business focused on ultracapacitors and high-voltage capacitors and additional design and production capabilities that enhanced our profile as a reliable, global supplier. (See “—Divestitures” below for a discussion of our disposition of the Winding Equipment business, which we acquired through our acquisition of Montena.)
Restructuring charges were $1.6 million for the year ended December 31, 2002. There were no restructuring charges for the year ended December 31, 2001. In 2002, the restructuring charges were primarily attributable to restructuring of our I-Bus Computing Systems business and our actions to position that business for sale. In the first half of 2002, I-Bus/Phoenix introduced new applied computing products that had been developed in 2001. However, the market for applied computing products, particularly in telecommunications, deteriorated throughout 2002. We responded to the poor market conditions for computing systems and other capital goods by restructuring I-Bus/Phoenix. In June 2002, we began implementing the restructuring plan and recorded restructuring charges of $700,000. In addition, we also determined that certain components in inventory had been adversely impacted. Accordingly, we recorded an inventory charge of approximately $3.0 million for certain excess and obsolete raw material components and finished goods. This charge is included in cost of sales. During the third quarter of 2002, we decided to sell the applied computing business of I-Bus/Phoenix to a new company organized by former I-Bus/Phoenix senior managers. In preparation for the sale and to configure the I-Bus/Phoenix computing business to be self-supporting, I-Bus/Phoenix consolidated all production of the applied computing products in its facility in Tangmere, United Kingdom, and reduced personnel worldwide. As a result of these actions, we recorded additional restructuring charges of $900,000 during the quarter ended September 30, 2002. The unpaid restructuring balance of $400,000 at December 31, 2002 was paid in 2003.
In June 2001, we sold our Sierra-KD EMI filter and ceramic capacitor business for $46.9 million in cash. We retained accounts receivable as of the acquisition date, which amounted to $2.5 million. As a result of this transaction, we recorded a net pre-tax gain of $39.1 million on that sale for the year ended December 31, 2001.
In September 2002, we sold the I-Bus Computing Systems business for $7.0 million in debt and certain other considerations. We also incurred $7.6 million in charges related to goodwill impairment and other asset write-downs related to that business. The loss on the disposition totaled $7.0 million as we fully reserved for the note due to risks of collectability.
In September 2002, we also sold our non-core TeknaSeal glass-to-metal seals business for $5.5 million in cash, of which $1.0 million was held in an escrow account and subsequently released to us over the succeeding four calendar quarters. Approximately $400,000 of the $5.5 million proceeds were paid to certain former employees of TeknaSeal. We recorded a net gain of $200,000 in the fourth quarter of 2002and recorded additional gains of $695,000 for the year ended December 31, 2003.
(Gain) loss on sale of businesses was $6.5 million for the year ended December 31, 2002 and ($39.1) million for the year ended December 31, 2001.
In June 2003, we decided to discontinue marketing and supporting our electronic components tester business and recorded charges in cost of sales of $444,000 primarily attributable to excess inventory and equipment, $393,000 primarily attributable to warranty buy-outs, and $259,000 primarily attributable to expected future warranty returns in the quarters ended June 30, 2003, September 30, 2003 and December 31, 2003, respectively. Sales for our electronic components tester business were immaterial in all periods presented.
In December 2003, we sold our former I-Bus manufacturing and administrative facility in San Diego. The facility was previously classified as Assets Held for Sale at its book value of $7.4 million. Proceeds from the sale of the facility were $9.0 million, resulting in a gain of $1.2 million after payment of a loan balance with Comerica Bank and closing costs of $387,000, which was recorded in gain on sale of property and equipment.
In December 2003, Maxwell Technologies SA (our Swiss subsidiary formerly known as Montena Components Ltd.) sold all of the fixed assets, substantially all inventory, and all warranty and employee agreement obligations of its Winding Equipment business, located in Matran, Switzerland, to Metar SA, a new company formed by the former CEO of Montena Components and Metar employees. The business was sold for $324,000, and we recognized a net loss of $538,000.
Discontinued Operations
Our Government Systems business and PurePulse are reported as discontinued operations. The loss from discontinued operations was $6,000 for the year ended December 31, 2003, compared to $4.8 million for the year ended December 31, 2002 and $4.7 million for the year ended December 31, 2001.
In March 2001, we sold our Government Systems business for $20.7 million and recorded a gain of $1.1 million, net of a $2.7 million provision mainly related to ongoing lease obligations. As of December 31, 2003, the remaining lease obligation, which expires in April 2006, is $1.1 million with a reserve provision of $600,000.
In September 2002, PurePulse suspended operations and we recorded non-cash charges of approximately $1.7 million and cash charges of approximately $0.5 million for severance and other charges. PurePulse had been designing and developing systems that generate extremely intense, broad-spectrum, pulsed light to purify water and inactivate viruses and other pathogens that contaminate vaccines and products sourced from human or animal tissues, such as plasma derivatives, transfusion blood components and biopharmaceuticals. Although PurePulse raised $5 million of equity capital from Millipore and Maxwell in March 2002, the venture capital and other equity markets deteriorated after that time and PurePulse was not able to raise additional capital to fund its operations.
Loss from operations of these discontinued businesses was $5.8 million for the year ended December 31, 2001. Included in the loss is a charge to the tax provision of $2.5 million for recording a valuation allowance.
Other Events
An investment impairment of $500,000 was recorded in 2001 related to Maxwell’s ownership of approximately 1% of a privately-held company involved in support services in the areas of information technology, system and software integration and engineering and technical services under contract with various government agencies. Upon review of its annual financial statements and discussions with its chief financial offer, we were informed that the company had a negative net worth and had decided to restructure its operations to discontinue its information technology and software integration and engineering businesses and focus only on government contracting. Based on these facts and the uncertainty surrounding its ability to return to profitability, we concluded that the investment was impaired and we fully reserved for the investment.
Amortization of goodwill was $1.2 million for the year ended December 31, 2001. In connection with the adoption of SFAS 142, the amortization of goodwill was discontinued beginning with fiscal year 2002.
In 2003, we made an assessment of the Company’s goodwill and intangible assets and determined that there was no impairment. Accordingly, no goodwill impairments were recognized for the year ended December 31, 2003. Goodwill impairments were $5.3 million for the year ended December 31, 2002. There was no goodwill impairment recognized for the year ended December 31, 2001.
We received $209,000 from the sale of the privately-held company referred to above, of which $26,000 had previously been recorded by us as investment. In 2003, we recovered $183,000 of the $500,000 recorded as impaired in 2001 and reflected in (gain) loss on sale of business.
Amortization of other intangibles was $76,000 for the year ended December 31, 2003 and $483,000 for the year ended December 31, 2002, and relates to the amortization of customer backlog acquired in conjunction with the acquisition of Montena and the amortization of ultracapacitor intellectual property that was recorded in conjunction with the merger of the Electronic Components Group, a majority-owned subsidiary, into Maxwell after the purchase of all shares not already owned by us.
Minority interest in income of consolidated subsidiaries was $200,000 and $700,000 for the years ended December 31, 2002 and 2001, respectively. During the first quarter of 2002, we acquired all of the outstanding minority interests, including stock options, of our majority-owned subsidiaries, except for PurePulse (see “—Discontinued Operations” above), in exchange for shares and options in Maxwell.
Interest (income) expense, net was $1,000, ($42,000) and $600,000 for the years ended December 31, 2003, 2002 and 2001, respectively. We used proceeds from the sale of businesses to pay down debt and the excess was invested in high quality short-term marketable investments.
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Fixed asset impairments were $2.3 million for the year ended December 31, 2002. Impairment charges recorded in 2002 were related to fixed assets associated with the I-Bus Computing Systems business that were abandoned, and computers and computer systems infrastructure directly related to supporting the I-Bus Computing Systems business. The impairment also included fixed assets associated with transformer and harness production for the I-Bus/Phoenix power systems group. Production of transformers and harnesses subsequently was outsourced.
Liquidity and Capital Resources
Changes in Cash Flow
For the year ended December 31, 2003, cash used by operating activities was $5.0 million compared to $9.0 million for the year ended December 31, 2002 and $17.3 million in for the year ended December 31, 2001. The use of cash for the year ended December 31, 2003 was primarily attributed to operating losses.
