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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-10964
MAXWELL TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-2390133
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9275 SKY PARK COURT
SAN DIEGO, CALIFORNIA 92123
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 279-5100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK,
PAR VALUE $.10 PER SHARE NAME OF EACH EXCHANGE ON WHICH REGISTERED: NASDAQ
NATIONAL MARKET ("NASDAQ")
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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. /X/
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on September 30, 1999, based on the closing
price at which the Common Stock was sold on Nasdaq as of September 30, 1999, was
$125,477,244.
The number of shares of the Registrant's Common Stock outstanding as of
September 30, 1999 was 9,560,171 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A (including the Appendix thereto) are incorporated by
reference in Part III of this Report.
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MAXWELL TECHNOLOGIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JULY 31, 1999
PAGE
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PART I
Item 1. Business.......................................................................................... 1
Item 2. Properties........................................................................................ 21
Item 3. Legal Proceedings................................................................................. 22
Item 4. Submission of Matters to a Vote of Security Holders............................................... 22
Item 4.1 Executive Officers of the Registrant ............................................................. 22
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................. 24
Item 6. Selected Financial Data........................................................................... 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 26
Item 7a. Quantitative and Qualitative Disclosures about Market Risk........................................ 36
Item 8. Financial Statements.............................................................................. 36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 54
PART III
Item 10. Directors and Executive Officers of the Registrant................................................ 54
Item 11. Executive Compensation............................................................................ 54
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................... 54
Item 13. Certain Relationships and Related Transactions.................................................... 54
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................. 55
PART I
AS USED IN THIS ANNUAL REPORT ON FORM 10-K, ("FORM 10-K"), UNLESS THE
CONTEXT INDICATES OTHERWISE, THE TERMS "COMPANY" AND "MAXWELL" REFER TO MAXWELL
TECHNOLOGIES, INC., A DELAWARE CORPORATION, AND ITS CONSOLIDATED SUBSIDIARIES.
UNLESS OTHERWISE INDICATED, AS USED IN THIS FORM 10-K, THE TERM FISCAL YEAR
SHALL REFER TO THE 12-MONTH PERIOD ENDED OR ENDING JULY 31 OF A GIVEN YEAR.
SHARE OR PER SHARE INFORMATION IN THIS FORM 10-K FOR PERIODS PRIOR TO DECEMBER
17, 1996, IS ADJUSTED TO REFLECT A 2 FOR 1 STOCK SPLIT. THIS FORM 10-K MAY
CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934.
SUCH FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN ANY
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" HEREIN. DISCUSSIONS
CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE MATERIAL SET
FORTH UNDER "ITEM 1. BUSINESS", AND "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", AS WELL AS WITHIN
THIS FORM 10-K GENERALLY.
ITEM 1. BUSINESS
GENERAL
Maxwell Technologies, Inc. ("Maxwell" or the "Company") applies
industry-leading capabilities in pulsed power, space applications, industrial
computers and other advanced technologies to develop and market products and
services for commercial and government customers in multiple industries,
including energy, satellite, defense, telecommunications, consumer
electronics, medical products and water purification.
A worldwide leader in pulsed power technologies, the storage of
electrical energy and delivery of power in brief controlled bursts, the
Company has leveraged its technical expertise, gained from over 30 years of
experience performing research and development primarily for the United
States Department of Defense ("DOD"), to develop a portfolio of pulsed power
based products, ranging from components such as ultracapacitors and
electromagnetic interference ("EMI") filters to systems for purification and
sterilization and major pulsed power x-ray simulators. For the space and
satellite market, Maxwell offers a line of microelectronic components and
subsystems, as well as sophisticated analysis and services involving the
effects of the space environment on spacecraft and sensor signal processing
for space systems. In addition to space and power based products, the Company
designs and manufacturers industrial computers and subsystems which are sold
to original equipment manufacturers and as standard catalogue products in the
computer telephony, broadcasting, manufacturing automation and e-commerce.
The Company continues to pursue government funded research and development
projects, many of which involve computer-based analytic services and software.
PRODUCTS AND SERVICES
STERILIZATION AND PURIFICATION SYSTEMS
The Company's PUREBRIGHT-Registered Trademark- and COOLPURE-Registered
Trademark- systems are based on two patented pulsed power processes
incorporating capacitors and other pulsed power components designed and
manufactured by the Company. The PUREBRIGHT system utilizes intense pulsed light
to kill microorganisms and viruses in water, blood plasma and other
biopharmaceutical and medical products, and on food and food packaging. The
COOLPURE system uses pulsed electrical fields to kill microorganisms in liquids
and liquid foods.
MEDICAL AND PHARMACEUTICAL PRODUCT STERILIZATION. Maxwell is marketing
PUREBRIGHT systems for sterilization of medical and pharmaceutical products and
packaging materials. PUREBRIGHT systems for medical and pharmaceutical
applications consist of a standard enclosure containing the pulsed power
delivery system, linked by cable to a flash lamp unit. The flash lamp unit is
configurable to the customer's specific requirements for integration into
processing line equipment. The Company has strategic partnerships with medical
and pharmaceutical product companies, which are seeking FDA approval for
PUREBRIGHT's integration into blow-fill-seal plastic packaging equipment and
certain disposable medical product manufacturing equipment. In collaboration
with la Calhene, the Company has developed a barrier isolation system utilizing
PUREBRIGHT for sterile environments for use in the pharmaceutical industry. La
Calhene plans to introduce such systems to the market place in fiscal year 2000.
1
Tests conducted during fiscal year 1999 confirmed that PUREBRIGHT
technology can be effective in deactivating microorganisms, including viruses
such as the HIV virus, in blood plasma products and other biopharmaceutical
products. The ability to destroy viruses without harming surrounding proteins
would open significant opportunities for PUREBRIGHT in the biotechnology
industry, ranging from treatment of biologically derived products to production
of vaccines. The Company is conducting further tests with industry partners to
establish and develop this PUREBRIGHT application.
WATER QUALITY. The Company has developed a four-gallon per minute
PUREBRIGHT system that reduces microbial contamination in water at the point of
entry in hotels, restaurants, laboratories and similar establishments. Several
of these systems are in use in restaurants in the San Diego and Tijuana, Mexico
area. In fiscal year 1999, the Company entered into a strategic relationship
with two United States entities in the Sanyo Group, in which the Sanyo companies
provide manufacturing capability for the Company's water purification units and
have marketing and distribution rights for such units in certain countries.
Sanyo also acquired a 2% equity interest in the Company's PurePulse Technologies
subsidiary.
In a strategic relationship with Pall Corporation, the Company has
developed a PUREBRIGHT system for anti-microbial treatment of ultra-high purity
water used in semiconductor manufacturing. Upon successful testing of a
prototype 250-gallon per minute system, the Company and Pall expect to conclude
a license under which the PUREBRIGHT system will be integrated into Pall's line
of water treatment products for semiconductor applications. Beta site testing is
expected to be completed in fiscal year 2000. The Company is also collaborating
with a Japanese company to develop a PUREBRIGHT system for the municipal
drinking water market in Japan.
FOOD PACKAGING. Through a long-standing relationship with Tetra Pak, the
Company has developed PUREBRIGHT systems for food packaging applications similar
in size, price and customizable features to the PUREBRIGHT systems for medical
and pharmaceutical products. During fiscal year 1999, Tetra Pak made a decision
to continue its traditional, chemical-based sterilization technique and to offer
PUREBRIGHT as an alternative, rather than replacement solution. The Company
reached an agreement with Tetra Pak amending its license to reduce the scope of
its exclusivity and remove minimum performance requirements. Upon successful
completion of field tests, Tetra Pak will offer PUREBRIGHT as an option in its
next generation of container filling machines.
The COOLPURE system, currently in the prototype stage, kills microorganisms
using pulses of electricity, rather than light. The COOLPURE system can be used
with opaque or cloudy liquids or pumpable foods such as juices, dairy products
and sauces, which the PUREBRIGHT light pulses are unable to penetrate. COOLPURE
is effective against vegetative bacteria, a narrower range of microorganisms
than those controlled by PUREBRIGHT. The Company has supplied COOLPURE
prototypes to the National Center for Food, Safety and Technology and an
international food products company. During fiscal year 1999, the Company
entered into a four-year research and development agreement with a consortium of
companies centered in The Netherlands for the development of COOLPURE
technology. If the development is successful, various members of the consortium
will have commercial rights to use or distribute COOLPURE systems throughout the
world.
POWER CONVERSION PRODUCTS
ULTRACAPACITORS. Maxwell is developing the POWERCACHE-TM- ultracapacitor to
provide bursts of power when a rapid injection of energy is required for an
application. The Company's ultracapacitor is scalable in that it can be
manufactured in a broad range of shapes and sizes. Currently, the Company is
developing ultracapacitors from sub-matchbook sized to cells measuring 2" x 2"
x 6", while maintaining the same high energy storage per unit volume. The
Company's ultracapacitors can also be linked together in modules to supply
higher power for applications such as automotive and power quality systems.
2
In fiscal year 1998, the Company entered into a broad-based agreement
with EPCOS AG, formerly Siemens Matsushita Components GmbH, which is a joint
venture of Siemens AG and Matsushita Electrical Industries in the field of
passive electrical components. The agreement provides for the transfer of
Maxwell's ultracapacitor technology, sharing of ongoing product development
by both parties and the non-exclusive licensing right for EPCOS to
manufacture products based on Maxwell's ultracapacitor technology and to sell
such products in all countries of the world except the United States, Canada
and Mexico. EPCOS will target the full range of applications for the
Company's ultracapacitor. The Company receives initial license fees and
on-going royalties under the agreement.
The Company has identified electronics as the primary initial market for
its POWERCACHE ultracapacitor, including wireless communication devices such as
two-way pagers, modems, global satellite telephones and locator beacons, and
other devices such as power tools, toys, buoys, laptop computers, emergency
lights, PDA's and scanners. The devices appropriate for this market are the
small, sub-matchbook size units. In wireless communication devices, POWERCACHE
ultracapacitors can increase signal strength and significantly extend battery
life for devices that transmit in sequences of bursts. The Company is pursuing
design-in wins for its ultracapacitor into a variety of next generation portable
devices dependent on battery power, including two-way pagers and wireless
modems, and has targeted automatic meter reading devices and actuators as
near-term opportunities. During fiscal year 1999 and the beginning of the
current fiscal year, the Company installed and began the process of qualifying
an automated manufacturing line for the small ultracapacitor, which will
substantially increase the Company's production capacity for that device.
The Company has also identified power quality and automotive as
potential markets for its ultracapacitor. In the power quality arena, the
Company's ultracapacitors can function as a standby reserve of power to be
supplied in the event of an electrical interruption or voltage fluctuation in
an external power source. For this purpose, ultracapacitors are now being
integrated into a power supply product sold by the Company for sensitive
medical applications, such as MRI machines. In conventional combustion engine
vehicles, the Company's POWERCACHE ultracapacitor has potential applications
in catalytic converter pre-heating, air bag deployment, seat belt tightening
and engine starting. In electric and hybrid vehicles, the Company's
ultracapacitors have the potential to reduce the load on the battery pack by
using its stored energy for acceleration power and recapturing energy
otherwise lost during braking.
COMPONENTS. The Company designs, manufactures and sells a line of filters
to absorb the electromagnetic fields and signals generated by electronic devices
which interfere with and disrupt the functioning of other electronic devices,
including implantable medical devices such as pacemakers and defibrillators, and
aerospace guidance and communications systems. The Company's product blocks EMI
from entering an electronic device at the opening used by, for example, power
leads or sensors (the "feedthrough"). The Company supplies these filters to
major medical device manufacturers, currently for use with implantable
pacemakers and defibrillators, but potentially also for use with hearing aids
and other electronic devices. Similar feedthrough filters are supplied for
military and commercial space programs requiring high reliability broad-based
EMI filters.
In fiscal year 1999, the Company acquired KD Components, Inc. ("KD"), a
manufacturer of high voltage, high temperature ceramic capacitors for
aerospace, aviation, medical, mining, geophysical and automotive
applications. The operations of KD have been combined with the Company's
Sierra Division, which manufacturers ceramic capacitor EMI filters, to enable
the Company to offer a broad range of ceramic capacitor products. The Company
also offers a line of proprietary hermetic glass-to-metal seals for
industrial and automotive applications.
HIGH VOLTAGE PRODUCTS AND SYSTEMS. The Company designs, manufactures and
sells a range of high voltage capacitors supplying from thousands of volts to
tens of thousands of volts. Maxwell has long been a major supplier of capacitors
used in portable and stationary heart defibrillators used by medical personnel
to treat heart attacks. The Company also manufactures high voltage capacitors
for lasers for use in medical applications such as eye surgery, dentistry and
dermatology, and for industrial applications such as microlithography for
semiconductor manufacturing, flat panel annealing for LCD displays, marking,
welding, drilling and cutting. Other high-voltage capacitors are sold for use in
specialized applications and for use in large systems for the United States
government. The Company was recently selected to be one of two suppliers of high
voltage capacitors under a multi-year contract for the National Ignition
Facility, a nuclear fusion research effort of Lawrence Livermore Laboratory, a
United States Department of Energy national laboratory. The Company also
develops, manufactures and sells a line of compact power supplies used for
charging high voltage capacitors for the medical and industrial laser markets.
3
POWER QUALITY. The Company develops and manufacturers power distribution
units, power conditioners and inverters, and other power protection products for
medical, telecommunications, industrial and commercial applications. It also
provides private label uninterruptible power supplies and power distribution
units for major companies in the power and energy industries world-wide.
SPACE AND TECHNOLOGY PRODUCTS AND PROGRAMS
SPACE. In fiscal year 1999, the Company acquired Space Electronics, Inc.
("SEi"), a San Diego - based designer and manufacturer of high reliability,
radiation hardened microelectronic components and assemblies primarily for the
space market. Following the acquisition of SEi, the Company has begun to
integrate various aspects of its technology-based programs and services, which
address technical challenges in commercial and government space programs, with
the capabilities of SEi to create a broad offering of products and services to
the space market.
Through its SEi unit, Maxwell provides integrated circuits, multi-chip
modules and boards designed and adapted for space flight, and other high
reliability applications. The Company uses proprietary technology, including its
RADPAK-Registered Trademark- packaging, to protect commercial, off-the-shelf
integrated circuits from radiation in space, and was recently selected by Sandia
National Laboratory to develop the first radiation-hardened single board
computer for the satellite market using Intel's Pentium-Registered Trademark-
processor. The Company has historically provided analytical services to the
government on the effects of the space environment on spacecraft, and this space
physics group has begun working with the leading commercial satellite developers
to solve complex space environment problems affecting existing and planned
satellite constellations. In addition, the Company's operation in Albuquerque,
New Mexico, continues to provide state-of-the-art analysis in sensor design and
development and signal processing for space systems and testing support for
techniques to harden electronic circuits and systems from radiation in space and
other hostile environments.
POWER SYSTEMS AND SIMULATORS. Maxwell is engaged in a variety of research
and development programs in pulsed power, weapons effects simulation and pulsed
power systems design and construction. These services are primarily supplied to
the United States government and its agencies including the Air Force and the
Defense Threat Reduction Agency. The Company also provides systems and services
to national laboratories and industrial and defense companies. The Company
typically performs research and development under contracts that allow the
Company to apply developed technology in commercial markets.
The Company performs above-ground simulation and testing of weapons effects
via the design and operation of large-scale X-ray and electromagnetic pulse
producing systems. The Company operates and maintains five simulation systems at
its San Leandro facility and one such system in San Diego. These systems employ
the Company's capacitors and other pulsed power components. The Company also has
developed power quality systems and power conditioning systems, including a
power conditioning system for an accelerator for tritium production. In
addition, the Company performs on-site technical, operations and maintenance
support at government facilities involving applications such as electric and
electrothermal gun research, advanced pulsed power development, high-power
microwave source development, energy storage and system integration of advanced
concept demonstration experiments.
COMPUTER-BASED ANALYTIC SERVICES AND SOFTWARE. Maxwell provides complex
computer-based analytic services, primarily to the DOD, and sells various
commercial software products. A primary focus of the Company's government funded
research is computer modeling of physical phenomena and improvement of the
architecture of the computer-based systems and networks used for transmitting
and applying data. The Company has developed highly advanced computer software
for modeling and predicting physical effects such as electromagnetic pulses,
electric currents, shock waves, ground shock and ground movement, as well as
modeling and predicting the interaction of chemical and biological agents with
buildings and other physical structures.
4
In commercial markets, Maxwell provides software-related products and
services for cost accounting and management information systems. The Company is
marketing these products, which incorporate sophisticated job-cost and
activity-based accounting capabilities, to large contractors and others
interested in tracking costs by job, activity or cost center. The software is
sold under the JAMIS-Registered Trademark- (Job-cost Accounting and Management
Information Systems) label, and contains modules necessary for a comprehensive,
enterprise-wide system including accounting functions, Federal Acquisition
Regulation compliant billings, human resources, payroll, contracts and
purchasing. Potential markets for the Company's software offering have expanded
significantly with the full commercial introduction in fiscal year 1999 of JAMIS
e-timecard, an online web-enabled time recording system that operates in a
client-server environment including remote-site entry. This product can serve
any organization that seeks to collect and track time entries by its employees.
INDUSTRIAL COMPUTERS AND SUBSYSTEMS
Through its industrial computers and subsystems business, the Company
designs, manufactures and supplies standard, custom and semi-custom industrial
computer modules, platforms and fully-integrated systems to OEMs, on a worldwide
basis. The Company's product line ranges from enclosures, CPU boards and
backplanes to fully integrated and highly customized computer systems. The
Company's product line primarily employs passive backplane architecture,
complemented by the Company's recent development of its CompactPCI line of
products.
The Company's custom and semi-custom components and systems are
design-intensive applications. All of the Company's products are based on
Intel's x86 and Pentium architectures and are PC-compatible. The Company's
products are utilized primarily in computer telephony equipment such as
voice-mail servers, interactive voice response servers, telephone switching
servers and telephone network transaction control servers. Business in the
industrial automation market increased significantly in fiscal year 1999 with
the Company's participation in a major program to support the installation of
new mail sorting equipment by the United States Postal Service. The Company's
industrial computers are also used in a number of other applications such as
broadcasting, medical (CT Scan, MRI equipment and drug dispensing equipment),
test instrumentation (data acquisition and test), imaging instrumentation
(large-scale optical reading and sorting equipment) and manufacturing automation
(pick-and-place equipment).
The Company's products utilize passive backplane technology in which CPU
and input/output functionality is provided by add-in cards for flexibility and
ease of replacement. The Company provides fault resistant and fault tolerant
systems that include redundant components -- cooling fans, power supplies and
hard disks -- that can be "hot-swapped" without shutting down or otherwise
affecting the system. The Company also provides enclosures with segmented
backplanes that allow two or more independent computer systems to operate within
a single enclosure, an important feature in systems in which fault tolerance or
size requirements are critical. Enclosures are available to support from six to
twenty-five slots and can be configured in rack mount, table top or tower
models.
The Company's products employ several industry standard buses, form factors
and interfaces, which enable OEMs to integrate the Company's products with many
widely available and economical third party products. The Company's products
incorporate standard bus architecture including ISA Bus, PCI Bus, CompactPCI,
SCSI Bus and IDE and microprocessors in the Intel family up to the Pentium III,
and support operating systems including Windows, Windows NT, Solaris and Linux.
During fiscal year 1999, the Company continued to expand its geographic
scope with the addition of full service facilities in France and Germany, which
complement its operations in the United Kingdom. With facilities capable of
designing, developing, integrating and assembling products in three countries,
the Company is a major participant in the European market, and reflecting this
fact, a total of approximately 40% of the Company's fiscal year 1999 sales of
industrial computers and subsystems were generated in Europe.
5
STRATEGIC PARTNERSHIPS
In recent years the Company has formed or expanded several strategic
partnerships. Through these alliances, Maxwell may obtain an enhanced
understanding of market demands and needs, access to funding for continued
development and commercialization of products, or a channel for market
penetration. In return, the strategic partner obtains an opportunity for early
adoption or use of the product or service.
For sterilization and purification products, the Company frequently accepts
initial funding to engineer a specific application for the strategic partner,
thus reducing the Company's product development expense, and in exchange, the
strategic partner often receives a period of exclusivity for the application.
During fiscal year 1999 the Company entered into a broad-based strategic
relationship with Sanyo. In exchange for $2 million, Sanyo obtained the right to
manufacture a portion of the Company's water quality products, certain sales and
distribution rights and a preferred stock interest in the Company's PurePulse
Technologies, Inc. subsidiary. The Company has also received funding from Pall
Corporation for development and testing of a prototype 250-gallon per minute
PUREBRIGHT water treatment system for ultra-high purity water used in
semiconductor manufacturing. Successful testing of the prototype could lead to a
commercialization agreement for that market, which will include exclusive rights
for Pall Corporation for a period of time. A strategic collaboration involving
development funding from la Calhene has led to the introduction by la Calhene of
a barrier isolation system, under an exclusive license, utilizing PUREBRIGHT
technology.
