recognizes
as revenue. Revenues from the Company's research and development contracts
funded by the U.S. government, and their percent of net revenues, for the last
three years were as follows:
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1998 1997 1996
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$6,092,000 $7,972,000 $6,706,000
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43% 35% 39%
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As of December 31, 1998, the Company was performing 17 contracts and grants for
the U.S. government, compared with 40 as of December 31, 1997. All contracts
with U.S. government agencies have been audited and settled through December
1995. The audits for the years ended December 31, 1996, through December 31,
1998 have not yet been performed.
The Company's contracts with the U.S. government grant to the Company
proprietary rights in any technology developed pursuant to such contracts and
grant to the U.S. government a non-exclusive license to utilize the technology
for its benefit. The U.S. government retains the right to obtain the patent on
any inventions made under these contracts as to which patent protection is not
sought and obtained by the Company. The Company's rights to technology developed
under contracts with private companies vary, depending upon negotiated terms.
See "Risk Factors - Dependence on Outside Funding for Research and Development,"
" - Protection of Proprietary Technology" and " Government Regulation."
The Company's internally funded research and development expenditures for
the last three years were as follows:
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1998 1997 1996
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$344,000 $133,000 $84,000
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SALES AND MARKETING
The Company builds its photovoltaic module manufacturing equipment
generally to order, and usually requires 35% of the total purchase price on
order, 55% on shipment and the final 10% upon acceptance of the equipment by the
customer. The Company receives progress payments under its research and
development contracts on a cost reimbursement or per deliverable basis.
Biomedical processing services and optoelectronic devices generally are sold on
a net 30 day basis.
The Company markets its products and services through a network of
non-exclusive commissioned sales representatives, as well as through its
internal staff. The Company had ten sales representatives as of December 31,
1998. These outside sales representatives are responsible for making initial
contacts with potential customers, after which the representatives work in
conjunction with the Company's internal staff to consummate sales. The Company
believes that use of outside sales representatives is particularly important in
facilitating access into certain foreign countries. Most of the Company's sales
representatives have had long term relationships with the Company, and work with
the Company without written agreements. Sales initiated through the Company's
internal staff arise from a number of sources, including trade shows, printed
advertisements and telephone campaigns.
In 1997, the Company entered into two agreements with Marubeni
Corporation of Nagoya, Japan, relating to the manufacture and distribution of
certain Spire photovoltaic module manufacturing equipment in Japan. Under the
agreements, Marubeni distributes, and in some cases manufactures under a
technology license, certain of Spire's photovoltaic module manufacturing
equipment under the Company's name in Japan, and has rights to market this
equipment line throughout certain countries in Southeast Asia and the Pacific
Rim. However, because of the Asian economic crisis, the Company had limited
sales through Marubeni in 1998. Marubeni's Japanese office established on behalf
of the Company is headed by the Company's long-time photovoltaic equipment sales
representative in Japan.
In the biomedical area, the Company concentrates on identifying and
serving the leading U.S. manufacturers of orthopedic and other medical devices.
Where possible, the Company seeks to be the sole provider of surface processing
services to its biomedical customers.
The Company's scientists are responsible for submitting proposals to the
U.S. government and other outside sources for sponsored research and development
work, particularly in the optoelectronics area. The Company has been increasing
its efforts to commercialize its extensive optoelectronics technology, by
focusing on marketing optoelectronic products such as epitaxial wafers. See
"Risk Factors - Dependence on Outside Funding for Research and Development," " -
Reliance on Sales Representatives" and " - Technological Advances; Dependence on
Future Product Development and Market Acceptance."
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MANUFACTURING AND QUALITY CONTROL
The Company manufactures all of its products and performs all of its
biomedical processing services in a single facility. The fulfillment of each
customer order for the Company's photovoltaic module manufacturing equipment
requires customized engineering and systems design. While the time required to
fill orders is slightly different for each item of equipment, it generally takes
approximately six months from date of order to delivery to the customer. The
first few months of this process is devoted to customizing the design of the
item of equipment to meet the customer's requirements. The balance of the time
is spent on internal assembly, wiring and testing of the equipment. The Company
maintains quality control measures throughout each step of the manufacturing
process. Employees are responsible for reviewing incoming materials, conducting
interim testing throughout the Company's processing of the materials, and
servicing and testing final products before shipment to the Company's customers.
The Company's MOCVD reactors produce wafers with layers of semiconductor
materials, some of which are further processed into semiconductor devices. All
the Company's semiconductor wafers and semiconductor devices are tested in the
Company's measuring lab for quality control before shipment to the customer. The
Company currently produces semiconductor wafers only to order. In the biomedical
area, customers ship medical devices to be surface-processed to the Company.
These devices are reviewed for surface defects prior to undergoing the Company's
surface processing, and are reviewed again for defects upon completion of the
processing. The devices are then shipped back to the customer.
The Company assembles its photovoltaic module manufacturing equipment
from a combination of components purchased from a variety of suppliers and
self-fabricated components. The Company has not experienced any major price
increases, or lack of availability, of its components. For many items, alternate
sources are available. The Company believes that the loss of any supplier would
not be material due to the ability to use alternate suppliers or to substitute
other items with minimal re-engineering. The Company anticipates that it will be
able to manufacture and procure all such parts and materials in sufficient
quantities to meet its needs. See "Risk Factors Dependence on Single
Manufacturing Facility."
PROPRIETARY RIGHTS
Through 29 years of research and development, the Company has accumulated
extensive scientific and technological expertise. The Company protects its
technological advances as trade secrets, in part through confidentiality
agreements with employees, consultants and third parties. The Company also seeks
and enforces patents as appropriate. The Company currently has 38 U.S. patents,
of which one is jointly owned, four patents pending in the United States and two
foreign patents pending, all of which cover elements of its materials and
processing technologies.
The majority of the Company's research and development work is funded by
the U.S. government and other entities. The U.S. government retains the right to
obtain a patent on any invention developed under government contracts as to
which the Company does not seek and obtain a patent, and may require the Company
to grant a third party license of such invention if steps to achieving practical
application of the invention have not been taken. The U.S. government also
retains a non-exclusive, royalty-free, non-transferable license to all
technology developed under government contracts, whether or not patented, for
government use, including use by other parties to U.S. government contracts.
Furthermore, the Company's U.S. government contracts prohibit the Company from
granting exclusive rights to use or sell any inventions unless the grantee
agrees that any product using the invention will be manufactured substantially
in the United States. See "Risk Factors - Protection of Proprietary Technology"
and "Government Regulation."
COMPETITION
The Company sells its products and services in competitive markets.
Entities now operating in related markets can also enter the Company's markets.
Some of the Company's current and potential competitors have financial and
technical resources greater than those of the Company. Competitive factors for
the Company in its various markets include the amount and pace of technological
innovation, financial resources, product quality, timely delivery, service and
price. The Company believes that there are considerable barriers to entry into
the markets it serves, including a significant investment in specialized capital
equipment and product design and development, and the need for a staff with
sophisticated scientific and technological knowledge.
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The Company faces competition from various companies in the terrestrial
photovoltaic module manufacturing equipment market, particularly in Japan. As an
industry leader, the Company has been subject to competitive pricing on some of
the components of its photovoltaic module manufacturing equipment product line.
The Company's automated equipment competes with more labor intensive, lower
priced alternatives. Furthermore, the Company competes in foreign countries
where there may be a preference for doing business with local companies. In
addition, large manufacturers may produce items of equipment for their own
internal use, eliminating the purchase of such equipment from commercial
vendors.
With respect to its optoelectronics and biomedical products and services,
the Company competes on the basis of overall quality of service and price, and
at times on the basis of value added. The Company's products and services also
compete against products based on alternate technologies. In addition, the
Company faces competition from numerous other businesses, particularly small
businesses throughout the United States, for contracts for research and
development funded by the U.S. government and other outside sources.
Because the Company often markets its photovoltaic products to
governmental agencies or financiers in foreign countries, it faces risks
inherent in international sales, such as regulatory requirements, political and
economic changes and disruptions and transportation delays. The Company also
faces competition from government or private companies in these countries. The
Company addresses these issues by working with local commissioned sales
representatives, seeking to establish a local presence, such as through its
agreements with Marubeni, maintaining technological leadership, and quoting
prices and accepting payment only in U.S. dollars, generally against letters of
credit. Because the Company sells its products only in U.S. dollars, the
Company's sales could be adversely affected to the extent that its customers
have limited access to U.S. dollars and to the extent that fluctuations in
exchange rates may render the Company's prices less competitive relative to
competitors' prices. See "Risk Factors Competition" and " - Dependence on Export
Sales."
EMPLOYEES
As of January 31, 1999, the Company employed 115 people, of whom 109 were
full-time. Ten of the Company's employees hold Ph.D.'s. The Company has 30
employees on its technical staff and 16 on its manufacturing staff. The Company
has never experienced a work stoppage and considers its relationship with its
employees to be good. See "Risk Factors - Competition" and " - Dependence on
Export Sales."
GOVERNMENT REGULATION
The Company's government contracts are subject to a large number of
federal regulations and oversight requirements. Compliance with the array of
government regulations requires extensive record keeping and the maintenance of
complex policies and procedures relating to all aspects of the Company's
business, as well as to work performed for the Company by any subcontractors.
The Company believes that it has put in place systems and personnel to ensure
compliance with all U.S. government regulations relating to contracting.
The Company also is subject to export control regulations that govern the
export of Company products to designated countries, as well as the release of
technical information to non-U.S. individuals and entities. Further, the Company
is subject to federal, state and local governmental environmental regulations
and to federal OSHA regulations. The Company believes that it has complied in
all material respects with all applicable environmental and safety regulations
and has all permits necessary to conduct its business. The Company employs a
full-time Environmental and Safety Engineer to manage its compliance efforts.
The cost of such compliance has not been material to the Company.
The introduction by the Company's customers of new biomedical products
depends on passage of these products through various stages of review by the
FDA. The process of obtaining regulatory approvals involves lengthy and detailed
laboratory and clinical testing and other costly and time-consuming procedures.
The Company continues to refine its interaction with its customers in the
regulatory approval process in an effort to streamline its customers'
application process. See "Risk Factors - Government Regulation."
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RISK FACTORS
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In addition to the other information in this SEC Form 10-KSB, the
following risk factors inherent in and affecting the business of the Company
should be considered. The discussion in this SEC Form 10-KSB contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results and the timing of certain events may differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below and in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business."
DEPENDENCE ON MARKET GROWTH. The ability of the Company to sustain or
expand its business depends substantially on the stability and growth of the
various markets for the Company's products and services.
The size of the photovoltaic market depends on the amount of worldwide
need for wireless power, especially in developing countries, and on domestic and
international government funding of initiatives to invest in solar energy as an
alternative to the burning of fossil fuels and other energy production methods.
There can be no assurance that government funding for such initiatives will be
available, or that solar energy will prove to be a cost-effective alternative to
other energy sources and gain acceptance where traditional energy sources
continue to be available. Most of the Company's revenues from its
optoelectronics activities are generated by research and development contracts
with the U.S. government. There can be no assurance that the U.S. government
will fund the Company's research and development projects at the same level as
it has in the past. The growth of the Company's biomedical business depends on
the condition of the health care system and the industry sectors serving that
system; and on the Company's ability to introduce new products and services. The
health care system recently has been characterized by pricing pressures and
consolidations which could reduce or eliminate demand for the Company's
processing services. The merger or consolidation of manufacturers of orthopedic
and other medical devices could reduce the number of customers for the Company's
biomedical processing services.
COMPETITION. The Company sells its products and services against existing
competitors, and entities now operating in related markets may enter the
Company's markets. Some of the Company's current and potential competitors have
financial and technical resources greater than those of the Company. Competitive
factors for the Company in its various markets include the amount and pace of
technological innovation, financial resources, product quality, timely delivery,
service and price. Although the Company believes that there are considerable
barriers to entry into the markets it serves, including a significant investment
in specialized capital equipment and product design and development, and the
need for a staff with sophisticated scientific and technological knowledge,
there can be no assurance that new or existing entities will not seek to enter
the Company's markets.
