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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-10964
MAXWELL TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-2390133
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9275 SKY PARK COURT
SAN DIEGO, CALIFORNIA 92123
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 279-5100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK,
PAR VALUE $.10 PER SHARE NAME OF EACH EXCHANGE ON WHICH REGISTERED: NASDAQ
NATIONAL MARKET ("NASDAQ")
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on September 30, 1999, based on the closing
price at which the Common Stock was sold on Nasdaq as of September 30, 1999, was
$125,477,244.
The number of shares of the Registrant's Common Stock outstanding as of
September 30, 1999 was 9,560,171 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A (including the Appendix thereto) are incorporated by
reference in Part III of this Report.
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MAXWELL TECHNOLOGIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JULY 31, 1999
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PART I
Item 1. Business.......................................................................................... 1
Item 2. Properties........................................................................................ 21
Item 3. Legal Proceedings................................................................................. 22
Item 4. Submission of Matters to a Vote of Security Holders............................................... 22
Item 4.1 Executive Officers of the Registrant ............................................................. 22
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................. 24
Item 6. Selected Financial Data........................................................................... 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 26
Item 7a. Quantitative and Qualitative Disclosures about Market Risk........................................ 36
Item 8. Financial Statements.............................................................................. 36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 54
PART III
Item 10. Directors and Executive Officers of the Registrant................................................ 54
Item 11. Executive Compensation............................................................................ 54
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................... 54
Item 13. Certain Relationships and Related Transactions.................................................... 54
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................. 55
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PART I
AS USED IN THIS ANNUAL REPORT ON FORM 10-K, ("FORM 10-K"), UNLESS THE
CONTEXT INDICATES OTHERWISE, THE TERMS "COMPANY" AND "MAXWELL" REFER TO MAXWELL
TECHNOLOGIES, INC., A DELAWARE CORPORATION, AND ITS CONSOLIDATED SUBSIDIARIES.
UNLESS OTHERWISE INDICATED, AS USED IN THIS FORM 10-K, THE TERM FISCAL YEAR
SHALL REFER TO THE 12-MONTH PERIOD ENDED OR ENDING JULY 31 OF A GIVEN YEAR.
SHARE OR PER SHARE INFORMATION IN THIS FORM 10-K FOR PERIODS PRIOR TO DECEMBER
17, 1996, IS ADJUSTED TO REFLECT A 2 FOR 1 STOCK SPLIT. THIS FORM 10-K MAY
CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934.
SUCH FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN ANY
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" HEREIN. DISCUSSIONS
CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE MATERIAL SET
FORTH UNDER "ITEM 1. BUSINESS", AND "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", AS WELL AS WITHIN
THIS FORM 10-K GENERALLY.
ITEM 1. BUSINESS
GENERAL
Maxwell Technologies, Inc. ("Maxwell" or the "Company") applies
industry-leading capabilities in pulsed power, space applications, industrial
computers and other advanced technologies to develop and market products and
services for commercial and government customers in multiple industries,
including energy, satellite, defense, telecommunications, consumer
electronics, medical products and water purification.
A worldwide leader in pulsed power technologies, the storage of
electrical energy and delivery of power in brief controlled bursts, the
Company has leveraged its technical expertise, gained from over 30 years of
experience performing research and development primarily for the United
States Department of Defense ("DOD"), to develop a portfolio of pulsed power
based products, ranging from components such as ultracapacitors and
electromagnetic interference ("EMI") filters to systems for purification and
sterilization and major pulsed power x-ray simulators. For the space and
satellite market, Maxwell offers a line of microelectronic components and
subsystems, as well as sophisticated analysis and services involving the
effects of the space environment on spacecraft and sensor signal processing
for space systems. In addition to space and power based products, the Company
designs and manufacturers industrial computers and subsystems which are sold
to original equipment manufacturers and as standard catalogue products in the
computer telephony, broadcasting, manufacturing automation and e-commerce.
The Company continues to pursue government funded research and development
projects, many of which involve computer-based analytic services and software.
PRODUCTS AND SERVICES
STERILIZATION AND PURIFICATION SYSTEMS
The Company's PUREBRIGHT-Registered Trademark- and COOLPURE-Registered
Trademark- systems are based on two patented pulsed power processes
incorporating capacitors and other pulsed power components designed and
manufactured by the Company. The PUREBRIGHT system utilizes intense pulsed light
to kill microorganisms and viruses in water, blood plasma and other
biopharmaceutical and medical products, and on food and food packaging. The
COOLPURE system uses pulsed electrical fields to kill microorganisms in liquids
and liquid foods.
MEDICAL AND PHARMACEUTICAL PRODUCT STERILIZATION. Maxwell is marketing
PUREBRIGHT systems for sterilization of medical and pharmaceutical products and
packaging materials. PUREBRIGHT systems for medical and pharmaceutical
applications consist of a standard enclosure containing the pulsed power
delivery system, linked by cable to a flash lamp unit. The flash lamp unit is
configurable to the customer's specific requirements for integration into
processing line equipment. The Company has strategic partnerships with medical
and pharmaceutical product companies, which are seeking FDA approval for
PUREBRIGHT's integration into blow-fill-seal plastic packaging equipment and
certain disposable medical product manufacturing equipment. In collaboration
with la Calhene, the Company has developed a barrier isolation system utilizing
PUREBRIGHT for sterile environments for use in the pharmaceutical industry. La
Calhene plans to introduce such systems to the market place in fiscal year 2000.
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Tests conducted during fiscal year 1999 confirmed that PUREBRIGHT
technology can be effective in deactivating microorganisms, including viruses
such as the HIV virus, in blood plasma products and other biopharmaceutical
products. The ability to destroy viruses without harming surrounding proteins
would open significant opportunities for PUREBRIGHT in the biotechnology
industry, ranging from treatment of biologically derived products to production
of vaccines. The Company is conducting further tests with industry partners to
establish and develop this PUREBRIGHT application.
WATER QUALITY. The Company has developed a four-gallon per minute
PUREBRIGHT system that reduces microbial contamination in water at the point of
entry in hotels, restaurants, laboratories and similar establishments. Several
of these systems are in use in restaurants in the San Diego and Tijuana, Mexico
area. In fiscal year 1999, the Company entered into a strategic relationship
with two United States entities in the Sanyo Group, in which the Sanyo companies
provide manufacturing capability for the Company's water purification units and
have marketing and distribution rights for such units in certain countries.
Sanyo also acquired a 2% equity interest in the Company's PurePulse Technologies
subsidiary.
In a strategic relationship with Pall Corporation, the Company has
developed a PUREBRIGHT system for anti-microbial treatment of ultra-high purity
water used in semiconductor manufacturing. Upon successful testing of a
prototype 250-gallon per minute system, the Company and Pall expect to conclude
a license under which the PUREBRIGHT system will be integrated into Pall's line
of water treatment products for semiconductor applications. Beta site testing is
expected to be completed in fiscal year 2000. The Company is also collaborating
with a Japanese company to develop a PUREBRIGHT system for the municipal
drinking water market in Japan.
FOOD PACKAGING. Through a long-standing relationship with Tetra Pak, the
Company has developed PUREBRIGHT systems for food packaging applications similar
in size, price and customizable features to the PUREBRIGHT systems for medical
and pharmaceutical products. During fiscal year 1999, Tetra Pak made a decision
to continue its traditional, chemical-based sterilization technique and to offer
PUREBRIGHT as an alternative, rather than replacement solution. The Company
reached an agreement with Tetra Pak amending its license to reduce the scope of
its exclusivity and remove minimum performance requirements. Upon successful
completion of field tests, Tetra Pak will offer PUREBRIGHT as an option in its
next generation of container filling machines.
The COOLPURE system, currently in the prototype stage, kills microorganisms
using pulses of electricity, rather than light. The COOLPURE system can be used
with opaque or cloudy liquids or pumpable foods such as juices, dairy products
and sauces, which the PUREBRIGHT light pulses are unable to penetrate. COOLPURE
is effective against vegetative bacteria, a narrower range of microorganisms
than those controlled by PUREBRIGHT. The Company has supplied COOLPURE
prototypes to the National Center for Food, Safety and Technology and an
international food products company. During fiscal year 1999, the Company
entered into a four-year research and development agreement with a consortium of
companies centered in The Netherlands for the development of COOLPURE
technology. If the development is successful, various members of the consortium
will have commercial rights to use or distribute COOLPURE systems throughout the
world.
POWER CONVERSION PRODUCTS
ULTRACAPACITORS. Maxwell is developing the POWERCACHE-TM- ultracapacitor to
provide bursts of power when a rapid injection of energy is required for an
application. The Company's ultracapacitor is scalable in that it can be
manufactured in a broad range of shapes and sizes. Currently, the Company is
developing ultracapacitors from sub-matchbook sized to cells measuring 2" x 2"
x 6", while maintaining the same high energy storage per unit volume. The
Company's ultracapacitors can also be linked together in modules to supply
higher power for applications such as automotive and power quality systems.
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In fiscal year 1998, the Company entered into a broad-based agreement
with EPCOS AG, formerly Siemens Matsushita Components GmbH, which is a joint
venture of Siemens AG and Matsushita Electrical Industries in the field of
passive electrical components. The agreement provides for the transfer of
Maxwell's ultracapacitor technology, sharing of ongoing product development
by both parties and the non-exclusive licensing right for EPCOS to
manufacture products based on Maxwell's ultracapacitor technology and to sell
such products in all countries of the world except the United States, Canada
and Mexico. EPCOS will target the full range of applications for the
Company's ultracapacitor. The Company receives initial license fees and
on-going royalties under the agreement.
The Company has identified electronics as the primary initial market for
its POWERCACHE ultracapacitor, including wireless communication devices such as
two-way pagers, modems, global satellite telephones and locator beacons, and
other devices such as power tools, toys, buoys, laptop computers, emergency
lights, PDA's and scanners. The devices appropriate for this market are the
small, sub-matchbook size units. In wireless communication devices, POWERCACHE
ultracapacitors can increase signal strength and significantly extend battery
life for devices that transmit in sequences of bursts. The Company is pursuing
design-in wins for its ultracapacitor into a variety of next generation portable
devices dependent on battery power, including two-way pagers and wireless
modems, and has targeted automatic meter reading devices and actuators as
near-term opportunities. During fiscal year 1999 and the beginning of the
current fiscal year, the Company installed and began the process of qualifying
an automated manufacturing line for the small ultracapacitor, which will
substantially increase the Company's production capacity for that device.
The Company has also identified power quality and automotive as
potential markets for its ultracapacitor. In the power quality arena, the
Company's ultracapacitors can function as a standby reserve of power to be
supplied in the event of an electrical interruption or voltage fluctuation in
an external power source. For this purpose, ultracapacitors are now being
integrated into a power supply product sold by the Company for sensitive
medical applications, such as MRI machines. In conventional combustion engine
vehicles, the Company's POWERCACHE ultracapacitor has potential applications
in catalytic converter pre-heating, air bag deployment, seat belt tightening
and engine starting. In electric and hybrid vehicles, the Company's
ultracapacitors have the potential to reduce the load on the battery pack by
using its stored energy for acceleration power and recapturing energy
otherwise lost during braking.
COMPONENTS. The Company designs, manufactures and sells a line of filters
to absorb the electromagnetic fields and signals generated by electronic devices
which interfere with and disrupt the functioning of other electronic devices,
including implantable medical devices such as pacemakers and defibrillators, and
aerospace guidance and communications systems. The Company's product blocks EMI
from entering an electronic device at the opening used by, for example, power
leads or sensors (the "feedthrough"). The Company supplies these filters to
major medical device manufacturers, currently for use with implantable
pacemakers and defibrillators, but potentially also for use with hearing aids
and other electronic devices. Similar feedthrough filters are supplied for
military and commercial space programs requiring high reliability broad-based
EMI filters.
In fiscal year 1999, the Company acquired KD Components, Inc. ("KD"), a
manufacturer of high voltage, high temperature ceramic capacitors for
aerospace, aviation, medical, mining, geophysical and automotive
applications. The operations of KD have been combined with the Company's
Sierra Division, which manufacturers ceramic capacitor EMI filters, to enable
the Company to offer a broad range of ceramic capacitor products. The Company
also offers a line of proprietary hermetic glass-to-metal seals for
industrial and automotive applications.
HIGH VOLTAGE PRODUCTS AND SYSTEMS. The Company designs, manufactures and
sells a range of high voltage capacitors supplying from thousands of volts to
tens of thousands of volts. Maxwell has long been a major supplier of capacitors
used in portable and stationary heart defibrillators used by medical personnel
to treat heart attacks. The Company also manufactures high voltage capacitors
for lasers for use in medical applications such as eye surgery, dentistry and
dermatology, and for industrial applications such as microlithography for
semiconductor manufacturing, flat panel annealing for LCD displays, marking,
welding, drilling and cutting. Other high-voltage capacitors are sold for use in
specialized applications and for use in large systems for the United States
government. The Company was recently selected to be one of two suppliers of high
voltage capacitors under a multi-year contract for the National Ignition
Facility, a nuclear fusion research effort of Lawrence Livermore Laboratory, a
United States Department of Energy national laboratory. The Company also
develops, manufactures and sells a line of compact power supplies used for
charging high voltage capacitors for the medical and industrial laser markets.
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POWER QUALITY. The Company develops and manufacturers power distribution
units, power conditioners and inverters, and other power protection products for
medical, telecommunications, industrial and commercial applications. It also
provides private label uninterruptible power supplies and power distribution
units for major companies in the power and energy industries world-wide.
SPACE AND TECHNOLOGY PRODUCTS AND PROGRAMS
SPACE. In fiscal year 1999, the Company acquired Space Electronics, Inc.
("SEi"), a San Diego - based designer and manufacturer of high reliability,
radiation hardened microelectronic components and assemblies primarily for the
space market. Following the acquisition of SEi, the Company has begun to
integrate various aspects of its technology-based programs and services, which
address technical challenges in commercial and government space programs, with
the capabilities of SEi to create a broad offering of products and services to
the space market.
Through its SEi unit, Maxwell provides integrated circuits, multi-chip
modules and boards designed and adapted for space flight, and other high
reliability applications. The Company uses proprietary technology, including its
RADPAK-Registered Trademark- packaging, to protect commercial, off-the-shelf
integrated circuits from radiation in space, and was recently selected by Sandia
National Laboratory to develop the first radiation-hardened single board
computer for the satellite market using Intel's Pentium-Registered Trademark-
processor. The Company has historically provided analytical services to the
government on the effects of the space environment on spacecraft, and this space
physics group has begun working with the leading commercial satellite developers
to solve complex space environment problems affecting existing and planned
satellite constellations. In addition, the Company's operation in Albuquerque,
New Mexico, continues to provide state-of-the-art analysis in sensor design and
development and signal processing for space systems and testing support for
techniques to harden electronic circuits and systems from radiation in space and
other hostile environments.
POWER SYSTEMS AND SIMULATORS. Maxwell is engaged in a variety of research
and development programs in pulsed power, weapons effects simulation and pulsed
power systems design and construction. These services are primarily supplied to
the United States government and its agencies including the Air Force and the
Defense Threat Reduction Agency. The Company also provides systems and services
to national laboratories and industrial and defense companies. The Company
typically performs research and development under contracts that allow the
Company to apply developed technology in commercial markets.
The Company performs above-ground simulation and testing of weapons effects
via the design and operation of large-scale X-ray and electromagnetic pulse
producing systems. The Company operates and maintains five simulation systems at
its San Leandro facility and one such system in San Diego. These systems employ
the Company's capacitors and other pulsed power components. The Company also has
developed power quality systems and power conditioning systems, including a
power conditioning system for an accelerator for tritium production. In
addition, the Company performs on-site technical, operations and maintenance
support at government facilities involving applications such as electric and
electrothermal gun research, advanced pulsed power development, high-power
microwave source development, energy storage and system integration of advanced
concept demonstration experiments.
COMPUTER-BASED ANALYTIC SERVICES AND SOFTWARE. Maxwell provides complex
computer-based analytic services, primarily to the DOD, and sells various
commercial software products. A primary focus of the Company's government funded
research is computer modeling of physical phenomena and improvement of the
architecture of the computer-based systems and networks used for transmitting
and applying data. The Company has developed highly advanced computer software
for modeling and predicting physical effects such as electromagnetic pulses,
electric currents, shock waves, ground shock and ground movement, as well as
modeling and predicting the interaction of chemical and biological agents with
buildings and other physical structures.
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In commercial markets, Maxwell provides software-related products and
services for cost accounting and management information systems. The Company is
marketing these products, which incorporate sophisticated job-cost and
activity-based accounting capabilities, to large contractors and others
interested in tracking costs by job, activity or cost center. The software is
sold under the JAMIS-Registered Trademark- (Job-cost Accounting and Management
Information Systems) label, and contains modules necessary for a comprehensive,
enterprise-wide system including accounting functions, Federal Acquisition
Regulation compliant billings, human resources, payroll, contracts and
purchasing. Potential markets for the Company's software offering have expanded
significantly with the full commercial introduction in fiscal year 1999 of JAMIS
e-timecard, an online web-enabled time recording system that operates in a
client-server environment including remote-site entry. This product can serve
any organization that seeks to collect and track time entries by its employees.
INDUSTRIAL COMPUTERS AND SUBSYSTEMS
Through its industrial computers and subsystems business, the Company
designs, manufactures and supplies standard, custom and semi-custom industrial
computer modules, platforms and fully-integrated systems to OEMs, on a worldwide
basis. The Company's product line ranges from enclosures, CPU boards and
backplanes to fully integrated and highly customized computer systems. The
Company's product line primarily employs passive backplane architecture,
complemented by the Company's recent development of its CompactPCI line of
products.
The Company's custom and semi-custom components and systems are
design-intensive applications. All of the Company's products are based on
Intel's x86 and Pentium architectures and are PC-compatible. The Company's
products are utilized primarily in computer telephony equipment such as
voice-mail servers, interactive voice response servers, telephone switching
servers and telephone network transaction control servers. Business in the
industrial automation market increased significantly in fiscal year 1999 with
the Company's participation in a major program to support the installation of
new mail sorting equipment by the United States Postal Service. The Company's
industrial computers are also used in a number of other applications such as
broadcasting, medical (CT Scan, MRI equipment and drug dispensing equipment),
test instrumentation (data acquisition and test), imaging instrumentation
(large-scale optical reading and sorting equipment) and manufacturing automation
(pick-and-place equipment).
The Company's products utilize passive backplane technology in which CPU
and input/output functionality is provided by add-in cards for flexibility and
ease of replacement. The Company provides fault resistant and fault tolerant
systems that include redundant components -- cooling fans, power supplies and
hard disks -- that can be "hot-swapped" without shutting down or otherwise
affecting the system. The Company also provides enclosures with segmented
backplanes that allow two or more independent computer systems to operate within
a single enclosure, an important feature in systems in which fault tolerance or
size requirements are critical. Enclosures are available to support from six to
twenty-five slots and can be configured in rack mount, table top or tower
models.
The Company's products employ several industry standard buses, form factors
and interfaces, which enable OEMs to integrate the Company's products with many
widely available and economical third party products. The Company's products
incorporate standard bus architecture including ISA Bus, PCI Bus, CompactPCI,
SCSI Bus and IDE and microprocessors in the Intel family up to the Pentium III,
and support operating systems including Windows, Windows NT, Solaris and Linux.
During fiscal year 1999, the Company continued to expand its geographic
scope with the addition of full service facilities in France and Germany, which
complement its operations in the United Kingdom. With facilities capable of
designing, developing, integrating and assembling products in three countries,
the Company is a major participant in the European market, and reflecting this
fact, a total of approximately 40% of the Company's fiscal year 1999 sales of
industrial computers and subsystems were generated in Europe.
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STRATEGIC PARTNERSHIPS
In recent years the Company has formed or expanded several strategic
partnerships. Through these alliances, Maxwell may obtain an enhanced
understanding of market demands and needs, access to funding for continued
development and commercialization of products, or a channel for market
penetration. In return, the strategic partner obtains an opportunity for early
adoption or use of the product or service.
For sterilization and purification products, the Company frequently accepts
initial funding to engineer a specific application for the strategic partner,
thus reducing the Company's product development expense, and in exchange, the
strategic partner often receives a period of exclusivity for the application.
During fiscal year 1999 the Company entered into a broad-based strategic
relationship with Sanyo. In exchange for $2 million, Sanyo obtained the right to
manufacture a portion of the Company's water quality products, certain sales and
distribution rights and a preferred stock interest in the Company's PurePulse
Technologies, Inc. subsidiary. The Company has also received funding from Pall
Corporation for development and testing of a prototype 250-gallon per minute
PUREBRIGHT water treatment system for ultra-high purity water used in
semiconductor manufacturing. Successful testing of the prototype could lead to a
commercialization agreement for that market, which will include exclusive rights
for Pall Corporation for a period of time. A strategic collaboration involving
development funding from la Calhene has led to the introduction by la Calhene of
a barrier isolation system, under an exclusive license, utilizing PUREBRIGHT
technology.
The Company has also developed strategic partner relationships for product
development and marketing of ultracapacitors. PacifiCorp has provided funding
for early-stage product analysis, development and testing of ultracapacitors in
power quality applications and has provided an additional $7 million in funding
for product development, preferred access to the technology, royalty rights and
an equity investment in the Company's subsidiary, Maxwell Energy Products, Inc.
The Company has signed a broad-based licensing agreement relating to
ultracapacitors with EPCOS, formerly Siemens Matsushita Components, GmbH,
providing for technology transfer, joint product improvement and non-exclusive
rights for EPCOS to manufacture ultracapacitor products and to sell such
products in all countries of the world other than the United States, Canada and
Mexico.
SALES AND MARKETING
The Company's commercial products sales teams consist of sales personnel
based in its operating facilities, and for the Company's industrial computer and
SEi units, geographically-dispersed sales offices. These sales teams are often
supported by scientists, application engineers and technical specialists. Sales
and marketing for the Company's products in the United States, and, for
industrial computer, Europe, is handled directly by the Company. Elsewhere, the
Company utilizes sales representatives and distributors to assist in the
marketing of its products. The Company conducts marketing programs intended to
position and promote its products and services, including trade shows, seminars,
advertising, public relations, distribution of product literature and web-sites
on the Internet.
Emerging technologies require customer acceptance of new and different
technical approaches, and the sales effort for new products, particularly in the
Power Conversion Products and Sterilization and Purification Systems business
segments, includes substantial involvement from engineers to demonstrate the
applications of the Company's products. Senior management is also significantly
involved in gaining access to customers or potential strategic partners to
discuss the Company's emerging product lines. The time required to demonstrate
technical feasibility and cost effectiveness for new technologies often requires
an extended initial marketing effort by the Company. As a result, an important
part of the sales strategy for new products is to capitalize on strategic
partnerships formed to develop the product and establish an avenue to obtain
product validation.
In its Space and Technology Products and Programs segment, the Company's
sales and marketing is primarily conducted by key scientists and other members
of its technical staff. A large portion of this business is obtained in response
to requests for proposals by the government, with the Company's bids and
proposals focused on providing the government with detailed technical
information, as well as competitive pricing. Successful performance of the
Company's contracts is an important factor in securing follow-on business.
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COMPETITION
In most of the markets in which it operates, Maxwell has a number of
competitors, many of which have longer operating histories, significantly
greater financial, technical, marketing and other resources, greater name
recognition, and a larger installed base of customers than the Company. In some
of the Company's business areas involving emerging technologies, the Company
faces competition from products utilizing alternative technologies.
The Company does not believe that its PUREBRIGHT products have direct
competitors in the application of pulsed broad spectrum light to treat water,
decontaminate food packaging, or sterilize medical or pharmaceutical products.
Pulsed light competes with many other established and developing technologies,
most of which are available in forms that are significantly less expensive than
the Company's products. For water treatment, the Company faces competition from
many alternative technologies, including filtration systems, reverse osmosis,
chemicals, distillation technology and continuous wave ultraviolet light
systems. Alternative technologies also exist for the sterilization, disinfection
and purification of medical products, food packaging and food products,
including technologies such as autoclave heat sterilization, chemicals, gamma
radiation and modified atmosphere packaging. The Company believes its
Sterilization and Purification Systems will be competitive because of their
efficacy in microbial reduction, their speed in providing treatment, their
ability to be integrated directly into processing lines rather than providing
treatment after the product comes off the line, and their capability to provide
treatment without producing hazardous wastes.
Although a number of companies are researching and developing
ultracapacitor technology, the Company has three principal competitors in
ultracapacitor products: Panasonic, a division of Matsushita Electric
Industries, Ltd.; Elna, a unit of Asahi Glass; and Polystor, a manufacturer
of batteries and ultracapacitors. The key competitive factors are price,
performance (energy stored and power delivered per unit volume), form factor
and breadth of product offerings. Although its products are not yet
sufficiently established to be fully competitive on price, the Company
believes it competes favorably with respect to each of the other factors. In
addition, the Company will be aggressive in pricing when necessary.
Ultracapacitors also compete with other technologies, including high-power
batteries in power quality and automobile load leveling applications,
flywheels in power quality and automotive applications (including as a power
source for electric vehicles), and superconducting magnetic energy storage in
power quality.
The Company's EMI filter business competes with AVX Filter, a subsidiary of
Kyocera, in the EMI feedthrough filter market. The competitive factors in this
market include price, breadth of electromagnetic spectrum filtered, small size
and reliability. The Company believes it competes favorably with respect to each
of these factors. The Company believes its patent for mounting of the filter at
the surface of an implantable medical device's feedthrough provides a
competitive advantage by allowing the manufacture of a smaller sized device.
The Company's traditional high voltage capacitors face competition from
numerous independent electronics suppliers, as well as from component
manufacturing operations within certain medical and industrial OEM
organizations. The largest independent competitor in the United States is
Aerovox, which has competing high voltage capacitor lines very similar to the
Company's. Customers generally select capacitor components for their systems
based on criteria such as price, functionality (I.E. voltage requirements) and
past experience with a vendor. The Company focuses on high-end, high-power
capacitors, maintains relationships with customers geared towards achieving
design wins and offers competitive pricing.
In space products, the Company faces a variety of competition in different
product areas. The Company competes with traditional radiation-hardened IC
suppliers like Honeywell, Lockheed Martin, and Intersel (formerly Harris)
Devices for different monolithic ICs, processors and ASIC products. The Company
also has competition from commercial suppliers with lines that have favorable
radiation-hardened characteristics like Temic in Europe and National
Semiconductor and Analog Devices. SEi competes with high reliability packaging
houses such as Austin, White Microelectronics, Teledyne and Sac Tec for
monolithic and MCMs. SEi's proprietary technology enables the Company to compete
using unique solutions on the most advanced commercial electronic circuits.
The Company's primary competition in its passive backplane industrial
computer target markets include RadiSys, Diversified Technology, Advantech,
Industrial Computer Source, a division of Dynatech, Xtech and Trenton, among
others, resulting in a highly fragmented market in which no one entrant is
dominant. In addition,
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there are industrial computers and subsystems divisions within several large
OEM operations. Competitive factors in this market include price, design
expertise, functionality and fault tolerance. The Company believes it
competes favorably with respect to each of these factors. CompactPCI is an
emerging technology that is neither widely marketed nor accepted; it will
potentially compete with passive backplane and much more widely installed
VME-based systems for market share. The competitive factors surrounding
CompactPCI are very similar to passive backplane systems; however,
traditional VME manufacturers such as Motorola and Force have entered the
market.
In complex computer-based analytic services, the Company often competes
with larger, better funded entities to secure government and other contracts.
The Company relies on its expertise in modeling and analysis and its ability to
make competitive bids to secure contracts. In commercial software, the JAMIS
accounting system competes principally with one similar government contract
based software application produced by Deltek Systems, as well as with numerous
customized and several off-the-shelf accounting software products. The Company
relies on superior performance and an attractive price point to secure market
share.
MANUFACTURING AND SUPPLIERS
Maxwell currently manufactures products in its Power Conversion Products,
Industrial Computers and Subsystems and Sterilization and Purification Systems
segments, some of which consist primarily of design, assembly and system
integration. The Company has several manufacturing and assembly facilities in
the United States and the United Kingdom. Five of the Company's facilities in
the United States, two in the United Kingdom and one in Germany have obtained
ISO 9001 certification. For certain emerging products, the Company will evaluate
whether outsourcing or licensing arrangements are preferable to establishing its
own high volume manufacturing capacity for that product.
The Company generally purchases components and materials, such as
electronics components, dielectric materials and enclosures of metal and
plastic, from a number of suppliers. In certain operations, the Company relies
on a limited number of suppliers or a single supplier. Although the Company
believes there are alternative sources for components and materials currently
obtained from a single source, there can be no assurance that the Company will
be able to identify and qualify alternative suppliers in a timely manner.
Maxwell's industrial computer business relies on single qualified suppliers for
some of its critical components, primarily CPU boards and some power supplies.
The EMI filters produced by the Company rely on a sole domestic source for one
component, and that supplier has indicated its plans to design, build and sell a
competing filter in the future. The Company believes this supplier will continue
to sell to the Company; but, if necessary, the Company could replace this
supplier or design and manufacture the component itself. Although the Company
seeks to reduce its dependence on sole and limited source suppliers, the partial
or complete loss of these sources could have at least a temporary material
adverse effect on the Company's results of operations, and damage customer
relationships due to the complexity of the products supplied and the significant
amount of time required to qualify new suppliers. See "Risk Factors".
The Company has limited experience with volume manufacturing of commercial
products. To date, the Company has not manufactured in volume its
ultracapacitors or sterilization and purification systems and has not
manufactured its other products in high volume. The Company may face challenges
in scaling up production of its new products, especially those products that
contain newly developed technologies. In addition, the Company will need to
expand its current facilities, obtain additional production equipment or
outsource manufacturing in order to manufacture a substantial quantity of its
products.
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RESEARCH AND DEVELOPMENT
The Company conducts internally-funded engineering, research and
development to refine and expand its products and services. Approximately 10% of
the reported research and development expense consists of the Company's
preparation of proposals principally for contracts for funded research and
development for the government. For fiscal years 1999, 1998, and 1997,
expenditures for internally-funded research and development were approximately
$10.8 million, $9.7 million and $6.0 million, respectively. In addition, the
Company performs substantial research and development work funded by customers,
including agencies of the United States government and commercial companies
under strategic partnership arrangements.
PATENTS, LICENSES AND TRADEMARKS
The Company's success is heavily dependent upon the establishment and
maintenance of proprietary technologies. Although the Company attempts to
protect its intellectual property rights through patents, copyrights, trade
secrets and other measures, there can be no assurance that the steps taken by
the Company to protect its proprietary technologies will be adequate to prevent
misappropriation by third parties, or will be adequate under the laws of some
foreign countries, which may not protect the Company's proprietary rights to the
same extent as do the laws of the United States.
The Company uses employee and third-party confidentiality and
non-disclosure agreements to protect its trade secrets and unpatented know-how.
The Company requires each of its employees to enter into a proprietary rights
and non-disclosure agreement in which the employee agrees to maintain the
confidentiality of all proprietary information of the Company and, subject to
certain exceptions, to assign to the Company all rights in any proprietary
information or technology made or contributed by the employee during his or her
employment. In addition, the Company regularly enters into non-disclosure
agreements with third parties, such as potential joint venture partners and
customers.
The Company has historically relied primarily on its technological and
engineering abilities, and on its design and production capabilities to gain
competitive business advantages, rather than on patents or other intellectual
property rights. However, the Company does file patent applications on concepts
and processes developed by the Company's personnel, and, as its commercial
businesses expand, the Company has placed increased emphasis on patents to
provide protection for certain of its technologies and products. The Company's
success will depend in part on its ability to maintain its patents, add to them
where appropriate, and to develop new products and applications without
infringing the patent and other proprietary rights of third parties, and without
breaching or otherwise losing rights in technology licenses obtained by the
Company for other products. There can be no assurance that any patent owned by
the Company will not be circumvented or challenged, that the rights granted
thereunder will provide competitive advantages to the Company or that any of the
Company's pending or future patent applications will be issued with claims of
the scope sought by the Company, if at all. If challenged, there can be no
assurance that the Company's patents (or patents under which it licenses
technology) will be held valid or enforceable. In addition, a number of the
patents and patent applications owned or licensed by the Company are subject to
"march-in" rights and non-exclusive, royalty-free, confirmatory licenses held by
various governmental agencies or other entities.
BACKLOG
The Company's funded backlog as of July 31, 1999 and 1998 amounted to
approximately $67 million and $47 million, respectively. The funded backlog
consists of remaining funding under cost-plus contracts for tasks not yet
completed, remaining revenues to be recognized on contracts accounted for on a
percentage-of-completion basis and firm orders for products not yet delivered.
The Company expects to complete or deliver substantially all of its currently
funded backlog within 12 months. The unfunded portion of contracts awarded was
approximately $19 million and $34 million at July 31, 1999 and 1998,
respectively.
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GOVERNMENT BUSINESS
A substantial portion of the Company's sales (approximately 29% in
fiscal year 1999 and 31% in fiscal year 1998) is derived from contracts with
the United States government, principally agencies of the DOD, and
subcontracts with government suppliers. The reductions in defense budgets in
the 1990s adversely affected the Company's activities, particularly in the
area of system survivability products and services, such as weapons effects
simulation and testing. The Company has also experienced increased
competition in bidding for new defense programs from contractors seeking to
replace their lost business. While the DOD has continued to fund, although at
lower levels, research on next-generation pulsed power concepts, the
operation of existing simulation machines remains subject to curtailment.
The Company's government contracts are typically performable over a
one-year or multi-year period, with funding provided in increments of one year
or less. Government agencies may terminate their contracts, in whole or in part,
at their discretion, and in such event, the government agency is obligated
generally to pay the costs incurred by the Company thereunder, plus a fee based
upon work completed. Contract costs for services or products supplied to
government agencies, including allocated indirect costs, are subject to audit
and adjustment. Contract costs have been reviewed and accepted by the government
through fiscal year 1995. Contract revenues for periods subsequent to fiscal
year 1995 have been recorded in amounts that are expected to be realized upon
final review and settlement. Contracts entered into by the Company with
government agencies are fixed-price contracts or cost-plus contracts. Under a
fixed-price contract, the customer agrees to pay a specific price for
performance. Under a cost-plus contract, the customer agrees to pay an amount
equal to the Company's allowable costs in performing the contract, plus a fixed
or incentive fee. Certain costs of doing business, such as interest expenses and
advertising expenses, are not allowable under cost-plus contracts. Greater risks
are involved under a fixed-price contract than under a cost-plus contract,
because in a fixed-price contract the Company assumes responsibility for
providing the specified product or services regardless of the actual costs
incurred. Failure to anticipate technical problems, estimate costs accurately or
control costs during contract performance reduces or eliminates the contemplated
profit and can result in a loss. On the other hand, the government generally
permits higher profit margins when establishing prices for fixed-price contracts
because of such risks. In the space and technology products and programs
business segment approximately 53% and 69% of sales were derived from cost-plus
contracts in fiscal year 1999 and 1998, respectively, and the balance of sales
in such years were derived from fixed-price contracts.
GOVERNMENT REGULATION
The testing, manufacture and sale of certain of the Company's products are
subject to regulation by numerous governmental authorities. Pursuant to the
Federal Food, Drug, and Cosmetic Act, and the regulations promulgated
thereunder, the FDA regulates the pre-clinical and clinical testing,
manufacture, labeling, storage, distribution and promotion of food and medical
products and processes. The Company has obtained clearance from the FDA for use
of COOLPURE technology for preservation of liquid foods. In addition, the
Company has obtained clearance from the FDA for PUREBRIGHT for food use and is
applying for similar approvals in Canada and Europe, as well as supporting
customers in obtaining clearance of PUREBRIGHT for medical applications. The
Company's EMI filter capacitor has been approved for use in implantable
defibrillators and implantable pacemakers of certain medical device
manufacturers.
The testing, preparation of necessary marketing applications and processing
of those applications with the FDA is expensive and time consuming, can vary
based on the type of product and may take several years to complete. There is no
assurance that the FDA will act favorably or quickly in making such reviews, and
significant difficulties or costs may be encountered by the Company in its
efforts to obtain FDA approvals that could delay or preclude the Company from
marketing any products it may develop, or furnish an advantage to competitors.
The FDA may also require post-marketing testing and surveillance to monitor the
effects of approved products or place conditions on any approvals that could
restrict the commercial applications of such products. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing.
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Because of the nature of its operations and the use of hazardous substances
in certain of its ongoing manufacturing and research and development activities,
the Company is subject to stringent federal, state and local laws, rules,
regulations and policies governing the use, generation, manufacturing, storage,
air emission, effluent discharge, handling and disposal of certain materials and
wastes. Although the Company believes it is in material compliance with all
applicable government and environmental laws, rules, regulations and policies,
there can be no assurance that the Company's business, financial condition or
results of operations will not be materially adversely affected by current or
future environmental laws, rules, regulations and policies or by liability
arising out of any past or future releases or discharges of materials that could
be hazardous. See "Risk Factors" .