For the year ended December 31, 2002, the use of cash primarily was attributable to operating losses, including restructuring-related cash expenses for our continuing operations, which for most of 2002 included the I-Bus Computing Systems business. Cash used in discontinued operations, which included PurePulse and residual leases and other obligations of divested businesses, in the year ended December 31, 2002 was $4.1 million, as compared to $9.7 million in the year ended December 31, 2001. Capital expenditures for the years ended December 31, 2003, 2002 and 2001 were $2.4 million, $1.8 million and $6.2 million, respectively. We spent over $10 million in capital investments to build and outfit state-of-the-art production facilities, which include both mechanization and full-scale automation. In 2002, cash of $3.0 million was used in the Company’s third quarter as part of the purchase price for Montena. Capital expenditures for 2004 are not expected to exceed $3.6 million, which is approximately equal to our annual depreciation and amortization charges.
Our restructuring plan which started in early 2000 was completed in 2003, and we started realizing the benefit of our restructuring effort in the fourth quarter of 2003. All indicators such as productivity, lower product cost and new product introduction have increased. The reduction of overhead and increased productivity should improve our gross margin and reduce our operating expenses in 2004. Based on our current plan, we believe we will generate positive cash flow from operations for the year ending December 31, 2004. In January 2004, we secured a $3.0 million line of credit from a U.S. bank that is available for working capital needs; the line has not been used to date. We also have a line of credit for $1.6 million from a Swiss bank for working capital in Switzerland. The line has been fully used as of December 31, 2003. We had $9.8 million in cash and $2.5 million in short-term investments at the end of December 2003. We also have a $925,000 term loan available from a Swiss bank for capital equipment purchases. We have a loan from the employee pension fund in the amount of approximately $250,000. We believe the liquidity provided by the existing cash and cash equivalents, as well as the cash generated from operations and available under our lines of credit, will provide sufficient capital to fund our capital equipment and working capital requirements and potential operating losses for more than the next 12 months. Failure to achieve expected cash flows or to obtain additional debt or equity investments, if necessary, would have a material adverse effect on us.
Net accounts receivable decreased to $5.9 million as of December 31, 2003 from $8.5 million at December 31, 2002. The primary reasons for the decrease was due to lower revenues and improvement in the collection cycle.
Net inventory balance decreased to $7.3 million as of December 31, 2003 from $11.8 million as of December 2002. This reduction is due to improved inventory management and the increase in inventory reserves due to the phase-out of our tester and magnetic based power products. Inventory reserves as of December 31, 2003, were $3.1 million compared to $2.0 million as of December 31, 2002.
Accounts payable and accrued liabilities as of December 31, 2003 were $7.7 million compared to $10.4 million as of December 31, 2002. The primary reason for the reduction was lower inventory purchases and a decrease in operating expenses. Short-term borrowing increased to $1.9 million as of December 31, 2003 from $570,000 as of December 31, 2002. Net liability of discontinued operations as of December 31, 2003 and 2002 was $1.5 million and $2.3 million, respectively.
During 2002 and 2001, we financed operating losses with term debt, as described under the heading “Short-term and Long-term Borrowings,” and the sale of non-strategic businesses. In the year ended December 31, 2001, we received $46.9 million and $20.7 million of cash in connection with the sale of Sierra-KD EMI, our filter and ceramic capacitor business, and Government Systems , our defense contracting business, respectively. These funds were used to pay down debt of $22.8 million and to fund continuing and discontinued operations. On the first day of our fourth fiscal quarter of 2002, we sold TeknaSeal, our glass-to-metal seals business, and received approximately $5.1 million net cash, of which $1.0 million was held in an escrow account and was later paid upon TeknaSeal achieving certain revenue benchmarks in 2003. We used a
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portion of these proceeds to prepay $2.8 million of our bank term loan, which reduced the outstanding term loan to $3.0 million. The term loan was paid off in full in December 2003.
Maxwell Technologies SA requires advances from customers for certain product lines and issues bank guarantees that give the customer the right to receive back the advance if the product is not delivered by a specific date. As of the end of December 2003, we had issued guarantees of $400,000 related to these product arrangements, most of which we expect to ship to customers in the first quarter of 2004.
During the quarter ended September 2002, we suspended the operations of PurePulse, sold the I-Bus Computing Systems business and started consolidating our power systems business and corporate headquarters into our leased facility in San Diego, which also contains, in part, our ultracapacitor and microelectronics businesses. We also decided to offer for sale our 85,000 square foot owned facility that housed I-Bus/Phoenix’s computing systems North American operations and administration. These actions, combined with the acquisition of Montena, are consistent with our strategy to focus on high value, high reliability power and microelectronic products and to structure the Company’s operations to be self-supporting on product revenues in the near future. The former I-Bus/Phoenix facility was sold in December 2003.
Short-term and Long-term Borrowings
Short-term Borrowings
Maxwell’s European subsidiary, Maxwell Technologies SA, has a $1.6 million bank credit agreement with a Swiss bank. Borrowings under the credit agreement bear interest at 5.5% plus .25% for every quarter borrowings are outstanding. Under the credit agreement, we are eligible to borrow fixed term loans at LIBOR plus 1.75% with repayment terms extending beyond one month from the date of funding. Borrowings under the credit agreement are secured by the assets of Maxwell Technologies SA. As of December 31, 2003, the full amount of the credit line was drawn. In addition, $400,000 of letters of guarantee were outstanding as of December 31, 2003 related to customer deposits.
In February 2004, we secured a $3.0 million credit line from a U.S. bank for working capital purposes, subject to a one-year repayment period. This line is secured by accounts receivable and assets of the Company and bears interest at the bank’s prime plus 1.75%, but subject to a minimum interest rate of 5.75%. The agreement requires us to maintain a minimum tangible net worth of $15 million plus 50% of any consideration from future equity and debt transactions plus 50% of net income in each fiscal quarter after the date of the agreement.
Long-term Borrowings
At the beginning of 2004, Maxwell Technologies SA obtained a $925,000 term loan for financing the acquisition of specific capital equipment. Borrowings under the term loan are secured by the equipment being purchased. This credit agreement bears interest at the Swiss inter-bank borrowing rate plus 2.0%. The term loan can be borrowed in quarterly advances up to the $925,000 limit and repaid over one to five years. If funds were borrowed at the beginning of 2004 and repaid over a 5-year period, the interest rate would be 4.3%.
Maxwell SA had a loan from the Montena SA pension plan for 300,000 Swiss Francs or $250,000 at December 31, 2003 and December 31, 2002. The loan from the pension plan bears interest at the variable mortgage rate of the Banque Cantonale de Fribourg plus 1%, which resulted in a 5% interest rate for 2003.
In February 2001, we entered into a Loan and Security Agreement with Comerica Bank-California. The Loan and Security Agreement, as amended, consisted of a $5.0 million credit line secured by a deed on the I-Bus/Phoenix facility in San Diego, as well as certain other collateral. The term loan bore interest, at our option, at the bank’s reference rate plus .5%, or cost of funds plus 2.25%. The interest rate was 4.75% at December 31, 2002. The principal was amortized monthly over 20 years with the balance due December 31, 2004. The amount of the loan was paid in full in December 2003 with a portion of the proceeds from the sale of the I-Bus/Phoenix facility.
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Minority Equity Interests in Subsidiaries and Subsidiary Option Programs
In January 2002, we adopted a plan to complete merger transactions between Maxwell, our Electronic Components Group and our I-Bus/Phoenix subsidiary whereby all of the minority shareholdings and options in such subsidiaries would be converted to shares and options of Maxwell. On April 15, 2002, these merger transactions resulted in the issuance of 565,000 common shares of Maxwell and options to purchase 520,000 common shares of Maxwell. In February 2002, PacifiCorp Energy Ventures, Inc., the largest minority shareholder in the Electronic Components Group, exchanged its preferred shares of the Electronic Components Group for 518,000 common shares of Maxwell pursuant to its right under the original investment agreement.
PurePulse, which is classified as discontinued operations, has minority equity investors. These investors are former strategic partners, former employees who were issued shares when PurePulse originally was incorporated and former employees who have exercised stock options in that entity. As of December 31, 2003, minority investors owned approximately 18% of the outstanding stock of PurePulse.
Loss on the Sale of the I-Bus Computing Systems Business
We fully reserved for the $7.0 million note received in exchange for the I-Bus Computing Systems business in September 2002 due to the uncertainty as to its collectability. The note was discounted and cancelled in exchange for $475,000 in the fourth quarter of 2003.