The Company faces competition from various companies in the terrestrial
photovoltaic module manufacturing equipment market. The Company's more
technologically sophisticated and highly automated photovoltaic module
manufacturing equipment competes with more labor intensive, lower priced
alternatives. Furthermore, the Company competes in foreign countries where there
may be a preference for doing business with local companies. In addition, large
manufacturers produce some of the equipment for their own internal use,
eliminating the purchase of such equipment from commercial vendors. With respect
to its optoelectronics and biomedical products and services, the Company
competes on the basis of overall quality of service and price, and at times on
the basis of value added. The Company's products and services also compete
against products based on alternate technologies. In addition, the Company faces
competition from numerous other businesses, particularly small businesses
throughout the United States, for contracts for research and development funded
by the U.S. government and other outside sources.
DEPENDENCE ON OUTSIDE FUNDING FOR RESEARCH AND DEVELOPMENT. Substantially
all of the Company's research and development work is funded by the U.S.
government and other outside sources. Loss of outside funding may materially
adversely affect the Company's ability further to develop its proprietary
technologies and applications of these technologies to its current products and
products under development. If the Company is unable to maintain its current
level of such funding for any reason, the Company would need to generate funds
for such research from other sources, reduce its research and development effort
or increase its internal research and development. An increase in internally
funded research and development would have a negative impact on profitability.
U.S. government contracts are cancelable without the Company's consent.
Furthermore, all companies that are parties to cost-plus contracts with the U.S.
government are subject to annual government audit and possible recapture of
payments. While the Company has not
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incurred significant losses as a result of government audits to date, the
Defense Contract Audit Agency has not yet audited the Company for the years
ended after December 31, 1995 and the rates at which the Company is reimbursed
for future government contracts (see also "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Other Operating Charges").
Loss of a number of U.S. government or other research and development contracts
could have a material adverse effect on the Company's business, results of
operations or financial condition. The number of contracts performed by the
Company for the U.S. government declined from 40 at December 31, 1997 to 17 at
December 31, 1998, or a decrease of 58%.
DEPENDENCE ON EXPORT SALES. For the fiscal years ended December 31, 1998,
1997 and 1996, export sales from the United States accounted for approximately
the following percentages of the Company's net sales and revenues:
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1998 1997 1996
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17% 34% 19%
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The majority of the Company's international revenues are derived from sales of
its photovoltaic module manufacturing equipment. The Company anticipates that
international sales will continue to account for a significant portion of net
sales and revenues. The Company's operating results are subject to the risks
inherent in international sales, including, but not limited to, regulatory
requirements, political and economic changes and disruptions, transportation
delays, national preferences for locally manufactured products and import duties
or other taxes which may affect the prices of the Company's products in other
countries relative to competitors' products. In addition, present or future U.S.
government trade restrictions relating to sales to certain countries may limit
the Company's ability to sell its products in the affected foreign countries.
The Company currently sells its products only in U.S. dollars. As a
result, the Company's sales could be negatively affected to the extent that its
customers have limited access to U.S. dollars and to the extent that
fluctuations in exchange rates may render the Company's prices less competitive
relative to competitors' prices. If the Company chooses to accept payment for
its products in other currencies, it may be subject to reduced profits from
adverse changes in exchange rates. These factors could have a material adverse
effect on the Company's business, results of operations or financial condition.
RELIANCE ON SALES REPRESENTATIVES. The Company markets its photovoltaic
manufacturing equipment products through a network of non-exclusive commissioned
sales representatives, as well as though its internal staff. While the Company
believes it has good relationships with its sales representatives, there can be
no assurance that the Company will be able to retain such representatives. In
addition, under the Company's agreements with Marubeni Corporation of Nagoya,
Japan, Marubeni will distribute, and in some cases manufacture under a
technology license, certain Spire photovoltaic module manufacturing equipment
under Spire's name in Japan, and has rights to market this equipment line
throughout certain countries in Southeast Asia and the Pacific Rim. The loss of
a significant number of the Company's commissioned sales representatives or the
inability of Marubeni to market and distribute the Company's products
effectively in Japan, Southeast Asia and the Pacific Rim could adversely affect
the Company's ability to market its photovoltaic products and could have a
material adverse effect on the Company's business, results of operations or
financial condition.
FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced a net loss
in two out of its most recent three full fiscal years. The Company's revenues
and operating results may vary significantly from quarter to quarter as a result
of a number of factors, many of which are outside of management's control. These
factors include, among others, timing of capital expenditures by customers,
changes in demand for the Company's products, long business procurement cycles,
changes in pricing policies by the Company and its competitors, cancellation or
delay by customers of contracts with the Company and access to U.S. currency by
the Company's customers.
TECHNOLOGICAL ADVANCES; DEPENDENCE ON FUTURE PRODUCT DEVELOPMENT AND
MARKET ACCEPTANCE. Each of the areas in which the Company maintains a
proprietary technology position is characterized by rapid technological advances
and improvements in manufacturing efficiencies. The Company's ability to operate
profitably depends in large part on its timely access to, or development of,
technological advances, and on its ability to use those advances to improve
existing products, develop new products and manufacture those products
efficiently. In addition, there can be no assurance that the Company will be
able to attain market acceptance for commercial products based on these
technologies. The failure to
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introduce new or enhanced products on a timely and cost competitive basis, or to
attain market acceptance for commercial products, could have a material adverse
effect on the Company's business, results of operations or financial condition.
PROTECTION OF PROPRIETARY TECHNOLOGY. The Company actively protects its
intellectual property and technological advances as trade secrets, in part
through confidentiality agreements with employees, consultants and third
parties. The Company also seeks and enforces patents as it deems appropriate.
The Company currently has 38 U.S. patents, one of which is jointly owned, four
patents pending in the United States and two foreign patents pending, all of
which cover elements of its materials and processing technologies. There can be
no assurance that the Company will be able to assert its intellectual property
rights successfully against allegedly infringing competitors, and the inability
to assert its rights successfully may have a negative impact on the Company's
competitive position and financial condition. Furthermore, there can be no
assurance that the Company's intellectual property rights will deter others from
developing substantially equivalent or competitive products or from
reverse-engineering the Company's products. Even if a third party's products
infringe upon the Company's patents or other intellectual property, it may be
costly to enforce such rights, and such enforcement efforts may divert
management attention from the operations of the Company. In addition, the
foreign legal protection afforded intellectual property rights, including
patents, if issued, may be different from that afforded under U.S. laws. To the
extent the Company relies on non-disclosure agreements to protect its rights,
there can be no assurance that such information will not be disclosed in breach
of these agreements or, if disclosed, that the Company will be able to recover
amounts sufficient to compensate it for any damage such disclosure may cause.
Further, although no such claims are currently outstanding against the
Company, there can be no assurance that the Company will not be subject to
patent or other intellectual property rights infringement claims asserted by
others, or if asserted, that the Company will be successful in defending its
position or challenging such claims. In the event that the Company were to be
adjudged to infringe patents or other intellectual property rights of others,
the Company might be required to pay damages, and might be enjoined from making,
using or selling the infringing product or service, or might be required to
obtain a royalty-bearing license, if available on acceptable terms.
Alternatively, in the event a license is not offered or is not available on
commercially acceptable terms, the Company may be required to re-engineer the
affected products or processes to avoid such infringement. There can be no
assurance that any such re-engineering will be successful or will result in
commercially acceptable alternatives, and any such re-engineering may entail
significant or prohibitive expense to the Company.
In addition to the foregoing, the U.S. government retains the right to
obtain a patent on any invention developed under contract as to which patent
protection is not sought and obtained by the contractor, or to require the
contractor to grant a third party license of such invention if steps to achieve
practical application of the invention have not been taken. The Company has not
sought, and will not seek, patent protection for each of its inventions under
U.S. government contracts, either due to the nature of the invention or the cost
of applying for and obtaining a patent. This practice subjects the Company to
the potential of losing patent rights to the U.S. government. The Company also
may not achieve practical application of an invention in each instance, or in a
timely manner, thus leading to the possibility of a mandatory third party
license. Furthermore, the U.S. government retains a non-exclusive, royalty-free,
non-transferable license to all technology developed under government contracts,
whether or not patented, for government use, including use by other parties to
U.S. government contracts.
DEPENDENCE ON SINGLE MANUFACTURING FACILITY. The Company has only one
manufacturing facility, and the Company's revenues are dependent upon the
continued operation of such facility. The operation of a manufacturing plant
involves many risks, including potential damage from fire or natural disasters.
In addition, the Company has obtained certain permits to conduct its business as
currently operated at its facility. There can be no assurance that such permits
would continue to be effective at the current location if the facility were
destroyed and rebuilt, or that the Company will be able to obtain similar
permits to operate at another location. While the Company maintains insurance
covering such risks, including business interruption coverage, there can be no
assurance that the occurrence of these or any other operational problems at the
Company's facility would not materially adversely affect the Company's business,
results of operations or financial condition.
NEED TO MANAGE GROWTH. The future success of the Company will depend
upon, among other factors the ability of the Company to identify and exploit new
product and services opportunities, to recruit, hire, train and retain highly
educated, skilled and experienced management and technical personnel, to
generate capital from operations and to manage the effects of growth on all
aspects of its business, including research, development, manufacturing,
distribution, sales and
9
<PAGE> 10
marketing, administration and finance. Any failure by the Company to identify
and exploit new product and service opportunities, attract or retain necessary
personnel, generate adequate revenues or conduct its expansion or manage growth
effectively could have a material adverse effect on the Company's business,
results of operations or financial condition.
DEPENDENCE ON KEY PERSONNEL. The Company's long-term success and its
growth strategy depend on the efforts and abilities of its senior management,
particularly Roger G. Little, the Company's founder and its Chairman, Chief
Executive Officer and President, and on its technical staff. The loss of
services of Mr. Little or one or more of the Company's technical staff, or an
ability of the Company to attract and motivate highly educated and skilled
employees, could result in the Company's inability to continue certain product
offerings, and could have a material adverse effect on the Company's business,
results of operations or financial condition. Further, there can be no assurance
that former employees will not compete with the Company or disclose Company
confidential information, whether or not in violation of any agreements. While
the Company has sought to enforce its rights, any such competition or disclosure
could have a material adverse effect on the Company's business, results of
operations or financial condition.
CONTROL BY PRINCIPAL STOCKHOLDER. Roger G. Little, the Chairman of the
Board, Chief Executive Officer and President of the Company, controls
approximately 44% of the Company's outstanding Common Stock. In addition, as one
of three Trustees of the Company's 401(k) Plan, Mr. Little may exercise control
over shares of Common Stock held by the Plan. As a result, Mr. Little is in a
position to exert significant influence over actions of the Company which
require stockholder approval and generally to direct the affairs of the Company,
including potential acquisitions, sales and changes in control of the Company.
GOVERNMENT REGULATION. The process of bidding for, obtaining, retaining
and performing U.S. government contracts is subject to a large number of U.S.
government regulations and oversight requirements. Compliance with these
government regulations requires extensive record keeping and the maintenance of
complex policies and procedures relating to all aspects of the Company's
business, as well as to work performed for the Company by any subcontractors.
Any failure by the Company to comply with applicable regulations, or to require
its subcontractors so to comply, could result in a variety of adverse
consequences, ranging from remedial requirements to termination of contracts,
reimbursement of fees, reduction of fees on a going forward basis and
prohibition from obtaining future U.S. government contracts. While the Company
believes that it has put in place systems and personnel to ensure compliance
with all U.S. government regulations relating to contracting, there can be no
assurance that it will at all times be in compliance or that any failure to
comply will not have a material adverse effect on the Company's business,
results of operations or financial condition. See Note (3) to the financial
statements in Item 7, below. Furthermore, the Company's U.S. government
contracts include provisions prohibiting the Company from granting exclusive
rights to use or sell any inventions unless the grantee agrees that any product
using the invention will be manufactured substantially in the United States.