The Company has also developed strategic partner relationships for product
development and marketing of ultracapacitors. PacifiCorp has provided funding
for early-stage product analysis, development and testing of ultracapacitors in
power quality applications and has provided an additional $7 million in funding
for product development, preferred access to the technology, royalty rights and
an equity investment in the Company's subsidiary, Maxwell Energy Products, Inc.
The Company has signed a broad-based licensing agreement relating to
ultracapacitors with EPCOS, formerly Siemens Matsushita Components, GmbH,
providing for technology transfer, joint product improvement and non-exclusive
rights for EPCOS to manufacture ultracapacitor products and to sell such
products in all countries of the world other than the United States, Canada and
Mexico.
SALES AND MARKETING
The Company's commercial products sales teams consist of sales personnel
based in its operating facilities, and for the Company's industrial computer and
SEi units, geographically-dispersed sales offices. These sales teams are often
supported by scientists, application engineers and technical specialists. Sales
and marketing for the Company's products in the United States, and, for
industrial computer, Europe, is handled directly by the Company. Elsewhere, the
Company utilizes sales representatives and distributors to assist in the
marketing of its products. The Company conducts marketing programs intended to
position and promote its products and services, including trade shows, seminars,
advertising, public relations, distribution of product literature and web-sites
on the Internet.
Emerging technologies require customer acceptance of new and different
technical approaches, and the sales effort for new products, particularly in the
Power Conversion Products and Sterilization and Purification Systems business
segments, includes substantial involvement from engineers to demonstrate the
applications of the Company's products. Senior management is also significantly
involved in gaining access to customers or potential strategic partners to
discuss the Company's emerging product lines. The time required to demonstrate
technical feasibility and cost effectiveness for new technologies often requires
an extended initial marketing effort by the Company. As a result, an important
part of the sales strategy for new products is to capitalize on strategic
partnerships formed to develop the product and establish an avenue to obtain
product validation.
In its Space and Technology Products and Programs segment, the Company's
sales and marketing is primarily conducted by key scientists and other members
of its technical staff. A large portion of this business is obtained in response
to requests for proposals by the government, with the Company's bids and
proposals focused on providing the government with detailed technical
information, as well as competitive pricing. Successful performance of the
Company's contracts is an important factor in securing follow-on business.
6
COMPETITION
In most of the markets in which it operates, Maxwell has a number of
competitors, many of which have longer operating histories, significantly
greater financial, technical, marketing and other resources, greater name
recognition, and a larger installed base of customers than the Company. In some
of the Company's business areas involving emerging technologies, the Company
faces competition from products utilizing alternative technologies.
The Company does not believe that its PUREBRIGHT products have direct
competitors in the application of pulsed broad spectrum light to treat water,
decontaminate food packaging, or sterilize medical or pharmaceutical products.
Pulsed light competes with many other established and developing technologies,
most of which are available in forms that are significantly less expensive than
the Company's products. For water treatment, the Company faces competition from
many alternative technologies, including filtration systems, reverse osmosis,
chemicals, distillation technology and continuous wave ultraviolet light
systems. Alternative technologies also exist for the sterilization, disinfection
and purification of medical products, food packaging and food products,
including technologies such as autoclave heat sterilization, chemicals, gamma
radiation and modified atmosphere packaging. The Company believes its
Sterilization and Purification Systems will be competitive because of their
efficacy in microbial reduction, their speed in providing treatment, their
ability to be integrated directly into processing lines rather than providing
treatment after the product comes off the line, and their capability to provide
treatment without producing hazardous wastes.
Although a number of companies are researching and developing
ultracapacitor technology, the Company has three principal competitors in
ultracapacitor products: Panasonic, a division of Matsushita Electric
Industries, Ltd.; Elna, a unit of Asahi Glass; and Polystor, a manufacturer
of batteries and ultracapacitors. The key competitive factors are price,
performance (energy stored and power delivered per unit volume), form factor
and breadth of product offerings. Although its products are not yet
sufficiently established to be fully competitive on price, the Company
believes it competes favorably with respect to each of the other factors. In
addition, the Company will be aggressive in pricing when necessary.
Ultracapacitors also compete with other technologies, including high-power
batteries in power quality and automobile load leveling applications,
flywheels in power quality and automotive applications (including as a power
source for electric vehicles), and superconducting magnetic energy storage in
power quality.
The Company's EMI filter business competes with AVX Filter, a subsidiary of
Kyocera, in the EMI feedthrough filter market. The competitive factors in this
market include price, breadth of electromagnetic spectrum filtered, small size
and reliability. The Company believes it competes favorably with respect to each
of these factors. The Company believes its patent for mounting of the filter at
the surface of an implantable medical device's feedthrough provides a
competitive advantage by allowing the manufacture of a smaller sized device.
The Company's traditional high voltage capacitors face competition from
numerous independent electronics suppliers, as well as from component
manufacturing operations within certain medical and industrial OEM
organizations. The largest independent competitor in the United States is
Aerovox, which has competing high voltage capacitor lines very similar to the
Company's. Customers generally select capacitor components for their systems
based on criteria such as price, functionality (I.E. voltage requirements) and
past experience with a vendor. The Company focuses on high-end, high-power
capacitors, maintains relationships with customers geared towards achieving
design wins and offers competitive pricing.
In space products, the Company faces a variety of competition in different
product areas. The Company competes with traditional radiation-hardened IC
suppliers like Honeywell, Lockheed Martin, and Intersel (formerly Harris)
Devices for different monolithic ICs, processors and ASIC products. The Company
also has competition from commercial suppliers with lines that have favorable
radiation-hardened characteristics like Temic in Europe and National
Semiconductor and Analog Devices. SEi competes with high reliability packaging
houses such as Austin, White Microelectronics, Teledyne and Sac Tec for
monolithic and MCMs. SEi's proprietary technology enables the Company to compete
using unique solutions on the most advanced commercial electronic circuits.
The Company's primary competition in its passive backplane industrial
computer target markets include RadiSys, Diversified Technology, Advantech,
Industrial Computer Source, a division of Dynatech, Xtech and Trenton, among
others, resulting in a highly fragmented market in which no one entrant is
dominant. In addition,
7
there are industrial computers and subsystems divisions within several large
OEM operations. Competitive factors in this market include price, design
expertise, functionality and fault tolerance. The Company believes it
competes favorably with respect to each of these factors. CompactPCI is an
emerging technology that is neither widely marketed nor accepted; it will
potentially compete with passive backplane and much more widely installed
VME-based systems for market share. The competitive factors surrounding
CompactPCI are very similar to passive backplane systems; however,
traditional VME manufacturers such as Motorola and Force have entered the
market.
In complex computer-based analytic services, the Company often competes
with larger, better funded entities to secure government and other contracts.
The Company relies on its expertise in modeling and analysis and its ability to
make competitive bids to secure contracts. In commercial software, the JAMIS
accounting system competes principally with one similar government contract
based software application produced by Deltek Systems, as well as with numerous
customized and several off-the-shelf accounting software products. The Company
relies on superior performance and an attractive price point to secure market
share.
MANUFACTURING AND SUPPLIERS
Maxwell currently manufactures products in its Power Conversion Products,
Industrial Computers and Subsystems and Sterilization and Purification Systems
segments, some of which consist primarily of design, assembly and system
integration. The Company has several manufacturing and assembly facilities in
the United States and the United Kingdom. Five of the Company's facilities in
the United States, two in the United Kingdom and one in Germany have obtained
ISO 9001 certification. For certain emerging products, the Company will evaluate
whether outsourcing or licensing arrangements are preferable to establishing its
own high volume manufacturing capacity for that product.
The Company generally purchases components and materials, such as
electronics components, dielectric materials and enclosures of metal and
plastic, from a number of suppliers. In certain operations, the Company relies
on a limited number of suppliers or a single supplier. Although the Company
believes there are alternative sources for components and materials currently
obtained from a single source, there can be no assurance that the Company will
be able to identify and qualify alternative suppliers in a timely manner.
Maxwell's industrial computer business relies on single qualified suppliers for
some of its critical components, primarily CPU boards and some power supplies.
The EMI filters produced by the Company rely on a sole domestic source for one
component, and that supplier has indicated its plans to design, build and sell a
competing filter in the future. The Company believes this supplier will continue
to sell to the Company; but, if necessary, the Company could replace this
supplier or design and manufacture the component itself. Although the Company
seeks to reduce its dependence on sole and limited source suppliers, the partial
or complete loss of these sources could have at least a temporary material
adverse effect on the Company's results of operations, and damage customer
relationships due to the complexity of the products supplied and the significant
amount of time required to qualify new suppliers. See "Risk Factors".
The Company has limited experience with volume manufacturing of commercial
products. To date, the Company has not manufactured in volume its
ultracapacitors or sterilization and purification systems and has not
manufactured its other products in high volume. The Company may face challenges
in scaling up production of its new products, especially those products that
contain newly developed technologies. In addition, the Company will need to
expand its current facilities, obtain additional production equipment or
outsource manufacturing in order to manufacture a substantial quantity of its
products.
8
RESEARCH AND DEVELOPMENT
The Company conducts internally-funded engineering, research and
development to refine and expand its products and services. Approximately 10% of
the reported research and development expense consists of the Company's
preparation of proposals principally for contracts for funded research and
development for the government. For fiscal years 1999, 1998, and 1997,
expenditures for internally-funded research and development were approximately
$10.8 million, $9.7 million and $6.0 million, respectively. In addition, the
Company performs substantial research and development work funded by customers,
including agencies of the United States government and commercial companies
under strategic partnership arrangements.
PATENTS, LICENSES AND TRADEMARKS
The Company's success is heavily dependent upon the establishment and
maintenance of proprietary technologies. Although the Company attempts to
protect its intellectual property rights through patents, copyrights, trade
secrets and other measures, there can be no assurance that the steps taken by
the Company to protect its proprietary technologies will be adequate to prevent
misappropriation by third parties, or will be adequate under the laws of some
foreign countries, which may not protect the Company's proprietary rights to the
same extent as do the laws of the United States.
The Company uses employee and third-party confidentiality and
non-disclosure agreements to protect its trade secrets and unpatented know-how.
The Company requires each of its employees to enter into a proprietary rights
and non-disclosure agreement in which the employee agrees to maintain the
confidentiality of all proprietary information of the Company and, subject to
certain exceptions, to assign to the Company all rights in any proprietary
information or technology made or contributed by the employee during his or her
employment. In addition, the Company regularly enters into non-disclosure
agreements with third parties, such as potential joint venture partners and
customers.
The Company has historically relied primarily on its technological and
engineering abilities, and on its design and production capabilities to gain
competitive business advantages, rather than on patents or other intellectual
property rights. However, the Company does file patent applications on concepts
and processes developed by the Company's personnel, and, as its commercial
businesses expand, the Company has placed increased emphasis on patents to
provide protection for certain of its technologies and products. The Company's
success will depend in part on its ability to maintain its patents, add to them
where appropriate, and to develop new products and applications without
infringing the patent and other proprietary rights of third parties, and without
breaching or otherwise losing rights in technology licenses obtained by the
Company for other products. There can be no assurance that any patent owned by
the Company will not be circumvented or challenged, that the rights granted
thereunder will provide competitive advantages to the Company or that any of the
Company's pending or future patent applications will be issued with claims of
the scope sought by the Company, if at all. If challenged, there can be no
assurance that the Company's patents (or patents under which it licenses
technology) will be held valid or enforceable. In addition, a number of the
patents and patent applications owned or licensed by the Company are subject to
"march-in" rights and non-exclusive, royalty-free, confirmatory licenses held by
various governmental agencies or other entities.
BACKLOG
The Company's funded backlog as of July 31, 1999 and 1998 amounted to
approximately $67 million and $47 million, respectively. The funded backlog
consists of remaining funding under cost-plus contracts for tasks not yet
completed, remaining revenues to be recognized on contracts accounted for on a
percentage-of-completion basis and firm orders for products not yet delivered.
The Company expects to complete or deliver substantially all of its currently
funded backlog within 12 months. The unfunded portion of contracts awarded was
approximately $19 million and $34 million at July 31, 1999 and 1998,
respectively.
9
GOVERNMENT BUSINESS
A substantial portion of the Company's sales (approximately 29% in
fiscal year 1999 and 31% in fiscal year 1998) is derived from contracts with
the United States government, principally agencies of the DOD, and
subcontracts with government suppliers. The reductions in defense budgets in
the 1990s adversely affected the Company's activities, particularly in the
area of system survivability products and services, such as weapons effects
simulation and testing. The Company has also experienced increased
competition in bidding for new defense programs from contractors seeking to
replace their lost business. While the DOD has continued to fund, although at
lower levels, research on next-generation pulsed power concepts, the
operation of existing simulation machines remains subject to curtailment.
The Company's government contracts are typically performable over a
one-year or multi-year period, with funding provided in increments of one year
or less. Government agencies may terminate their contracts, in whole or in part,
at their discretion, and in such event, the government agency is obligated
generally to pay the costs incurred by the Company thereunder, plus a fee based
upon work completed. Contract costs for services or products supplied to
government agencies, including allocated indirect costs, are subject to audit
and adjustment. Contract costs have been reviewed and accepted by the government
through fiscal year 1995. Contract revenues for periods subsequent to fiscal
year 1995 have been recorded in amounts that are expected to be realized upon
final review and settlement. Contracts entered into by the Company with
government agencies are fixed-price contracts or cost-plus contracts. Under a
fixed-price contract, the customer agrees to pay a specific price for
performance. Under a cost-plus contract, the customer agrees to pay an amount
equal to the Company's allowable costs in performing the contract, plus a fixed
or incentive fee. Certain costs of doing business, such as interest expenses and
advertising expenses, are not allowable under cost-plus contracts. Greater risks
are involved under a fixed-price contract than under a cost-plus contract,
because in a fixed-price contract the Company assumes responsibility for
providing the specified product or services regardless of the actual costs
incurred. Failure to anticipate technical problems, estimate costs accurately or
control costs during contract performance reduces or eliminates the contemplated
profit and can result in a loss. On the other hand, the government generally
permits higher profit margins when establishing prices for fixed-price contracts
because of such risks. In the space and technology products and programs
business segment approximately 53% and 69% of sales were derived from cost-plus
contracts in fiscal year 1999 and 1998, respectively, and the balance of sales
in such years were derived from fixed-price contracts.
GOVERNMENT REGULATION
The testing, manufacture and sale of certain of the Company's products are
subject to regulation by numerous governmental authorities. Pursuant to the
Federal Food, Drug, and Cosmetic Act, and the regulations promulgated
thereunder, the FDA regulates the pre-clinical and clinical testing,
manufacture, labeling, storage, distribution and promotion of food and medical
products and processes. The Company has obtained clearance from the FDA for use
of COOLPURE technology for preservation of liquid foods. In addition, the
Company has obtained clearance from the FDA for PUREBRIGHT for food use and is
applying for similar approvals in Canada and Europe, as well as supporting
customers in obtaining clearance of PUREBRIGHT for medical applications. The
Company's EMI filter capacitor has been approved for use in implantable
defibrillators and implantable pacemakers of certain medical device
manufacturers.
The testing, preparation of necessary marketing applications and processing
of those applications with the FDA is expensive and time consuming, can vary
based on the type of product and may take several years to complete. There is no
assurance that the FDA will act favorably or quickly in making such reviews, and
significant difficulties or costs may be encountered by the Company in its
efforts to obtain FDA approvals that could delay or preclude the Company from
marketing any products it may develop, or furnish an advantage to competitors.
The FDA may also require post-marketing testing and surveillance to monitor the
effects of approved products or place conditions on any approvals that could
restrict the commercial applications of such products. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing.
10
Because of the nature of its operations and the use of hazardous substances
in certain of its ongoing manufacturing and research and development activities,
the Company is subject to stringent federal, state and local laws, rules,
regulations and policies governing the use, generation, manufacturing, storage,
air emission, effluent discharge, handling and disposal of certain materials and
wastes. Although the Company believes it is in material compliance with all
applicable government and environmental laws, rules, regulations and policies,
there can be no assurance that the Company's business, financial condition or
results of operations will not be materially adversely affected by current or
future environmental laws, rules, regulations and policies or by liability
arising out of any past or future releases or discharges of materials that could
be hazardous. See "Risk Factors" .
FOREIGN SALES
The Company's revenue from customers outside of the United States for the
past three years was $32.5 million in fiscal year 1999, $21.1 million in fiscal
year 1998 and $14.1 million in fiscal year 1997. In fiscal year 1999, $13.1
million of the total foreign sales was attributable to sales to customers
located in the United Kingdom.
SEGMENTS
The Company's business segments are discussed in Note 11 of Notes to
Consolidated Financial Statements included as Item 8 herein. The Company
currently operates in four business segments: Space and Technology Products and
Programs (includes products and services for the government and commercial space
markets, research and development and programs in pulsed power, pulsed power
systems design and construction, weapons effects simulation and computer-based
analytic services, and computer software services and products; Industrial
Computers and Subsystems (includes design and manufacture of standard, custom
and semi-custom industrial computer modules, platforms and fully-integrated
systems); Power Conversion Products (includes design, development and
manufacture of electrical components, systems and subsystems, including products
that capitalize on pulsed power such as ultracapacitors, high voltage capacitors
and other electrical components, power supplies and power conditioning systems
and EMI filter capacitors); and Sterilization and Purification Systems (includes
sterilization and purification systems to reduce or eliminate microbial
contamination). The Company's operating subsidiaries are Maxwell Energy
Products, Inc. and Phoenix Power Systems, Inc. (Power Conversion Products),
PurePulse Technologies, Inc. (Sterilization and Purification Systems), I-Bus,
Inc., I-Bus UK, Ltd., I-Bus France and I-Bus Germany (Industrial Computers and
Subsystems), and Maxwell Technologies Systems Division, Inc., Space Electronics,
Inc., and Maxwell Business Systems, Inc. (Space and Technology Products and
Programs). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included as Item 7 herein.
EMPLOYEES
At July 31, 1999, the Company had 1,093 employees, including 62 employees
with Ph.D. degrees and 101 others with post-graduate degrees. None of the
Company's employees is represented by a labor union. Maxwell considers its
relations with its employees to be good.
RISK FACTORS
Any of the following risks could materially affect the Company's business,
financial condition and results of operations could be adversely impacted by any
of the following risks. The risks set out below are not exhaustive.
11
OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND MARKET OUR PRODUCTS AND
TECHNOLOGIES
Many of our products are in the development stage. Our products are also
alternatives to established products or are new technologies that provide
capabilities that do not presently exist in the marketplace. Our products are
sold in highly competitive and rapidly changing markets. The success of our
products is significantly affected by their cost, technology standards and end
user preferences. In addition, the success of our products depends on a number
of factors, including our ability to:
- overcome technical, financial and other risks involved in introducing
new products and technologies;
- identify and develop a market for our new products and technologies;
- produce products that can be competitively priced;
- respond to technological changes by improving our existing products
and technologies;
- accurately anticipate market demand for our products and technologies;
- demonstrate that our products have technological and/or economic
advantages over the products of our competitors; and
- respond to competitors that are more experienced, have significantly
greater resources, and a larger base of customers.
OUR SUCCESS DEPENDS ON OUR ABILITY TO TRANSITION FROM RELYING ON THE GOVERNMENT
SECTOR TO PRIVATE-SECTOR SALES
Historically, we have relied upon various government agencies to fund our
research and development, and we have derived a significant portion of our
revenues from the government sector. Our business strategy is to now concentrate
on developing, manufacturing and marketing our products to the private sector,
while maintaining steady revenues from the government sector. Our success in
this transition will depend upon a number of objectives, including the
following:
- developing and manufacturing new products at competitive prices;
- gaining customer acceptance for our products and services;
- expanding our customer base through our sales and marketing efforts;
- increasing our manufacturing capacity; and
- developing extensions of our existing products and services into new
applications.
WE RELY EXTENSIVELY ON STRATEGIC RELATIONSHIPS THAT MAY NOT BE SUCCESSFUL
We have established and will continue to attempt to establish strategic
relationships with corporate partners and United States government agencies to
develop our products. These relationships allow us to understand and access new
markets, and provide us an opportunity to test our products. If these
relationships are not successful or not continued, it could have a material
adverse effect on our sales and growth. The success of these relationships
depends on a number of factors, including:
- the interest in our products which are still in the development stage;
- our success in meeting the expectations of our strategic partners; and
12
- our strategic partners' success in marketing or their willingness to
purchase any such products.
We may not be successful in continuing our relationships with our current
strategic partners. In addition, we may not be able to enter into new strategic
relationships on commercially reasonable terms, or if we do, these relationships
may not be successful.
EVEN IF SUCCESSFUL, OUR STRATEGIC RELATIONSHIPS PRESENT SEVERAL RISKS
Although we rely extensively on our strategic relationships, these
relationships present several risks to our business, including the following:
- Our partners may require us to share control over our development,
manufacturing and marketing programs, and limit our ability to license
our technology to others. In addition, some of our partners require
that we share our proprietary technology with them and restrict our
ability to engage in some areas of product development and marketing;
- Our strategic partners may use or disclose the technology which we
jointly develop without paying us any royalties;
- We often grant certain exclusive rights to our strategic partners as
an incentive for them to participate in the development of a product.
