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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-K/A
(AMENDMENT NO. 1)
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2007 or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _____________
Commission file number: 0-12742
SPIRE CORPORATION
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(Exact name of registrant as specified in its charter)
Massachusetts 04-24 7335
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Patriots Park
Bedford, Massachusetts 01730-2396
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(Address of principal executive offices)
(781) 275-6000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $0.01 par value per share The Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer (Do
not check if a smaller reporting company) |_| Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Aggregate market value of the voting stock held by non-affiliates of the
registrant based on the last sale price of such stock as reported by The Nasdaq
Global Market on June 29, 2007: $41,581,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Special Meeting in Lieu
of 2008 Annual Meeting of Stockholders to be held on May 22, 2008, are
incorporated by reference in Part III of this Form 10-K.
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SPIRE CORPORATION
FORM 10-K/A
FOR THE YEAR ENDED DECEMBER 31, 2007
TABLE OF CONTENTS
Explanatory Note .......................................................... 1
PART I
Item 1. Business ....................................................... 3
Item 1A. Risk Factors ................................................... 10
Item 1B. Unresolved Staff Comments Procedures ........................... 17
Item 2. Properties ..................................................... 17
Item 3. Legal Proceedings .............................................. 18
Item 4. Submission of Matters to a Vote of Security Holders ............ 18
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities .............. 19
Item 6. Selected Financial Data ........................................ 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..... 32
Item 8. Financial Statements ........................................... 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ....................................... 62
Item 9A(T) Controls and Procedures ........................................ 62
Item 9B. Other Information .............................................. 65
PART III
Item 10. Directors, Executive Officers and Corporate Governance ......... 65
Item 11. Executive Compensation ......................................... 65
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters ................................ 65
Item 13. Certain Relationships and Related Transactions, and Director
Independence ................................................... 65
Item 14. Principal Accounting Fees and Services ......................... 65
PART IV
Item 15. Exhibits, Financial Statements ................................. 66
Signatures ..................................................... 69
EXPLANATORY NOTE
In November 2008, our management notified the Audit Committee of the Board
of Directors over a concern relating to the timing of revenue recognition with
respect to a single contract with one customer that we recognized in prior
periods. Management determined that this customer was provided a concession,
which was previously undisclosed and undocumented, with respect to upgrade
rights to a specific tool sold in conjunction with a module line delivered to
this customer. As the upgrade was not available for sale at the time when
certain elements of the contract were recognized, management determined that
revenue for the entire contract should have been deferred until the upgrade was
provided to the customer. Management informed both the Audit Committee and our
independent registered public accounting firm when the concession was
discovered. Management in concert with the Audit Committee initiated an internal
review of other solar equipment contracts to determine if other concessions or
side arrangements were timely conveyed, such that revenue was appropriately
recognized. The review revealed that, except for the one contract in question,
all customer concessions and modifications were conveyed on a timely basis and
revenue was appropriately recorded in all other cases during the period under
review.
On November 18, 2008, as a result of these investigations, the Audit
Committee concluded, in consultation with and upon the recommendation of
management, that the previously issued financial statements for the fourth
quarter and fiscal 2007 included in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2007 (the "Original Report") and previously
issued financial statements included in our Quarterly Reports on Form 10-Q for
the fiscal quarters ended March 31, 2008 and June 30, 2008 and the related
earnings releases and similar communications relating to all such fiscal
periods, should no longer be relied upon. Specifically, adjustments needed to be
made in the fourth quarter of 2007 and the first quarter of 2008.
In this Annual Report on Form 10-K/A (the "Amended Report") we are
restating our consolidated balance sheet as of December 31, 2007 and our
consolidated statements of operations, stockholder's equity, cash flows and
related disclosures for the year ended December 31, 2007 included in the
Original Report to correct this error. We are also restating the condensed
consolidated financial statement for first and second quarter of 2008 to correct
this error. We anticipate filing on the same date as this Amended Report,
Quarterly Reports on Form 10-Q/A for the first and second quarters of 2008. We
also anticipate filing our Quarterly Report on Form 10-Q for the three and nine
months ended September 30, 2008, which will also include the effects of the
restatements. We do not anticipate filing amended periodic reports for any
periods prior to the fourth quarter of 2007. For a detailed discussion of the
effect of the restatements, see Part I, Item 8, Note 2, "Restatement of
Previously Issued Financial Statements" to the consolidated financial
statements.
We have identified and reported "material weaknesses" to the Audit
Committee of our Board of Directors and Vitale, Caturano & Company, Ltd., our
independent registered public accounting firm. Please see "Item 9A(T). Controls
and Procedures" in Part II for a description of these matters, and of the
measures that we have implemented to date, as well as additional steps we plan
to take to strengthen our controls.
We are recording adjustments affecting our previously-reported financial
statements for the fourth quarter of 2007 and for the first quarter of 2008, the
cumulative effects of which are summarized in the table below.
CUMULATIVE EFFECT OF ADJUSTMENTS ON ACCUMULATED DEFICIT
The following table presents the cumulative effect of adjustments resulting
from the reviews described above for the periods shown.
Year Ended Quarter Ended
December 31, March 31,
2007 2008
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As Restated (1)
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Net loss as originally reported $ (1,686,000) $ (508,000)
Adjustments related to:
Revenue recognition (1,355,000) (380,000)
Cost of goods sold 1,108,000 365,000
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Net adjustments (247,000) (15,000)
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Net loss as restated $ (1,933,000) $ (523,000)
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Cumulative effect to accumulated deficit $ 247,000 $ 262,000
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(1) See Note 2, to the Consolidated Financial Statements included in Part I,
Item 8
1
For the reasons discussed above, we are filing this Amended Report in order
to amend Item 1 "Business," Item 1A "Risk Factors," Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations," Item
8 "Financial Statements and Supplementary Data," and Item 9A(T) "Controls and
Procedures" of the Original Report to the extent necessary to reflect the
adjustments discussed above and to reflect the results of our evaluations of
disclosure controls and procedures and internal control over financial
reporting, taking into consideration these restatements. The remaining Items of
our Original Report are not amended hereby and are repeated herein only for the
reader's convenience.
In order to preserve the nature and character of the disclosures set forth
in the Original Report, except as expressly noted above, this report speaks as
of the date of the filing of the Original Report, March 31, 2008, and we have
not updated the disclosures in this report to speak as of a later date. All
information contained in this Amended Report is subject to updating and
supplementing as provided in our reports filed with the SEC subsequent to the
date of the Original Report.
2
FORWARD-LOOKING STATEMENTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE
ACT"), WHICH STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE
TO OUR FUTURE PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THESE STATEMENTS
MAY BE IDENTIFIED BY THE USE OF WORDS SUCH AS "MAY", "COULD", "WOULD", "SHOULD",
"WILL", "EXPECTS", "ANTICIPATES", "INTENDS", "PLANS", "BELIEVES", "ESTIMATES"
AND SIMILAR EXPRESSIONS. OUR ACTUAL RESULTS AND TIMING OF CERTAIN EVENTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED IN THESE STATEMENTS. FACTORS THAT COULD
CONTRIBUTE TO THESE DIFFERENCES INCLUDE BUT ARE NOT LIMITED TO, THOSE DISCUSSED
UNDER "ITEM 1A. RISK FACTORS", "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS REPORT.
READERS ARE ENCOURAGED TO CAREFULLY REVIEW THESE RISK FACTORS. THE CAUTIONARY
STATEMENTS MADE IN THIS REPORT SHOULD BE READ AS BEING APPLICABLE TO ALL
FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS REPORT. WE UNDERTAKE NO
OBLIGATION TO UPDATE ANY FORWARD LOOKING STATEMENTS.
PART I
ITEM 1. BUSINESS
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Spire Corporation ("Spire" or the "Company") is a Massachusetts corporation
incorporated in 1969. Our principal offices are located at One Patriots Park,
Bedford, Massachusetts, and our phone number is (781) 275-6000. Our SEC filings
are available through our website, www.spirecorp.com. Our common stock trades on
the Nasdaq Global Market under the symbol "SPIR".
PRINCIPAL PRODUCTS AND SERVICES
Overview
We principally develop, manufacture and market customized turnkey solutions
for the solar industry, including manufacturing equipment and full turnkey lines
for cell and module production and testing. We also offer through our subsidiary
Spire Semiconductor concentrator cell and light-emitting diode ("LED")
fabrication services and through our joint venture Gloria Spire Solar
photovoltaic ("PV") system integration services. We also operate a line of
business associated with advanced biomedical applications. The foundation for
our business is our industry-leading expertise in materials technologies and
surface treatments; this proprietary knowledge enables us to further develop our
offerings in solar equipment, optoelectronics, and biomedical products and
services.
Our initial focus on high-energy physics led to the development of our
first product, the SPI-PULSE electron beam generator, to support research in
radiation effects testing. The company moved into the space solar cell business
after signing a contract to develop solar cell coverslip for radiation
hardening. In addition, we began to develop a new technology based on ion
implantation and pulsed electron beam annealing of silicon solar cells. As a
result of the energy crisis in the early 1980s, which forced the United States
to consider photovoltaics for terrestrial applications, we received our first
terrestrial solar cell contract for low cost production using our ion
implantation technology. We leveraged this knowledge to develop our
state-of-the-art manufacturing equipment, in addition to our offerings in the
optoelectronics and biomaterials industries.
As photovoltaic cell and module manufacturers ramp production to meet
increasing demand, they will first need to acquire greater quantities of turnkey
equipment in order to produce more photovoltaic cells and modules. We believe
that we are one of the world's leading suppliers of the manufacturing equipment
and technology needed to produce solar photovoltaic power systems. Our
individual manufacturing equipment products and our SPI-LINETM integrated
turnkey cell and module production lines can be highly scaled, customized, and
automated with high throughput. These systems are designed to meet the needs of
a broad range of customers ranging from manufacturers relying on mostly manual
processes, to some of the largest photovoltaic manufacturing companies in the
world.
In addition to our cell and module manufacturing solutions, we have a
device fabrication facility where we produce, under contract with our customers,
gallium arsenide ("GaAs") concentrator cells. The state-of-the-art semiconductor
fabrication and foundry facility is the foundation of our solar cell process
technology for silicon, polysilicon, thin film and
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GaAs concentrator cells. Under the name Spire Semiconductor, this division
produces GaAs concentrator cells, high performance LEDs, and other custom
semiconductor foundry services for our customers. In July 2007, we entered into
a joint venture with Gloria Solar Co., Ltd., a leading cell and module
manufacturer in Taiwan, which designs, sells and manages installations of
photovoltaic systems. Our 45% ownership stake in the joint venture, Gloria Spire
Solar, LLC, was obtained through the contribution of our building integrated
photovoltaic business to Gloria Solar. This transaction has allowed us to focus
more of our attention on our core solar business, while continuing to expand the
Spire brand name in the marketplace.
Capitalizing on our expertise in surface treatments, we also have a
biomedical division which manufactures medical devices and provides advanced
medical device surface treatment processes to our customers. Our medical device
business develops, manufactures and sells premium products for vascular access
in chronic kidney disease patients. Our surface treatment business modifies the
surfaces of medical devices to improve their performance.
We have been in the solar business for over 30 years and have been active
in research and development in the space, with over $100 million of research and
development conducted and 50 patents granted to date, as well as cell and module
production, having been a pioneer in the early development of solar technology.
This expertise has provided the platform and expertise for our manufacturing
equipment. In 2007, we nearly doubled 2006 annual revenues and we believe it is
possible to grow revenues significantly again in 2008 based upon current orders
as of December 31, 2007. We have equipment deployed in approximately 50
countries and have enjoyed the patronage of some of the world's leading solar
manufacturers including First Solar, BP Solar, Kyocera, Sharp, Hitachi,
Evergreen and Solaria Energia.
INDUSTRY OVERVIEW
Over the last few years, solar power has become one of the fastest growing
sources of renewable energy. Key factors which have driven the demand for solar
power include rising fossil fuel prices, security concerns over the dependence
of fossil fuel imports from areas of volatility, environmental concerns over the
hazards associated with fossil fuel use, government incentive programs making
solar power more cost competitive, and overall changes in consumer preference.
As a result, businesses, governments, and consumers alike have become
increasingly supportive of the development of alternative sources of energy,
such as solar power. The largest markets for PV systems are in Europe and Japan
with manufacturing located primarily in Europe and Asia.
According to Solarbuzz, an international solar energy research and
consulting company, the global solar power market, measured by photovoltaic
installations, increased from 427 megawatts ("MW") in 2002, to 1,744MW in 2006
representing a compound annual growth rate ("CAGR") of 42.2%; photovoltaic
installations are estimated to grow to 7,630MW in 2011, representing a CAGR of
134.3%. Meanwhile, solar industry revenues grew to $10.6 billion in 2006, and
are expected to grow to $31.5 billion in 2011 representing a CAGR of 124.6%, as
projected by Solarbuzz.
[Mountain Charts]
Global Annual Solar Power Installed Capacities (MW)
2006A 1,744
2007E 2,308
2008E 3,071
2009E 4,029
2010E 5,587
2011E 7,630
Global Solar Industry Revenues ($MM)
2006A 10,580
2007E 13,832
2008E 16,333
2009E 18,068
2010E 24,223
2011E 31,463
* Source: Solarbuzz, 2007.
PHOTOVOLTAIC MODULE MANUFACTURING OVERVIEW
Several technologies have been developed to harness the sun's energy. Most
prolific is the direct conversion of photons of light into electricity through
the use of photovoltaic cells. Though various thin film photovoltaic materials
are growing in popularity due the low production costs, the vast majority,
roughly 93%, of the photovoltaic market is composed
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of crystalline silicon. The popularity of silicon is largely based on its
technology legacy, abundant raw material (silicate), and high conversion
efficiency.
Crystalline solar cells and modules are produced in five basic stages: (i)
polysilicon production; (ii) ingot growth; (iii) ingot wafering; (iv) cell
production; and (v) module assembly. The value chain begins with the processing
of quartz sand to produce silicon. The resulting silicon is purified to solar
grade polysilicon, which is then processed into ingots. The ingots are sliced
into wafers which are manufactured into solar cells through an etching, doping
and coating process. The solar cells are combined into modules through another
series of steps which include testing, sorting and stringing the cells,
transferring the strings onto glass, laminating and framing the module for final
assembly. Not all solar cell and module manufacturers participate in each stage
of the production process. Some manufacturers are integrated across multiple
stages while others specialize in one stage of the process.
The rapid growth of the photovoltaic industry has led to increased
investments across the entire value chain, including turnkey equipment
manufacturing. The solar industry has raised several billion in new equity and
debt to fund expansion of the industry. According to Solarbuzz, in 2005, 2006
and 2007, the industry raised a total of $2 billion, $4 billion and $10 billion,
respectively. In 2006, Solarbuzz reports that the total capital expenditures of
manufacturing equipment for crystalline silicon photovoltaic products reached
$2.4 billion.
Currently, the bottleneck in the industry lies in polysilicon supply. The
large growth in the solar space has resulted in greater demand for polysilicon
than available, resulting in considerable increases in price for both long-term
contract prices and spot market prices. Polysilicon consumption increased from
5,100 metric tons ("MT") to 20,700MT from 2001 to 2006 respectively, with the
top seven polysilicon producers accounting for nearly 96% of the industry's
total production capacity, according to Solarbuzz. While the dominant players in
the industry have enjoyed increasingly higher margins, the huge demand for
polysilicon has attracted numerous new entrants into the market to capitalize on
the opportunity. In addition, the dominant players have significantly scaled
their production to also meet this demand. As a result, a large influx of
polysilicon is forecasted to enter the market in 2009-2010 with incremental
capacity being added in 2007 and 2008. With demand met by this time, the next
bottleneck in the industry will occur with the turnkey equipment manufacturing
needed in the latter stages of the value chain.
[PIE CHART]
Crystalline Silicon 93%
Thin Film 7%
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Technology MW Produced
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A-Si 100
------------------------------------ -----------------------
Cd-Te 70
------------------------------------ -----------------------
CIS/CIGS 5
------------------------------------ -----------------------
Monocrystalline Flat Plate 955
------------------------------------ -----------------------
Multicrystalline Flat Plate 1,170
------------------------------------ -----------------------
Ribbon (Silicon) 70
------------------------------------ -----------------------
Other Crystalline 150
------------------------------------ -----------------------
Total 2,520
------------------------------------ -----------------------
*Source: Prometheus Institute, November 2007
PRODUCTS AND SERVICES
Applying our expertise in ion implantation has allowed us to develop solar,
semiconductor and biomedical products, all of which have evolved from a single
technology. Our core business is in solar, though profitable applications in the
biomedical and semiconductor industries have enabled us to continue developing
these operations. Currently we operate our business in three segments: Spire
Solar, Spire Semiconductor and Spire Biomedical.
Spire Solar
We believe that we are one of the world's leading suppliers of
manufacturing equipment and technology needed to manufacture solar photovoltaic
power systems. Our individual items of manufacturing equipment products and our
SPI-LINETM module production lines span the full photovoltaic module fabrication
process, which currently include:
o Sorting solar cells into performance groups;
o Assembling and soldering strings of cells interconnected with metal
ribbons or "tabs";
o Completing the module circuit by soldering bus ribbons to connect the
strings together;
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o Cutting polymer, fiberglass and back cover to length and assembling
them with the glass and module circuit in preparation for
encapsulation;
o Laminating the module assembly and curing the encapsulating polymer;
o Final assembly, including edge trimming, installing an edge gasket and
frame, and attaching a junction box;
o Performing a high voltage isolation test to guarantee safe voltage
isolation between the cell circuit and the module frame; and
o Electrically testing the module performance by measuring a
current-voltage curve under simulated sunlight.
The fabrication of photovoltaic modules uses solar cells and module
materials as input and produces functional photovoltaic modules, ready for use.
We provide the necessary equipment and training for implementing these process
steps as individual equipment items and as fully integrated production lines.
Our primary customers have been new entrants that wish to enter the solar
PV market. These entrants are primarily local manufacturers that are encouraged
to produce PV modules by governmental incentive programs. We offer a turnkey
solution with enabling technology to allow these entrants to quickly enter into
the market, or to expand existing capacity, within one year of their initial
investment decision. We also sell individual equipment to existing silicon
module manufacturers as well as certain pieces of our module equipment to "thin
film" manufacturers specifically lamination and testing equipment. We also
provide full turnkey solar cell and wafer lines to customers to vertically
integrate their manufacturing lines (for these production lines). We purchase
rather than manufacture equipment while offering proprietary technology and
integration services to enable customers. We currently have two customers under
contract to deliver 50MW of cell line production.
On July 31, 2007, we entered into a contractual relationship with Gloria
Solar Co., Ltd. ("Gloria Solar"), a leading cell and module manufacturer in
Taiwan organized under the laws of the Republic of China (Taiwan). Under the
agreement, we agreed to sell Gloria Solar certain assets pertaining to our solar
systems business for $4 million. In addition, we agreed to form a joint venture
for the purpose of pursuing the solar photovoltaic systems market within the
United States. The joint venture will design, sell and manage the installations
of solar systems for the generation of electrical power by solar photovoltaic
means in primarily commercial/industrial and utility segments of such market
(the "JV Systems Business"). Gloria Solar owns 55% of the joint venture and we
own 45% of the joint venture. In connection with the formation of the joint
venture, we contributed our solar photovoltaic system assets related to the JV
Systems Business, including certain intellectual property and know-how, access
to information technology assets and relationships, relationships with current
and previous customers, contract backlog and project leads, certain registered
trademarks, and employment relationships with staff members; Gloria Solar
contributed $5 million in cash.
Spire Semiconductor
-------------------
Spire Semiconductor operates a state-of-the-art semiconductor foundry and
fabrication facility in Hudson, New Hampshire equipped with advanced and
sophisticated metal-organic chemical vapor deposition ("MOCVD") reactors and
fabrication equipment. Our fabrication facility has been designed to have the
flexibility to engage in quick-turn research and prototyping, as well as for
economical full-rate volume production services in three primary areas: GaAs
concentrator solar cells, high performance LEDs and other device foundry
services. Bandwidth Semiconductor LLC ("Bandwidth") changed its name to Spire
Semiconductor in 2007.
Our MOCVD reactors have the capacity to include a wide range of compound
semiconductor (chiefly GaAs and indium phosphide-based compounds) epitaxial
structures fabricated to our customers' designs or in some cases to our own
designs. GaAs concentrator cells represent a significant market opportunity and,
as one of the first pioneers in GaAs fabrication, we have the expertise to
provide customers with turnkey cell products. We offer double and
triple-junction cells and have recently filed a patent application for a 40%+
conversion efficiency solar cell design. We currently have capacity for 25 MW of
high efficiency solar cell production with opportunities to expand.
Our foundry services can take compound semiconductor wafers up to 4 inches
in diameter through processing, on-wafer test, and die separation. We can use
customer-supplied photomasks or develop a new set of masks for an entire process
sequence. We design the process steps and conditions to meet the desired device
characteristics and implement the process in our fabrication facility, saving
our customers development time and providing a source of proprietary devices
without the expense of a dedicated internal fabrication. Typical OEM devices we
have fabricated include
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thermo-photovoltaic ("TPV") cells and communications-quality LEDs as well as a
host of other optoelectronics including single-element photodetectors,
photodetector arrays, vertical cavity surface emitting lasers ("VCSELs"), and
edge-emitting lasers.
Spire Biomedical
----------------
We also provide advanced medical device surface treatment processes for the
performance improvement of orthopedic and cardiovascular devices, enhancing
properties such as wear resistance, infection resistance and thromboresistance.
Additionally, we offer a wide range of high performance vascular access
catheters for hemodialysis treatment in patients with chronic kidney disease.
Our line of long-term hemodialysis catheters combines high level
performance with increased catheter placement options. Our proprietary catheter
products provide higher flow at lower pressures and superior kink-resistance.
Our patented separated distal tip design minimizes recirculation and provides a
wider margin of functionality compared to conventional staggered tip designs. We
recently introduced a line of heparin coated catheters that have shown reduced
clotting in laboratory and animal studies. We believe that these key features
present the renal care community with attractive value and performance for
patient care.
We also offer our medical customers a family of process services utilizing
ion beam technologies to enhance both the surface characteristics and the
performance of medical devices. Our advanced surface modification technology
services employ proprietary Ion Implantation and Ion Beam Assisted Deposition
("IBAD") techniques to improve the performance of medical components. Our
customized surface treatments meet a variety of needs, including reduced
friction, wear and abrasion, infection resistance, enhanced tissue and bone
growth, increased thromboresistance, conductivity, improved radiopacity and the
improvement of other performance characteristics. Spire-treated products
currently include orthopedic prostheses (such as replacement hips, knees,
elbows), catheters, guidewires, ear-nose-throat devices, vascular grafts, and
other specialty medical devices.
PRINCIPAL DISTRIBUTION METHODS
Our products and services are sold primarily by our direct, internal sales
staff with four notable exceptions: in certain offshore markets, we utilize
independent sales representatives to aid our sales efforts to sell our solar
equipment, our hemodialysis catheter products are sold via independent
distributors, proposals for sponsored research and development work are prepared
by our scientists and researchers, and, in certain locations, we have granted
licenses to third parties to sell their product base upon our technology.
PHYSICIAN RELATIONSHIPS
We have engaged certain physicians to serve as consultants to us. These
physicians enter into written contracts that specify their duties and fix their
compensation for periods of one or more years. The compensation for these
consultants is the result of arm's length negotiations and generally depends
upon competitive factors in the local market, the physician's professional
qualifications and the specific duties and responsibilities of the physician.
COMPETITIVE CONDITIONS
The markets in which we operate are highly competitive and characterized by
changes due to technological improvements and developments. We compete with many
other manufacturers and service providers in each of our product and service
areas; many of these competitors have greater resources and sales. Additionally,
our products and services compete with products and services utilizing
alternative technologies. For example, our solar photovoltaic systems compete
with other forms of renewable energy such as wind, solar thermal and
geo-thermal. Price, service and product performance are significant elements of
competition in the sale of each of our products. We believe that there are
considerable barriers to entry into the markets we serve, including a
significant investment in specialized capital equipment and product design and
development, and the need for a staff with sophisticated scientific and
technological knowledge.
SOURCES AND AVAILABILITY OF RAW MATERIALS
Principal raw materials purchased by us include polymer extrusions, molded
plastic parts, silicon photovoltaic cells, compound semiconductor wafer
substrates, high purity industrial gases, custom metal welded structures,
fasteners, position
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sensors, electrical motors, electrical power conditioning inverters, and
electrical controls. All of these items are available from several suppliers and
we generally rely on more than one supplier for each item. There has been a
multi-year shortage in semiconductor grade silicon leading to dramatic price
increases over the past two years. The shortage in semiconductor grade silicon
did have an adverse effect on the ordering patterns of our solar equipment
customers in the early part of 2006 and could have an adverse effect on solar
ordering patterns in the future.
SOURCES AND AVAILABILITY OF MANUFACTURING SERVICES
We employ an outsourcing-model supply chain in our biomedical products
business by which certain manufacturing services, such as polymer extrusion,
assembly, packaging and sterilization, are obtained from third party
contractors. We have identified multiple potential sources for the services it
requires; however, certain elements of the supply chain currently involve only
one qualified contractor. As sales volume expands, we plan to reassess our
supply chain to eliminate potential "bottlenecks" and reduce dependence on
sole-source, single site contract services.
DEPENDENCE ON MAJOR CUSTOMERS
One customer accounted for more than 10% of our consolidated net sales and
revenues during the year ended December 31, 2007 (approximately 15%), and one
customer accounted for more than 10% of our consolidated net sales and revenues
in 2006 (approximately 12%).
KEY LICENSES AND PATENTS, GOVERNMENT RIGHTS TO INTELLECTUAL PROPERTY
On May 26, 2005, we entered into a global consortium agreement (the
"Agreement") with Nisshinbo Industries, Inc. ("Nisshinbo") for the development,
manufacturing, and sales of solar photovoltaic module manufacturing equipment.
Nisshinbo's prior relationship with Spire was as a sub-licensee of Marubeni
Corporation with whom we had a license arrangement that was originally signed in
1997, extended in 2003, and terminated in May 2005. Nisshinbo's role as
sub-licensee was to manufacture equipment for Marubeni to sell to the Japanese
market based upon our proprietary technology. Under the terms of the Agreement,
Nisshinbo purchased a license to manufacture and sell our module manufacturing
equipment on a semi-exclusive basis for an upfront fee plus additional royalties
based on ongoing equipment sales over a ten-year period. In addition, we and
Nisshinbo agreed, but are not obligated, to pursue joint research and
development, product improvement activities and sales and marketing efforts. The
companies may share market costs such as product collateral and trade show
expenses. Each company may also collaborate on sales leads and have the other
company manufacture and service its equipment in the field. Both companies have
reciprocal rights to participate in the other company's R&D efforts on a
going-forward basis. Nisshinbo can request us to further develop a technology
but Nisshinbo must (a) share in the costs of these development efforts equally
with us (and thereafter have joint ownership) otherwise we will own the
technology under a partial contribute or no participation by Nisshinbo with us
receiving a royalty from Nisshinbo if it utilizes the technology. At the end of
the license all non-jointly owned technology developed under the Agreement will
revert back to the owner, with the other party being required to purchase a new
license based upon the fair market value of that technology in order to continue
to utilize the technology.