FOREIGN SALES
The Company's revenue from customers outside of the United States for the
past three years was $32.5 million in fiscal year 1999, $21.1 million in fiscal
year 1998 and $14.1 million in fiscal year 1997. In fiscal year 1999, $13.1
million of the total foreign sales was attributable to sales to customers
located in the United Kingdom.
SEGMENTS
The Company's business segments are discussed in Note 11 of Notes to
Consolidated Financial Statements included as Item 8 herein. The Company
currently operates in four business segments: Space and Technology Products and
Programs (includes products and services for the government and commercial space
markets, research and development and programs in pulsed power, pulsed power
systems design and construction, weapons effects simulation and computer-based
analytic services, and computer software services and products; Industrial
Computers and Subsystems (includes design and manufacture of standard, custom
and semi-custom industrial computer modules, platforms and fully-integrated
systems); Power Conversion Products (includes design, development and
manufacture of electrical components, systems and subsystems, including products
that capitalize on pulsed power such as ultracapacitors, high voltage capacitors
and other electrical components, power supplies and power conditioning systems
and EMI filter capacitors); and Sterilization and Purification Systems (includes
sterilization and purification systems to reduce or eliminate microbial
contamination). The Company's operating subsidiaries are Maxwell Energy
Products, Inc. and Phoenix Power Systems, Inc. (Power Conversion Products),
PurePulse Technologies, Inc. (Sterilization and Purification Systems), I-Bus,
Inc., I-Bus UK, Ltd., I-Bus France and I-Bus Germany (Industrial Computers and
Subsystems), and Maxwell Technologies Systems Division, Inc., Space Electronics,
Inc., and Maxwell Business Systems, Inc. (Space and Technology Products and
Programs). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included as Item 7 herein.
EMPLOYEES
At July 31, 1999, the Company had 1,093 employees, including 62 employees
with Ph.D. degrees and 101 others with post-graduate degrees. None of the
Company's employees is represented by a labor union. Maxwell considers its
relations with its employees to be good.
RISK FACTORS
Any of the following risks could materially affect the Company's business,
financial condition and results of operations could be adversely impacted by any
of the following risks. The risks set out below are not exhaustive.
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OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND MARKET OUR PRODUCTS AND
TECHNOLOGIES
Many of our products are in the development stage. Our products are also
alternatives to established products or are new technologies that provide
capabilities that do not presently exist in the marketplace. Our products are
sold in highly competitive and rapidly changing markets. The success of our
products is significantly affected by their cost, technology standards and end
user preferences. In addition, the success of our products depends on a number
of factors, including our ability to:
- overcome technical, financial and other risks involved in introducing
new products and technologies;
- identify and develop a market for our new products and technologies;
- produce products that can be competitively priced;
- respond to technological changes by improving our existing products
and technologies;
- accurately anticipate market demand for our products and technologies;
- demonstrate that our products have technological and/or economic
advantages over the products of our competitors; and
- respond to competitors that are more experienced, have significantly
greater resources, and a larger base of customers.
OUR SUCCESS DEPENDS ON OUR ABILITY TO TRANSITION FROM RELYING ON THE GOVERNMENT
SECTOR TO PRIVATE-SECTOR SALES
Historically, we have relied upon various government agencies to fund our
research and development, and we have derived a significant portion of our
revenues from the government sector. Our business strategy is to now concentrate
on developing, manufacturing and marketing our products to the private sector,
while maintaining steady revenues from the government sector. Our success in
this transition will depend upon a number of objectives, including the
following:
- developing and manufacturing new products at competitive prices;
- gaining customer acceptance for our products and services;
- expanding our customer base through our sales and marketing efforts;
- increasing our manufacturing capacity; and
- developing extensions of our existing products and services into new
applications.
WE RELY EXTENSIVELY ON STRATEGIC RELATIONSHIPS THAT MAY NOT BE SUCCESSFUL
We have established and will continue to attempt to establish strategic
relationships with corporate partners and United States government agencies to
develop our products. These relationships allow us to understand and access new
markets, and provide us an opportunity to test our products. If these
relationships are not successful or not continued, it could have a material
adverse effect on our sales and growth. The success of these relationships
depends on a number of factors, including:
- the interest in our products which are still in the development stage;
- our success in meeting the expectations of our strategic partners; and
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- our strategic partners' success in marketing or their willingness to
purchase any such products.
We may not be successful in continuing our relationships with our current
strategic partners. In addition, we may not be able to enter into new strategic
relationships on commercially reasonable terms, or if we do, these relationships
may not be successful.
EVEN IF SUCCESSFUL, OUR STRATEGIC RELATIONSHIPS PRESENT SEVERAL RISKS
Although we rely extensively on our strategic relationships, these
relationships present several risks to our business, including the following:
- Our partners may require us to share control over our development,
manufacturing and marketing programs, and limit our ability to license
our technology to others. In addition, some of our partners require
that we share our proprietary technology with them and restrict our
ability to engage in some areas of product development and marketing;
- Our strategic partners may use or disclose the technology which we
jointly develop without paying us any royalties;
- We often grant certain exclusive rights to our strategic partners as
an incentive for them to participate in the development of a product.
Any exclusive rights granted to strategic partners may decrease our
ability to find a broader market for some of our products. This may
have the effect of substantially decreasing our revenues during the
exclusivity period; and
- Our strategic partners may seek to manufacture jointly developed
products on their own or obtain these products from third party
sources that would have the effect of decreasing our revenues from
these products.
WE DEPEND ON OEM CUSTOMERS AND AS A RESULT HAVE LONG SALES CYCLES
Sales to a few original equipment manufacturers, known as "OEMs," as
opposed to direct retail sales to customers, make up a significant part of our
revenues. The timing and volume of these sales depend upon the sales levels and
shipping schedules for the products of our OEM customers. Thus, even if we
develop a successful component, our sales will not increase unless the product
into which our component is incorporated is successful. If our OEM customers
fail to sell a sufficient quantity of products incorporating our components, or
if the OEM's sales timing and volume fluctuates, it could have a material
adverse effect on our business, financial condition and results of operations.
Our OEM customers typically require a long development and engineering process
before incorporating our products and services into their devices. This period
of time is in addition to the time we spend on basic research and product
development. As a result, we are vulnerable to changes in technology or end user
preferences.
Our opportunity to sell our products to our OEM customers typically occurs
at infrequent intervals, depending on when the OEM customer designs a new
product or enhances an existing one. If we are not aware of an OEM's product
development schedule, or if we cannot provide components or technologies when
they develop their products, we will miss an opportunity that may not reappear
for some time.
OUR ACQUISITION STRATEGY COULD ADVERSELY AFFECT OUR PERFORMANCE
As part of our business strategy, we regularly review possible acquisitions
of complementary companies, technologies or products, and periodically engage in
discussions regarding such possible acquisitions. During fiscal year 1999, we
acquired three businesses with strategic importance to different areas of our
operations. The businesses we acquired are geographically dispersed, with one
located in California, one in Nevada and the other in Germany. We completed four
acquisitions in fiscal year 1998. The success of our acquisition strategy
depends on a number of factors, including the following:
- correctly valuing the commercial potential of technologies owned by
the companies we acquire;
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- successfully integrating the operations, products, personnel and
cultures of the companies we acquire;
- effectively managing our operations in a number of locations and
foreign countries;
- our ability to focus on our day-to-day business operations while
pursuing our acquisition strategy;
- our ability to enter markets in which we have limited or no direct
experience; and
- retaining the key employees of the companies we acquire.
In addition, similar to the acquisitions we completed in fiscal years
1999 and 1998, any future acquisition may result in:
- dilutive issuances of equity securities;
- the incurrence of debt;
- a decrease in our cash balances;
- amortization expenses related to goodwill and other intangible assets;
and
- other charges to operating results, including acquired in-process
research and development charges.
Moreover, there can be no assurance that any equity or debt financing
proposed in connection with any acquisition will be available to us on
acceptable terms or at all, when, and if, we find a suitable company, technology
or product to acquire. We cannot assure that any acquisition we complete will
result in long-term benefits to us or to our stockholders or that we will be
able to effectively manage the resulting business.
WE HAVE INCURRED LOSSES HISTORICALLY AND IN THE EVENT OF FUTURE LOSSES, THE
PRICE OF OUR COMMON STOCK MAY FLUCTUATE
We have incurred net losses in three of our past five fiscal years. In the
future, we may experience significant fluctuations in our revenues and we may
incur net losses from period to period as a result of a number of factors,
including the following:
- the amounts invested in developing and marketing our products in any
period as compared to the volume of sales of those products in the
same period;
- fluctuations in the demand for our products by OEMs;
- the prices at which we sell our products and services as compared to
the prices of our competitors;
- the timing of our product introductions as compared to those of our
competitors;
- the profit margins on our mix of product sales;
- the structure and timing of new strategic relationships;
- the contraction, cancellation or suspension by the United States
government of its programs and contracts with us; and
- the dilution, debt, expenses, and/or charges we incur as part of our
acquisition strategy.
In addition, we incur significant costs developing and marketing products
based on new technologies. If in any period these costs are more than the
revenues we derive from the sales of these products, it could have the effect of
offsetting any income derived from our other products, and we could incur net
losses.
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We anticipate that, in order to increase our market share, we may sell our
products and services at profit margins below those we ultimately expect to
achieve and/or significantly reduce the prices of our products and services in a
particular quarter or quarters. The impact of the foregoing may cause our
operating results to be below the expectations of public market analysts and
investors. In such event, the price of our common stock would likely fluctuate.
WE MAY EXPERIENCE DIFFICULTIES MANUFACTURING OUR PRODUCTS
We may experience difficulties in manufacturing our products in increased
quantities, outsourcing the manufacturing of our products, and customizing our
manufacturing process. We have limited experience in manufacturing our products
in high volume. It may be difficult for us to:
- increase the quantity of the new products we manufacture, especially
those products that contain new technologies; and
- reduce our manufacturing costs to a level needed to produce adequate
profit margins.
It may also be difficult for us to solve management, technological,
engineering and other problems related to our manufacturing processes. These
problems include production yields, quality control and assurance, component
supply, and shortages of qualified management and other personnel. In addition,
in order to manufacture our products in high volume, we will need to continue to
expand our current facilities and/or obtain additional facilities. We may not be
successful in expanding our facilities or in obtaining additional facilities.
We may elect to have some of our products manufactured by third parties.
Outsourcing involves risks with respect to quality assurance, cost and the
absence of close engineering support.
Part of our ultracapacitor manufacturing strategy is to implement a process
that will allow customization of our ultracapacitors while retaining the
benefits of volume manufacturing and materials procurement. There can be no
assurance that such a process can be developed and implemented in time to meet
our needs.
WE HAVE LIMITED MARKETING AND SALES EXPERIENCE AND OUR STRATEGY DEPENDS ON THIRD
PARTIES
We have limited experience marketing and selling our products. To sell our
products, we will need to train our marketing and sales personnel to effectively
demonstrate the advantages of our products over the products offered by our
competitors. The highly technical nature of the products we offer may limit our
ability to retain and attract adequate marketing and sales personnel. Thus, as
part of our sales and marketing strategy, we enter into arrangements with
distributors and sales representatives and depend upon their efforts to sell our
products. These arrangements may not be successful.
OUR SUCCESS DEPENDS UPON PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS
Our success depends on the establishment and maintenance of intellectual
property rights. Although we try to protect our intellectual property rights
through patents, copyrights, trade secrets and other measures, these steps may
not prevent misappropriation by third parties. Other issues include:
- adequately protecting our intellectual property rights under the laws
of some foreign countries, which may not be as protective as United
States laws; and
- the possibility that third parties could "reverse engineer" our
products in order to determine their method of operation and introduce
competing products or develop competing technology independently.
As our business has expanded, we have emphasized protecting our
technologies and products through patents. Our success depends on maintaining
our patents, adding to them where appropriate, and developing products and
applications without infringing on third parties' patent and proprietary rights.
The risks involved in protecting our patents include:
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- our patents may be circumvented or challenged and held unenforceable
or invalid;
- our pending or future patent applications, if any, may not be issued
with the protections we seek; and
- others may claim rights in the patented and other proprietary
technology owned or licensed by us.
If our patents are invalidated or if it is determined that we, or the
licensor of the patent, does not hold sole rights to the patent, it could have a
material adverse effect on our business, results of operations and financial
condition, particularly if we cannot design around others' proprietary rights.
Competing research and patent activity in our product areas is substantial.
Conflicting patent and other proprietary rights claims may result in disputes or
litigation. Although we do not believe that our products or proprietary rights
infringe on third party rights, infringement claims could be asserted against us
in the future. The negative effects of such claims, with or without merit, are:
- time-consuming, costly litigation;
- product shipment delays;
- we could be required to enter into royalty or licensing agreements;
and
- possible damage payments or injunctions which prevent us from making,
using or selling the infringing product.
Also, we may not be able to stop a third party's product from infringing on
our proprietary rights, without litigation.
Some of our owned or licensed patents and patent applications have
"march-in" rights and non-exclusive, royalty-free, confirmatory licenses held by
various governmental agencies or other entities. "March-in" rights are the
United States government or agency's right to cancel agreements and require a
contractor to grant licenses to third parties if the contractor does not develop
the technology in the agreements. Confirmatory licenses permit the United States
government to select vendors other than us to make products for them which would
otherwise infringe our patent rights that are subject to the royalty-free
licenses.
In addition, the United States government can require us to grant licenses
(including exclusive licenses) of our patents and patent applications or other
inventions developed for the government to a third party if it finds that we did
not commercialize such inventions or if such action is necessary:
- to meet public health or safety needs;
- to meet requirements for public use under federal regulations; or
- because we have not made reasonable efforts to ensure products are
manufactured in the United States.
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Because a number of our commercial products are derived from technology
originally developed in government funded programs, these risks may apply
outside of the work on government contracts.
THERE ARE RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES AND OPERATIONS
We derive an increasing portion of our revenues from sales to customers
located outside of the United States. We expect our international sales to
continue to represent a significant and increasing portion of our future
revenues. As a result, our business will continue to be subject to certain
risks, such as foreign government regulations and export controls, as well as
changes in tax laws, tax treaties, tariffs and freight rates.
We have only recently established or acquired operations in foreign
countries. Since we are relatively inexperienced in managing our international
operations, we may be unable to focus on the operation and expansion of our
worldwide business and to manage cultural, language and legal differences
inherent in international operations. In addition, to the extent we are unable
to effectively respond to political, economic and other conditions in these
countries, our business, results of operations and financial condition could be
materially adversely affected. Moreover, changes in the mix of income from our
foreign subsidiaries, expiration of tax holidays and changes in tax laws and
regulations could result in increased tax rates for us.
THERE ARE RISKS ASSOCIATED WITH OUR CONTINUING BUSINESS WITH THE UNITED STATES
GOVERNMENT
We derive a significant portion of our revenues, including revenues from
contracts with the United States government, principally agencies of the DOD,
and from subcontracts with government suppliers. The reductions in defense
budgets in the 1990s have adversely affected our traditional business,
particularly in the area of system survivability products and services, such as
weapons effects simulation and testing. We have also experienced increased
competition in bidding for new defense programs from contractors seeking to
replace their lost government business. In addition, defense spending in
general, and the number and size of contracts awarded to us, could be reduced in
the future. A significant loss of United States government funding would have a
material adverse effect on our business, results of operations and financial
condition.
Our business with the United States government is also subject to various
other risks, including the following:
- unilateral termination for the convenience of the government;
- reduction or modification in the event of changes in the government's
requirements or budgetary constraints;
- increased or unexpected costs causing losses or reduced profits under
fixed-price contracts or unallowable costs under cost-plus contracts;
- risks of potential disclosure of our confidential information to third
parties;
- the failure or inability of a subcontractor or contractor to perform
its obligations under a contract in circumstances where we are the
prime contractor or subcontractor; and
- the failure of the government to exercise options provided for in the
contracts and the exercise of march-in rights or confirmatory licenses
by the government.
There can be no assurance that our contracts with the DOD and other
government agencies will not be terminated, reduced or modified.
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OUR SUCCESS DEPENDS ON OUR ABILITY TO OBTAIN A SUBSTANTIAL AMOUNT OF CAPITAL
We believe that in the future we will need a substantial amount of capital
for a number of purposes including the following:
- to achieve our long-term strategic objectives;
- to maintain and enhance our competitive position;
- to meet anticipated volume production requirements for several of our
product lines, in particular our ultracapacitors and sterilization and
purification systems;
- to expand our manufacturing capabilities and facilities;
- to establish viable production alternatives;
- to fund our continuing expansion into commercial markets;
- to construct and equip additional or existing facilities; and
- to acquire new or complementary businesses, product lines and
technologies.
There can be no assurance that the necessary additional financing will be
available to us on acceptable terms or at all. If adequate funds are not
available, we may be required to change, delay, reduce or eliminate our planned
product commercialization strategy or our anticipated facilities expansion plans
and expenditures. This could have a material adverse effect on our business,
results of operations and financial condition.
OUR SUCCESS DEPENDS ON OUR KEY PERSONNEL
Since we primarily focus on emerging technologies, our success depends upon
the continued service of our key technical and senior management personnel. Some
of our scientists and engineers are the key developers of our products and
technologies and are recognized as world-leaders in their area of expertise. The
loss of any of these scientists or engineers to our competitors could end our
technological and competitive advantage in some product areas and business
segments.
Our performance also depends on our ability to identify, hire, train,
retain and motivate high quality personnel, especially key manufacturing
executives and highly skilled engineers and scientists. The industries in which
we compete are characterized by a high level of employee mobility and aggressive
recruiting of skilled personnel. Our employees may terminate their employment
with us at any time.
OUR FAILURE OR THE FAILURE OF OUR PRODUCTS, CUSTOMERS, SUPPLIERS OR VENDORS TO
BE YEAR 2000 COMPLIANT COULD ADVERSELY AFFECT OUR OPERATIONS
A significant percentage of the software that runs most computers relies on
two digit date codes to perform a number of computation and decision-making
functions. As the year 2000 approaches, these computer programs may fail from an
inability to interpret date codes properly, misreading "00" for the year 1900
instead of 2000.
We believe that our major computer systems and software programs are Year
2000 compliant. In addition, we have taken steps to bring our products which
could be impacted by potential Year 2000 problems into compliance. However, the
failure of our computer systems and software programs or of our products to
operate properly with regard to Year 2000 requirements could result in the
following:
- unanticipated expenses to remedy any problems;
18
<PAGE>
- a reduction in our sales; and
- exposure to related litigation by our customers.
In addition, our customers or third party component suppliers and vendors
may also experience business disruptions in connection with the potential Year
2000 problem. Our business, operating results and financial condition could be
materially adversely affected by potential Year 2000 problems with our own
systems and products, or if any of our customers, vendors or other third party
entities experience a business disruption as a result of potential Year 2000
problems.
WE RELY ON A LIMITED NUMBER OF THIRD PARTY SUPPLIERS
Our ability to manufacture products depends in part on our ability to
secure qualified and adequate sources of materials, components and
sub-assemblies at prices which enable us to make our products at competitive
costs. Some of our suppliers are currently the sole source of one or more items
which we need to manufacture our products. On occasion, we have experienced
difficulty in obtaining timely delivery of supplies from outside suppliers. This
has adversely impacted our delivery time to our customers and, in one
circumstance, we believe such delivery problems were a contributing factor to
the loss of certain business from a major customer. There can be no assurance
that these and other similar supply problems will not recur.
Currently, a single domestic supplier provides one of the components for
our EMI filter product. This supplier has indicated that it plans to design,
build and sell a product which would compete with our EMI filter. If this
occurs, we believe that we could still obtain the component from this supplier
or, if necessary, we believe that we could replace this supplier with another
vendor, or that we could manufacture the component on our own. Although we seek
to reduce our dependence on sole and limited source suppliers, the partial or
complete loss of these sources could have at least a temporary material adverse
effect on our business and results of operations, and damage customer
relationships.
WE ARE EXPOSED TO SIGNIFICANT PRODUCT LIABILITY RISKS
We may be exposed to certain product liability risks. For example, our EMI
filters are components of implantable medical devices and, due to the litigious
environment surrounding the medical device industry, may subject us to an
increased risk of product liability claims that may involve significant defense
costs. Our other products may also be used in functions involving significant
product liability risks. There can be no assurance that product liability claims
will not be asserted against us in the future. Although we maintain product
liability insurance with coverage limits that we believe to be adequate, there
can be no assurance that this coverage will, in fact, be adequate to protect us
against future product liability claims. In addition, product liability
insurance is expensive and there can be no assurance that, in the future,
product liability insurance will be available to us in amounts or on terms
satisfactory to us, if at all. A successful product liability claim or series of
claims brought against us could have a material adverse effect on our business,
financial condition and results of operations.
WE ARE SUBJECT TO VARIOUS ENVIRONMENTAL REGULATIONS
We are subject to a variety of environmental regulations relating to the
use, storage, discharge, handling, emission, generation, manufacture and
disposal of toxic or other hazardous substances. If we fail to comply with
current or future regulations, substantial fines could be imposed against us,
our production could be suspended or stopped, or our manufacturing process could
be altered. Such regulations could require us to acquire expensive remediation
or abatement equipment or to incur substantial expenses to comply with
environmental regulations. If we fail to adequately control the use, discharge,
disposal or storage of hazardous or toxic substances, we could incur significant
liabilities.
19
<PAGE>
OUR FINANCIAL CONDITION COULD BE AFFECTED BY THE STOCK OPTION PLANS AT OUR
SUBSIDIARIES
Several of our principal operating subsidiaries have employee stock option
plans which provide for the issuance of options to purchase shares of the
subsidiary's common stock. In most cases, we can grant up to 12% or 15% of the
outstanding stock of a subsidiary under its stock option plan. Certain key
employees of one of our subsidiaries, Maxwell Business Systems, Inc., however,
own an aggregate of 20%, and have the right to purchase up to an additional 29%,
of that subsidiary's common stock. If the options granted under one of our
subsidiary's stock option plans are exercised, our ownership interest in that
subsidiary will be reduced. This will have the effect of reducing our portion of
the net income and dividends that we receive from that subsidiary, as well as
reducing the proceeds if we were to sell that subsidiary. Ultimately, we expect
that our reported earnings per share will be reduced in future quarters due to
the increasing fair value of certain subsidiaries and the dilution created by
options granted under our subsidiaries' stock option plans.
Currently, no established trading market exists for the common stock
underlying any of the subsidiary options and such options are not exchangeable
for shares of our common stock. We have no plan to offer an exchangeability
feature for options to purchase shares of our common stock or otherwise provide
liquidity for these subsidiary options, but we could consider such alternatives
in the future.
OUR FINANCIAL CONDITION COULD BE AFFECTED BY POTENTIAL PUBLIC OFFERINGS OF OUR
SUBSIDIARIES' STOCK
Due to our corporate structure of operating through separate subsidiaries,
we could engage in future public offerings or other sales of the common stock of
our subsidiaries, sales of subsidiaries or strategic acquisitions with
subsidiary stock if our board determined that it was in the best interests of
the stockholders to pursue that course of action. Some of these alternatives
could adversely effect our business, financial condition and results of
operations. For example, any public offering or other sale of a minority portion
of a subsidiary's stock would reduce that subsidiary's contribution to our net
income and earnings per share.
WE MAY FACE DIFFICULTIES IN OBTAINING FOOD AND DRUG ADMINISTRATION APPROVAL FOR
OUR PRODUCTS
Some of our products are subject to the approval process of the Food and
Drug Administration ("FDA") because they are used for food storage or in
medical devices. These products include our COOLPURE and PUREBRIGHT
technologies and the EMI filter. There are many aspects of the FDA approval
process that could have a material adverse effect on our business, financial
condition and results of operations, including the following:
- the FDA testing and application process is expensive and lengthy, and
varies based on the type of product;
- our products may not ultimately receive FDA approval or clearance,
which would prevent us from marketing such products;
- the FDA may restrict a product's intended use as a condition to
approving or clearing such product, or place conditions on any
approval that could restrict the commercial applications of such
products;
- the FDA may require post-marketing testing and surveillance to monitor
the effects of products it initially approves;
- the FDA may withdraw its approval or clearance of any product if
compliance with regulatory standards is not maintained, or if problems
occur following initial marketing; and
- failure to comply with existing or future regulatory requirements can
result in, among other things, fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of
production, failure of the United States government to grant
pre-market clearance or pre-market approval for products, withdrawal
of marketing clearances or approvals and criminal prosecution.
20
<PAGE>
OUR LONG-TERM FIXED-PRICE CONTRACTS MAY BE UNPROFITABLE
Some of our businesses, primarily those involved in government funded
research and systems development, enter into long-term fixed-price contracts for
large hardware systems or components. If we experience unanticipated delays in
program schedules, fail to anticipate costs accurately or encounter problems
with important vendors, it could adversely affect the profitability of these
contracts.
ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BY-LAWS COULD
PREVENT TRANSACTIONS WHICH ARE IN THE BEST INTEREST OF OUR STOCKHOLDERS
Some provisions in our certificate of incorporation could make it more
difficult for a third party to acquire control of Maxwell, even if such change
in control would be beneficial to our stockholders. We have a staggered Board of
Directors, which means that our directors are divided into three classes. The
directors in each class are elected to serve three-year terms. Since the
three-year terms of each class overlap the terms of the other classes of
directors, the entire Board of Directors cannot be replaced in any one year.
Furthermore, our certificate of incorporation contains a "fair price provision"
which may require a potential acquirer to obtain the consent of our board to any
business combination involving Maxwell. Our certificate of incorporation and
bylaws do not permit stockholder action by written consent or the calling by
stockholders of a special meeting.
We have adopted a program under which our stockholders have rights to
purchase our stock directly from Maxwell at a bargain price if a company or
person attempts to buy Maxwell without talking to the Board. This program is
intended to encourage a buyer to negotiate with us, but may have the effect of
discouraging offers from possible buyers.
The provisions of our certificate of incorporation and bylaws could delay,
deter or prevent a merger, tender offer, or other business combination or change
in control involving us that some, or a majority, of our stockholders might
consider to be in their best interests. This includes offers or attempted
takeovers that could result in our stockholders receiving a premium over the
market price for their shares of our common stock.
OUR COMMON STOCK EXPERIENCES LIMITED TRADING VOLUME AND OUR STOCK PRICE HAS BEEN
VOLATILE
Our common stock is traded on the Nasdaq National Market. The trading
volume of our common stock each day is relatively small. This means that sales
or purchases of relatively small blocks of stock can have a significant impact
on the price at which our stock is traded. We believe factors such as quarterly
fluctuations in financial results, announcements of new technologies impacting
our products, announcements by competitors or changes in securities analysts'
recommendations may cause the price of our stock to fluctuate, perhaps
substantially. These fluctuations, as well as general economic conditions in the
United States and worldwide, such as recessions or higher interest rates, may
adversely affect the market price of our common stock.
ITEM 2. PROPERTIES
The Company owns a 45,600 square foot engineering and administrative
support facility and a 22,000 square foot manufacturing facility, both located
in San Diego, California. In addition, the Company owns a 25,000 square foot
manufacturing facility on 2.6 acres of land located in Carson City, Nevada. The
Company leases six other facilities in the San Diego area and a 240,000 square
foot facility in San Leandro, California, of which 45,000 square feet is
subleased to a third party. The Company also leases an 8,200 square foot
facility in Minneapolis, Minnesota, three facilities totaling 30,000 square feet
in the United Kingdom, a 9,000 square foot facility in Germany and 3,400 square
foot facility in Nice, France. The Company leases office space in Reston,
Virginia; Carson City, Nevada; Albuquerque, New Mexico; and Mission Viejo,
California. The Company's leased facilities are leased for varying terms and
some of them contain options permitting the Company to extend the lease term.
The Company utilizes its facilities in the following manner: corporate, sales
and administrative (126,000 sq. ft.); manufacturing, assembly and testing,
research and development laboratories and engineering (515,000 sq. ft.) The
Company also utilizes on a rent-free basis 22,000 square feet at Kirkland Air
Force Base in Albuquerque, New Mexico and operates a 500-acre test site in San
Diego under a facilities contract with the Defense Threat Reduction Agency.
21
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In January 1991, the California Department of Toxic Substances Control, or
DTSC, notified the Company that it had been identified as one of a number of
"potentially responsible parties" with respect to alleged hazardous substances
released into the environment at a recycling facility in San Diego County. As
Maxwell is not in the business of transporting or disposing of waste materials,
the Company retained the services of the owners of the recycling facility to
transport certain waste material generated by Maxwell. After properly delivering
the materials to the transporter, Maxwell was not further involved in the
transportation, treatment or disposal of the materials. Under California and
Federal "Superfund" laws, Maxwell is a potentially responsible party even though
it was not involved in the transport or disposal of the substances. Moreover, it
is the Company's understanding that alleged hazardous substances from at least
approximately 160 other potentially responsible parties were released at the
facility.
In 1992, the Company and approximately 40 other potentially responsible
parties signed a consent order with the State of California with respect to
costs to be incurred at a recycling facility to characterize and remediate
hazardous substances. To date, the site has been characterized, and the Company
and the other potentially responsible parties have paid substantially all of
their respective shares of the costs of such characterization. The estimated
cost of monitoring and remediation activities, of which the Company's share is
currently estimated at approximately 3.3%, totals approximately $23 million.
Approximately $21 million of this amount will consist of maintenance, monitoring
and related costs to be incurred over a 25-30 year period. The Company has
accrued its share of such estimated costs; on the basis of amounts accrued by
the Company, it is management's opinion that any additional liability resulting
from this situation will not have a material effect on the Company's financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4.1 EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive officers of the Company are set forth below. The Company's
officers serve at the pleasure of the Board of Directors.
Name Age Position
- ---- --- --------
Thomas L. Horgan 39 President and Chief Executive Officer. Mr.
Horgan was named CEO in March 1999 and had
served as interim CEO since November 1998.
Previously, he served as Corporate Vice
President, Business Development since joining
Maxwell in June 1996, and was elected to the
Board of Directors of the Company in January
1997. Mr. Horgan served from 1991 through 1993
as European Information Security Manager for
Digital Equipment. In 1993 he joined Quantum
Corporation and until 1995 served as Director,
Customer Service. From 1995 until joining
Maxwell, he was Vice President, Customer
Service, for Conner Peripherals.
Kenneth F. Potashner 42 Chairman of the Board. Mr. Potashner has served
Maxwell as Chairman of the Board since April
1997. He joined Maxwell in April 1996 and served
as President and Chief Executive Officer from
that time until November 1998. From 1991 through
1994 he was Vice President, Product Engineering,
for Quantum Corporation. From 1994 to April
1996, he served as Executive Vice President,
Operations, Conner Peripherals.
22
<PAGE>
Richard Balanson 50 Vice President. From 1996 until joining Maxwell
in August 1999, Mr. Balanson was the President
and Chief Operating Officer for 3D Systems, a
California-based manufacturer of rapid
prototyping equipment. From 1994 to 1996, Mr.
Balanson was the General Manager and Executive
Vice President of Maxtor Corporation, and
before that was President and Chief
Operating Officer of Applied Magnetics
Corporation.
Vickie L. Capps 38 Vice President-Finance and Administration,
Treasurer and Chief Financial Officer. Prior to
joining Maxwell in July 1999, Ms. Capps served
Wavetek Wandel Golterman, Inc. as group
controller from 1992 through 1994, vice
president - corporate finance from 1994 through
1996 and then chief financial officer from 1996
through 1999. Previously she spent 10 years with
the firm of Ernst & Young LLP.
Gregg McKee 56 Vice President. Mr. McKee became Corporate Vice
President and President of Maxwell Energy
Products, Inc. in September 1996. From 1990
until joining Maxwell he served Quantum
Corporation in various capacities. From 1990 to
January 1993 he was Director of the Customer
Service Group; from February 1993 to December
1995, he served as Corporate Director of
Malaysian Operations; and from January 1995
until joining Maxwell he was President, Quantum
Malaysia.
Donald M. Roberts 51 Vice President, General Counsel and Secretary.
Mr. Roberts has served as General Counsel since
joining the Company in April 1994, and was
appointed Secretary in June 1996 and Vice
President in January 1999. For more than five
years prior thereto, Mr. Roberts was a
shareholder of the law firm of Parker, Milliken,
Clark, O'Hara & Samuelian, a Professional
Corporation, and a partner of the predecessor
law partnership, and in that capacity had served
the Company as outside legal advisor for more
than ten years.
Walter P. Robertson 57 Vice President. Mr. Robertson was named
Corporate Vice President and President of
Maxwell Technologies Systems Division, Inc. in
August of 1996. Prior to that he served General
Dynamics as Vice President, Aircraft Production
from 1991 through 1992 and as Vice President and
General Manager, Space Magnetics from 1992
through 1994. From May 1994 through November
1994, Mr. Robertson was Transition Director for
Martin Marietta. In April 1995 and until joining
Maxwell, he served BioSolutions Technologies, a
start-up company, as President and Chief
Executive Officer.
Ted Toch 50 Vice President. Mr. Toch joined the Company in
June 1998, as Corporate Vice President and
President of PurePulse Technologies, Inc. Prior
to joining PurePulse Technologies he was Vice
President of Marketing and Sales for Johnson &
Johnson's Advanced Sterilization Products
Division from 1993 to 1998 with earlier
experience as Vice-President and General Manager
of the Instrument's Division of Nellcor, Inc.
23
<PAGE>
John D. Werderman 53 Vice President. Mr. Werderman was named
Corporate Vice President and President of I-Bus,
Inc. in July 1997. Previously, Mr. Werderman
served as Chief Operating Officer of Maxwell
Technologies Systems Division, Inc. Prior to
joining Maxwell in October 1996, Mr. Werderman
worked for M/A.COM, Inc. for over 15 years, most
recently as President and General Manager of
their Baltimore, Maryland operation, M/A.COM
Government Products, Inc.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "MXWL." The following table sets forth, for the fiscal periods
indicated, the high and low closing sales prices for the Common Stock as
reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR 1998
Quarter ended October 31, 1997 $ 38-1/2 $ 21-3/4
Quarter ended January 31, 1998 36-3/8 21
Quarter ended April 30, 1998 32-5/16 25
Quarter ended July 31, 1998 28-7/8 22
FISCAL YEAR 1999
Quarter ended October 31, 1998 $ 26-3/8 $ 19-1/4
Quarter ended January 31, 1999 40-1/4 23-3/8
Quarter ended April 30, 1999 34-1/2 18-3/16
Quarter ended July 31, 1999 30-11/16 18-5/8
</TABLE>
The last reported sale price of the Common Stock on the Nasdaq National
Market on October 12, 1999, was $11-5/16 per share. As of July 31, 1999, there
were 508 holders of record of the Company's Common Stock.
The Company currently anticipates that any earnings will be retained for
the development and expansion of its business and, therefore, does not
anticipate paying dividends on its Common Stock in the foreseeable future. In
addition, under the Company's Line of Credit Agreement, neither the Company nor
any of its subsidiaries may, directly or indirectly, pay any cash dividends to
its stockholders.
24
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of operations data for the
fiscal years ended July 31, 1997, 1998 and 1999, and consolidated balance sheet
data as of July 31, 1998 and 1999 are derived from the Consolidated Financial
Statements of the Company and Notes thereto, which have been audited by Ernst &
Young LLP, independent auditors. The following selected consolidated statement
of operations data for the years ended July 31, 1995 and 1996 and consolidated
balance sheet data as of July 31, 1995, 1996 and 1997 are derived from audited
consolidated financial statements of the Company not included in this Appendix.