Contractual Obligations
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| | Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years | |
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Operating Lease Obligations (1) | | $ | 7,318 | | | $ | 1,612 | | | | $ | 4,523 | | | | $ | 1,183 | | | | | — | | |
Debt Obligations (2) | | | 1,851 | | | | 1,851 | | | | | — | | | | | — | | | | | — | | |
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Total | | $ | 9,169 | | | $ | 3,463 | | | | $ | 4,523 | | | | $ | 1,183 | | | | | — | | |
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(1) | Operating lease obligations represent building leases and vehicle leases for management personnel at our Rossens, Switzerland, facility. |
(2) | Debt obligations represent short-term borrowings and current portion of long-term debt. |
Critical Accounting Policies
This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America, which we refer to as U.S. GAAP. We have used certain assumptions and judgments in the preparation of these financial statements, which assumptions and estimates may potentially affect the reported amounts of assets and liabilities and the disclosure of contingencies as well as reported amounts of revenues and expenses. The following may involve a higher degree of judgment and complexity and, as such, management assumptions and conclusions in these areas may significantly impact the results of operations of the Company.
Revenue Recognition
For the fiscal year ended December 31, 2003, substantially all of our revenue was derived from the sale of manufactured products directly to customers and licensing fees received for the right to manufacture our proprietary BOOSTCAP® ultracapacitors. Product revenue is recognized at the time the product is shipped and title passes to the customer unless specific terms require otherwise. In general no discounts are offered and there is no right of return. License fee revenues are recognized when the performance requirements have been met, the fee is fixed or determinable, and collection of fees is probable. In prior years, certain continuing and discontinued segments involved revenues from both long-term and short-term fixed price contracts and cost plus contracts with the U.S. Government directly or through a prime contractor. Those revenues, including estimated profits, were recognized at the time the costs were incurred and included provisions for any anticipated losses. These contracts are subject to rate audits and other audits, which could result in the reduction of revenue in excess of estimated provisions. In turn, this could increase losses for the periods in which any such reduction occurs.
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Accounts Receivable
We establish and maintain customer credit limits based on references, financial information, credit-worthiness and payment history. Accounts receivable consist primarily of amounts due to us from our normal business activities. We maintain an allowance for doubtful accounts to reflect anticipated bad debts based on past collection history and any specific risks identified in the portfolio. We determine our bad debt reserve based on an analysis we make to measure our reserve requirements and we establish specific reserves when we recognize the inability of our customer to pay its obligation. If we become aware of increasing negative changes in the financial condition of our customers, or if economic conditions change adversely, we may have to increase the allowance. An increase in such allowances would adversely impact our financial condition and results of operations.
Assets Held for Sale and Remaining Lease Obligation
In December 2003, we sold the building formerly occupied by I-Bus/Phoenix, Inc., which was classified as assets held for sale in 2002. Proceeds from the sale of the facility were approximately $9.0 million and closing expenses were $387,000, resulting in a gain from the sale of the facility of $1.2 million.
We have provided an estimate of the remaining liability of discontinued operations of PurePulse associated with a remaining lease obligation, which has been recorded in discontinued operations. In making this estimate, we considered factors such as the commercial real estate market, including our estimate as to how and when we will be able to sub-lease, terminate or buy out the remaining lease obligation. Given the currently depressed commercial real estate markets and the continued spending reductions by businesses and government agencies, there can be no guarantee that we will be able to conclude this lease obligation for the amount that we have accrued, which could require additional charges.
Excess and Obsolete Inventory
We value inventories at the lower of cost or market. In assessing the ultimate realization of inventories, we make judgments as to future demand requirements and compare that with current and committed inventory levels. The markets for the Company’s products are extremely competitive and are characterized by rapid technological change, new product development, product obsolescence and evolving industry standards. In addition, price competition is intense and significant price erosion generally occurs over the life of a product. We have recorded significant charges for reserves in recent periods to reflect changes in market conditions. We believe that future events are subject to change and errors in estimates may have significant adverse impact on the balance sheet.
Long-Lived Assets and Other Intangible Assets
�� Long-lived assets such as property, plant and equipment and other intangible assets are reviewed for impairment whenever events and changes in business circumstances indicate that the carrying value of the long-lived asset may not be recoverable in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.” The most significant assumptions in the analysis of impairment involve estimates of future discounted cash flows. We use cash flow assumptions that are consistent with our business plans and consider other relevant information. If we determine that the carrying value of the long-lived asset may not be recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of the long-lived assets exceeds its fair market value. If there are changes in business circumstances or in the key assumptions used in estimating undiscounted cash flows, the carrying value of our long-lived assets may be overstated or understated, as well as the related impairment charge.
Goodwill
We account for goodwill in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” This standard requires that goodwill no longer be amortized but is subject to an annual impairment test and when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. The first step consists of estimating the fair value of each reporting unit based on a discounted cash flow model using revenue and profit forecasts and comparing those estimated fair values with the carrying values of the reporting unit, which includes the allocated goodwill. If the fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an implied fair value of goodwill. The implied fair value of goodwill is the residual fair value derived by deducting the fair value of a reporting unit’s assets and liabilities from its estimated fair value, which was calculated in step one. The impairment charge represents the excess of the carrying amount of the reporting units’ goodwill over the implied fair value of their goodwill.
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In assessing the implied fair value of goodwill, we have made assumptions regarding estimates of future cash flows and other operating factors. The most significant assumptions in the analysis of impairment involve estimates of revenue and expense forecasts of the reporting unit. If there are changes in business circumstances of in the key assumptions used in estimating the fair value of the reporting unit, the carrying value of our goodwill may be overstated or understated, as well as the related impairment charge. We cannot say with certainty that we may not incur charges for impairment of goodwill in the future if the fair value of Maxwell Technologies and Maxwell SA decrease due to market conditions or other unanticipated circumstances. We may have to revise our assumptions and incur additional charges. Any additional impairment charges will adversely affect our results of operations.
Valuation Allowance for Deferred Tax Assets
A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before we are able to realize their benefit, or that future deductibility is uncertain. In general, companies that have had a recent history of operating losses are faced with a difficult burden of proof as to their ability to generate sufficient future income in order to realize the benefit of the deferred tax assets. We determined that it was appropriate to record a valuation allowance as of December 31, 2003 against our deferred tax assets based on the recent history of losses to amounts that are expected to be more likely than not realizable. The deferred tax assets are still available for us to use in the future to offset taxable income, which would result in the recognition of a tax benefit and a reduction to the Company’s effective tax rate.
Impact of Inflation
We believe that inflation has not had a material impact on our results of operations for each of our fiscal years in the three-year period ended December 31, 2003. However, there can be no assurance that future inflation would not have an adverse impact on our operating results and financial condition.
New Accounting Pronouncements
Effective January 1, 2003, we adopted SFAS No. 87, “Employers’ Accounting for Pensions,” as amended, in accordance with Emerging Issues Task Force 03-4, “Determining the Classification and Benefit Attribution Method for a “Cash Balance” Pension Plan” related to its Swiss pension plan. This statement requires a standardized method for measuring net periodic pension cost and recognizing the compensation cost of an employee’s pension over the employee’s approximate service period by relating the cost more directly to the terms of the plan. This statement requires immediate recognition of a liability (the minimum liability) when the accumulated benefit obligation exceeds the fair value of plan assets. This statement also requires expanded disclosures about pension plan assets, obligations, benefit payments, contributions and net benefit cost.
The adoption of SFAS No. 87 on January 1, 2003, resulted in a cumulative effect of an accounting change, net of tax, of $878,000 (Note 11).
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) 46, “Consolidation of Variable Interest Entities.” This interpretation provided guidance on the identification of, and financial reporting for, variable interest entities. Variable interest entities are entities that lack the characteristics of a controlling financial interest or lack sufficient equity to finance activities without additional subordinated financial support. FIN 46 requires a company to consolidate a variable interest entity if that company is obligated to absorb the majority of the entity’s expected losses or is entitled to receive the majority of the entity’s residual returns, or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. FIN 46 is applicable immediately to variable interest entities created after January 31, 2003. For all variable interest entities created prior to February 1, 2003, FIN 46 is applicable to the first interim or annual period ending after December 15, 2003. The application of this interpretation is not expected to have a material effect on our Consolidated Financial Statements.