Any exclusive rights granted to strategic partners may decrease our
ability to find a broader market for some of our products. This may
have the effect of substantially decreasing our revenues during the
exclusivity period; and
- Our strategic partners may seek to manufacture jointly developed
products on their own or obtain these products from third party
sources that would have the effect of decreasing our revenues from
these products.
WE DEPEND ON OEM CUSTOMERS AND AS A RESULT HAVE LONG SALES CYCLES
Sales to a few original equipment manufacturers, known as "OEMs," as
opposed to direct retail sales to customers, make up a significant part of our
revenues. The timing and volume of these sales depend upon the sales levels and
shipping schedules for the products of our OEM customers. Thus, even if we
develop a successful component, our sales will not increase unless the product
into which our component is incorporated is successful. If our OEM customers
fail to sell a sufficient quantity of products incorporating our components, or
if the OEM's sales timing and volume fluctuates, it could have a material
adverse effect on our business, financial condition and results of operations.
Our OEM customers typically require a long development and engineering process
before incorporating our products and services into their devices. This period
of time is in addition to the time we spend on basic research and product
development. As a result, we are vulnerable to changes in technology or end user
preferences.
Our opportunity to sell our products to our OEM customers typically occurs
at infrequent intervals, depending on when the OEM customer designs a new
product or enhances an existing one. If we are not aware of an OEM's product
development schedule, or if we cannot provide components or technologies when
they develop their products, we will miss an opportunity that may not reappear
for some time.
OUR ACQUISITION STRATEGY COULD ADVERSELY AFFECT OUR PERFORMANCE
As part of our business strategy, we regularly review possible acquisitions
of complementary companies, technologies or products, and periodically engage in
discussions regarding such possible acquisitions. During fiscal year 1999, we
acquired three businesses with strategic importance to different areas of our
operations. The businesses we acquired are geographically dispersed, with one
located in California, one in Nevada and the other in Germany. We completed four
acquisitions in fiscal year 1998. The success of our acquisition strategy
depends on a number of factors, including the following:
- correctly valuing the commercial potential of technologies owned by
the companies we acquire;
13
- successfully integrating the operations, products, personnel and
cultures of the companies we acquire;
- effectively managing our operations in a number of locations and
foreign countries;
- our ability to focus on our day-to-day business operations while
pursuing our acquisition strategy;
- our ability to enter markets in which we have limited or no direct
experience; and
- retaining the key employees of the companies we acquire.
In addition, similar to the acquisitions we completed in fiscal years
1999 and 1998, any future acquisition may result in:
- dilutive issuances of equity securities;
- the incurrence of debt;
- a decrease in our cash balances;
- amortization expenses related to goodwill and other intangible assets;
and
- other charges to operating results, including acquired in-process
research and development charges.
Moreover, there can be no assurance that any equity or debt financing
proposed in connection with any acquisition will be available to us on
acceptable terms or at all, when, and if, we find a suitable company, technology
or product to acquire. We cannot assure that any acquisition we complete will
result in long-term benefits to us or to our stockholders or that we will be
able to effectively manage the resulting business.
WE HAVE INCURRED LOSSES HISTORICALLY AND IN THE EVENT OF FUTURE LOSSES, THE
PRICE OF OUR COMMON STOCK MAY FLUCTUATE
We have incurred net losses in three of our past five fiscal years. In the
future, we may experience significant fluctuations in our revenues and we may
incur net losses from period to period as a result of a number of factors,
including the following:
- the amounts invested in developing and marketing our products in any
period as compared to the volume of sales of those products in the
same period;
- fluctuations in the demand for our products by OEMs;
- the prices at which we sell our products and services as compared to
the prices of our competitors;
- the timing of our product introductions as compared to those of our
competitors;
- the profit margins on our mix of product sales;
- the structure and timing of new strategic relationships;
- the contraction, cancellation or suspension by the United States
government of its programs and contracts with us; and
- the dilution, debt, expenses, and/or charges we incur as part of our
acquisition strategy.
In addition, we incur significant costs developing and marketing products
based on new technologies. If in any period these costs are more than the
revenues we derive from the sales of these products, it could have the effect of
offsetting any income derived from our other products, and we could incur net
losses.
14
We anticipate that, in order to increase our market share, we may sell our
products and services at profit margins below those we ultimately expect to
achieve and/or significantly reduce the prices of our products and services in a
particular quarter or quarters. The impact of the foregoing may cause our
operating results to be below the expectations of public market analysts and
investors. In such event, the price of our common stock would likely fluctuate.
WE MAY EXPERIENCE DIFFICULTIES MANUFACTURING OUR PRODUCTS
We may experience difficulties in manufacturing our products in increased
quantities, outsourcing the manufacturing of our products, and customizing our
manufacturing process. We have limited experience in manufacturing our products
in high volume. It may be difficult for us to:
- increase the quantity of the new products we manufacture, especially
those products that contain new technologies; and
- reduce our manufacturing costs to a level needed to produce adequate
profit margins.
It may also be difficult for us to solve management, technological,
engineering and other problems related to our manufacturing processes. These
problems include production yields, quality control and assurance, component
supply, and shortages of qualified management and other personnel. In addition,
in order to manufacture our products in high volume, we will need to continue to
expand our current facilities and/or obtain additional facilities. We may not be
successful in expanding our facilities or in obtaining additional facilities.
We may elect to have some of our products manufactured by third parties.
Outsourcing involves risks with respect to quality assurance, cost and the
absence of close engineering support.
Part of our ultracapacitor manufacturing strategy is to implement a process
that will allow customization of our ultracapacitors while retaining the
benefits of volume manufacturing and materials procurement. There can be no
assurance that such a process can be developed and implemented in time to meet
our needs.
WE HAVE LIMITED MARKETING AND SALES EXPERIENCE AND OUR STRATEGY DEPENDS ON THIRD
PARTIES
We have limited experience marketing and selling our products. To sell our
products, we will need to train our marketing and sales personnel to effectively
demonstrate the advantages of our products over the products offered by our
competitors. The highly technical nature of the products we offer may limit our
ability to retain and attract adequate marketing and sales personnel. Thus, as
part of our sales and marketing strategy, we enter into arrangements with
distributors and sales representatives and depend upon their efforts to sell our
products. These arrangements may not be successful.
OUR SUCCESS DEPENDS UPON PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS
Our success depends on the establishment and maintenance of intellectual
property rights. Although we try to protect our intellectual property rights
through patents, copyrights, trade secrets and other measures, these steps may
not prevent misappropriation by third parties. Other issues include:
- adequately protecting our intellectual property rights under the laws
of some foreign countries, which may not be as protective as United
States laws; and
- the possibility that third parties could "reverse engineer" our
products in order to determine their method of operation and introduce
competing products or develop competing technology independently.
As our business has expanded, we have emphasized protecting our
technologies and products through patents. Our success depends on maintaining
our patents, adding to them where appropriate, and developing products and
applications without infringing on third parties' patent and proprietary rights.
The risks involved in protecting our patents include:
15
- our patents may be circumvented or challenged and held unenforceable
or invalid;
- our pending or future patent applications, if any, may not be issued
with the protections we seek; and
- others may claim rights in the patented and other proprietary
technology owned or licensed by us.
If our patents are invalidated or if it is determined that we, or the
licensor of the patent, does not hold sole rights to the patent, it could have a
material adverse effect on our business, results of operations and financial
condition, particularly if we cannot design around others' proprietary rights.
Competing research and patent activity in our product areas is substantial.
Conflicting patent and other proprietary rights claims may result in disputes or
litigation. Although we do not believe that our products or proprietary rights
infringe on third party rights, infringement claims could be asserted against us
in the future. The negative effects of such claims, with or without merit, are:
- time-consuming, costly litigation;
- product shipment delays;
- we could be required to enter into royalty or licensing agreements;
and
- possible damage payments or injunctions which prevent us from making,
using or selling the infringing product.
Also, we may not be able to stop a third party's product from infringing on
our proprietary rights, without litigation.
Some of our owned or licensed patents and patent applications have
"march-in" rights and non-exclusive, royalty-free, confirmatory licenses held by
various governmental agencies or other entities. "March-in" rights are the
United States government or agency's right to cancel agreements and require a
contractor to grant licenses to third parties if the contractor does not develop
the technology in the agreements. Confirmatory licenses permit the United States
government to select vendors other than us to make products for them which would
otherwise infringe our patent rights that are subject to the royalty-free
licenses.
In addition, the United States government can require us to grant licenses
(including exclusive licenses) of our patents and patent applications or other
inventions developed for the government to a third party if it finds that we did
not commercialize such inventions or if such action is necessary:
- to meet public health or safety needs;
- to meet requirements for public use under federal regulations; or
- because we have not made reasonable efforts to ensure products are
manufactured in the United States.
16
Because a number of our commercial products are derived from technology
originally developed in government funded programs, these risks may apply
outside of the work on government contracts.
THERE ARE RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES AND OPERATIONS
We derive an increasing portion of our revenues from sales to customers
located outside of the United States. We expect our international sales to
continue to represent a significant and increasing portion of our future
revenues. As a result, our business will continue to be subject to certain
risks, such as foreign government regulations and export controls, as well as
changes in tax laws, tax treaties, tariffs and freight rates.
We have only recently established or acquired operations in foreign
countries. Since we are relatively inexperienced in managing our international
operations, we may be unable to focus on the operation and expansion of our
worldwide business and to manage cultural, language and legal differences
inherent in international operations. In addition, to the extent we are unable
to effectively respond to political, economic and other conditions in these
countries, our business, results of operations and financial condition could be
materially adversely affected. Moreover, changes in the mix of income from our
foreign subsidiaries, expiration of tax holidays and changes in tax laws and
regulations could result in increased tax rates for us.
THERE ARE RISKS ASSOCIATED WITH OUR CONTINUING BUSINESS WITH THE UNITED STATES
GOVERNMENT
We derive a significant portion of our revenues, including revenues from
contracts with the United States government, principally agencies of the DOD,
and from subcontracts with government suppliers. The reductions in defense
budgets in the 1990s have adversely affected our traditional business,
particularly in the area of system survivability products and services, such as
weapons effects simulation and testing. We have also experienced increased
competition in bidding for new defense programs from contractors seeking to
replace their lost government business. In addition, defense spending in
general, and the number and size of contracts awarded to us, could be reduced in
the future. A significant loss of United States government funding would have a
material adverse effect on our business, results of operations and financial
condition.
Our business with the United States government is also subject to various
other risks, including the following:
- unilateral termination for the convenience of the government;
- reduction or modification in the event of changes in the government's
requirements or budgetary constraints;
- increased or unexpected costs causing losses or reduced profits under
fixed-price contracts or unallowable costs under cost-plus contracts;
- risks of potential disclosure of our confidential information to third
parties;
- the failure or inability of a subcontractor or contractor to perform
its obligations under a contract in circumstances where we are the
prime contractor or subcontractor; and
- the failure of the government to exercise options provided for in the
contracts and the exercise of march-in rights or confirmatory licenses
by the government.
There can be no assurance that our contracts with the DOD and other
government agencies will not be terminated, reduced or modified.
17
OUR SUCCESS DEPENDS ON OUR ABILITY TO OBTAIN A SUBSTANTIAL AMOUNT OF CAPITAL
We believe that in the future we will need a substantial amount of capital
for a number of purposes including the following:
- to achieve our long-term strategic objectives;
- to maintain and enhance our competitive position;
- to meet anticipated volume production requirements for several of our
product lines, in particular our ultracapacitors and sterilization and
purification systems;
- to expand our manufacturing capabilities and facilities;
- to establish viable production alternatives;
- to fund our continuing expansion into commercial markets;
- to construct and equip additional or existing facilities; and
- to acquire new or complementary businesses, product lines and
technologies.
There can be no assurance that the necessary additional financing will be
available to us on acceptable terms or at all. If adequate funds are not
available, we may be required to change, delay, reduce or eliminate our planned
product commercialization strategy or our anticipated facilities expansion plans
and expenditures. This could have a material adverse effect on our business,
results of operations and financial condition.
OUR SUCCESS DEPENDS ON OUR KEY PERSONNEL
Since we primarily focus on emerging technologies, our success depends upon
the continued service of our key technical and senior management personnel. Some
of our scientists and engineers are the key developers of our products and
technologies and are recognized as world-leaders in their area of expertise. The
loss of any of these scientists or engineers to our competitors could end our
technological and competitive advantage in some product areas and business
segments.
Our performance also depends on our ability to identify, hire, train,
retain and motivate high quality personnel, especially key manufacturing
executives and highly skilled engineers and scientists. The industries in which
we compete are characterized by a high level of employee mobility and aggressive
recruiting of skilled personnel. Our employees may terminate their employment
with us at any time.
OUR FAILURE OR THE FAILURE OF OUR PRODUCTS, CUSTOMERS, SUPPLIERS OR VENDORS TO
BE YEAR 2000 COMPLIANT COULD ADVERSELY AFFECT OUR OPERATIONS
A significant percentage of the software that runs most computers relies on
two digit date codes to perform a number of computation and decision-making
functions. As the year 2000 approaches, these computer programs may fail from an
inability to interpret date codes properly, misreading "00" for the year 1900
instead of 2000.
We believe that our major computer systems and software programs are Year
2000 compliant. In addition, we have taken steps to bring our products which
could be impacted by potential Year 2000 problems into compliance. However, the
failure of our computer systems and software programs or of our products to
operate properly with regard to Year 2000 requirements could result in the
following:
- unanticipated expenses to remedy any problems;
18
- a reduction in our sales; and
- exposure to related litigation by our customers.
In addition, our customers or third party component suppliers and vendors
may also experience business disruptions in connection with the potential Year
2000 problem. Our business, operating results and financial condition could be
materially adversely affected by potential Year 2000 problems with our own
systems and products, or if any of our customers, vendors or other third party
entities experience a business disruption as a result of potential Year 2000
problems.
WE RELY ON A LIMITED NUMBER OF THIRD PARTY SUPPLIERS
Our ability to manufacture products depends in part on our ability to
secure qualified and adequate sources of materials, components and
sub-assemblies at prices which enable us to make our products at competitive
costs. Some of our suppliers are currently the sole source of one or more items
which we need to manufacture our products. On occasion, we have experienced
difficulty in obtaining timely delivery of supplies from outside suppliers. This
has adversely impacted our delivery time to our customers and, in one
circumstance, we believe such delivery problems were a contributing factor to
the loss of certain business from a major customer. There can be no assurance
that these and other similar supply problems will not recur.
Currently, a single domestic supplier provides one of the components for
our EMI filter product. This supplier has indicated that it plans to design,
build and sell a product which would compete with our EMI filter. If this
occurs, we believe that we could still obtain the component from this supplier
or, if necessary, we believe that we could replace this supplier with another
vendor, or that we could manufacture the component on our own. Although we seek
to reduce our dependence on sole and limited source suppliers, the partial or
complete loss of these sources could have at least a temporary material adverse
effect on our business and results of operations, and damage customer
relationships.
WE ARE EXPOSED TO SIGNIFICANT PRODUCT LIABILITY RISKS
We may be exposed to certain product liability risks. For example, our EMI
filters are components of implantable medical devices and, due to the litigious
environment surrounding the medical device industry, may subject us to an
increased risk of product liability claims that may involve significant defense
costs. Our other products may also be used in functions involving significant
product liability risks. There can be no assurance that product liability claims
will not be asserted against us in the future. Although we maintain product
liability insurance with coverage limits that we believe to be adequate, there
can be no assurance that this coverage will, in fact, be adequate to protect us
against future product liability claims. In addition, product liability
insurance is expensive and there can be no assurance that, in the future,
product liability insurance will be available to us in amounts or on terms
satisfactory to us, if at all. A successful product liability claim or series of
claims brought against us could have a material adverse effect on our business,
financial condition and results of operations.
WE ARE SUBJECT TO VARIOUS ENVIRONMENTAL REGULATIONS
We are subject to a variety of environmental regulations relating to the
use, storage, discharge, handling, emission, generation, manufacture and
disposal of toxic or other hazardous substances. If we fail to comply with
current or future regulations, substantial fines could be imposed against us,
our production could be suspended or stopped, or our manufacturing process could
be altered. Such regulations could require us to acquire expensive remediation
or abatement equipment or to incur substantial expenses to comply with
environmental regulations. If we fail to adequately control the use, discharge,
disposal or storage of hazardous or toxic substances, we could incur significant
liabilities.
19
OUR FINANCIAL CONDITION COULD BE AFFECTED BY THE STOCK OPTION PLANS AT OUR
SUBSIDIARIES
Several of our principal operating subsidiaries have employee stock option
plans which provide for the issuance of options to purchase shares of the
subsidiary's common stock. In most cases, we can grant up to 12% or 15% of the
outstanding stock of a subsidiary under its stock option plan. Certain key
employees of one of our subsidiaries, Maxwell Business Systems, Inc., however,
own an aggregate of 20%, and have the right to purchase up to an additional 29%,
of that subsidiary's common stock. If the options granted under one of our
subsidiary's stock option plans are exercised, our ownership interest in that
subsidiary will be reduced. This will have the effect of reducing our portion of
the net income and dividends that we receive from that subsidiary, as well as
reducing the proceeds if we were to sell that subsidiary. Ultimately, we expect
that our reported earnings per share will be reduced in future quarters due to
the increasing fair value of certain subsidiaries and the dilution created by
options granted under our subsidiaries' stock option plans.
Currently, no established trading market exists for the common stock
underlying any of the subsidiary options and such options are not exchangeable
for shares of our common stock. We have no plan to offer an exchangeability
feature for options to purchase shares of our common stock or otherwise provide
liquidity for these subsidiary options, but we could consider such alternatives
in the future.
OUR FINANCIAL CONDITION COULD BE AFFECTED BY POTENTIAL PUBLIC OFFERINGS OF OUR
SUBSIDIARIES' STOCK
Due to our corporate structure of operating through separate subsidiaries,
we could engage in future public offerings or other sales of the common stock of
our subsidiaries, sales of subsidiaries or strategic acquisitions with
subsidiary stock if our board determined that it was in the best interests of
the stockholders to pursue that course of action. Some of these alternatives
could adversely effect our business, financial condition and results of
operations. For example, any public offering or other sale of a minority portion
of a subsidiary's stock would reduce that subsidiary's contribution to our net
income and earnings per share.
WE MAY FACE DIFFICULTIES IN OBTAINING FOOD AND DRUG ADMINISTRATION APPROVAL FOR
OUR PRODUCTS
Some of our products are subject to the approval process of the Food and
Drug Administration ("FDA") because they are used for food storage or in
medical devices. These products include our COOLPURE and PUREBRIGHT
technologies and the EMI filter. There are many aspects of the FDA approval
process that could have a material adverse effect on our business, financial
condition and results of operations, including the following:
- the FDA testing and application process is expensive and lengthy, and
varies based on the type of product;
- our products may not ultimately receive FDA approval or clearance,
which would prevent us from marketing such products;
- the FDA may restrict a product's intended use as a condition to
approving or clearing such product, or place conditions on any
approval that could restrict the commercial applications of such
products;
- the FDA may require post-marketing testing and surveillance to monitor
the effects of products it initially approves;
- the FDA may withdraw its approval or clearance of any product if
compliance with regulatory standards is not maintained, or if problems
occur following initial marketing; and
- failure to comply with existing or future regulatory requirements can
result in, among other things, fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of
production, failure of the United States government to grant
pre-market clearance or pre-market approval for products, withdrawal
of marketing clearances or approvals and criminal prosecution.
20
OUR LONG-TERM FIXED-PRICE CONTRACTS MAY BE UNPROFITABLE
Some of our businesses, primarily those involved in government funded
research and systems development, enter into long-term fixed-price contracts for
large hardware systems or components. If we experience unanticipated delays in
program schedules, fail to anticipate costs accurately or encounter problems
with important vendors, it could adversely affect the profitability of these
contracts.
ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BY-LAWS COULD
PREVENT TRANSACTIONS WHICH ARE IN THE BEST INTEREST OF OUR STOCKHOLDERS
Some provisions in our certificate of incorporation could make it more
difficult for a third party to acquire control of Maxwell, even if such change
in control would be beneficial to our stockholders. We have a staggered Board of
Directors, which means that our directors are divided into three classes. The
directors in each class are elected to serve three-year terms. Since the
three-year terms of each class overlap the terms of the other classes of
directors, the entire Board of Directors cannot be replaced in any one year.
Furthermore, our certificate of incorporation contains a "fair price provision"
which may require a potential acquirer to obtain the consent of our board to any
business combination involving Maxwell. Our certificate of incorporation and
bylaws do not permit stockholder action by written consent or the calling by
stockholders of a special meeting.
We have adopted a program under which our stockholders have rights to
purchase our stock directly from Maxwell at a bargain price if a company or
person attempts to buy Maxwell without talking to the Board. This program is
intended to encourage a buyer to negotiate with us, but may have the effect of
discouraging offers from possible buyers.