All selected financial data presented has been restated to include the results
and accounts of business combinations completed during fiscal year 1999, using
the pooling-of-interests method of accounting. The following selected data
should be read in conjunction with Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Item 8. FINANCIAL
STATEMENTS appearing elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ----------- ---------- ---------- -----------
CONSOLIDATED STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Sales.................................... $ 80,807 $ 91,725 $117,775 $140,565 $179,685
Cost of sales............................ 60,020 71,727 76,781 92,919 118,937
---------- ----------- ----------- ---------- -----------
Gross profit............................. 20,787 19,998 40,994 47,646 60,748
Operating expenses:
Selling, general and administrative.... 15,376 18,464 26,947 31,378 38,576
Research and development............... 5,264 5,331 6,042 9,712 10,824
Restructuring, acquisition and other
charges................................ -- 5,703 -- 8,942 5,885
---------- ----------- ----------- ---------- -----------
Total operating expenses............ 20,640 29,498 32,989 50,032 55,285
---------- ----------- ----------- ---------- -----------
Operating income (loss).................. 147 (9,500) 8,005 (2,386) 5,463
Interest expense......................... 361 368 220 338 404
Interest income and other, net........... (871) (395) (249) (1,510) (660)
---------- ----------- ----------- ---------- -----------
Income (loss) before income taxes, minority
interest and cumulative effect of change
in accounting principle................ 657 (9,473) 8,034 (1,214) 5,719
Provision (credit) for income taxes...... 118 1,894 1,473 413 (5,776)
Minority interest in net income of
subsidiaries........................... 86 50 54 80 427
Cumulative effect of change in accounting
principle.............................. -- 2,569 -- -- --
---------- ----------- ----------- ---------- -----------
Net income (loss)........................ $ 453 $(13,986) $ 6,507 $( 1,707) $ 11,068
========== =========== =========== ========== ===========
Income (loss) per share:
Basic................................. $0.07 $(2.21) $0.96 $(0.20) $1.18
========== =========== =========== ========== ===========
Diluted............................... $0.07 $(2.21) $0.87 $(0.20) $1.12
========== =========== =========== ========== ===========
Before cumulative effect of change in
accounting principle................ -- $(1.81) -- -- --
========== =========== =========== ========== ===========
<CAPTION>
JULY 31,
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ----------- ---------- ---------- -----------
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS, EXCEPT RATIO)
<S> <C> <C> <C> <C> <C>
Total assets............................. $ 32,855 $ 46,602 $ 55,180 $115,385 $134,434
Cash and cash equivalents................ $ 4,181 $ 2,385 $ 2,194 $ 21,397 $ 8,839
Working capital.......................... $ 18,760 $ 8,931 $ 15,274 $ 50,882 $ 62,238
Working capital ratio.................... 2.33:1 1.42:1 1.73:1 2.58:1 2.81:1
Long-term debt, including current
portion................................ $ 3,250 $ 2,193 $ 1,762 $ 2,462 $ 3,688
Shareholders' equity at year-end......... $ 36,666 $ 23,243 $ 32,617 $ 80,153 $ 97,168
Shares outstanding at year-end........... 6,204 6,513 6,969 9,210 9,557
</TABLE>
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Maxwell Technologies, Inc. ("Maxwell" or the "Company") applies
industry-leading capabilities in pulsed power, space applications, industrial
computers and other advanced technologies to develop and market products and
services for commercial and government customers in multiple industries,
including energy, satellite, defense, telecommunications, consumer
electronics, medical products and water purification.
A worldwide leader in pulsed power technologies, the storage of
electrical energy and delivery of power in brief controlled bursts, the
Company has leveraged its technical expertise, gained from over 30 years of
experience performing research and development primarily for the DOD, to
develop a portfolio of pulsed power based products, ranging from components
such as ultracapacitors and EMI filters to systems for purification and
sterilization and major pulsed power x-ray simulators. For the space and
satellite market, Maxwell offers a line of microelectronic components and
subsystems, as well as sophisticated analysis and services involving the
effects of the space environment on spacecraft and sensor signal processing
for space systems. In addition to space and power based products, the Company
designs and manufacturers industrial computers and subsystems which are sold
to original equipment manufacturers and as standard catalogue products in the
computer telephony, broadcasting, manufacturing automation and e-commerce.
The Company generates revenue from the sale of commercial products, from
licensing technology and other rights to strategic partners and from performing
contract research and other projects for the United States government and other
customers. The Company's commercial products sales teams consist of sales
personnel based in its operating facilities and for the Company's industrial
computer and SEi units, geographically dispersed sales offices. These sales
teams are often supported by scientists, application engineers and technical
specialists. Sales and marketing for the Company's products in the United
States, and, for industrial computers, Europe, is handled directly by the
Company, and elsewhere the Company utilizes sales representatives and
distributors to assist in the marketing of its products. The Company conducts
marketing programs intended to position and promote its products and services,
including trade shows, seminars, advertising, public relations, distribution of
product literature and web-sites on the Internet.
The Company's operating expenses are substantially impacted by selling,
general and administrative activities and by research and development
activities. Selling, general and administrative expenses are primarily driven by
(1) sales volume, with respect to sales force expenses and commission expenses;
(2) the extent of market research activities for new product design efforts; (3)
advertising and trade show activities and (4) the number of new products
launched in the period. General and administrative expenses primarily include
costs associated with the Company's administrative employees, facilities and
functions. The Company incurs expenses in foreign countries primarily in the
functional currencies of such locations. As a result of the Company's
international operations, the United States dollar amount of its revenue and
expenses is impacted by changes in foreign currency exchange rates. The
Company's ability to maintain and grow its sales depends on a variety of factors
including its ability to maintain its competitive position in areas such as
technology, performance, price, brand identity, quality, reliability,
distribution and customer service and support. The Company's sales growth also
depends on its ability to continue to introduce new products that respond to
technological change and market demand in a timely manner.
BUSINESS SEGMENTS
In fiscal year 1999, Maxwell adopted Statement of Financial Accounting
Standards No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION ("Statement No. 131"). The new rules establish revised standards
for public companies relating to the reporting of financial information about
operating segments. The adoption of Statement No. 131 did not have a material
effect on Maxwell's financial statements, although segment information
disclosures were affected.
26
<PAGE>
In accordance with the requirements and guidelines of Statement No. 131,
Maxwell's operations have been classified into the following business segments
(prior year segment information has been restated to conform to Statement No.
131 guidelines):
- SPACE AND TECHNOLOGY PRODUCTS AND PROGRAMS: Includes design,
development and manufacture of high reliability radiation-hardened
electronic components and consulting services for commercial and
government space systems, research and development programs in pulsed
power, pulsed power systems design and construction, computer-based
analytic services and software, and weapons effects simulation,
primarily for the DOD. Over the last several periods, the Company
has re-directed some of its space effects modeling and analysis
services, with expertise developed over a 25-year period, from
government to commercial programs. The success of these activities
and the size and growth potential of the commercial space market have
led Maxwell to focus on this business area. To complement its
consulting services, during the second quarter of this fiscal year
the Company acquired SEi, a San Diego based supplier of specially
treated electronic components for use in space environments,
primarily by commercial satellite manufacturers. SEi utilizes patented
processes to protect computer boards and chips, either of its own
design or commercially available components, from the radiation
encountered in space. The methods used by SEi have the potential to
result in both lower cost and increased protection for satellite
systems. The combination of Maxwell's world-class space effects
consulting and software with the newly acquired capabilities of SEi
provide the Company with a substantial value-added foothold in the
commercial space market, and the Company plans to increase its
presence in this area.
- INDUSTRIAL COMPUTERS AND SUBSYSTEMS: Includes design and assembly of
standard, custom and semi-custom industrial computer modules,
platforms and fully integrated systems primarily for OEMs.
- POWER CONVERSION PRODUCTS: Includes design, development and
manufacture of electrical components, systems and subsystems,
including products that capitalize on pulsed power such as
ultracapacitors, high voltage capacitors and other electrical
components, power distribution and conditioning systems, and EMI
filter capacitors.
- STERILIZATION AND PURIFICATION SYSTEMS: Includes design, development
and manufacture of systems based on two patented pulse power processes
incorporating capacitors and other pulsed power components designed
and manufactured by the Company. The PUREBRIGHT system utilizes
intense pulsed light to kill microorganisms and viruses in water and
blood plasma and other biopharmaceutical products, and on food, food
packaging and medical products. The COOLPURE system uses pulsed
electrical fields to kill microorganisms in liquids and liquid foods,
such as juices, dairy products and sauces.
Results of operations for fiscal years 1998 and 1997 have been restated to
include the results of acquisitions completed in fiscal year 1999 and accounted
for using the pooling-of-interests method. Such acquisitions included SEi, and
KD, a small manufacturer of ceramic capacitors located in Carson City, Nevada.
27
<PAGE>
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>
YEARS ENDED JULY 31,
------------------------------------------------------
1997 1998 1999
---------------- -------------- ---------------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 65.2 66.1 66.2
---------------- -------------- ---------------
Gross profit 34.8 33.9 33.8
Operating expenses:
Selling, general and administrative 22.9 22.3 21.5
Research and development 5.1 6.9 6.0
Restructuring, acquisition and other charges -- 6.4 3.3
---------------- -------------- ---------------
Total operating expenses 28.0 35.6 30.8
---------------- -------------- ---------------
Operating income (loss) 6.8 (1.7) 3.0
Interest expense 0.2 0.2 0.2
Interest income and other, net (0.2) (1.2) (0.4)
---------------- -------------- ---------------
Income (loss) before income taxes and minority interest 6.8 (0.7) 3.2
Provision (credit) for income taxes 1.3 0.3 (3.2)
Minority interest in net income of subsidiaries -- 0.2 0.2
---------------- -------------- ---------------
Net income (loss) 5.5% (1.2)% 6.2%
================ ============== ===============
</TABLE>
The following table sets forth sales, gross profit and gross profit as a
percentage of sales for each of the Company's business segments for the fiscal
years ended July 31, 1997, 1998, and 1999.
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
---------------------------------------------------
1997 1998 1999
--------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Space and Technology Products and Programs
Sales $47,006 $54,113 $71,748
Gross profit 16,345 15,204 25,466
Gross profit as a percentage of sales 34.8% 28.1% 35.5%
Industrial Computers and Subsystems:
Sales $34,259 $40,864 $56,516
Gross profit 11,537 14,210 17,487
Gross profit as a percentage of sales 33.7% 34.8% 30.9%
Power Conversion Products:
Sales $24,766 $36,981 $42,032
Gross profit 9,025 14,072 11,900
Gross profit as a percentage of sales 36.4% 38.1% 28.3%
Sterilization and Purification Systems:
Sales $ 6,473 $ 6,774 $ 9,389
Gross profit 2,849 3,528 5,895
Gross profit as a percentage of sales 44.0% 52.1% 62.8%
Other
Sales $ 5,271 $ 1,833 $ --
Gross profit 1,238 632 --
Gross profit as a percentage of sales 47.0% 34.5% --
</TABLE>
28
<PAGE>
SALES
In fiscal year 1999, total sales increased $39.1 million, or 27.8%, to
$179.7 million from $140.6 million in fiscal year 1998. In fiscal year 1998,
sales increased $22.8 million, or 19.4%, to $140.6 million from $117.8 million
in fiscal year 1997. International sales totaled approximately $33 million, $21
million, and $14 million in fiscal years 1999, 1998 and 1997, respectively.
Expansion of the Company's industrial computer business in Germany and France in
the current fiscal year and a full year of sales in fiscal year 1999 from the
Company's United Kingdom operation (which was acquired in fiscal year 1998), are
the primary factors relating to the increase in international sales. Sales in
both fiscal years 1999 and 1998 increased over the prior year in all of the
Company's on-going business segments, as described below.
SPACE AND TECHNOLOGY PRODUCTS AND PROGRAMS. In fiscal year 1999, sales in
this segment increased $17.6 million, or 32.6%, to $71.7 million from $54.1
million in fiscal year 1998. The Company has both enhanced and re-profiled this
business segment with its acquisitions of Physics International, the primarily
government-funded pulsed power research and simulation business of Primex
Technologies, in April 1998, and SEi, a primarily commercial, radiation-tolerant
satellite computer components business, in January 1999. Physics International
was the Company's principal competitor in the simulation area, and the combined
businesses consolidate scientific and technical research capabilities for the
benefit of both the government and the Company's technology base. These added
operations accounted for substantially all of the increase in revenue in this
segment compared to fiscal year 1998. The software business recorded
significantly increased sales of its new web-based time card product in the
latter half of the fiscal year 1999, including sales to several large
defense-oriented companies and license fees under a source-code license directed
to the professional services market not currently served by the Company.
Offsetting these increases were the wind-down and completion of several
government programs. The Company has won certain follow-on contracts, but the
levels of work under such new programs were less than in the prior year.
In fiscal year 1998, Space and Technology Products and Programs sales
increased $7.1 million, or 15.1%, to $54.1 million from $47.0 million in fiscal
year 1997. A portion of this increase was in the Company's core,
government-funded pulsed power research and development activities, including
revenue from the Physics International acquisition. Partially offsetting these
increases was a decrease in fiscal year 1998 revenues compared to fiscal year
1997 at the newly acquired SEi operation.
A substantial portion of the revenues in this business segment comes from
contracts with the DOD. These contracts are subject to increases and decreases
as well as to periodic changes in government funding provisions. Additional
replacement or follow-on contracts may not be available or awarded to the
Company. The level of future DOD expenditures in the Company's research and
development areas and the related impact on funding for the Company's contracts
are therefore not predictable, and previously reported results are not
necessarily indicative of those to be expected in the future. The Company is
expanding into more commercial markets, thereby contributing to offset any
potential effects of any future decreases in governmental funding.
INDUSTRIAL COMPUTERS AND SUBSYSTEMS. In fiscal year 1999, Industrial
Computers and Subsystems sales increased $15.6 million, or 38.3%, to $56.5
million from $40.9 million in fiscal year 1998. Domestic sales in this segment
are made principally to OEM customers and are primarily derived from the
shipment of industrial computers and subsystems that are "designed-in" to the
OEMs' products. Over the last two fiscal years, the Company has strengthened its
international presence through the acquisition of industrial computer businesses
in the United Kingdom and Germany and through the inception of operations in
France. These European businesses focus on lower-priced standard products, with
an emphasis on catalog sales. The increase in sales in fiscal year 1999 is
primarily attributable to the increase in European sales, as well as new
design-in wins for the customized OEM products, including supply contracts of
approximately $27 million over two years under two Siemens ElectroCom L.P.
programs for the United States Postal Service. Partially offsetting these
increases was the completion in the second quarter of fiscal year 1998 of sales
to a single, long-standing OEM customer under a multi-year program and the
curtailment at the end of fiscal year 1998 of the Company's program with Digital
Equipment Corporation due to its acquisition by Compaq Computers. While standard
product sales have accelerated, and the Company continues to expand its presence
in Europe, sales under large OEM programs remain a critical element of this
business. As a current marketing strategy, the Company has issued product
catalogs featuring both the standard and custom product lines with the dual aim
of generating direct sales, as well as leads for additional OEM design-in
opportunities. If sales of OEM products do not achieve the levels projected by
the OEM, or if OEM projects are curtailed due to
29
<PAGE>
consolidations or other market conditions, such as the impact of economic
conditions in Asia which have substantially slowed shipments under certain
programs, the Company may be unable to offset such loss of sales.
In fiscal year 1998, Industrial Computers and Subsystems sales increased
$6.6 million, or 19.3%, to $40.9 million from $34.3 million in fiscal year 1997.
Sales growth in this business segment was principally derived from the expansion
of its standard product offerings and marketing capabilities with the
acquisition of a United Kingdom-based company. Although the Company completed a
major multi-year program with a long-standing customer during the first half of
fiscal year 1998, other new OEM design-in projects, as well as the expansion
into more standard products, more than offset the impact of the major program
completed, resulting in the sales growth for the year.
POWER CONVERSION PRODUCTS. In fiscal year 1999, Power Conversion Products
sales increased $5.0 million, or 13.7%, to $42.0 million from $37.0 million in
fiscal year 1998. This increase was primarily attributable to an increase in
sales of power protection and delivery systems, a business area acquired by the
Company in the third quarter of fiscal year 1998. In addition, sales in the
Company's glass-to-metal seal and EMI filter capacitor businesses also
contributed to the sales increase in this business segment. As described above,
during the second quarter of fiscal year 1999, the Company acquired a small
manufacturer of ceramic capacitors used in a variety of high voltage
applications, including commercial space, defense and medical equipment. This
business has been combined with a ceramic filter business of the Company, which
makes similar ceramic products for different markets, and which has a growing
business in filters for implantable medical devices. The combination of these
complementary product lines will provide improved efficiencies and economies of
scale in the Company's Carson City, Nevada facility. Sales of traditional
high-voltage capacitors increased over fiscal year 1998, primarily due to a
large multi-year order under a National Laboratory program that is expected to
be completed in mid-fiscal year 2000. Offsetting this increase was the
completion in the first quarter of fiscal year 1999 of an 18-month contract for
switches for the same National Laboratory program. This contract was in full
production during fiscal year 1998. This segment also experienced a reduction in
funded research in the POWERCACHE-TM- ultracapacitor business area, which was
partially offset by a non-recurring fee received under a technology and product
rights license with Siemens Matsushita Components GmbH.
In fiscal year 1998, Power Conversion Products sales increased $12.2
million, or 49.3%, to $37.0 million from $24.8 million in fiscal year 1997.
Nearly all product areas contributed to the sales growth. Specifically, the
ultracapacitor business area entered into new strategic partnering arrangements,
including marketing and technology access rights with EPCOS AG (formerly Siemens
Matshusita Components) and PacifiCorp. The Company also experienced sales growth
in EMI filters for implantable medical products and aerospace applications. The
Company's power conditioning and delivery systems and its glass-to-metal seal
product line, both of which were acquired during fiscal year 1998, also
contributed to fiscal year 1998 sales growth, as did the aforementioned switch
component contract with a National Laboratory.
STERILIZATION AND PURIFICATION SYSTEMS. In fiscal year 1999,
Sterilization and Purification Systems sales increased $2.6 million, or
38.6%, to $9.4 million from $6.8 million in fiscal year 1998. Fiscal year
1999 revenues consisted primarily of fees under license agreements with key
partners in several strategic business areas. The license agreements included
a grant to two Sanyo entities of certain non-exclusive rights for
manufacturing and distribution of this segment's products; an exclusive
license agreement with Johnson & Johnson Vision Products, Inc. for the
integration of PUREBRIGHT pulsed light sterilization systems into the
manufacturing process for contact lenses, including a one-time license fee,
on-going royalties and an equipment supply arrangement; and an amendment of
an existing license with a long-standing partner which narrowed the field of
exclusivity and eliminated certain minimum purchase requirements, in exchange
for a one-time payment.
In fiscal year 1998, Sterilization and Purification Systems sales increased
$0.3 million, or 4.7%, to $6.8 million from $6.5 million in fiscal year 1997.
30
<PAGE>
GROSS PROFIT
In fiscal year 1999, the Company's gross profit increased $13.1 million,
or 27.5% to $60.7 million as compared to $47.6 million in fiscal year 1998.
In fiscal year 1998, gross profit increased $6.6 million, or 16.2% to $47.6
million from $41.0 million in fiscal year 1997. As a percentage of sales,
gross profit remained constant at 33.9% in fiscal year 1999 compared to 33.9%
in fiscal year 1998. However, in fiscal year 1998 this percentage decreased
slightly to 33.8% from 34.8% in fiscal year 1997. The increase in the dollar
amount of gross profit was noted in most of the Company's business segments,
with the Space and Technology Products and Programs segment experiencing the
largest increase in fiscal year 1999, both in dollars and as a percentage of
sales, which was primarily related to the increases in higher margin software
sales and commercial space-related applications previously discussed. The
Company's other business segments, in particular, Power Conversion Products,
experienced significant decreases in gross profit as a percentage of sales in
fiscal year 1999, primarily the result of increasing price pressures and
changes in sales mix.
SPACE AND TECHNOLOGY PRODUCTS AND PROGRAMS. In fiscal year 1999, Space and
Technology Products and Programs gross profit increased $10.3 million, or 67.5%,
to $25.5 million from $15.2 million in fiscal year 1998. As a percentage of
sales, gross profit increased to 35.5% in fiscal year 1999 from 28.1% in fiscal
year 1998. The primary factors in the increase in gross profit in fiscal year
1999 as compared to fiscal year 1998, include a higher portion of higher margin
software sales, including the aforementioned large sales to defense-oriented
companies and the source code license fees received this fiscal year, and the
inclusion of SEi, which had improved gross margins in fiscal year 1999 as
compared to fiscal year 1998. Further, the current fiscal year includes full
year revenues from Physics International, which was acquired in April 1998.
Future gross profit margins may not be maintained at the level reached in the
current year in light of the significant contribution of software license sales,
which may not recur in a comparable amount. However, the commercial space
business of SEi and the software product lines have the potential, if their
respective growth and business objectives are achieved, to produce higher gross
profit margins as a percent of sales than the traditional government-focused
programs of this segment. There can, however, be no assurance that such higher
margins will be achieved.
In fiscal year 1998, Space and Technology Programs and Systems gross profit
was $15.2 million, down from $16.3 million in fiscal year 1997. As a percentage
of sales, gross profit decreased to 28.1% in fiscal year 1998 from 34.8% in
fiscal year 1997. The decrease in gross profit, both as a dollar amount and as a
percentage of sales, in fiscal year 1998 as compared to fiscal year 1997, was
primarily due to low margins received on a large space technology program at
SEi. Partially offsetting the low SEi margins, were gross margin increases
primarily due to the addition of Physics International, as previously described,
as well as a commercial pulsed power systems contract won during fiscal year
1998. This contract was substantially complete as of the end of fiscal year
1998.
INDUSTRIAL COMPUTERS AND SUBSYSTEMS. In fiscal year 1999, Industrial
Computers and Subsystems gross profit increased $3.3 million, or 23.1%, to $17.5
million from $14.2 million fiscal year 1998. As a percentage of sales, gross
profit decreased to 30.9% in fiscal year 1999 from 34.8% in fiscal year 1998.
This decrease was primarily due to a change in sales mix which, in fiscal year
1998, included certain higher margin products for an OEM that were near the end
of their life cycle, with no such sales in the current year. In addition, the
Company now has lower-priced standard products, particularly in Europe, as well
as contracts which include full systems with greater third party content, upon
which lower gross profit margins are realized.
The Company won several major contracts with large OEMs during fiscal year
1999, including the aforementioned Siemens ElectroCom programs, and believes it
will continue to win OEM projects and that its distribution of catalogs with new
lower-priced standard products will provide access to a larger number of OEM
opportunities. The competition for such OEM programs, however, is beginning to
include more foreign competitors, including Asian companies. In addition,
consolidations and other market trends, such as the economic situation in Asia,
can adversely impact projected volumes under contracts previously awarded, as
happened in fiscal year 1998 when Compaq Computer's acquisition of Digital
Equipment Corporation curtailed a Company project. Further, CompactPCI products
are continuing to gain favor in the marketplace. While the Company believes its
own line of CompactPCI products is well positioned to gain market share in this
product area, the impact of these factors on the Company's business is not yet
predictable. As a result of the above factors, the Company does not expect
future gross profit margins as a percent of sales to increase significantly over
those achieved in the current fiscal year.
31
<PAGE>
In fiscal year 1998, Industrial Computers and Subsystems gross profit
increased $2.7 million, or 23.2%, to $14.2 million from $11.5 million in fiscal
year 1997. As a percentage of sales, gross profit increased to 34.8% in fiscal
year 1998 from 33.7% in fiscal year 1997. This increase in gross profit as a
percentage of sales was primarily the result of increased sales during the first
half of fiscal year 1998 of certain higher margin customized OEM products to a
long-standing customer under a program that was completed during the second
quarter of that year. As a result of the completion of this program, as well as
the Company's entry into the lower-price standard product arena, gross profit
margins were higher in the first half of fiscal year 1998 than in the second
half in this business area.
POWER CONVERSION PRODUCTS. In fiscal year 1999, Power Conversion Products
gross profit decreased $2.2 million to $11.9 million from $14.1 million in
fiscal year 1998. As a percentage of sales, gross profit decreased to 28.3% in
fiscal year 1999 from 38.1% in fiscal year 1998. The decrease in gross profit as
a percentage of sales reflects decreased development funding and technology
license fees in the POWERCACHE ultracapacitor business, and a lower margin mix
of products and services, particularly in the power protection and delivery
systems business area. This decrease also reflects significant changes in the
Company's pricing strategies in response to competitive pressures, as it
continues to improve penetration in its various markets. In addition, as the
Company introduces its POWERCACHE ultracapacitor products, it is pursuing
aggressive pricing to gain market penetration. As ultracapacitor product sales
ramp-up, gross margins will continue to be impacted until the Company reaches
full production volumes. In addition, the Company is working on programs to
reduce the cost of materials and automate manufacturing in an effort to reduce
its production costs. Further, the completion of a high-margin long-term
contract for switch components for a National Laboratory pulsed power system
contributed to the gross margin decline.
In fiscal year 1998, gross profit increased $5.1 million to $14.1 million
from $9.0 million in fiscal year 1997. Gross margin as a percentage of sales
increased to 38.1% in 1998 from 36.4% in fiscal year 1997. This increase in
gross profit reflects an increase in sales volume as well as a higher margin mix
of products and services from fiscal year 1997, including the contract for
switch components for the National Laboratory referred to above and increased
funded development and related technology access rights associated with
strategic partnering arrangements.
STERILIZATION AND PURIFICATION SYSTEMS. In fiscal year 1999, Sterilization
and Purification Systems gross profit increased $2.4 million to $5.9 million
from $3.5 million fiscal year 1998. As a percentage of sales, gross profit
increased to 62.8% in fiscal year 1999 from 52.1% in fiscal year 1998. In fiscal
year 1998, gross profit increased to $3.5 million and 52.1% from $2.8 million
and 44.0% in sales in fiscal year 1997. The increase in gross profit, both in
dollars and as a percentage of sales, reflects the increased revenues from high
margin license activities in fiscal year 1999 compared to fiscal year 1998 and
in fiscal year 1998 compared to fiscal year 1997. In fiscal year 1998, the
Company substantially completed a multi-year, low-margin research program with
the US Army. The revenues from this program were replaced in fiscal year 1999
and fiscal year 1998 with higher margin commercial licensing and developmental
programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In fiscal year 1999, the Company's selling, general and administrative
expenses increased $7.2 million, or 22.9%, to $38.6 million from $31.4 million
in fiscal year 1998 and $26.9 million in fiscal year 1997. As a percentage of
total sales, selling, general and administrative expenses decreased to 21.5% in
fiscal year 1999 from 22.3% in fiscal year 1998 and 22.9% in fiscal year 1997.
The increase in the dollar amount of these expenses is primarily in support of
the Company's strong sales growth, including the businesses acquired in fiscal
years 1999 and 1998. In addition, the Company has made substantial investments
related to infrastructure, administrative and sales support. The decrease in
selling, general and administrative expenses as a percentage of sales in the
current year reflects, in part, the Company's consolidation of the businesses
acquired in 1999 and 1998, efforts initiated in the current year to reduce
general and administrative expenses, and the fact that certain general and
administrative expenses do not increase in direct proportion to sales growth.
32
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
The Company's research and development expenses reflect only internally
funded research and development programs. Costs associated with United States
government and other customer funded research and development contracts are
included in cost of sales. Research and development expenses were $10.8 million,
$9.7 million and $6.0 million for fiscal years 1999, 1998 and 1997,
respectively. As a percentage of sales, research and development expenses were
6.0% in fiscal year 1999, 6.9% in fiscal year 1998, and 5.1% in fiscal year
1997. The level of research and development expenses reflects the Company's
ability to obtain customer funding to support a significant portion of its
research and product development activities. The increase in the amount of
internally funded research and development in fiscal year 1999 over the level
expended in fiscal year 1998, reflects the Company's focus on new commercial
product areas, and is primarily due to development efforts on new products at
SEi in order to continue the growth of the commercial satellite market for the
Company, as well as continuing efforts on development projects in the Company's
other operations.
The increase in the amount of internally funded research and development in
fiscal year 1998 over the level expended in fiscal year 1997 was primarily due
to expenditures related to ultracapacitor, other power conversion products and
power electronics systems development, and CompactPCI and other product
development for major new programs in the Industrial Computers and Subsystems
business segment.
RESTRUCTURING, ACQUISITION AND OTHER CHARGES
During fiscal year 1999, the Company recorded restructuring, acquisition
and other charges of approximately $5.9 million. Of these charges, approximately
$1.6 million consisted primarily of direct acquisition costs for business
combinations accounted for using the pooling-of-interests method. In the fourth
quarter of fiscal year 1999, the Company recorded a charge of $4.3 million, of
which approximately $2.8 million relates to revised estimates of final costs
necessary to complete certain criminal justice information system contracts and
complete the discontinuation of the related business segment that was
discontinued in the third quarter of fiscal year 1998. The charge includes costs
to complete and terminate such contracts, as well as other business shutdown
costs, including employee-related costs. The remaining $1.5 million of the
charge consists primarily of amounts provided for revised estimates of costs to
resolve certain environmental and legal contingencies which occurred in prior
years, as well as other restructuring provisions, including employee and
facility expenses, related to decisions made in July 1999 to reduce certain
administrative infrastructure of the Company in Europe and the United States.
In fiscal year 1998, the Company recorded restructuring, acquisition and
other charges totaling $8.9 million. Approximately $6.3 million of the charge is
acquisition related, and included a $5.5 million write-off of acquired
in-process research and development and direct acquisition costs of
approximately $0.8 million for business combinations accounted for using the
pooling-of-interests method of accounting. The remaining $2.6 million charge
relates to the restructuring and discontinuance of a business segment and the
aforementioned criminal justice information system contracts.
INTEREST EXPENSE
Interest expense was $404,000, $338,000 and $220,000 in fiscal years 1999,
1998, and 1997, respectively. The increase in interest expense in each of last
two years is the result of higher average borrowing over the preceding year, due
primarily to an increase in debt assumed by the Company from the various
businesses acquired in 1999 and 1998. At July 31, 1999, the Company has $2.5
million outstanding under its bank line-of-credit, which was borrowed to pay off
certain acquired debt with a higher borrowing rate.
INTEREST INCOME AND OTHER, NET
Interest income and other, net, consisting primarily of interest income,
decreased to $660,000 in fiscal year 1999 from $1.5 million in fiscal year 1998.
The decrease in interest income reflects lower average cash balances in fiscal
year 1999. During fiscal year 1998, the Company received proceeds of
approximately $47 million from a follow-on offering of its common stock. Such
cash proceeds have been substantially used by the Company to fund growth in
operations and acquisitions during fiscal years 1999 and 1998. Prior to the
follow-on offering, interest income was not significant ($249,000 in fiscal year
1997).
33
<PAGE>
PROVISION (CREDIT) FOR INCOME TAXES
The fiscal year 1999 credit for income taxes includes a credit of $6.1
million, representing the reversal of a valuation allowance provided in previous
years against certain deferred tax benefits. The valuation allowance was
reversed based on the Company's determination that it has become more likely
than not that such deferred tax benefits will be realized in the future. The
deferred income tax credit was partially offset by approximately $500,000 of
certain foreign and state income tax expense. In future years, the Company will
provide income taxes approximating applicable statutory rates, although cash
payments for taxes will be substantially lower in the near term as remaining tax
loss carry-forwards are utilized.
The Company's fiscal year 1998 and 1997 provisions for income taxes relate
primarily to taxes of the businesses acquired in fiscal year 1999 using the
pooling-of-interests method.
MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES
Minority interest in net income of subsidiaries increased in fiscal year
1999 to $427,000 from $80,000 in fiscal year 1998 and $54,000 in fiscal year
1997. The increase in fiscal year 1999 reflects an increase in the profitability
in fiscal year 1999 of the Company's minority owned subsidiaries, primarily in
the Sterilization and Purification Systems segment and the Business Software
product line of the Space and Technology Products and Programs segment.
NET INCOME (LOSS)
As a result of the factors mentioned above, net income was $11.1 million in
fiscal year 1999 as compared to a net loss of $1.7 million for fiscal year 1998
and net income of $6.5 million for fiscal year 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically relied on a combination of internally
generated funds and bank borrowings to finance its working capital requirements
and capital expenditures. In addition, in each of the two most recent fiscal
years, the Company received approximately $2.3 million from the exercise of
stock options and purchases under employee stock purchase plans. In fiscal year
1998, the Company completed a follow-on public offering of 1.5 million shares of
its Common Stock, generating net proceeds of approximately $47 million. A
portion of the proceeds was used to repay outstanding bank loans and
approximately $12 million of cash was used in fiscal year 1998 for acquisitions.
The remaining proceeds were used in fiscal years 1998 and 1999 to fund growth,
including additional working capital requirements.
Cash used in operations in fiscal year 1999 was $6.6 million, compared to
$6.1 million in fiscal year 1998, primarily attributable to increases in
accounts receivable and inventory, due both to acquired businesses and in
support of increased fiscal year 1999 sales. In fiscal year 1997, cash of $3.5
million was provided by operating activities. The Company's capital expenditures
in fiscal years 1999, 1998 and 1997 were $8.2 million, $8.4 million and $5.6
million, respectively, and related primarily to production and other capital
assets needed to support growth in all of the Company's business units. The
Company has ordered and continues to receive additional equipment for volume
manufacturing of ultracapacitors in an existing facility, and for manufacture of
EMI filter capacitors at the newly expanded Carson City, Nevada manufacturing
site. The Company will continue to address future volume or other manufacturing
requirements in the upcoming year. Alternatively, the Company may consider
leasing facilities or manufacturing equipment or both or may satisfy high-volume
manufacturing requirements through outsourcing or under licensing arrangements
with third parties. If the Company decides to internally finance construction of
additional facilities, a significant amount of capital would be required.
The Company believes that funds on-hand, together with cash generated from
operations and funds available under its bank line of credit, will be sufficient
to finance its operations and capital expenditures through fiscal year 2000. In
addition to addressing manufacturing requirements, the Company may also from
time-to-time consider acquisitions of complementary businesses, products or
technologies, which may require additional funding. Sources of additional
funding for these purposes could include one or more of the following: cash,
cash equivalents and
34
<PAGE>
short-term investments on hand; cash flow from operations; borrowings under
the existing bank line of credit; investments by strategic partners and
additional debt or equity financings. There can be no assurance that the
Company will be able to obtain additional sources of financing on favorable
terms, if at all, at such time or times as the Company may require such
capital.
Maxwell has an unsecured bank line of credit of $20.0 million, under which
the Company had borrowings outstanding of approximately $2.5 million as of July
31, 1999, which were repaid in October 1999. The interest rate on the line of
credit is tied to LIBOR or the bank's prime rate.
INFLATION AND CHANGES IN PRICES
Generally, the Company has been able to increase prices to offset its
inflation-related increased costs in its commercial businesses. A substantial
portion of the Company's business with agencies of the United States government
consists of cost-reimbursement contracts, which permit recovery of inflation
costs. Fixed-price contracts with government and other customers typically
include estimated costs for inflation in the contract price.
SOFTWARE COMPATIBILITY WITH YEAR 2000 DATE PROCESSING
The Year 2000 issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Computer systems
utilizing such programs may be unable to interpret dates beyond the year 1999,
which could cause a system failure or other computer errors, leading to
disruptions in operations. This issue is often referred to as "Y2K" or a "Y2K"
issue or problem. In fiscal year 1998, the Company commenced a three-phase
program to ensure Y2K information systems compliance. Phase 1 is to identify and
remedy Y2K issues in the Company's significant information systems
infrastructure and enterprise business applications, including
telecommunications and networking systems, manufacturing/production and delivery
systems, as well as accounting and manufacturing software. Phase 2 is to
identify and plan for Y2K issues that are specific to the Company's business
units, including local software, product matters, facilities related systems and
vendor and key partner concerns. Phase 3 is the final testing of each major area
of exposure to ensure compliance, and the development of contingency plans for
unsolved Y2K deficiencies, such as key vendors failing to adequately address
their Y2K problems. The Company has identified four major areas determined to be
critical for successful Y2K compliance: (1) networking and telecommunications;
(2) financial and manufacturing information systems applications; (3) products;
and (4) third-party relationships.
In Phase 1 of the program, the Company has completed its review of
company-wide and significant systems, several of which have been identified as
being Y2K compliant due to their recent implementation or upgrade. Such
installations and upgrades were unrelated to the Y2K concern, but rather were
implemented in the ordinary course of business. For certain accounting and
manufacturing systems, upgrades were needed and all such upgrades have been
installed. Identified upgrades of the system infrastructure, such as telephone
and networking equipment, are also completed. Final testing and documentation
under Phase 1 has been completed. Under Phase 2, the Company has completed
identifying, evaluating and resolving business unit exposures. In the
third-party area, the Company contacted its significant third parties, primarily
key vendors and customers, regarding their Y2K readiness and evaluated their
responses. As to products, initial findings indicated that most Company products
were not impacted by the potential Y2K problem and that most of those that were
impacted appeared to be Y2K compliant. For all products that were not Y2K
compliant, the Company has made upgrades available via the Company's Internet
web site. Final testing and contingency plan development under Phase 3 was
completed in October 1999. Accordingly, the Company believes that it has now
fully completed its Y2K Information Systems Compliance Plan.
The Company has incurred costs of approximately $1.4 million to complete
all three phases of its Y2K Information Systems Compliance Program. Such
costs include approximately $700,000 related to purchases of certain computer
hardware and software, which addressed the Company's Y2K program, but would
have been purchased by the Company in any event in connection with the normal
periodic upgrade of its systems. In addition, such costs include Company
labor costs and amounts paid to external consultants and advisors.