On June 27, 2005, we received JPY 400,000,000 from the sale of this
permanent license. We determined that the Nisshinbo Agreement contains multiple
elements consisting of (1) the granting of a license to utilize our technology
and (2) the semi-exclusive right to utilize the technology for a period of 10
years. We believe the granting of the license meets the criteria of Emerging
Issues Task Force ("EITF") 00-21, "Accounting for Revenue Arrangements with
Multiple Elements", paragraph 9(a), as the license to utilize the technology has
value to Nisshinbo on a stand-alone basis. Further, Question 1 to Securities and
Exchange Commission ("SEC") Staff Accounting Bulletin Topic 13A-3f
"Nonrefundable Up-Front Fees", was directly considered as guidance for
determining if the upfront fee under the Nisshinbo Agreement should be
recognized upon the signing of contract or recognized over the term of the
license. It is our belief that a separate earnings process was complete as
Nisshinbo was purchasing access to utilize technology it already had in its
possession; therefore, recognition of the gain on the sale was appropriate. We
have determined the fair value of the license and royalty based on an appraisal.
As a result, a $3,319,600 gain was recognized as a gain on sale of license in
the consolidated statements of operations for the year ended December 31, 2005.
The balance of $350,000 was determined to represent an advanced royalty payment
and was recorded as an advance on contracts in progress. This amount is being
credited as royalty income over the ten-year license period on a straight-line
basis.
Through over 30 years of research and development, we have accumulated
extensive scientific and technological expertise. We protect our technological
advances as trade secrets, in part through confidentiality agreements with
8
employees, consultants and third parties. We also seek and enforce patents as
appropriate. We currently has 35 issued United States patents, one of which is
jointly owned, 33 patents pending in the United States, and five foreign patents
pending, all of which cover elements of our materials and processing
technologies.
The United States government retains the right to obtain a patent on any
invention developed under government contracts as to which we do not seek and
obtain a patent, and may require us to grant a third party license of such
invention if steps to achieving practical application of the invention have not
been taken. The United States government also retains a non-exclusive,
royalty-free, non-transferable license to all technology developed under
government contracts, whether or not patented, for government use, including use
by other parties to United States government contracts. Furthermore, our United
States government contracts prohibit us from granting exclusive rights to use or
sell any inventions unless the grantee agrees that any product using the
invention will be manufactured substantially in the United States.
GOVERNMENT REGULATION OF MEDICAL PRODUCTS
Our hemodialysis catheters and accessory products require the approval of
the United States Food & Drug Administration ("FDA") prior to sale within the
United States. Sales within the European Union ("EU") require the CE Mark
certification and sales within Canada require a medical device license issued by
Health Canada.
Within the United States, the process requires that a pre-market
notification (the "510(k) Submission") be made to the FDA to demonstrate that
the device is as safe and effective, substantially equivalent to a legally
marketed device that is not subject to pre-market approval. FDA guidance
documents are used to prepare the 510(k) Submission. Applicants must compare
this device to one or more similar devices commercially available in the United
States, known as the "predicate" device(s), and make and support their
substantial equivalency claims. Applicants must submit descriptive data and
performance data to establish that the device is substantially equivalent to a
predicate device. In some instances, data from human clinical trials must also
be submitted in support of a 510(k) Submission. If so, the data must be
collected in a manner that conforms to specific requirements in accordance with
federal regulations. The FDA must issue a 510(k) letter order finding
substantial equivalence before commercial distribution can occur. Upon receipt
of the 510(k) application by the FDA, up to a 90-day response period is allowed
before the FDA must respond.
We currently hold all required approvals and certifications to market our
Heparin coated and uncoated hemodialysis catheters and accessory products in the
USA, and our uncoated catheters in the EU, Canada, Australia and Hong Kong. We
are committed to maintaining these critical approvals and certifications and the
stringent quality requirements applicable to the development, testing,
manufacturing, labeling, marketing and distribution of these products.
Recent actions by the FDA to improve the quality of the supply chains of
medical device manufacturers has had an indirect effect on our biomedical
processing services. However, our current quality control systems have been more
than adequate to meet the increased demands of our customers.
GOVERNMENT REGULATION OF CONTRACTS
Our United States government contracts are subject to a large number of
federal regulations and oversight requirements. Compliance with the array of
government regulations requires extensive record keeping and the maintenance of
complex policies and procedures relating to all aspects of our business, as well
as to work performed for us by any subcontractors. We believe that we have put
in place systems and personnel to ensure compliance with all such federal
regulations and oversight requirements. All contracts with United States
government agencies have been audited by the government through December 2005.
We have not incurred substantial losses as a result of these incurred cost
audits.
RESEARCH AND DEVELOPMENT
Our policy is to support as much of our research and development as
possible through government contract funding, which we recognize as revenue.
Revenues from our research and development contracts and Natural Renewable
Energy Laboratory ("NREL") funded by the United States government, and their
percent of consolidated net sales and revenues were $1,303,000, or 4%, and
$2,261,000, or 11%, for the years ended December 31, 2007 and 2006,
respectively.
Our contracts with the United States government grant to us proprietary
rights in any technology developed pursuant to such contracts and grant to the
United States government a non-exclusive license to utilize the technology for
its benefit. The United States government retains the right to pursue patent
protection on any inventions made under these contracts
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as to which patent protection is not sought and obtained by us. To date, the
Government has not exercised its rights to patent nor indicated it has or it
will do so. We still have the ability to sell our rights to develop technology
and has successfully sold the rights in the past. Our rights to technology
developed under contracts with private companies vary, depending upon negotiated
terms.
Our internally funded research and development expenditures were $313,000
and $734,000 for the years ended December 31, 2007 and 2006, respectively.
CUSTOMERS AND MARKETS
One customer accounted for more than 10% of our consolidated net sales and
revenues during the year ended December 31, 2007 (approximately 15%), and one
customer accounted for more than 10% of our consolidated net sales and revenues
in 2006 (approximately 12%).
Our export sales, which amounted to 47% and 33% of net sales and revenues
for 2007 and 2006, respectively, continue to constitute a significant portion of
our net sales and revenues. Over 90% of export sales in 2007 and 2006 were to
solar equipment customers with the remainder to biomedical and optoelectronic
related customers.
The following table shows net sales and revenues by geographic area (based
on customer location) for the years ended December 31:
2007 % 2006 %
As Restated
---------------------- ------------ ------
United States $ 19,714,000 53% $ 13,454,000 67%
Europe/Africa 9,129,000 25% 3,389,000 17%
Asia 7,643,000 21% 2,771,000 13%
Rest of the world 582,000 1% 511,000 3%
------------ ------ ------------ ------
$ 37,068,000 100% $ 20,125,000 100%
============ ====== ============ ======
ENVIRONMENTAL QUALITY
Compliance with federal, state and local provisions regulating the
discharge of materials into the environment has not materially affected our
capital expenditures, earnings or its competitive position. Currently there are
no lawsuits related to the environment or material administrative proceedings
pending against us.
EMPLOYEES
At December 31, 2007, we had approximately 188 employees, of whom 179
worked full time. Our year end head count included 134 employees in
manufacturing operations, 10 employees in research and development, and 44
employees in sales, general and administrative. We also employ part-time
employees and hire independent contractors. Our employees are not represented by
any collective bargaining agreement, and we have never experienced a work
stoppage. We believe that our employee relations are good.
ITEM 1A. RISK FACTORS
-----------------------
In addition to the other information in this Form 10-K, the following risk
factors inherent in and affecting our business should be considered. The
descriptions in this Form 10-K contain forward-looking statements that involve
risks and uncertainties. Our actual results and the timing of certain events may
differ materially from the results and timing described in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those described below and in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and above in
"Business."
RISKS RELATING TO OUR BUSINESS
------------------------------
OUR SUCCESS WILL DEPEND UPON OUR ABILITY TO EFFECTIVELY IMPLEMENT OUR BUSINESS
MODEL OF CREATING OR ACQUIRING SCIENTIFICALLY ADVANCED TECHNOLOGY, DEVELOPING
AND MANUFACTURING COMMERCIALLY VIABLE PRODUCTS FROM SUCH TECHNOLOGY AND
SUCCESSFULLY
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MARKETING AND DISTRIBUTING SUCH PRODUCTS. THE FAILURE TO SUCCESSFULLY EXECUTE
ANY STAGE OF THIS PROCESS COULD HAVE A MATERIALLY NEGATIVE IMPACT ON OUR
BUSINESS AND RESULTS OF OPERATIONS.
We believe that our continued success will depend upon our ability to
create or acquire scientifically advanced technology, apply our technology
cost-effectively across product lines and markets, develop or acquire
proprietary products, attract and retain skilled development personnel, obtain
patent or other protection for our products, obtain required regulatory
approvals, manufacture and successfully market our products either directly or
through outside distributors and sales representatives and supply sufficient
inventory to meet customer demand. There can be no assurance that we will
realize financial benefit from our technology development and application
efforts, that we will continue to be successful in identifying, developing and
marketing new products or enhancing our existing products, or that products or
technologies developed by others will not render our products or technologies
non-competitive or obsolete.
WE HAVE EXPERIENCED LOSSES FROM OPERATIONS, BEFORE THE SALE OF CERTAIN
TECHNOLOGY LICENSES, AND WE EXPECT THAT OUR OPERATING RESULTS WILL FLUCTUATE IN
THE FUTURE.
We have experienced losses from operations in each of the past two fiscal
years. These losses have contributed to an accumulated deficit of approximately
$11.7 million as of December 31, 2007. Our revenues have not been sufficient to
cover our operating expenses, and we anticipate that we may sustain future
losses from operations if revenues do not increase. Future fluctuations in
operating results may also be caused by a number of factors, many of which are
outside our control. Additional factors that could affect our future operating
results include the following:
o Availability of raw materials processed by the capital
equipment we provide to our buyers, particularly the
polysilicon used in the manufacture of the silicon wafers and
solar cells;
o Delays, postponements or cancellations of orders and shipments
of our products, particularly in our solar equipment and solar
systems businesses where individual order sizes may be large
and thus may represent a significant portion of annual revenue;
o Changes in our receipt of license fees, milestone payments and
royalty payments relating to our intellectual property;
o Loss of major customers, particularly as a result of customers
changing their own product designs in such ways as reduce or
eliminate the need for the manufacturing services we provide;
o Reductions in the selling prices of our products and services
as a result of competitive pressures;
o Variation in capacity, capacity utilization and manufacturing
yields within the third party medical contract manufacturing
service providers that constitute the supply chain for our
biomedical products that, in turn, cause variation in our
ability to timely ship our products;
o Increased competition from current and future competitors,
including competition resulting from services and products
utilizing competing technologies;
o Variation in the timing of customer orders and inventory levels
at our customers, particularly within our biomedical
manufacturing services business;
o Termination of existing grants with government agencies or
delays in funding of grants awarded;
o Delays in introducing and gaining physician acceptance for new
products and product improvements, particularly in our
biomedical products business; and
o Disruption in the distributor sales channels by which we bring
our biomedical products to market.
If we are unable to reach and sustain profitability from our operations, we
risk depleting our working capital balances and our business may not continue as
a going concern. Even if we are profitable, we may require additional working
capital to meet expected growth. Although future sales of technology licenses
may be pursued, such sales cannot be assured. In addition, we may need to raise
additional capital, or arrange other sources of funds, in order to sustain our
operations. There can be no assurance that we will be able to raise such funds
if they are required. Even if new financing were available, it may not be on
commercially reasonable terms or terms that are acceptable to us.
OUR ABILITY TO EXPAND REVENUE AND SUSTAIN PROFITABILITY DEPENDS SUBSTANTIALLY ON
THE STABILITY AND GROWTH OF THE VARIOUS MARKETS FOR OUR PRODUCTS AND SERVICES.
SHOULD WE BE UNABLE TO EXPAND OUR REVENUE, OUR ABILITY TO REACH AND SUSTAIN
PROFITABILITY WOULD BE IMPAIRED.
o The world demand for photovoltaic manufacturing equipment
depends on sustained expansion in the demand for decentralized
power sources, especially in developing countries, and on
domestic and foreign government funding of initiatives to
invest in solar energy as an alternative to the burning of
fossil fuels and other energy production methods. There can be
no assurance that government funding for such initiatives
11
will be available, or that solar energy will prove to be a
cost-effective alternative to other energy sources and thus
gain acceptance where traditional energy sources continue to be
available. Should demand for solar photovoltaic power sources
not increase, demand for new photovoltaic manufacturing
equipment would not materialize and our business would be
adversely affected.
o Most of our research and development revenues are generated by
contracts with the United States government. There can be no
assurance that the United States government will fund our
research and development projects at the same level as it has
in the past. Should federal research funding priorities change,
and should we be unable to adjust our research focus to reflect
the shift, our business could be adversely affected.
o The growth of our biomedical products business depends on
increased physician acceptance of our hemodialysis catheter
products, our ability to manage the production of higher unit
volumes of catheter products and our ability to effectively
distribute those products. Should our hemodialysis catheters
not gain market acceptance or should we not be able to meet
demand for our products, our biomedical products business could
be adversely affected.
o The growth of our biomedical services business depends upon our
customers' ability to serve demand for the end-use items, such
as orthopedic prostheses, on which our services are performed
and thus is substantially beyond our control.
o Our ability to expand our biomedical business depends upon our
ability to introduce new products and services. The marketing
of new biomedical products requires pre-approval of government
regulatory authorities, the completion of which can be lengthy
and more costly than originally planned.
o The growth of our optoelectronics business depends upon growth
in demand for compound semiconductor wafers from manufacturers
of microwave and optoelectronic circuits and sensors that, in
turn, are used in diverse biomedical, telecommunications and
aerospace products. Should these end-use markets not experience
anticipated levels of growth and, in the case of
telecommunications uses, experience a recovery from currently
depressed business levels, our optoelectronics business could
be adversely affected.
o We have made a substantial investment in equipment at Spire
Semiconductor in anticipation of future revenues under its
agreement with Principia Lightworks. If these anticipated
revenues are not achieved, we will have significant unutilized
capacity and may not recover our investment in the equipment.
WE HAVE NOT CONSISTENTLY COMPLIED WITH NASDAQ'S MARKETPLACE RULES FOR CONTINUED
LISTING, WHICH EXPOSES US TO THE RISK OF DELISTING FROM THE NASDAQ GLOBAL
MARKET.
Our stock is currently listed on the Nasdaq Global Market. In August 2003,
we received notice from Nasdaq that we were not in compliance with Nasdaq's
Marketplace Rules as a result of filing our second quarter Form 10-QSB prior to
the completion of the review by our independent auditors and, accordingly, were
subject to possible delisting. We subsequently filed all reports and were able
to maintain its continued listing on the Nasdaq Global Market.
In April 2005, we received notice from Nasdaq that we were not in
compliance with the minimum stockholders' equity level of $10,000,000 required
for continued listing on the Nasdaq Global Market. Following the submission of a
plan of compliance and making later filings showing this deficiency no longer
existed, Nasdaq subsequently notified us that we had achieved compliance with
the $10,000,000 stockholders' equity threshold during 2005 and the matter was
closed. However, as of December 31, 2007, we were not in compliance with the
minimum stockholders' equity threshold. As a result, we do not meet Standard No.
1 for continued listing on the Nasdaq Global Market. However, we believe that we
do meet Standard No. 2 for continued listing on the Nasdaq Global Market as the
market value of our listed securities currently exceeds $50,000,000 and we meets
all of the other requirements of Standard No. 2. In order to remain in
compliance with Standard No. 2, our market value of listed securities cannot
fall below $50,000,000 for ten consecutive trading days at any point. If we fail
to maintain compliance with these rules and our common stock is delisted from
the Nasdaq Global Market, there could be a number of negative implications,
including reduced liquidity in the common stock as a result of the loss of
market efficiencies associated with the Nasdaq Global Market, the loss of
federal preemption of state securities laws, the potential loss of confidence by
suppliers, customers and employees, as well as the loss of analyst coverage and
institutional investor interest, fewer business development opportunities and
greater difficulty in obtaining financing.
12
OUR BUSINESS RELIES IN PART ON A LIMITED NUMBER OF CUSTOMERS, AND UNFAVORABLE
DEVELOPMENTS IN RELATION TO A MAJOR CUSTOMER MAY ADVERSELY AFFECT OUR REVENUES,
OPERATING RESULTS AND CASH FLOWS.
We had one customer that accounted for more than 10% of consolidated net
sales and revenues during the year ended December 31, 2007 (approximately 15%),
and one customer that accounted for more than 10% consolidated net sales and
revenues in 2006 (approximately 12%). In addition, we have had such customers in
other years and may have them again in the future. If an unfavorable development
were to occur with respect to any significant customer it would likely have a
material adverse affect on our business, financial condition, operating results,
cash flows and future prospects.
WE SELL OUR PRODUCTS AND SERVICES AGAINST ESTABLISHED COMPETITORS, AND ENTITIES
NOW OPERATING IN RELATED MARKETS MAY ENTER OUR MARKETS. SOME OF OUR CURRENT AND
POTENTIAL COMPETITORS HAVE GREATER FINANCIAL AND TECHNICAL RESOURCES THAN WE DO.
SHOULD WE BE UNABLE TO OFFER OUR CUSTOMERS PRODUCTS AND SERVICES THAT REPRESENT
ATTRACTIVE PRICE VERSUS VALUE, OUR BUSINESS WOULD SUFFER.
Although we believe that there are considerable barriers to entry into the
markets we serve, including a significant investment in specialized capital
equipment, product design and development, and the need for a staff with
sophisticated scientific and technological knowledge, there can be no assurance
that new or existing entities would not seek to enter our markets or that we
would be able to compete effectively against such entities.
o In our biomedical products business, our hemodialysis catheter
products directly compete against the already established
product offerings of larger competitors. Although we believe
that our catheter products offer significant advantages,
widespread physician acceptance of these products in preference
to the more established products of competitors cannot be
assured.
o In our optoelectronics business, our manufacturing services may
compete against the internal manufacturing capabilities of our
customers. Although we believe that we offer significant
advantages in terms of timely response, reduced total cost and
reduced capital investment over the captive fabrication
facilities of our customers, customers may elect to maintain
their internal capabilities despite economic incentives to
outsource these services from us.
IF WE ARE UNABLE TO DEVELOP AND INTRODUCE NEW PRODUCTS SUCCESSFULLY OR TO
ACHIEVE MARKET ACCEPTANCE OF OUR NEW PRODUCTS, OUR OPERATING RESULTS WOULD
BE ADVERSELY AFFECTED.
We compete in markets characterized by technological advances and
improvements in manufacturing efficiencies. Our ability to operate profitably
depends in large part on our timely access to, or development of, technological
advances, and on our ability to use those advances to improve existing products,
develop new products and manufacture those products efficiently. There can be no
assurance that we will realize financial benefit from our development programs,
will continue to be successful in identifying, developing and marketing new
products or enhancing our existing products, or that products or technologies
developed by others will not render our products or technologies non-competitive
or obsolete. The failure to introduce new or enhanced products on a timely and
cost competitive basis, or to attain market acceptance for commercial products,
could have a material adverse effect on our business, results of operations or
financial condition.
IF WE ARE NOT SUCCESSFUL IN PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS, OUR
ABILITY TO COMPETE MAY BE HARMED.
We rely on a combination of patent, copyright, trademark and trade secret
protections as well as confidentiality agreements and other methods, to protect
our proprietary technologies and processes. For example, we enter into
confidentiality agreements with our employees, consultants and business
partners, and control access to and distribution of our proprietary information.
We have been issued 35 United States patents, one of which is jointly owned, and
have a number of pending patent applications. However, despite our efforts to
protect our intellectual property, we cannot assure that:
o The steps we take to prevent misappropriation or infringement
of our intellectual property will be successful;
o Any existing or future patents will not be challenged,
invalidated or circumvented;
o Any pending patent applications or future applications will be
approved;
o Others will not independently develop similar products or
processes to ours or design around our patents; or
13
o Any of the measures described above would provide meaningful
protection.
A failure by us to meaningfully protect our intellectual property could
have a material adverse effect on our business, financial condition, operating
results and ability to compete. In addition, effective patent, copyright,
trademark and trade secret protection may be unavailable or limited in certain
countries.
From time to time we may be subject to lawsuits by other parties seeking to
enforce their intellectual property rights.
WE DEPEND ON OTHERS, PARTICULARLY ON AGENCIES OF THE UNITED STATES GOVERNMENT,
FOR FUNDING OUR RESEARCH AND DEVELOPMENT EFFORT.
Substantially most of our research and development work is funded by
agencies of the United States government either directly or via their
contractors. Loss of outside funding may materially adversely affect our ability
to further develop our proprietary technologies and to apply these technologies
to our current products and products under development. If we are unable to
maintain our current level of such funding for any reason, we would need to
generate funds for such research from other sources, reduce our research and
development effort or increase our internal funding for research and
development. An increase in internally funded research and development would
have a negative impact on our profitability.
Additionally, the process of bidding for, obtaining, retaining and
performing United States government contracts is subject to a large number of
United States government regulations and oversight requirements. Compliance with
these government regulations requires extensive record keeping and the
maintenance of complex policies and procedures relating to all aspects of our
business, as well as to work performed for us by any subcontractors. Any failure
to comply with applicable regulations, or to require our subcontractors so to
comply, could result in a variety of adverse consequences, ranging from remedial
requirements to termination of contracts, reimbursement of fees, reduction of
fees on a going forward basis and prohibition from obtaining future United
States government contracts. While we believe that we have in place systems and
personnel to ensure compliance with all United States government regulations
relating to contracting, we cannot assure that we will at all times be in
compliance or that any failure to comply will not have a material adverse effect
on our business, results of operations or financial condition.
THE U.S. GOVERNMENT HAS CERTAIN RIGHTS RELATING TO OUR INTELLECTUAL PROPERTY.
The United States government retains the right to obtain a patent on any
invention developed under government contracts as to which we do not seek and
obtain a patent, and may require us to grant a third party license of such
invention if steps to achieving practical application of the invention have not
been taken. The United States government also retains a non-exclusive,
royalty-free, non-transferable license to all technology developed under
government contracts, whether or not patented, for government use, including use
by other parties to United States government contracts. Furthermore, our United
States government contracts prohibit us from granting exclusive rights to use or
sell any inventions unless the grantee agrees that any product using the
invention will be manufactured substantially in the United States.
WE DEPEND ON THIRD-PARTY CONTRACTORS TO MANUFACTURE SUBSTANTIALLY ALL OF OUR
CURRENT BIOMEDICAL PRODUCTS.
We depend on third-party subcontractors in the U.S. for the manufacturing,
assembly and packaging of our biomedical products. Any difficulty in obtaining
parts or services from these subcontractors could affect our ability to meet
scheduled product deliveries to customers, which could in turn have a material
adverse effect on our customer relationships, business and financial results.
Several significant risks are associated with reliance on third-party
subcontractors, including:
o The lack of assured product supply and the potential for
product shortages;
o Reduced control over inventory located at contractors'
premises;
o Limited control over delivery schedules, manufacturing yields
and production costs;
o Direct control over product quality;
o The temporary or permanent unavailability of, or delays in
obtaining, access to key process technologies; and
o Dependence on single source contractors to provide critical
services.
OUR SUCCESS DEPENDS ON OUR ABILITY TO HIRE AND RETAIN QUALIFIED TECHNICAL
PERSONNEL, AND IF WE ARE UNABLE TO DO SO, OUR PRODUCT DEVELOPMENT EFFORTS AND
CUSTOMER RELATIONS WILL SUFFER.
14
Our products require sophisticated manufacturing, research and development,
marketing and sales, and technical support. Our success depends on our ability
to attract, train and retain qualified technical personnel in each of these
areas. Competition for personnel in all of these areas is intense and we may not
be able to hire or retain sufficient personnel to achieve our goals or support
the anticipated growth in our business. The market for the highly trained
personnel we require is very competitive, due to the limited number of people
available with the necessary technical skills and understanding of our products
and technology. If we fail to hire and retain qualified personnel, our product
development efforts and customer relations will suffer.
WE ARE SUBJECT TO ENVIRONMENTAL LAWS AND OTHER LEGAL REQUIREMENTS THAT HAVE THE
POTENTIAL TO SUBJECT US TO SUBSTANTIAL LIABILITY AND INCREASE OUR COSTS OF DOING
BUSINESS.
Our properties and business operations are subject to a wide variety of
federal, state, and local environmental, health and safety laws and other legal
requirements, including those relating to the storage, use, discharge and
disposal of toxic, volatile or otherwise hazardous substances used in our
manufacturing processes. We cannot assure that these legal requirements will not
impose on us the need for additional capital expenditures or other requirements.
If we fail to obtain required permits or otherwise fail to operate within these
or future legal requirements, we may be required to pay substantial penalties,
suspend our operations or make costly changes to our manufacturing processes or
facilities. Although we believe that we are in compliance and have complied with
all applicable legal requirements, we may also be required to incur additional
costs to comply with current or future legal requirements.
OUR INTERNATIONAL SALES SUBJECT US TO RISKS THAT COULD ADVERSELY AFFECT OUR
REVENUE AND OPERATING RESULTS.
Sales to customers located outside the U.S. have historically accounted for
a significant percentage of our revenue (approximately 47% in 2007) and we
anticipate that such sales will continue to be a significant percentage of our
revenue. International sales involve a variety of risks and uncertainties,
including risks related to:
o Reliance on strategic alliance partners such as representatives
and licensees;
o Compliance with changing foreign regulatory requirements and
tax laws;
o Reduced protection for intellectual property rights in some
countries;
o Longer payment cycles to collect accounts receivable in some
countries;
o Increased costs or reduced revenues as a result of movements in
foreign currency exchange rates;
o Political instability;
o Economic downturns in international markets; and
o Changing restrictions imposed by United States export laws.
Failure to successfully address these risks and uncertainties could
adversely affect our international sales, which could in turn have a material
and adverse effect on our results of operations and financial condition.
THE USE OF OUR CATHETER AND OTHER MEDICAL RELATED PRODUCTS ENTAILS A RISK OF
PHYSICAL INJURY; THE DEFENSE OF CLAIMS ARISING FROM SUCH RISK MAY EXCEED OUR
INSURANCE COVERAGE AND DISTRACT OUR MANAGEMENT.
