<PAGE> 1
SCHEDULE 14A INFORMATION
(Rule 14a-101)
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
MAXWELL TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
[MAXWELL TECHNOLOGIES LOGO]
MAXWELL TECHNOLOGIES, INC.
9275 SKY PARK COURT
SAN DIEGO, CA 92123
---------------
NOTICE OF THE 1998 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 27, 1999
---------------
To the Shareholders of
Maxwell Technologies, Inc.
The 1998 Annual Meeting of Shareholders of Maxwell Technologies, Inc., a
Delaware corporation (the "Company"), will be held on January 27, 1999 at 10:00
A.M., local time, at the Coronado Marriott, 2000 Second Street, Coronado,
California, for the following purposes, all as more fully set forth in the
accompanying Proxy Statement:
1. To elect two directors of the Company of Class III, to serve until the
fiscal year 2001 annual meeting of shareholders and until their successors
shall have been duly elected and qualified.
2. To consider and approve an amendment to the Company's 1995 Stock Option
Plan to increase the maximum number of shares reserved for options
thereunder by 700,000 shares.
3. To consider and approve an amendment to the Company's Director Stock
Option Plan to increase the initial number of shares under options granted
to a new director from 6,000 to 10,000 shares and the number of shares
under options granted annually to continuing directors from 2,000 to 3,000
shares. This amendment will not increase the overall maximum number of
shares reserved for options under the Director Stock Option Plan.
4. To transact such other business as may properly come before the meeting or
any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on December 2, 1998 as
the record date for determining shareholders entitled to notice of and to vote
at the meeting and any adjournment or adjournments thereof.
By Order of the Board of Directors,
Donald M. Roberts
Secretary
Dated: December 11, 1998
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING. IF YOU DO NOT EXPECT TO
ATTEND THE MEETING, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN
IT IN THE ENCLOSED ENVELOPE AS SOON AS POSSIBLE.
<PAGE> 3
MAXWELL TECHNOLOGIES, INC.
9275 SKY PARK COURT
SAN DIEGO, CALIFORNIA 92123
---------------
PROXY STATEMENT FOR THE 1998 ANNUAL MEETING
OF SHAREHOLDERS TO BE HELD ON JANUARY 27, 1999
---------------
GENERAL INFORMATION
This Proxy Statement is being mailed on or about December 11, 1998 to the
shareholders of Maxwell Technologies, Inc., a Delaware corporation (the
"Company"), in connection with the solicitation of proxies on behalf of the
Board of Directors of the Company to be used at the 1998 Annual Meeting of the
Shareholders of the Company to be held on January 27, 1999 (the "Meeting") and
any adjournment or adjournments thereof. Any proxy given may be revoked at any
time prior to the exercise of the powers conferred by it by filing with the
Secretary of the Company a written notice signed by the shareholder revoking
such proxy or a duly executed proxy bearing a later date. In addition, the
powers conferred by such proxy may be suspended if the person executing the
proxy is present at the meeting and elects to vote in person. All shares
represented by each properly executed and unrevoked proxy received in time for
the Meeting will be voted (unless otherwise indicated thereon) in the manner
specified therein at the Meeting and any adjournment or adjournments thereof.
The Company will pay the expenses of soliciting proxies, including the
charges and expenses of brokerage firms and others for forwarding solicitation
material to beneficial owners of shares. In addition to the use of the mails,
some of the Company's directors, officers and regular employees, without extra
compensation, may solicit proxies by telephone, personal interview, or other
means.
A Summary Annual Report of the Company for the fiscal year ended July 31,
1998 ("fiscal 1998") is being mailed to shareholders concurrently with the
mailing of this Notice of Annual Meeting and Proxy Statement. The Summary Annual
Report contains, among other things, summary financial information regarding the
Company and a discussion of developments in the Company's business during fiscal
1998. In addition, there is included as an Appendix to this Proxy Statement
complete financial statements of the Company for fiscal 1998 together with the
report of the Company's independent auditors thereon. The Appendix also contains
certain additional financial and related information regarding the Company.
VOTING RIGHTS
The close of business on December 2, 1998 (the "Record Date") has been fixed
by the Board of Directors as the record date for determining shareholders
entitled to notice of and to vote at the Meeting and any adjournment or
adjournments thereof. On the Record Date, there were outstanding 8,466,446
shares of the Company's Common Stock, $.10 par value ("Common Stock"), all of
one class and all of which are entitled to be voted at the Meeting. Holders of
such issued and outstanding shares of Common Stock are entitled to one vote for
each share held by them.
A majority of the outstanding shares will constitute a quorum at the meeting.
Abstentions and broker non-votes are counted for purposes of determining the
presence or absence of a quorum for the transaction of business. In matters
other than the election of directors, abstentions are counted in the tabulation
of the votes cast on proposals presented to stockholders, whereas broker
non-votes are not counted for purposes of determining whether a proposal has
been approved. With regard to the election of directors, the nominees who
receive the greatest number of votes at the 1998 Annual Meeting will be elected
to the Board. Stockholders are not entitled to cumulate votes. Votes against a
candidate, votes withheld and abstentions have no legal effect in the election
of directors.
<PAGE> 4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock by (i) each person (or group
of affiliated persons) known by the Company to beneficially own more than five
percent of the outstanding shares of Common Stock, (ii) each director and
nominee for director of the Company, (iii) the Chief Executive Officer and each
of the other four most highly compensated executive officers of the Company, and
(iv) all directors and executive officers of the Company as a group. Information
for the officers and directors is as of September 30, 1998, and information for
the institution shown in the table is as of the most recent date such
information has been provided or is available to the Company. The address for
each individual is 9275 Sky Park Court, San Diego, CA 92123.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK BENEFICIALLY
OWNED (1)(2)(3)
NAME AND ADDRESS OF ------------------------
BENEFICIAL OWNER NUMBER PERCENT
- --------------------------------------------- ------- -------
<S> <C> <C>
FMR Corp. (4) ............................... 884,843 10.5%
82 Devonshire Street
Boston, Massachusetts 02109
Kenneth F. Potashner ........................ 224,742 2.6%
Thomas L. Horgan ............................ 28,713 *
Gregg L. McKee .............................. 11,762 *
Walter P. Robertson ......................... 29,212 *
Donald M. Roberts ........................... 16,161 *
Alan C. Kolb ................................ 96,496 1.1%
Carlton J. Eibl ............................. -0- --
Mark Rossi .................................. -0- --
Karl M. Samuelian ........................... 23,174 *
All directors and executive officers as
a group (12 persons) ........................ 480,338 5.6%
</TABLE>
- ----------
* Less than one percent.
(1) Information with respect to beneficial ownership is based on information
furnished to the Company by each shareholder included in the table or
included in filings with the Securities and Exchange Commission. The Company
understands that each individual person has sole voting and investment power
for shares beneficially owned by him, subject to community property laws
where applicable.
(2) Shares of Common Stock subject to options which are currently exercisable or
exercisable within 60 days of September 30, 1998, are deemed outstanding for
computing the percentage of the person holding such options but are not
deemed outstanding for computing the percentage of any other person.
Percentage of ownership is based on 8,456,096 shares of Common Stock
outstanding on September 30, 1998.
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(3) Shares of Common Stock beneficially owned include options exercisable within
60 days of September 30, 1998 to purchase 47,303 shares granted to Mr.
Potashner, 26,700 shares granted to Mr. Horgan, 3,000 shares granted to Mr.
McKee, 16,012 shares granted to Mr. Robertson, 8,400 shares granted to Mr.
Roberts and 21,334 shares granted to Mr. Samuelian, and options to purchase
159,149 shares granted to all directors and officers as a group.
(4) As reported in its October 31, 1998, Schedule 13G., FMR Corp. has sole
voting power over 62,200 of such shares, shared voting power over none of
such shares, and sole dispositive power over all 884,843 such shares.
ELECTION OF DIRECTORS
The Board of Directors of the Company is divided into three classes, with the
terms of office of each class ending in successive years. The terms of the
directors currently serving in Class III expire with this Annual Meeting of
Shareholders. The directors in Class I and Class II will continue in office
until their terms expire at the 1999 and 2000 Annual Meeting of Shareholders,
respectively. Each director elected in Class III at the Meeting will hold office
for a term expiring at the 2001 Annual Meeting of Shareholders and until his
successor is duly elected and qualified.
Holders of Common Stock are entitled to cast one vote for each share held for
each of two nominees for director in Class III. The two nominees receiving the
greatest number of votes will be elected directors of the Company in Class III.
It is intended that the shares represented by the enclosed proxy will be voted,
unless otherwise instructed, for the election of the two nominees named below.
While the Company has no reason to believe that either of the nominees will be
unable to stand for election as a director, it is intended that if such an event
should occur, such shares will be voted for the other nominee and for such
substitute nominee as may be selected by the Board of Directors.
Set forth below is certain information regarding the nominees for director
and the other directors of the Company who will continue in office for terms
extending beyond the Meeting.
NOMINEES FOR ELECTION AS DIRECTORS
<TABLE>
<CAPTION>
PERIOD SERVED AS A DIRECTOR,
POSITIONS AND OTHER RELATIONSHIPS
WITH THE COMPANY, AND BUSINESS
NAME AND AGE EXPERIENCE
------------ ----------
<S> <C>
Karl M. Samuelian, 66 Mr. Samuelian has been a director of the
(Class III) Company since 1967 and served as Secretary
from that time until June, 1996. From 1978 to
June, 1980, he also held the office of
Chairman of the Board of the Company. For
more than five years, Mr. Samuelian has been
a shareholder in the law firm of Parker,
Milliken, Clark, O'Hara & Samuelian, A
Professional Corporation, and a partner in
the predecessor law partnership.
Carlton J. Eibl, 38 Mr. Eibl was appointed a director in July,
(Class III) 1998. Since 1997, Mr. Eibl has served as
chief executive officer of Mycogen
Corporation, a diversified agribusiness and
biotechnology company. Mr. Eibl joined
Mycogen in 1993 as executive vice president
and general counsel. In 1995, he took on
additional responsibility for finance, and
later that year was appointed president and
chief operating officer.
</TABLE>
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<PAGE> 6
DIRECTORS CONTINUING IN OFFICE
<TABLE>
<CAPTION>
PERIOD SERVED AS A DIRECTOR,
POSITIONS AND OTHER RELATIONSHIPS
WITH THE COMPANY, AND BUSINESS
NAME AND AGE EXPERIENCE
------------ ----------
<S> <C>
Kenneth F. Potashner, 41 Mr. Potashner has served as a director since
(Class I) April, 1996 and as Chairman since April,
1997. From the time he joined the Company in
April, 1996 until November, 1998, he served
Maxwell as President, Chief Executive Officer
and Chief Operating Officer. In November,
1998, Mr. Potashner was named chief executive
officer of S3 Incorporated, a manufacturer of
embedded graphics accelerator chips. From
1991 through 1994, he was Vice President,
Product Engineering, for Quantum Corporation.
From 1994 to April of 1996, he served as
Executive Vice President, Operations, of
Conner Peripherals.
Thomas L. Horgan, 39 Mr. Horgan joined the Company in June, 1996
(Class I) as Vice President, Business Development and
was elected a director in January of 1997. In
November, 1998 Mr. Horgan was appointed
interim Chief Executive Officer. From 1995
until joining Maxwell, he was Vice President,
Customer Service, for Conner Peripherals and
from 1993 to 1995 served as Director,
Customer Service for Quantum Corporation.
From 1991 to 1993, Mr. Horgan served as
European Information Security Center Manager
for Digital Equipment Corporation.
Mark Rossi, 42 Mr. Rossi was appointed a director of the
(Class II) Company in November, 1997 and elected to a
full term at the Company's Annual
Shareholder's Meeting in January, 1998. Mr.
Rossi is a Senior Managing Director of
Cornerstone Equity Investors, L.L.C., a New
York-based private equity firm with assets
under management in excess of $1 billion.
Prior to the formation of Cornerstone Equity
Investors in 1996, Mr. Rossi was President of
Prudential Equity Investors, Inc. Mr. Rossi's
industry focus is on technology-related and
consumer products companies. He is a member
of the Board of Directors of International
Manufacturing Services, Inc., StorMedia,
Inc., and MCMS Inc. as well as several
privately-held companies.
</TABLE>
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of twelve regular and
special meetings during fiscal 1998. All directors continuing in office attended
more than 75% of the aggregate of (a) the total number of meetings of the Board
of Directors and (b) the total number of meetings of all committees of the Board
on which he served.
The Board of Directors has an Audit Committee, the function of which is to
assist the full Board in fulfilling its responsibilities with respect to
corporate accounting, auditing and reporting practices. In performing such
function, the Audit Committee maintains a direct line of communication with the
Company's independent auditors. This committee held three meetings during fiscal
1998, and its current members who are continuing, or nominated to continue, in
office are Messrs. Rossi, Eibl and Samuelian.
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<PAGE> 7
The Board also has a Compensation Committee which authorizes and reviews
officers' compensation. This committee held two meetings during fiscal 1998, and
its current members who are continuing, or nominated to continue, in office are
Messrs. Samuelian and Rossi.
The Board also has an Executive Committee empowered to act on behalf of the
Board in appropriate circumstances. The current members of the Executive
Committee who are continuing in office are Messrs. Potashner, Eibl and Rossi.
The Board has no separately designated Nominating Committee.
COMPENSATION OF DIRECTORS
Each director of the Company (other than Mr. Potashner and Mr. Horgan who
receive no compensation other than that received as officers of the Company)
receives compensation of $6,250 per quarter and $1,000 per Board and Committee
meeting attended ($500 per Board or Committee telephonic meeting in which such
director participates).
The Company maintains the Maxwell Technologies, Inc. Director Stock Option
Plan (the "Director Option Plan") which authorizes the granting of ten-year
options to purchase an aggregate of 264,600 shares of the Company's Common Stock
to non-employee directors of the Company during the ten-year term of the
Director Option Plan which expires in 1999. Under the Director Option Plan prior
to the amendment submitted for approval at the Meeting, each eligible director
automatically received options to purchase 6,000 shares of Company Common Stock
on the first business day following such director's initial Annual Shareholders'
Meeting of the Company, and options to purchase 2,000 shares following
subsequent Annual Shareholders' Meetings. Under the amendment to such plan
approved by the Board, subject to shareholder approval, these grants would be
increased to 10,000 shares after the initial Annual Shareholder's Meeting and
3,000 shares annually thereafter. (See "PROPOSAL TO AMEND THE COMPANY'S DIRECTOR
STOCK OPTION PLAN" below.) The option price per share is the fair market value
based on the public trading price of such shares on the date of grant. Options
granted to directors vest in full on the first anniversary of the date of grant.
The Company maintains the Maxwell Technologies, Inc. 1994 Director Stock
Purchase Plan (the "Director Purchase Plan"), under which directors, other than
those who are full-time employees of the Company, have the opportunity to
purchase directly from the Company shares of Common Stock at 100% of the public
trading price of the shares. An aggregate of 100,000 shares have been authorized
for purchase by directors under the plan. The Director Purchase Plan authorizes
purchases by eligible directors from and after January 1, 1995, the effective
date of the plan, until the earlier of ten years thereafter or the issuance of
all shares authorized for purchase. 47,826 shares remain available for purchase
under the Director Purchase Plan.
PROPOSAL TO AMEND TO THE COMPANY'S
1995 STOCK OPTION PLAN
The Board of Directors has adopted, subject to shareholder approval, an
amendment to the Maxwell Technologies, Inc. 1995 Stock Option Plan (the "1995
Plan") which provides for an increase of 700,000 shares in the number of shares
of the Company's Common Stock authorized for grant of options to purchase such
shares to key employees of the Company and its subsidiaries, including officers
and directors who are also employees.
