1 1998 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1998. 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 - -------------------------------------------------------------------------------- (Exact Name of Small Business Issuer as Specified in Its Charter) Massachusetts 04-2457335 - ------------------------------------------------------------------------------------------------------------------- (State or Other Jurisdiction of Incorporation or Organization (I.R.S. Employer Identification No.) One Patriots Park, Bedford, Massachusetts 01730-2396 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) 781-275-6000 - -------------------------------------------------------------------------------- (Issuer's Telephone Number, Including Area Code) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. There were 3,243,766 outstanding shares of the issuer's only class of common equity, Common Stock, $.01 par value, on October 30, 1998. Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X] 2 SPIRE CORPORATION INDEX Page Number ----------- PART I - FINANCIAL INFORMATION - ------------------------------ Condensed Consolidated Balance Sheets at 3 September 30, 1998 (unaudited) and December 31, 1997 Condensed Consolidated Statements of Operations 4 For the Three Months Ended September 30, 1998 and 1997 and For the Nine Months Ended September 30, 1998 and 1997 (unaudited) Condensed Consolidated Statements of Cash Flows 5 For the Nine Months Ended September 30, 1998 and 1997 (unaudited) Notes to Condensed Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial 7 - 11 Condition and Results of Operations PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings 11 Item 6. Exhibits and Reports on Form 8-K 11 2 3 SPIRE CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 481,844 $ 1,695,727 Accounts receivable, trade: Amounts billed 2,853,017 3,012,701 Retainage 54,133 69,772 Unbilled costs 631,826 621,760 ----------- ----------- 3,538,976 3,704,233 Less allowance for doubtful accounts 107,900 40,000 ----------- ----------- Net accounts receivable 3,431,076 3,664,233 ----------- ----------- Inventories (Note 2) 1,848,132 988,580 Deferred income taxes 349,578 300,000 Prepaid expenses and other current assets 552,647 501,650 ----------- ----------- Total current assets 6,663,277 7,150,190 ----------- ----------- Property and equipment 24,729,255 24,015,445 Less accumulated depreciation and amortization 19,927,103 19,242,437 ----------- ----------- Net property and equipment 4,802,152 4,773,008 ----------- ----------- Computer software costs (less accumulated amortization, $821,117 in 1998 and $810,466 in 1997) 40,484 51,135 Patents (less accumulated amortization, $576,726 in 1998 and $542,344 in 1997) 253,093 274,810 Other assets 16,146 19,679 ----------- ----------- 309,723 345,624 ----------- ----------- $11,775,152 $12,268,822 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,592,534 $ 903,581 Accrued liabilities 1,308,943 859,093 Advances on contracts in progress 735,946 410,370 ----------- ----------- Total current liabilities 3,637,423 2,173,044 ----------- ----------- STOCKHOLDERS' EQUITY Common stock, $.01 par value; shares authorized 20,000,000; issued 3,795,926 shares in 1998 and 3,757,082 shares in 1997 37,959 37,571 Additional paid-in capital 9,780,494 9,645,468 Retained earnings (accumulated deficit) (461,036) 1,632,427 ----------- ----------- 9,357,417 11,315,466 Treasury stock at cost, 552,160 shares (1,219,688) (1,219,688) ----------- ----------- Total stockholders' equity 8,137,729 10,095,778 ----------- ----------- $11,775,152 $12,268,822 =========== =========== See accompanying notes to condensed consolidated financial statements. 3 4 SPIRE CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- ---------------------------- 1998 1997 1998 1997 ---------- ---------- ----------- ----------- NET SALES AND REVENUES Contract research, service and license revenues $2,869,262 $3,833,257 $ 8,604,736 $10,773,933 Sales of manufacturing equipment 850,655 2,342,777 3,002,998 6,285,648 ---------- ---------- ----------- ----------- Total sales and revenues 3,719,917 6,176,034 11,607,734 17,059,581 ---------- ---------- ----------- ----------- COSTS AND EXPENSES Cost of contract research, services and licenses 1,698,051 2,377,376 6,058,255 6,899,334 Cost of manufacturing equipment 963,082 1,597,626 2,705,442 4,213,078 Selling, general and administrative expenses 1,396,092 1,486,400 4,949,017 4,284,212 ---------- ---------- ----------- ----------- Total costs and expenses 4,057,225 5,461,402 13,712,714 