In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation- Transition and Disclosure- an amendment of FASB Statement No. 123” (SFAS No. 148). This statement amends SFAS No. 123 “Accounting for Stock Based Compensation” (SFAS No. 123) to provide alternative methods of voluntarily transitioning to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require disclosure of the method used to account for stock-based employee compensation and the effects of the method on reported results in both annual and interim financial statements. The disclosure provisions were effective for our fiscal year ended December 31, 2002.
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In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which elaborates on the disclosures to be made by a guarantor and clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The recognition provisions of FIN 45 are applicable to guarantees issued or modified after December 31, 2002 and the disclosure provisions were effective for the year ended December 31, 2003. The adoption of FIN 45 did not have a material impact on our consolidated financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS No. 146). This statement supercedes Emerging Issues Task Force (EITF) issue No. 94-3 “Liabilities Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for cost associated with an exit or disposal activity be recognized at the date an entity commits to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The provisions of SFAS No. 146 were effective for any exit and disposal activities initiated after December 31, 2002. Adoption of SFAS No. 146 as of January 1, 2003 did not have a material impact on the Company’s financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121 but retains SFAS No. 121’s fundamental provisions for recognition and measurement of impairment of long-lived assets to be held and used and measurement of long-lived assets to be disposed of by sale. SFAS No. 144 also supersedes the accounting and reporting provisions of Accounting Principles Board (“APB”) Opinion No. 30 for segments of a business to be disposed of but retains APB Opinion No. 30’s requirement to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. SFAS No. 144 became effective for the Company beginning January 1, 2002. Adoption of SFAS No. 144 as of January 1, 2002 did not have a material impact on the Company’s financial position or results of operations.
We have not entered into or invested in any instruments that are subject to market risk, except as follows:
We face exposure to financial market risks, including adverse movements in foreign currency exchange rates and changes in interest rates. These exposures may change over time and could have a material adverse impact on our financial results.
Foreign Currency Risk
Our primary foreign currency exposure is related to our subsidiary in Switzerland. Maxwell Technologies SA has Euro and local currency (Swiss Franc) revenue and local currency operating expenses. Changes in these currency exchange rates impact the U.S. dollar amount of revenue and expenses. We do not hedge our currency exposures.
Interest Rate Risk
At December 31, 2003, we had $1.6 million or 2 million Swiss Franc denominated-term debt. The carrying value of these short-term borrowings approximates fair value due to the short maturity dates of this instrument. We do not anticipate significant interest rate swings in the near future; however, the exchange loss or gain may significantly affect the balance sheet or the statement of operations.
We invest excess cash in debt instruments of the U.S. Government and its agencies, high-quality corporate issuers and money market accounts. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. Current policies do not allow the use of interest rate derivative instruments to manage exposure to interest rate changes. As of December 31, 2003, a third party manages approximately $2.5 million of the investment portfolio under guidelines approved by the Company’s Board of Directors. The balance of our cash is invested in money market accounts with banks.
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See pages F-1 through F-36.
Effective March 27, 2003, the Company engaged Deloitte & Touche LLP to serve as the Company’s principal accountant to audit the Company’s financial statements for the fiscal year ending December 31, 2003. Ernst & Young LLP continued to serve as the Company’s principal accountant to audit the Company’s financial statements for the fiscal year ended December 31, 2002, through the completion of that audit and the date of the Company’s Annual Report on Form 10-K for that period. The change in the Company’s principal accountant was approved by the Audit Committee.
The reports of Ernst & Young LLP with respect to the Company’s financial statements for the fiscal years ended December 31, 2002 and December 31, 2001 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. During the fiscal years ended December 31, 2002 and December 31, 2001 and the period from December 31, 2002 through the end of Ernst & Young LLP’s engagement by the Company, there were no disagreements between the Company and Ernst & Young LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to make reference to the subject matter of the disagreements in its report on the Company’s financial statements for such years.
During the fiscal years ended December 31, 2002 and December 31, 2001 and the period from December 31, 2002 to the date of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, the Company did not consult with Deloitte & Touche LLP regarding either the application of accounting principles to a specified transaction, the type of audit opinion that might be rendered on the Company’s financial statements, or any matter that was the subject of a disagreement, as defined in Item 304(a)(1)(iv) of Regulation S-K under the Securities Exchange Act of 1934, as amended, or reportable event, as defined in Item 304(a)(1)(v) of Regulation S-K.
Pursuant to Item 304(a)(3) of Regulation S-K, the Company requested that Ernst & Young LLP furnish it with a letter addressed to the SEC stating whether or not it agrees with the above statements. A copy of that letter was included as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on April 1, 2003.
On March 29, 2004, the Audit Committee received a letter from Deloitte & Touche LLP identifying a reportable condition under the standards established by the American Institute of Certified Public Accountants and advising us that, in their judgment, the reportable condition constitutes a material weakness under such standards. In planning and performing the audit of our consolidated financial statements for the year ended December 31, 2003, Deloitte & Touche LLP observed that the Company has experienced significant turnover during 2003 in our financial accounting and reporting function, which has resulted in the loss of in-house expertise in the areas of generally accepted accounting principals (GAAP) and the financial statements reporting requirements of the SEC. In their March 29, 2004 letter to us, Deloitte & Touche LLP recommended that we reassess our current accounting and reporting organization/positions and hire additional personnel with GAAP and SEC reporting expertise as soon as possible to augment current resources. Our Audit Committee has discussed with Deloitte & Touche LLP the matters raised in its March 29, 2004 letter to the Audit Committee. We have authorized Deloitte & Touche LLP to respond fully to the inquiries of our successor accountant concerning the subject matter of such letter.
We have been informed that Deloitte & Touche LLP is resigning as our independent auditors and we are filing a Current Report on Form 8-K regarding this matter concurrently with this Annual Report.
The report of Deloitte & Touche LLP with respect to the Company’s financial statements for the fiscal year ended December 31, 2003 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the fiscal year ended December 31, 2003 and the period from December 31, 2003 through the end of Deloitte & Touche LLP’s engagement with the Company, there were no disagreements between the Company and Deloitte & Touche LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Deloitte & Touche LLP, would have caused Deloitte & Touche LLP to make reference to the subject matter of the disagreements in its report on the Company’s financial statements for such year.
Pursuant to Item 304(a)(3) of Regulation S-K, the Company requested that Deloitte & Touche LLP furnish it with a letter addressed to the SEC stating whether or not it agrees with the above statements. A copy of that letter will be filed with the SEC promptly upon receipt.
Disclosure Controls and Procedures
Richard D. Balanson, our Chief Executive Officer, and Tesfaye Hailemichael, our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report. Based on the evaluation, they believe that:
| • | our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and |
| | |
| • | our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. |
Internal Control Over Financial Reporting
There has not been any change in our internal control over financial reporting that occurred during our quarterly period ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
40
Limitations on the Effectiveness of Controls
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
41
PART III
The information required by this item will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 6, 2004, under the captions “Election of Directors,” “Board of Directors Meetings and Committees,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Executive Compensation” and “Code of Business Ethics and Conduct” and is incorporated by reference herein.
The information required by this item will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 6, 2004, under the caption “Executive Compensation,” is incorporated by reference herein.
The information required by this item will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 6, 2004, under the caption “Security Ownership of Certain Beneficial Owners and Management” and is incorporated by reference herein.
The information required by this item will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 6, 2004, under the caption “Certain Transactions” and is incorporated by reference herein.
The information required by this item will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 6, 2004, under the caption “Ratification of Independent Auditor” and is incorporated by reference herein.
42
PART IV
(a) Documents filed as part of this report.
1. Financial Statements.The consolidated financial statements required by this item are submitted in a separate section beginning on page F-1 of this Annual Report on Form 10-K.
2. Financial Statement Schedules. The financial statement schedule entitled “Valuation and Qualifying Accounts” required by this item is submitted in a separate section beginning on page F-36 of this Annual Report on Form 10-K. All other schedules are omitted because they are not applicable.