The Company is subject to export control regulations, which govern the
export of Company products to certain countries, as well as the release of
technical information to non-U.S. individuals and entities. It also is subject
to the federal Occupational Safety and Health Act ("OSHA"). While the Company
has a full-time compliance officer monitoring compliance with these laws and
regulations, there can be no assurance that it will at all times be in
compliance. Failure to comply with these laws and regulations could result in
penalties to the Company, including fines and requirements to take remedial
action, which would have a material adverse effect on the Company's business,
results of operations or financial condition.
The Company is also subject to a number of federal, state and local
government regulations relating to the use, storage, discharge and disposal of
toxic, volatile or otherwise hazardous chemicals used in its business. Any
failure to comply with present or future regulations could result in the
imposition of fines and the suspension of production or a cessation of
operations. In addition, such regulations could restrict the Company's ability
to expand, or could require the Company to acquire costly equipment or incur
other significant expenses to comply with environmental regulations or to
remediate any pollution.
The introduction by the Company's customers of certain new biomedical
products depends on such products' passage through various stages of review by
the United States Food and Drug Administration ("FDA"). The process of obtaining
regulatory approvals involves lengthy and detailed laboratory and clinical
testing and other costly and time-consuming procedures. There can be no
assurance as to the timely or positive outcome of any such review process. The
10
<PAGE> 11
inability of the Company's customers to obtain such approvals in a timely
manner, or at all, could impede or prevent the introduction of these biomedical
products into the marketplace, and could adversely affect the Company's revenues
from its biomedical services.
The extent of government regulation that may arise from future
legislative or administrative action cannot be predicted.
RISK OF UNINSURED LOSS. The use of orthopedic and other medical devices
may entail a risk of physical injury to patients. To the extent the Company has
been involved in the manufacturing of these products, it may be exposed to
potential product liability and other damage claims. Furthermore, the use of the
Company's photovoltaic module manufacturing equipment could result in operator
injury. To date, no product liability or other damage claim has been initiated
against the Company. The Company maintains product liability and umbrella
insurance coverage; however, there can be no assurance that any product
liability claim assessed against the Company would not exceed its insurance
coverage, or that insurance coverage will continue to be available. While the
Company typically obtains agreements of indemnity from manufacturers of
biomedical products for which the Company provides services, there can be no
assurance that any such indemnity agreements will be enforceable or that such
manufacturers will have adequate funds to meet their obligations under such
agreements. The cost of defending a product liability, negligence or other
action, and/or assessment of damages in excess of insurance coverage, could have
a material adverse effect on the Company's business, results of operations, or
financial condition.
FLUCTUATIONS IN STOCK PRICE. The Company's Common Stock has recently
experienced price and volume fluctuations and may experience such fluctuations
in the future. Factors such as announcements of technological innovations or new
products by the Company or its competitors, changes in domestic or foreign
governmental regulations or regulatory approval processes and fluctuations in
quarterly operating results, have and may continue to have a significant impact
on the market price of the Common Stock. Moreover, the stock market (and in
particular the securities of technology companies such as the Company) has
experienced and could in the future experience extreme price and volume
fluctuations. These fluctuations may be unrelated to operating performance and
could have a significant impact on the market price of the Common Stock.
NO DIVIDENDS. The Company has paid no dividends since its inception. The
Company anticipates retaining any future earnings for operations and does not
anticipate that dividends will be paid in the foreseeable future. Under its
credit agreement with Silicon Valley Bank, the Company is prevented from paying
dividends without the prior written consent of the Bank.
ITEM 2. PROPERTIES
- -------------------
The Company leases 74,000 square feet in a building located at One
Patriots Park, Bedford, Massachusetts. The production facilities and
substantially all of the Company's offices are located in the building. All of
the Bedford space is subleased from Millipore Corporation on what the Company
believes are commercially reasonable terms. Millipore leases the building from a
trust of which Roger G. Little, Chairman, Chief Executive Officer and President
of the Company, is sole trustee and principal beneficiary. The 1985 sublease
originally was for a period of ten years. The Company has exercised its option
to extend the sublease for an additional five-year period expiring on November
30, 2000 and has an option for an additional five-year extension. The Company
believes that its facilities are suitable for their present intended purposes
and adequate for the Company's current level of operations. See "Risk Factors -
Dependence on Single Manufacturing Facility" and " - Need to Manage Growth."
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is subject, from time to time, to legal proceedings and
claims arising out of its business, which cover a wide range of matters.
Management, after review and consultation with counsel, considers that any
liability from all of these legal proceedings and claims would not materially
affect the consolidated financial position, results of operations or liquidity
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of the Company's security-holders in
the fourth quarter of 1998.
11
<PAGE> 12
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------
The Company's Common Stock, $.01 par value ("Common Stock"), is traded on
the Nasdaq National Market under the symbol "SPIR." The following chart sets
forth the high and low closing sale prices for the Common Stock for the periods
shown:
<TABLE>
<CAPTION>
CLOSING SALE PRICE CLOSING SALE PRICE
HIGH LOW
------------------ ------------------
1998
----
<S> <C> <C>
First Quarter $17 3/8 $12 4/9
Second Quarter 14 3 1/2
Third Quarter 5 3/8 2 1/2
Fourth Quarter 3 7/8 2 5/8
1997
----
First Quarter $ 4 1/4 $ 2 1/4
Second Quarter 5 3/8 4
Third Quarter 16 5/8 5 1/8
Fourth Quarter 23 14 3/8
</TABLE>
These prices do not reflect retail mark-ups, mark-downs or commissions.
The closing price of the Common Stock on February 26, 1999 was $4.03, and on
that date, there were approximately 223 stockholders of record.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
This Management's Discussion and Analysis of Financial Condition and
Results of Operations section and other parts of this Report contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results and the timing of certain events may differ significantly from
the results discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below and in "Risk Factors" and "Business." The following discussion
is qualified in its entirety by, and should be read in conjunction with, the
detailed information and the Consolidated Financial Statements, including the
Notes thereto, appearing elsewhere or incorporated by reference in this Report.
OVERVIEW
Spire develops, manufactures and markets highly-engineered photovoltaic
module manufacturing equipment and optoelectronic products and provides
biomedical processing services. Spire is the world's leader in the design and
manufacture of specialized equipment for the production of terrestrial
photovoltaic modules from solar cells, with its equipment installed in 142
factories and in 38 countries. The Company also offers optoelectronic products
and is continuing to develop additional advanced optoelectronic products for
telecommunications, biomedical and electronics applications. Spire'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's net sales and revenues for the year ended December 31, 1998
decreased 39%, compared to the year ended December 31, 1997. All of the
Company's three areas of business declined in net sales and revenues.
The Company's photovoltaics business area declined 59% during 1998 as
compared to 1997. During 1998 photovoltaic module manufacturers delayed
expansion plans due to global economic concerns and excess capacity for 1997
investments. Also the Company recorded a one time license payment of $600,000 in
1997. The Company's optoelectronics business area declined 16%. In this area,
the decline was caused by a decrease in U.S. Government research and development
programs. However commercial revenues increased slightly to help offset the
decline in government contracts.
12
<PAGE> 13
The biomedical business area also declined 39% during 1998 as compared to
1997 due to: 1) a one time sale of a piece of equipment in 1997 of $825,000; and
2) a decline in U.S. Government contract funded research development programs.
Operating results in any particular quarter will depend upon product mix,
as well as the timing of shipments of higher priced products from its equipment
line. Export sales, which amounted to 17% of net sales and revenues from the
year ended December 31, 1998, 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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net sales and revenues 100.0% 100.0% 100.0%
Cost of sales and revenues 79.3 66.5% 76.2
----- ----- -----
Gross profit 20.7 33.5 23.8
Selling, general and administrative expenses 36.4 24.4 27.3
Other operating charges 8.7 1.4 --
----- ----- -----
Earnings (loss) from operations (24.4) 7.7 (3.5)
Earnings (loss) before income taxes (24.4) 7.8 (3.4)
Income tax expense 2.5 0.6 --
===== ===== =====
Net earnings (loss) (26.9%) 7.2% (3.4%)
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Sales and Revenues
Net sales and revenues decreased $8,871,000 or 39% for the year ended
December 31, 1998 to $14,143,000, compared to $23,014,000 for the year ended
December 31, 1997. Contract research, service and license revenues decreased
$1,718,000 or 14% to $10,924,000 for the year ended December 31, 1998 compared
to $12,642,000 for 1997. Manufacturing equipment sales decreased $7,153,000 or
69% to $3,219,000 for 1998, compared to $10,372,000 for 1997. The following
table categorizes the Company's net sales and revenues for the periods
presented:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 CHANGE
----------- ----------- ------
<S> <C> <C> <C>
Contract research, service and license revenues $10,924,000 $12,642,000 (14%)
Manufacturing equipment sales 3,219,000 10,372,000 (69%)
----------- -----------
Net sales and revenues $14,143,000 $23,014,000 (39%)
=========== ===========
</TABLE>
Cost of Sales and Revenues
The cost of sales and revenues decreased $4,093,000 to $11,209,000, but
increased to 79% of net sales and revenues, for the year ended December 31,
1998, compared to $15,302,000 or 66% of net sales and revenues for the year
ended December 31, 1997.
The cost of contract research, service and license revenues decreased
$613,000 to $8,102,000, and increased to 74% of related revenues, for the year
ended December 31, 1998, compared to $8,715,000 or 69% of related revenues for
the year ended December 31, 1997. Cost of manufacturing equipment sales
decreased $3,480,000 to $3,107,000, but increased to 97% of related sales, for
the year ended December 31, 1998, compared to $6,587,000 or 64% of related
sales, for the year ended December 31, 1997. The increase in total cost of sales
and revenues as a percentage of related sales and revenues is caused by product
mix and lower volume.
13
<PAGE> 14
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:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 % DECEMBER 31, 1997 %
----------------------------------------------------
<S> <C> <C> <C> <C>
Contract research, service and license revenues $ 8,102,000 74% $ 8,715,000 69%
Manufacturing equipment sales 3,107,000 97% 6,587,000 64%
----------- -----------
Total cost of sales and revenues $11,209,000 79% $15,302,000 66%
=========== ===========
</TABLE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December
31, 1998 decreased $459,000 to $5,147,000, but increased to 36% of sales and
revenues, compared to $5,606,000 or 24% of sales and revenues for the year ended
December 31, 1997. Selling, general and administrative expenses decreased due to
decreases in staffing, commissions, marketing and travel costs related to
decreased sales of products and services.
Other Operating Charges
Other operating charges included expenses of a non-recurring nature, and
amounted to $1,244,000 and $332,000, or 9% and 1% of total revenues, for the
years 1998 and 1997, respectively. Included in the 1998 charge are a $547,000
payment to the U.S. Government to settle a dispute involving contracting
requirements in proposals and contract fulfillment, associated legal costs,
other legal costs incurred in the enforcement of non-competition agreements of
two former employees, and severance costs and related fringe benefits incurred
in downsizing the Company's workforce. These downsizing efforts include the
reduction of 24 employees and the estimated annualized savings is $1,100,000.
Other operating charges in 1997 included outside costs incurred in an
unsuccessful attempt at a secondary offering. The following table summarizes
other operating charges for the years 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997
---------- --------
<S> <C> <C>
Settlement of Government claim $ 547,000 $ --
Legal costs incurred in settlement of Government claim 159,000 --
Legal costs incurred in enforcing non-competition agreements
with former employees 295,000 --
Severance and associated fringe benefit costs incurred in downsizing Company 243,000 --
Costs incurred in unsuccessful secondary offering attempt -- 332,000
========== ========
$1,244,000 $332,000
========== ========
</TABLE>
Interest
The Company earned $22,000 in interest income for the year ended December
31, 1998, compared to $31,000 for the year ended December 31, 1997. The Company
incurred interest expense of $19,000 in 1998 and $2,000 in 1997.