There can be no assurance that Y2K compliance problems will not be revealed
in the future which could have a material adverse affect on the Company's
business, financial condition and results of operations. Many of the Company's
customers and suppliers may be affected by Y2K issues that may require them to
expend significant resources to modify or replace their existing systems, which
may result in those customers having reduced funds to purchase the Company's
products or those suppliers experiencing difficulties in producing or shipping
key components to the Company on a timely basis or at all. Such third party
issues could have a material adverse affect
35
<PAGE>
on the Company's business, financial condition and results of operations.
This discussion of the Company's Y2K status constitutes a "Year 2000
Readiness Disclosure" as that item is defined in the Year 2000 Information
and Readiness Disclosure Act, and also contains forward-looking statements
(see "Forward-Looking Statements" below).
FORWARD-LOOKING STATEMENTS
To the extent that the above discussion goes beyond historical information
and indicates results or developments which the Company plans or expects to
achieve, these forward-looking statements are identified by the use of terms
such as "expected," "anticipates," "believes," "plans" and the like. Readers are
cautioned that such future results are uncertain and could be affected by a
variety of factors that could cause actual results to differ from those
expected, and such differences could be material. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances. Readers are referred to the Company's Risk Factor section of the
10-K for a further and more detailed discussion of certain of those factors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has not entered into or invested in any instruments that are
subject to market risk.
The Company's bank line of credit agreement bears interest at a rate that
varies based on the LIBOR or the bank's prime rate. The $2.5 million outstanding
at July 31, 1999, under this line of credit was repaid in October 1999.
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS OF MAXWELL TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................................................37
Consolidated Balance Sheets as of July 31, 1998 and 1999.................................................38
Consolidated Statements of Operations for the Years Ended July 31, 1997, 1998 and 1999...................39
Consolidated Statements of Stockholders' Equity for the Three Years Ended July 31, 1999..................40
Consolidated Statements of Cash Flows for the Years Ended July 31, 1997, 1998 and 1999...................41
Notes to Consolidated Financial Statements...............................................................42
</TABLE>
36
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Maxwell Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Maxwell
Technologies, Inc., and subsidiaries, as of July 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended July 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Maxwell
Technologies, Inc. and subsidiaries at July 31, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended July 31, 1999, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Diego, California
September 21, 1999
37
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JULY 31,
------------------------------------
1998 1999
--------------- -----------------
ASSETS (RESTATED)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................. $ 21,397 $ 8,839
Accounts receivable:
Trade and other, less allowance for doubtful accounts of
$1,513 and $1,003 in 1998 and 1999, respectively....................... 27,030 35,080
Long-term contracts...................................................... 12,723 14,898
--------------- -----------------
39,753 49,978
Inventories................................................................ 19,378 23,627
Prepaid expenses........................................................... 2,199 3,733
Deferred income taxes...................................................... 457 10,493
--------------- -----------------
Total current assets..................................................... 83,184 96,670
Property, plant and equipment, net........................................... 25,542 27,880
Goodwill and other non-current assets........................................ 6,659 9,884
--------------- -----------------
$ 115,385 $ 134,434
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 24,019 $ 23,817
Accrued employee compensation.............................................. 7,039 7,363
Current portion of long-term debt.......................................... 1,244 3,252
--------------- -----------------
Total current liabilities................................................ 32,302 34,432
Long-term debt............................................................... 1,218 436
Minority interest............................................................ 1,712 2,398
Commitments and contingencies
Stockholders' equity:
Common stock, $0.10 par value per share, 40,000 shares authorized; 9,210 and
9,557 shares issued and outstanding at July 31, 1998
and 1999, respectively................................................... 920 956
Additional paid-in capital................................................. 72,245 78,082
Deferred compensation...................................................... (413) (204)
Accumulated other comprehensive income..................................... -- (132)
Retained earnings.......................................................... 7,401 18,466
--------------- -----------------
Total stockholders' equity............................................... 80,153 97,168
--------------- -----------------
$ 115,385 $ 134,434
=============== =================
</TABLE>
See accompanying notes.
38
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
-------------------------------------------
1997 1998 1999
------------ ------------ ------------
(RESTATED) (RESTATED)
<S> <C> <C> <C>
Sales................................................................ $117,775 $140,565 $179,685
Cost of sales........................................................ 76,781 92,919 118,937
------------ ------------ ------------
Gross profit......................................................... 40,994 47,646 60,748
Operating expenses:
Selling, general and administrative................................ 26,947 31,378 38,576
Research and development........................................... 6,042 9,712 10,824
Restructuring, acquisition and other charges....................... -- 8,942 5,885
------------ ------------ ------------
Total operating expenses........................................ 32,989 50,032 55,285
------------ ------------ ------------
Operating income (loss).............................................. 8,005 (2,386) 5,463
Interest expense..................................................... 220 338 404
Interest income and other, net....................................... (249) (1,510) (660)
------------ ------------ ------------
Income (loss) before income taxes and minority interest.............. 8,034 (1,214) 5,719
Provision (credit) for income taxes.................................. 1,473 413 (5,776)
Minority interest in net income of subsidiaries...................... 54 80 427
------------ ------------ ------------
Net income (loss).................................................... $ 6,507 $ (1,707) $ 11,068
============ ============ ============
Net income (loss) per share:
Basic income (loss) per share................................... $ 0.96 $ (0.20) $ 1.18
============ ============ ============
Diluted income (loss) per share:................................ $ 0.87 $ (0.20) $ 1.12
============ ============ ============
Shares used in computing:
Basic income (loss) per share................................... 6,775 8,503 9,414
============ ============ ============
Diluted income (loss) per share................................. 7,470 8,503 9,801
============ ============ ============
</TABLE>
See accompanying notes.
39
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED JULY 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN DEFERRED RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL COMPENSATION EARNINGS INCOME EQUITY
--------- ---------- ------------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 1, 1996 (Restated) $ 650 $ 20,243 $ (605) $ 2,955 $ -- $ 23,243
Issuance of 445,785 shares under
stock purchase and option
plans, net of repurchases.... 45 2,814 -- (165) -- 2,694
Deferred compensation related to
issuance of 10,000 shares.... 1 189 (190) -- -- --
Amortization of deferred
compensation................. -- -- 173 -- -- 173
Comprehensive income:
Net income................... -- -- -- 6,507 -- 6,507
------------
Comprehensive income............. 6,507
--------- ---------- ------------- --------- -------------- ------------
Balance at July 31, 1997 (Restated) 696 23,246 (622) 9,297 -- 32,617
Issuance of 1,500,000 shares in a
public stock offering, net of
offering costs of$3.9 million 150 46,967 -- -- -- 47,117
Issuance of 356,240 shares under
stock purchase and option
plans........................ 36 2,348 -- -- -- 2,384
Issuance of 544,785 shares in
connection with acquisitions. 54 3,270 -- 609 -- 3,933
Repurchase of 162,073 shares for
cash under repurchase program (16) (3,586) -- (391) -- (3,993)
Amortization of deferred
Compensation................. -- -- 209 -- -- 209
Dividends paid to shareholders of
subchapter S corporation prior
to acquisition............... -- -- -- (407) -- (407)
Comprehensive income:
Net loss..................... -- -- -- (1,707) -- (1,707)
------------
Comprehensive income............. (1,707)
--------- ---------- ------------- --------- -------------- ------------
Balance at July 31, 1998 (Restated) 920 72,245 (413) 7,401 -- 80,153
Issuance of 296,451 shares
under stock purchase and
option plans, including
related income tax benefit... 30 7,498 -- -- -- 7,528
Repurchase of 62,316 shares for
cash under repurchase program (6) (1,679) -- (41) -- (1,726)
Issuance of 113,514 shares in
connection with acquisition.. 12 18 -- 184 -- 214
Amortization of deferred
compensation................. -- -- 209 -- -- 209
Dividends paid to shareholder of
acquired company prior to
acquisition.................. -- -- -- (146) -- (146)
Comprehensive income: -- -- -- -- -- (132)
Net income................... -- -- -- 11,068 -- 11,068
Other comprehensive income:
Foreign currency translation
adjustment............... -- -- -- -- (132) (132)
------------
Other comprehensive income... -- -- -- -- -- (132)
------------
Comprehensive income............. 10,936
--------- ---------- ------------- --------- -------------- ------------
Balance at July 31, 1999 (Restated) $ 956 $ 78,082 $ (204) $18,466 $ (132) $ 97,168
========= ========== ============= ========= ============== ============
</TABLE>
See accompanying notes.
40
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
-----------------------------------------------
1997 1998 1999
-------------- ------------ -------------
(RESTATED) (RESTATED)
<S> <C> <C> <C>
Operating activities:
Net income (loss)............................................. $ 6,507 $ (1,707) $ 11,068
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 2,995 4,362 5,829
Restructure, acquisition and other charges............ -- 7,450 4,240
Provision for losses on accounts receivable........... 184 734 435
Loss on sales of property and equipment............... 10 50 116
Deferred income taxes................................. (345) 37 (6,144)
Minority interest in net income of subsidiaries....... 54 80 427
Deferred compensation................................. 173 209 209
Changes in operating assets and liabilities:
Accounts receivable................................. (3,244) (13,963) (10,075)
Inventories......................................... (2,812) (5,882) (3,899)
Prepaid expenses and other.......................... (717) (1,385) (4,222)
Accounts payable.................................... (1,950) 2,818 (4,525)
Accrued employee compensation....................... 1,818 1,192 145
Income taxes payable and refundable, net............ 832 (45) (211)
-------------- ------------ -------------
Net cash provided by (used in) operating activities 3,505 (6,050) (6,607)
Investing activities:
Purchases of property and equipment........................... (5,589) (8,426) (8,215)
Purchases of businesses, net of cash acquired................. -- (11,481) --
Proceeds from sales of property and equipment................. 8 149 60
-------------- ------------ -------------
Net cash used in investing activities............ (5,581) (19,758) (8,155)
Financing activities:
Principal payments on long-term debt and short-term
borrowings................................................. (1,011) (2,464) (2,484)
Proceeds from long-term debt and short-term borrowings........ 580 1,322 3,528
Proceeds from issuance of Company and subsidiary stock........ 2,893 50,560 3,164
Repurchase of Company and subsidiary stock.................... (578) (4,000) (1,726)
Dividends paid to shareholders of acquired companies prior
to acquisition............................................. -- (407) (146)
-------------- ------------ -------------
Net cash provided by financing activities........ 1,884 45,011 2,336
-------------- ------------ -------------
Effect of exchange rate changes on cash and cash equivalents.... -- -- (132)
-------------- ------------ -------------
Increase (decrease) in cash and cash equivalents................ (192) 19,203 (12,558)
Cash and cash equivalents at beginning of year.................. 2,386 2,194 21,397
-------------- ------------ -------------
Cash and cash equivalents at end of year........................ $ 2,194 $ 21,397 $ 8,839
============== ============ =============
Cash (paid) received for:
Interest...................................................... $ (47) $ 1,287 $ 379
============== ============ =============
Income taxes.................................................. $ (121) $ (577) $ (633)
============== ============ =============
</TABLE>
See accompanying notes.
41
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Maxwell Technologies, Inc. ("Maxwell" or the "Company") applies
industry-leading capabilities in pulsed power, space applications, industrial
computers and other advanced technologies to develop and market products and
services for commercial and government customers in multiple industries,
including energy, satellite, defense, telecommunications, consumer
electronics, medical products and water purification. As further
discussed in Note 2, the Company's financial results for prior fiscal years have
been restated to include the results and accounts of business combinations
completed during fiscal year 1999.
CONSOLIDATION
The consolidated financial statements include the accounts of Maxwell
Technologies, Inc. and its subsidiaries. All significant inter-company
transactions and account balances are eliminated in consolidation.
CASH EQUIVALENTS
The Company classifies all highly liquid investments with a maturity of
three months or less when purchased as cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (principally average cost
method) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost and are generally
depreciated using the straight-line method. Depreciation and amortization are
provided over the estimated useful lives of the related assets (three to thirty
years). Depreciation and amortization of property, plant and equipment amounted
to $2,995,000, $4,325,000 and $5,444,000 in fiscal years 1997, 1998 and 1999,
respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to potential concentrations
of credit risk consist principally of investments in cash equivalents and the
Company's accounts receivable. The Company invests its excess cash with major
corporate and financial institutions and in United States government backed
securities. The Company has established guidelines relative to diversification
and maturities to maintain safety and liquidity, and has not experienced any
losses on these investments. The Company's accounts receivable result from
contracts with the United States government, as well as contract and product
sales to non-government customers in various industries. The Company performs
ongoing credit evaluations of selected non-government customers and generally
requires no collateral.
The balances billed but not paid by customers pursuant to retainage
provisions under long-term contracts will be due upon completion of the
contracts and acceptance by the customers. Substantially all unbilled
receivables at July 31, 1999 are expected to become due and payable within the
next year.
42
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REVENUE RECOGNITION
The Company recognizes substantially all revenue from the sale of
manufactured products and short-term fixed price contracts upon shipment of
products or completion of services. Revenues, including estimated profits, on
long-term fixed price contracts are recognized as costs are incurred. Revenues,
including fees earned, on cost plus contracts are also recognized as costs are
incurred. Contract and license revenue is reflected in the Company's sales and
includes amounts received from the United States government and commercial
customers for the funded research and development efforts of the Company.
Provisions are made on a current basis to fully recognize any anticipated losses
on contracts.
INTEREST INCOME AND OTHER NET
Included in interest income and other, net is interest income of $173,000,
$1,625,000 and $783,000 in fiscal years 1997, 1998 and 1999, respectively. The
increase in interest income in fiscal year 1998 is due to the investment of net
cash proceeds from the Company's follow-on public stock offering completed in
November 1997.
FOREIGN CURRENCIES
A portion of the Company operations consists of manufacturing and sales
activity in foreign countries, specifically the United Kingdom, France and
Germany. As a result, the Company's financial results could be significantly
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the European markets that the Company serves. The
operating results of the Company are exposed to changes in exchange rates
between the United States Dollar and the British pound, French franc, and the
German mark. The Company does not currently hedge its foreign exchange risk,
which is not significant at this time. The assets and liabilities of the
Company's foreign subsidiaries are translated from their function currencies
into United States dollars at exchange rates in effect on the balance sheet
date, and revenues and expenses are translated at weighted-average rates
prevailing during the year.
INCOME (LOSS) PER SHARE
Effective November 1, 1997, the Company adopted Financial Accounting
Standards Board Statement No. 128, EARNINGS PER SHARE ("Statement No. 128").
Statement No. 128 replaced previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Basic earnings per
share is calculated using the weighted average number of common shares
outstanding. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share, and is calculated on the basis of the
weighted average number of common shares outstanding plus the dilutive effect of
outstanding stock options, assuming their exercise using the "treasury stock"
method, and convertible preferred shares outstanding at certain subsidiaries of
the Company, assuming their conversion. Earnings per share amounts for all prior
periods have been restated as necessary to conform to Statement No. 128
requirements. For the year ended July 31, 1998, all potentially dilutive
securities were excluded from the calculation of diluted loss per share as their
inclusion would have been antidilutive.
43
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The following table sets forth the computation of basic and diluted income
per share:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
--------------------------------------------
1997 1998 1999
------------ ------------ -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Basic:
Net income (loss)........................................ $ 6,507 $ (1,707) $11,068
============ ============ =============
Weighted average shares.................................. 6,775 8,503 9,414
============ ============ =============
Basic income (loss) per share............................ $ 0.96 $ (0.20) $ 1.18
============ ============ =============
Diluted:
Net income (loss)........................................ $ 6,507 $ (1,707) $11,068
Effect of majority-owned subsidiaries' dilutive securities (12) -- (78)
------------ ------------ -------------
Income (loss) available to common shareholders,
as adjusted.......................................... $ 6,495 $ (1,707) $10,990
============ ============ =============
Weighted average shares.................................. 6,775 8,503 9,414
Effect of dilutive stock options and other securities.... 695 -- 387
------------ ------------ -------------
Weighted average shares, as adjusted..................... 7,470 8,503 9,801
============ ============ =============
Diluted income (loss) per share.......................... $ 0.87 $ (0.20) $ 1.12
============ ============ =============
</TABLE>
COMPREHENSIVE INCOME
As of August 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, REPORTING COMPREHENSIVE INCOME ("Statement No. 130").
Statement No. 130, established new rules for the reporting and display of
comprehensive income and its components; however, the adoption of Statement No.
130 had no impact on the Company's net income or its shareholders' equity.
Foreign currency translation adjustments are the Company's only component of
other comprehensive income.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Several of the industries in which the Company operates are
characterized by rapid technological change and short product life cycles. As a
result, estimates are required to provide for product returns and product
obsolescence as well as other matters. Historically, actual amounts recorded
have not varied significantly from estimated amounts.
NOTE 2 -- BUSINESS COMBINATIONS
In December 1998, the Company acquired KD Components, Inc. ("KD"), a
privately held company that develops and manufactures high voltage multilayer
ceramic capacitors and switch mode power supply capacitors for military,
aerospace, medical and other applications. Under the terms of the agreement,
which was accounted for as a pooling-of-interests, Maxwell purchased all of the
outstanding stock of KD in exchange for approximately 145,000 shares of Maxwell
common stock valued at approximately $5.5 million on the closing date. The
Company incurred direct acquisition costs of approximately $120,000, which were
charged to operations.
44
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- BUSINESS COMBINATIONS (CONTINUED)
In January 1999, the Company acquired Space Electronics, Inc. ("SEi"),
a closely held company that specializes in the manufacture of radiation-hardened
microelectronics for the commercial space market. Under the terms of this
agreement, which was accounted for as a pooling-of-interests, Maxwell purchased
all of the outstanding stock of SEi in exchange for approximately 681,000 shares
of Maxwell common stock valued at approximately $25 million on the closing date.
The Company incurred direct acquisition costs of approximately $1.1 million,
which were charged to operations.
As a result of the above acquisitions, the Company's prior year
financial statements have been restated to include the combined historical
results of KD and SEi. The table below sets for the combined revenues, net
income (loss) and basic and diluted income (loss) per share for the restated
periods shown (in thousands, except per share data):
<TABLE>
<CAPTION>
MAXWELL KD SEI COMBINED
------------------ ------------------ ---------------- ------------------
<S> <C> <C> <C> <C>
Year Ended July 31, 1998:
Revenues $125,308 $4,443 $10,814 $140,565
Net loss (769) (35) (903) (1,707)
Basic loss per share (0.10) (0.24) (1.33) (0.20)
Diluted loss per share (0.10) (0.24) (1.33) (0.20)
Year Ended July 31, 1997:
Revenues $101,411 $4,200 $12,164 $117,775
Net income 4,024 231 2,252 6,507
Basic income per share 0.68 1.59 3.31 0.86
Diluted income per share 0.60 1.59 3.31 0.87
</TABLE>
Also in January 1999, the Company purchased a German company, which was
formerly a distributor for the Company's industrial computer business. The
acquisition was accounted for as a pooling-of-interests and consisted of the
purchase of all the outstanding stock of the German company in exchange for
approximately 114,000 shares of Maxwell common stock valued at approximately $5
million on the closing date. The Company incurred direct acquisition costs of
approximately $75,000, which were charged to operations. The historical results
of operations of the acquired company were not material in relation to those of
Maxwell and financial information for prior periods was not restated to reflect
the merger. Retained earnings as of the beginning of the Company's fiscal year
1999 second quarter were restated to reflect the retained earnings of the
acquired company of approximately $184,000 as of such date.
NOTE 3 -- BALANCE SHEET DETAILS
Accounts receivable from long-term contracts consists of the following at
July 31:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
United States Government:
Amounts billed.............................................. $ 7,248 $ 5,878
Amounts unbilled............................................ 3,024 3,534
Commercial customers:
Amounts billed.............................................. 905 4,530
Amounts unbilled............................................ 1,546 956
----------- -----------
$ 12,723 $ 14,898
=========== ===========
</TABLE>
45
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- BALANCE SHEET DETAILS (CONTINUED)
Inventories consist of the following at July 31:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Finished goods................................................ $ 1,494 $ 3,624
Work in process............................................... 3,686 3,907
Raw materials and purchased parts............................. 14,198 16,096
----------- -----------
$ 19,378 $ 23,627
=========== ===========
Property, plant and equipment consists of the following at July 31:
<CAPTION>
1998 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Land and land improvements.................................... $ 3,470 $ 3,470
Buildings and building improvements........................... 8,442 9,257
Machinery, furniture and office equipment..................... 45,029 49,517
Leasehold improvements........................................ 5,395 6,029
----------- -----------
62,336 68,273
Less accumulated depreciation and amortization................ 37,958 41,719
----------- -----------
24,378 26,554
Construction in progress...................................... 1,164 1,326
----------- -----------
$ 25,542 $ 27,880
=========== ===========
Goodwill and other non-current assets consist of the following at July 31:
<CAPTION>
1998 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Goodwill and other intangible assets, net of accumulated
amortization of $37 and $422 in 1998 and 1999, respectively $ 5,282 $ 5,450
Equity investments in unconsolidated companies................ 40 2,050
Deposits and other............................................ 1,337 1,571
Deferred income taxes - long-term............................. -- 813
----------- -----------
$ 6,659 $ 9,884
=========== ===========
Accounts payable consist of the following at July 31:
<CAPTION>
1998 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable and accrued expenses......................... $ 21,061 $ 18,413
Restructure accruals.......................................... -- 2,475
Customer advances............................................. 1,806 1,887
Environmental reserves........................................ 1,152 1,042
----------- -----------
$ 24,019 $23,817
=========== ===========
</TABLE>
NOTE 4 -- CREDIT AGREEMENT
The Company has an unsecured bank line of credit agreement, which expires
in March 2000, under which the Company may borrow up to $20 million at the
bank's prime rate, or at LIBOR plus 1.75% (6.56% at July 31, 1999). At July 31,
1999, the Company had $2.5 million outstanding under the line, which was repaid
in October 1999. The line of credit agreement provides that neither the Company
nor any of its subsidiaries may, directly or indirectly, make any distributions
of cash dividends. The line of credit agreement also requires the Company to
comply with various financial covenants. The Company was in compliance with all
such covenants at July 31, 1999.
46
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- STOCK ACTIVITY AND STOCK PLANS
STOCK OPTION PLANS
In December 1995, the Company adopted the 1995 Stock Option Plan under
which 500,000 shares of Common Stock were reserved for future grant. In January
1997, January 1998, and January 1999 an additional 300,000, 490,000 and 700,000
shares, respectively, were reserved for future issuance under the plan. This
plan and the Company's Director Stock Option Plan provide for granting either
Incentive Stock Options or Non-Qualified Stock Options to employees and
non-employee members of the Company's Board of Directors, respectively. Options
are also outstanding under an expired stock option plan. Options granted under
these plans are for the purchase of Common Stock of the Company at not less than
the stock's fair market value at the date of grant. Employee options are
generally exercisable in cumulative annual installments of 20 - 30 percent,
while options in the Director Option Plan are exercisable in full one year after
date of grant. All options have terms of five to ten years.
The following table summarizes Company stock option activity for the three
years ended July 31, 1999:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
------------- ----------------
<S> <C> <C>
Balance at August 1, 1996......................................... 1,196,026 $ 4.57
Granted......................................................... 373,700 $15.95
Exercised....................................................... (406,656) $ 4.61
Expired or forfeited............................................ (108,390) $ 4.42
-------------
Balance at July 31, 1997.......................................... 1,054,680 $ 8.60
Granted......................................................... 591,500 $25.23
Exercised....................................................... (324,825) $ 5.49
Expired or forfeited............................................ (56,200) $18.57
-------------
Balance at July 31, 1998.......................................... 1,265,155 $16.73
Granted......................................................... 684,140 $23.87
Exercised....................................................... (285,400) $ 9.65
Expired or forfeited............................................ (41,340) $19.96
-------------
Outstanding at July 31, 1999...................................... 1,622,555 $20.90
=============
Available for future grant under the 1995 Stock Option Plan....... 116,100
=============
Available for future grant under the Director Option Plan......... 85,674
=============
</TABLE>
The following table summarizes information concerning outstanding and
exercisable Company stock options at July 31, 1999:
<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>
$ 3.56 - 5.00 172,946 $ 4.24 3.7 years 113,903 $ 4.40
$ 5.12 - 7.25 59,248 $ 6.80 2.1 years 26,020 $ 6.53
$ 11.00 - 20.63 277,421 $ 18.61 5.9 years 87,700 $ 18.86
$ 20.64 - 22.50 266,050 $ 21.94 8.6 years 3,300 $ 21.67
$ 22.51 - 24.75 277,200 $ 23.70 6.5 years 80,100 $ 23.69
$ 24.76 - 25.00 227,890 $ 25.00 9.8 years -- $ --
$ 25.01 - 32.75 341,800 $ 27.83 8.3 years 64,070 $ 27.45
---------------- -------------
1,622,555 375,093
================ =============
</TABLE>
47
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- STOCK ACTIVITY AND STOCK PLANS (CONTINUED)
In addition, the Company has established separate stock option plans for
four of its principal operating subsidiaries. Options to purchase shares of
subsidiary stock were granted primarily during fiscal year 1997. Options
outstanding at July 31, 1999 total from 7% to 14% of such various subsidiaries'
outstanding common stock.
The Company has adopted the disclosure-only provisions of FASB Statement
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement No. 123"). In
accordance with the provisions of Statement No. 123, the Company applies
Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for its stock option plans, and accordingly, no compensation expense
has been recognized for stock options granted in 1997, 1998 or 1999 as the stock
options have been granted at their current fair market value. If the Company had
elected to recognize compensation cost based on the fair value method prescribed
by Statement No. 123, the Company's net income (loss) and diluted income (loss)
per share would have been adjusted to the pro-forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------------------------------------------
1997 1998 1999
---------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss), as reported.......... $ 6,507 $ (1,707) $ 11,068
Pro forma net income (loss)........... $ 5,783 $ (4,739) $ 5,381
Diluted income (loss) per share, as
reported................................ $ 0.87 $ (0.20) $ 1.12
Pro forma diluted income (loss) per
share................................. $ 0.77 $ (0.56) $ 0.55
</TABLE>
The impact of outstanding non-vested stock options granted prior to 1997
has been excluded from the pro forma 1999 calculations; accordingly, the
1997, 1998 and 1999 pro forma adjustments are not indicative of future period
pro forma adjustments when the calculation will reflect all applicable stock
options. The fair value of Company options at the date of grant was estimated
using the Black-Scholes option-pricing model with assumptions as follows:
1999 -risk-free interest rate of 5.0%; dividend yield of 0%; volatility
factor of 66%; and a weighted average expected term of 5 years; 1998 -
risk-free interest rate of 5.5%; dividend yield of 0%; volatility factor of
54%; and a weighted-average expected term of 4 years; 1997 - risk-free
interest rate of 6.0%; dividend yield of 0%; volatility factor of 52%; and a
weighted-average expected term of 3 years. The fair value of subsidiary
options at the date of grant was estimated using the Black-Scholes model with
assumptions as above. The estimated weighted average fair value at grant date
for Company options granted during fiscal years 1997, 1998 and 1999 was
$6.49, $12.05 and $13.50 per option, respectively.
STOCK PURCHASE PLANS
In December 1994, the Company established the 1994 Employee Stock Purchase
Plan and a Director Stock Purchase Plan. The employee plan permits substantially
all employees to purchase Common Stock through payroll deductions at 85% of the
lower of the trading price of the stock at the beginning or at the end of each
six-month offering period. The director plan permits non-employee directors to
purchase common stock at 100% of the trading price of the stock on the date a
request for purchase is received. In fiscal years 1997, 1998 and 1999, 39,129,
40,795 and 48,388 shares, respectively, were issued under the two plans for an
aggregate of $442,000, $759,000 and $970,000, respectively. At July 31, 1999,
250,152 shares are reserved for future issuance under these plans.
DEFERRED COMPENSATION
In 1996 and 1997, an executive officer of the Company was granted shares of
the Company's Common Stock subject to certain restrictions. The shares granted
vest ratably over a four-year period, and at the grant dates the shares had a
fair value of approximately $645,000 and $190,000, respectively. Those values,
net of accumulated amortization, are shown as deferred compensation in the
accompanying Consolidated Balance Sheets and Consolidated Statements of
Stockholders' Equity. The deferred compensation is being amortized to expense
over the four-year vesting periods, and such amortization totaled $173,000,
$209,000 and $209,000 in fiscal year 1997, 1998 and 1999, respectively.
48
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- STOCK ACTIVITY AND STOCK PLANS (CONTINUED)
STOCKHOLDER RIGHTS PLAN
In October 1999, the Company adopted a new Stockholder Rights Plan as a
successor to its previous plan, which expired in June 1999. In accordance
with the new plan, the Company distributed one non-voting Common Stock
purchase right ("Right") for each outstanding share of Common Stock. The
Rights are not exercisable and will not trade separately from the Common
Stock unless a person or group acquires, or makes a tender offer for, 15% or
more of the Company's Common Stock. Initially, each Right entitles the
registered holder to purchase one share of Company Common Stock at a price of
$75 per share, subject to certain anti-dilution adjustments.
If the Rights become exercisable and certain conditions are met, then each
Right not owned by the acquiring person or group will entitle its holder to
receive, upon exercise, Company Common Stock having a market value of twice the
exercise price of the Right. In addition, the Company may redeem the Rights at a
price of $0.01 per Right, subject to certain restrictions.
The new Stockholder Rights Plan expires on October 21, 2009.
NOTE 6 -- INCOME TAXES
The provision (credit) for income taxes is as follows for the years ended
July 31:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current....................... $ 1,431 $ 127 $ --
Deferred...................... (293) 16 (4,354)
---------- ---------- ---------
1,138 143 (4,354)
State:
Current....................... 387 25 82
Deferred...................... (52) 19 (1,872)
---------- ---------- ---------
335 44 (1,790)
Foreign:
Current....................... -- 200 394
Deferred...................... -- 26 (26)
---------- ---------- ---------
-- 226 368
---------- ---------- ---------
$ 1,473 $ 413 $ (5,776)
========== ========== =========
</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>
1998 1999
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Uniform capitalization, contract and
inventory-related reserves.................. $ 2,732 $ 2,650
Environmental and restructuring provisions.... 1,430 2,319
Asset write-downs under FASB Statement No. 121 1,112 1,031
Acquired in-process research and development.. 959 893
Accrued vacation.............................. 819 866
Allowance for doubtful accounts............... 451 380
Tax loss carryforwards........................ 1,300 900
Research and development and other tax credit
carryforwards............................... -- 2,921
Other........................................ 483 401
Valuation allowance.......................... (7,920) --
--------- --------
Total deferred tax assets................ 1,366 12,361
--------- --------
Deferred tax liabilities:
Tax basis depreciation in excess of book
depreciation............................... (686) (816)
Tax basis research and development expense
in excess of book expense.................. (223) (239)
--------- --------
Total deferred tax liabilities........... (909) (1,055)
--------- --------
Net deferred tax assets.................. $ 457 $11,306
========= ========
</TABLE>
The Company cannot carry losses back to prior years. Through fiscal year
1998, the Company had provided a valuation allowance against the future tax
benefits of its net operating loss carryforwards and net deferred income tax
assets as realization of such future benefits was deemed to be uncertain.
Based on the Company's earnings in fiscal years 1997, 1998 and 1999 and the
amount of its pre-tax income in fiscal year 1999, management has determined
that it is more likely than not that the Company will receive the future
benefits from its net deferred income tax assets, including tax credits and
remaining net operating loss carryforwards. Accordingly, in the fourth
quarter of fiscal year 1999, the Company reversed the valuation allowance and
recorded net deferred income tax assets of approximately $10.7 million, of
which $4.6 million was recorded as a credit to additional paid-in capital for
tax benefits relating to employee stock option and stock purchase plan
activity in the current and prior years.
49
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- INCOME TAXES (CONTINUED)
The current income tax expense in fiscal year 1999 was primarily due to
foreign taxes on the profits of the Company's United Kingdom subsidiary, and
certain minimum state income taxes. The Company's fiscal year 1998 and 1997
provisions for income taxes relate primarily to taxes of the businesses acquired
in fiscal year 1999 using the pooling-of-interests method.
As of July 31, 1999, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $1,700,000 and
$3,300,000, respectively. The federal loss carryforward expires in fiscal year
2011, while the state loss carryforwards expire in fiscal years 2000 through
2001. In addition, the Company has research and development and other tax credit
carryforwards for federal and state income tax purposes of $6.3 million an $9.6
million, which begin to expire in 2004.
The provision (credit) for income taxes in the accompanying statements of
operations differs from the amount calculated by applying the statutory income
tax rate of 35% to income (loss) before income taxes and minority interest. The
primary components of such difference are as follows for the years ended
July 31:
<TABLE>
<CAPTION>
1997 1998 1999
----------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax at federal statutory rate............... $ 2,811 $ (425) $ 2,002
State taxes, net of federal benefit......... 633 102 339
Effect of foreign subsidiary................ -- (47) 76
Impact of asset basis difference in
acquisitions............................ -- 1,237 496
Utilization of net operating loss carryforwards (700) (500) (400)
Valuation allowance, including tax benefits of
stock activity and other items.......... (1,271) 46 (8,289)
----------------- -------------- -------------
$ 1,473 $ 413 $ (5,776)
================= ============== =============
</TABLE>
NOTE 7 -- LEASES
Rental expense amounted to $2,101,000, $3,676,000 and $5,459,000 in fiscal
years 1997, 1998 and 1999, respectively, and was incurred primarily for facility
rental. Future annual minimum rental commitments as of July 31, 1999, are as
follows:
<TABLE>
<CAPTION>
FISCAL YEARS
<S> <C>
2000...................................................... $ 5,169,000
2001...................................................... 4,996,000
2002...................................................... 3,866,000
2003...................................................... 2,850,000
2004...................................................... 2,251,000
Thereafter................................................ 4,820,000
---------------
$23,952,000
===============
</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 through 2002. Future annual amounts due to the Company
under such subleases are as follows: fiscal year 2000 - $392,000, fiscal year
2001 - $404,000 and fiscal year 2002 - $168,000.
50
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- EMPLOYEE BENEFIT PLANS
Substantially all United States employees are eligible to elect coverage
under contributory employee savings plans which provide for Company matching
contributions based on one-half of employee contributions up to certain plan
limits. The Company's matching contributions under these plans totaled $632,000,
$824,000 and $1,074,000 in fiscal years 1997, 1998 and 1999, respectively.
NOTE 9 -- RESTRUCTURING, ACQUISITION AND OTHER CHARGES
During fiscal year 1999, the Company recorded restructuring, acquisition
and other charges of approximately $5.9 million. Of these charges,
approximately $1.6 million consisted primarily of direct acquisition costs
for business combinations accounted for using the pooling-of-interests
method. In the fourth quarter of fiscal year 1999, the Company recorded an
additional $4.3 million charge, of which approximately $2.8 million relates
to revised estimates of final costs necessary to complete certain criminal
justice information system contracts and complete the discontinuation of the
related business segment that was discontinued in the third quarter of fiscal
year 1998. The revision affected costs to complete and terminate such
contracts, as well as other business shutdown costs, including
employee-related costs. The remaining $1.5 million of the charge consists
primarily of amounts provided for revised estimates of costs to resolve
certain environmental and legal contingencies which occurred in prior years,
as well as other restructuring provisions, including employee and facility
expenses, related to decisions made in July 1999 to reduce certain
administrative infrastructure of the Company in Europe and the United States.
Primarily due to the acquisition of three businesses, the Company recorded
an $8.9 million pre-tax charge in the third quarter of fiscal year 1998.
Approximately $6.3 million of the charge related to the acquisition of the three
businesses, including transaction costs for business combinations accounted for
as a pooling of interests, and the appraised amount of acquired in-process
research and development for the two purchase business combinations. Also during
the third quarter of fiscal year 1998, the Company reorganized the operations
within the former Information Products and Services business segment, including
a refocusing of certain operations along the lines of other business segments
and the discontinuation of certain businesses. Charges related to this
discontinued business segment amounted to $2.6 million.
NOTE 10 -- ENVIRONMENTAL MATTER
In 1992, the Company and approximately 40 other potentially responsible
parties signed a consent order with the State of California with respect to
costs to be incurred at a recycling facility to characterize and remediate
hazardous substances. To date, the site has been characterized, and the Company
and the other potentially responsible parties have paid substantially all of
their respective shares of the costs of such characterization. The estimated
cost of monitoring and remediation activities, of which the Company's share is
currently estimated at approximately 3.3%, totals approximately $23 million.
Approximately $21 million of this amount will consist of maintenance, monitoring
and related costs to be incurred over a 25-30 year period. The Company has
accrued its share of such estimated costs. On the basis of such amounts accrued
by the Company, it is management's opinion that any additional liability
resulting from this situation will not have a material effect on the Company's
consolidated financial statements.