The provisions of our certificate of incorporation and bylaws could delay,
deter or prevent a merger, tender offer, or other business combination or change
in control involving us that some, or a majority, of our stockholders might
consider to be in their best interests. This includes offers or attempted
takeovers that could result in our stockholders receiving a premium over the
market price for their shares of our common stock.
OUR COMMON STOCK EXPERIENCES LIMITED TRADING VOLUME AND OUR STOCK PRICE HAS BEEN
VOLATILE
Our common stock is traded on the Nasdaq National Market. The trading
volume of our common stock each day is relatively small. This means that sales
or purchases of relatively small blocks of stock can have a significant impact
on the price at which our stock is traded. We believe factors such as quarterly
fluctuations in financial results, announcements of new technologies impacting
our products, announcements by competitors or changes in securities analysts'
recommendations may cause the price of our stock to fluctuate, perhaps
substantially. These fluctuations, as well as general economic conditions in the
United States and worldwide, such as recessions or higher interest rates, may
adversely affect the market price of our common stock.
ITEM 2. PROPERTIES
The Company owns a 45,600 square foot engineering and administrative
support facility and a 22,000 square foot manufacturing facility, both located
in San Diego, California. In addition, the Company owns a 25,000 square foot
manufacturing facility on 2.6 acres of land located in Carson City, Nevada. The
Company leases six other facilities in the San Diego area and a 240,000 square
foot facility in San Leandro, California, of which 45,000 square feet is
subleased to a third party. The Company also leases an 8,200 square foot
facility in Minneapolis, Minnesota, three facilities totaling 30,000 square feet
in the United Kingdom, a 9,000 square foot facility in Germany and 3,400 square
foot facility in Nice, France. The Company leases office space in Reston,
Virginia; Carson City, Nevada; Albuquerque, New Mexico; and Mission Viejo,
California. The Company's leased facilities are leased for varying terms and
some of them contain options permitting the Company to extend the lease term.
The Company utilizes its facilities in the following manner: corporate, sales
and administrative (126,000 sq. ft.); manufacturing, assembly and testing,
research and development laboratories and engineering (515,000 sq. ft.) The
Company also utilizes on a rent-free basis 22,000 square feet at Kirkland Air
Force Base in Albuquerque, New Mexico and operates a 500-acre test site in San
Diego under a facilities contract with the Defense Threat Reduction Agency.
21
ITEM 3. LEGAL PROCEEDINGS
In January 1991, the California Department of Toxic Substances Control, or
DTSC, notified the Company that it had been identified as one of a number of
"potentially responsible parties" with respect to alleged hazardous substances
released into the environment at a recycling facility in San Diego County. As
Maxwell is not in the business of transporting or disposing of waste materials,
the Company retained the services of the owners of the recycling facility to
transport certain waste material generated by Maxwell. After properly delivering
the materials to the transporter, Maxwell was not further involved in the
transportation, treatment or disposal of the materials. Under California and
Federal "Superfund" laws, Maxwell is a potentially responsible party even though
it was not involved in the transport or disposal of the substances. Moreover, it
is the Company's understanding that alleged hazardous substances from at least
approximately 160 other potentially responsible parties were released at the
facility.
In 1992, the Company and approximately 40 other potentially responsible
parties signed a consent order with the State of California with respect to
costs to be incurred at a recycling facility to characterize and remediate
hazardous substances. To date, the site has been characterized, and the Company
and the other potentially responsible parties have paid substantially all of
their respective shares of the costs of such characterization. The estimated
cost of monitoring and remediation activities, of which the Company's share is
currently estimated at approximately 3.3%, totals approximately $23 million.
Approximately $21 million of this amount will consist of maintenance, monitoring
and related costs to be incurred over a 25-30 year period. The Company has
accrued its share of such estimated costs; on the basis of amounts accrued by
the Company, it is management's opinion that any additional liability resulting
from this situation will not have a material effect on the Company's financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4.1 EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive officers of the Company are set forth below. The Company's
officers serve at the pleasure of the Board of Directors.
Name Age Position
- ---- --- --------
Thomas L. Horgan 39 President and Chief Executive Officer. Mr.
Horgan was named CEO in March 1999 and had
served as interim CEO since November 1998.
Previously, he served as Corporate Vice
President, Business Development since joining
Maxwell in June 1996, and was elected to the
Board of Directors of the Company in January
1997. Mr. Horgan served from 1991 through 1993
as European Information Security Manager for
Digital Equipment. In 1993 he joined Quantum
Corporation and until 1995 served as Director,
Customer Service. From 1995 until joining
Maxwell, he was Vice President, Customer
Service, for Conner Peripherals.
Kenneth F. Potashner 42 Chairman of the Board. Mr. Potashner has served
Maxwell as Chairman of the Board since April
1997. He joined Maxwell in April 1996 and served
as President and Chief Executive Officer from
that time until November 1998. From 1991 through
1994 he was Vice President, Product Engineering,
for Quantum Corporation. From 1994 to April
1996, he served as Executive Vice President,
Operations, Conner Peripherals.
22
Richard Balanson 50 Vice President. From 1996 until joining Maxwell
in August 1999, Mr. Balanson was the President
and Chief Operating Officer for 3D Systems, a
California-based manufacturer of rapid
prototyping equipment. From 1994 to 1996, Mr.
Balanson was the General Manager and Executive
Vice President of Maxtor Corporation, and
before that was President and Chief
Operating Officer of Applied Magnetics
Corporation.
Vickie L. Capps 38 Vice President-Finance and Administration,
Treasurer and Chief Financial Officer. Prior to
joining Maxwell in July 1999, Ms. Capps served
Wavetek Wandel Golterman, Inc. as group
controller from 1992 through 1994, vice
president - corporate finance from 1994 through
1996 and then chief financial officer from 1996
through 1999. Previously she spent 10 years with
the firm of Ernst & Young LLP.
Gregg McKee 56 Vice President. Mr. McKee became Corporate Vice
President and President of Maxwell Energy
Products, Inc. in September 1996. From 1990
until joining Maxwell he served Quantum
Corporation in various capacities. From 1990 to
January 1993 he was Director of the Customer
Service Group; from February 1993 to December
1995, he served as Corporate Director of
Malaysian Operations; and from January 1995
until joining Maxwell he was President, Quantum
Malaysia.
Donald M. Roberts 51 Vice President, General Counsel and Secretary.
Mr. Roberts has served as General Counsel since
joining the Company in April 1994, and was
appointed Secretary in June 1996 and Vice
President in January 1999. For more than five
years prior thereto, Mr. Roberts was a
shareholder of the law firm of Parker, Milliken,
Clark, O'Hara & Samuelian, a Professional
Corporation, and a partner of the predecessor
law partnership, and in that capacity had served
the Company as outside legal advisor for more
than ten years.
Walter P. Robertson 57 Vice President. Mr. Robertson was named
Corporate Vice President and President of
Maxwell Technologies Systems Division, Inc. in
August of 1996. Prior to that he served General
Dynamics as Vice President, Aircraft Production
from 1991 through 1992 and as Vice President and
General Manager, Space Magnetics from 1992
through 1994. From May 1994 through November
1994, Mr. Robertson was Transition Director for
Martin Marietta. In April 1995 and until joining
Maxwell, he served BioSolutions Technologies, a
start-up company, as President and Chief
Executive Officer.
Ted Toch 50 Vice President. Mr. Toch joined the Company in
June 1998, as Corporate Vice President and
President of PurePulse Technologies, Inc. Prior
to joining PurePulse Technologies he was Vice
President of Marketing and Sales for Johnson &
Johnson's Advanced Sterilization Products
Division from 1993 to 1998 with earlier
experience as Vice-President and General Manager
of the Instrument's Division of Nellcor, Inc.
23
John D. Werderman 53 Vice President. Mr. Werderman was named
Corporate Vice President and President of I-Bus,
Inc. in July 1997. Previously, Mr. Werderman
served as Chief Operating Officer of Maxwell
Technologies Systems Division, Inc. Prior to
joining Maxwell in October 1996, Mr. Werderman
worked for M/A.COM, Inc. for over 15 years, most
recently as President and General Manager of
their Baltimore, Maryland operation, M/A.COM
Government Products, Inc.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "MXWL." The following table sets forth, for the fiscal periods
indicated, the high and low closing sales prices for the Common Stock as
reported by the Nasdaq National Market.
HIGH LOW
---- ---
FISCAL YEAR 1998
Quarter ended October 31, 1997 $ 38-1/2 $ 21-3/4
Quarter ended January 31, 1998 36-3/8 21
Quarter ended April 30, 1998 32-5/16 25
Quarter ended July 31, 1998 28-7/8 22
FISCAL YEAR 1999
Quarter ended October 31, 1998 $ 26-3/8 $ 19-1/4
Quarter ended January 31, 1999 40-1/4 23-3/8
Quarter ended April 30, 1999 34-1/2 18-3/16
Quarter ended July 31, 1999 30-11/16 18-5/8
The last reported sale price of the Common Stock on the Nasdaq National
Market on October 12, 1999, was $11-5/16 per share. As of July 31, 1999, there
were 508 holders of record of the Company's Common Stock.
The Company currently anticipates that any earnings will be retained for
the development and expansion of its business and, therefore, does not
anticipate paying dividends on its Common Stock in the foreseeable future. In
addition, under the Company's Line of Credit Agreement, neither the Company nor
any of its subsidiaries may, directly or indirectly, pay any cash dividends to
its stockholders.
24
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of operations data for the
fiscal years ended July 31, 1997, 1998 and 1999, and consolidated balance sheet
data as of July 31, 1998 and 1999 are derived from the Consolidated Financial
Statements of the Company and Notes thereto, which have been audited by Ernst &
Young LLP, independent auditors. The following selected consolidated statement
of operations data for the years ended July 31, 1995 and 1996 and consolidated
balance sheet data as of July 31, 1995, 1996 and 1997 are derived from audited
consolidated financial statements of the Company not included in this Appendix.
All selected financial data presented has been restated to include the results
and accounts of business combinations completed during fiscal year 1999, using
the pooling-of-interests method of accounting. The following selected data
should be read in conjunction with Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Item 8. FINANCIAL
STATEMENTS appearing elsewhere in this Annual Report on Form 10-K.
YEARS ENDED JULY 31,
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ----------- ---------- ---------- -----------
CONSOLIDATED STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales.................................... $ 80,807 $ 91,725 $117,775 $140,565 $179,685
Cost of sales............................ 60,020 71,727 76,781 92,919 118,937
---------- ----------- ----------- ---------- -----------
Gross profit............................. 20,787 19,998 40,994 47,646 60,748
Operating expenses:
Selling, general and administrative.... 15,376 18,464 26,947 31,378 38,576
Research and development............... 5,264 5,331 6,042 9,712 10,824
Restructuring, acquisition and other
charges................................ -- 5,703 -- 8,942 5,885
---------- ----------- ----------- ---------- -----------
Total operating expenses............ 20,640 29,498 32,989 50,032 55,285
---------- ----------- ----------- ---------- -----------
Operating income (loss).................. 147 (9,500) 8,005 (2,386) 5,463
Interest expense......................... 361 368 220 338 404
Interest income and other, net........... (871) (395) (249) (1,510) (660)
---------- ----------- ----------- ---------- -----------
Income (loss) before income taxes, minority
interest and cumulative effect of change
in accounting principle................ 657 (9,473) 8,034 (1,214) 5,719
Provision (credit) for income taxes...... 118 1,894 1,473 413 (5,776)
Minority interest in net income of
subsidiaries........................... 86 50 54 80 427
Cumulative effect of change in accounting
principle.............................. -- 2,569 -- -- --
---------- ----------- ----------- ---------- -----------
Net income (loss)........................ $ 453 $(13,986) $ 6,507 $( 1,707) $ 11,068
========== =========== =========== ========== ===========
Income (loss) per share:
Basic................................. $0.07 $(2.21) $0.96 $(0.20) $1.18
========== =========== =========== ========== ===========
Diluted............................... $0.07 $(2.21) $0.87 $(0.20) $1.12
========== =========== =========== ========== ===========
Before cumulative effect of change in
accounting principle................ -- $(1.81) -- -- --
========== =========== =========== ========== ===========
JULY 31,
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ----------- ---------- ---------- -----------
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS, EXCEPT RATIO)
Total assets............................. $ 32,855 $ 46,602 $ 55,180 $115,385 $134,434
Cash and cash equivalents................ $ 4,181 $ 2,385 $ 2,194 $ 21,397 $ 8,839
Working capital.......................... $ 18,760 $ 8,931 $ 15,274 $ 50,882 $ 62,238
Working capital ratio.................... 2.33:1 1.42:1 1.73:1 2.58:1 2.81:1
Long-term debt, including current
portion................................ $ 3,250 $ 2,193 $ 1,762 $ 2,462 $ 3,688
Shareholders' equity at year-end......... $ 36,666 $ 23,243 $ 32,617 $ 80,153 $ 97,168
Shares outstanding at year-end........... 6,204 6,513 6,969 9,210 9,557
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Maxwell Technologies, Inc. ("Maxwell" or the "Company") applies
industry-leading capabilities in pulsed power, space applications, industrial
computers and other advanced technologies to develop and market products and
services for commercial and government customers in multiple industries,
including energy, satellite, defense, telecommunications, consumer
electronics, medical products and water purification.
A worldwide leader in pulsed power technologies, the storage of
electrical energy and delivery of power in brief controlled bursts, the
Company has leveraged its technical expertise, gained from over 30 years of
experience performing research and development primarily for the DOD, to
develop a portfolio of pulsed power based products, ranging from components
such as ultracapacitors and EMI filters to systems for purification and
sterilization and major pulsed power x-ray simulators. For the space and
satellite market, Maxwell offers a line of microelectronic components and
subsystems, as well as sophisticated analysis and services involving the
effects of the space environment on spacecraft and sensor signal processing
for space systems. In addition to space and power based products, the Company
designs and manufacturers industrial computers and subsystems which are sold
to original equipment manufacturers and as standard catalogue products in the
computer telephony, broadcasting, manufacturing automation and e-commerce.
The Company generates revenue from the sale of commercial products, from
licensing technology and other rights to strategic partners and from performing
contract research and other projects for the United States government and other
customers. The Company's commercial products sales teams consist of sales
personnel based in its operating facilities and for the Company's industrial
computer and SEi units, geographically dispersed sales offices. These sales
teams are often supported by scientists, application engineers and technical
specialists. Sales and marketing for the Company's products in the United
States, and, for industrial computers, Europe, is handled directly by the
Company, and elsewhere the Company utilizes sales representatives and
distributors to assist in the marketing of its products. The Company conducts
marketing programs intended to position and promote its products and services,
including trade shows, seminars, advertising, public relations, distribution of
product literature and web-sites on the Internet.
The Company's operating expenses are substantially impacted by selling,
general and administrative activities and by research and development
activities. Selling, general and administrative expenses are primarily driven by
(1) sales volume, with respect to sales force expenses and commission expenses;
(2) the extent of market research activities for new product design efforts; (3)
advertising and trade show activities and (4) the number of new products
launched in the period. General and administrative expenses primarily include
costs associated with the Company's administrative employees, facilities and
functions. The Company incurs expenses in foreign countries primarily in the
functional currencies of such locations. As a result of the Company's
international operations, the United States dollar amount of its revenue and
expenses is impacted by changes in foreign currency exchange rates. The
Company's ability to maintain and grow its sales depends on a variety of factors
including its ability to maintain its competitive position in areas such as
technology, performance, price, brand identity, quality, reliability,
distribution and customer service and support. The Company's sales growth also
depends on its ability to continue to introduce new products that respond to
technological change and market demand in a timely manner.
BUSINESS SEGMENTS
In fiscal year 1999, Maxwell adopted Statement of Financial Accounting
Standards No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION ("Statement No. 131"). The new rules establish revised standards
for public companies relating to the reporting of financial information about
operating segments. The adoption of Statement No. 131 did not have a material
effect on Maxwell's financial statements, although segment information
disclosures were affected.
26
In accordance with the requirements and guidelines of Statement No. 131,
Maxwell's operations have been classified into the following business segments
(prior year segment information has been restated to conform to Statement No.
131 guidelines):
- SPACE AND TECHNOLOGY PRODUCTS AND PROGRAMS: Includes design,
development and manufacture of high reliability radiation-hardened
electronic components and consulting services for commercial and
government space systems, research and development programs in pulsed
power, pulsed power systems design and construction, computer-based
analytic services and software, and weapons effects simulation,
primarily for the DOD. Over the last several periods, the Company
has re-directed some of its space effects modeling and analysis
services, with expertise developed over a 25-year period, from
government to commercial programs. The success of these activities
and the size and growth potential of the commercial space market have
led Maxwell to focus on this business area. To complement its
consulting services, during the second quarter of this fiscal year
the Company acquired SEi, a San Diego based supplier of specially
treated electronic components for use in space environments,
primarily by commercial satellite manufacturers. SEi utilizes patented
processes to protect computer boards and chips, either of its own
design or commercially available components, from the radiation
encountered in space. The methods used by SEi have the potential to
result in both lower cost and increased protection for satellite
systems. The combination of Maxwell's world-class space effects
consulting and software with the newly acquired capabilities of SEi
provide the Company with a substantial value-added foothold in the
commercial space market, and the Company plans to increase its
presence in this area.
- INDUSTRIAL COMPUTERS AND SUBSYSTEMS: Includes design and assembly of
standard, custom and semi-custom industrial computer modules,
platforms and fully integrated systems primarily for OEMs.
- POWER CONVERSION PRODUCTS: Includes design, development and
manufacture of electrical components, systems and subsystems,
including products that capitalize on pulsed power such as
ultracapacitors, high voltage capacitors and other electrical
components, power distribution and conditioning systems, and EMI
filter capacitors.
- STERILIZATION AND PURIFICATION SYSTEMS: Includes design, development
and manufacture of systems based on two patented pulse power processes
incorporating capacitors and other pulsed power components designed
and manufactured by the Company. The PUREBRIGHT system utilizes
intense pulsed light to kill microorganisms and viruses in water and
blood plasma and other biopharmaceutical products, and on food, food
packaging and medical products. The COOLPURE system uses pulsed
electrical fields to kill microorganisms in liquids and liquid foods,
such as juices, dairy products and sauces.
Results of operations for fiscal years 1998 and 1997 have been restated to
include the results of acquisitions completed in fiscal year 1999 and accounted
for using the pooling-of-interests method. Such acquisitions included SEi, and
KD, a small manufacturer of ceramic capacitors located in Carson City, Nevada.
27
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated selected
operating data for the Company, expressed as a percentage of sales.
YEARS ENDED JULY 31,
------------------------------------------------------
1997 1998 1999
---------------- -------------- ---------------
Sales 100.0% 100.0% 100.0%
Cost of sales 65.2 66.1 66.2
---------------- -------------- ---------------
Gross profit 34.8 33.9 33.8
Operating expenses:
Selling, general and administrative 22.9 22.3 21.5
Research and development 5.1 6.9 6.0
Restructuring, acquisition and other charges -- 6.4 3.3
---------------- -------------- ---------------
Total operating expenses 28.0 35.6 30.8
---------------- -------------- ---------------
Operating income (loss) 6.8 (1.7) 3.0
Interest expense 0.2 0.2 0.2
Interest income and other, net (0.2) (1.2) (0.4)
---------------- -------------- ---------------
Income (loss) before income taxes and minority interest 6.8 (0.7) 3.2
Provision (credit) for income taxes 1.3 0.3 (3.2)
Minority interest in net income of subsidiaries -- 0.2 0.2
---------------- -------------- ---------------
Net income (loss) 5.5% (1.2)% 6.2%
================ ============== ===============
The following table sets forth sales, gross profit and gross profit as a
percentage of sales for each of the Company's business segments for the fiscal
years ended July 31, 1997, 1998, and 1999.
YEARS ENDED JULY 31,
---------------------------------------------------
1997 1998 1999
--------------- -------------- -------------
(IN THOUSANDS)
Space and Technology Products and Programs
Sales $47,006 $54,113 $71,748
Gross profit 16,345 15,204 25,466
Gross profit as a percentage of sales 34.8% 28.1% 35.5%
Industrial Computers and Subsystems:
Sales $34,259 $40,864 $56,516
Gross profit 11,537 14,210 17,487
Gross profit as a percentage of sales 33.7% 34.8% 30.9%
Power Conversion Products:
Sales $24,766 $36,981 $42,032
Gross profit 9,025 14,072 11,900
Gross profit as a percentage of sales 36.4% 38.1% 28.3%
Sterilization and Purification Systems:
Sales $ 6,473 $ 6,774 $ 9,389
Gross profit 2,849 3,528 5,895
Gross profit as a percentage of sales 44.0% 52.1% 62.8%
Other
Sales $ 5,271 $ 1,833 $ --
Gross profit 1,238 632 --
Gross profit as a percentage of sales 47.0% 34.5% --
28
SALES
In fiscal year 1999, total sales increased $39.1 million, or 27.8%, to
$179.7 million from $140.6 million in fiscal year 1998. In fiscal year 1998,
sales increased $22.8 million, or 19.4%, to $140.6 million from $117.8 million
in fiscal year 1997. International sales totaled approximately $33 million, $21
million, and $14 million in fiscal years 1999, 1998 and 1997, respectively.
