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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, 2008 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 04-2457335
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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.
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
(Do not check if a
smaller reporting company)
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 30, 2008: $62,903,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Special Meeting in Lieu
of 2009 Annual Meeting of Stockholders to be held on May 21, 2009, are
incorporated by reference in Part III of this Form 10-K.
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SPIRE CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2008
TABLE OF CONTENTS
Explanatory Note ........................................................... 1
PART I
Item 1. Business ....................................................... 2
Item 1A. Risk Factors ................................................... 7
Item 1B. Unresolved Staff Comments ...................................... 15
Item 2. Properties ..................................................... 15
Item 3. Legal Proceedings .............................................. 15
Item 4. Submission of Matters to a Vote of Security Holders ............ 16
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities .............. 16
Item 6. Selected Financial Data ........................................ 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................... 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..... 29
Item 8. Financial Statements ........................................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ........................................... 56
Item 9A(T). Controls and Procedures ........................................ 57
Item 9B. Other Information .............................................. 59
PART III
Item 10. Directors, Executive Officers and Corporate Governance ......... 59
Item 11. Executive Compensation ......................................... 60
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters ..................... 60
Item 13. Certain Relationships and Related Transactions, and Director
Independence ................................................... 60
Item 14. Principal Accounting Fees and Services ......................... 60
PART IV
Item 15. Exhibits, Financial Statement Schedules ........................ 60
Signatures ..................................................... 64
EXPLANATORY NOTE
We are filing this Amendment No. 1 (the "Amended Report") to our Annual
Report on Form 10-K for the year ended December 31, 2008 (the "Original Report")
for the sole purpose of (i) indicating on the signature page hereto that (A)
Roger G. Little, our Chairman, Chief Executive Officer and President, is signing
in his capacity as our "principal executive officer" and (B) Christian Dufresne,
our Chief Financial Officer and Treasurer, is signing in his capacity as both
our "principal financial officer" and "principal accounting officer"; (ii)
filing as an exhibit hereto our contract, dated November 28, 2008, with Federal
Prisons Industries, Inc., otherwise known as UNICOR (the "UNICOR Contract") and
amendments thereto; (iii) describing the material terms of the UNICOR Contract
under Item 9B, "Other Information"; and (iv) revising the description of the
UNICOR Contract under Item 1, "Business" to include such material terms.
For the reasons discussed above, we are filing this Amended Report in
order to amend Item 1, "Business," Item 9B, "Other Information," Item 15,
"Exhibits" and the signature page of the Original Report to the extent required
to reflect the changes described above. 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 herein, this report
speaks as of the date of the filing of the Original Report, March 31, 2009, 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 Securities and Exchange
Commission subsequent to the date of the Original Report.
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
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Spire has been in the solar business for over 30 years, initially
pioneering developments in solar cell technology. Currently, we develop,
manufacture, and market customized turnkey solutions for the solar industry,
including individual pieces of manufacturing equipment and full turnkey lines
for cell and module production and testing. We have been continually active in
research and development in the space, with over $100 million of R&D conducted
and 35 issued patents. This expertise has provided the platform for development
of our manufacturing equipment and turnkey lines. We have equipment deployed in
approximately 50 countries and have among our customers some of the world's
leading solar manufacturers including First Solar, BP Solar, Canadian Solar,
Trina Solar Energy, Evergreen and Solaria Energia.
As the solar market continues to expand, and photovoltaic cell and
module manufacturers ramp production to meet increasing demand, they require
more turnkey equipment to produce additional 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 customer base ranging from manufacturers relying on mostly manual
processes, to some of the largest photovoltaic manufacturing companies in the
world. With nearly forty years since our incorporation and over thirty years in
the solar market, we have been in a good position to capitalize on the market's
growth. Our total sales and revenues for 2008 increased approximately 85%
compared to 2007.
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.
In addition to our cell and module manufacturing solutions, our Spire
Semiconductor subsidiary provides semiconductor foundry services and is
currently developing triple-junction gallium arsenide ("GaAs") concentrator
solar cells. This state-of-the-art semiconductor fabrication facility is the
foundation of our solar cell process technology for silicon, polysilicon,
thin-film, and GaAs concentrator cells. We also operate a small business line
associated with advanced
1
biomedical applications. The foundation for all of our business units is our
industry-leading expertise in manufacturing, materials technologies and surface
treatments; this proprietary knowledge enables us to further develop our
offerings in each market we serve.
INDUSTRY OVERVIEW
Solar power has become one of the fastest growing sources of renewable
energy in recent years. Key factors driving 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 have become increasingly
supportive of the development of alternative sources of energy, such as solar
power. Historically, the largest markets for PV systems have been in Europe and
Japan with manufacturing located primarily in Europe and Asia. However, industry
analysts predict that the U.S. will be the fastest growing market over the next
several years due to a number of factors including the extension of the Section
48 business and Section 25D residential investment tax credits through 2016, and
the alternative energy focus of the American Recovery and Reinvestment Act
(ARRA).
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 low production costs, the majority of
the photovoltaic market, roughly 85%, is composed of crystalline silicon. The
popularity of silicon is largely based on its technological legacy, abundant raw
material (silicate), and high conversion efficiency. Bottlenecks in silicon
solar cell supply that existed prior to 2008 have now been relieved, and there
is abundant supply for the industry.
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, and 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.
PRODUCTS AND SERVICES
Our core business is in the solar market, where we provide individual
pieces of manufacturing equipment, turnkey cell and module lines, integrated
cell supply, solar factory management services, and solar systems through our
joint venture. Our solar business was responsible for over 75% of our revenues
in 2008. We also operate smaller businesses in the semiconductor and biomedical
device markets, both of which derived from our core expertise in solar cell
fabrication.
Spire Solar
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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 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
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
2
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 for individual equipment items and for fully integrated production lines.
Our primary customers have been new entrants in 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 companies 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 provide full
turnkey solar cell and wafer lines to customers to vertically integrate their
manufacturing lines (for these production lines) by providing integration
services using equipment purchased from third parties. We provide a customized
proprietary cell line process technology solution along with our own proprietary
process technology. We currently have three 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 designs, sells and manages the installations of
solar systems for the generation of electrical power by solar photovoltaic means
in primarily commercial/industrial and utility segments of the market (the "JV
Systems Business"). Gloria Solar owns 55% of the joint venture and we own 45%.
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.
In November 2008, we received a contract worth nearly $54 million from
the Federal Prison Industries, Inc, otherwise known as UNICOR, to supply solar
cells for the Spire-installed Turnkey Photovoltaic Module Factory located at the
Federal Correctional Institution (FCI) in Otisville, New York. UNICOR is a
wholly-owned government corporation that is authorized to operate industries in
federal correctional institutions and disciplinary barracks throughout the
United States. The Spire-supplied turnkey module line at FCI Otisville is to be
operated by inmates who will be trained to find employment in the rapidly
growing United States solar industry. Modules manufactured at FCI Otisville will
be sold for government installations. Successful performance of the factory may
lead to similar factories at other UNICOR locations. The contract has an initial
term of twenty two (22) months. Delivery commences in the first quarter of 2009
with approximately 30% of the contract value being delivered in 2009 and 70%
being delivered in 2010. The contract allows UNICOR to exercise, at its option,
three separate one-year extensions. The three, one-year extensions are worth up
to $266.3 million in the aggregate. Under the terms of the contract, UNICOR can
terminate the contract for convenience at any time.
Spire Semiconductor
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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 with
flexibility to engage in quick-turn research and prototyping, as well as for
economical full-rate volume production services.
Spire Semiconductor offers double- and triple-junction gallium arsenide
(GaAs) solar cells and has recently been awarded a contract by the Department of
Energy's National Renewable Energy Laboratory (NREL) for a $3.7 million, 20%
cost share program to develop a 40%+ conversion efficiency solar cell design.
GaAs concentrator cells represent a significant market opportunity and, as one
of the pioneers in GaAs fabrication, we have the expertise to provide customers
with turnkey cell products. We currently have capacity for 25 MW of high
efficiency solar cell production with opportunities to expand. We also have
capabilities for fabricating thermo-photovoltaic ("TPV") cells.
3
Spire Biomedical
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Through our Spire Biomedical subsidiary, we provide advanced medical
device surface treatment processes for 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, including advanced catheters coated with heparin to
minimize thrombus and fibrin sheath accumulation. As previously announced, we
are currently evaluating strategic alternatives for our catheter product line to
further focus our resources on our solar business.
PRINCIPAL DISTRIBUTION METHODS
Our products and services are sold primarily by our direct, internal
sales staff with four notable exceptions: (i) in certain offshore markets, we
utilize independent sales representatives to aid our sales efforts to sell our
solar equipment, (ii) our hemodialysis catheter products are sold via
independent distributors, and (iii) proposals for sponsored research and
development work are prepared by our scientists and researchers.
PHYSICIAN RELATIONSHIPS
We have engaged certain physicians to serve as consultants to us. These
physicians enter into written contracts that specify their duties and
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 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.
Up until the third quarter of 2008, there has been a multi-year shortage in
semiconductor grade silicon leading to huge increases in the spot market price.
However, at the end of 2008 new capacity has been added and further capacity is
expected to come online in 2009 given that the spot market is expected to remain
above production costs for 2009. This has as resulted in a significant reduction
in the cost of crystalline silicon based material. If poly-silicon production
scheduled to come on line is delayed or scaled back there is potential for a new
shortage which would cause users of our equipment to either scale back or delay
their expansion plans.
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 we
require; 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.
4
KEY LICENSES AND PATENTS, GOVERNMENT RIGHTS TO INTELLECTUAL PROPERTY
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
employees, consultants and third parties. We also seek and enforce patents as
appropriate. We currently have 33 issued United States patents, three of which
are jointly owned, two foreign patents, 26 patents pending in the United States,
and eight 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 2006.
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 $1,709,000, or 2%, and
$1,303,000, or 4%, for the years ended December 31, 2008 and 2007, respectively.
5
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 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
$803,000 and $313,000 for the years ended December 31, 2008 and 2007,
respectively.
CUSTOMERS AND MARKETS
We did not have any customers that accounted for more than 10% of our
consolidated net sales and revenues during the year ended December 31, 2008. One
customer accounted for more than 10% of our consolidated net sales and revenues
in 2007 (approximately 15%).
Our export sales, which amounted to 56% and 47% of net sales and
revenues for 2008 and 2007, respectively, continue to constitute a significant
portion of our net sales and revenues. Over 90% of export sales in 2008 and 2007
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:
2008 % 2007 %
---------------------- ----------------------
United States $ 30,377,000 44% $ 19,714,000 53%
Europe/N. Africa 14,665,000 22% 9,129,000 25%
Asia 22,782,000 33% 7,643,000 21%
Rest of the world 828,000 1% 582,000 1%
------------- ------ ------------- ------
$ 68,652,000 100% $ 37,068,000 100%
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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, 2008, we had approximately 229 employees, of whom 217
worked full time. Our year end head count included 154 employees in
manufacturing operations, 6 employees in research and development, and 69
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."
6
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 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 GAIN ON TERMINATION OF CONTRACT, AND WE EXPECT THAT OUR
OPERATING RESULTS WILL FLUCTUATE IN THE FUTURE.
We have experienced losses from operations before non-recurring gains in
each of the past two fiscal years. These losses have contributed to an
accumulated deficit of approximately $6.9 million as of December 31, 2008. 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 assets or 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.
7
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 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. Subsequent to December 31, 2008, the
parties have terminated this agreement by mutual consent. Spire
Semiconductor is planning to redirect the use of equipment to
manufacture solar concentrator cells. If we are not successful in
manufacturing solar concentrator cells, we will have significant
unutilized capacity and may not recover our investment in the
equipment.
DISRUPTIONS IN THE CAPITAL AND CREDIT MARKETS RELATED TO THE CURRENT NATIONAL
AND WORLD-WIDE FINANCIAL CRISIS, WHICH MAY CONTINUE OR INTENSIFY, COULD
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS, CASH FLOWS AND FINANCIAL CONDITION,
OR THOSE OF OUR CUSTOMERS OR SUPPLIERS.
The current disruptions in the capital and credit markets may continue
indefinitely or intensify, and adversely impact our results of operations, cash
flows and financial condition, or those of our customers and suppliers. These
disruptions could adversely affect our ability to draw on our bank credit
facilities. Disruptions in the capital and credit markets as a result of
uncertainty, changing or increased regulation, reduced alternatives or failures
of significant financial institutions could adversely affect our access to
liquidity needed to conduct or expand our businesses or conduct acquisitions or
make other discretionary investments, as well as our ability to effectively
hedge our currency or interest rates. These same conditions and disruptions may
also adversely impact the capital needs of our customers and suppliers, which,
in turn, could adversely affect our results of operations, cash flows and
financial condition.
