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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 Compan