Expansion of the Company's industrial computer business in Germany and France in
the current fiscal year and a full year of sales in fiscal year 1999 from the
Company's United Kingdom operation (which was acquired in fiscal year 1998), are
the primary factors relating to the increase in international sales. Sales in
both fiscal years 1999 and 1998 increased over the prior year in all of the
Company's on-going business segments, as described below.
SPACE AND TECHNOLOGY PRODUCTS AND PROGRAMS. In fiscal year 1999, sales in
this segment increased $17.6 million, or 32.6%, to $71.7 million from $54.1
million in fiscal year 1998. The Company has both enhanced and re-profiled this
business segment with its acquisitions of Physics International, the primarily
government-funded pulsed power research and simulation business of Primex
Technologies, in April 1998, and SEi, a primarily commercial, radiation-tolerant
satellite computer components business, in January 1999. Physics International
was the Company's principal competitor in the simulation area, and the combined
businesses consolidate scientific and technical research capabilities for the
benefit of both the government and the Company's technology base. These added
operations accounted for substantially all of the increase in revenue in this
segment compared to fiscal year 1998. The software business recorded
significantly increased sales of its new web-based time card product in the
latter half of the fiscal year 1999, including sales to several large
defense-oriented companies and license fees under a source-code license directed
to the professional services market not currently served by the Company.
Offsetting these increases were the wind-down and completion of several
government programs. The Company has won certain follow-on contracts, but the
levels of work under such new programs were less than in the prior year.
In fiscal year 1998, Space and Technology Products and Programs sales
increased $7.1 million, or 15.1%, to $54.1 million from $47.0 million in fiscal
year 1997. A portion of this increase was in the Company's core,
government-funded pulsed power research and development activities, including
revenue from the Physics International acquisition. Partially offsetting these
increases was a decrease in fiscal year 1998 revenues compared to fiscal year
1997 at the newly acquired SEi operation.
A substantial portion of the revenues in this business segment comes from
contracts with the DOD. These contracts are subject to increases and decreases
as well as to periodic changes in government funding provisions. Additional
replacement or follow-on contracts may not be available or awarded to the
Company. The level of future DOD expenditures in the Company's research and
development areas and the related impact on funding for the Company's contracts
are therefore not predictable, and previously reported results are not
necessarily indicative of those to be expected in the future. The Company is
expanding into more commercial markets, thereby contributing to offset any
potential effects of any future decreases in governmental funding.
INDUSTRIAL COMPUTERS AND SUBSYSTEMS. In fiscal year 1999, Industrial
Computers and Subsystems sales increased $15.6 million, or 38.3%, to $56.5
million from $40.9 million in fiscal year 1998. Domestic sales in this segment
are made principally to OEM customers and are primarily derived from the
shipment of industrial computers and subsystems that are "designed-in" to the
OEMs' products. Over the last two fiscal years, the Company has strengthened its
international presence through the acquisition of industrial computer businesses
in the United Kingdom and Germany and through the inception of operations in
France. These European businesses focus on lower-priced standard products, with
an emphasis on catalog sales. The increase in sales in fiscal year 1999 is
primarily attributable to the increase in European sales, as well as new
design-in wins for the customized OEM products, including supply contracts of
approximately $27 million over two years under two Siemens ElectroCom L.P.
programs for the United States Postal Service. Partially offsetting these
increases was the completion in the second quarter of fiscal year 1998 of sales
to a single, long-standing OEM customer under a multi-year program and the
curtailment at the end of fiscal year 1998 of the Company's program with Digital
Equipment Corporation due to its acquisition by Compaq Computers. While standard
product sales have accelerated, and the Company continues to expand its presence
in Europe, sales under large OEM programs remain a critical element of this
business. As a current marketing strategy, the Company has issued product
catalogs featuring both the standard and custom product lines with the dual aim
of generating direct sales, as well as leads for additional OEM design-in
opportunities. If sales of OEM products do not achieve the levels projected by
the OEM, or if OEM projects are curtailed due to
29
consolidations or other market conditions, such as the impact of economic
conditions in Asia which have substantially slowed shipments under certain
programs, the Company may be unable to offset such loss of sales.
In fiscal year 1998, Industrial Computers and Subsystems sales increased
$6.6 million, or 19.3%, to $40.9 million from $34.3 million in fiscal year 1997.
Sales growth in this business segment was principally derived from the expansion
of its standard product offerings and marketing capabilities with the
acquisition of a United Kingdom-based company. Although the Company completed a
major multi-year program with a long-standing customer during the first half of
fiscal year 1998, other new OEM design-in projects, as well as the expansion
into more standard products, more than offset the impact of the major program
completed, resulting in the sales growth for the year.
POWER CONVERSION PRODUCTS. In fiscal year 1999, Power Conversion Products
sales increased $5.0 million, or 13.7%, to $42.0 million from $37.0 million in
fiscal year 1998. This increase was primarily attributable to an increase in
sales of power protection and delivery systems, a business area acquired by the
Company in the third quarter of fiscal year 1998. In addition, sales in the
Company's glass-to-metal seal and EMI filter capacitor businesses also
contributed to the sales increase in this business segment. As described above,
during the second quarter of fiscal year 1999, the Company acquired a small
manufacturer of ceramic capacitors used in a variety of high voltage
applications, including commercial space, defense and medical equipment. This
business has been combined with a ceramic filter business of the Company, which
makes similar ceramic products for different markets, and which has a growing
business in filters for implantable medical devices. The combination of these
complementary product lines will provide improved efficiencies and economies of
scale in the Company's Carson City, Nevada facility. Sales of traditional
high-voltage capacitors increased over fiscal year 1998, primarily due to a
large multi-year order under a National Laboratory program that is expected to
be completed in mid-fiscal year 2000. Offsetting this increase was the
completion in the first quarter of fiscal year 1999 of an 18-month contract for
switches for the same National Laboratory program. This contract was in full
production during fiscal year 1998. This segment also experienced a reduction in
funded research in the POWERCACHE-TM- ultracapacitor business area, which was
partially offset by a non-recurring fee received under a technology and product
rights license with Siemens Matsushita Components GmbH.
In fiscal year 1998, Power Conversion Products sales increased $12.2
million, or 49.3%, to $37.0 million from $24.8 million in fiscal year 1997.
Nearly all product areas contributed to the sales growth. Specifically, the
ultracapacitor business area entered into new strategic partnering arrangements,
including marketing and technology access rights with EPCOS AG (formerly Siemens
Matshusita Components) and PacifiCorp. The Company also experienced sales growth
in EMI filters for implantable medical products and aerospace applications. The
Company's power conditioning and delivery systems and its glass-to-metal seal
product line, both of which were acquired during fiscal year 1998, also
contributed to fiscal year 1998 sales growth, as did the aforementioned switch
component contract with a National Laboratory.
STERILIZATION AND PURIFICATION SYSTEMS. In fiscal year 1999,
Sterilization and Purification Systems sales increased $2.6 million, or
38.6%, to $9.4 million from $6.8 million in fiscal year 1998. Fiscal year
1999 revenues consisted primarily of fees under license agreements with key
partners in several strategic business areas. The license agreements included
a grant to two Sanyo entities of certain non-exclusive rights for
manufacturing and distribution of this segment's products; an exclusive
license agreement with Johnson & Johnson Vision Products, Inc. for the
integration of PUREBRIGHT pulsed light sterilization systems into the
manufacturing process for contact lenses, including a one-time license fee,
on-going royalties and an equipment supply arrangement; and an amendment of
an existing license with a long-standing partner which narrowed the field of
exclusivity and eliminated certain minimum purchase requirements, in exchange
for a one-time payment.
In fiscal year 1998, Sterilization and Purification Systems sales increased
$0.3 million, or 4.7%, to $6.8 million from $6.5 million in fiscal year 1997.
30
GROSS PROFIT
In fiscal year 1999, the Company's gross profit increased $13.1 million,
or 27.5% to $60.7 million as compared to $47.6 million in fiscal year 1998.
In fiscal year 1998, gross profit increased $6.6 million, or 16.2% to $47.6
million from $41.0 million in fiscal year 1997. As a percentage of sales,
gross profit remained constant at 33.9% in fiscal year 1999 compared to 33.9%
in fiscal year 1998. However, in fiscal year 1998 this percentage decreased
slightly to 33.8% from 34.8% in fiscal year 1997. The increase in the dollar
amount of gross profit was noted in most of the Company's business segments,
with the Space and Technology Products and Programs segment experiencing the
largest increase in fiscal year 1999, both in dollars and as a percentage of
sales, which was primarily related to the increases in higher margin software
sales and commercial space-related applications previously discussed. The
Company's other business segments, in particular, Power Conversion Products,
experienced significant decreases in gross profit as a percentage of sales in
fiscal year 1999, primarily the result of increasing price pressures and
changes in sales mix.
SPACE AND TECHNOLOGY PRODUCTS AND PROGRAMS. In fiscal year 1999, Space and
Technology Products and Programs gross profit increased $10.3 million, or 67.5%,
to $25.5 million from $15.2 million in fiscal year 1998. As a percentage of
sales, gross profit increased to 35.5% in fiscal year 1999 from 28.1% in fiscal
year 1998. The primary factors in the increase in gross profit in fiscal year
1999 as compared to fiscal year 1998, include a higher portion of higher margin
software sales, including the aforementioned large sales to defense-oriented
companies and the source code license fees received this fiscal year, and the
inclusion of SEi, which had improved gross margins in fiscal year 1999 as
compared to fiscal year 1998. Further, the current fiscal year includes full
year revenues from Physics International, which was acquired in April 1998.
Future gross profit margins may not be maintained at the level reached in the
current year in light of the significant contribution of software license sales,
which may not recur in a comparable amount. However, the commercial space
business of SEi and the software product lines have the potential, if their
respective growth and business objectives are achieved, to produce higher gross
profit margins as a percent of sales than the traditional government-focused
programs of this segment. There can, however, be no assurance that such higher
margins will be achieved.
In fiscal year 1998, Space and Technology Programs and Systems gross profit
was $15.2 million, down from $16.3 million in fiscal year 1997. As a percentage
of sales, gross profit decreased to 28.1% in fiscal year 1998 from 34.8% in
fiscal year 1997. The decrease in gross profit, both as a dollar amount and as a
percentage of sales, in fiscal year 1998 as compared to fiscal year 1997, was
primarily due to low margins received on a large space technology program at
SEi. Partially offsetting the low SEi margins, were gross margin increases
primarily due to the addition of Physics International, as previously described,
as well as a commercial pulsed power systems contract won during fiscal year
1998. This contract was substantially complete as of the end of fiscal year
1998.
INDUSTRIAL COMPUTERS AND SUBSYSTEMS. In fiscal year 1999, Industrial
Computers and Subsystems gross profit increased $3.3 million, or 23.1%, to $17.5
million from $14.2 million fiscal year 1998. As a percentage of sales, gross
profit decreased to 30.9% in fiscal year 1999 from 34.8% in fiscal year 1998.
This decrease was primarily due to a change in sales mix which, in fiscal year
1998, included certain higher margin products for an OEM that were near the end
of their life cycle, with no such sales in the current year. In addition, the
Company now has lower-priced standard products, particularly in Europe, as well
as contracts which include full systems with greater third party content, upon
which lower gross profit margins are realized.
The Company won several major contracts with large OEMs during fiscal year
1999, including the aforementioned Siemens ElectroCom programs, and believes it
will continue to win OEM projects and that its distribution of catalogs with new
lower-priced standard products will provide access to a larger number of OEM
opportunities. The competition for such OEM programs, however, is beginning to
include more foreign competitors, including Asian companies. In addition,
consolidations and other market trends, such as the economic situation in Asia,
can adversely impact projected volumes under contracts previously awarded, as
happened in fiscal year 1998 when Compaq Computer's acquisition of Digital
Equipment Corporation curtailed a Company project. Further, CompactPCI products
are continuing to gain favor in the marketplace. While the Company believes its
own line of CompactPCI products is well positioned to gain market share in this
product area, the impact of these factors on the Company's business is not yet
predictable. As a result of the above factors, the Company does not expect
future gross profit margins as a percent of sales to increase significantly over
those achieved in the current fiscal year.
31
In fiscal year 1998, Industrial Computers and Subsystems gross profit
increased $2.7 million, or 23.2%, to $14.2 million from $11.5 million in fiscal
year 1997. As a percentage of sales, gross profit increased to 34.8% in fiscal
year 1998 from 33.7% in fiscal year 1997. This increase in gross profit as a
percentage of sales was primarily the result of increased sales during the first
half of fiscal year 1998 of certain higher margin customized OEM products to a
long-standing customer under a program that was completed during the second
quarter of that year. As a result of the completion of this program, as well as
the Company's entry into the lower-price standard product arena, gross profit
margins were higher in the first half of fiscal year 1998 than in the second
half in this business area.
POWER CONVERSION PRODUCTS. In fiscal year 1999, Power Conversion Products
gross profit decreased $2.2 million to $11.9 million from $14.1 million in
fiscal year 1998. As a percentage of sales, gross profit decreased to 28.3% in
fiscal year 1999 from 38.1% in fiscal year 1998. The decrease in gross profit as
a percentage of sales reflects decreased development funding and technology
license fees in the POWERCACHE ultracapacitor business, and a lower margin mix
of products and services, particularly in the power protection and delivery
systems business area. This decrease also reflects significant changes in the
Company's pricing strategies in response to competitive pressures, as it
continues to improve penetration in its various markets. In addition, as the
Company introduces its POWERCACHE ultracapacitor products, it is pursuing
aggressive pricing to gain market penetration. As ultracapacitor product sales
ramp-up, gross margins will continue to be impacted until the Company reaches
full production volumes. In addition, the Company is working on programs to
reduce the cost of materials and automate manufacturing in an effort to reduce
its production costs. Further, the completion of a high-margin long-term
contract for switch components for a National Laboratory pulsed power system
contributed to the gross margin decline.
In fiscal year 1998, gross profit increased $5.1 million to $14.1 million
from $9.0 million in fiscal year 1997. Gross margin as a percentage of sales
increased to 38.1% in 1998 from 36.4% in fiscal year 1997. This increase in
gross profit reflects an increase in sales volume as well as a higher margin mix
of products and services from fiscal year 1997, including the contract for
switch components for the National Laboratory referred to above and increased
funded development and related technology access rights associated with
strategic partnering arrangements.
STERILIZATION AND PURIFICATION SYSTEMS. In fiscal year 1999, Sterilization
and Purification Systems gross profit increased $2.4 million to $5.9 million
from $3.5 million fiscal year 1998. As a percentage of sales, gross profit
increased to 62.8% in fiscal year 1999 from 52.1% in fiscal year 1998. In fiscal
year 1998, gross profit increased to $3.5 million and 52.1% from $2.8 million
and 44.0% in sales in fiscal year 1997. The increase in gross profit, both in
dollars and as a percentage of sales, reflects the increased revenues from high
margin license activities in fiscal year 1999 compared to fiscal year 1998 and
in fiscal year 1998 compared to fiscal year 1997. In fiscal year 1998, the
Company substantially completed a multi-year, low-margin research program with
the US Army. The revenues from this program were replaced in fiscal year 1999
and fiscal year 1998 with higher margin commercial licensing and developmental
programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In fiscal year 1999, the Company's selling, general and administrative
expenses increased $7.2 million, or 22.9%, to $38.6 million from $31.4 million
in fiscal year 1998 and $26.9 million in fiscal year 1997. As a percentage of
total sales, selling, general and administrative expenses decreased to 21.5% in
fiscal year 1999 from 22.3% in fiscal year 1998 and 22.9% in fiscal year 1997.
The increase in the dollar amount of these expenses is primarily in support of
the Company's strong sales growth, including the businesses acquired in fiscal
years 1999 and 1998. In addition, the Company has made substantial investments
related to infrastructure, administrative and sales support. The decrease in
selling, general and administrative expenses as a percentage of sales in the
current year reflects, in part, the Company's consolidation of the businesses
acquired in 1999 and 1998, efforts initiated in the current year to reduce
general and administrative expenses, and the fact that certain general and
administrative expenses do not increase in direct proportion to sales growth.
32
RESEARCH AND DEVELOPMENT EXPENSES
The Company's research and development expenses reflect only internally
funded research and development programs. Costs associated with United States
government and other customer funded research and development contracts are
included in cost of sales. Research and development expenses were $10.8 million,
$9.7 million and $6.0 million for fiscal years 1999, 1998 and 1997,
respectively. As a percentage of sales, research and development expenses were
6.0% in fiscal year 1999, 6.9% in fiscal year 1998, and 5.1% in fiscal year
1997. The level of research and development expenses reflects the Company's
ability to obtain customer funding to support a significant portion of its
research and product development activities. The increase in the amount of
internally funded research and development in fiscal year 1999 over the level
expended in fiscal year 1998, reflects the Company's focus on new commercial
product areas, and is primarily due to development efforts on new products at
SEi in order to continue the growth of the commercial satellite market for the
Company, as well as continuing efforts on development projects in the Company's
other operations.
The increase in the amount of internally funded research and development in
fiscal year 1998 over the level expended in fiscal year 1997 was primarily due
to expenditures related to ultracapacitor, other power conversion products and
power electronics systems development, and CompactPCI and other product
development for major new programs in the Industrial Computers and Subsystems
business segment.
RESTRUCTURING, ACQUISITION AND OTHER CHARGES
During fiscal year 1999, the Company recorded restructuring, acquisition
and other charges of approximately $5.9 million. Of these charges, approximately
$1.6 million consisted primarily of direct acquisition costs for business
combinations accounted for using the pooling-of-interests method. In the fourth
quarter of fiscal year 1999, the Company recorded a charge of $4.3 million, of
which approximately $2.8 million relates to revised estimates of final costs
necessary to complete certain criminal justice information system contracts and
complete the discontinuation of the related business segment that was
discontinued in the third quarter of fiscal year 1998. The charge includes costs
to complete and terminate such contracts, as well as other business shutdown
costs, including employee-related costs. The remaining $1.5 million of the
charge consists primarily of amounts provided for revised estimates of costs to
resolve certain environmental and legal contingencies which occurred in prior
years, as well as other restructuring provisions, including employee and
facility expenses, related to decisions made in July 1999 to reduce certain
administrative infrastructure of the Company in Europe and the United States.
In fiscal year 1998, the Company recorded restructuring, acquisition and
other charges totaling $8.9 million. Approximately $6.3 million of the charge is
acquisition related, and included a $5.5 million write-off of acquired
in-process research and development and direct acquisition costs of
approximately $0.8 million for business combinations accounted for using the
pooling-of-interests method of accounting. The remaining $2.6 million charge
relates to the restructuring and discontinuance of a business segment and the
aforementioned criminal justice information system contracts.
INTEREST EXPENSE
Interest expense was $404,000, $338,000 and $220,000 in fiscal years 1999,
1998, and 1997, respectively. The increase in interest expense in each of last
two years is the result of higher average borrowing over the preceding year, due
primarily to an increase in debt assumed by the Company from the various
businesses acquired in 1999 and 1998. At July 31, 1999, the Company has $2.5
million outstanding under its bank line-of-credit, which was borrowed to pay off
certain acquired debt with a higher borrowing rate.
INTEREST INCOME AND OTHER, NET
Interest income and other, net, consisting primarily of interest income,
decreased to $660,000 in fiscal year 1999 from $1.5 million in fiscal year 1998.
The decrease in interest income reflects lower average cash balances in fiscal
year 1999. During fiscal year 1998, the Company received proceeds of
approximately $47 million from a follow-on offering of its common stock. Such
cash proceeds have been substantially used by the Company to fund growth in
operations and acquisitions during fiscal years 1999 and 1998. Prior to the
follow-on offering, interest income was not significant ($249,000 in fiscal year
1997).
33
PROVISION (CREDIT) FOR INCOME TAXES
The fiscal year 1999 credit for income taxes includes a credit of $6.1
million, representing the reversal of a valuation allowance provided in previous
years against certain deferred tax benefits. The valuation allowance was
reversed based on the Company's determination that it has become more likely
than not that such deferred tax benefits will be realized in the future. The
deferred income tax credit was partially offset by approximately $500,000 of
certain foreign and state income tax expense. In future years, the Company will
provide income taxes approximating applicable statutory rates, although cash
payments for taxes will be substantially lower in the near term as remaining tax
loss carry-forwards are utilized.
The Company's fiscal year 1998 and 1997 provisions for income taxes relate
primarily to taxes of the businesses acquired in fiscal year 1999 using the
pooling-of-interests method.
MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES
Minority interest in net income of subsidiaries increased in fiscal year
1999 to $427,000 from $80,000 in fiscal year 1998 and $54,000 in fiscal year
1997. The increase in fiscal year 1999 reflects an increase in the profitability
in fiscal year 1999 of the Company's minority owned subsidiaries, primarily in
the Sterilization and Purification Systems segment and the Business Software
product line of the Space and Technology Products and Programs segment.