On November 18, 1998, the date on which the Board of Directors adopted the
proposed amendment, only 21,390 shares remained available for grant under the
1995 Plan. On that date the Board amended the Plan, subject to shareholder
approval, to add 700,000 shares authorized for the grant of options. After this
amendment, the maximum number of shares authorized under the 1995 Plan for grant
of options is 1,990,000 shares. A total of 1,051,948 shares are currently
subject to outstanding options.
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<PAGE> 8
The Board of Directors of the Company believes that the Company's ability to
grant employee stock options plays a critical role in the ability of the Company
to attract and retain key employees by affording them an opportunity to acquire
a proprietary interest in the Company. The Company has undergone significant
growth in its business operations in the last two years, with a resultant
expansion of the employee base from under 500 to nearly 1,000 employees. A
critical part of this growth has been the Company's ability to recruit key
managers, technical and sales and marketing staff and others needed to sustain
the growth environment in a successful fashion. The Board believes that the
Company's ability to offer equity incentives is crucial to its ability to
attract and retain such key individuals.
TERMS AND CONDITIONS OF THE PLAN
The 1995 Plan authorizes the granting to key employees during the period
commencing on October 24, 1995, the date of adoption of the 1995 Plan by the
Board of Directors of the Company, and concluding on the tenth anniversary
thereof, of stock options to purchase shares of the Company's Common Stock.
Prior to the proposed amendment, the maximum number of shares available for
options granted under the 1995 Plan was 1,290,000 shares. The 1995 Plan provides
the flexibility for the grant of options intended to qualify as "incentive stock
options" under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") and options which do not so qualify, referred to as "non-qualified stock
options."
The 1995 Plan is administered by the Board of Directors of the Company or, at
the discretion of the Board, by a Stock Option Committee appointed by the Board
(the "Committee"). The Board of Directors of the Company has delegated the
authority to administer the 1995 Plan to such a Committee. Subject to the
provisions of the 1995 Plan, the Committee has the authority to determine the
employees to whom and the times at which options are granted, the price and
terms of and the number of shares covered by each option, and whether it is
intended to be an incentive stock option or a non-qualified stock option.
The number of shares subject to incentive stock options which may become
exercisable by any one individual for any calendar year is limited to a dollar
value of $100,000 (measured by the fair market value of the shares on the date
of grant). Any options becoming exercisable in excess of such limit in any
calendar year will be non-qualified stock options.
The purchase price of shares with respect to which an option is granted under
the 1995 Plan and the terms covering payment of such purchase price are
determined by the Committee in its sole discretion, but such price may not be
less than 100% of the fair market value of the shares on the date the option is
granted, as such fair market value is determined in good faith. In the event,
however, that an incentive stock option is granted to an employee who, at the
time the option is granted, owns stock representing more than ten percent of the
total combined voting power of all classes of stock of the Company or any
subsidiary, the purchase price of shares with respect to which such option is
granted must be at least 110% of the fair market value of the shares on the date
of grant.
Options granted under the 1995 Plan are exercisable in such increments and at
such times as the Committee shall specify, provided that in the event of a
"change in control" of the Company, as defined in the Plan, options will become
fully exercisable. In addition, no incentive stock option may be exercised after
the expiration of ten years from the date of grant, or five years from the date
of grant with respect to options granted to an employee who owns more than 10%
of the outstanding shares of the Company's stock. No non-qualified stock option
may be exercised more than eleven years after the date of grant. Shares covered
by the unexercised portion of any terminated or expired option may again be the
subject of further options under the 1995 Plan.
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<PAGE> 9
Upon any exercise of an option granted under the 1995 Plan, the purchase
price of the shares purchased upon such exercise shall be paid in full (i) in
cash, (ii) by delivery to the Company of shares of its Common Stock having a
fair market value equal to the purchase price or (iii) by a combination of cash
and stock. The fair market value of shares of the Company's Common Stock
delivered in full or partial payment of the exercise price of an option will be
determined by the Committee as of the date of exercise in the same manner by
which the fair market value of shares of the Company's Common Stock is
determined on the date of grant of an option.
The Company will receive no consideration upon the grant of any option under
the 1995 Plan. Cash proceeds received by the Company from the sale of Common
Stock pursuant to the exercise of options granted under the 1995 Plan constitute
general funds of the Company which may be used for general corporate purposes.
Under the 1995 Plan, if an optionee's employment with the Company is
terminated for any reason, the number of shares purchasable under any option
granted thereunder held by such optionee is limited to the number of shares
which are purchasable by him at the date of such termination. If termination of
employment occurs for any reason other than such optionee's death, the option
will expire unless exercised by him within sixty days after the date of such
termination. If termination of employment occurs by reason of death, the option
will expire unless exercised by the optionee's successor within one year after
the date of death.
Options granted under the 1995 Plan are exercisable only by the optionee
during such optionee's and are not transferable except by will or the laws of
descent and distribution.
In the event of any change in the Common Stock by reason of recapitalization,
reclassification, stock split, combination of shares, stock dividend, or like
capital adjustment, the 1995 Plan provides that the Board of Directors shall
make appropriate adjustments in the aggregate number, class and kind of shares
available for option grants under the 1995 Plan or subject to outstanding
options thereunder and also make appropriate adjustments in the per share
exercise price of outstanding options.
In the event of the merger, consolidation or other reorganization of the
Company, or in the event of any dissolution or liquidation of the Company, the
1995 Plan provides that the Board of Directors shall elect either to (i)
appropriately adjust the number, class, kind and exercise price of shares
subject to all outstanding options thereunder and shares which may become
subject to options granted thereafter, or (ii) terminate the 1995 Plan and any
options theretofore granted thereunder, subject to the right of optionees under
the 1995 Plan to exercise, in whole or in part (including the portions of
options which may not otherwise have been exercisable due to any insufficient
passage of time), their options during a period of not less than thirty days
following notification by the Company of the event causing such termination.
The 1995 Plan may be amended, suspended or terminated by the Board of
Directors of the Company at any time, except that no amendment, suspension or
termination may affect, without his consent, any right or obligation of an
optionee under an option theretofore granted to him, and except that no
amendment made without shareholder approval shall (i) increase the maximum
number of shares for which options may be granted (except pursuant to
adjustments of the types described above), (ii) change the provisions relating
to the expiration dates of options, (iii) change the provisions relating to the
establishment of the option price (except pursuant to adjustments of the types
described above), or (iv) change the expiration date of the 1995 Plan. No
options may be granted under the 1995 Plan after its termination on October 24,
2005.
FEDERAL INCOME TAX CONSEQUENCES
Incentive Stock Options. No federal income tax consequences result from the
grant of an incentive stock option, and generally the exercise of an incentive
stock option will not result in the recognition of income by an optionee. If an
optionee satisfies certain holding period requirements for shares acquired
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<PAGE> 10
upon the exercise of an incentive stock option, the full amount of his gain upon
the sale of such shares (measured by the difference between the amount of his
proceeds of sale less the exercise price) will normally be treated as long-term
capital gain. The Company will not be entitled to any deduction under such
circumstances.
Non-Qualified Options. No federal income tax consequences result from the
grant of a non-qualified stock option. Generally, an optionee will recognize
ordinary income upon exercise of a non-qualified stock option in an amount equal
to the difference between the fair market value of the shares acquired on the
date the option is exercised and the aggregate exercise price for such shares.
The Company will be entitled to an income tax deduction equal to the amount of
ordinary income recognized by an optionee as a result of the exercise of a
non-qualified stock option.
The preceding discussion under the heading "Federal Income Tax Consequences"
is based on federal tax laws and regulations as in effect on the date of this
Proxy Statement and does not purport to be a complete description of the federal
income tax aspects of the 1995 Plan.
VOTE REQUIRED FOR APPROVAL
Approval of the proposed amendment to the 1995 Plan by the shareholders of
the Company will require the affirmative vote of a majority of the shares of
Common Stock present and represented at the Meeting.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS A VOTE "FOR"
APPROVAL OF THE PROPOSED AMENDMENT TO THE COMPANY'S 1995 STOCK OPTION PLAN.
PROPOSAL TO AMEND THE COMPANY'S
DIRECTOR STOCK OPTION PLAN
The Board of Directors has adopted, subject to shareholder approval, an
amendment to the Maxwell Technologies, Inc. Director Stock Option Plan (the
"Director Option Plan") which increases the number of shares under options
granted to each director following the Annual Shareholder's Meeting at which
such individual is first elected to the Board from 6,000 to 10,000 shares, and
increases the number of shares under options granted to continuing directors on
the day following each Annual Shareholder's Meeting from 2,000 to 3,000 shares.
The amendment also provides for a one-time grant of options covering 4,000
shares on the day following the Meeting, to continuing directors who received
options for 6,000 shares when they first joined the Board. Only directors
Samuelian and Rossi will receive this one-time grant. This amendment does not
increase the overall maximum number of shares subject to options under the Plan,
which remains at a total of 264,600 shares.
The Board of Directors believes that the Director Option Plan provides an
important incentive to attract qualified individuals to serve as members of the
Board. In particular, the Company has, during the last two years, undergone a
significant change in management and a reorganization of its operating
businesses to accelerate the commercialization of its technologies. Likewise,
the Board has undergone significant change in its membership to align the skills
and experience of the directors with the orientation of the Company towards
large commercial markets for its products and services. Increasing the option
grants for directors will assist the Board in attracting and retaining members
with the background and experience necessary to assist the Company in achieving
its strategic goals.
TERMS AND CONDITIONS OF THE PLAN
The Director Option Plan authorizes the granting during the period
commencing on August 17, 1989, the date of its adoption by the Board of
Directors of the Company, and concluding on the tenth anniversary thereof, of
stock options to purchase an aggregate of 264,600 shares of the Company's Common
Stock. Persons who are incumbent directors of the Company who are not at the
time employees of the Company or any subsidiary of the Company are the only
persons eligible to participate in the
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<PAGE> 11
Director Option Plan. As of the date of this Proxy Statement options to purchase
a total of 75,696 shares are outstanding under the Director Option Plan, and
109,674 are available for future grant.
The Director Option Plan is administered by the Board of Directors of the
Company which has the authority, subject to the terms of the Director Option
Plan, to prescribe, amend and rescind rules and regulations pertaining to the
Plan and the administration thereof. The Director Option Plan provides that each
non-employee director will automatically receive annual grants of options to
purchase 2,000 shares (3,000 shares under the proposed amendment) of the
Company's Common Stock on the first business day following the scheduled
organizational meeting of the Board of Directors of the Company (which is the
first meeting of the Board following the Company's Annual Meeting of
Shareholders), provided that any eligible director on the date of any such
annual grant who was not a member of the Board of Directors on the date of the
preceding grant of options under the Director Option Plan and who was not an
employee of the Company at any time after the date of such preceding grant will
receive an initial grant of options to purchase 6,000 shares (10,000 shares
under the proposed amendment) of the Company's Common Stock.
The purchase price of shares covered by an option granted under the
Director Option Plan is the fair market value (as defined in the Plan) of the
Company's Common Stock on the date of grant of the option. Generally, fair
market value is defined as the closing selling price for such stock in the
public trading market on the date of grant.
Each option granted under the Director Option Plan becomes exercisable in
full on the first anniversary of the date on which it was granted ("Vested
Options"), provided that no such option may be exercised after the expiration of
ten years from the date of grant. Shares covered by the unexercised portion of
any terminated or expired option may again be the subject of further options
under the Director Option Plan.
Upon any exercise of an option granted under the Director Option Plan, the
purchase price of the shares purchased upon such exercise shall be paid in full
(i) in cash, (ii) by delivery to the Company of shares of its Common Stock
having a fair market value equal of the purchase price or (iii) by a combination
of cash and stock. The fair market value of shares of the Company's Common Stock
delivered in full or partial payment of the exercise price of an option will be
determined by the Board of Directors as of the date of exercise in the same
manner by which the fair market value of shares of the Company's Common Stock is
determined on the date of grant of an option.
The Company receives no consideration upon the grant of any option under
the Director Option Plan. Cash proceeds received by the Company from the sale of
Common Stock pursuant to the exercise of options granted under the Director
Option Plan constitute general funds of the Company which may be used for
general corporate purposes.
Under the Director Option Plan, if an optionee's service as a director of
the Company is terminated for any reason, the number of shares that may be
purchased is limited to the shares subject to Vested Options. If termination of
service as a director occurs by reason of death, the option will expire unless
exercised by the optionee's successor within one year after the date of death.
Options granted under the Director Option Plan are exercisable only by the
optionee during such optionee's lifetime and are not transferable except by will
or the laws of descent and distribution.
In the event of any change in the Common Stock by reason of
recapitalization, reclassification, stock split, combination of shares, stock
dividend, or like capital adjustment, the Director Option Plan provides that the
Board of Directors shall make appropriate adjustments in the aggregate number,
class and kind of shares available for option grants under the Director Option
Plan or subject to outstanding options thereunder and also make appropriate
adjustments in the per share exercise price of outstanding options.
9
<PAGE> 12
In the event of the merger, consolidation or other reorganization of the
Company, or in the event of any dissolution or liquidation of the Company, the
Director Option Plan provides that the Board of Directors shall elect either to
(i) appropriately adjust the number, class, kind and exercise price of shares
subject to all outstanding options thereunder and shares which may become
subject to options granted thereafter, or (ii) terminate the Director Option
Plan and any options theretofore granted thereunder, subject to the right of
optionees under the Director Option Plan to exercise, in whole or in part
(including the portion of options which may not otherwise have been exercisable
due to any insufficient passage of time), their options during a period of not
less than thirty days following notification by the Company of the event causing
such termination.
The Director Option Plan may be amended, suspended or terminated by the
Board of Directors of the Company at any time, except that no amendment of the
Plan may, without shareholder approval, change the number of shares subject to
the Plan (except pursuant to adjustments of the types described above), change
the designation of the class of directors eligible to receive options or
materially increase the benefits accruing to participants under the Plan. The
Board of Directors of the Company also has the right to modify, extend or renew
outstanding options granted under the Director Option Plan or to authorize the
grant of new options in substitution therefor, provided that no such action may
affect, without his consent, any right or obligation of an optionee under an
option previously granted to him and except that no such power shall be
exercised in a manner which would adversely affect the qualification of the
Director Option Plan or any other stock related plan of the Company under Rule
16b-3 under the Securities Exchange Act of 1934. No options may be granted under
the Director Option Plan after its termination on August 16, 1999.
FEDERAL TAX CONSEQUENCES
Options granted under the Director Option Plan will not constitute
"incentive stock options" as defined in the Internal Revenue Code of 1986, as
amended, but rather will constitute "non-qualified" options. No federal income
tax consequences result from the grant of a non-qualified stock option.
Generally, an optionee will recognize ordinary income upon exercise of a
non-qualified stock option in an amount equal to the difference between the fair
market value of the shares acquired on the date the option is exercised and the
aggregate exercise price for such shares. The Company will be entitled to an
income tax deduction equal to the amount of ordinary income recognized by an
optionee as a result of the exercise of a non-qualified stock option. The
preceding discussion is based on federal tax laws and regulations as in effect
on the date of this Proxy Statement and does not purport to be a complete
description of the federal income tax aspects of the Director Option Plan.
VOTE REQUIRED FOR APPROVAL
Approval of the proposed amendment to the Director Option Plan by the
shareholders of the Company will require the affirmative vote of a majority of
the shares of Common Stock present and represented at the Meeting.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS A VOTE "FOR"
APPROVAL OF THE PROPOSED AMENDMENT TO THE COMPANY'S DIRECTOR STOCK OPTION PLAN.