3. Exhibits.
| Exhibit
Number | | Description of Document |
|
|
|
|
| 2.1 | | Asset Purchase Agreement dated December 10, 2003 between the Registrant and Metar SA en constitution. (1) |
| | | |
| 2.2 | | Purchase and Sale Agreement and Joint Escrow Instructions dated August 15, 2003 by and between the Registrant and Horizon Christian Fellowship. (1) |
| | | |
| 2.3 | | First Amendment to Purchase and Sale Agreement and Joint Escrow Instructions by and between the Registrant and Horizon Christian Fellowship, dated September 26, 2003 (1) |
| | | |
| 2.4 | | Second Amendment to Purchase and Sale Agreement and Joint Escrow Instructions by and between the Registrant and Horizon Christian Fellowship, dated October 13, 2003. (1) |
| | | |
| 2.5 | | Third Amendment to Purchase and Sale Agreement and Joint Escrow Instructions by and between the Registrant and Horizon Christian Fellowship, dated December 23, 2003. (1) |
| | | |
| 3.1 | | Restated Certificate of Incorporation of the Registrant. (19) |
| | | |
| 3.2 | | Certificate of Amendment of Restated Certificate of Incorporation of the Registrant, dated November 22, 1996. (13) |
| | | |
| 3.3 | | Certificate of Amendment of Restated Certificate of Incorporation of the Registrant, dated February 9, 1998. (2) |
| | | |
| 3.4 | | Amended and Restated Bylaws of the Registrant. (3) |
| | | |
| 4.1 | | Rights Agreement dated November 5, 1999 between the Registrant and Chase Mellon Shareholders Services, LLC, as Rights Agent. (18) |
| | | |
| 4.2 | | Amendment of Rights Agreement dated as of July 5, 2002 * |
| | | |
| 10.1 | | Amended and Restated 1995 Stock Option Plan of the Registrant. (3) |
| | | |
| 10.2 | | Stock Option Agreement under 1995 Stock Option Plan by and between Registrant and Kenneth Potashner, dated as of May 19, 2003. * |
| | | |
| 10.3 | | Maxwell Laboratories, Inc. 1989 Director Stock Option Plan. (20) |
| | | |
| 10.4 | | Amendment Number One to Maxwell Laboratories, Inc. Director Stock Option Plan, dated February 7, 1997. (13) |
43
| 10.5 | | Amendment Number Two to Maxwell Laboratories, Inc. Director Stock Option Plan, dated January 28, 1999. (2) |
| | | |
| 10.6 | | 1999 Director Stock Option Plan of the Registrant. (5) |
| | | |
| 10.7 | | Maxwell Laboratories, Inc. 1994 Employee Stock Purchase Plan. (14) |
| | | |
| 10.8 | | Amendment Number One to the Maxwell Laboratories, Inc. 1994 Employee Stock Purchase Plan, effective as of April 30, 1997. (13) |
| | | |
| 10.9 | | Maxwell Laboratories, Inc. 1994 Director Stock Purchase Plan. (14) |
| | | |
| 10.10 | | PurePulse Technologies, Inc. 1994 Stock Option Plan. (15) |
| | | |
| 10.11 | | Employment Agreement dated November 9, 1999 between the Registrant and Carlton J. Eibl. (5) |
| | | |
| 10.12 | | Restricted Stock Agreement dated July 25, 1996, between the Registrant and Kenneth F. Potashner. (15) |
| | | |
| 10.13 | | Amendment Number One to Restricted Stock Agreement, dated June 24, 1997, between the Registrant and Kenneth F. Potashner. (13) |
| | | |
| 10.14 | | Secured Promissory Note dated February 2, 1999 and Stock Pledge Agreement dated February 2, 1999 between Registrant and Kenneth F. Potashner. (2) |
| | | |
| 10.15 | | Stock Pledge Agreement dated February 2, 1999 between Registrant and Kenneth F. Potashner. (2) |
| | | |
| 10.16 | | Shareholder Agreement among the Registrant, PurePulse Technologies, Inc., Sanyo E&E Corporation and Three Oceans Inc., dated January 28, 1999. (2) |
| | | |
| 10.17 | | Loan and Security Agreement dated February 26, 2001, between the Registrant, Maxwell Electronic Components Group, Inc., I-Bus/Phoenix, Inc., PurePulse Technologies, Inc., Maxwell Technologies Systems Division, Inc., MML Acquisition Corporation and Comerica Bank – California. (6) |
| | | |
| 10.18 | | Third Amendment to Loan and Security Agreement dated December 21, 2001, among the Registrant, Maxwell Electronic Components Group, Inc., I-Bus/Phoenix, Inc., PurePulse Technologies, Inc., MML Acquisition Corp. and Comerica Bank – California. (12) |
| | | |
| 10.19 | | Fourth Amendment to Loan and Security Agreement dated July 2, 2002, among the Registrant, Maxwell Electronic Components Group, Inc., I-Bus/Phoenix, Inc., PurePulse Technologies, Inc., MML Acquisition Corp. and Comerica Bank-California. * |
| | | |
| 10.20 | | Fifth Amendment to Loan and Security Agreement dated August 13, 2002, among the Registrant, Maxwell Electronic Components Group, Inc., I-Bus/Phoenix, Inc., PurePulse Technologies, Inc., MML Acquisition Corp. and Comerica Bank-California. * |
| | | |
| 10.21 | | Sixth Amendment to Loan and Security Agreement dated October 31, 2002, among the Registrant, Maxwell Electronic Components Group, Inc., I-Bus/Phoenix, Inc., PurePulse Technologies, Inc., MML Acquisition Corp. and Comerica Bank-California. * |
| | | |
| 10.22 | | Seventh Amendment to Loan and Security Agreement dated June 30, 2003, among the Registrant, Maxwell Electronic Components Group, Inc., I-Bus/Phoenix, Inc., PurePulse Technologies, Inc., MML Acquisition Corp. and Comerica Bank-California. * |
| | | |
| 10.23 | | Term Loan Agreement dated December 21, 2001 between the Registrant and Comerica Bank-California. (12) |
| | | |
| 10.24 | | Lease dated March 28, 2000 by and between Balboa Boulevard Building, G.P., as Lessor, and the Registrant, as Lessee. (6) |
44
| 10.25 | | Lease dated November 1, 1996, by and between Ponderosa Pines Partnership, as Lessor, and PurePulse Technologies, Inc., as Lessee. (13) |
| | | |
| 10.26 | | Stock Purchase and Barter Agreement by and between the Registrant and Montena SA dated May 30, 2002 (8) |
| | | |
| 10.27 | | Amendment Number One to Stock Purchase and Barter Agreement by and between the Registrant and Montena SA dated June 28, 2002 (8) |
| | | |
| 10.28 | | Amendment Number Two to the Stock Purchase and Barter Agreement by and between the Registrant and Montena SA dated August 12, 2002. (9) |
| | | |
| 10.29 | | Asset Purchase Agreement dated as of September 30, 2002 between Maxwell Electronic Components Group, Inc. and TeknaSeal L.L.C. (10) |
| | | |
| 10.30 | | Purchase and Sale Agreement dated as of September 29, 2002 between I-Bus/Phoenix, Inc. and I-Bus Corporation. (10) |
| | | |
| 10.31 | | 8% Senior Subordinated Promissory Note dated September 29, 2002 in the principal amount of $7,000,000. (10) |
| | | |
| 10.32 | | Warrant for Common Stock of I-Bus Corporation dated September 29, 2002 issued to I-Bus/Phoenix, Inc. (10) |
| | | |
| 10.33 | | Term Loan Agreement Amendments dated August 13, 2002 and October 31, 2002 between the Registrant and Comerica Bank California. (11) |
| | | |
| 10.34 | | Services Agreement dated April 4, 2003 between the Registrant and Carlton Eibl. (16) |
| | | |
| 10.35 | | Separation Agreement and General Release of Claims effective as of May 8, 2003 between the Registrant and Kenneth Potashner. (17) |
| | | |
| 10.36 | | Employment Agreement dated August 1, 2003 between the Registrant and Richard D. Balanson. (17) |
| | | |
| 10.37 | | Employment Agreement dated December 22, 2003 between the Registrant and Tesfaye Hailemichael. * |
| | | |
| 10.38 | | Employment Agreement dated December 22, 2003 between the Registrant and Richard Smith. * |
| | | |
| 10.39 | | Separation Agreement and General Release of All Claims effective as of October 31, 2003 between the Registrant and James Baumker. * |
| | | |
| 10.40 | | Indemnity Agreement for Directors of the Registrant. * |
| | | |
| 10.41 | | Loan and Security Agreement dated February 4, 2004 between the Registrant and Silicon Valley Bank. * |
| | | |
| 10.42 | | Schedule to Loan and Security Agreement dated February 4, 2004 between the Registrant and Silicon Valley Bank. * |
| | | |
| 10.43 | | Loan and Security Agreement (Exim Program) dated February 4, 2004 between the Registrant and Silicon Valley Bank. * |
| | | |
| 10.44 | | Schedule to Loan and Security Agreement (Exim Program) dated February 4, 2004 between the Registrant and Silicon Valley Bank. * |
| | | |
| 10.45 | | Export-Import Bank of the United States Agreement Executed by Borrower dated February 4, 2004 between Registrant, Export-Import Bank of the United States and Silicon Valley Bank. * |
45
| | | |
| 10.46 | | Intellectual Property Security Agreement dated February 4, 2004 between Registrant and Silicon Valley Bank. * |
| | | |
| 10.47 | | Securities Account Control Agreement dated February 4, 2004 between Registrant and Silicon Valley Bank. * |
| | | |
| 21.1 | | List of subsidiaries of the Registrant. * |
| | | |
| 23.1 | | Consent of Deloitte & Touche LLP, Independent Auditors. * |
| | | |
| 23.2 | | Consent of Ernst & Young LLP, Independent Auditors. * |
| | | |
| 31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (Section 302 Certification) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * |
| | | |
| 31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (Section 302 Certification) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * |
| | | |
| 32 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * |
(1) | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on January 15, 2004. |
| |
(2) | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 1999. |
| |
(3) | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003. |
| |
(4) | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on November 18, 1999. |
| |
(5) | Incorporated herein by reference to the Registrant’s Transition Report on Form 10-K for the transition period from August 1, 1999 to December 31, 1999. |
| |
(6) | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000. |
| |
(7) | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. |
| |
(8) | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on July 19, 2002. |
| |
(9) | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on September 18, 2002. |
| |
(10) | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on October 15, 2002. |
| |
(11) | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002. |
| |
(12) | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001. |
46
| |
(13) | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 1997. |
| |
(14) | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 1995. |
| |
(15) | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 1996. |
| |
(16) | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003. |
| |
(17) | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003. |
| |
(18) | Incorporated herein by reference to Form 8-A filed November 18, 1999. |
| |
(19) | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 1987 (SEC file no. 000-10964). |
| |
(20) | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 1989 (SEC file no. 000-10964). |
| (b) | Reports On Form 8-K. |
| |
| On October 29, 2003 we filed a report on Form 8-K with the SEC relating to the announcement of our results of operations and financial condition for the third quarter and the nine-month period ended on September 30, 2003. |
| | |
| (c) | See Exhibits required by this item under Item 15(a)(3). |
| | |
| (d) | See the financial statement schedule required by this item under Item 15(a)(2). |
47
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, on this 30th day of March 2004.