NOTE 11 -- BUSINESS SEGMENTS
In fiscal year 1999, Maxwell adopted Statement of Financial Accounting
Standards No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION ("Statement No. 131"). The new rules establish revised standards for
public companies relating to the reporting of financial information about
operating segments. The adoption of Statement No. 131 did not have a material
effect on Maxwell's financial statements, although segment information
disclosures were affected.
51
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- BUSINESS SEGMENTS (CONTINUED)
Maxwell's management evaluates performance and allocates resources based
on a measure of segment operating profit (loss), excluding restructuring,
acquisition and other charges. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies. Maxwell does not evaluate segment performance on amounts
provided for restructuring, acquisition and other charges, or on items of
income or expense below operating profit (loss). Accordingly, such items are
not segregated by operating segment.
In accordance with the requirements and guidelines of Statement No. 131,
Maxwell's operations have been classified into the following business segments
(prior year segment information has been restated to conform to Statement No.
131 guidelines):
- SPACE AND TECHNOLOGY PRODUCTS AND PROGRAMS: Includes design,
development and manufacture of high reliability radiation-hardened
electronic components and consulting services for commercial and
government space systems, research and development programs in pulsed
power, pulsed power systems design and construction, computer-based
analytic services and software, and weapons effects simulation,
primarily for the DOD.
- INDUSTRIAL COMPUTERS AND SUBSYSTEMS: Includes design and assembly of
standard, custom and semi-custom industrial computer modules,
platforms and fully integrated systems primarily for OEMs.
- POWER CONVERSION PRODUCTS: Includes design, development and
manufacture of electrical components, systems and subsystems,
including products that capitalize on pulsed power such as
ultracapacitors, high voltage capacitors and other electrical
components, power distribution and conditioning systems and EMI filter
capacitors.
- STERILIZATION AND PURIFICATION SYSTEMS: Includes design, development
and manufacture of systems based on two patented pulse power processes
incorporating capacitors and other pulsed power components designed
and manufactured by the Company. The PUREBRIGHT-Registered Trademark-
system utilizes intense pulsed light to kill microorganisms and
viruses in water and blood plasma and other biopharmaceutical
products, and on food, food packaging and medical products. The
COOLPURE-Registered Trademark- system uses pulsed electrical fields to
kill microorganisms in liquids and liquid foods, such as juices, dairy
products and sauces.
52
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- BUSINESS SEGMENTS (CONTINUED)
Business segment financial data, including partial-year results for fiscal
year 1998 of the Information Products and Services segment prior to it
discontinuance, for the three years ended July 31 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales:
Other....................................................... $ 5,271 $ 1,833 $ --
Space and Technology Products and Programs.................. 47,006 54,113 71,748
Industrial Computers and Subsystems......................... 34,259 40,864 56,516
Power Conversion Products................................... 24,766 36,981 42,032
Sterilization and Purification Systems...................... 6,473 6,774 9,389
-------------- -------------- -------------
Consolidated total...................................... $ 117,775 $ 140,565 $ 179,685
============== ============== =============
Operating profit (loss):
Other....................................................... $ (3,377) $ (728) $ --
Space and Technology Products and Programs.................. 5,857 (1,745) 8,325
Industrial Computers and Subsystems......................... 2,417 3,149 3,325
Power Conversion Products................................... 2,508 3,798 (1,630)
Sterilization and Purification Systems...................... 316 466 2,512
-------------- -------------- -------------
Total operating profit (loss)........................... 7,721 4,940 12,532
Corporate expenses and revenues............................. 533 (5,816) (6,409)
Interest expense............................................ (220) (338) (404)
-------------- -------------- -------------
Income (loss) before income taxes, and minority interest $ 8,034 $ (1,214) $ 5,719
============== ============== =============
Identifiable assets:
Other....................................................... $ 4,631 $ -- $ --
Space and Technology Products and Programs.................. 15,708 39,737 40,631
Industrial Computers and Subsystems......................... 12,167 19,180 26,806
Power Conversion Products................................... 9,031 23,574 30,202
Sterilization and Purification Systems...................... 5,207 6,230 9,169
Corporate................................................... 8,436 26,664 27,626
-------------- -------------- -------------
Consolidated total...................................... $ 55,180 $ 115,385 $ 134,434
============== ============== =============
Depreciation and amortization:
Other....................................................... $ 218 $ 133 $ --
Space and Technology Products and Programs.................. 991 1,884 2,413
Industrial Computers and Subsystems......................... 469 667 1,126
Power Conversion Products................................... 642 890 1,391
Sterilization and Purification Systems...................... 349 462 504
Corporate................................................... 326 326 395
-------------- -------------- -------------
Consolidated total...................................... $ 2,995 $ 4,362 $ 5,829
============== ============== =============
Capital expenditures:
Other....................................................... $ 590 $ 15 $ --
Space and Technology Products and Programs.................. 1,789 2,917 3,262
Industrial Computers and Subsystems......................... 992 810 1,009
Power Conversion Products................................... 1,036 3,277 3,098
Sterilization and Purification Systems...................... 872 458 283
Corporate................................................... 310 949 563
-------------- -------------- -------------
Consolidated total...................................... $ 5,589 $ 8,426 $ 8,215
============== ============== =============
</TABLE>
53
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- BUSINESS SEGMENTS (CONTINUED)
Intersegment sales are insignificant. Corporate expenses include
restructuring, acquisition and other charges in fiscal years 1998 and 1999.
Identifiable assets by segment include the assets directly identified with those
segments. Corporate assets consist primarily of cash and cash equivalents,
deferred tax assets and credits, and the telecommunications, centralized
computers and networking equipment of the Company.
Sales under United States government contracts and subcontracts are
primarily in the Space and Technology Products and Programs business segment,
and aggregated $36,246,000, $43,946,000 and $51,823,000 in fiscal year 1997,
1998, and 1999, respectively.
Sales to customers in excess of 10% of total Company sales included sales
to the United States Air Force amounting to 12% and 10% of Company sales in
fiscal years 1997 and 1998, respectively. Additionally, a customer of the
Industrial Computers and Subsystems business segment represented 10% of sales of
the Company in fiscal year 1997.
International sales amounted to $14,123,000, $21,065,000 and $32,545,000 in
fiscal years 1997, 1998, and 1999 respectively, principally to customers in the
United Kingdom and countries in Europe and the Pacific Rim. Company assets
located outside the United States totaled approximately $4,200,000 and
$9,100,000 at July 31, 1998 and 1999, respectively. The Company had no foreign
operations in 1997.
NOTE 12 - RELATED PARTY TRANSACTION
In February 1999, the Company loaned $2.0 million to its Chairman and
former CEO under a full recourse promissory note agreement. The note bears
interest at 5% per year. Principal and accumulated interest is due and payable
in February 2001, and is secured in part by a pledge of Company stock owned by
the Chairman.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10 THROUGH 13.
The information required under Item 10 (Directors and Executive
Officers of the Registrant), Item 11, (Executive Compensation), Item 12
(Security Ownership of Certain Beneficial Owners and Management) and Item 13
(Certain Relationships and Related Transactions) will be reported in the
Company's Proxy Statement for the 1999 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A as
follows and is incorporated herein by reference:
<TABLE>
<CAPTION>
Item Number Heading in Proxy Statement
- ----------- --------------------------
<S> <C>
10--------------- "ELECTION OF DIRECTORS"
11--------------- "EXECUTIVE COMPENSATION"
12--------------- "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT"
13--------------- "EXECUTIVE COMPENSATION"
</TABLE>
(See also Item 4.1 - "Executive Officers of the Registrant," Part I, SUPRA)
54
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
See Item 6, Item 7 and Item 8.
(a)(2) FINANCIAL STATEMENT SCHEDULES
Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are omitted because they
are inapplicable or not required under the related instructions.
(a)(3) LIST OF EXHIBITS.
3.1 Restated Certificate of Incorporation of the Registrant --
Exhibit 3.1 to the Registrant's Form 10-K Annual Report for
the year ended July 31, 1987 ("1987 Form 10-K") is
incorporated by reference.
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant increasing the number of
authorized shares to 20 million, dated November 22, 1996 --
Exhibit 3.2 to the Registrant's 1997 Form 10-K Annual Report
for the year ended July 31, 1997 ("1997 Form 10-K") is
incorporated by reference.
3.3+ Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant increasing the number of
authorized shares to 40 million, dated February 9, 1998.
3.4 Bylaws of the Registrant as amended to date-- Exhibit 3.2 to
the 1987 Form 10-K is incorporated by reference.
3.5 Revised Article IV of the Bylaws of the Registrant-- Exhibit
3.4 to the 1997 Form 10-K is incorporated by reference.
10.1 Maxwell Laboratories, Inc. Director Stock Option Plan --
Exhibit 10.23 to the Registrant's Form 10-K Annual Report
for the year ended July 31, 1989 ("1989 Form 10-K") is
incorporated by reference.
10.2 Amendment Number One to Maxwell Laboratories, Inc. Director
Stock Option Plan, dated February 7, 1997 -- Exhibit 10.2 to
the 1997 Form 10-K is incorporated by reference.
10.3+ Amendment Number Two to Maxwell Laboratories, Inc. Director
Stock Option Plan, dated January 28, 1999.
10.4 Maxwell Laboratories, Inc. 1985 Stock Option Plan as amended
to date -- Exhibit 10.3 to the Registrant's Form 10-K Annual
Report for the year ended July 31, 1991 ("1991 Form 10-K")
is incorporated by reference.
10.5 Maxwell Laboratories, Inc. 1995 Stock Option Plan -- Exhibit
10.3 to the Registrant's Form 10-K Annual Report for the
year ended July 31, 1995 ("1995 Form 10-K") is incorporated
by reference.
10.6 Amendment Number One to Maxwell Laboratories, Inc. 1995
Stock Option Plan, dated March 19, 1997-- Exhibit 10.6 to
the 1997 Form 10-K is incorporated by reference.
10.7 Amendment Number Two to Maxwell Technologies, Inc. 1995
Stock Option Plan, dated January 28, 1998-- Exhibit 10.6 to
the 1998 Form 10-K is incorporated by reference.
55
<PAGE>
10.8+ Amendment Number Three to Maxwell Technologies, Inc. 1995
Stock Option Plan, dated January 28, 1999.
10.9 Maxwell Laboratories, Inc. 1994 Employee Stock Purchase
Plan-- Exhibit 10.4 to the 1995 Form 10-K is incorporated by
reference.
10.10 Maxwell Laboratories, Inc. 1994 Director Stock Purchase
Plan-- Exhibit 10.5 to the 1995 Form 10-K is incorporated by
reference.
10.11 Lease dated February 28, 1986 between the Registrant, as
Lessee, and Elkhorn Ranch, Inc., as Lessor -- Exhibit 10.11
to the Registrant's Form 10-K Annual Report for the year
ended July 31, 1986 ("1986 Form 10-K") is incorporated by
reference.
10.12 First Amendment to Industrial Real Estate Lease between the
Registrant, as Lessee, and Elkhorn Ranch, Inc., as Lessor,
dated June 30, 1995 -- Exhibit 10.11 to the 1997 Form 10-K
is incorporated by reference.
10.13 Maxwell Technologies, Inc. Officer and Director Stock
Repurchase Policy-- Exhibit 10.12 to the 1998 Form 10-K is
incorporated by reference.
10.14 Office Lease Agreement dated August 28, 1987 by and between
Airport Property Company, a N.M. Limited Partnership, as
Lessor, and the Registrant, as Lessee -- Exhibit 10.16 to
the Registrant's Form 10-K Annual Report for the year ended
July 31, 1988 ("1988 Form 10-K") is incorporated by
reference.
10.15 Agreement of May, 1994 between the Registrant and Compagnie
Europeene de Composants Electroniques -- LCC under which the
Registrant licenses, manufactures and distributes certain
capacitors -- Exhibit 10.11 to the 1995 Form 10-K is
incorporated by reference.
10.16 Lease dated April 17, 1995, by and between Cody Three, Inc.,
as Lessor, and the Registrant, as Lessee -- Exhibit 10.12 to
the Registrant's Form 10-K Annual Report for the year ended
July 31, 1996 ("1996 Form 10-K") is incorporated by
reference.
10.17 Amended and Restated Industrial Real Estate Lease dated
January 1, 1997 by and between Equus 9177, LLC, as Lessor,
and I-Bus, Inc., as Lessee. -- Exhibit 10.16 to the 1997
Form 10-K is incorporated by reference.
10.18 Maxwell Laboratories, Inc. Executive Deferred Compensation
Plan, dated September 1, 1998. -- Exhibit 10.17 to the 1998
Form 10-K is incorporated by reference.
10.19+ Chief Executive Officer Maxwell Technologies, Inc.
Employment Agreement dated April 30, 1999 between the
Registrant and Thomas L. Horgan.
10.20 Chief Executive Officer Employment Contract dated March 25,
1996 and Amendment dated April 16, 1996 between the
Registrant and Kenneth F. Potashner-- Exhibit 10.16 to the
1996 Form 10-K is incorporated by reference.
10.21 Second Amendment to the Chief Executive Officer Employment
Contract dated June 23, 1997 between the Registrant and
Kenneth F. Potashner -- Exhibit 10.21 to the 1997 Form 10-K
is incorporated by reference.
10.22 Restricted Stock Agreement dated July 25, 1996, between the
Registrant and Kenneth F. Potashner -- Exhibit 10.17 to the
1996 Form 10-K is incorporated by reference.
10.23 Amendment Number One to Restricted Stock Agreement, dated
June 24, 1997, between the Registrant and Kenneth F.
Potashner -- Exhibit 10.23 to the 1997 Form 10-K is
incorporated by reference.
10.24+ Secured Promissory Note dated February 2, 1999 and Stock
Pledge Agreement dated February 2, 1999 between Registrant
and Kenneth F. Potashner.
10.25+ Stock Pledge Agreement dated February 2, 1999 between
Registrant and Kenneth F. Potashner.
56
<PAGE>
10.26 Lease dated October 12, 1994 by and between Madison Square
Partnership, as Lessor, and PurePulse Technologies, Inc.
(formerly Foodco Corporation), as Lessee -- Exhibit 10.18 to
the 1995 Form 10-K is incorporated by reference.
10.27 Lease dated November 1, 1996, by and between Ponderosa Pines
Partnership, as Lessor, and PurePulse Technologies, Inc., as
Lessee -- Exhibit 10.25 to the 1997 Form 10-K is
incorporated by reference.
10.28 Line of Credit Agreement dated March 4, 1998, between the
Registrant and Sanwa Bank California and First Amendment
dated May 29, 1998 between the Registrant and Sanwa Bank of
California -- Exhibit 10.26 to the 1998 Form 10-K is
incorporated by reference.
10.29 Lease dated February 13, 1994 by and between Terilee
Enterprises, Inc., as Lessor, and the Registrant, as Lessee
-- Exhibit 10.23 to the 1994 Form 10-K is incorporated by
reference.
10.30 Lease dated June, 1997 by and between AEW/LBA Acquisition
Company II, LLC, as Lessor and the Registrant as Lessee --
Exhibit 10.29 to the 1997 Form 10-K is incorporated by
reference.
10.31+ Executive Bonus Plan for Fiscal Year 2000.
10.32 PurePulse Technologies, Inc. 1994 Stock Option Plan--
Exhibit 10.26 to the 1996 Form 10-K is incorporated by
reference.
10.33 Maxwell Federal Division, Inc. 1996 Stock Option Plan--
Exhibit 10.34 to the 1997 Form 10-K is incorporated by
reference.
10.34 Maxwell Energy Products, Inc. 1996 Stock Option Plan--
Exhibit 10.35 to the 1997 Form 10-K is incorporated by
reference.
10.35 I-Bus, Inc. 1996 Stock Option Plan-- Exhibit 10.36 to the
1997 Form 10-K is incorporated by reference.
10.36 Maxwell Information Systems, Inc. 1996 Stock Option Plan--
Exhibit 10.37 to the 1997 Form 10-K is incorporated by
reference.
10.37 Amendment Number One to the Maxwell Laboratories, Inc. 1994
Employee Stock Purchase Plan, effective as of April 30, 1997
-- Exhibit 10.38 to the 1997 Form 10-K is incorporated by
reference.
10.38 Lease dated March 1, 1998, between Hassan H. Yarpezeshkan
and Maryam Yarpezeshkan, as Lessor and the Registrant, as
Lessee -- Exhibit 10.37 to the 1998 Form 10-K is
incorporated by reference.
10.39 Stock Purchase Agreement among Maxwell Technologies, Inc.,
Maxwell Energy Products, Inc., and PacifiCorp Energy
Ventures, Inc., dated October 30, 1997. Exhibit 10 to the
Registrant's October 31, 1997 Form 10-Q is incorporated by
reference.
10.40 Amended and Restated Agreement of Purchase and Sale of
Assets, dated as of March 29, 1998, among the Company,
Maxwell Technologies Systems Division, Inc., Primex
Technologies, Inc. and Primex Physics International Company
-- Exhibit 2.1 to the Registrant's Form 8-K filed April 29,
1998 is hereby incorporated by reference.
10.41 Assignment and Assumption Agreement (Facility Lease) dated
April 15, 1998, by and between Primex Physics International
Company, as assignor and Maxwell Technologies Systems
Division, Inc., as assignee -- Exhibit 10.40 to the 1998
Form 10-K is incorporated by reference.
10.42 Assignment and Assumption Agreement (Ground Lease) dated
April 15, 1998, by and between Primex Physics International
Company, as assignor and Maxwell Technologies Systems
Division, Inc., as assignee -- Exhibit 10.41 to the 1998
Form 10-K is incorporated by reference.
10.43 Underlease dated March 6, 1997 by and between Pegasus
Airwave Limited, as Lessor and I-Bus UK, Limited (formerly
Tri-MAP International, Limited), as Lessee -- Exhibit 10.42
to the 1998 Form 10-K is incorporated by reference.
10.44+ Shareholder Agreement among Maxwell Technologies, Inc.,
PurePulse Technologies, Inc., Sanyo E&E Corporation and
Three Oceans Inc., dated January 28, 1999.
57
<PAGE>
10.45+ Lease dated May 9, 1995, Modification and Amendment
Agreement dated September 24, 1997 and Modification and
Amendment Agreement dated June 20, 1996 between Arvco
Realty, agent for Sorrento Park Investments, as Lessor and
Space Electronics, Inc., as Lessee.
10.46 Acquisition of Space Electronics Inc., by Maxwell
Technologies, Inc., dated January 29, 1999 - Exhibit 2.1 to
the Registrant's Form 8-K filed February 12, 1999 is hereby
incorporated by reference.
21.1+ List of subsidiaries of the Registrant.
23.1+ Consent of Ernst & Young, LLP, Independent Auditors
27.1+ Financial Data Schedule.
(b) REPORTS ON FORM 8-K
None.
- ----------
+ Filed herewith.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Diego, State of California, on this 22nd day of October, 1999.
MAXWELL TECHNOLOGIES, INC.
By: /s/ THOMAS L. HORGAN
---------------------------------------
Thomas L. Horgan
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ THOMAS L. HORGAN Chief Executive Officer, President and October 22, 1999
- -------------------------------------------- Director
Thomas L. Horgan
/s/ KENNETH F. POTASHNER Chairman of the Board, Director October 22, 1999
- --------------------------------------------
Kenneth F. Potashner
/s/ VICKIE L. CAPPS Vice President-Finance and October 22, 1999
- -------------------------------------------- Administration, Treasurer
Vickie L. Capps and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ MARK ROSSI Director October 22, 1999
- --------------------------------------------
Mark Rossi
/s/ CARLTON J. EIBL Director October 22, 1999
- --------------------------------------------
Carlton J. Eibl
/s/ KARL M. SAMUELIAN Director October 22, 1999
- --------------------------------------------
Karl M. Samuelian
/s/ JEAN LAVIGNE Director October 22, 1999
- --------------------------------------------
Jean Lavigne
</TABLE>
59
<PAGE>
STATE OF DELAWARE PAGE 1
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT
OF "MAXWELL TECHNOLOGIES, INC.", FILED IN THIS OFFICE ON THE NINTH DAY OF
FEBRUARY, A.D. 1998, AT 2 O'CLOCK P.M.
/s/ Edward J. Freel
[SEAL] ------------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
2105646 8100 AUTHENTICATION: 8910574
981050641 DATE: 02-09-98
<PAGE>
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
MAXWELL TECHNOLOGIES, INC.
ADOPTED IN ACCORDANCE WITH THE PROVISIONS OF
SECTION 242 OF THE GENERAL CORPORATION LAW
OF THE STATE OF DELAWARE
The undersigned, Kenneth F. Potashner, President, and Donald M. Roberts,
Secretary, of MAXWELL TECHNOLOGIES, INC., a corporation existing under the laws
of the State of Delaware (hereinafter referred to as the "Corporation"), do
hereby certify as follows:
FIRST: That the Restated Certificate of Incorporation of the Corporation
was filed in the Office of the Secretary of State of Delaware on February 17,
1987.
SECOND: That Article FOURTH of the Restated Certificate of
Incorporation is amended to read as follows:
"The total number of shares of all classes of stock which the
Corporation shall have authority to issue is Forty Million
(40,000,000) shares, consisting of Forty Million (40,000,000) shares
of Common Stock, par value $0.10 per share (the "Common Stock").
THIRD: That such amendment has been duly adopted in accordance with
the provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to its Restated Certificate of Incorporation to be executed on its
behalf by its President and Secretary this 28th day of January, 1998.
/s/ Kenneth F. Potashner
Kenneth F. Potashner, President
/s/ Donald M. Roberts
Donald M. Roberts, Secretary
<PAGE>
AMENDMENT NUMBER TWO TO
MAXWELL TECHNOLOGIES, INC.
DIRECTOR STOCK OPTION PLAN
The Maxwell Technologies, Inc. Director Stock Option Plan (the "Plan") is
hereby amended in the following respects:
1. STOCK OPTIONS.
Section 6(B), entitled "Number of Shares", which sets forth the initial
grant of options to each eligible director at 6,000 shares of Common Stock
and thereafter each annual grant to each eligible director at 2,000 shares
of Common Stock is hereby adjusted to 10,000 shares of Common Stock and
3,000 shares of Common Stock, respectively. Each director eligible for the
grant of options for 3,000 shares on the day following the next Annual
Shareholder's Meeting after the effective date of this Amendment shall
receive a one-time grant of options for 4,000 shares at the same time and
on the same terms as said 3,000 share option grant.
2. EFFECT OF AMENDMENTS.
This amendment to the Plan shall be effective as of November 19, 1998,
subject to the approval of the shareholder of Maxwell Technologies, Inc.
at the Annual Shareholder's Meeting on January 27, 1999. Except to the
extent specifically modified herein, the Plan shall remain in full force
and effect.
MAXWELL TECHNOLOGIES, INC.
By: /s/ Donald M. Roberts
Donald M. Roberts, Secretary
Date: January 28, 1999
<PAGE>
AMENDMENT NUMBER THREE TO
MAXWELL TECHNOLOGIES, INC.
1995 STOCK OPTION PLAN
The Maxwell Technologies, Inc. 1995 Stock Option Plan (the "Plan") is
hereby amended in the following respects:
1. COMMON STOCK SUBJECT TO OPTIONS.
The maximum number of shares authorized under the Plan for grant of
options as set forth in paragraph 4 of the Plan entitled "Common Stock
Subject to Options", consisting of 1,290,000 shares of the Company's
Common Stock as previously amended, is hereby adjusted to a maximum of
1,990,000 shares of the Company's Common Stock.
2. EFFECT OF AMENDMENTS.
This amendment to the Plan shall be effective as of November 19, 1998,
subject to the approval of the shareholders of Maxwell Technologies, Inc.,
at the Annual Shareholder's Meeting on January 27, 1999. Except to the
extent specifically modified herein, the Plan shall remain in full force
and effect.
MAXWELL TECHNOLOGIES, INC.
By: /s/ Donald M. Roberts
Donald M. Roberts, Secretary
Date: January 28, 1999
<PAGE>
MAXWELL TECHNOLOGIES, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made as of this 30th day
of April, 1999, by and between MAXWELL TECHNOLOGIES, INC. a Delaware
corporation, ("Company") and THOMAS L. HORGAN ("Executive"). The parties
agree with each other as follows:
1. TERM OF EMPLOYMENT. Subject to the terms and conditions set forth
in this Agreement, the Company hereby agrees to employ Executive, and
Executive agrees to be employed by the Company, for the period commencing on
April 1, 1999 and ending on the first to occur of (i) the date on which
Executive first qualifies for or elects to receive retirement benefits in
accordance with the Company's normal retirement policies and (ii) the date on
which this Agreement is terminated by either the Company or Executive
pursuant to any subsection of Section 4 hereof.
2. DUTIES OF EXECUTIVE.
(a) Executive shall serve as the President and Chief Executive
Officer of the Company and serve in such additional positions as the
Company's Board of Directors (the "Board") shall reasonably determine from
time to time. In such capacities, Executive shall report to the Board and
Executive shall perform the duties and render the services for and on
behalf of the Company associated with the positions he shall hold and as
may be set forth from time to time in resolutions of, or other directives
issued by, the Board or authorized delegate of the Board.
(b) Executive agrees to perform such duties and render such services
to the best of his ability, devoting thereto his entire professional time,
attention and energy exclusively to the business and affairs of the
Company and its affiliates, as its business and affairs now exist and as
they hereafter maybe changed, and shall not during the term of his
employment hereunder be engaged in any other business activity, whether or
not such business activity is pursued for gain or profit; provided,
however, that Executive may serve on (i) civic or charitable boards or
committees and (ii) with the prior approval of the Board, boards of
corporations or other business enterprises, in each case so long as such
activities do not interfere with the performance of Executive's
obligations under this Agreement.
(c) The Company agrees that Executive shall be included in the slate
of nominees proposed by the Board in the Company's proxy statements
delivered to its shareholders for election to the Board for as long as
this Agreement is in effect.
<PAGE>
3. COMPENSATION OF EXECUTIVE. As compensation for the services to be
performed under this Agreement:
(a) BASE SALARY. Effective April 1, 1999, Executive shall be paid a
base salary at the initial annual rate of $350,000, payable in installments
consistent with the Company's payroll practices, and subject to normal
withholding. Executive's base salary shall be reviewed annually prior to
each anniversary of this Agreement by the Board or its Compensation
Committee and if the Board or Committee determines, in its discretion, that
Executive's base salary is to be increased, such increase shall be
effective as of such anniversary date;
(b) ANNUAL BONUS. Executive shall be entitled to an annual bonus
which shall be determined as provided in this subsection (b):
(i) For the Company's fiscal year ending July 31, 1999,
Executive's bonus will be determined in accordance with the bonus
program previously established for Executive for such fiscal year, but
the amount thereof shall be prorated - one half to be based on the
level of Executive's annual base salary as in effect through March 31,
1999 and one half to be based on an annual base salary of $350,000.
(ii) For each subsequent fiscal year of the Company, the Board
will set specific financial and non-financial performance targets and
the amount of Executive's bonus will range $0 to a maximum amount
equal to Executive's annual base salary as in effect for such fiscal
year (with a target bonus of 70% of the then effective base salary)
depending on the Board's determination of Executive's success in
achieving the specified targets.
(iii) The bonus payable to Executive for each fiscal year, if any
is due, shall be paid to Executive, subject to normal withholding,
promptly after the completion of the audit of the Company's financial
statements for such fiscal year.
(c) OPTIONS. Upon execution of this Agreement, Executive will be
granted options under the Company's 1995 Stock Option Plan to purchase
227,890 shares of the Company's common stock at an exercise price of $25
per share (the "Options"). The Options shall be "non-qualified" stock
options, shall be subject to the other terms and conditions specified in
the stock option agreement evidencing the same, shall have a term of four
years from the date of grant, and shall vest at the rate of 1/48 of the
total number thereof on the last day of each month commencing with the
month of April, 1999 so long as Executive remains employed with the
Company. The Board or its Stock Option Committee will from time to time
consider making additional grants to Executive, but the Company shall not
be obligated to make any particular grant or grants thereof.
2
<PAGE>
(d) BENEFITS. Executive shall be entitled to participate in the
Company's insurance, health, life insurance, long term disability,
dental and medical, and automobile programs as the same may exist from
time to time on the terms and conditions applicable to other senior
officers of the Company. Nothing in this Agreement shall preclude the
Company from terminating or amending any employee benefit plan or
program from time to time. The Company will reimburse Executive for the
reasonable cost of an annual physical examination, if Executive elects
to have the same.
(e) VACATION. Executive shall be entitled to four weeks vacation
per year. Such vacation shall be taken at such times as the Company and
Executive shall mutually agree, acting reasonably, having regard to the
performance of Executive's essential duties to the Company pursuant to
the terms of this Agreement. Executive may accumulate unused vacation
time from year to year to the extent permitted under the Company's
vacation policy for executives as in effect from time to time.
(f) EXPENSES. Executive shall be reimbursed for all travel and
other reasonable out-of-pocket expenses actually incurred by him in
connection with the performance of his duties hereunder, subject the
Company's expense reimbursement policies as in effect from time to time
and to the receipt by the Company of receipts and statements in a form
reasonably satisfactory to it.
4. TERMINATION.
(a) TERMINATION BY THE COMPANY FOR CAUSE. Notwithstanding anything
to the contrary herein contained, the Company may terminate immediately
the employment of Executive without notice and without pay in lieu of
notice:
(i) if Executive commits an act of theft, fraud or material
dishonesty or misconduct involving the property or affairs
of the Company or the carrying out of Executive's duties;
or
(ii) if Executive is guilty of a material breach or material
non-observance of any of the terms or conditions of this
Agreement provided that Executive is given written notice
of any such breach or non-observance and fails to remedy
the same within 15 days of receipt of such notice; or
(iii) if Executive is convicted of a felony; or
(iv) if there is a repeated and demonstrated failure on the
part of the Executive to perform his duties in a competent
manner and Executive fails to remedy the failure within 15
days of receipt of written notice of such failure; or
3
<PAGE>
(v) if Executive or any member of his family makes any
personal profit arising out of or in connection with a
transaction to which the Company or any of its
subsidiaries is a party or with which it is associated
without making disclosure to and obtaining prior written
consent of the Company.
Upon the termination of Executive's employment pursuant to this Subsection
(a), this Agreement and the employment of Executive hereunder shall be
wholly terminated. Upon any such termination, Executive shall have no
claim against the Company in respect of his employment for damages or
otherwise except in respect of payment of base salary earned, due and
owing and unused vacation time to the date of termination.
(b) TERMINATION BY THE COMPANY WITHOUT CAUSE. Notwithstanding
anything herein to the contrary, the Company may terminate Executive's
employment hereunder at any time, for any reason or no reason, on not less
than 15 days' prior written notice. In the event of termination pursuant
to this Subsection (b), Executive will be paid:
(i) if the termination occurs prior to the second anniversary
of the date of this Agreement, an amount equal to two
times his annual base salary at the rate in effect on the
date of his termination; and
(ii) if the termination occurs thereafter, an amount equal to
the average of the total annual compensation (annual base
salary plus bonuses earned, if any, for such years) earned
by Executive for the preceding two full fiscal years of
the Company prior to the date of termination.
In addition, if Executive is terminated under this subsection
(b) prior to the second anniversary of the date of this Agreement,
notwithstanding anything to the contrary contained herein or in the
applicable stock option agreements, all of the stock options then held by
Executive (including the Options) shall continue to vest in accordance
with their terms through the second anniversary of the date of this
Agreement and shall be exercisable to the extent so vested by Executive on
or prior to the 60th day following the second anniversary date of this
Agreement.
(c) TERMINATION BY EXECUTIVE. Executive may terminate his
employment hereunder at any time, for any reason, upon the giving of not
less than 15 days' prior written notice to the Board. In the event of
termination by Executive under this clause (c), Executive shall be
entitled to receive only his base salary and unused vacation time due him
through the effective date of termination. Upon the termination of
Executive's employment pursuant to this Subsection (a), this Agreement and
the employment of Executive hereunder shall be wholly terminated. Upon
any such termination, Executive shall have no claim against the Company in
respect of his employment for damages or
4
<PAGE>
otherwise except in respect of payment of base salary earned, due and
owing and unused vacation time to the date of termination.
(d) TERMINATION BY THE COMPANY DUE TO DEATH OR DISABILITY. The
employment of Executive shall, at the option of the Company, terminate
immediately in the event of his death or permanent disability, in which
case notice in writing from the Company shall be sent to Executive or his
legal representative. In the event of termination under this clause (d),
in addition to any disability benefit coverage to which he may be entitled
under any disability insurance programs maintained by the Company in which
he is a participant, Executive will be paid an amount equal to the
difference between (i) six months salary at Executive's annual base salary
rate as in effect on the date of the termination under this clause (d) and
(ii) the amount of disability benefits for a six-month period payable to
Executive under the Company's long-term disability program in which he is
a participant. Except as provided in the preceding sentence, Executive
shall be entitled to no additional compensation under this Agreement
following the date of termination under this clause (d), other than base
salary earned but not paid, and unused vacation time accrued, through the
date of termination. For purposes of this Agreement "permanent
disability" shall mean an illness, disease, mental or physical disability
or other causes beyond Executive's control which makes Executive incapable
of discharging his duties or obligations hereunder, or causes Executive to
fail in the performance of his duties hereunder, for six consecutive
months, as determined in good faith by the Board based on a report of a
physician selected in good faith by the Board.
(e) TERMINATION BY EXECUTIVE UPON A CHANGE OF CONTROL. In the event
that (x) a Change of Control (as hereinafter defined) occurs and (y) at
any time after such Change of Control a Triggering Event (as hereinafter
defined) shall occur, then unless the Executive shall have given his
express written consent to the contrary, Executive may, upon 30 days
written notice to the Company, terminate his employment hereunder. In
such event Executive shall be entitled to the following:
(i) Following the date of the Triggering Event, Executive
shall be paid two cash payments each to be equal to Executive's
annual base salary in effect on the date of the Triggering Event, the
first of such payments to be paid within 30 days of the Triggering
Event and the second of such payments to be paid on the first
anniversary of the date of the Triggering Event, in each case subject
to normal withholding.
(ii) As of the date of the Triggering Event, notwithstanding
the vesting schedule set out in Subsection 3(c) above, all of the
Options shall thereupon become fully vested; and
(iii) For a one year period following the date of the Triggering
Event, Executive shall be provided with employee benefits
substantially identical to those to which Executive was entitled
immediately prior to the Triggering Event, subject
5
<PAGE>
to any changes or modifications (including reductions or
terminations) to the Company's employee benefit and welfare plans
that are made generally for all of the Company's senior executives.
In the event that the benefits provided for in this
Subsection 4(e) to be paid Executive constitute "parachute payments"
within the meaning of section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), and will be subject to the excise tax
imposed by Section 4999 of the Code, then Executive shall receive
(a) a payment from the Company sufficient to pay such excise tax and
(b) an additional payment from the Company sufficient to pay the
Federal and California income tax arising from the payment made under
clause (a) of this sentence. Unless the Company and Executive
otherwise agree, the determination of Executive's excise tax
liability and the Federal and California income tax resulting from
the payment under clause (a) above shall be made by the Company's
independent accountants (the "Accountants"), whose determination
shall be conclusive and binding upon the Company and Executive for
all purposes. For purposes of making the calculations required by
this Subsection 4(e), the Accountants may make reasonable assumptions
and approximations concerning applicable taxes and may rely on
interpretations of the Code for which there is a "substantial
authority" tax reporting position. The Company and Executive shall
furnish to the Accountants such information and documents as the
Accountants may reasonably request in order to make the
determinations required by this Subsection 4(e). The Company shall
bear the expenses of the Accountants under this Subsection 4(e).
For purposes of this Subsection 4(e):
(a) Change of Control" means the occurrence of any one of
the following: (i) any transaction or series of transactions
(as a result of a tender offer, merger, consolidation or
otherwise) that results in any person, entity or group acting in
concert, acquiring "beneficial ownership" (as defined in rule
13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, of such percentage of the aggregate voting power of
all classes of common equity stock of the Company as shall
exceed 50% of such aggregate voting power; or (ii) a merger or
consolidation of the Company, other than a merger or
consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least 50% of
the voting power represented by the voting securities of the
Company or such entity outstanding immediately after such merger
or consolidation; or (iii) the shareholders approve a plan of
complete liquidation of the Company or an agreement for the sale
or disposition by the Company of all, or substantially all, of
the Company's assets (other than in connection
6
<PAGE>
with a sale or disposition to subsidiaries of the Company or in
connection with a reorganization or restructuring of the
Company); or (iv) there occurs a change in the composition of
the Board as a result of which fewer than a majority of the
directors are Incumbent Directors (as hereinafter defined).