10
<PAGE> 13
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation earned by the Company's Chief Executive Officer and its four other
most highly compensated executive officers (the "Named Executive Officers")
whose total salary and bonus for fiscal 1998 exceeded $100,000, for services
rendered to the Company and its subsidiaries in all capacities during that
fiscal year. No executive who would otherwise have been includable in such table
on the basis of salary and bonus earned for fiscal 1998 has resigned or
otherwise terminated employment during fiscal 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------
STOCK OPTION
ANNUAL COMPENSATION (1) RESTRICTED GRANTS (4)
------------------------------------ STOCK (NO. OF ALL OTHER
NAME AND POSITION YEAR SALARY BONUS OTHER(2) AWARDS(3) SHARES) COMPENSATION(5)
-------- -------- -------- -------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth F. Potashner (6),(7) 1998 $469,877 $495,009 $ 4,038 $ -0- 200,000 $170,000
Chairman, 1997 400,004 400,000 2,850 190,000 50,000 361,031
Chief Executive 1996 93,847 100,000 -0- 645,105 177,960 44,000
Officer, President,
Chief Operating
Officer, Director
Thomas L. Horgan (6),(7) 1998 192,123 86,051 3,000 -0- 2,000 50,000
Vice President, 1997 180,083 81,630 -0- -0- 9,000 19,254
Director 1996 19,615 -0- -0- -0- 60,000 -0-
Gregg L. McKee (6) 1998 197,242 108,724 8,286 -0- 2,000 35,439
Vice President 1997 167,990 82,617 -0- -0- 10,000 49,863
1996 -0- -0- -0- -0- 60,000 -0-
Walter P. Robertson (6) 1998 175,349 83,400 7,153 -0- 2,000 -0-
Vice President 1997 165,713 69,228 -0- -0- 69,000 -0-
Donald M. Roberts 1998 165,978 96,513 4,990 -0- 2,000 -0-
General Counsel & 1997 158,111 78,606 4,671 -0- 8,000 -0-
Secretary 1996 150,010 -0- 346 -0- 10,000 -0-
</TABLE>
- ----------
(1) Amounts shown include cash compensation earned and received by executive
officers as well as amounts earned but deferred at the election of those
officers under the Company's Savings Plan and Deferred Compensation Plan.
(2) Amounts in this column consist of matching contributions made by the Company
under its Savings Plan. They do not include the dollar value of certain
perquisites and other personal benefits, securities or property the
recipient received as personal benefits. Although such amounts cannot be
determined precisely, the Company has concluded that the aggregate amount
thereof does not exceed as to any of the named individuals the lesser of
$50,000 and 10% of the total salary and bonus paid to such individual for
fiscal 1998.
(3) Mr. Potashner was awarded 10,000 shares of restricted stock in fiscal 1997
and 177,960 shares of restricted stock in fiscal 1996, which restricted
shares vest 25% one year after grant and each month thereafter an additional
1/48 of the total number of shares granted become vested. Mr. Potashner has
full voting power and dividend rights with respect to all of the restricted
stock. At July 31, 1998, Mr. Potashner held a total of 123,437 shares of
such restricted stock having a value based on the closing price of the
Company's Common Stock on that date of $3,101,000.
11
<PAGE> 14
(4) Options shown in this column are options to purchase shares of Common Stock
of Maxwell Technologies, Inc. granted under the Company's 1995 Stock Option
Plan. Each individual in the table also received options in fiscal 1997 to
purchase common stock in five of the Company's operating subsidiaries as
follows: Mr. Potashner - 100,000 shares in each of Maxwell Energy Products,
Inc. ("Energy Products"), I-Bus, Inc. ("I-Bus"), Maxwell Technologies
Systems Division, Inc. ("Systems") and Maxwell Information Systems, Inc.
("Information Systems"); Mr. Horgan - 33,750 shares in Pure Pulse
Technologies, Inc. ("PurePulse") and 37,500 shares in each of Energy
Products, I-Bus, Systems and Information Systems; Mr. McKee - 125,000 shares
in Energy Products, 22,500 shares in PurePulse and 25,000 shares in each of
I-Bus, Systems and Information Systems; Mr. Robertson - 100,000 shares in
Systems, 22,500 shares in PurePulse and 25,000 shares in each of Energy
Products, I-Bus and Information Systems; and Mr. Roberts - 33,750 shares in
PurePulse and 37,500 shares in each of Energy Products, I-Bus, Systems and
Information Systems. In addition, Mr. Potashner received options in fiscal
1996 to purchase 150,000 shares of PurePulse common stock.
(5) For Mr. Potashner, represents amounts paid or accrued in fiscal 1996 for
consulting activities; in fiscal 1997 for relocation expenses including
certain carrying and sale-related costs for his former residence, and
related tax offset payments; and in fiscal 1998 for certain non-qualified
retirement benefits. For Mr. Horgan, the fiscal 1998 amount is a hiring
bonus in the form of a loan from the Company which was forgivable two years
after Mr. Horgan's fiscal 1996 hire date. For Mr. Horgan for fiscal 1996,
and Mr. McKee for fiscal years 1997 and 1996, the amounts are reimbursements
of relocation expenses (including reimbursement of brokerage commissions on
the sale of a residence).
(6) Mr. Potashner and Mr. Horgan were hired as executive officers in fiscal
1996. Mr. McKee and Mr. Robertson were hired as executive officers in fiscal
1997.
(7) In November, 1998, Mr. Potashner stepped down from his positions of Chief
Executive Officer, President and Chief Operating Officer and Mr. Horgan was
appointed interim Chief Executive Officer. Mr. Potashner continues as
Chairman, with an on-going executive role with the Company.
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows information on grants of options to purchase stock
of the Company pursuant to the 1995 Stock Option Plan to the Named Executive
Officers. Pursuant to Securities and Exchange Commission rules, the table also
shows the value of the options at the end of the five and ten year option terms
if the stock price were to appreciate annually by 5% and 10%, respectively.
These assumed values may not reflect actual value at the times indicated.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
PERCENTAGE OF STOCK PRICE
TOTAL OPTIONS APPRECIATION FOR
GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------------
NAME GRANTED (1) FY 1998 (2) (PER SHARE) DATE 5% 10%
- --------------------- ----------- -------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Kenneth F. Potashner 100,000 16.91% $ 25.88 12/10/2007 $1,627,260 $4,123,810
100,000 16.91% 24.63 07/28/2008 1,548,650 3,924,590
Thomas L. Horgan 2,000 0.34% 25.88 12/10/2007 32,550 82,480
Gregg L. McKee 2,000 0.34% 25.88 12/10/2007 32,550 82,480
Walter P. Robertson 2,000 0.34% 25.88 12/10/2007 32,550 82,480
Donald M. Roberts 2,000 0.34% 25.88 12/10/2007 32,550 82,480
</TABLE>
12
<PAGE> 15
- ----------
(1) These options are either incentive stock options or non-qualified stock
options and were granted at a purchase price equal to the fair market value
of the underlying Company Common Stock based on the closing trading price of
such stock on the date of grant. The options have a term of ten years. The
increments in which the options are exercisable are determined by the
committees which administer the plans.
(2) Total options include options covering 14,000 shares of Company Common Stock
granted in fiscal 1998 to directors of the Company under the Director Stock
Option Plan.
FISCAL YEAR END OPTION VALUES
Shown below is information on each Named Executive Officer with respect to
(i) the value of stock options exercised by such person in fiscal 1998, measured
in terms of the closing price of the Company's Common Stock on the date of
exercise, and (ii) the value of unexercised options to purchase the Company's
Common Stock held by such person granted in fiscal 1998 and prior years under
the Company's 1995 or 1985 Stock Option Plans, measured in terms of the closing
price of the Company's Common Stock on July 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
ACQUIRED JULY 31, 1998 (1) JULY 31, 1998 (1)
ON EXERCISE VALUE ------------------------------- -------------------------------
NAME (NO. OF SHARES) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth F. Potashner 42,880 $ 866,338 39,429 311,651 $ 650,902 $1,859,633
Thomas L. Horgan 12,000 267,000 26,700 32,300 498,188 518,438
Gregg L. McKee 13,000 256,750 21,000 33,000 338,625 468,375
Walter P. Robertson 18,000 467,910 4,626 48,374 127,695 773,402
Donald M. Roberts 10,000 235,000 8,400 11,600 134,250 112,000
</TABLE>
- ----------
(1) Does not include options held by the Named Executive Officers to purchase
shares of common stock in five of the Company's operating subsidiaries under
the stock option plans of such subsidiaries. All options held by these
individuals under such subsidiary stock option plans were granted in fiscal
1997, except for options to purchase 150,000 shares of common stock of the
Company's PurePulse Technologies, Inc. subsidiary granted to Mr. Potashner
in fiscal 1996, and are described in footnote (4) to the Summary
Compensation Table. With the exception of Mr. Potashner's PurePulse options,
of which 90,000 shares were exercisable, 25% of such subsidiary options
described in said footnote (4) were exercisable within 60 days of July 31,
1998. No public market exists for the common stock of any of the Company's
subsidiaries. For purposes of the above table, no value has been attributed
to the subsidiary stock options.
SHAREHOLDER RETURN PERFORMANCE PRESENTATION
Set forth below is a line graph comparing the five year cumulative total
return to shareholders on the Company's Common Stock with the five year
cumulative total return on the NASDAQ and a peer group of comparable companies
identified therein.
13
<PAGE> 16
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG MAXWELL TECHNOLOGIES, INC., NASDAQ, AND INDUSTRY PEER GROUP
YEARS ENDING JULY 31, 1993-1998
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
<S> <C>
Cumulative Total Return
-----------------------
7/93 7/94 7/95 7/96 7/97 7/98
MAXWELL TECHNOLOGIES, INC. 100.00 66.63 58.56 105.00 375.58 405.87
PEER GROUP 100.00 107.92 181.78 132.17 183.52 137.55
NASDAQ STOCK MARKET (U.S. & FOREIGN) 100.00 102.70 142.55 154.47 227.88 266.87
</TABLE>
ASSUMES $100 INVESTED 7/31/93 IN MAXWELL TECHNOLOGIES, INC. COMMON
STOCK, NASDAQ, AND INDUSTRY PEER GROUP (DIVIDENDS REINVESTED). INDUSTRY
PEER GROUP INCLUDES: CALIFORNIA MICROWAVE, COHERENT, INC., CUBIC
CORPORATION, ILC TECHNOLOGY, INC., KAMAN CORPORATION CLA, TITAN
CORPORATION AND WATKINS- JOHNSON.
REPORT OF THE COMPENSATION COMMITTEE AND STOCK OPTION COMMITTEE ON
EXECUTIVE COMPENSATION
As described in more detail below, the Company's executive compensation
consists of three principal components--base salary and annual incentive
compensation as determined by the Compensation Committee of the Board of
Directors and stock option awards as determined by the Stock Option Committee of
the Board of Directors. During fiscal 1998, the Compensation Committee also
acted as the Stock Option Committee.
The compensation policies of the Company are designed to set its executive
compensation, including salary and short-term and long-term incentive programs,
at a level consistent with amounts paid to executive officers of companies of
similar size and business orientation and consistent with marketplace
requirements to attract and retain management personnel with the experience and
background to drive the commercialization of the Company's technologies. In this
regard, the compensation policies of the Company are particularly designed to
link executive officer bonus compensation to the Company's performance in the
short-term and to emphasize compensation from equity, primarily employee stock
options, for long-term incentives.
14
<PAGE> 17
The Company's policy is to qualify executive compensation to be deductible
under applicable provisions of the Internal Revenue Code of 1986. However, in
hiring the Company's Chief Executive Officer in 1996, a key component of the
compensation package for Mr. Potashner was the grant of restricted stock which
vests over a period of years. Although this component may not fully qualify for
deductibility under such provisions, the Board concluded that inclusion of this
element of compensation was an important factor in the Company's ability to
secure Mr. Potashner's services and was therefore in the Company's best
interest.
The three principal components of the Company's executive compensation are as
follows:
(1) Base Salary. Base salary is intended to be set at a level consistent with
amounts paid to executive officers of companies of comparable size and
business areas and generally reflective of the performance of the Company
and the individual. Salaries for executive officers are reviewed on an
annual basis. Base salary (and annual incentive bonus compensation) for Mr.
Potashner through fiscal 1998 is set forth in Mr. Potashner's employment
agreement discussed below.
(2) Annual Incentive Compensation. The Company met the revenue and earnings per
share target in fiscal 1998 for target bonus payout to executive officers,
and other than for the CEO, bonuses of about 50% of base compensation were
paid; the determination of the exact percentage was at the discretion of the
CEO. Pursuant to his employment contract described below and based on
meeting the revenue and earnings targets, Mr. Potashner received a bonus of
$495,000, or 100% of his base compensation, for fiscal 1998. For fiscal
1999, the Compensation Committee adopted a bonus plan for executive officers
similar to that in fiscal 1998, with a range of new revenue and earnings per
share performance targets established.
(3) Long Term Incentive Compensation/Stock Options. The Company's long-term
incentive program consists of a stock option program pursuant to which the
Chief Executive Officer and other executive officers (as well as other key
employees) are periodically granted stock options at the then fair market
value of the Company's Common Stock. In addition, the Company adopted a
program in early fiscal 1997 for the one-time award to such individuals of
stock options in the Company's operating subsidiaries. These option programs
are designed to reward and retain executive officers over the long-term and
to link the value of the incentive to increases in the value of the
subsidiaries and in the Company's stock price over time, benefiting
shareholders as a whole.
Dated: December 11, 1998
COMPENSATION AND STOCK OPTION
COMMITTEE
Karl M. Samuelian
Mark Rossi
15
<PAGE> 18
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1998 through June, 1998, the Compensation Committee of the
Board of Directors was comprised of directors Lewis J. Colby, Jr., Thomas B.
Hayward, Mark Rossi and Karl M. Samuelian. From July, 1998 through October,
1998, the Compensation Committee consisted of Messrs. Samuelian, Rossi and
Colby, and the current members of such committee are Messrs. Samuelian and
Rossi.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Employment Agreement. In March, 1996, the Company entered into an Employment
Contract ("Contract") with Kenneth F. Potashner pursuant to which Mr. Potashner
became the President and Chief Executive Officer of the Company effective April
26, 1996. The Contract, as amended, is for a term ending July 31, 2000, and
requires Mr. Potashner to perform the duties associated with the office of chief
executive of the Company plus such other duties or positions as the Board of
Directors may require. In November, 1998, Mr. Potashner stepped down from his
position as Chief Executive Officer and agreed with the Board to continue as
Chairman, as well as, for a period of time, in an active, although less than
full time, executive role with the Company. The Board and Mr. Potashner agreed
to amend the Contract to provide for an annual base salary of $250,000 for the
period in which Mr. Potashner continues in such executive role. Mr. Potashner
currently holds a total of 123,437 shares of restricted stock granted under the
Contract and options under the Company's 1995 Stock Option Plan for a total of
339,958 shares. Both the restricted shares and the options are subject to
four-year vesting schedules. Vesting will continue during the period in which
Mr. Potashner is active with the Company in an executive, consulting or other
role. In addition, Mr. Potashner is entitled to non-qualified retirement
benefits payable in installments following the termination of his employment
equal, in the aggregate, to 10% of the total of his annual salary and target
bonus each year under the Contract. A total of $170,000 has been earned under
this provision through the end of fiscal 1998.
Under the Contract, Mr. Potashner will be immediately fully vested in the
restricted shares and stock options in the event that a "change of control"
occurs and certain other conditions are met. A "change of control" is defined as
the acquisition by a person or group of a majority of the Company's stock by
direct purchase or through a merger, the liquidation or sale of substantially
all of the assets of the Company or a change in a majority of the members of the
Board of Directors other than through membership changes determined by the Board
itself.
OTHER PROGRAMS
In September, 1998, the Board adopted a policy involving the purchase by the
Company of shares of Company common stock from officers and directors. Under the
policy, such individuals may tender shares on selected days during the Company's
open trading windows, and if the Compensation Committee of the Board determines
that purchases of such shares are then in the best interest of the Company, the
Company will buy such shares at a price $.25 below the closing trading price on
that day. No individual may sell shares to the Company under the policy in
excess of 50% of his total share ownership at the time the policy was adopted.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
Ernst & Young LLP, independent auditors ("E&Y"), were the Company's auditors
in fiscal 1998.