| MAXWELL TECHNOLOGIES, INC. |
| | |
| | |
| By: | /s/ Richard D. Balanson |
| |
|
| | Richard D. Balanson |
| | President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | | Title | | Date |
| |
| |
|
| | | | |
/s/ Richard D. Balanson | | President, Chief Executive Officer and | | March 30, 2004 |
| | Director | | |
Richard D. Balanson | | | | |
| | | | |
/s/ Tesfaye Hailemichael | | Vice President, Finance, | | March 30, 2004 |
| | Treasurer and Chief Financial Officer | | |
Tesfaye Hailemichael | | (Principal Financial and Accounting Officer) | | |
| | | | |
| | | | |
/s/ Carlton J. Eibl | | Director | | March 30, 2004 |
| | | | |
Carlton J. Eibl | | | | |
| | | | |
/s/ Mark Rossi | | Director | | March 30, 2004 |
| | | | |
Mark Rossi | | | | |
| | | | |
/s/ Jean Lavigne | | Director | | March 30, 2004 |
| | | | |
Jean Lavigne | | | | |
| | | | |
/s/ Robert Guyett | | Director | | March 30, 2004 |
| | | | |
Robert Guyett | | | | |
| | | | |
/s/ José Cortes | | Director | | March 30, 2004 |
| | | | |
José Cortes | | | | |
48
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements and notes thereto appear on pages F-1 to F-36 of this Annual Report on
Form 10-K.
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors and Stockholders
Maxwell Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Maxwell Technologies, Inc. and subsidiaries (the “Company”) as of December 31, 2003, and the related consolidated statements of operations, shareholders’ equity and comprehensive loss, and cash flows for the year then ended. Our audit also included the 2003 financial statement schedule listed at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Maxwell Technologies, Inc. and subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2003, the Company changed its method of accounting for its Swiss pension plan to conform with Statement of Financial Accounting Standards No. 87, as amended.
Deloitte & Touche LLP
San Diego, California
March 29, 2004
F-2
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Maxwell Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Maxwell Technologies, Inc. and subsidiaries as of December 31, 2002, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2002. Our audits also included the financial statement schedule II, Valuation and Qualifying Accounts. These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule 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, 2002, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 8 to the consolidated financial statements, effective January 1, 2002, the Company adopted Financial Accounting Standards Board Statement No. 142, “Goodwill and Other Intangible Assets.”
San Diego, California
February 7, 2003
F-3
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| | December 31, | |
| |
| |
| | 2003 | | 2002 | |
| |
| |
| |
Assets | | | | | | | |
Current assets: | | | | | | | |
| Cash and cash equivalents | | $ | 9,784 | | $ | 3,545 | |
| Short-term investments | | | 2,455 | | | 7,546 | |
| Trade and other accounts receivable, net | | | 5,936 | | | 8,530 | |
| Inventories | | | 7,309 | | | 11,833 | |
| Assets held-for-sale | | | — | | | 7,356 | |
| Prepaid expenses and other current assets | | | 1,143 | | | 1,037 | |
| |
|
| |
|
| |
| Total current assets | | | 26,627 | | | 39,847 | |
| | | | | | | |
| Property, plant and equipment, net | | | 10,769 | | | 11,653 | |
| Other intangible assets, net | | | 2,002 | | | 2,009 | |
| Goodwill | | | 19,478 | | | 17,577 | |
| Prepaid pension asset | | | 3,962 | | | — | |
| Other non-current assets | | | 175 | | | 294 | |
| |
|
| |
|
| |
| | $ | 63,013 | | $ | 71,380 | |
| |
|
| |
|
| |
| | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | |
Current liabilities: | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 7,650 | | $ | 10,354 | |
| Accrued warranty | | | 1,262 | | | 1,154 | |
| Customer deposits | | | 599 | | | 2,305 | |
| Accrued employee compensation | | | 1,653 | | | 1,590 | |
| Short-term borrowings and current portion of long-term debt | | | 1,851 | | | 570 | |
| Deferred tax liability | | | 339 | | | 272 | |
| Net liabilities of discontinued operations | | | 1,494 | | | 2,326 | |
| |
|
| |
|
| |
| Total current liabilities | | | 14,848 | | | 18,571 | |
| | | | | | | |
Deferred tax liability | | | 473 | | | 183 | |
Long-term debt, excluding current portion | | | — | | | 2,675 | |
Commitments and contingencies (Note 10) | | | | | | | |
Stockholders’ equity: | | | | | | | |
| Common stock, $0.10 par value per share, 40,000 shares authorized; 14,339 and
13,726 shares issued and outstanding at December 31, 2003 and 2002,
respectively | | | 1,434 | | | 1,373 | |
| Additional paid-in capital | | | 113,221 | | | 112,255 | |
| Accumulated deficit | | | (70,310 | ) | | (64,015 | ) |
| Accumulated other comprehensive income | | | 3,347 | | | 338 | |
| |
|
| |
|
| |
| Total stockholders’ equity | | | 47,692 | | | 49,951 | |
| |
|
| |
|
| |
| | $ | 63,013 | | $ | 71,380 | |
| |
|
| |
|
| |
| | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-4
MAXWELL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| | Years Ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
| | | | | | | | | | |
Sales | | $ | 41,024 | | $ | 57,965 | | $ | 77,856 | |
License Fees | | | 4,000 | | | — | | | — | |
| |
|
| |
|
| |
|
| |
Total Revenue | | | 45,024 | | | 57,965 | | | 77,856 | |
Cost of sales | | | 36,740 | | | 51,133 | | | 66,616 | |
| |
|
| |
|
| |
|
| |
Gross profit | | | 8,284 | | | 6,832 | | | 11,240 | |
Operating expenses (income): | | | | | | | | | | |
Selling, general and administrative | | | 13,866 | | | 18,092 | | | 22,465 | |
Pension curtailment and settlement gain | | | (2,177 | ) | | — | | | — | |
Research and development | | | 5,917 | | | 8,417 | | | 11,519 | |
Property, plant and equipment impairment | | | — | | | 2,308 | | | — | |
Goodwill impairment | | | — | | | 5,320 | | | — | |
Restructuring charge | | | — | | | 1,629 | | | — | |
Investment impairment | | | — | | | — | | | 500 | |
Amortization of goodwill | | | — | | | — | | | 1,196 | |
Amortization of other intangibles | | | 76 | | | 483 | | | — | |
Gain on sale of property and equipment | | | (1,417 | ) | | — | | | — | |
(Gain) loss on sale of businesses | | | (632 | ) | | 6,542 | | | (39,142 | ) |