The use of orthopedic and other medical devices may entail a risk of
physical injury to patients. To the extent we have been involved in the design
and manufacturing of these products, we may be exposed to potential product
liability and other damage claims. Furthermore, the use of our photovoltaic
module manufacturing equipment could result in operator injury. We have had
cases brought against us in which it was alleged that we have been a party to
the manufacture and sale of defective heart valves with other defendants. We
recently settled a case alleging that our catheter contributed to a patient's
death in Ohio. No other claims of product liability or other damages have been
initiated against us. We maintain product liability and umbrella insurance
coverage; however, there can be no assurance that any product liability claim
assessed against us would not exceed our insurance coverage, or that insurance
coverage would continue to be available. While we typically obtain agreements of
indemnity from manufacturers of biomedical products for which we provide
manufacturing services, there can be no assurance that any such indemnity
agreements will be enforceable or that such manufacturers will have adequate
funds to meet their obligations under such agreements. The cost of defending a
product liability, negligence or other action, and/or assessment of damages in
excess of insurance coverage, could have a material adverse effect on our
business, results of operations, or financial condition.
15
RISKS RELATED TO OUR COMPANY
----------------------------
OUR COMPANY IS SUBJECT TO CONTROL BY PRINCIPAL STOCKHOLDER.
Roger G. Little, our founder, Chairman of the Board, Chief Executive
Officer and President, controls approximately 26% of our outstanding common
stock. As a result, Mr. Little is in a position to exert significant influence
over actions which require stockholder approval and generally to direct our
affairs, including the election of directors, potential acquisitions and sales
or otherwise preventing or delaying changes in control of our Company that may
be otherwise viewed as beneficial by shareholders other than Mr. Little.
WE DO NOT PAY DIVIDENDS AND WE MAY NOT PAY DIVIDENDS IN THE FUTURE.
We have paid no cash dividends since our inception. We anticipate retaining
any future earnings for reinvestment in operations and do not anticipate that
dividends will be paid in the foreseeable future. Accordingly, the return on
investment should be expected to depend on changes in the market price of our
common stock.
THE MARKET PRICE FOR OUR COMMON STOCK HAS BEEN VOLATILE AND FUTURE VOLATILITY
COULD CAUSE THE VALUE OF INVESTMENTS IN OUR COMPANY TO FLUCTUATE.
Our stock price has experienced significant volatility. While our revenues
have increased since 2000, we expect that uncertainty regarding demand for our
products will cause our stock price to continue to be volatile. In addition, the
value of your investment could decline due to the impact of any of the following
factors, among others, upon the market price of our common stock:
o Additional changes in investment analysts' estimates of our
revenues and operating results;
o Our failure to meet investment analysts' performance
expectations; and
o Changes in market valuations of other companies in the
biomedical, alternative energy or semiconductor industries.
In addition, many of the risks described elsewhere in this section could
materially and adversely affect our stock price, as discussed in those risk
factors. U.S. financial markets have recently experienced substantial price and
volume volatility. Fluctuations such as these have affected and are likely to
continue to affect the market price of our common stock.
OUR JOINT VENTURE TRANSACTION WITH GLORIA SOLAR MAY NOT REALIZE ALL OF ITS
INTENDED BENEFITS
On September 4, 2007, we closed a contractual relationship with Gloria
Solar. Pursuant to this transaction, among other things, we formed a joint
venture, owned 55% by Gloria Solar and 45% by us, for the purpose of pursuing
the solar photovoltaic systems market within the United States. The joint
venture will design, market, sell and manage the installation of systems for the
generation of electrical power by solar photovoltaic means in primarily
commercial/industrial and utility segments of such market (the "JV Systems
Business"). In connection with the formation of the joint venture, (i) we
contributed to the joint venture our assets primarily relating to the JV Systems
Business, including certain intellectual property and know-how, access to
information technology assets and relationships, relationships with current and
previous customers, contract backlog and project opportunities, certain
registered trademarks, and employment relationships with staff members and (ii)
Gloria Solar contributed $5,000,000 in cash. In connection with the
establishment of the joint venture, we may experience:
o Difficulties in integrating our and Gloria Solar's respective
corporate cultures and business objectives into the new joint
venture;
o Diversion of our management's time and attention from other
business concerns;
o Higher than anticipated costs of integration at the joint
venture;
o Difficulties in retaining key employees who are necessary to
manage the joint venture; or
o Difficulties in working with an entity based in Taiwan and thus
remote or inconvenient to our Bedford, Massachusetts
headquarters.
For any of these reasons or as a result of other factors, we may not
realize the anticipated benefits of the joint venture, and cash flow or profits
derived from our ownership interest in the joint venture may be less than the
cash flow or profits that could have been derived had we retained the
transferred assets and continued to operate the JV Systems Business ourselves.
Either party has the right, at any time upon certain material breaches by the
other party of obligations under the joint venture documents, to acquire all of
the breaching party's interest in the joint venture at 90% fair market value. In
16
addition, in the event of a "change in control" of a member, the other members
may purchase such member's interest in the joint venture at fair market value.
Furthermore, our further participation in the business of the joint venture is
restricted; for a period of three (3) years, we may not mass manufacture, market
or sell solar cell modules with less than 575 watt capacity, and may do so
thereafter only outside the United States.
SOME OF THE REQUIREMENTS OF SARBANES-OXLEY AFFECT US AS A SMALL COMPANY
DISPROPORTIONATELY, AND WE MAY NOT BE ABLE TO COMPLY IN A TIMELY MANNER DESPITE
SUBSTANTIAL EFFORT AND EXPENSE.
The Sarbanes-Oxley Act of 2002 imposed many new requirements on public
companies, the most significant of which involves the documentation, testing and
reporting of the effectiveness of our internal control over financial reporting.
We are required to report on our assessment of the effectiveness of our
internal control over financial reporting to be in compliance with Section 404
of Sarbanes-Oxley, in our annual report for the year ended December 31, 2007. We
have documented and tested our internal controls in 2007 and this effort
involved substantial time and expense. We have identified material weaknesses,
as discussed below, from our internal review and our registered public
accounting firm has also identified items in its annual audit of our financial
statements.
Based on this evaluation, management concluded that the following material
weaknesses in internal control over financial reporting existed as of December
31, 2007: we did not have a sufficient level of staffing with the necessary
knowledge, experience and training to ensure the completeness and accuracy of
our financial statements. Additionally, our internal policies and procedures
related to internal control over financial reporting were not effective. As a
result of this material weakness, issues related to accounting for inventory,
accruals, reserves, income taxes and revenues existed in our internal
preliminary 2007 fiscal year consolidated financial statements and resulted in a
restatement of 2007 and 2008 results. For more detailed information see "Item
9A(T). Controls and Procedures."
We are working to address the issues raised by this material weakness, but
we may not be successful in remediating them in a timely manner.
OUR CREDIT AGREEMENTS WITH SILICON VALLEY BANK SUBJECTS US TO VARIOUS
RESTRICTIONS, WHICH MAY LIMIT OUR ABILITY TO PURSUE BUSINESS OPPORTUNITIES.
Our credit agreements with Silicon Valley Bank subjects us to various
restrictions on our ability to engage in certain activities without the prior
written consent of the bank, including, among other things, our ability to:
o Dispose of or encumber assets, other than in the ordinary
course of business,
o Incur additional indebtedness,
o Merge or consolidate with other entities, or acquire other
businesses, and
o Make investments.
The agreements also subject us to various financial and other covenants
with which we must comply on an ongoing or periodic basis. For example under our
equipment line, as long as any commitment remains outstanding under the
facility, we must comply with an adjusted quick ratio covenant and a rolling six
month average minimum net income covenant. If we violate these or any other
covenant, any outstanding debt under these agreements could become immediately
due and payable, the bank could proceed against any collateral securing
indebtedness and our ability to borrow funds in the future may be restricted or
eliminated. These restrictions may also limit our ability to pursue business
opportunities or strategies that we would otherwise consider to be in the best
interests of the company.
ITEM 1B. UNRESOLVED STAFF COMMENTS
------------------------------------
None.
ITEM 2. PROPERTIES
---------------------
Our corporate headquarters are located at One Patriots Park, Bedford,
Massachusetts. This 144,230 square foot facility is leased and contains our
administrative offices, sales and marketing offices, research and development
facilities and the manufacturing facilities of our biomedical and solar
equipment and systems businesses. The lease expires in November 2012. We lease
an approximately 90,000 square foot facility located at 25 Sagamore Park Road,
Hudson, New
17
Hampshire that contains a semiconductor wafer growth and fabrication facility
and administrative offices used primarily by our optoelectronics business unit
including Spire Semiconductor. The lease expires in May 2008. We believe that
our facilities are suitable for their present intended purposes and adequate for
our current level of operations.
ITEM 3. LEGAL PROCEEDINGS
----------------------------
From time to time, we are subject to legal proceedings and claims arising
from the conduct of our business operations. We do not expect the outcome of
these proceedings, either individually or in the aggregate, to have a material
adverse effect on our financial position, results of operations, or cash flows.
During the second quarter of 2005 a suit was filed by Arrow International,
Inc. against Spire Biomedical, Inc., our wholly owned subsidiary, alleging
patent infringement by us. The complaint claims one of our catheter products
induces and contributes to infringement when medical professionals insert it. We
have responded to the complaint denying all allegations and have filed certain
counterclaims. The discovery process in this case has continued and is nearly
complete. We filed a motion for summary judgment, asserting patent invalidity
resulting from plaintiff's failure to follow the administrative procedures of
the U.S. Patent and Trademark Office ("USPTO") which failure has remained
uncorrected. On August 4, 2006, the Court granted our motion and dismissed this
lawsuit without prejudice. Plaintiffs applied to revive the applicable patent,
which application was granted by the USPTO in August 2006. Plaintiffs refiled
their lawsuit against us in September 2006. We have filed our answer and resumed
our defense. The parties have been working to conclude discovery. Based on
information presently available to us, we believe that we do not infringe any
valid claim of the plaintiff's patent and that, consequently, we have
meritorious legal defenses with respect to this action in the event it were to
be reinstated. The parties have agreed to limit any potential damages to us to a
pre-specified royalty rate.
In an amended complaint filed on December 28, 2006, in the Eastern Division
of the U.S. District Court for the Southern District of Ohio, the wife and
executor of the estate of Darrell Adams, deceased, alleged that the failure of a
hemodialysis catheter manufactured by us contributed to his death. Subsequent to
the end of fiscal 2007, the case was settled between the parties. Our product
liability insurance covered the settlement and all legal expenses, less our
deductible, which has been partially accrued.
In a complaint filed July 11, 2007 in the U.S. District Court for the
Eastern District of Pennsylvania, Medical Components, Inc. (the "Plaintiff")
alleges that we and our wholly-owned subsidiary, Spire Biomedical, Inc., through
the manufacture and sale of its multilumen catheter products infringes upon one
of Plaintiff's patents. The Plaintiff seeks unspecified damages, including
enhanced damages and attorneys fees and costs, and an injunction against certain
manufacturing techniques. We have negotiated a settlement with the Plaintiff
which allows us to sell our remaining multilumen catheter inventory in exchange
for a lump sum payment which has been fully accrued in the recent quarter.
Further, we have altered our manufacturing methods such that there is no
question of potential infringement of plantiff's patent.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
--------------------------------------------------------------
No matters were submitted to a vote of our security holders in the fourth
quarter of 2007.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------------------
AND ISSUER PURCHASES OF EQUITY SECURITIES
-----------------------------------------
MARKET INFORMATION
Our common stock is traded on the Nasdaq Global Market under the symbol
"SPIR." The following chart sets forth the high and low bid prices for the
common stock for the periods shown:
High Bid Low Bid
-------- -------
2007
----
First Quarter $11.84 $ 7.63
Second Quarter 11.19 8.61
Third Quarter 14.95 8.39
Fourth Quarter 26.78 11.33
2006
----
First Quarter $10.61 $ 7.49
Second Quarter 10.25 6.98
Third Quarter 7.45 6.67
Fourth Quarter 8.69 6.50
These prices do not reflect retail mark-ups, markdowns or commissions and
may not reflect actual transactions. The closing price of the common stock on
March 28, 2008 was $16.04, and on that date, there were 179 stockholders of
record. The number of holders does not include individuals or entities who
beneficially own shares but whose shares are held of record by a broker or
clearing agency, but does include each such broker or clearing agency as one
record holder.
DIVIDENDS
We did not pay any cash dividends during 2007 or 2006 and currently do not
intend to pay dividends in the foreseeable future so that we may reinvest our
earnings in the development of our business. The payment of dividends in the
future will be at the discretion of the Board of Directors. In addition, under
our credit agreements with Silicon Valley Bank, we may not pay dividends on our
common stock without the consent of the bank.
ITEM 6. SELECTED FINANCIAL DATA
----------------------------------
Not required as we are a smaller reporting company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SECTION AND OTHER PARTS OF THIS REPORT CONTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED (THE "EXCHANGE ACT"), WHICH STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES. THESE STATEMENTS RELATE TO OUR FUTURE PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. THESE STATEMENTS MAY BE IDENTIFIED BY THE USE OF
WORDS SUCH AS "MAY", "COULD", "WOULD", "SHOULD", "WILL", "EXPECTS",
"ANTICIPATES", "INTENDS", "PLANS", "BELIEVES", "ESTIMATES", AND SIMILAR
EXPRESSIONS. OUR ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS AND TIMING DESCRIBED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, THOSE FACTORS DESCRIBED BELOW AND ABOVE UNDER "ITEM 1A.
RISK FACTORS" AND "ITEM 1. BUSINESS." READERS ARE ENCOURAGED TO CAREFULLY REVIEW
THOSE RISK FACTORS. THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN LIGHT OF THOSE FACTORS AND
IN CONJUNCTION WITH, OUR ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO.
19
OVERVIEW
We develop, manufacture and market highly-engineered products and services
in three principal business areas: (i) capital equipment for the PV solar
industry, (ii) biomedical and (iii) optoelectronics, generally bringing to bear
expertise in materials technologies, surface science and thin films across all
three business areas, discussed below.
In the PV solar area, we develop, manufacture and market specialized
equipment for the production of terrestrial photovoltaic modules from solar
cells. Our equipment has been installed in approximately 190 factories in 50
countries.
In the biomedical area, we provides value-added surface treatments to
manufacturers of orthopedic and other medical devices that enhance the
durability, antimicrobial characteristics or other material characteristics of
their products; develops and markets coated and uncoated hemodialysis catheters
and related devices for the treatment of chronic kidney disease; and performs
sponsored research programs into practical applications of advanced biomedical
and biophotonic technologies.
In the optoelectronics area, we provide custom compound semiconductor
foundry and fabrication services on a merchant basis to customers involved in
biomedical/biophotonic instruments, telecommunications and defense applications.
Services include compound semiconductor wafer growth, other thin film processes
and related device processing and fabrication services. We also provide
materials testing services and perform services in support of sponsored research
into practical applications of optoelectronic technologies.
Operating results will depend upon revenue growth and product mix, as well
as the timing of shipments of higher priced products from our solar equipment
line and delivery of solar systems. Export sales, which amounted to 47% of net
sales and revenues for 2007, continue to constitute a significant portion of our
net sales and revenues.
RESTATEMENTS
We restated our previously issued consolidated financial statements as of
and for the year ended December 31, 2007 to correct errors under generally
accepted accounting principles ("GAAP") in the United States relating to the
recognition of revenue. We determined that a single customer of our solar
equipment business unit was provided certain upgrade rights in connection with
the sale of products, as a result of which the revenue associated with those
sales should not have been recognized upon shipment of the products to the
customers under GAAP because the upgrade was not available at that time. We
determined that revenue for the entire contract should have been deferred until
the upgrade was provided to the customer. These orders resulted in aggregate
gross revenues of approximately $1.4 million during the fourth quarter of 2007.
To correct this error, we reversed this revenue and the associated cost of goods
sold. See Note 2 to the consolidated financial statements.
RESULTS OF OPERATIONS
The following table sets forth certain items as a percentage of net sales
and revenues for the periods presented:
Year Ended December 31,
---------------------
2007 2006
As
Restated
-------- --------
Net sales and revenues 100% 100%
Cost of sales and revenues (81) (89)
-------- --------
Gross profit 19 11
Selling, general and administrative expenses (36) (48)
Internal research and development expenses (1) (4)
Gain on sales of trademark 7 --
-------- --------
Loss from operations (11) (41)
Other expense, net 0 --
-------- --------
Loss before income taxes
(11) (41)
Income tax benefit 2 --
-------- --------
Loss before extraordinary gain (9) (41)
Extraordinary gain, net of taxes
4 --
-------- --------
Net loss (5)% (41)%
======== ========
20
OVERALL
Our total net sales and revenues for the year ended December 31, 2007
("2007") increased 84% to $37,068,000 as compared to $20,125,000 for the year
ended December 31, 2006 ("2006"). The increase came primarily from our solar
business unit, while our optoelectronics business unit achieved a small
increase.
SOLAR BUSINESS UNIT
Sales in our solar business unit increased 211% to $21,748,000 in 2007 as
compared to $6,992,000 in 2006, primarily due to a 345% increase in solar
equipment sales resulting from higher volume offset by a 41% decrease in solar
systems sales.
BIOMEDICAL BUSINESS UNIT
Revenues of our biomedical business unit increased 6% to $11,106,000 in
2007 as compared to $10,517,000 in 2006, as a result of a 20% increase in
revenue from our line of hemodialysis catheters and 12% increase in biomedical
services offset by a 30% decrease in revenue from our research and development
activities.
OPTOELECTRONICS BUSINESS UNIT
Sales in our optoelectronics business unit increased 61% in 2007 to
$4,214,000 as compared to $2,616,000 in 2006.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
---------------------------------------------------------------------
Net Sales and Revenues
----------------------
The following table categorizes our net sales and revenues for the periods
presented:
Year Ended December 31, Increase
--------------------------- -----------------------
2007 2006 $ %
As Restated As Restated
------------ ------------ -----------------------
Sales of goods $ 24,723,000 $ 9,562,000 $ 15,161,000 159%
Contract research, service and
license revenues 12,345,000 10,563,000 1,782,000 17%
------------ ------------ ------------
Net sales and revenues $ 37,068,000 $ 20,125,000 $ 16,943,000 84%
============ ============ ============
The 159% increase in sales of goods for the year ended December 31, 2007 as
compared to the year ended December 31, 2006 was primarily due to a 247%
increase in solar equipment and solar systems revenues, with higher volume being
the primary contributor to the increase. Biomedical product sales increased 20%
in 2007 as compared to 2006 as a result of increased demand for our expanded
line of hemodialysis catheters. We introduced a new heparin coated catheter late
in the fourth quarter of 2006.
The 17% increase in contract research, service and license revenues in 2007
is primarily attributable to an increase in our optoelectronics business unit.
Revenues from optoelectronic services increased 61% in 2007 as compared to 2006
primarily due to an increase in semiconductor foundry and fabrication services.
The increase was partially offset by a decrease in R&D and NREL service revenue.
Cost of Sales and Revenues
--------------------------
The following table categorizes our cost of sales and revenues for the
periods presented, stated in dollars and as a percentage of related sales and
revenues:
21
Years Ended December 31, Increase
---------------------------------------------- ---------------------
2007 % 2006 % $ %
As Restated As Restated
--------------------- ------------ ----- ---------------------
Cost of goods sold $ 20,826,000 84% $ 9,029,000 94% $ 11,797,000 131%
Cost of contract research,
service and license revenues 9,360,000 76% 8,819,000 83% 541,000 6%
------------ ------------ ------------
Net cost of sales and revenues $ 30,186,000 81% $ 17,848,000 89% $ 12,338,000 69%
============ ============ ============
Cost of goods sold increased 131% in 2007 as compared to 2006, primarily as
a result of the 84% increase in related revenues. As a percentage of sales, cost
of goods sold was 84% of sales of goods in 2007 as compared to 94% of sales in
2006. This change is due to increased costs in 2007 associated with higher
levels of revenue along with better utilization of solar manufacturing overhead.
The overall cost of contract research, services and licenses in 2007 is up
slightly as increased costs at our optoelectronics facility (Spire
Semiconductor) were somewhat offset by a decrease in costs of our contract
research activities due to lower volumes. Spire Semiconductor's costs increased
primarily due to fixed costs associated with new capital equipment that were
brought into service in 2007. Cost of contract research, services and licenses
as a percentage of revenue increased to 76% of revenues in 2007 from 83% in
2006, primarily due to the increase in Spire Semiconductor costs.
Cost of sales and revenues also includes approximately $93,000 and $47,000
of stock-based compensation in 2007 and 2006, respectively, due to the adoption
of SFAS 123(R) in 2006.
OPERATING EXPENSES
The following table categorizes our operating expenses for the periods
presented, stated in dollars and as a percentage of net sales and revenues:
Years Ended December 31, Increase/(Decrease)
---------------------------------------------- ----------------------
2007 % 2006 % $ %
As
Restated
------------ ------ ------------ ------ ------------ ------
Selling, general and administrative $ 13,226,000 36% $ 9,794,000 48% $ 3,432,000 35%
Internal research and development 313,000 1% 734,000 4% (421,000) (57%)
------------ ------------ ------------
Operating expenses $ 13,539,000 37% $ 10,528,000 52% $ 3,011,000 29%
============ ============ ============
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The 35% increase in selling, general and administrative expenses was
primarily due to increased costs associated with sales and marketing efforts in
our solar business unit, ongoing litigation matters, increased facility related
costs, sales commissions and stock-based compensation costs. Selling, general
and administrative expense includes approximately $486,000 of stock-based
compensation in 2007 versus $209,000 in 2006.
INTERNAL RESEARCH AND DEVELOPMENT EXPENSES
The 57% decrease in internal research and development expense in 2007
versus 2006 was primarily due to decreased development efforts within the solar
equipment and biomedical services group and an allocation of certain internal
research and development costs at Spire Semiconductor to cost of sales in 2006.
In 2006, we completed most of our three year contract with NREL to develop new
solar module equipment. The decrease in internal research and development
expenses as a percentage of sales and revenues was due to the decrease in costs.
GAIN ON SALE OF TRADEMARK
We sold Gloria Solar a PV module line operated by the our solar system
business along with the transfer of technology and rights to mark the modules
with our trademark to build, design and sell specialty BIPV and PV modules, in
exchange for $4,000,000 in cash. This transaction closed on September 4, 2007.
As of December 31, 2007 we still had outstanding obligations to refurbish the
module line and provide some additional PV module design work. We believe the
sale of the trademark and the other goods and services meets the criteria of
Emerging Issues Task Force ("EITF") 00-21,
22
"ACCOUNTING FOR REVENUE ARRANGEMENTS WITH MULTIPLE ELEMENTS," paragraph 9(a), as
each element has utility on a stand-alone basis. Further, Question 1 to SAB
Topic 13A-3f was considered as guidance for determining if the trademark fee
under the agreement should be recognized as a sale. As the trademark agreement
has no term and is permanent in nature, the earnings process was complete;
accordingly, we recognized a gain on the sale. We have determined the fair value
of the trademark sale, the PV module line and services based on a third party
appraisal. As a result, a $2,735,000 gain was recognized on the sale of the
trademark for the year ended December 31, 2007. We also recognized $715,000 in
service revenue reflecting the delivery of PV technology designs to build PV
modules. We have sold and will continue to sell this technology to other
customers as part of our equipment business. As of December 31, 2007, the fair
value of the undelivered goods and services was $550,000, which is in advances
on contracts in progress. Gloria Solar has further contracted with us to
purchase additional PV module equipment lines at market prices. We also provide
Gloria Solar general and administrative services and provide space in our
facility on a pass through basis.
OTHER INCOME (EXPENSE), NET
We earned $74,000 and $268,000 of interest income for the years ended
December 31, 2007 and 2006, respectively. We incurred interest expense of
$225,000 and $154,000 for the years ended December 31, 2007 and 2006,
respectively. The decreased interest income is due to lower cash balances held
by us during 2007 compared with 2006. The increase interest expense is due to
higher interest payments associated with the $3.5 million term loan outstanding
with Silicon Valley Bank compared with 2006 interest expenses primarily
associated with interest incurred on capital leases associated with the
semiconductor foundry.
We recorded a $24,000 loss on equity investment in joint venture with
Gloria Solar for the year ended December 31, 2007.
We recorded $14,000 currency transaction loss related to the conversion of
a Japanese Yen account into U.S. dollars for each of the years ended December
31, 2007 and 2006.
INCOME TAXES
We recorded a benefit for income taxes of $877,000 related to income from
continuing operations for year ended December 31, 2007, representing the tax
benefit of the continuing operation loss that is offset by the extraordinary
gain. We did not record an income tax benefit for the year ended December 31,
2006. A full valuation allowance has been provided against the deferred tax
assets due to uncertainty regarding the realization of the net operating loss in
the future. A valuation allowance was provided against the deferred tax assets
generated in 2007 and 2006 due to uncertainty regarding the realization of the
net operating loss in the future. At December 31, 2007, we had gross deferred
tax assets of $6,831,000, against which a valuation allowance of $6,831,000 had
been applied.
NET EARNINGS (LOSS)
We reported a net losses of $1,933,000 and $8,151,000 for the years ended
December 31, 2007 and 2006, respectively. In 2007, we recorded a gain of
$2,735,000 from the sale of trademark and an extraordinary gain, net of taxes of
$1,301,000 compared to no gains from trademarks and extraordinary gains in 2006.
We are likely to continue to report losses unless we can increase revenues or
sell additional technology licenses. If additional sources of revenue are not
identified we can take measures to reduce costs but it is unclear whether cost
reductions alone can eliminate all of the potential future losses.
EQUITY INVESTMENT IN JOINT VENTURE
On July 31, 2007, we entered into contractual relationship with Gloria
Solar Co., Ltd. ("Gloria Solar") pursuant to which (i) we sold Gloria Solar
certain assets belonging to our solar systems business for $4,000,000 and (ii)
we and Gloria Solar formed a joint venture named Gloria Spire Solar, LLC, for
the purpose of pursuing the solar photovoltaic systems market within the United
States. The joint venture will design, market, sell and manage the installation
of systems for the generation of electrical power by solar photovoltaic means in
primarily commercial/industrial and utility segments of such market (the "JV
Systems Business"). Gloria Solar owns 55% of the joint venture and we own 45% of
the joint venture. In connection with the formation of the joint venture, (i) we
contributed to the joint venture assets primarily relating to the JV Systems
Business, including certain intellectual property and know-how, access to
information technology assets and relationships, relationships with current and
previous customers, contract backlog and project opportunities, certain
23
registered trademarks, and employment relationships with staff members and (ii)
Gloria Solar contributed $5,000,000 in cash. This transaction closed on
September 4, 2007. Our initial investment was recorded at $2,288,000. We are
accounting for our investment in the joint venture under the equity method, as
we have significant influence over the investee; however, we lack significant
control. We will be reporting the ongoing financial results of the joint venture
one quarter in arrears. We recorded a $24,000 loss on equity investment in joint
venture for the year ended December 31, 2007. As a result of applying the
provisions of Accounting Principles Board ("APB") Opinion No. 18 "THE EQUITY
METHOD OF ACCOUNTING FOR INVESTMENTS IN COMMON STOCK" to the differences between
the fair value of the assets contributed and the cost basis on our books, we
recorded an extraordinary gain of $1,301,000, net of tax provision of $877,000.