The Company has engaged E&Y as its auditors for the current fiscal year;
provided, however, that if E&Y shall decline to act or otherwise become
incapable of acting, or if its engagement is otherwise terminated by the Board
of Directors (none of which events are currently anticipated), the Board of
Directors will appoint other auditors for the fiscal year.
16
<PAGE> 19
Representatives of E&Y will be present at the meeting with an opportunity to
make a statement if they desire to do so and such representatives will be
available to respond to appropriate questions from shareholders in attendance.
SHAREHOLDER PROPOSALS
Shareholders may present proposals for inclusion in the proxy statement and
form of proxy to be used in connection with the 1999 Annual Meeting of
Shareholders of the Company, provided such proposals are received by the Company
no later than August 17, 1999 and are otherwise in compliance with applicable
laws and regulations. Proposals which a shareholder does not propose for
inclusion in the proxy statement and form of proxy but which the shareholder
wishes to raise at the meeting must be received by the Company no later than
November 1, 1999.
OTHER BUSINESS
The Board of Directors does not intend to present any other business at the
meeting and knows of no other matters which will be presented at the meeting.
By Order of the Board of Directors
Donald M. Roberts
Secretary
Dated: December 11, 1998
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING. IF YOU DO NOT EXPECT TO ATTEND
THE MEETING, PLEASE MARK, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE
ENCLOSED ENVELOPE AS SOON AS POSSIBLE.
17
<PAGE> 20
APPENDIX A
MAXWELL TECHNOLOGIES, INC.
FISCAL YEAR 1998 FINANCIAL INFORMATION
<PAGE> 21
<TABLE>
<CAPTION>
MAXWELL TECHNOLOGIES, INC.
INDEX TO FINANCIAL INFORMATION
PAGE
----
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of Operations............ F-2
Selected Consolidated Financial Data............................................................. F-11
Report of Ernst & Young LLP, Independent Auditors................................................ F-12
Consolidated Balance Sheets at July 31, 1997 and 1998............................................ F-13
Consolidated Statement of Operations for the Years Ended July 31, 1996, 1997 and 1998............ F-14
Consolidated Statement of Stockholders' Equity for the Three Years Ended July 31, 1998........... F-15
Consolidated Statement of Cash Flows for the Years Ended July 31, 1996, 1997 and 1998............ F-16
Notes to Consolidated Financial Statements....................................................... F-17
</TABLE>
F-1
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Two years ago Maxwell implemented a business reorganization that became
effective August 1, 1996 (the "Reorganization"). In the Reorganization, the
Company was recast into distinct business and operating units, and new senior
management was put in place. While commercial business opportunities underlay
the Reorganization, the Company continues to perform research and development,
primarily in its core pulsed power and advanced software areas for the United
States Department of Defense ("DOD"). These activities have produced a suite of
innovative products, technologies and research and development capabilities.
Entering fiscal 1998, the new senior management team focused on utilizing these
resources to lay the foundation for a global, commercially-focused enterprise.
To this end, the following major steps were taken during the year.
- Completed a follow-on offering of common stock, raising approximately
$47 million in equity capital.
- Placed a strong focus on the PowerCache(TM) ultracapacitor product line,
including build-up of infrastructure and manufacturing capability, and
direct-line organizational reporting.
- Hired a senior executive with international expertise, Claude Barathon,
as President of European Operations with an initial emphasis on sales
and marketing for Europe.
- Acquired three domestic companies related to the Company's core business
areas of pulsed power products, systems and R&D.
- Acquired a United Kingdom-based company which both complements Maxwell's
line of industrial PC's and provides a strong base of operations
overseas.
- Discontinued the separate operation of the primarily software-related
Information Products and Services business segment; the Company is now
organized in three business segments, and effective with the third
quarter of fiscal 1998, is reporting its results accordingly.
Primarily due to the acquisitions mentioned above, the Company incurred
special charges during the year of $8.9 million, including costs of acquired
in-process research and development meeting certain criteria. Excluding these
special charges, net income for fiscal 1998 was $8.2 million, or more than
double the $4.0 million of 1997. After special charges, the Company incurred a
net loss of $769,000. See "Special Charges" below, and Note 9 of Notes to
Consolidated Financial Statements.
The net loss of $15.2 million in fiscal 1996 included $14.4 million of
charges related to the Reorganization, adoption of new accounting standards, a
valuation allowance for net deferred income tax assets and other charges.
See Note 9 of Notes to Consolidated Financial Statements.
The Company's business segments are as follows:
- Power Conversion Products: Includes design, development and manufacture
of electrical components, systems and subsystems, including products
that capitalize on pulsed power such as ultracapacitors, microbial
purification systems, high voltage capacitors and other electrical
components, power supplies and power conditioning systems and
electromagnetic interference filter capacitors.
- Industrial Computers and Subsystems: Includes design and manufacture of
standard, custom and semi-custom industrial computer modules, platforms
and fully integrated systems primarily for OEMs.
F-2
<PAGE> 23
- Technology Programs and Systems: Includes research and development
programs in pulsed power, pulsed power systems design and construction,
weapons effects simulation and computer-based analytic services,
primarily for the DOD.
- Information Products and Services: Includes design, development and
integration of software products and services including job cost
accounting and management information systems and other software
products including applications for the Internet, as well as wide-area
and local-area network and software integration services.
As mentioned above, the Company reorganized the operations within the
Information Products and Services business segment, including a refocusing of
certain operations along the lines of other of the Company's existing business
segments and the discontinuation of certain businesses. Therefore, effective as
of the beginning of the fiscal 1998 third quarter, the Company no longer
operates or reports in the Information Products and Services segment.
Partial-year results from that segment, covering the first six months of fiscal
1998, are included in the Company's segment reporting.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
operating data for the Company, expressed as a percentage of sales.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------
1996 1997 1998
------ ----- -----
<S> <C> <C> <C>
Sales ...................................................... 100.0% 100.0% 100.0%
Cost of sales .............................................. 81.4 69.1 66.6
----- ----- -----
Gross profit ............................................. 18.6 30.9 33.4
Operating expenses:
Selling, general and administrative expenses ............. 19.3 21.6 21.1
Research and development expenses ........................ 6.3 5.2 6.5
Acquired in-process R&D and other special charges ........ -- -- 7.1
Restructure and asset impairment losses .................. 7.0 -- --
----- ----- -----
Total operating expenses .............................. 32.6 26.8 34.7
----- ----- -----
Operating income (loss) .................................... (14.0) 4.1 (1.3)
Interest expense ........................................... 0.4 0.2 0.2
Other-net .................................................. (0.5) (0.2) (1.1)
----- ----- -----
Income (loss) before income taxes, minority interest
and loss from cumulative effect of change in accounting
principle ................................................ (13.9) 4.1 (0.4)
Income tax expense ......................................... 1.6 -- 0.2
Minority interest in net income of subsidiaries ............ 0.1 0.1 --
Loss from cumulative effect of change in accounting
principle ................................................ 3.2 -- --
----- ----- -----
Net income (loss) ........................................ (18.8)% 4.0% (0.6)%
===== ===== =====
</TABLE>
The following table sets forth, for the periods indicated, the Company's
business segment sales, gross profit and gross profit as a percentage of
business segment sales.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------------------------
1996 1997 1998
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Power Conversion Products:
Sales............................................... $ 16,448 $27,039 $39,312
Gross profit..................................... 3,887 10,142 16,226
Gross profit as a percentage of sales............ 23.6% 37.5% 41.3%
Industrial Computers and Subsystems:
Sales............................................... $ 26,131 $34,259 $40,864
Gross profit..................................... 7,633 11,537 14,210
Gross profit as a percentage of sales............ 29.2% 33.7% 34.8%
Technology Programs and Systems:
Sales............................................... $ 30,198 $31,087 $40,446
Gross profit..................................... 5,659 6,246 9,107
Gross profit as a percentage of sales............ 18.7% 20.1% 22.5%
Information Products and Services:
Sales............................................... $ 8,134 $ 9,026 $ 4,666
Gross profit..................................... (2,161) 3,379 2,306
Gross profit as a percentage of sales............ (26.6)% 37.4% 49.4%
</TABLE>
F-3
<PAGE> 24
Sales
In fiscal 1998, the Company's total sales increased $23.9 million, or 23.6%,
to $125.3 million from $101.4 million in fiscal 1997. In fiscal 1997, sales
increased $20.5 million, or 25.3%, to $101.4 million from $80.9 million in
fiscal 1996. International sales totaled $19.6 million in fiscal 1998, $12.6
million in fiscal 1997 and $7.6 million in fiscal 1996. The increase in
international sales in fiscal 1998 over fiscal 1997 was primarily due to
revenues from the expansion of the Company's industrial computer business into
Europe. The increase in these sales in fiscal 1997 over fiscal 1996 was
primarily attributable to increased international revenues from customer funded
development in the Power Conversion Products business segment.
Power Conversion Products. In fiscal 1998, Power Conversion Products sales
increased $12.3 million, or 45.4%, to $39.3 million from $27.0 million in fiscal
1997. Power Conversion Products exhibited sales growth in nearly all product
areas; in particular, a switch component for a National Laboratory pulsed power
project; the ultracapacitor business area, which included marketing and
technology access rights with two new strategic partners during the fiscal year,
Siemens Matshusita Components and PacifiCorp; electromagnetic interference
("EMI") filters for implantable medical products and aerospace applications; as
well as two newly acquired business areas for the Company involving power
systems and glass-to-metal seals, both of which have application to the
ultracapacitor product line, all contributed to the increase in sales.
In fiscal 1997, Power Conversion Products sales increased $10.6 million, or
64.4%, to $27.0 million from $16.4 million in fiscal 1996. This increase was
primarily attributable to higher revenues from customer funded ultracapacitor
development and sales of prototype ultracapacitor products to potential OEM
customers for evaluation, increased sales of EMI filters for implantable medical
products and increased revenues from customer funded development of pulsed power
purification systems.
Industrial Computers and Subsystems. In fiscal 1998, Industrial Computers
and Subsystems sales increased $6.6 million, or 19.3%, to $40.9 million from
$34.3 million in fiscal 1997. Sales in this business segment are made
principally to OEM customers and are primarily derived from the shipment of
computers and subsystems that are "designed-in" to the OEM's product. In fiscal
1998, the Company expanded its product offering and marketing strategy with the
acquisition of an United Kingdom-based company that offers standard products to
OEMs primarily via catalogs. The Company expects to be selling standard products
in the U.S. in fiscal 1999, and to leverage leads from catalog sales into
additional OEM design-ins going forward. Sales to a long-standing OEM customer
under a major multi-year program were completed during fiscal 1998. Other OEM
projects as well as the expansion into the standard product area more than
offset the major program completion, and resulted in the increase in sales for
the year.
In fiscal 1997, Industrial Computers and Subsystems sales increased $8.1
million, or 31.1%, to $34.3 million from $26.1 million in fiscal 1996. The sales
increase in fiscal 1997 was derived from increased sales to OEM customers
primarily in the computer telephony market. The largest portion of the increase
consisted of sales to a single, long-standing OEM customer under a program that
was concluded in the subsequent fiscal year, as described above.
Technology Programs and Systems. In fiscal 1998, sales in the Technology
Programs and Systems segment increased $9.4 million, or 30.2%, to $40.5 million
from $31.1 million in fiscal 1997. The Company had an increase in revenues in
its core, Government-funded pulsed power research and development activities,
including revenue in this business area from the Physics International
acquisition. In addition, the Company's job-cost accounting software business,
which is primarily focused on Government contractors, was shifted to this
segment during the third quarter of the year when the commercial
software-oriented business segment was reorganized.
In fiscal 1997, sales in the Technology Programs and Systems segment
increased $0.9 million, or 2.9%, to $31.1 million from $30.2 million in fiscal
1996. This increase was primarily attributable to revenues from a contract for
high-voltage power supplies for a Department of Energy accelerator project and
increased work levels on two large multi-year contracts for the DOD. This
increase was partially offset by the absence of revenue from the Company's
chemical analytical services business, which was sold in the fourth quarter of
fiscal 1996, the winding-down of the Company's environmental consulting business
and lower hardware systems sales.
F-4
<PAGE> 25
Revenues for fiscal 1997 and a portion of fiscal 1998 include amounts
related to the closure of three DOD pulsed power simulation facilities operated
by the Company for many years in San Diego. The closure activities were
concluded in the first half of fiscal 1998. The Company continues to perform
services under long-term contracts with the DOD, including both research for
next-generation pulsed power technology for x-ray simulators as well as
conducting experiments using existing simulators at the newly acquired Physics
International facility. These and other contracts with the DOD are subject to
periodic Government funding provisions. The level of future DOD expenditures in
the Company's research and development area and the related impact on funding
for the Company's contracts are not predictable and, therefore, previously
reported results are not necessarily indicative of those to be expected in the
future.
Information Products and Services. As previously discussed, the Information
Products and Services business was operated as a segment only for the first six
months of fiscal 1998. During this six-month period, sales of Information
Products and Services decreased $4.3 million, or 48.3%, to $4.7 million from
$9.0 million for the full twelve months of fiscal 1997. This decrease reflects
both the partial-year of operations and the wind-down and near completion of two
large multi-year software development contracts for criminal justice information
systems (the "CJIS Contracts").
In fiscal 1997, sales of Information Products and Services increased $0.9
million, or 11.0%, to $9.0 million from $8.1 million in fiscal 1996. This
increase primarily reflects greater sales of the Company's job-cost accounting
software, partially offset by a decline in revenues from the CJIS Contracts.
Gross Profit
In fiscal 1998, the Company's gross profit was $41.8 million, or 33.4% of
sales, compared to $31.3 million, or 30.9% of sales, in fiscal 1997. In fiscal
1997, the Company's gross profit was $31.3 million, or 30.9% of sales, compared
to $15.0 million, or 18.6% of sales, in fiscal 1996. The increase in gross
profit as a percentage of sales in each year was primarily due to the increases
in overall sales, resulting in improved overhead absorption, and the mix of
products and services, particularly in the Power Conversion Products business
segment. In addition, the lower gross profit margin in fiscal 1996 reflects the
portion of the $14.4 million charge taken in that year that was recorded in
costs of sales.
Power Conversion Products. In fiscal 1998, Power Conversion Products gross
profit increased $6.1 million to $16.2 million from $10.1 million in fiscal
1997. As a percentage of sales, gross profit increased to 41.3% in fiscal 1998
from 37.5% in fiscal 1997. This increase in gross profit as a percentage of
sales reflected improved overhead absorption on the higher level of sales, and a
higher margin mix of products and services, including switch components for a
National Laboratory pulsed power system and increased funded development and
related marketing and technology access rights associated with strategic
partnering arrangements.
In fiscal 1997, Power Conversion Products gross profit increased $6.3
million to $10.1 million from $3.9 million in fiscal 1996. As a percentage of
sales, gross profit increased to 37.5% in fiscal 1997 from 23.6% in fiscal 1996.
This increase in gross profit as a percentage of sales reflected improved
overhead absorption and a more favorable mix of products and services, including
higher sales of EMI filters for implantable medical devices and greater revenues
from funded research and development. Also, the gross profit margin was lower in
fiscal 1996 due to a portion of the $14.4 million charge taken in that year that
was recorded in cost of sales.
As the Company introduces ultracapacitor products it may offer aggressive
pricing to gain market penetration. This would have an adverse impact on gross
profit margins until the Company reaches full production volumes.