8
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 did not have any customers that accounted for more than 10% of
consolidated net sales and revenues during the year ended December 31, 2008. One
customer accounted for more than 10% of consolidated net sales and revenues in
2007 (approximately 15%). 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 41 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
o Any of the measures described above would provide meaningful
protection.
9
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. Any litigation could result in
the expenditure of significant financial resources and the diversion of
management's time and resources. In addition, litigation in which we are accused
of infringement may have an impact on prospective customers, cause product
delays, require us to develop non-infringing technology, make substantial
payments to third parties or enter into royalty or license agreements, which may
not be available on acceptable terms, or at all. If a successful claim of
infringement were made against us and we could not develop non-infringing
technology or license the infringed or similar technology on a timely and
cost-effective basis, we may be forced to stop selling current products or
abandon new products under development and we could be exposed to legal actions
by our customers.
WE DEPEND ON OTHERS, PARTICULARLY ON AGENCIES OF THE UNITED STATES GOVERNMENT,
FOR FUNDING OUR RESEARCH AND DEVELOPMENT EFFORT.
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
10
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.
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 56% in 2008) 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. In the
past, we have 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
11
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.
RISKS RELATED TO OUR COMPANY
----------------------------
WE MAY NOT BE ABLE TO MAINTAIN OUR LISTING ON THE NASDAQ GLOBAL MARKET, WHICH
WOULD ADVERSELY AFFECT THE PRICE AND LIQUIDITY OF OUR COMMON STOCK.
Our stock is currently listed on the Nasdaq Global Market. On December
1, 2008, we received a letter from The Nasdaq Stock Market ("Nasdaq") advising
that for the prior ten (10) consecutive trading days, the market value of our
listed securities was below the minimum $50,000,000 requirement for continued
inclusion on The Nasdaq Global Market under Marketplace Rule 4450(b)(1)(A) (the
"Rule"). Nasdaq also noted that at the time we did not comply with Marketplace
Rule 4450(b)(1)(B), which alternatively requires total assets and total revenue
of at least $50,000,000 each for the most recently completed fiscal year or two
of the three most recently completed fiscal years. On March 3, 2009, we received
a Staff Determination Letter from Nasdaq indicating that we have not regained
compliance with the Rule as the market value of our common stock has remained
below the minimum $50,000,000 required for continued inclusion on The Nasdaq
Global Market. Accordingly, our common stock is subject to delisting from the
Nasdaq Global Market. We have requested a hearing before a Nasdaq Listing
Qualifications Panel to review the Staff Determination. The request for a
hearing will stay the Staff Determination and, as a result, our common stock
will remain listed on The Nasdaq Global Market until the Panel issues its
decision after the hearing. There can be no assurance the Panel will grant our
request for continued listing. However, we expect to regain compliance with
alternative continued listing requirements upon the filing of this Annual Report
on Form 10-K as we believe we now meet both (i) Marketplace Rule 4450(b)(1)(B),
which alternatively requires total assets and total revenue of at least
$50,000,000 each for the most recently completed fiscal year or two of the three
most recently completed fiscal years and (ii) Marketplace Rule 4450(a)(3), which
alternatively requires stockholders' equity of at least $10,000,000. Even if we
are able to regain compliance with the alternative continued listing
requirements, there is no assurance that in the future we will continue to
satisfy Nasdaq continued listing requirements. At various times in the past, we
have received other deficiency notices from Nasdaq and have been able to regain
compliance prior to delisting, but, as noted above, we cannot assure you that we
will always be able to regain or maintain compliance with Nasdaq continued
listing requirements.
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.
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:
12
o Overall economic conditions and general market volatility;
o 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 alternative
energy, semiconductor or biomedical 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
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; until September 2010, 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 in this Annual Report on From 10-K. We
have documented and tested our internal controls in 2008 and this effort
involved substantial time and expense. We have identified material weaknesses,
as discussed below, from our internal assessment and our independent 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, 2008: we did not have adequate 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 these material
13
weaknesses, issues related to accounting for inventory, accruals, reserves,
income taxes and revenues existed in our internal preliminary 2008 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 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 August 2015.
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.
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 claimed one of our catheter
products induced and contributed to infringement when medical professionals
inserted it. We responded to the complaint denying all allegations and filed
certain counterclaims. We also 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"). 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 later in August 2006. Plaintiffs refiled their lawsuit
against us on August 31, 2006. We have filed our answer and resumed our defense.
We have filed summary judgment motions with the Court and a hearing was held on
November 12, 2008. Following this hearing, the Judge ordered discovery reopened
on the issue of possible inequitable conduct by the plaintiff, Arrow
International, Inc. Based on information presently available to us, we believe
we have meritorious legal defenses with respect to this action. If we are
unsuccessful in our defenses, a portion of our product line may be enjoined or
we may need to redesign certain products to
14
avoid future infringement. However, if the plaintiff's patent is found valid and
infringed, the parties have already agreed to a stipulated calculation of
damages based on a pre-specified nominal non-punitive royalty rate.
We are not aware of any other current or pending legal proceedings to
which we are or may be party that we believe could materially adversely affect
our results of operations or financial condition or cash flows.
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 2008.
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
-------- -------
2008
----
First Quarter $25.82 $ 10.36
Second Quarter 18.75 9.80
Third Quarter 14.48 8.80
Fourth Quarter 15.64 2.94
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
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 27, 2009 was $4.21, 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 2008 or 2007 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",
15
"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.
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 200 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
56% of net sales and revenues for 2008, continue to constitute a significant
portion of our net sales and revenues.
RESULTS OF OPERATIONS
The following table sets forth certain items as a percentage of net
sales and revenues for the periods presented:
Year Ended December 31,
---------------------------
2008 2007
------------ ------------
Net sales and revenues 100% 100%
Cost of sales and revenues (71) (81)
------------ ------------
Gross profit 29 19
Selling, general and administrative expenses (29) (36)
Internal research and development expenses (1) (1)
Gain on sales of trademark - 7
Gain on termination of contract 10 -
------------ ------------
Income (loss) from operations 9 (11)
Other expense, net (2) -
------------ ------------
Income (loss) before income taxes 7 (11)
Income tax (provision) benefit - 2
------------ ------------
Income (loss) before extraordinary gain 7 (9)
Extraordinary gain, net of taxes - 4
------------ ------------
Net income (loss) 7% (5)%
============ ============
16
OVERALL
Our total net sales and revenues for the year ended December 31, 2008
("2008") increased 85% to $68,652,000 as compared to $37,068,000 for the year
ended December 31, 2007 ("2007"). The increase came primarily from our solar
business unit, while our biomedical and optoelectronics business units achieved
a small increase.
SOLAR BUSINESS UNIT
Sales in our solar business unit increased 139% to $51,901,000 in 2008
as compared to $21,748,000 in 2007, primarily due to a 154% increase in solar
equipment sales resulting from higher volume and a 388% increase in royalties
offset by a 63% decrease in solar systems sales.
BIOMEDICAL BUSINESS UNIT
Revenues of our biomedical business unit increased 5% to $11,643,000 in
2008 as compared to $11,106,000 in 2007, as a result of a 31% increase in
revenue from research and development activities and 9% increase in biomedical
services offset by a 10% decrease in revenue from our line of hemodialysis
catheters.
OPTOELECTRONICS BUSINESS UNIT
Sales in our optoelectronics business unit increased 21% in 2008 to
$5,108,000 as compared to $4,214,000 in 2007.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
---------------------------------------------------------------------
Net Sales and Revenues
----------------------
The following table categorizes our net sales and revenues for the
periods presented:
Year Ended December 31, Increase
----------------------------- -----------------------
2008 2007 $ %
------------ ------------ ------------ ------
Sales of goods $ 54,024,000 $ 24,723,000 $ 29,301,000 119%
Contract research, service and
license revenues 14,628,000 12,345,000 2,283,000 18%
------------ ------------ ------------
Net sales and revenues $ 68,652,000 $ 37,068,000 $ 31,584,000 85%
============ ============ ============
The 119% increase in sales of goods for the year ended December 31, 2008
as compared to the year ended December 31, 2007 was primarily due to an increase
in solar equipment revenues, partially offset by a 63% decrease in solar system
sales and a 10% decrease in catheter products sales. Solar equipment sales
increased 154% in 2008 as compared to 2007 primarily due to an overall increase
in solar power industry activity.
The 18% increase in contract research, services and license revenues for
the year ended December 31, 2008 as compared to the year ended December 31, 2007
is primarily attributable to an increase in royalties, optoelectronics, research
and development activities and in orthopedics, partially offset by $716,000 in
additional service revenue associated with the sale of technology services
delivered to Gloria Solar in the 2007. Revenue from royalties increased 388% in
2008 compared to 2007 as a result of an increase in royalties from Nisshinbo
Industries, Inc. ("Nisshinbo") along with an acceleration of deferred royalty
revenue related to the Development, Manufacturing, and Sales Consortium
Agreement (the "Consortium Agreement") with Nisshinbo that terminated in
November 2008, as a result of early termination by Nisshinbo (see Note 16 and
Note 17 for more information on the Consortium Agreement). Revenue from our
optoelectronics processing services (Spire Semiconductor) increased 21% in 2008
compared to 2007 as a result of an overall increase in optoelectronics
activities attributable to a shift in product mix to larger scale commercial
orders compared with smaller sized research and development projects. Revenues
from our research and development activities increased 31% in 2008 as compared
to 2007 primarily due to an increase in the number and value of contracts
associated with funded research and development. Revenues from our orthopedic
activities increased 9% in 2008 as compared to 2007.
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
17
percentage of related sales and revenues:
Years Ended December 31, Increase
---------------------------------------------------- -----------------------
2008 % 2007 % $ %
------------ ------ ------------ ------ ------------ ------
Cost of goods sold $ 38,501,000 71% $ 20,826,000 84% $ 17,675,000 85%
Cost of contract research,
service and license revenues 10,003,000 68% 9,360,000 76% 643,000 7%
------------ ------------ ------------
Net cost of sales and revenues $ 48,504,000 71% $ 30,186,000 81% $ 18,318,000 61%
============ ============ ============
The $17,675,000 (85%) increase in cost of goods sold for the year ended
December 31, 2008 as compared to the year ended December 31, 2007 was primarily
due to increased costs within our solar equipment product line corresponding to
the 154% increase in solar equipment sales. As a percentage of sales, cost of
goods sold was 71% of sales of goods in 2008 as compared to 84% of sales in
2007. This reduction in the percentage of sales in 2008 is due to a favorable
product mix with improved margins along with better utilization of solar
manufacturing overhead.
Cost of contract research, services and licenses increased 7% for the
year ended December 31, 2008 as compared to the year ended December 31, 2007,
primarily as a result of the 18% increase in related revenues and increased
costs at our optoelectronics facility (Spire Semiconductor) along with increased
costs of our contract research activities due to higher volumes. Cost of
contract research, services and licenses as a percentage of revenue decreased to
68% of revenues in 2008 from 76% in 2007, primarily due to absorption of
overhead costs improving margins in biomedical and optoelectronic services in
2008, partially offset by favorable margin related to $716,000 in additional
service revenue associated with the sale of technology services delivered to
Gloria Solar in 2007.
Cost of sales and revenues also includes approximately $180,000 and
$93,000 of stock-based compensation in 2008 and 2007, respectively.
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
---------------------------------------------------- -----------------------
2008 % 2007 % $ %
------------ ------ ------------ ------ ------------ ------
Selling, general and administrative $ 19,612,000 29% $ 13,226,000 36% $ 6,386,000 48%
Internal research and development 803,000 1% 313,000 1% 490,000 157%
------------ ------------ ------------
Operating expenses $ 20,415,000 30% $ 13,539,000 37% $ 6,876,000 51%
============ ============ ============
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expense increased 48% for the year
ended December 31, 2008 as compared to the year ended December 31, 2007,
primarily as a result of an increase in marketing activities, professional
services, stock-based compensation, and higher head count and related employee
costs to support our overall growth. In addition, commissions to our network of
independent sales representatives related to sales of solar equipment were up
due to increased sales and revenues. Selling, general and administrative expense
decreased to 29% of sales and revenues in 2008 as compared to 36% in 2007. The
reduction was primarily due to the absorption of selling, general and
administrative overhead costs by the 85% increase in sales and revenues.
Selling, general and administrative expense includes approximately $574,000 of
stock-based compensation in 2008 versus $486,000 in 2007.
INTERNAL RESEARCH AND DEVELOPMENT EXPENSES
Internal research and development expense increased 157% for the year
ended December 31, 2008 as compared to the year ended December 31, 2007,
primarily as a result of our cost sharing contract with the NREL reducing 2007
costs. In addition, Spire Semiconductor had higher head count and related
employee costs for 2008. As a percentage of sales and revenue, however, internal
research and development expenses remained at 1% for both periods.