15,396,624 ---------- ---------- ----------- ----------- EARNINGS (LOSS) FROM OPERATIONS (337,308) 714,632 (2,104,980) 1,662,957 Interest income, net 2,030 10,294 20,517 13,940 ---------- ---------- ----------- ----------- Earnings (loss) before income taxes (335,278) 724,926 (2,084,463) 1,676,897 Income tax expense -- -- 9,000 100,000 ---------- ---------- ----------- ----------- NET EARNINGS (LOSS) $ (335,278) $ 724,926 $(2,093,463) $ 1,576,897 ========== ========== =========== =========== EARNINGS (LOSS) PER SHARE OF COMMON STOCK - BASIC $ (0.10) $ 0.23 $ (0.65) $ 0.52 ========== ========== =========== =========== EARNINGS (LOSS) PER SHARE OF COMMON STOCK - DILUTED $ (0.10) $ 0.22 $ (0.65) $ 0.48 ========== ========== =========== =========== Weighted average number of common shares outstanding - basic 3,243,766 3,094,744 3,232,722 3,052,263 ========== ========== =========== =========== Weighted average number of common and common equivalent shares outstanding - diluted 3,243,766 3,317,628 3,232,722 3,275,147 ========== ========== =========== =========== See accompanying notes to condensed consolidated financial statements. 4 5 SPIRE CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1998 1997 ----------- ----------- Cash flows from operating activities: Net earnings (loss) $(2,093,463) $ 1,576,897 Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation and amortization 736,958 845,425 Deferred income taxes (49,578) (300,000) Changes in assets and liabilities: Accounts receivable 233,157 (76,272) Inventories (859,552) (646,703) Prepaid expenses and other current assets (50,997) (167,031) Accounts payable and accrued liabilities 1,138,803 31,634 Advances on contracts in progress 325,576 (1,267,338) ----------- ----------- Net cash used in operating activities (619,096) (3,388) ----------- ----------- Cash flows from investing activities: Additions to property and equipment (713,810) (611,724) Increase in patent costs (19,924) (29,370) Increase in software production costs -- (34,229) Other assets 3,533 210,143 ----------- ----------- Net cash used in investing activities (730,201) (465,180) ----------- ----------- Cash flows from financing activities: Tax benefit of disqualifying dispositions of stock option exercises -- 377,763 Exercise of stock options 135,414 542,981 Repurchase of common stock -- (20,625) ----------- ----------- Net cash provided by financing activities 135,414 (900,119) ----------- ----------- Net increase (decrease) in cash and cash equivalents (1,213,883) 431,551 Cash and cash equivalents, beginning of period 1,695,727 970,997 ----------- ----------- Cash and cash equivalents, end of period $ 481,844 $ 1,402,548 =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest expense $ 2,810 $ 5,118 =========== =========== Income taxes $ 44,400 $ 75,895 =========== =========== See accompanying notes to condensed consolidated financial statements. 5 6 SPIRE CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 1998 (1) INTERIM FINANCIAL STATEMENTS In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company's financial position as of September 30, 1998, the results of operations for the three and nine months ended September 30, 1998 and 1997, and changes in cash flows for the nine months ended September 30, 1998 and 1997. The results of operations for the nine months ended September 30, 1998 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 1998. Certain amounts from the second quarter 1998 financial statements have been reclassified to conform to the third quarter 1998 presentation. The accounting policies followed by the Company are set forth in Note 2 to the Company's consolidated financial statements in its annual report on Form 10-KSB for the year ended December 31, 1997. The financial statements, with the exception of the December 31, 1997 balance sheet, are unaudited and have not been examined by independent certified public accountants. (2) INVENTORIES Inventories consist of the following: September 30, December 31, 1998 1997 ------------- ------------ Raw materials $ 790,521 $736,930 Work in process 1,057,611 251,650 ---------- -------- $1,848,132 $988,580 ========== ======== (3) EARNINGS PER SHARE The reconciliation of the denominators of the basic and diluted earnings (loss) per share computations for the Company's reported earnings (loss) is as follows: Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Weighted average number of shares outstanding - basic 3,243,766 3,094,744 3,232,722 3,052,263 Incremental shares from the assumed exercise of stock options -- 222,884 -- 222,884 --------- --------- --------- --------- Weighted average number of shares outstanding - diluted 3,243,766 3,317,628 3,232,722 3,275,147 ========= ========= ========= ========= 6 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Spire develops, manufactures and markets highly-engineered photovoltaic module manufacturing equipment and optoelectronic products and provides biomedical processing services. Spire is the world's leader in the design and manufacture of specialized equipment for the production of terrestrial photovoltaic modules from solar cells, with its equipment installed in 140 factories and in 38 countries. The Company also offers certain optoelectronic products and is continuing to develop additional advanced optoelectronic products for telecommunications, biomedical and electronics applications, including solar cells used to power satellites. Spire's value-added biomedical processing services offer surface treatments to enhance the durability or the antimicrobial characteristics of orthopedic and other medical devices. The Company's net sales and revenues for the quarter ended September 30, 1998 declined, compared to the quarter ended September 30, 1997. RESULTS OF OPERATIONS The following table sets forth certain items as a percentage of net sales and revenues for the periods presented: Three Months Ended Nine Months Ended September 30, September 30, -------------------- --------------------- 1998 1997 1998 1997 ----- ----- ----- ----- Net sales and revenues 100.0% 100.0% 100.0% 100.0% Cost of sales and revenues 71.5 64.4 75.5 65.1 ----- ----- ----- ----- Gross profit 28.5 35.6 24.5 34.9 Selling, general and administrative expenses 37.5 24.1 42.6 25.1 ----- ----- ----- ----- Earnings (loss) from operations (9.0) 11.5 (18.1) 9.8 Earnings (loss) before income taxes (9.0) 11.7 (18.0) 9.8 Income tax expense -- -- -- 0.6 ----- ----- ----- ----- Net (loss) earnings (9.0%) 11.7% (18.0%) 9.2% ===== ====== ====== ===== THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 Net Sales and Revenues Net sales and revenues decreased $2,456,000 or 40% for the three months ended September 30, 1998 to $3,720,000, compared to $6,176,000 for the three months ended September 30, 1997. Contract research, service and license revenues decreased $964,000 or 25% to $2,869,000 for the three months ended September 30, 1998 compared to $3,833,000 for 1997. Manufacturing equipment sales decreased $1,492,000 or 64% to $851,000 for 1998, compared to $2,343,000 for 1997. The following table categorizes the Company's net sales and revenues for the periods presented: Three Months Ended September 30, ---------------------------------------------- 1998 1997 % Change ---------- ---------- -------- Contract research, service and license revenues $2,869,000 $3,833,000 (25%) Manufacturing equipment sales 851,000 2,343,000 (64%) ---------- ---------- Net sales and revenues $3,720,000 $6,176,000 (40%) ========== ========== 7 8 Net sales and revenues decreased $5,452,000 or 32% for the nine months ended September 30, 1998 to $11,608,000, compared to $17,060,000 for the nine months ended September 30, 1997. Contract research, service and license revenues decreased $2,169,000 or 20% to $8,605,000 for the nine months ended September 30, 1998 compared to $10,774,000 for 1997. Manufacturing equipment sales decreased $3,283,000 or 52% to $3,003,000 for 1998, compared to $6,286,000 for 1997. The following table categorizes the Company's net sales and revenues for the periods presented: Nine Months Ended September 30, -------------------------------------------- 1998 1997 % Change ----------- ----------- -------- Contract research, service and license revenues $ 8,605,000 $10,774,000 (20%) Manufacturing equipment sales 3,003,000 6,286,000 (52%) ----------- ----------- Net sales and revenues $11,608,000 $17,060,000 (32%) =========== =========== The decline in manufacturing equipment sales for the three and nine month periods ended September 30, 1998 is primarily due to a global decline in photovoltaic module production. The decline in contract research, service and license revenues for the three and nine month periods ended September 30, 1998 is primarily due to a decline in government contracts in 1998. The decline in contract research, service and license revenues for the nine month periods ended September 30, 1998 is also due to revenue of $600,000 associated with a one-time technology transfer in the second quarter of 1997, and a revision to government contract overhead rates for 1997 and 1998, which came in