F-5
<PAGE> 26
Industrial Computers and Subsystems. In fiscal 1998, Industrial Computers
and Subsystems gross profit increased $2.7 million, or 23.2%, to $14.2 million
from $11.5 million in fiscal 1997. As a percentage of sales, gross profit
increased to 34.8% in fiscal 1998 from 33.7% in fiscal 1997. This increase in
gross profit as a percentage of sales was primarily due to increased sales
during the first half of fiscal 1998 of certain higher margin customized OEM
products to a long-standing customer under a program that was completed during
the second quarter of the year. As a result of the completion of this program,
as well as the Company's entry into the lower-price standard product arena,
gross profit margins were higher in the first half of fiscal 1998 than in the
second half in this business area.
The Company won several major contracts with large OEMs during fiscal 1998
and believes it will continue to win OEM projects and that its distribution of
catalogs with new lower-price standard products will provide access to a larger
number of OEM opportunities. The competition for such programs, however, is
beginning to include more foreign competitors, including Asian companies. In
addition, consolidations and other market trends can adversely impact projected
volumes under contracts previously awarded, as happened in fiscal 1998 when
Compaq's acquisition of Digital Equipment Corporation curtailed a Company
project. Further, a new form factor, CompactPCI, is beginning to gain favor in
the marketplace. While the Company has developed its own line of CompactPCI
products and believes it is well positioned to gain market share in this product
area, the impact of these factors on the Company's business is not yet
predictable.
In fiscal 1997, Industrial Computers and Subsystems gross profit increased
$3.9 million, or 51.1%, to $11.5 million from $7.6 million in fiscal 1996. As a
percentage of sales, gross profit increased to 33.7% in fiscal 1997 from 29.2%
in fiscal 1996 due to increased sales of certain higher margin customized OEM
products and improved overhead absorption from the higher overall sales. In
addition, cost of sales in fiscal 1996 reflected higher inventory write-offs
than in fiscal 1997.
Technology Programs and Systems. Technology Programs and Systems gross
profit was $9.1 million, $6.2 million and $5.7 million in fiscal years 1998,
1997 and 1996, respectively. As a percentage of sales, gross profit remained
relatively constant at 22.5% in fiscal 1998, 20.1% in fiscal 1997 and 18.7% in
fiscal 1996. There is a base of business in this segment with relatively stable
gross profit margins due to the predominance of government cost-plus contracts
in this business segment. This base of cost-plus business was the major factor
in the comparability of gross profit as a percentage of sales in fiscal years
1997 and 1996. The increase in gross profit, both as a dollar amount and as a
percentage of sales, in fiscal 1998 as compared to fiscal 1997 was primarily due
to the addition of Physics International and reorganization of the software
businesses late in the fiscal year, as previously described, and to work on a
commercial pulsed power systems contract won during fiscal 1998. This systems
contract was substantially complete as of fiscal year-end.
Information Products and Services. As discussed above, operation of the
Information Products and Services business as a separate segment was
discontinued as of the beginning of the third quarter of fiscal 1998; therefore,
on 48% lower revenue, segment gross profit decreased in fiscal 1998 by $1.1
million, or 32%, to $2.3 million from $3.4 million in fiscal 1997. As a
percentage of sales, gross profit increased to 49.4% in fiscal 1998 from 37.4%
in fiscal 1997.
In fiscal 1997, Information Products and Services gross profit increased
$5.5 million to $3.4 million from $(2.2) million in fiscal 1996. As a percentage
of sales, gross profit increased to 37.4% in fiscal 1997 from (26.6)% in fiscal
1996. In fiscal 1996, the Company recorded reserves against the CJIS Contracts
because total contract completion costs were projected to exceed the contract
value on these fixed price contracts. In addition, fiscal 1996 included a
write-off of certain capitalized software development costs.
Selling, General and Administrative Expenses
In fiscal 1998, the Company's selling, general and administrative expenses
increased $4.5 million, or 20.5%, to $26.4 million from $21.9 million in fiscal
1997. As a percentage of total sales, selling, general and administrative
expenses decreased slightly to 21.1% in fiscal 1998 from 21.6% in fiscal 1997.
The increase in the dollar amount of these expenses is primarily in support of
the Company's growth during the year, as well as a continued ramp-up of the
organizational structure and selling efforts for the ultracapacitor business
area.
F-6
<PAGE> 27
In fiscal 1997, the Company's selling, general and administrative expenses
increased $6.3 million, or 40.7%, to $21.9 million from $15.6 million in fiscal
1996. As a percentage of total sales, selling, general and administrative
expenses increased to 21.6% in fiscal 1997 from 19.3% in fiscal 1996. These
increases were attributable primarily to (i) increased sales and marketing
costs, principally from the addition of new sales and marketing personnel added
as part of the Company's plan to grow its commercial businesses, and commissions
earned on higher commercial sales in fiscal 1997 primarily in the Company's
Power Conversion Products and Industrial Computers and Subsystems business
segments; (ii) accruals under new incentive and profit sharing plans implemented
in fiscal 1997 and (iii) additions to senior management, both at the executive
and business unit levels, to support the Company's new strategic direction.
Research and Development Expenses
The Company's research and development expenses reflect only internally
funded research and development programs. Costs associated with United States
government and other customer funded research and development contracts are
included in cost of sales. Research and development expenses were $8.2 million,
$5.3 million and $5.1 million for fiscal 1998, 1997 and 1996, respectively. As a
percentage of sales, research and development expenses were 6.5% in fiscal 1998,
5.2% in fiscal 1997, and 6.3% in fiscal 1996. The level of research and
development expenses reflects the Company's ability to obtain customer funding
to support a significant portion of its research and product development
activities. The increase in internally funded research and development in fiscal
1998 over the level expended in fiscal 1997 and 1996 reflects the Company's
focus on new commercial product areas, and is primarily due to ultracapacitor
and other power conversion products and power electronics systems development,
and Compact PCI and continued product development for major new programs in the
Industrial Computers and Subsystems business segment.
Special Charges
During the third quarter of fiscal 1998, the Company completed the
acquisition of three businesses. In acquiring these businesses, the Company
acquired certain intangible assets. Some of these intangible assets have been
capitalized and will be amortized over their estimated economic lives; the
acquired in-process research and development meeting certain criteria, however,
was expensed during the quarter as the technology had no alternative future use
and the ultimate recovery of the acquired value was not assured. In addition,
certain costs of acquisitions, as well as certain charges related to the
discontinued business segment, were also charged to operations. The total amount
of all such charges was $8.9 million and has been classified as "Acquired
in-process research and development and other special charges" in the
consolidated statement of operations. Approximately $6.3 million of the charge
is acquisition related, and approximately $2.6 million relates to the
Information Products and Services business segment. See Notes 8 and 9 of Notes
to Consolidated Financial Statements.
Interest Expense
Interest expense was $214,000 and $173,000 in fiscal years 1998 and 1997,
respectively, compared to $329,000 in fiscal 1996. The decrease from fiscal 1996
is a result of lower average borrowings in the two more recent fiscal years. The
Company completed a follow-on stock offering in fiscal 1998, and used a portion
of the proceeds from that offering to pay off an outstanding balance on the bank
line of credit and the remaining balance on a bank term loan.
Other-net
In fiscal 1998, other-net was $1.4 million, compared to $150,000 in fiscal
1997 and $398,000 in fiscal 1996. The increase in other-net is primarily
attributable to interest income from the investment of the net cash proceeds of
the Company's follow-on offering which was completed in November 1997. In
addition, fiscal 1996 other-net reflects completion in April 1996 of the
amortization into income of amounts contributed by minority stockholders upon
the organization of the Company's PurePulse Technologies, Inc. subsidiary over
such stockholders' proportionate share of PurePulse's equity. Fiscal 1996
other-net included $379,000 of such income, while none is included in subsequent
fiscal years.
F-7
<PAGE> 28
Income Tax Expense
The Company had net operating loss carryforwards which offset the Company's
provision for U.S. income taxes in both fiscal years 1998 and 1997. Fiscal 1998
income tax expense is primarily due to foreign taxes on the profits of the
Company's U.K. subsidiary that was acquired during the year. Fiscal 1996 income
tax expense was primarily due to the establishment of a valuation allowance of
$1.1 million for the net deferred income tax assets of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically relied on a combination of internally generated
funds and bank borrowings to finance its working capital requirements and
capital expenditures. In addition, in fiscal years 1998 and 1997, the Company
received approximately $2.3 million and $2.5 million, respectively, from the
exercise of stock options and purchases under employee stock purchase plans. In
November 1997, the Company completed a follow-on public offering of 1.5 million
shares of its Common Stock, and received net proceeds of approximately $47
million. A portion of the proceeds was used to repay an outstanding balance on
the bank line of credit and the remaining balance on a bank term loan.
Approximately $12 million of cash was used in fiscal 1998 in completing the
acquisitions discussed in Results of Operations above.
Cash used in operations in fiscal 1998 was $5.0 million, primarily
attributable to increases in accounts receivable and inventory, due both to
acquired businesses and in support of the higher fiscal 1998 sales.
The Company's capital expenditures in fiscal 1998, excluding acquired
businesses, increased to $7.0 million from $4.7 million in fiscal 1997,
primarily for facility expansion and production equipment and other assets
needed to support growth of the Company's business units, principally in the
Power Conversion Products business segment. The Company has currently budgeted
capital expenditures of $8.7 million for fiscal 1999, including commitments for
capital expenditures to support volume manufacturing of ultracapacitors in its
existing facilities. The Company will continue to assess its capital needs in
this area; alternatively, it may consider leasing facilities or manufacturing
equipment or both or may satisfy high-volume manufacturing requirements through
outsourcing or under licensing arrangements with third parties. If the Company
decides to internally finance construction of additional facilities, a
significant amount of capital would be required.
The Company re-negotiated its unsecured bank line of credit during fiscal
1998, increasing the amount available to $20.0 million from its previous level
of $10.0 million. The interest rate on the line of credit is tied to LIBOR or
the bank's prime rate. As of July 31, 1998, there were no outstanding borrowings
under the line of credit.
The Company believes that funds on hand, together with cash generated from
operations and funds available under its bank line of credit, will be sufficient
to finance its operations and capital expenditures through fiscal 1999. In
addition to addressing the need for high-volume manufacturing of its
ultracapacitor products, the Company may continue from time-to-time to consider
acquisitions of complementary businesses, products or technologies, which may
require additional funding. Sources of additional funding for these purposes
could include one or more of the following: cash flow from operations;
investments by strategic partners and additional debt or equity financing. There
can be no assurance that the Company will be able to obtain additional sources
of financing on favorable terms, if at all, at such time or times as the Company
may require such capital.
INFLATION AND CHANGES IN PRICES
Generally, the Company has been able to increase prices to offset its
inflation-related increased costs in its commercial businesses. A substantial
portion of the Company's business with agencies of the United States government
consists of cost-reimbursement contracts which permit recovery of inflation
costs. Fixed-price contracts with government and other customers typically
include estimated costs for inflation in the contract price.
F-8
<PAGE> 29
SOFTWARE COMPATIBILITY WITH YEAR 2000 DATE PROCESSING
The Year 2000 ("Y2K") issue is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Computer
systems utilizing such programs may be unable to interpret dates beyond the year
1999, which could cause a system failure or other computer errors, leading to
disruptions in operations. In 1998, the Company developed a three-phase program
for Y2K information systems compliance. Phase 1 is to identify and solve Y2K
issues in the Company's significant information systems infrastructure and
enterprise business applications, including telecommunications and networking
systems as well as accounting and manufacturing software. Phase 2 is to identify
and plan for Y2K issues that are specific to the Company's business units,
including local software, product matters, facilities related systems and vendor
and key partner concerns. Phase 3 is the final testing of each major area of
exposure to ensure compliance, and the development of contingency plans for
unsolved Y2K deficiencies, such as key vendors failing to adequately address
their Y2K problems. The Company has identified four major areas determined to be
critical for successful Y2K compliance: (1) networking and telecommunications,
(2) financial and manufacturing informational systems applications, (3) products
and (4) third-party relationships.
In Phase 1 of the program, the Company has completed its review of
company-wide and large systems, several of which have been identified as being
Y2K compliant due to their recent implementation or upgrade. Such installations
were unrelated to the Y2K concern, but rather were needed as part of the
ordinary course of business. For certain accounting and manufacturing systems,
upgrades are needed. These upgrades are available from the third party
suppliers, and are in the process of being evaluated. Implementation of the
updated systems is expected by calendar year end. Remaining upgrades of system
infrastructure have been identified and planned. Final testing and documentation
under Phase 1 is currently anticipated in the January 1999 time frame. Under
Phase 2, the Company is currently identifying and evaluating business unit
exposures. In the third-party area, the Company is in the process of contacting
its significant third parties, primarily key vendors and customers, regarding
their Y2K readiness. As to products, preliminary findings indicate that most
Company products appear to be Y2K compliant. For several of those that are not,
the Company has made upgrades available via the Company's Internet web site. For
other products, the Company is still completing its evaluation process. The
testing and contingency plan development under Phase 3 will begin in early 1999,
and is expected to be completed in mid-1999.
The Company believes it will cost approximately $100,000 to complete the
replacement of network and telecommunication infrastructure requiring Y2K
upgrades. The Company has yet to determine what costs, if any, will be incurred
in connection with local software, facilities, products and the third party
area.
The anticipated costs relating to resolving Y2K issues are based on
estimates which were derived utilizing assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and, as
additional Y2K remediation activities are developed and planned, that actual
results will not differ materially from those in the current estimate. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the completion
of the Company's Y2K investigations, the ability to locate and correct all
relevant computer codes, and similar uncertainties. In addition, there can be no
assurance that Y2K compliance problems will not be revealed in the future which
could have a material adverse affect on the Company's business, financial
condition and results of operations. Many of the Company's customers and
suppliers may be affected by Y2K issues that may require them to expend
significant resources to modify or replace their existing systems, which may
result in those customers having reduced funds to purchase the Company's
products or those suppliers experiencing difficulties in producing or shipping
key components to the Company on a timely basis or at all. Such third party
issues could have a material adverse affect on the Company's business, financial
condition and results of operations. This discussion of the Company's Y2K status
constitutes a "Year 2000 Readiness Disclosure" as that item is defined in the
Year 2000 Information and Readiness Disclosure Act, and also contains
forward-looking statements (see "Forward-Looking Statements " below).
F-9
<PAGE> 30
ACCOUNTING PRINCIPLES
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, and Statement No. 131, Disclosures About Segments of an Enterprise and
Related Information, both of which are effective for fiscal periods beginning
after December 15, 1997. The Company believes the statements, which will be
adopted in fiscal 1999, will not have a material effect on its financial
statements.
FORWARD-LOOKING STATEMENTS
To the extent that the above discussion goes beyond historical information
and indicates results or developments which the Company plans or expects to
achieve, these forward-looking statements are identified by the use of terms
such as "expected," "anticipates," "plans," and the like. Readers are cautioned
that such statements are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are subject to a
number of risks and uncertainties. Actual results in the future could differ
materially from those described in any forward-looking statements as a result of
various risk factors. The Company undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements that may be made
to reflect any future events or circumstances. Readers are referred to item 1 of
the Company's Annual Report on Form 10-K for fiscal 1998 for a discussion of
certain of those factors.
F-10
<PAGE> 31
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of operations data for the
fiscal years ended July 31, 1996, 1997 and 1998, and consolidated balance sheet
data at July 31, 1997 and 1998 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, 1994 and 1995 and consolidated
balance sheet data at July 31, 1994, 1995 and 1996 are derived from audited
consolidated financial statements of the Company not included in this Appendix.