18
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.
We believe the sale of the trademark and the other goods and services meets the
criteria of Emerging Issues Task Force ("EITF") 00-21, "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 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 was in advances on contracts in progress
and was later recognized in sales of goods in 2008. Gloria Solar has further
contracted with us in 2007 and 2008 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.
GAIN ON TERMINATION OF CONTRACT
On May 16, 2005, we entered into the global Consortium Agreement with
Nisshinbo for the development, manufacturing, and sales of solar photovoltaic
module manufacturing equipment. On September 1, 2008, Nisshinbo delivered a
letter to us stating its intention to terminate the Consortium Agreement entered
into between Nisshinbo and us on May 16, 2005. Pursuant to the Consortium
Agreement, Nisshinbo provided its 180 day prior notice to terminate the
Consortium Agreement, effective as of February 28, 2009. However, on November
28, 2008, we signed a Separation and Novation Agreement (the "Separation
Agreement") with Nisshinbo that, among other things, accelerated the termination
of the Consortium Agreement and the payment by Nisshinbo to us of an early
termination penalty in the amount of $6.8 million which was paid in December
2008. This penalty is recorded as a one-time gain on termination of contract for
the year ended December 31, 2008. In addition, we received a final royalty
payment of approximately $659,000 from Nisshinbo for outstanding equipment being
built by Nisshinbo for its customer base. Under the Separation Agreement, the
termination of the Consortium Agreement was effective as of November 30, 2008
(see Note 16 and Note 17 for more information on the Consortium Agreement and
the Separation Agreement).
OTHER INCOME (EXPENSE), NET
We earned $21,000 and $74,000 of interest income for the year ended
December 31, 2008 and 2007, respectively. The decrease in earned interest
relates to the decrease in interest rates during 2008 compared with 2007. We
incurred interest expense of $233,000 and $225,000 for the year ended December
31, 2008 and 2007, respectively. The slight increase in interest expense is due
to higher interest payments associated with the Equipment Credit Facility
outstanding with Silicon Valley Bank in 2008 compared with 2007 interest
expenses primarily associated with interest incurred on capital leases
associated with the semiconductor foundry. The capital leases ended in May 2008.
We recorded losses of $807,000 and $24,000 on the equity investment in
the joint venture with Gloria Solar for the years ended December 31, 2008 and
2007, respectively. The $783,000 increase in loss on equity investment in joint
venture for the year ended December 31, 2008 as compared to the year ended
December 31, 2007 is attributable to reporting only two months of losses in
2007, due to the formation of the joint venture on July 31, 2007, compared to
twelve months reported in 2008. We report the ongoing financial results of the
joint venture one quarter in arrears. The joint venture has experienced
significant losses in 2008 due to its inability to generate revenue
commensurable with operating expenses.
We had currency exchange losses of approximately $430,000 and $14,000
during the years ended December 31, 2008 and 2007, respectively. The $416,000
increase in currency exchange losses for the year ended December 31, 2008 as
compared to the year ended December 31, 2007 is primarily attributable to
unfavorable changes in the Japanese Yen effecting inventory purchases in 2008.
19
INCOME TAXES
We recorded a provision for income taxes of $270,000 for the year ended
December 31, 2008. 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. 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 due to uncertainty regarding the
realization of the net operating loss in the future. At December 31, 2008, we
had gross deferred tax assets of $6,034,000, against which a valuation allowance
of $5,030,000 had been applied. The remaining deferred tax assets have been
offset against deferred tax liabilities.
EXTRAORDINARY GAIN ON INVESTMENT IN JOINT VENTURE AND EQUITY INVESTMENT IN JOINT
VENTURE
On July 31, 2007, we entered into contractual relationship with 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
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. 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
benefit of $877,000 for the year ended December 31, 2007.
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 losses of $807,000 and
$24,000 on the equity investment in joint venture for the years ended December
31, 2008 and 2007, respectively.
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%.
NET EARNINGS (LOSS)
We reported a net income for the year ended December 31, 2008 of
$4,775,000 and a net loss for the year ended December 31, 2007 of $1,933,000.
The net increase in income of approximately $6,708,000 is primarily due to a one
time termination fee of $6,761,000 and by the increase in sales and revenues and
the improvement in gross margins in 2008 partially offset by gains from the sale
of assets to Gloria Solar, and the extraordinary gain on our equity investment
in our joint venture with Gloria Solar in 2007.
LIQUIDITY AND CAPITAL RESOURCES
Increase (Decrease)
December 31, December 31, -----------------------
2008 2007 $ %
------------ ------------ ------------ ------
Cash and cash equivalents $ 5,971,000 $ 2,372,000 $ 3,599,000 152%
Working capital $ 6,835,000 $ 2,587,000 $ 4,248,000 164%
20
Cash and cash equivalents increased due to cash provided by operating
activities, partially offset by cash used in investing and financing activities.
The overall increase in working capital is due to an increase in current assets,
primarily cash and restricted cash, partially offset by an increase in advances
on contracts in progress. We have historically funded our operating cash
requirements using operating cash flow, proceeds from the sale and licensing of
technology and proceeds from the sale of equity securities.
There are no material commitments by us for capital expenditures. At
December 31, 2008, our accumulated deficit was approximately $6,914,000,
compared to accumulated deficit of approximately $11,689,000 as of December 31,
2007.
LOAN AGREEMENTS
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).
Advances made under the Equipment Credit Facility would bear interest at the
Bank's prime rate, as determined, plus 0.5% and payable in thirty-six (36)
consecutive monthly payments following the funding date of that advance.
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 Equipment 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 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, on March 31, 2008 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 2008 liquidity covenants.
Further, the covenants were amended to match the covenants as discussed below
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%) or seven percent
(7%).
On May 13, 2008, the Bank amended the Equipment Credit Facility and the
Revolving Credit Facility, modifying our net income profitability covenant
requirements in exchange for a three quarters percent (0.75%) increase in our
interest rate (7.75% at December 31, 2008) and waiver restructuring fee equal to
one half percent (0.5%) of amounts outstanding under the Equipment Credit
Facility and committed under the Revolving Credit Facility. 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, our term loan
balance will be factored in when calculating our borrowing base under the
Revolving Credit Facility.
Under the amended terms of both credit facilities, as long as any
commitment remains outstanding under the facilities, we must comply with an
adjusted quick ratio covenant and a minimum monthly 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.
21
On March 31, 2009, the Bank extended the expiration of the Revolving
Credit Facility under the same terms for an additional sixty days, to expire on
May 29, 2009. The purpose of the extension is to allow both parties the time to
negotiate an expansion of the credit limit contingent upon our qualifying for an
Export-Import Bank loan guarantee.
Our Equipment Credit Facility principal balance outstanding was
$1,750,000 and $2,917,000 at December 31, 2008 and 2007, respectively. Our
Revolving Credit Facility principal balance outstanding was $1,500,000 at
December 31, 2008. We were in compliance with our credit facility covenants as
of December 31, 2008.
TERMINATION OF CONTRACTS
On August 29, 2008, we delivered to Principia Lightworks, Inc.
("Principia") a Notice of Breach and Pending Termination (the "Notice") of a
certain Manufacturing Agreement, dated August 29, 2006, by and between Spire
Semiconductor and Principia (the "Manufacturing Agreement"). Under the terms of
the Manufacturing Agreement, Principia made an up-front payment for nonrecurring
engineering and facility access costs and, in addition was required to make
monthly facility availability payments throughout the term of the agreement. As
a result of Principia's failure to make recent monthly facility availability
payments, we have reserved $225,000 against Principia's accounts receivable
balance. We have entered into a mutual standstill agreement with Principia which
expired on March 15, 2009. The purpose of the standstill was to give the parties
additional time to negotiate a resolution.
On March 27, 2009, Spire Semiconductor and Principia mutually agreed to
terminate the Manufacturing Agreement for convenience and entered into a
separation and novation agreement (the "Novation Agreement"). Under the terms of
the Novation Agreement, both parties agreed to terminate technology licenses
that were granted to each other under the terms of the Manufacturing Agreement
and Spire Semiconductor will be released from its production requirements to
Principia. Principia is released from paying its future facility availability
payments due under the Manufacturing Agreement but will be required to pay
outstanding facility availability payments of $300,000. Spire Semiconductor
holds 67,500 shares of Principia stock as collateral against the outstanding
facility availability payments. Additionally, in the first quarter of 2009 we
will accelerate the amortization of deferred revenue and will recognize $1.54
million in statement of operations related to the termination of the
Manufacturing Agreement.
On September 1, 2008, Nisshinbo delivered a letter to us stating its
intention to terminate the Consortium Agreement entered into between Nisshinbo
and us on May 16, 2005. Pursuant to the Consortium Agreement, Nisshinbo provided
its 180 day prior notice to terminate the Consortium Agreement, effective as of
February 28, 2009. However, on November 28, 2008, we signed the Separation
Agreement with Nisshinbo that, among other things, accelerated the termination
of the Consortium Agreement and the payment by Nisshinbo to us of an early
termination penalty in the amount of $6.8 million which was paid in December
2008. In addition, we received a final royalty payment of approximately $659,000
from Nisshinbo for outstanding equipment being built by Nisshinbo for its
customer base. Under the Separation Agreement, the termination of the Consortium
Agreement was effective as of November 30, 2008 (see Note 16 and Note 17 for
more information on the Consortium Agreement and the Separation Agreement).
CASH GAIN (LOSS) FROM OPERATIONS
We have incurred operating losses before non-recurring gains in 2008 and
2007. Loss from operations, before gain on termination of contract, was $267,000
in 2008 and loss from operations, before gain on sales of trademarks, was $6.7
million in 2007. Previous 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 $5.7 million in 2007. We have funded
these cash losses from cash receipts of $3.0 million from credit facility
borrowings and $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 our trademark to
the joint venture in 2007. We have funded our working capital needs in 2007 from
customer advances on contracts. For the year ended December 31, 2008, the cash
gain (income from operations excluding gain on termination of contract plus or
minus non-cash adjustments) was $4.1 million. As of December 31, 2008, we had
unrestricted cash and cash equivalents of $6.0 million compared to unrestricted
cash and cash equivalents of $2.4 million as of December 31, 2007. We have
numerous options on how to fund future operational losses or working capital
needs, including but not limited to sales of equity, bank debt or the sale or
license of assets and technology, as we have done in the past; however, there
are no assurances that we will be able to sell equity, obtain bank debt, or sell
or license assets or technology on a timely basis and at appropriate values. We
have reduced our loss from operations substantially in 2008 and have funded our
working capital needs from customer advances on contracts. We have developed
several plans including cost containment efforts and outside financing to offset
a decline in business due to a further deepening of the current global economic
recession. As a result, we believe we have sufficient
22
resources to continue as a going concern through at least December 31, 2009. The
table below details our cash gain(loss) from operations which excludes changes
in working capital during the respective periods.
Years Ended December 31,
------------------------------
2008 2007
------------ ------------
Gain (loss) from operations $ 6,494,000 $ (3,922,000)
Gain on termination of contract (6,761,000) --
Gain on sale of trademark -- (2,735,000)
------------ ------------
Adjusted loss from operations (267,000) (6,657,000)
Depreciation and amortization 1,939,000 2,213,000
Loss on impairment of capital equipment -- 78,000
Loss on equity investment in joint venture 807,000 24,000
Deferred tax benefit -- (877,000)
Deferred compensation (487,000) 2,000
Deferred rent 275,000 18,000
Extraordinary gain in equity investment in joint venture, net of tax -- (1,301,000)
Stock-based compensation 754,000 579,000
Provision for inventory and accounts receivable reserves 1,057,000 260,000
------------ ------------
Cash gain (loss) from operations $ 4,078,000 $ (5,661,000)
============ ============
CONTRACTUAL OBLIGATIONS, COMMERCIAL COMMITMENTS AND OFF-BALANCE SHEET
ARRANGEMENTS.
The following table summarizes our gross contractual obligations at
December 31, 2008 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
---------------------------------- ------------ ------------ ------------ ------------ ------------
Equipment Credit Facility (SVB) $ 1,859,000 $ 1,262,000 $ 597,000 -- --
Revolving Credit Facility (SVB) $ 1,500,000 $ 1,500,000 -- -- --
Purchase obligations $ 18,160,000 $ 18,068,000 $ 92,000 -- --
Operating leases:
Unrelated party operating leases $ 270,000 $ 136,000 $ 134,000 -- --
Related party operating leases $ 17,051,000 $ 3,067,000 $ 6,662,000 $ 4,817,000 $ 2,505,000
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.
Equipment Credit Facility obligations outlined above include both the
principal and interest components of these contractual obligations.