lower than billed rates and resulted in a reserve of $70,000 in the second quarter of 1998. Cost of Sales and Revenues The cost of sales and revenues decreased $1,314,000 to $2,661,000, but increased to 72% of net sales and revenues, for the quarter ended September 30, 1998, compared to $3,975,000 or 64% of net sales and revenues for the quarter ended September 30, 1997. The cost of contract research, service and license revenues decreased $679,000 to $1,698,000, and decreased to 59% of related revenues, for the quarter ended September 30, 1998, compared to $2,377,000 or 62% of related revenues for the quarter ended September 30, 1997. Cost of manufacturing equipment sales decreased $635,000 to $963,000, but increased to 113% of related sales, for the quarter ended September 30, 1998, compared to $1,598,000 or 68% of related sales, for the quarter ended September 30, 1997. The following table categorizes the Company's cost of sales and revenues for the periods presented, stated in dollars and as a percentage of related sales and revenues: Three Months Ended September 30, ----------------------------------------------------- 1998 % 1997 % ---------- --- ---------- --- Contract research, service and license revenues $1,698,000 59% $2,377,000 62% Manufacturing equipment sales 963,000 113% 1,598,000 68% ---------- ---------- Total cost of sales and revenues $2,661,000 72% $3,975,000 64% ========== ========== The cost of sales and revenues decreased $2,349,000 to $8,764,000, but increased to 75% of net sales and revenues, for the nine months ended September 30, 1998, compared to $11,112,000 or 65% of net sales and revenues for the nine months ended September 30, 1997. The cost of contract research, service and license revenues decreased $841,000 to $6,058,000, but increased to 70% of related revenues, for the nine months ended September 30, 1998, compared to $6,899,000 or 64% of related revenues for the nine months ended September 30, 1997. Cost of manufacturing equipment sales decreased $1,508,000 to $2,705,000, but increased to 90% of related sales, for the nine months ended September 30, 1998, compared to $4,213,000 or 67% of related sales, for the nine months ended September 30, 1997. 8 9 The following table categorizes the Company's cost of sales and revenues for the periods presented, stated in dollars and as a percentage of related sales and revenues: Nine Months Ended September 30, ----------------------------------------------------- 1998 % 1997 % ---------- --- ----------- --- Contract research, service and license revenues $6,058,000 70% $ 6,899,000 64% Manufacturing equipment sales 2,706,000 90% 4,213,000 67% ---------- ----------- Total cost of sales and revenues $8,764,000 75% $11,112,000 65% ========== =========== For both the three and nine month periods ended September 30, 1998, the increase in total cost of sales and revenues as a percentage of related sales and revenues is due to lower sales volume in 1998 available to spread fixed cost of sales over and a change in product mix from 1997, particularly related to a technology transfer in the second quarter of 1997 for which revenue of $600,000 was recognized. Selling, General and Administrative Expenses Selling, general and administrative expenses for the nine months ended September 30, 1998 increased $665,000 to $4,949,000, and increased to 43% of sales and revenues, compared to $4,284,000 or 25% of sales and revenues for the nine months ended September 30, 1997. Selling, general and administrative expenses increased due to the accrual of $547,000 of non-recurring costs in the second quarter of 1998 related to the settlement with the government (See Part II, Item 1. Legal Proceedings). Also impacting selling, general and administrative expenses was an increase in legal costs for the nine months ended September 30, 1998 versus the similar 1997 time period. Selling, general and administrative expenses for the quarter ended September 30, 1998 decreased $90,000 to $1,396,000, but increased to 38% of sales and revenues, compared to $1,486,000 or 24% of sales and revenues for the quarter ended September 30, 1997. The decrease in selling, general and administrative expenses in the third quarter of 1998 versus the third quarter of 1997 was primarily due to a decrease in public relations and marketing expenses and commissions in 1998. During the third quarter of 1998, the Company incurred legal expenses of $140,000 in pursuit of a claim against a former employee. Depreciation and Amortization Expenses Depreciation and amortization expenses for