| |
|
| |
|
| |
|
| |
Total operating expenses (income) | | | 15,633 | | | 42,791 | | | (3,462 | ) |
| |
|
| |
|
| |
|
| |
(Loss) income from operations | | | (7,349 | ) | | (35,959 | ) | | 14,702 | |
Interest (expense) income, net | | | (1 | ) | | 42 | | | (615 | ) |
Other (expense) income, net | | | (37 | ) | | 220 | | | 17 | |
Minority interest in income of consolidated subsidiaries | | | — | | | 241 | | | 710 | |
| |
|
| |
|
| |
|
| |
(Loss) income from continuing operations before income taxes | | | (7,387 | ) | | (35,456 | ) | | 14,814 | |
Income tax (benefit) provision | | | (220 | ) | | (132 | ) | | 23,035 | |
Loss from continuing operations | | | (7,167 | ) | | (35,324 | ) | | (8,221 | ) |
Discontinued operations (Note 14): | | | | | | | | | | |
Loss from operations, net of tax | | | (6 | ) | | (4,832 | ) | | (5,777 | ) |
Gain on disposal, net of tax | | | — | | | — | | | 1,081 | |
| |
|
| |
|
| |
|
| |
Net loss from discontinued operations | | | (6 | ) | | (4,832 | ) | | (4,696 | ) |
Net loss before cumulative effect of accounting change | | | (7,173 | ) | | (40,156 | ) | | (12,917 | ) |
Cumulative effect of accounting change, net of tax (Note 11) | | | 878 | | | — | | | — | |
| |
|
| |
|
| |
|
| |
Net loss | | $ | (6,295 | ) | $ | (40,156 | ) | $ | (12,917 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Basic net loss per share: | | | | | | | | | | |
Loss from continuing operations | | $ | (0.51 | ) | $ | (2.88 | ) | $ | (0.82 | ) |
Loss from discontinued operations, net of tax | | | — | | | (0.39 | ) | | (0.47 | ) |
Cumulative effect of accounting change, net of tax | | | 0.06 | | | — | | | — | |
| |
|
| |
|
| |
|
| |
Net loss per share | | $ | (0.45 | ) | $ | (3.27 | ) | $ | (1.29 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Diluted net loss per share: | | | | | | | | | | |
Loss from continuing operations | | $ | (0.51 | ) | $ | (2.88 | ) | $ | (0.82 | |
Loss from discontinued operations, net of tax | | | — | | | (0.39 | ) | | (0.47 | ) |
Cumulative effect of accounting change, net of tax | | | 0.06 | | | — | | | — | |
| |
|
| |
|
| |
|
| |
Net loss per share | | $ | (0.45 | ) | $ | (3.27 | ) | $ | (1.29 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Shares used in computing: | | | | | | | | | | |
Basic net loss per share | | | 13,939 | | | 12,264 | | | 10,040 | |
| |
|
| |
|
| |
|
| |
Diluted net loss per share | | | 13,939 | | | 12,264 | | | 10,040 | |
| |
|
| |
|
| |
|
| |
See accompanying notes to consolidated financial statements.
F-5
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
(in thousands)
| | Shares | | Amount | | Additional
Paid—in
Capital | | Deferred
Compensation
and Notes
Receivable from
Executives for
Stock Purchases | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income (Loss) | | Total
Stockholders’
Equity | | Comprehensive
Loss | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Balance at January 1, 2001 | | | 9,877 | | $ | 988 | | $ | 81,204 | | $ | (915 | ) | $ | (10,942 | ) | $ | (581 | ) | $ | 69,754 | | | — | |
Stock purchase and option plans | | | 291 | | | 29 | | | 3,079 | | | — | | | — | | | — | | | 3,108 | | | — | |
Interest on notes issued for stock | | | — | | | — | | | — | | | (97 | ) | | — | | | — | | | (97 | ) | | — | |
Payment on notes issued for
purchase of stock | | | — | | | — | | | — | | | 100 | | | — | | | — | | | 100 | | | — | |
Amortization of deferred
compensation | | | — | | | — | | | — | | | 15 | | | — | | | — | | | 15 | | | — | |
Net loss | | | — | | | — | | | — | | | — | | | (12,917 | ) | | — | | | (12,917 | ) | $ | (12,917 | ) |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation
adjustments | | | — | | | — | | | — | | | — | | | — | | | (311 | ) | | (311 | ) | | (311 | ) |
Unrealized gain on securities | | | — | | | — | | | — | | | — | | | — | | | 79 | | | 79 | | | 79 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at December 31, 2001 | | | 10,168 | | | 1,017 | | | 84,283 | | | (897 | ) | | (23,859 | ) | | (813 | ) | | 59,731 | | $ | (13,149 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
|
| |
Stock purchase and option plans | | | 225 | | | 23 | | | 560 | | | 868 | | | — | | | — | | | 1,451 | | | — | |
Shares issued for business
acquisition | | | 2,250 | | | 225 | | | 17,724 | | | — | | | — | | | — | | | 17,949 | | | — | |
Shares issued in exchange for
subsidiaries’ minority interest | | | 1,083 | | | 108 | | | 9,688 | | | — | | | — | | | — | | | 9,796 | | | — | |
Payment on notes issued for
purchase of stock | | | — | | | — | | | — | | | 29 | | | — | | | — | | | 29 | | | — | |
Deferred compensation | | | — | | | — | | | — | | | (154 | ) | | — | | | — | | | (154 | ) | | — | |
Amortization of deferred
compensation | | | — | | | — | | | — | | | 154 | | | — | | | — | | | 154 | | | — | |
Net loss | | | — | | | — | | | — | | | — | | | (40,156 | ) | | — | | | (40,156 | ) | $ | (40,156 | ) |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | — | | | — | | | — | | | — | | | — | | | 1,121 | | | 1,121 | | | 1,121 | |
Unrealized gain on securities | | | — | | | — | | | — | | | — | | | — | | | 30 | | | 30 | | | 30 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at December 31, 2002 | | | 13,726 | | | 1,373 | | | 112,255 | | | — | | | (64,015 | ) | | 338 | | | 49,951 | | $ | (39,005 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
|
| |
Stock purchase and option plans | | | 148 | | | 15 | | | 1,012 | | | — | | | — | | | — | | | 1,027 | | | — | |
Shares issued for business
acquisition | | | 465 | | | 46 | | | (46 | ) | | — | | | — | | | — | | | — | | | — | |
Net loss | | | — | | | — | | | — | | | — | | | (6,295 | ) | | — | | | (6,295 | ) | $ | (6,295 | ) |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation
adjustments | | | — | | | — | | | — | | | — | | | — | | | 3,112 | | | 3,112 | | | 3,112 | |
Unrealized (loss) on securities | | | — | | | — | | | — | | | — | | | — | | | (103 | ) | | (103 | ) | | (103 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at December 31, 2003 | | | 14,339 | | $ | 1,434 | | $ | 113,221 | | $ | — | | $ | (70,310 | ) | $ | 3,347 | | $ | 47,692 | | $ | (3,286 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
See accompanying notes to consolidated financial statements.