"Incumbent Directors" shall mean directors who either (A)
are directors of the Company as of the Commencement Date or
(B) are elected, or nominated for election, to the Board
with the affirmative votes of at least a majority of the
Incumbent Directors casting votes at the time of such
election or nomination.
(b) "Triggering Event" means any of the following: (i) the
termination by the Company without Cause of Executive's
employment pursuant to Subsection 4(a) hereof; (2) the reduction
of Executive's annual base salary or annual incentive bonus
formula from that in effect on the date of the Change of
Control; (3) the removal of Executive as the Company's President
and Chief Executive Officer or a material reduction in his
duties and responsibilities; or (4) the relocation of
Executive's principal place of employment to a location outside
San Diego County, California.
(f) PAYMENTS. Any amounts payable to Executive under this Section 4
shall be paid, unless otherwise specified hereunder, within 30 days of the
date the payment obligation accrues and shall be subject to normal
withholding.
(g) EXCLUSIVE RIGHTS. In connection with any termination under
Subsection 4(b) or 4(e), Executive shall have no claim against the Company
in respect of his employment for damages or otherwise except in respect of
the payments and other provisions specified in such Subsections.
(h) COOPERATION. Upon any termination of employment by the Company
or by Executive hereunder, Executive shall cooperate with the Company, as
reasonably requested by the Company, to effect a transition of Executive's
responsibilities and to ensure that the Company is aware of all matters
being handled by Executive.
5. RESOLUTION OF DISPUTES. The parties recognize that claims,
controversies and disputes may arise out of this Agreement with respect to
Executive's employment, termination of employment, or other terms of this
Agreement or based on common law or statute, either during the existence of
the employment relationship or afterwards. The parties agree that should any
such claim, controversy or dispute arise, the parties will use their best
efforts to resolve such dispute informally, between them. In the event that
any such claim, controversy or dispute between Company and Executive cannot
be resolved within thirty (30) days after either party first gives notice in
writing that any such claim, controversy or dispute exists, either party may
then refer the matter to arbitration before JAMS/ENDISPUTE pursuant to its
rules for resolution of employment disputes.
7
<PAGE>
The parties hereby agree that referral to arbitration shall be the sole
recourse of either party under this Agreement with respect to any such claim,
controversy or dispute and that the decision of the arbitrator shall be
binding on the parties in accordance with applicable law; provided, however,
that nothing in this Section 5 shall be construed as precluding either party
from bringing an action for injunctive relief or other equitable relief. The
parties shall keep confidential the existence of each such the claim,
controversy or dispute from third parties (other than arbitrator), and the
determination thereof, unless otherwise required by law. Except as provided
in the following sentence, such decision rendered by the arbitrator shall be
final and conclusive and may be entered in any court having jurisdiction
thereof as a basis of judgment and of the issuance of execution for its
collection. In rendering his or her decision, the arbitrator shall be bound
to follow California or Federal law, as applicable, in the same manner as
would a court of law. Any claim that the arbitrator made a mistake or error
in determining or applying the appropriate law shall be subject to judicial
review.
The parties further agree that the party prevailing in the arbitration
shall be entitled to its reasonable attorney's fees and that the arbitration
itself shall take place within the County of San Diego, California, and that
the internal laws of the State of California shall apply.
6. GENERAL OBLIGATIONS OF EXECUTIVE.
(a) Executive agrees and acknowledges that he owes a duty of
loyalty, fidelity and allegiance to act at all times in the best interests
of the Company, to not knowingly become involved in a conflict of interest
and to not knowingly do any act or knowingly make any statement, oral or
written, which would injure the Company's business, its interest or its
reputation unless required to do so in any legal proceeding by a competent
court with proper jurisdiction.
(b) Executive agrees to comply at all times with all applicable
policies, rules and regulations of the Company, including, without
limitation, the Company's policy regarding trading in the Common Stock, as
is in effect from time to time.
7. NO SOLICITATION. Executive agrees that in the event he is no
longer employed by the Company, for any reason, he shall not hire, solicit or
otherwise cause to be solicited for employment elsewhere, either directly or
indirectly, for a period of one year from his termination of employment, any
employee, officer or director of the Company or any individual who chooses
not to join the Company, provided that Executive participated actively in the
recruiting of such individual.
8. NONCOMPETITION. Executive agrees that for a period of one year
following termination of his employment with the Company for any reason, he
will not, nor will he permit any entity or other person under his control to,
directly or indirectly, own, manage, operate or control, or participate in
the ownership, management, operation or control of, or be connected with or
have any interest in, as a shareholder, director, officer, employee, agent,
consultant, partner, creditor or otherwise, any business or activity which is
competitive with any business or
8
<PAGE>
activity engaged in by the Company or any of its subsidiaries or affiliates
anywhere within (i) the State of California, or (ii) any other state of the
United States and the District of Columbia in which the Company engages in or
has engaged in business during the past five years.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement
between the parties and contains all agreements between them with the
exception of the 1995 Stock Option Plan (and any stock option agreements
issued thereunder) the other employee benefit and welfare programs maintained
by the Company, and the Invention and Secrecy Agreement dated July 1, 1996
previously signed by Executive, which are supplementary to this Agreement and
are each deemed to be incorporated herein by reference. Each party to this
Agreement acknowledges that no representations, inducements, promises or
agreements, orally or otherwise, have been made by any party, or anyone
acting on behalf of any party, which are not embodied in this Agreement, and
that no agreement, statement or promise not contained in this Agreement shall
be valid or binding. Except for the other agreements, plans and programs
referred to in this Section 9, this Agreement also supersedes any and all
other agreements and contracts whether verbal or in writing relating to the
subject matter hereof.
10. AMENDMENT. Except as otherwise specifically provided herein, the
terms and conditions of this Agreement may be amended at any time by mutual
agreement of the parties; provided that before any amendment shall be valid
or effective, it shall have been reduced to writing and signed by the
Chairman of the Board on behalf of the Company and by Executive.
11. INVALIDITY. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect its other provisions, and this
contract shall be construed in all respects as if such invalid or
unenforceable provision has been omitted.
12. BINDING NATURE. Executive's rights and obligations under this
Agreement shall not be assignable, transferable or delegable by assignment or
otherwise, and any purported assignment, transfer or delegation thereof shall
be void. This Agreement shall inure to the benefit of, and be enforceable
by, any purchaser of substantially all of the Company's assets, any corporate
successor to the Company or any assignee thereof.
13. ASSISTANCE IN LITIGATION. Executive shall, during and after
termination of employment, upon reasonable notice, furnish such information
and proper assistance to the Company as may reasonably be required by the
Company in connection with any litigation in which it or any of its
subsidiaries or affiliates is, or may become a party. Except where Executive
is a named defendant, Executive shall be paid a reasonable hourly fee to be
mutually agreed upon.
14. INDEMNIFICATION. The Company shall indemnify Executive in
accordance with its standard indemnification policy for offices and directors
of the Company and as required by applicable law.
15. NO DUTY TO MITIGATE. Executive shall not be required to mitigate
the amount of any payment contemplated by this Agreement (whether by seeking
new employment or in any
9
<PAGE>
other manner), nor shall any such payment be reduced by any earnings that
Executive may receive from any other source not paid for by the Company.
16. CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California except for Sections 7 and 8 hereof which shall be governed by, and
interpreted and construed in accordance with, the internal laws (without
giving effect to choice of law principles) of the jurisdiction in which
either of said Sections is being sought to be enforced.
17. NOTICES. All notices and other communications required or
permitted hereunder or necessary or convenient in connection herewith shall
be in writing and, if given by telegram, telecopy or telex, shall be deemed
to have been validly served, given or delivered when sent, if given by
personal delivery, shall be deemed to have been validly served, given or
delivered upon actual delivery and, if mailed, shall be deemed to have been
validly served, given or delivered three business days after deposit in the
United States mail, as registered or certified mail, with proper postage
prepaid and addressed to the party or parties to be notified, at the
following addresses:
If to Executive to:
Thomas L. Horgan
1245 Virginia Way
La Jolla, California 92037
Telephone: (619) 456-1742
Fax:
--------------------------
If to the Company to:
Maxwell Technologies Inc.
9275 Sky Park Court
San Diego, California 92123
Attn: General Counsel
Telephone: (619) 576-7502
Fax: (619) 277-6754
18. INJUNCTIVE RELIEF. The Company and Executive agree that a breach
of any term of this Agreement by Executive would cause irreparable damage to
the Company and that, in the event of such breach, the Company shall have, in
addition to any and all remedies of law, the right to any injunction,
specific performance and other equitable relief to prevent or to redress the
violation of Executive's duties or responsibilities hereunder.
19. RELEASE. If Executive's employment hereunder shall terminate under
Subsection 4(b) or 4(e), Executive agrees, as a condition to his entitlement
to receive the amounts specified in such Subsections to be due to him, to
execute and deliver to the Company a release in the form
10
<PAGE>
attached hereto as EXHIBIT A. Such release shall be delivered by Executive at
the time of termination, but shall become effective only after Executive has
received all payments specified in this Agreement to be due to him from the
Company in respect of his termination.
20. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and either of the parties to this Agreement may execute this
Agreement by signing any such counterpart.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the 30th day of April, 1999.
"Company"
MAXWELL TECHNOLOGIES, INC.
By:/s/ Carlton J. Eibl
Director
"Executive"
/s/ Thomas L. Horgan
Thomas L. Horgan
11
<PAGE>
SECURED
PROMISSORY NOTE
$2,000,000
February 2, 1999 San Diego, California
FOR VALUE RECEIVED, the undersigned, Kenneth F. Potashner, an individual,
("Maker") hereby promises to pay to the order of Maxwell Technologies, Inc., a
Delaware corporation, ("Holder") at its offices located at 9275 Sky Park Court,
Suite 400, San Diego, California 92123, or such other place as Holder may
designate in writing from time to time, the principal sum of Two Million Dollars
($2,000,000) plus accrued interest, on the terms and conditions of this
Promissory Note ("Note").
The entire principal and interest of this Note shall be due and payable in
whole on the second anniversary of the date hereof. Interest shall accrue under
this Note at the rate of 5.0% per annum. Any principal or interest not paid
when due shall bear a default rate of interest at the maximum rate permitted by
applicable law.
Payment of the principal and interest due under this Note is secured by a
pledge by Maker of shares of common stock of Holder pursuant to that certain
Stock Pledge Agreement of even date herewith ("Pledge Agreement").
In the event of default of Maker in the timely payment of any amount
hereunder or the occurrence of an Event of Default as defined in the Pledge
Agreement, the entire unpaid balance under this Note shall be immediately due
and payable, together with costs of collection, including, but not limited to,
reasonable attorneys' fees, costs, expenses, or losses and interest; and
diligence in taking any action to collect any sums owing under this Note. Maker
further agrees that, in the event of Maker's termination of employment with
Holder and all its subsidiaries and affiliates at a time when amounts hereunder
are due and payable, the amount of any balance due hereunder may, at the option
of Holder, be withheld from any sums otherwise payable to Maker as a result of
such employment or the termination thereof, and such withheld amount shall be
applied to the payment of said balance.
The Maker shall be permitted to prepay, without penalty or charge, all or
any portion of the amount due under this Note.
This Note is made in the State of California, U.S.A. and it is mutually
agreed that California law shall apply to the interpretation of the terms and
conditions of this Note.
IN WITNESS WHEREOF, this Note is executed the above date first written.
/s/ Kenneth F. Potashner
------------------------
Kenneth F. Potashner
<PAGE>
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT (this "Pledge Agreement") is made as of
February 2, 1999, between Kenneth F. Potashner as pledgor ("Pledgor"), and
Maxwell Technologies, Inc., a Delaware corporation, as pledgee ("Pledgee").
R E C I T A L S:
A. Pledgor is the beneficial owner of Fifty Thousand (50,000) shares
(the "Shares") of common stock, $0.10 par value per share of Pledgee.
B. Pursuant to the terms of that certain Secured Promissory Note in
the amount of $2,000,000 of even date herewith delivered by Pledgor to Pledgee
(the "Note"), Pledgor has agreed to make payments of principal and interest to
Pledgee as provided in the Note.
C. Pursuant to the terms of Note, Pledgor is required to execute
this Pledge Agreement to secure payment in full of all obligations under the
Note, whether for principal, interest, fees, expenses or otherwise and to ensure
compliance with the terms and conditions of this Pledge Agreement.
A G R E E M E N T:
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants and conditions contained herein, the parties hereto agree as follows:
1. GRANT OF SECURITY INTEREST IN THE SHARES. Pledgor hereby grants
to Pledgee a security interest in the Shares, pledges and hypothecates the
Shares to Pledgee, and deposits the certificates evidencing the Shares (the
"Certificates") with Pledgee as collateral security for the payment by Pledgor
of all obligations existing under the Note, whether for principal, interest,
fees, expenses or otherwise, and the satisfaction of all obligations of Pledgor
under this Pledge Agreement. The Certificates, together with one or more stock
assignments duly executed in blank with signatures appropriately guaranteed or
witnessed, are being delivered herewith to Pledgee, to be retained by Pledgee as
the pledgeholder for the Shares.
2. REPRESENTATION AND WARRANTY OF PLEDGOR. Pledgor represents and
warrants to Pledgee that the Shares are free and clear of all claims, mortgages,
pledges, liens and other encumbrances of any nature whatsoever, except (a) the
liens and restrictions set forth herein and
<PAGE>
in the Note and (b) any restrictions upon sale and distribution imposed by
the Securities Act of 1933, as amended (the "Act"), and applicable state
securities laws.
3. VOTING OF SHARES. So long as there shall exist no Event of
Default (as hereinafter defined), Pledgor shall be entitled to exercise, as
Pledgor deems proper but in a manner not inconsistent with the terms hereof,
Pledgor's rights to voting power with respect to the Shares. Pledgee, and not
Pledgor, shall be entitled to vote the Shares at any time that there exists an
Event of Default.
4. DIVIDENDS. So long as there shall exist no Event of Default,
Pledgor shall be entitled to receive any dividend (ordinary or extraordinary,
whether paid in cash, stock or property) or other distribution with respect to
the Shares. If there exists an Event of Default, such dividend or other
distribution shall be delivered to Pledgee to be held as additional collateral
security under this Pledge Agreement.
5. PLEDGEE'S DUTIES. So long as Pledgee exercises reasonable care
with respect to the Shares in its possession, Pledgee shall have no liability
for any loss or damage to such Shares, and in no event shall Pledgee have
liability for any diminution in value of the Shares occasioned by economic or
market conditions or events. Pledgee shall be deemed to have exercised
reasonable care within the meaning of the preceding sentence if the Shares in
its possession are accorded treatment substantially equal to that which Pledgee
accords its own property, it being understood that Pledgee shall not have any
responsibility under this Pledge Agreement for (a) ascertaining or taking action
with respect to calls, conversions, exchanges, maturities, tenders or other
matters relating to the Shares, whether or not Pledgee has or is deemed to have
knowledge of such matters, or (b) taking any necessary steps to preserve rights
against any person or entity with respect to the Shares.
6. TRANSFERS TO PERMITTED TRANSFEREES. In the event of a purchase
by Pledgee of any or all of the Shares pursuant to Section 3 of the Purchase
Agreement, such Shares shall be released from this Pledge Agreement. Pledgor
hereby authorizes and directs Pledgee, upon receipt by Pledgor of payment
pursuant to Section 3 of the Purchase Agreement, to complete and execute the
stock assignment or stock assignments delivered herewith to effectuate such
Transfer.
Pledgor shall not sell, assign, transfer, hypothecate, encumber or
otherwise dispose of (collectively, a "Transfer") any Shares (except as set
forth in the next sentence), unless Pledgor has made payment to Pledgee of all
unpaid obligations existing under the Note (whether or not then due and
payable), whether for principal, interest, fees, expenses or otherwise and all
unsatisfied obligations of Pledgor under this Pledge Agreement. In the event of
a transfer to which Pledgee gives its written consent (a "Permitted Transfer"),
the Pledgor authorizes the Pledgee to cause the certificate or certificates
evidencing the Shares to be reissued in the name of the transferee (the
"Permitted Transferee"); provided, however, that (a) the Shares shall continue
to be subject to this Agreement and the Permitted Transferee(s) shall execute an
undertaking agreeing to be bound by this Agreement, (b) the reissued certificate
or certificates shall continue
2.
<PAGE>
to be held by the Pledgee pursuant hereto, and (c) the Permitted
Transferee(s) shall execute and deliver to the Pledgee stock assignments in
blank with respect to the Shares. Upon receipt by Pledgee of the payment as
required by this paragraph, the Shares shall be released from this Pledge
Agreement.
7. SALE OF COLLATERAL. Upon the occurrence of any Event of Default,
Pledgee shall have all the rights and remedies of a secured party under the
applicable Uniform Commercial Code and also may, without notice, except as
specified below, at its option, sell all or any part of the Shares, for cash,
note or other property upon credit for future delivery or upon such other terms
as Pledgee may deem commercially reasonable. Upon such sale, Pledgee, unless
prohibited by a provision of any applicable statute, may purchase all or any
part of the Shares being sold, free from and discharged of all trusts, claims,
rights of redemption and equities of Pledgor. If the proceeds of any sale of
the Shares shall be insufficient to pay all amounts due under the Notes and
satisfy the obligations of Pledgor under this Pledge Agreement, including
collection costs and expenses of such sale, Pledgor shall remain obligated and
liable for any deficiency with respect thereto. If, at any time when Pledgee
shall determine to exercise its rights to sell all or any part of the Shares
pursuant to this SECTION 7, such Shares, or the part thereof to be sold, shall
not be effectively registered under the Act as then in effect or any similar
statute then in force, subject to the provisions of SECTION 9 hereof, Pledgee,
in its sole and absolute discretion, is hereby expressly authorized to sell such
Shares, or any part thereof, by private sale in such manner and under such
circumstances as Pledgee may deem necessary or advisable in order that such sale
may be effectuated legally without such registration or the Pledgee may
undertake, in its sole and absolute discretion, to register the Shares under the
Act in order to sell such Shares in a public offering, the costs of such
registration to be for the account of the Pledgor. Without limiting the
generality of the foregoing, Pledgee, in its sole and absolute discretion, may
approach and negotiate with a restricted number of potential purchasers to
effectuate such sale or restrict such sale to a purchaser or purchasers who
shall represent and agree that such purchaser or purchasers are purchasing for
its or their own account, for investment only, and not with a view to the
distribution or sale of such Shares or any part thereof. Any sale conducted in
the manner described in the foregoing sentence shall be deemed to be a sale
conducted in a commercially reasonable manner within the meaning of the
applicable Uniform Commercial Code, and Pledgor hereby consents and agrees that
Pledgee shall incur no responsibility or liability for selling all or any part
of the Shares at a price which is not unreasonably low, notwithstanding the
possibility that a substantially higher price might be realized if the sale were
public. Pledgee shall not be obligated to make any sale of the Shares
regardless of notice of sale having been given. Pledgee may adjourn any public
or private sale from time to time by announcement at the time and place fixed
therefor, and any such sale may, without further notice, be made at the time and
place to which it was so adjourned.
8. REDEMPTION OF COLLATERAL. Notwithstanding any other provision of
this Pledge Agreement, upon the occurrence of an Event of Default, Pledgee shall
give Pledgor written notice of the time and place of any public sale or of the
time on or after which any private sale or other Transfer is to be made at least
five (5) days before the date fixed for any public sale or before the day on or
after which any private sale or other Transfer is to be made. Pledgor
3.
<PAGE>
agrees that, to the extent notice of sale shall be required by law, such five
(5) days' notice shall constitute reasonable notification. This notice shall
also specify the aggregate outstanding monetary obligations of the Pledgor to
Pledgee at the date of such notice (the "Total Obligation"). At any time
during such five-day period, Pledgor shall have the right to redeem the
Shares by the payment by certified or bank cashier's check of an amount equal
to the Total Obligation.
9. EVENTS OF DEFAULT. At the option of Pledgee, the principal
balance of the Note and all accrued and unpaid interest thereon, and all other
obligations of Pledgor to Pledgee thereunder and hereunder, shall become and be
immediately due and payable, without notice of default, presentment or demand
for payment, protest or notice of nonpayment or dishonor, or other notices or
demands of any kind (all of which are hereby expressly waived by Pledgor), upon
the occurrence of any of the events set forth below (individually, an "Event of
Default"):
(a) Pledgor shall cease to be an employee of the Company or any of
its subsidiaries;
(b) Pledgor shall fail to make complete payment of any installment
of accrued interest under the Note on the date such installment of accrued
interest is due, after being given notice and an opportunity of at least five
(5) days to cure such nonpayment;
(c) Pledgor shall fail to make complete payment of principal when
due under the Note; or
(d) Pledgor shall commit a breach of or default under this Pledge
Agreement.
10. TERMINATION. This Pledge Agreement shall terminate only upon
payment to Pledgee of all unpaid obligations existing under the Note, whether
for principal, interest, fees, expenses or otherwise and all unsatisfied
obligations of Pledgor under this Pledge Agreement. Upon termination of this
Pledge Agreement, Pledgor shall be entitled to the return of the Certificates
then held by Pledgee and any other collateral security then held by Pledgee
pursuant to SECTION 4 of this Pledge Agreement.
11. CUMULATION OF REMEDIES; WAIVER OF RIGHTS. The remedies provided
herein in favor of Pledgee shall not be deemed exclusive but shall be cumulative
and shall be in addition to all of the remedies in favor of Pledgee existing at
law or in equity. Nothing in this Pledge Agreement shall require Pledgee to
proceed against or exhaust its remedies against the Shares before proceeding
against Pledgor or executing against any other security or collateral securing
performance of Pledgor's obligations to Pledgee under the Note or this Pledge
Agreement. No delay on the part of Pledgee in exercising any of its options,
powers or rights, or the partial or single exercise thereof, shall constitute a
waiver thereof.
4.
<PAGE>
12. EXECUTION OF ENDORSEMENTS, ASSIGNMENTS, ETC. Upon the occurrence
of an Event of Default, Pledgee shall have the right for and in the name, place
and stead of Pledgor to execute endorsements, assignments or other instruments
of conveyance or transfer with respect to all or any of the Shares and any other
shares of the capital stock of Pledgee or other property which is held by
Pledgee as collateral security pursuant to this Pledge Agreement.
13. MISCELLANEOUS.
(a) FURTHER ASSURANCES; CHANGES IN CAPITALIZATION. Each party
hereto agrees to perform any further acts and execute and deliver any documents
which may be reasonably necessary to carry out the intent of this Pledge
Agreement. The provisions of this Pledge Agreement shall apply to any and all
stock or other securities of the Pledgee or any successor or assign of the
Pledgee, which may be issued in respect of, in exchange for or in substitution
of, the Shares by reason of any split, reverse split, recapitalization,
reclassification, combination, merger, consolidation or otherwise, and such
Shares or other securities shall be encompassed within the term "Shares" for
purposes of this Pledge Agreement and the Pledgee shall have a security interest
in all such securities on the same terms set forth in this Pledge Agreement.
(b) NOTICE. Except as otherwise provided herein, all notices,
requests, demands and other communications under this Agreement shall be in
writing, and if by telegram or telecopy, shall be deemed to have been validly
served, given or delivered when sent, or if by personal delivery or messenger or
courier service, or by registered or certified mail, shall be deemed to have
been validly served, given or delivered upon actual delivery, at the following
addresses, telephone and facsimile numbers (or such other address(es), telephone
and facsimile numbers a party may designate for itself by like notice):
If to Pledgee:
Maxwell Technologies, Inc.
9275 Sky Park Court
San Diego, California 92123
Attention: Donald M. Roberts, Esq.
Telephone: (619) 279-5100
Telecopy: (619) 277-6754
If to Pledgor:
Kenneth F. Potashner
_________________________
_________________________
5.
<PAGE>
(c) AMENDMENTS. This Pledge Agreement may be amended only by a
written agreement executed by the parties hereto.
(d) GOVERNING LAW. This Pledge Agreement shall be governed by
and construed in accordance with the laws of the State of California.
(e) DISPUTES. In the event of any dispute between the parties
arising out of this Pledge Agreement, the prevailing party shall be entitled to
recover from the nonprevailing party the reasonable expenses of the prevailing
party including, without limitation, reasonable attorneys' fees.
(f) ENTIRE AGREEMENT. This Pledge Agreement constitutes the
entire agreement and understanding among the parties pertaining to the subject
matter hereof and supersedes any and all prior agreements, whether written or
oral, relating hereto.
(g) SUCCESSORS AND ASSIGNS. Pledgee shall have the right to
assign with absolute discretion any or all of its rights and/or obligations
and/or delegate any or all of its duties under this Agreement to any of its
affiliates, successors and/or assigns, including, without limitation (i) to
any of its banks or lending institutions as collateral security, or (ii) to
any entity succeeding the Pledgee by merger, consolidation or acquisition of
all or substantially all of the Pledgee's assets, and this Agreement shall
inure to the benefit of, and be binding upon, such respective affiliates,
successors and/or assigns of Pledgee in the same manner and to the same
extent as if such affiliates, successors and/or assigns were original parties
hereto. Unless specifically provided herein to the contrary, Pledgor may not
assign any or all of its rights and/or obligations and/or delegate any or all
of its duties under this Pledge Agreement without the prior written consent
of Pledgee. Upon an assignment of any or all of Pledgor's rights and/or
obligations and/or a delegation of any or all of its duties under this Pledge
Agreement in accordance with the terms of this Pledge Agreement, this Pledge
Agreement shall inure to the benefit of, and be binding upon, Pledgor's
respective affiliates, successors and/or assigns in the same manner and to
the same extent as if such affiliates, successors and/or assigns were
original parties hereto.
(h) HEADINGS. Introductory headings at the beginning of each
section and subsection of this Pledge Agreement are solely for the convenience
of the parties and shall not be deemed to be a limitation upon or description of
the contents of any such section and subsection of this Pledge Agreement.
(i) COUNTERPARTS. This Agreement may be executed in two
counterparts, each of which shall be deemed an original and both of which, when
taken together, shall constitute one and the same Pledge Agreement.
6.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Pledge
Agreement as of the day and year first above written.
PLEDGEE:
MAXWELL TECHNOLOGIES, INC.
a Delaware corporation
By: /s/ Donald M. Roberts
Name: Donald M. Roberts
Title: VP & General Counsel
PLEDGOR:
/s/ Kenneth F. Potashner
Kenneth F. Potashner
7.
<PAGE>
EXHIBIT 10.31
Objective
- To drive the maximization of company-wide growth, financial
performance and shareholder value.
Eligibility
- The CEO recommends participants and their participation levels (ie:
Target Bonus)
- Participants must be actively employed on the last day of the
performance period to be eligible for any award.
- Participants who do not complete a full plan year will have pro-rated
eligibility.
Bonus Opportunity
- The bonus opportunity is based on a participant's assigned target,
and expressed as a percent of base salary at the time of the payout.
- Participants, excluding the CEO, will have targets that vary from
20% to 50% of base salary as set by the CEO. The CEO's target will
be determined by the Compensation Committee.
Bonus Calculation
- Two weighted factors; Sales and EPS Up to 100% Target
- 50% Sales
- 50% EPS
- Above 100%
- 1/3 Sales
- 2/3 EPS
Bonus Calculation
- EPS is calculated after Profit Sharing payments and Bonus expense.
- The exact percentage for each participant is determined by the CEO and
is based on each individual's goal achievement and leadership
performance.
<PAGE>
<TABLE>
<CAPTION>
Bonus Calculation
MINIMUM INCOME % OF TARGET
SALES OPERATING INCOME FROM OPS. BONUS EARNED
----- ---------------- -------------- -------------
<S> <C> <C> <C>
$205M $ 9M $ 4M 25%
$210M $10M $ 5M 50%
$217M $12M $6.5M 100%
$234M $16M $6.5M 200%
</TABLE>
Notes:
(A) Up to 100% of target (Sales $217M, OP $12M), all acquisitions are excluded
from calculations.
(B) Above 100%, acquisitions will be included.
(C) Minimum income from operations excludes all revenue and income from
license agreements and any other deals or non-recurring items.
(D) No bonuses will be earned, or accrued, in any quarter for which the
consolidated results show a loss. Bonuses will be earned and accrued pro
rata during the year based on the relationship of operating profits earned
in a quarter as a percentage of the planned profits for the year.
Timing and Form of
Bonus Payment
- The bonus will be paid to participants in cash, following the year end
results.
- Operating Income of $9 million must be achieved for any payout to
occur.
<PAGE>
SHAREHOLDER AGREEMENT
This SHAREHOLDER AGREEMENT (the "Agreement") is made as of January 28,
1999, by and among PUREPULSE TECHNOLOGIES, INC., a Delaware corporation (the
"Company"), MAXWELL TECHNOLOGIES, INC., a Delaware corporation ("MTI"), SANYO
E&E CORPORATION, a Delaware corporation ("SEE") and THREE OCEANS, INC., a
Delaware corporation ("TOI"). SEE and TOI are sometimes collectively referred
to herein as the "Investors" and individually as an "Investor." Each of the
Investors owns the capital stock of the Company set forth on Schedule 1 hereto.
In consideration of the mutual promises, covenants and agreements contained
herein, the parties hereto agree as follows:
SECTION 1. RESTRICTIONS ON TRANSFER
1.1 RIGHT OF FIRST OFFER. Except in accordance with the provisions of
this Section 1 or Section 2, the Investors may not transfer all or any portion
of the Company's Series A Preferred Stock, $0.01 par value per share (the
"Preferred Stock") or the Company's common stock, $0.01 par value per share (the
"Common Stock") into which the Preferred Stock has been converted now or
subsequently held by either of them (collectively, the "Investor Shares").
(a) Each Investor agrees that in the event it either receives an
offer to purchase for cash (which offer it wishes to accept) or otherwise
desires to transfer all or a portion of the Investor Shares (the "Offered
Investor Shares"), it shall deliver to the Company a notice of proposed transfer
stating (i) its bona fide intention to sell or otherwise transfer such Offered
Investor Shares, (ii) the number of such Offered Investor Shares to be sold or
otherwise transferred, (iii) the terms and conditions of the proposed transfer
including the purchase price (the "Proposed Investor Price") and (iv) the name
of the proposed transferee, if any. The Company shall have the right to
purchase all, but not less than all, the Offered Investor Shares at the Proposed
Investor Price and pursuant to the terms and conditions stated in the notice.
The Company shall, within 15 days following receipt of the Investor's notice,
deliver to the Investor, a certificate stating whether the Company has elected
to exercise or to not exercise its right to purchase the Offered Investor
Shares. If the Company elects to exercise its right in accordance with this
Section 1.1, the respective parties shall effect a closing on a mutually agreed
date, which closing date shall be within 15 days after the date of such notice
of exercise. The Company may assign its rights under this Section 1.1 to MTI.
(b) Unless the Company (or MTI) agrees to purchase the Offered
Investor Shares offered pursuant to Section 1.1(a) above, the Investor may
transfer the Offered Investor Shares at the Proposed Investor Price, provided
that (i) the terms and conditions of the transfer are no more favorable to the
transferee than the terms and conditions stated in the Investor's notice to the
Company, (ii) such sale or other transfer is consummated within 120 days from
the date of the notice of proposed transfer, and (iii) any such sale or other
transfer is in accordance with all the terms and conditions hereof, and with
applicable securities laws.
<PAGE>
(c) As used in this Section 1.1, the term "transfer" shall mean any
sale, exchange, execution on a pledge, assignment, gift, sale by legal process
under execution or attachment, or change in ownership, voluntary or involuntary
because of any other act or occurrence, but shall not include (i) transfers by
an Investor to one or more Affiliates (as defined in Rule 144 promulgated under
the Securities Act of 1933, as amended (the "Securities Act")) of such Investor,
(ii) an exchange of securities effected in connection with any merger or
recapitalization of the Company or the sale of substantially all of the
Company's Common Stock, or (iii) a sale of Common Stock in connection with a
Public Offering (as hereinafter defined).
(d) In the case of any transfer under clause (b) or clause (c)(i) of
this Section 1.1, prior to the transfer, the transferee shall execute and
deliver to the Company a valid and binding agreement to the effect the
transferee shall receive and hold such shares subject to the provisions of this
Agreement and there shall be no further transfer of such shares except in
accordance herewith.
1.2 RIGHT OF CO-SALE.
(a) MTI agrees that it will not sell, exchange or transfer more than
25 percent of the Common Stock of the Company that it now or subsequently holds
("MTI Shares") to or with any third person, unless the Investors shall have been
given reasonable opportunity to participate in the proposed sale, exchange or
transfer on the same terms and conditions. In the event MTI receives a good
faith offer to purchase (which offer it wishes to accept) all or a portion of
the MTI Shares (the "Offered MTI Shares"), it shall deliver to the Company and
the Investors a notice stating (i) its bona fide intention to sell, exchange or
transfer the Offered MTI Shares, (ii) the number of such Offered MTI Shares to
be sold, exchanged or transferred; (iii) the terms and conditions of the
proposed sale, exchange or transfer including the purchase price (the "Proposed
MTI Price") and (iv) the name of the proposed transferee. Each Investor shall
have 15 days from the date on which MTI sent its notice of proposed sale,
exchange or transfer in which to elect to participate in the proposed sale,
exchange or transfer under the terms set forth in Section 1.2(b). Any such
election to participate shall be made by giving notice thereof to the Company
and MTI, which notice shall specify the maximum number of Investor Shares that
such Investor wishes to sell, exchange or transfer (which number may be greater
than the number which such Investor is entitled to sell, exchange or transfer
pursuant to this section).
(b) If the Offered MTI Shares constitute 75 percent or more of the
outstanding capital stock of the Company (after giving effect to the deemed
conversion of all outstanding convertible preferred stock), MTI shall use its
best efforts to cause the proposed transferee to accept all Investor Shares
specified in the notices of the Investors pursuant to Section 1.2(a). If either
(i) the Offered MTI Shares constitute less than 75 percent of the outstanding
capital stock of the Company (after giving effect to the deemed conversion of
all outstanding convertible preferred stock), or (ii) the transferee refuses to
acquire all Investor Shares offered by the Investors, then each Investor who has
elected to participate in MTI's proposed transfer (a "Participating Investor")
shall have the right to sell to the proposed transferee only the number of
2
<PAGE>
shares of Common Stock that equals the product of (i) the total number of MTI
Shares to be transferred to the proposed transferee (which shall not be more
than the amount specified in MTI's notice) multiplied by (ii) the ratio that
(A) the number of shares of Common Stock then held by such Participating
Investor together with the number of shares of Common Stock issuable upon
conversion of such Participating Investor's Preferred Stock (together, "Common
Stock Equivalents") bears to (B) the number calculated by adding the number of
Common Stock Equivalents held by all Participating Investors to the number of
MTI Shares.
(c) Each Participating Investor shall effect its participation in the
transfer by delivering to MTI for transfer to the proposed transferee one or
more certificates, properly endorsed for transfer, which represent either
(i) the number of shares of Common Stock that the Participating Investor elects
to transfer pursuant to this Section 1.2, or (ii) that number of shares of
Preferred Stock that is then convertible into the number of shares of Common
Stock that the Participating Investor elects to transfer pursuant to this
Section 1.2. The stock certificates that the Participating Investor delivers to
MTI shall be transferred by MTI to the proposed transferee in consummation of
the sale of shares pursuant to the terms and conditions specified in MTI's
notice, and MTI shall remit to each Participating Investor that portion of the
sale proceeds to which such Participating Investor is entitled by reason of its
participation in such sale.
(d) MTI shall not permit a merger, consolidation, share exchange or
similar transaction affecting the Company, unless the rights of Investors under
this Section 1.2 are given effect in such transaction as though it had been
structured as a sale or exchange by MTI of Common Stock of the Company.
(e) In the event MTI should sell any of its shares in contravention
of the co-sale rights of the Investors under this Section 1.2 (a "Prohibited
Transfer"), each Investor, in addition to any other remedies as may be available
to it at law, in equity or hereunder, shall have the put option provided herein,
and MTI shall be bound by the applicable provisions of such option. In the
event of a Prohibited Transfer, each Investor shall have the right to sell to
MTI the number of shares equal to the number of shares such Investor would have
been entitled to transfer to the purchaser had the Prohibited Transfer been
effected pursuant to and in compliance with the terms hereof. Such sale shall
be made on the following terms and conditions: (i) the consideration per share
to be received for the shares to be sold to MTI shall be equal to the
consideration given by the purchaser to MTI in the Prohibited Transfer; (ii)
within sixty (60) days after the later of the dates on which the Investor
received notice of the Prohibited Transfer or otherwise became aware of the
Prohibited Transfer, each Investor shall, if exercising the option created
hereby, deliver to MTI (a) written notice of its election to exercise the put
option specifying the number of shares to be sold and (b) the certificate or
certificates representing the shares to be sold, each such certificate to be
properly endorsed for transfer; and (iii) MTI shall, upon receipt of the items
specified in clause (ii) of this Section 1.2(e), deliver the aggregate
consideration receivable therefor; PROVIDED, subject to Section 2.2(f), that if
the consideration paid by the purchaser to MTI for the Prohibited Transfer was
not cash, Maxwell's obligation to purchase the Investors' shares under this
Section 1.2(e) shall not be effective until the first date on which MTI is
legally and contractually able to transfer the consideration therefor to the
Investors. Notwithstanding the
3
<PAGE>
foregoing, any attempt by MTI to sell, transfer or exchange shares in
violation of Section 1.2 shall constitute a violation of this Agreement. In
addition, MTI shall, upon receipt of the items specified in clause (ii) and
notification in reasonable detail of the amount thereof, promptly reimburse
each Investor for any and all reasonable fees and expenses, including
reasonable legal fees and expenses, incurred in connection with the exercise,
or the attempted exercise, of such Investor's rights under this Section
1.2(e).