Additional recognition of the deferential will be recorded over time to offset
our ownership percentage of the amortization of the contributed intangibles
assets as recorded on the joint venture's books. If the managing board of the
joint venture determines that additional capital is required to support the
operations of the joint venture, the joint venture shall make a call for
additional funds. Within ten (10) days after the members have received written
notice of the call, the members shall make additional capital contributions to
the joint venture in proportion to each member's interest in the joint venture.
If a member fails to fund its pro rata portion of any capital call, the
non-defaulting member may purchase the defaulting member's shortfall; however,
in no event may either member's interest in the joint venture be reduced to
below 10%.
24
LIQUIDITY AND CAPITAL RESOURCES
Increase (Decrease)
December 31, December 31, ----------------------
2007 2006 $ %
As Restated As Restated
------------ ------------ ----------------------
Cash and cash equivalents $ 2,372,000 $ 1,536,000 $ 836,000 54%
Working capital $ 2,587,000 $ 3,938,000 $ (1,351,000) (34%)
Included in working capital at December 31, 2006, was $5,000,000 of
certificates of deposit with a bank, classified on the balance sheet as
short-term investments. $1,969,000 of this short-term investment was restricted
as security for a letter of credit.
On April 26, 2006, we entered into Stock Purchase Agreements with two
accredited institutional investors in connection with the private placement of
941,176 shares of our common stock at a purchase price of $8.50 per share. On
April 28, 2006, we completed the private placement. The net proceeds of the sale
were approximately $7.7 million after deducting placement fees and other closing
costs. The proceeds were used to fund additions to property plant and equipment,
short-term investments and operating losses.
Under the terms of the Stock Purchase Agreements, we were obligated to file
a registration statement on Form S-3 with the Securities and Exchange Commission
(the "SEC") registering the resale of the shares of common stock sold. We filed
the Form S-3 on May 3, 2006 and the SEC declared it effective on May 12, 2006.
In the event that this registration statement ceases to be effective and
available to the investors for an aggregate period of 30 days in any 12 month
period, we must pay liquidated damages starting on the 61st day (in the
aggregate) of any suspensions in any 12 month period, and each 30th day
thereafter until the suspension is terminated an amount equal to 1% of the
aggregate purchase price paid by the investors. However, we are not obligated to
pay liquidation damages on shares not owned by the investors at the time of the
suspension or shares that are tradable without restriction under Rule 144. We
reviewed Emerging Issues Task Force ("EITF") 00-19: ACCOUNTING FOR DERIVATIVE
FINANCIAL INSTRUMENTS INDEXED TO, AND POTENTIALLY SETTLED IN, A COMPANY'S OWN
STOCK, and EITF 05-04: THE EFFECT OF A LIQUIDATED DAMAGES CLAUSE ON A
FREESTANDING FINANCIAL INSTRUMENT SUBJECT TO EITF ISSUE NO. 00-19, to determine
if these liquidation damages provisions require a portion of the equity raised
needs to be accounted under Financial Accounting Standards ("FAS") No. 133:
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. We determined that
the liquidated damages provisions did not require treatment under FAS No. 133
and therefore will treat all of the funds raised under these agreements as
additions to permanent equity.
We had a $2,000,000 Loan Agreement with Citizens Bank of Massachusetts
which expired on June 26, 2007. On May 25, 2007, we and our wholly-owned
subsidiary, Spire Semiconductor, LLC, entered into a Loan and Security Agreement
(the "Equipment Credit Facility") with Silicon Valley Bank (the "Bank"). Under
the Equipment Credit Facility, for a one-year period, we and Spire Semiconductor
could borrow up to $3,500,000 in the aggregate to finance certain equipment
purchases (including reimbursement of certain previously-made purchases). Each
advance made under the Equipment Credit Facility would be due thirty-six (36)
months from the date the advance is made. Advances made under the Equipment
Credit Facility would bear interest at the Bank's prime rate, as determined,
plus 0.5% (7.25% at December 31, 2007) and payable in thirty-six (36)
consecutive monthly payments following the funding date of that advance. At
December 31, 2007, our outstanding borrowings from the equipment line of credit
amounted to $2,917,000.
On March 31, 2008, we entered into a second Loan and Security Agreement
(the "Revolving Credit Facility") with the Bank. Under the terms of the
Revolving Credit Facility, the Bank agreed to provide us with a credit line up
to $5,000,000. Our obligations under the Revolving Credit Facility are secured
by substantially all of our assets and advances under the Revolving Credit
Facility are limited to 80% of eligible receivables and the lesser of 25% of the
value of our eligible inventory, as defined, or $2,500,000 if the inventory is
backed by a customer letter of credit. Interest on outstanding borrowings
accrues at a rate per annum equal to the greater of Prime Rate plus one percent
(1.0%) or seven percent (7%). In addition, we agreed to pay to the Bank a
collateral monitoring fee of $750 per month in the event the we are in default
of our covenants and agreed to the following additional terms: (i) $50,000
commitment fee; (ii) an unused line fee in the amount of 0.75% per annum of the
average unused portion of the revolving line; and (iii) an early termination fee
of 0.5% of the total credit line if we terminate the Revolving Credit Facility
prior to 12 months from the Revolving Credit Facility's effective date. The
Revolving Credit Facility, if not sooner terminated in accordance with its
terms, expires on March 30, 2009. In addition our existing Equipment Credit
Facility was amended whereby the Bank granted a waiver for our defaults for not
meeting our December 31, 2007 quarter liquidity and profit covenants and for not
meeting our January and February
25
2008 liquidity covenants. Further the covenants were amended to match the new
covenants contained in the Revolving Credit Facility. Our interest rate under
the Equipment Credit Facility was also modified from Bank Prime plus one half
percent to the greater of Bank Prime plus one percent (1.0%) or seven percent
(7%).
Under the terms of the Equipment Credit Facility, as long as any commitment
remains outstanding under the facility, we must comply with an adjusted quick
ratio covenant and a minimum quarterly net income covenant. In addition, until
all amounts under the credit facilities with the bank are repaid, covenants
under the credit facilities impose restrictions on our ability to, among other
things, incur additional indebtedness, create or permit liens on our assets,
merge, consolidate or dispose of assets (other than in the ordinary course of
business), make dividend and other restricted payments, make certain debt or
equity investments, make certain acquisitions, engage in certain transactions
with affiliates or change the business conducted by us and our subsidiaries. Any
failure by us to comply with the covenants and obligations under the credit
facilities could result in an event of default, in which case the Bank may be
entitled to declare all amounts owed to be due and payable immediately. Our
obligations under the credit facilities are secured by substantially all of our
assets.
We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to pay amounts due. We actively pursue
collection of past due receivables as the circumstances warrant. Customers are
contacted to determine the status of payment and senior accounting and
operations management are included in these efforts as deemed necessary. A
specific reserve is established for past due accounts over 60 days and over a
specified amount, when it is probable that a loss has been incurred and we can
reasonably estimate the amount of the loss. We do not record an allowance for
government receivables and invoices backed by letters of credit as realizability
is reasonably assured. Bad debts are written off against the allowance when
identified. There is no dollar threshold for account balance write-offs. While
rare, a write-off is only recorded when all efforts to collect the receivable
have been exhausted and only in consultation with the appropriate business line
manager.
At December 31, 2007, our accumulated deficit was approximately $11,689,000
compared to accumulated deficit of approximately $9,756,000 as of December 31,
2006.
We have incurred significant operating losses in 2007 and 2006. Loss from
operations, before gain on sales of trademarks, were $6.7 million and $8.3
million in 2007 and 2006, respectively. These losses from operations have
resulted in cash losses (loss from operations excluding gain on sales of
trademark plus or minus non-cash adjustments) of approximately $6.1 million and
$5.4 million in 2007 and 2006, respectively. We have funded these cash losses
from cash receipts of $4 million from the sale of a solar PV module line along
with the transfer of technology and rights to mark the modules with our
trademark in 2007 and $7.7 million from the sale of equity in 2006. As of
December 31, 2007, we had unrestricted cash and cash equivalents of $2.4 million
compared to unrestricted cash and cash equivalents of $1.5 million and
unrestricted short-term investments of $3 million as of December 31, 2006. While
we believe we have inherent assets and technology that we could sell or license
in the near term, there is no guarantee that we would be able to sell or license
those assets on a timely basis and at appropriate values that would allow us to
continue to fund our operating losses. We have developed several plans to
mitigate cash losses primarily from increased revenues and, if required,
potential cost reduction efforts and outside financing. As a result, we believe
we have sufficient resources to continue as a going concern at least through
December 31, 2008. The table below details our cash loss from operations which
excludes changes in working capital during the respective periods.
Years Ended December 31,
----------------------------
2007 2006
As Restated
------------ ------------
Loss from operations $ (3,922,000) $ (8,251,000)
Gain on sale of trademark (2,735,000) --
------------ ------------
Adjusted loss from operations (6,657,000) (8,251,000)
Depreciation and amortization 2,213,000 2,027,000
Loss on impairment of capital equipment 78,000 --
Loss on buyout of capital lease -- 105,000
Loss on equity investment in joint venture 24,000 --
Deferred tax benefit (877,000) --
Deferred compensation 2,000 35,000
Deferred rent 18,000 --
Extraordinary gain in equity investment in joint venture, net of tax (1,301,000) --
Stock-based compensation 579,000 256,000
Increase (decrease) to reserves (223,000) 467,000
------------ ------------
Cash loss from operations $ (6,144,000) $ (5,361,000)
============ ============
26
CONTRACTUAL OBLIGATIONS, COMMERCIAL COMMITMENTS AND OFF-BALANCE SHEET
ARRANGEMENTS.
The following table summarizes our gross contractual obligations at
December 31, 2007 and the maturity periods and the effect that such obligations
are expected to have on its liquidity and cash flows in future periods:
Payments Due by Period
------------------------------------------------------------------------
Less than 2 - 3 4 - 5 More Than
Contractual Obligations Total 1 Year Years Years 5 Years
--------------------------------- ------------ ------------ ------------ ------------ ------------
PURCHASE OBLIGATIONS $ 2,669,000 $ 2,620,000 $ 49,000 -- --
CAPITAL LEASES:
Related party capital lease $ 495,000 $ 495,000 -- -- --
OPERATING LEASES:
Unrelated party operating leases $ 338,000 $ 124,000 $ 200,000 $ 14,000 --
Related party operating lease $ 9,946,000 $ 1,812,000 $ 3,948,000 $ 4,186,000 --
Purchase obligations include all open purchase orders outstanding
regardless of whether they are cancelable or not. Included in purchase
obligations are raw material and equipment needed to fulfill customer orders.
Capital lease obligations outlined above include both the principal and
interest components of these contractual obligations.
On May 26, 2005, we entered into a global consortium agreement (the
"Agreement") with Nisshinbo Industries, Inc. ("Nisshinbo") for the development,
manufacturing, and sales of solar photovoltaic module manufacturing equipment.
Nisshinbo's prior relationship with Spire was as a sub-licensee of Marubeni
Corporation with whom we had a license arrangement that was originally signed in
1997, extended in 2003, and terminated in May 2005. Nisshinbo's role as
sub-licensee was to manufacture equipment for Marubeni to sell to the Japanese
market based upon our proprietary technology. Under the terms of the Agreement,
Nisshinbo purchased a license to manufacture and sell our module manufacturing
equipment on a semi-exclusive basis for an upfront fee plus additional royalties
based on ongoing equipment sales over a ten-year period. In addition, we and
Nisshinbo agreed, but are not obligated, to pursue joint research and
development, product improvement activities and sales and marketing efforts. The
companies may share market costs such as product collateral and trade show
expenses. Each company may also collaborate on sales leads and have the other
company manufacture and service its equipment in the field. Both companies have
reciprocal rights to participate in the other company's R&D efforts on a
going-forward basis. Nisshinbo can request us to further develop a technology
but Nisshinbo must (a) share in the costs of these development efforts equally
with us (and thereafter have joint ownership) otherwise we will own the
technology under a partial contribute or no participation by Nisshinbo with us
receiving a royalty from Nisshinbo if it utilizes the technology. At the end of
the license all non-jointly owned technology developed under the Agreement will
revert back to the owner, with the other party being required to purchase a new
license based upon the fair market value of that technology in order to continue
to utilize the technology.
On June 27, 2005, we received JPY 400,000,000 from the sale of this
permanent license. We determined that the Nisshinbo Agreement contains multiple
elements consisting of (1) the granting of a license to utilize our technology
and (2) the semi-exclusive right to utilize the technology for a period of 10
years. We believe the granting of the license meets the criteria of Emerging
Issues Task Force ("EITF") 00-21, "Accounting for Revenue Arrangements with
Multiple Elements", paragraph 9(a), as the license to utilize the technology has
value to Nisshinbo on a stand-alone basis. Further, Question 1 to Securities and
Exchange Commission ("SEC") Staff Accounting Bulletin Topic 13A-3f
"Nonrefundable Up-Front Fees", was directly considered as guidance for
determining if the upfront fee under the Nisshinbo Agreement should be
recognized upon the signing of contract or recognized over the term of the
license. It is our belief that a separate earnings process was complete as
Nisshinbo was purchasing access to utilize technology it already had in its
possession; therefore, recognition of the gain on the sale was appropriate. We
have determined the fair value of the license and royalty based on an appraisal.
As a result, a $3,319,600 gain was recognized as a gain on sale of license in
the consolidated statements of operations for the year ended December 31, 2005.
The balance of $350,000 was determined to represent an advanced royalty payment
and was recorded as an advance on contracts in progress. This amount is being
credited as
27
royalty income over the ten-year license period on a straight-line basis.
We maintain a Japanese yen account (approximately JPY 90,000 as of December
31, 2007). As of December 31, 2007, approximately $1,000 has been reflected in
cash and cash equivalents in the accompanying consolidated balance sheet
utilizing the closing yen/dollar exchange rate as of December 31, 2007. Total
currency translation loss of $14,000 for each of the years ended December 31,
2007 and 2006, is reflected in other expense, net in the accompanying
consolidated statement of operations.
Outstanding letters of credit totaled $261,000 at December 31, 2007. The
letters of credit secure performance obligations and purchase commitments, and
allow holders to draw funds up to the face amount of the letter of credit if we
do not perform as contractually required. These letters of credit expire through
2008 and are 100% secured by cash and short term-investments.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 157, Fair Value Measurements ("FAS 157"). This Statement is effective
for financial statements issued for fiscal years beginning after November 15,
2007. On February 6, 2008, the FASB announced it will issue a FASB Staff
Position ("FSP") to allow a one-year deferral of adoption of FAS 157 for
nonfinancial assets and nonfinancial liabilities that are recognized at fair
value on a nonrecurrng basis. FAS 157 provides a common fair value hierarchy for
companies to follow in determining fair value measurements in the preparation of
financial statements and expands disclosure requirements relating to how such
fair value measurements were developed. FAS 157 clarifies the principle that
fair value should be based on the assumptions that the marketplace would use
when pricing an asset or liability, rather than company specific data. We are
currently assessing the impact that FAS 157 will have on our financial position,
results of operations and cash flow.
In February 2007, the FASB issued SFAS No. 159 ("FAS 159"), The Fair Value
Option for Financial Assets and Financial Liabilities - Including an Amendment
of FASB Statement No. 115. FAS 159 allows companies to report selected financial
assets and liabilities at fair value. The changes in fair value are recognized
in earnings and the assets and liabilities measured under this methodology are
required to be displayed separately in the balance sheet. The main intent of the
Statement is to mitigate the difficulty in determining the reported earnings
caused by a "mixed-attribute" model" (or reporting some assets are fair value
and others using a different valuation attribute such as amortized cost). The
project is separated into two phases. This first phase addressed the creation of
a fair value option for financial assets and liabilities. A second phase will
address creating a fair value option for selected non-financial items. FAS 159
is effective for all financial statements issued for fiscal years beginning
after November 15, 2007. We are evaluating the impact that this issuance will
have on our financial position, results of operation and cash flow.
In December 2007, the FASB issued SFAS No. 141R ("FAS 141R"), Business
Combinations, which revises FAS 141 and changes multiple aspects of the
accounting for business combinations. Under the guidance in FAS 141R, the
acquisition method must be used, which requires the acquirer to recognize most
identifiable assets acquired, liabilities assumed, and non-controlling interests
in the acquiree at their full fair value on the acquisition date. Goodwill is to
be recognized as the excess of the consideration transferred plus the fair value
of the non-controlling interest over the fair values of the identifiable net
assets acquired. Subsequent changes in the fair value of contingent
consideration classified as a liability are to be recognized in earnings, while
contingent consideration classified as equity is not to be re-measured. Costs
such as transaction costs are to be excluded from acquisition accounting,
generally leading to recognizing expense, and, additionally, restructuring costs
that do not meet certain criteria at acquisition date are to be subsequently
recognized as post-acquisition costs. FAS 141R is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. We are
evaluating the impact that this issuance will have on our financial position,
results of operation and cash flow.
In December 2007, the FASB issued SFAS No. 160 ("FAS 160"), Non-controlling
Interest in Consolidated Financial Statements - an Amendment of ARB No. 151. FAS
160 requires that a non-controlling interest in a subsidiary (i.e. minority
interest) be reported in the equity section of the balance sheet instead of
being reported as a liability or in the mezzanine section between debt and
equity. It also requires that the consolidated income statement include
consolidated net income attributable to both the parent and non-controlling
interest of a consolidated subsidiary. A disclosure must be made on the face of
the consolidated income statement of the net income attributable to the parent
and to the non-controlling interest. Also, regardless of whether the parent
purchases additional ownership interest, sells a portion of its ownership
interest in a subsidiary or the subsidiary participates in a transaction that
changes the parent's ownership interest, as long as the parent
28
retains controlling interest, the transaction is considered an equity
transaction. FAS 160 is effective for annual periods beginning after December
15, 2008. We are evaluating the impact that this issuance will have on our
financial position, results of operation and cash flow.
IMPACT OF INFLATION AND CHANGING PRICES
Historically, our business has not been materially impacted by inflation.
Manufacturing equipment and solar systems are generally quoted, manufactured and
shipped within a cycle of approximately nine months, allowing for orderly
pricing adjustments to the cost of labor and purchased parts. We have not
experienced any negative effects from the impact of inflation on long-term
contracts. Our service business is not expected to be seriously affected by
inflation because its procurement-production cycle typically ranges from two
weeks to several months, and prices generally are not fixed for more than one
year. Research and development contracts usually include cost escalation
provisions.
FOREIGN CURRENCY FLUCTUATION
We sell only in U.S. dollars, generally against an irrevocable confirmed
letter of credit through a major United States bank. Accordingly, we are not
directly affected by foreign exchange fluctuations on our current orders.
However, fluctuations in foreign exchange rates do have an effect on our
customers' access to U.S. dollars and on the pricing competition on certain
pieces of equipment that we sell in selected markets. We received Japanese yen
in exchange for the sale of a license to our solar technology. In addition,
purchases made and royalties received under our Consortium Agreement with our
Japanese partner will be in Japanese yen. We have committed to purchase certain
pieces of equipment from European vendors; these commitments are denominated in
Euros. We bear the risk of any currency fluctuations that may be associated with
these commitments. We do not believe that foreign exchange fluctuations will
materially affect our operations.
RELATED PARTY TRANSACTIONS
We subleased 77,000 square-feet in a building leased by Mykrolis
Corporation, who in turn leased the building from SPI-Trust, a Trust of which
Roger Little, our Chairman of the Board, Chief Executive Officer and President,
is the sole trustee and principal beneficiary. The 1985 sublease, originally for
a period of ten years, was extended for a five-year period expiring on November
30, 2000 and was further extended for a five-year period expiring on November
30, 2005. The sublease agreement provided for minimum rental payments plus
annual increases linked to the consumer price index. Effective December 1, 2005,
we entered into a two-year Extension of Lease Agreement (the "Lease Extension")
directly with SPI-Trust.
We assumed certain responsibilities of Mykrolis, the tenant under the
former lease, as a result of the Lease Extension including payment of all
building and real estate related expenses associated with the ongoing operations
of the property. We have allocated a portion of these expenses to SPI-Trust
based on pre-established formulas utilizing square footage and actual usage
where applicable. These allocated expenses were invoiced monthly and be paid
utilizing a SPI-Trust escrow account of which we have sole withdrawal authority.
SPI-Trust is required to maintain three (3) months of its anticipated operating
costs within this escrow account. On December 1, 2006, we and SPI-Trust amended
the Lease Extension to include the lease of an additional 15,000 square feet
from SPI-Trust for a one-year term. The additional space was leased at a rate of
$8.06 per square foot on annual basis. The additional space was used to expand
our solar operations.
On November 30, 2007, we entered into a new Lease Agreement (the "New
Lease") with SPI-Trust, with respect to 144,230 square feet of space comprising
the entire building in which we have occupied space since December 1, 1985. The
term of the New Lease commenced on December 1, 2007 and continues for five (5)
years until November 30, 2012. We have the right to extend the term of the New
Lease for an additional five (5) year period. The annual rental rate for the
first year of the New Lease is $12.50 per square foot on a triple net basis,
whereby the tenant is responsible for operating expenses, taxes and maintenance
of the building. The annual rental rate increases on each anniversary by $0.75
per square foot. If we exercise our right to extend the term of the New Lease,
the annual rental rate for the first year of the extended term will be the
greater of (a) the rental rate in effect immediately preceding the commencement
of the extended term or (b) the market rate at such time, and on each
anniversary of the commencement of the extended term the rental rate will
increase by $0.75 per square foot. We believe that the terms of the New Lease
are commercially reasonable.
Rent expense under the New Lease and the Lease Extension, as amended, for
the year ended December 31, 2007 and 2006 was $1,415,000 and $1,262,000,
respectively. In connection with the Lease Extension, as amended, we were
invoiced
29
and paid certain SPI-Trust related expenses, including building maintenance and
insurance. We invoiced SPI-Trust on a monthly basis and SPI-Trust reimbursed us
for all such costs. Approximately $14,000 was due from SPI-Trust as of December
31, 2006 for building related costs and no amounts due as of December 31, 2007.
In conjunction with our acquisition of Bandwidth (now known as Spire
Semiconductor) in May 2003, SPI-Trust purchased from Stratos Lightwave, Inc.
(Spire Semiconductor's former owner) the building that Spire Semiconductor
occupies in Hudson, New Hampshire for $3.7 million. Subsequently, we entered
into a lease for the building (90,000 square feet) with SPI-Trust whereby we
agreed to pay $4.1 million to the SPI-Trust over an initial five-year term
expiring in 2008 with our option to extend for five years. In addition to the
rent payments, the lease obligates us to keep on deposit with SPI-Trust the
equivalent of three months rent ($304,000 as of December 31, 2007). The lease
agreement does not provide for a transfer of ownership at any point. Interest
costs were assumed at 7%. Interest expense was approximately $76,000 and
$136,000 for the years ended December 31, 2007 and 2006, respectively. This
lease has been classified as a related party capital lease and a summary of
payments (including interest) follows:
Rate Per Monthly Security
Year Square Foot Annual Rent Rent Deposit
--------------------------- ----------- ----------- -------- --------
June 1, 2003 - May 31, 2004 $ 6.00 $ 540,000 $ 45,000 $135,000
June 1, 2004 - May 31, 2005 7.50 675,000 56,250 168,750
June 1, 2005 - May 31, 2006 8.50 765,000 63,750 191,250
June 1, 2006 - May 31, 2007 10.50 945,000 78,750 236,250
June 1, 2007 - May 31, 2008 13.50 1,215,000 101,250 303,750
----------
$4,140,000
==========
At December 31, 2007, $486,000 reflected the current portion of capital
lease obligation - related party, with no long-term portion, in the consolidated
balance sheet.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Among the significant estimates affecting our consolidated
financial statements are those relating to revenue recognition, reserves for
doubtful accounts and sales returns and allowances, reserve for excess and
obsolete inventory, impairment of long-lived assets, income taxes, and warranty
reserves. We regularly evaluate our estimates and assumptions based upon
historical experience and various other factors that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. To the extent actual results differ from
those estimates, our future results of operations may be affected. We believe
the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our consolidated financial statements.
Refer to Footnote 2 of our notes to consolidated financial statements for a
description of our significant accounting policies.
REVENUE RECOGNITION
We derive our revenues from three primary sources: (1) commercial products
including, but not limited to, solar energy manufacturing equipment, solar
energy systems and hemodialysis catheters; (2) biomedical and semiconductor
processing services; and (3) United States government funded research and
development contracts.
We generally recognize product revenue upon shipment of products provided
there are no uncertainties regarding customer acceptance, persuasive evidence of
an arrangement exists, the sales price is fixed or determinable, and
collectibility is reasonably assured. These criteria are generally met at the
time of shipment when the risk of loss and title passes to the customer or
distributor, unless a consignment arrangement exists. Revenue from consignment
arrangements is recognized based on product usage indicating sales are complete.
We utilize a distributor network to market and sell its hemodialysis
catheters domestically. We generally recognize revenue when the catheters are
shipped to our distributors. Gross sales reflect reductions attributable to
customer returns and various customer incentive programs including pricing
discounts and rebates. Product returns are permitted in certain sales
30
contracts and an allowance is recorded for returns based on our history of
actual returns. Certain customer incentive programs require management to
estimate the cost of those programs. The allowance for these programs is
determined through an analysis of programs offered, historical trends,
expectations regarding customer and consumer participation, sales and payment
trends, and experience with payment patterns associated with similar programs
that had been previously offered. An analysis of the sales return and rebate
activity for the years ended December 31, 2007 and 2006, is as follows:
Rebates Returns Total
------------ ------------ ------------
Balance - December 31, 2005 $ 92,000 $ 19,000 $ 111,000
Provision 387,000 60,000 447,000
Utilization (341,000) (62,000) (403,000)
------------ ------------ ------------
Balance - December 31, 2006 138,000 17,000 155,000
Provision 224,000 32,000 256,000
Utilization (285,000) (39,000) (324,000)
------------ ------------ ------------
Balance - December 31, 2007 $ 77,000 $ 10,000 $ 87,000
============ ============ ============
o Credits for rebates are recorded in the month of the actual sale.
o Credits for returns are processed when the actual merchandise is received
by us.
o Substantially all rebates and returns are processed no later than three
months after original shipment by us.
The reserve percentage of inventory held by distributors over the last two
years has decreased to approximately 8% in 2007, when compared to 13% in 2006.
We perform various sensitivity analyses to determine the appropriate reserve
percentage to use. To date, actual quarterly reserve utilization has
approximated the amount provided. The total inventory held by distributors was
approximately $1,039,000 at December 31, 2007.
