SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended January 31, 1999 Commission File Number 0-10964
MAXWELL TECHNOLOGIES, INC.
Delaware IRS ID #95-2390133
9275 Sky Park Court
San Diego, California 92123
Telephone (619) 279-5100
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
------ ------
As of February 28, 1999, Registrant had only one class of common stock of
which there were 9,546,224 shares outstanding.
<PAGE>
PART I - FINANCIAL STATEMENTS
<TABLE>
Maxwell Technologies, Inc.
Consolidated Condensed Balance Sheet - (Unaudited)
(in thousands)
<CAPTION>
Assets
------
January 31, July 31,
1999 1998
---------- ----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 14,847 $ 21,397
Accounts receivable - net 39,640 39,753
Inventories:
Finished products 2,160 1,494
Work in process 3,861 3,686
Parts and raw materials 15,096 14,198
---------- ----------
21,117 19,378
Prepaid expenses 4,337 2,199
Deferred income taxes 457 457
---------- ----------
Total current assets 80,398 83,184
Property, plant and equipment - net 26,837 25,542
Goodwill and other non-current assets 9,686 6,659
---------- ----------
$ 116,921 $ 115,385
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity
------------------------------------
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable $ 20,342 $ 24,019
Accrued employee compensation 6,196 7,039
Current portion of long-term debt and
short-term borrowings 1,122 1,244
---------- ----------
Total current liabilities 27,660 32,302
Long-term debt 1,339 1,218
Minority interest 2,264 1,712
Stockholders' equity:
Common stock 952 920
Additional paid-in capital 73,441 72,245
Deferred compensation (293) (413)
Accumulated other comprehensive income (2) --
Retained earnings 11,560 7,401
---------- ----------
85,658 80,153
---------- ----------
$ 116,921 $ 115,385
========== ==========
See notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
PART I - FINANCIAL STATEMENTS, continued
<TABLE>
Maxwell Technologies, Inc.
Consolidated Condensed Statement of Operations - (Unaudited)
(in thousands except per share data)
<CAPTION>
Three Months
Ended January 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C> <C> <C>
Sales $ 40,034 $ 33,337
Cost of sales 26,061 21,590
---------- ----------
Gross profit 13,973 11,747
Operating expenses:
Selling, general and administrative expenses 8,156 8,346
Research and development expenses 2,483 2,138
Acquisition and related charges 1,645 --
---------- ----------
Total operating expenses 12,284 10,484
---------- ----------
Operating income 1,689 1,263
Interest expense 90 60
Interest income and other - net (211) (440)
---------- ----------
Income before income taxes and minority
interest 1,810 1,643
Income tax expense 125 --
Minority interest in net income
of subsidiaries 141 10
---------- ----------
Net income $ 1,544 $ 1,633
========== ==========
Basic income per share $ 0.16 $ 0.19
========== ==========
Diluted income per share $ 0.15 $ 0.18
========== ==========
Weighted average number of shares used to calculate:
Basic income per share 9,412 8,562
========== ==========
Diluted income per share 9,943 9,185
========== ==========
See notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
PART I - FINANCIAL STATEMENTS, continued
<TABLE>
Maxwell Technologies, Inc.
Consolidated Condensed Statement of Operations - (Unaudited)
(in thousands except per share data)
<CAPTION>
Six Months
Ended January 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C> <C> <C>
Sales $ 83,020 $ 65,074
Cost of sales 54,440 42,168
---------- ----------
Gross profit 28,580 22,906
Operating expenses:
Selling, general and administrative expenses 17,663 15,684
Research and development expenses 4,986 4,159
Acquisition and related charges 1,645 --
---------- ----------
Total operating expenses 24,294 19,843
---------- ----------
Operating income 4,286 3,063
Interest expense 208 177
Interest income and other - net (499) (501)
---------- ----------
Income before income taxes and minority
interest 4,577 3,387
Income tax expense 225 187
Minority interest in net income (loss)
of subsidiaries 336 (9)
---------- ----------
Net income $ 4,016 $ 3,209
========== ==========
Basic income per share $ 0.43 $ 0.41
========== ==========
Diluted income per share $ 0.40 $ 0.38
========== ==========
Weighted average number of shares used to calculate:
Basic income per share 9,320 7,779
========== ==========
Diluted income per share 9,824 8,461
========== ==========
See notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
PART I - FINANCIAL STATEMENTS, continued
Maxwell Technologies, Inc.