Income Taxes
The Company recorded $359,000 of tax expense for the year ended December
31, 1998, compared to $141,000 for the year ended December 31, 1997. Tax expense
for the year ended December 31, 1997 benefited from the recognition of a
$300,000 deferred tax asset, which was subsequently reserved for in 1998 based
on the Company's operating results. At December 31, 1998, the Company had gross
deferred tax assets of $2,859,000, against which a valuation allowance of
$2,172,000 was applied. Total gross deferred tax liabilities of $687,000 were
applied against the resulting in a net deferred tax asset of zero.
Net Earnings (Loss)
The Company reported a net loss for the year ended December 31, 1998 of
$3,811,000, compared to net earnings of $1,667,000 for the year ended December
31, 1997. The loss resulted in large part from decreased net sales and revenues
in all areas of the Company's business, particularly in photovoltaic equipment
sales.
14
<PAGE> 15
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales and Revenues
Net sales and revenues increased $5,626,000 or 32% for the year ended
December 31, 1997 to $23,014,000, compared to $17,388,000 for the year ended
December 31, 1996. The increase is due to increased demand for commercial
products and services especially the Company's photovoltaic manufacturing
equipment, increased contract research and development revenues, and receipt of
a $600,000 one-time license fee. Contract research, service and license revenues
increased $1,195,000 or 10% to $12,642,000 for the year ended December 31, 1997
compared to $11,447,000 for 1996. Manufacturing equipment sales increased
$4,431,000 or 75% to $10,372,000 for 1997, compared to $5,941,000 for 1996, due
to increased sales of photovoltaic equipment resulting from increased demand for
photovoltaic energy. The following table categorizes the Company's net sales and
revenues for the periods presented:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 CHANGE
----------------------------- ------
<S> <C> <C> <C>
Contract research, service and license revenues $12,642,000 $11,447,000 10%
Manufacturing equipment sales 10,372,000 5,941,000 75%
-----------------------------
Net sales and revenues $23,014,000 $17,388,000 32%
=============================
</TABLE>
Cost of Sales and Revenues
The cost of sales and revenues increased $2,052,000 to $15,302,000, but
decreased to 66% of net sales and revenues, for the year ended December 31,
1997, compared to $13,250,000 or 76% of net sales and revenues for the year
ended December 31, 1996.
The cost of contract research, service and license revenues decreased
$223,000 to $8,715,000, and decreased to 69% of related revenues, for the year
ended December 31, 1997, compared to $8,938,000 or 78% of related revenues for
the year ended December 31, 1996. Cost of manufacturing equipment sales
increased $2,275,000 to $6,587,000, but decreased to 64% of related sales, for
the year ended December 31, 1997, compared to $4,312,000 or 73% of related
sales, for the year ended December 31, 1996. The decrease in total cost of sales
and revenues as a percentage of related sales and revenues is due to increased
efficiencies in manufacturing process, product mix and higher volume.
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:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 % DECEMBER 31, 1996 %
----------------- --- ----------------- ---
<S> <C> <C> <C> <C>
Contract research, service and license revenues $ 8,715,000 69% $ 8,938,000 78%
Manufacturing equipment sales 6,587,000 64% 4,312,000 73%
----------- -----------
Total cost of sales and revenues $15,302,000 66% $13,250,000 76%
=========== ===========
</TABLE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December
31, 1997 increased $860,000 to $5,606,000, but decreased to 24% of sales and
revenues, compared to $4,746,000 or 27% of sales and revenues for the year ended
December 31, 1996. Selling, general and administrative expenses increased due to
increases in commissions, marketing and travel costs related to increased sales
of products and services.
Other Operating Charges
Non-recurring charges in 1997 of $332,000 included outside costs incurred
in an unsuccessful attempt at a secondary offering. There were no non-recurring
charges for the year ended December 31, 1996.
15
<PAGE> 16
Interest
The Company earned $31,000 in interest income for the year ended December
31, 1997, compared to $17,000 for the year ended December 31, 1996. The Company
incurred insignificant interest expense in both years.
Income Taxes
The Company recorded tax expense of $141,000 for the year ended December
31, 1997, compared to no expense for the year ended December 31, 1996. Tax
expense for the year ended December 31, 1997 benefited from the recognition of a
$300,000 deferred tax asset. The Company recorded this benefit because it
believed that the tax effects of existing deductible temporary differences or
carryforwards of $300,000 were more likely than not to be realized through the
generation of sufficient future taxable income. At December 31, 1997, the
Company had gross deferred tax assets of $1,519,000, against which a valuation
allowance of $444,000 was applied. Total gross deferred tax liabilities of
$775,000 were applied against the resulting net deferred tax asset of
$1,075,000.
Net Earnings (Loss)
The Company reported net earnings for the year ended December 31, 1997 of
$1,667,000, compared to a loss of $599,000 for the year ended December 31, 1996.
The improvement in the Company's profitability resulted in large part from
increased net sales and revenues in all areas of the Company's business,
particularly in manufacturing equipment sales, where the Company's profit
margins are generally higher. In addition, the Company received a $600,000
one-time license fee.
LIQUIDITY AND CAPITAL RESOURCES
To date the Company has been able to fund its liquidity requirements
using cash from operations and available lines of credit. On April 7, 1998 and
September 17, 1998, the Company amended and extended its revolving credit
agreement with the Silicon Valley Bank. This agreement provides for a $2 million
revolving credit facility, based upon eligible accounts receivable requirements.
This line of credit has been established to provide the Company with resources
for general working capital purposes and Standby Letter of Credit Guarantees for
foreign customers. The line is secured by all assets of the Company. At December
31, 1998, interest on the line was at the Bank's prime rate plus one percent.
The line contains covenants including provisions relating to profitability and
net worth. As of December 31, 1998, the Company was in default of certain
financial covenants; however on March 19, 1999 the Company executed a new
revolving credit agreement with the Bank with a term through July 5, 1999. The
Company is currently compliant with the terms of this credit agreement. As of
December 31, 1998, the Company had $850,000 of 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, its existing line
of credit and available lease arrangements. In addition, the Company has taken
steps to conserve its resources by reducing its cost of operations. Cash and
cash equivalents decreased $1,574,000 to $122,000 at December 31, 1998, from
$1,696,000 at December 31, 1997. To date there are no material commitments by
the Company for capital expenditures. At December 31, 1998, the Company's
accumulated deficit was $2,179,000, compared to retained earnings of $1,632,000
as of December 31, 1997. Working capital as of December 31, 1998 decreased 70%
to $1,501,000, compared to $4,977,000 as of December 31, 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as "derivatives") and for hedging activities. This
statement requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The statement also sets forth the criteria for determining whether a derivative
may be specifically designed as a hedge of a particular exposure with the intent
of measuring the effectiveness of that hedge in the statement of operations.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. Management does not believe that the adoption of this statement
will have a material impact on the Company's consolidated financial position,
results of operations or cash flows.
16
<PAGE> 17
Also in 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", and SOP 98-5,
"Reporting on the Costs of Start-Up Activities." The Company adopted SOP 98-1 on
January 1, 1998, with no material effect on the consolidated financial
statements. The Company will adopt SOP 98-5 in 1999. It will not materially
affect the consolidated financial statements.
IMPACT OF INFLATION AND CHANGING PRICES
Historically, the Company's business has not been materially impacted by
inflation. Manufacturing equipment sales are generally quoted, manufactured and
shipped within a cycle of approximately six 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 only in U.S. dollars, generally against an irrevocable
confirmed letter of credit through a major U.S. 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.
IMPACT OF THE YEAR 2000 ISSUE
The Company has identified the potential impact of the Year 2000 issue.
The Year 2000 issue relates to computer programs and embedded computer chips
being viable to distinguish between the year 1900 and the year 2000.
The Company has completed a review and assessment of potentially affected
items, including information technology and non-information technology, for Year
2000 compliance. When identifying computer programs that were not Year 2000
compliant, the Company sought to upgrade these programs to newer versions of
software that are Year 2000 compliant. The Company estimates that it will obtain
all required software no later than June 1999. The cost of the software is
estimated to not exceed $50,000.
The Company's business is also dependent upon systems of third parties,
primarily its vendors and customers. The Company has submitted questionnaires to
all of its significant vendors. The Company is now collecting and analyzing
their responses. Although this process is incomplete, no known problems have
been identified. The Company expects to complete the analysis by May 1999.
During the fourth quarter of 1998, the Company issued questionnaires to its
customer base. The Company anticipates completion of the analysis of its
customer base by April 1999.
The Company believes that its most likely and reasonable worst case
scenario relating to the Year 2000 would be failure of certain of its
applications with imbedded software or failure of such applications of a
material customer or vendor. Failure of applications of embedded software could
result in a disruption of the Company's operation and thereby negatively affect
revenues and profitability. Failure of a significant vendor's information
systems could temporarily interrupt supply of materials or services and impair
the Company's ability to fill orders. If a major customer system fails to become
Year 2000 compliant, the Company's revenues could be temporarily disrupted if
the customer suspends further purchases. Although there can be no assurance that
these failures will not have an adverse effect on the Company's business, the
Company believes that any such adverse effect would not be material.
The Company is formulating contingency plans to address any such
failures. The plans include identifying Year 2000 compliant software for the
Company's internal systems, and identifying alternative vendors to assure
continuity of supplies.