NET INCOME (LOSS)
As a result of the factors mentioned above, net income was $11.1 million in
fiscal year 1999 as compared to a net loss of $1.7 million for fiscal year 1998
and net income of $6.5 million for fiscal year 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically relied on a combination of internally
generated funds and bank borrowings to finance its working capital requirements
and capital expenditures. In addition, in each of the two most recent fiscal
years, the Company received approximately $2.3 million from the exercise of
stock options and purchases under employee stock purchase plans. In fiscal year
1998, the Company completed a follow-on public offering of 1.5 million shares of
its Common Stock, generating net proceeds of approximately $47 million. A
portion of the proceeds was used to repay outstanding bank loans and
approximately $12 million of cash was used in fiscal year 1998 for acquisitions.
The remaining proceeds were used in fiscal years 1998 and 1999 to fund growth,
including additional working capital requirements.
Cash used in operations in fiscal year 1999 was $6.6 million, compared to
$6.1 million in fiscal year 1998, primarily attributable to increases in
accounts receivable and inventory, due both to acquired businesses and in
support of increased fiscal year 1999 sales. In fiscal year 1997, cash of $3.5
million was provided by operating activities. The Company's capital expenditures
in fiscal years 1999, 1998 and 1997 were $8.2 million, $8.4 million and $5.6
million, respectively, and related primarily to production and other capital
assets needed to support growth in all of the Company's business units. The
Company has ordered and continues to receive additional equipment for volume
manufacturing of ultracapacitors in an existing facility, and for manufacture of
EMI filter capacitors at the newly expanded Carson City, Nevada manufacturing
site. The Company will continue to address future volume or other manufacturing
requirements in the upcoming year. Alternatively, the Company may consider
leasing facilities or manufacturing equipment or both or may satisfy high-volume
manufacturing requirements through outsourcing or under licensing arrangements
with third parties. If the Company decides to internally finance construction of
additional facilities, a significant amount of capital would be required.
The Company believes that funds on-hand, together with cash generated from
operations and funds available under its bank line of credit, will be sufficient
to finance its operations and capital expenditures through fiscal year 2000. In
addition to addressing manufacturing requirements, the Company may also from
time-to-time consider acquisitions of complementary businesses, products or
technologies, which may require additional funding. Sources of additional
funding for these purposes could include one or more of the following: cash,
cash equivalents and
34
short-term investments on hand; cash flow from operations; borrowings under
the existing bank line of credit; investments by strategic partners and
additional debt or equity financings. There can be no assurance that the
Company will be able to obtain additional sources of financing on favorable
terms, if at all, at such time or times as the Company may require such
capital.
Maxwell has an unsecured bank line of credit of $20.0 million, under which
the Company had borrowings outstanding of approximately $2.5 million as of July
31, 1999, which were repaid in October 1999. The interest rate on the line of
credit is tied to LIBOR or the bank's prime rate.
INFLATION AND CHANGES IN PRICES
Generally, the Company has been able to increase prices to offset its
inflation-related increased costs in its commercial businesses. A substantial
portion of the Company's business with agencies of the United States government
consists of cost-reimbursement contracts, which permit recovery of inflation
costs. Fixed-price contracts with government and other customers typically
include estimated costs for inflation in the contract price.
SOFTWARE COMPATIBILITY WITH YEAR 2000 DATE PROCESSING
The Year 2000 issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Computer systems
utilizing such programs may be unable to interpret dates beyond the year 1999,
which could cause a system failure or other computer errors, leading to
disruptions in operations. This issue is often referred to as "Y2K" or a "Y2K"
issue or problem. In fiscal year 1998, the Company commenced a three-phase
program to ensure Y2K information systems compliance. Phase 1 is to identify and
remedy Y2K issues in the Company's significant information systems
infrastructure and enterprise business applications, including
telecommunications and networking systems, manufacturing/production and delivery
systems, as well as accounting and manufacturing software. Phase 2 is to
identify and plan for Y2K issues that are specific to the Company's business
units, including local software, product matters, facilities related systems and
vendor and key partner concerns. Phase 3 is the final testing of each major area
of exposure to ensure compliance, and the development of contingency plans for
unsolved Y2K deficiencies, such as key vendors failing to adequately address
their Y2K problems. The Company has identified four major areas determined to be
critical for successful Y2K compliance: (1) networking and telecommunications;
(2) financial and manufacturing information systems applications; (3) products;
and (4) third-party relationships.
In Phase 1 of the program, the Company has completed its review of
company-wide and significant systems, several of which have been identified as
being Y2K compliant due to their recent implementation or upgrade. Such
installations and upgrades were unrelated to the Y2K concern, but rather were
implemented in the ordinary course of business. For certain accounting and
manufacturing systems, upgrades were needed and all such upgrades have been
installed. Identified upgrades of the system infrastructure, such as telephone
and networking equipment, are also completed. Final testing and documentation
under Phase 1 has been completed. Under Phase 2, the Company has completed
identifying, evaluating and resolving business unit exposures. In the
third-party area, the Company contacted its significant third parties, primarily
key vendors and customers, regarding their Y2K readiness and evaluated their
responses. As to products, initial findings indicated that most Company products
were not impacted by the potential Y2K problem and that most of those that were
impacted appeared to be Y2K compliant. For all products that were not Y2K
compliant, the Company has made upgrades available via the Company's Internet
web site. Final testing and contingency plan development under Phase 3 was
completed in October 1999. Accordingly, the Company believes that it has now
fully completed its Y2K Information Systems Compliance Plan.
The Company has incurred costs of approximately $1.4 million to complete
all three phases of its Y2K Information Systems Compliance Program. Such
costs include approximately $700,000 related to purchases of certain computer
hardware and software, which addressed the Company's Y2K program, but would
have been purchased by the Company in any event in connection with the normal
periodic upgrade of its systems. In addition, such costs include Company
labor costs and amounts paid to external consultants and advisors.
There can be no assurance that Y2K compliance problems will not be revealed
in the future which could have a material adverse affect on the Company's
business, financial condition and results of operations. Many of the Company's
customers and suppliers may be affected by Y2K issues that may require them to
expend significant resources to modify or replace their existing systems, which
may result in those customers having reduced funds to purchase the Company's
products or those suppliers experiencing difficulties in producing or shipping
key components to the Company on a timely basis or at all. Such third party
issues could have a material adverse affect
35
on the Company's business, financial condition and results of operations.
This discussion of the Company's Y2K status constitutes a "Year 2000
Readiness Disclosure" as that item is defined in the Year 2000 Information
and Readiness Disclosure Act, and also contains forward-looking statements
(see "Forward-Looking Statements" below).
FORWARD-LOOKING STATEMENTS
To the extent that the above discussion goes beyond historical information
and indicates results or developments which the Company plans or expects to
achieve, these forward-looking statements are identified by the use of terms
such as "expected," "anticipates," "believes," "plans" and the like. Readers are
cautioned that such future results are uncertain and could be affected by a
variety of factors that could cause actual results to differ from those
expected, and such differences could be material. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances. Readers are referred to the Company's Risk Factor section of the
10-K for a further and more detailed discussion of certain of those factors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has not entered into or invested in any instruments that are
subject to market risk.
The Company's bank line of credit agreement bears interest at a rate that
varies based on the LIBOR or the bank's prime rate. The $2.5 million outstanding
at July 31, 1999, under this line of credit was repaid in October 1999.
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS OF MAXWELL TECHNOLOGIES, INC.
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........................................................37
Consolidated Balance Sheets as of July 31, 1998 and 1999.................................................38
Consolidated Statements of Operations for the Years Ended July 31, 1997, 1998 and 1999...................39
Consolidated Statements of Stockholders' Equity for the Three Years Ended July 31, 1999..................40
Consolidated Statements of Cash Flows for the Years Ended July 31, 1997, 1998 and 1999...................41
Notes to Consolidated Financial Statements...............................................................42
36
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Maxwell Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Maxwell
Technologies, Inc., and subsidiaries, as of July 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended July 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Maxwell
Technologies, Inc. and subsidiaries at July 31, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended July 31, 1999, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Diego, California
September 21, 1999
37
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
JULY 31,
------------------------------------
1998 1999
--------------- -----------------
ASSETS (RESTATED)
Current assets:
Cash and cash equivalents.................................................. $ 21,397 $ 8,839
Accounts receivable:
Trade and other, less allowance for doubtful accounts of
$1,513 and $1,003 in 1998 and 1999, respectively....................... 27,030 35,080
Long-term contracts...................................................... 12,723 14,898
--------------- -----------------
39,753 49,978
Inventories................................................................ 19,378 23,627
Prepaid expenses........................................................... 2,199 3,733
Deferred income taxes...................................................... 457 10,493
--------------- -----------------
Total current assets..................................................... 83,184 96,670
Property, plant and equipment, net........................................... 25,542 27,880
Goodwill and other non-current assets........................................ 6,659 9,884
--------------- -----------------
$ 115,385 $ 134,434
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 24,019 $ 23,817
Accrued employee compensation.............................................. 7,039 7,363
Current portion of long-term debt.......................................... 1,244 3,252
--------------- -----------------
Total current liabilities................................................ 32,302 34,432
Long-term debt............................................................... 1,218 436
Minority interest............................................................ 1,712 2,398
Commitments and contingencies
Stockholders' equity:
Common stock, $0.10 par value per share, 40,000 shares authorized; 9,210 and
9,557 shares issued and outstanding at July 31, 1998
and 1999, respectively................................................... 920 956
Additional paid-in capital................................................. 72,245 78,082
Deferred compensation...................................................... (413) (204)
Accumulated other comprehensive income..................................... -- (132)
Retained earnings.......................................................... 7,401 18,466
--------------- -----------------
Total stockholders' equity............................................... 80,153 97,168
--------------- -----------------
$ 115,385 $ 134,434
=============== =================
See accompanying notes.
38
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JULY 31,
-------------------------------------------
1997 1998 1999
------------ ------------ ------------
(RESTATED) (RESTATED)
Sales................................................................ $117,775 $140,565 $179,685
Cost of sales........................................................ 76,781 92,919 118,937
------------ ------------ ------------
Gross profit......................................................... 40,994 47,646 60,748
Operating expenses:
Selling, general and administrative................................ 26,947 31,378 38,576
Research and development........................................... 6,042 9,712 10,824
Restructuring, acquisition and other charges....................... -- 8,942 5,885
------------ ------------ ------------
Total operating expenses........................................ 32,989 50,032 55,285
------------ ------------ ------------
Operating income (loss).............................................. 8,005 (2,386) 5,463
Interest expense..................................................... 220 338 404
Interest income and other, net....................................... (249) (1,510) (660)
------------ ------------ ------------
Income (loss) before income taxes and minority interest.............. 8,034 (1,214) 5,719
Provision (credit) for income taxes.................................. 1,473 413 (5,776)
Minority interest in net income of subsidiaries...................... 54 80 427
------------ ------------ ------------
Net income (loss).................................................... $ 6,507 $ (1,707) $ 11,068
============ ============ ============
Net income (loss) per share:
Basic income (loss) per share................................... $ 0.96 $ (0.20) $ 1.18
============ ============ ============
Diluted income (loss) per share:................................ $ 0.87 $ (0.20) $ 1.12
============ ============ ============
Shares used in computing:
Basic income (loss) per share................................... 6,775 8,503 9,414
============ ============ ============
Diluted income (loss) per share................................. 7,470 8,503 9,801
============ ============ ============
See accompanying notes.
39
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED JULY 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN DEFERRED RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL COMPENSATION EARNINGS INCOME EQUITY
--------- ---------- ------------- --------- -------------- ------------
Balance at August 1, 1996 (Restated) $ 650 $ 20,243 $ (605) $ 2,955 $ -- $ 23,243
Issuance of 445,785 shares under
stock purchase and option
plans, net of repurchases.... 45 2,814 -- (165) -- 2,694
Deferred compensation related to
issuance of 10,000 shares.... 1 189 (190) -- -- --
Amortization of deferred
compensation................. -- -- 173 -- -- 173
Comprehensive income:
Net income................... -- -- -- 6,507 -- 6,507
------------
Comprehensive income............. 6,507
--------- ---------- ------------- --------- -------------- ------------
Balance at July 31, 1997 (Restated) 696 23,246 (622) 9,297 -- 32,617
Issuance of 1,500,000 shares in a
public stock offering, net of
offering costs of$3.9 million 150 46,967 -- -- -- 47,117
Issuance of 356,240 shares under
stock purchase and option
plans........................ 36 2,348 -- -- -- 2,384
Issuance of 544,785 shares in
connection with acquisitions. 54 3,270 -- 609 -- 3,933
Repurchase of 162,073 shares for
cash under repurchase program (16) (3,586) -- (391) -- (3,993)
Amortization of deferred
Compensation................. -- -- 209 -- -- 209
Dividends paid to shareholders of
subchapter S corporation prior
to acquisition............... -- -- -- (407) -- (407)
Comprehensive income:
Net loss..................... -- -- -- (1,707) -- (1,707)
------------
Comprehensive income............. (1,707)
--------- ---------- ------------- --------- -------------- ------------
Balance at July 31, 1998 (Restated) 920 72,245 (413) 7,401 -- 80,153
Issuance of 296,451 shares
under stock purchase and
option plans, including
related income tax benefit... 30 7,498 -- -- -- 7,528
Repurchase of 62,316 shares for
cash under repurchase program (6) (1,679) -- (41) -- (1,726)
Issuance of 113,514 shares in
connection with acquisition.. 12 18 -- 184 -- 214
Amortization of deferred
compensation................. -- -- 209 -- -- 209
Dividends paid to shareholder of
acquired company prior to
acquisition.................. -- -- -- (146) -- (146)
Comprehensive income: -- -- -- -- -- (132)
Net income................... -- -- -- 11,068 -- 11,068
Other comprehensive income:
Foreign currency translation
adjustment............... -- -- -- -- (132) (132)
------------
Other comprehensive income... -- -- -- -- -- (132)
------------
Comprehensive income............. 10,936
--------- ---------- ------------- --------- -------------- ------------
Balance at July 31, 1999 (Restated) $ 956 $ 78,082 $ (204) $18,466 $ (132) $ 97,168
========= ========== ============= ========= ============== ============
See accompanying notes.
40
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED JULY 31,
-----------------------------------------------
1997 1998 1999
-------------- ------------ -------------
(RESTATED) (RESTATED)
Operating activities:
Net income (loss)............................................. $ 6,507 $ (1,707) $ 11,068
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 2,995 4,362 5,829
Restructure, acquisition and other charges............ -- 7,450 4,240
Provision for losses on accounts receivable........... 184 734 435
Loss on sales of property and equipment............... 10 50 116
Deferred income taxes................................. (345) 37 (6,144)
Minority interest in net income of subsidiaries....... 54 80 427
Deferred compensation................................. 173 209 209
Changes in operating assets and liabilities:
Accounts receivable................................. (3,244) (13,963) (10,075)
Inventories......................................... (2,812) (5,882) (3,899)
Prepaid expenses and other.......................... (717) (1,385) (4,222)
Accounts payable.................................... (1,950) 2,818 (4,525)
Accrued employee compensation....................... 1,818 1,192 145
Income taxes payable and refundable, net............ 832 (45) (211)
-------------- ------------ -------------
Net cash provided by (used in) operating activities 3,505 (6,050) (6,607)
Investing activities:
Purchases of property and equipment........................... (5,589) (8,426) (8,215)
Purchases of businesses, net of cash acquired................. -- (11,481) --
Proceeds from sales of property and equipment................. 8 149 60
-------------- ------------ -------------
Net cash used in investing activities............ (5,581) (19,758) (8,155)
Financing activities:
Principal payments on long-term debt and short-term
borrowings................................................. (1,011) (2,464) (2,484)
Proceeds from long-term debt and short-term borrowings........ 580 1,322 3,528
Proceeds from issuance of Company and subsidiary stock........ 2,893 50,560 3,164
Repurchase of Company and subsidiary stock.................... (578) (4,000) (1,726)
Dividends paid to shareholders of acquired companies prior
to acquisition............................................. -- (407) (146)
-------------- ------------ -------------
Net cash provided by financing activities........ 1,884 45,011 2,336
-------------- ------------ -------------
Effect of exchange rate changes on cash and cash equivalents.... -- -- (132)
-------------- ------------ -------------
Increase (decrease) in cash and cash equivalents................ (192) 19,203 (12,558)
Cash and cash equivalents at beginning of year.................. 2,386 2,194 21,397
-------------- ------------ -------------
Cash and cash equivalents at end of year........................ $ 2,194 $ 21,397 $ 8,839
============== ============ =============
Cash (paid) received for:
Interest...................................................... $ (47) $ 1,287 $ 379
============== ============ =============
Income taxes.................................................. $ (121) $ (577) $ (633)
============== ============ =============
See accompanying notes.
41
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Maxwell Technologies, Inc. ("Maxwell" or the "Company") applies
industry-leading capabilities in pulsed power, space applications, industrial
computers and other advanced technologies to develop and market products and
services for commercial and government customers in multiple industries,
including energy, satellite, defense, telecommunications, consumer
electronics, medical products and water purification. As further
discussed in Note 2, the Company's financial results for prior fiscal years have
been restated to include the results and accounts of business combinations
completed during fiscal year 1999.
CONSOLIDATION
The consolidated financial statements include the accounts of Maxwell
Technologies, Inc. and its subsidiaries. All significant inter-company
transactions and account balances are eliminated in consolidation.
CASH EQUIVALENTS
The Company classifies all highly liquid investments with a maturity of
three months or less when purchased as cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (principally average cost
method) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost and are generally
depreciated using the straight-line method. Depreciation and amortization are
provided over the estimated useful lives of the related assets (three to thirty
years). Depreciation and amortization of property, plant and equipment amounted
to $2,995,000, $4,325,000 and $5,444,000 in fiscal years 1997, 1998 and 1999,
respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to potential concentrations
of credit risk consist principally of investments in cash equivalents and the
Company's accounts receivable. The Company invests its excess cash with major
corporate and financial institutions and in United States government backed
securities. The Company has established guidelines relative to diversification
and maturities to maintain safety and liquidity, and has not experienced any
losses on these investments. The Company's accounts receivable result from
contracts with the United States government, as well as contract and product
sales to non-government customers in various industries. The Company performs
ongoing credit evaluations of selected non-government customers and generally
requires no collateral.
The balances billed but not paid by customers pursuant to retainage
provisions under long-term contracts will be due upon completion of the
contracts and acceptance by the customers. Substantially all unbilled
receivables at July 31, 1999 are expected to become due and payable within the
next year.
42
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REVENUE RECOGNITION
The Company recognizes substantially all revenue from the sale of
manufactured products and short-term fixed price contracts upon shipment of
products or completion of services. Revenues, including estimated profits, on
long-term fixed price contracts are recognized as costs are incurred. Revenues,
including fees earned, on cost plus contracts are also recognized as costs are
incurred. Contract and license revenue is reflected in the Company's sales and
includes amounts received from the United States government and commercial
customers for the funded research and development efforts of the Company.
Provisions are made on a current basis to fully recognize any anticipated losses
on contracts.
INTEREST INCOME AND OTHER NET
Included in interest income and other, net is interest income of $173,000,
$1,625,000 and $783,000 in fiscal years 1997, 1998 and 1999, respectively. The
increase in interest income in fiscal year 1998 is due to the investment of net
cash proceeds from the Company's follow-on public stock offering completed in
November 1997.
FOREIGN CURRENCIES
A portion of the Company operations consists of manufacturing and sales
activity in foreign countries, specifically the United Kingdom, France and
Germany. As a result, the Company's financial results could be significantly
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the European markets that the Company serves. The
operating results of the Company are exposed to changes in exchange rates
between the United States Dollar and the British pound, French franc, and the
German mark. The Company does not currently hedge its foreign exchange risk,
which is not significant at this time. The assets and liabilities of the
Company's foreign subsidiaries are translated from their function currencies
into United States dollars at exchange rates in effect on the balance sheet
date, and revenues and expenses are translated at weighted-average rates
prevailing during the year.
INCOME (LOSS) PER SHARE
Effective November 1, 1997, the Company adopted Financial Accounting
Standards Board Statement No. 128, EARNINGS PER SHARE ("Statement No. 128").
Statement No. 128 replaced previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Basic earnings per
share is calculated using the weighted average number of common shares
outstanding. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share, and is calculated on the basis of the
weighted average number of common shares outstanding plus the dilutive effect of
outstanding stock options, assuming their exercise using the "treasury stock"
method, and convertible preferred shares outstanding at certain subsidiaries of
the Company, assuming their conversion. Earnings per share amounts for all prior
periods have been restated as necessary to conform to Statement No. 128
requirements. For the year ended July 31, 1998, all potentially dilutive
securities were excluded from the calculation of diluted loss per share as their
inclusion would have been antidilutive.