The following selected data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company and Notes thereto appearing
elsewhere in this Appendix.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-----------------------------------------------------------------
1994 1995 1996 1997 1998
-----------------------------------------------------------------
( IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Sales .......................................... $ 85,463 $ 75,004 $ 80,911 $ 101,411 $ 125,308
Cost of sales .................................. 68,555 56,447 65,893 70,107 83,459
--------- --------- --------- --------- ---------
Gross profit ................................. 16,908 18,557 15,018 31,304 41,849
Operating expenses:
Selling, general and administrative expenses . 14,068 13,636 15,564 21,900 26,391
Research and development expenses ............ 4,794 5,038 5,081 5,303 8,206
Acquired in-process R&D and other
special charges (1) ....................... -- -- -- -- 8,942
Restructure and asset impairment losses(1) ... -- -- 5,703 -- --
Loss on closing of Brobeck division .......... 1,018 -- -- -- --
--------- --------- --------- --------- ---------
Total operating expenses .................. 19,880 18,674 26,348 27,203 43,539
--------- --------- --------- --------- ---------
Operating income (loss) ........................ (2,972) (117) (11,330) 4,101 (1,690)
Interest expense ............................... 252 315 329 173 214
Other-net ...................................... (589) (848) (398) (150) (1,441)
--------- --------- --------- --------- ---------
Income (loss) before income taxes, minority
interest and loss from cumulative effect
of change in accounting principle ......... (2,635) 416 (11,261) 4,078 (463)
Income tax expense (benefit) ................... (1,028) 15 1,296 -- 226
Minority interest in net income of
subsidiaries .............................. 80 86 50 54 80
Loss from cumulative effect of change
in accounting principle (1) ............... -- -- 2,569 -- --
--------- --------- --------- --------- ---------
Net income (loss) .............................. $ (1,687) $ 315 $ (15,176) $ 4,024 $ (769)
========= ========= ========= ========= =========
Basic income (loss) per share:
Basic income (loss) per share before
cumulative effect of change in
accounting principle ...................... $ (0.32) $ 0.06 $ (2.29) $ 0.68 $ (0.10)
Basic income (loss) per share: ............... $ (0.32) $ 0.06 $ (2.76) $ 0.68 $ (0.10)
========= ========= ========= ========= =========
Diluted income (loss) per share:
Diluted income (loss) per share before
cumulative effect of change in
accounting principle ...................... $ (0.32) $ 0.06 $ (2.29) $ 0.60 $ (0.10)
Diluted income (loss) per share: ............. $ (0.32) $ 0.06 $ (2.76) $ 0.60 $ (0.10)
========= ========= ========= ========= =========
Shares used in computing:
Basic income (loss) per share: ............ 5,350 5,351 5,494 5,949 7,677
========= ========= ========= ========= =========
Diluted income (loss) per share: .......... 5,350 5,356 5,494 6,644 7,677
========= ========= ========= ========= =========
JULY 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
------------------------------------------------------------------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ................... $ 4,579 $ 4,053 $ 1,465 $ 826 $ 21,224
Working capital ............................. 18,091 17,855 7,288 10,908 48,132
Total assets ................................ 54,322 52,370 40,724 47,120 105,065
Long-term debt, excluding current portion.... 2,797 1,928 1,018 465 361
Total stockholders' equity .................. 34,960 35,364 20,745 27,410 75,838
</TABLE>
- ----------
(1) See Note 9 of Notes to Consolidated Financial Statements.
F-11
<PAGE> 32
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Maxwell Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Maxwell
Technologies, Inc., and subsidiaries as of July 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended July 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Maxwell
Technologies, Inc. and subsidiaries at July 31, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended July 31, 1998, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Diego, California
September 15, 1998
F-12
<PAGE> 33
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JULY 31,
-----------------------------
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 826 $ 21,224
Accounts receivable:
Trade and other, less allowance for doubtful accounts of $350
and $950 at July 31, 1997 and 1998, respectively............ 9,391 23,339
Long-term contracts........................................... 9,221 12,723
------------ -------------
18,612 36,062
Inventories...................................................... 8,722 15,823
Prepaid expenses................................................. 1,203 2,016
Deferred income taxes............................................ 161 161
------------ -------------
Total current assets.......................................... 29,524 75,286
Property, plant and equipment, net................................. 16,929 23,276
Goodwill and other non-current assets.............................. 667 6,503
------------ -------------
$ 47,120 $ 105,065
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 13,640 $ 20,680
Accrued employee compensation.................................... 4,465 6,353
Current portion of long-term debt................................ 511 121
------------ -------------
Total current liabilities..................................... 18,616 27,154
Long-term debt..................................................... 465 361
Minority interest.................................................. 629 1,712
Commitments and contingencies (Notes 6 and 10)
Stockholders' equity:
Common stock, $0.10 par value, 40,000 shares authorized, 6,143
and 8,384 shares issued and outstanding at July 31, 1997 and
1998, respectively............................................. 614 838
Additional paid-in capital....................................... 22,364 70,926
Deferred compensation............................................ (622) (413)
Retained earnings................................................ 5,054 4,487
------------ -------------
Total stockholders' equity.................................... 27,410 75,838
------------ -------------
$ 47,120 $ 105,065
============ =============
</TABLE>
See accompanying notes.
F-13
<PAGE> 34
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Sales .................................................. $ 80,911 $ 101,411 $ 125,308
Cost of sales .......................................... 65,893 70,107 83,459
--------- --------- ---------
Gross profit ......................................... 15,018 31,304 41,849
Operating expenses:
Selling, general and administrative expenses ......... 15,564 21,900 26,391
Research and development expenses .................... 5,081 5,303 8,206
Acquired in-process R&D and other special charges .... -- -- 8,942
Restructure and asset impairment losses .............. 5,703 -- --
--------- --------- ---------
Total operating expenses .......................... 26,348 27,203 43,539
--------- --------- ---------
Operating income (loss) ................................ (11,330) 4,101 (1,690)
Interest expense ....................................... 329 173 214
Other-net .............................................. (398) (150) (1,441)
--------- --------- ---------
Income (loss) before income taxes, minority interest and
loss from Cumulative effect of change in
accounting principle ................................. (11,261) 4,078 (463)
Income tax expense ..................................... 1,296 -- 226
Minority interest in net income of subsidiaries ........ 50 54 80
Loss from cumulative effect of change in accounting
principle ............................................ 2,569 -- --
--------- --------- ---------
Net income (loss) ...................................... $ (15,176) $ 4,024 $ (769)
========= ========= =========
Basic income (loss) per share:
Basic income (loss) per share before cumulative
effect of change in accounting principle ........ $ (2.29) $ 0.68 $ (0.10)
========= ========= =========
Basic income (loss) per share: .................... $ (2.76) $ 0.68 $ (0.10)
========= ========= =========
Diluted income (loss) per share:
Diluted income (loss) per share before cumulative
effect of change in accounting principle ........ $ (2.29) $ 0.60 $ (0.10)
========= ========= =========
Diluted income (loss) per share: .................. $ (2.76) $ 0.60 $ (0.10)
========= ========= =========
Shares used in computing:
Basic income (loss) per share ..................... 5,494 5,949 7,677
========= ========= =========
Diluted income (loss) per share ................... 5,494 6,644 7,677
========= ========= =========
</TABLE>
See accompanying notes.
F-14
<PAGE> 35
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE YEARS ENDED JULY 31, 1998
-------------------------------------------------------------------------------
ADDITIONAL TOTAL
COMMON PAID-IN DEFERRED RETAINED STOCKHOLDERS'
STOCK CAPITAL COMPENSATION EARNINGS EQUITY
-------- --------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at August 1, 1995 ................... $ 537 $ 18,621 $ -- $ 16,206 $ 35,364
Issuance of 130,796 shares under stock
purchase and option plans .............. 13 504 -- -- 517
Deferred compensation related to
issuance of 177,960 shares ............. 18 627 (645) -- --
Amortization of deferred compensation ..... -- -- 40 -- 40
Net loss for the year ..................... -- -- -- (15,176) (15,176)
-------- -------- -------- -------- --------
Balance at July 31, 1996 .................... 568 19,752 (605) 1,030 20,745
Issuance of 445,785 shares under stock
purchase and option plans ............. 45 2,423 -- -- 2,468
Deferred compensation related to
issuance of 10,000 shares ............. 1 189 (190) -- --
Amortization of deferred compensation ..... -- -- 173 -- 173
Net income for the year ................... -- -- -- 4,024 4,024
-------- -------- -------- -------- --------
Balance at July 31, 1997 .................... 614 22,364 (622) 5,054 27,410
Issuance of 1,500,000 shares in a follow-on
public stock offering, net of offering
costs of $3.9 million ................. 150 46,967 -- -- 47,117
Issuance of 356,240 shares under stock
purchase and option plans ............. 36 2,302 -- -- 2,338
Issuance of 544,785 shares in connection
with acquisitions ..................... 54 3,270 -- 609 3,933
Repurchase of 162,073 shares for cash
under repurchase program ............. (16) (3,977) -- -- (3,993)
Amortization of deferred compensation ..... -- -- 209 -- 209
Dividends paid to shareholders of
subchapter S corporation prior to
acquisition ........................... -- -- -- (407) (407)
Net loss for the year ..................... -- -- -- (769) (769)
-------- -------- -------- -------- --------
Balance at July 31, 1998 .................... $ 838 $ 70,926 $ (413) $ 4,487 $ 75,838
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-15
<PAGE> 36
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income (loss) .............................................. $(15,176) $ 4,024 $ (769)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization .......................... 2,128 2,587 3,781
Restructure and asset impairment losses ................ 5,960 -- --
Acquired in-process R&D and other special charges ...... -- -- 7,450
Loss from cumulative effect of change in accounting
principle ........................................... 2,569 -- --
Provision for losses on accounts receivable ............ 105 184 534
Loss on sales of property and equipment ................ 118 10 50
Deferred income taxes .................................. 1,124 -- --
Minority interest in net income of subsidiaries ........ 50 54 80
Deferred compensation .................................. 40 173 209
Changes in operating assets and liabilities:
Accounts receivable .................................. 252 (3,223) (12,534)
Inventories .......................................... (469) (1,914) (4,708)
Prepaid expenses and other ........................... 614 (702) (1,115)
Accounts payable ..................................... 2,153 (683) 909
Accrued employee compensation ........................ 185 1,599 1,139
Income taxes payable/recoverable ..................... 121 832 (45)
-------- -------- --------
Net cash provided by (used in) operating
activities ..................................... (226) 2,941 (5,019)
Investing activities:
Purchases of property, plant and equipment ..................... (1,976) (4,725) (7,026)
Business acquisitions under purchase accounting, net of cash
acquired ................................................. -- -- (11,481)
Proceeds from sales of property and equipment .................. 6 8 149
-------- -------- --------
Net cash used in investing activities ............. (1,970) (4,717) (18,358)
Financing activities:
Principal payments on long-term debt ........................... (909) (952) (2,336)
Proceeds from issuance of Company and subsidiary stock ......... 517 2,502 50,518
Repurchase of Company and subsidiary stock ..................... -- (413) (4,000)
Dividends paid to shareholders of Subchapter S corporation prior
to acquisition ............................................. -- -- (407)
-------- -------- --------
Net cash provided by (used in) financing
activities ..................................... (392) 1,137 43,775
-------- -------- --------
Increase (decrease) in cash and cash equivalents .. (2,588) (639) 20,398
Cash and cash equivalents at beginning of year ................... 4,053 1,465 826
-------- -------- --------
Cash and cash equivalents at end of year .......... $ 1,465 $ 826 $ 21,224
======== ======== ========
</TABLE>
See accompanying notes.
F-16
<PAGE> 37
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Company is a leader in pulsed power technologies, providing pulsed power
based systems and components for a wide range of commercial applications and
research and development for both commercial customers and the United States
government. The Company also offers industrial computers and subsystems,
primarily to OEMs in computer telephony and other markets, and software products
and services, both for government research and for various commercial
applications.
Consolidation and Minority Interest Amounts
The consolidated financial statements include the accounts of Maxwell
Technologies, Inc. and its subsidiaries. All significant intercompany
transactions and account balances are eliminated in consolidation.
Cash Equivalents
The Company classifies all highly liquid investments with a maturity of
three months or less when purchased as cash equivalents.
Inventories
Inventories are stated at the lower of cost (principally average cost
method) or market.
Property, Plant and Equipment
Property, plant and equipment are carried at cost and are generally
depreciated using the straight-line method. Depreciation and amortization are
provided over the estimated useful lives of the related assets (three to thirty
years). Depreciation and amortization of property, plant and equipment amounted
to $2,507,000, $2,587,000 and $3,745,000 in fiscal 1996, 1997 and 1998,
respectively.
Revenue Recognition
The Company recognizes substantially all revenue from the sale of
manufactured products and short-term fixed price contracts upon shipment of
products or completion of services. Revenues, including estimated profits, on
long-term fixed price contracts are recognized as costs are incurred. Revenues,
including fees earned, on cost plus contracts are also recognized as costs are
incurred. Contract and license revenue is reflected in the Company's sales and
includes amounts received from the United States government and commercial
customers for the funded research and development efforts of the Company.
Provisions are made on a current basis to fully recognize any anticipated losses
on contracts.
Foreign Currency
In March 1998, the Company acquired a United Kingdom-based subsidiary (see
Note 8 - Business Combinations). The assets and liabilities of this foreign
subsidiary are translated to U.S. dollars at year-end exchange rates, and
revenues and expenses are translated at average rates prevailing during the
year. There have been no material effects of foreign currency translation during
the year ended July 31, 1998.
Income (Loss) Per Share
Effective November 1, 1997, the Company adopted Financial Accounting
Standards Board ("FASB") Statement No. 128, Earnings Per Share. Statement No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Basic earnings per share is
calculated using the weighted average number of common shares outstanding.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share, and is calculated on the basis of the weighted
average number of common shares outstanding plus the dilutive effect of
outstanding stock options assuming their exercise using the "treasury stock"
method and the outstanding preferred shares in the Maxwell Energy Products
subsidiary assuming
F-17
<PAGE> 38
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
their conversion. Earnings per share amounts for all prior periods have been
restated as necessary to conform to Statement No. 128 requirements. For the
years ended July 31, 1996 and 1998, all potentially dilutive common shares have
been excluded from the calculation of diluted loss per share as their inclusion
would have been antidilutive.
The following table sets forth the computation of basic and diluted income
per share:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------------------------------
1996 1997 1998
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Basic:
Net income (loss) ............................. $(15,176) $ 4,024 $ (769)
======== ======== ========
Weighted average shares ....................... 5,494 5,949 7,677
-------- -------- --------
Basic income (loss) per share ................. $ (2.76) $ 0.68 $ (0.10)
======== ======== ========
Diluted:
Net income (loss) ............................. $(15,176) $ 4,024 $ (769)
Effect of majority-owned subsidiaries'
dilutive securities ........................ -- (12) --
-------- -------- --------
Income (loss) available to common shareholders,
as adjusted................................. $(15,176) $ 4,012 $ (769)
======== ======== ========
Weighted average shares ....................... 5,494 5,949 7,677
Effect of dilutive stock options .............. -- 695 --
-------- -------- --------
Weighted average shares, as adjusted .......... 5,494 6,644 7,677
-------- -------- --------
Diluted income (loss) per share ............... $ (2.76) $ 0.60 $ (0.10)
======== ======== ========
</TABLE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Several of the industries in which the Company operates are
characterized by rapid technological change and short product life cycles. As a
result, estimates are required to provide for product returns and product
obsolescence as well as other matters.
Historically, actual amounts recorded have not varied significantly from
estimated amounts.
Stock Split
In November 1996, the Company declared a 2-for-1 stock split of the
Company's common shares, effected as a 100% stock dividend that was distributed
on December 17, 1996 to stockholders of record as of November 26, 1996. Common
stock accounts, income (loss) per share and weighted average number of share
amounts from prior periods have been restated to reflect the stock split.
New Accounting Standards
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, and Statement No. 131, Disclosures About Segments of an Enterprise and
Related Information, both of which are effective for fiscal periods beginning
after December 15, 1997. The Company believes the statements, which will be
adopted in fiscal 1999, will not have a material effect on its financial
statements.