17
<PAGE> 18
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
<S> <C>
Independent Auditors' Report 19
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997 20
Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 21
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 22
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 23
Notes to Consolidated Financial Statements 24
</TABLE>
18
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Spire Corporation:
We have audited the consolidated balance sheets of Spire Corporation and
subsidiary as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Spire
Corporation and subsidiary at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG PEAT MARWICK LLP
Boston, Massachusetts
March 8, 1999, except for Note 7 as to which the date is March 19, 1999
19
<PAGE> 20
SPIRE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 121,866 $ 1,695,727
Accounts receivable, trade (Notes 3 and 7):
Amounts billed 2,799,037 3,012,701
Retainage 62,173 69,772
Unbilled costs 355,716 621,760
------------------------------
3,216,926 3,704,233
Less allowance for doubtful accounts 102,000 40,000
------------------------------
Net accounts receivable 3,114,926 3,664,233
------------------------------
Inventories (Note 4) 2,254,043 988,580
Deferred income taxes (Note 9) -- 300,000
Prepaid expenses and other current assets 363,649 501,650
------------------------------
Total current assets 5,854,484 7,150,190
------------------------------
Property and equipment (Note 6) 25,675,700 24,877,046
Less accumulated depreciation and amortization 20,986,170 20,052,903
------------------------------
Net property and equipment 4,689,530 4,824,143
------------------------------
Patents (less accumulated amortization, $611,650 in 1998 and $542,344 in 1997) 214,758 274,810
Other assets 15,071 19,679
------------------------------
229,829 294,489
------------------------------
$10,773,843 $12,268,822
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,555,019 $ 903,581
Accrued liabilities (Note 5) 836,846 859,093
Notes payable (Note 7) 850,000 --
Advances on contracts in progress 1,112,058 410,370
------------------------------
Total current liabilities 4,353,923 2,173,044
------------------------------
COMMITMENTS (NOTES 7 AND 10)
STOCKHOLDERS' EQUITY (NOTE 8)
Common stock, $.01 par value; shares authorized 20,000,000;
issued 3,795,926 shares in 1998 and 3,757,082 shares in 1997 37,959 37,571
Additional paid-in capital 9,780,494 9,645,468
Retained earnings (deficit) (2,178,845) 1,632,427
------------------------------
7,639,608 11,315,466
Treasury stock at cost, 552,160 shares in 1998 and 1997 (1,219,688) (1,219,688)
------------------------------
Total stockholders' equity 6,419,920 10,095,778
------------------------------
$10,773,843 $12,268,822
==============================
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 21
SPIRE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
NET SALES AND REVENUES
Contract research, service and license revenues $10,924,062 $12,642,251 $11,447,000
Sales of manufacturing equipment 3,219,181 10,372,190 5,941,319
------------------------------------------------
Total sales and revenues 14,143,243 23,014,441 17,388,319
------------------------------------------------
COSTS AND EXPENSES
Cost of contract research, services and licenses 8,102,075 8,714,713 8,938,034
Cost of manufacturing equipment 3,106,948 6,587,331 4,311,774
Selling, general and administrative expenses 5,146,930 5,605,507 4,746,235
Other operating charges (Note 13) 1,243,989 331,511 --
------------------------------------------------
Total costs and expenses 17,599,942 21,239,062 17,996,043
------------------------------------------------
EARNINGS (LOSS) FROM OPERATIONS (3,456,699) 1,775,379 (607,724)
Interest income, net (Note 7) 4,005 32,856 8,492
------------------------------------------------
Earnings (loss) before income taxes (3,452,694) 1,808,235 (599,232)
Income tax expense (Note 9) 358,578 141,000 --
------------------------------------------------
NET EARNINGS (LOSS) $(3,811,272) $ 1,667,235 $ (599,232)
================================================
EARNINGS (LOSS) PER SHARE OF COMMON STOCK - BASIC $ (1.18) $ 0.54 $ (0.20)
================================================
EARNINGS (LOSS) PER SHARE OF COMMON STOCK - DILUTED $ (1.18) $ 0.52 $ (0.20)
================================================
Weighted average number of common shares outstanding - basic 3,235,271 3,086,326 3,028,850
================================================
Weighted average number of common and common equivalent
shares outstanding - diluted 3,235,271 3,217,467 3,028,850
================================================
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 22
SPIRE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK RETAINED
--------------------- PAID-IN ---------------------- EARNINGS
SHARES AMOUNT CAPITAL SHARES AMOUNT (DEFICIT) TOTAL
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 3,560,360 $35,604 $8,468,903 537,160 $(1,174,688) $ 564,424 $ 7,894,243
Exercise of stock options 6,825 68 22,163 -- -- -- 22,231
Repurchase of treasury stock -- -- -- 10,000 (24,375) -- (24,375)
Net loss -- -- -- -- -- (599,232) (599,232)
--------------------------------------------------------------------------------------------
Balance, December 31, 1996 3,567,185 35,672 8,491,066 547,160 (1,199,063) (34,808) 7,292,867
Exercise of stock options 189,897 1,899 680,095 -- -- -- 681,994
Tax benefit of disqualifying
dispositions of stock option
exercises -- -- 474,307 -- -- -- 474,307
Repurchase of treasury stock -- -- -- 5,000 (20,625) -- (20,625)
Net earnings -- -- -- -- -- 1,667,235 1,667,235
--------------------------------------------------------------------------------------------
Balance, December 31, 1997 3,757,082 37,571 9,645,468 552,160 (1,219,688) 1,632,427 10,095,778
Exercise of stock options 38,844 388 135,026 -- -- -- 135,414
Net loss -- -- -- -- -- (3,811,272) (3,811,272)
--------------------------------------------------------------------------------------------
Balance, December 31, 1998 3,795,926 $37,959 $9,780,494 552,160 $(1,219,688) $(2,178,845) $ 6,419,920
============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
SPIRE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(3,811,272) $ 1,667,235 $ (599,232)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,018,112 1,079,572 1,240,215
Deferred income taxes 300,000 (300,000) --
Changes in assets and liabilities:
Accounts receivable 549,307 (650,085) (161,074)
Inventories (1,265,463) 32,348 105,806
Prepaid expenses and other current assets 138,001 (214,137) 81,970
Accounts payable and accrued liabilities 629,191 (125,106) (396,250)
Advances on contracts in progress 701,688 (975,092) 629,706
-----------------------------------------------
Net cash (used in) provided by operating activities (1,740,436) 514,735 901,141
-----------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (798,654) (1,101,686) (943,053)
Increase in patent costs (24,793) (39,546) (129,797)
Other assets 4,608 215,551 24,823
-----------------------------------------------
Net cash used in investing activities (818,839) (925,681) (1,048,027)
-----------------------------------------------
Cash flows from financing activities:
Net receipts (payments) on short-term debt 850,000 -- (10,401)
Tax benefit of disqualifying dispositions of stock
option exercises -- 474,307 --
Exercise of stock options 135,414 681,994 22,231
Repurchase of common stock -- (20,625) (24,375)
-----------------------------------------------
Net cash provided by (used in) financing activities 985,414 1,135,676 (12,545)
-----------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,573,861) 724,730 (159,431)
Cash and cash equivalents, beginning of year 1,695,727 970,997 1,130,428
===============================================
Cash and cash equivalents, end of year $ 121,866 $ 1,695,727 $ 970,997
===============================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 19,030 $ 5,118 $ 4,084
===============================================
Income taxes $ 44,400 $ 51,595 $ --
===============================================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
SPIRE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(1) NATURE OF THE BUSINESS
Spire develops, manufactures, and markets highly engineered photovoltaic
manufacturing equipment and optoelectronic products and provides biomedical
processing services. Spire designs and manufactures specialized equipment for
the production of terrestrial photovoltaic modules from solar cells. The Company
offers certain optoelectronic products and is continuing to develop additional
advanced optoelectronic products for telecommunications, biomedical and
electronics applications. In addition, Spire's value-added service offerings to
biomedical customers provide surface treatments to enhance the performance of
medical products.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Spire International Sales Corporation. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(b) Revenue Recognition
Revenue for equipment sales is recognized upon shipment. Revenue for
service contracts is recognized upon performance of the service. Revenue on
government research contracts is recorded as costs are incurred and includes a
pro-rated portion of the estimated profit.
(c) Inventories
Inventories are stated at the lower of cost or market, cost being
determined by the average cost method, on a first-in, first-out (FIFO) basis.
(d) Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
respective assets, as follows:
Machinery and equipment 5 and 7 years
Furniture and fixtures 5 years
Leasehold improvements Lesser of 10 years or remaining life of
facility lease
Maintenance and repairs are charged to expense as incurred. Major renewals
and betterments are added to property and equipment accounts at cost.
(e) Patent Costs
Patent costs are capitalized and amortized over five years using the
straight-line method.
24
<PAGE> 25
SPIRE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(f) Income Taxes
The Company accounts for income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(g) Research and Development Costs
Research and development costs are charged to operations as incurred, except
where such costs are reimbursable under customer funded contracts. During the
years ended December 31, 1998, 1997 and 1996, unfunded research and development
costs were $344,000, $133,000 and $84,000, respectively.
(h) Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings (loss) per share gives effect to all
dilutive potential common shares outstanding during the period. The computation
of diluted earnings (loss) per share does not assume conversion, exercise or
contingent exercise of securities that would have an antidilutive effect on
earnings.
(i) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(j) Financial Instruments
Financial instruments of the Company consist of cash and cash equivalents,
accounts receivable, accounts payable and notes payable. The carrying amounts of
these financial instruments approximate their fair value.
(k) Long-lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.
(l) Stock-Based Compensation
During 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net earnings (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
25
<PAGE> 26
SPIRE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(m) Reclassification of Prior Years
Prior year financial statements have been reclassified to conform to the
1998 presentation.
(n) Cash and Cash Equivalents
Cash and cash equivalents include cash, time deposits and all highly liquid
debt with an original maturity of three months or less.
(3) ACCOUNTS RECEIVABLE
Unbilled costs on contracts in progress represent revenues recognized on
contracts for which billings have not been presented to customers as of each
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
$62,000 and $70,000 at December 31, 1998 and 1997, respectively. All other
accounts receivable are expected to be collected within one year.
All contracts with United States Government agencies have been audited and
settled through December 1995. Except as discussed in the following paragraph,
the Company has not incurred significant losses as a result of government
audits.
On March 2, 1998 the Company received a letter from the Office of the
United States Attorney for the Eastern District of Virginia stating that it was
considering the commencement of a civil action concerning seven research
initiatives undertaken by the Company in the period from 1990 to the present.
The letter alleged that, in certain instances, the Company had failed to inform
the government of pending or previously submitted proposals for work the
government alleges was related to proposals which were funded. Rather than
continuing to incur the legal costs and expend management resources in
litigating this matter, the Company settled with the government on August 18,
1998 for $547,000.
(4) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
---------- --------
<S> <C> <C>
Raw materials $ 776,933 $736,930
Work in process 1,307,088 251,650
Finished goods 170,022 --
---------- --------
$2,254,043 $988,580
========== ========
</TABLE>
(5) ACCRUED LIABILITIES
Accrued liabilities include the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Accrued payroll and payroll taxes $568,193 $294,248
Accrued other 268,653 564,845
-------- --------
$836,846 $859,093
======== ========
</TABLE>
26
<PAGE> 27
SPIRE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(6) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Machinery and equipment $20,757,776 $20,275,030
Furniture and fixtures 2,988,993 2,820,567
Leasehold improvements 1,765,043 1,541,582
Construction in progress 163,888 239,867
----------- -----------
$25,675,700 $24,877,046
=========== ===========
</TABLE>
(7) NOTES PAYABLE AND CREDIT ARRANGEMENTS
On April 7, 1998, the Company amended and extended its revolving credit
agreement for a one year period with Silicon Valley Bank. This agreement
established a $2 million revolving credit facility, based upon eligible accounts
receivable requirements. This line of credit was established to provide the
Company with resources for general working capital purposes and standby letter
of credit guarantees for foreign customers. The line is secured by all assets of
the Company. Interest on the line is at the bank's prime rate plus one percent
(8.75% at December 31, 1998). The line contains restrictive covenants including
provisions relating to profitability and net worth. These covenants were amended
in September, 1998. As of December 31, 1998, the Company was in default of
certain financial covenants; however, on March 19, 1999 the Company executed an
amendment to the revolving credit agreement with the Bank with a term through
July 5, 1999. The Company is currently compliant with the terms of this credit
agreement. As of December 31, 1998, the Company had $850,000 of outstanding debt
under this revolving credit line, and the related interest expense in 1998 was
$19,000.
(8) STOCK COMPENSATION PLANS
The Company has two employee stock option plans: the 1985 Incentive Stock
Option Plan, and the 1996 Equity Incentive Plan. These plans provide that the
Board of Directors may grant options to purchase the Company's common stock to
key employees of the Company. Incentive options must be granted at least at the
fair market value of the common stock or, in the case of certain optionees, at
110% of such fair market value at the time of grant. The exercise price of
options is determined by the Board of Directors. The options may be exercised,
subject to certain vesting requirements, for periods up to ten years from the
date of issue.
Through December 31, 1998, the Company has outstanding under its Directors
Stock Option Plan and the 1996 Equity Incentive Plan, 36,000 non-qualified stock
options to the unaffiliated directors of the Company for the purchase of common
stock at an average price of $11.56 per share. The options may be exercised,
subject to certain vesting requirements, for periods up to ten years from the
date of issue. The Company may no longer award options under any plans except
the 1996 Equity Incentive Plan.