43
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The following table sets forth the computation of basic and diluted income
per share:
YEARS ENDED JULY 31,
--------------------------------------------
1997 1998 1999
------------ ------------ -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Basic:
Net income (loss)........................................ $ 6,507 $ (1,707) $11,068
============ ============ =============
Weighted average shares.................................. 6,775 8,503 9,414
============ ============ =============
Basic income (loss) per share............................ $ 0.96 $ (0.20) $ 1.18
============ ============ =============
Diluted:
Net income (loss)........................................ $ 6,507 $ (1,707) $11,068
Effect of majority-owned subsidiaries' dilutive securities (12) -- (78)
------------ ------------ -------------
Income (loss) available to common shareholders,
as adjusted.......................................... $ 6,495 $ (1,707) $10,990
============ ============ =============
Weighted average shares.................................. 6,775 8,503 9,414
Effect of dilutive stock options and other securities.... 695 -- 387
------------ ------------ -------------
Weighted average shares, as adjusted..................... 7,470 8,503 9,801
============ ============ =============
Diluted income (loss) per share.......................... $ 0.87 $ (0.20) $ 1.12
============ ============ =============
COMPREHENSIVE INCOME
As of August 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, REPORTING COMPREHENSIVE INCOME ("Statement No. 130").
Statement No. 130, established new rules for the reporting and display of
comprehensive income and its components; however, the adoption of Statement No.
130 had no impact on the Company's net income or its shareholders' equity.
Foreign currency translation adjustments are the Company's only component of
other comprehensive income.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Several of the industries in which the Company operates are
characterized by rapid technological change and short product life cycles. As a
result, estimates are required to provide for product returns and product
obsolescence as well as other matters. Historically, actual amounts recorded
have not varied significantly from estimated amounts.
NOTE 2 -- BUSINESS COMBINATIONS
In December 1998, the Company acquired KD Components, Inc. ("KD"), a
privately held company that develops and manufactures high voltage multilayer
ceramic capacitors and switch mode power supply capacitors for military,
aerospace, medical and other applications. Under the terms of the agreement,
which was accounted for as a pooling-of-interests, Maxwell purchased all of the
outstanding stock of KD in exchange for approximately 145,000 shares of Maxwell
common stock valued at approximately $5.5 million on the closing date. The
Company incurred direct acquisition costs of approximately $120,000, which were
charged to operations.
44
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- BUSINESS COMBINATIONS (CONTINUED)
In January 1999, the Company acquired Space Electronics, Inc. ("SEi"),
a closely held company that specializes in the manufacture of radiation-hardened
microelectronics for the commercial space market. Under the terms of this
agreement, which was accounted for as a pooling-of-interests, Maxwell purchased
all of the outstanding stock of SEi in exchange for approximately 681,000 shares
of Maxwell common stock valued at approximately $25 million on the closing date.
The Company incurred direct acquisition costs of approximately $1.1 million,
which were charged to operations.
As a result of the above acquisitions, the Company's prior year
financial statements have been restated to include the combined historical
results of KD and SEi. The table below sets for the combined revenues, net
income (loss) and basic and diluted income (loss) per share for the restated
periods shown (in thousands, except per share data):
MAXWELL KD SEI COMBINED
------------------ ------------------ ---------------- ------------------
Year Ended July 31, 1998:
Revenues $125,308 $4,443 $10,814 $140,565
Net loss (769) (35) (903) (1,707)
Basic loss per share (0.10) (0.24) (1.33) (0.20)
Diluted loss per share (0.10) (0.24) (1.33) (0.20)
Year Ended July 31, 1997:
Revenues $101,411 $4,200 $12,164 $117,775
Net income 4,024 231 2,252 6,507
Basic income per share 0.68 1.59 3.31 0.86
Diluted income per share 0.60 1.59 3.31 0.87
Also in January 1999, the Company purchased a German company, which was
formerly a distributor for the Company's industrial computer business. The
acquisition was accounted for as a pooling-of-interests and consisted of the
purchase of all the outstanding stock of the German company in exchange for
approximately 114,000 shares of Maxwell common stock valued at approximately $5
million on the closing date. The Company incurred direct acquisition costs of
approximately $75,000, which were charged to operations. The historical results
of operations of the acquired company were not material in relation to those of
Maxwell and financial information for prior periods was not restated to reflect
the merger. Retained earnings as of the beginning of the Company's fiscal year
1999 second quarter were restated to reflect the retained earnings of the
acquired company of approximately $184,000 as of such date.
NOTE 3 -- BALANCE SHEET DETAILS
Accounts receivable from long-term contracts consists of the following at
July 31:
1998 1999
----------- -----------
(IN THOUSANDS)
United States Government:
Amounts billed.............................................. $ 7,248 $ 5,878
Amounts unbilled............................................ 3,024 3,534
Commercial customers:
Amounts billed.............................................. 905 4,530
Amounts unbilled............................................ 1,546 956
----------- -----------
$ 12,723 $ 14,898
=========== ===========
45
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- BALANCE SHEET DETAILS (CONTINUED)
Inventories consist of the following at July 31:
1998 1999
----------- -----------
(IN THOUSANDS)
Finished goods................................................ $ 1,494 $ 3,624
Work in process............................................... 3,686 3,907
Raw materials and purchased parts............................. 14,198 16,096
----------- -----------
$ 19,378 $ 23,627
=========== ===========
Property, plant and equipment consists of the following at July 31:
1998 1999
----------- -----------
(IN THOUSANDS)
Land and land improvements.................................... $ 3,470 $ 3,470
Buildings and building improvements........................... 8,442 9,257
Machinery, furniture and office equipment..................... 45,029 49,517
Leasehold improvements........................................ 5,395 6,029
----------- -----------
62,336 68,273
Less accumulated depreciation and amortization................ 37,958 41,719
----------- -----------
24,378 26,554
Construction in progress...................................... 1,164 1,326
----------- -----------
$ 25,542 $ 27,880
=========== ===========
Goodwill and other non-current assets consist of the following at July 31:
1998 1999
----------- -----------
(IN THOUSANDS)
Goodwill and other intangible assets, net of accumulated
amortization of $37 and $422 in 1998 and 1999, respectively $ 5,282 $ 5,450
Equity investments in unconsolidated companies................ 40 2,050
Deposits and other............................................ 1,337 1,571
Deferred income taxes - long-term............................. -- 813
----------- -----------
$ 6,659 $ 9,884
=========== ===========
Accounts payable consist of the following at July 31:
1998 1999
----------- -----------
(IN THOUSANDS)
Accounts payable and accrued expenses......................... $ 21,061 $ 18,413
Restructure accruals.......................................... -- 2,475
Customer advances............................................. 1,806 1,887
Environmental reserves........................................ 1,152 1,042
----------- -----------
$ 24,019 $23,817
=========== ===========
NOTE 4 -- CREDIT AGREEMENT
The Company has an unsecured bank line of credit agreement, which expires
in March 2000, under which the Company may borrow up to $20 million at the
bank's prime rate, or at LIBOR plus 1.75% (6.56% at July 31, 1999). At July 31,
1999, the Company had $2.5 million outstanding under the line, which was repaid
in October 1999. The line of credit agreement provides that neither the Company
nor any of its subsidiaries may, directly or indirectly, make any distributions
of cash dividends. The line of credit agreement also requires the Company to
comply with various financial covenants. The Company was in compliance with all
such covenants at July 31, 1999.
46
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- STOCK ACTIVITY AND STOCK PLANS
STOCK OPTION PLANS
In December 1995, the Company adopted the 1995 Stock Option Plan under
which 500,000 shares of Common Stock were reserved for future grant. In January
1997, January 1998, and January 1999 an additional 300,000, 490,000 and 700,000
shares, respectively, were reserved for future issuance under the plan. This
plan and the Company's Director Stock Option Plan provide for granting either
Incentive Stock Options or Non-Qualified Stock Options to employees and
non-employee members of the Company's Board of Directors, respectively. Options
are also outstanding under an expired stock option plan. Options granted under
these plans are for the purchase of Common Stock of the Company at not less than
the stock's fair market value at the date of grant. Employee options are
generally exercisable in cumulative annual installments of 20 - 30 percent,
while options in the Director Option Plan are exercisable in full one year after
date of grant. All options have terms of five to ten years.
The following table summarizes Company stock option activity for the three
years ended July 31, 1999:
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
------------- ----------------
Balance at August 1, 1996......................................... 1,196,026 $ 4.57
Granted......................................................... 373,700 $15.95
Exercised....................................................... (406,656) $ 4.61
Expired or forfeited............................................ (108,390) $ 4.42
-------------
Balance at July 31, 1997.......................................... 1,054,680 $ 8.60
Granted......................................................... 591,500 $25.23
Exercised....................................................... (324,825) $ 5.49
Expired or forfeited............................................ (56,200) $18.57
-------------
Balance at July 31, 1998.......................................... 1,265,155 $16.73
Granted......................................................... 684,140 $23.87
Exercised....................................................... (285,400) $ 9.65
Expired or forfeited............................................ (41,340) $19.96
-------------
Outstanding at July 31, 1999...................................... 1,622,555 $20.90
=============
Available for future grant under the 1995 Stock Option Plan....... 116,100
=============
Available for future grant under the Director Option Plan......... 85,674
=============
The following table summarizes information concerning outstanding and
exercisable Company stock options at July 31, 1999:
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF EXERCISE OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISE
PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE
$ 3.56 - 5.00 172,946 $ 4.24 3.7 years 113,903 $ 4.40
$ 5.12 - 7.25 59,248 $ 6.80 2.1 years 26,020 $ 6.53
$ 11.00 - 20.63 277,421 $ 18.61 5.9 years 87,700 $ 18.86
$ 20.64 - 22.50 266,050 $ 21.94 8.6 years 3,300 $ 21.67
$ 22.51 - 24.75 277,200 $ 23.70 6.5 years 80,100 $ 23.69
$ 24.76 - 25.00 227,890 $ 25.00 9.8 years -- $ --
$ 25.01 - 32.75 341,800 $ 27.83 8.3 years 64,070 $ 27.45
---------------- -------------
1,622,555 375,093
================ =============
47
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- STOCK ACTIVITY AND STOCK PLANS (CONTINUED)
In addition, the Company has established separate stock option plans for
four of its principal operating subsidiaries. Options to purchase shares of
subsidiary stock were granted primarily during fiscal year 1997. Options
outstanding at July 31, 1999 total from 7% to 14% of such various subsidiaries'
outstanding common stock.
The Company has adopted the disclosure-only provisions of FASB Statement
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement No. 123"). In
accordance with the provisions of Statement No. 123, the Company applies
Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for its stock option plans, and accordingly, no compensation expense
has been recognized for stock options granted in 1997, 1998 or 1999 as the stock
options have been granted at their current fair market value. If the Company had
elected to recognize compensation cost based on the fair value method prescribed
by Statement No. 123, the Company's net income (loss) and diluted income (loss)
per share would have been adjusted to the pro-forma amounts indicated below:
YEAR ENDED JULY 31,
------------------------------------------------------
1997 1998 1999
---------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss), as reported.......... $ 6,507 $ (1,707) $ 11,068
Pro forma net income (loss)........... $ 5,783 $ (4,739) $ 5,381
Diluted income (loss) per share, as
reported................................ $ 0.87 $ (0.20) $ 1.12
Pro forma diluted income (loss) per
share................................. $ 0.77 $ (0.56) $ 0.55
The impact of outstanding non-vested stock options granted prior to 1997
has been excluded from the pro forma 1999 calculations; accordingly, the
1997, 1998 and 1999 pro forma adjustments are not indicative of future period
pro forma adjustments when the calculation will reflect all applicable stock
options. The fair value of Company options at the date of grant was estimated
using the Black-Scholes option-pricing model with assumptions as follows:
1999 -risk-free interest rate of 5.0%; dividend yield of 0%; volatility
factor of 66%; and a weighted average expected term of 5 years; 1998 -
risk-free interest rate of 5.5%; dividend yield of 0%; volatility factor of
54%; and a weighted-average expected term of 4 years; 1997 - risk-free
interest rate of 6.0%; dividend yield of 0%; volatility factor of 52%; and a
weighted-average expected term of 3 years. The fair value of subsidiary
options at the date of grant was estimated using the Black-Scholes model with
assumptions as above. The estimated weighted average fair value at grant date
for Company options granted during fiscal years 1997, 1998 and 1999 was
$6.49, $12.05 and $13.50 per option, respectively.
STOCK PURCHASE PLANS
In December 1994, the Company established the 1994 Employee Stock Purchase
Plan and a Director Stock Purchase Plan. The employee plan permits substantially
all employees to purchase Common Stock through payroll deductions at 85% of the
lower of the trading price of the stock at the beginning or at the end of each
six-month offering period. The director plan permits non-employee directors to
purchase common stock at 100% of the trading price of the stock on the date a
request for purchase is received. In fiscal years 1997, 1998 and 1999, 39,129,
40,795 and 48,388 shares, respectively, were issued under the two plans for an
aggregate of $442,000, $759,000 and $970,000, respectively. At July 31, 1999,
250,152 shares are reserved for future issuance under these plans.
DEFERRED COMPENSATION
In 1996 and 1997, an executive officer of the Company was granted shares of
the Company's Common Stock subject to certain restrictions. The shares granted
vest ratably over a four-year period, and at the grant dates the shares had a
fair value of approximately $645,000 and $190,000, respectively. Those values,
net of accumulated amortization, are shown as deferred compensation in the
accompanying Consolidated Balance Sheets and Consolidated Statements of
Stockholders' Equity. The deferred compensation is being amortized to expense
over the four-year vesting periods, and such amortization totaled $173,000,
$209,000 and $209,000 in fiscal year 1997, 1998 and 1999, respectively.
48
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- STOCK ACTIVITY AND STOCK PLANS (CONTINUED)
STOCKHOLDER RIGHTS PLAN
In October 1999, the Company adopted a new Stockholder Rights Plan as a
successor to its previous plan, which expired in June 1999. In accordance
with the new plan, the Company distributed one non-voting Common Stock
purchase right ("Right") for each outstanding share of Common Stock. The
Rights are not exercisable and will not trade separately from the Common
Stock unless a person or group acquires, or makes a tender offer for, 15% or
more of the Company's Common Stock. Initially, each Right entitles the
registered holder to purchase one share of Company Common Stock at a price of
$75 per share, subject to certain anti-dilution adjustments.
If the Rights become exercisable and certain conditions are met, then each
Right not owned by the acquiring person or group will entitle its holder to
receive, upon exercise, Company Common Stock having a market value of twice the
exercise price of the Right. In addition, the Company may redeem the Rights at a
price of $0.01 per Right, subject to certain restrictions.
The new Stockholder Rights Plan expires on October 21, 2009.
NOTE 6 -- INCOME TAXES
The provision (credit) for income taxes is as follows for the years ended
July 31:
1997 1998 1999
---------- ---------- ---------
(IN THOUSANDS)
Federal:
Current....................... $ 1,431 $ 127 $ --
Deferred...................... (293) 16 (4,354)
---------- ---------- ---------
1,138 143 (4,354)
State:
Current....................... 387 25 82
Deferred...................... (52) 19 (1,872)
---------- ---------- ---------
335 44 (1,790)
Foreign:
Current....................... -- 200 394
Deferred...................... -- 26 (26)
---------- ---------- ---------
-- 226 368
---------- ---------- ---------
$ 1,473 $ 413 $ (5,776)
========== ========== =========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
The primary components of the Company's deferred tax assets and liabilities
are as follows at July 31:
1998 1999
---------- ---------
(IN THOUSANDS)
Deferred tax assets:
Uniform capitalization, contract and
inventory-related reserves.................. $ 2,732 $ 2,650
Environmental and restructuring provisions.... 1,430 2,319
Asset write-downs under FASB Statement No. 121 1,112 1,031
Acquired in-process research and development.. 959 893
Accrued vacation.............................. 819 866
Allowance for doubtful accounts............... 451 380
Tax loss carryforwards........................ 1,300 900
Research and development and other tax credit
carryforwards............................... -- 2,921
Other........................................ 483 401
Valuation allowance.......................... (7,920) --
--------- --------
Total deferred tax assets................ 1,366 12,361
--------- --------
Deferred tax liabilities:
Tax basis depreciation in excess of book
depreciation............................... (686) (816)
Tax basis research and development expense
in excess of book expense.................. (223) (239)
--------- --------
Total deferred tax liabilities........... (909) (1,055)
--------- --------
Net deferred tax assets.................. $ 457 $11,306
========= ========
The Company cannot carry losses back to prior years. Through fiscal year
1998, the Company had provided a valuation allowance against the future tax
benefits of its net operating loss carryforwards and net deferred income tax
assets as realization of such future benefits was deemed to be uncertain.
Based on the Company's earnings in fiscal years 1997, 1998 and 1999 and the
amount of its pre-tax income in fiscal year 1999, management has determined
that it is more likely than not that the Company will receive the future
benefits from its net deferred income tax assets, including tax credits and
remaining net operating loss carryforwards. Accordingly, in the fourth
quarter of fiscal year 1999, the Company reversed the valuation allowance and
recorded net deferred income tax assets of approximately $10.7 million, of
which $4.6 million was recorded as a credit to additional paid-in capital for
tax benefits relating to employee stock option and stock purchase plan
activity in the current and prior years.
49
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- INCOME TAXES (CONTINUED)
The current income tax expense in fiscal year 1999 was primarily due to
foreign taxes on the profits of the Company's United Kingdom subsidiary, and
certain minimum state income taxes. The Company's fiscal year 1998 and 1997
provisions for income taxes relate primarily to taxes of the businesses acquired
in fiscal year 1999 using the pooling-of-interests method.
As of July 31, 1999, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $1,700,000 and
$3,300,000, respectively. The federal loss carryforward expires in fiscal year
2011, while the state loss carryforwards expire in fiscal years 2000 through
2001. In addition, the Company has research and development and other tax credit
carryforwards for federal and state income tax purposes of $6.3 million an $9.6
million, which begin to expire in 2004.
The provision (credit) for income taxes in the accompanying statements of
operations differs from the amount calculated by applying the statutory income
tax rate of 35% to income (loss) before income taxes and minority interest. The
primary components of such difference are as follows for the years ended
July 31:
1997 1998 1999
----------------- -------------- -------------
(IN THOUSANDS)
Tax at federal statutory rate............... $ 2,811 $ (425) $ 2,002
State taxes, net of federal benefit......... 633 102 339
Effect of foreign subsidiary................ -- (47) 76
Impact of asset basis difference in
acquisitions............................ -- 1,237 496
Utilization of net operating loss carryforwards (700) (500) (400)
Valuation allowance, including tax benefits of
stock activity and other items.......... (1,271) 46 (8,289)
----------------- -------------- -------------
$ 1,473 $ 413 $ (5,776)
================= ============== =============
NOTE 7 -- LEASES
Rental expense amounted to $2,101,000, $3,676,000 and $5,459,000 in fiscal
years 1997, 1998 and 1999, respectively, and was incurred primarily for facility
rental. Future annual minimum rental commitments as of July 31, 1999, are as
follows:
FISCAL YEARS
2000...................................................... $ 5,169,000
2001...................................................... 4,996,000
2002...................................................... 3,866,000
2003...................................................... 2,850,000
2004...................................................... 2,251,000
Thereafter................................................ 4,820,000
---------------
$23,952,000
===============
Certain leases include renewal options for periods ranging from one to
twenty-five years and are subject to rental adjustment based on consumer price
indices. Substantially all leases provide that the Company pay for property
taxes, insurance, and repairs and maintenance.
The Company also subleases certain of its leased facilities under
non-cancellable subleases through 2002. Future annual amounts due to the Company
under such subleases are as follows: fiscal year 2000 - $392,000, fiscal year
2001 - $404,000 and fiscal year 2002 - $168,000.
50
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- EMPLOYEE BENEFIT PLANS
Substantially all United States employees are eligible to elect coverage
under contributory employee savings plans which provide for Company matching
contributions based on one-half of employee contributions up to certain plan
limits. The Company's matching contributions under these plans totaled $632,000,
$824,000 and $1,074,000 in fiscal years 1997, 1998 and 1999, respectively.
NOTE 9 -- RESTRUCTURING, ACQUISITION AND OTHER CHARGES
During fiscal year 1999, the Company recorded restructuring, acquisition
and other charges of approximately $5.9 million. Of these charges,
approximately $1.6 million consisted primarily of direct acquisition costs
for business combinations accounted for using the pooling-of-interests
method. In the fourth quarter of fiscal year 1999, the Company recorded an
additional $4.3 million charge, of which approximately $2.8 million relates
to revised estimates of final costs necessary to complete certain criminal
justice information system contracts and complete the discontinuation of the
related business segment that was discontinued in the third quarter of fiscal
year 1998. The revision affected costs to complete and terminate such
contracts, as well as other business shutdown costs, including
employee-related costs. The remaining $1.5 million of the charge consists
primarily of amounts provided for revised estimates of costs to resolve
certain environmental and legal contingencies which occurred in prior years,
as well as other restructuring provisions, including employee and facility
expenses, related to decisions made in July 1999 to reduce certain
administrative infrastructure of the Company in Europe and the United States.
Primarily due to the acquisition of three businesses, the Company recorded
an $8.9 million pre-tax charge in the third quarter of fiscal year 1998.