1.3 RIGHT TO COMPEL SALE.
(a) If MTI proposes to sell or exchange all, but not less than all,
of the MTI Shares to or with any third person (other than an Affiliate of MTI),
then MTI may, at its option, subject to Section 1.3(c), require each Investor to
sell all of the Investor Shares owned by it to such person on the same terms and
conditions upon which MTI is selling the MTI Shares. MTI shall send written
notice of the exercise of its rights pursuant to this Section 1.3(a) to the
Company and the Investors, which notice of transfer shall be delivered at least
30 days prior to such transfer and shall set forth the terms and conditions of
the proposed transfer.
(b) On or prior to the closing date of such transfer, each Investor
shall deliver to MTI for transfer to the proposed transferee certificates
representing the Investor Shares held by such Investor, properly endorsed for
transfer, and with all other documents required to be executed in connection
with such transaction. MTI shall transfer such certificates to the proposed
transferee in consummation of the sale of shares pursuant to the terms and
conditions specified in MTI's notice of exercise, and MTI shall remit to each
Investor that portion of the sale proceeds to which such Investor is entitled.
In the event that a Investor should fail to deliver such certificates to MTI in
the manner set forth above, the Company shall cause the books and records of the
Company to show that such Investor Shares are bound by the provisions of this
Section 1.3 and that such Investor Shares shall be transferred only to the third
party purchaser upon surrender for transfer by the Investor thereof.
(c) In the event an Investor would receive less than the Fair Market
Value (as defined in Section 2.2(e) below) of the Investor Shares pursuant to a
sale or exchange made pursuant to this Section 1.3, MTI shall pay to the
Investor the amount of the difference within ten days after the Fair Market
Value of the Investor Shares (and if applicable, the consideration to be
received in respect thereof) has been determined in accordance with Section
2.2(e) below.
SECTION 2. OPTION TO SELL INVESTOR SHARES TO MTI
2.1 GRANT OF OPTION. MTI grants to each of the Investors the right and
option to sell to MTI (a) all or part of the Investor Shares (the"Option") and
(b) certain other securities contemplated by Section 2.2(f)(B) (the "Special
Option"), all as provided in, and subject to the provisions of, this Section 2.
As used in this Section 2, MTI Common Stock shall mean that class of MTI capital
stock so denominated on the date hereof or such other class of capital stock of
MTI issued in exchange therefore on a pro rata basis to MTI's shareholders which
is listed on a national securities exchange or qualified for quotation on the
NASDAQ National Market.
4
<PAGE>
2.2 EXERCISE.
(a) Except as otherwise provided in Section 2.2(f)(A), neither the
Option nor the Special Option may be exercised prior to the third anniversary of
the date hereof. The Option may be exercised twice by each Investor. The
Special Option, if it should arise, may be exercised only once by each Investor
with respect to each occurrence that gives rise to the Investors' right to
exercise the Special Option.
(b) The Option shall terminate upon the earlier to occur of (i) the
consummation of the Company's sale of its Common Stock in a firm commitment
underwritten public offering pursuant to a registration statement filed under
the Securities Act of 1933, as amended, which results in aggregate offering
proceeds paid to the Company of at least $10,000,000 (a "Public Offering"), or
(ii) except as provided in Sections 2.2(f)(A) and 2.2(f)(B), the sixth
anniversary of the date hereof.
(c) In the event an Investor wishes to exercise the Option or the
Special Option, it shall send to MTI and the Company a written notice (the date
of which such notice is sent being referred to as the "Notice Date") specifying
the number of Investor Shares (or Restricted Securities) to be sold, and a place
and date not earlier than sixty days (or such additional time, not to exceed 90
days following the Notice Date, or such other time as may be mutually acceptable
to the parties hereto, as shall be reasonably required to complete the closing
of such sale) following the Notice Date for the closing of such sale (the
"Option Closing Date").
(d) On the Option Closing Date, the Investor shall deliver to MTI
certificates representing the number of Investor Shares (or Restricted
Securities) specified in the notice, and MTI shall deliver to such Investor
either, at MTI's election, (i) cash in the amount of the Fair Market Value
(hereinafter defined) of the Investor Shares (or Restricted Securities)
tendered, or (ii) if, on such date, the MTI Common Stock is traded on a
national securities exchange or the NASD National Stock Market, that number
of authorized, unrestricted, freely tradable shares of MTI Common Stock
calculated by dividing the Fair Market Value of the Investor Shares (or
Restricted Securities) tendered by the average closing quotation, or, in an
interdealer quotation system, the average closing sale price, for the 20
trading days which concludes two trading days before the Notice Date.
(e) "Fair Market Value" shall be (a) determined by the mutual
agreement of the Investors and MTI or (b) calculated by an independent appraiser
from a nationally recognized accounting or investment banking firm chosen by
mutual agreement of the Investors and MTI, which agreement shall not be
unreasonably withheld. If MTI and the Investors are unable to agree upon an
appraiser, then each of them shall name an appraiser meeting the requirements
described in the foregoing sentence, and the two appraisers so named shall
appoint a third appraiser meeting such requirements, which appraiser shall
conduct the appraisal contemplated by this Section 2.2(e). The appraiser will
be instructed to determine the price at which the Company (or Restricted
Securities) would change hands between a willing buyer and a willing seller when
5
<PAGE>
neither is under compulsion and both have reasonable knowledge of relevant facts
and shall fully value the Company (or Restricted Securities) without minority,
illiquidity or similar discounts. If Investor Shares are being valued, the Fair
Market Value of the Investor Shares tendered shall equal the product of the
price determined by the appraiser and the quotient of the number of Common Stock
Equivalents represented by the tendered Investor Shares and the total number of
issued and outstanding shares of the Company's Common Stock (after giving effect
to the deemed conversion of all outstanding convertible preferred stock).
(f) In the event that MTI proposes to engage in a transaction to
which (i) Section 1.2 is applicable, or (ii) Section 1.3 is applicable and MTI
has elected to cause the Investors to sell or exchange their Investor Shares
pursuant to Section 1.3, then:
(A) if the consideration that the Investors would receive for
their Investor Shares is other than cash or debt or equity securities, the
Investors shall be entitled (irrespective of the time period specified in
Section 2.2(a)) to exercise the Option as to all Investor Shares as to which
Section 1.2 or 1.3, as the case may be, is applicable; or
(B) if the consideration that the Investors receive in respect
of the sale or exchange of their Investor Shares consists of debt or equity
securities that are not, or do not become, freely transferrable by the Investors
without restrictions arising under federal or state securities laws on or after
the third anniversary of the date hereof ("Restricted Securities"), then the
Investors may exercise the Special Option with respect to such Restricted
Securities on and after the third anniversary of the date hereof. The Special
Option shall be exercisable, beginning on such date, for so long as the transfer
of such Restricted Securities continues to be restricted under federal or state
securities laws.
(g) All parties will bear their own expenses relating to each
exercise of the Option or the Special Option. Any appraiser's fee incurred
under Section 2.2(e) shall be charged one-half to the Investor or Investors and
one-half to MTI.
2.3 FURTHER ASSURANCES. MTI shall take all actions necessary to enable
the Investors to realize the benefits of this Section 2. Without limiting the
foregoing, if MTI dissolves or otherwise ceases to exist prior to the expiration
of the Option or the Special Option in connection with a transaction or series
of transactions in which an Affiliate of MTI becomes a reporting company under
Sections 12, 13 or 15 of the Securities and Exchange Act of 1934, as amended,
MTI shall take all actions necessary to assign its obligations hereunder to such
Affiliate.
SECTION 3. RESTRICTIONS ON PUBLIC SALE BY INVESTORS
Provided that other principal shareholders of the Company do so also, each
Investor agrees that it will enter into a customary "lock-up" agreement under
which it will agree not to effect any public sale or distribution of equity
securities of the Company, including a sale pursuant to Rule 144 under the
Securities Act, during the 14 day period prior to, and during the 180 day period
(or shorter period requested by the managing underwriter) beginning on the
effective date
6
<PAGE>
of a registration statement relating to an underwritten public offering of
equity securities of the Company, if requested to do so in writing by the
managing underwriter.
SECTION 4. COVENANTS
4.1 DELIVERY OF ANNUAL AND QUARTERLY FINANCIAL STATEMENTS
The Company shall deliver to each Investor, and the transferees or
assignees of the Investors, the information specified in clauses (a) and (b) of
this Section 4.1; and in addition, provided that the Investors, or transferees
or assignees thereof, hold in the aggregate at least 35,927 shares of Series A
Stock and/or Common Stock (as presently constituted) into which the Series A
Stock has been converted, the information specified in clauses (c) and (d) of
this Section 4.1:
(a) As soon as practicable, but in any event within 90 days after the
end of each fiscal year of the Company, an income statement and statement of
cash flows of the Company for such fiscal year, and a balance sheet of the
Company as of the end of such year, such financial statements to be prepared in
accordance with generally accepted accounting principles and covered by a report
of independent certified public accountants of nationally recognized standing
selected by the Company which report shall be substantially to the effect that
the information contained in such financial statements has been subjected to the
auditing procedures applied in such accountants' audit of the consolidated
financial statements of MTI, and, in the opinion of such accountants, is fairly
stated in all material respects in relation to such consolidated financial
statements taken as a whole; and
(b) as soon as practicable, but in any event, within 45 days after
the end of each fiscal quarter an unaudited income statement, statement of cash
flow and balance sheet for and as of the end of such quarter and for the year to
date, in reasonable detail, together with a certificate of the Company's Chief
Financial Officer to the effect that information contained in such financial
statements has been subjected to the review procedures applied in the review of
the consolidated financial statements of MTI, and, in his opinion, is fairly
stated in all material respects in relation to such consolidated financial
statements taken as a whole;
(c) as soon as practicable, but in any event within 60 days after the
commencement of each fiscal year, a budget approved by the Board of Directors
for such fiscal year; and
(d) such other information relating to the financial condition,
business, prospects or corporate affairs of the Company as each Investor may
from time to time reasonably request.
The information provided pursuant to this Section 4.1 shall be used by the
Investors solely in furtherance of their interests as Investors in the Company
and the Investors shall maintain the confidentiality of all confidential
information of the Company obtained under this Section 4.1 and under Section 4.2
in accordance with, and subject to, Section 8.3 of that certain Stock and
7
<PAGE>
Warrant Purchase Agreement dated as of January 28, 1999 by and among the
Company, MTI and the Investors.
4.2 ADDITIONAL INFORMATION AND RIGHTS
The Company will permit each Investor and its representatives to
discuss the Company's affairs, finances and accounts with the Company's officers
and its independent public accountants, at such reasonable times and as often as
such Investor may reasonably request; PROVIDED that the Company shall have the
right in its discretion to refuse to discuss or provide any information that the
Company in its discretion believes constitutes (a) trade secrets, know-how or
other confidential and proprietary technical information or (b) confidential and
proprietary information concerning the Company's commercial relationship with
either of the Investors or any of their affiliates. The provisions of
Sections 4.1 and 4.2 shall not limit any rights which either Investor may have
with respect to the books and records of the Company, or to inspect its
properties or discuss its affairs, finances and accounts under the laws of the
jurisdiction in which it is incorporated.
SECTION 5. LEGENDS
All certificates representing any Investor Shares shall have endorsed
thereon the following legend, in addition to any legends required by applicable
state securities laws or otherwise:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AND
TRANSFERABLE ONLY UPON COMPLIANCE WITH THE TERMS AND CONDITIONS OF
A SHAREHOLDER AGREEMENT (WHICH INCLUDES CERTAIN RESTRICTIONS ON
TRANSFERABILITY OF THE SHARES) BETWEEN THE CORPORATION AND THE
INVESTOR, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE
CORPORATION."
SECTION 6. TERM
This Agreement shall terminate upon the earlier to occur of (i) a Public
Offering, (ii) the liquidation or dissolution of the Company, or (iii) the
merger or consolidation of the Company into or with another corporation or
business entity after which the stockholders of the Company immediately prior to
such transaction shall own, directly or indirectly, less than 50 percent of the
voting securities of the surviving corporation or business entity or its parent.
SECTION 7. MISCELLANEOUS
7.1 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
8
<PAGE>
7.2 SUCCESSORS. This Agreement is binding upon and shall inure to the
benefit of the successors and permitted assigns of the Company, the Investors
and MTI. Except as otherwise provided herein, neither the Company nor MTI may
assign any of their rights hereunder or delegate any of their duties hereunder
without the prior written consent of the Investors, except for assignment in
connection with the sale of all or substantially all of the assets of MTI in
which the buyer has expressly agreed in writing to assume all of MTI's duties
hereunder.
7.3 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given when delivered in person, by
facsimile with confirmation of receipt, or three days after mailing by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at the addresses specified on the signature pages hereof or
to such other address as the person to whom notice is given may have previously
furnished to the others in writing in the manner set forth above (provided that
notice of any change of address shall be effective only upon receipt thereof).
7.4 AMENDMENTS AND WAIVERS. Any amendment, waiver or modification of this
Agreement may be made only with the written consent of the parties hereto. No
failure by any party to insist upon the strict performance of any provision of
this Agreement, or to exercise any right or remedy consequent upon a breach
thereof, shall constitute a waiver of any such breach or of any subsequent
breach of the same or any other provision. No waiver of any provision of this
Agreement shall be deemed a waiver of any other provision of this Agreement or a
waiver of such provision with respect to any subsequent breach, unless expressly
provided in writing.
7.5 ENTIRE AGREEMENT. This Agreement constitutes the full and entire
understanding and agreement between the parties with respect to the subject
matter hereof and supersedes all prior agreements with respect to the subject
matter hereof. There are no promises, terms, conditions, obligations,
representations or warranties other than those contained in this Agreement.
This Agreement supersedes all prior communications, representations or
agreements, verbal or written, among the parties relating to the subject matter
hereof.
7.6 SPECIFIC ENFORCEMENT. The parties intend and agree that the
provisions of this Agreement shall be specifically enforceable in any court
having jurisdiction to grant the remedy of specific performance. In any action
brought by any party against another arising out of or in connection with this
Agreement, the prevailing party shall, in addition to other allowable costs, be
entitled to an award of reasonable attorneys' fees.
[THE REMAINDER OF THIS PAGE IS LEFT BLANK INTENTIONALLY]
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this SHAREHOLDER AGREEMENT as
of the date first above written.
PUREPULSE TECHNOLOGIES, INC.
By: /s/ Gary Davidson
Name: Gary Davidson
Title: Treasurer
Address: 4241 Ponderosa Avenue
San Diego, CA 92123
MAXWELL TECHNOLOGIES, INC.
By: /s/ Gary Davidson
Name: Gary Davidson
Title: CFO
Address: 9275 Sky Park Court
San Diego, CA 92123
SANYO E&E CORPORATION
By: /s/ Shigeru Otsuka
Name: Shigeru Otsuka
Title: President
Address: 2001 Sanyo Avenue
San Diego, CA 92173
THREE OCEANS, INC.
By: /s/ Motoharu Iue
Name: Motoharu Iue
Title: President
Address: 2055 Sanyo Avenue
San Diego, CA 92173
10
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
NAME SERIES A PREFERRED STOCK
<S> <C>
Sanyo E&E Corporation . . . . . . . . . . 71,855
Three Oceans Inc. . . . . . . . . . . . . 71,855
</TABLE>
11
<PAGE>
MODIFICATION AND AMENDMENT AGREEMENT
THIS MODIFICATION AND AMENDMENT AGREEMENT (hereinafter "Agreement"), made
this 20th day of June, 1996, by and between ARVCO REALTY, Agent for SORRENTO
PARK INVESTMENTS, a California Limited Partnership, having its principal
office and place of business at 4655 Cass St., Ste. 400, San Diego, CA 92109
(hereinafter "Lessor"), and SPACE ELECTRONICS, INC., having its principal
office and place of business at 4031 Sorrento Valley Blvd., San Diego, CA
92121 (hereinafter "Lessee").
WITNESSETH:
By executed Lease Agreement dated May 9, 1995 (hereinafter ("Lease"). Lessor
leased to Space Electronics, Inc., as Lessee, the real property and
improvements located at 4031 Sorrento Valley Blvd., San Diego, CA 92121.
WHEREAS, it is the mutual desire of the parties hereto to amend the Lease.
NOW, THEREFORE, in consideration of the premises and the covenants herein
contained, it is mutually hereby agreed as follows, to wit:
1. Lessee shall lease the additional space (hereinafter "Addition"), in
the building known as 4031 Sorrento Valley Blvd., San Diego, CA 92121,
as shown on the attached Exhibit A. The Premises as defined in the
Lessee shall include the total area in the 4031 building.
2. Rent for the Addition shall commence July 15, 1996, and Lessor shall
give possession to Lessee immediately upon execution of this Agreement.
Rent for the entire Premises commencing July 1, 1996, shall be as
follows:
<TABLE>
<S> <C>
July 1, 1996 through July 31, 1996 $9,640.00/month
Aug. 1, 1996 through July 31, 1997 $11,849.60/month
Aug. 1, 1997 through July 31, 1998 $12,602.10/month
Aug. 1, 1998 through July 31, 1999 $13,431.20/month
</TABLE>
3. The security deposit shall be increased by $3,800.00 and paid upon
execution of this Agreement, making a total security deposit in the
amount of $11,540.00.
4. Lessor shall immediately upon Agreement execution, complete the
following modifications and Improvements to the Addition:
(a) Lessor shall place all existing heating, ventilating and air
conditioning systems (HVAC) in good operating condition and
provide Lessee with a 30-day warranty for all parts and
repairs. Thereafter, Lessee shall maintain and repair all HVAC
systems within the Addition.
(b) Replace or repair any damaged or stained ceiling tiles to match
as close as possible to existing ceiling tiles.
(c) Place all existing light fixtures and existing electrical
systems in good operating condition. Lessor shall not be
responsible for any upgrades to the existing electrical systems.
(d) All plumbing in the existing bathroom shall be placed in good
operating condition.
All other Improvements or modifications to the Premises shall be at
Lessee's sole cost and expense and subject to prior written approval
from Lessor as stated in the Lease.
-1-
<PAGE>
5. In addition to the foregoing modifications and improvements, Lessor
shall pay to Lessee, within five (5) days of completion and
delivery of lien releases, an amount of $10,000.00 for the following
improvements to be completed by Lessee in the Addition:
(a) Patching, repairing and painting of existing walls and interior
doors.
(b) Installing new carpet in the areas mutually agreed upon by
Lessor and Lessee.
(c) Removal of carpet in specified areas and cleaning of tiles
underneath.
(d) Cleaning and/or stretching, if possible, or specified carpeted
areas.
6. Paragraphs 49 and 50 of the Lease are hereby deleted upon execution of
this Agreement, and the temporary lease arrangement letter dated
November 14, 1995, for a portion of the Addition shall be canceled,
effective July 1, 1996.
7. All other terms and conditions of the Lease not modified herein shall
remain in full force and effect.
IN WITNESS HEREOF, the parties hereto have executed this Agreement to date
and year first above written.
SPACE ELECTRONICS, INC. ARVCO REALTY, Agent for Lessor
By: /s/ Robert Czajkowski /s/ Joan M. Barnes
----------------------------- -------------------------------
Print Name: Robert Czajkowski Joan M. Barnes
------------------
Title: CEO
-----------------------
Date: 3-6-96
-2-
<PAGE>
EXHIBIT A
[FLOOR PLAN]
FLOOR PLAN
4031 SORRENTO VALLEY BOULEVARD
<PAGE>
MODIFICATION AND AMENDMENT AGREEMENT
THIS MODIFICATION AND AMENDMENT AGREEMENT (hereinafter "Agreement"), made
this 24th day of September, 1997, by and between ARVCO REALTY, Agent for
SORRENTO PARK INVESTMENTS, a California Limited Partnership, having its
principal office and place of business at 4655 Cass St., Ste. 400, San Diego,
CA 92109 (hereinafter "Landlord"), and SPACE ELECTRONICS, INC., having its
principal office and place of business at 4031 Sorrento Valley Blvd., San
Diego, CA 92121 (hereinafter "Tenant"),
WITNESSETH:
By executed Lease Agreement dated May 9, 1995 (hereinafter "Lease"), and
subsequent Modification Amendment Agreement dated June 20, 1996, Landlord
leased to Tenant, the real property and Improvements located at 4031 Sorrento
Valley Blvd., San Diego, CA 92121. (hereinafter "Premises").
WHEREAS, it is the mutual desire of the parties hereto to amend the Lease.
NOW, THEREFORE, in consideration of the premise and the covenants herein
contained, it is mutually hereby agreed as follows, to wit:
1. Tenant shall lease the additional building known as 4025 Sorrento
Valley Blvd., San Diego, CA 92121 (hereinafter "Addition"), as
shown on the attached Exhibit C. The Premises shall include the total
area in the 4025 building, approximately 12,000 square feet. The term
shall be four (4) years, commencing November 1, 1997, and expiring
October 31, 2001.
2. Rent for the Addition shall commence November 1, 1997. Tenant is
currently subleasing a portion of existing building and will take over
entire building as of November 1, 1997.
Rent for the Addition commencing November 1, 1997, shall be as follows:
<TABLE>
<S> <C>
November 1, 1997 through October 31, 1998 $11,160.00/mo.
November 1, 1998 through October 31, 1999 $11,718.00/mo.
November 1, 1999 through October 31, 2000 $12,305.00/mo.
November 1, 2000 through October 31, 2001 $12,918.00/mo.
</TABLE>
3. The security deposit shall be $11,160.00, and paid upon execution of
this Agreement.
4. Landlord and Tenant, upon document execution, agree to the following
terms and conditions for the Addition:
(a) Lessor shall place all existing heating, ventilating and air
conditioning systems (HVAC) in good operating condition and
provide Tenant with a 30-day warranty for all parts and
repairs. Thereafter, Tenant shall maintain and repair all HVAC
systems with the Addition.
(b) Landlord acknowledges that certain Liebert units are old and
will need replacement in the near future. Landlord agrees to
replace units as needed and at his sole discretion, with Tenant
paying one-third (1/3) of the cost and Landlord paying two-thirds
(2/3) of the cost for the first year of the term of the Lease.
Thereafter, Landlord agrees to replace units as needed, and at
his sole discretion, with Tenant paying one-half (1/2) of the
cost and Landlord paying one-half (1/2) of the cost. Tenant must
have a maintenance contract with an HVAC company for regular
maintenance and repairs.
(c) Tenant has performed a walk-through of the premises and is
satisfied with the condition of the building. Lessee agrees
to take the building in "as is" condition.
-1-
<PAGE>
All other improvements or modifications to the Premises shall
be at Tenant's sole cost and expense and subject to prior
written approval from Landlord as stated in the Lease.
5. Additionally, Tenant agrees to extend the lease term for the Premises
known as 4031 Sorrento Valley Blvd. for two (2) years and three (3)
months, commencing August 1, 1999, and expiring October 31, 2001.
Rent for the 4031 Building commencing on August 1, 1999, shall be as
follows:
<TABLE>
<S> <S>
August 1, 1999 through July 31, 2000 16,719.50/mo.
August 1, 2000 through July 31, 2001 17,555.00/mo.
August 1, 2001 through October 31, 2001 18,432.75/mo.
</TABLE>
6. Landlord agrees to replace HVAC units on roof of 4031 Sorrento Valley
Blvd. on an as needed basis, and at his sole discretion, at his sole
cost. Tenant must have a maintenance contract with an HVAC company for
regular maintenance and repairs.
7. All other terms and conditions of the original Lease Agreement and
subsequent Modification and Amendment Agreement dated June 20, 1996,
not modified herein, shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to date
and year first above written.
Tenant: Landlord:
SPACE ELECTRONICS, INC. ARVCO REALTY
By: /s/ Bob Czajkowski /s/ Joan M. Barnes
------------------ ------------------
Bob Czajkowski Joan M. Barnes
Title: Chief Executive Officer
Date: 10/24/97
----------
-2-
<PAGE>
[FLOOR PLAN]
-1-
<PAGE>
PROPERTY ADDRESS: SORRENTO PARK INVESTMENTS
------------------------------
4031 Sorrento Valley Blvd.
------------------------------
San Diego, CA 92121
------------------------------
LEASE SUMMARY
TENANT: SPACE ELECTRONICS, INC.
-------------------------------------------------
CONTACT: Bob Czajkowski PHONE: (619)452-4167
------------------------- -------------------------
Ed Li
Dave Strobol
USE OF PREMISES: Offices/Lab area
------------------------------------------------------
SECURITY DEPOSIT: $7,740.00* PAID ON:
---------------- -----------------------
1ST MONTH'S RENT: $7,740.00 PAID ON:
---------------- -----------------------
***$5,032.00 carried over from previous lease dated October 15, 1992, balance of
$2,708.00 due upon execution of this lease.
LEASE TERM: Four (4) Years
----------------------
OTHER:
----------------------
TOTAL SQ. FT. IN
LEASED SPACE: 12,900
--------------------
<PAGE>
ARVCO REALTY, INC.
4685 Case St., Suite 400
P.O. Box 90948, SAN DIEGO, CA 92169
(619) 272-7070 FAX: (619) 272-7079
BUSINESS PARK LEASE
THIS LEASE is made this 9th day of May, 1995, at San Diego, California, by and
between ARVCO REALTY, Agent for SORRENTO PARK INVESTMENTS and:
SPACE ELECTRONICS, INC.
hereafter called respectively Lessor and Lessee, without regard to number and
gender.
1. PREMISES: Lessor hereby leases to Lessee and Lessee hereby hires, upon the
conditions and covenants herein set forth, the property described as follows,
and hereinafter referred to as "the premises:"
4031 Sorrento Valley Boulevard, San Diego, CA 92121
2. TERM: The term of this lease shall be Four (4) Years, commencing August 1,
1995, and terminating on July 31, 1999, unless extended or sooner terminated in
accordance with terms of this lease. If Lessee shall take occupancy on a day
other than the first day of the month, the term of this lease has been extended
by the number of days remaining in the first month of occupancy. In the event,
for any reason, Lessor cannot deliver possession on the commencement date set
forth above, this lease shall remain in full force and effect provided that
Lessee shall not be required to pay any rent until date possession is delivered.
In the event of such entry into possession by Lessee at a date subsequent to
the commencement date set forth above, the term of this lease shall be extended
by the number of days of such delay.
3. RENTAL: The total rent for the term of this lease shall be $306,442.00,
plus adjustments as provided herein, without offset or deduction, which Lessee
agrees to pay to Lessor at the office of ARVCO REALTY, Suite 400, 4685 Case
Street, San Diego, California 92109 or, if mailed, send to P.O. Box 90948, San
Diego, CA 92169 or at such other place as Lessor shall designate in writing,
payable in monthly installments of $ ** , payable in advance on the FIRST DAY
OF EACH CALENDAR MONTH of the term of this lease, commencing on the first day
of the term hereof and continuing throughout the term of this lease, except
that if the commencement date of this lease is a date other than the first day
of the month, then rent for the second month of the lease term shall be $N/A.
WITHOUT EXCEPTION, THERE IS A $25.00 CHARGE ON ALL RETURNED CHECKS.
** See Article #47 for Rent Schedule
4. SECURITY DEPOSIT: (a) Lessee shall deposit with Lessor the sum of
***$7,740.00, as a security for full performance of the obligation of this
Lease. Should any portion of this deposit be used, Lessee shall within five
(5) days of notice from Lessor, deposit such additional amount as is
necessary to restore deposit to original amount. If Lessee shall be in
default in payment of rent or any other covenant herein, Lessor may use all
of any of such deposit to cure such default, or to repair damages to the
premises caused by Lessee, or to clean premises on termination, or for costs
of recovery of possession. If Lessee is not in default at termination of
this lease, Lessor shall return such deposit to Lessee within thirty (30)
days. Lessor's obligation for such deposit is that of a debtor, not a
trustee, and the money may be commingled or dissipated and no interest shall
accrue thereon. THE SECURITY DEPOSIT SHALL NOT BE USED AS LAST MONTH'S RENT.
(b) In the event of sale of Building by Lessor, Lessor may transfer any
sums received as deposit from Lessee to the purchaser and shall be thereafter
discharged of further liability upon notice of such transfer to Lessee giving
name and address of transferee.
***$5,032.00 carried over from previous lease dated October 15, 1992, balance
of $2,708.00 due upon execution of this lease.
1
<PAGE>
6. LATE CHARGE: Lessee shall be liable for and pay promptly without
specific demand therefore, a service charge equal to ten (10%) percent of the
monthly rent or Twenty ($20.00) Dollars, whichever is greater, in addition to
rent due, in the event, and each such event, that the rent is not paid and
RECEIVED in Lessor's office in advance BY THE 5TH OF THE MONTH, unless
postmarked on or prior to the first of the month.
7. USE: (a) Lessee agrees to use the leased premises for the purpose of:
Offices/Lab Area
and for no other purpose without the written consent of Lessor; personally to
supervise the operation of said business and to see that it is conducted in a
businesslike manner and in such manner that it shall not become a public
nuisance or interfere in any way with rights of the other tenants or
occupants of the land or building of which the leased premises are a part in
their right to the peaceful enjoyment of their premises on or in said land or
building; neither to use or permit to be used the leased premises for immoral
purposes or in any way that would be a violation of any Federal, State, or
local law, regulation, or ordinance, that would injure the reputation of the
premises, said land and building, or the neighborhood, or that would
constitute a violation of any conditions or restrictions of record affecting
the leased premises or said land or building; to keep the leased premises,
storefront, including sidewalks and driveways adjacent thereto, and
identification signs, AT HIS OWN EXPENSE, safe, secure, clean, sightly, and
in a wholesome condition at all times, abiding by all health and sanitation
regulations and requirements.
(b) It is understood that the premises are subject to restrictions
contained in the Declaration of Restrictions recorded April 30, 1968 as
instrument number 72080 in the office of the San Diego County Recorder, and
Lessee's use and occupancy shall be subject to the restrictions as to use and
occupancy contained therein. A copy of said Declaration of Restrictions is
available to Lessee, in the Lessor's office.
8. UTILITIES: Lessee agrees hereby to pay promptly all costs for gas,
electricity, telephone, and Lessor shall have no responsibility therefore.
9. PROHIBITED USES: Lessee shall not use, or permit said premises or
any part thereof to be used, for any purpose or purposes other than the
purpose or purposes for which the said premises are hereby leased, and no use
shall be made or permitted to be made of the said premises, nor [ILLEGIBLE]
[ILLEGIBLE], which will cause an increased rate of or cancellation of any
insurance policy covering said building or any part thereof, in or about said
premises, any article which may be prohibited by the standard form of fire
insurance policies. Lessee shall, at his sole cost and expense, comply with
any and all requirements, pertaining to said premises, of any Insurance
organization or company, necessary for the maintenance of insurance, as
herein provided, covering any building and appurtenances at any time located
on said premises.
10. CONDITION AND MAINTENANCE OF PREMISES: (a) Lessee's acceptance of
possession of the premises shall constitute Lessee's acknowledgement that the
premises are in good and tenantable condition. Lessee understands and
acknowledges that the lease premises were constructed a number of years ago
and may not be in compliance with all Federal, State and local regulations,
including "The Americans with Disabilities Act of 1990" for your proposed
business. Should any standard or regulation now or hereafter be imposed on
Lessor or Lessee by any body, State or Federal, charged with the
establishment, regulation, and enforcement of occupational health or safety
standards or other standards for employers, employees, lessors, lessees, or
the premises, then Lessor agrees, at his sole cost and expense, to comply
promptly with such standards or regulations, provided the condition existed
prior to the commencement date of the lease and which constitutes a violation
of any law or regulation. However, if violation pertains to the Lessee's
specific and particular use of the premises and directly results from such
use, Lessee shall be responsible for all costs to comply.
(b) Lessee shall keep and maintain the entire premises in as good,
clean, and sanitary order, condition, and repair, INCLUDING MAINTENANCE AND
REPAIR OF AIR CONDITIONING UNITS UP TO $100.00 PER UNIT PER YEAR PROVIDED
LESSEE KEEPS A MAINTENANCE CONTRACT THROUGHOUT THE TERM OF THE LEASE IN PLACE
TO SERVICE ALL UNITS QUARTERLY, WATER HEATERS, ALL PLUMBING, ELECTRICAL,
LIGHTING, FIXTURES, ETC., as they shall be upon the commencement of the term
of this lease. repairs of $100.00 or more paid by Lessor. If Lessee fails
to keep and maintain the premises as aforesaid and such failure is not cured
within ten (10) days after Lessor's written notice to Lessee of such failure,
then Lessor shall have the option (but not the obligation) to enter upon the
premises and clean, repair, or otherwise maintain the same to the extent that
Lessee has failed to do so. The costs and expenses incurred by Lessor in so
doing shall be payable by Lessee to Lessor promptly upon demand or, at the
option of Lessor, shall be included in the next basic monthly rent
installment. Lessee waives right to make repairs at the expense of Lessor as
provided in Section 1942 of the Civil Code of the State of California, and
all rights provided by Section 1941 of said Civil Code, to the extent that
such rights may be legally waived. On the last day of the term hereof, or on
any sooner termination, Lessee shall surrender the premises to Lessor in the
same condition as when received, scrubbed clean, ordinary wear and tear
excepted. Attached inventory sheet shall be used as a basis for determining
the original condition of the space.
(c) All fixtures remaining on the premises when the tenancy
terminates become the property of the Lessor.
(d) Lessor, after the commencement of this lease, shall NOT BE
REQUIRED TO MAKE ANY EXPENDITURE whatsoever in connection with this lease or
to make any alterations OR REPAIRS to maintain the premises IN ANY WAY during
the term hereof, except that Lessor
2
<PAGE>
shall maintain exterior walls, the structural portions of the floor, the
sidewalks, and the roof in good repair. Lessee shall diligently maintain,
at their expense, the storefront, windows, doors, and floor covering.
11. WASTE: Lessee shall not commit, or suffer to be committed, any waste
upon the said premises, or any nuisance or maintenance of pets (cats, dogs,
birds, etc.).
13. LOCKS AND KEYS: Lessor shall provide Lessee with one set of keys to
exterior doors and premises. Lessee shall not secure doors by additional
locking mechanisms nor by changing present locks, unless required by
circumstances of conduct of business, in which event Lessee shall notify
Lessor. In the case of Lessor not being able to have access to premises
during an emergency, due to aforementioned circumstances, or due to other
reasons beyond control of Lessor, Lessee and his agents assume full
responsibility for damages done to these or adjacent premises due to fire,
explosion, flooding, or other damaging circumstances originating in or
spreading through the demised premises. Upon termination of his tenancy,
Lessee shall return all keys to the premises to Lessor, and if keys are not
returned or if the locks have been changed without Lessor's permission,
Lessee shall pay the cost of replacing the keys or changing the locks, as the
case may require. AFTER EXPIRATION OF THE LEASE, AND FAILURE TO TURN IN
KEYS, DENYING LESSOR'S ACCESS, RENT SHALL ACCRUE UNTIL KEYS ARE DELIVERED TO
LESSOR.
14. ABANDONMENT: Lessee shall not vacate or abandon the premises at any
time during the term of the lease without notifying Lessor. The vacation or
abandonment for a period of five (5) days without said notice to Lessor is
considered an abandonment and default under the lease. If Lessee shall
abandon, vacate, or surrender said premises, or be dispossessed by process of
law or otherwise, any personal property belonging to Lessee and left on the
premises for a period of five (5) days or longer shall be deemed to be
abandoned, at the option of Lessor.
15. ENTRY BY LESSOR: Lessee shall permit Lessor and his agents to enter
into and upon said premises at all reasonable times without prior notice for
the purpose of inspecting the same, or for the purpose of posting notices of
non-responsibility for alterations, additions, or repairs, without any rebate
of rent and without any liability to Lessee for any loss of occupation or
quiet enjoyment of the premises thereby occasioned; and shall permit Lessor
and his agents, at any time within six (6) months prior to the expiration of
this lease, to place upon said premises any unusual or ordinary "to let" or
"to lease" signs and to exhibit the premises to prospective tenants at
reasonable hours.