Outstanding letters of credit totaled $4,187,000 and $261,000 at
December 31, 2008 and 2007, respectively. 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 2009 and are 100%
secured by cash, short-term investments and the Revolving Credit Facility.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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 acquire 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
23
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 and will change the
accounting for business combinations on a prospective basis.
Effective January 1, 2008, we adopted SFAS No. 157, FAIR VALUE
MEASUREMENTS ("FAS 157"). In February 2008, the FASB issued FASB Staff Position
No. FAS 157-2, EFFECTIVE DATE OF FASB STATEMENT NO. 157, which provides a one
year deferral of the effective date of FAS 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. Therefore, we have adopted
the provisions of FAS 157 with respect to its financial assets and liabilities
only. FAS 157 defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. The new standard
provides a consistent definition of fair value which focuses on an exit price
which is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. The standard also prioritizes, within the measurement of fair
value, the use of market-based information over entity specific information and
establishes a three-level hierarchy for fair value measurements based on the
nature of inputs used in the valuation of an asset or liability as of the
measurement date. The application of FAS 157 in situations where the market for
a financial asset is not active was clarified by the issuance of FASB Staff
Position No. FAS 157-3, DETERMINING THE FAIR VALUE OF A FINANCIAL ASSET WHEN THE
MARKET FOR THAT ASSET IS NOT ACTIVE, ("FAS 157-3") in October 2008. FAS 157-3
became effective immediately and did not significantly impact the methods by
which we determine the fair values of our financial assets.
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. We are
currently evaluating the impact, if any, that this standard will have on its
financial position and results of operations.
In March 2008, the FASB issued SFAS No. 161 ("FAS 161"), DISCLOSURES
ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - AN AMENDMENT OF FASB
STATEMENT NO. 133. FAS 161 requires enhanced disclosures about an entity's
derivative and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement No. 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. FAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. FAS 161 encourages, but does not
require, comparative disclosures for earlier periods at initial adoption. We are
currently evaluating the impact, if any, that this standard will have on its
financial position and results of operations.
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.
24
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. In addition, purchases
made and royalties received under our Consortium Agreement with Nisshinbo are in
Japanese yen. In addition, we received Japanese yen related to the termination
of the Consortium Agreement in 2008. 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 attempt to hedge known transactions when possible to
minimize foreign exchange risk. There were no hedged amounts at December 31,
2008 and 2007. Foreign exchange loss included in other income (expense) was
$430,000 and $14,000 for the year ended December 31, 2008 and 2007,
respectively.
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 for the ten year period ending
November 2005. 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 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 were 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 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 exercises 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, 2008 and 2007 was $2,019,000 and
$1,415,000, respectively.
In May 2003, Spire Semiconductor leased a building (90,000 square feet)
in Hudson, New Hampshire from SPI-Trust whereby we agreed to pay $4.1 million to
SPI-Trust over an initial five-year term expiring in May 2008 with an option for
us to extend for five years. In addition to the rent payments, the lease
obligated us to keep on deposit with SPI-Trust the equivalent of three months
rent. The lease agreement did not provide for a transfer of ownership at any
point. Interest costs were assumed at 7%. This lease was 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
============
25
Upon the expiration of the lease in May 2008, we did not exercise our
option to extend the lease for an additional 5 years. On May 20, 2008, we agreed
with SPI-Trust to continue the current lease, under the current terms and
conditions on a month-to-month basis for a maximum of three (3) months beyond
the current term.
On August 29, 2008, we entered into a new Lease Agreement (the "Hudson
Lease") with SPI-Trust, with respect to 90,000 square feet of space comprising
the entire building in which Spire Semiconductor has occupied space since June
1, 2003. The term of the Hudson Lease commenced on September 1, 2008, and
continues for seven (7) years until August 31, 2015. We have the right to extend
the term of the Hudson Lease for an additional five (5) year period. The annual
rental rate for the first year of the Hudson 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 Hudson 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. In addition, we are required
to deposit with SPI-Trust $300,000 as security for performance by us for our
covenants and obligations under the Hudson Lease. SPI-Trust is responsible, at
its sole expense, to make certain defined tenant improvements to the building.
We believe that the terms of the Hudson Lease are commercially reasonable and
reflective of market rates. The lease agreement does not provide for a transfer
of ownership at any point. The Hudson Lease is classified as a related party
operating lease. Rent expense under the Hudson Lease for the year ended December
31, 2008 was $443,000.
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, stock-based compensation,
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 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,
26
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, 2008 and 2007, is as
follows:
Rebates Returns Total
------------ ------------ ------------
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
Provision 588,000 34,000 622,000
Utilization (513,000) (34,000) (547,000)
------------ ------------ ------------
Balance - December 31, 2008 $ 152,000 $ 10,000 $ 162,000
============ ============ ============
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 past
quarters has increased to approximately 17% at December 31, 2008, when compared
to 8% at December 31, 2007. We perform various sensitivity analyses to determine
the appropriate reserve percentage to use. To date, actual reserve utilization
has approximated the amount provided. The total inventory held by distributors
was approximately $952,000 at December 31, 2008.
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. Most orders are sold on a
FOB Bedford, Massachusetts (or EX-Works Factory) basis and other orders are sold
on a CIP or on rare situations a DDU basis. It is our policy to recognize
revenues for this equipment as title of the product has passed 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. 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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
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 is deemed necessary.
A specific reserve will be established for past due accounts 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
27
recorded when all efforts to collect the receivable have been exhausted and only
in consultation with the appropriate business line manager.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, including fixed assets and intangible assets, are
continually monitored and are evaluated at least annually for impairment. The
determination of recoverability is based on an estimate of undiscounted cash
flows expected to result from the use of an asset and its eventual disposition.
The estimate of cash flows is based upon, among other things, certain
assumptions about expected future operating performance. Our estimates of
undiscounted cash flows may differ from actual cash flows due to, among other
things, technological changes, economic conditions, changes to our business
model or changes in our operating performance. If the sum of the undiscounted
cash flows (excluding interest) is less than 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
We account for our stock-based compensation plans in accordance with the
fair value recognition provisions of SFAS No, 123(R). SHARE-BASED PAYMENT
("Statement 123(R)"). We use the Black-Scholes option pricing model as our
method for determining the fair value of stock option grants. Statement 123(R)
requires the fair value of all share-based awards that are expected to vest to
be recognized in the statements of operations over the service or vesting period
of each award. We use the straight-line method of attributing the value of
stock-based compensation expense for all stock option grants.
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. We have 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).
WARRANTY
We provide warranties on certain products and services. Our 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 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 we disclaim any responsibility for any medical
complications. Spire Biomedical warrants that its services only will meet the
agreed upon specifications.
Spire Semiconductor warrants that its products will meet the agreed upon
specifications.
We provide 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 our estimates,
revisions to the estimated warranty liability would be required.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------
Not required as we are a smaller reporting company.
28
ITEM 8. FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm .................... 30
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2008 and 2007 ......... 31
Consolidated Statements of Operations for the Years Ended December
31, 2008 and 2007 ................................................. 32
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
for the Years Ended December 31, 2008 and 2007 .................... 33
Consolidated Statements of Cash Flows for the Years Ended December
31, 2008 and 2007 ................................................. 34
Notes to Consolidated Financial Statements ........................... 35
29
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, 2008 and 2007 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 that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Spire Corporation
and subsidiaries as of December 31, 2008 and 2007, 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, P.C.
March 31, 2009
Boston, Massachusetts
30
SPIRE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2008 2007
------------ ------------
ASSETS
Current assets
--------------
Cash and cash equivalents $ 5,971,000 $ 2,372,000
Restricted cash - current portion 4,167,000 391,000
------------ ------------
10,138,000 2,763,000
Accounts receivable - trade, net 8,873,000 11,865,000
Inventories, net 17,876,000 11,570,000
Deferred cost of goods sold 17,088,000 8,044,000
Deposits on equipment for inventory 3,433,000 2,475,000
Prepaid expenses and other current assets 468,000 542,000
------------ ------------
Total current assets 57,876,000 37,259,000
Property and equipment, net 6,089,000 6,209,000
Intangible and other assets, net 846,000 851,000
Available-for-sale investments, at quoted market value (cost
of $1,859,000 and $1,738,000 at December 31, 2008 and
December 31, 2007, respectively) 1,434,000 1,800,000
Equity investment in joint venture 1,473,000 2,264,000
Deposit - related party 300,000 304,000
------------ ------------
Total other assets 4,053,000 5,219,000
------------ ------------
Total assets $ 68,018,000 $ 48,687,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Current portion of capital lease obligation - related party $ -- $ 486,000
Current portion of equipment and revolving line of credit 2,667,000 1,167,000
Accounts payable 5,161,000 2,909,000
Accrued liabilities 8,704,000 6,057,000
Current portion of advances on contracts in progress 34,509,000 24,053,000
------------ ------------
Total current liabilities 51,041,000 34,672,000
Long-term portion of equipment line of credit 583,000 1,750,000
Long-term portion of advances on contracts in progress 1,149,000 1,950,000
Deferred compensation 1,434,000 1,800,000
Other long-term liabilities 293,000 60,000
------------ ------------
Total long-term liabilities 3,459,000 5,560,000
------------ ------------
Total liabilities 54,500,000 40,232,000
------------ ------------
Stockholders' equity
--------------------
Common stock, $0.01 par value; 20,000,000 shares authorized;
8,330,688 and 8,321,188 shares issued and outstanding on
December 31, 2008 and December 31, 2007, respectively 83,000 83,000
Additional paid-in capital 20,774,000 19,999,000
Accumulated deficit (6,914,000) (11,689,000)
Accumulated other comprehensive income (loss), net (425,000) 62,000
------------ ------------
Total stockholders' equity 13,518,000 8,455,000
------------ ------------
Total liabilities and stockholders' equity $ 68,018,000 $ 48,687,000
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
31
SPIRE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
------------------------------
2008 2007
------------ ------------
Net sales and revenues
----------------------
Sales of goods $ 54,024,000 $ 24,723,000
Contract research, service and license revenues 14,628,000 12,345,000
------------ ------------
Total net sales and revenues 68,652,000 37,068,000
Cost of sales and revenues
--------------------------
Cost of goods sold 38,501,000 20,826,000
Cost of contract research, services and licenses 10,003,000 9,360,000
------------ ------------
Total cost of sales and revenues 48,504,000 30,186,000
------------ ------------
Gross margin 20,148,000 6,882,000
Operating expenses
------------------
Selling, general and administrative expenses 19,612,000 13,226,000
Internal research and development expenses 803,000 313,000
------------ ------------
Total operating expenses 20,415,000 13,539,000
------------ ------------
Gain on sale of trademark -- 2,735,000
Gain on termination of contract 6,761,000 --
------------ ------------
Gain (loss) from operations 6,494,000 (3,922,000)
---------------------------
Interest income (expense), net (212,000) (151,000)
Loss on equity investment in joint venture (807,000) (24,000)
Other expense (430,000) (14,000)
------------ ------------
Total other income (expense), net (1,449,000) (189,000)
------------ ------------
Income (loss) before income taxes and extraordinary gain 5,045,000 (4,111,000)
--------------------------------------------------------
Income tax (provision) benefit (270,000) 877,000
------------ ------------
Net income (loss) before extraordinary gain 4,775,000 (3,234,000)
-------------------------------------------
Extraordinary gain, net of taxes -- 1,301,000
------------ ------------
Net income (loss) $ 4,775,000 $ (1,933,000)
----------------- ============ ============
Basic income (loss) per share:
From continuing operations after income taxes $ 0.57 $ (0.39)
From extraordinary gain, net of tax -- 0.16
------------ ------------
Basic income (loss) per share $ 0.57 $ (0.23)
----------------------------- ============ ============
Diluted income (loss) per share:
From continuing operations after income taxes $ 0.56 $ (0.39)
From extraordinary gain, net of tax -- 0.16
------------ ------------
Diluted income (loss) per share $ 0.56 $ (0.23)
------------------------------- ============ ============
Weighted average number of common and common equivalent
shares outstanding - basic 8,328,592 8,272,123
============ ============
Weighted average number of common and common equivalent
shares outstanding - diluted 8,464,623 8,272,123
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
32
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 (loss) Total
------------ ------------ ------------ ------------ ------------ ------------
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 -- -- -- (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
Exercise of stock options 9,500 -- 21,000 -- -- 21,000
Stock-based compensation -- -- 754,000 -- -- 754,000
Net unrealized loss on
available for sale
marketable securities,
net of tax -- -- -- -- (487,000) (487,000)
Net income -- -- -- 4,775,000 -- 4,775,000
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2008 8,330,688 $ 83,000 $ 20,774,000 $ (6,914,000) $ (425,000) $ 13,518,000
============ ============ ============ ============ ============ ============
Years Ended December 31,
-----------------------------
2008 2007
------------ ------------
Comprehensive income/(loss) is calculated as follows:
Net income (loss) $ 4,775,000 $ (1,933,000)
Other comprehensive gain (loss) on available for sale marketable securities (487,000) 2,000
------------ ------------
Comprehensive income (loss) $ 4,288,000 $ (1,931,000)
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
33
SPIRE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------
2008 2007
------------ ------------
Cash flows from operating activities:
-------------------------------------
Net income (loss) $ 4,775,000 $ (1,933,000)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,939,000 2,213,000
Loss on impairment of capital equipment -- 78,000
Loss on equity investment in joint venture 807,000 24,000
Gain on sale of trademark -- (2,735,000)
Gain on sale of asset (60,000) --
Deferred tax benefit -- (877,000)
Extraordinary gain in equity investment in joint venture, net of tax -- (1,301,000)
Deferred compensation (487,000) 2,000
Stock-based compensation 754,000 579,000
Provision for rebates, returns and accounts receivable reserves 929,000 300,000
Provision for inventory reserve 128,000 (40,000)
Changes in assets and liabilities:
Restricted cash (3,776,000) (1,000)
Accounts receivable 2,063,000 (8,155,000)
Inventories (6,450,000) (7,448,000)
Deferred cost of goods sold (9,044,000) (8,044,000)
Deposits, prepaid expenses and other current assets (884,000) 299,000
Accounts payable, accrued liabilities and other liabilities 5,132,000 1,998,000
Deposit - related party 4,000 (68,000)
Advances on contracts in progress 9,655,000 17,836,000
------------ ------------
Net cash provided by (used in) operating activities 5,485,000 (7,273,000)
------------ ------------
Cash flows from investing activities:
-------------------------------------
Proceeds from maturity of short-term investments -- 5,000,000
Proceeds from sale of trademark -- 2,735,000
Proceeds from sale of asset 61,000 --
Purchase of property and equipment (1,710,000) (1,730,000)
Increase in intangible and other assets (105,000) (130,000)
------------ ------------
Net cash (used in) provided by investing activities (1,754,000) 5,875,000
------------ ------------
Cash flows from financing activities:
-------------------------------------
Principal payments on capital lease obligations - related parties (486,000) (1,027,000)
Principal (payments) borrowings on equipment line of credit, net (1,167,000) 2,917,000
Borrowings from revolving line of credit 1,500,000 --
Proceeds from exercise of stock options 21,000 344,000
------------ ------------
Net cash (used in) provided by financing activities (132,000) 2,234,000
------------ ------------
Net increase in cash and cash equivalents 3,599,000 836,000
Cash and cash equivalents, beginning of year 2,372,000 1,536,000
------------ ------------
Cash and cash equivalents, end of year $ 5,971,000 $ 2,372,000
============ ============
Supplemental disclosures of cash flow information:
--------------------------------------------------
Interest paid $ 224,000 $ 149,000
============ ============
Interest received $ 21,000 $ 74,000
============ ============
Interest paid - related party $ 9,000 $ 76,000
============ ============
Income taxes paid (refunded) $ (2,000) $ 18,000
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
34
SPIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
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
200 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 56% of net sales and revenues for 2008, continue to constitute a significant
portion of the Company's net sales and revenues.