If sufficient history to make reasonable and reliable estimates of returns
or rebates does not exist, revenue associated with such practices is deferred
until the return period lapses or a reasonable estimate can be made. This
deferred revenue will be recognized as revenue when the distributor reports to
us that it has either shipped or disposed of the units (indicating that the
possibility of return is remote).
Our OEM capital equipment solar energy business builds complex customized
machines to order for specific customers. Substantially all of these orders are
sold on a FOB Bedford, Massachusetts (or EX-Works Factory) basis. It is our
policy to recognize revenues for this equipment as the product is shipped to the
customer, as customer acceptance is obtained prior to shipment and the equipment
is expected to operate the same in the customer's environment as it does in our
environment. When an arrangement with the customer includes future obligations
or customer acceptance, revenue is recognized when those obligations are met or
customer acceptance has been achieved. Our solar energy systems business
installs solar energy systems on customer-owned properties on a contractual
basis. Generally, revenue is recognized once the systems have been installed and
the title is passed to the customer. For arrangements with multiple elements, we
allocate fair value to each element in the contract and revenue is recognized
upon delivery of each element. If we are not able to establish fair value of
undelivered elements, all revenue is deferred.
We recognize revenues and estimated profits on long-term government
contracts on the accrual basis where the circumstances are such that total
profit can be estimated with reasonable accuracy and ultimate realization is
reasonably assured. We accrue revenue and profit utilizing the percentage of
completion method using a cost-to-cost methodology. A percentage of the contract
revenues and estimated profits is determined utilizing the ratio of costs
incurred to date to total estimated cost to complete on a contract by contract
basis. Profit estimates are revised periodically based upon changes and facts,
and any losses on contracts are recognized immediately. Some of the contracts
include provisions to withhold a portion of the contract value as retainage
until such time as the United States government performs an audit of the cost
incurred under the contract. Our policy is to take into revenue the full value
of the contract, including any retainage, as we perform against the contract
because we have not experienced any substantial losses as a result of audits
performed by the United States government.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, including fixed assets and intangible assets, are
continually monitored and are evaluated at least annually for impairment. The
determination of recoverability is based on an estimate of undiscounted cash
flows expected to result from the use of an asset and its eventual disposition.
The estimate of cash flows is based upon, among other things,
31
certain assumptions about expected future operating performance. Our estimates
of undiscounted cash flows may differ from actual cash flows due to, among other
things, technological changes, economic conditions, changes to our business
model or changes in our operating performance. If the sum of the undiscounted
cash flows (excluding interest) is less than the carrying value, we recognize an
impairment loss, measured as the amount by which the carrying value exceeds the
fair value of the asset.
STOCK-BASED COMPENSATION
On January 1, 2006, we adopted the fair value recognition provisions of
Financial Accounting Standards Board ("FASB") Statement No. 123(R), Share-Based
Payment ("Statement 123(R)") using the modified prospective method. In
accordance with the modified prospective method, we have not restated its
consolidated financial statements for prior periods. Under this transition
method, stock-based compensation expense for 2006 includes stock-based
compensation expense for all of our stock-based compensation awards granted
prior to, but not yet vested as of, January 1, 2006, based on the grant-date
fair value estimated in accordance with the provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation ("Statement 123"). Stock-based
compensation expense for all stock-based compensation awards granted on or after
January 1, 2006 will be based on the grant-date fair value estimated in
accordance with the provisions of Statement 123(R). The impact of Statement
123(R) on our results of operations resulted in recognition of stock-based
compensation expense of approximately $579,000 and $256,000 for the years ended
December 31, 2007 and 2006, respectively.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
---------------------------------------------------------------------
Not required as we are a smaller reporting company.
32
ITEM 8. FINANCIAL STATEMENTS
-----------------------------
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm ..................................... 34
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2007 (as restated) and 2006............... 35
Consolidated Statements of Operations for the Years Ended December 31, 2007
(as restated) and 2006 ................................................................ 36
Consolidated Statements of Stockholders' Equity and Comprehensive Loss for
the Years Ended December 31, 2007 (as restated) and 2006 ............................ 37
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007
(as restated) and 2006 ................................................................ 38
Notes to Consolidated Financial Statements (as restated) ................................ 39
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Spire Corporation:
We have audited the consolidated balance sheets of Spire Corporation and
subsidiaries as of December 31, 2007 and 2006 and the related consolidated
statements of operations, stockholders' equity and comprehensive loss, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe our audits provide a
reasonable basis for our opinion.
As discussed in Note 2 to the accompanying consolidated financial statements,
the Company has restated its financial statements for the year ended December
31, 2007.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Spire Corporation
and subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
VITALE, CATURANO & COMPANY, LTD.
March 31, 2008, except for
Note 2, as to which the date is
November 24, 2008
Boston, Massachusetts
34
SPIRE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2007 2006
As Restated (1)
------------ ------------
ASSETS
Current assets
--------------
Cash and cash equivalents $ 2,372,000 $ 1,536,000
Restricted cash - current portion 391,000 269,000
------------ ------------
2,763,000 1,805,000
Short-term investments -- 3,031,000
Restricted short-term investments -- 1,969,000
Accounts receivable - trade, net 11,865,000 4,010,000
Inventories, net 11,570,000 4,217,000
Deferred cost of goods sold 8,044,000 --
Deposits on equipment for inventory 2,475,000 2,580,000
Prepaid expenses and other current assets 542,000 737,000
------------ ------------
Total current assets 37,259,000 18,349,000
Property and equipment, net 6,209,000 6,673,000
Intangible and other assets, net 851,000 844,000
Available-for-sale investments, at quoted market value (cost of
$1,696,000 and $1,361,000 at 12/31/07 and 12/31/06, respectively) 1,800,000 1,461,000
Equity investment in joint venture 2,264,000 --
Restricted cash - long-term -- 121,000
Deposit - related party 304,000 236,000
------------ ------------
Total other assets 5,219,000 2,662,000
------------ ------------
Total assets $ 48,687,000 $ 27,684,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Current portion of capital lease obligation - related party $ 486,000 $ 1,027,000
Current portion of equipment line of credit 1,167,000 --
Accounts payable 2,909,000 1,982,000
Accrued liabilities 6,057,000 5,006,000
Current portion of advances on contracts in progress 24,053,000 6,396,000
------------ ------------
Total current liabilities 34,672,000 14,411,000
Long-term portion of capital lease obligation - related party -- 486,000
Long-term portion of equipment line of credit 1,750,000 --
Long-term portion of advances on contracts in progress 1,950,000 1,823,000
Deferred compensation 1,800,000 1,461,000
Other long-term liabilities 60,000 40,000
------------ ------------
Total long-term liabilities 5,560,000 3,810,000
------------ ------------
Total liabilities 40,232,000 18,221,000
------------ ------------
Stockholders' equity
--------------------
Common stock, $0.01 par value; 20,000,000 shares authorized;
8,321,188 shares issued and outstanding on December 31, 2007 and
8,236,663 shares issued and outstanding on December 31, 2006 83,000 82,000
Additional paid-in capital 19,999,000 19,077,000
Accumulated deficit (11,689,000) (9,756,000)
Accumulated other comprehensive income, net 62,000 60,000
------------ ------------
Total stockholders' equity 8,455,000 9,463,000
------------ ------------
Total liabilities and stockholders' equity $ 48,687,000 $ 27,684,000
============ ============
------------------
(1) See Note 2.
The accompanying notes are an integral part
of these consolidated financial statements.
35
SPIRE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
------------------------------
2007 2006
As Restated (1)
------------ ------------
Net sales and revenues
----------------------
Sales of goods $ 24,723,000 $ 9,562,000
Contract research, service and license revenues 12,345,000 10,563,000
------------ ------------
Total net sales and revenues 37,068,000 20,125,000
Cost of sales and revenues
--------------------------
Cost of goods sold 20,826,000 9,029,000
Cost of contract research, services and licenses 9,360,000 8,819,000
------------ ------------
Total cost of sales and revenues 30,186,000 17,848,000
------------ ------------
Gross margin 6,882,000 2,277,000
Operating expenses
------------------
Selling, general and administrative expenses 13,226,000 9,794,000
Internal research and development expenses 313,000 734,000
------------ ------------
Total operating expenses 13,539,000 10,528,000
------------ ------------
Gain on sale of trademark 2,735,000 --
------------ ------------
Loss from operations (3,922,000) (8,251,000)
--------------------
Interest income (expense), net (151,000) 114,000
Loss on equity investment in joint venture (24,000) --
Other expense (14,000) (14,000)
------------ ------------
Total other income (expense), net (189,000) 100,000
------------ ------------
Loss before income taxes and extraordinary gain (4,111,000) (8,151,000)
Income tax benefit 877,000 --
------------ ------------
Net loss before extraordinary gain (3,234,000) (8,151,000)
----------------------------------
Extraordinary gain, net of taxes 1,301,000 --
------------ ------------
Net loss $ (1,933,000) $ (8,151,000)
-------- ============ ============
Basic and diluted income (loss) per share:
From continuing operations after income taxes $ (0.39) $ (1.03)
From extraordinary gain, net of tax 0.16 --
------------ ------------
Basic and diluted income (loss) per share $ (0.23) $ (1.03)
----------------------------------------- ============ ============
Weighted average number of common and common equivalent
shares outstanding - basic and diluted 8,272,123 7,898,320
============ ============
------------------
(1) See Note 2.
The accompanying notes are an integral part
of these consolidated financial statements.
36
SPIRE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
Accumulated
Common Stock Additional Other
----------------------------- Paid-in (Accumulated Comprehensive
Shares Amount Capital Deficit) Income Total
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2005 7,222,987 $ 72,000 $ 10,763,000 $ (1,605,000) $ 25,000 $ 9,255,000
Exercise of stock options 72,500 1,000 337,000 -- -- 338,000
Proceeds from issuance of
common stock, net of
offering costs 941,176 9,000 7,721,000 -- -- 7,730,000
Stock-based compensation -- -- 256,000 -- -- 256,000
Net unrealized gain on
available for sale marketable
securities, net of tax -- -- -- -- 35,000 35,000
Net loss -- -- -- (8,151,000) -- (8,151,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2006 8,236,663 82,000 19,077,000 (9,756,000) 60,000 9,463,000
Exercise of stock options 84,525 1,000 343,000 -- -- 344,000
Stock-based compensation -- -- 579,000 -- -- 579,000
Net unrealized gain on
available for sale marketable
securities, net of tax -- -- -- -- 2,000 2,000
Net loss - (as restated (1)) -- -- -- (1,933,000) -- (1,933,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2007 - 8,321,188 $ 83,000 $ 19,999,000 $(11,689,000) $ 62,000 $ 8,455,000
(as restated (1)) ============ ============ ============ ============ ============ ============
Years Ended December 31,
-----------------------------
2007 2006
As Restated(1)
------------ ------------
Comprehensive income/(loss) is calculated as follows:
Net loss $ (1,933,000) $ (8,151,000)
Other comprehensive gain on available for sale marketable securities 2,000 35,000
------------ ------------
Comprehensive loss $ (1,931,000) $ (8,116,000)
============ ============
------------------
(1) See Note 2.
The accompanying notes are an integral part
of these consolidated financial statements.
37
SPIRE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------
2007 2006
As Restated (1)
------------ ------------
Cash flows from operating activities:
-------------------------------------
Net loss $ (1,933,000) $ (8,151,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,213,000 2,027,000
Loss on impairment of capital equipment 78,000 --
Loss on buy-out of capital lease -- 105,000
Gain on sale of trademark (2,735,000) --
Loss on equity investment in joint venture 24,000 --
Deferred tax benefit (877,000) --
Deferred compensation 2,000 35,000
Extraordinary gain in equity investment in joint venture, net of tax (1,301,000) --
Stock-based compensation 579,000 256,000
Increase (decrease) in accounts receivable reserves (43,000) 86,000
Increase (decrease) in inventory reserves (180,000) 381,000
Changes in assets and liabilities:
Restricted cash (1,000) 536,000
Accounts receivable (7,812,000) (400,000)
Interest receivable -- (158,000)
Inventories (7,308,000) (1,938,000)
Deferred cost of goods sold (8,044,000) --
Deposits, prepaid expenses and other current assets 299,000 (2,552,000)
Accounts payable, accrued liabilities and other liabilities 1,998,000 3,839,000
Deposit - related party (68,000) (45,000)
Advances on contracts in progress 17,836,000 6,461,000
------------ ------------
Net cash provided by (used in) operating activities (7,273,000) 482,000
------------ ------------
Cash flows from investing activities:
-------------------------------------
Purchase of short-term investments -- (7,500,000)
Proceeds from maturity of short-term investments 5,000,000 2,500,000
Proceeds from sale of trademark 2,735,000 --
Purchase of property and equipment (1,730,000) (4,085,000)
Increase in intangible and other assets (130,000) (268,000)
------------ ------------
Net cash provided by (used in) investing activities 5,875,000 (9,353,000)
------------ ------------
Cash flows from financing activities:
-------------------------------------
Proceeds from issuance of common stock, net of offering costs -- 7,730,000
Principal payments on capital lease obligations - related parties (1,027,000) (734,000)
Borrowings from equipment line of credit, net 2,917,000 --
Principal payments and buy-out of capital lease obligations -- (557,000)
Proceeds from exercise of stock options 344,000 338,000
------------ ------------
Net cash provided by financing activities 2,234,000 6,777,000
------------ ------------
Net increase (decrease) in cash and cash equivalents 836,000 (2,094,000)
Cash and cash equivalents, beginning of year 1,536,000 3,630,000
------------ ------------
Cash and cash equivalents, end of year $ 2,372,000 $ 1,536,000
============ ============
Supplemental disclosures of cash flow information:
--------------------------------------------------
Interest paid $ 149,000 $ 18,000
============ ============
Interest received $ 74,000 $ 110,000
============ ============
Interest paid - related party $ 76,000 $ 136,000
============ ============
Income taxes paid (refunded) $ 18,000 $ (155,000)
============ ============
------------------
(1) See Note 2.
The accompanying notes are an integral part
of these consolidated financial statements.
38
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
1. DESCRIPTION OF THE BUSINESS
Spire Corporation ("Spire" or the "Company") develops, manufactures and
markets highly-engineered products and services in three principal business
areas: (i) capital equipment for the PV solar industry, (ii) biomedical and
(iii) optoelectronics, generally bringing to bear expertise in materials
technologies, surface science and thin films across all three business areas,
discussed below.
In the PV solar area, the Company develops, manufactures and markets
specialized equipment for the production of terrestrial photovoltaic modules
from solar cells. The Company's equipment has been installed in approximately
190 factories in 50 countries.
In the biomedical area, the Company provides value-added surface
treatments to manufacturers of orthopedic and other medical devices that enhance
the durability, antimicrobial characteristics or other material characteristics
of their products; develops and markets coated and uncoated hemodialysis
catheters and related devices for the treatment of chronic kidney disease; and
performs sponsored research programs into practical applications of advanced
biomedical and biophotonic technologies.
In the optoelectronics area, the Company provides custom compound
semiconductor foundry and fabrication services on a merchant basis to customers
involved in biomedical/biophotonic instruments, telecommunications and defense
applications. Services include compound semiconductor wafer growth, other thin
film processes and related device processing and fabrication services. The
Company also provides materials testing services and performs services in
support of sponsored research into practical applications of optoelectronic
technologies.
Operating results will depend upon revenue growth and product mix, as
well as the timing of shipments of higher priced products from the Company's
solar equipment line and delivery of solar systems. Export sales, which amounted
to 47% of net sales and revenues for 2007, continue to constitute a significant
portion of the Company's net sales and revenues.
The Company has incurred significant operating losses in 2007 and 2006.
Loss from operations, before gain on sales of trademarks, were $6.7 million and
$8.3 million in 2007 and 2006, respectively. These losses from operations have
resulted in cash losses (loss from operations excluding gain on sales of
trademark plus or minus non-cash adjustments) of approximately $6.1 million and
$5.4 million in 2007 and 2006, respectively. The Company has funded these cash
losses from cash receipts of $4.0 million from the sale of a solar PV module
line along with the transfer of technology and rights to mark the modules with
the Company's trademark in 2007 and $7.7 million from the sale of equity in
2006. As of December 31, 2007, the Company had unrestricted cash and cash
equivalents of $2.4 million compared to unrestricted cash and cash equivalents
of $1.5 million and unrestricted short-term investments of $3.0 million as of
December 31, 2006. While the Company believes it has inherent assets and
technology that it could sell or license in the near term, there is no guarantee
that the Company would be able to sell or license those assets on a timely basis
and at appropriate values that would allow the Company to continue to fund its
operating losses. The Company has developed several plans to mitigate cash
losses primarily from increased revenues and, if required, potential cost
reduction efforts and outside financing. As a result, the Company believes it
has sufficient resources to continue as a going concern at least through
December 31, 2008.
2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
BACKGROUND OF THE RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS AND REMEDIAL
MEASURES.
REVIEW OF ACCOUNTING FOR PHOTOVOLTAIC MODULE EQUIPMENT TRANSACTIONS
In November 2008, management, in concert with the Audit Committee,
commenced a review of the revenue recognized during the fourth quarter of 2007
and the first quarter of 2008 with respect to a single contract due to the
existence of a previously undisclosed and undocumented side agreement. The
Company also conducted an internal review of other solar equipment contracts to
determine if other concessions or side agreements were granted and not timely
conveyed such that revenue could be appropriately recognized.
39
The Company conducted a review of the solar equipment contracting process
and order management activity, including a review of contract modifications. The
results of this review revealed that during the fulfillment of several customer
orders, concessions and contract modifications were made in the ordinary course
of business to reflect changing facts and circumstances but that these changes
were appropriately communicated and recorded. It was determined that the
identified contract was the only instance where revenue recognition requirements
were not met at the time revenue was initially recognized. As a result, the
Company has recorded adjustments to both the fourth quarter of 2007 and the
first quarter of 2008, by reversing the revenue recognized and associated costs
of goods sold previously recorded in those periods. The revenue associated with
this contract will be deferred until the remaining undelivered element is
supplied to the customer. These adjustments are summarized below, and generally
have the effect of deferring revenue and related cost of goods sold, previously
recognized until later periods.
CUMULATIVE EFFECT OF ADJUSTMENTS ON ACCUMULATED DEFICIT
The following table presents the cumulative effect of adjustments
resulting from the reviews described above for the periods shown.
Year Ended Quarter Ended
December 31, 2007 March 31, 2008
------------ ------------
As Restated
------------------------------
Net loss as originally reported $ (1,686,000) $ (508,000)
Adjustments related to:
Revenue recognition (1,355,000) (380,000)
Cost of goods sold 1,108,000 365,000
------------ ------------
Net adjustments (247,000) (15,000)
------------ ------------
Net loss as restated $ (1,933,000) $ (523,000)
------------ ------------
Cumulative effect to accumulated deficit $ 247,000 $ 262,000
============ ============
40
The tables below set forth the effect of the adjustments as of December
31, 2007 and for the year ended December 31, 2007, as applicable:
SPIRE CORPORATION AND SUBSIDIARIES
RESTATED CONSOLIDATED BALANCE SHEETS
December 31, 2007
------------------------------
As Reported As Restated
------------ ------------
ASSETS
Current assets
--------------
Cash and cash equivalents $ 2,372,000 $ 2,372,000
Restricted cash - current portion 391,000 391,000
------------ ------------
2,763,000 2,763,000
Accounts receivable - trade, net 12,766,000 11,865,000
Inventories, net 18,506,000 11,570,000
Deferred cost of goods sold -- 8,044,000
Deposits on equipment for inventory 2,475,000 2,475,000
Prepaid expenses and other current assets 542,000 542,000
------------ ------------
Total current assets 37,052,000 37,259,000
Property and equipment, net 6,209,000 6,209,000
Intangible and other assets, net 851,000 851,000
Available-for-sale investments, at quoted market value (cost of
$1,696,000 at 12/31/07) 1,800,000 1,800,000
Equity investment in joint venture 2,264,000 2,264,000
Deposit - related party 304,000 304,000
------------ ------------
Total other assets 5,219,000 5,219,000
------------ ------------
Total assets $ 48,480,000 $ 48,687,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Current portion of capital lease obligation - related party $ 486,000 $ 486,000
Current portion of equipment line of credit 1,167,000 1,167,000
Accounts payable 2,909,000 2,909,000
Accrued liabilities 6,057,000 6,057,000
Current portion of advances on contracts in progress 23,599,000 24,053,000
------------ ------------
Total current liabilities 34,218,000 34,672,000
Long-term portion of equipment line of credit 1,750,000 1,750,000
Long-term portion of advances on contracts in progress 1,950,000 1,950,000
Deferred compensation 1,800,000 1,800,000
Other long-term liabilities 60,000 60,000
------------ ------------
Total long-term liabilities 5,560,000 5,560,000
------------ ------------
Total liabilities 39,778,000 40,232,000
------------ ------------
Stockholders' equity
--------------------
Common stock, $0.01 par value; 20,000,000 shares authorized;
8,321,188 shares issued and outstanding on December 31, 2007 83,000 83,000
Additional paid-in capital 19,999,000 19,999,000
Accumulated deficit (11,442,000) (11,689,000)
Accumulated other comprehensive income, net 62,000 62,000
------------ ------------
Total stockholders' equity 8,702,000 8,455,000
------------ ------------
Total liabilities and stockholders' equity $ 48,480,000 $ 48,687,000
============ ============
41
SPIRE CORPORATION AND SUBSIDIARIES
RESTATED CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2007
------------------------------
As Reported As Restated
------------ ------------
Net sales and revenues
----------------------
Sales of goods $ 26,078,000 $ 24,723,000
Contract research, service and license revenues 12,345,000 12,345,000
------------ ------------
Total net sales and revenues 38,423,000 37,068,000
Cost of sales and revenues
--------------------------
Cost of goods sold 21,934,000 20,826,000
Cost of contract research, services and licenses 9,360,000 9,360,000
------------ ------------
Total cost of sales and revenues 31,294,000 30,186,000
------------ ------------
Gross margin 7,129,000 6,882,000
Operating expenses
------------------
Selling, general and administrative expenses 13,226,000 13,226,000
Internal research and development expenses 313,000 313,000
------------ ------------
Total operating expenses 13,539,000 13,539,000
------------ ------------
Gain on sale of trademark 2,735,000 2,735,000
------------ ------------
Loss from operations (3,675,000) (3,922,000)
--------------------
Interest income (expense), net (151,000) (151,000)
Loss on equity investment in joint venture (24,000) (24,000)
Other expense (14,000) (14,000)
------------ ------------
Total other income (expense), net (189,000) (189,000)
------------ ------------
Loss before income taxes and extraordinary gain (3,864,000) (4,111,000)
Income tax benefit 877,000 877,000
------------ ------------
Net loss before extraordinary gain (2,987,000) (3,234,000)
----------------------------------
Extraordinary gain, net of taxes 1,301,000 1,301,000
------------ ------------
Net loss $ (1,686,000) $ (1,933,000)
-------- ============ ============
Basic and diluted income (loss) per share:
From continuing operations after income taxes $ (0.36) $ (0.39)
From extraordinary gain, net of tax 0.16 0.16
------------ ------------
Basic and diluted income (loss) per share $ (0.20) $ (0.23)
----------------------------------------- ============ ============
Weighted average number of common and common equivalent
shares outstanding - basic and diluted 8,272,123 8,272,123
============ ============
42
SPIRE CORPORATION AND SUBSIDIARIES
RESTATED CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 2007
------------------------------
As Reported As Restated
------------ ------------
Cash flows from operating activities:
-------------------------------------
Net loss $ (1,686,000) $ (1,933,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,213,000 2,213,000
Loss on impairment of capital equipment 78,000 78,000
Gain on sale of trademark (2,735,000) (2,735,000)
Loss on equity investment in joint venture 24,000 24,000
Deferred tax benefit (877,000) (877,000)
Deferred compensation 2,000 2,000
Extraordinary gain in equity investment in joint venture,
net of tax (1,301,000) (1,301,000)
Stock-based compensation 579,000 579,000
Increase (decrease) in accounts receivable reserves (43,000) (43,000)
Increase (decrease) in inventory reserves (180,000) (180,000)
Changes in assets and liabilities:
Restricted cash (1,000) (1,000)
Accounts receivable (8,713,000) (7,812,000)
Inventories (14,244,000) (7,308,000)
Deferred cost of goods sold -- (8,044,000)
Deposits, prepaid expenses and other current assets 299,000 299,000
Accounts payable, accrued liabilities and other liabilities 1,998,000 1,998,000
Deposit - related party (68,000) (68,000)
Advances on contracts in progress 17,382,000 17,836,000
------------ ------------
Net cash provided by (used in) operating activities (7,273,000) (7,273,000)
------------ ------------
Cash flows from investing activities:
-------------------------------------
Proceeds from maturity of short-term investments 5,000,000 5,000,000
Proceeds from sale of trademark 2,735,000 2,735,000
Purchase of property and equipment (1,730,000) (1,730,000)
Increase in intangible and other assets (130,000) (130,000)
------------ ------------
Net cash provided by (used in) investing activities 5,875,000 5,875,000
------------ ------------
Cash flows from financing activities:
-------------------------------------
Principal payments on capital lease obligations - related parties (1,027,000) (1,027,000)
Borrowings from equipment line of credit, net 2,917,000 2,917,000
Proceeds from exercise of stock options 344,000 344,000
------------ ------------
Net cash provided by financing activities 2,234,000 2,234,000
------------ ------------
Net increase (decrease) in cash and cash equivalents 836,000 836,000
Cash and cash equivalents, beginning of year 1,536,000 1,536,000
------------ ------------
Cash and cash equivalents, end of year $ 2,372,000 $ 2,372,000
============ ============
Supplemental disclosures of cash flow information:
--------------------------------------------------
Interest paid $ 149,000 $ 149,000
============ ============
Interest received $ 74,000 $ 74,000
============ ============
Interest paid - related party $ 76,000 $ 76,000
============ ============
Income taxes paid (refunded) $ 18,000 $ 18,000
============ ============
43
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. The Company's joint venture
with Gloria Solar is not consolidated but recognized using the equity method of
accounting. We report results one quarter in arrears. There were no significant
balances or transactions during the current reporting period.
(b) REVENUE RECOGNITION
The Company derives its revenues from three primary sources: (1)
commercial products including, but not limited to, solar energy manufacturing
equipment, solar energy systems and hemodialysis catheters; (2) biomedical and
semiconductor processing services; and (3) United States government funded
research and development contracts
The Company generally recognizes product revenue upon shipment of
products provided there are no uncertainties regarding customer acceptance,
persuasive evidence of an arrangement exists, the sales price is fixed or
determinable, and collectibility is reasonably assured. These criteria are
generally met at the time of shipment when the risk of loss and title passes to
the customer or distributor, unless a consignment arrangement exists. Revenue
from consignment arrangements is recognized based on product usage indicating
sales are complete.