Due to proprietary nature of Lessee's manufacturing and other processes
related to Lessee's business, Lessor or Lessor's agents shall give adequate
notice to enter upon said premises so as not to disturb or interfere with any
testing or business meeting planned or in progress.
16. ESTOPPEL CERTIFICATE: If Lessor is not in default in performance of
any of the terms, covenants and conditions of this lease, Lessee shall, on
demand, acknowledge and deliver to Lessor or any mortgagee, without charge, a
duly executed certificate, certifying that this lease is valid and subsisting
and in full force and effect and that Lessor, at the time, is not in default
under any terms or provisions of this lease.
17. NOTICES: All notices, demands, or other writings in the lease
provided to be given, made, or sent, or which may be given, made, or sent, by
either party hereto to the other, shall be deemed to have been given, made,
or sent when made in writing and deposited in the United States mail, postage
prepaid, and addressed as follows:
To Lessor: P.O. Box 9094B
San Diego, CA 92169
To Lessee: At the referenced premises in Article 1
The address to which any notice, demand, or other writing may be given, made,
or sent to any party as above provided may be changed by written notice given
by such party as above provided.
18. PERSONAL PROPERTY TAXES: Lessee agrees to pay prior to delinquency
all taxes, assessments, license fees, or other charges made against or levied
upon the fixtures, furnishings, Lessee's improvements, merchandise, or other
personal property of Lessee, or upon the business of Lessee, or upon the use
to which the Premises are put by Lessee.
19. MECHANIC'S LIEN: Lessee agrees to keep the leased premises free from
all mechanic's liens or other liens or of like nature arising because of work
done or materials furnished upon the leased premises at the instance of or on
behalf of Lessee.
3
<PAGE>
20. DEFAULT: The occurrence of any of the following shall constitute a
material default and breach of the lease by Lessee:
(a) Any failure by Lessee to pay the rental or to make any other
payment required to be made by Lessee hereunder (where such failure
continues for three (3) days after written notice thereof by Lessor to
Lessee). If Lessee fails to pay rent due within the five day (5 day) period
specified in Article 6 above in two (2) of any four (4) consecutive months,
and Lessor has given Lessee written notice of such failure, Lessor's
acceptance of late rent and the service charge provided for in Article 6 does
not waive default under this paragraph.
(b) The abandonment or vacation of the premises by Lessee.
(c) A failure by Lessee to observe and perform any other provision of
this lease to be observed or performed by Lessee, where such failure continues
for thirty (30) days after written notice thereof by Lessor to Lessee;
provided, however, that if the nature of such default is such that the same
cannot reasonably be cured within such thirty-day (30-day) period, Lessee
shall not be deemed to be in default if Lessee shall within such period
commence such cure and thereafter diligently prosecute the same to completion.
(d) The making by Lessee of any general assignment for the benefit of
creditors; the filing by or against Lessee of a petition to have Lessee
adjudged bankrupt or of a petition for re-organization of arrangement under
any law relating to bankruptcy; the appointment of a trustee or receiver to
take possession of substantially all of Lessee's assets located at the
premises; or the attachment, execution, or other judicial seizure of
substantially all of Lessee's assets located at the premises or of Lessee's
interest in this lease, where such seizure is not discharged within thirty
(30) days.
21. SECURITY INTEREST: To secure the payment of all rent due and to become
due hereunder and the faithful performance of all of the other covenants of
this lease required to be performed by Lessee, Lessee hereby gives to Lessor
an express contract lien on and security interest in all property, chattels,
or merchandise which may be placed in the premises and also upon all proceeds
of any insurance which may accrue to Lessee by reason of damage to or
destruction of any such property, chattels, or merchandise. All exemption laws
are hereby waived by Lessee. This lien and security interest are given in
addition to the Lessor's statutory liens and shall be cumulative thereto. This
lien and security interest may be foreclosed with or without court
proceedings, by public or private sale, upon not less than twenty (20) days
prior notice, and Lessor shall have the right to become purchaser upon being
the highest bidder at such sale. Upon request of Lessor, Lessee shall execute
Uniform Commercial Code financing statements relating to aforesaid security
interest.
22. REMEDIES UPON DEFAULT: Lessor and Lessee agree as follows upon Lessor's
remedies for any default by Lessee as set forth in Article 20 above:
(a) In the event of any such default by Lessee, then in addition to any
other remedies available to Lessor at law or in equity, Lessor shall have the
immediate option to terminate this lease and all rights of Lessee hereunder
by giving written notice of such intention to terminate. In the event that
Lessor shall elect to so terminate this lease, then Lessor may recover from
Lessee:
(i) the worth at the time of award of any unpaid rent which had
been earned at the time of such termination; plus
(ii) the worth at the time of award of the amount by which the
unpaid rent would have been earned after termination until the time of award,
exceeds the amount of such rental loss Lessee proves could have been
reasonably avoided; plus
(iii) the worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss Lessee proves could be reasonably avoided; plus
(iv) any other amount necessary to compensate Lessor for all the
detriment proximately caused by Lessee's failure to perform his obligations
under this lease which in the ordinary course of things would be likely to
result therefrom; and
(v) at Lessor's election, such other amounts in addition to or
in lieu of the foregoing as may be permitted from time to time by applicable
California law.
(b) The term "rent," as used herein, shall be deemed to be and to mean
the minimum rental and all sums required to be paid by Lessee pursuant to the
terms of this lease.
(c) As used in subparagraphs (a) (i) and (ii) above, the "worth at the
time of award" is computed by allowing interest at the rate of ten (10%)
percent per annum. As used in subparagraph (a) (iii), the "worth at the time
of award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus one (1%)
percent.
(d) In the event of any such default by Lessee, Lessor shall also have
the right, with or without terminating this lease, to re-enter the premises
and remove all persons and property from the premises. Such property may be
removed and stored in a public warehouse or elsewhere at the cost of and for
the account of Lessee.
4
<PAGE>
(e) In the event of the vacation or abandonment of the premises by
Lessee, or in the event that Lessor shall elect to re-enter as provided in
paragraph (d) above or shall take possession of the premises pursuant to
legal proceeding or to any notice provided by law, then if Lessor does not
elect to terminate this lease as provided in paragraph (a) above, then Lessor
may from time to time, without terminating this lease, either recover all
rental as it becomes due or relet the premises or any part thereof for such
term or terms and conditions as Lessor in his sole discretion may deem
advisable with the right to make alterations and repairs to the premises.
(f) In the event that Lessor shall elect to so relet, then rentals
received by Lessor from such reletting shall be applied: first, to the
payment of any indebtedness other than rent due hereunder from Lessee to
Lessor; second, to the payment of any cost of such reletting; third, to the
payment of the cost of any alterations and repairs to the premises; fourth,
to the payment of rent due and unpaid hereunder, and the residue, if any,
shall be held by Lessor and applied in payment of future rent as the same may
become due and payable hereunder. Should that portion of such rentals
received from such reletting during any month, which is applied by the
payment of rent hereunder, be less than the rent payable during that month by
Lessee hereunder, then Lessee shall pay such deficiency to Lessor immediately
upon demand therefore by Lessor. Such deficiency shall be calculated and paid
monthly.
(g) No re-entry or taking possession of the premises by Lessor pursuant
to paragraphs (d) or (e) of this Article 22 shall be construed as an election
to terminate this lease unless a written notice of such intention be given
Lessee or unless the termination thereof be directed by a court of competent
jurisdiction. Notwithstanding any reletting without termination by Lessor
because of any default by Lessee, Lessor may at any time after such reletting
elect to terminate this lease for any such default.
23. ATTORNEY'S FEES: If any action at law or in equity shall be brought to
recover any rent under this lease, or for or on account of any breach of, or
to enforce or interpret any of the covenants, terms, or conditions of this
lease, or for the recovery of the possession of the leased premises, the
prevailing party shall be entitled to recover from the other party as part of
the prevailing party's costs a reasonable attorney's fee, the amount of which
shall be fixed by the court and shall be made a part of any judgment rendered.
24. INSURANCE: (a) Lessee agrees at all times during the term of this lease
and at his sole expense to keep all trade fixtures and equipment and all
merchandise of Lessee or any subtenant of Lessee that may be in the premises
from time to time, insured by licensed insurance carrier rated B or better,
against loss or damage by fire and the extended coverage hazards for an
amount that, in Lessee's judgment, will insure the ability of Lessee and his
subtenants, if any, to replace such trade fixtures, equipment, and
merchandise.
(b) Lessee further agrees to maintain in effect throughout the term of
this lease personal injury liability insurance covering the premises and its
appurtenances and sidewalks fronting thereon, including the sidewalk area
used for pedestrians or vehicular travel entering or leaving the premises,
in the amount of One Hundred Thousand ($100,000.00) Dollars for injury to or
death of any one person and Three Hundred Thousand ($300,000.00) Dollars for
injury to or death of any number of persons in one occurrence, and property
damage liability insurance in the amount of Ten Thousand ($10,000.00) Dollars
against all liability. THE INSURANCE POLICY OR POLICIES OF SUCH COVERAGE
SHALL NAME LESSOR AS CO-INSURED; AND LESSEE SHALL PROVIDE LESSOR WITH A
CERTIFICATE OF INSURANCE ACCORDINGLY WITHIN TWO (2) WEEKS OF EXECUTING THIS
LEASE.
(c) The cost of all insurance herein provided to be carried by Lessee
shall be at the sole cost of Lessee.
25. HOLD HARMLESS. (a) Lessee shall indemnify and hold harmless Lessor
against and from any and all claims arising from Lessee's use of the premises
or from the conduct of its business or from any activity, work or other
things done, permitted, or suffered by Lessee in or about the premises, and
shall further indemnify and hold harmless Lessor against and from any and all
claims arising from any breach or default in the performance of any
obligation on Lessee's part to be performed under the terms of this lease or
arising from any act or negligence of Lessee or any officer, agent, employee,
guest, or invitee of Lessee and from all costs, attorney's fees, and
liabilities incurred in or about the defense of any such claim or any action
or proceeding brought thereon; and in case any action or proceeding be
brought against Lessor by reason of such claim, Lessee upon notice from
Lessor shall defend the same at Lessee's expense by counsel reasonably
satisfactory to Lessor.
(b) Lessee, as material part of the consideration to Lessor, hereby
assumes all risk of damage to property or injury to persons in, upon, or
about the premises from any cause other than Lessor's negligence, and Lessee
hereby waives all claims in respect thereof against Lessor. Lessee shall give
prompt notice to Lessor in case of casualty or accidents in the premises.
(c) Lessee shall not record or allow any agency, lender firm or other
person to record any document against the leased premises, the Center, or
Lessor without the prior written knowledge and consent of Lessor. Any
document so recorded shall be considered fraudulent recording and recordation
will be vacated by Lessor at Lessee's expense.
26. LIMIT OF LESSOR'S LIABILITY: Lessor's liability under the lease is
limited solely to its interest in the building or property in which the
leased premises are located
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without liability on the part of the individual officers, directors, and
Limited Partners.
27. SUBORDINATION: (a) This lease, at Lessor's option, shall be
subordinate to any mortgage, deed of trust, or any other hypothecation for
security now or hereafter placed upon the real property of which the premises
are a part and to any and all advances made on the security thereof and to all
renewals, modifications, consolidations, replacements, and extensions
thereof. Notwithstanding such subordination, Lessee's right to quiet
possession of the premises shall not be disturbed if Lessee is not in default
and so long as Lessee shall pay the rent and observe and perform all of the
provisions of this lease, unless this lease is otherwise terminated pursuant
to its terms. If any mortgagee or trustee shall elect to have this lease
prior to the lien of its mortgage or deed of trust and shall give written
notice thereof to Lessee, this lease shall be deemed prior to such mortgage
or deed of trust, whether this lease is dated prior or subsequent to the date
of said mortgage or deed of trust or the date of recording thereof.
(b) Lessee shall attorn to the purchaser upon any foreclosure or sale
and recognize such purchaser as the Lessor under the lease.
(c) Lessee agrees to execute any documents required to effectuate such
subordination or to make this lease prior to the lien of any mortgage or deed
of trust, as the case may be. And if the Lessee does not return the required
document within a ten (10) day period, Lessee is considered to be in
automatic default under the lease, and furthermore, that the matters stated in
the document are deemed to be true.
28. NOTICE OF NON-OCCUPANCY: Lessee agrees to notify Lessor in writing if
at any time during the term of this lease the leased premises are to be
unoccupied for more than five (5) consecutive days.
29. ASSIGNMENT AND SUBLETTING: Lessee agrees not to assign this lease, or
sublet the leased premises or any part thereof, or encumber his leasehold
estate, or any interest therein, or permit the same to be occupied by
another, either voluntarily or by operation of law, without first obtaining
the written consent of Lessor or his duly authorized agent, which consent
shall not be unreasonably withheld. It is also agreed that the giving of the
written consent required on any one or more occasions shall not thereafter
operate as a waiver of the requirement of written consent on any one or more
subsequent occasions, but that written consent must first be obtained before
any assignment, sublease, or encumbrance of the leased premises can ever be
made or another permitted to occupy the same. Lessor will not approve any
sublease unless said sublease conforms to the following conditions:
(a) Rent shall be commercially reasonable, payable in monthly
installments.
(b) Subtenant shall be required to attorn to Lessor upon termination of
this lease for any cause prior to fulfillment of term.
(c) Sublease shall not be for a term longer than is provided in the
within lease.
(d) Should Lessee be in default in payment of rent hereunder, subtenant
shall, upon notice from Lessor of such default, make all subsequent payments
of rent for said sublease to Lessor, without liability therefore to Lessee,
and Lessor shall credit such payments upon rent due from Lessee.
(e) Should sublease require, or should subtenant make any payments for
advance rent in a sum greater than one month's rent, such payment shall be
made to Lessor to be held by Lessor and credited upon rent due hereunder in a
monthly amount equal to the rental charged for such subtenancy.
(f) Subtenant shall be required to comply with all appropriate terms
and conditions of this lease, and a copy of this lease shall be made a part
of paid sublease by attachment thereto.
30. HOLDING OVER: Any holding over after the expiration of term of this
lease, with the consent of Lessor, either expressed or implied, shall be
construed to be a tenancy from month-to-month at a fixed monthly rental
equal to the last month's rent paid during the term of this lease, including
any additional rent paid, plus twenty percent (20%), and shall otherwise be
on the same terms and conditions as herein provided. This article shall be in
effect only if Lessee fails to desire new lease. When a month-to-month
tenancy exists, Lessee must give a thirty (30) day written notice to vacate.
If a notice is received by Lessor any time in the month AFTER THE FIRST of
the month, the 30-day notice will take effect on the first of the FOLLOWING
month.
31. CUMULATIVE REMEDIES: It is agreed that the rights and remedies given to
Lessor by this lease are cumulative and are not intended and shall not operate
to deprive Lessor of any other rights or remedies available to him,
whether in law or equity or pursuant to special proceedings.
32. BINDING ON HEIRS: It is agreed that all covenants, agreements,
provisions, terms, and conditions of this lease shall inure to the benefit of
and be binding upon the
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heirs, successors, legal representatives, and assigns of the respective
parties hereto as fully as though they were in each case specifically
mentioned.
33. SALE BY LESSOR: In the event of a sale or conveyance by Lessor of the
building or the premises or any part containing the premises, Lessor shall be
released from future liability upon any of the covenants and conditions,
expressed or implied, in favor of lessee, and, in such event, Lessee agrees to
look solely to the responsibility of the successor in interest of Lessor in
and to this lease.
34. ALTERATIONS, ADDITIONS, OR IMPROVEMENTS: Lessee shall not make any
alterations, improvements, or additions to the premises without first
obtaining Lessor's permission in writing. Any such improvements or additions
shall, at the option of the Lessor, become a part of the realty and become
the property of Lessor upon termination of this lease. If Lessor shall deem
removal, Lessee shall put that part of the leased premises into like
condition as existed prior to the installation of such alteration, addition,
or fixture or be financially responsible for said cost and rent during
restoration. Lessee shall pay promptly all charges for such labor and
materials furnished as may become a lien upon the premises, and shall, prior
to instituting any work of such kind, provide to Lessor notice of the
expected date of commencement so that Lessor may, and is hereby authorized
to, post such notices of non-responsibility as Lessor deems necessary and
appropriate. Lessee shall, upon termination of this lease, and at option of
Lessor, remove such trade fixtures as have been installed and repair any
damage to the premises caused by such removal.
35. EMINENT DOMAIN: (a) In the event of any eminent domain, condemnation,
or street widening proceedings, or purchase under threat of condemnation by
public authority, any monies payable as compensation for the taking of, or
damage to, any portion of the leased premises shall be the absolute property
of Lessor, and Lessee shall have no interest therein.
(b) If the premises or any part thereof are taken by right of eminent
domain, or purchase in lieu thereof, the proceeds awarded as damages, or as
the purchase price in lieu thereof, shall be apportioned among the parties as
their interest may appear. Should such taking result in diminishment of floor
area in excess of twenty-five (25%) percent, this lease shall terminate, and
both parties shall be relieved of further liability. In the event a partial
taking results in such damage to the premises as can be repaired within three
(3) months of said taking, and the premises restored to a condition
reasonably suitable to Lessee's enterprise, this lease shall remain in force,
providing such repairs are promptly made and there be granted to Lessee
proportional abatement of rent for the space and time lost. The
determination as to whether such repairs can be made shall be at Lessor's
discretion.
36. DAMAGE OR DESTRUCTION: In the event that the premises or the building
in which the premises are located is partially or completely damaged or
destroyed, or declared unsafe or unfit for occupancy by any authorized public
authority for any reason other than Lessee's act or use of occupation, which
declaration requires repairs to either said premises or the building in
which the premises are located, the rights and obligations of Lessee and
Lessor shall be as follows:
(a) If the damage is covered under fire and extended coverage insurance
carried by Lessor, Lessor shall repair such damage as soon as is reasonably
possible, and this lease shall continue in full force and effect.
(b) In the event that such damage is not covered by fire and extended
coverage insurance carried by Lessee, Lessor shall repair such damage,
provided that such damage or destruction does not exceed twenty (20%) percent
of the then-replacement value or the improvements on the premises, exclusive
of trade fixtures, equipment, and foundations. If such damage exceeds twenty
(20%) percent of the then-replacement value, Lessor may elect not to restore
by written notice to Lessee to terminate this lease, said written notice
shall be given within thirty (30) days from the date of damage or destruction
and, if not given, Lessor shall be deemed to have elected to restore the
damage and destruction and shall repair any damage as soon as reasonably
possible.
(c) Notwithstanding anything contained,
(i) if the premises are damaged or destroyed to any extent
during the last three (3) years of the term of this lease;
(ii) if the uninsured portion of such damage exceeds twenty (20%)
percent of the then-replacement value of the building of which the premises
constitute all or a part;
(iii) if over fifty (50%) percent of Lessee's premises shall be
damaged or destroyed at any time, Lessor may at Lessor's option, cancel and
terminate this lease as of the date of the occurrence of such damage by
delivery of written notice to Lessee within forty-five (45) days after the
date of the occurrence of such damage or destruction of Lessors' election to
so terminate.
(d) If Lessor elects or is required to make repairs, Lessee shall be
entitled to a proportionate reduction in rent during the time in which the
repairs are being made, to the extent that Lessee is deprived of the use of
the premises.
(e) Lessor's obligation to restore shall not include the restoration or
replacement of Lessee's trade fixtures, equipment, merchandise, or any
improvements or alterations made by Lessee to the premises. Lessee shall
restore and replace the same in the event that Lessor is obligated or elects
to repair any damage or destruction of the premises.
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37. WAIVERS: It is agreed that any waiver by Lessor of any breach of any
one or more of the covenants, conditions, or agreements of this lease shall
not be construed to be a waiver of any subsequent or other breach of the same
or any other covenant, condition, or agreement; nor shall any failure on the
part of Lessor to require exact or full, complete and explicit compliance
with any of the covenants, conditions, or agreements in this lease be
construed as in any manner changing the terms hereof, or to stop Lessor from
enforcing the full provisions hereof, nor shall the terms of this lease be
changed or altered in any way whatsoever, other than by written amendment,
signed by both parties.
38. WHOLE AGREEMENT: This lease represents the whole agreement as to the
hiring of the premises, and may be modified only by an instrument in writing
signed by the parties hereto.
39. LAW APPLICABLE: This agreement shall be interpreted and construed in
accord with the laws of the State of California.
40. SURRENDER OF LEASE: The voluntary surrender of this lease by Lessee
shall not work a merger.
41. PARTIAL INVALIDITY: Any provision of this lease which shall prove to be
invalid, void, or illegal shall in no way affect, impair, or invalidate any
other provision hereof, and such other provisions shall remain in full force
and effect.
42. RULES AND REGULATIONS: Lessee agrees to observe faithfully, and comply
strictly with, the Rules and Regulations attached to this lease as Exhibit D
and hereby made a part hereof, and such other rules and regulations,
promulgated from time to time by Lessor, as in his judgment are necessary for
the safety, care and cleanliness of the building or the preservation of good
order therein. Lessor shall not be liable to Lessee for violation of such
rules and regulations by any other tenant, its servants, employees, agents,
visitors, or licensees.
43. DRAPES: Lessee shall only install in the premises those window
coverings or drapes which have been approved by Lessor in writing.
44. FIRE EXTINGUISHER: Lessee shall have a suitable fire extinguisher
mounted and accessible on the premises with an updated inspection tag on the
extinguisher.
45. SIGNS: Lessee may affix and maintain upon the glass panes and supports
of the show windows and within twelve (12) inches or any window and upon the
exterior walls of the premises only such signs, advertising placards, names,
insignia, trademarks, and descriptive material as shall have first received
the written approval of Lessor as to type, size, color, location, copy
nature, and display qualities. Anything to the contrary in this lease
notwithstanding, Lessee shall not affix any sign to the roof.
Lessee shall however, erect one sign on the front of the premises not later
than the date Lessee opens for business, in accordance with a design to be
prepared by Lessee and approved in writing by Lessor. If sign standardization
criteria are in effect for said premises, such criteria shall take precedence.
46. JOINT & SEVERAL LIABILITY: If there be more than one Lessee, the
obligations hereunder imposed upon Lessee shall be joint and several. If
there be a guarantor of Lessee's obligations hereunder, the obligations
hereunder imposed upon Lessee shall be the joint and several obligations of
Lessee and such guarantor and Lessor need not first proceed against the
Lessee hereunder. The Guarantor and/or Co-Lessees further jointly and
severally covenant and agree to pay all expenses and fees, including
attorneys' fees which may be incurred by the Lessor in the enforcement of the
terms and conditions of this lease.
47. RENT SCHEDULE:
August 1, 1995 thru July 31, 1996 - $7,740.00 per month
August 1, 1996 thru July 31, 1997 - $8,049.60 per month
August 1, 1997 thru July 31, 1998 - $8,172.10 per month
August 1, 1998 thru July 31, 1999 - $8,875.20 per month
48. RENEWAL OPTIONS: For consideration of this lease, Lessee shall have one
(1) two-year option to renew the lease on the same terms and conditions
herein except rental rate, provided Lessee is not in default of any of the
covenants and conditions herein expressed. Rental rate shall be determined to
be market rate at that time, and consistent with other like properties in
Sorrento Valley so determined and mutually agreed to by both parties and if
not agreed by both parties, shall be determined by an Independent Appraiser
or Broker. This option shall be exercised by written notice to Lessor at
least sixty (60) days prior to the expiration date of the lease, and if not
exercised by that date shall be considered null and void.
49. FIRST RIGHT OF REFUSAL:
Lessee shall have first right of refusal on the remaining adjacent space
(7,100 Sq. Ft.) located in 4031 Sorrento Valley Blvd. Lessee will be notified
within five (5) days of receipt of offer to lease. Lessee shall have two (2)
weeks to notify lessor in writing, of its intention to lease the remaining
premises after receiving notice from Lessor, and if not exercised in that
time shall become null and void. The rental rate will be the same rate per
square foot that Lessee is currently paying at the time the first right of
refusal is exercised. Lessor and Lessee agree the improvements provided to
the remaining 7,100 Sq. Ft. by Lessor will be limited to the following:
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New flooring (where needed), paint, cleaned and other cosmetic changes as
required, subject to mutual agreement between the parties.
50. MODIFICATIONS TO PREMISES:
The following modifications and improvements shall be completed in the
premises prior to August 1, 1995. Lessor agrees to pay up to $30,000.00 for
said improvements and Lessee agrees to pay for any improvements or costs over
$30,000.00. Any unused monies less than $30,000.00 shall be credited to
future or other improvements not specified herein, up to the expiration of
the lease term. See attached floor plan.
TENANT IMPROVEMENTS
EXISTING 7,400 SQ. FT.
- ----------------------
1. Move shipping wall out five (5) feet and widen existing door
opening-demo where noted.
2. Move A/C ducts out to area 1 and relocate it to area 3 and 4.
3. Install vent in area 1 with fan.
4. Add double doors between area 1 and 3 with weather stripping.
5. Install a 5' wide sliding glassdoor between area 3 and 4.
6. Vent fume hood to roof in area 5 with fan providing adequate air flow.
7. Install cabinets in two existing restrooms.
8. Add six (220) plugs on west wall area 1 - (moved from another area).
9. Demo wall in area 1.
10. Add 12 (110) drops as shown on plan - 3 circuits (36 drops).
11. Add 9 (110) drops as shown on plan.
12. Add 16 (110) outlets on a power strip.
13. Area 4 - Add 2 (220 3-phase) outlets to area 4.
14. Area 5 - Install drain and water outlet.
15. Clean/shampoo carpets and buff/wax tile in existing space (7,400 Sq.
Ft.).
16. Move 100 amp panel.
17. Touch up paint.
EXPANSION AREA 5,500 SQ. FT.
- ----------------------------
1. New walls as shown on plan and demo.
2. Install doors and new walls where needed.
3. Flooring - as noted on plan, replace, buff and wax tile where needed.
4. SEN room - water source.
5. Construct kitchen area with counter top - double sink and disposal.
6. Add adequate 110 outlets in new walls - 3 circuits.
7. Repair and clean restrooms and janitorial area.
8. Repair all roof ventilators.
9. Paint entire space.
10. Replace ceiling tile where needed.
11. Check out and repair all mechanical units (HVAC, lighting etc.)
51. ELECTRICITY:
Lessee shall, upon commencement of lease, transfer the SPACE gas and electric
accounts (#15-9419-1290-04 and #15-9419-1292-01) to Lessee's name. Lessor
shall reimburse Lessee each month for electric use for exterior lights and
common area, in accordance with the subpanel meter reading.
Time and punctual and strict performance are each hereby declared to the
essence of this lease and of each and all of its covenants and conditions.
IN WITNESS WHEREOF, Lessor and Lessee have executed this lease as of the day
and year first above written.
SPACE ELECTRONICS, INC. ARVCO REALTY, Agent for Lessor
/s/ Bob Czajkowski /s/ Steve Turner
- ------------------------------- -------------------------------
Bob Czajkowski, President/Owner Steve Turner
Date: 5/22/95
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PERSONAL GUARANTEE:
Bob Czajkowski, owner of Space Electronics, Inc. shall personally grant Lessor
a limited guarantee for the performance of this lease, and Lessor may proceed
forthwith against said guarantor for the Breach by Lessee of any obligation
hereby guaranteed without first taking action against Lessee. The limited
personal guarantee shall be limited to one year's rental payments after
default and shall equal to 12 months rental payments of the rent schedule.
This guarantee shall insure to the benefit of and bind, as the case may
require, its successor, assigns, heirs, executors and administrators.
/s/ Bob Czajkowski
- -------------------------------
Bob Czajkowski
Date: 5/22/95
- -------------------------------
- -------------------------------
David Struber
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EXHIBIT B
RULES AND REGULATIONS
1. USE: All activities connected with the Tenant's use of the leased
premises shall be only for those purposes defined in the lease. No work or
storage of any kind including vehicles, shall be allowed in the parking lot
or exterior entrance of the leased premises. Vehicle cleaning, maintenance or
repair of any kind is prohibited. Pallets may not be stored against the
building or in the parking lot.
2. LOCKS AND KEYS: No additional locks shall be placed upon any exterior or
interior door by Lessee, nor shall any changes be made to existing locks or
mechanism thereof without first obtaining Lessor's permission in writing. Any
such locks installed shall become part of the realty.
3. WIRING: No additional electric wiring shall be installed except with
prior written approval by Lessor. All electrical operations or additions
shall be completed under permit. All electrical wires shall be installed in
conduits.
4. DOORS AND WINDOWS: Doors shall not be defaced by signs, nails or other
means. Windows shall be kept clean and free of signs or other obstructions,
except approved drapes or mini blinds.
5. PLUMBING: Water closets and other plumbing fixtures shall not be used
for any purpose other than those for which they were constructed, and no
rubbish, rags, paper towels, coffee grounds or other substances shall be
thrown therein. All damage resulting from any misuse of the plumbing fixtures
shall be repaired at Tenant's expense. If damage occurs in the main sewer
line and is traceable to a certain tenant, responsible tenant shall be
required to pay said cost.
6. SOLICITATION: Canvassing, soliciting, and peddling in the Center are
prohibited; each Tenant shall cooperate to prevent the same by informing
Lessor and requesting such person to vacate the complex.
7. PARKING: Lessor has provided non-assigned limited parking that may be
used by Lessee, Lessee employees, and customers. Parking is limited to daily
use and cannot be used for overnight storage of vehicles of any kind with the
exception of one company van for which Lessor agrees to mark a reserved
space. Lessor also agrees to mark off two additional reserved spaces for the
exclusive use of Lessee.
8. ANIMALS: No animals, birds, or pets of any kind shall be permitted, kept
or harbored in the leased premises or common area of the Center.
9. ADVERTISING MEDIUM: No use of advertising medium that shall be a
nuisance to Lessor or other tenants is allowed. No noise, music or other
sounds shall be permitted at any time in such a manner as to disturb or annoy
other tenants.
10. USE OF SPACE: No space demised to any Tenant shall be used, or
permitted to be used, for lodging or sleeping or for any immoral or illegal
purpose.
11. NSF CHECKS: In the event Tenant's rental payment check is returned to
Lessor for N.S.F. (bounced), Lessor will accept as payment only a cashier's
check or money order which shall include the amount of a late charge as
provided in the lease and a $20.00 return check service charge.
12. LEASE EXTENSIONS OR RENEWALS: Prior to the termination of this lease,
should Lessee hire a leasing agent or other third party to assist Lessee in
negotiating a lease extension or lease renewal with Lessor, all costs for
said third party services will be the sole responsibility of Lessee. The
Lessor may assume financial responsibility for the third party services if
and only if all three of the following conditions exist:
(a) Lessee has previously contacted Lessor requesting a lease extension
or renewal.
(b) Lessee and Lessor have failed to reach a satisfactory agreement after
fourteen (14) days of sincere negotiation.
(c) The terms and conditions negotiated by the Lessee's third party are
considered more favorable to Lessee than the one Lessor previously offered.
13. VACATING LEASED PREMISES: Provided the lease has expired, or proper
written notice was given to Lessor on a month-to-month tenancy, or the
termination of the lease has been warranted through other provisions in the
lease, rent stops accruing when Lessee has vacated the suite AND all keys
have been turned in to Lessor.
14. ODORS: No Tenant shall cause or permit any unusual or objectionable
odors to be produced upon or emanate from the leased space.
15. AUGMENTATION: Lessor reserves the right to rescind, amend, alter, or
waive any of the foregoing Rules and Regulations at any time when its
judgement deems it necessary, desirable or proper for its best interest and
for the best interest of the Tenants, and no such rescission, amendment,
alteration, or waiver of any rule or regulation in favor of one Tenant shall
operate as an alteration or waiver in favor of any other Tenant. Landlord
shall not be responsible to any tenant for the non-observance or violation by
any other tenant of any of these Rules and Regulations at any time.
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16. EQUIPMENT: No equipment (i.e. hand trucks, fork lift, etc.) shall be
used in a manner that will damage sidewalks or paving. Should the sidewalks
or paving be damaged by Lessee, Lessor at his option will repair such damage
at Lessee's expense.
17. PREMISES: The premises shall be maintained in a clean and sanitary
condition at all times. Lessee shall dispose of all rubbish and trash in an
approved dumpster. No trash generated off premises or from non-normal use
shall be placed into dumpster provided within the Center. All boxes shall be
out up and placed flat in the trash container. No drums, pallets, or large
objects may be placed next to or in the dumpster for pickup.
18. FIRE EXTINGUISHERS: An adequate number of suitable fire extinguishers
shall be maintained on the premises for use in case of fire.
19. SPEED LIMIT: The speed limit throughout the Center is 10 miles per
hour. Violations, at the option of Lessor, will be excluded from driving and
parking within the complex.
20. ANTENNAS: No communication Antenna shall be erected on the roof or
exterior walls of the premises, or on the grounds without prior written
consent of Lessor. An aerial satellite antenna so installed without written
consent shall be subject to removal by Lessor without prior notice. The cost
of such removal and repair of damage, if any, shall be at the expense of
Lessee.
21. ADVERTISEMENTS: No sign, advertisement, object, notice or other
lettering shall be exhibited, inscribed, painted or affixed on any part of
the outside or inside of Tenant's premises so as to be visable from the
exterior without prior written consent of Lessor. Lessor hereby consents to
give Lessee the right to install a sign in front of the property with
Lessee's name, address, and direction indications at Lessee's expense with
prior written approval from Lessor.
22. TIE-INS: No Tenant shall tie-in or permit others to tie-in to the
electrical or water supply within the premises without written consent from
Lessor.
23. OBSTRUCTION: Sidewalks and entryway shall not be obstructed or used for
any other purposes than for ingress and egress.
24. ROOF DAMAGE: Roof damage occurs each time someone walks on the roof.
Tenants access to the roof is limited to the repair and maintenance of air
conditioning unit. Lessor reserves the right to charge Tenant for excessive
use of the roof to the extent of damage caused by such use.
I have read and understood the Rules and Regulations which will become part
of lease executed on 5/22/95 , 1995.
--------------
/s/ Bob Czajkowski
- ----------------------
Bob Czajkowski, President/Owner
SPACE ELECTRONICS, INC.
Date: 5/22/95 , 1995.
-----------------
12
<PAGE>
[FLOOR PLAN]
<PAGE>
List of Subsidiaries
ENTITY STATE OF INCORPORATION
Maxwell Technologies, Inc. Delaware
PurePulse Technologies, Inc. Delaware
I-Bus, Inc. California
Maxwell Business Systems, Inc. California
Maxwell Technologies Systems Division, Inc. California
Maxwell Information Systems, Inc. California
Maxwell Energy Products, Inc. California
Phoenix Power Systems, Inc. California
I-Bus UK, Ltd. United Kingdom
Space Electronics, Inc. Delaware
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Form S-8 (Nos. 2-91483, 33-88634, 33-88636, 33-88638, 333-07835,
333-07831, 333-63815 and 333-63813) and Form S-3 (Nos. 333-36853, 333-49941,
333-57947, 333-75227 and 333-81965) of Maxwell Technologies, Inc. of our
report dated September 21, 1999, with respect to the consolidated financial
statements of Maxwell Technologies, Inc. included in the Annual Report (Form
10-K) for the year ended July 31, 1999.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
San Diego, California
October 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MAXWELL
TECHNOLOGIES, INC.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JULY 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JUL-31-1999 JUL-31-1998
<PERIOD-START> AUG-01-1998 AUG-01-1997
<PERIOD-END> JUL-31-1999 JUL-31-1998
<CASH> 8,839 21,397
<SECURITIES> 0 0
<RECEIVABLES> 50,981 41,266
<ALLOWANCES> (1,003) (1,513)
<INVENTORY> 23,627 19,378
<CURRENT-ASSETS> 96,670 83,184
<PP&E> 69,599 63,500
<DEPRECIATION> (41,719) (37,958)
<TOTAL-ASSETS> 134,434 115,385
<CURRENT-LIABILITIES> 34,432 32,302
<BONDS> 436 1,218
0 0
0 0
<COMMON> 956 920
<OTHER-SE> 96,212 79,233
<TOTAL-LIABILITY-AND-EQUITY> 134,434 115,385
<SALES> 179,685 140,565
<TOTAL-REVENUES> 179,685 140,565
<CGS> 118,937 92,919
<TOTAL-COSTS> 118,937 92,919
<OTHER-EXPENSES> 55,285 50,032
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 404 338
<INCOME-PRETAX> 5,719 (1,214)
<INCOME-TAX> (5,776) 413
<INCOME-CONTINUING> 11,068 (1,707)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 11,068 (1,707)
<EPS-BASIC> 1.18 (0.20)
<EPS-DILUTED> 1.12 (0.20)
</TABLE>