The Company has incurred operating losses before non-recurring gains in
2008 and 2007. Loss from operations, before gain on termination of contract, was
$267,000 in 2008 and loss from operations, before gain on sales of trademarks,
was $6.7 million in 2007. Previous 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 $5.7 million in 2007. The Company has
funded these cash losses from cash receipts of $3.0 million from credit facility
borrowings and $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 to the joint venture in 2007. The Company has funded its working
capital needs in 2007 from customer advances on contracts. For the year ended
December 31, 2008, the cash gain (income from operations excluding gain on
termination of contract plus or minus non-cash adjustments) was $4.1 million. As
of December 31, 2008, the Company had unrestricted cash and cash equivalents of
$6.0 million compared to unrestricted cash and cash equivalents of $2.4 million
as of December 31, 2007. The Company has numerous options on how to fund future
operational losses or working capital needs, including but not limited to sales
of equity, bank debt or the sale or license of assets and technology, as it has
done in the past; however, there are no assurances that the Company will be able
to sell equity, obtain bank debt, or sell or license assets or technology on a
timely basis and at appropriate values. The Company has reduced its loss from
operations substantially in 2008 and has funded its working capital needs from
customer advances on contracts. The Company has developed several plans
including cost containment efforts and outside financing to offset a decline in
business due to a further deepening of the current global economic recession. As
a result, the Company believes it has sufficient resources to continue as a
going concern through at least December 31, 2009.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. The Company's joint venture with
Gloria Solar is not consolidated but recognized using the equity method of
accounting. All significant intercompany balances and transactions have been
eliminated in consolidation.
35
(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, 2008 and 2007, is as follows:
Rebates Returns Total
--------- --------- ---------
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
Provision 588,000 34,000 622,000
Utilization (513,000) (34,000) (547,000)
--------- --------- ---------
Balance - December 31, 2008 $ 152,000 $ 10,000 $ 162,000
========= ========= =========
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 Company perform various sensitivity analyses to determine the
appropriate reserve percentage to use. To date, actual reserve utilization has
approximated the amount provided.
The Company's OEM capital equipment solar energy business builds complex
customized machines to order for specific customers. Most orders are sold on a
FOB Bedford, Massachusetts (or EX-Works Factory) basis and other orders are sold
on a CIP, or on rare situations, a DDU basis. It is the Company's policy to
recognize revenues for this equipment as title of the product has passed 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
36
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) 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:
2008 2007
---------- ----------
Equity investments $1,170,000 $1,411,000
Government bonds 190,000 303,000
Cash and money market funds 74,000 86,000
---------- ----------
$1,434,000 $1,800,000
========== ==========
These investments have been classified as available-for-sale investments
and are reported at fair value, with unrealized gains and losses included in
accumulated other comprehensive loss. As of December 31, 2008, the unrealized
loss on these marketable securities was $425,000 and as of December 31, 2007,
the unrealized gain on these marketable securities was $62,000.
Effective January 1, 2008, the Company adopted SFAS No. 157, FAIR VALUE
MEASUREMENTS ("FAS 157"). In February 2008, the FASB issued FASB Staff Position
No. FAS 157-2, EFFECTIVE DATE OF FASB STATEMENT NO. 157, which provides a one
year deferral of the effective date of FAS 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. Therefore, the Company has
adopted the provisions of FAS 157 with respect to its financial assets and
liabilities only. FAS 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements. The
new standard provides a consistent definition of fair value which focuses on an
exit price which is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. The standard also prioritizes, within the measurement of
fair value, the use of market-based information over entity specific information
and establishes a three-level hierarchy for fair value measurements based on the
nature of inputs used in the valuation of an asset or liability as of the
measurement date. The application of FAS 157 in situations where the market for
a financial asset is not active was clarified by the issuance of FASB Staff
Position No. FAS 157-3, DETERMINING THE FAIR VALUE OF A FINANCIAL ASSET WHEN THE
MARKET FOR THAT ASSET IS NOT ACTIVE, ("FAS 157-3") in October 2008. FAS 157-3
became effective immediately and did not significantly impact the methods by
which the Company determines the fair values of its financial assets.
The hierarchy established under FAS 157 gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3). As required
by FAS 157, the Company's available for sale investments are classified within
the fair value hierarchy based on the lowest level of input that is significant
to the fair value measurement. The three levels of the fair value hierarchy
under FAS 157, and its applicability to the Company's available-for-sale
investments, are described below:
Level 1 - Pricing inputs are quoted prices available in active markets
for identical investments as of the reporting date. As required by FAS
157, the Company does not adjust the quoted price for these investments,
even in situations where the Company holds a large position and a sale
could reasonably impact the quoted price.
Level 2 - Pricing inputs are quoted prices for similar investments, or
inputs that are observable, either directly or indirectly, for
substantially the full term through corroboration with observable market
data. Level 2 includes investments valued at quoted prices adjusted for
legal or contractual restrictions specific to these investments.
37
Level 3 - Pricing inputs are unobservable for the investment, that is,
inputs that reflect the reporting entity's own assumptions about the
assumptions market participants would use in pricing the asset or
liability. Level 3 includes investments that are supported by little or
no market activity.
The following table presents the financial instruments related to the
Company's non-qualified deferred compensation plan carried at fair value as of
December 31, 2008 by FAS 157 valuation hierarchy (as defined above).
Level 1 Level 2 Level 3 Total
---------------------------------------------------------
Cash and short term investments $ 74,000 $ -- $ -- $ 74,000
Fixed income -- 231,000 -- 231,000
Equities 721,000 408,000 -- 1,129,000
---------------------------------------------------------
Total available for-sale-investments $ 795,000 $ 639,000 $ -- $1,434,000
Percent of total 55% 45% -- 100%
(e) 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 in 2007, 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.
(f) 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
Machinery and equipment 5 and 7 years
Furniture and fixtures and computer equipment 3 - 5 years
Leasehold improvements Lesser of 10 years or remaining life of lease
Maintenance and repairs are charged to expense as incurred. Major
renewals and betterments are added to property and equipment accounts at cost.
(g) INTANGIBLE AND OTHER ASSETS
Patents amounted to $154,000 and $143,000, net of accumulated
amortization of $754,000 and $687,000, at December 31, 2008 and 2007,
respectively. Licenses amounted to $66,000 and $109,000, net of accumulated
amortization of $259,000 and $216,000, at December 31, 2008 and 2007,
respectively. 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 $110,000 and
$117,000, for the years ended December 31, 2008 and 2007, 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, 2008
of $616,000. 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
-------------- --------------------
2009 $189,000
2010 182,000
2011 174,000
2012 154,000
2013 137,000
--------------------
$836,000
--------------------
38
Also included in other assets are approximately $10,000 of refundable
deposits made by the Company at December 31, 2008.
(h) 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.
(i) 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.
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, 2008. 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 subject to audit by the Internal Revenue Service for the
calendar years ended 2004, 2005, 2006, 2007 and 2008. The Company and its
subsidiaries state income tax returns are subject to audit for the calendar
years ended 2004, 2005, 2006, 2007 and 2008.
(j) 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 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 warrants that its products will meet the agreed upon
specifications.
39
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
changes in the product warranties for the years ended December 31, 2008 and
2007, are as follows:
Balance at December 31, 2006 $ 115,000
Provision charged to income 207,000
Usage (187,000)
-----------
Balance at December 31, 2007 $ 135,000
Provision charged to income 842,000
Usage (482,000)
-----------
Balance at December 31, 2008 $ 495,000
===========
(k) INTERNAL RESEARCH AND DEVELOPMENT COSTS
Internal research and development costs are charged to operations as
incurred. During the years ended December 31, 2008 and 2007, Company funded
research and development costs were approximately $803,000 and $313,000,
respectively.
(l) 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
2008 and 2007.
(m) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income (loss). Other comprehensive income (loss) includes certain
changes in equity that are excluded from net income (loss). Accumulated other
comprehensive income was comprised of an unrealized gain (loss) of
available-for-sale investments of approximately $(425,000) and $62,000, net of
tax at December 31, 2008 and 2007, respectively.
(n) STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans in
accordance with the fair value recognition provisions of Statement 123(R). The
Company uses the Black-Scholes option pricing model as its method for
determining the fair value of stock option grants. Statement 123(R) requires the
fair value of all share-based awards that are expected to vest to be recognized
in the statements of operations over the service or vesting period of each
award. The Company uses the straight-line method of attributing the value of
stock-based compensation expense for all stock option grants.
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).
(o) 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. The significant estimates included in the
consolidated financial statements are those relating to revenue recognition,
reserves for doubtful accounts and sales returns and allowances, reserves for
excess and obsolete inventory, impairment of long-lived assets, stock-based
compensation, income taxes, and warranty reserves. Actual results could differ
from those estimates. 40
(p) 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.
(q) SHIPPING AND HANDLING COSTS
Shipping and handling costs are included in cost of goods sold.
(r) 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
sales 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. In
addition, purchases made and royalties received under the Company's Consortium
Agreement with Nisshinbo are in Japanese yen. In addition, the Company received
Japanese yen related to the termination of the Consortium Agreement in 2008. The
Company does purchase pieces of equipment from European vendors; these
commitments are occasionally denominated in Euros. The Company bears the risk of
any currency fluctuations that may be associated with these commitments. The
Company attempts to hedge known transactions when possible to minimize foreign
exchange risk. There were no hedged amounts at December 31, 2008 and 2007.
Foreign exchange loss included in other income (expense) was $430,000 and
$14,000 for the years ended December 31, 2008 and 2007, respectively.
(s) EQUITY INVESTMENT IN JOINT VENTURE
The Company accounts for its unconsolidated investment in joint venture,
Gloria Spire Solar, LLC, in accordance with the provisions of APB Opinion No.
18, THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN COMMON STOCK. The results
of the joint venture are reported one quarter in arrears, given there are no
significant transactions recorded by the joint venture during the most recent
unreported quarter.
(t) SEGMENT INFORMATION
SFAS No 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION ("FAS 131"), requires public entities to report certain information
about operating segments. Based on the guidance provided in FAS 131, the Company
has determined that its business is conducted in four reportable segments, solar
equipment, biomedical, optoelectronics and corporate.
(u) NEW ACCOUNTING STANDARDS
In December 2007, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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 and will change the accounting for business
combinations on a prospective basis.
41
Effective January 1, 2008, the Company adopted SFAS No. 157, FAIR VALUE
MEASUREMENTS ("FAS 157"). In February 2008, the FASB issued FASB Staff Position
No. FAS 157-2, EFFECTIVE DATE OF FASB STATEMENT NO. 157, which provides a one
year deferral of the effective date of FAS 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. Therefore, the Company has
adopted the provisions of FAS 157 with respect to its financial assets and
liabilities only. FAS 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements. The
new standard provides a consistent definition of fair value which focuses on an
exit price which is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. The standard also prioritizes, within the measurement of
fair value, the use of market-based information over entity specific information
and establishes a three-level hierarchy for fair value measurements based on the
nature of inputs used in the valuation of an asset or liability as of the
measurement date. The application of FAS 157 in situations where the market for
a financial asset is not active was clarified by the issuance of FASB Staff
Position No. FAS 157-3, DETERMINING THE FAIR VALUE OF A FINANCIAL ASSET WHEN THE
MARKET FOR THAT ASSET IS NOT ACTIVE, ("FAS 157-3") in October 2008. FAS 157-3
became effective immediately and did not significantly impact the methods by
which the Company determines the fair values of its financial assets.
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.
In March 2008, the FASB issued SFAS No. 161 ("FAS 161"), DISCLOSURES
ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--AN AMENDMENT OF FASB
STATEMENT NO. 133. FAS 161 requires enhanced disclosures about an entity's
derivative and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement No. 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. FAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. FAS 161 encourages, but does not
require, comparative disclosures for earlier periods at initial adoption. The
Company does not believe the adoption of this standard will have a material
impact on its financial position and results of operations.
3. ACCOUNTS RECEIVABLE/ADVANCES ON CONTRACTS IN PROGRESS
Net accounts receivable, trade consists of the following at December 31:
2008 2007
------------ ------------
Amounts billed $ 7,671,000 $ 11,142,000
Retainage -- 8,000
Accrued revenue 1,790,000 945,000
------------ ------------
9,461,000 12,095,000
Less: Allowance for sales returns and doubtful accounts (588,000) (230,000)
------------ ------------
Net accounts receivable - trade $ 8,873,000 $ 11,865,000
============ ============
Advances on contracts in progress $ 35,658,000 $ 26,003,000
============ ============
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
42
collectible until a final cost review has been performed by government auditors.
The government's most recent audit was as of December 31, 2006, with no adverse
impact.
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 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. The Company has increased its allowances for doubtful
accounts reserve in 2008, primarily as a result of a customer's failure to make
timely facility availability payments of $225,000 related to a Spire
Semiconductor manufacturing agreement (see note 18).
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.
4. INVENTORIES AND DEFERRED COST OF GOODS SOLD
Inventories, net of $214,000 and $354,000 of reserves at December 31,
2008 and 2007, respectively, and deferred cost of goods sold consist of the
following at December 31:
2008 2007
------------ ------------
Raw materials $ 4,048,000 $ 4,989,000
Work in process 7,385,000 4,663,000
Finished goods 6,443,000 1,918,000
------------ ------------
Net inventory $ 17,876,000 $ 11,570,000
============ ============
Deferred cost of goods sold $ 17,088,000 $ 8,044,000
============ ============
The Company wrote-off $268,000 and $140,000 of excess and obsolete
inventory for the years ended December 31, 2008 and 2007, respectively.
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 the related revenue is recognized.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
2008 2007
------------ ------------
Building under capital lease $ -- $ 3,390,000
Machinery and equipment 17,985,000 17,508,000
Furniture fixtures and computer equipment 4,506,000 4,060,000
Leasehold improvements 3,299,000 2,167,000
Construction in progress 338,000 830,000
------------ ------------
26,128,000 27,955,000
Accumulated depreciation and amortization (20,039,000) (21,746,000)
------------ ------------
$ 6,089,000 $ 6,209,000
============ ============
Depreciation and amortization expense relating to property and equipment
was approximately $1,829,000 and $2,096,000 for the years ended December 31,
2008 and 2007, respectively. The capital lease for the building in Hudson, NH
expired during 2008 and the Company entered into a new lease which is classified
as an operating lease, based on the
43
terms of the lease agreement. Accordingly, the asset and accumulated
depreciation were removed from the balance sheet as of December 31, 2008. (See
Note 11)
6. ACCRUED LIABILITIES
Accrued liabilities include the following at December 31:
2008 2007
------------ ------------
Accrued payroll and payroll taxes $ 1,689,000 $ 972,000
Accrued legal and audit fees 789,000 319,000
Accrued accounts payable 4,191,000 3,398,000
Accrued other 2,035,000 1,368,000
------------ ------------
$ 8,704,000 $ 6,057,000
============ ============
7. 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). Advances made under the Equipment Credit Facility
would bear interest at the Bank's prime rate, as determined, plus 0.5% and
payable in thirty-six (36) consecutive monthly payments following the funding
date of that advance. The Equipment Credit Facility, if not sooner terminated in
accordance with its terms, expires on June 1, 2010.
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 all 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, on March 31, 2008 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 covenants as discussed below 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%).
On May 13, 2008, the Bank amended the Equipment Credit Facility and the
Revolving Credit Facility, modifying the Company's net income profitability
covenant requirements in exchange for a three quarters percent (0.75%) increase
in the Company's interest rate (7.75% at December 31, 2008) and waiver
restructuring fee equal to one half percent (0.5%) of amounts outstanding under
the Equipment Credit Facility and committed under the Revolving Credit Facility.
In addition, the Company's term loan balance will be factored in when
calculating the Company's borrowing base under the Revolving Credit Facility.
Under the amended terms of both credit facilities, as long as any
commitment remains outstanding under the facilities, the Company must comply
with an adjusted quick ratio covenant and a minimum monthly 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
44
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.
On March 31, 2009, the Bank extended the expiration of the Revolving
Credit Facility under the same terms for an additional sixty days, to expire on
May 29, 2009. The purpose of the extension is to allow both parties the time to
negotiate an expansion of the credit limit contingent upon our qualifying for an
Export-Import Bank loan guarantee.
The Equipment Credit Facility principal balance outstanding was
$1,750,000 and $2,917,000 at December 31, 2008 and 2007, respectively. The
Revolving Credit Facility principal balance outstanding was $1,500,000 at
December 31, 2008. The Company was in compliance with its credit facility
covenants as of December 31, 2008.
Annual maturities of the Equipment Credit Facility and the Revolving Credit
Facility as of December 31, 2008 are as follows:
Year Ending December 31,
2009 $ 2,667,000
2010 583,000
------------
Total equipment and revolving line of credit $ 3,250,000
============
8. STOCK-BASED COMPENSATION
At December 31, 2008, 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, 2008, the Company has outstanding under its 1996 Plan
and 2007 Plan, an aggregate 123,746 non-qualified stock options held by the
unaffiliated directors of the Company for the purchase of common stock at an
average exercise price of $9.23 per share.
A summary of the activity of this plan follows:
Weighted
Number of Average
Shares Exercise Price
------------ ------------
Options Outstanding at December 31, 2007 495,177 $ 7.10
Granted 135,000 $ 8.91
Exercised (9,500) $ 2.22
Forfeited (14,500) $ 9.49
------------ ------------
Options Outstanding at December 31, 2008 606,177 $ 7.52
============ ============
Options Exercisable at December 31, 2008 346,662 $ 6.72
============ ============
Options Available for Future Grant at
December 31, 2008 703,800
============
In accordance with Statement 123(R), the Company has recognized
stock-based compensation expense of approximately $754,000 and $579,000 for the
years ended December 31, 2008 and 2007, respectively. Approximately $574,000 and
$486,000 of stock-based compensation expense was charged to selling, general and
administrative expenses for the years ended December 31, 2008 and 2007,
respectively and approximately $180,000 and $93,000 of stock-based compensation
expense was charged to cost of sales for the years ended December 31, 2008 and
2007, respectively. No stock-based compensation expense was capitalized during
2008 and 2007. Compensation expense related to stock options to be charged in
future periods amount to approximately $1,237,000 at December 31, 2008 and will
be recognized over a weighted-average period of 2.70 years as follows:
45
For the years ended Expected
December 31, Compensation Expense
-------------- --------------------
2009 $ 508,000
2010 429,000
2011 228,000
2012 72,000
--------------------
$1,237,000
====================
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.
The options outstanding and exercisable at December 31, 2008 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 87,911 3.16 $ 3.75 $122,000 87,911 3.16 $ 3.75 $ 122,000
$3.91 to $ 4.90 108,819 5.42 $ 4.32 89,000 94,009 5.27 $ 4.31 78,000
$4.91 to $ 8.40 172,122 8.47 $ 6.98 -- 67,877 7.83 $ 7.42 --
$8.41 to $ 9.60 136,700 8.49 $ 9.39 -- 49,175 8.49 $ 9.39 --
$9.61 to $15.73 100,625 9.15 $12.68 -- 47,690 9.03 $13.17 --
----------- -------- ----------- ---------
606,177 7.27 $ 7.52 $211,000 346,662 6.21 $ 6.72 $ 200,000
=========== ======== =========== =========
The aggregate intrinsic value in the table above represents the total
intrinsic value, based on the Company's closing stock price of $5.14 as of
December 31, 2008, 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 $111,000 and $854,000 for the years
ended December 31, 2008 and 2007, respectively.
The per-share weighted-average fair value of stock options granted was
$5.19 and $6.09 for the years ended December 31, 2008 and 2007, respectively, on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
Expected Risk-Free Expected Expected
Year Dividend Yield Interest Rate Option Life Volatility Factor
------ -------------- ------------- ----------- -----------------
2007 -- 4.39% 4.5 years 72.3%
2008 -- 2.11% 4.5 years 73.7%
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.
9. NASDAQ LISTING
On December 1, 2008, the Company received a letter from The Nasdaq Stock
Market ("Nasdaq") advising that for the prior ten (10) consecutive trading days,
the Company's market value of listed securities was below the minimum
$50,000,000 requirement for continued inclusion on The Nasdaq Global Market
under Marketplace Rule 4450(b)(1)(A) ("the Rule"). Nasdaq also noted that at
that time the Company did not comply with Marketplace Rule 4450(b)(1)(B), which
46
alternatively requires total assets and total revenue of at least $50,000,000
each for the most recently completed fiscal year or two of the three most
recently completed fiscal years.
On March 3, 2009, the Company received a Staff Determination Letter from
Nasdaq indicating that the Company has not regained compliance with the Rule as
the market value of the Company's common stock has remained below the minimum
$50,000,000 required for continued inclusion on The Nasdaq Global Market.
Accordingly, its common stock is subject to delisting from the Nasdaq Global
Market.
The Company has requested a hearing before a Nasdaq Listing
Qualifications Panel to review the Staff Determination. The request for a
hearing will stay the Staff Determination and, as a result, the Company's common
stock will remain listed on The Nasdaq Global Market until the Panel issues its
decision after the hearing. There can be no assurance the Panel will grant the
Company's request for continued listing.
The Company expects to regain compliance with alternative continued
listing requirements upon the filing of this Annual Report on Form 10-K, as the
Company believes it now meets both (i) Marketplace Rule 4450(b)(1)(B), which
alternatively requires total assets and total revenue of at least $50,000,000
each for the most recently completed fiscal year or two of the three most
recently completed fiscal years and (ii) Marketplace Rule 4450(a)(3), which
alternatively requires stockholders' equity of at least $10,000,000.
10. INCOME TAXES
There was an income tax provision of $270,000 for the year ended
December 31, 2008 and an income tax benefit of $877,000 for the year ended
December 31, 2007.