The Company utilizes a distributor network to market and sell its
hemodialysis catheters domestically. The Company generally recognizes revenue
when the catheters are shipped to its distributors. Gross sales reflect
reductions attributable to customer returns and various customer incentive
programs including pricing discounts and rebates. Product returns are permitted
in certain sales contracts and an allowance is recorded for returns based on the
Company's history of actual returns. Certain customer incentive programs require
management to estimate the cost of those programs. The allowance for these
programs is determined through an analysis of programs offered, historical
trends, expectations regarding customer and consumer participation, sales and
payment trends, and experience with payment patterns associated with similar
programs that had been previously offered. An analysis of the sales return and
rebate activity for the years ended December 31, 2007 and 2006, is as follows:
Rebates Returns Total
--------- --------- ---------
Balance - December 31, 2005 $ 92,000 $ 19,000 $ 111,000
Provision 387,000 60,000 447,000
Utilization (341,000) (62,000) (403,000)
--------- --------- ---------
Balance - December 31, 2006 138,000 17,000 155,000
Provision 224,000 32,000 256,000
Utilization (285,000) (39,000) (324,000)
--------- --------- ---------
Balance - December 31, 2007 $ 77,000 $ 10,000 $ 87,000
========= ========= =========
o Credits for rebates are recorded in the month of the actual sale.
o Credits for returns are processed when the actual merchandise is
received by the Company.
o Substantially all rebates and returns are processed no later than
three months after original shipment by the Company.
The reserve percentage of inventory held by distributors over the last
two years has decreased to approximately 8% in 2007, when compared to 13% in
2006. The Company performs various sensitivity analyses to determine the
appropriate reserve percentage to use. To date, actual quarterly reserve
utilization has approximated the amount provided. The total inventory held by
distributors was approximately $1,039,000 at December 31, 2007 and $1,210,000 at
December 31, 2006.
If sufficient history to make reasonable and reliable estimates of
returns or rebates does not exist, revenue associated with such practices is
deferred until the return period lapses or a reasonable estimate can be made.
This deferred revenue will be recognized as revenue when the distributor reports
to the Company that it has either shipped or disposed of the units (indicating
that the possibility of return is remote).
44
The Company's OEM capital equipment solar energy business builds complex
customized machines to order for specific customers. Substantially all of these
orders are sold on a FOB Bedford, Massachusetts (or EX-Works Factory) basis. It
is the Company's policy to recognize revenues for this equipment as the product
is shipped to the customer, as customer acceptance is obtained prior to shipment
and the equipment is expected to operate the same in the customer's environment
as it does in the Company's environment. When an arrangement with the customer
includes future obligations or customer acceptance, revenue is recognized when
those obligations are met or customer acceptance has been achieved. For
arrangements with multiple elements, the Company allocates total fees under
contract to each element using the relative fair value method and revenue is
recognized upon delivery of each element. If the Company is not able to
establish fair value of undelivered elements, all revenue is deferred.
The Company recognizes revenues and estimated profits on long-term
government contracts on the accrual basis where the circumstances are such that
total profit can be estimated with reasonable accuracy and ultimate realization
is reasonably assured. The Company accrues revenue and profit utilizing the
percentage of completion method using a cost-to-cost methodology. A percentage
of the contract revenues and estimated profits is determined utilizing the ratio
of costs incurred to date to total estimated cost to complete on a contract by
contract basis. Profit estimates are revised periodically based upon changes and
facts, and any losses on contracts are recognized immediately. Some of the
contracts include provisions to withhold a portion of the contract value as
retainage until such time as the United States government performs an audit of
the cost incurred under the contract. The Company's policy is to take into
revenue the full value of the contract, including any retainage, as it performs
against the contract since the Company has not experienced any substantial
losses as a result of audits performed by the United States government.
(c) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, time deposits and all highly
liquid debt instruments with original maturities of three months or less. These
investments are carried at cost, which approximates market value. Cash and cash
equivalents are deposited at various area banks, and at times may exceed
federally insured limits.
(d) SHORT TERM INVESTMENTS
Short term investments at December 31, 2006 include highly liquid debt
instruments with original maturities of more than three months and less than one
year. These investments are carried at cost, which approximates market value.
(e) AVAILABLE-FOR-SALE INVESTMENTS
Available-for-sale securities consist of the following assets held as
part of the Spire Corporation Non-Qualified Deferred Compensation Plan for the
years ended December 31,:
2007 2006
---------- ----------
Equity investments $1,411,000 $1,160,000
Government bonds 303,000 262,000
Cash and money market funds 86,000 39,000
---------- ----------
$1,800,000 $1,461,000
========== ==========
These investments have been classified as long-term available-for-sale
and are reported at fair value, with unrealized gains and losses included in
accumulated other comprehensive income, net of related tax effect. As of
December 31, 2007, the pre-tax unrealized gain on these marketable securities
was approximately $104,000.
(f) INVENTORIES
Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out (FIFO) basis. Judgments and estimates are
used in determining the likelihood that goods on hand can be sold to customers.
The Company expensed approximately $77,000 and $208,000 in 2007 and 2006,
respectively, to cost of goods sold, for work in process inventory that was
determined to be valued in excess of market value. Historical inventory usage
and current revenue trends are considered in estimating both excess and obsolete
inventory. If actual product demand and market conditions are less favorable
than those projected by management, additional inventory write-downs may be
required.
45
(g) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the respective assets, as follows:
Building and equipment under capital lease Lesser of 5 years or
remaining life of lease term
Machinery and equipment 5 and 7
years Furniture and fixtures 5 years
Leasehold improvements Lesser of 10 years or
remaining life of facility
lease term
Maintenance and repairs are charged to expense as incurred. Major
renewals and betterments are added to property and equipment accounts at cost.
(h) INTANGIBLE AND OTHER ASSETS
Patents amounted to $143,000, net of accumulated amortization of
$687,000, at December 31, 2007. Licenses amounted to $109,000 net of accumulated
amortization of $216,000, at December 31, 2007. Patent cost is primarily
composed of cost associated with securing and registering patents that the
Company has been awarded or that have been submitted to, and the Company
believes will be approved by, the government. License cost is composed of the
cost to acquire rights to the underlying technology or know-how. These costs are
capitalized and amortized over their useful lives or terms, ordinarily five
years, using the straight-line method. There are no expected residual values
related to these patents. Amortization expense, relating to patents and
licenses, was approximately $117,000 and $94,000, for the years ended 2007 and
2006, respectively.
For disclosure purposes, the table below includes future amortization
expense for patents and licenses owned by the Company as well as estimated
amortization expense related to patents that remain pending at December 31, 2007
of $578,000. This estimated expense for patents pending assumes that the patents
are issued immediately, and therefore are being amortized over five years on a
straight-line basis. Estimated amortization expense for the periods ending
December 31, is as follows:
Year Amortization Expense
---------- --------------------
2008 $207,000
2009 166,000
2010 161,000
2011 154,000
2012 134,000
Thereafter 8,000
--------------------
$830,000
====================
Also included in other assets are approximately $21,000 of refundable
deposits made by the Company at December 31, 2007.
(i) LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". SFAS No. 144 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company measures recoverability of assets to be held and used
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. The Company
reports assets to be disposed of at the lower of the carrying amount or fair
value less costs to sell.
(j) INCOME TAXES
In accordance with SFAS No. 109, "Accounting for Income Taxes", the
Company recognizes deferred income taxes based on the expected future tax
consequences of differences between the financial statement basis and the tax
basis of assets and liabilities, calculated using enacted tax rates in effect
for the year in which the differences are expected to be reflected in the tax
return. Valuation allowances are provided if, based on the weight of available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized.
46
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement 109" ("FIN 48"). This statement clarifies the
criteria that an individual tax position must satisfy for some or all of the
benefits of that position to be recognized in a company's financial statements.
FIN 48 prescribes a recognition threshold of more likely-than-not, and a
measurement attribute for all tax positions taken or expected to be taken on a
tax return, in order for those tax positions to be recognized in the financial
statements. Effective January 1, 2007, the Company adopted the provisions of FIN
48. The Company has determined that no liability exists for interest and
penalties related to uncertain tax positions as of January 1, 2007 and December
31, 2007. The Company accounts for interest and penalties related to uncertain
tax positions as part of its provision for federal and state income taxes. The
Company does not expect that the amounts of unrecognized tax benefits will
change significantly within the next 12 months.
The Company is currently subject to audit by the Internal Revenue Service
for the calendar years ended 2003, 2004, 2005, 2006 and 2007. The Company and
its subsidiaries state income tax returns are subject to audit for the calendar
years ended 2003, 2004, 2005, 2006 and 2007.
(k) WARRANTY
The Company provides warranties on certain of its products and services.
The Company's warranty programs are described below:
Spire Solar Equipment warrants solar energy module manufacturing
equipment sold for a total of 360 days, the first 90 days of which include the
replacement of defective component parts and the labor to correct the defect and
the next 270 days of which include only the cost of defective component parts.
Spire Solar Systems warrants photovoltaic electric power systems sold
against defective components for 360 days to include the replacement of
defective component parts and the labor to correct the defect. Spire Solar
Systems also warrants that its photovoltaic electric power systems will achieve
a minimum of 80% of rated electrical power output for 20 years.
Spire Biomedical warrants that any of its catheter products found to be
defective will be replaced. No warranty is made that the failure of the product
will not occur, and Spire disclaims any responsibility for any medical
complications. Spire Biomedical warrants that its services only will meet the
agreed upon specifications.
Spire Semiconductor, LLC warrants that its products will meet the agreed
upon specifications.
The Company provides for the estimated cost of product warranties,
determined primarily from historical information, at the time product revenue is
recognized. Should actual product failure warranties differ from the Company's
estimates, revisions to the estimated warranty liability would be required. The
Company incurred a high level of warranty expense attributed to one customer in
2006 and does not expect the problem to have a significant impact on earnings in
future periods. The changes in the product warranties for the years ended
December 31, 2007 and 2006, are as follows:
Balance at December 31, 2005 $ 50,000
Provision charged to income 250,000
Usage (185,000)
----------
Balance at December 31, 2006 115,000
Provision charged to income 207,000
Usage (187,000)
----------
Balance at December 31, 2007 $ 135,000
==========
(l) INTERNAL RESEARCH AND DEVELOPMENT COSTS
Internal research and development costs are charged to operations as
incurred. During the years ended December 31, 2007 and 2006, Company funded
research and development costs were approximately $313,000 and $734,000,
respectively.
47
(m) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per share gives effect to
all potential dilutive common shares outstanding during the period. The
computation of diluted earnings (loss) per share does not assume conversion,
exercise or contingent exercise of securities that would have an anti-dilutive
effect on earnings (loss) per share. The Company did not pay any dividends in
2007 and 2006.
(n) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income. Other comprehensive income includes certain changes in
equity that are excluded from net income (loss). At December 31, 2007,
accumulated other comprehensive income was comprised of unrealized gain of
available-for-sale investments of approximately $62,000, net of tax.
(o) STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS No. 123(R) Share-Based Payment ("Statement 123(R)") using the
modified prospective method. In accordance with the modified prospective method,
the Company has not restated its consolidated financial statements for prior
periods. Under this transition method, stock-based compensation expense for the
year ended December 31, 2006 includes stock-based compensation expense for all
of the Company's stock-based compensation awards granted prior to, but not yet
vested as of January 1, 2006, based on the grant-date fair value estimated in
accordance with the provisions of FASB Statement No. 123, "Accounting for
Stock-Based Compensation" ("Statement 123"). Stock-based compensation expense
for all stock-based compensation awards granted on or after January 1, 2006 will
be based on the grant-date fair value estimated in accordance with the
provisions of Statement 123(R). The impact of Statement 123(R) on the Company's
results of operations resulted in recognition of stock-based compensation
expense of approximately $579,000 and $256,000 for the years ended December 31,
2007 and 2006, respectively.
(p) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Significant estimates include revenue
recognition, valuation of income tax assets, warranty reserves, inventory
reserves, and intangible assets. Actual results could differ from those
estimates.
(q) FINANCIAL INSTRUMENTS
Financial instruments of the Company consist of cash and cash
equivalents, short-term investments, accounts receivable, available for sale
marketable securities, accounts payable, equipment line of credit and capital
leases. The carrying amounts of these financial instruments approximate their
fair value.
(r) SHIPPING AND HANDLING COSTS
Shipping and handling costs are included in cost of goods sold.
(s) FOREIGN CURRENCY
The Company sells only in U.S. dollars, generally against an irrevocable
confirmed letter of credit through a major United States bank. Accordingly, the
Company is not directly affected by foreign exchange fluctuations on its current
orders. However, fluctuations in foreign exchange rates have an effect on the
Company's customers' access to U.S. dollars and on the pricing competition on
certain pieces of equipment that the Company sells in selected markets. The
Company received Japanese yen in exchange for the sale of a license to its solar
technology. In addition, purchases made and royalties received under the
Company's Consortium Agreement with its Japanese partner will be in Japanese
yen. The Company does purchase pieces of equipment from European vendors; these
commitments can be denominated in Euros. The Company bears the risk of any
currency fluctuations that may be associated with these commitments. The Company
books gains and losses when they are incurred.
48
(t) NEW ACCOUNTING STANDARDS
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("FAS 157"). This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007. On February 6, 2008, the FASB
announced it will issue a FASB Staff Position ("FSP") to allow a one-year
deferral of adoption of FAS 157 for nonfinancial assets and nonfinancial
liabilities that are recognized at fair value on a nonrecurring basis. FAS 157
provides a common fair value hierarchy for companies to follow in determining
fair value measurements in the preparation of financial statements and expands
disclosure requirements relating to how such fair value measurements were
developed. FAS 157 clarifies the principle that fair value should be based on
the assumptions that the marketplace would use when pricing an asset or
liability, rather than company specific data. The Company is currently assessing
the impact that FAS 157 will have on its financial position, results of
operations and cash flow.
In February 2007, the FASB issued SFAS No. 159 ("FAS 159"), THE FAIR
VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES - INCLUDING AN
AMENDMENT OF FASB STATEMENT NO. 115. FAS 159 allows companies to report selected
financial assets and liabilities at fair value. The changes in fair value are
recognized in earnings and the assets and liabilities measured under this
methodology are required to be displayed separately in the balance sheet. The
main intent of the Statement is to mitigate the difficulty in determining the
reported earnings caused by a "mixed-attribute" model" (or reporting some assets
are fair value and others using a different valuation attribute such as
amortized cost). The project is separated into two phases. This first phase
addressed the creation of a fair value option for financial assets and
liabilities. A second phase will address creating a fair value option for
selected non-financial items. FAS 159 is effective for all financial statements
issued for fiscal years beginning after November 15, 2007. The Company is
currently evaluating the impact that this issuance will have on its financial
position and results of operation.
In December 2007, the FASB issued SFAS No. 141R ("FAS 141R"), BUSINESS
COMBINATIONS, which revises FAS 141 and changes multiple aspects of the
accounting for business combinations. Under the guidance in FAS 141R, the
acquisition method must be used, which requires the acquirer to recognize most
identifiable assets acquired, liabilities assumed, and non-controlling interests
in the acquiree at their full fair value on the acquisition date. Goodwill is to
be recognized as the excess of the consideration transferred plus the fair value
of the non-controlling interest over the fair values of the identifiable net
assets acquired. Subsequent changes in the fair value of contingent
consideration classified as a liability are to be recognized in earnings, while
contingent consideration classified as equity is not to be re-measured. Costs
such as transaction costs are to be excluded from acquisition accounting,
generally leading to recognizing expense, and, additionally, restructuring costs
that do not meet certain criteria at acquisition date are to be subsequently
recognized as post-acquisition costs. FAS 141R is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
Company is currently evaluating the impact that this issuance will have on its
financial position and results of operation.
In December 2007, the FASB issued SFAS No. 160 ("FAS 160"),
NON-CONTROLLING INTEREST IN CONSOLIDATED FINANCIAL STATEMENTS - AN AMENDMENT OF
ARB NO. 151. FAS 160 requires that a non-controlling interest in a subsidiary
(i.e. minority interest) be reported in the equity section of the balance sheet
instead of being reported as a liability or in the mezzanine section between
debt and equity. It also requires that the consolidated income statement include
consolidated net income attributable to both the parent and non-controlling
interest of a consolidated subsidiary. A disclosure must be made on the face of
the consolidated income statement of the net income attributable to the parent
and to the non-controlling interest. Also, regardless of whether the parent
purchases additional ownership interest, sells a portion of its ownership
interest in a subsidiary or the subsidiary participates in a transaction that
changes the parent's ownership interest, as long as the parent retains
controlling interest, the transaction is considered an equity transaction. FAS
160 is effective for annual periods beginning after December 15, 2008. The
Company is currently evaluating the impact, if any, that this standard will have
on its financial position and results of operations.
49
4. ACCOUNTS RECEIVABLE/ADVANCES ON CONTRACTS IN PROGRESS
Net accounts receivable, trade consists of the following at December 31:
2007 2006
As Restated
------------ ------------
Amounts billed $ 11,142,000 $ 3,876,000
Retainage 8,000 8,000
Accrued revenue 945,000 399,000
------------ ------------
12,095,000 4,283,000
Less: Allowance for sales returns
and doubtful accounts (230,000) (273,000)
------------ ------------
Net accounts receivable - trade $ 11,865,000 $ 4,010,000
============ ============
Advances on contracts in progress $ 26,003,000 $ 8,219,000
============ ============
Accrued revenue represents revenues recognized on contracts for which
billings have not been presented to customers as of the balance sheet date.
These amounts are billed and generally collected within one year.
Retainage represents revenues on certain United States government
sponsored research and development contracts. These amounts, which usually
represent 15% of the Company's research fee on each applicable contract, are not
collectible until a final cost review has been performed by government auditors.
Included in retainage are amounts expected to be collected after one year, which
totaled approximately $8,000 at December 31, 2007. The government's most recent
audit was as of December 31, 2005, with no adverse impact. All other accounts
receivable are expected to be collected within one year.
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to pay amounts due. The
Company actively pursues collection of past due receivables as the circumstances
warrant. Customers are contacted to determine the status of payment and senior
accounting and operations management are included in these efforts as is deemed
necessary. A specific reserve will be established for past due accounts over 60
days and over a specified amount, when it is probable that a loss has been
incurred and the Company can reasonably estimate the amount of the loss. The
Company does not record an allowance for government receivables and invoices
backed by letters of credit as realizeability is reasonably assured. Bad debts
are written off against the allowance when identified. There is no dollar
threshold for account balance write-offs. While rare, a write-off is only
recorded when all efforts to collect the receivable have been exhausted and only
in consultation with the appropriate business line manager.
In addition, the Company maintains an allowance for potential future
product returns and rebates related to current period revenues. The Company
analyzes the rate of historical returns when evaluating the adequacy of the
allowance for sales returns and allowances. Returns and rebates are charged
against the allowance when incurred.
Advances on contracts in progress represent contracts for which billings
have been presented to the customer, either as deposits or progress payments
against future shipments, but revenue has not been recognized.
5. SHORT-TERM INVESTMENTS
There were no short-term investments at December 31, 2007. Short-term
investments at December 31, 2006 consisted of $5,000,000 of certificates of
deposit which matured on March 31, 2007. Interest receivable on these short-term
investments amounted to approximately $158,000 at December 31, 2006, and is
classified with other current assets. Approximately $1,969,000 of the short-term
investment were restricted to back a letter of credit with a bank.
6. INVENTORIES AND DEFERRED COST OF GOODS SOLD
Inventories, net of $354,000 and $534,000 of reserves at December 31,
2007 and 2006, respectively, consist of the following at December 31:
50
2007 2006
------------ ------------
Raw materials $ 4,989,000 $ 1,519,000
Work in process 4,663,000 2,310,000
Finished goods 1,918,000 388,000
------------ ------------
Net Inventory $ 11,570,000 $ 4,217,000
------------ ------------
Deferred cost of goods sold $ 8,044,000 --
============ ============
Deferred cost of goods sold represents costs on equipment that has
shipped to the customer and title has passed. The Company defers these costs
until related revenue is recognized.
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
2007 2006
------------ ------------
Building under capital lease $ 3,390,000 $ 3,390,000
Machinery and equipment 17,508,000 13,448,000
Furniture fixtures and computer equipment 4,060,000 3,760,000
Leasehold improvements 2,167,000 2,078,000
Construction in progress 830,000 3,889,000
------------ ------------
27,955,000 26,565,000
Accumulated depreciation and amortization (21,746,000) (19,892,000)
------------ ------------
$ 6,209,000 $ 6,673,000
============ ============
Depreciation and amortization expense relating to property and equipment
was approximately $2,096,000 and $1,933,000 for the years ended December 31,
2007 and 2006, respectively.
8. ACCRUED LIABILITIES
Accrued liabilities include the following at December 31:
2007 2006
------------ ------------
Accrued payroll and payroll taxes $ 972,000 $ 689,000
Accrued legal and audit fees 319,000 214,000
Accrued liability for equipment purchases -- 2,506,000
Accrued accounts payable 3,398,000 812,000
Accrued other 1,368,000 785,000
------------ ------------
$ 6,057,000 $ 5,006,000
============ ============
9. NOTES PAYABLE AND CREDIT ARRANGEMENTS
The Company had a $2,000,000 Loan Agreement with Citizens Bank of
Massachusetts which expired on June 26, 2007. On May 25, 2007, the Company and
its wholly-owned subsidiary, Spire Semiconductor, LLC, entered into a Loan and
Security Agreement (the "Equipment Credit Facility") with Silicon Valley Bank
(the "Bank"). Under the Equipment Credit Facility, for a one-year period, the
Company and Spire Semiconductor could borrow up to $3,500,000 in the aggregate
to finance certain equipment purchases (including reimbursement of certain
previously-made purchases). Each advance made under the Equipment Credit
Facility would be due thirty-six (36) months from the date the advance is made.
Advances made under the Equipment Credit Facility would bear interest at the
Bank's prime rate, as determined, plus 0.5% (7.25% at December 31, 2007) and
payable in thirty-six (36) consecutive monthly payments following the funding
date of that advance. At December 31, 2007, the Company's outstanding borrowings
from the equipment line of credit amounted to $2,917,000. The Company was not in
compliance with its covenants as of December 31, 2007, but not in default
because a Bank waiver has been received.
On March 31, 2008, the Company entered into a second Loan and Security
Agreement (the "Revolving Credit Facility") with the Bank. Under the terms of
the Revolving Credit Facility, the Bank agreed to provide the Company with a
credit line up to $5,000,000. The Company's obligations under the Equipment
Credit Facility are secured by substantially of its assets and advances under
the Revolving Credit Facility are limited to 80% of eligible receivables and the
lesser of 25% of the value of its eligible inventory, as defined, or $2,500,000
if the inventory is backed by a customer letter of credit.
51
Interest on outstanding borrowings accrues at a rate per annum equal to the
greater of Prime Rate plus one percent (1.0%) or seven percent (7%). In
addition, the Company agreed to pay to the Bank a collateral monitoring fee of
$750 per month in the event the Company is in default of its covenants and
agreed to the following additional terms: (i) $50,000 commitment fee; (ii) an
unused line fee in the amount of 0.75% per annum of the average unused portion
of the revolving line; and (iii) an early termination fee of 0.5% of the total
credit line if the Company terminates the Revolving Credit Facility prior to 12
months from the Revolving Credit Facility's effective date. The Revolving Credit
Facility, if not sooner terminated in accordance with its terms, expires on
March 30, 2009. In addition the Company's existing Equipment Credit Facility was
amended whereby the Bank granted a waiver for the Company's defaults for not
meeting its December 31, 2007 quarter liquidity and profit covenants and for not
meeting its January and February 2008 liquidity covenants. Further the covenants
were amended to match the new covenants contained in the Revolving Credit
Facility. The Company's interest rate under the Equipment Credit Facility was
also modified from Bank Prime plus one half percent to the greater of Bank Prime
plus one percent (1%) or seven percent (7%).
Under the terms of the Equipment Credit Facility, as long as any
commitment remains outstanding under the facility, the Company must comply with
an adjusted quick ratio covenant and a minimum quarterly net income covenant In
addition, until all amounts under the credit facilities with the Bank are
repaid, covenants under the credit facilities impose restrictions on the
Company's ability to, among other things, incur additional indebtedness, create
or permit liens on the Company's assets, merge, consolidate or dispose of assets
(other than in the ordinary course of business), make dividend and other
restricted payments, make certain debt or equity investments, make certain
acquisitions, engage in certain transactions with affiliates or change the
business conducted by the Company and its subsidiaries. Any failure by the
Company to comply with the covenants and obligations under the credit facilities
could result in an event of default, in which case the Bank may be entitled to
declare all amounts owed to be due and payable immediately. The Company's
obligations under the credit facilities are secured by substantially all of its
assets.
10. STOCK-BASED COMPENSATION
At December 31, 2007, the Company had outstanding options under two stock
option plans: the 1996 Equity Incentive Plan (the "1996 Plan") and the 2007
Stock Equity Plan (the "2007 Plan"). Both plans were approved by stockholders
and provided that the Board of Directors may grant options to purchase the
Company's common stock to key employees and directors of the Company. Incentive
and non-qualified options must be granted at least at the fair market value of
the common stock or, in the case of certain optionees, at 110% of such fair
market value at the time of grant. The options may be exercised, subject to
certain vesting requirements, for periods up to ten years from the date of
issue. The 1996 Plan expired with respect to the issuance of new grants as of
December 10, 2006. Accordingly, future grants may be made only under the 2007
Plan.
At December 31, 2007, the Company has outstanding under its 1996 Plan and
2007 Plan, an aggregate 91,246 non-qualified stock options held by the
unaffiliated directors of the Company for the purchase of common stock at an
average exercise price of $7.88 per share.
A summary of the activity of this plan follows:
Weighted
Number of Average
Shares Exercise Price
------------ ------------
Options Outstanding at December 31, 2006 416,002 $ 5.21
Granted 175,700 $ 10.17
Exercised (84,525) $ 4.07
Forfeited (12,000) $ 7.81
------------ ------------
Options Outstanding at December 31, 2007 495,177 $ 7.10
============ ============
Options Exercisable at December 31, 2007 217,867 $ 5.47
============ ============
Options Available for Future Grant at
December 31, 2007 824,300
============
52
On January 1, 2006, the Company adopted the fair value recognition
provisions of Statement 123(R) using the modified prospective method. In
accordance with the modified prospective method, the Company has not restated
its consolidated financial statements for prior periods. Under this transition
method, stock-based compensation expense for the year ended December 31, 2006
includes stock-based compensation expense for all of the Company's stock-based
compensation awards granted prior to, but not yet vested as of, January 1, 2006,
based on the grant-date fair value estimated in accordance with the provisions
of Statement No. 123. Stock-based compensation expense for all stock-based
compensation awards granted on or after January 1, 2006 will be based on the
grant-date fair value estimated in accordance with the provisions of Statement
123(R). The impact of Statement 123(R) on the Company's results of operations
resulted in recognition of stock-based compensation expense of approximately
$579,000 and $256,000 for the year ended December 31, 2007 and 2006,
respectively. Approximately $486,000 and $209,000 of stock-based compensation
expense was charged to selling, general and administrative expenses for the
years ended December 31, 2007 and 2006, respectively and approximately $93,000
and $47,000 of stock-based compensation expense was charged to cost of sales for
the years ended December 31, 2007 and 2006, respectively.