Consolidated Condensed Statement of Cash Flows - (Unaudited)
(in thousands)
<CAPTION>
Six Months
Ended January 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C> <C> <C>
Operating Activities:
Net income $ 4,016 $ 3,209
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 2,749 1,716
Deferred compensation 120 105
Minority interest in net income (loss)
of subsidiaries 336 (9)
Changes in operating assets and
liabilities - net (11,159) (8,410)
---------- ----------
Net cash used in
operating activities (3,938) (3,389)
---------- ----------
Investing Activities:
Purchases of property and equipment (3,800) (3,827)
---------- ----------
Net cash used in
investing activities (3,800) (3,827)
---------- ----------
Financing Activities:
Principal payments on long-term debt and
short-term borrowings (558) (2,541)
Proceeds from long-term debt and short-term
borrowings 375 3,399
Proceeds from issuance of Company and
subsidiary stock 2,069 49,298
Dividends paid to shareholders of Subchapter
S corporation prior to acquisition -- (407)
Repurchase of Company and subsidiary stock (696) (221)
---------- ----------
Net cash provided by
financing activities 1,190 49,528
---------- ----------
Effect of exchange rates on cash and
cash equivalents (2) --
---------- ----------
Increase (decrease) in cash and
cash equivalents (6,550) 42,312
Cash and cash equivalents at beginning
of period 21,397 2,194
---------- ----------
Cash and cash equivalents
at end of period $ 14,847 $ 44,506
========== ==========
See notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
PART I - continued
NOTES TO FINANCIAL STATEMENTS
1. General
The preceding interim consolidated condensed financial
statements contain all adjustments (consisting of normal recurring
accruals) which are, in the opinion of management, necessary for a
fair and accurate presentation of financial position at January 31,
1999 and the results of operations for the three and six month
periods then ended. These interim financial statements should be
read in conjunction with the Company's July 31, 1998 audited
consolidated financial statements and notes thereto included in its
Annual Report on Form 10-K for fiscal 1998. Interim results are not
necessarily indicative of those to be expected for the full year.
The Balance Sheet at July 31, 1998 has been derived from the audited
financial statements at that date, as adjusted for the unaudited
balances of acquisitions accounted for by the pooling-of-interests
accounting method.
The consolidated financial statements include the accounts
of Maxwell Technologies, Inc., and its subsidiaries. All significant
intercompany transactions and account balances are eliminated in
consolidation.
Backlog of unfilled orders at January 31, 1999 was $105.3
million, of which $81.0 million is fully funded.
2. Acquisitions and Related Charges
The Company has restated the preceding prior period financial
statements to reflect the acquisition of two businesses during the
quarter ended January 31, 1999 that were accounted for as pooling-
of-interests: KD Components, Inc. ("KD"); and Space Electronics
Incorporated ("SEi"). Both of these acquired businesses were
privately held, additional information on each of these acquisitions
is presented below. In the restatement, the historical results of
the Company have been combined with the operating results of the
newly acquired companies.
KD develops and manufactures high voltage multilayer
ceramic capacitors and switch mode power supply capacitors.
Under the terms of the agreement, Maxwell acquired all of the
outstanding stock of KD in a stock-for-stock exchange, for an
aggregate of approximately 145,000 shares of Maxwell common
stock. Direct acquisition costs were approximately $120,000
and were charged to operations during the quarter ended January
31, 1999.
SEi specializes in the manufacture of radiation-hardened
microelectronics for the commercial space market. Under the terms
of the agreement, structured as a merger, the Company acquired all
of the outstanding stock of SEi in exchange for approximately
681,000 shares of Maxwell common stock. The Company incurred
direct acquisition costs of approximately $1.1 million which have
been charged to operations during the quarter ended January 31,
1999.
In addition, $320,000 of charges were incurred related to a
decision made and carried out during the quarter to discontinue an
insignificant software product line within the Space and Technology
Products and Programs business segment, and approximately $75,000
related to the purchase of a German distributor of the Company's
I-Bus operation, which was not material to the Company.
PART I - continued
As discussed above, the Company's has restated its
previously reported quarterly financial results to include the
operating results of KD and SEi. The restated and unaudited
quarterly statements of operations for the fiscal year ended
July 31, 1998 are as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
October January April July
1997 1998 1998 1998
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $ 31,737 $ 33,337 $ 35,519 $ 39,972
Cost of sales 20,578 21,590 24,068 26,683
-------- -------- -------- --------
Gross profit 11,159 11,747 11,451 13,289
Operating expenses:
Selling, general and administrative expenses 7,338 8,346 7,232 8,462
Research and development expenses 2,021 2,138 2,829 2,724
Acquired in-process R&D and other
special charges -- -- 8,942 --
-------- -------- -------- --------
Total operating expenses 9,359 10,484 19,003 11,186
-------- -------- -------- --------
Operating income (loss) 1,800 1,263 (7,552) 2,103
Interest expense 117 60 62 99
Interest income and other - net (61) (440) (598) (411)
-------- -------- -------- --------
Income (loss) before income taxes and
minority interest 1,744 1,643 (7,016) 2,415
Income tax expense 187 -- 74 152
Minority interest in net income (loss) of
subsidiaries (19) 10 (15) 104
-------- -------- -------- --------
Net income (loss) $ 1,576 $ 1,633 $ (7,075) $ 2,159
======== ======== ======== ========
Diluted income (loss) per share $ 0.20 $ 0.18 $ (0.77) $ 0.22
======== ======== ======== ========
Weighted average used to calculate diluted
income (loss) per share 7,737 9,185 9,181 9,745
======== ======== ======== ========
</TABLE>
3. Foreign Currency Translation
The assets and liabilities of the Company's foreign
operations are translated to U.S. dollars at quarter-end exchange
rates, and revenues and expenses are translated at average rates
prevailing during the period. There was no material effect from
foreign currency translation adjustments during the three and six
month periods ended January 31, 1999.
4. Income per share
In accordance with Financial Accounting Standards Board
Statement No. 128, Earnings Per Share, basic earnings per share
excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share includes the dilutive effects
of all common stock equivalents.
PART I - continued
The following table has set forth the computation of basic
and diluted income per share (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three Months Six Months
Ended January 31, Ended January 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic:
Net income $ 1,544 $ 1,633 $ 4,016 $ 3,209
-------- -------- -------- --------
Weighted average shares 9,412 8,562 9,320 7,779
-------- -------- -------- --------
Basic income per share $ 0.16 $ 0.19 $ 0.43 $ 0.41
======== ======== ======== ========
Diluted:
Net income $ 1,544 $ 1,633 $ 4,016 $ 3,209
Effect of majority-owned
subsidiaries' dilutive securities (45) -- (111) --
-------- -------- -------- --------
Income available to Common Shareholders,
as adjusted $ 1,499 $ 1,633 $ 3,905 $ 3,209
======== ======== ======== ========
Weighted average shares 9,412 8,562 9,320 7,779
Effect of dilutive securities:
Stock options 514 604 485 673
Convertible preferred stock
of subsidiaries 17 19 19 9
-------- -------- -------- --------
Dilutive potential common shares 531 623 504 682
-------- -------- -------- --------
Weighted average shares, as adjusted 9,943 9,185 9,824 8,461
-------- -------- -------- --------
Diluted income per share $ 0.15 $ 0.18 $ 0.40 $ 0.38
======== ======== ======== ========
</TABLE>
5. New Accounting Standards
In June 1997, the FASB issued Statement No. 131,
Disclosures About Segments of an Enterprise and Related Information,
which is effective for the fourth quarter of the Company's fiscal year
1999. The Company believes that its current segment reporting is
generally in compliance with Statement No. 131, and therefore the
adoption of Statement No. 131 will not have a material effect on its
financial statements.
PART I - continued
6. Comprehensive Income
The Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", in the quarter
ended October 31, 1998. Statement No. 130 establishes new rules
for the reporting and display of comprehensive income and its
components.
The components of comprehensive income for the three
and six month periods ended January 31, 1999 and 1998 were as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
Ended January 31, Ended January 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income $ 1,544 $ 1,633 $ 4,016 $ 3,209
Foreign currency translation adjustments (6) -- (2) --
-------- -------- -------- --------
Comprehensive income $ 1,538 $ 1,633 $ 4,014 $ 3,209
======== ======== ======== ========
</TABLE>
PART I - continued
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL POSITION
Business Segments
The Company's three business segments are as follows:
* Power Conversion Products: Includes design, development
and manufacture of electrical components, systems and
subsystems, including products that capitalize on pulsed
power such as ultracapacitors, microbial purification
systems, high voltage capacitors and other electrical
components, power distribution and conditioning systems
and electromagnetic interference filter capacitors.
* Industrial Computers and Subsystems: Includes design and
manufacture of standard, custom and semi-custom
industrial computer modules, platforms and fully
integrated systems primarily for OEMs.
* Space and Technology Products and Programs: Includes
research and development programs in pulsed power,
pulsed power systems design and construction, design and
assembly of high reliability radiation-hardened electronic
components and consulting services for commercial and
Government space systems, computer-based analytic
services and software, and weapons effects simulation,
primarily for the U.S. Government Department of Defense
("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 the Company
acquired Space Electronics Incorporated, a San Diego based supplier
of specially treated electronic components for use in space
environments, primarily by commercial satellite manufacturers.
Space Electronics ("SEi") utilizes patented processes to protect
computer boards and chips, either of their 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. To reflect these capabilities, the Company has
re-named and re-defined its Technology Programs and Systems
business segment as the Space and Technology Products and
Programs segment.
In the first and second quarters of fiscal 1998, the Company
had a fourth business segment, Information Products and Services,
which was primarily focused on commercial software and internet
related services. During the third quarter of last fiscal year, the
Company reorganized the operations within the Information
Products and Services segment, including a refocusing of certain
operations along the lines of other of the Company's existing
business segments and the discontinuation of certain businesses.
The Company no longer operates or reports in the Information
Products and Services segment, and therefore prior year results
include sales and cost of sales for such segment, while current year
results do not.
Results of operations for both the first three months of fiscal
year 1999 and the three and six month periods ended January 31,
1998 have been restated to include the results of acquisitions
accounted for by the pooling-of-interests accounting method. One
of the acquisitions is Space Electronics Incorporated, a San Diego
based company that provides electronics parts which have been
hardened to withstand the effects of radiation in space to customers
in the satellite arena, primarily on a commercial basis. The other
company included in the restatement is a small manufacturer of
ceramic capacitors located adjacent to the Company's ceramic
filter/capacitor business in Carson City, Nevada. While the
operations of the acquired companies are not material to Maxwell,
the discussion of results of operations below is based on the
restated results.
Results of Operations
The following table sets forth selected operating data for
the Company, expressed as a percentage of sales, for the three and
six month periods ended January 31, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Six Months
Ended January 31, Ended January 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 65.1 64.8 65.6 64.8
-------- -------- -------- --------
Gross profit 34.9 35.2 34.4 35.2
Operating expenses:
Selling, general and administrative expenses 20.4 25.0 21.3 24.1
Research and development expenses 6.2 6.4 6.0 6.4
Acquisition and related charges 4.1 -- 2.0 --
-------- -------- -------- --------
Total operating expenses 30.7 31.4 29.3 30.5
-------- -------- -------- --------
Operating income 4.2 3.8 5.1 4.7
Interest expense 0.2 0.2 0.3 0.3
Interest income and other - net (0.5) (1.3) (0.7) (0.8)
-------- -------- -------- --------
Income before income taxes and minority
interest 4.5 4.9 5.5 5.2
Income tax expense 0.3 -- 0.3 0.3
Minority interest in net income (loss)
of subsidiaries 0.9 -- 1.0 0.6
-------- -------- -------- --------
Net income 3.9% 4.9% 4.8% 4.9%
======== ======== ======== ========
</TABLE>
The following table sets forth the Company's business
segment sales, gross profit and gross profit as a percentage of
business segment sales for the three and six-month periods ended
January 31, 1999 and 1998. As mentioned above, the Company no
longer maintains an Information Products and Services business
segment. Therefore, reporting for such segment is for prior periods
only.
<TABLE>
<CAPTION>
Three Months Six Months
Ended January 31, Ended January 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Power Conversion Products:
Sales $ 11,822 $ 9,920 $ 26,196 $ 19,440
Gross profit 3,916 4,088 10,082 7,887
Gross profit as a percentage of sales 33.1% 41.2% 38.5% 40.6%
Industrial Computers and Subsystems
Sales $ 12,014 $ 10,506 $ 22,281 $ 19,409
Gross profit 3,749 3,649 6,942 7,249
Gross profit as a percentage of sales 31.2% 34.7% 31.2% 37.3%
Space and Technology Products and Programs
Sales $ 16,198 $ 10,198 $ 34,543 $ 21,559
Gross profit 6,308 2,382 11,556 5,464
Gross profit as a percentage of sales 38.9% 23.4% 33.5% 25.3%
Information Products and Services
Sales $ -- $ 2,713 $ -- $ 4,666
Gross profit -- 1,628 -- 2,306
Gross profit as a percentage of sales -- 60.0% -- 49.4%
Consolidated
Sales $ 40,034 $ 33,337 $ 83,020 $ 65,074
Gross profit 13,973 11,747 28,580 22,906
Gross profit as a percentage of sales 34.9% 35.2% 34.4% 35.2%
</TABLE>
Sales
Sales for the three months ended January 31, 1999 were
$40,034,000, a 20.0% increase over the $33,337,000 for the same
period last year. Sales for the six months ended January 31, 1999
were $83,020,000, a 27.6% increase over the $65,074,000 in last year's
first six months. For both the three and six month periods,
increases in sales over the prior year occurred in all three of the
Company's on-going business segments, with the largest amount of
increase in the Space and Technology Products and Programs
business segment. These results are more fully described in the
business segment discussion below.
Power Conversion Products. In the quarter ended January 31,
1999, Power Conversion Products sales increased $1.9 million, or
19.2%, to $11.8 million from $9.9 million in the second quarter of
last fiscal year. This increase was primarily attributable to sales of
power protection and delivery systems, a business area acquired by
the Company in the prior year, and greater revenue from the
PurePulse purification business. During the quarter, PurePulse
concluded an exclusive license agreement with Johnson & Johnson
Vision Products, Inc. for the integration of PureBright(R) 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. Partially offsetting these increases
was the completion in the first quarter of fiscal 1999 of an 18-month
contract for switches for a National Laboratory system which was
in full production in last year's second quarter, and lower revenues,
primarily in the form of funded research, in the ultracapacitor
business area. As described above, during the quarter 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 the ceramic
filter business of the Company's Energy Products subsidiary, 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 Carson City,
Nevada plant.
For the six months ended January 31, 1999, Power
Conversion products sales increased $6.8 million, or 34.8%, to $26.2
million from $19.4 million for the same period last year. The two
business areas that comprised the majority of the second quarter
sales gains - power protection and distribution systems and the
PurePulse business area - are also primarily responsible for the
increase in the year-to-date revenues, although most of the
Company's other power conversion products, including glass-to-
metal seals, electromagnetic interference filter capacitors,
and the PowerCache(TM) and traditional capacitor areas, also
contributed to the overall sales increase in this business segment.
Industrial Computers and Subsystems. In the quarter ended
January 31, 1999, Industrial Computers and Subsystems sales
increased $1.5 million, or 14.4%, to $12.0 million from $10.5 million
in the second quarter of last fiscal year. Sales in this business
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 OEM's products. In the third quarter of
fiscal 1998, Maxwell acquired a company in the United Kingdom
that focuses on lower priced standard products, and the Company
has since 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. In
addition, the Company continues to expand its presence in Europe
with the addition of operations in both France and Germany this
year. The increase in sales for the quarter is attributable both to the
European sales of the standard products, as well as new design
wins for the customized OEM products. Offsetting these increases
was the completion in last year's second quarter of sales to a single,
long-standing OEM customer under a multi-year program, and the
curtailing of the Company's program with Digital Equipment
Corporation due to its acquisition by Compaq. Even with the
increase in the sale of standard products, sales under large OEM
programs remain a critical element of this business. While receipt
of orders under typical OEM programs are subject to risks and
fluctuations relating to the sales level of the OEM's product, during
the quarter ended January 31, 1999, I-Bus received firm orders
totaling over $25 million under two Siemens ElectroCom L.P.
programs for the U.S. Postal Service. As a result, I-Bus now has the
largest backlog of firm orders in its history. Shipments to Siemens
ElectroCom began at the end of the second quarter, and will
continue for approximately 18 months.
Sales for the six months ended January 31, 1999 increased
$2.9 million, or 14.8%, to $22.3 million from $19.4 million for the
prior year's first six months. For the six-month period, the sales
increase is also primarily attributable to European sales, mostly of
standard products.
Space and Technology Products and Programs. In the quarter
ended January 31, 1999, sales in the Space and Technology Products
and Programs segment increased $6.0 million, or 58.8%, to $16.2
million from $10.2 million in the second quarter of last fiscal year.
The Company substantially enhanced its funded pulsed power
research and simulation business with its purchase of the
Physics International operation of Primex Technologies in April 1998.
Physics International was the Company's primary competitor in this
area, and the combined businesses consolidate much of the scientific
and technical research capabilities for the benefit of both the
Government and the Company's technology base. The increase in
revenue in the second quarter compared to last year is attributable
primarily to the additional pulsed power simulation work with the
inclusion of Physics International, increased revenue from the newly
acquired SEi operation, as well as certain software sales that,
prior to a reorganization last year, were included in a separate
business segment. Offsetting these increases was lower revenue
from work on a large multi-year contract for the DOD which is now
substantially complete. The Company won a follow-on contract,
but the start-up of work under the new program is still ramping up.
These and other contracts with the DOD are subject to such increases
and decreases as well as to periodic Government funding provisions.
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.
Sales for the six months ended January 31, 1999 increased
$13.0 million, or 60.2%, to $34.5 million from $21.6 in the prior year.
For the six months, the increase was primarily attributable to the
same factors as described above for the second quarter.
Gross Profit
In the quarter ended January 31, 1999, the Company's gross
profit was $14.0 million, or 34.9% of sales, compared to $11.7
million, or 35.2% of sales, in the second quarter of last fiscal year.
For the current year's six-month period, gross profit was $28.6
million, or 34.4% of sales, compared to $22.9 million, or 35.2% of
sales in the first six months of the prior year. Gross profit is
discussed by business segment in the sections that follow.
Power Conversion Products. In the quarter ended January 31,
1999, Power Conversion Products gross profit decreased by $0.2
million, or 4.2%, to $3.9 million from $4.1 million in the second
quarter of last fiscal year. In the six months ended January 31, 1999,
Power Conversion Products gross profit increased $2.2 million, or
27.8%, to $10.1 million from $7.9 million for the same period last
year. As a percentage of sales, gross profit declined to 33.1% in this
year's second quarter from 41.2% in the second quarter of the prior
year. Gross profit as a percentage of sales for the six-month period
decreased to 38.5% from 40.6% in the prior year. The decrease in
gross profit as a percentage of sales for both the three and six month
periods reflects a lower margin mix of products and services,
including, primarily in the second quarter of this fiscal year,
decreased funded ultracapacitor development and the completion
of a high-margin contract for switch components for a National
Laboratory pulsed power system.
As the Company introduces PowerCache ultracapacitor
products, it may continue to offer aggressive pricing to gain market
penetration. As product sales ramp up, such pricing would have an
on-going impact on gross profit margins 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 PowerCache product costs.
Industrial Computers and Subsystems. In the quarter ended
January 31, 1999, Industrial Computers and Subsystems gross profit
increased $0.1 million, or 2.7%, to $3.7 million from $3.6 million in
the second quarter of last fiscal year. For the year-to-date, gross
profit decreased $0.3 million, or 4.2%, to $6.9 million from $7.2
million one year ago. As a percentage of sales, gross profit declined
to 31.2% in this year's second quarter from 34.7% in the second
quarter of the prior year. For the six months ended January 31,
1999, gross profit as percentage of sales was also 31.2%, down from
37.3% for the same period last year. The decrease in gross profit as
a percentage of sales as compared to the prior year three and six-
month periods is primarily due to a sales mix which in the prior
fiscal year included certain higher margin products for an OEM that
were near the end of their product and sales 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 that have reduced gross profit margins. With these factors,
along with the increasing competition for OEM design-in programs
and increasing foreign competition, the Company does not expect
future gross profit margins as a percent of sales to be as high as
those experienced in last year's first six months.
Space and Technology Products and Programs. In the quarter
ended January 31, 1999, Space and Technology Products and
Programs gross profit increased $3.9 million, or 164.8%, to $6.3
million from $2.4 million in the second quarter of last fiscal year. In
the six months ended January 31, 1999, Space and Technology
Products and Systems gross profit increased $6.1 million, or 111.5%,
to $11.6 million from $5.5 million for the same period last year. As
a percentage of sales, gross profit increased to 38.9% in this year's
second quarter from 23.4% in the second quarter of the prior year.
Gross profit as a percentage of sales for the six-month period
increased to 33.5% from 25.3% in the prior year. The increase in
gross profit, both as a dollar amount and as a percentage of sales, in
the three month period ended January 31, 1999 as compared to the
same period last year is primarily due to higher margin software
sales due to the inclusion in this segment of certain software
businesses, as previously described, a greater recovery of overhead
costs on cost plus Government contracts than was recorded in the
second quarter of last year, and margin recovery upon completion
of a large multi-year DOD contract. In addition, SEi had improved
gross margins in this year's second quarter as compared to last
year's comparable three month period. For the year-to-date, the
increase in gross profit includes the factors described above as well
as the addition of Physics International, acquired in the third
quarter of fiscal year 1998. Based on the factors described above,
future gross profit margins are not currently expected to be
maintained at the level reached in this year's second quarter.
However, the commercial space business of SEi and the software
product line added to this business segment last year have the
potential to produce higher gross profit margins as a percent of
sales than this segment's traditional Government-focused programs if
their growth and business objectives are achieved.
Selling, General and Administrative Expenses
In the quarter ended January 31, 1999, the Company's
selling, general and administrative expenses were nearly
unchanged at $8.2 million compared to $8.3 million in the second
quarter of last fiscal year. For the six months ended January 31,
1999, selling, general and administrative expenses increased $2.0
million, or 12.6%, to $17.7 million from $15.7 million in the prior
year. As a percentage of total sales, selling, general and
administrative expenses decreased to 20.4% in this year's second
quarter from 25.0% in the second quarter of the prior year. For the
six month period, selling, general and administrative expenses as a
percentage of sales decreased to 21.3% from 24.1% in the prior year.
The increase in the dollar amount of these expenses is primarily in
support of the Company's growth, including businesses acquired in
fiscal 1998, as well as increased support and sales effort as
compared to last year in the ultracapacitor business area. The
decrease in selling, general and administrative expenses as a
percentage of sales reflects a decrease in expenses attributable to
the Company's incentive plans in the current fiscal year as
compared to last year, as well as the absorption of selling, general
and administrative costs over the expanded level of sales.
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. The level of internally funded 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. Internally funded research and
development expenses were $2.5 million and $2.1 million for the
three months ended January 31, 1999 and 1998, respectively. For
the six months, research and development expenses were $5.0
million and $4.2 million in 1999 and 1998, respectively. As a
percentage of sales, these expenses were just over 6.0% in all
applicable periods.
Acquisition and Related Charges
Acquisition and related charges during the three and six-
months ended January 31, 1999 totalled $1,645,000, and consisted
primarily of direct acquisition costs for pooling-of-interests
combinations completed during the quarter. There were no such
charges in the prior year periods.
Interest Income and Other-net and Income Tax Expense
Interest income and other-net decreased to $211,000 for the
three months ended January 31, 1999 from $440,000 in the second
quarter of the prior year. At the beginning of the second quarter of
the prior year, the Company had just completed its follow-on
offering of common stock, and therefore had a greater amount of cash
available for investment during that three-month period than was
available during this year's second quarter. For the six months
ended January 31, 1999, interest income and other-net was virtually
unchanged at $499,000 compared to $501,000 in the prior year's six-
month period. In fiscal year 1998, cash was available for investment
only during the second quarter, after the follow-on offering was
completed. Fiscal year 1999 includes the investment of cash on
hand for the entire six-month period, but at a lower level than in
last year's second quarter due to the use of funds over the
intervening months. These two factors offset each other in the
comparison of the two six-month periods. The Company has net
operating loss carryforwards which offset the majority of the
Company's provision for U.S. income taxes in the three and six
month periods of both the current and prior fiscal years. Income
tax expense in the first six months of this fiscal year is
primarily due to foreign taxes on the profits of the Company's
European operations.
Liquidity and Capital Resources
Net cash used in operations in the current year's first six
months was $3.9 million, of which about $3.5 million occurred in
the first quarter. The first quarter use of cash was primarily
attributable to increases in receivables and inventory, reflecting the
higher quarterly sales volume. The Company's capital
expenditures during the first six months amounted to $3.8 million,
and primarily consisted of production and other capital assets in the
Power Conversion Products business segment, and additions at the
newly acquired SEi operation. These outlays are part of Company's
budgeted capital expenditures for fiscal 1999 totaling
approximately $9 million. The Company may address future high
volume or other manufacturing requirements as the year
progresses. Alternatively, the Company may consider leasing
facilities or manufacturing equipment or both or may satisfy
additional manufacturing requirements through outsourcing or
under licensing arrangements with third parties. If the Company
decides to internally finance construction of such facilities, a
significant amount of capital would be required.
Maxwell has an unsecured bank line of credit of $20.0 million,
under which there were no outstanding borrowings as of January 31,
1999.
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
budgeted capital expenditures through fiscal 1999. 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
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.
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 1998, the Company developed a three-phase
program for Y2K information systems compliance. Phase 1 is to
identify and solve Y2K issues in the Company's significant
information systems infrastructure and enterprise business
applications, including telecommunications and networking
systems as well as accounting and manufacturing software. Phase 2
is to identify and plan for Y2K issues that are specific to the
Company's business units, including local software, product
matters, facilities related systems and vendor and key partner
concerns. Phase 3 is the final testing of each major area of exposure
to ensure compliance, and the development of contingency plans
for unsolved Y2K deficiencies, such as key vendors failing to
adequately address their Y2K problems. The Company has
identified four major areas determined to be critical for successful
Y2K compliance: (1) networking and telecommunications, (2)
financial and manufacturing informational systems applications, (3)
products and (4) third-party relationships.
In Phase 1 of the program, the Company has completed its
review of company-wide and large systems, several of which have
been identified as being Y2K compliant due to their recent
implementation or upgrade. Such installations were unrelated to
the Y2K concern, but rather were needed as part of the ordinary
course of business. For certain accounting and manufacturing
systems, upgrades were needed; all required upgrades are available
from the third party suppliers. Some of these upgrades have been
installed, and the remaining upgrades are either in process or
planned. Implementation of all the updated systems is expected by
the middle of the calendar year. Identified upgrades of the system
infrastructure, such as telephone and networking equipment, are
largely completed. Final testing and documentation under Phase 1
is currently anticipated in the May 1999 time frame. Under Phase 2,
the Company is currently identifying and evaluating business unit
exposures. In the third-party area, the Company has contacted its
significant third parties, primarily key vendors and customers,
regarding their Y2K readiness. Responses are currently being
evaluated. As to products, initial findings indicate that most
Company products will not be impacted by the Y2K problem and
most of those that are impacted appear to be Y2K compliant. For
several of those products that are not Y2K compliant, the Company
has made upgrades available via the Company's Internet web site.
For other products, the Company is still evaluating its Y2K
compliance plans. The testing and contingency plan development
under Phase 3 will begin in mid-1999, and is expected to be
completed in the August to September time frame.
The Company believes it will cost approximately $100,000
to complete the replacement of network and telecommunication
infrastructure requiring Y2K upgrades. The Company is still
evaluating what costs will be incurred in connection with local
software, facilities, products and the third party area, but at this
time does not believe that such costs will be material.
The anticipated costs relating to resolving Y2K issues are
based on estimates which were derived utilizing assumptions of
future events, including the continued availability of certain
resources and other factors. However, there can be no guarantee
that these estimates will be achieved and, as additional Y2K
remediation activities are developed and planned, that actual
results will not differ materially from those in the current estimate.
Specific factors that might cause such material differences include,
but are not limited to, the availability and cost of personnel trained
in this area, the completion of the Company's Y2K investigations,
the ability to locate and correct all relevant computer codes, and
similar uncertainties. In addition, there can be no assurance that
Y2K compliance problems will not be revealed in the future which
could have a material adverse affect on the Company's business,
financial condition and results of operations. Many of the
Company's customers and suppliers may be affected by Y2K issues
that may require them to expend significant resources to modify or
replace their existing systems, which may result in those customers
having reduced funds to purchase the Company's products or those
suppliers experiencing difficulties in producing or shipping key
components to the Company on a timely basis or at all. Such third
party issues could have a material adverse affect on the Company's
business, financial condition and results of operations. This
discussion of the Company's Y2K status constitutes a "Year 2000
Readiness Disclosure" as that item is defined in the Year 2000
Information and Readiness Disclosure Act, and also contains
forward-looking statements (see "Forward-Looking Statements "
below).
Accounting Principles
In June 1997, the FASB issued Statement No. 131,
Disclosures About Segments of an Enterprise and Related
Information, which is effective for the fourth quarter of the
Company's fiscal year 1999. The Company believes that its
current segment reporting is generally in compliance with
Statement No. 131 and therefore the adoption of Statement
No. 131 will not have a material effect on its financial
statements.
Forward-Looking Statements
To the extent that the above discussion goes beyond
historical information and indicates results or developments which
the Company plans or expects to achieve, these forward-looking
statements are identified by the use of terms such as "expected,"
"anticipates," "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 item 1 of the Company's Annual Report on
Form 10-K for fiscal 1998 for a discussion of certain of those
factors.
PART II - OTHER INFORMATION
Item 2. Changes in Securities
---------------------
(c) On December 31, 1998, the Company issued
approximately 145,000 shares of its Common Stock in
connection with an acquisition of all the outstanding
capital stock of a privately-held company. The form of
transaction was an exchange of common stock. No
underwriters were used and the recipients of the
Registrant's common stock were the shareholders of the
acquired company. The shares issued were not
registered under the Securities Act of 1933, as amended,
pursuant to the exemption contained in Rule 506 of
Regulation D of such Act.
On January 29, 1999, the Company issued
approximately 681,000 shares of its common stock in
connection with an acquisition of all the outstanding
capital stock of a privately-held company. The form of
transaction was an exchange of common stock through
a statutory merger. No underwriters were used and
the recipients of the Company's common stock were the
shareholders of the acquired company. The shares
issued were not registered under the Securities Act of
1933, as amended, pursuant to the exemption contained
in Section 3(a)(10) of such Act.
In addition, the Company acquired the German
distributor of its I-Bus operation in exchange for
approximately 114,000 shares of Company common
stock. The form of transaction was an exchange of
common stock. No underwriters were used and the
recipient of the Company's common stock was the sole
shareholder of the acquired company. The shares
issued were not registered under the Securities Act of
1933, as amended, pursuant to the exemption contained
in Regulation S of such Act.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Registrant's 1998 Annual Meeting of Shareholders was
held on January 27, 1999. At the meeting, Karl M. Samualian and
Carlton J. Eibl were elected as Class III directors for terms expiring
at the 2001 Annual Meeting of Shareholders. Directors Kenneth F.
Potashner, Thomas L. Horgan and and Mark Rossi continue to
serve as directors with terms expiring at the 1999 and 2000 Annual
Meetings of Shareholders.
In addition, the Registrant's shareholders approved an
amendment to the Company's 1995 Stock Option Plan, increasing
the number of shares reserved for options thereunder by 700,000
shares and an amendment to the Company's Director Stock Option
Plan to increase the initial number of shares under options granted
to a new director from 6,000 to 10,000 and the number of shares
under options granted annually to continuing directors from 2,000
to 3,000 shares.
The following numbers of votes were cast "for" and to
"withhold authority to vote for" on the election of the two directors
elected as Class III directors at the meeting:
Karl M. Samuelian For: 7,250,616 Withhold Authority: 420,240
Carlton J. Eibl For: 7,303,084 Withhold Authority: 367,772
The vote on the approval of the amendment to the
Company's 1995 Stock Option Plan was as follows:
For: 3,972,360
Against: 984,487
Abstain: 40,613
Broker non-votes: 2,673,386
The vote on the approval of the amendment to the
Company's Director Stock Option Plan was as follows:
For: 6,156,063
Against: 1,419,934
Abstain: 94,859
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
27 - Financial Data Schedule
(b) Reports on Form 8-K
-------------------
On November 13, 1998, the Company filed a report on
Form 8-K to report that the Company signed a letter of
intent to acquire all the outstanding capital stock of
Space Electronics Incorporated ("SEi"). In January
1999, the Company completed the acquisition and
acquired all the outstanding capital stock of SEi.
SIGNATURE
Pursuant to the requirements 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.
MAXWELL TECHNOLOGIES, INC.
March 17, 1999 /s/ Gary Davidson
- --------------------------------- --------------------------
Date Gary Davidson, Chief Financial
Officer and Authorized Officer
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MAXWELL
TECHNOLOGIES, INC.'S CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS,
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS AND CONSOLIDATED CONDENSED
BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS.
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