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:
2008 2007
----------- -----------
Income tax expense (benefit) at statutory rate $ 1,745,000 $ (664,000)
Increase (decrease) in valuation allowance
related to income tax expense (1,833,000) 483,000
State income taxes 46,000
Permanent differences 312,000 181,000
----------- -----------
Total $ 270,000 $ --
=========== ===========
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as follows:
47
2008 2007
---------- ----------
Deferred tax assets:
Accounts receivable $ 215,000 $ 93,000
Accruals 3,716,000 1,504,000
Inventories 177,000 1,002,000
Net operating loss carryforwards 1,375,000 4,327,000
General business credit carryforwards 26,000 26,000
Alternative minimum tax credit carryforwards 468,000 268,000
Foreign tax credit 57,000 38,000
---------- ----------
Total gross deferred tax assets 6,034,000 7,258,000
Equity investment in joint venture 476,000 476,000
Depreciation 528,000 98,000
---------- ----------
Total gross deferred tax liabilities 1,004,000 574,000
---------- ----------
Valuation allowance 5,030,000 6,684,000
---------- ----------
Net deferred tax assets $ -- $ --
========== ==========
The net change in the total valuation allowance for the period ended
December 31, 2008 was a decrease of $1,654,000. Gross federal net operating loss
carryforwards were approximately $4.4 million as of December 31, 2008. Included
in this amount was approximately $3.5 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.
11. COMMITMENTS
Letters of Credit
-----------------
Outstanding letters of credit totaled $4,187,000 and $261,000 at
December 31, 2008 and 2007, respectively. 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 2009 and are 100% secured by
cash, restricted cash and the Revolving Credit Facility.
Property Under Capital Leases and Lease Commitments
---------------------------------------------------
At December 31, 2008 and 2007, the Company had operating leases for
office space and other miscellaneous items. The Company also had a capital lease
in effect for a building at December 31, 2007.
At December 31, 2008, future minimum lease payments for the period ended
are as follows:
Unrelated Party Related Party
Operating Leases Operating Leases
---------------- ----------------
2009 $ 136,000 $ 3,068,000
2010 114,000 3,243,000
2011 20,000 3,419,000
2012 3,399,000
2013 2,902,000
5 years and thereafter 1,020,000
------------ ------------
Total minimum lease payments $ 270,000 $ 17,051,000
============ ============
The components of capitalized costs and carrying value of the property
under capital leases were as follows at December 31, 2007:
48
2007
------------
Related party capital lease:
Hudson, New Hampshire building $ 3,390,000
Less: Accumulated depreciation (3,108,000)
------------
$ 282,000
============
The Related Party Capital Lease and three month extension with SPI-Trust
expired in August 2008. On August 29, 2008, the Company and SPI-Trust entered in
a new seven-year lease that the Company determined qualifies as a related party
operating lease based on the terms of the lease agreement. Accordingly, the
asset and accumulated depreciation were removed from the balance sheet. See
"Related Party Operating Lease" below.
Related Party Capital Lease
---------------------------
In May 2003, Spire Semiconductor leased a building (90,000 square feet)
in Hudson, New Hampshire from SPI-Trust whereby Spire Semiconductor agreed to
pay $4.1 million to SPI-Trust over an initial five-year term expiring in May
2008 with a Company option to extend for five years. In addition to the rent
payments, the lease obligated 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 did not provide for a transfer of ownership at any point. Interest
costs were assumed at 7%. Interest expense was approximately $8,000 and $76,000
for the years ended December 31, 2008 and 2007, respectively. This lease was
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.
Upon the expiration of the lease in May 2008, The Company did not
exercise its option to extend the lease for an additional 5 years. On May 20,
2008, the Company agreed with SPI-Trust to continue the current lease, under the
current terms and conditions on a month-to-month basis for a maximum of three
(3) months beyond the current term which ended on August 31, 2008. On August 29,
2008, the Company and SPI-Trust entered in a new seven-year lease that the
Company determined qualifies as a related party operating lease. See "Related
Party Operating Lease" below.
Unrelated Party Operating Leases
--------------------------------
Unrelated party operating leases primarily consist of leases for copiers
and the telephone system.
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 for the year
period ending November 2005. 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.
49
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, 2008 and 2007 was $2,019,000 and $1,415,000, respectively.
On August 29, 2008, the Company entered into a new Lease Agreement (the
"Hudson Lease") with SPI-Trust, with respect to 90,000 square feet of space
comprising the entire building in which Spire Semiconductor has occupied space
since June 1, 2003. The term of the Hudson Lease commenced on September 1, 2008,
and continues for seven (7) years until August 31, 2015. The Company has the
right to extend the term of the Hudson Lease for an additional five (5) year
period. The annual rental rate for the first year of the Hudson 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 Hudson 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. In addition, the Company is required to deposit with SPI-Trust
$300,000 as security for performance by the Company for its covenants and
obligations under the Hudson Lease. SPI-Trust is responsible, at its sole
expense, to make certain defined tenant improvements to the building. The
Company believes that the terms of the Hudson Lease are commercially reasonable
and reflective of market rates. The lease agreement does not provide for a
transfer of ownership at any point. The Hudson Lease is classified as a related
party operating lease. Rent expense under the Hudson Lease for the year ended
December 31, 2008 was $443,000.
12. 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 discretionary matching contributions have been made to the plan
for the year ended December 31, 2007. The Company began discretionary matching
contributions starting September 2008. The Company's matching contributions were
approximately $60,000 for the year ended December 31, 2008.
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 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
50
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, 2008 and 2007.
13. 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:
2008 2007
------------ ------------
Weighted average number of common and common
equivalent shares outstanding - basic 8,328,592 8,272,123
Add: Net additional common shares upon assumed
exercise of common stock options 136,031 --
------------ ------------
Weighted average number of common and common
equivalent shares outstanding - diluted 8,464,623 8,272,123
============ ============
For the years ended December 31, 2008 and 2007, 206,825 and 495,177
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.
14. LEGAL MATTERS
From time to time, the Company is subject to legal proceedings and
claims arising from the conduct of its business operations.
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 claimed
one of the Company's catheter products induced and contributed to infringement
when medical professionals inserted it. The Company responded to the complaint
denying all allegations and filed certain counterclaims. The Company also 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"). 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 later in August 2006. Plaintiffs refiled their lawsuit against the Company
on August 31, 2006. The Company has filed its answer and resumed its defense.
The Company has filed summary judgment motions with the Court and a hearing was
held on November 12, 2008. Following this hearing, the Judge ordered discovery
reopened on the issue of possible inequitable conduct by the plaintiff, Arrow
International, Inc. Based on information presently available to the Company, it
believes it has meritorious legal defenses with respect to this action. If the
Company is unsuccessful in its defenses, a portion of the Company's product line
may be enjoined or the Company may need to redesign certain products to avoid
future infringement. However, if the plaintiff's patent is found valid and
infringed, the parties have already agreed to a stipulated calculation of
damages based on a pre-specified nominal non-punitive royalty rate.
The Company is not aware of any other current or pending legal
proceedings to which it is or may be a party that it believes could materially
adversely affect its results of operations or financial condition or cash flows.
51
15. 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 Corporate Company
------------ ------------ ------------ ------------ ------------
December 31, 2008
-----------------
Net sales and revenues $ 51,901,000 $ 11,643,000 $ 5,108,000 $ -- $ 68,652,000
Earnings (loss) from operations 10,353,000 (1,075,000) (2,784,000) -- 6,494,000
Identifiable assets 45,209,000 4,440,000 3,962,000 14,407,000 68,018,000
Capital expenditures 689,000 49,000 183,000 789,000 1,710,000
Depreciation and amortization 268,000 289,000 1,198,000 184,000 1,939,000
Stock-based compensation 193,000 98,000 95,000 368,000 754,000
Spire Spire Total
Solar Biomedical Optoelectronics Corporate Company
------------ ------------ ------------ ------------ ------------
December 31, 2007
-----------------
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
The following table shows net sales and revenues by geographic area
(based on customer location) for the years ended December 31:
2008 % 2007 %
------------ ------ ------------ ------
United States $ 30,377,000 44% $ 19,714,000 53%
Europe/N. Africa 14,665,000 22% 9,129,000 25%
Asia 22,782,000 33% 7,643,000 21%
Rest of the world 828,000 1% 582,000 1%
------------ ------ ------------ ------
$ 68,652,000 100% $ 37,068,000 100%
============ ====== ============ ======
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, gain on sales of licenses and gain
on termination of contract, 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 2008
and 2007 were approximately $1,709,000 and $1,303,000, or 2% and 4% of
consolidated net sales and revenues, respectively.
The Company did not have any customers that accounted for more than 10%
of consolidated net sales and revenues in 2008. One customer accounted for
approximately 15% of consolidated net sales and revenues during 2007. Two
customers represented approximately 13% and 11% of net accounts receivable,
trade at December 31, 2008 and two customers represented approximately 34% and
16% of net accounts receivable, trade at December 31, 2007.
52
Spain and India were the only foreign countries that accounted for more
than 10% of sales in 2008 and Spain and Taiwan were the only foreign countries
that accounted for more than 10% of sales in 2007. Net sales to customers in
Spain and India accounted for $9,205,000 and $8,622,000, respectively, in 2008
and net sales to customers in Spain and Taiwan accounted for $7,331,000 and
$5,208,000, respectively, in 2007.
16. SALE OF LICENSES
On May 16, 2005, the Company entered into the global Consortium
Agreement with 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 Consortium 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 were not obligated, to pursue joint research
and development, product improvement activities and sales and marketing efforts.
The companies could share market costs such as product collateral and trade show
expenses. Each company could also collaborate on sales leads and have the other
company manufacture and service its equipment in the field. Both companies had
reciprocal rights to participate in the other company's R&D efforts on a
going-forward basis. Nisshinbo could request the Company to further develop a
technology but Nisshinbo had to (a) share in the costs of these development
efforts equally with the Company (and thereafter have joint ownership);
otherwise the Company would 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 Consortium Agreement would 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 Consortium Agreement
contained 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 Consortium
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 was being credited as royalty income over the
ten-year license period on a straight-line basis. Due to the termination of the
Consortium Agreement on November 30, 2008 (see Note 17), the Company accelerated
the recognition of the remaining royalty income balance in the forth quarter of
2008. The Company recognized $263,000 and $35,000 of royalty income associated
with this license in 2008 and 2007, respectively.
17. GAIN ON TERMINATION OF CONTRACT
On September 1, 2008, Nisshinbo delivered a letter to the Company
stating its intention to terminate the Consortium Agreement entered into between
Nisshinbo and the Company on May 16, 2005 (see Note 16 for more on the
Consortium Agreement). Pursuant to the Consortium Agreement, Nisshinbo provided
its 180 day prior notice to terminate the Consortium Agreement effective as of
February 28, 2009. However, on November 28, 2008, the Company signed the
Separation Agreement with Nisshinbo that, among other things, accelerated the
termination of the Consortium Agreement and the payment by Nisshinbo to the
Company of an early termination penalty. Under the Separation Agreement, the
termination of the Consortium Agreement was effective as of November 30, 2008.
Under the terms of the Consortium Agreement and the Separation
Agreement, as a result of early termination by
53
Nisshinbo for convenience, the Company received a termination penalty payment of
$6.8 million in December 2008. In addition, the Company received a final royalty
payment of approximately $659,000 from Nisshinbo for outstanding equipment being
built by Nisshinbo for its customer base. The Company granted Nisshinbo a
perpetual, royalty-free, non-exclusive, non-sub-licensable (for four (4) years)
license to the Company's existing solar photovoltaic module manufacturing
equipment methods of engineering, designing, manufacturing and other related
methods that were in effect when the Company entered into the Consortium
Agreement in 2005. Both parties declined technology licenses for technology
developed by the other party during the term of the Consortium Agreement.
Nisshinbo will continue to manufacture certain products for the Company on a
non-exclusive basis.
18. MANUFACTURING AGREEMENTS
On August 29, 2006, the Company's wholly owned subsidiary, Spire
Semiconductor, entered into a five-year manufacturing agreement in which it
would 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 would 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 would be
producing III/V and II/VI wafers for Principia with full production expected to
start in mid 2008. Spire Semiconductor would have begun 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,
was required to make monthly facility availability payments throughout the term
of the agreement. The first eighteen months of the facility availability
payments were secured by a pledge of Principia common equity which was to 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
should not recognize the pledged shares and only would recognize if Principia
defaulted under the terms of the agreement. Principia has no right of repayment
with respect to these payments. Spire Semiconductor had 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 had an obligation to purchase a minimum
quantity of wafers for the first two years of the Agreement. A fixed price had
been established for each wafer produced with some discounting contingent upon
Principia committing to certain volume commitments. During the fourth quarter of
2007, 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. This amounted to $526,000 and $357,000 in
revenue in 2008 and 2007, respectively. Spire Semiconductor had full ownership
of the equipment and could 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 committed resources to complete the
scale-up, it anticipated this up-front payment plus the monthly payments would
be sufficient to meet its capital requirements under the agreement. Providing
the parties met their respective obligations over the term of the agreement, no
net outlay of capital would be needed.