This expense represents an incremental charge of $0.07 and $0.03 per
basic and diluted share for the years ended December 31, 2007 and 2006,
respectively. The adoption had no impact on cash used in operating activities or
cash provided by financing activities. No stock-based compensation expense was
capitalized during 2007 and 2006. Compensation expense related to stock options
to be charged in future periods amount to approximately $1,331,000 at December
31, 2007, which the Company expects to recognize as follows:
For the years ended Expected
December 31, Compensation Expense
-------------------- --------------------
2008 $ 500,000
2009 396,000
2010 318,000
2011 117,000
--------------------
$1,331,000
====================
The Company uses the Black-Scholes option pricing model as its method for
determining fair value of stock option grants, which was also used by the
Company for its pro forma information disclosures of stock-based compensation
expense prior to the adoption of Statement 123(R). The Company uses the
straight-line method of attributing the value of stock-based compensation
expense for all stock option grants. Stock compensation expense for all
stock-based grants and awards is recognized over the service or vesting period
of each grant or award.
Statement 123(R) requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates in order to derive the Company's best estimate of
awards ultimately expected to vest. Forfeitures represent only the unvested
portion of a surrendered option and are typically estimated based on historical
experience. Based on an analysis of the Company's historical data, the Company
applied 10% and 14% forfeiture rates for the years ended December 31, 2007 and
2006, respectively, to stock options granted in determining its Statement 123(R)
stock-based compensation expense which it believes is a reasonable forfeiture
estimate for the periods.
The options outstanding and exercisable at December 31, 2007 were in the
following exercise price ranges:
Options Outstanding Options Exercisable
------------------------------------------------------ ------------------------------------------------------
Weighted Weighted
Average Weighted- Average Weighted
Number Remaining Average Aggregate Number Remaining Average Aggregate
Range of of Shares Contractual Exercise Intrinsic of Shares Contractual Exercise Intrinsic
Exercise Price Outstanding Life (Years) Price Value Exercisable Life (Years) Price Value
--------------- ----------- ------------ --------- ---------- ----------- ------------ -------- ----------
$1.78 to $ 3.90 97,411 3.86 $3.60 $1,953,000 97,411 3.86 $3.60 $1,953,000
$3.91 to $ 4.90 108,819 6.42 $4.32 2,103,000 58,074 5.77 $4.27 1,125,000
$4.91 to $ 8.40 107,622 8.58 $7.89 1,696,000 29,882 8.39 $7.69 477,000
$8.41 to $ 9.60 151,200 9.48 $9.40 2,154,000 20,000 9.50 $9.38 286,000
$9.61 to $14.88 30,125 9.48 $14.11 287,000 12,500 9.45 $14.05 120,000
----------- ---------- ----------- ----------
495,177 7.51 $7.10 $8,193,000 217,867 5.83 $5.47 $3,961,000
=========== ========== =========== ==========
53
The aggregate intrinsic value in the table above represents the total
intrinsic value, based on the Company's closing stock price of $23.65 as of
December 31, 2007, which would have been received by the option holders had all
option holders exercised their options as of that date. The total intrinsic
value of options exercised was approximately $854,000 and $289,000, for the
years ended December 31, 2007 and 2006, respectively.
The per-share weighted-average fair value of stock options granted was
$6.09 and $5.41 for the years ended December 31, 2007 and 2006, respectively, on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
Risk-Free Expected
Expected Interest Expected Volatility
Year Dividend Yield Rate Option Life Factor
-------- -------------- --------- ----------- ----------
2006 -- 4.71% 4.5 years 83.3%
2007 -- 4.39% 4.5 years 72.3%
The risk free interest rate reflects treasury yields rates over a term
that approximates the expected option life. The expected option life is
calculated based on historical lives of all options issued under the plan. The
expected volatility factor is determined by measuring the actual stock price
volatility over a term equal to the expected useful life of the options granted.
On November 10, 2005, the FASB issued FASB Staff Position SFAS 123R-3
"Transition Election Related to Accounting for Tax Effects of Share-Based
Payment Awards." The Company has elected to adopt the alternative transition
method provided by the FASB Staff Position for calculating the tax effects (if
any) of stock-based compensation expense pursuant to Statement 123(R). The
alternative transition method includes simplified methods to establish the
beginning balance of the additional paid-in capital pool related to the tax
effects of employee stock-based compensation, and to determine the subsequent
impact to the additional paid-in capital pool and the consolidated statements of
operations and cash flows of the tax effects of employee stock-based
compensation awards that are outstanding upon adoption of Statement 123(R).
11. NASDAQ LISTING
At December 31, 2007, the Company's stockholder's equity was $8.5
million. As a result, the Company did not meet the $10 million minimum
stockholder's equity requirement under Standard No. 1 for continued listing on
the Nasdaq Global Market. However, the Company believes that it meets Standard
No. 2 for continued listing on the Nasdaq Global Market as the market value of
its listed securities currently exceeds $50 million and it meets all other
requirements under Standard No. 2. In order to remain in compliance with
Standard No. 2, the Company's market value of listed securities cannot fall
below $50 million for ten consecutive trading days at any point.
12. INCOME TAXES
There was no income tax provision (benefit) required for 2007 and 2006.
The reconciliation between the amount computed by applying the United
States federal statutory tax rate of 34% to pretax income (loss) and the actual
provision for income taxes follows:
2007 2006
As Restated
----------- -----------
Income tax expense (benefit) at statutory rate $ (664,000) $(2,763,000)
Increase (decrease) in valuation allowance
related to income tax expense 483,000 2,674,000
Permanent differences 181,000 89,000
----------- -----------
Total $ -- $ --
=========== ===========
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as follows:
54
2007 2006
As Restated
----------- -----------
Deferred tax assets:
Accounts receivable $ 93,000 $ 110,000
Accruals 1,028,000 1,159,000
Inventories 1,002,000 752,000
Net operating loss carryforwards 4,327,000 4,096,000
General business credit carryforwards 26,000 22,000
Alternative minimum tax credit carryforwards 268,000 268,000
Foreign tax credit 38,000 38,000
----------- -----------
Total gross deferred tax assets 6,782,000 $ 6,445,000
----------- -----------
Depreciation 98,000 (45,000)
----------- -----------
Total gross deferred tax liabilities 98,000 (45,000)
----------- -----------
Valuation allowance 6,684,000 6,400,000
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
The net change in the total valuation allowance for the period ended
December 31, 2007 was an increase of $284,000. Gross net operating loss
carryforwards were approximately $11.8 million as of December 31, 2007. Included
in this amount was approximately $3.4 million attributable to equity based
compensation transactions. Approximately $1 million of the valuation allowance
will be relieved through equity if these deductions for equity based
transactions are realized.
13. COMMITMENTS
Letters of Credit
-----------------
Outstanding letters of credit totaled $261,000 at December 31, 2007. The
letters of credit principally secure performance obligations, and allow holders
to draw funds up to the face amount of the letter of credit if the Company does
not perform as contractually required. These letters of credit expire through
2008 and are 100% secured by cash and short-term investments.
Property Under Capital Leases and Lease Commitments
---------------------------------------------------
At December 31, 2007 and 2006, the Company had capital leases in effect
for a building. The Company also had operating leases for office space and other
miscellaneous items.
The components of capitalized costs and carrying value of the property
under capital leases were as follows at December 31:
2007 2006
----------- -----------
Related party capital lease:
Hudson, New Hampshire building $ 3,390,000 $ 3,390,000
Less: Accumulated depreciation (3,108,000) (2,430,000)
----------- -----------
$ 282,000 $ 960,000
=========== ===========
55
At December 31, 2007, future minimum lease payments for the period ended
are as follows:
Related
Party Unrelated Party Related Party
Capital Lease Operating Leases Operating Lease
----------- ----------- -----------
2008 $ 495,000 $ 124,000 $ 1,812,000
2009 -- 110,000 1,920,000
2010 -- 90,000 2,028,000
2011 14,000 2,137,000
2012 2,049,000
----------- ----------- -----------
Total minimum lease payments 495,000 $ 338,000 $ 9,946,000
=========== ===========
Less amount representing interest (9,000)
-----------
Present value of minimum lease payments 486,000
Less current portion (486,000)
-----------
Long-term portion of capital lease obligation $ --
===========
Unrelated Party Capital Lease
-----------------------------
In September 2001, Spire Semiconductor entered into an agreement with GE
Capital Leasing Corp, for the lease of a reactor for its wafer production line.
The lease was originally accounted for as a capital lease. Under the lease
agreement, the Company was making monthly payments of approximately $36,000.
After the initial three-year period ending in September 2004, the lease allowed
for an additional two-year extension. In September 2004, the Company extended
the lease term for the additional two years to September 2006. In September 2006
the Company purchased the equipment from the leasing company for $275,000
resulting in a loss on buyout of capital lease of $105,000. The expense is
included in selling, general and administrative expense for the optoelectronics
business unit.
Related Party Capital Lease
---------------------------
In conjunction with the acquisition of Spire Semiconductor by the Company
in May 2003, SPI-Trust, a Trust of which Roger G. Little, Chairman of the Board,
Chief Executive Officer and President of the Company, is sole trustee and
principal beneficiary, purchased from Stratos Lightwave, Inc. (Spire
Semiconductor's former owner) the building that Spire Semiconductor occupies in
Hudson, New Hampshire for $3.7 million. Subsequently, the Company entered into a
lease for the building (90,000 square feet) with SPI-Trust whereby the Company
agreed to pay $4.1 million to the SPI-Trust over an initial five-year term
expiring in 2008 with a Company option to extend for five years. In addition to
the rent payments, the lease obligates the Company to keep on deposit with
SPI-Trust the equivalent of three months rent ($304,000 as of December 31,
2007.) The lease agreement does not provide for a transfer of ownership at any
point. Interest costs were assumed at 7%. Interest expense was approximately
$76,000 and $136,000 for the years ended December 31, 2007 and 2006,
respectively. This lease has been classified as a related party capital lease
and a summary of payments (including interest) follows:
Rate Per Security
Year Square Foot Annual Rent Monthly Rent Deposit
--------------------------- ----------- ----------- ------------ --------
June 1, 2003 - May 31, 2004 $6.00 $ 540,000 $45,000 $135,000
June 1, 2004 - May 31, 2005 7.50 675,000 56,250 168,750
June 1, 2005 - May 31, 2006 8.50 765,000 63,750 191,250
June 1, 2006 - May 31, 2007 10.50 945,000 78,750 236,250
June 1, 2007 - May 31, 2008 13.50 1,215,000 101,250 303,750
-----------
$4,140,000
===========
At December 31, 2007, $486,000 reflected the current portion of capital
lease obligation - related party, with no long-term portion, in the consolidated
balance sheet.
Unrelated Party Operating Leases
--------------------------------
Unrelated party operating leases primarily consist of leases for copiers
and the telephone system.
56
Related Party Operating Lease
-----------------------------
The Company subleased 77,000 square-feet in a building leased by Mykrolis
Corporation, who in turn leased the building from SPI-Trust, a Trust of which
Roger Little, Chairman of the Board, Chief Executive Officer and President of
the Company, is the sole trustee and principal beneficiary. The 1985 sublease,
originally was for a period of ten years, was extended for a five-year period
expiring on November 30, 2000 and was further extended for a five-year period
expiring on November 30, 2005. The sublease agreement provided for minimum
rental payments plus annual increases linked to the consumer price index.
Effective December 1, 2005, the Company entered into a two-year Extension of
Lease Agreement (the "Lease Extension") directly with SPI-Trust.
The Company assumed certain responsibilities of Mykrolis, the tenant
under the former lease, as a result of the Lease Extension including payment of
all building and real estate related expenses associated with the ongoing
operations of the property. The Company will allocate a portion of these
expenses to SPI-Trust based on pre-established formulas utilizing square footage
and actual usage where applicable. These allocated expenses will be invoiced
monthly and be paid utilizing a SPI-Trust escrow account of which the Company
has sole withdrawal authority. SPI-Trust is required to maintain three (3)
months of its anticipated operating costs within this escrow account. On
December 1, 2006, the Company and SPI-Trust amended the Lease Extension to
include the lease of an additional 15,000 square feet from SPI-Trust for a
one-year term. The additional space was leased at a rate of $8.06 per square
foot on annual basis. The additional space was used to expand the Company's
solar operations.
On November 30, 2007, the Company entered into a new Lease Agreement (the
"New Lease") with SPI-Trust, with respect to 144,230 square feet of space
comprising the entire building in which the Company has occupied space since
December 1, 1985. The term of the New Lease commenced on December 1, 2007 and
continues for five (5) years until November 30, 2012. The Company has the right
to extend the term of the New Lease for an additional five (5) year period. The
annual rental rate for the first year of the Lease is $12.50 per square foot on
a triple net basis, whereby the tenant is responsible for operating expenses,
taxes and maintenance of the building. The annual rental rate increases on each
anniversary by $0.75 per square foot. If the Company exercises its right to
extend the term of the New Lease, the annual rental rate for the first year of
the extended term will be the greater of (a) the rental rate in effect
immediately preceding the commencement of the extended term or (b) the market
rate at such time, and on each anniversary of the commencement of the extended
term the rental rate will increase by $0.75 per square foot. The Company
believes that the terms of the New Lease are commercially reasonable.
Rent expense under the New Lease and the Lease Extension, as amended, for
the year ended December 31, 2007 and 2006 was $1,415,000 and $1,262,000,
respectively. In connection with the Lease Extension, as amended, the Company
was invoiced and paid certain SPI-Trust related expenses, including building
maintenance and insurance. The Company invoiced SPI-Trust on a monthly basis and
SPI-Trust reimbursed the Company for all such costs. Approximately $14,000 was
due from SPI-Trust as of December 31, 2006 for building related costs and no
amounts were due as of December 31, 2007.
14. EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
-------------------
In 1985, the Company adopted a profit sharing plan under Section 401(k)
of the Internal Revenue Code. This plan allows employees to defer up to 17.5% of
their income up to certain dollar limits on a pretax basis through contributions
to the plan. No matching contributions have been made to the plan for the years
ended December 31, 2007 and 2006, respectively.
Deferred Compensation Plan
--------------------------
Effective January 1, 2002, the Company adopted the Spire Corporation
Non-Qualified Deferred Compensation Plan (the "Plan") for Roger Little, Chairman
of the Board, Chief Executive Officer and President of the Company (the
"Participant"). Under this Plan, the Company makes equal monthly contributions
to the Spire Corporation Non-Qualified Deferred Compensation Trust (the "Trust")
up to the annually required amount of $250,000. The Company records these
contributions as selling, general and administrative expense when made. The
Trustee makes all investment decisions for the Trust on behalf of the
Participant. The Company has not guaranteed a return on investment for the
Participant, however, all earnings and losses on the Plan assets are borne by
the Participant. All contributions and earnings are fully vested to the
Participant when made but are subject to the Company's creditors in the event of
bankruptcy. As a result, the assets held in
57
the Plan have been recorded as available-for-sale investments in the
consolidated balance sheet with a corresponding liability being recorded as
deferred compensation. Unrealized gains and losses on the available-for-sale
investments are recorded as accumulated other comprehensive income within the
equity section of the consolidated balance sheet. A corresponding entry to
deferred compensation is made to increase (decrease) the amounts due the
Participant resulting from the changes in the asset value with an offsetting
charge or credit to selling, general and administrative expense. Compensation
expense was approximately $250,000 in each of the years ended December 31, 2007
and 2006.
15. EARNINGS (LOSS) PER SHARE
The following table provides a reconciliation of the denominators of the
Company's reported basic and diluted earnings (loss) per share computations for
the years ended December 31:
2007 2006
---------- ----------
Weighted average number of common and common
equivalent shares outstanding - basic 8,272,123 7,898,320
Add: Net additional common shares upon assumed
exercise of common stock options -- --
---------- ----------
Weighted average number of common and common
equivalent shares outstanding - diluted 8,272,123 7,898,320
========== ==========
For the years ended December 31, 2007 and 2006, 495,177 and 416,002
shares of common stock, respectively, issuable relative to stock options were
excluded from the calculation of diluted shares since their inclusion would have
been anti-dilutive.
16. LEGAL MATTERS
From time to time, the Company is subject to legal proceedings and claims
arising from the conduct of its business operations. The Company does not expect
the outcome of these proceedings, either individually or in the aggregate, to
have a material adverse effect on its financial position, results of operations,
or cash flows.
During the second quarter of 2005 a suit was filed by Arrow
International, Inc. against Spire Biomedical, Inc., a wholly owned subsidiary of
the Company, alleging patent infringement by the Company. The complaint claims
one of the Company's catheter products induces and contributes to infringement
when medical professionals insert it. The Company has responded to the complaint
denying all allegations and has filed certain counterclaims. The discovery
process in this case has continued and is nearly complete. The Company filed a
motion for summary judgment, asserting patent invalidity resulting from
plaintiff's failure to follow the administrative procedures of the U.S. Patent
and Trademark Office ("USPTO") which failure has remained uncorrected. On August
4, 2006, the Court granted the Company's motion and dismissed this lawsuit
without prejudice. Plaintiffs applied to revive the applicable patent, which
application was granted by the USPTO in August 2006. Plaintiffs refiled their
lawsuit against the Company in September 2006. The Company has filed its answer
and resumed its defense. The parties have been working to conclude discovery.
Based on information presently available to the Company, the Company believes
that it does not infringe any valid claim of the plaintiff's patent and that,
consequently, it has meritorious legal defenses with respect to this action in
the event it were to be reinstated. The parties have agreed to limit any
potential damages to the Company to a pre-specified royalty rate.
In an amended complaint filed on December 28, 2006, in the Eastern
Division of the U.S. District Court for the Southern District of Ohio, the wife
and executor of the estate of Darrell Adams, deceased, alleged that the failure
of a hemodialysis catheter manufactured by the Company contributed to his death.
Subsequent to the end of fiscal 2007, the case was settled between the parties.
The Company's product liability insurance covered the settlement and all legal
expenses, less our deductible.
In a complaint filed July 11, 2007 in the U.S. District Court for the
Eastern District of Pennsylvania, Medical Components, Inc. (the "Plaintiff")
alleges that the Company and its wholly-owned subsidiary, Spire Biomedical,
Inc., through the manufacture and sale of its multilumen catheter products
infringes upon one of Plaintiff's patents. The Plaintiff seeks unspecified
damages, including enhanced damages and attorneys fees and costs, and an
injunction against certain manufacturing techniques. The Company has negotiated
a settlement with the Plaintiff which allows the Company to sell its remaining
multilumen catheter inventory in exchange for a lump sum payment which has been
fully accrued in the recent quarter. Further, we have altered our manufacturing
methods such that there is no question of potential infringement of plantiff's
patent.
58
17. OPERATING SEGMENTS AND RELATED INFORMATION
The following table presents certain operating division information in
accordance with the provisions of SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information".
Spire Spire Total
Solar Biomedical Optoelectronics Other Company
December 31, 2007 As Restated As Restated
----------------- -----------------------------------------------------------------------------------
Net sales and revenues $ 21,748,000 $ 11,106,000 $ 4,214,000 $ -- $ 37,068,000
Earnings (loss) from operations 515,000 (1,506,000) (2,931,000) -- (3,922,000)
Identifiable assets 30,983,000 4,932,000 5,630,000 7,142,000 48,687,000
Capital expenditures 977,000 198,000 265,000 290,000 1,730,000
Depreciation and amortization 107,000 299,000 1,641,000 166,000 2,213,000
Stock-based compensation 115,000 84,000 87,000 293,000 579,000
Spire Spire Total
December 31, 2006 Solar Biomedical Optoelectronics Other Company
----------------- -----------------------------------------------------------------------------------
Net sales and revenues $ 6,992,000 $ 10,517,000 $ 2,616,000 $ -- $ 20,125,000
Loss from operations (4,011,000) (1,241,000) (2,999,000) -- (8,251,000)
Identifiable assets 7,516,000 4,819,000 6,615,000 8,734,000 27,684,000
Capital expenditures 14,000 309,000 3,618,000 144,000 4,085,000
Depreciation and amortization 88,000 374,000 1,421,000 144,000 2,027,000
Stock-based compensation 40,000 66,000 34,000 116,000 256,000
The following table shows net sales and revenues by geographic area
(based on customer location) for the years ended December 31:
2007 % 2006 %
As Restated
----------------------- ----------- -------
United States $19,714,000 53% $13,454,000 67%
Europe/Africa 9,129,000 25% 3,389,000 17%
Asia 7,643,000 21% 2,771,000 13%
Rest of the world 582,000 1% 511,000 3%
----------- ------- ----------- -------
$37,068,000 100% $20,125,000 100%
----------- ------- ----------- -------
The Company's operations are focused on three primary business areas:
Spire Solar (comprised of solar equipment and solar systems), Spire Biomedical
(comprised of biomedical and biophotonics research) and optoelectronics
(comprised primarily of Spire Semiconductor). Spire Solar and Spire Biomedical
operate out of the Company's facility in Bedford, Massachusetts. Spire
Semiconductor operates out of the Company's facility in Hudson, New Hampshire.
Each business area is independently managed and has separate financial results
that are reviewed by the Board of Directors and Chief Executive Officer and the
chief executive officers of each operating division.
Earnings (loss) from operations is net sales less cost of sales, selling,
general and administrative expenses and gain on sales of licenses, but is not
affected either by non-operating income or by income taxes. In calculating
earnings from operations for individual business units, substantial
administrative expenses incurred at the operating level that are common to more
than one segment are allocated on a net sales basis. Certain corporate expenses
of an operational nature are also allocated to the divisions based on factors
including occupancy, employment, and purchasing volume. All intercompany
transactions have been eliminated.
Revenues from contracts with United States government agencies for 2007
and 2006 were approximately $1,303,000 and $2,261,000, or 4% and 11% of
consolidated net sales and revenues, respectively.
59
One customer accounted for approximately 15% of consolidated net sales
and revenues in 2007, and one customer accounted for approximately 12% of
consolidated net sales and revenues during 2006. Two customers represented
approximately 34% and 16% of net accounts receivable, trade at December 31, 2007
and two customers represented approximately 14% and 10% of net accounts
receivable, trade at December 31, 2006.
Spain and Taiwan were the only foreign country that accounted for more
than 10% of sales in 2007 and Germany was the only foreign country that
accounted for more than 10% of sales in 2006. Net sales to customers in Spain
and Taiwan accounted for $7,331,000 and $5,208,000, respectively in 2007 and net
sales to customers in Germany accounted for $2,568,000 in 2006.
18. SALE OF LICENSES
On May 26, 2005, the Company entered into a global consortium agreement
(the "Agreement") with Nisshinbo Industries, Inc. ("Nisshinbo") for the
development, manufacturing, and sales of solar photovoltaic module manufacturing
equipment. Nisshinbo's prior relationship with Spire was as a sub-licensee of
Marubeni Corporation with whom the Company had a license arrangement that was
originally signed in 1997, extended in 2003, and terminated in May 2005.
Nisshinbo's role as sub-licensee was to manufacture equipment for Marubeni to
sell to the Japanese market based upon the Company's proprietary technology.
Under the terms of the Agreement, Nisshinbo purchased a license to manufacture
and sell the Company's module manufacturing equipment on a semi-exclusive basis
for an upfront fee plus additional royalties based on ongoing equipment sales
over a ten-year period. In addition, the Company and Nisshinbo agreed, but are
not obligated, to pursue joint research and development, product improvement
activities and sales and marketing efforts. The companies may share market costs
such as product collateral and trade show expenses. Each company may also
collaborate on sales leads and have the other company manufacture and service
its equipment in the field. Both companies have reciprocal rights to participate
in the other company's R&D efforts on a going-forward basis. Nisshinbo can
request the Company to further develop a technology but Nisshinbo must (a) share
in the costs of these development efforts equally with the Company (and
thereafter have joint ownership); otherwise the Company will own the technology
under a partial contribute or no participation by Nisshinbo with the Company
receiving a royalty from Nisshinbo if it utilizes the technology. At the end of
the license all non-jointly owned technology developed under the Agreement will
revert back to the owner, with the other party being required to purchase a new
license based upon the fair market value of that technology in order to continue
to utilize the technology.
On June 27, 2005, the Company received JPY 400,000,000 from the sale of
this permanent license. The Company determined that the Nisshinbo Agreement
contains multiple elements consisting of (1) the granting of a license to
utilize the Company's technology and (2) the semi-exclusive right to utilize the
technology for a period of 10 years. The Company believes the granting of the
license meets the criteria of Emerging Issues Task Force ("EITF") 00-21,
"Accounting for Revenue Arrangements with Multiple Elements", paragraph 9(a), as
the license to utilize the technology has value to Nisshinbo on a stand-alone
basis. Further, Question 1 to Securities and Exchange Commission ("SEC") Staff
Accounting Bulletin Topic 13A-3f "Nonrefundable Up-Front Fees", was directly
considered as guidance for determining if the upfront fee under the Nisshinbo
Agreement should be recognized upon the signing of contract or recognized over
the term of the license. It is the Company's belief that a separate earnings
process was complete as Nisshinbo was purchasing access to utilize technology it
already had in its possession; therefore, recognition of the gain on the sale
was appropriate. The Company has determined the fair value of the license and
royalty based on an appraisal. As a result, a $3,320,000 gain was recognized as
a gain on sale of license in the consolidated statements of operations for the
year ended December 31, 2005. The balance of $350,000 was determined to
represent an advanced royalty payment and was recorded as an advance on
contracts in progress. This amount is being credited as royalty income over the
ten year license period on a straight-line basis. The Company recognized $35,000
and $35,000 of royalty income associated with this license in 2007 and 2006,
respectively.
19. PRIVATE PLACEMENT OF EQUITY
On April 26, 2006, the Company entered into Stock Purchase Agreements
with two accredited institutional investors in connection with the private
placement of 941,176 shares of the Company's common stock at a purchase price of
$8.50 per share. On April 28, 2006, the Company completed the private placement.
The net proceeds of the sale were approximately $7.7 million after deducting
placement fees and other closing costs.