the nine months ended September 30, 1998 decreased $108,000 or 13% to $737,000, compared to $845,000 for the nine months ended September 30, 1997. Capital expenditures increased $102,000 or 17% to $714,000 for the nine months ended September 30, 1998, compared to $612,000 for the nine months ended September 30, 1997. Interest The Company earned $3,000 in interest income for the quarter ended September 30, 1998, compared to $10,000 for the quarter ended September 30, 1997. The Company incurred insignificant interest expense in both periods. Income Taxes The Company recorded $9,000 income tax expense for the nine months ended September 30, 1998 and income tax expense of $400,000 for the nine months ended September 30, 1997. At September 30, 1998, the Company had gross deferred tax assets of $349,578, which represents the amount of tax benefits of existing deductible temporary differences or carryforwards that are more likely than not to be realized through the generation of sufficient future taxable income within the carryforward period. Net Earnings (Loss) The Company reported a net loss for the quarter ended September 30, 1998 of $335,000, compared to net earnings of $725,000 for the quarter ended September 30, 1997. The decline in the Company's profitability resulted in large part 9 10 from an approximately $2,500,000 decrease in net sales and revenues when compared with the prior period, and to a lesser extent, an increase in legal costs in the third quarter of 1998 versus the third quarter of 1997. LIQUIDITY AND CAPITAL RESOURCES To date the Company has been able to fund its liquidity requirements using cash from operations and available lines of credit. On April 7, 1998, the Company amended and extended its revolving credit agreement with Silicon Valley Bank. This agreement provides for a $2 million revolving credit facility, based upon eligible accounts receivable requirements. This line of credit has been established to provide the Company with resources for general working capital purposes and Standby Letter of Credit Guarantees for foreign customers. The line is secured by all assets of the Company. Interest on the line is at the Bank's prime rate plus one-half of one percent. The line contains covenants including provisions relating to profitability and net worth. As of September 30, 1998, the Company was in default of certain financial covenants; however the Company anticipates receiving a waiver of these defaults from the Bank. As of September 30, 1998, the Company had no outstanding debt under this revolving credit facility. The Company has also entered into a $1 million equipment leasing line with Silicon Valley Bank. The Company believes it has sufficient resources to finance its current operations for the foreseeable future through working capital, its existing line of credit and available lease arrangements. In addition, the Company has taken steps to conserve its resources by reducing its cost of operations. Cash and cash equivalents decreased $1,214,000 to $482,000 at September 30, 1998, from $1,696,000 at December 31, 1997. To date there are no material commitments by the Company for capital expenditures. At September 30, 1998, the Company's accumulated deficit was $461,000, compared to retained earnings of $1,632,000 as of December 31, 1997. Working capital as of September 30, 1998 decreased 39% to $3,026,000, compared to $4,977,000 as of December 31, 1997. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report selected information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131, which becomes effective for the Company in its year ending December 31, 1998, is not expected to have a material impact on the Company's results of operations. The Company is in the process of determining the impact of SFAS 131 on its footnote disclosures. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1), which establishes guidelines for the accounting for the costs of all computer software developed or obtained for internal use. SOP 98-1 is effective for the Company in 1999 and is not expected to have a material effect on the Company's financial statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as "derivatives") and for hedging activities. This statement requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The statement also sets forth the criteria for determining whether a derivative may be specifically designed as a hedge of a particular exposure with the intent of measuring the effectiveness of that hedge in the statement of operations. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management does not believe that the adoption of this statement will have a material impact on the Company's consolidated financial position, results of operations or cash flows. IMPACT OF THE YEAR 2000 ISSUE The Company has initiated a program to identify the potential impact of the Year 2000 issue. The Year 2000 relates to computer programs and embedded computer chips being viable to distinguish between the year 1900 and the year 2000. 10 11 The Company is near completion of a review and assessment of potentially affected items, including information technology and non-information technology, for Year 2000 compliance. A final examination of potentially affected items will be completed no later than December 1998. When identifying computer programs that are not Year 2000 compliant, the Company has sought to upgrade these programs to newer versions of software that are Year 2000 compliant. The Company estimates that it will obtain all required software no later than June 1999. The cost of the software is estimated to not exceed $50,000. The Company's business is also dependent upon systems of third parties, primarily its vendors and customers. The Company has prepared questionnaires and submitted them to all of its significant vendors. The Company is now collecting and analyzing their responses. Although this process is incomplete, no known problems have been identified. The Company expects to complete the analysis by March 1999. During the fourth quarter of 1998, the Company will be issuing questionnaires to its customer base. The Company anticipates completion of the analysis of its customer base by March 1999. The Company believes that its most likely and reasonable worst case scenario relating to the Year 2000 would be failure of certain of its applications with imbedded software or failure of such applications of a material customer or vendor. Failure of applications of embedded software could result in a disruption of the Company's operation and thereby negatively affect revenues and profitability. Failure of a significant vendor's information systems could temporarily interrupt supply of materials or services and impair the Company's ability to fill orders. If a major customer system fails to become Year 2000 compliant, the Company's revenues could be temporarily disrupted if the customer suspends further purchases. Although there can be no assurance that these failures will not have an adverse effect on the Company's business, the Company believes that any such adverse effect would not be material. The Company is formulating contingency plans to address any such failures. The plans include identifying Year 2000 compliant software for the Company's internal systems, and identifying alternative vendors to assure continuity of supplies. THE FOREGOING STATEMENTS MAY INCLUDE FORWARD-LOOKING STATEMENTS SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED OR REFERRED TO IN THIS REPORT AND IN ITEM 6 OF THE ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On March 2, 1998 the Company received a letter from the Office of the United States Attorney for the Eastern District of Virginia stating that it was considering the commencement of a civil action concerning research initiatives undertaken by the Company in the period from 1990 to 1997. The letter alleged that, in certain instances, the Company had failed to inform the government of pending or previously submitted proposals for work the government alleges was related to proposals which were funded. Rather than continuing to incur the legal costs and expend management resources in litigating this matter the Company settled with the government on August 18, 1998 for $547,000. This matter was previously reported in Quarterly Reports on Form 10-QSB for quarterly periods ended March 31, 1998 and June 30, 1998. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. The following exhibits are filed herewith: 27 Financial Data Schedule B. During the quarter ended September 30, 1998, the Company filed no reports on Form 8-K. 11 12 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SPIRE CORPORATION (Registrant) 12 NOVEMBER 1998 By: /s/ Roger G. Little - ----------------------------- ---------------------------------------- Date Roger G. Little President, Chief Executive Officer and Chairman of the Board 12 NOVEMBER 1998 By: /s/ Richard S. Gregorio - ----------------------------- ---------------------------------------- Date Richard S. Gregorio Vice President and Chief Financial Officer, Treasurer, Clerk and Principal Accounting Officer 12