27
<PAGE> 28
SPIRE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
A summary of the activity of these plans follows: WEIGHTED
NUMBER OF SHARES AVERAGE
OPTION PRICE
-------------------------------
<S> <C> <C>
Outstanding, December 31, 1995 290,075 $ 3.51
Granted 99,425 $ 2.63
Exercised (6,825) $ 3.26
Terminated (23,500) $ 3.40
-----------------------
Outstanding, December 31, 1996 359,175 $ 3.28
Granted 76,825 $ 5.36
Exercised (189,897) $ 3.57
Terminated (26,222) $ 3.24
-----------------------
Outstanding, December 31, 1997 219,881 $ 3.75
Granted 99,663 $11.52
Exercised (38,844) $ 3.49
Terminated (40,850) $ 3.68
-----------------------
Outstanding, December 31, 1998 239,850 $ 7.02
=======================
Options Exercisable at December 31, 1998 74,375 $ 3.38
=======================
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- -------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER REMAINING CONTRACTUAL EXERCISE PRICE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING LIFE EXERCISABLE EXERCISE PRICE
---------------- ------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
$ 2.50 to $ 5.00 121,037 7.1 years $ 3.33 68,125 $3.07
$ 5.01 to $10.00 65,813 9.2 years $ 6.95 5,000 $5.13
$10.01 to $15.88 53,000 9.2 years $15.52 1,250 $12.63
------- ------
239,850 8.7 years $ 7.02 74,375 $3.38
======= ======
</TABLE>
There were 318,787 shares reserved for issuance under all plans at
December 31, 1998. The per-share weighted-average fair value of stock options
granted in 1998, 1997 and 1996 was $8.13, $4.24 and $1.39, respectively, on the
date of grant using the Black Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
EXPECTED RISK-FREE EXPECTED EXPECTED
YEAR DIVIDEND YIELD INTEREST RATE OPTION LIFE VOLATILITY FACTOR
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 0% 5.50% 5 years 85.4%
1997 0% 5.50% 5 years 68.4%
1996 0% 5.07% 5 years 54.7%
</TABLE>
28
<PAGE> 29
SPIRE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
The Company applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its options under SFAS No.
123, the Company's net earnings (loss) would have been reduced (increased) to
the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
Net earnings (loss) as reported $(3,811,272) $1,667,235 $(599,232)
Earnings (loss) per share of common stock - diluted, as reported (1.18) 0.52 (0.20)
Net earnings (loss) pro forma (4,068,390) 1,592,349 (649,724)
Earnings (loss) per share of common stock - diluted, pro forma (1.26) 0.49 (0.21)
</TABLE>
Pro forma net earnings (loss) reflect only options granted in 1998, 1997
and 1996. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net earnings (loss)
amounts presented above because compensation cost is reflected over the options'
vesting period of five years and compensation cost for options granted prior to
January 1, 1995 is not considered.
(9) INCOME TAXES
Total federal and state income tax expense (benefit) for the years ended
December 31, 1998, 1997 and 1996, consists of the following:
1998 1997 1996
-------- --------- ----
Current:
State $ 9,000 $ 68,663 $--
Federal 49,578 372,337 --
-------- --------- ---
58,578 441,000 --
-------- --------- ---
Deferred:
State 46,474 (46,710) --
Federal 253,526 (253,290) --
-------- --------- ---
300,000 (300,000) --
======== ========= ===
$358,578 $ 141,000 $--
======== ========= ===
Actual income tax expense (benefit) for the years ended December 31, 1998,
1997 and 1996 differs from the "expected" income tax expense (benefit) for the
year (computed by applying the U.S. federal corporate income tax rate of 34% to
earnings (loss) before income taxes) as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- ---------
<S> <C> <C> <C>
Computed "expected" income tax expense (benefit) $(1,114,746) $ 614,800 $(203,739)
State tax, net of federal benefit (89,660) 119,453 (34,327)
Increase (decrease) in valuation allowance 1,582,790 (498,247) 298,686
Permanent differences 8,194 32,953 15,289
Increase in tax credit carryforwards (28,000) (103,089) (15,300)
Recovery of prior year estimate -- -- (62,912)
Other -- (24,870) 2,303
============ ========== =========
$ 358,578 $ 141,000 $ --
============ ========== =========
</TABLE>
The amount recorded as a deferred income tax asset as of December 31, 1998
represents the amount of tax benefits of existing deductible temporary
differences or carryforwards that are more likely than not to be realized
through the generation of sufficient future taxable income within the
carryforward period. At December 31, 1998, based on the Company's level of net
income and projected earnings, the Company increased the valuation allowance by
$1,728,012. The Company continually re-evaluates the recoverability of deferred
tax assets.
29
<PAGE> 30
SPIRE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
The tax effects of temporary differences that give rise to significant
portions of net deferred tax assets at December 31, 1998 and 1997 are presented
below:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Charitable contributions $ 8,976 $ 7,164
Accounts receivable 41,075 16,108
Accruals 90,498 118,385
Inventories 60,405 56,439
Federal net operating loss carryforwards 1,153,016 96,648
General business credit carryforwards 752,998 752,998
Alternative minimum tax credit carryforwards 342,030 342,030
Foreign tax credit 51,475 48,475
State net operating loss and investment tax credit 358,092 80,524
----------- -----------
Total gross deferred tax assets 2,858,565 1,518,771
Less: valuation allowance (2,172,045) (444,033)
----------- -----------
Net deferred tax assets 686,520 1,074,738
----------- -----------
Deferred tax liabilities:
Property and equipment (686,520) (766,644)
Patents -- (5,544)
Research agreements -- (2,550)
----------- -----------
Total gross deferred tax liabilities (686,520) (774,738)
=========== ===========
Net deferred tax assets $ -- $ 300,000
=========== ===========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1998 was
$2,172,000. The net change in the total valuation allowance for the year ended
December 31, 1998 was an increase of $1,728,000.
At December 31, 1998, the Company has approximately $753,000 of general
business tax credits available to offset future taxable income which expire
through 2001. Net operating loss carryforwards for federal and state purposes at
December 31, 1998 are approximately $3,027,000 and $2,722,000, and expire
through 2018 and 2003, respectively. The Company also has approximately $342,000
of alternative minimum tax credits to offset future taxable income. However, if
changes in the Company's stock ownership exceed 50% of the value of the
Company's stock during any three-year period, the utilization of credit
carryforwards may be subject to limitations.
Subsequently recognized tax benefit relating to the valuation allowance for
deferred tax assets will be as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1998
------------------
<S> <C>
Income tax benefit that would be reported in the statement of earnings $2,026,823
Charge to additional paid in capital for recognition of stock option expense 145,222
----------
$2,172,045
==========
</TABLE>
(10) COMMITMENTS
The Company subleases its facilities from a company that leases the
building from a trust; the principal beneficiary of the trust is the principal
stockholder of the Company. The sublease originally was for a period of ten
years, after which the Company exercised its option to extend for an additional
five-year period expiring on November 30, 2000 with an option for an additional
five-year extension period. The agreement provides for minimum rental payments
plus annual increases linked with the Consumer Price Index. Total rent expense
under this lease was $907,000, $889,000 and $922,000 in 1998, 1997 and 1996,
respectively.
30
<PAGE> 31
SPIRE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
The Company has also entered into other noncancelable operating leases.
Total rent expense charged to these noncancelable leases was $128,000, $110,000,
and $90,000 in 1998, 1997 and 1996, respectively.
Future minimum lease payments under operating leases are as follows:
<TABLE>
<S> <C>
1999 $1,044,000
2000 922,000
2001 24,000
==========
$1,990,000
==========
</TABLE>
(11) PROFIT SHARING PLAN
In 1985, the Company adopted a profit sharing plan under Section 401(k)
of the Internal Revenue Code. This plan allows employees to defer up to 17.5% of
their income up to certain dollar limits on a pretax basis through contributions
to the plan. Through December 31, 1998, the Company contributed its Common Stock
in an amount equal to 40% of the employee's contribution up to a maximum of 15%
of the employee's cash compensation. The Company temporarily suspended such
contribution beginning in 1999. Expense recognized under the plan in 1998, 1997
and 1996 was $46,000, $199,000 and $145,000, respectively.
(12) EARNINGS (LOSS) PER SHARE
The following table provides a reconciliation of the denominators of
diluted earnings (loss) per share computations for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Weighted average number of common shares outstanding 3,235,271 3,086,326 3,028,850
Add net additional common shares upon exercise of common
stock options -- 131,141 --
===========================================
Adjusted weighted average common shares outstanding 3,235,271 3,217,467 3,028,850
===========================================
</TABLE>
(13) OTHER OPERATING CHARGES
Other operating charges, which included expenses of a non-recurring
nature, consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Settlement of Government claim $ 547,000 $ -- $--
Legal costs incurred in settlement of Government claim 159,000 -- --
Legal costs incurred in enforcing non-competition
agreements with former employees 295,000 -- --
Severances and associated fringe benefit costs incurred in
downsizing Company 243,000 -- --
Costs incurred in unsuccessful secondary offering attempt -- 332,000 --
---------------------------------
$1,244,000 $332,000 $--
=================================
</TABLE>
31
<PAGE> 32
SPIRE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
The downsizing program initiated by the Company during 1998 will result
in the reduction of 24 employees. Through December 31, 1998, total employee
reduction amounted to 12 and $35,782 of the amount provided for the related
severance and fringe benefit costs had been spent. The remaining employee
reduction was completed in January and February of 1999 and the remaining
severance provision of $207,218 was utilized.
(14) OPERATING SEGMENTS AND RELATED INFORMATION
The following table presents certain operating division information in
accordance with the provisions of SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which was adopted in 1998.
<TABLE>
<CAPTION>
PHOTOVOLTAICS OPTOELECTRONICS BIOMEDICAL ALL TOTAL
DIVISION DIVISION DIVISION OTHER COMPANY
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
- -----------------
Net sales and revenues $ 3,949,000 $6,106,000 $4,088,000 $ -- $14,143,000
Loss from operations (1,465,000) (1,421,000) (571,000) -- (3,457,000)
Identifiable assets 3,822,000 3,690,000 1,942,000 1,320,000 10,774,000
Capital expenditures 126,000 290,000 197,000 186,000 799,000
Depreciation 133,000 577,000 308,000 -- 1,018,000
Other operating charges 396,000 497,000 351,000 -- 1,244,000
DECEMBER 31, 1997
- -----------------
Net sales and revenues $ 9,701,000 $7,241,000 $6,702,000 $ -- $23,014,000
Earnings (loss) from operations 1,313,000 132,000 662,000 (332,000) 1,775,000
Identifiable assets 2,382,000 4,454,000 2,127,000 3,306,000 12,269,000
Capital expenditures 92,000 244,000 262,000 504,000 1,102,000
Depreciation 150,000 585,000 345,000 -- 1,080,000
Other operating charges -- -- -- 332,000 332,000
DECEMBER 31, 1996
- -----------------
Net sales and revenues $ 5,901,000 $6,007,000 $5,480,000 $ -- $17,388,000
Earnings (loss) from operations (690,000) (376,000) 458,000 -- (608,000)
Identifiable assets 2,336,000 4,335,000 2,134,000 1,761,000 10,566,000
Capital expenditures 50,000 503,000 190,000 200,000 943,000
Depreciation 122,000 703,000 415,000 -- 1,240,000
Other operating charges -- -- -- -- --
</TABLE>
The Company has three separate operating divisions: Photovoltaics,
Optoelectronics; and Biomedical. All divisions operate out of the Company's
facility in Bedford, Massachusetts.
The Photovoltaics division develops, manufactures and markets
photovoltaic module manufacturing equipment and production lines. The
Optoelectronics division uses thin film technology such as metal organic
chemical vapor deposition (MOCVD) to create semiconductor devices for total
communications for biomedical and electronics applications. The Biomedical
division uses ion beam technology to provide processing services to the medical
industry by treating the surfaces of products such as orthopedic devices and
catheters used in the human body.
Each operating division is individually managed and has separate
financial results that are reviewed by the Board of Directors, Chief Executive
Officer, and the vice president and general manager of each operating division.
32
<PAGE> 33
SPIRE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
Profit (loss) from operations is net sales less cost of sales, selling,
general and administrative expenses and other operating charges (Note 13), but
is not affected either by non-operating income or by income taxes. Non-operating
income consists principally of net interest income. In calculating profit from
operations for individual operating divisions, substantial administrative
expenses incurred at the operating level that are common to more than one
statement are allocated on a net sales basis. Certain corporate expenses of an
operational nature are also allocated to the divisions based on factors
including occupancy, employment, and purchasing volume. All intercompany
transactions have been eliminated.