On August 29, 2008, the Company delivered to Principia a Notice of
Breach and Pending Termination of the manufacturing agreement. Under the terms
of the manufacturing agreement, Principia made an up-front payment for
nonrecurring engineering and facility access costs and, in addition was required
to make monthly facility availability payments throughout the term of the
agreement. As a result of Principia's failure to make certain monthly facility
availability payments, the Company has reserved $225,000 against Principia's
accounts receivable balance at December 31, 2008. The Company entered into a
mutual standstill agreement with Principia which expired on March 15, 2009. The
purpose of the standstill was to give the parties additional time to negotiate a
resolution.
On March 27, 2009, Spire Semiconductor and Principia mutually agreed to
terminate the Manufacturing Agreement for convenience and entered into a
separation and novation agreement (the "Novation Agreement"). Under the terms of
the Novation Agreement, both parties agreed to terminate technology licenses
that were granted to each other under the terms of the Manufacturing Agreement
and Spire Semiconductor will be released from its production requirements to
Principia. Principia is released from paying its future facility availability
payments due under the Manufacturing Agreement but will be required to pay
outstanding facility availability payments of $300,000. Spire Semiconductor
holds 67,500 shares of Principia stock as collateral against the outstanding
facility availability payments. Additionally, in the first quarter of 2009
54
the Company will accelerate the amortization of deferred revenue and will
recognize $1.54 million in statement of operations related to the termination of
the Manufacturing Agreement.
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 the Company
began installation in 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 purchase price for the Cell Line. At December 31,
2008, 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.
19. EXTRAORDINARY GAIN ON INVESTMENT IN JOINT VENTURE
On July 31, 2007, the Company entered into contractual relationship with
Gloria Solar pursuant to which (i) the Company sold Gloria Solar certain assets
belonging to its solar systems business for $4,000,000 and (ii) the Company 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 the Company
owns 45% of the joint venture. In connection with the formation of the joint
venture, (i) the Company 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 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. The Company's initial investment was
recorded at $2,288,000. 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, the Company recorded an
extraordinary gain of $1,301,000, net of tax provision of $877,000 for the year
ended December 31, 2007. Additional recognition of the deferential will be
recorded over time to offset the Company's ownership percentage of the
amortization of the contributed intangibles assets as recorded on the joint
venture's books.
20. SUBSEQUENT EVENTS
On March 3, 2009, the Company received a Staff Determination Letter from
Nasdaq indicating that the Company has not regained compliance with the Rule as
the market value of the Company's common stock has remained below the minimum
$50,000,000 required for continued inclusion on The Nasdaq Global Market.
Accordingly, its common stock is subject to delisting from the Nasdaq Global
Market.
The Company has requested a hearing before a Nasdaq Listing
Qualifications Panel to review the Staff Determination. The request for a
hearing will stay the Staff Determination and, as a result, the Company's common
stock will remain listed on The Nasdaq Global Market until the Panel issues its
decision after the hearing. There can be no assurance the Panel will grant the
Company's request for continued listing.
The Company expects to regain compliance with alternative continued
listing requirements upon the filing of this Annual Report on Form 10-K, as the
Company believes it now meets both (i) Marketplace Rule 4450(b)(1)(B), which
alternatively requires total assets and total revenue of at least $50,000,000
each for the most recently completed fiscal year or two of the three most
recently completed fiscal years and (ii) Marketplace Rule 4450(a)(3), which
alternatively requires stockholders' equity of at least $10 million.
55
On March 31, 2009, the Bank extended the expiration of the Revolving
Credit Facility under the same terms for an additional sixty days, to expire on
May 29, 2009. The purpose of the extension is to allow both parties the time to
negotiate an expansion of the credit limit contingent upon our qualifying for an
Export-Import Bank loan guarantee.
On March 27, 2009, Spire Semiconductor and Principia mutually agreed to
terminate the Manufacturing Agreement for convenience and entered into a
separation and novation agreement (the "Novation Agreement"). Under the terms of
the Novation Agreement, both parties agreed to terminate technology licenses
that were granted to each other under the terms of the Manufacturing Agreement
and Spire Semiconductor will be released from its production requirements to
Principia. Principia is released from paying its future facility availability
payments due under the Manufacturing Agreement but will be required to pay
outstanding facility availability payments of $300,000. Spire Semiconductor
holds 67,500 shares of Principia stock as collateral against the outstanding
facility availability payments. Additionally, in the first quarter of 2009 the
Company will accelerate the amortization of deferred revenue and will recognize
$1.54 million in statement of operations related to the termination of the
Manufacturing Agreement.
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 a 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 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. Each of these reports was
subsequently amended to include restated financial statements.
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, 2008.
56
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, 2008 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, 2008.
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, 2008. Management based its assessment on criteria
established in "Internal Control Integrated Framework" issued by the Committee
of Sponsoring Organizations of the Treadway Commission ("COSO").
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, 2008:
We had an ineffective control environment. This has been previously disclosed in
prior filings. Management has designed and implemented some effective controls,
however, these controls are not sufficient and are not operating effectively.
Efforts to remediate deficiencies were impeded by an evolving control
environment brought on by the rapid expansion in our business. 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. 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.
Specifically, the financial reporting organization structure was not adequate to
support the size, complexity or activities of our Company.
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 timely review of restricted user access in
our application software system and we did not consistently follow our defined
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.
Inventory, prepaid expenses, deposits, other assets, accrued
expenses, deferred/unbilled revenue and deferred rent were not
properly reconciled. Formal review and approval of reconciliations is
not working effectively.
We did not maintain effective controls to ensure proper valuation of
inventory and project cost variance review and analysis. We did not
properly mark payables denominated in foreign currency to market at
December 31, 2008.
57
Due to the limited number of people working in the accounting group
that have significant tax experience, the deferred tax analysis and
the related disclosures were not prepared timely at year end. Failure
to do so could result in misstatement of the financial statements or
the required disclosures.
We did not maintain effective controls to ensure existence and
valuation of revenue. Specifically, we lacked formal policies and
procedures to monitor revenue contracts for side agreements.
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.
Each one of these control deficiencies, until corrected, 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, 2008 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, 2008.
Our management has undertaken the following actions to remediate the
material weakness identified.
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. Management believes
these new controls, policies and procedures, training of key personnel, testing
of these key controls will be effective in remediating these material
weaknesses. Management reports quarterly to our Audit Committee on the status of
the remediation effort.
Management has partially addressed the need for additional experienced
staff with the addition of a Director of Financial Reporting (February 2008) who
has the primary responsibility for the financial close and reporting process and
monitoring environment related to financial reporting. We also hired a Senior
Financial Analyst, CPA (July 2008) who is actively involved in the financial
close and reporting process and assisting us in our remediation efforts. These
positions 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.
Further, we have continued our relationship with an outside consulting firm and
expanded their scope to assist us in our Sarbanes-Oxley control rationalization,
testing and remediation efforts.
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 steps 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.
Changes in Internal Control Over Financial Reporting
----------------------------------------------------
There have been no changes during our fiscal quarter ended December 31,
2008 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
---------------------------
On November 28, 2008, we entered into a Solicitation/Contract/Order For
Commercial Items (the "Cell Materials Contract") to provide Federal Prison
Industries, Inc., otherwise known as UNICOR ("UNICOR"), a twenty two (22) month
supply of multicrystalline solar cells for $53.94 million in the aggregate.
Delivery commences in the first quarter of 2009 with approximately 30% of the
contract value being delivered in 2009 and 70% being delivered in 2010. The
contract allows UNICOR to exercise, at its option, three separate one-year
extensions. The three, one year extensions are worth up to $266.63 million in
the aggregate. Under the terms of the Cell Materials Contract, UNICOR can
terminate the contract for convenience at any time.
58
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 2009 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.
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
59
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
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 Form 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 Form 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 Form 10-KSB
10(p) Amendment Number Four to the Spire Corporation 401(k) Profit
Sharing Plan dated November 21, 2005,
60
incorporated by reference to Exhibit 10(p) to the Company's
2005 Form 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 Form 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 and Principia Lightworks, Inc., incorporated by
reference to Exhibit 10(s) to the Company's 2006 Form 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 Form 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 Form 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 Form 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
10(z) Amended and Restated Deferred Compensation Plan with Roger G.
Little dated as of January 1, 2005, incorporated by reference
to Exhibit 10(z) to the Company's 2008 Form 10-Q for the
quarter ended March 31, 2008.
10(aa) First Loan Modification Agreement, dated March 31, 2008, to
the Loan and Security Agreement, dated May 25, 2007, among
Spire Corporation, Bandwidth Semiconductor, LLC and Silicon
Valley Bank, incorporated by reference to Exhibit 10(aa) to
the Company's 2008 Form 10-Q for the quarter ended March 31,
2008.
10(ab) Loan and Security Agreement, dated March 31, 2008, among Spire
Corporation, Spire Solar, Inc., Spire Biomedical, Inc., Spire
Semiconductor, LLC and Silicon Valley Bank, incorporated by
reference to Exhibit 10(ab) to the Company's 2008 Form 10-Q
for the quarter ended March 31, 2008.
10(ac) Second Loan Modification Agreement, dated May 13, 2008, to the
Loan and Security Agreement, dated May 25, 2007, among Spire
Corporation, Bandwidth Semiconductor, LLC and Silicon Valley
Bank, incorporated by reference to Exhibit 10(ac) to the
Company's 2008 Form 10-Q for the quarter ended June 30, 2008.
61
10(ad) Waiver and First Loan Modification Agreement, dated May 13,
2008, to Loan and Security Agreement, dated March 31, 2008,
among Spire Corporation, Spire Solar, Inc., Spire Biomedical,
Inc., Spire Semiconductor, LLC and Silicon Valley Bank,
incorporated by reference to Exhibit 10(ad) to the Company's
2008 Form 10-Q for the quarter ended June 30, 2008.
10(ae) Lease Agreement, dated September 1, 2008, between Roger G.
Little, Trustee of SPI-Trust, and Spire Corporation,
incorporated by reference to Exhibit 10(ae) to the Company's
Form 8-K filed with the SEC on August 29, 2008.
10(ap) Solicitation/Contract/Order for Commercial Items, dated
November 28, 2008, by and between Spire Corporation and
Federal Prison Industries, UNICOR. *
10(aq) Amendment of Solicitation/Modification of Contract MOD01 to
Solicitation/Contract/Order for Commercial Items, dated April
20, 2009, by and between Spire Corporation and Federal Prison
Industries, UNICOR. *
10(ar) Amendment of Solicitation/Modification of Contract MOD02 to
Solicitation/Contract/Order for Commercial Items, dated June
8, 2009, by and between Spire Corporation and Federal Prison
Industries, UNICOR. *
10(as) Amendment of Solicitation/Modification of Contract MOD03 to
Solicitation/Contract/Order for Commercial Items, dated
September 8, 2009, by and between Spire Corporation and
Federal Prison Industries, UNICOR. *
14 Code of Business Conduct and Ethics incorporated by reference
to Exhibit 14 to the 2003 10-KSB
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.
62
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 20, 2009
--------------------------------
Roger G. Little
Chairman of the Board, Chief
Executive Officer, and President
(Principal Executive Officer)
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, November 20, 2009
--------------------------- Chief Executive Officer
Roger G. Little and President
(Principal Executive Officer)
/s/ Christian Dufresne Chief Financial Officer November 20, 2009
--------------------------- and Treasurer
Christian Dufresne (Principal Financial Officer and
Principal Accounting Officer)
/s/ Udo Henseler Director November 20, 2009
---------------------------
Udo Henseler
/s/ David R. Lipinski Director November 20, 2009
---------------------------
David R. Lipinski
/s/ Mark C. Little Chief Executive Officer, November 20, 2009
--------------------------- Spire Biomedical and
Mark C. Little Director
/s/ Michael J. Magliochetti Director November 20, 2009
---------------------------
Michael J. Magliochetti
/s/ Guy L. Mayer Director November 20, 2009
---------------------------
Guy L. Mayer
/s/ Roger W. Redmond Director November 20, 2009
---------------------------
Roger W. Redmond
63
EXHIBIT INDEX
Exhibit Description
------- -----------
10(ap) Solicitation/Contract/Order for Commercial Items, dated November 28,
2008, by and between Spire Corporation and Federal Prison Industries,
UNICOR. *
10(aq) Amendment of Solicitation/Modification of Contract MOD01 to
Solicitation/Contract/Order for Commercial Items, dated April 20,
2009, by and between Spire Corporation and Federal Prison Industries,
UNICOR. *
10(ar) Amendment of Solicitation/Modification of Contract MOD02 to
Solicitation/Contract/Order for Commercial Items, dated June 8, 2009,
by and between Spire Corporation and Federal Prison Industries,
UNICOR. *
10(as) Amendment of Solicitation/Modification of Contract MOD03 to
Solicitation/Contract/Order for Commercial Items, dated September 8,
2009, by and between Spire Corporation and Federal Prison Industries,
UNICOR. *
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
___________________
* Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment.