-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T+2O4P+o7H+kiWGtPWdkjt96UC4bDj9lZdxW1kNcAOf6rNi1OBIaIPg34RMIDh+8 qSRKqc1ts+AL9tccLVFxbQ== 0000912057-00-014028.txt : 20000329 0000912057-00-014028.hdr.sgml : 20000329 ACCESSION NUMBER: 0000912057-00-014028 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXWELL TECHNOLOGIES INC CENTRAL INDEX KEY: 0000319815 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 952390133 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-15477 FILM NUMBER: 581093 BUSINESS ADDRESS: STREET 1: 9275 SKY PARK COURT CITY: SAN DIEGO STATE: CA ZIP: 92123 BUSINESS PHONE: 8582795100 MAIL ADDRESS: STREET 1: 8888 BALBOA AVE STREET 2: 8888 BALBOA AVE CITY: SAN DIEGO STATE: CA ZIP: 92123 FORMER COMPANY: FORMER CONFORMED NAME: MAXWELL LABORATORIES INC /DE/ DATE OF NAME CHANGE: 19920703 10-K405 1 FORM 10-K405 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K (MARK ONE) / / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED ____________________ OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM AUGUST 1, 1999 TO DECEMBER 31, 1999 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 February 29, 2000, based on the closing price at which the Common Stock was sold on Nasdaq as of February 29, 2000, was $157,125,553. The number of shares of the Registrant's Common Stock outstanding as of February 29, 2000 was 9,753,420 shares. ================================================================================ MAXWELL TECHNOLOGIES, INC. INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE TRANSITION PERIOD FROM AUGUST 1, 1999 TO DECEMBER 31, 1999
PAGE ------- PART I Item 1. Business.......................................................................................... 1 Item 2. Properties........................................................................................ 20 Item 3. Legal Proceedings................................................................................. 21 Item 4. Submission of Matters to a Vote of Security Holders............................................... 21 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................. 22 Item 6. Selected Consolidated Financial Data.............................................................. 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 24 Item 7a. Quantitative and Qualitative Disclosures about Market Risk........................................ 36 Item 8. Consolidated Financial Statements................................................................. 36 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 61 PART III Item 10. Directors and Executive Officers of the Registrant................................................ 61 Item 11. Executive Compensation............................................................................ 63 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................... 72 Item 13. Certain Relationships and Related Transactions.................................................... 72 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................. 73
i 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. EFFECTIVE WITH CALENDAR YEAR 2000, THE COMPANY HAS CHANGED ITS FISCAL YEAR TO A 12-MONTH PERIOD ENDING DECEMBER 31. AS USED IN THIS FORM 10-K, THE TERM FISCAL YEAR SHALL REFER TO PRIOR FISCAL YEARS CONSISTING OF 12-MONTH PERIODS ENDED JULY 31. THE TERM "CURRENT FISCAL YEAR" SHALL REFER TO THE 12-MONTH PERIOD ENDING DECEMBER 31, 2000. THE FIVE-MONTH PERIOD AUGUST 1 - DECEMBER 31, 1999 IS REFERRED TO IN THIS FORM 10-K AS THE "SHORT FISCAL 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 power and computing to develop and market products and services for customers in multiple industries, including energy, satellite, defense, telecommunications, consumer electronics, medical and bioprocessing markets. During the Short Fiscal Year, the Company adopted a plan to restructure its operations (the "Restructuring Plan") and to change its fiscal year to a calendar year effective January 1, 2000. This Restructuring Plan (i) consolidates certain commercial business operations and improves their manufacturing and other operational capabilities, (ii) focuses the defense contracting business on pulsed power systems and computer-based analysis for government and national laboratories, (iii) focuses the application of PUREBRIGHT-Registered Trademark- technology on bioprocessing, medical and consumer water markets, and (iv) provides for the sale of certain non-strategic business operations. Beginning with the Current Fiscal Year, the Company has combined its industrial computer business and its power quality business. The Company has also combined three components businesses - POWERCACHE-TM- ultracapacitors, electromagnetic interference ("EMI") filters and other ceramic capacitor products and radiation-hardened microelectronics - into a commercial, high-reliability electronic components group. The Company has focused its defense contracting business on pulsed power systems and computer-based analysis for government and national laboratories. Maxwell's PurePulse Technologies subsidiary will concentrate on significant opportunities in the application of PUREBRIGHT technology to pathogen inactivation in medical and bioprocessing markets and to consumer water applications. Finally, the Company has initiated the sale of its businesses involving high voltage wound film capacitors, high voltage power supplies, time card and job cost accounting software and glass-to-metal seals. On February 29, 2000, the Company sold the high voltage wound film capacitors and high voltage power supplies businesses for cash of $3.5 million. 1 PRODUCTS AND SERVICES POWER AND COMPUTING SYSTEMS Since the early 1990s the Company has designed, manufactured and sold custom, semi-custom and standard industrial computer systems and subsystems through its I-Bus, Inc. subsidiary, primarily to original equipment manufacturers ("OEMs") for incorporation into the OEMs' products. In recent years, the Company has added industrial computer operations in the United Kingdom, France and Germany and has become a major supplier of industrial computer products throughout Europe. In fiscal year 1998, the Company added a line of custom power quality protection products, including power conditioning units, power distribution units and uninterruptible power supplies, through the acquisition of San Diego-based Phoenix Power Systems, Inc. As part of the Restructuring Plan, the Company is integrating the operations of I-Bus, Inc. with those of Phoenix Power Systems, Inc. ("I-Bus/Phoenix"). The new I-Bus/Phoenix operation will expand the former industrial computer product line with complementary power quality products and broaden the global reach of the power quality products. The Company is combining the San Diego operations of these two subsidiaries into a single facility in San Diego. The new facility is being designed for highly-efficient manufacturing, with improved processes, improved personnel training and more disciplined cost control practices. INDUSTRIAL COMPUTERS. 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 I-Bus/Phoenix product line ranges from enclosures, CPU boards and backplanes to fully integrated and highly customized computer systems. This product line primarily employs passive backplane architecture, complemented by a newly-introduced CompactPCI line of products. The Company's custom and semi-custom components and systems are design-intensive applications. All of the I-Bus/Phoenix products are based on Intel's x86 and Pentium architectures and are PC-compatible. The 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 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 I-Bus/Phoenix 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 products employ several industry standard buses, form factors and interfaces, which enable OEMs to integrate the products with many widely available and economical third party products. The 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 industrial computer 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, I-Bus/Phoenix is a major participant in the European market, and reflecting this fact, approximately 35% of fiscal year 1999 sales of industrial computers and subsystems were generated in Europe. 2 POWER QUALITY. The I-Bus/Phoenix power quality products consist of power distribution units, power conditioners and inverters, uninterruptible power supplies ("UPS") and other power protection products. These products are designed and engineered by the Company for customer applications primarily in the medical and telecommunications markets. Medical applications include power distribution units for medical imaging equipment and UPS products for hospital equipment. An increasing portion of the sales in the medical market, including a major program in fiscal year 1999 involving power distribution units for medical imaging products, are to OEMs which incorporate the product into larger systems. In the telecommunications market, I-Bus/Phoenix supplies power quality protection and power conditioning systems, often through private label arrangements, for broadcasting stations, remote transmitting sites, telecom base stations and similar applications. Through private label arrangements and sales to OEMs, I-Bus/Phoenix supplies power distribution units and UPS products for industrial applications in the power and energy industries world-wide. ELECTRONIC COMPONENTS The Restructuring Plan organizes a high-reliability electronic components group (the "Electronic Components Group") within the Company by combining its POWERCACHE ultracapacitor business, its Sierra-KD EMI filter and ceramic capacitor business and its Space Electronics, Inc. ("SEi") high-reliability and radiation-hardened microelectronics business. These businesses involve manufacturing high-reliability electronic components based on the Company's core competencies in power and computing. During the Current Fiscal Year the Company will integrate the POWERCACHE ultracapacitor business and SEi microelectronics components business into one manufacturing site in San Diego, while the EMI filters and ceramic capacitors will continue to be manufactured at the Company's facility in Carson City, Nevada. Both facilities are being designed for highly-efficient manufacturing, improved processes, improved personnel training and more disciplined cost control practices. ULTRACAPACITORS. The Electronic Components Group is developing the POWERCACHE ultracapacitor to provide bursts of power for applications that require a rapid injection of energy. The POWERCACHE 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 size to cells measuring 2" x 2" x 6", while maintaining the same high energy storage per unit volume. The POWERCACHE ultracapacitors can also be linked together in modules to supply higher power for applications such as automotive and power quality systems. In fiscal year 1998, the Company entered into a collaborative 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 sharing of POWERCACHE ultracapacitor technology, sharing of ongoing product development by both parties and the non-exclusive licensing right for EPCOS to manufacture products based on POWERCACHE 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 POWERCACHE ultracapacitors. The Electronic Components Group received initial license fees and is entitled to on-going royalties under the agreement. The Company has identified consumer and industrial electronics markets as the primary initial markets for its POWERCACHE ultracapacitors, which include 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 and hand-held computers, emergency lights, and bar code scanners. These devices require the small, sub-matchbook size POWERCACHE 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 Electronic Components Group is pursuing design-in wins for its ultracapacitors 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 Short Fiscal Year, the Electronic Components Group installed and began the process of qualifying an automated manufacturing line for small ultracapacitors, which will substantially increase the production capacity for that device. 3 The Company also has identified power quality and automotive as potential markets for its ultracapacitor. In the power quality arena, the POWERCACHE 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's I-Bus/Phoenix subsidiary for sensitive medical applications, such as MRI machines. In conventional combustion engine vehicles, the POWERCACHE ultracapacitor has potential applications such as catalytic converter pre-heating, air bag deployment, seat belt tightening and engine starting. In electric and hybrid vehicles, the POWERCACHE 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. EMI FILTERS AND CERAMIC CAPACITORS. The Electronic Components Group designs, manufactures and sells a line of ceramic capacitor 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. These products block EMI from entering an electronic device at the opening used by, for example, power leads or sensors. The Company supplies these filters to major medical device manufacturers, currently for use with implantable pacemakers and defibrillators, but the devices could potentially also be used with other cardiac devices, hearing aids and other implantable electronic devices. Similar filters are supplied for military and commercial space programs requiring high reliability broad-based EMI filters. The Electronic Components Group also manufactures a line of high reliability ceramic capacitors capable of operating at high voltages and high temperatures. These products are used in applications ranging from aerospace and space to oil services and exploration. MICROELECTRONIC COMPONENTS. In fiscal year 1999, Maxwell acquired SEi, a San Diego-based designer and manufacturer of high reliability, radiation hardened microelectronic components and assemblies primarily for the space market. Through this SEi unit, the Electronic Components Group provides integrated circuits ("IC"s) and multi-chip modules designed and adapted for space flight and other high reliability applications. In the space market, SEi products are used in satellites which experience extreme environmental conditions, often in radiation-intense orbits. The Electronic Components Group uses proprietary technology, including its RAD-PAK-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 based on Intel's Pentium processor. GOVERNMENT SYSTEMS POWER SYSTEMS AND SIMULATORS. Through its Systems Division, Maxwell is engaged in a variety of research and development programs in pulsed power, pulsed power systems design and construction, and weapons effects simulation. These services are primarily supplied to the United States government and its agencies including the Air Force and the Defense Threat Reduction Agency. The Systems Division also provides systems and services to national laboratories and industrial and defense companies. The Systems Division typically performs research and development under contracts that allow the Company to apply developed technology in commercial markets. The Systems Division 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 Systems Division operates and maintains five simulation systems at its San Leandro facility and one such system in San Diego. The San Diego system is scheduled for closure in calendar year 2000. The Systems Division also has developed power quality systems and power conditioning systems. 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. The System Division's operation in Albuquerque, New Mexico, provides 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. 4 COMPUTER-BASED ANALYTIC SERVICES AND SOFTWARE. Maxwell provides complex computer-based analytic services, primarily to the U.S. Department of Defense ("DOD"), and sells various commercial software products. A primary focus 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 Systems Division 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. The Company's space physics group has begun working with commercial satellite developers to solve complex space environment problems affecting existing and planned satellite constellations. STERILIZATION AND PURIFICATION SYSTEMS The Company's PurePulse Technologies, Inc. subsidiary ("PurePulse") applies PUREBRIGHT intense broad spectrum pulsed light technology to kill viruses and other microorganisms in water, blood plasma and other biopharmaceutical and medical products, and on medical product packaging material. Tests conducted during fiscal year 1999 confirmed that PUREBRIGHT technology can be effective in deactivating microorganisms, including viruses and other pathogens, in blood plasma products and other biopharmaceutical products. The ability to destroy viruses without harming beneficial proteins would open significant opportunities for PUREBRIGHT in the biotechnology industry, ranging from treatment of biologically derived products to production of vaccines. PurePulse 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. Such systems are planned by la Calhene to be introduced to the market place in the Current Fiscal Year. Systems based on PUREBRIGHT technology can also purify water, including deactivating the cryptosporidium organism, which is not affected by many other water treatment techniques, either at the point of entry into a facility, at the point of use within a facility or as part of the in-flow process of production and packaging. The technology is flexible enough to treat bottled water after it has been packaged and sealed. PurePulse believes a significant market exists for consumer water applications of PUREBRIGHT, and penetration of this market will require development and marketing assistance from one or more strategic partners. As part of the Restructuring Plan, PurePulse will pursue PUREBRIGHT applications in the medical, biopharmaceutical and consumer water markets. Other PUREBRIGHT applications involving food and food packaging, industrial water applications and niche markets in medical packaging, as well as applications involving the COOLPURE-Registered Trademark- pulsed electric field technology, will be de-emphasized and possibly sold or licensed. Maxwell intends to seek equity financing directly into PurePulse to finance its product development activities and operations. DISCONTINUED OPERATIONS As part of the Restructuring Plan, the Company decided to sell its high voltage wound film capacitor business and its line of high voltage power supplies. These capacitor and power supply products are predominantly used in the military and medical industries. On February 29, 2000, the Company sold these businesses for cash of $3.5 million. The Company's Restructuring Plan also includes the sale of its Maxwell Business Systems subsidiary, which markets time card and job cost accounting software, as well as its glass-to-metal seal business located in Minnesota. The Company is currently discussing potential terms of sale with parties who have expressed interest in considering a purchase of these businesses. 5 SALES AND MARKETING The Company's commercial products sales teams consist of sales personnel based in the Company's operating facilities and in geographically-dispersed sales offices. These sales teams are supported by scientists, application engineers and technical specialists. Sales and marketing for the Company's products in the United States, and for industrial computer products in Europe, are 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 Electronic Components and the 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 technology and 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 products and establish avenues to obtain product validation. In its Government Systems segment, the Company's sales and marketing are 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. COMPETITION Each of Maxwell's business operations has competitors, many of whom 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 target markets for the Company's emerging technologies, the Company faces competition from products utilizing alternative technologies. The Company's primary competition in its passive backplane industrial computer target markets include RadiSys Corporation, Diversified Technology, Inc., American Advantech Corp., ICS Advent, Teknor Applicom, a Kontron company, Trenton Technology, Inc., among others, resulting in a highly fragmented market in which no one entrant is dominant. In addition, there are industrial computers and subsystems divisions within several large OEM operations. Competitive factors in this market include price, custom 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 widely 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. The power quality market for I-Bus/Phoenix products is also highly fragmented, with no single dominant participant. In the medical and telecommunications industries in which I-Bus/Phoenix product offerings are concentrated, the Company competes with several participants, including Liebert Corporation, OnLine Power, Inc., Teal Electronics Corporation and the Square D Corporation. The Company believes it competes favorably in these markets on price, quality and functionality, and that it has competitive advantages in those segments of the markets that emphasize custom design expertise, advanced technology and rapid engineering turnaround. 6 Although a number of companies are 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 believes that with increasing volume, it will achieve cost reductions sufficient to enable it to compete aggressively on price. 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 the feedthrough for an implantable medical device provides a competitive advantage by allowing the manufacture of a smaller sized device. In radiation-hardened 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 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. The Company competes with high reliability packaging houses such as Austin, White Microelectronics, Teledyne and Sac Tec for monolithic and multi-chip modules. Proprietary technology enables the Company to compete using unique solutions on the most advanced commercial electronic circuits. The Company's competition in the government systems business ranges from small competitors with expertise in specialized technology areas to large, high technology government contractors such as SAIC, Titan and certain operations of ITT. In addition, the Company faces growing competition in the x-ray simulation and weapons effects business and various analytical and research and development activities from U.S. National Laboratories. Much of this business is under cost reimbursement-type contracts in which the cost structure of the enterprise is an important competitive factor, as well as superior technology and a strong track record of performance. The Company believes it competes favorably with respect to these factors. The Company does not believe that its PUREBRIGHT products have direct competitors in the application of pulsed broad spectrum light to treat water or sterilize medical or pharmaceutical products. Pulsed light does, however, compete with many other established and developing technologies. Alternative technologies for the sterilization, disinfection and purification of medical and pharmaceutical products including technologies such as autoclave heat sterilization, solvent detergents and other chemical and gamma radiation. For water treatment, the Company faces competition from many alternative, and often less expensive, technologies, including filtration systems, reverse osmosis, chemicals, distillation technology and continuous wave ultraviolet light systems. MANUFACTURING AND SUPPLIERS Maxwell currently performs design, assembly and systems integration for its Power and Computing Systems and Sterilization and Purification Systems segments and conducts material and component manufacturing in its Electronic Components segment. 7 The Company generally purchases components and materials, such as electronic 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 it 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 is currently laying out two new manufacturing facilities in San Diego, one for I-Bus/Phoenix and the other for the Electronic Components Group. The new facilities will improve the manufacturing capabilities and capacity for the Company's commercial products. RESEARCH AND DEVELOPMENT The Company conducts internally-funded engineering, research and development to refine and expand its products and services. For the Short Fiscal Year and fiscal years 1999, 1998, and 1997 expenditures for internally-funded research and development were approximately $3.5 million, $7.9 million, $7.4 million and $4.1 million, respectively. In addition, the Company performs substantial research and development work funded by research grants and customers, including agencies of the United States government and commercial companies under strategic partnership arrangements. PATENTS, LICENSES AND TRADEMARKS An important element in the Company's success is 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. 8 BACKLOG The Company's funded backlog for continuing operations as of December 31, 1999, July 31, 1999 and July 31, 1998 amounted to approximately $55 million, $56 million and $38 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. Additional unfunded backlog related to contracts awarded was approximately $57 million, $19 million and $34 million at December 31, 1999, July 31, 1999 and July 31, 1998, respectively. GOVERNMENT BUSINESS A substantial portion of the Company's sales from continuing operations (approximately 30% in the Short Fiscal Year and 31%, 32% and 33% in fiscal years 1999, 1998 and 1997, respectively) 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 simulation machine in the Company's San Diego facility will cease operations in the Current Fiscal Year, and the operation of the Company's remaining simulation machines remains subject to curtailment. The Company's government contracts may be performed over a 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. In such event, the government agency is generally obligated 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 Government Systems business segment approximately 81%, 77%, 82% and 85% of sales were derived from cost-plus contracts in the Short Fiscal Year and fiscal years 1999, 1998 and 1997, 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 U.S. Food and Drug Administration ("FDA") regulates the pre-clinical and clinical testing, manufacture, labeling, storage, distribution and promotion of food and medical products and processes. The Company is supporting customers in obtaining FDA 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. 9 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. 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 was $11.4 million in the Short Fiscal Year, and $31.0 million, $19.4 million, and $11.4 million in fiscal years 1999, 1998 and 1997, respectively. Of the total foreign sales in the Short Fiscal Year and fiscal years 1999 and 1998, $5.9 million, $13.1 million and $8.3 million, respectively, were attributable to sales to customers located in the United Kingdom. In fiscal year 1997, $4.0 million of sales were attributable to customers in Japan. SEGMENTS The Company's business segments are discussed in Note 12 of Notes to Consolidated Financial Statements included as Item 8 herein. The Company currently operates in four business segments: Power and Computing Systems (includes design and manufacture of standard, custom and semi-custom industrial computer modules, platforms and fully-integrated systems and power quality systems); Electronic Components (includes design, development and manufacture of high-reliability electronic components, including products such as ultracapacitors, EMI filter capacitors and radiation-hardened microelectronics); Government Systems (includes research and development and programs in pulsed power, pulsed power systems design and construction, weapons effects simulation and computer-based analytic services) and Sterilization and Purification Systems (includes sterilization and purification systems to reduce or eliminate microbial contamination). Also see "Management's Discussion and Analysis of Financial Condition and Results of Operations" included as Item 7 herein. EMPLOYEES At December 31, 1999, the Company's continuing operations had 896 employees, including 62 employees with Ph.D. degrees and 70 others with post-graduate degrees. The Company had another 179 employees at operations to be discontinued. None of the Company's employees is represented by a labor union. Maxwell considers its relations with its employees to be good. 10 RISK FACTORS 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. WE MAY NOT ACHIEVE THE GOALS OF OUR RESTRUCTURING PLAN Our Restructuring Plan is designed to improve the manufacturing and other operational capabilities of our commercial businesses. This involves combining several separate businesses into two new commercial divisions and moving from eight facilities in San Diego into four. To achieve our financial goals, particularly in the next few quarters, these combinations must be done successfully and on schedule, and we must achieve our operating goals of reducing costs, increasing efficiency and improving quality. A number of factors could affect our ability to reach these goals, including our ability to accomplish the following: - obtain and build out new facilities at the right time and at a reasonable cost; - sublease or terminate lease-hold obligations of excess facilities on a timely basis; - combine separate employee organizations into single organizations; - move manufacturing and assembly operations without seriously delaying regular product shipments; - combine manufacturing facilities to reduce costs and improve efficiency; and - redesign our manufacturing processes for improved quality and productivity. 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. 11 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 and improving our manufacturing capabilities; and - developing extensions of our existing products and services into new applications. 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 OEMs' 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. WE RELY 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 - 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. 12 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. 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; - 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. 13 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 two of our past five full fiscal years, and during the five-month period August 1 through December 31, 1999. 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: - our success in achieving the goals of our Restructuring Plan; - 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. 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. 14 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: - 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, do 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. 15 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. 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. 16 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. 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; - 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. 17 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. 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 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. 18 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. 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 FDA because they are used for food storage or in medical devices. These products include our 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. 19 ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BYLAWS 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 seven 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. Under the Restructuring Plan, the Company intends to continue to occupy the facilities it owns and reduce the number of leased facilities in San Diego to three facilities with a total of 96,000 square feet of office, engineering and manufacturing space. 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, and Albuquerque, New Mexico. 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 current facilities (prior to completion of the Restructuring Plan) 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. 20 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. 21 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market under the symbol "MXWL." The following table sets forth, for the fiscal periods indicated, the high and low closing sales prices for the Common Stock as reported by the Nasdaq National Market.
HIGH LOW ---- --- SHORT FISCAL YEAR November 1, 1999 to December 31, 1999 $11-1/2 $ 7-7/8 Quarter ended October 31, 1999 26-15/16 10-3/16 FISCAL YEAR 1999 Quarter ended July 31, 1999 $30-11/16 $18-5/8 Quarter ended April 30, 1999 34-1/2 18-3/16 Quarter ended January 31, 1999 40-1/4 23-3/8 Quarter ended October 31, 1998 26-3/8 19-1/4 FISCAL YEAR 1998 Quarter ended July 31, 1998 $28-7/8 $22 Quarter ended April 30, 1998 32-5/16 25 Quarter ended January 31, 1998 36-3/8 21 Quarter ended October 31, 1997 38-1/2 21-3/4
The last reported sale price of the Common Stock on the Nasdaq National Market on March 15, 2000, was $16.50 per share. As of December 31, 1999, there were 507 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. 22 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated statement of operations data for the Short Fiscal Year and for the fiscal years ended July 31, 1999, 1998 and 1997, and consolidated balance sheet data as of December 31, 1999 and July 31, 1999 and 1998 are derived from the Consolidated Financial Statements of the Company and Notes thereto included in this Form 10-K, which have been audited by Ernst & Young LLP, independent auditors. The following selected consolidated statement of operations data for the fiscal years ended July 31, 1996 and 1995 and consolidated balance sheet data as of July 31, 1997, 1996 and 1995 are derived from audited consolidated financial statements of the Company not included in this Form 10-K. All selected consolidated financial data presented has been restated to reflect certain businesses to be divested by the Company as discontinued operations. 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. CONSOLIDATED FINANCIAL STATEMENTS appearing elsewhere in this Form 10-K.
FIVE-MONTH PERIOD ENDED DECEMBER 31, YEARS ENDED JULY 31, ----------------- ------------------------------------------------------------- 1999 1999 1998 1997 1996 1995 --------- --------- --------- --------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Continuing Operations: Sales......................... $ 52,170 $153,686 $123,358 $101,899 $ 76,534 $ 68,088 Cost of sales................. 41,382 105,039 81,554 65,669 56,548 49,098 -------- -------- -------- -------- -------- -------- Gross profit.................. 10,788 48,647 41,804 36,230 19,986 18,990 Operating expenses: Selling, general and administrative............ 16,436 34,398 26,677 20,694 17,378 13,702 Research and development.... 3,451 7,893 7,375 4,061 3,083 3,261 Restructuring, acquisition and other charges............. 4,953 3,050 6,339 -- 5,703 -- -------- -------- -------- -------- -------- -------- Total operating expenses.. 24,840 45,341 40,391 24,755 26,164 16,963 -------- -------- -------- -------- -------- -------- Operating income (loss)....... (14,052) 3,306 1,413 11,475 (6,178) 2,027 Interest expense.............. (112) (404) (338) (220) (368) (361) Interest income and other, net 17 647 1,471 238 395 871 -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle........ (14,147) 3,549 2,546 11,493 (6,151) 2,537 Provision (credit) for income taxes......................... (5,474) (5,582) 413 1,473 1,894 118 Minority interest in net income (loss) of subsidiaries...... (548) 427 80 54 50 86 -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations.................. (8,125) 8,704 2,053 9,966 (8,095) 2,333 Discontinued operations, net of tax: Income (loss) from operations. (2,901) 2,364 (3,760) (3,459) (3,322) (1,880) Provision for estimated loss on disposal.................... (2,065) -- -- -- -- -- -------- -------- -------- -------- -------- -------- (4,966) 2,364 (3,760) (3,459) (3,322) (1,880) Cumulative effect of change in accounting principle.......... -- -- -- -- 2,569 -- -------- -------- -------- -------- -------- -------- Net income (loss)................ $(13,091) $ 11,068 $ (1,707) $ 6,507 $(13,986) $ 453 ======== ======== ======== ======== ======== ======== Basic net income (loss) per share: Income (loss) from continuing operations.................. $ (0.85) $ 0.93 $ 0.24 $ 1.47 $ (1.28) $ 0.35 Income (loss) from discontinued operations.................. (0.52) 0.25 (0.44) (0.51) (0.52) (0.28) Cumulative effect of change in accounting principle........ -- -- -- -- (0.41) -- -------- -------- -------- -------- -------- -------- Basic net income (loss) per share $ (1.37) $ 1.18 $ (0.20) $ 0.96 $ (2.21) $ 0.07 ======== ======== ======== ======== ======== ======== Diluted income (loss) per share: Income (loss) from continuing operations.................. $ (0.85) $ 0.88 $ 0.22 $ 1.33 $ (1.28) $ 0.35 Income (loss) from discontinued operations.................. (0.52) 0.24 (0.41) (0.46) (0.52) (0.28) -------- -------- -------- -------- -------- -------- Cumulative effect of change in accounting principle........ -- -- -- -- (0.41) -- -------- -------- -------- -------- -------- -------- Diluted net income (loss) per share $ (1.37) $ 1.12 $ (0.19) $ 0.87 $ (2.21) $ 0.07 ======== ======== ======== ======== ======== ========
23
JULY 31, DECEMBER 31, -------------------------------------------------------------------- 1999 1999 1998 1997 1996 1995 ----------- ---------- ---------- ---------- ---------- ---------- CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS) Total assets......................... $ 105,781 $ 122,291 $ 105,702 $ 50,774 $ 44,177 $ 31,943 Cash and cash equivalents............ $ 4,065 $ 8,832 $ 21,629 $ 2,321 $ 2,446 $ 4,137 Long-term debt, including current portion............................ $ 459 $ 3,668 $ 2,434 $ 1,762 $ 2,193 $ 3,250 Shareholders' equity at year-end..... $ 84,416 $ 97,168 $ 80,153 $ 32,617 $ 23,243 $ 36,666 Shares outstanding at year-end....... 9,564 9,557 9,210 6,969 6,513 6,204
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company applies industry-leading capabilities in power and computing to develop and market products and services for customers in multiple industries, including energy, satellite, defense, telecommunications, consumer electronics, medical and bioprocessing markets. In November 1999, the Company's Board of Directors adopted a resolution to change the Company's fiscal year to a calendar year effective January 1, 2000. The Company previously reported results on a fiscal year of August 1 through July 31. The following discussion includes the five-month transition period August 1 to December 31, 1999 (the "Short Fiscal Year") and the previously reported fiscal years ended July 31, 1999, 1998 and 1997. See Note 1 of the Notes to Consolidated Financial Statements. During the Short Fiscal Year, the Company adopted a plan to restructure its operations (the "Restructuring Plan") and to change its fiscal year to a calendar year effective January 1, 2000. This Restructuring Plan (i) consolidates certain commercial business operations and improves their manufacturing and other operational capabilities, (ii) focuses the defense contracting business on pulsed power systems and computer-based analysis for government and national laboratories, (iii) focuses the application of PUREBRIGHT technology on bioprocessing, medical and consumer water markets, and (iv) provides for the sale of certain non-strategic business operations. Beginning with the Current Fiscal Year, the Company has combined its industrial computer business and its power quality business. The Company has also combined three components businesses - POWERCACHE ultracapacitors, EMI filters and other ceramic capacitor products and radiation-hardened microelectronics - into a commercial, high-reliability electronic components group. The Company has focused its defense contracting business on pulsed power systems and computer-based analysis for government and national laboratories. Maxwell's PurePulse Technologies subsidiary will concentrate on significant opportunities in the application of PUREBRIGHT technology to pathogen inactivation in medical and bioprocessing markets and to consumer water applications. Finally, the Company has initiated the sale of its businesses involving high voltage wound film capacitors, high voltage power supplies, time card and job cost accounting software and glass-to-metal seals. Results of operations for all prior fiscal years have been restated to report these businesses as discontinued operations. On February 29, 2000, the Company sold the high voltage wound film capacitors and high voltage power supplies businesses for cash of $3.5 million. The Company generates revenue from the sale of commercial products and from performing contract research and other projects for the United States government and other customers. From time to time, the Company also generates revenue from licensing technology and other rights to strategic partners. Sales and marketing for the Company's products in the United States, and for industrial computers in Europe, are 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. 24 The Company's operating expenses are substantially impacted by selling, general and administrative activities and by research and development activities. Selling 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 accordance with the requirements and guidelines of Statement of Financial Accounting Standards No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("Statement No. 131"), Maxwell's operations have been classified into business segments. In connection with the Company's Restructuring Plan, the Company has integrated its businesses into new operating divisions. Accordingly, the Company has defined four new reporting segments as follows (prior year segment information has been restated to conform to the new segmentation): POWER AND COMPUTING SYSTEMS As part of its Restructuring Plan, the Company is integrating its I-Bus, Inc. and Phoenix Power Systems, Inc. subsidiaries ("I-Bus/Phoenix"). The new I-Bus/Phoenix operation will expand the industrial computer product line of I-Bus, Inc. with complementary power quality products and broaden the global reach of the power quality products. As part of the Restructuring Plan, the Company is combining the San Diego operations of these two subsidiaries into a single facility in San Diego. The new San Diego facility is being designed for highly-efficient manufacturing, with improved processes, improved personnel training and more disciplined cost control practices. 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 I-Bus/Phoenix product line ranges from enclosures, CPU boards and backplanes to fully integrated and highly customized computer systems. This product line primarily employs passive backplane architecture, complemented by a newly-introduced CompactPCI line of products. The I-Bus/Phoenix power quality products consist of power distribution units, power conditioners and inverters, uninterruptible power supplies ("UPS") and other power protection products. These products are designed and engineered by the Company for customer applications primarily in the medical and telecommunications markets. ELECTRONIC COMPONENTS The Restructuring Plan organizes a high-reliability electronic components group (the "Electronic Components Group") within the Company by combining its POWERCACHE ultracapacitor business, its Sierra-KD EMI filter and ceramic capacitor business and its Space Electronics, Inc. ("SEi") high-reliability and radiation-hardened microelectronics business. These businesses involve manufacturing high-reliability electronic components based on the Company's core competencies in power and computing. During the Current Fiscal Year the Company will integrate the POWERCACHE ultracapacitor business and microelectronics components business into one manufacturing site in San Diego, while the EMI filters and ceramic capacitors will continue to be manufactured at the Company's facility in Carson City, Nevada. Both facilities are being designed for highly-efficient manufacturing, with improved processes, improved personnel training and more disciplined cost control practices. 25 The Components Group is developing the POWERCACHE ultracapacitor to provide bursts of power when a rapid injection of energy is required for an application. The POWERCACHE 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 size to cells measuring 2" x 2" x 6", while maintaining the same high energy storage per unit volume. The POWERCACHE ultracapacitors can also be linked together in modules to supply higher power for applications such as automotive and power quality systems. The Electronic Components Group designs, manufactures and sells a line of ceramic capacitor 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. These products block EMI from entering an electronic device at the opening used by, for example, power leads or sensors. In fiscal year 1999, Maxwell acquired SEi, a San Diego-based designer and manufacturer of high reliability, radiation hardened microelectronic components and assemblies primarily for the space market. Through this SEi unit, the Electronic Components Group provides integrated circuits and multi-chip modules designed and adapted for space flight and other high reliability applications. In the space market, SEi products are used in satellites which experience extreme environmental conditions, often in radiation-intense orbits. GOVERNMENT SYSTEMS Through its Systems Division, Maxwell is engaged in a variety of research and development programs in pulsed power, pulsed power systems design and construction, and weapons effects simulation. These services are primarily supplied to the United States government and its agencies including the Air Force and the Defense Threat Reduction Agency. The Systems Division also provides systems and services to national laboratories and industrial and defense companies. The Systems Division typically performs research and development under contracts that allow the Company to apply developed technology in commercial markets. STERILIZATION AND PURIFICATION SYSTEMS The Company's PurePulse Technologies, Inc. subsidiary ("PurePulse") applies PUREBRIGHT intense broad spectrum pulsed light technology to kill viruses and other microorganisms in water, blood plasma and other biopharmaceutical and medical products, and on medical product packaging material. As part of the Restructuring Plan, PurePulse will pursue PUREBRIGHT applications in the medical, biopharmaceutical and consumer water markets. Other PUREBRIGHT applications involving food and food packaging, industrial water applications and niche markets in medical packaging, as well as applications involving the COOLPURE-Registered Trademark- pulsed electric field technology, will be de-emphasized and possibly sold or licensed. Maxwell intends to seek equity financing directly into PurePulse to finance its product development activities and operations. 26 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected operating data for the Company, expressed as a percentage of sales.
FIVE-MONTH PERIOD ENDED DECEMBER 31, YEARS ENDED JULY 31, -------------------------- -------------------------------------- 1999 1998 1999 1998 1997 ----------- ---------- ---------- ---------- ---------- Continuing Operations: Sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales.................................. 79.3 70.0 68.3 66.1 64.4 ----------- ---------- ---------- ---------- ---------- Gross profit................................... 20.7 30.0 31.7 33.9 35.6 Operating expenses: Selling, general and administrative.......... 31.5 25.4 22.4 21.6 20.3 Research and development..................... 6.6 5.5 5.1 6.1 4.0 Restructuring, acquisition and other charges. 9.5 0.3 2.0 5.1 -- ----------- ---------- ---------- ---------- ---------- Total operating expenses..................... 47.6 31.2 29.5 32.8 24.3 ----------- ---------- ---------- ---------- ---------- Operating income (loss)........................ (26.9) (1.2) 2.2 1.1 11.3 Interest expense............................... (0.2) (0.3) (0.3) (0.2) (0.2) Interest income and other, net................. -- 0.1 0.4 1.2 0.2 ----------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations before income taxes and minority interest........... (27.1) (1.4) 2.3 2.1 11.3 Provision (credit) for income taxes............ (10.5) 0.2 (3.6) 0.3 1.5 Minority interest in net income of subsidiaries (1.0) 0.2 0.2 0.2 -- ----------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations....... (15.6) (1.8) 5.7 1.6 9.8 Discontinued operations, net of tax: Income (loss) from operations.................. (5.5) (1.4) 1.5 (3.0) (3.4) Provision for estimated loss on disposal....... (4.0) -- -- -- -- ------------ ---------- ---------- ---------- ---------- Net income (loss)................................. (25.1)% (3.2)% 7.2% (1.4)% 6.4% =========== ========== ========== ========== ==========
27 The following table sets forth sales, gross profit and gross profit as a percentage of sales for each of the Company's business segments.
FIVE-MONTH PERIOD ENDED DECEMBER 31, YEARS ENDED JULY 31, ------------------------- -------------------------------------- 1999 1998 1999 1998 1997 ---------- ----------- ---------- ---------- ---------- (DOLLAR AMOUNTS IN THOUSANDS) Power and Computing Systems: Sales..................................... $ 27,720 $ 18,540 $ 65,095 $ 42,848 $ 34,259 Gross profit.............................. 7,998 5,569 20,419 14,560 11,537 Gross profit as a percentage of sales..... 28.9% 30.0% 31.4% 34.0% 33.7% Electronic Components: Sales..................................... $ 7,699 $ 16,310 $ 34,646 $ 32,755 $ 29,477 Gross profit.............................. 146 6,344 11,444 14,134 15,465 Gross profit as a percentage of sales..... 1.9% 38.9% 33.0% 43.2% 52.5% Government Systems: Sales..................................... $ 16,123 $ 17,685 $ 44,556 $ 40,981 $ 31,690 Gross profit.............................. 3,665 2,987 10,889 9,582 6,379 Gross profit as a percentage of sales..... 22.7% 16.9% 24.4% 23.4% 20.1% Sterilization and Purification Systems: Sales..................................... $ 628 $ 3,223 $ 9,389 $ 6,774 $ 6,473 Gross profit (loss)....................... (1,021) 1,838 5,895 3,528 2,849 Gross profit as a percentage of sales..... -- 57.0% 62.8% 52.1% 44.0% Consolidated (from continuing operations): Sales..................................... $ 52,170 $ 55,758 $ 153,686 $ 123,358 $ 101,899 Gross profit.............................. 10,788 16,738 48,647 41,804 36,230 Gross profit as a percentage of sales..... 20.7% 30.0% 31.7% 33.9% 35.6%
SALES In the Short Fiscal Year, sales from continuing operations ("sales") totaled $52.2 million, a decrease of $3.6 million, or 6.4%, from total sales of $55.8 million for the comparable five-month period ended December 31, 1998. In fiscal year 1999, total sales were $153.7 million, an increase of $30.3 million, or 24.5%, from $123.4 million in fiscal year 1998. In fiscal year 1998 sales increased $21.5 million, or 21.1%, to $123.4 million from $101.9 million in fiscal year 1997. International sales totaled $11.4 million, $31.0 million, $19.4 million, and $11.4 million in the Short Fiscal Year and in fiscal years 1999, 1998 and 1997, respectively. Sales in the Short Fiscal Year were lower than in the comparable five-month period ended December 31, 1998 because the Short Fiscal Year included revenue from sales of licenses and other collaborative agreements of only $0.6 million, while the comparable prior period included $4.8 million of such revenue. Revenue from sales of products increased approximately 2% to $51.6 million in the Short Fiscal Year, from $50.7 million in the comparable prior period. Sales in the Short Fiscal Year were negatively impacted by reduced revenues from the wind-down of certain government programs and by economic issues facing certain customers in the commercial satellite and oil markets. Expansion of the Company's industrial computer business in Germany and France in fiscal year 1999 and a full year of sales in fiscal year 1999 from the Company's United Kingdom industrial computer operation, which was acquired in fiscal year 1998, are the primary drivers for the increased international sales in fiscal years 1999 and 1998. Sales in both fiscal years 1999 and 1998 increased over the prior fiscal year in all of the Company's business segments. Sales within each of the Company's business segments is discussed below. 28 POWER AND COMPUTING SYSTEMS. In the Short Fiscal Year, sales in this segment totaled $27.7 million, an increase of $9.2 million, or 50.2%, from sales of $18.5 million in the comparable five-month period ended December 31, 1998. In fiscal year 1999, Power and Computing Systems sales increased $22.3 million, or 51.9%, to $65.1 million from $42.8 million in fiscal year 1998. Domestic sales in this segment are made principally to OEM customers and are primarily derived from the shipment of power and computing systems 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 the Short Fiscal Year, as well as in fiscal year 1999, is primarily attributable to the increase in European sales and an increase in sales of power quality protection and delivery systems, following the fiscal year 1998 acquisition of Phoenix Power Systems, Inc., as well as new design-in wins for customized OEM products, including supply contracts for industrial computers 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. In addition, the Company's recent integration of the industrial computer and power quality businesses should improve the international sales of the power quality products and services. If sales of OEM products do not achieve the levels projected by the OEM, or if OEM projects are curtailed due to consolidations or other market conditions, the Company may be unable to offset such loss of sales. In fiscal year 1998, Power and Computing Systems sales increased $8.5 million, or 25.0%, to $42.8 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 acquisitions of a United Kingdom-based industrial computer company, and San Diego-based Phoenix Power, specializing in power quality conditioning and delivery systems. 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. ELECTRONIC COMPONENTS. In the Short Fiscal Year, Electronic Components sales totaled $7.7 million, a decrease of $8.6 million, or 52.8%, from sales of $16.3 million in the comparable five-month period ended December 31, 1998. The decrease in sales in the Short Fiscal Year resulted partly from the fact that no revenue was received in the Short Fiscal Year from technology licenses and other collaborative agreements, while $3.0 million of such revenue was received in the prior year comparable period in the POWERCACHE ultracapacitor business area. In addition, revenues from customers of the Company's microelectronic components business area in the commercial satellite market decreased in the Short Fiscal Year due to recent economic issues affecting such customers. Also, over-stock issues at its primary medical filter customer and weakness in oil and space markets resulted in a decrease in sales in the Company's EMI filters and ceramic capacitors business area. In the Current Fiscal Year, the Company expects to see improved trends in each of these customer and market areas. In fiscal year 1999, Electronic Components sales increased $1.8 million, or 5.7%, to $34.6 million from $32.8 million in fiscal year 1998. Sales in the EMI filter capacitor businesses contributed to the sales increase in this business segment. In 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 was combined with another 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 provided improved efficiencies and economies of scale in the Company's Carson City, Nevada facility. Partially offsetting the increased product sales, revenue from licenses and collaborative agreements decreased to $3.7 million in fiscal year 1999 from $7.3 million in fiscal year 1998. 29 In fiscal year 1998, Electronic Components sales increased $3.3 million, or 11.1%, to $32.8 million from $29.5 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. GOVERNMENT SYSTEMS. Sales for this segment in the Short Fiscal Year were $16.1 million as compared to $17.7 million for the comparable five-month period ended December 31, 1998. In fiscal year 1999, sales in this segment increased $3.6 million, or 8.7%, to $44.6 million from $41.0 million in fiscal year 1998. In April 1998, the Company acquired Physics International ("PI"), a primarily government-funded pulsed power research and simulation business of Primex Technologies. PI 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. The inclusion of revenues from PI accounted for substantially all of the increase in revenue in this segment in fiscal year 1999 as compared to fiscal year 1998. However, these increases were offset in both fiscal year 1999, and the Short Fiscal Year by 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 prior periods. In fiscal year 1998, Government Systems sales increased $9.3 million, or 29.3%, to $41.0 million from $31.7 million in fiscal year 1997. This increase was in the Company's core, government-funded pulsed power research and development activities, including revenue from PI following the acquisition. A substantial portion of the revenues in this business segment comes from contracts with the DOD and other agencies of the U.S. government. 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 government 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. STERILIZATION AND PURIFICATION SYSTEMS. In the Short Fiscal Year, sales totaled $0.6 million, a substantial decrease from prior periods. Prior year revenues consisted primarily of fees under license agreements with key partners in several strategic business areas. No such agreements occurred in the Short Fiscal Year. The Company is redefining its product strategy and market focus in this segment and, as a result, does not expect significant revenue contribution from either license fees or product sales in the Current Fiscal Year. 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. Revenues in fiscal year 1999 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. GROSS PROFIT In the Short Fiscal Year, the Company's gross profit was $10.8 million, or 20.7% of sales, a substantial decrease from prior years. Reduced sales volumes, specifically, decreases in high margin revenues from licenses and other collaborative agreements, and certain write-offs of inventories determined to be excess or obsolete are the primary reasons for the reduced gross margins. 30 In fiscal year 1999, the Company's gross profit increased $6.8 million, or 16.4%, to $48.6 million as compared to $41.8 million in fiscal year 1998. In fiscal year 1998, gross profit increased $5.6 million, or 15.4%, to $41.8 million from $36.2 million in fiscal year 1997. As a percentage of sales, gross profit was 31.7% in fiscal year 1999 compared to 33.9% in fiscal year 1998 and 35.6% in fiscal year 1997. Reductions in gross margins as a percentage of sales from fiscal year 1997 to fiscal years 1998 and 1999 result from a combination of factors, including: an increase in revenues from sales of full systems with significant third party content, upon which lower overall gross profit margins are realized; a decrease in high margin development funding and technology license fees; and changes in the mix of products and services sold. The Company believes that its Restructuring Plan, which consolidates certain commercial business operations and improves their manufacturing and other operational capabilities, will result in an improvement in the gross profit margins achieved by the Company. Gross profit by segment is discussed below. POWER AND COMPUTING SYSTEMS. In the Short Fiscal Year, Power and Computing Systems gross profit totaled $8.0 million, or 28.9% of sales, compared to $5.6 million, or 30% of sales for the five-month period ended December 31, 1998. This decrease in gross margin as a percentage of sales is primarily attributable to a lower margin mix of product sales in the Short Fiscal Year and certain write-offs of excess and obsolete inventories. In fiscal year 1999, Power and Computing Systems gross profit increased $5.8 million, or 40.2%, to $20.4 million from $14.6 million in fiscal year 1998. As a percentage of sales, gross profit decreased to 31.4% in fiscal year 1999 from 34.0% 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 fiscal year 1999. In addition, more of the Company's revenues are derived from contracts which include full systems with greater third party content, upon which lower overall gross profit margins are realized. In fiscal year 1998, Power and Computing Systems gross profit increased $3.1 million, or 26.2%, to $14.6 million from $11.5 million in fiscal year 1997. As a percentage of sales, gross profit increased to 34.0% 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. ELECTRONIC COMPONENTS. Gross profit for the Electronic Components segment was $0.1 million in the Short Fiscal Year, or 1.9% of sales. Gross profit in this segment was significantly impacted in the Short Fiscal Year by unabsorbed overhead and other production costs in the POWERCACHE ultracapacitors business area, which is currently in the start-up phase of volume production, resulting in negative gross margins. In addition, this business area received no contribution in the Short Fiscal Year from high margin revenue from licenses and other collaborative agreements. The Company expects POWERCACHE gross margins to turn positive and improve as sales volumes increase in this business. As ultracapacitor product sales ramp-up, gross margins will continue to be impacted until the Company reaches full production volumes. The Company is currently working on programs to reduce the cost of materials and automate manufacturing in an effort to reduce its production costs. However, required infrastructure and other investments are continuing to be made which will impact gross profit at current sales volumes. Low sales volumes in the other electronic components business areas also contributed to reduced gross margins in the Short Fiscal Year. In addition, the EMI filter, ceramic capacitors and the SEi microelectronics business areas recorded charges in the Short Fiscal Year to write-off certain slow moving or excess inventories, also impacting gross margins. In fiscal year 1999, Electronic Components gross profit decreased $2.7 million to $11.4 million from $14.1 million in fiscal year 1998. As a percentage of sales, gross profit decreased to 33.0% in fiscal year 1999 from 43.2% in fiscal year 1998. The decrease in gross profit primarily reflects a decrease in high margin development funding and technology license fees of $3.7 million, and also reflects a lower margin mix of products and services. This decrease also reflects changes in the Company's pricing strategies in response to competitive pressures, as it continues to improve penetration in its various markets. In fiscal year 1998, gross profit decreased $1.4 million to $14.1 million from $15.5 million in fiscal year 1997. Gross margin as a percentage of sales decreased to 43.2% in 1998 from 52.5% in fiscal year 1997. This decrease in gross profit primarily reflects lower margins received on a large program at SEi. 31 GOVERNMENT SYSTEMS. In the Short Fiscal Year, gross profit was $3.7 million, or 22.7% of revenues, compared to $3.0 million or 16.9% of sales for the five-month period ended December 31, 1998. Gross profit as a percentage of sales for the five-month period ended December 31, 1998 was negatively impacted by poor absorption of fixed overhead costs prior to an adjustment later in fiscal year 1999 to the rates billable to the government by this segment. In fiscal year 1999, Government Systems gross profit increased $1.3 million, or 13.6%, to $10.9 million from $9.6 million in fiscal year 1998. As a percentage of sales, gross profit increased to 24.4% in fiscal year 1999 from 23.4% in fiscal year 1998. The primary factors in the increase in gross profit in fiscal year 1999 as compared to fiscal year 1998 is the full year contribution of revenues and gross margins from PI, following its acquisition in April 1998. In fiscal year 1998, Government Systems gross profit was $9.6 million, up from $6.4 million in fiscal year 1997. As a percentage of sales, gross profit increased to 23.4% in fiscal year 1998 from 20.1% in fiscal year 1997. The increase in gross profit, both as a dollar amount and as a percentage of sales, in fiscal year 1998 as compared to fiscal year 1997, relates to the acquisition of PI, as well as a commercial contract for pulsed power systems won during fiscal year 1998. This contract was substantially complete as of the end of fiscal year 1998. STERILIZATION AND PURIFICATION SYSTEMS. With very low sales volume in the Short Fiscal Year, gross profit in the Sterilization and Purification Systems segment was a loss of $1.0 million, reflecting unabsorbed fixed costs. 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 a substantial portion of high margin revenues from 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 the Short Fiscal Year, selling, general and administrative expenses were approximately $16.4 million, or 31.5% of sales compared to $14.1 million, or 25.4% of sales for the five-month period ended December 31, 1998. The increase in these expenses is primarily in support of the Company's growth in fiscal year 1999 and the continuing expansion into Europe by the Power and Computing Systems business segment. The Short Fiscal Year also includes $750,000 of severance costs related to the Company's former CEO. As further discussed below, the Company adopted a Restructuring Plan in the Short Fiscal Year which includes certain facility consolidations and other cost-saving programs which will be implemented in the Current Fiscal Year. In fiscal year 1999, the Company's selling, general and administrative expenses increased $7.7 million, or 28.9%, to $34.4 million from $26.7 million in fiscal year 1998 and $20.7 million in fiscal year 1997. As a percentage of total sales, selling, general and administrative expenses increased to 22.4% in fiscal year 1999 from 21.6% in fiscal year 1998 and 20.3% in fiscal year 1997. The increase in these expenses was primarily in support of the Company's sales growth, including the businesses acquired in fiscal years 1999 and 1998. In addition, the Company made certain investments related to administrative infrastructure and in administrative and sales support which has increased the expenses as a percentage of sales. 32 RESEARCH AND DEVELOPMENT EXPENSES The Company's research and development expenses reflect only internally funded research and development programs. Costs associated with research and development contracts funded by the United States government and other customers are included in cost of sales. Research and development expenses were $3.5 million, $7.9 million, $7.4 million and $4.1 million for the Short Fiscal Year and fiscal years 1999, 1998 and 1997, respectively. As a percentage of sales, research and development expenses were 6.6% in the five-month period ended December 1999, 5.1% in fiscal year 1999, 6.1% in fiscal year 1998, and 4.0% in fiscal year 1997. The level of research and development expenses reflects, in part, the Company's ability to obtain customer funding to support a portion of its research and product development activities. The increase in the amount of internally funded research and development as a percentage of sales in the Short Fiscal Year reflects an increased emphasis on development of new commercial product areas. RESTRUCTURING, ACQUISITION AND OTHER CHARGES In connection with the Restructuring Plan, the Company has undertaken various actions to improve the cost structure of the Company. As a result, the Company recorded restructuring and other related charges in the Short Fiscal Year totaling approximately $5.0 million. These charges primarily include severance costs related to a reduction in work force, the closure and combination of certain facilities and the write-off of non-performing operating assets. The Company expects to record additional restructuring-related charges over the next three fiscal quarters as the Company completes its Restructuring Plan and finalizes the consolidation and integration of its operations and related facilities. During fiscal year 1999, the Company recorded restructuring, acquisition and other charges of approximately $3.1 million. Of these charges, approximately $1.6 million consisted of direct acquisition costs for business combinations accounted for using the pooling-of-interests method. The remaining $1.5 million 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. The Company recorded a $6.3 million charge in fiscal year 1998 related to the acquisition of three businesses, including transaction costs for a business combination accounted for as a pooling-of-interest, and the appraised amount of acquired in-process research and development for the two business combinations accounted for as purchases. INTEREST EXPENSE Interest expense was $112,000, $404,000, $338,000 and $220,000 in the Short Fiscal Year and in fiscal years 1999, 1998, and 1997, respectively. The increase in interest expense in each of last two fiscal 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 December 31, 1999, the Company had no amounts outstanding under its bank line-of-credit. INTEREST INCOME AND OTHER, NET Interest income and other, net, consisting primarily of interest income, was $17,000, $647,000, $1,471,000 and $238,000 in the Short Fiscal Year and in fiscal years 1999, 1998 and 1997, respectively. The decrease in interest income reflects lower average cash balances in both the Short Fiscal Year and 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. 33 PROVISION (CREDIT) FOR INCOME TAXES The credit for income taxes in the Short Fiscal Year includes a credit of $5.5 million, primarily representing the deferred income tax benefits of temporary differences and tax loss carryforwards. The deferred income tax credit was partially offset by approximately $600,000 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 carryforwards are utilized. The fiscal year 1999 credit for income taxes includes a credit of $5.9 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. 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 (LOSS) OF SUBSIDIARIES Minority interest in net income (loss) of subsidiaries was $(548,000) in the Short Fiscal Year and $427,000, $80,000 and $54,000 in fiscal years 1999, 1998 and 1997, respectively. The current period loss results from a loss in the Short Fiscal Year incurred by the Company's minority owned subsidiaries, primarily in the Sterilization and Purification Systems segment. INCOME (LOSS) FROM CONTINUING OPERATIONS As a result of the factors mentioned above, the income (loss) from continuing operations was $(8.1) million for the Short Fiscal Year, compared to $8.7 million in fiscal year 1999, $(2.1) million for fiscal year 1998, and $10.0 for fiscal year 1997. DISCONTINUED OPERATIONS As previously discussed, the Company has adopted a plan to divest its high voltage wound film capacitors, high voltage power supplies, time card and job cost accounting software and glass-to-metal seals businesses. In connection with its decision to sell these businesses, the Company recorded pre-tax charges of $4.7 million, including provisions of $3.8 million for estimated losses on the sale of the businesses and $0.9 million for severance costs for involuntary employee terminations and provisions for contractual employment obligations that will have no continuing benefit. On February 29, 2000, the Company sold the high voltage wound capacitors and high voltage power supplies businesses for cash of $3.5 million, approximately the net book value of the net assets sold as of that date. The anticipated disposal of the remaining businesses is expected to occur by the end of the second quarter of calendar year 2000. 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 full 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. 34 Cash provided by continuing operations in the Short Fiscal Year was approximately $400,000, as compared to uses of cash by operations of $7.8 million and $6.0 million in fiscal years 1999 and 1998, respectively. In fiscal year 1997, cash of $4.1 million was provided by continuing operations. In the Short Fiscal Year, the operating losses were more than offset by decreases in operating assets, primarily accounts receivable. In fiscal years 1999 and 1998, the use of cash was primarily attributable to increases in accounts receivable, due both to acquired businesses and in support of increased sales in fiscal year 1999. The Company's capital expenditures in the Short Fiscal Year and in fiscal years 1999, 1998 and 1997 were $2.0 million, $7.4 million, $6.1 million and $4.4 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 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. In addition, the Company will incur expenditures in connection with the design and construction of the new facilities for its newly-integrated commercial divisions. The Company may also 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 may be required. The Company will also incur cash expenditures in the Current Fiscal Year in connection with completing its Restructuring Plan. The Company believes that funds on-hand, together with cash generated from operations, cash expected to be received from the divestiture of certain businesses and funds available under its bank line-of-credit, will be sufficient to finance its Restructuring Plan, its operations and its capital expenditures through the Current Fiscal Year. 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. Maxwell has an unsecured bank line-of-credit of $20.0 million, under which the Company had no borrowings outstanding as of December 31, 1999. 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 In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its Year 2000 Information Systems Compliance Program, including the remediation and testing of its systems and the development of a contingency plan. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes that those systems successfully responded to the Year 2000 date change. The Company incurred costs of approximately $1.5 million in connection with its Year 2000 Information Systems Compliance Program, including $0.1 million incurred in the Short Fiscal Year. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are promptly addressed. 35 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 revise these forward-looking statements to reflect 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. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is required to be adopted in years beginning after June 15, 2000. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB 101"), which among other guidance, clarifies certain conditions to be met in order to recognize revenue. SAB 101 requires companies, if necessary, to restate previously reported financial statements to comply with the new guidance. The Company is currently evaluating the impact that the adoption of SAB 101 will have on its results of operations and its financial position. 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 LIBOR or the bank's prime rate. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF MAXWELL TECHNOLOGIES, INC.
PAGE ---- Report of Ernst & Young LLP, Independent Auditors........................................................37 Consolidated Balance Sheets as of December 31, 1999, July 31, 1999 and July 31, 1998.....................38 Consolidated Statements of Operations for the Five-Months ended December 31, 1999, and for the Years Ended July 31, 1999, 1998 and 1997.................................................................39 Consolidated Statements of Stockholders' Equity for the Five-Months ended December 31, 1999, and for the Years Ended July 31, 1999, 1998 and 1997.....................................................40 Consolidated Statements of Cash Flows for the Five-Months ended December 31, 1999, and for the Years Ended July 31, 1999, 1998 and 1997.................................................................41 Notes to Consolidated Financial Statements...............................................................42
36 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Stockholders Maxwell Technologies, Inc. We have audited the accompanying consolidated balance sheets of Maxwell Technologies, Inc., and subsidiaries, as of December 31, 1999, July 31, 1999 and July 31, 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the five months ended December 31, 1999 and 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 auditing standards generally accepted in the United States. 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 December 31, 1999, July 31, 1999 and July 31, 1998, and the consolidated results of their operations and their cash flows for the five months ended December 31, 1999 and for each of the three years in the period ended July 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP San Diego, California February 19, 2000, except for the first paragraph of Note 10, as to which the date is February 29, 2000 37 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
JULY 31, DECEMBER 31, --------------------------------- 1999 1999 1998 ---------------- ---------------- ------------- ASSETS Current assets: Cash and cash equivalents.................................. $ 4,065 $ 8,832 $ 21,629 Trade and other accounts receivable, less allowance for doubtful accounts of $1,519 at December 31, 1999 and $1,033 and $1,513 at July 31, 1999 and 1998, respectively........................................... 30,381 43,066 34,162 Inventories................................................ 22,015 19,869 16,538 Prepaid expenses........................................... 691 1,710 2,072 Deferred income taxes...................................... 14,740 8,647 457 Net assets of discontinued operations...................... 3,564 4,995 2,800 ---------------- ---------------- ------------- Total current assets..................................... 75,456 87,119 77,658 Property, plant and equipment, net............................ 18,340 24,684 21,881 Goodwill and other non-current assets......................... 11,985 10,488 6,163 ---------------- ---------------- ------------- $ 105,781 $ 122,291 $ 105,702 ================ ================ ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities................... $ 13,639 $ 12,586 $ 15,581 Accrued employee compensation.............................. 5,382 6,471 5,822 Current portion of long-term debt.......................... 278 3,251 1,241 ---------------- ---------------- ------------- Total current liabilities................................ 19,299 22,308 22,644 Long-term debt, excluding current portion..................... 181 417 1,193 Minority interest............................................. 1,885 2,398 1,712 Commitments and contingencies Stockholders' equity: Common stock, $0.10 par value per share, 40,000 shares authorized; 9,564, 9,557 and 9,210 shares issued and outstanding at December 31, 1999, July 31, 1999 and July 31, 1998, respectively.............................. 957 956 920 Additional paid-in capital................................. 78,378 78,082 72,245 Deferred compensation...................................... (117) (204) (413) Retained earnings.......................................... 5,375 18,466 7,401 Accumulated other comprehensive income (loss) - foreign currency translation adjustments......................... (177) (132) -- ---------------- ---------------- ------------- Total stockholders' equity............................... 84,416 97,168 80,153 ---------------- ---------------- ------------- $ 105,781 $ 122,291 $ 105,702 ================ ================ =============
See accompanying notes. 38 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FIVE-MONTH PERIOD ENDED YEARS ENDED JULY 31, DECEMBER 31, -------------------------------------------- 1999 1999 1998 1997 -------------- ------------- ------------ ------------ Continuing Operations: Sales............................................ $ 52,170 $ 153,686 $ 123,358 $ 101,899 Cost of sales.................................... 41,382 105,039 81,554 65,669 -------------- ------------- ------------ ------------ Gross profit..................................... 10,788 48,647 41,804 36,230 Operating expenses: Selling, general and administrative............ 16,436 34,398 26,677 20,694 Research and development....................... 3,451 7,893 7,375 4,061 Restructuring, acquisition and other charges... 4,953 3,050 6,339 -- -------------- ------------- ------------ ------------ Total operating expenses..................... 24,840 45,341 40,391 24,755 -------------- ------------- ------------ ------------ Operating income (loss).......................... (14,052) 3,306 1,413 11,475 Interest expense................................. (112) (404) (338) (220) Interest income and other, net................... 17 647 1,471 238 -------------- ------------- ------------ ------------ Income (loss) from continuing operations before income taxes and minority interest............. (14,147) 3,549 2,546 11,493 Provision (credit) for income taxes.............. (5,474) (5,582) 413 1,473 Minority interest in net income (loss) of subsidiaries................................... (548) 427 80 54 -------------- ------------- ------------ ------------ Income (loss) from continuing operations......... (8,125) 8,704 2,053 9,966 Discontinued operations, net of tax: Income (loss) from operations.................... (2,901) 2,364 (3,760) (3,459) Provision for estimated loss on disposal......... (2,065) -- -- -- -------------- ------------- ------------ ------------ (4,966) 2,364 (3,760) (3,459) -------------- ------------- ------------ ------------ Net income (loss)................................... $ (13,091) $ 11,068 $ (1,707) $ 6,507 ============== ============= ============ ============ Basic net income (loss) per share: Income (loss) from continuing operations......... $ (0.85) $ 0.93 $ 0.24 $ 1.47 Income (loss) from discontinued operations....... (0.52) 0.25 (0.44) (0.51) -------------- ------------- ------------ ------------ $ (1.37) $ 1.18 $ (0.20) $ 0.96 ============== ============= ============ ============ Diluted net income (loss) per share: Income (loss) from continuing operations......... $ (0.85) $ 0.88 $ 0.22 $ 1.33 Income (loss) from discontinued operations....... (0.52) 0.24 (0.41) (0.46) ============== ============= ============ ============ $ (1.37) $ 1.12 $ (0.19) $ 0.87 ============== ============= ============ ============ Shares used in computing: Basic net income (loss) per share................ 9,562 9,414 8,503 6,775 ============== ============= ============ ============ Diluted net income (loss) per share.............. 9,562 9,801 9,111 7,470 ============== ============= ============ ============
See accompanying notes. 39 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FIVE-MONTH PERIOD ENDED DECEMBER 31, 1999 AND THREE YEARS ENDED JULY 31, 1999 (IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED ADDITIONAL OTHER TOTAL COMMON PAID-IN DEFERRED RETAINED COMPREHENSIVE STOCKHOLDERS' STOCK CAPITAL COMPENSATION EARNINGS INCOME (LOSS) EQUITY --------- ---------- ------------- -------- -------------- ------------ Balance at August 1, 1996.......... $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 --------- ---------- ------------- -------- -------------- ------------ Balance at July 31, 1997........... 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 (loss) - net loss.......................... -- -- -- (1,707) -- (1,707) --------- ---------- ------------- -------- -------------- ------------ Balance at July 31, 1998........... 920 72,245 (413) 7,401 -- 80,153 Issuance of 296,451 shares under stock purchase and option plans, including related income tax benefit of $4,623......... 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 (loss): Net income.................... -- -- -- 11,068 -- 11,068 Other comprehensive income (loss) - Foreign currency translation adjustments................. -- -- -- -- (132) (132) --------- ---------- ------------- -------- -------------- ------------ Total comprehensive income...... -- -- -- 11,068 (132) 10,936 --------- ---------- ------------- -------- -------------- ------------ Balance at July 31, 1999........... 956 78,082 (204) 18,466 (132) 97,168 Issuance of 6,680 shares under stock option plans, including related income tax benefit of $220.......................... 1 296 -- -- -- 297 Amortization of deferred compensation.................. -- -- 87 -- -- 87 Comprehensive income (loss): Net loss...................... -- -- -- (13,091) -- (13,091) Other comprehensive income (loss) - foreign currency translation adjustments................. -- -- -- -- (45) (45) --------- ---------- ------------- -------- -------------- ------------ Total comprehensive income (loss) -- -- -- (13,091) (45) (13,136) --------- ---------- ------------- -------- -------------- ------------ Balance at December 31, 1999....... $957 $78,378 $(117) $5,375 $(177) $84,416 ========= ========== ============= ======== ============== ============
See accompanying notes. 40 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FIVE-MONTH PERIOD ENDED YEARS ENDED JULY 31, DECEMBER 31, -------------------------------------- 1999 1999 1998 1997 ---------- --------- ----------- ----------- Operating activities: Income (loss) from continuing operations..................... $ (8,125) $ 8,704 $ 2,053 $ 9,966 Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities: Depreciation and amortization............................ 2,309 5,077 3,596 2,525 Restructure, acquisition and other charges............... 4,953 1,405 7,450 -- Provision for losses on accounts receivable.............. 585 435 734 184 Loss on sales of property and equipment.................. 308 116 50 10 Deferred income taxes.................................... (6,193) (4,730) 37 (345) Minority interest in net income (loss) of subsidiaries... (548) 427 80 54 Deferred compensation.................................... 87 209 209 173 Changes in operating assets and liabilities: Accounts receivable.................................... 11,781 (8,172) (11,299) (2,221) Inventories............................................ (3,213) (2,981) (4,114) (3,542) Prepaid expenses and other............................. (364) (4,326) (1,414) (700) Accounts payable....................................... 9 (3,047) (4,255) (4,106) Accrued employee compensation.......................... (1,089) 470 932 1,280 Income taxes payable and refundable, net............... (105) (1,431) (45) 832 ---------- --------- ----------- ----------- Net cash provided by (used in) operating activities.... 395 (7,844) (5,986) 4,110 Investing activities: Purchases of property and equipment.......................... (1,959) (7,394) (6,078) (4,353) Purchases of businesses, net of cash acquired................ -- -- (11,481) -- Proceeds from sales of property and equipment................ 3,254 60 149 8 ---------- --------- ----------- ----------- Net cash provided by (used in) investing activities.... 1,295 (7,334) (17,410) (4,345) Financing activities: Principal payments on long-term debt and short-term borrowings (3,209) (2,523) (2,339) (993) Proceeds from long-term debt and short-term borrowings....... -- 3,575 1,197 562 Proceeds from issuance of Company and subsidiary stock....... 332 3,164 50,560 2,893 Repurchase of Company and subsidiary stock................... -- (1,726) (4,000) (578) Dividends paid to shareholders of acquired companies prior to acquisition................................................ -- (146) -- -- ---------- --------- ----------- ----------- Net cash provided by (used in) financing activities.... (2,877) 2,344 45,418 1,884 Net cash provided by (used in) discontinued operations.......... (3,535) 169 (2,714) (1,774) Effect of exchange rate changes on cash and cash equivalents.... (45) (132) -- -- ---------- --------- ----------- ----------- Increase (decrease) in cash and cash equivalents................ (4,767) (12,797) 19,308 (125) Cash and cash equivalents at beginning of period................ 8,832 21,629 2,321 2,446 ---------- --------- ----------- ----------- Cash and cash equivalents at end of period...................... $ 4,065 $ 8,832 $21,629 $ 2,321 ========== ========= =========== =========== Cash (paid) received for: Interest...................................................... $ 86 $ 379 $ 1,287 $ (47) ========== ========= =========== =========== Income taxes.................................................. $ (168) $ (633) $ (577) $ (121) ========== ========= =========== =========== See accompanying notes.
41 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Maxwell Technologies, Inc. ("Maxwell" or the "Company") applies industry-leading capabilities in power and computing to develop and market products and services for customers in multiple industries, including energy, satellite, defense, telecommunications, consumer electronics, medical and bioprocessing markets. In November 1999, the Company's Board of Directors adopted a resolution to change the Company's fiscal year to a calendar year effective January 1, 2000. The Company previously reported results on a fiscal year of August 1 through July 31. During the five-month transition period August 1 to December 31, 1999 (the "Short Fiscal Year"), the Company adopted a plan to restructure its operations (the "Restructuring Plan"). This Restructuring Plan (i) consolidates certain commercial business operations and improves their manufacturing and other operational capabilities, (ii) focuses the defense contracting business on pulsed power systems and computer-based analysis for government and national laboratories, (iii) focuses the application of PUREBRIGHT(R) technology on bioprocessing, medical and consumer water markets, and (iv) provides for the sale of certain non-strategic business operations. The accompanying consolidated financial statements have been reclassified to present the financial position and results of operations of the continuing businesses of the Company. Businesses which the Company intends to sell or discontinue, and certain businesses sold or discontinued by the Company in prior periods, have been classified as discontinued operations in the accompanying consolidated financial statements. See Notes 9 and 10. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Maxwell Technologies, Inc. and its subsidiaries. All significant intercompany transactions and account balances are eliminated in consolidation. CASH EQUIVALENTS The Company classifies all highly liquid investments with a maturity of three months or less when purchased as cash equivalents. INVENTORIES Inventories are stated at the lower of cost (principally average cost method) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost and are generally depreciated using the straight-line method. Depreciation and amortization are provided over the estimated useful lives of the related assets (three to thirty years). Depreciation and amortization of property, plant and equipment amounted to $2,148,000, $4,723,000, $3,559,000 and $2,525,000 in the Short Fiscal Year and fiscal years 1999, 1998 and 1997, respectively. 42 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 December 31, 1999 are expected to become due and payable within the next year. REVENUE RECOGNITION The Company recognizes substantially all revenue from the sale of manufactured products and short-term fixed price contracts upon shipment of products or completion of services. Revenues, including estimated profits, on long-term fixed price contracts are recognized as costs are incurred. Revenues, including fees earned, on cost plus contracts are also recognized as costs are incurred. Contract and license revenue is reflected in the Company's sales and includes amounts received from the United States government and commercial customers for the funded research and development efforts of the Company. Provisions are made on a current basis to fully recognize any anticipated losses on contracts. FOREIGN CURRENCIES The Company has foreign subsidiaries which conduct manufacturing and sales activities 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 functional 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 period. INCOME (LOSS) PER SHARE The Company reports basic and diluted earnings per share in accordance with Financial Accounting Standards Board Statement No. 128, EARNINGS PER SHARE ("Statement No. 128"). Basic earnings per share is calculated using the weighted average number of common shares outstanding. Diluted earnings per share 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. For the Short Fiscal Year, all potentially dilutive securities were excluded from the calculation of diluted loss per share as their inclusion would have been antidilutive. 43 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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:
FIVE-MONTH PERIOD ENDED YEARS ENDED JULY 31, DECEMBER 31, -------------------------------- 1999 1999 1998 1997 -------------- -------- -------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) Basic: Income (loss) from continuing operations .................... $ (8,125) $ 8,704 $ 2,053 $ 9,966 Income (loss) from discontinued operations .................. (4,966) 2,364 (3,760) (3,459) -------------- -------- -------- -------- Net income (loss) ........................................... $ (13,091) $ 11,068 $ (1,707) $ 6,507 ============== ======== ======== ======== Weighted average shares ........................................ 9,562 9,414 8,503 6,775 ============== ======== ======== ======== Basic income (loss) per share: Income (loss) from continuing operations .................... $ (0.85) $ 0.93 $ 0.24 $ 1.47 Income (loss) from discontinued operations .................. (0.52) 0.25 (0.44) (0.51) -------------- -------- -------- -------- Basic net income (loss) per share ........................... $ (1.37) $ 1.18 $ (0.20) $ 0.96 ============== ======== ======== ======== Diluted: Income (loss) from continuing operations .................... $ (8,125) $ 8,704 $ 2,053 $ 9,966 Effect of majority-owned subsidiaries' dilutive securities ................................................ -- (78) (24) (12) -------------- -------- -------- -------- Income (loss) from continuing operations available to common stockholders, as adjusted .......................... (8,125) 8,626 2,029 9,954 Income (loss) from discontinued operations .................. (4,966) 2,364 (3,790) (3,459) -------------- -------- -------- -------- Net income (loss), as adjusted .............................. $ (13,091) $ 10,990 $ (1,731) $ 6,495 ============== ======== ======== ======== Weighted average shares ........................................ 9,562 9,414 8,503 6,775 Effect of dilutive stock options and other securities ....... -- 387 608 695 -------------- -------- -------- -------- Weighted average shares, as adjusted ........................ 9,562 9,801 9,111 7,470 ============== ======== ======== ======== Diluted income (loss) per share: Income (loss) from continuing operations .................... $ (0.85) $ 0.88 $ 0.22 $ 1.33 Income (loss) from discontinued operations .................. (0.52) 0.24 (0.41) (0.46) -------------- -------- --------- -------- Diluted net income (loss) per share ......................... $ (1.37) $ 1.12 $ (0.19) $ 0.87 =============== ======== ======== ========
COMPREHENSIVE INCOME (LOSS) The Company reports and displays comprehensive income (loss) and its components in accordance with Statement of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME ("Statement No. 130"). Foreign currency translation adjustments are the Company's only component of other comprehensive income (loss). 44 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. SELECTED FINANCIAL DATA FOR FIVE-MONTH PERIODS ENDED DECEMBER 31, 1999 AND 1998 The following is selected financial data for the Short Fiscal Year, and the comparable prior year period:
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1999 1998 --------------------- --------------------- (unaudited) Sales from continuing operations................................. $ 52,170 $55,758 Gross profit..................................................... 10,788 16,738 Operating loss................................................... (14,052) (640) Provision (credit) for income taxes.............................. (5,474) 100 Loss from continuing operations.................................. (8,125) (1,000) Loss from discontinued operations, net of tax.................... (4,966) (770) Net loss......................................................... (13,091) (1,770) Diluted loss per share from continuing operations................ (0.85) (0.11) Diluted net loss per share....................................... (1.37) (0.19)
NOTE 2 -- BUSINESS COMBINATIONS 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 in fiscal year 1999. 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 in fiscal year 1999. 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. 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 in fiscal year 1999. 45 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- BUSINESS COMBINATIONS (CONTINUED) In April 1998, the Company acquired the majority of the assets of the Electromagnetic Systems Group of Primex Physics International Company ("PI"), for cash of $10 million, assumption of certain liabilities and direct acquisition costs of $175,000. PI specializes in high-energy pulsed power technology, primarily performing research and development for the U.S. government. The acquisition was accounted for as a purchase. The purchase price was allocated to the estimated fair values of the new assets acquired, of which approximately $2.5 million was charged to acquired in-process R&D during fiscal year 1998. The value assigned to the other intangible assets was $3.7 million, and is being amortized on a straight-line basis over the estimated economic lives. In March 1998, the Company acquired Tri-MAP International, Ltd. ("Tri-MAP"), a privately-held, United Kingdom-based manufacturer of industrial-grade PC-compatible computer systems. Tri-MAP was acquired in a stock-for-stock exchange accounted for as a pooling-of-interests for an aggregate of 290,000 shares of Maxwell common stock valued at approximately $7.0 million. The Company incurred direct transaction costs of approximately $0.6 million, which were charged to operations during fiscal year 1998. Also in March 1998, the Company acquired Phoenix Power Systems, Inc. ("Phoenix Power"), a privately-held manufacturer of power quality protection products. Under the terms of this agreement, Maxwell purchased all of the outstanding stock of Phoenix Power for approximately $4 million ($1.3 million in cash and 100,679 shares of Maxwell common stock valued at approximately $2.7 million). The acquisition was accounted for as a purchase. Direct acquisition costs were approximately $95,000. The purchase price was allocated to the estimated fair values of the net tangible and intangible assets acquired, approximately $3 million of which was charged to acquired in-process R&D in fiscal year 1998. The value assigned to other intangible assets was $1.6 million, and is being amortized on a straight-line basis over the estimated economic lives. The terms of the agreement provided for additional contingent purchase price based upon the financial performance of Phoenix Power following the acquisition. In January 2000, the Company agreed to pay $5 million of such additional purchase price of which $4.5 million will be paid in cash on June 30, 2000. The Company issued 45,506 shares of its common stock in January 2000 representing the remaining $500,000 in additional purchase price. The additional purchase price will be assigned to intangible assets. NOTE 3 -- BALANCE SHEET DETAILS Trade and other accounts receivable consists of the following:
JULY 31, DECEMBER 31, ------------------------------ 1999 1999 1998 ------------- ------------- ------------- (IN THOUSANDS) Amounts billed...................................... $19,848 $35,811 $27,409 Amounts unbilled under long-term contracts.......... 5,793 4,490 4,570 Intercompany receivable from subsidiary classified as discontinued operations.......................... 4,740 2,765 2,183 ------------- ------------- ------------- $30,381 $43,066 $34,162 ============= ============= =============
Inventories consist of the following:
JULY 31, DECEMBER 31, ------------------------------ 1999 1999 1998 ------------- ------------- ------------- (IN THOUSANDS) Finished goods...................................... $ 2,030 $ 3,758 $ 1,359 Work-in-process..................................... 4,469 3,081 3,183 Raw materials and purchased parts................... 15,516 13,030 11,996 ------------- ------------- ------------- $ 22,015 $ 19,869 $ 16,538 ============= ============= =============
46 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 -- BALANCE SHEET DETAILS (CONTINUED) Property, plant and equipment consists of the following:
JULY 31, DECEMBER 31, ------------------------------ 1999 1999 1998 ------------- ------------- ------------- (IN THOUSANDS) Land and land improvements.......................... $ 2,738 $ 3,470 $ 3,470 Buildings and building improvements................. 6,537 9,250 8,435 Machinery, furniture and office equipment........... 37,699 37,988 34,420 Leasehold improvements.............................. 4,370 4,340 3,793 ------------- ------------- ------------- 51,344 55,048 50,118 Less accumulated depreciation and amortization...... (33,495) (31,646) (29,016) ------------- ------------- ------------- 17,849 23,402 21,102 Construction-in-progress............................ 491 1,282 779 ------------- ------------- ------------- $ 18,340 $ 24,684 $ 21,881 ============= ============= =============
Goodwill and other non-current assets consist of the following:
JULY 31, DECEMBER 31, ------------------------------ 1999 1999 1998 ------------- ------------- ------------- (IN THOUSANDS) Goodwill and other intangible assets, net of accumulated amortization of $582 at December 31, 1999 and $422 and $37 at July 31, 1999 and 1998, respectively............. $ 5,299 $ 5,427 $ 5,282 Note receivable from related party, including accrued interest......................................... 2,092 2,000 -- Equity investments in unconsolidated companies...... 566 550 40 Deposits and other.................................. 2,683 1,266 841 Long-term deferred income taxes..................... 1,345 1,245 -- ------------- ------------- ------------- $ 11,985 $ 10,488 $ 6,163 ============= ============= =============
Accounts payable and accrued liabilities consists of the following:
JULY 31, DECEMBER 31, ------------------------------ 1999 1999 1998 ------------- ------------- ------------- (IN THOUSANDS) Accounts payable and accrued liabilities............ $ 11,095 $ 11,072 $ 13,136 Accrued restructuring costs......................... 948 -- -- Customer advances................................... 736 472 1,293 Environmental reserves.............................. 860 1,042 1,152 ------------- ------------- ------------- $ 13,639 $ 12,586 $ 15,581 ============= ============= =============
47 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- CREDIT AGREEMENT The Company has an unsecured bank line-of-credit agreement, as amended, which expires in January 2001, under which the Company may borrow up to $20 million at the bank's prime rate, or at LIBOR plus 1.75% (7.76% at December 31, 1999). At December 31, 1999, the Company had no amounts outstanding under the line. The line-of-credit agreement provides that neither the Company nor any of its subsidiaries may, directly or indirectly, make any distributions of cash dividends. 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 December 31, 1999. At December 31, 1999, the Company was contingently liable for outstanding letters of credit aggregating approximately $1.3 million, which expire through April 2000. 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. At subsequent dates, aggregate additional shares of 1,890,000, including 400,000 shares in January 2000, were reserved for future issuance under the plan. This plan and the Company's 1999 Director Stock Option Plan (which was adopted in 1999 and approved by the shareholders in January 2000) 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. In December 1999, the Company adopted an Executive Stock Option Plan under which 294,030 options were granted to the Company's new President and CEO. Options are also outstanding under expired stock option plans which were superceded by the current plans. Options granted under all stock option 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. The options have terms of five to ten years. As of December 31, 1999, prior to the additional reservation of shares in January 2000, the Company had no options available for future grant under its stock option plans. 48 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- STOCK ACTIVITY AND STOCK PLANS (CONTINUED) The following table summarizes Company stock option activity for the period August 1, 1996 through December 31, 1999:
NUMBER WEIGHTED AVERAGE OF SHARES EXERCISE PRICE ------------- -------------------- Balance at August 1, 1996......................................... 1,196,026 $ 4.57 Granted......................................................... 373,700 $15.95 Exercised....................................................... (406,656) $ 4.61 Expired or forfeited............................................ (108,390) $ 4.42 ------------- Balance at July 31, 1997.......................................... 1,054,680 $ 8.60 Granted......................................................... 591,500 $25.23 Exercised....................................................... (324,825) $ 5.49 Expired or forfeited............................................ (56,200) $18.57 ------------- Balance at July 31, 1998.......................................... 1,265,155 $16.73 Granted......................................................... 684,140 $23.87 Exercised....................................................... (285,400) $ 9.65 Expired or forfeited............................................ (41,340) $19.96 ------------- Balance at July 31, 1999.......................................... 1,622,555 $20.90 Granted......................................................... 647,602 $10.42 Exercised....................................................... (6,680) $ 3.63 Expired or forfeited............................................ (221,325) $23.25 ------------- Outstanding at December 31, 1999.................................. 2,042,152 $17.38 =============
The following table summarizes information concerning outstanding and exercisable Company stock options at December 31, 1999:
WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING AVERAGE RANGE OF EXERCISE OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISE PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE --------------------- ---------------- --------------- ---------------- ------------- -------------- $ 3.27- 6.55 172,778 $ 4.30 3.4 years 147,113 $ 4.29 $ 6.56- 9.82 554,838 $ 8.72 6.7 years 36,247 $ 7.25 $ 9.83 - 13.10 46,500 $ 10.45 6.2 years 11,000 $ 11.00 $ 13.11 - 16.38 58,000 $ 13.13 9.6 years -- $ -- $ 16.39 - 19.65 150,441 $ 18.88 3.5 years 83,489 $ 18.86 $ 19.66 - 22.93 321,250 $ 21.22 8.2 years 17,465 $ 20.80 $ 22.94 - 26.20 548,345 $ 24.55 5.9 years 191,881 $ 24.76 $ 26.21 - 29.48 120,500 $ 27.92 7.7 years 46,575 $ 28.16 $ 29.49 - 32.75 69,500 $ 31.44 7.7 years -- $ -- ------------- ------------- 2,042,152 533,770 ================ =============
In addition, the Company has established separate stock option plans for five of its principal operating subsidiaries. Options to purchase shares of subsidiary stock were granted primarily during fiscal year 1997. Options outstanding at December 31, 1999 total from 9% to 14% of such various subsidiaries' outstanding common stock. 49 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- STOCK ACTIVITY AND STOCK PLANS (CONTINUED) 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 the Short Fiscal Year or the fiscal years ended July 31, 1999, 1998 or 1997 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) from continuing operations and diluted income (loss) from continuing operations per share would have been adjusted to the pro-forma amounts indicated below:
FIVE-MONTH PERIOD ENDED DECEMBER 31, YEARS ENDED JULY 31, 1999 1999 1998 1997 ------------ ------------ ----------- ----------- (IN THOUSANDS) Income (loss) from continuing operations, as reported....................................... $ (8,125) $8,704 $ 2,053 $9,966 Pro forma income (loss) from continuing operations..................................... $ (10,600) $3,122 $(1,453) $8,607 Diluted income (loss) from continuing operations per share, as reported......................... $ (0.85) $ 0.88 $ 0.22 $ 1.33 Pro forma diluted income (loss) from continuing operations per share........................... $ (1.11) $ 0.32 $ (0.17) $ 1.15
The impact of outstanding non-vested stock options granted prior to 1997 has been excluded from the pro forma calculations; accordingly, the pro forma adjustments shown above 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: Short Fiscal Year - risk-free interest rate 5.0%; dividend yield of 0%; volatility factor of 106%; and a weighted average expected term of five years; July 31, 1999 - risk-free interest rate of 5.0%; dividend yield of 0%; volatility factor of 66%; and a weighted average expected term of five years; 1998 - risk-free interest rate of 5.5%; dividend yield of 0%; volatility factor of 54%; and a weighted-average expected term of four years; 1997 - risk-free interest rate of 6.0%; dividend yield of 0%; volatility factor of 52%; and a weighted-average expected term of three years. The fair value of subsidiary options at the date of grant was estimated using the Black-Scholes model with assumptions as above. Based on these assumptions, the estimated weighted average fair value at grant date for Company options granted during the Short Fiscal Year and fiscal years 1999, 1998 and 1997 was $9.13, $12.53, $12.00 and $7.37 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 ended July 31, 1999, 1998 and 1997, 48,388, 40,795 and 39,129 shares, respectively, were issued under the two plans for aggregate proceeds to the Company of $970,000, $759,000 and $442,000, respectively. No shares were issued under the plans in the Short Fiscal Year. At December 31, 1999, 250,152 shares are reserved for future issuance under these plans. 50 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- STOCK ACTIVITY AND STOCK PLANS (CONTINUED) DEFERRED COMPENSATION In 1997 and 1996, 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 $190,000 and $645,000, 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 $87,000, $209,000, $209,000 and $173,000 in the Short Fiscal Year and fiscal years 1999, 1998 and 1997, respectively. 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. In January 2000, the Board adopted, and the Company's shareholders subsequently approved, the Company's Management Equity Ownership Program (the "Program"). Under the Program, executive officers of the Company and other members of senior management selected by the Committee are offered loans from the Company to be used to purchase stock of the Company. The loans bear interest and must be repaid in annual installments of principal and interest over a four-year period. Repayment of the loans is secured by the shares purchased with the loan proceeds. On February 1, 2000, loans in the aggregate amount of $900,000, bearing interest at 6.56%, were made in connection with the aggregate purchase of 74,995 newly issued shares of the Company's common stock at $12.00 per share, the closing market price on the date of purchase. 51 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- INCOME TAXES The provision (credit) for income taxes for continuing operations is as follows:
FIVE-MONTH PERIOD ENDED YEARS ENDED JULY 31, DECEMBER 31, ------------------------------------------ 1999 1999 1998 1997 ------------ ------------ ------------ ----------- (IN THOUSANDS) Federal: Current................................... $ -- $ (1,020) $ 127 $ 1,431 Deferred.................................. (4,969) (3,189) 16 (293) ------------ ------------ ------------ ----------- (4,969) (4,209) 143 1,138 State: Current................................... 399 (118) 25 387 Deferred.................................. (1,224) (1,623) 19 (52) ------------ ------------ ------------ ----------- (825) (1,741) 44 335 Foreign: Current................................... 320 394 200 -- Deferred.................................. -- (26) 26 -- ------------ ------------ ------------ ----------- 320 368 226 -- ------------ ------------ ------------ ----------- $ (5,474) $ (5,582) $ 413 $ 1,473 ============ ============ ============ ===========
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:
JULY 31, DECEMBER 31, ------------------------------ 1999 1999 1998 -------------- -------------- ------------- (IN THOUSANDS) Deferred tax assets: Environmental and restructuring provisions............ $ 3,038 $ 1,342 $ 1,430 Uniform capitalization, contract and inventory-related reserves......................................... 2,921 2,089 2,732 Asset write-downs under FASB Statement No. 121........ 952 1,031 1,112 Acquired in-process research and development.......... 866 893 959 Accrued vacation...................................... 785 764 819 Allowance for doubtful accounts....................... 611 306 451 Tax loss carryforwards................................ 4,000 900 1,300 Research and development and other tax credit carryforwards.................................... 2,874 2,921 -- Other................................................. 748 269 483 Valuation allowance................................... -- -- (8,124) -------------- -------------- ------------- Total deferred tax assets..................... 16,795 10,515 1,162 -------------- -------------- ------------- Deferred tax liabilities: Tax basis depreciation in excess of book depreciation. (710) (605) (686) Tax basis research and development expense in excess of book expense..................................... -- (18) (19) -------------- -------------- ------------- Total deferred tax liabilities................ (710) (623) (705) -------------- -------------- ------------- Net deferred tax assets................................. $ 16,085 $ 9,892 $ 457 ============== ============== =============
52 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- INCOME TAXES (CONTINUED) 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 from continuing operations in fiscal years 1999, 1998 and 1997, 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. In 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. The current income tax expense in the Short Fiscal Year and the fiscal year ended July 31, 1999 was primarily due to foreign taxes on the profits of the Company's United Kingdom subsidiary, and certain minimum state income and franchise 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 December 31, 1999, the Company had net operating loss carryforwards for federal and state income tax of approximately $7.2 million and $10.2 million, respectively. The federal loss carryforward begins to expire in calendar year 2011, while the state loss carryforwards expire in calendar years 2000 through 2006. In addition, the Company has research and development and other tax credit carryforwards for federal and state income tax purposes of $6.3 million and $9.6 million, which begin to expire in 2004. The provision (credit) for income taxes in the accompanying consolidated statements of operations differs from the amount calculated by applying the statutory income tax rate of 35% to income (loss) from continuing operations before income taxes and minority interest. The primary components of such difference are as follows:
FIVE-MONTH PERIOD ENDED YEARS ENDED JULY 31, DECEMBER 31, ------------------------------------------- 1999 1999 1998 1997 ---------- ------------ ------------ ------------ (IN THOUSANDS) Tax at federal statutory rate............................. $ (4,983) $ 1,242 $ (425) $ 2,811 State taxes, net of federal benefit....................... (862) 182 102 633 Effect of tax rate differential for foreign subsidiary.... 283 76 (47) -- Impact of asset basis difference in acquisitions.......... -- 496 1,237 -- Utilization of net operating loss carryforwards........... -- (400) (500) (700) Valuation allowance, including tax benefits of stock -- (7,530) (127) (1,340) activity............................................... Other items not reflected in consolidated statement of operations.......................................... 88 352 173 69 ----------- ------------ ------------ ------------ $ (5,474) $ (5,582) $ 413 $ 1,473 =========== ============ ============ ============
53 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- LEASES Rental expense amounted to $2,064,000, $5,459,000, $3,676,000 and $2,101,000 in the Short Fiscal Year and in fiscal years 1999, 1998 and 1997, respectively, and was incurred primarily for facility rental. Future annual minimum rental commitments as of December 31, 1999, are as follows (in thousands):
FISCAL YEARS - ------------ 2000...................................................... $ 4,626 2001...................................................... 4,028 2002...................................................... 2,640 2003...................................................... 1,717 2004...................................................... 9 -------------- $13,020 ===============
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 2001. Future annual amounts due to the Company under such subleases are as follows: calendar year 2000 - $143,000 and calendar year 2001 - $98,000. In connection with its Restructuring Plan, the Company intends to lease two new facilities in San Diego and consolidate and reduce the total number of leased facilities it maintains in the San Diego area through a combination of sublease activities and negotiating early lease terminations. 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 $464,000, $927,000, $705,000 and $497,000 in the Short Fiscal Year and in fiscal years 1999, 1998 and 1997, respectively. NOTE 9 -- RESTRUCTURING, ACQUISITION AND OTHER CHARGES In connection with the Restructuring Plan, the Company has undertaken various actions to reduce the cost structure of the Company. As a result, the Company recorded restructuring and other related charges in the Short Fiscal Year, totaling approximately $5.0 million. Such charges were determined in accordance with Staff Accounting Bulletin No. 100, RESTRUCTURING AND IMPAIRMENT CHARGES, and Emerging Issues Task Force No. 94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). These charges include severance costs related to a reduction in work force, the closure and combination of certain facilities, and the write-off of certain non-performing operating assets. The Company expects to record additional restructuring-related charges over the next three fiscal quarters as the Company completes its Restructuring Plan and finalizes the consolidation and integration of its operations and related facilities. 54 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- RESTRUCTURING, ACQUISITION AND OTHER CHARGES (CONTINUED) The following table summarizes the restructuring and other related charges recorded in December 1999, of which approximately $0.9 million are included in accrued liabilities at December 31, 1999 (in thousands): Write-down of abandoned fixed assets, inventory and other operating assets associated with the discontinuation of certain products.............................................................. $1,895 Write-down of long-lived assets under FASB Statement No. 121....................................... 1,662 Severance costs for involuntary employee terminations.............................................. 756 Costs to exit certain contractual obligations related to discontinued products..................... 374 Remaining lease obligations and write-off of related leasehold improvements associated with abandoned facilities, net of anticipated sublease income......................................... 216 Anticipated moving costs related to consolidation of facilities.................................... 50 ------------ $4,953 ============
During fiscal year 1999, the Company recorded restructuring, acquisition and other charges of approximately $3.1 million. Of these charges, approximately $1.6 million consisted of direct acquisition costs for business combinations accounted for using the pooling-of-interests method. The remaining $1.5 million 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. The Company recorded a $6.3 million charge in fiscal year 1998 related to the acquisition of three businesses, including transaction costs for a business combination accounted for as a pooling-of-interest, and the appraised amount of acquired in-process research and development for the two business combinations accounted for as purchases. NOTE 10 -- DISCONTINUED OPERATIONS As discussed in Note 9, the Company has adopted a plan to divest its high voltage wound film capacitors, high voltage power supplies, time card and job cost accounting software and glass-to-metal seals businesses. In connection with its decision to sell these businesses, the Company recorded pre-tax charges of $4.7 million, including provisions of $3.8 million for estimated losses on the sale of the businesses and $0.9 million for severance costs for involuntary employee terminations and provisions for contractual employment obligations that will have no continuing benefit. On February 29, 2000, the Company sold the high voltage wound film capacitors and high voltage power supplies businesses for cash of $3.5 million, approximately the net book value of the net assets sold as of that date. The anticipated disposal of the remaining businesses is expected to occur by the end of the second quarter of calendar year 2000. Operating results of the discontinued operations are shown, net of tax, separately in the accompanying consolidated statements of operations. The provision (credit) for income taxes related to the discontinued operations was $(2.1) million and $(0.2) million in the Short Fiscal Year and fiscal year 1999, respectively. No provision for income taxes was provided for fiscal years 1998 and 1997. The businesses included in discontinued operations had sales aggregating $9.4 million, $26.0 million, $17.2 million and $15.9 million for the Short Fiscal Year, and in fiscal years 1999, 1998 and 1997, respectively. These amounts are not included in net sales in the accompanying consolidated statements of operations. 55 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- DISCONTINUED OPERATIONS (CONTINUED) In fiscal year 1999, the Company recorded a pre-tax charge of $2.8 million related to revised estimates of final costs necessary to complete certain criminal justice information system contracts and complete the discontinuation of a business segment that was discontinued in fiscal year 1998. The revision affected costs to complete and terminate such contracts, as well as other business shutdown costs, including employee-related costs. During fiscal year 1998, the Company reorganized the operations within its 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. Related pre-tax charges, including discontinued operations, amounted to $2.6 million. Assets and liabilities of the discontinued operations consisted of the following:
JULY 31, DECEMBER 31, ----------------------------- 1999 1999 1998 ------------- ------------- ------------ Assets: (IN THOUSANDS) Cash..................................................... $ (18) $ 7 $ (232) Accounts receivable...................................... 9,192 9,677 7,774 Inventories.............................................. 3,069 3,758 2,840 Prepaid expenses and other assets........................ 4,025 3,265 623 Property and equipment................................... 3,089 3,196 3,661 ------------- ------------- ------------ 19,357 19,903 14,666 Liabilities: Accounts payable and other current liabilities, including provisions for estimated losses upon disposal.......... 15,793 14,908 11,866 ------------- ------------- ------------ Net assets of discontinued operations....................... $ 3,564 $ 4,995 $ 2,800 ============= ============= ============
Net assets of the discontinued operations have been separately classified in the accompanying consolidated balance sheet at December 31, 1999. Prior year consolidated financial statements have been restated to conform to the current year presentation. NOTE 11 -- 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. 56 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 -- BUSINESS SEGMENTS In accordance with the requirements and guidelines of Statement of Financial Accounting Standards No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("Statement No. 131"), Maxwell's operations have been classified into business segments. In connection with the Company's Restructuring Plan, the Company has integrated its businesses into new operating divisions. Accordingly, the Company has defined four new reporting segments as follows (prior year segment information has been restated to conform to the new segmentation): POWER AND COMPUTING SYSTEMS As part of its Restructuring Plan, the Company is integrating its I-Bus, Inc. and Phoenix Power Systems, Inc. subsidiaries ("I-Bus/Phoenix"). The new I-Bus/Phoenix operation will expand the industrial computer product line of I-Bus, Inc. with complementary power quality products and broaden the global reach of the power quality products. As part of the Restructuring Plan, the Company is combining the San Diego operations of these two subsidiaries into a single facility in San Diego. The new San Diego facility is being designed for highly-efficient manufacturing, with improved processes, improved personnel training and more disciplined cost control practices. 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 I-Bus/Phoenix product line ranges from enclosures, CPU boards and backplanes to fully integrated and highly customized computer systems. This product line primarily employs passive backplane architecture, complemented by a newly-introduced CompactPCI line of products. The I-Bus/Phoenix power quality products consist of power distribution units, power conditioners and inverters, uninterruptible power supplies ("UPS") and other power protection products. These products are designed and engineered by the Company for customer applications primarily in the medical and telecommunications markets. ELECTRONIC COMPONENTS The Restructuring Plan organizes a high-reliability electronic components group (the "Electronic Components Group") within the Company by combining its POWERCACHE ultracapacitor business, its Sierra-KD EMI filter and ceramic capacitor business and its Space Electronics, Inc. ("SEi") high-reliability and radiation-hardened microelectronics business. These businesses involve manufacturing high-reliability electronic components based on the Company's core competencies in power and computing. During the Current Fiscal Year the Company will integrate the POWERCACHE ultracapacitor business and microelectronics components business into one manufacturing site in San Diego, while the EMI filters and ceramic capacitors will continue to be manufactured at the Company's facility in Carson City, Nevada. Both facilities are being designed for highly-efficient manufacturing, with improved process, improved personnel training and more disciplined cost control practices. The Components Group is developing the POWERCACHE ultracapacitor to provide bursts of power when a rapid injection of energy is required for an application. The POWERCACHE 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 size to cells measuring 2" x 2" x 6", while maintaining the same high energy storage per unit volume. The POWERCACHE ultracapacitors can also be linked together in modules to supply higher power for applications such as automotive and power quality systems. 57 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 -- BUSINESS SEGMENTS (CONTINUED) The Electronic Components Group designs, manufactures and sells a line of ceramic capacitor 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. These products block EMI from entering an electronic device at the opening used by, for example, power leads or sensors. In fiscal year 1999, Maxwell acquired SEi, a San Diego-based designer and manufacturer of high reliability, radiation hardened microelectronic components and assemblies primarily for the space market. Through this SEi unit, the Electronic Components Group provides integrated circuits and multi-chip modules designed and adapted for space flight and other high reliability applications. In the space market, SEi products are used in satellites which experience extreme environmental conditions, often in radiation-intense orbits. GOVERNMENT SYSTEMS Through its Systems Division, Maxwell is engaged in a variety of research and development programs in pulsed power, pulsed power systems design and construction, and weapons effects simulation. These services are primarily supplied to the United States government and its agencies including the Air Force and the Defense Threat Reduction Agency. The Systems Division also provides systems and services to national laboratories and industrial and defense companies. The Systems Division typically performs research and development under contracts that allow the Company to apply developed technology in commercial markets. STERILIZATION AND PURIFICATION SYSTEMS The Company's PurePulse Technologies, Inc. subsidiary applies PUREBRIGHT intense broad spectrum pulsed light technology to kill viruses and other microorganisms in water, blood plasma and other biopharmaceutical and medical products, and on medical product packaging material. As part of the Restructuring Plan PurePulse will pursue PUREBRIGHT applications in the medical, biopharmaceutical and consumer water markets. Other PUREBRIGHT applications involving food and food packaging, industrial water applications and niche markets in medical packaging, as well as applications involving the COOLPURE-Registered Trademark- pulsed electric field technology, will be de-emphasized and possibly sold or licensed. Maxwell intends to seek equity financing directly into PurePulse to finance its product development activities and operations. 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. 58 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 -- BUSINESS SEGMENTS (CONTINUED) Business segment financial data for the Short Fiscal Year and the three fiscal years ended July 31 is as follows:
FIVE-MONTH PERIOD ENDED YEARS ENDED JULY 31, DECEMBER 31, -------------------------------------------- 1999 1999 1998 1997 ------------- ------------- ------------ ------------ (IN THOUSANDS) Sales: Power and Computing Systems....................... $ 27,720 $ 65,095 $ 42,848 $ 34,259 Electronic Components............................. 7,699 34,646 32,755 29,477 Government Systems................................ 16,123 44,556 40,981 31,690 Sterilization and Purification Systems............ 628 9,389 6,774 6,473 ------------- ------------- ------------ ------------ Consolidated total.............................. $ 52,170 $ 153,686 $ 123,358 $ 101,899 ============= ============= ============ ============ Operating profit (loss): Power and Computing Systems....................... $ 128 $ 3,444 $ 3,297 $ 2,417 Electronic Components............................. (5,068) (2,120) 2,954 6,679 Government Systems................................ 98 3,704 2,655 1,779 Sterilization and Purification Systems............ (2,987) 2,512 466 316 ------------- ------------- ------------ ------------ Total segment operating profit (loss)........... (7,829) 7,540 9,372 11,191 Corporate expenses, including total restructuring, acquisition and other charges.. (6,223) (4,234) (7,959) 284 Interest and other, net........................... (95) 243 1,133 18 ------------- ------------- ------------ ------------ Income (loss) from continuing operations before income taxes, and minority interest........... $ (14,147) $ 3,549 $ 2,546 $ 11,493 ============= ============= ============ ============ Identifiable assets: Power and Computing Systems....................... $ 29,517 $ 33,163 $ 23,700 $ 12,167 Electronic Components............................. 25,108 26,266 22,689 14,014 Government Systems................................ 23,296 23,658 24,686 8,392 Sterilization and Purification Systems............ 7,053 9,169 6,217 5,194 Corporate......................................... 17,243 25,040 25,610 7,161 Net assets of discontinued operations............. 3,564 4,995 2,800 3,846 ------------- ------------- ------------ ------------ Consolidated total.............................. $ 105,781 $ 122,291 $ 105,702 $ 50,774 ============= ============= ============ ============ Depreciation and amortization: Power and Computing Systems....................... $ 612 $ 1,357 $ 754 $ 469 Electronic Components............................. 655 1,331 938 734 Government Systems................................ 619 1,490 1,116 647 Sterilization and Purification Systems............ 189 504 462 349 Corporate......................................... 234 395 326 326 ------------- ------------- ------------ ------------ Consolidated total.............................. $ 2,309 $ 5,077 $ 3,596 $ 2,525 ============= ============= ============ ============ Capital expenditures: Power and Computing Systems....................... $ 587 $ 1,223 $ 861 $ 992 Electronic Components............................. 762 3,320 2,738 1,790 Government Systems................................ 205 2,005 1,072 389 Sterilization and Purification Systems............ 200 283 458 872 Corporate......................................... 205 563 949 310 ------------- ------------- ------------ ------------ Consolidated total.............................. $ 1,959 $ 7,394 $ 6,078 $ 4,353 ============= ============= ============ ============
59 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 -- BUSINESS SEGMENTS (CONTINUED) Intersegment sales are insignificant. Corporate expenses include total restructuring, acquisition and other charges. 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 centralized telecommunications, networking and other information technology equipment of the Company. Sales under United States government contracts and subcontracts are primarily in the Government Systems business segment, and aggregated $15.5 million, $47.0 million, $39.8 million and $33.7 million in the Short Fiscal Year and in fiscal years 1999, 1998, and 1997, respectively. Sales to customers in excess of 10% of total Company sales included sales to the United States Air Force amounting to 11% and 14% of Company sales in fiscal years 1998 and 1997, respectively. Additionally, a customer of the Power and Computing Systems business segment represented 11% of the Company's sales in fiscal year 1997. International sales amounted to $11.4 million, $31.0 million, $19.4 million and $11.4 million in the Short Fiscal Year and in fiscal years 1999, 1998, and 1997 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 $8.9 million, $9.1 million and $4.2 million at December 31, 1999 and at July 31, 1999 and 1998, respectively. The Company had no foreign operations in 1997. NOTE 13 - 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. 60 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Board of Directors of the Company is divided into three classes, with the terms of office of each class ending in successive years. The term of the director currently serving in Class I expires with the 2002 Annual Meeting of Shareholders. The directors in Class II and Class III will continue in office until their terms expire at the 2000 and 2001 Annual Meetings of Shareholders, respectively. The directors and executive officers of the Company are set forth below.
Name and Age Position and Other Relationships with the Company; Business Experience - ------------ ---------------------------------------------------------------------- Carlton J. Eibl, 39 DIRECTOR (CLASS III), PRESIDENT AND CHIEF EXECUTIVE OFFICER. Mr. Eibl was appointed a director in July, 1998 and named Chief Executive Officer and President of the Company in November, 1999. From February 1999 until he formally joined the Company on December 1, 1999, Mr. Eibl served as President and Chief Operating Officer of Stratagene Corporation, a privately-held biotechnology company. Prior thereto, Mr. Eibl held various executive positions with Mycogen Corporation, a diversified agribusiness and biotechnology company. Mr. Eibl joined Mycogen in 1993 as Executive Vice President and General Counsel. In 1995, he was appointed President and Chief Operating Officer and in 1997 he became Chief Executive Officer. The Dow Chemical Company acquired Mycogen at the end of 1998. Robert L. Guyett, 63 DIRECTOR (CLASS III). Mr. Guyett was appointed a director in January 2000. He is a director and Treasurer of the Christopher Reeve Paralysis Foundation. Since 1995, he has been President and Chief Executive Officer of Crescent Management Enterprises, and for five years prior thereto, he was a director and Chief Financial Officer of Engelhard Corp. From 1987-1991, Mr. Guyett was a director and Chief Financial Officer of Fluor Corporation. Mr. Guyett is a director of Newport Corp. and several privately-held companies. Jean Lavigne, 61 DIRECTOR (CLASS II). Mr. Lavigne was appointed a director of the Company in August, 1999. Mr. Lavigne is Vice President and Country President in France for Motorola, Inc., and he is President and Chief Executive Officer of Motorola, S.A. Prior to joining Motorola, Mr. Lavigne was with Digital Equipment Corporation ("DEC") in Europe where he was responsible for interconnect technology and served as a member of DEC's European Government Affairs Team. Kenneth F. Potashner, 42 DIRECTOR (CLASS I), CHAIRMAN OF THE BOARD. Mr. Potashner has served as a director since April, 1996 and as Chairman since April, 1997. From the time he joined the Company in April, 1996 until November, 1998, he served Maxwell as President, Chief Executive Officer and Chief Operating Officer. In November, 1998, Mr. Potashner was named Chief Executive Officer of S3 Incorporated, a manufacturer of embedded graphics accelerator chips. From 1991 through 1994, he was Vice President, Product Engineering, for Quantum Corporation. From 1994 to April, 1996, he served as Executive Vice President, Operations, of Conner Peripherals. Mr. Potashner is a director of S3 Incorporated and Newport Corp.
61
Name and Age Position and Other Relationships with the Company; Business Experience - ------------ ---------------------------------------------------------------------- Mark Rossi, 43 DIRECTOR (CLASS II). Mr. Rossi was appointed a director of the Company in November, 1997 and elected to a full term at the Company's Annual Shareholder's Meeting in January, 1998. Mr. Rossi is a Senior Managing Director of Cornerstone Equity Investors, L.L.C., a New York-based private equity firm with assets under management in excess of $1 billion. Prior to the formation of Cornerstone Equity Investors in 1996, Mr. Rossi was President of Prudential Equity Investors, Inc. Mr. Rossi's industry focus is on technology-related and telecommunications companies. He is a member of the Board of Directors of True Temper, Inc. and MCMS, Inc. as well as several privately-held companies. Richard D. Balanson, 50 VICE PRESIDENT. Mr. Balanson is Corporate Vice President and President of the Electronic Components Group of Maxwell. 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. 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.
62
Name and Age Position and Other Relationships with the Company; Business Experience - ------------ ---------------------------------------------------------------------- Ted Toch, 51 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 Instruments Division of Nellcor, Inc. 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.
ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS Each director of the Company (other than Mr. Eibl who receives no compensation other than that received as an officer of the Company) receives compensation of $6,250 per quarter and $1,000 per Board and Committee meeting attended ($500 per Board or Committee telephonic meeting in which such director participates). The Company maintains the Maxwell Technologies, Inc. 1999 Director Stock Option Plan (the "Director Option Plan") which authorizes the granting of ten-year options to purchase an aggregate of 75,000 shares of the Company's Common Stock to non-employee directors of the Company during the ten-year term of the Director Option Plan which expires in 2009. This plan succeeds a similar director stock option plan that expired in 1999. Under the Director Option Plan, each eligible director automatically receives options to purchase 10,000 shares of Company Common Stock on the first business day following such director's initial Annual Shareholders' Meeting of the Company, and options to purchase 3,000 shares following subsequent Annual Shareholders' Meetings. The option price per share is the fair market value based on the public trading price of such shares on the date of grant. Options granted to directors vest in full on the first anniversary of the date of grant. The Company maintains the Maxwell Technologies, Inc. 1994 Director Stock Purchase Plan (the "Director Purchase Plan"), under which directors, other than those who are full-time employees of the Company, have the opportunity to purchase directly from the Company shares of Common Stock at 100% of the public trading price of the shares. An aggregate of 100,000 shares have been authorized for purchase by directors under the plan. The Director Purchase Plan authorizes purchases by eligible directors from and after January 1, 1995, the effective date of the plan, until the earlier of ten years thereafter or the issuance of all shares authorized for purchase. As of December 31, 1999, 47,826 shares remain available for purchase under the Director Purchase Plan. EXECUTIVE COMPENSATION The following table sets forth certain summary information concerning the compensation earned by the two individuals who served as the Company's Chief Executive Officer during the Short Fiscal Year and its six other most highly compensated executive officers (the "Named Executive Officers") during such year for services rendered to the Company and its subsidiaries in all capacities. 63 SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION --------------------------------- ANNUAL COMPENSATION (2) STOCK OPTION ------------------------------- RESTRICTED GRANTS (5) ALL OTHER NAME AND POSITION YEAR (1) SALARY BONUS OTHER (3) STOCK AWARDS (4) (NO. OF SHARES) COMPENSATION (6) - ---------------------------- ---------- ---------- ---------- ---------- ----------------- --------------- ---------------- Carlton J. Eibl (7) 1999(s) $ 29,423 $ -- $ -- $ -- 294,030 $ 8,750 CHIEF EXECUTIVE OFFICER, 1999 -- -- -- -- 10,000 31,810 PRESIDENT, DIRECTOR Thomas L. Horgan (7) 1999(s) 139,589 -- -- -- -- -- CHIEF EXECUTIVE OFFICER, 1999 260,841 156,416 6,600 -- 227,890 -- PRESIDENT, DIRECTOR 1998 192,123 86,051 3,000 -- 2,000 50,000 1997 179,516 81,630 -- -- 9,000 19,254 Kenneth F. Potashner (7) 1999(s) 110,577 -- 419 -- -- -- CHAIRMAN OF THE BOARD, 1999 339,062 181,875 5,142 -- -- 50,000 DIRECTOR 1998 469,877 495,009 4,038 -- 200,000 170,000 1997 400,004 400,000 2,850 190,000 50,000 361,031 Gregg L. McKee (8) 1999(s) 114,869 5,000 2,268 -- -- -- VICE PRESIDENT 1999 207,795 85,664 4,486 -- 24,000 -- 1998 197,242 108,724 3,486 -- 2,000 35,439 1997 166,622 82,617 -- -- 10,000 49,863 Vickie L. Capps (9) 1999(s) 84,615 -- -- -- 56,520 -- VICE PRESIDENT, FINANCE 1999 3,846 1,865 -- -- 90,000 -- & ADMINISTRATION AND CHIEF FINANCIAL OFFICER John D. Werderman 1999(s) 84,612 -- 2,008 -- 34,982 -- VICE PRESIDENT 1999 185,782 94,610 4,625 -- 24,000 50,000 1998 170,160 68,065 4,350 -- 12,000 17,598 1997 121,162 38,166 -- -- 50,000 37,475 Ted Toch (9) 1999(s) 82,227 -- 808 -- -- 12,343 VICE PRESIDENT 1999 182,211 101,628 430 -- 24,000 10,286 1998 10,096 8,413 -- -- 80,000 -- Walter P. Robertson 1999(s) 81,022 -- 1,478 -- 27,304 -- VICE PRESIDENT 1999 177,085 94,475 3,217 -- 24,000 -- 1998 175,349 83,400 3,121 -- 2,000 -- 1997 163,713 69,228 -- -- 69,000 -- - --------
(1) The year designated "1999(s)" is the five-month period, August 1 - December 31, 1999, referred to in this Form 10-K as the Short Fiscal Year. (2) Amounts shown include cash compensation earned and received by executive officers as well as amounts earned but deferred at the election of those officers under the Company's 401(k) Savings Plan and Deferred Compensation Plan. (3) Amounts in this column consist of matching contributions made by the Company under its Savings Plan. They do not include the dollar value of certain perquisites the recipient received as personal benefits. Although such amounts cannot be determined precisely, the Company has concluded that the aggregate amount thereof does not exceed as to any of the named individuals the lesser of $50,000 and 10% of the total salary and bonus paid to such individual for the Short Fiscal Year. (4) Mr. Potashner was awarded 10,000 shares of restricted stock in fiscal year 1997, which restricted shares vest 25% one year after grant and each month thereafter an additional 1/48 of the total number of shares granted become vested. Mr. Potashner has full voting power and dividend rights with respect to all of the restricted stock. At December 31, 1999, Mr. Potashner held a total of 98,437 shares of restricted stock having a value based on the closing price of the Company's Common Stock on that date of $984,370. 64 (5) Options shown in this column are options to purchase shares of Common Stock of Maxwell Technologies, Inc. granted under the Company's 1995 Stock Option Plan. Several individuals in the table also received options in fiscal year 1997 to purchase common stock in the Company's operating subsidiaries as follows: Mr. Potashner - 100,000 shares in each of Maxwell Energy Products, Inc. ("Energy Products"), I-Bus, Inc. ("I-Bus") and Maxwell Technologies Systems Division, Inc. ("Systems"); Mr. Horgan - 33,750 shares in Pure Pulse Technologies, Inc. ("PurePulse"), 37,500 shares in each of I-Bus, and Systems; Mr. McKee - 125,000 shares in Energy Products, 22,500 shares in PurePulse, 25,000 shares in each of I-Bus and Systems; Mr. Werderman - 25,000 shares in Energy Products, 100,000 shares in I-Bus, 22,500 shares in PurePulse and 50,000 shares in Systems; Mr. Robertson - 100,000 shares in Systems, 22,500 shares in PurePulse, 25,000 shares in each of Energy Products and I-Bus. In fiscal year 1998, Mr. Toch was granted options to purchase 100,000 shares of common stock in PurePulse. Mr. Potashner received options in fiscal 1996 to purchase 150,000 shares of PurePulse common stock. In the Short Fiscal Year, Mr. Horgan was granted options to purchase 23,000 shares in Space Electronics, Inc. ("SEi"), Ms. Capps was granted options to purchase 8,000 shares of common stock in SEi, and Messrs. McKee, Werderman, Toch and Robertson were each granted options to purchase 7,000 shares of common stock of SEi. (6) For Mr. Eibl, the amounts in 1999 and the Short Fiscal Year represent compensation received as a director of the Company prior to being named as President and CEO in November 1999. For Mr. Potashner, represents amounts paid or accrued in fiscal year 1997 for relocation expenses, including certain carrying and sale-related costs for his former residence, and related tax offset payments; and in fiscal year 1998 and fiscal year 1999 for certain non-qualified retirement benefits. For Mr. Horgan, the fiscal year 1998 amount is a loan from the Company made at point of hire, which was forgivable two years after Mr. Horgan's fiscal year 1996 hire date. For Mr. Werderman, the fiscal year 1999 amount is a loan from the Company made at point of hire, which was forgivable two years after Mr. Werderman's fiscal year 1997 hire date. For Mr. Horgan for fiscal 1996, Mr. McKee for fiscal years 1998 and 1997, Mr. Werderman for fiscal years 1998 and 1997 and Mr. Toch for fiscal year 1999 and the Short Fiscal Year, the amounts are reimbursements of relocation expenses (including reimbursement of brokerage commissions on the sale of a residence). During fiscal year 1998, Mr. Toch received a loan of $50,000 from the Company which is forgivable if Mr. Toch remains employed with the Company through June 2000. During fiscal year 1999, Mr. Werderman received a loan of $50,000 from the Company which is forgivable if Mr. Werderman remains employed with the Company through August 31, 2000. Also, during fiscal year 1999, Ms. Capps received a loan of $50,000 from the Company which is forgivable if she remains employed until July 2001. (7) In November 1998, Mr. Potashner stepped down from his positions of Chief Executive Officer and President and continued as Chairman, with an on-going executive role with the Company, through December 31, 1999. In April 1999, Mr. Horgan was appointed Chief Executive Officer and President. Mr. Horgan resigned from these positions in November 1999. Mr. Eibl was named Chief Executive Officer and President in November 1999. (8) Mr. McKee's employment with the Company terminated on December 31, 1999. Mr. McKee is receiving salary continuation payments through June 2000. (9) Mr. Toch was hired as a Vice President in fiscal year 1998. Under the terms of his employment, the Company agreed to retain Mr. Toch as an employee or consultant on a full-time basis, at no less than his inital compensation, for a period of two years, which under certain circumstances can be extended to three years, from his hire date. Ms. Capps was hired as Chief Financial Officer and Vice President, Finance and Administration in July 1999. 65 OPTION GRANTS IN LAST FISCAL YEAR The following table shows information on grants of options to purchase stock of the Company and its SEi subsidiary to those Named Executive Officers who received such grants during the Short Fiscal Year. Pursuant to Securities and Exchange Commission rules, the table also shows the value of the options at the end of the ten year option terms if the stock price were to appreciate annually by 5% and 10%, respectively. These assumed values may not reflect actual value at the times indicated.
PERCENTAGE OF POTENTIAL REALIZABLE TOTAL OPTIONS VALUE AT ASSUMED TO EMPLOYEES ANNUAL RATES OF IN FIVE-MONTH STOCK PRICE PERIOD ENDED EXERCISE APPRECIATION FOR OPTIONS DECEMBER 31, PRICE EXPIRATION OPTION TERM NAME ENTITY GRANTED (1) 1999 (PER SHARE) DATE 5% 10% - ---------------------- ---------- ------------ ---------------- ------------ ------------ ------------ ------------ Carlton J. Eibl Maxwell 294,030 45.40% $8.75 11/09/2009 $1,618,000 $4,100,320 Thomas L. Horgan SEi 23,000 4.60% $5.00 08/18/2009 72,320 183,280 Gregg L. McKee SEi 7,000 1.40% $5.00 08/18/2009 22,010 55,780 Vickie L. Capps Maxwell 56,250 8.69% $9.00 12/27/2009 318,380 806,830 SEi 8,000 1.60% $5.00 08/18/2009 25,160 63,750 John D. Werderman Maxwell 34,982 5.40% $9.00 12/27/2009 198,000 501,770 SEi 7,000 1.40% $5.00 08/18/2009 22,010 55,780 Ted Toch SEi 7,000 1.40% $5.00 08/18/2009 22,010 55,780 Walter P. Robertson Maxwell 27,304 4.22% $9.00 12/27/2009 154,540 391,640 SEi 7,000 1.40% $5.00 08/18/2009 22,010 55,780
- ---------- (1) Mr. Eibl's options represent a one-time grant of non-qualified stock options in connection with his commitment to join the Company as President and Chief Executive Officer. These options are not under the Company's 1995 Stock Option Plan, and they vest at the rate of 1/48th of the total shares each month, commencing December 1999. The balance of the Maxwell options shown in the table are under the 1995 Stock Option Plan and are either incentive stock options or non-qualified stock options, granted at a purchase price no less than the fair market value of the underlying Company Common Stock based on the closing trading price of such stock on the date of grant. The increments in which the options are exercisable are determined by the committee that administers the plan. The SEi options are granted under that company's employee stock option plan at an exercise price equal to the fair market value of the underlying shares as determined by the SEi board of directors. 66 FISCAL YEAR END OPTION VALUES Shown below is information on each Named Executive Officer with respect to (i) the value of stock options exercised by such person in the Short Fiscal Year, measured in terms of the closing price of the Company's Common Stock on the date of exercise, and (ii) the value of unexercised options to purchase the Company's Common Stock held by such person, measured in terms of the closing price of the Company's Common Stock on December 31, 1999.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED SHARES ACQUIRED OPTIONS HELD AT IN-THE-MONEY OPTIONS AT ON EXERCISE VALUE DECEMBER 31, 1999 (1) DECEMBER 31, 1999 (1) --------------------------- --------------------------- NAME (NO. OF SHARES) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------- ---------------- ------------ ------------ -------------- ------------ -------------- Carlton J. Eibl -- $ -- 6,125 297,905 $ 7,656 $359,881 Kenneth F. Potashner -- -- 112,242 140,915 262,235 333,756 Thomas L. Horgan -- -- 80,581 90,164 180,000 60,000 Gregg L. McKee -- -- 15,924 15,924 23,991 23,991 Vickie L. Capps -- -- -- 146,250 -- 56,250 John D. Werderman -- -- 23,600 77,382 -- 34,982 Ted Toch -- -- 24,000 80,000 -- -- Walter P. Robertson -- -- 24,906 64,998 52,996 60,420
- ---------- (1) Does not include options held by the Named Executive Officers to purchase shares of common stock in five of the Company's operating subsidiaries under the stock option plans of such subsidiaries. All options held by these individuals under such subsidiary stock option plans were granted in fiscal year 1997, except for options to purchase 150,000 shares of common stock of the Company's PurePulse Technologies, Inc. subsidiary granted to Mr. Potashner in fiscal 1996, 100,000 shares of common of the Company's PurePulse Technologies, Inc. subsidiary granted to Mr. Toch in fiscal year 1998, and options to purchase shares of common stock in the Company's Space Electronics, Inc. subsidiary granted to Named Executive Officers during the Short Fiscal Year as shown in the Option Grants Table. With the exception of SEi options for which no shares are exercisable, and Mr. Potashner's and Mr. Toch's PurePulse options, of which 120,000 and 25,000 shares, respectively, were exercisable, 75% of such subsidiary options described in footnote (4) to the Summary Compensation Table were exercisable within 60 days of December 31, 1999. No public market exists for the common stock of any of the Company's subsidiaries. For purposes of the above table, no value has been attributed to the subsidiary stock options. 67 SHAREHOLDER RETURN PERFORMANCE PRESENTATION Set forth below is a line graph comparing the cumulative total return to shareholders on the Company's Common Stock with the cumulative total return on the NASDAQ and a peer group of comparable companies identified therein for the five-year and five-month period August 1, 1994 - December 31, 1999. COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG MAXWELL TECHNOLOGIES, INC., NASDAQ, AND INDUSTRY PEER GROUP AUGUST 1, 1994 - DECEMBER 31, 1999
7/1994 7/1995 7/1996 7/1997 7/1998 7/1999 12/1999 ------ ------ ------ ------ ------ ------ ------- Maxwell Technologies 100.0 93.9 157.6 563.6 609.1 630.3 242.4 Nasdaq Stock Market 100.0 138.8 150.3 221.7 258.7 366.6 568.4 Self-determined Peer Group 100.0 166.9 120.9 165.6 127.8 174.3 392.6
68 REPORT OF THE COMPENSATION COMMITTEE AND STOCK OPTION COMMITTEE ON EXECUTIVE COMPENSATION As described in more detail below, the Company's executive compensation consists of three principal components--base salary and annual incentive compensation, as determined by the Compensation Committee of the Board of Directors; and stock option awards, as determined by the Stock Option Committee of the Board of Directors. During fiscal year 1999 and through December 31, 1999, the Compensation Committee also acted as the Stock Option Committee. The compensation policies of the Company are designed to set its executive compensation, including salary and short-term and long-term incentive programs, at a level consistent with amounts paid to executive officers of companies of similar size and business orientation and consistent with marketplace requirements to attract and retain management personnel with the experience and background to drive the commercialization of the Company's technologies. In this regard, the compensation policies of the Company are particularly designed to link executive officer bonus compensation to the Company's performance in the short-term and to emphasize compensation from equity, primarily employee stock options, for long-term incentives. The three principal components of the Company's executive compensation are as follows: (1) BASE SALARY. Base salary is intended to be set at a level consistent with amounts paid to executive officers of companies of comparable size and business areas and generally reflective of the performance of the Company and the individual. Salaries for executive officers are reviewed on an annual basis. Base salary (and annual incentive bonus compensation) during the period for Mr. Horgan, who was Chief Executive Officer for part of the year, was set forth in the employment agreement discussed below. Mr. Eibl's base salary and annual bonus incentive for the period after he joined the Company as President and Chief Executive Officer on December 1, 1999 is set forth in his employment agreement described below. (2) ANNUAL INCENTIVE COMPENSATION. The Company fell slightly short of the revenue and earnings per share target in the fiscal year ended July 31, 1999 for target bonus payout to executive officers, and other than for the CEO, bonuses of just under 50% of base compensation were paid. The determination of the exact percentage was at the discretion of the CEO. Pursuant to their respective employment contracts described below and based on the percentage of the revenue and earnings targets achieved, for the fiscal year ended July 31, 1999, Mr. Potashner received a bonus of $181,875, or just under 100% of his base compensation, prorated for the time he served in the Chief Executive Officer capacity, and Mr. Horgan received $156,416, or just under 100% of his base compensation, prorated for the time he served in the Chief Executive Officer capacity. No bonuses were paid for the Short Fiscal Year. For the Current Fiscal Year (January 1 - December 31, 2000), the Committee adopted a bonus plan for executive officers under which bonuses ranging from 50% to 100% of base salary can be earned if certain revenue and operating income targets are met. (3) LONG TERM INCENTIVE COMPENSATION/STOCK OPTIONS. The Company's long-term incentive program consists of a stock option program pursuant to which the Chief Executive Officer and other executive officers (as well as other key employees) are periodically granted stock options at the then fair market value of the Company's Common Stock. In addition, the Company began a program in fiscal year 1997 for the award to executives of stock options in the Company's operating subsidiaries. These option programs are designed to reward and retain executive officers over the long-term and to link the value of the incentive to increases in the value of the subsidiaries and in the Company's stock price over time, benefiting shareholders as a whole. Dated: February 29, 2000 COMPENSATION AND STOCK OPTION COMMITTEE Karl M. Samuelian Mark Rossi 69 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During the Short Fiscal Year until Mr. Eibl's selection as President and Chief Executive Officer, the Compensation Committee consisted of Messrs. Samuelian, Rossi and Eibl, and thereafter the members of such committee were Messrs. Samuelian and Rossi. Mr. Samuelian stepped down from the Board of Directors on January 31, 2000. The compensation committee now consists of Messrs. Guyett, Lavigne and Rossi. EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS MR. EIBL. In November 1999, the Company entered into an Employment Agreement ("Agreement") with Carlton J. Eibl pursuant to which Mr. Eibl is to become the President and Chief Executive Officer of the Company effective December 1, 1999. The Agreement requires Mr. Eibl to perform duties associated with the office of chief executive of the Company plus other duties or positions as the Board of Directors may require. The Agreement provides for a base salary of $425,000 per year, reviewed annually, with an annual bonus opportunity targeted at 100% of base salary, to be determined by the Board of Directors. Such bonus will be based on financial and non-financial performance targets set by the Board of Directors. The Agreement provides for the grant of special, non-qualified options to purchase 294,030 shares of the Company's common stock at an exercise price of $8.75 per share, with four year vesting at the rate of 1/48 of the total number of shares per month commencing with December, 1999, as long as Mr. Eibl is with the Company. Under the Agreement, Mr. Eibl will become immediately vested in all the options, and receive payments equal to twice his annual salary then in effect, in the event a "change of control" occurs and either his compensation or responsibilities are reduced or the Company's principal place of business is moved outside of San Diego County. A "change of control" is defined as the acquisition by a person or group of a majority of the Company's stock by direct purchase or through merger, the liquidation or sale of substantially all of the assets of the Company or a change in the majority of the members of the Board of Directors other than through membership changes determined by the Board itself. If Mr. Eibl is terminated without cause prior to the second anniversary date of the Agreement, he will be paid two times his annual base salary in effect on the date of termination and his stock options will continue to vest until the second anniversary date of his Agreement. If the termination occurs after the second anniversary date of the Agreement, he will receive the average of the total annual compensation (annual base salary plus bonuses earned) for the preceding two years. If Mr. Eibl voluntarily resigns or is terminated for cause, he will be paid only such salary and accrued vacation pay as is then due him. MR. HORGAN. The Company entered into an Employment Agreement with Mr. Horgan upon his appointment as President and Chief Executive Officer in April, 1999. Mr. Horgan resigned from his positions with the Company in November, 1999, and under the Employment Agreement, he received a total of $700,000, representing an amount equal to twice his annual salary then in effect. In addition, Mr. Horgan will continue to vest in a portion of the stock options covering 227,890 shares granted to him pursuant to the Employment Agreement. Such options vest at the rate of 1/48 of the total shares each month commencing with April, 1999, and will continue to vest at that rate through April, 2001, after which the vested options must be exercised within 60 days or they will expire. MR. POTASHNER. In March, 1996, the Company entered into an Employment Contract ("Contract") with Kenneth F. Potashner pursuant to which Mr. Potashner became the President and Chief Executive Officer of the Company effective April 26, 1996. In November, 1998, Mr. Potashner stepped down from his position as Chief Executive Officer and agreed with the Board to continue as Chairman, as well as, for a period of time, in an active, although less than full time, executive role with the Company. Mr. Potashner received an annual base salary of $250,000 for the period in which he has continued in such executive role. Effective January 1, 2000, Mr. Potashner ceased serving in such executive role. Mr. Potashner's salary for such role ceased January 31, 2000 and Mr. Potashner received an $85,000 separation payment. Mr. Potashner currently holds a total of 98,437 shares of restricted stock granted under the Contract and options under the Company's 1995 Stock Option Plan for a total of 351,594 shares. Both the restricted shares and the options are subject to four-year vesting schedules. Vesting will continue during the period in which Mr. Potashner is active with the Company in an executive, consulting or other role. In addition, Mr. Potashner is entitled to non-qualified retirement benefits payable in installments following the termination of his employment equal, in the aggregate, to 10% of the total of his annual salary and target bonus each year under the Contract. A total of $263,079 has been earned under this provision through the end of the Short Fiscal Year, and no further amounts will accrue thereafter. 70 Mr. Potashner will be immediately fully vested in the restricted shares and stock options in the event that a "change of control" occurs and certain other conditions are met. A "change of control" is defined as the acquisition by a person or group of a majority of the Company's stock by direct purchase or through a merger, the liquidation or sale of substantially all of the assets of the Company or a change in a majority of the members of the Board of Directors other than through membership changes determined by the Board itself. OTHER CHANGE-IN-CONTROL ARRANGEMENTS. In connection with the employment of Ms. Capps, the Company agreed that Ms. Capps will receive payment of base salary for one year in the event a "change of control" occurs and either her compensation or responsibilities are reduced or the Company's principal place of business is moved outside of San Diego County. A "change of control" is defined as the acquisition by a person or group of a majority of the Company's stock by direct purchase or through merger, the liquidation or sale of substantially all of the assets of the Company or a change in the majority of the members of the Board of Directors other than through membership changes determined by the Board itself. OTHER PROGRAMS In January 2000, the Board adopted, and the Company's shareholders subsequently approved, the Company's Management Equity Ownership Program (the "Program"). Under the Program, executive officers of the Company and other members of senior management selected by the Committee are offered full recourse loans from the Company to be used to purchase stock of the Company. The loans bear interest and must be repaid in annual installments of principal and interest over a four-year period. Repayment of the loan is secured by the shares purchased with the loan proceeds. The Committee may decide to permit purchases directly from the Company, in which case the purchase price is set at the closing price that day in the public trading market, or to require the purchases to be made in the public trading market. On February 1, 2000, loans in the total amount of $900,000, bearing interest at 6.56%, were made in connection with the purchase of shares directly from the Company by Carlton J. Eibl - 20,833 shares; Vickie L. Capps, Richard D. Balanson, Donald M. Roberts, and John D. Werderman (each a Vice President of the Company) - 8,333 shares each; and nine other members of management - a total of 20,830 shares. All of these purchases were made at the $12.00 per share closing price on the date of purchase. 71 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock by (i) each person (or group of affiliated persons) known by the Company to beneficially own more than five percent of the outstanding shares of common stock; and (ii) each director of the Company, (iii) each of the Named Executive Officers, and (iv) all directors and executive officers of the Company as a group. Information for the officers and directors is as of February 29, 2000. The address for each individual is 9275 Sky Park Court, San Diego, CA 92123.
TOTAL NAME AND ADDRESS OF BENEFICIAL % BENEFICIAL OWNER OWNERSHIP (1) OWNERSHIP (2) - ----------------------------------------------------------------------------- ---------------- ----------------- Security Management Company, LLC.......................................... 821,900 8.4% 700 S.W. HARRISON STREET, TOPEKA, KS 66636-0001 Carlton J. Eibl........................................................... 57,335 (3) * Kenneth F. Potashner...................................................... 284,835 (3) 2.9% Vickie L. Capps........................................................... 15,833 * John Werderman............................................................ 38,387 (3) * Ted Toch.................................................................. 24,300 (3) * Walter P. Robertson....................................................... 40,107 (3) * Thomas L. Horgan.......................................................... 99,637 (3) 1.0% Gregg L. McKee............................................................ 18,000 (3) * Mark Rossi................................................................ 13,000 (3) * Robert Guyett............................................................. 4,000 * Jean Lavigne.............................................................. -- * All directors and executive officers as a group (13 persons).............. 634,329 (3) 6.3%
- ---------------- *Less than one percent. (1) Information with respect to beneficial ownership is based on information furnished to the Company by each shareholder included in the table or included in filings with the Securities and Exchange Commission. The Company understands that each person in the table has sole voting and investment power for shares beneficially owned by such person, subject to community property laws where applicable. (2) Shares of Common Stock subject to options which are currently exercisable or exercisable within 60 days of February 29, 2000, are deemed outstanding for computing the percentage of the person holding such options but are not deemed outstanding for computing the percentage of any other person. Percentage of ownership is based on 9,753,420 shares of Common Stock outstanding on February 29, 2000. (3) Shares of Common Stock beneficially owned include options exercisable within 60 days of February 29, 2000 to purchase 34,502 shares granted to Mr. Eibl, 127,531 shares granted to Mr. Potashner, 23,600 shares granted to Mr. Werderman, 24,000 shares granted to Mr. Toch, 24,906 shares granted to Mr. Robertson, 94,824 shares granted to Mr. Horgan, 14,724 shares granted to Mr. McKee and 13,000 shares granted to Mr. Rossi and options to purchase 261,539 shares granted to all directors and officers as a group. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In January 1999, the Company loaned Kenneth F. Potashner, its Chairman and former Chief Executive Officer, a total of $2,000,000 to assist in the payment of income taxes accruing on restricted stock previously granted to Mr. Potashner. The loan is evidenced by a full recourse promissory note and secured by the pledge of 50,000 shares of common stock of the Company. The promissory note is payable in full on or before the second anniversary of the date of such note and accrues interest on the outstanding balance at the rate of 5% per annum. In August 1999, the Company loaned Richard Balanson, a Vice President, a total of $120,000. As long as he remains employed by the Company, 50% of the loan is forgivable 18 months after Mr. Balanson's August 1999 hire date and the balance is forgivable 36 months after such date. 72 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 -- Exhibit 3.3 to the Registrant's Form 10-K Annual Report for the year ended July 31, 1999 ("1999 Form 10-K") is incorporated by reference. 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. 4.1 Rights Agreement dated November 5, 1999 between Registrant and ChaseMellon Shareholders Services, LLC, as Rights Agent - Exhibit 1 to the Registrant's Form 8-A filed November 18, 1999 is hereby 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 -- Exhibit 10.3 to the 1999 Form 10-K is incorporated by reference. 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. 73 10.8 Amendment Number Three to Maxwell Technologies, Inc. 1995 Stock Option Plan, dated January 28, 1999 -- Exhibit 10.8 to the 1999 Form 10-K is incorporated by reference. 10.9+ Amendment Number Four to Maxwell Technologies, Inc. 1995 Stock Option Plan, dated January 28, 2000. 10.10 Maxwell Laboratories, Inc. 1994 Employee Stock Purchase Plan-- Exhibit 10.4 to the 1995 Form 10-K is incorporated by reference. 10.11 Maxwell Laboratories, Inc. 1994 Director Stock Purchase Plan-- Exhibit 10.5 to the 1995 Form 10-K is incorporated by reference. 10.12+ Maxwell Technologies, Inc. 1999 Director Stock Option Plan, dated January 28, 2000. 10.13 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. 10.14 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. 10.15 Maxwell Technologies, Inc. Officer and Director Stock Repurchase Policy-- Exhibit 10.12 to the 1998 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+ Maxwell Technologies, Inc. Employment Agreement dated November 9, 1999 between the Registrant and Carlton J. Eibl. 10.20 Chief Executive Officer Maxwell Technologies, Inc. Employment Agreement dated April 30, 1999 between the Registrant and Thomas L. Horgan -- Exhibit 10.9 to the 1999 Form 10-K is incorporated by reference. 10.21 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. 10.22 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. 10.23 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. 10.24 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. 10.25 Secured Promissory Note dated February 2, 1999 and Stock Pledge Agreement dated February 2, 1999 between Registrant and Kenneth F. Potashner -- Exhibit 10.24 to the 1999 Form 10-K is incorporated by reference. 74 10.26 Stock Pledge Agreement dated February 2, 1999 between Registrant and Kenneth F. Potashner -- Exhibit 10.25 to the 1999 Form 10-K is incorporated by reference. 10.27 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. 10.28 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. 10.29 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+ Executive Bonus Plan for Calendar Year 2000. 10.31 PurePulse Technologies, Inc. 1994 Stock Option Plan-- Exhibit 10.26 to the 1996 Form 10-K is incorporated by reference. 10.32 Maxwell Federal Division, Inc. 1996 Stock Option Plan-- Exhibit 10.34 to the 1997 Form 10-K is incorporated by reference. 10.33 Maxwell Energy Products, Inc. 1996 Stock Option Plan-- Exhibit 10.35 to the 1997 Form 10-K is incorporated by reference. 10.34 I-Bus, Inc. 1996 Stock Option Plan-- Exhibit 10.36 to the 1997 Form 10-K is incorporated by reference. 10.35 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. 10.36+ Space Electronics, Inc. 1999 Stock Option Plan. 10.37 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. 10.38 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. 10.39 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. 10.40 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. 75 10.41 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. 10.42 Shareholder Agreement among Maxwell Technologies, Inc., PurePulse Technologies, Inc., Sanyo E&E Corporation and Three Oceans Inc., dated January 28, 1999 -- Exhibit 10.44 to the 1999 Form 10-K is incorporated by reference. 10.43 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 -- Exhibit 10.45 to the 1999 Form 10-K is incorporated by reference. 10.44 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. 10.45+ Maxwell Technologies, Inc. 1999 Management Equity Ownership Program dated January 28, 2000. 10.46 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 California -- Exhibit 10.26 to the 1998 Form 10-K is 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 On November 9, 1999, the Registrant filed a report on Form 8-K which included a press release announcing the modification and renewal of the Registrant's Shareholder Rights Plan which had expired in June 1999. On December 7, 1999, the Registrant filed a report on Form 8-K reporting that its Board of Directors adopted a resolution on November 22, 1999 to change the fiscal year of the Registrant to calendar year effective January 1, 2000. - ---------- + Filed herewith. 76 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 24th day of March, 2000. MAXWELL TECHNOLOGIES, INC. By: /s/ CARLTON J. EIBL ------------------------------------- Carlton J. Eibl Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ CARLTON J. EIBL Chief Executive Officer, President and March 24, 2000 - -------------------------------------------- Director Carlton J. Eibl /s/ KENNETH F. POTASHNER Chairman of the Board, Director March 24, 2000 - -------------------------------------------- Kenneth F. Potashner /s/ VICKIE L. CAPPS Vice President-Finance and March 24, 2000 - -------------------------------------------- Administration, Treasurer Vickie L. Capps and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ MARK ROSSI Director March 24, 2000 - -------------------------------------------- Mark Rossi /s/ JEAN LAVIGNE Director March 24, 2000 - -------------------------------------------- Jean Lavigne /s/ ROBERT GUYETT Director March 24, 2000 - -------------------------------------------- Robert Guyett
77 EX-10.9 2 EXHIBIT 10.9 Exhibit 10.9 AMENDMENT NUMBER FOUR 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 1,990,000 shares of the Company's Common Stock as previously amended, is hereby adjusted to a maximum of 2,440,000 shares of the Company's Common Stock. 2. EFFECT OF AMENDMENTS. This amendment to the Plan shall be effective as of August 31, 1999, subject to the approval of the shareholders of Maxwell Technologies, Inc., at the Annual Shareholder's Meeting on December 10, 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: November 22, 2000 EX-10.12 3 EXHIBIT 10.12 Exhibit 10.12 MAXWELL TECHNOLOGIES, INC. 1999 DIRECTOR STOCK OPTION PLAN 1. PURPOSE The purpose of this Director Stock Option Plan (the "Plan") of Maxwell Technologies, Inc. (the "Company"), is to encourage ownership in the Company by its outside directors whose services are considered essential to the Company's continued progress and thus to provide them with a further incentive to continue to serve as directors of the Company. The Plan is also intended to assist the Company through utilization of the incentives provided by the Plan to attract and retain experienced and qualified candidates to fill vacancies in the Board which may occur in the future. The Plan is intended to be a "formula plan" for purposes of ("Rule 16b-3") promulgated under the Securities Exchange Act of 1934 (the "1934 Act") and the interpretations thereof by the Staff or the Securities and Exchange Commission. 2. ADMINISTRATION The Plan will be administered by the Board of Directors (the "Board") of the Company. Subject to the express provisions of the Plan, the Board will have authority to amend, suspend or terminate the Plan; to interpret the Plan; to prescribe, amend, and rescind rules and regulations relating to it; to determine the terms and provisions of the respective option agreements (which need not be identical); and to make all other determinations necessary or advisable for the administration of the plan. The interpretation and construction of the Plan, and any determination made by the Board in administering and interpreting the provisions of the Plan, and of any option granted hereunder, shall be conclusive and binding. 3. PARTICIPATION IN THE PLAN Persons who are now or shall become incumbent directors of the Company who are not at the time employees of the Company or any subsidiary of the Company shall be eligible to participate in the Plan (hereinafter "eligible directors"). A director of the Company shall not be deemed to be an employee of the Company solely by reason of the existence of a consulting contract between such director and the Company or any subsidiary thereof pursuant to which the director agrees to provide consulting services as an independent consultant to the Company or its subsidiaries on a regular or occasional basis for a stated consideration. The term "director" as used in this Plan shall include a "director emeritus". 1 4. STOCK SUBJECT TO THE PLAN The stock subject to the Plan shall consist of 75,000 shares of the $.10 par value Common Stock of the Company ("Common Stock"). Such shares may, as the Board shall from time to time determine, be either authorized and unissued shares of Common Stock or issued shares of Common Stock which have been reacquired by the Company. 5. STOCK OPTIONS Each option granted under this Plan shall be evidenced by a written agreement in such form as the Board shall from time to time approve, which agreement shall comply with and be subject to the following terms and conditions: A. AUTOMATIC GRANT DATES. Options shall be granted to each eligible director automatically on the first business day after the organizational meeting of the Board in each year, which is the first meeting of the Board following the Company's Annual Meeting of Shareholders (hereinafter a "Grant Date"). B. NUMBER OF SHARES. The initial grant of options under this Plan for each eligible director on the first Grant Date on which such individual is an eligible director shall constitute a grant of options to purchase 10,000 shares of Common Stock. Thereafter each annual grant to each such eligible director on succeeding Grant Dates shall constitute a grant of options to purchase 3,000 shares of Common Stock. C. DISCRETIONARY GRANTS. In addition to automatic grants under Section 5(A) above, the Board may, from time to time, grant options to one or more eligible directors to purchase such number of shares as the Board shall determine, subject to all of the terms and conditions of the Plan (other than Section 5(A) and Section 5(B) above). The Grant Date for such discretionary options shall be the date on which the Board approves the grant. D. OPTION PRICE PER SHARE. All options granted hereunder shall be exercisable at a price per share equal to the Fair Market Value of the Common Stock on the date of the grant of the option. "Fair Market Value" for purposes of this Plan shall be defined as the mean between the closing bid and asked quotations for such stock (or the closing selling price for such stock, if applicable) on the Grant Date (as reported by a newspaper of general circulation or a recognized stock quotation service) or, in the event that there shall be no bid or asked quotations (or reported closing selling price) on the Grant Date, then upon the basis of the mean between the closing bid and asked quotations (or the closing selling price, as the case may be,) on the date nearest preceding the Grant Date. In the event that the Company's Common Stock shall become listed and traded upon a recognized securities exchange, then the Fair Market Value shall be determined upon the basis of the closing 2 selling price at which shares of the Common Stock were traded on such recognized securities exchange on the date of grant or, if the Common Stock was not traded on said date, upon the basis of the closing selling price on the date nearest preceding the date of grant. E. TRANSFERABILITY. Except as provided below, each option granted under the Plan by its terms shall be exercisable during the lifetime of the optionee only by him and shall not be transferable by the optionee in whole or in part, by sale, assignment, pledge or otherwise, except by will, or by the laws of descent and distribution, nor be made subject to execution, attachment, or similar process. Notwithstanding the foregoing, the Board may, in its discretion, limit or eliminate these restrictions on transferability to the extent such restrictions are not at the time required for the Plan to continue to meet the requirements of Rule 16b-3 or otherwise result in adverse consequences to the Company. F. PERIOD OF OPTION. Each option granted under this Plan shall become exercisable on the first anniversary of the date upon which it was granted. Except for earlier termination as provided below, no option shall be exercisable after the expiration of ten years from the date upon which such option was granted. In the event of the death of an optionee, the option privileges of said optionee shall be limited to the shares which were immediately purchasable by such optionee at the date of death and such option shall terminate unless exercised by said optionee's successor within one (1) year after the date of death. In the event that an optionee ceases to serve as a director of the Company other than by reason of death, the option privileges of such optionee shall be limited to the shares which were immediately purchasable by him at the date of such termination. If any option granted under the Plan is canceled by mutual consent or terminates or expires for any reason without having been exercised in full, the number of shares subject thereto shall again be available for purposes of the Plan. G. EXERCISE OF OPTIONS. Options may be exercised only by written notice delivered to the Company at its corporate office and the exercise price of each option being exercised shall be paid in full upon exercise, including any federal, state, and/or local income tax withholding amount due and shall be payable in cash in United States dollars (including check, bank draft or money order); provided, however, that in lieu of such cash the person exercising the option may pay the option price in whole or in part by delivering to the Company shares of the Common Stock. For this purpose, the Common Stock shall be treated as having a Fair Market Value on the date of exercise of the stock option, determined as provided in Section 5(D), except that no shares of the Common Stock which have been held for less than six months may be delivered in payment of the option price of an option, if that would result in adverse accounting or tax consequences to the Company as determined by the Board, in its sole discretion. Delivery of shares may also be accomplished through the effective transfer 3 to the Company of shares held by a broker or other agent. The Company will also cooperate with any person exercising an option who participates in a cashless exercise program of a broker or other agent under which all or part of the shares received upon exercise of the option are sold through the broker or other agent or under which the broker or other agent makes a loan to such person. Notwithstanding the foregoing, the exercise of the option shall not be deemed to occur and no shares of the Common Stock will be issued by the Company upon exercise of the option until the Company has received payment of the option price in full. The number of shares of the Common Stock deemed issued upon an exercise paid for with shares shall be the number of shares issued upon exercise less the number of shares delivered in satisfaction of the exercise price. No options may be exercised as a fraction of a share. H. NONSTATUTORY OPTIONS. No option granted hereunder shall constitute an incentive stock option" as that term is defined in the Internal Revenue Code of 1986, as amended. 6. MODIFICATION, EXTENSION, AND RENEWAL OF OPTIONS The Board shall have the power to modify, extend, or renew outstanding options and authorize the grant of new options in substitution therefor, provided that such power may not be exercised in a manner which would (i) alter or impair any rights or obligations of any option previously granted without the written consent of the optionee or (ii) adversely affect the qualification of the Plan or any other stock-related plan of the Company under Rule 16b-3 or any successor provision. 7. LIMITATION OF RIGHTS A. NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the existence of the Plan nor the granting of an option nor any other action taken pursuant to the Plan, shall constitute or be evidence of any agreement or understanding, express or implied, that the Company will retain a director for any period of time, or at any particular rate of compensation. B. NO STOCKHOLDERS' RIGHTS FOR OPTIONEES. Neither an optionee nor his representative shall have rights as a stockholder with respect to the shares covered by his options until the date of the issuance to him or his representative of a stock certificate therefor, and except as provided in Paragraph 8 below, no adjustment will be made for dividends or other rights for which the record date is prior to the date such certificate is issued. 8. ADJUSTMENTS 4 (i) In the event that the outstanding shares of Common Stock are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, by reason of a recapitalization, reclassification, stock split-up, combination of shares, dividend or other distribution payable in capital stock, an appropriate adjustment shall be made by the Board in the number, kind and exercise price of shares for the purchase of which options have theretofore been or may thereafter be granted under the Plan. (ii) In the event that the Company shall determine to merge, consolidate or enter into any other reorganization with or into any other corporation, or in the event of any dissolution or liquidation of the Company, and in the further event that neither (i) appropriate adjustment is made in the number, kind and exercise price of shares for the purchase of which options have theretofore been granted under the Plan, nor (ii) does the surviving entity (which may be the Company) tender to any holder of options, substitute options to purchase shares or equity interests of the surviving entity which substituted options shall contain terms substantially preserving the rights and benefits (including economic value) of the options outstanding hereunder, plus any reasonable changes to reflect the circumstances of the surviving entity, then the Plan and any options theretofore granted under the Plan shall terminate as of the date of such merger, consolidation, reorganization, dissolution or liquidation, provided that written notice of such event shall have been given to each optionee not less than five (5) days prior to the date of such event. If the Plan will be terminated as contemplated in the preceding sentence, each optionee shall have the right during the period commencing on the date the notice referred to above is given and concluding on the date of such merger, consolidation, reorganization, dissolution or liquidation, as the case may be, to exercise such optionee's outstanding and unexercised options, including for any shares as to which such options would not otherwise have been exercisable on such date. (iii) All adjustments and determinations under this Paragraph 8 shall be made by the Board, whose decisions as to what adjustments or determinations shall be made, and the extent thereof, shall be final, binding and conclusive. 9. EFFECTIVE DATE AND DURATION OF THE PLAN The effective date of the Plan shall be the date of its adoption by the Board of Directors of the Company; provided, however, that in the event that shareholder approval of the Plan is not secured on or before the first anniversary of such adoption, the Plan shall thereupon terminate. Any options granted prior to the aforesaid shareholder approval being secured shall be subject to such approval being secured. The Plan shall terminate ten (10) years after the effective date of the Plan (the "Automatic Termination Date") unless earlier terminated due to a lack of shareholder approval or discontinuance by the Board. 5 No option may be granted during any suspension or termination of the Plan. The rights of the holders of any options outstanding on the date of termination of the Plan shall not be affected thereby. 10. USE OF PROCEEDS The proceeds received by the Company from the sale of the Common Stock pursuant to the exercise of options granted under the Plan shall be added to the Company's general funds and used for general corporate purposes. 11. COMPLIANCE WITH LAW, ETC. Notwithstanding any other provision of this Plan or agreements made pursuant hereto, the Company shall not be required to issue or deliver any certificate or certificates for shares of Common Stock under this Plan prior to fulfillment of the following conditions: (i) The satisfaction of withholding tax or other withholding liabilities; (ii) Any registration or other qualification of such shares of the Company under any state or federal law or regulation, or the maintaining in effect of any such registration or other qualification which the Board shall, in its absolute discretion upon the advice of counsel, deem necessary or advisable; and (iii) The satisfaction of any conditions imposed by any stock exchange on which the Common Stock is listed or any quotation system which quotes the price of the Common Stock; (iv) The obtaining of any other consent, approval, or permit from any state or federal governmental agency which the Board shall, in its absolute discretion after receiving the advice of counsel, determine to be necessary or advisable. 12. NOTICE Any written notice to the Company required by any of the provisions of this Plan shall be addressed to the Secretary of the Company and shall become effective when it is received. 13. GOVERNING LAW This Plan and all determinations made and actions taken pursuant hereto shall be governed by the law of the State of Delaware and construed accordingly. 6 EX-10.19 4 EXHIBIT 10.19 Exhibit 10.19 MAXWELL TECHNOLOGIES, INC. EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made as of this 9th day of November, 1999, by and between MAXWELL TECHNOLOGIES, INC. a Delaware corporation, ("Company") and CARLTON J. EIBL ("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 December 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. In such capacities, Executive shall report to the Board of Directors of the Company (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. (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 may be 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 (i) in a transition capacity with Stratagene Holding Corporation and its affiliates (collectively, "Stratagene"), for a period not to exceed six months, as Executive deems necessary in connection with the transition in an orderly manner of Executive's roles and responsibilities in Stratagene to other executives within Stratagene, (ii) on civic or charitable boards or committees and (iii) on the Board of Directors of Stratagene and, with the prior approval of the Board, boards of corporations or 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. 3. COMPENSATION OF EXECUTIVE. As compensation for the services to be performed under this Agreement: (a) BASE SALARY. Effective December 1, 1999, Executive shall be paid a base salary at the initial annual rate of $425,000, 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) Commencing with the Company's anticipated new fiscal year beginning January 1, 2000 and ending December 31, 2000 and 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 100% of the then effective base salary) depending on the Board's determination of Executive's success in achieving the specified targets. (ii) 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 special options to purchase 294,030 shares of the Company's common stock at an exercise price of $8.75 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 December, 1999 so long as Executive remains employed with the Company. The options will provide that if, during their term, the Company pays any extraordinary dividend or otherwise distributes assets to the Company's stockholders, the exercise price of the Options will be adjusted to preserve the economic benefit the Executive would have realized had Executive owned, on the record date for such extraordinary dividend or distribution, a number of shares of the Company's common stock equal to the total Options (vested and unvested) then held by Executive. The Company will register the shares of common stock acquirable upon exercise of the Options under the Securities Act of 1933. 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 (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 commits 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 Executive refuses or fails to implement any reasonable directive issued by the Company's Board of Directors and Executive fails to remedy the refusal or failure within 15 days of receipt of written notice thereof; or (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 3 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 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 4 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 prior to the third anniversary of 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 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 5 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 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 6 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. 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. 7 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 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 the date of this Agreement 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. 8 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 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 9 proper postage prepaid and addressed to the party or parties to be notified, at the following addresses: If to Executive to: Carlton J. Eibl 1903 El Camino del Teatro La Jolla, California 92037 Telephone: (858) 551-8237 Fax: (858) 551-8254 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 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. 10 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 9th day of November, 1999. "Company" MAXWELL TECHNOLOGIES, INC. By: /s/ Donald M. Roberts --------------------- "Executive" /s/ Carlton J. Eibl -------------------------- Carlton J. Eibl EXHIBIT A WAIVER AND RELEASE AGREEMENT This Release is given By the Releasor(s): Carlton J. Eibl Address: hereinafter referred to as "I" or "me", To the Releasee(s): MAXWELL TECHNOLOGIES, INC. and its parent, division, subsidiary and affiliated corporations (including predecessors and successors) and their Officers, Directors, Shareholders, Partners, Employees and Representatives and their successors and assigns sometimes hereinafter referred to as "you." 1. RELEASE. Subject to Paragraph 3 hereof, I hereby release and give up any and all actions, causes of actions, claims and rights (hereinafter "Claims") which I may have against you. This releases all claims, including those of which I am not aware and those not mentioned herein. This Waiver and Release Agreement ("Agreement") applies to Claims resulting from anything that has happened up to now. I specifically release any and all Claims relating in any way to my employment relationship, or the termination of my Employment Agreement dated as of April 30, 1999, with you, including but not limited to any Claims arising under the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act of 1990, Title VII of the Civil Rights Act of 1964, the Equal Pay Act, the Employee Retirement Income Security Act, the Fair Labor Standards Act, the Consolidated Omnibus Budget Reconciliation Act of 1986, the California Fair Employment and Housing Act or any other federal, state or local laws or ordinances and any common law claims under tort, contract, or any other theories now or hereafter recognized. This Agreement specifically includes, but without limitation, all Claims arising out of my employment relationship with you. 2. WAIVER. Subject to Paragraph 3 hereof, I hereby acknowledge and assume all risks or chances that the injuries claimed to have resulted from the above stated matter may become greater or more extensive than now known, anticipated or expected. I understand that this instrument shall be effective as a full and final release of all Claims. I acknowledge that I am familiar with and have been provided with separate consideration for that portion of Section 1542 of the Civil Code of the State of California which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with debtor." I waive any right that I have under the above-mentioned Section 1542 to the fullest extent that I may lawfully waive all such rights pertaining to the subject matter of this Agreement. In connection with the above waiver, I am aware that I may hereafter discover Claims or facts in addition to or different from those I now know or believe to exist with respect to the subject matter of this instrument or you. However, I and my successors and assigns hereby settle and release all of the Claims which I may have against you. I acknowledge that you have specifically bargained for this Agreement. 3. EFFECTIVENESS. This Agreement, and the release and waivers contained herein, is subject to and shall become effective only after, you have paid in full the amounts due to me under the Employment Agreement dated as of November 9, 1999 between you and me. 4. NO ADMISSIONS. I agree and acknowledge that this Agreement is not to be construed as an admission of any violation of any federal, state or local statutes, ordinance or regulation or any duty allegedly owed by you to me. You specifically disclaim any liability to me on any basis. 5. TIME PERIODS. I have been given the opportunity to take a period of at least twenty-one (21) days within which to consider this Agreement. If I choose to sign this Agreement before that time period expires, I do so knowingly and voluntarily. I also understand that I have the right to change my mind and cancel this Agreement within seven (7) days following the date that I have signed it by doing so in writing. This Agreement will not be effective until the end of this seven (7) day period. 6. CONSIDERATION. In exchange for, consideration of and reliance on my execution of this Agreement, you have agreed, upon the expiration of the seven (7) day time period referred to in Paragraph 4 above, to commence making the payments pursuant to Subsection 4(b) or 4(e), as applicable of that certain Employment Agreement dated as of November 9, 1999. I agree that I will not seek anything further, including any other payment from you. I further agree, in return for receipt of the foregoing payments, to abide by all of your rules, policies and procedures applicable to current and former employees. 7. CONFIDENTIALITY. I agree that the terms and conditions of this Agreement shall remain confidential and shall not be disclosed to any other person (other than my family members, attorneys, and accountants who shall be informed of and bound by the confidentiality provisions of this Agreement) other than as required by court order, legal process or applicable law or as otherwise agreed to by you and me. I understand that this provision regarding confidentiality constitutes a substantial inducement for you to enter into this Agreement. 8. WHO IS BOUND. I am bound by this Agreement. Anyone who succeeds to my rights and responsibilities, such as my heirs or the executor of my estate, is also bound by this Agreement. This Agreement is made for your benefit and that of anyone who succeeds to your rights and responsibilities. 9. NO INDUCEMENTS. I further warrant that no promise or inducement for this Agreement has been made except as set forth herein, that this Agreement is executed without reliance upon any statement or representation by any person or parties released, their officers, directors, employees, agents or representatives, concerning any fact material to my act in releasing them, and that I am legally competent to execute this Agreement and accept full responsibility therefor. 10. REPRESENTATIONS. I understand and agree that I understand the contents, implications, and consequences of this Agreement, and that I agree to the terms of this Agreement and have executed it voluntarily. I have had an opportunity to discuss the terms of this Agreement with individuals of my own choosing who are not associated with you. I have been advised by you to consult with an attorney of my own choosing. 11. ENTIRE AGREEMENT. This Agreement and the Employment Agreement dated as of November 9, 1999 constitute the entire agreements between you and me concerning the subject matter hereof and supersede all prior agreements between you and me.. This Agreement may not be modified orally. I understand and agree to the terms of this Agreement. 12. GOVERNING LAW. This Agreement is made and entered into in the State of California and shall in all respects be interpreted, enforced and governed under the laws of said State. The language of all parts of this Agreement shall cases to be construed as a whole, according to its fair meaning, and not strictly for or against you or me. 13. INVALIDITY. Should any provisions of this Agreement be determined by any court to be illegal or invalid, the validity of the remaining parts, terms or provisions shall not be affected thereby and said illegal or invalid part, term or provision shall be deemed not to be a part of this Agreement. Intending to be legally bound hereby, the undersigned has executed this Agreement as of the date written freely and voluntarily. Dated: ---------------- ----------------------------------- Carlton J. Eibl MAXWELL TECHNOLOGIES, INC. Dated: By: ---------------- -------------------------------- 14 MAXWELL TECHNOLOGIES, INC. STOCK OPTION AGREEMENT (Non-Qualified Stock Option) THIS AGREEMENT, made and entered into as of November 9, 1999 by and between MAXWELL TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and Carlton J. Eibl ("Optionee"). WITNESSETH: WHEREAS, the Company and Optionee are parties to that certain Maxwell Technologies Inc. Employment Agreement, dated November 9, 1999 ("Employment Agreement"); WHEREAS, the Employment Agreement provides for the award to Optionee of options to purchase shares of the Company's Common Stock which are not from any pool of options covered by the Company's 1995 Stock Option Plan but a special one time grant; and WHEREAS, pursuant to the Employment Agreement, the Board of Directors of the Company, has authorized the granting of a special stock option (the "Option"), as an inducement for Optionee to accept employment as the president and chief executive officer of the Company and in the conviction that the interests of the Company will be advanced by encouraging and enabling Optionee to acquire a proprietary interest in the Company; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. OPTION GRANT AND ACCRUAL OF RIGHT TO PURCHASE. As a matter of separate inducement and agreement in connection with his employment with the Company and/or any of its subsidiaries, and not in lieu of any salary or other compensation for Optionee's services, the Company hereby grants to Optionee, at the times, on the terms and subject to conditions set forth herein, the right and "non-qualified stock option" to purchase an aggregate of 294,030 shares of the Company's Common Stock, par value $.10, at the purchase price of $8.75 per share (the "Option"). The Option shall continue for, and is limited to, the period of 120 months from and after the Grant Date (which 120 month period is hereinafter referred to as the "Option Period"), except as and to the extent that (a) the term of the Option may be reduced as provided in Paragraphs 4 and 5 hereof, or (b) the Option may be terminated as provided in Paragraph 13 hereof. In no event may the Option or any portion thereof be exercised after the end of the Option Period. The Option shall become exercisable and shall vest at the rate of 1/48 of the total number of shares covered hereby on the last day of each month commencing with the month of December, 1999, so long as Optionee remains employed with the Company. On and after the fourth anniversary of Grant Date the Option shall be 100% exercisable as to all shares covered hereby. Notwithstanding the preceding paragraph, in the event that Optionee's employment with the Company is terminated under circumstances specified in Section 4(b) or 4(e) of the Employment Agreement, the Option shall become exercisable in the manner and at the time set forth in such section. Prior to the expiration of the Option Period as specified above, and subject to the provisions hereof, all or any portion of the shares of Common Stock available for exercise may be purchased at any time and from time to time after they become exercisable; provided that in no case may Optionee exercise the Option for a fraction of a share. 15 2. METHOD OF EXERCISE. The Option shall be exercisable by the giving of written notice of exercise to the Company, in either of the manners set forth below in this Paragraph 2, specifying the number of shares to be purchased and accompanying such notice with (i) payment by cash and/or check payable to the Company of the full purchase price therefor or (ii) in the discretion of the Committee at the time of the exercise of the Option regarding whether to permit payment in either of the following manners 1) payment by a stock certificate or certificates, duly endorsed for transfer to the Company, representing shares of Common Stock of the Company owned by the Optionee which have a fair market value on the date of exercise equal to the purchase price or 2) cash and/or a check payable to the Company and a stock certificate or certificates, duly endorsed for transfer to the Company, representing shares of the Common Stock of the Company owned by the Optionee, which, when added to the amount of the cash and/or check, have a fair market value on the date of exercise equal to the purchase price and (iii) if required by the Company, the written representations and agreements referred to in Paragraph 7 hereof. If sent by mail such written notice shall be deemed for all purposes to be given and the Option exercised on the second business day following the date the same is deposited in the United States mail, properly addressed to the Secretary of the Company, with postage thereon prepaid. If personally delivered, such written notice shall be deemed for all purposes to be given and the Option exercised on the date the same is personally delivered to the Secretary of the Company (or such other officer as may be designated by the Company in writing). 3. WHO MAY EXERCISE. The Option shall be exercisable during the lifetime of Optionee only by the Optionee. In the event that the notice specified in Paragraph 2 hereof shall, pursuant to the provisions of Paragraph 5 hereof, be given by any person other than Optionee, such notice shall be accompanied by appropriate evidence satisfactory to the Company to establish such person's right to exercise the Option. 4. EXERCISE UPON TERMINATION OF EMPLOYMENT. Subject to the other provisions hereof, if Optionee shall cease to be employed by the Company or any subsidiary of the Company for any reason other than the death of Optionee, the Optionee may, during the sixty (60) day period following his termination of employment with the Company or subsidiary (or following such later date as provided in Section 4(b) of the Employment Agreement), exercise the Option to the extent that the Option was exercisable on the date of termination of Optionee's employment (or on such later date); provided, however, that in no event shall the Option or any portion thereof be exercisable except during the Option Period. The Optionee's right to exercise the Option, to the extent permitted under this Paragraph 4, shall terminate at the end of said sixty (60) day period. 5. EXERCISE IN THE EVENT OF DEATH. Subject to the other provisions hereof, in the event of the death of Optionee while in the employ of the Company or a subsidiary of the Company, the Option may be exercised by the person or persons to whom Optionee's rights under the Option shall pass by Optionee's will or by the laws of descent and distribution. In such event, the Option may be exercised during the one year period following the Optionee's date of death, but only to the extent that Optionee was entitled to exercise the Option at the date of death; provided, however, that in no event shall the Option or any portion thereof be exercisable except during the Option Period. The right to exercise the Option provided under this Paragraph 5, to the extent permitted hereunder, shall terminate on the first anniversary of the date of the Optionee's death. 6. STOCK TO BE ISSUED. Shares to be issued on the exercise of the Option may, at the election of the Company, be either authorized and unissued shares or shares previously issued and re-acquired by the Company. 7. INVESTMENT REPRESENTATION AND RESTRICTIONS ON DISPOSITION. By accepting the Option, Optionee 16 agrees for himself or herself and any other person or persons entitled to exercise the Option pursuant to the provisions of Paragraph 5 hereof, that any and all shares purchased upon the exercise of the Option shall be acquired for investment and not with a view to distribution, and that if required by the Company: 1) each notice of the exercise of all or any portion of the Option shall be accompanied by such representations and agreements in writing, signed by the Optionee or such other person or persons entitled to exercise the Option, as the case may be, and in form and substance satisfactory to the Company, to such effect as the Company may deem necessary in order to insure compliance with all laws, orders, rules, regulations, conditions and undertakings of any kind which may be in effect at any time with respect to the purchase or disposition of any shares purchased upon exercise of the Option, including, but not limited to, a representation to the effect that the shares covered by such notice are being acquired in good faith for investment and not for distribution; 2) the certificate or certificates evidencing the shares may be legended with language appropriate to give notice of the restrictions referred to in this Paragraph 7; and 3) the Company may place "stop orders" or other impediments to the transfer of the shares until it is satisfied that the transfer can be made in conformity with the representations and agreements of Optionee made pursuant to this Paragraph 7. Optionee understands that the effect of this Paragraph 7 is to restrict the right to sell, transfer or otherwise distribute such shares except in accordance with the Securities Act of 1933 ("the Act") and all other laws, orders, rules, regulations, conditions and undertakings of any kind which may be in effect at any time with respect to the purchase or disposition of such shares. In the event such shares are or shall at any time hereafter become duly registered under the Act, then those provisions of this Paragraph 7 which the Company determines are rendered unnecessary by reason of such registration shall not be operative during such time as said registration remains effective. 8. RESTRICTIONS ON EXERCISE. Each exercise of the Option shall be subject to the condition that if at any time the Company shall determine in its discretion that 1) the satisfaction of withholding tax or other withholding liabilities, or 2) the listing, registration or qualification of any shares otherwise deliverable upon such exercise upon any securities exchange or under any state or federal law, or 3) the consent or approval of any regulatory body, or 4) the perfection of any exemption from any such withholding, listing, registration, qualification, consent or approval is necessary or desirable as a condition of, or in connection with, such exercise or the issuance, delivery or purchase of shares hereunder, then in any such event, such exercise shall not be effective, and the Company shall not be required to accept a notice of exercise delivered by Optionee pursuant to Paragraph 2 hereof or the tender of any portion of the purchase price for the shares covered by such exercise or to issue or deliver any certificate or certificates for shares intended to be purchased by such exercise, unless such withholding, listing, registration, qualification, consent, approval or exemption shall have been effected, obtained or perfected free of any conditions not acceptable to the Company. 9. ADJUSTMENTS. In the event that prior to the delivery by the Company of all the shares covered by the Option, the outstanding shares of Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, by reason of a recapitalization, reclassification, stock split-up, combination of shares, dividend or other distribution payable in capital stock, appropriate adjustment shall be made by the Board in the number, kind and exercise price of shares for the purchase of which Options have theretofore been or may thereafter be granted to the Optionee. In the event that the Company shall determine to merge, consolidate or enter into any other reorganization with or into any other corporation, or in the event of any dissolution or liquidation of the Company, and in the further event that neither (i) appropriate adjustment is made in the number, kind and exercise price of shares under the Option, nor (ii) does the surviving entity (which may be the Company) tender to the Optionee, substitute options to purchase shares or equity interests of the surviving entity which substituted options shall contain terms substantially, preserving the rights and benefits (including economic value) of the 17 options outstanding hereunder, plus any reasonable changes to reflect the circumstances of the surviving entity, then the Option granted shall terminate as of the date of such merger, consolidation, reorganization, dissolution or liquidation, provided that written notice of such event shall have been given to the Optionee not less than five (5) days prior to the date of such event. If the Option will terminate as contemplated in the preceding sentence, the Optionee shall have the right during the period commencing on the date the notice referred to above is given and concluding on the date of such merger, consolidation, reorganization, dissolution or liquidation, as the case may be, to exercise the Optionee's unexercised Option, including for any shares as to which such Option would not otherwise have been exercisable on such date. All adjustments and determinations hereunder shall be made by the Board, whose decisions as to what adjustments or determinations shall be made, and the extent thereof, shall be final, binding and conclusive. In the event the Company, at any time or from time to time after the date hereof, makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, without payment therefor, (i) a dividend payable in cash or property (including securities of subsidiaries) attributable to the sale by the Company of assets (including subsidiaries) other than in the ordinary course of business or (ii) a distribution of assets (including securities of subsidiaries), then, and in each such case, the Exercise Price in effect immediately prior to the close of business on the record date fixed for the determination of the Persons entitled to receive such dividend or distribution shall be adjusted, effective as of the close of business on such record date, to a price equal to such Exercise Price in effect less (x) the amount of such dividend per Common Share (if in cash), or (y) the value per share of Common Stock of such dividend or distribution (if in property), with such value to be determined in good faith by the Board of Directors of the Company. 10. ISSUANCE OF CERTIFICATES AND RIGHTS AS SHAREHOLDERS OF THE COMPANY. As soon as practicable after the exercise of the Option as provided in Paragraph 2 hereof, but subject to the provisions of Paragraphs 7 and 8 hereof, the Company shall issue and deliver to Optionee or any other person who has exercised the Option pursuant to the provisions of Paragraph 5 hereof a certificate evidencing the shares purchased thereby. Neither Optionee nor any other person entitled to exercise the Option pursuant to the provisions of Paragraph 5 hereof shall be or have any of the rights or privileges of a shareholder of the Company in respect of any of the shares issuable upon the exercise of the Option unless and until a certificate representing such shares shall have been issued and delivered. 11. TRANSFERABILITY OF OPTION. Except as otherwise herein provided, the Option and the rights and privileges conferred hereby may not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of the Option or any right or privilege conferred hereby contrary to the provisions hereof, or upon the levy of any attachment or similar process on the rights and privileges conferred hereby, contrary to the provisions hereof, the Option and the rights and privileges conferred hereby shall immediately become null and void. 18 12. INTERPRETATION OF AGREEMENT. The Committee shall have the full and final authority in its discretion to construe, interpret and define all terms and provisions of this Agreement and to correct any defect or supply any omission or reconcile any inconsistency herein and to prescribe rules and regulations relating to the administration of the Option. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. /s/ Carlton J. Eibl ------------------------------------------ Carlton J. Eibl, "Optionee" MAXWELL TECHNOLOGIES, INC. By: /s/ Donald M. Roberts ------------------------------------------------ Donald M. Roberts, Vice President, Secretary & General Counsel 19 EX-10.30 5 EXHIBIT 10.30 EXHIBIT 10.30 [MAXWELL TECHNOLOGIES LETTERHEAD] MEMO TO: Corporate Bonus Plan Participants FROM: Don Roberts Vickie Capps DATE: February 8, 2000 RE: 2000 BONUS PLAN The Board of Directors has approved a new bonus plan for fiscal year 2000 containing the following terms and conditions. It is important to note that this plan is for this calendar year only. 1. The threshold for earning any bonus is the "base case" budget for the consolidated, continuing operations of the Company for the year 2000: revenue of $156.569 million and operating profit of $1.170 million. If the results for the year exceed both of these figures, bonuses will be paid. 2. 100% of target bonuses will be earned if the Company achieves its "target case" or target plan for fiscal year 2000 consolidated, continuing operations revenue of $165.553 million and operating profit of $3.915 million. 3. For results up to the midpoint between the base case and the target plan, one-third of target bonus can be earned. Results at the midpoint will result in a full one-third earned. Between the base case and the midpoint, some portion of the full one-third will be earned, with revenue and profit each contributing 50% to the calculation, which will be done on a linear basis. 4. Above the midpoint and up to the target plan, the other two-thirds of target bonus is earned, again with 50% determined by revenue and 50% by operating profit and calculated on a linear basis. 5. Revenue and operating profit attributable to businesses acquired during the year are excluded from this calculation, and nonrecurring licensing, funded R&D or other "deal" money not otherwise in the target plan will be considered only at the discretion of the CEO and the Board of Directors. For purposes of this Plan, operating profit will be calculated after giving effect to bonus payments and before any restructuring charge. 6. Additional bonuses will be available for performance in excess of the target plan. Additional bonuses will be based on incremental net income to Maxwell from continuing operations from above-target achievement. Because of the complexity of the current fiscal year, there will be a discretionary element to the calculation of any additional bonuses. However, the intent would be to make additional bonuses significant for above-target performance. 7. Each individual's bonus will also be subject to a performance factor based on that individual's job performance during the year. Bonus participants must be employed on the last day of the calendar year (December 31, 2000) to be eligible for any bonus payout. EX-10.36 6 EXHIBIT 10.36 Exhibit 10.36 SPACE ELECTRONICS INC. 1999 STOCK OPTION PLAN 1. PURPOSE. The 1999 Stock Option Plan (the "Plan") is intended to advance the interests of Space Electronics Inc. (the "Company"), and its stockholders by encouraging and enabling selected "key employees" (as defined below) to acquire and retain a proprietary interest in the Company by ownership of its stock. For purposes of this Plan, the term "key employee" shall include employees of the Company, its parent corporation, Maxwell Technologies, Inc., and any majority-owned subsidiaries of Maxwell Technologies, Inc., upon whose judgment, initiative and effort the Company is dependent for success in the conduct of its business. Selected employees of the Company's parent corporation and subsidiaries of the parent corporation are included within the definition of "key employee" in recognition that the Company's success depends in part on the success of the combined corporate enterprise which includes the Company. It is intended that the Plan provide the flexibility for the issuance of options which qualify as incentive stock options ("incentive stock options") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and options which do not so qualify ("non-qualified stock options"). 2. DEFINITIONS. (a) "Affiliate" means Maxwell Technologies, Inc. and each corporation in which such entity owns, directly or indirectly, more than 50% of the voting equity interests. (b) "Agreement" means the agreement between the Company and the Optionee under which an option is granted, and setting forth the terms and conditions of the option and the Optionee's rights thereunder. (c) "Board" means the Board of Directors of the Company. (d) "Committee" means the Stock Option Committee (the members of which shall be appointed by the Board from among the directors of the Company) of the Board. If no such committee has been appointed by the Board, then the term "Committee" shall refer to the entire Board. (e) "Common Stock" means the Company's common stock. (f) "Date of Grant" means the date on which an option under the Plan is approved by the Committee. (g) "Option" means an option granted under the Plan. 1 (h) "Optionee" means a person to whom an option, which has not expired, has been granted under the Plan. (i) "Successor" means the legal representative of the estate of the deceased Optionee or the person or persons who acquire the right to exercise an option by bequest or inheritance or by reason of the death of any Optionee. 3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee which shall report all action taken by it to the Board. The Committee shall have full and final authority in its discretion, subject to the provisions of the Plan, to determine the number of shares and purchase price of Common Stock covered by each option, the individuals to whom and the time or times at which options shall be granted and the nature of each option granted under the Plan, i.e., whether the option will be an incentive stock option or a non-qualified stock option; to construe and interpret the Plan; to determine the terms and provisions of the respective Agreements, which need not be identical, including, but without limitation, terms covering the payment of the option price, and to make all other determinations and take all other actions deemed necessary or advisable for the proper administration of the Plan. All such actions and determinations of the Committee shall be conclusively binding for all purposes and upon all persons. 4. COMMON STOCK SUBJECT TO OPTIONS. Unless amended in accordance with the provisions of Paragraph 11, and subject to adjustment under the provisions of Paragraph 7, the aggregate number of shares of the Company's Common Stock which may be issued upon the exercise of options granted under the Plan shall not exceed 750,000. The shares of Common Stock to be issued upon the exercise of options may be authorized but unissued shares, shares issued and reacquired by the Company or shares bought on the market for the purposes of the Plan. In the event any option shall, for any reason, terminate or expire or be surrendered without having been exercised in full, the shares subject to such option but not purchased thereunder shall again be available for options to be granted under the Plan. 5. PARTICIPANTS. Options may be granted under the Plan to any person who, in the opinion of the Committee, is a key employee of the Company or any Affiliate. 6. TERMS AND CONDITIONS OF OPTIONS. Any option granted under the Plan shall be evidenced by an Agreement executed by the Company and the Optionee and shall contain such terms and be in such form as the Committee may from time to time approve, subject to the following limitations and conditions: 2 (a) OPTION PRICE. The option price per share with respect to each option shall be determined by the Committee but shall in no instance be less than 100% of the fair market value of a share of the Common Stock on the Date of Grant; provided that with respect to an option granted to an individual who, on the grant date, is the holder of stock representing more than 10% of the voting equity of the Company or any Affiliate (hereinafter a "10% Holder"), the option price for such option shall be no less than 110% of such fair market value. For the purposes hereof, fair market value shall be as determined by the Committee and such determination shall be binding upon the Company and upon the Optionee. The Committee may make such determination upon any factors which the Committee shall deem appropriate. (b) PERIOD OF OPTION. Except for earlier termination as provided in Subparagraphs (g) and (h) of this Paragraph 6, and in Subparagraph (b) of Paragraph 7, the expiration date of each option shall be fixed by the Committee, but, notwithstanding any provision of the Plan to the contrary, such expiration date shall not be more than ten years from the Date of Grant or, with respect to a 10% Holder, five years from the Date of Grant. (c) VESTING OF STOCKHOLDER RIGHTS. Neither an Optionee nor any Successor shall have any of the rights of a stockholder of the Company until the option with respect to the applicable shares shall have been duly exercised and the certificate evidencing such shares delivered to such Optionee or any Successor. (d) EXERCISE OF OPTION. Each option shall be exercisable in such amounts and at such respective dates prior to the expiration of the option as provided in the Agreement. (e) PAYMENT OF OPTION PRICE. Upon exercise of an option, the Optionee or Successor shall pay the option price by delivering to the Company: (i) cash or a check payable to the Company in an amount equal to the option price; (ii) a stock certificate or certificates, duly endorsed for transfer to the Company, representing shares of Common Stock of the Company owned by the Optionee or Successor which have a fair market value on the date of exercise equal to the option price; or (iii) cash or a check payable to the Company and a stock certificate or certificates, duly endorsed for transfer to the Company, representing shares of Common Stock owned by the Optionee or Successor, which, when added to the amount of the cash or check, have a fair market value on the date of exercise equal to the option price. 3 For the purposes hereof, fair market value shall be determined by the Committee and such determination shall be binding upon the Company and upon the Optionee or Successor. The Committee may make such determination in accordance, with Paragraph 6(a) hereof by substituting "date of exercise" for "Date of Grant" each time the latter appears therein and upon any other factors which the Committee shall deem appropriate. (f) NON-TRANSFERABILITY OF OPTION. No option shall be transferable or assignable by an Optionee, otherwise than by will or the laws of descent and distribution and each option shall be exercisable during the Optionee's lifetime only by the Optionee. No option shall be pledged or hypothecated in any way and no option shall be subject to execution, attachment or similar process. (g) TERMINATION OF EMPLOYMENT. Upon termination of an Optionee's employment with the Company and all Affiliates other than by reason of the death of the Optionee, the option privileges of such Optionee shall be limited to the shares which were immediately purchasable by Optionee at the date of such termination and such option privilege shall expire unless exercised by Optionee within sixty (60) days after the date of such termination. The granting of an option to any person shall not alter in any way the Company's right to terminate such person's employment at any time for any reason, nor shall it confer upon the Optionee any rights or privileges except as specifically provided for in the Plan. (h) DEATH OF OPTIONEE. If an Optionee dies while in the employ of the Company or any Affiliate, the option privileges of said Optionee shall be limited to the shares which were immediately purchasable by such Optionee at the date of death and such option privileges shall expire unless exercised by said Optionee's Successor within one (1) year after the date of death. 7. ADJUSTMENTS. (a) In the event that the outstanding shares of Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, by reason of a recapitalization, reclassification, stock split-up, combination of shares, dividend or other distribution payable in capital stock, appropriate adjustment shall be made by the Board in the number, kind and exercise price of shares for the purchase of which options have theretofore been or may thereafter be granted under the Plan. 4 (b) In the event that the Company shall determine to merge, consolidate or enter into any other reorganization with or into any other corporation, or in the event of any dissolution or liquidation of the Company, then in any such event, at the election of the Board, (i) appropriate adjustment shall be made by the Board in the number, kind and exercise price of shares for the purchase of which options have theretofore been and/or may thereafter be granted under the Plan, and if such event results in Maxwell Technologies, Inc. ceasing to own, directly or indirectly, more than 50% of the voting equity of the Company, each such adjusted option shall be fully vested and exercisable as to all shares thereunder regardless of an otherwise insufficient passage of time; or (ii) the Plan and any options theretofore granted under the Plan shall terminate as of the date of such merger, consolidation, reorganization, dissolution or liquidation, provided that written notice of such event shall have been given to each Optionee not less than 30 days prior to the date of such event. Upon any election by the Board pursuant to the provisions of clause (ii) of this Subparagraph (b), each Optionee shall have the right during the period commencing on the date the notice referred to in said clause (ii) is given and concluding on the date of such merger, consolidation, reorganization, dissolution or liquidation, as the case may be, to exercise such Optionee's outstanding and unexercised stock options, including shares as to which such options would not otherwise have been exercisable by reason of an insufficient lapse of time. (c) All adjustments and determinations under this Paragraph 7 shall be made by the Board, whose decisions as to what adjustments or determinations shall be made, and the extent thereof, shall be final, binding and conclusive. 8. DOLLAR LIMITATION ON INCENTIVE STOCK OPTIONS. The aggregate fair market value (determined as of the Date of Grant) of the Common Stock with respect to which incentive stock options are exercisable for the first time by any individual during any calendar year (under the Plan and all other stock option plans of the Company or any Affiliate) shall not exceed $100,000. 9. RESTRICTIONS ON ISSUING SHARES. The exercise of each option shall be subject to the condition that if at any time the Company shall determine in its discretion that (i) the satisfaction of withholding tax or other withholding liabilities, or (ii) the listing, registration or qualification of any shares otherwise deliverable upon such exercise upon any securities exchange or under any state or federal law, or (iii) the consent or approval of any regulatory body, or (iv) the perfection of any exemption from any such withholding, listing, registration, qualification, consent or approval is necessary or desirable as a condition of, or in connection with, such exercise or the issuance, delivery or purchase of shares thereunder, then in any such event, such exercise shall not be effective unless such withholding, listing registration, qualification, consent, approval or exemption shall have been effected, obtained or perfected free of any conditions not acceptable to the Company. 5 10. USE OF PROCEEDS. The proceeds received by the Company from the sale of its Common Stock pursuant to the exercise of options granted under the Plan shall be added to the Company's general funds and used for general corporate purposes. 11. AMENDMENT, SUSPENSION AND TERMINATION OF THE PLAN. The Board may at any time suspend or terminate the Plan or may amend it from time to time in such respects as the Board may deem advisable in order that the options granted thereunder may conform to any changes in the law or in any other respect which the Board may deem to be in the best interests of the Company; PROVIDED, HOWEVER, that without approval by the stockholders of the Company representing a majority of the voting power, no such amendment shall (a) except pursuant to Paragraph 7, increase the maximum number of shares for which options may be granted under the Plan, (b) change the provisions of Subparagraph (a) of Paragraph 6 relating to the establishment of the option price, (c) change the provisions of Subparagraph (b) of Paragraph 6 relating to the expiration date of each option or (d) change the provisions of the second sentence of this Paragraph 11 relating to the term of this Plan. Unless the Plan shall theretofore have been terminated by the Board or as provided in Paragraph 12, the Plan shall terminate ten (10) years after the effective date of the Plan. No option may be granted during any suspension or after the termination of the Plan. Except as otherwise provided in the Plan, no amendment, suspension or termination of the Plan shall, without an Optionee's consent, alter or impair any of the right or obligations under any option theretofore granted to such Optionee under the Plan. 12. EFFECTIVE DATE OF THE PLAN AND STOCKHOLDER APPROVAL. The effective date of the Plan shall be the date of its approval by the Board; provided, however, that in the event that stockholder approval of the Plan is not secured on or before the date which is twelve (12) months from the date of approval by the Board, the Plan shall thereupon terminate. Any options granted prior to the aforesaid stockholder approval being secured shall be subject to such approval being secured. SPACE ELECTRONICS INC. By: /s/ Donald M. Roberts ---------------------------- Donald M. Roberts, Secretary Date: March 1, 1999 6 EX-10.45 7 EXHIBIT 10.45 Exhibit 10.45 MAXWELL TECHNOLOGIES, INC. 1999 MANAGEMENT EQUITY OWNERSHIP PROGRAM (AS AMENDED THROUGH JANUARY 28, 2000) 1. PURPOSE The Maxwell Technologies, Inc. 1999 Management Equity Ownership Program (the "Program") is intended to promote the long-term growth and financial success of Maxwell Technologies, Inc. (the "Company") and to strengthen the link between the interests of management and the Company and its stockholders by: - providing senior management of the Company and its Subsidiaries with an opportunity to increase their ownership of the Company's Common Stock; and - providing this opportunity in a manner that is designed to align senior management's investment risk with the Company's financial performance. 2. DEFINITIONS Except where the context otherwise indicates, the following definitions apply: "Board" means Board of Directors of the Company or, for purposes of administering the Program after delegation by the Board, the Compensation Committee of the Board. "Cause" means termination for any of the following reasons: (i) commission of an act of theft, fraud or material dishonesty or misconduct involving the property or affairs of the Company or the carrying out of Participant's duties; or (ii) conviction of a felony; or (iii) refusal or failure to implement any reasonable directive issued by the Board and failure to remedy the refusal or failure within 15 days of receipt of written notice thereof; or (iv) obtaining of any personal profit by Participant or his family 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. "Common Stock" means the Common Stock, $0.10 par value per share, of the Company. "Disability" means the inability of the Participant to perform his or her normal duties of employment as a result of incapacity as determined by the Board. "Effective Date" means the date the Program is approved by the stockholders of the Company. "Interest Rate" means the "applicable federal rate" in effect on the date of a Purchase Loan for loans with a maturity of four years with interest compounded annually, as determined by Section 1274(d) of the Internal Revenue Code of 1986, as amended. "Market Price" with respect to a given security shall mean, for any given date (or in the event such date is not a Trading Day, the last Trading Day prior to such date), the closing sale price of such security on such date, as reported in The Wall Street Journal, as reported on the principal national securities exchange or national automated stock quotation system on which such security is traded or quoted. "1934 Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Participant" means each eligible employee of the Company or any of its Subsidiaries who is designated by the Board to receive a Purchase Loan. "Purchase Loan" means an extension of credit to the Participant by the Company evidenced by the Purchase Note and secured by a pledge of the Common Stock purchased by the Participant in accordance with the Program's terms and conditions. Purchase Loans need not be identical and shall be in the form approved by the Board. "Purchase Note" means a full recourse promissory note including the terms set forth in Section 6(a). "Retirement" shall be as defined by the Board. "Service" means employment with the Company or its Subsidiaries. "Subsidiary" means a corporation (or partnership, joint venture, or other enterprise) of which the Company owns or controls, directly or indirectly, 50% or more of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power). "Tax Rate" means, at the time of determination, the maximum marginal effective combined federal and state tax rates on ordinary income or capital gains, as the case may be, to which such individual is subject. "Termination of Service" means a Participant's termination of Service such that he or she is no longer an employee of either the Company or any of its Subsidiaries for any reason whatsoever. 3. THE PROGRAM (a) GENERAL. The aggregate principal amount of Purchase Loans outstanding at any time under the program shall not exceed $900,000. All repayments of principal (of any type and for whatever reason) of outstanding Purchase Loans extended under the Program shall again become available for further Purchase Loans. As further provided in Section 6, Purchase Loans may be extended in connection with open market purchases or acquisitions directly from the Company. (b) DIRECT ACQUISITIONS. The Board shall have complete discretion as to whether to offer to any Participant the opportunity to acquire Common stock directly from the Company. If the Board determines to offer such opportunity to a Participant, the Board shall specify a date to establish a price at which such Common Stock shall be offered (the "Offer Price"). The Offer Price shall be the closing sale price on the date on which such price was established. Each Participant to whom the Board elects to extend the offer to purchase shall have the right to accept the offer for all or any portion (subject to a minimum established by the Board) of the shares offered. Upon receipt of each Participant's election, the Company shall proceed to issue the shares in accordance with the provisions of Section 6. 4. TERM OF THE PROGRAM The Program shall become effective upon the approval by the stockholders of the Company. The Program shall terminate on the tenth anniversary of such approval date; provided that Purchase Loans outstanding as of such date shall not be affected or impaired by the termination of the Program. 5. ELIGIBLE EMPLOYEES The chief executive officer of the Company and other executive officers and senior management personnel of the Company and its Subsidiaries who, in the opinion of the Board, can materially influence the long-term performance of the Company and/or its Subsidiaries are eligible to receive a Purchase Loan. The Board shall have the power and complete discretion to select those eligible employees who are to receive Purchase Loans. 6. LOAN TERMS 3 (a) GENERAL. The Company shall extend a Purchase Loan, subject to the terms and conditions set forth in this Section 6, to Participants either (i) to purchase Common Stock in the public trading market or (ii) to acquire Common Stock directly from the Company. The original principal amount of the Purchase Loan shall be equal to the purchase price of such Common Stock. For Common Stock acquired in the public trading market, the purchase price shall be the price actually paid, including commissions, by the Participant. For Common Stock acquired directly from the Company, the purchase price shall be the Offer Price, and the Purchaser shall execute a Purchase Note in such amount against delivery by the Company of a certificate evidencing the stock acquired. Each Purchase Loan shall be evidenced by a Purchase Note with full recourse against the maker. The obligations of each Participant under a Purchase Note shall be unconditional and absolute and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by any change in the existence, structure or ownership of the Company, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Company or its assets or the market value of the Common Stock or any resulting release or discharge of any obligation of the Company or the existence of any claim, set-off or other rights which any Participant may have at any time against the Company or any other person, whether in connection with the Program or with any unrelated transactions, provided that nothing herein shall prevent the assertion of any such claim by separate suit or counterclaim. Notwithstanding anything to the contrary in this Section 6, the Company shall not be required to make any Purchase Loan to a Participant if the making of such Purchase Loan would (i) cause the Company to violate any covenant or similar provision in any indenture, loan agreement or other agreement, or (ii) violate any applicable federal, state or local law or regulation. (b) AMOUNTS. Purchase Loans shall be limited in principal amounts outstanding at any point in time to $300,000 for the chief executive officer, $100,000 each for other corporate executive officers and $50,000 each for other management personnel. (c) SECURITY. Payment of each Purchase Note shall be secured by a pledge of all of the Common Stock acquired by the Participant to which the Purchase Loan relates or by some other form of collateral approved by the Board. If the Purchase Loan is secured by a pledge of Common Stock, the Participant shall effect such pledge by delivering to the Company (i) the certificate or certificates for the applicable shares of Common Stock, accompanied by a duly executed stock power in blank, (ii) a properly executed stock pledge agreement, and (iii) such other documents as may be required by the Board. If the Purchase Loan is secured by some other form of collateral than Common Stock, then the Company's security interest in such collateral shall be effected as determined by the Board. A Participant shall always have the right to sell the Common Stock securing a Purchase Loan provided that (i) such sales are in accordance with the Company's trading policies and applicable securities laws, (ii) the Company shall have a security interest in the proceeds of such sale to the extent of any outstanding Purchase Loan, and (iii) the proceeds of any such 4 sale are utilized in the manner provided in Section 6(f)(ii). Prior to payment in full of the outstanding balance on the Purchase Note (including accrued and unpaid interest), no Common Stock or other collateral pledged to the Company under the stock pledge agreement shall be released except pursuant to Section 6(f)(ii). (d) INTEREST. Interest on the principal balance of each Purchase Loan will accrue annually, in arrears, at the Interest Rate. Except as provided in subsections (f) and (g) of this Section 6, accrued interest shall be payable with each installment of principal and at maturity. (e) TERM. The term of each Purchase Loan shall begin on the date specified in subsection (a) of this Section 6 and, subject to prepayment as provided in subsections (f), (g) and (h) of this Section 6, mature no later than the fifth anniversary of such date. The principal balance of the Purchase Loan shall be payable in installments as provided in the Purchase Note, with interest on the unpaid balance payable as provided in Section 6(d). The Board shall have the discretion to grant Purchase Loans with payments of principal and accrued but unpaid interest due in a lump sum at the end of the loan term. (f) PREPAYMENT OBLIGATIONS OTHER THAN ON TERMINATION OF SERVICE. (i) DIVIDENDS AND DISTRIBUTIONS. To the extent the Participant receives cash dividends or other distributions (other than liquidating distributions) paid in cash on the Common Stock securing a Purchase Loan, the Participant shall be entitled to retain such dividend or distribution with no prepayment of the related Purchase Loan. (ii) SALE OF COMMON STOCK. In the event a Participant sells some or all of the Common Stock securing a Purchase Loan, the full pre-tax amount of the proceeds of such sale shall be applied to prepay the Purchase Loan to the extent of the outstanding balance of principal and accrued interest thereon. In the event that the Participant sells all the Common Stock securing a Purchase Loan and the proceeds of any such sale are inadequate to fully pay the principal and accrued interest thereon, such loan will become due and payable in full 30 days after such sale unless the Participant provides substitute collateral satisfactory to the Board. A transfer of a Participant's Common Stock to a revocable trust as to which the Participant retains voting and investment power (which powers of revocation, voting and investment may be shared with the Participant's spouse) or a transfer to joint ownership with such Participant's spouse shall not be deemed a sale for purposes of this Section 6(f)(ii), although such Common Stock shall remain pledged to secure the Purchase Loan. (iii) OPTIONAL PREPAYMENTS. The Participant may prepay all or any portion of a Purchase Loan at any time. (iv) APPLICATION OF PREPAYMENTS. All prepayments made to the Company pursuant to this Section 6(f) shall first be applied to pay accrued interest on the Purchase Loan and then to reduce the principal balance due on the Purchase Loan. Any prepayment of a 5 remaining balance shall be applied to the principal payments due thereon in chronological order of maturity. (g) PREPAYMENT OBLIGATIONS ON TERMINATION OF SERVICE. In the event of Participant's Termination of Service for any reason except (1) Retirement, (2) Disability, or (3) termination by the Company without Cause, any outstanding balance (including accrued and unpaid interest) of the Purchase Loan to such Participant shall be due and payable 30 days following the later of (i) the day following the date of Termination or (ii) the day following the first date on which the Participant may sell the Common Stock securing the Purchase Loan in the public trading market under Rule 144 of the Securities and Exchange Commission, if such stock was not registered under the Securities Act of 1933 at the time of issuance, and without otherwise incurring liability under the federal securities laws, including Section 16 of the 1934 Act, (limited, in the case of Section 16, to liability relating to purchases or sales of Common Stock or any derivative security occurring prior to the Termination of Service). There shall be no prepayment obligation incurred solely as a result of a Participant's Termination of Service for any of the reasons mentioned in the first sentence of this Section 6(g) prior to maturity of a Purchase Loan. All prepayments under this Section 6(g) shall be applied as provided in Section 6(f)(iv). (h) COMPLIANCE WITH SECURITIES LAWS. With respect to purchases of Common Stock directly from the Company hereunder, the Board shall have the discretion, but shall be under no obligation, to register the issuance of such shares under the Securities Act of 1933. In the event that the Board elects not to register such issuances, the Board may require of Participants such investment representations and other documents as the Board deems necessary to enable the Common Stock to be issued under available exemptions from federal and state securities laws, and the Board may cause the certificates representing such Common Stock to bear appropriate legends restricting transfer as required to qualify for such exemptions. 7. PROGRAM ADMINISTRATION. 6 The Program shall be administered by the Board. Subject to the provisions of the Program, the Board shall interpret the Program and make such rules as it deems necessary for the proper administration of the Program, shall make all other determinations necessary or advisable for the administration of the Program and shall correct any defect or supply any omission or reconcile any inconsistency in the Program in the manner and to the extent that the Board deems desirable to carry the Program into effect. Among other things, the Board shall have the authority, subject to the terms of the Program, to determine (i) the individuals to whom the Purchase Loans are offered, (ii) the basis for any Termination of Service, and (iii) the forms, terms and provisions of any documents utilized under the Program. Any action taken or determination made by the Board pursuant to this paragraph and the other paragraphs of the Program in which the Board is given discretion shall be final and conclusive on all parties. The Board may consult with counsel, who may be counsel to the Company, and such other advisors as the Board may deem necessary and/or desirable, and the members of the Board shall not incur any liability for any action taken in good faith in reliance upon the advice of counsel or any other advisor. 8. AMENDMENT AND DISCONTINUANCE OF THE PROGRAM. The Board may amend, suspend or terminate the Program at any time, subject to the provisions of this Section 8. No amendment, suspension or termination of the Program may, without the consent of the Participant, adversely affect such Participant's rights under any outstanding Purchase Loans in any material respect. 9. MISCELLANEOUS PROVISIONS. (a) EMPLOYMENT NOT GUARANTEED. Nothing contained in the Program nor any related agreement nor any action taken in the administration of the Program shall be construed as a contract of employment or as giving a Participant any right to be retained in the Service of the Company. (b) NONASSIGNABILITY. No person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, hypothecate or convey any interest in the Program. (c) SEPARABILITY, VALIDITY. In the event that any provision of the Program or any related document is held to be invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of the Program or any related document. (d) APPLICABLE LAW. The Program, any Purchase Loans extended pursuant thereto and any related documents shall be governed in accordance with the laws of the State of Delaware without regard to the application of the conflicts of law provisions thereof. The obligation of the Company with respect to the grant of Purchase Loans shall be subject to all applicable laws, rules and regulations and such approvals by any governmental agencies as 7 may be required, including, without the rules and regulations of any securities exchange on which the Common Stock may be listed. (e) INUREMENT OF RIGHTS AND OBLIGATIONS. The rights and obligations under the Program, any Purchase Loans extended pursuant thereto and any related documents shall inure to the benefit of, and shall be binding upon, the Company, its successors and assigns, and the Participants and their beneficiaries. (f) NOTICES. All notices and other communications required or permitted to be given under this Program shall be in writing and shall be deemed to have been duly given if delivered personally or mailed first class, postage prepaid, as follows: (A) if to the Company--at its principal business address to the attention of the General Counsel; (B) if to any Participant--at the last address of the Participant known to the sender at the time the notice or other communication is sent. 8 EX-21.1 8 EXHIBIT 21.1 Exhibit 21.1 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 Energy Products, Inc. California Phoenix Power Systems, Inc. California I-Bus UK, Ltd. United Kingdom I-Bus Manufacturing, Ltd. United Kingdom Space Electronics, Inc. Delaware KD Components, Inc. Nevada EX-23.1 9 EXHIBIT 23.1 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 February 19, 2000, with respect to the consolidated financial statements of Maxwell Technologies, Inc. included in the Annual Report (Form 10-K) for the five-month period ended December 31, 1999. /s/ Ernst & Young LLP ERNST & YOUNG LLP San Diego, California March 24, 2000 EX-27 10 EXHIBIT 27
5 0000319815 MAXWELL TECHNOLOGIES, INC. YEAR DEC-31-1999 AUG-01-1999 DEC-31-1999 4,065 0 31,900 1,513 22,015 75,456 51,835 33,495 105,781 19,299 181 0 0 957 83,459 105,781 52,170 52,170 41,382 41,382 24,840 0 112 (14,147) (5,474) (8,125) (4,966) 0 0 (13,091) (1.37) (1.37)
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