Revenues from contracts with United States Government agencies for the
years ended December 31, 1998, 1997 and 1996 were $6,092,000, $7,972,000 and
$6,706,000 or 43%, 35% and 39% of consolidated net sales and revenues,
respectively. In 1998, 1997 and 1996, export revenues were $2,400,000,
$7,890,000 and $3,330,000, respectively, or 17%, 34% and 19% of consolidated net
sales and revenues, respectively.
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the consolidated quarterly results for the
years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997
Three Months Ended
------------------------------------------------------------
March 31 June 30 September 30 December 31
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales and revenues $4,450,699 $6,432,848 $6,176,034 $5,954,860
Costs and expenses 4,304,022 5,631,200 5,461,402 5,842,438
Earnings before income taxes 150,294 801,677 724,926 131,338
Income tax expense -- 100,000 -- 41,000
Net earnings 150,294 701,677 724,926 90,338
Net earnings per share 0.05 0.22 0.22 0.03
</TABLE>
<TABLE>
<CAPTION>
1998
Three Months Ended
------------------------------------------------------------
March 31 June 30 September 30 December 31
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales and revenues $4,442,526 $ 3,445,291 $3,719,917 $2,535,509
Costs and expenses 4,428,704 5,226,785 4,057,225 3,887,228
Earnings (loss) before income taxes 26,159 (1,775,344) (335,278) (1,368,231)
Income tax expense (benefit) 9,000 -- -- 349,578
Net earnings (loss) 17,159 (1,775,344) (335,278) (1,717,809)
Net earnings (loss) per share 0.01 (0.55) (0.10) (0.53)
</TABLE>
33
<PAGE> 34
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
- -------------------------------------------------
Information concerning the directors and executive officers of the Company
is set forth under "Election of Directors" and "Executive Officers" in the Proxy
Statement for the Special Meeting in Lieu of 1999 Annual Meeting of Stockholders
("Proxy Statement") and is incorporated herein by reference. Information
concerning compliance with Section 16(a) of the Exchange Act during 1997 is set
forth under "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Proxy Statement and is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------
Information concerning executive compensation is set forth under
"Executive Compensation" in the Proxy Statement and is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information concerning security ownership of certain beneficial owners and
management is set forth under "Ownership of Securities" in the Proxy Statement
and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information concerning certain relationships and related transactions is
set forth under "Other Transactions and Relationships" in the Proxy Statement
and is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(1) EXHIBITS
--------
The following Exhibits are either filed herewith or are incorporated
by reference as may be indicated.
3(a) Articles of Organization as amended, incorporated by
reference to Exhibit 3 (a) to the Company's Form 10-QSB for
the quarter ended June 30, 1997.
3(b) By-Laws, as amended, incorporated by reference to Exhibit 3
(b) to the Company's Form 10-K for the year ended December
31, 1989.
10.1 Equipment Manufacturing License Agreement with Marubeni
Corporation, incorporated by reference to Exhibit 10.1 to
Registration Statement 333-41445, filed December 3, 1997.
10.2 Distribution Agreement with Marubeni Corporation,
incorporated by reference to Exhibit 10.2 to Registration
Statement 333-41445, filed December 3, 1997.
10(a) Sublease Agreement for facility at Bedford, Massachusetts
dated November 25, 1985, incorporated by reference to
Exhibit 10 (a) to the Company's Form 10-K for the year
ended December 31, 1985 ("1985 10-K").
34
<PAGE> 35
EMPLOYEE AND DIRECTOR BENEFIT PLANS
-----------------------------------
10(f) Spire Corporation 1985 Incentive Stock Option Plan
incorporated by reference to Exhibit 10 (d) to the
Company's Form 10-K for the year ended December 31, 1984
("1984 10-K").
10(g) Spire Corporation 401(k) Profit Sharing Plan, including
Adoption Agreement, incorporated by reference to Exhibit 10
(e) to the 1984 10-K.
10(h) Spire Corporation Directors' Stock Option Plan,
incorporated by reference to Exhibit 10 (f) to the 1985
10-K.
10(i) Spire Corporation 1996 Equity Incentive Plan, incorporated
by reference to Exhibit 99 to Registration Statement
333-22223, filed February 21, 1997.
11 Statement Regarding Computation of Per Share Earnings
(Loss).
22 Subsidiary of the Company, incorporated by reference to
Exhibit 22 to the Company's Form 10-K for the year ended
December 31, 1988.
23.1 Accountants' Consent.
27.1 Financial Data Schedule, 12/31/98
27.2 Financial Data Schedule, 12/31/97
(2) REPORTS ON FORM 8-K
-------------------
The Company filed no Reports on Form 8-K during the last quarter of
1998.
PART IV
-------
11-K
Supplemental Information Pursuant to Rule 15d-21 Regarding Annual Report of
Employee Benefit Plans for the fiscal year ended December 31, 1998.
Spire Corporation Cash or Deferred Profit Sharing Plan
FINANCIAL STATEMENTS AND EXHIBITS
- ---------------------------------
A. FINANCIAL STATEMENTS
1. Audited Statements of Net Assets Available for Plan Benefits as of
December 31, 1998 and 1997.
2. Audited Statements of Changes in Net Assets Available for Plan
Benefits for each of the years in the three year period ended
December 31, 1998.
B. EXHIBITS
1. Accountants' Consent.
2. Financial Data Schedule.
35
<PAGE> 36
SPIRE CORPORATION CASH OR DEFERRED
PROFIT SHARING 401(K) PLAN
Financial Statements
December 31, 1998
(With Independent Auditor's Report Thereon)
<PAGE> 37
SPIRE CORPORATION CASH OR DEFERRED
PROFIT SHARING 401(K) PLAN
Index to Financial Statements
Independent Auditor's Report
Statements of Net Assets Available for Plan Benefits
Statements of Changes in Net Assets Available for Plan Benefits
Notes to the Financial Statements
<PAGE> 38
[LETTERHEAD OMITTED]
INDEPENDENT AUDITOR'S REPORT
----------------------------
The Participants and Administrator of
The Spire Corporation Cash or Deferred
Profit Sharing 401(k) Plan:
We have audited the accompanying statements of net assets available for plan
benefits of the Spire Corporation Cash or Deferred Profit Sharing 401(k) Plan as
of December 31, 1998 and 1997, and the related statements of changes in net
assets available for plan benefits for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Plan's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 that 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 net assets available for plan benefits at December
31, 1998 and 1997, and the changes in net assets available for plan benefits for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Gerald P. Bonder & Company, P.C.
March 5, 1999
Member of the Private Companies Practice Section, American Institute of
Certified Public Accountants
<PAGE> 39
SPIRE CORPORATION CASH OR DEFERRED
PROFIT SHARING 401(K) PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------
ASSETS:
- ------
<S> <C> <C>
Investments:
At fair value:
Common stock - Spire Corporation $ 715,536 3,282,873
Mutual funds 4,314,473 3,804,892
At contract value:
Hartford Fixed Income Fund 288,937 334,330
---------- ---------
Total investments 5,318,946 7,422,095
Contribution receivable 60,280 --
Participants' loan receivable 176,238 153,005
Cash 65 14,822
---------- ---------
NET ASSETS AVAILABLE FOR BENEFITS $5,555,529 7,589,922
========== =========
</TABLE>
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
<PAGE> 40
SPIRE CORPORATION CASH OR DEFERRED PROFIT SHARING 401(K) PLAN
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------------------
FIXED COMPANY MUTUAL
LOANS INCOME STOCK OTHER FUNDS TOTAL
===============================================================================
<S> <C> <C> <C> <C> <C> <C>
Additions to Net Assets attributed to:
Investment income:
Interest and dividends 13,255 232 64,478 77,965
Interest-other 13,732 0 13,732
Realized gains 148,391 148,391
Net appreciation(depreciation) in
fair value of investments as
determined by quoted market price (2,516,520) 129,431 (2,387,089)
-------------------------------------------------------------------------------
13,732 13,255 (2,516,520) 232 342,300 (2,147,001)
Contributions:
Employer 80,396 17,121 97,517
Employees 445 3,797 43,160 461,892 509,294
--------------------------------------------------------------------------------
Total additions 13,732 13,700 (2,432,327) 60,513 804,192 (1,540,190)
-------------------------------------------------------------------------------
Transfers 32,630 (16,695) 35,850 (14,990) (36,795)
Deductions from Net Assets attributed to:
Benefits paid to participants (23,129) (42,398) (170,860) (257,816) (494,203)
Insurance premiums paid for
participants
-------------------------------------------------------------------------------
Total deductions (23,129) (42,398) (170,860) (257,816) (494,203)
-------------------------------------------------------------------------------
Net increase(decrease) 23,233 (45,393) (2,567,337) 45,523 509,581 (2,034,393)
Net assets available for plan benefits:
Beginning of year 153,005 334,330 3,282,873 14,822 3,804,892 7,589,922
-------------------------------------------------------------------------------
End of year 176,238 288,937 715,536 60,345 4,314,473 5,555,529
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
1997 1996
---------- ---------
TOTAL TOTAL
========== =========
<S> <C> <C>
Additions to Net Assets attributed to:
Investment income:
Interest and dividends 21,351 24,999
Interest-other 8,837 7,055
Realized gains 5,022 4,426
Net appreciation(depreciation) in
fair value of investments as
determined by quoted market price 4,029,249 436,159
---------- ---------
4,064,459 472,639
Contributions:
Employer 162,411 137,929
Employees 663,519 403,918
---------- ---------
Total additions 4,890,389 1,014,486
---------- ---------
Transfers
Deductions from Net Assets attributed to:
Benefits paid to participants (1,259,334) (310,109)
Insurance premiums paid for
participants (2,270)
Total deductions (1,259,334) (312,379)
---------- ---------
Net increase(decrease) 3,631,055 702,107
Net assets available for plan benefits:
Beginning of year 3,958,867 3,256,760
---------- ---------
End of year 7,589,922 3,958,867
========== =========
</TABLE>
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
<PAGE> 41
SPIRE CORPORATION CASH OR DEFERRED PROFIT SHARING 401(K) PLAN
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------------------------
GROUP FIXED COMPANY MUTUAL
LOANS ANNUITY INCOME STOCK OTHER FUNDS TOTAL
=====================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Additions to Net Assets attributed to:
Investment income:
Interest and dividends 21,351 21,351
Interest-other 8,122 251 464 8,837
Realized gains 5,022 5,022
Net appreciation(depreciation) in
fair value of investments as
determined by quoted market price 453,989 3,170,741 404,519 4,029,249
-------------------------------------------------------------------------------------
8,122 459,011 21,351 3,170,741 251 404,983 4,064,459
Contributions:
Employer 78,018 84,393 162,411
Employees 356,642 13,377 1,926 291,574 663,519
-------------------------------------------------------------------------------------
Total additions 8,122 815,653 34,728 3,248,759 86,570 696,557 4,890,389
-------------------------------------------------------------------------------------
Transfers 62,556 (3,590,738) 2,580 99,147 (171,430) 3,597,885
Deductions from Net Assets attributed to:
Benefits paid to participants (3,665) (86,507) (109,560) (569,809) (243) (489,550) (1,259,334)
Insurance premiums paid for
participants
-------------------------------------------------------------------------------------
Total deductions (3,665) (86,507) (109,560) (569,809) (243) (489,550) (1,259,334)
-------------------------------------------------------------------------------------
Net increase(decrease) 67,013 (2,861,392) (72,252) 2,778,097 (85,103) 3,804,892 3,631,055
Net assets available for plan benefits:
Beginning of year 85,992 2,861,592 406,582 504,776 99,925 3,958,867
-------------------------------------------------------------------------------------
End of year 153,005 334,330 3,282,873 14,822 3,804,892 7,589,922
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------------------
GROUP FIXED MUTUAL COMPANY
LOANS ANNUITY INCOME FUNDS STOCK TOTAL
=============================================================================
<S> <C> <C> <C> <C> <C> <C>
Additions to Net Assets attributed to:
Investment income:
Interest and dividends 22,230 2,769 24,999
Interest-other 7,055 7,055
Realized gains 4,426 4,426
Net appreciation(depreciation) in
fair value of investments as
determined by quoted market price 396,284 39,875 436,159
-----------------------------------------------------------------------------
7,055 400,710 22,230 42,644 472,639
Contributions:
Employer 38,004 99,925 137,929
Employees 9,471 353,664 36,633 4,150 403,918
-----------------------------------------------------------------------------
Total additions 16,526 754,374 58,863 84,798 99,925 1,014,486
-----------------------------------------------------------------------------
Transfers 32,091 (24,344) (7,747)
Deductions from Net Assets attributed to:
Benefits paid to participants (2,994) (137,875) (102,551) (66,689) (310,109)
Insurance premiums paid for
participants (2,270) (2,270)
-----------------------------------------------------------------------------
Total deductions (2,994) (137,875) (102,551) (68,959) (312,379)
-----------------------------------------------------------------------------
Net increase(decrease) 13,532 648,590 (68,032) 8,092 99,925 702,107
Net assets available for plan benefits:
Beginning of year 72,460 2,213,002 474,614 496,684 3,256,760
-----------------------------------------------------------------------------
End of year 85,992 2,861,592 406,582 504,776 99,925 3,958,867
=============================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
<PAGE> 42
SPIRE CORPORATION CASH OR DEFERRED
PROFIT SHARING 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
(1) DESCRIPTION OF PLAN
The following description of the Spire Corporation (Company) Cash or
Deferred Profit Sharing 401(k) Plan (Plan) provides only general
information. Participants should refer to the Plan agreement for a more
complete description of the Plan's provisions.
(a) GENERAL
The Plan is a salary reduction (401(k)) plan covering all
full-time employees of the Company who have three months of
service and are age twenty-one or older. It is subject to the
provisions of the Employee Retirement Income Security Act of 1974
(ERISA).
(b) CONTRIBUTIONS
1. EMPLOYER CONTRIBUTION
The Company will contribute to the Plan an amount equal to
40% of an employee's contributions up to a maximum of 6% of
an employee's cash compensation. The Company's contribution
will always be used to purchase/acquire Company common stock
on the open market.
2. EMPLOYEE CONTRIBUTION
Employees electing to participate in the Plan may defer
receipt of up to 17.5% of their compensation subject to the
limitation imposed by the Internal Revenue Code in any one
calendar year, by directing the Company to invest the
deferred amount in various investment vehicles. The
investment choices are the Company's common stock, several
mutual funds and a fixed income fund offered by Hartford
Life Insurance Company.
(c) PARTICIPANTS' ACCOUNTS
Each participant's account is credited with the participant's
contribution and the Company's match contribution, plus an
allocation of (a) plan earnings, and (b) forfeitures of terminated
participants' nonvested accounts. The benefit to which a
participant is entitled is the benefit that can be provided from
the participant's account.
(d) VESTING
Participants are immediately vested in their voluntary
contributions plus actual earnings thereon. Vesting in other
amounts is based on years of continuous service. A participant is
100 percent vested after six years of credited service.
<PAGE> 43
SPIRE CORPORATION CASH OR DEFERRED 2
PROFIT SHARING 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(e) EMPLOYEE LOANS
Participants may borrow from their fund accounts a loan up to a
maximum equal to the lesser of $50,000 or 50% of their vested
account balance. Loan transactions are treated as a transfer from
the investment fund to the Participant Loan fund. Loan terms range
from 1-5 years or up to 25 years for the purchase of a primary
residence. The loans are secured by the balance in the
participant's account and bear interest at a rate commensurate
with local prevailing rates as determined by the Plan
administrator. Interest rates range from 8% to 11%. Principal and
interest is paid ratably through payroll deductions.
(f) PAYMENTS OF BENEFITS
On termination of service, a participant may elect to receive
either a lump-sum amount equal to the value of his or her account,
or annual installments over a period no longer than ten years.
In addition, a participant is eligible to receive distributions
under financial hardship rules for medical, housing and education
needs.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires the plan
administrator to make estimates and assumptions that affect
certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates.
(b) CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Plan to concentration of
credit risk principally of guaranteed investment contracts. The
Plan restricts investment of guaranteed investment contracts to
financial institutions with high credit standing.
(3) INVESTMENTS AND ADMINISTRATION OF PLAN ASSETS
During 1997, the plan trustees entered into an agreement with Benefit
Concepts Inc. to provide investment options and record keeping for the
participants of the plan. Prior to July 1, 1997 the plan custodian was
Hartford Life Insurance Company. Under the terms of the agreement, certain
assets of the plan are held in a Deposit Administration Account for the
benefit of the participants. The Deposit Administration Account consists
of:
(a) The Fixed Income Fund, which includes amounts allocated to
Hartford's General Investment Account. These amounts are
guaranteed as to principal and minimum interest earnings. The
interest rate guaranteed for the year ended December 31, 1998 was
4.75%.
<PAGE> 44
SPIRE CORPORATION CASH OR DEFERRED 3
PROFIT SHARING 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(3) INVESTMENTS AND ADMINISTRATION OF PLAN ASSETS (CONTINUED)
(b) The Direct Participation Account, which consists of amounts
allocated to Separate Investment Accounts. The Separate Investment
Accounts include investments in international and domestic equity
growth funds, balanced funds, income funds and money market funds.
The amounts invested in the Direct Participation Account are not
guaranteed as to principal or minimum interest earnings.
The common shares of the Company and the mutual fund shares are valued at
fair value on December 31 of each year. Fair value is determined by using
quoted market values. The fixed income fund and group annuity contracts
are stated at contract value, which approximates fair value, as reported
to the plan by Hartford. During the years ended December 31, the Plan's
investments appreciated (depreciated) in value by ($2,387,089) in 1998 and
$4,029,249 in 1997 and $436,159 in 1996.
(4) INCOME TAXES
The Plan qualifies for certain tax benefits under Section 401(a) and
401(k) of the Internal Revenue code. The Federal tax consequences to
employees participating in the Plan, and to the Company, under present tax
laws are as follows:
Salary reductions designated by employees to be contributed to the Plan
from their compensation are not includable in employees' taxable income
and are not subject to Federal tax withholding at the time such
contributions are made.
Additionally, interest, dividends and other earnings on such contributions
are not subject to tax when earned. Employees will be taxed on such
contributions and earnings at the time such amounts are returned as
withdrawals or distributions.
(5) PLAN TERMINATION
Although it has not expressed any intent to do so, the Company has the
right under the Plan to discontinue its contribution at any time and to
terminate the Plan subject to the provisions of ERISA. In the event of
plan termination, participants will become 100 percent vested in their
accounts.
(6) EXPENSES NOT INCLUDED IN THE FINANCIAL STATEMENTS
The Company pays all professional fees and other expenses related to the
Profit Sharing 401(k) Plan.
<PAGE> 45
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SPIRE CORPORATION
(Registrant)
By: /s/ Roger G. Little March 31, 1999
----------------------------------
Roger G. Little
President, Chief Executive Officer
and Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Roger G. Little President, Chief Executive Officer March 31, 1999
- ------------------------- and Chairman of the Board
Roger G. Little
/s/ Richard S. Gregorio Vice President and Chief Financial March 31, 1999
- ------------------------- Officer, Treasurer, Clerk,
Richard S. Gregorio Principal Accounting Officer
/s/ Michael T. Eckhart Director March 31, 1999
- -------------------------
Michael T. Eckhart
/s/ A. John Gale Director March 31, 1999
- -------------------------
A. John Gale
/s/ Udo Henseler Director March 31, 1999
- -------------------------
Udo Henseler
/s/ Roger W. Redmond Director March 31, 1999
- -------------------------
Roger W. Redmond
/s/ John A. Tarello Director March 31, 1999
- -------------------------
John A. Tarello
</TABLE>
36
<PAGE> 46
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
EXHIBIT DESCRIPTION NUMBER
- ------- ----------- ------
<S> <C> <C>
11 Statement Regarding Computation of Per Share Earnings (Loss). 38
23.1 Accountants' Consent. 39
27.1 Financial Data Schedule, 12/31/98 40
27.2 Financial Data Schedule, 12/31/97 43
</TABLE>
37
<PAGE> 1
EXHIBIT 11
SPIRE CORPORATION
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (LOSS)
For Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
NET EARNINGS (LOSS) PER COMMON SHARE - (BASIC)
Net earnings (loss) $(3,811,272) $1,667,235 $ (599,232)
==============================================
Weighted average number of common shares outstanding 3,235,271 3,086,326 3,028,850
==============================================
Net earnings (loss) per common share $ (1.18) $ 0.54 $ (0.20)
==============================================
NET EARNINGS (LOSS) PER COMMON SHARE - (DILUTED)
Net earnings (loss) $(3,811,272) $1,667,235 $ (599,232)
==============================================
Weighted average number of common shares outstanding 3,235,271 3,086,326 3,028,850
Add net additional common shares upon exercise of common stock options -- 131,141 --
----------------------------------------------
Adjusted average common shares outstanding 3,235,271 3,217,467 3,028,850
==============================================
Net earnings (loss) per common share $ (1.18) $ 0.52 $ (0.20)
==============================================
</TABLE>
38
<PAGE> 1
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
Spire Corporation:
We consent to incorporation by reference in the registration statement on
Form S-8 of Spire Corporation of our report dated March 8, 1999, relating to the
consolidated balance sheets of Spire Corporation and subsidiary as of December
31, 1997 and 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998, which report appears in the December 31, 1998
annual report on Form 10-KSB of Spire Corporation.
/s/ KPMG PEAT MARWICK LLP
-------------------------------------
KPMG PEAT MARWICK LLP
Boston, Massachusetts
March 31, 1999
39
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMETNTS OF OEPRATIONS ON
FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10-KSB
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 121,866
<SECURITIES> 0
<RECEIVABLES> 3,216,926
<ALLOWANCES> 102,000
<INVENTORY> 2,254,043
<CURRENT-ASSETS> 5,854,484
<PP&E> 25,675,700
<DEPRECIATION> 20,986,170
<TOTAL-ASSETS> 10,773,843
<CURRENT-LIABILITIES> 4,353,923
<BONDS> 0
37,959
0
<COMMON> 0
<OTHER-SE> 6,381,961
<TOTAL-LIABILITY-AND-EQUITY> 10,773,843
<SALES> 3,219,181
<TOTAL-REVENUES> 14,143,243
<CGS> 3,106,948
<TOTAL-COSTS> 17,599,942
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4,005)
<INCOME-PRETAX> (3,452,694)
<INCOME-TAX> 358,578
<INCOME-CONTINUING> (3,811,272)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,811,272)
<EPS-PRIMARY> (1.18)
<EPS-DILUTED> (1.18)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,695,727
<SECURITIES> 0
<RECEIVABLES> 3,704,233
<ALLOWANCES> 40,000
<INVENTORY> 988,580
<CURRENT-ASSETS> 7,150,190
<PP&E> 24,877,046
<DEPRECIATION> 20,052,903
<TOTAL-ASSETS> 12,268,822
<CURRENT-LIABILITIES> 2,173,044
<BONDS> 0
37,571
0
<COMMON> 0
<OTHER-SE> 10,058,207
<TOTAL-LIABILITY-AND-EQUITY> 12,268,822
<SALES> 10,372,190
<TOTAL-REVENUES> 23,014,441
<CGS> 6,587,331
<TOTAL-COSTS> 21,239,062
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (32,856)
<INCOME-PRETAX> 1,808,235
<INCOME-TAX> 141,000
<INCOME-CONTINUING> 1,667,235
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,667,235
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.52
</TABLE>