Under the terms of the Stock Purchase Agreements, the Company was
obligated to file a registration statement on
60
Form S-3 with the SEC, registering the resale of the shares of common stock
sold. The Company filed the Form S-3 on May 3, 2006 and the SEC declared it
effective on May 12, 2006. In the event that this registration statement ceases
to be effective and available to the investors for an aggregate period of 30
days in any 12 month period, the Company must pay liquidated damages starting on
the 61st day (in the aggregate) of any suspensions in any 12 month period, and
each 30th day thereafter until the suspension is terminated an amount equal to
1% of the aggregate purchase price paid by the investors. However, the Company
is not obligated to pay liquidation damages on shares not owned by the investors
at the time of the suspension or shares that are tradable without restriction
under Rule 144. The Company reviewed EITF 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock," and EITF 05-04, "The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to EITF Issue No. 00-19," to determine
if these liquidation damages provisions require a portion of the equity raised
needs to be accounted under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement 133"). It determined that the
liquidated damages provisions did not require separate treatment under Statement
133 and therefore will treat all of the funds raised under these agreements as
additions to permanent equity.
20. MANUFACTURING AGREEMENTS
On August 29, 2006, the Company's wholly owned subsidiary, Spire
Semiconductor, entered into a five-year manufacturing agreement in which it will
be the exclusive supplier to Principia Lightworks, Inc. ("Principia"), of
semiconductor wafers, enabling Principia, a Woodland Hills, California firm, to
begin high volume production of its patented device, an electron beam pumped
vertical cavity surface emitting laser ("eVCSEL") as a light source for
production display applications, including rear-projection consumer televisions.
Spire Semiconductor will manufacture epitaxial wafers which will be further
processed by Principia to produce red, blue, and green colored lasers.
Under the terms of this agreement, Spire Semiconductor will be producing
III/V and II/VI wafers for Principia with full production expected to start in
mid 2008. Spire Semiconductor will begin the scale-up of its existing
metalorganic chemical vapor deposition ("MOCVD") and related processing
facilities to satisfy Principia's requirements. Principia made an up-front
payment for nonrecurring engineering and facility access costs and, in addition,
will make monthly facility availability payments throughout the term of the
agreement. The first eighteen months of the facility availability payments have
been secured by a pledge of Principia common equity which shall be returned
after eighteen months upon receipt of the monthly payments. The Company reviewed
FASB Statement No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Debt", and determined that the Company shall not
recognize the pledged shares and only will recognize if Principia defaults under
the terms of the agreement. Principia has no right of repayment with respect to
these payments. Spire Semiconductor has an obligation to purchase and qualify
MOCVD equipment to manufacture the wafers and make available the facility for
Principia's manufacturing needs for a period of 5 years. Upon qualification,
Principia has an obligation to purchase a minimum quantity of wafers for the
first two years of the Agreement. A fixed price has been established for each
wafer produced with some discounting contingent upon Principia committing to
certain volume commitments. During the fourth quarter, the two companies
modified their agreement such that it was agreed that Spire Semiconductor had
qualified the new equipment. The Company began revenue recognition of the
advance payments related to the facility preparation and availability on a
straight line basis. In 2007, this amounted to $357,000 in revenue. Spire
Semiconductor shall have full ownership of the equipment and may utilize any
excess capacity for other customers. In September 2006, the Company entered into
a purchase order with a manufacturer of MOCVD equipment. Although the Company
will be committing resources to complete the scale-up, it anticipates the
up-front payment plus the monthly payments will be sufficient to meet its
capital requirements under the agreement. Providing the parties meet their
respective obligations over the term of the agreement, no net outlay of capital
will be needed.
On March 16, 2006, the Company entered into a Turn-Key Project Agreement
to provide a privately owned solar firm located in Europe (the "Purchaser"), a
commercially sized multi-megawatt turn-key Photovoltaic Cell Manufacturing Line
(the "Cell Line") for $6.75 million (to be paid over the course of two years
upon the achievement of certain milestones). The agreement was subsequently
amended to include automation equipment bringing the total value of the contract
to $9 million. The Cell Line has been shipped to the customer and we expect to
begin installation during the second quarter of 2008 The Company is subject to
certain penalty provisions if the Cell Line does not meet agreed-upon
performance criteria within a set period of time. Under this agreement, the
Company also agreed to supply the Purchaser up to 1,500,000 mono-crystalline
wafers or multi-crystalline wafers (meeting certain electrical capacity and
efficiency standards) prior to the starting date of production of cells by the
Cell Line or within 60 days after shipment of the Cell Line. The actual amount
of wafers ordered and the price of such wafers is subject to the mutual
agreement of the parties, and the Purchaser may cancel this non-exclusive
arrangement at any time. The price for such wafer supply is in addition to the
61
purchase price for the Cell Line. At December 31, 2007, the criteria for revenue
recognition under Staff Accounting Bulletin No. 104, "Revenue Recognition in
Financial Statements", have not been met therefore no revenue has been
recognized.
21. SUBSEQUENT EVENTS
On March 31, 2008, the Company entered into a second Loan and Security
Agreement (the "Revolving Credit Facility") with the Bank. Under the terms of
the Revolving Credit Facility, the Bank agreed to provide the Company with a
credit line up to $5,000,000. The Company's obligations under the Equipment
Credit Facility are secured by substantially of its assets and advances under
the Revolving Credit Facility are limited to 80% of eligible receivables and the
lesser of 25% of the value of its eligible inventory, as defined, or $2,500,000
if the inventory is backed by a customer letter of credit. Interest on
outstanding borrowings accrues at a rate per annum equal to the greater of Prime
Rate plus one percent (1.0%) or seven percent (7%). In addition, the Company
agreed to pay to the Bank a collateral monitoring fee of $750 per month in the
event the Company is in default of its covenants and agreed to the following
additional terms: (i) $50,000 commitment fee; (ii) an unused line fee in the
amount of 0.75% per annum of the average unused portion of the revolving line;
and (iii) an early termination fee of 0.5% of the total credit line if the
Company terminates the Revolving Credit Facility prior to 12 months from the
Revolving Credit Facility's effective date. The Revolving Credit Facility, if
not sooner terminated in accordance with its terms, expires on March 30, 2009.
In addition the Company's existing Equipment Credit Facility was amended whereby
the Bank granted a waiver for the Company's defaults for not meeting its
December 31, 2007 quarter liquidity and profit covenants and for not meeting its
January and February 2008 liquidity covenants. Further the covenants were
amended to match the new covenants contained in the Revolving Credit Facility.
The Company's interest rate under the Equipment Credit Facility was also
modified from Bank Prime plus one half percent to the greater of Bank Prime plus
one percent (1.0%) or seven percent (7%).
Under the terms of the Equipment Credit Facility, as long as any
commitment remains outstanding under the facility, the Company must comply with
an adjusted quick ratio covenant and a minimum quarterly net income covenant. In
addition, until all amounts under the credit facilities with the Bank are
repaid, covenants under the credit facilities impose restrictions on the
Company's ability to, among other things, incur additional indebtedness, create
or permit liens on the Company's assets, merge, consolidate or dispose of assets
(other than in the ordinary course of business), make dividend and other
restricted payments, make certain debt or equity investments, make certain
acquisitions, engage in certain transactions with affiliates or change the
business conducted by the Company and its subsidiaries. Any failure by the
Company to comply with the covenants and obligations under the credit facilities
could result in an event of default, in which case the Bank may be entitled to
declare all amounts owed to be due and payable immediately. The Company's
obligations under the credit facilities are secured by substantially all of its
assets.
In an amended complaint filed on December 28, 2006, in the Eastern
Division of the U.S. District Court for the Southern District of Ohio, the wife
and executor of the estate of Darrell Adams, deceased, alleged that the failure
of a hemodialysis catheter manufactured by the Company contributed to his death.
Subsequent to the end of fiscal 2007, the case was settled between the parties.
The Company's product liability insurance covered the settlement and all legal
expenses, less our deductible, which has been fully accrued as of March 31,
2008.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
--------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
ITEM 9A (T). CONTROLS AND PROCEDURES
------------------------------------
Restatement of Consolidated Financial Statements
------------------------------------------------
In November 2008, we detected a side arrangement of which its existence
was not taken into account when we recognized revenue on the multi-element
contract. The identified contract was partially recognized in the fourth quarter
of 2007 and partially in the first quarter of 2008 under multi-element
arrangement accounting rules. As we could not establish the fair value of the
undelivered elements given under the side arrangement, we incorrectly recognized
the revenue rather than deferring all revenue until all elements were delivered.
Under the direction of the Audit Committee and with the assistance of the
Chief Operating Officer, the Company's Chief Financial Officer conducted a
review of the solar equipment contracting process and order management activity,
including a review of contract modifications. Sales personnel and key managers
in the solar equipment department who are
62
involved with the execution of contracts were interviewed with respect to the
knowledge of internal procedures on customer requests for concessions as well as
their knowledge of any previously granted customer concessions or modifications.
Additionally, the Company contacted a large sample of external customers to
confirm the completeness of deliverables as called for by the written contract
or any other means of communications. The review revealed that, except for the
one contract in question, all customer concessions and modifications were
conveyed on a timely basis and revenue was appropriately recorded in all other
cases during the period under review.
The error that caused the improper recognition of revenue was not timely
identified by our procedures and controls in place and $1.735 million was
incorrectly recognized as goods revenue, resulting in a material overstatement
of goods revenue for the fourth quarter of fiscal year 2007 and the first
quarter of 2008. On November 18, 2008, the Audit Committee of the Board of
Directors, in consultation with and upon recommendation of management, concluded
that due to the error in accounting for goods revenue, our previously issued
financial statements for the fourth quarter and fiscal 2007 included in the
Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and our
previously issued financial statements included in the Quarterly Reports on Form
10-Q for the fiscal quarters ended March 31, 2008 and June 30, 2008 should no
longer be relied upon and should be restated. Please refer to Note 2 of the
notes to the consolidated financial statements for a quantification of the
restatement.
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
Our management, under the supervision of and with the participation of
the Chief Executive Officer and Chief Financial Officer, performed an evaluation
of the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"))
as of the end of the period covered by this report, December 31, 2007.
A material weakness is defined in Public Company Accounting Oversight
Board Auditing Standard No. 5 as a deficiency, or a combination of deficiencies,
in internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of the company's annual or interim
financial statements will not be prevented or detected on a timely basis. In
connection with our overall assessment of internal control over financial
reporting, as discussed below, we have evaluated the effectiveness of our
internal control over financial reporting as of December 31, 2007 and have
concluded that we have several material weaknesses. Accordingly, our Chief
Executive Officer and Chief Financial Officer concluded that due to the material
weaknesses in our internal control over financial reporting described below, our
disclosure controls and procedures were not effective as of December 31, 2007.
Management's Annual Report on Internal Control over Financial Reporting
-----------------------------------------------------------------------
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) to provide reasonable assurance regarding the reliability of
our financial reporting and the preparation of our consolidated financial
statements for external purposes in accordance with United States Generally
Accepted Accounting Principles ("US GAAP"). Under the supervision of, and with
the participation of our Chief Executive Officer and Chief Financial Officer,
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007. Management based its assessment on criteria
established in "Internal Control Integrated Framework" issued by the Committee
of Sponsoring Organizations of the Treadway Commission ("COSO").
This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by our registered
public accounting firm pursuant to the temporary rules of the Security and
Exchange Commission that permit us to provide only management's report in this
annual report.
Based on this evaluation, management concluded that the following
material weaknesses in internal control over financial reporting existed as of
December 31, 2007:
We had an ineffective control environment. This has been previously
disclosed in prior filings. Efforts to remediate deficiencies were impeded by an
evolving control environment brought on by the rapid expansion in our business
over the past twelve months. We did not maintain an effective financial
reporting process, ensure timely and accurate completion of financial statements
and we did not maintain effective monitoring controls including reconciliations
and analysis of key accounts. We did not have a sufficient level of staffing
with the necessary knowledge, experience and training to ensure the completeness
and accuracy of our financial statements. Specifically, the financial reporting
organization structure was not
63
adequate to support the size, complexity or activities of our Company. In
addition, certain finance positions were staffed with individuals who did not
possess the level of accounting knowledge, experience and training in the
application of US GAAP commensurate with our financial reporting requirements.
During the second quarter, our recently hired Chief Accounting Officer resigned
to pursue other opportunities. We had not replaced this position as of December
31, 2007 and during the year have used consultants to fill this role.
This affected our ability to maintain effective monitoring controls and
related segregation of duties over automated and manual transactions processes.
Specifically, inadequate segregation of duties led to untimely identification
and resolution of accounting and disclosure matters and failure to perform
timely and effective supervision and reviews. We did not maintain effective
controls over our IT environment. Specifically, we did not perform a review of
restricted user access in our application software system and file server
critical worksheet directories. We lacked sufficient business continuity and
back up polices and procedures.
The material weaknesses noted above contributed to the existence of the
following control deficiencies, each of which resulted in audit adjustments and
is considered to be a material weakness.
We did not maintain effective controls over our financial closing process
to ensure the complete, accurate and timely preparation and review of our
consolidated financial statements. Accounts were not properly reconciled
and account analysis was not performed. Deposits, WIP, accrued PO
receipts, were not properly reconciled. Patents and patents pending were
not properly reviewed to reflect current status of patents. We did not
perform a timely analysis of warranty reserves for year end. Deferred
compensation accounts were not properly reconciled.
We did not maintain effective controls to ensure proper existence and
valuation of inventory. We lacked sufficient formal inventory policies
and procedures, reconciliations of WIP, physical inventory count
procedures and physical count omissions. We also identified areas where
we did not have timely posting of sub ledger activity and adjustments,
improper cut-off/capitalization and monitoring of standard costs to
ensure the company is carrying inventory at lower of cost or market.
We did not maintain effective controls to ensure existence and valuation
of revenue. Specifically, we lacked formal policies and procedures to
monitor revenue contracts to identify contracts with negative margins..
Each one of these control deficiencies could result in a misstatement to
our interim or annual consolidated financial statements that would not be
prevented or detected. As a result of these material weaknesses, audit
adjustments were noted by our auditors. Additional analysis was performed
and correcting entries were recorded to ensure the accuracy and
completeness of our December 31, 2007 consolidated financial results.
These items were addressed prior to the finalization of the consolidated
financial statements.
As a result of the foregoing, management has concluded that our internal
control over financial reporting was not effective as of December 31, 2007.
Our management has undertaken the following actions to remediate the
material weakness identified. Management has addressed the need for additional
experienced staff with the addition of a Director of Financial Reporting
(February 2008). This position will help us address the identified weakness in
the knowledge and experience required for completeness and accuracy of our
financial statements and also helps improve our overall financial close and
reporting process. Management is actively addressing operational and internal
control remediation efforts. New policies and procedures have been created and
existing policies and procedures have been reviewed and modified as part of our
documentation of internal control over financial reporting. Implementation of
these new controls policies and procedures, training of key personnel, testing
of these key controls and quarterly reporting to our Audit Committee of the
status of the remediation effort is underway.
In addition to the material weaknesses previously discussed, we did not
maintain effective controls to identify and monitor the existence of side
agreements. In November 2008, we became aware of a preexisting undocumented side
agreement made in connection with a multiple element arrangement. Timely
notification of the existence of the oral agreement was not communicated to the
Finance Department, and therefore the impact of such agreement was not
considered in the evaluation of revenue recognition on the contract. As a
result, our recognition of revenue was materially misstated with respect to the
fourth quarter of 2007 and the first quarter of 2008 which required restatement
of previously issued financial statements.
64
In connection with the findings of our review related to the restatement,
management and the Audit Committee reviewed the additional internal control
procedures and processes that have been implemented since the original date of
the error and have identified additional remediation to address the material
weakness of untimely reporting of customer contract changes. We will be
implementing new internal controls and enhanced accounting policies, as well as
improved sales policies and procedures relating to customer contract management
and order fulfillment. In addition, we have begun to strengthen our financial
reporting competencies, develop internal controls and compliance training
programs directed towards contract management, implement personnel changes where
necessary and establish corporate policies, practices and controls which are
clear, concise and consistent.
Changes in Internal Control Over Financial Reporting
----------------------------------------------------
There have been no changes during our fiscal quarter ended December 31,
2007 in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION
----------------------------
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
-----------------------------------------------------------------
Information concerning our directors, executive officers and corporate
governance is set forth in the Proxy Statement for the Special Meeting in Lieu
of 2008 Annual Meeting of Stockholders ("Proxy Statement") and is incorporated
herein by reference. Information concerning compliance with Section 16(a) of the
Exchange Act is set forth under "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" in the Proxy Statement and is incorporated herein by
reference.
We have adopted a Code of Business Conduct and Ethics (the "Code") that
applies to our principal executive officer, principal financial officer and
principal accounting officer or controller, as well as to directors, officers
and employees generally. The Code sets forth written standards that are
reasonably designed to deter wrongdoing and to promote (1) honest and ethical
conduct, (2) full, fair, accurate, timely and understandable disclosure in
reports and documents that we file with the SEC and in other public
communications made by us, (3) compliance with applicable governmental laws,
rules and regulations, (4) the prompt internal reporting of violations of the
Code to an appropriate person or persons identified in the Code and (5)
accountability for adherence to the Code. We will provide to any person without
charge, upon request, a copy of the Code. Any person wishing a copy should write
to Michael W. O'Dougherty, Clerk, Spire Corporation, One Patriots Park, Bedford,
Massachusetts 01730-2396.
A copy of the Code is incorporated by reference as Exhibit 21 to our Form
10-KSB for the fiscal year ended December 31, 2003.
ITEM 11. EXECUTIVE COMPENSATION
---------------------------------
Information concerning executive compensation is set forth in the Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
-----------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
Information concerning security ownership of certain beneficial owners
and management, and related stockholder matters, is set forth in the Proxy
Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
-----------------------------------------------------------------------
INDEPENDENCE
------------
Information concerning certain relationships and related transactions,
and director independence, is set forth in the Proxy Statement and is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
-------------------------------------------------
Information concerning principal accounting fees and services is set
forth in the Proxy Statement and incorporated herein by reference.
65
PART IV
ITEM 15. EXHIBITS
-------------------
The following Exhibits are either filed herewith or are incorporated by
reference as may be indicated.
2.1 Asset Purchase Agreement, dated as of July 31, 2007, by and
between the Company and Gloria Solar Co., Ltd., incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K filed with the
Securities and Exchange Commission (the "SEC") on September 10,
2007 *+
2.2 Contribution Agreement, dated as of July 31, 2007, by and among
the Company, Gloria Solar Co., Ltd. and Gloria Solar (Delaware)
Company, Ltd., incorporated by reference to Exhibit 2.2 to the
Company's Form 8-K filed with the SEC on September 10, 2007 *+
3(a) Articles of Organization as amended, incorporated by reference to
Exhibit 3(a) to the Company's Form 10-QSB for the quarter ended
June 30, 1997
3(b) By-Laws, as amended, incorporated by reference to Exhibit 3(b) to
the Company's Form 10-K for the year ended December 31, 1989
10(a) Sublease Agreement with Millipore Corporation as landlord for
facility at Bedford, Massachusetts dated November 25, 1985,
incorporated by reference to Exhibit 10(a) to the Company's Form
10-K for the year ended December 31, 1985
10(b) Amendment to Sublease Agreement with Millipore Corporation as
landlord for facility at Bedford, Massachusetts dated December 30,
1999, incorporated by reference to Exhibit 10(b) to the Company's
Form 10-KSB for the year ended December 31, 1999 ("1999 10-KSB")
10(c) Sublease Agreement with Methode Electronics, Inc. as tenant for a
portion of the facility at Bedford, Massachusetts dated December
29, 1999, incorporated by reference to Exhibit 10(c) to the 1999
10-KSB
10(d) Asset Purchase Agreement dated as of November 18, 1999 with
Methode Electronics, Inc. and Methode Massachusetts, Inc.,
incorporated by reference to Exhibit 1 to the Company's Form 8-K
dated December 29, 1999
10(e) Employment Agreement with Roger G. Little dated as of January 1,
2002, incorporated by reference to Exhibit 10(e) to the Company's
Form 10-KSB for the year ended December 31, 2001 ("2001 10-KSB")
10(f) Deferred Compensation Plan with Roger G. Little dated as of
January 1, 2002, incorporated by reference to Exhibit 10(f) to
2001 10-KSB
10(g) Spire Corporation 1985 Incentive Stock Option Plan, incorporated
by reference to Exhibit 10(d) to the Company's Form 10-K for the
year ended December 31, 1984
10(h) Spire Corporation 401(k) Profit Sharing Plan, incorporated by
reference to Exhibit 10(h) to the Company's Form 10-KSB for the
year ended December 31, 2003 ("2003 10-KSB")
10(i) Spire Corporation 1996 Equity Incentive Plan, incorporated by
reference to Appendix A to the Company's Proxy Statement dated
April 15, 2004
10(j) Purchase Agreement dated May 23, 2003 with Stratos Lightwave and
Bandwidth Semiconductor, LLC, incorporated by reference to Exhibit
10(h) to the Company's Form 10-QSB for the quarter ended June 30,
2003
66
10(k) Lease Agreement dated May 23, 2003 by and between Roger G. Little,
Trustee of SPI-Trust as Landlord and Spire Corporation as Tenant,
incorporated by reference to Exhibit 10(i) to the Company's Form
10-QSB for the quarter ended June 30, 2003
10(l) Trust Agreement dated April 1, 2004 between the Company and Riggs
Bank N.A. as Trustee of the Company's 401(k) Profit Sharing Plan,
incorporated by reference to Exhibit 10(1) to the Company's Form
10-KSB for the year ended December 31, 2004 ("2004 10-KSB")
10(m) Amendment No. One dated November 18, 2004 to Employment Agreement
for Roger G. Little, incorporated by reference to Exhibit 10(m) to
the Company's 2004 10-KSB
10(n) Development, Manufacturing, and Sales Consortium Agreement between
Nisshinbo Industries, Inc. and Spire Corporation, with an
effective date of 16 May 2005, incorporated by reference to
Exhibit 10(n) to the Company's For 10-QSB for the quarter ended
June 30, 2005**
10(o) Extension of Lease Agreement dated November 11, 2005 between Roger
G. Little, Trustee of SPI-Trust and Spire Corporation (lease of
premises, 77,037 sq. ft.), incorporated by reference to Exhibit
10(o) to the Company's 2005 10-KSB
10(p) Amendment Number Four to the Spire Corporation 401(k) Profit
Sharing Plan dated November 21, 2005, incorporated by reference to
Exhibit 10(p) to the Company's 2005 10-KSB
10(q) Turn-Key Project Agreement, dated March 16, 2006, incorporated by
reference to Exhibit 10(s) to the Company's 2006 10-QSB for the
quarter ended March 31, 2006 **
10(r) Wafer Supply Agreement, dated March 16, 2006, incorporated by
reference to Exhibit 10(r) to the Company's 2006 10-QSB for the
quarter ended March 31, 2006 **
10(s) Manufacturing Agreement, dated August 29, 2006, by and between
Bandwidth Semiconductor, LLC, a wholly owned subsidiary of Spire
("Bandwidth"), and Principia Lightworks, Inc. ("Principia"),
incorporated by reference to Exhibit 10(s) to the Company's 2006
10-QSB for the quarter ended September 30, 2006 **
10(t) First Amendment to Extension of Lease Agreement dated December 1,
2006 between Roger G. Little, Trustee of SPI-Trust and Spire
Corporation (lease of premises, approximately 91,701 sq. ft.),
incorporated by reference to Exhibit 10(t) to the Company's 2006
10-KSB
10(u) Amendment Number Five to the Spire Corporation 401(k) Profit
Sharing Plan dated December 22, 2006, incorporated by reference to
Exhibit 10(u) to the Company's 2006 10-KSB
10(v) Spire Corporation 2007 Stock Equity Plan, incorporated by
reference to Exhibit 4.1 to the Company's Form S-8 filed with the
Securities and Exchange Commission on June 5, 2007
10(w) Loan and Security Agreement, dated May 25, 2007, among Spire
Corporation, Bandwidth Semiconductor, LLC and Silicon Valley Bank,
incorporated by reference to Exhibit 10(w) to the Company's 2007
10-Q for the quarter ended June 30, 2007
10(x) Operating Agreement of Gloria Spire Solar, LLC, dated July 31,
2007, by and among the Company, Gloria Solar (Delaware) Company,
Ltd. and Gloria Spire Solar, LLC, incorporated by reference to
Exhibit 10(x) to the Company's Form 8-K filed with the SEC on
September 10, 2007 *
10(y) Lease Agreement, dated November 30, 2007, between Roger G. Little,
Trustee of SPI-Trust, and Spire Corporation (lease of premises,
approximately 144,230 sq. ft.), incorporated by reference to
Exhibit 10(y) to the Company's Form 8-K filed with the SEC on
December 6, 2007
14 Code of Business Conduct and Ethics incorporated by reference to
Exhibit 14 to the 2003 10-KSB
67
21 Subsidiaries of the Registrant, incorporated by reference to
Exhibit 21 to the 2003 10-KSB
23 Consent of Independent Registered Public Accounting Firm (filed
herewith)
31.1 Certification of the Chairman of the Board, Chief Executive
Officer and President pursuant to ss.302 of the Sarbanes-Oxley Act
of 2002 (filed herewith)
31.2 Certification of the Chief Financial Officer pursuant to ss.302 of
the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1 Certification of the Chairman of the Board, Chief Executive
Officer and President pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to ss.906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act
of 2002 (filed herewith)
* Portions of this Exhibit have been omitted pursuant to a request
for confidential treatment.
+ We agree to furnish supplementally to the SEC a copy of any
omitted schedule or exhibit to this agreement upon request by the
SEC.
** Portions of this Exhibit have been omitted pursuant to a grant of
confidential treatment.
68
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SPIRE CORPORATION
By: /s/ Roger G. Little November 24, 2008
-----------------------------
Roger G. Little
Chairman of the Board,
Chief Executive Officer,
and President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
---------------------------- -------------------------------------- -----------------
/s/ Roger G. Little Chairman of the Board, Chief Executive November 24, 2008
---------------------------- Officer and President
Roger G. Little
/s/ Christian Dufresne Chief Financial Officer and Treasurer November 24, 2008
----------------------------
Christian Dufresne
/s/ Udo Henseler Director November 24, 2008
----------------------------
Udo Henseler
/s/ David R. Lipinski Director November 24, 2008
----------------------------
David R. Lipinski
/s/ Mark C. Little Chief Executive Officer, Spire Biomedical November 24, 2008
---------------------------- and Director
Mark C. Little
/s/ Michael J. Magliochetti Director November 24, 2008
----------------------------
Michael J. Magliochetti
/s/ Guy L. Mayer Director November 24, 2008
----------------------------
Guy L. Mayer
/s/ Roger W. Redmond Director November 24, 2008
----------------------------
Roger W. Redmond
69
EXHIBIT INDEX
Exhibit Description
------- -----------
23 Consent of Independent Registered Public Accounting Firm
31.1 Certification of the Chairman of the Board, Chief Executive Officer
and President pursuant to ss.302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to ss.302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chairman of the Board, Chief Executive Officer
and President pursuant to 18 U.S.C. ss.1350, as adopted pursuant to
ss.906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of
2002