Approximately $6.3 million of the charge related to the acquisition of the three
businesses, including transaction costs for business combinations accounted for
as a pooling of interests, and the appraised amount of acquired in-process
research and development for the two purchase business combinations. Also during
the third quarter of fiscal year 1998, the Company reorganized the operations
within the former Information Products and Services business segment, including
a refocusing of certain operations along the lines of other business segments
and the discontinuation of certain businesses. Charges related to this
discontinued business segment amounted to $2.6 million.
NOTE 10 -- ENVIRONMENTAL MATTER
In 1992, the Company and approximately 40 other potentially responsible
parties signed a consent order with the State of California with respect to
costs to be incurred at a recycling facility to characterize and remediate
hazardous substances. To date, the site has been characterized, and the Company
and the other potentially responsible parties have paid substantially all of
their respective shares of the costs of such characterization. The estimated
cost of monitoring and remediation activities, of which the Company's share is
currently estimated at approximately 3.3%, totals approximately $23 million.
Approximately $21 million of this amount will consist of maintenance, monitoring
and related costs to be incurred over a 25-30 year period. The Company has
accrued its share of such estimated costs. On the basis of such amounts accrued
by the Company, it is management's opinion that any additional liability
resulting from this situation will not have a material effect on the Company's
consolidated financial statements.
NOTE 11 -- BUSINESS SEGMENTS
In fiscal year 1999, Maxwell adopted Statement of Financial Accounting
Standards No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION ("Statement No. 131"). The new rules establish revised standards for
public companies relating to the reporting of financial information about
operating segments. The adoption of Statement No. 131 did not have a material
effect on Maxwell's financial statements, although segment information
disclosures were affected.
51
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- BUSINESS SEGMENTS (CONTINUED)
Maxwell's management evaluates performance and allocates resources based
on a measure of segment operating profit (loss), excluding restructuring,
acquisition and other charges. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies. Maxwell does not evaluate segment performance on amounts
provided for restructuring, acquisition and other charges, or on items of
income or expense below operating profit (loss). Accordingly, such items are
not segregated by operating segment.
In accordance with the requirements and guidelines of Statement No. 131,
Maxwell's operations have been classified into the following business segments
(prior year segment information has been restated to conform to Statement No.
131 guidelines):
- SPACE AND TECHNOLOGY PRODUCTS AND PROGRAMS: Includes design,
development and manufacture of high reliability radiation-hardened
electronic components and consulting services for commercial and
government space systems, research and development programs in pulsed
power, pulsed power systems design and construction, computer-based
analytic services and software, and weapons effects simulation,
primarily for the DOD.
- INDUSTRIAL COMPUTERS AND SUBSYSTEMS: Includes design and assembly of
standard, custom and semi-custom industrial computer modules,
platforms and fully integrated systems primarily for OEMs.
- POWER CONVERSION PRODUCTS: Includes design, development and
manufacture of electrical components, systems and subsystems,
including products that capitalize on pulsed power such as
ultracapacitors, high voltage capacitors and other electrical
components, power distribution and conditioning systems and EMI filter
capacitors.
- STERILIZATION AND PURIFICATION SYSTEMS: Includes design, development
and manufacture of systems based on two patented pulse power processes
incorporating capacitors and other pulsed power components designed
and manufactured by the Company. The PUREBRIGHT-Registered Trademark-
system utilizes intense pulsed light to kill microorganisms and
viruses in water and blood plasma and other biopharmaceutical
products, and on food, food packaging and medical products. The
COOLPURE-Registered Trademark- system uses pulsed electrical fields to
kill microorganisms in liquids and liquid foods, such as juices, dairy
products and sauces.
52
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- BUSINESS SEGMENTS (CONTINUED)
Business segment financial data, including partial-year results for fiscal
year 1998 of the Information Products and Services segment prior to it
discontinuance, for the three years ended July 31 is as follows:
1997 1998 1999
-------------- -------------- ---------------
(IN THOUSANDS)
Sales:
Other....................................................... $ 5,271 $ 1,833 $ --
Space and Technology Products and Programs.................. 47,006 54,113 71,748
Industrial Computers and Subsystems......................... 34,259 40,864 56,516
Power Conversion Products................................... 24,766 36,981 42,032
Sterilization and Purification Systems...................... 6,473 6,774 9,389
-------------- -------------- -------------
Consolidated total...................................... $ 117,775 $ 140,565 $ 179,685
============== ============== =============
Operating profit (loss):
Other....................................................... $ (3,377) $ (728) $ --
Space and Technology Products and Programs.................. 5,857 (1,745) 8,325
Industrial Computers and Subsystems......................... 2,417 3,149 3,325
Power Conversion Products................................... 2,508 3,798 (1,630)
Sterilization and Purification Systems...................... 316 466 2,512
-------------- -------------- -------------
Total operating profit (loss)........................... 7,721 4,940 12,532
Corporate expenses and revenues............................. 533 (5,816) (6,409)
Interest expense............................................ (220) (338) (404)
-------------- -------------- -------------
Income (loss) before income taxes, and minority interest $ 8,034 $ (1,214) $ 5,719
============== ============== =============
Identifiable assets:
Other....................................................... $ 4,631 $ -- $ --
Space and Technology Products and Programs.................. 15,708 39,737 40,631
Industrial Computers and Subsystems......................... 12,167 19,180 26,806
Power Conversion Products................................... 9,031 23,574 30,202
Sterilization and Purification Systems...................... 5,207 6,230 9,169
Corporate................................................... 8,436 26,664 27,626
-------------- -------------- -------------
Consolidated total...................................... $ 55,180 $ 115,385 $ 134,434
============== ============== =============
Depreciation and amortization:
Other....................................................... $ 218 $ 133 $ --
Space and Technology Products and Programs.................. 991 1,884 2,413
Industrial Computers and Subsystems......................... 469 667 1,126
Power Conversion Products................................... 642 890 1,391
Sterilization and Purification Systems...................... 349 462 504
Corporate................................................... 326 326 395
-------------- -------------- -------------
Consolidated total...................................... $ 2,995 $ 4,362 $ 5,829
============== ============== =============
Capital expenditures:
Other....................................................... $ 590 $ 15 $ --
Space and Technology Products and Programs.................. 1,789 2,917 3,262
Industrial Computers and Subsystems......................... 992 810 1,009
Power Conversion Products................................... 1,036 3,277 3,098
Sterilization and Purification Systems...................... 872 458 283
Corporate................................................... 310 949 563
-------------- -------------- -------------
Consolidated total...................................... $ 5,589 $ 8,426 $ 8,215
============== ============== =============
53
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- BUSINESS SEGMENTS (CONTINUED)
Intersegment sales are insignificant. Corporate expenses include
restructuring, acquisition and other charges in fiscal years 1998 and 1999.
Identifiable assets by segment include the assets directly identified with those
segments. Corporate assets consist primarily of cash and cash equivalents,
deferred tax assets and credits, and the telecommunications, centralized
computers and networking equipment of the Company.
Sales under United States government contracts and subcontracts are
primarily in the Space and Technology Products and Programs business segment,
and aggregated $36,246,000, $43,946,000 and $51,823,000 in fiscal year 1997,
1998, and 1999, respectively.
Sales to customers in excess of 10% of total Company sales included sales
to the United States Air Force amounting to 12% and 10% of Company sales in
fiscal years 1997 and 1998, respectively. Additionally, a customer of the
Industrial Computers and Subsystems business segment represented 10% of sales of
the Company in fiscal year 1997.
International sales amounted to $14,123,000, $21,065,000 and $32,545,000 in
fiscal years 1997, 1998, and 1999 respectively, principally to customers in the
United Kingdom and countries in Europe and the Pacific Rim. Company assets
located outside the United States totaled approximately $4,200,000 and
$9,100,000 at July 31, 1998 and 1999, respectively. The Company had no foreign
operations in 1997.
NOTE 12 - RELATED PARTY TRANSACTION
In February 1999, the Company loaned $2.0 million to its Chairman and
former CEO under a full recourse promissory note agreement. The note bears
interest at 5% per year. Principal and accumulated interest is due and payable
in February 2001, and is secured in part by a pledge of Company stock owned by
the Chairman.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10 THROUGH 13.
The information required under Item 10 (Directors and Executive
Officers of the Registrant), Item 11, (Executive Compensation), Item 12
(Security Ownership of Certain Beneficial Owners and Management) and Item 13
(Certain Relationships and Related Transactions) will be reported in the
Company's Proxy Statement for the 1999 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A as
follows and is incorporated herein by reference:
Item Number Heading in Proxy Statement
- ----------- --------------------------
10--------------- "ELECTION OF DIRECTORS"
11--------------- "EXECUTIVE COMPENSATION"
12--------------- "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT"
13--------------- "EXECUTIVE COMPENSATION"
(See also Item 4.1 - "Executive Officers of the Registrant," Part I, SUPRA)
54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
See Item 6, Item 7 and Item 8.
(a)(2) FINANCIAL STATEMENT SCHEDULES
Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are omitted because they
are inapplicable or not required under the related instructions.
(a)(3) LIST OF EXHIBITS.
3.1 Restated Certificate of Incorporation of the Registrant --
Exhibit 3.1 to the Registrant's Form 10-K Annual Report for
the year ended July 31, 1987 ("1987 Form 10-K") is
incorporated by reference.
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant increasing the number of
authorized shares to 20 million, dated November 22, 1996 --
Exhibit 3.2 to the Registrant's 1997 Form 10-K Annual Report
for the year ended July 31, 1997 ("1997 Form 10-K") is
incorporated by reference.
3.3+ Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant increasing the number of
authorized shares to 40 million, dated February 9, 1998.
3.4 Bylaws of the Registrant as amended to date-- Exhibit 3.2 to
the 1987 Form 10-K is incorporated by reference.
3.5 Revised Article IV of the Bylaws of the Registrant-- Exhibit
3.4 to the 1997 Form 10-K is incorporated by reference.
10.1 Maxwell Laboratories, Inc. Director Stock Option Plan --
Exhibit 10.23 to the Registrant's Form 10-K Annual Report
for the year ended July 31, 1989 ("1989 Form 10-K") is
incorporated by reference.
10.2 Amendment Number One to Maxwell Laboratories, Inc. Director
Stock Option Plan, dated February 7, 1997 -- Exhibit 10.2 to
the 1997 Form 10-K is incorporated by reference.
10.3+ Amendment Number Two to Maxwell Laboratories, Inc. Director
Stock Option Plan, dated January 28, 1999.
10.4 Maxwell Laboratories, Inc. 1985 Stock Option Plan as amended
to date -- Exhibit 10.3 to the Registrant's Form 10-K Annual
Report for the year ended July 31, 1991 ("1991 Form 10-K")
is incorporated by reference.
10.5 Maxwell Laboratories, Inc. 1995 Stock Option Plan -- Exhibit
10.3 to the Registrant's Form 10-K Annual Report for the
year ended July 31, 1995 ("1995 Form 10-K") is incorporated
by reference.
10.6 Amendment Number One to Maxwell Laboratories, Inc. 1995
Stock Option Plan, dated March 19, 1997-- Exhibit 10.6 to
the 1997 Form 10-K is incorporated by reference.
10.7 Amendment Number Two to Maxwell Technologies, Inc. 1995
Stock Option Plan, dated January 28, 1998-- Exhibit 10.6 to
the 1998 Form 10-K is incorporated by reference.
55
10.8+ Amendment Number Three to Maxwell Technologies, Inc. 1995
Stock Option Plan, dated January 28, 1999.
10.9 Maxwell Laboratories, Inc. 1994 Employee Stock Purchase
Plan-- Exhibit 10.4 to the 1995 Form 10-K is incorporated by
reference.
10.10 Maxwell Laboratories, Inc. 1994 Director Stock Purchase
Plan-- Exhibit 10.5 to the 1995 Form 10-K is incorporated by
reference.
10.11 Lease dated February 28, 1986 between the Registrant, as
Lessee, and Elkhorn Ranch, Inc., as Lessor -- Exhibit 10.11
to the Registrant's Form 10-K Annual Report for the year
ended July 31, 1986 ("1986 Form 10-K") is incorporated by
reference.
10.12 First Amendment to Industrial Real Estate Lease between the
Registrant, as Lessee, and Elkhorn Ranch, Inc., as Lessor,
dated June 30, 1995 -- Exhibit 10.11 to the 1997 Form 10-K
is incorporated by reference.
10.13 Maxwell Technologies, Inc. Officer and Director Stock
Repurchase Policy-- Exhibit 10.12 to the 1998 Form 10-K is
incorporated by reference.
10.14 Office Lease Agreement dated August 28, 1987 by and between
Airport Property Company, a N.M. Limited Partnership, as
Lessor, and the Registrant, as Lessee -- Exhibit 10.16 to
the Registrant's Form 10-K Annual Report for the year ended
July 31, 1988 ("1988 Form 10-K") is incorporated by
reference.
10.15 Agreement of May, 1994 between the Registrant and Compagnie
Europeene de Composants Electroniques -- LCC under which the
Registrant licenses, manufactures and distributes certain
capacitors -- Exhibit 10.11 to the 1995 Form 10-K is
incorporated by reference.
10.16 Lease dated April 17, 1995, by and between Cody Three, Inc.,
as Lessor, and the Registrant, as Lessee -- Exhibit 10.12 to
the Registrant's Form 10-K Annual Report for the year ended
July 31, 1996 ("1996 Form 10-K") is incorporated by
reference.
10.17 Amended and Restated Industrial Real Estate Lease dated
January 1, 1997 by and between Equus 9177, LLC, as Lessor,
and I-Bus, Inc., as Lessee. -- Exhibit 10.16 to the 1997
Form 10-K is incorporated by reference.
10.18 Maxwell Laboratories, Inc. Executive Deferred Compensation
Plan, dated September 1, 1998. -- Exhibit 10.17 to the 1998
Form 10-K is incorporated by reference.
10.19+ Chief Executive Officer Maxwell Technologies, Inc.
Employment Agreement dated April 30, 1999 between the
Registrant and Thomas L. Horgan.
10.20 Chief Executive Officer Employment Contract dated March 25,
1996 and Amendment dated April 16, 1996 between the
Registrant and Kenneth F. Potashner-- Exhibit 10.16 to the
1996 Form 10-K is incorporated by reference.
10.21 Second Amendment to the Chief Executive Officer Employment
Contract dated June 23, 1997 between the Registrant and
Kenneth F. Potashner -- Exhibit 10.21 to the 1997 Form 10-K
is incorporated by reference.
10.22 Restricted Stock Agreement dated July 25, 1996, between the
Registrant and Kenneth F. Potashner -- Exhibit 10.17 to the
1996 Form 10-K is incorporated by reference.
10.23 Amendment Number One to Restricted Stock Agreement, dated
June 24, 1997, between the Registrant and Kenneth F.
Potashner -- Exhibit 10.23 to the 1997 Form 10-K is
incorporated by reference.
10.24+ Secured Promissory Note dated February 2, 1999 and Stock
Pledge Agreement dated February 2, 1999 between Registrant
and Kenneth F. Potashner.
10.25+ Stock Pledge Agreement dated February 2, 1999 between
Registrant and Kenneth F. Potashner.
56
10.26 Lease dated October 12, 1994 by and between Madison Square
Partnership, as Lessor, and PurePulse Technologies, Inc.
(formerly Foodco Corporation), as Lessee -- Exhibit 10.18 to
the 1995 Form 10-K is incorporated by reference.
10.27 Lease dated November 1, 1996, by and between Ponderosa Pines
Partnership, as Lessor, and PurePulse Technologies, Inc., as
Lessee -- Exhibit 10.25 to the 1997 Form 10-K is
incorporated by reference.
10.28 Line of Credit Agreement dated March 4, 1998, between the
Registrant and Sanwa Bank California and First Amendment
dated May 29, 1998 between the Registrant and Sanwa Bank of
California -- Exhibit 10.26 to the 1998 Form 10-K is
incorporated by reference.
10.29 Lease dated February 13, 1994 by and between Terilee
Enterprises, Inc., as Lessor, and the Registrant, as Lessee
-- Exhibit 10.23 to the 1994 Form 10-K is incorporated by
reference.
10.30 Lease dated June, 1997 by and between AEW/LBA Acquisition
Company II, LLC, as Lessor and the Registrant as Lessee --
Exhibit 10.29 to the 1997 Form 10-K is incorporated by
reference.
10.31+ Executive Bonus Plan for Fiscal Year 2000.
10.32 PurePulse Technologies, Inc. 1994 Stock Option Plan--
Exhibit 10.26 to the 1996 Form 10-K is incorporated by
reference.
10.33 Maxwell Federal Division, Inc. 1996 Stock Option Plan--
Exhibit 10.34 to the 1997 Form 10-K is incorporated by
reference.
10.34 Maxwell Energy Products, Inc. 1996 Stock Option Plan--
Exhibit 10.35 to the 1997 Form 10-K is incorporated by
reference.
10.35 I-Bus, Inc. 1996 Stock Option Plan-- Exhibit 10.36 to the
1997 Form 10-K is incorporated by reference.
10.36 Maxwell Information Systems, Inc. 1996 Stock Option Plan--
Exhibit 10.37 to the 1997 Form 10-K is incorporated by
reference.
10.37 Amendment Number One to the Maxwell Laboratories, Inc. 1994
Employee Stock Purchase Plan, effective as of April 30, 1997
-- Exhibit 10.38 to the 1997 Form 10-K is incorporated by
reference.
10.38 Lease dated March 1, 1998, between Hassan H. Yarpezeshkan
and Maryam Yarpezeshkan, as Lessor and the Registrant, as
Lessee -- Exhibit 10.37 to the 1998 Form 10-K is
incorporated by reference.
10.39 Stock Purchase Agreement among Maxwell Technologies, Inc.,
Maxwell Energy Products, Inc., and PacifiCorp Energy
Ventures, Inc., dated October 30, 1997. Exhibit 10 to the
Registrant's October 31, 1997 Form 10-Q is incorporated by
reference.
10.40 Amended and Restated Agreement of Purchase and Sale of
Assets, dated as of March 29, 1998, among the Company,
Maxwell Technologies Systems Division, Inc., Primex
Technologies, Inc. and Primex Physics International Company
-- Exhibit 2.1 to the Registrant's Form 8-K filed April 29,
1998 is hereby incorporated by reference.
10.41 Assignment and Assumption Agreement (Facility Lease) dated
April 15, 1998, by and between Primex Physics International
Company, as assignor and Maxwell Technologies Systems
Division, Inc., as assignee -- Exhibit 10.40 to the 1998
Form 10-K is incorporated by reference.
10.42 Assignment and Assumption Agreement (Ground Lease) dated
April 15, 1998, by and between Primex Physics International
Company, as assignor and Maxwell Technologies Systems
Division, Inc., as assignee -- Exhibit 10.41 to the 1998
Form 10-K is incorporated by reference.
10.43 Underlease dated March 6, 1997 by and between Pegasus
Airwave Limited, as Lessor and I-Bus UK, Limited (formerly
Tri-MAP International, Limited), as Lessee -- Exhibit 10.42
to the 1998 Form 10-K is incorporated by reference.
10.44+ Shareholder Agreement among Maxwell Technologies, Inc.,
PurePulse Technologies, Inc., Sanyo E&E Corporation and
Three Oceans Inc., dated January 28, 1999.
57
10.45+ Lease dated May 9, 1995, Modification and Amendment
Agreement dated September 24, 1997 and Modification and
Amendment Agreement dated June 20, 1996 between Arvco
Realty, agent for Sorrento Park Investments, as Lessor and
Space Electronics, Inc., as Lessee.
10.46 Acquisition of Space Electronics Inc., by Maxwell
Technologies, Inc., dated January 29, 1999 - Exhibit 2.1 to
the Registrant's Form 8-K filed February 12, 1999 is hereby
incorporated by reference.
21.1+ List of subsidiaries of the Registrant.
23.1+ Consent of Ernst & Young, LLP, Independent Auditors
27.1+ Financial Data Schedule.
(b) REPORTS ON FORM 8-K
None.
- ----------
+ Filed herewith.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Diego, State of California, on this 22nd day of October, 1999.
MAXWELL TECHNOLOGIES, INC.
By: /s/ THOMAS L. HORGAN
---------------------------------------
Thomas L. Horgan
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ THOMAS L. HORGAN Chief Executive Officer, President and October 22, 1999
- -------------------------------------------- Director
Thomas L. Horgan
/s/ KENNETH F. POTASHNER Chairman of the Board, Director October 22, 1999
- --------------------------------------------
Kenneth F. Potashner
/s/ VICKIE L. CAPPS Vice President-Finance and October 22, 1999
- -------------------------------------------- Administration, Treasurer
Vickie L. Capps and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ MARK ROSSI Director October 22, 1999
- --------------------------------------------
Mark Rossi
/s/ CARLTON J. EIBL Director October 22, 1999
- --------------------------------------------
Carlton J. Eibl
/s/ KARL M. SAMUELIAN Director October 22, 1999
- --------------------------------------------
Karl M. Samuelian
/s/ JEAN LAVIGNE Director October 22, 1999
- --------------------------------------------
Jean Lavigne
59