F-18
<PAGE> 39
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- ACCOUNTS RECEIVABLE
The following tabulation shows the component elements of accounts receivable
from long-term contracts at July 31:
<TABLE>
<CAPTION>
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
U.S. Government:
Amounts billed ............................ $ 2,108 $ 7,248
Amounts unbilled .......................... 1,326 3,024
Retainage due upon completion of contracts 287 --
Commercial customers:
Amounts billed ............................ 2,693 905
Amounts unbilled .......................... 2,681 1,546
Retainage due upon completion of contracts 126 --
------- -------
$ 9,221 $12,723
======= =======
</TABLE>
The balances billed but not paid by customers pursuant to retainage
provisions under long-term contracts will be due upon completion of the
contracts and acceptance by the customers. Substantially all unbilled
receivables at July 31, 1998 are expected to become due and payable within the
next year.
NOTE 3 -- CREDIT AGREEMENT
The Company has an unsecured two-year bank line of credit agreement dated
March 1998, under which the Company may borrow up to $20 million at the bank's
prime rate, or at LIBOR plus 1.75%. At July 31, 1998, there were no outstanding
borrowings under the line. The line of credit agreement provides that neither
the Company nor any of its subsidiaries may, directly or indirectly, make any
distributions of cash dividends.
NOTE 4 -- STOCK ACTIVITY AND STOCK PLANS
Follow-on Public Stock Offering
In November 1997, the Company issued 1,500,000 shares of its common stock in
a follow-on public offering at $34.00 per share. Proceeds to the Company (net of
offering costs of $1.1 million and underwriters' commissions of $2.8 million)
totaled approximately $47 million, and are intended for general corporate
purposes, including working capital and capital expenditures, as well as
acquisitions.
Stock Option Plans
In December 1995, the Company adopted the 1995 Stock Option Plan under which
500,000 shares of Common Stock were reserved for future grant. In January 1997
and January 1998, an additional 300,000 and 490,000 shares, respectively, were
reserved for future issuance under the plan. This plan and the Company's
Director Stock Option Plan provide for granting either Incentive Stock Options
or Non-Qualified Stock Options to employees and non-employee members of the
Company's Board of Directors, respectively. Options are also outstanding under
an expired stock option plan. Options granted under these plans are for the
purchase of Common Stock of the Company at not less than the stock's fair market
value at the date of grant. Employee options are generally exercisable in
cumulative annual installments of 20 - 30 percent, while options in the Director
Option Plan are exercisable in full one year after date of grant. All options
have terms of five to ten years.
F-19
<PAGE> 40
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- STOCK ACTIVITY AND STOCK PLANS (CONTINUED)
The following table summarizes Company stock option activity for the three
years ended July 31, 1998.
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Balance at August 1, 1995 ............... 717,744 $ 4.84
Granted ............................... 623,600 $ 4.31
Exercised ............................. (37,684) $ 4.13
Expired or forfeited .................. (107,634) $ 5.05
---------
Balance at July 31, 1996 ................ 1,196,026 $ 4.57
Granted ............................... 373,700 $15.95
Exercised ............................. (406,656) $ 4.61
Expired or forfeited .................. (108,390) $ 4.42
---------
Balance at July 31, 1997 ................ 1,054,680 $ 8.60
Granted ............................... 591,500 $25.23
Exercised ............................. (324,825) $ 5.49
Expired or forfeited .................. (56,200) $18.57
---------
Outstanding at July 31, 1998 ............ 1,265,155 $16.73
=========
Available for future grant under the 1995
Stock Option Plan ..................... 35,460
=========
Available for future grant under the
Director Option Plan .................. 85,074
=========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable Company stock options at July 31, 1998.
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF EXERCISE OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISE
PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE
----------------- ----------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ 3.56 - 5.00 307,659 $ 4.04 4.4 years 150,825 $ 4.17
$ 5.12 - 7.25 125,696 $ 6.72 2.7 years 61,082 $ 6.41
$ 11.00 - 20.63 259,300 $17.90 4.9 years 69,810 $19.14
$ 21.75 - 24.75 279,000 $23.63 9.7 years -- $ --
$ 25.88 - 28.88 293,500 $26.71 9.2 years 1,250 $27.50
------------ --------
1,265,155 282,967
============ ========
</TABLE>
In addition, the Company has established separate stock option plans for
four of its principal operating subsidiaries. Options to purchase shares of
subsidiary stock were granted primarily during fiscal 1997. Options outstanding
at July 31, 1998 total from 8% to 15% of such various subsidiaries' outstanding
common stock.
The Company has adopted the disclosure-only provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation. In accordance with the provisions
of Statement No. 123, the Company applies Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its stock option plans, and
accordingly, no compensation expense has been recognized for stock options
granted in 1996, 1997 or 1998. If the Company had elected to recognize
compensation cost based on the fair value method prescribed by Statement No.
123, the Company's net income (loss) and net income (loss) per share would have
been adjusted to the pro-forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------------------------------
1996 1997 1998
--------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss)
As reported............ $(15,176) $ 4,024 $ (769)
Pro forma.............. (15,305) 3,405 (4,102)
Net income (loss) per share
As reported............ $ (2.76) $ 0.60 $ (0.10)
Pro forma.............. (2.78) 0.51 (0.53)
</TABLE>
F-20
<PAGE> 41
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- STOCK ACTIVITY AND STOCK PLANS (CONTINUED)
The impact of outstanding non-vested stock options granted prior to 1996 has
been excluded from the pro forma calculations; accordingly, the 1996, 1997 and
1998 pro forma adjustments are not indicative of future period pro forma
adjustments when the calculation will reflect all applicable stock options. The
fair value of Company options at the date of grant was estimated using the
Black-Scholes option-pricing model with assumptions as follows: 1998 - risk-free
interest rate of 5.5%; dividend yield of 0%; volatility factor of 54%; and a
weighted-average expected term of 4 years; 1996 and 1997 - risk-free interest
rate of 6.0%; dividend yield of 0%; volatility factor of 52%; and a
weighted-average expected term of 3 years. The fair value of subsidiary options
at the date of grant was estimated using the Minimum Value option-pricing model,
which is similar to the Black-Scholes model except that it excludes the factor
for volatility since there is no public market for the subsidiary shares. The
estimated weighted average fair value at grant date for Company options granted
during 1996, 1997 and 1998 was $1.74, $7.33 and $12.09 per option, respectively.
Stock Purchase Plans
In December 1994, the Company established the 1994 Employee Stock Purchase
Plan and a Director Stock Purchase Plan. The employee plan permits substantially
all employees to purchase Common Stock through payroll deductions at 85% of the
lower of the trading price of the Stock at the beginning or at the end of each
six-month offering period. The director plan permits non-employee directors to
purchase common stock at 100% of the trading price of the Stock on the date a
request for purchase is received. In fiscal years 1997 and 1998, 39,129 and
40,795 shares were issued under the two plans for an aggregate of $442,000 and
$759,000, respectively. At July 31, 1998, 298,540 shares are reserved for future
issuance under these plans.
Stock Repurchase Program
In January 1998, the Company adopted a common stock repurchase program
whereby up to 600,000 shares of common stock could be repurchased during a
two-year period. In fiscal year 1998, 162,000 shares were repurchased at an
aggregate cost of approximately $4.0 million.
Stockholder Rights Plan
In 1989, the Company adopted a Stockholder Rights Plan, and subsequently
distributed one nonvoting Common Stock purchase right ("Right") for each
outstanding share of Common Stock. The Rights are not exercisable and will not
trade separately from the Common Stock unless a person or group acquires, or
makes a tender offer for, 20% or more of the Company's Common Stock. Initially,
each Right entitles the registered holder to purchase one-half of a share of
Company Common Stock at a price of $16.25 per one-half share, subject to certain
anti-dilution adjustments. The Rights expire on June 20, 1999.
If the Rights become exercisable and certain conditions are met, then each
Right not owned by the acquiring person or group will entitle its holder to
receive, upon exercise, Company Common Stock having a market value of four times
the exercise price of the Right. These provisions will not apply if a majority
of the Board of Directors determines that the acquisition or other business
combination is in the best interest of the stockholders. In addition, the
Company may redeem the Rights at a price of $0.01 per Right, subject to certain
restrictions.
Deferred Compensation
In 1996 and 1997, an executive officer of the Company was granted shares of
the Company's Common Stock subject to certain restrictions. The shares granted
vest ratably over a four year period, and at the grant dates, the shares had a
fair value of approximately $645,000 and $190,000, respectively. Those values,
net of accumulated amortization, are shown as deferred compensation in the
Consolidated Balance Sheet and Consolidated Statement of Stockholders' Equity.
The deferred compensation is being amortized to expense over the four year
vesting periods, and such amortization totaled $40,000, $173,000 and $209,000 in
fiscal 1996, 1997 and 1998, respectively.
F-21
<PAGE> 42
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- INCOME TAXES
Income taxes are as follows for the years ended July 31:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current....................... $ 128 $ -- $ --
Deferred...................... 814 -- --
------ ------ ------
942 -- --
State and foreign:
Current....................... 44 -- 200
Deferred...................... 310 -- 26
------ ------ ------
354 -- 226
------ ------ ------
$1,296 $ -- $ 226
====== ====== ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The primary components of
the Company's deferred tax assets and liabilities are as follows at July 31:
<TABLE>
<CAPTION>
1997 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Uniform capitalization, contract and inventory-related
reserves.......................................... $1,465 $1,527
Environmental and restructure reserves................ 1,195 1,430
Asset write-downs under FASB Statement No. 121........ 943 1,112
Acquired in-process R&D............................... -- 959
Accrued vacation...................................... 594 733
Allowance for doubtful accounts....................... 321 371
Other................................................. 313 373
NOL carryforwards..................................... 1,800 1,300
Valuation allowance................................... (5,814) (6,735)
------ ------
Total deferred tax assets..................... 817 1,070
------ ------
Deferred tax liabilities:
Tax over book depreciation............................ 656 686
R&D expense tax over book............................. -- 223
------ ------
Total deferred tax liabilities................ 656 909
------ ------
Net deferred tax assets....................... $ 161 $ 161
====== ======
</TABLE>
As the Company cannot carry losses back to prior years, and had a loss in
the current year, a valuation allowance is provided on the net operating loss
carryforwards and net deferred income tax assets of the Company. The valuation
allowance at July 31, 1998 includes approximately $2,000,000 relating to
employee stock option and stock purchase plan activity, which upon realization
will result in a credit to additional paid-in capital. Income tax expense in
fiscal year 1996 was to provide for a valuation allowance on beginning of year
net deferred tax assets, and to provide for income tax expense at the PurePulse
Technologies subsidiary, which filed a separate tax return for that year. Income
tax expense in fiscal year 1998 was primarily due to foreign taxes on the
profits of the Company's newly acquired United Kingdom subsidiary.
As of July 31, 1998, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $3,000,000 and
$3,500,000, respectively. The federal loss carryforward expires in fiscal year
2011, while the state loss carryforwards expire in fiscal years 1999 through
2001.
F-22
<PAGE> 43
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- INCOME TAXES (CONTINUED)
The provisions for income taxes in the accompanying statements of operations
differ from the tax provision calculated by applying the statutory income tax
rate of 35% to income (loss) before income taxes and minority interest. The
primary components of such difference are as follows for the years ended
July 31:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax at federal statutory rate ............................................ $(3,941) $ 1,427 $ (162)
State taxes, net of federal benefit ...................................... (674) 246 58
Effect of foreign subsidiary ............................................. -- -- (47)
Impact of asset basis difference in acquisitions ......................... -- -- 1,237
Utilization of net operating loss carryforwards .......................... -- (700) (500)
Amortization of minority interest ........................................ (129) -- --
Valuation allowance and other items ...................................... 6,040 (973) (360)
------- ------- -------
$ 1,296 $ -- $ 226
======= ======= =======
</TABLE>
NOTE 6 -- LEASES
Rental expense amounted to $1,992,000, $1,831,000 and $3,303,000 in fiscal
1996, 1997 and 1998, respectively, and was incurred primarily for facility
rental. Future minimum rental commitments as of July 31, 1998, are as follows
(in thousands):
<TABLE>
<S> <C>
1999.......................................................... $ 4,799
2000.......................................................... 4,377
2001.......................................................... 4,158
2002.......................................................... 3,583
2003.......................................................... 2,973
Thereafter.................................................... 7,583
--------
$ 27,473
========
</TABLE>
Certain leases include renewal options for periods ranging from one to
twenty-five years and are subject to rental adjustment based on consumer price
indices. Substantially all leases provide that the Company pay for property
taxes, insurance, and repairs and maintenance.
The Company also subleases certain of its leased facilities under
non-cancellable subleases ranging from one to five years. Future amounts due to
the Company under such subleases for the next five years are as follows: 1999 -
$371,000; 2000 - $392,000; 2001 - $404,000; 2002 - $168,000; 2003 - None.
NOTE 7 -- EMPLOYEE BENEFIT PLAN
Substantially all employees are eligible to elect coverage under a
contributory employee savings plan which provides for Company matching
contributions based on one-half of employee contributions up to certain plan
limits. The Company's matching contributions under this plan totaled $541,000,
$592,000 and $749,000 in fiscal 1996, 1997 and 1998, respectively.
NOTE 8 -- BUSINESS COMBINATIONS
In January 1998, the Company acquired Tekna Seal, Inc., a privately-held
manufacturer of glass-to-metal seals for a variety of industrial applications,
in a stock-for-stock exchange accounted for as a pooling of interests. Under the
terms of the agreement, Maxwell purchased all of the outstanding stock of Tekna
Seal for an aggregate of 154,000 shares of Maxwell common stock with a fair
market value of approximately $4 million. The Company incurred direct
transaction costs of approximately $85,000, which were charged to operations
during the quarter ended January 31, 1998. The historical results of operations
for Tekna Seal are not material in relation to those of Maxwell and financial
information for prior periods has not been restated to reflect the merger.
Retained earnings as of November 1, 1997, was restated to reflect Tekna Seal's
accumulated earnings of approximately $1.3 million as of such date.
F-23
<PAGE> 44
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- BUSINESS COMBINATIONS (CONTINUED)
In March 1998, the Company acquired Phoenix Power Systems, Inc. ("Phoenix
Power"), a privately-held company with leading products for power electronics
and power conditioning applications in the telecommunications, broadcasting,
semiconductor manufacturing, medical, and biotechnology markets. Under the terms
of the agreement, Maxwell purchased all of the outstanding stock of Phoenix
Power for approximately $4 million ($1.3 million in cash and 100,679 shares of
Maxwell common stock valued at approximately $2.7 million). Direct acquisition
costs were approximately $95,000. The purchase price was allocated to the
estimated fair values of the net tangible and intangible assets acquired,
approximately $3 million of which was charged to acquired in-process R&D in the
three months ended April 30, 1998. The value assigned to other intangible assets
is $1.6 million, and is being amortized on a straight-line basis over the
estimated economic lives. The aggregate purchase price of Phoenix Power could
increase to as much as $13 million dependent upon the financial performance of
Phoenix Power over the next two years.
Also in March 1998, the Company acquired Tri-MAP International, Ltd.
("Tri-MAP"), a privately-held, United Kingdom-based manufacturer of
industrial-grade PC-compatible computer systems. Tri-MAP was acquired in a
stock-for-stock exchange accounted for as a pooling of interests for an
aggregate of 290,000 shares of Maxwell common stock valued at approximately $7.0
million. The Company incurred direct transaction costs of approximately
$625,000, which were charged to operations during the quarter ended April 30,
1998. The historical results of operations for Tri-MAP were not material in
relation to those of Maxwell and financial information for prior periods has not
been restated to reflect the merger. Retained earnings as of February 1, 1998
was restated to reflect Tri-MAP's accumulated deficit of approximately $660,000
as of such date.
In April 1998, the Company acquired the majority of the assets of the
Electromagnetic Systems Group of Primex Physics International Company ("Physics
International"), for cash of $10 million, assumption of certain liabilities and
direct acquisition costs of $175,000. Physics International specializes in
high-energy pulsed power technology, primarily performing research and
development for the U.S. government. The acquired assets consisted primarily of
intangible assets and intellectual property, fixed assets, existing customer
contracts and accounts receivable. The liabilities assumed consisted primarily
of the majority of Physics International's current liabilities, and obligations
under acquired customer contracts. The purchase price was allocated to the
estimated fair values of the net assets acquired, of which approximately $2.5
million was charged to acquired in-process R&D during the quarter ended April
30, 1998. The value assigned to the other intangible assets is $3.7 million, and
is being amortized on a straight-line basis over the estimated economic lives.
Pro forma results of operations, as if the Physics International acquisition
had occurred at the beginning of fiscal years 1997 and 1998, are as follows
(after eliminating all significant intercompany transactions and excluding the
charge for acquired in-process R&D):
<TABLE>
<CAPTION>
PHYSICS
MAXWELL INTERNATIONAL COMBINED
--------- ------------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Year ended July 31, 1997:
Sales.................... $101,411 $ 16,383 $117,794
Net income (loss)........ 4,024 (1,574) 2,450
Basic income per share... $ 0.68 -- $ 0.41
Diluted income per share. $ 0.60 -- $ 0.37
Year ended July 31, 1998:
Sales.................... $125,308 $ 11,267 $136,575
Net income............... 1,681 (1,240) 441
Basic income per share... $ 0.22 -- $ 0.06
Diluted income per share. $ 0.20 -- $ 0.05
</TABLE>
F-24
<PAGE> 45
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- BUSINESS COMBINATIONS (CONTINUED)
Shares used in computing pro forma basic and diluted income per share are
5,949,000 and 6,644,000 in fiscal 1997, and 7,677,000 and 8,356,000 in fiscal
1998.
The pro forma information is presented as an illustration only and does not
necessarily indicate the operating results that would have occurred had the
acquisition been completed as of the beginning of the years indicated, nor does
it necessarily indicate future operating results. Pro forma results for Phoenix
Power are not presented as the acquisition was not material to the Company.
NOTE 9 -- LOSSES, RESTRUCTURING AND OTHER SPECIAL CHARGES
Primarily due to the acquisition of three businesses during the quarter,
the Company recorded an $8.9 million pre-tax charge in the third quarter of
fiscal 1998. Approximately $6.3 million of the charge related to the
acquisitions, including transaction costs for business combinations accounted
for as a pooling of interests and the appraised amount of acquired in-process
research and development for the two purchase business combinations. Also during
the fiscal 1998 third quarter, the Company reorganized the operations within the
Information Products and Services business segment, including a refocusing of
certain operations along the lines of other business segments and the
discontinuation of certain businesses. Charges related to this discontinued
business segment amounted to $2.6 million, of which approximately $1.3 million
remained to be paid as of July 31, 1998. The majority of the remaining charge is
expected to be incurred by the end of the second quarter of fiscal 1999.
In fiscal 1996, the Company recorded $14.4 million of pre-tax charges. Of
this amount, $9.5 million was recorded during the first two quarters, and
included asset write-downs due to the adoption of FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, an increase in the valuation allowance against the Company's net
deferred income tax assets, the cost, primarily in the form of inventory
reserves, of re-positioning the Sierra Capacitor/Filter operation to focus on a
new commercial business area, and other operational reserves primarily
associated with fixed-price contracts and inventory. An additional $4.9 million
charge was recorded in the third quarter primarily for costs associated with
management changes and a restructuring of the Company's business units.
NOTE 10 -- ENVIRONMENTAL MATTER
In 1992, the Company and approximately 40 other potentially responsible
parties signed a consent order with the State of California with respect to
costs to be incurred at a recycling facility to characterize and remediate
hazardous substances. To date, the site has been characterized, and the Company
and the other potentially responsible parties have paid substantially all of
their respective shares of the costs of such characterization. The estimated
cost of monitoring and remediation activities, of which the Company's share is
currently estimated at approximately 3.3%, totals approximately $23 million.
Approximately $21 million of this amount will consist of maintenance, monitoring
and related costs to be incurred over a 25-30 year period. The Company has
accrued its share of such estimated costs; on the basis of amounts accrued by
the Company, it is management's opinion that any additional liability resulting
from this situation will not have a material effect on the Company's
consolidated financial statements.
NOTE 11 -- BUSINESS SEGMENTS
For purposes of analyzing and understanding the financial statements, the
Company's operations have been classified into the following business segments:
Power Conversion Products: Includes design, development and manufacture
of electrical components, systems and subsystems, including products that
capitalize on pulsed power such as ultracapacitors, microbial purification
systems, high voltage capacitors and other electrical components, power
supplies and power conditioning systems and eltromagnetic interface filter
capacitors.
Industrial Computers and Subsystems: Includes design and manufacture of
standard, custom and semi-custom industrial computer modules, platforms and
fully integrated systems primarily for OEMs.
F-25
<PAGE> 46
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- BUSINESS SEGMENTS (CONTINUED)
Technology Programs and Systems: Includes research and development
programs in pulsed power, pulsed power systems design and construction,
weapons effects simulation and computer-based analytic services, primarily
for the Department of Defense.
Information Products and Services: Includes design, development and
integration of software products and services including job cost accounting
and management information systems and other software products including
applications for the Internet, as well as wide-area and local-area network
and software integration services.
In fiscal 1998, the Company reorganized the operations within the
Information Products and Services business segment, including a refocusing
of certain operations along the lines of other business segments and the
discontinuation of certain businesses. Effective as of the beginning of the
fiscal third quarter, the Company no longer operates or reports in the
Information Products and Services business segment.
Business segment financial data, including partial-year results for
fiscal 1998 for the Information Products and Services segment prior to it
discontinuance, for the three years ended July 31 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales:
Power Conversion Products ................................... $ 16,448 $ 27,039 $ 39,312
Industrial Computers and Subsystems ......................... 26,131 34,259 40,864
Technology Programs and Systems ............................. 30,198 31,087 40,466
Information Products and Services ........................... 8,134 9,026 4,666
--------- --------- ---------
Consolidated total .................................. $ 80,911 $ 101,411 $ 125,308
========= ========= =========
Operating profit (loss):
Power Conversion Products ................................... $ (752) $ 2,482 $ 4,358
Industrial Computers and Subsystems ......................... 1,078 2,417 3,149
Technology Programs and Systems ............................. 2,131 1,804 (1,383)
Information Products and Services ........................... (3,680) (2,886) (488)
--------- --------- ---------
Total operating profit (loss) ....................... (1,223) 3,817 5,636
Corporate expenses and revenues ............................. (9,709) 434 (5,885)
Interest expense ............................................ (329) (173) (214)
--------- --------- ---------
Income (loss) before income taxes,
minority interest and cumulative
effect of change in accounting
principle ......................................... $ (11,261) $ 4,078 $ (463)
========= ========= =========
Identifiable assets:
Power Conversion Products ................................... $ 11,253 $ 12,299 $ 27,690
Industrial Computers and Subsystems ......................... 9,166 12,167 19,180
Technology Programs and Systems ............................. 7,586 8,298 31,531
Information Products and Services ........................... 3,136 5,920 --
Corporate ................................................... 9,583 8,436 26,664
--------- --------- ---------
Consolidated total .................................. $ 40,724 $ 47,120 $ 105,065
========= ========= =========
Depreciation and amortization:
Power Conversion Products ................................... $ 763 $ 887 $ 1,182
Industrial Computers and Subsystems ......................... 316 469 667
Technology Programs and Systems ............................. 994 647 1,413
Information Products and Services ........................... 162 258 157
Corporate ................................................... 272 326 326
--------- --------- ---------
Consolidated total .................................. $ 2,507 $ 2,587 $ 3,745
========= ========= =========
Capital expenditures:
Power Conversion Products ................................... $ 670 $ 1,768 $ 3,520
Industrial Computers and Subsystems ......................... 529 992 810
Technology Programs and Systems ............................. 240 424 1,581
Information Products and Services ........................... 482 1,231 166
Corporate ................................................... 55 310 949
--------- --------- ---------
Consolidated total .................................. $ 1,976 $ 4,725 $ 7,026
========= ========= =========
</TABLE>
F-26
<PAGE> 47
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- BUSINESS SEGMENTS (CONTINUED)
Intersegment sales are insignificant. Operating profit (loss) is sales less
cost of sales and operating expenses, excluding interest expense and corporate
expenses and revenues. Corporate expenses fiscal 1998 charges for acquired
in-process R&D, and in fiscal 1996 include certain restructuring costs and asset
write-downs relating to the adoption of FASB Statement No. 121. Identifiable
assets by segment include the assets directly identified with those segments.
Corporate assets consist primarily of cash and cash equivalents, facilities and
land, and, as of July 31, 1997, the telecommunications, centralized computers
and networking equipment of the Company, as well as the assets of the Corporate
information systems function.
Sales under United States government contracts and subcontracts are
primarily in the Technology Programs and Systems business segment, and
aggregated $32,622,000 and $33,526,000, and $40,332,000 in fiscal 1996, 1997,
and 1998, respectively. The portion of such sales to the United States Air Force
amounted to 14% and 10% of Company sales fiscal years 1997 and 1998,
respectively. A customer of the Industrial Computers and Subsystems business
segment represented 12% of sales of the Company in fiscal 1997.
International sales amounted to $7,555,000, $12,609,000 and $19,558,000 in
fiscal 1996, 1997, and 1998, respectively, principally to countries in Europe
and the Pacific Rim.
NOTE 12 -- FINANCIAL STATEMENT DETAILS
Inventories are classified as follows at July 31:
<TABLE>
<CAPTION>
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Finished goods......................................... $ 1,793 $ 1,019
Work in process........................................ 882 2,254
Raw materials and purchased parts...................... 6,047 12,550
------- -------
$ 8,722 $15,823
======= =======
</TABLE>
Property, plant and equipment consist of the following at July 31:
<TABLE>
<CAPTION>
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land and land improvements............................. $ 3,470 $ 3,470
Buildings and building improvements.................... 7,581 8,442
Machinery and equipment................................ 25,939 29,946
Office furniture and equipment......................... 7,861 11,109
Leasehold improvements................................. 3,462 5,292
------- -------
48,313 58,259
Less allowances for depreciation and
amortization........................................ 32,113 36,137
------- -------
16,200 22,122
Construction in progress............................... 729 1,154
------- -------
$16,929 $23,276
======= =======
</TABLE>
Goodwill and other non-current assets consist of the following at July 31:
<TABLE>
<CAPTION>
1997 1998
------- --------
(IN THOUSANDS)
<S> <C> <C>
Goodwill and other acquired intangible assets, net of
accumulated amortization......................... $ -- $ 5,280
Deposits and other..................................... 667 1,223
------- --------
$ 667 $ 6,503
======= ========
</TABLE>
F-27
<PAGE> 48
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- FINANCIAL STATEMENT DETAILS (CONTINUED)
Accounts payable consist of the following at July 31:
<TABLE>
<CAPTION>
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable and accrued expenses.................. $10,516 $18,853
Environmental reserves................................. 1,252 1,152
Customer advances...................................... 1,872 675
------- -------
$13,640 $20,680
======= =======
</TABLE>
Included in Other-net in fiscal 1996 is the amortization into income over a
three-year period of amounts contributed by minority stockholders upon the
organization of the Company's PurePulse Technologies, Inc. subsidiary over such
stockholders' proportionate share of PurePulse Technologies' equity. These
amounts were fully amortized at the end of the third quarter of fiscal 1996, and
amounted to $379,000 in that year. Also included in Other-net is interest income
of $128,000, $147,000 and $1,545,000 in fiscal 1996, 1997 and 1998,
respectively. The increase in interest income in fiscal 1998 is due to the
investment of net cash proceeds from the Company's follow-on public stock
offering completed in November 1997.
Financial instruments which subject the Company to potential concentrations
of credit risk consist principally of investments in cash equivalents and
accounts receivable. The Company invests its excess cash with major corporate
and financial institutions and in United States government backed securities.
The Company has established guidelines relative to diversification and
maturities to maintain safety and liquidity, and has not experienced any losses
on these investments. The Company's accounts receivable result from contracts
with the United States government, as well as contract and product sales to
non-government customers in various industries. The Company performs ongoing
credit evaluations of selected non-government customers and generally requires
no collateral.
Supplemental disclosure of cash flow information consists of the following
for the three years ended July 31:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid (refunded) for:
Interest ............................... $ 329 $ 173 $ 214
Income taxes ........................... $ 152 $(831) $ 45
Non-cash activities:
Issuance of Common Stock in connection
with Deferred compensation agreement $ 645 $ 190 $ --
</TABLE>
<PAGE> 49
PROXY
MAXWELL TECHNOLOGIES, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE 1998 ANNUAL MEETING OF SHAREHOLDERS
The undersigned shareholder of MAXWELL TECHNOLOGIES, INC. hereby appoints
Kenneth F. Potashner and Donald M. Roberts and each of them with full power of
substitution to each, proxies of the undersigned to represent the undersigned at
the 1998 Annual Meeting of Shareholders of MAXWELL TECHNOLOGIES, INC. to be held
on January 27, 1999, at 10:00 A.M., local time, at the Coronado Marriott, 2000
Second Street, Coronado, California and at any adjournment(s) thereof, with all
power, including voting rights, which the undersigned would possess if
personally present at said meeting on the matters set forth on the reverse side.
THIS PROXY WILL BE VOTED AS DIRECTED. UNLESS A CONTRARY DIRECTION IS INDICATED,
THIS PROXY WILL BE VOTED FOR ALL OF THE NOMINEES FOR DIRECTOR LISTED ON THE
REVERSE SIDE AND FOR PROPOSALS (2) AND (3).
The proxies (or, if only one, then that one proxy) or their substitutes acting
at the meeting may exercise all powers hereby conferred.
The undersigned hereby revokes any prior proxy and ratifies and confirms all
that the above-named proxies or their substitutes, and each of them, shall
lawfully do or cause to be done by virtue hereof.
The undersigned hereby acknowledges receipt of the Notice of the 1998 Annual
Meeting of Shareholders and accompanying Proxy Statement dated December ____,
1998.
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
FOLD AND DETACH HERE
<PAGE> 50
Please mark
your votes as /x/
indicated in
this example.
<TABLE>
<CAPTION>
FOR WITHHOLD
all nominees AUTHORITY
listed (except to vote for
as withheld) nominees listed
<S> <C> <C>
(1) Election of Two Directors of the / / / /
Company of Class III to serve until
the fiscal year 2001 Annual Meeting
of Shareholders of Maxwell
Technologies, Inc. and until their
respective successors are duly
elected and qualified.
</TABLE>
Karl M. Samuelian and Carlton J. Eibl
WITHHELD FOR: (To withhold authority to
vote for any individual nominee, write
that nominee's name in the space
provided below.)
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
(2) Approval of the Amendment to the / / / / / /
Company's 1995 Stock Option Plan
increasing the shares thereunder by
700,000 shares.
FOR AGAINST ABSTAIN
(3) Approval of the Amendment to the / / / / / /
Company's Director Stock Option Plan
increasing initial options granted
to a new director to 10,000 and
annual grants to continuing
directors to 3,000 shares.
(4) In their discretion, upon all
matters as may properly come before
the meeting or any adjournment or
adjournments thereof.
</TABLE>
Please mark, sign, date and return the proxy card promptly using the enclosed
envelope.
Signature(s)___________________________________________Dated__________________
IMPORTANT: In signing this Proxy, please sign your name or names in the same way
as shown above. When signing as a fiduciary, please give your full title. If
shares are registered in the names of two or more persons, each should sign.
FOLD AND DETACH HERE