F-6
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | Years Ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
Operating activities: | | | | | | | | | | |
| Loss from continuing operations | | $ | (7,167 | ) | $ | (35,324 | ) | $ | (8,221 | ) |
| Adjustments to reconcile loss from continuing operations to
net cash used in operating activities: | | | | | | | | | | |
| Depreciation and amortization | | | 3,805 | | | 4,633 | | | 5,295 | |
| Pension curtailment and settlement gain | | | (2,265 | ) | | — | | | — | |
| Non-cash restructuring and other charges | | | — | | | 3,254 | | | — | |
| Impaired asset write-down | | | — | | | 7,628 | | | — | |
| Gain on sales of property and equipment | | | (1,417 | ) | | — | | | — | |
| Loss (gain) on sales of business | | | (632 | ) | | 6,542 | | | (39,119 | ) |
| Cancellation of stock notes | | | — | | | 116 | | | — | |
| Minority interest in net income (loss) of subsidiaries | | | — | | | (241 | ) | | (710 | ) |
| Provision for losses on accounts receivable | | | 241 | | | 576 | | | 534 | |
| Amortization of deferred compensation | | | — | | | 182 | | | 15 | |
| Changes in operating assets and liabilities: | | | | | | | | | | |
| Trade and other accounts receivable | | | 2,335 | | | 6,846 | | | 8,039 | |
| Inventories | | | 4,449 | | | 2,184 | | | 2,441 | |
| Prepaid expenses and other current assets | | | 13 | | | 1,861 | | | (268 | ) |
| Deferred income taxes | | | (116 | ) | | 75 | | | 24,640 | |
| Accounts payable and accrued liabilities | | | (2,596 | ) | | (8,709 | ) | | (7,848 | ) |
| Customer deposits | | | (1,706 | ) | | 2,305 | | | — | |
| Accrued employee compensation | | | 63 | | | (920 | ) | | (2,118 | ) |
| |
|
| |
|
| |
|
| |
| Net cash used in operating activities | | | (4,993 | ) | | (8,992 | ) | | (17,320 | ) |
| |
|
| |
|
| |
|
| |
Investing activities: | | | | | | | | | | |
| Proceeds from sale of businesses | | | 632 | | | 4,927 | | | 67,731 | |
| Purchases of business, net of cash acquired | | | — | | | (2,692 | ) | | 235 | |
| Purchases of property and equipment | | | (2,439 | ) | | (1,796 | ) | | (6,232 | ) |
| Proceeds from sale of property and equipment | | | 8,872 | | | — | | | — | |
| Proceeds from sale of short-term investments | | | 7,746 | | | 14,247 | | | 14,114 | |
| Purchases of short-term investments | | | (2,758 | ) | | (9,877 | ) | | (25,921 | ) |
| Proceeds from collection of notes receivable | | | — | | | — | | | 2,100 | |
| |
|
| |
|
| |
|
| |
| Net cash provided by investing activities | | | 12,053 | | | 4,809 | | | 52,027 | |
| |
|
| |
|
| |
|
| |
Financing activities: | | | | | | | | | | |
| Principal payments on long-term debt and short-term borrowings | | | (4,520 | ) | | (3,385 | ) | | (59,857 | ) |
| Proceeds from short-term borrowings | | | 3,013 | | | 360 | | | 43,103 | |
| Proceeds from issuance of company and subsidiary stock | | | 1,027 | | | 1,167 | | | 2,781 | |
| |
|
| |
|
| |
|
| |
|
| Net cash used in financing activities | | | (480 | ) | | (1,858 | ) | | (13,973 | ) |
| |
|
| |
|
| |
|
| |
Increase (decrease) in cash and cash equivalents from
continuing operations | | | 6,580 | | | (6,041 | ) | | 20,734 | |
| |
|
| |
|
| |
|
| |
Net cash used in discontinued operations | | | (838 | ) | | (4,148 | ) | | (9,744 | ) |
Effect of exchange rate changes on cash and cash equivalents | | | 497 | | | 61 | | | (3 | ) |
Increase (decrease) in cash and cash equivalents | | | 6,239 | | | (10,128 | ) | | 10,987 | |
Cash and cash equivalents at beginning of year | | | 3,545 | | | 13,673 | | | 2,686 | |
| |
|
| |
|
| |
|
| |
Cash and cash equivalents at end of year | | $ | 9,784 | | $ | 3,545 | | $ | 13,673 | |
| |
|
| |
|
| |
|
| |
| Cash paid for: | | | | | | | | | | |
| Interest | | $ | 193 | | $ | 124 | | $ | 379 | |
| Income taxes | | $ | 164 | | $ | 69 | | $ | (633 | ) |
| | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-7
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Description of Business and Summary of Significant Accounting Policies
Descriptionof Business
Maxwell Technologies, Inc. (the “Company” or “Maxwell”) is a Delaware corporation originally incorporated in 1965 under the name “Maxwell Laboratories, Inc.” In 1996, the Company changed its name to Maxwell Technologies, Inc. Presently headquartered in San Diego, California, Maxwell is a developer and manufacturer of innovative, cost-effective energy storage and power delivery solutions.
Maxwell’s High Reliability business segment is comprised of three product lines:
| • | Ultracapacitors: Maxwell’s primary product, ultracapacitors, includes its BOOSTCAP® ultracapacitor cells and multi-cell modules and POWERCACHE® backup power systems, which provide highly reliable power solutions for applications in consumer and industrial electronics, transportation and telecommunications. |
| | |
| • | High-Voltage Capacitors: Maxwell’s CONDIS® high-voltage grading and coupling capacitors are used in electric utility infrastructure and other applications involving transport, distribution and measurement of high-voltage electrical energy. |
| | |
| • | Radiation-Mitigated Microelectronic Products: Maxwell’s radiation-mitigated microelectronic products include power modules, memory modules and single-board computers for applications in the space and satellite industries. |
The Company’s products are designed and manufactured to perform reliably for the life of the products and systems into which they are integrated. The Company achieves high reliability through the application of proprietary technologies and rigorously controlled design, development, manufacturing and test processes. This high reliability strategy emphasizes development and marketing of products that enables Maxwell to achieve higher profit margins than commodity electronic components and systems.
Financial StatementPresentation
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. The Company’s Government Systems business, which was sold in March 2001, and its PurePulse business, which was discontinued in September 2002, each of which was previously reported as a separate segment, have been classified as discontinued operations in the accompanying consolidated financial statements (Note 14). The results of operations of other businesses that do not meet the criteria to be classified as a component of an entity and were sold or otherwise disposed of are included in continuing operations through the date of sale. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and related disclosures. These estimates include assessing the collectability of accounts receivable, the usage and recoverability of inventories and long-lived assets and the incurrence of losses on warranty costs, vacant leased facilities and other facilities offered for sale. The markets for the Company’s products are extremely competitive and are characterized by rapid technological change, new product development, product obsolescence and evolving industry standards. In addition, price competition is intense and significant price erosion generally occurs over the life of a product. With respect to vacant leased facilities, commercial real estate markets have been depressed due to continued poor economic conditions and spending reductions by businesses and government agencies. As a result of such factors, actual results could differ from the estimates used by management. Certain prior year amounts have been reclassified to conform to the current year presentation. The Company’s fiscal quarters end on the last day of the calendar month on March 31, June 30, September 30, and December 31.
Cash and Cash Equivalents, Short-Term Investments
The Company invests its excess cash in debt instruments of the U.S. Government and its agencies, and in high-quality corporate issuers. All highly liquid instruments with an original maturity of three months or less from purchase are considered cash equivalents, and those with original maturities greater than three months on the date of purchase are considered short-term investments. The Company’s short-term investments in marketable securities are classified as available-for-sale and are reported at fair value, with unrealized gains and losses included in stockholders’ equity as a
F-8
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
separate component of comprehensive income. Realized gains or losses and other-than-temporary declines in value, if any, on available-for-sale securities are reported in other income or expense as incurred. The Company recognized $49,000, $22,000 and $82,000 in net realized gains in the years ended December 31, 2003, 2002 and 2001, respectively. The Company uses the specific identification method on sales of investments.
Maturities and gross unrealized gains (losses) on short-term investments at December 31, 2003 are as follows (in thousands):
| | Gross
Amortized
Cost | | Gross
Unrealized
Gain | | Gross
Unrealized
Loss | | Estimated
Fair Value | |
| |
| |
| |
| |
| |
As of December 31, 2003: | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government and Agencies: | | | | | | | | | | | | | | | | | | | | | |
| Maturing within 1 year | | | $ | 1,113 | | | | $ | 4 | | | | $ | — | | | | $ | 1,117 | | |
| Maturing between 1 and 5 years | | | | 903 | | | | | 2 | | | | | — | | | | | 905 | | |
| Corporate Debt Securities: | | | | | | | | | | | | | | | | | | | | | |
| Maturing within 1 year | | | | 204 | | | | | — | | | | | — | | | | | 204 | | |
| Certificates of Deposit | | | | | | | | | | | | | | | | | | | | | |
| Maturing within 1 year | | | | 100 | | | | | — | | | | | — | | | | | 100 | | |
| Asset-Backed Securities | | | | | | | | | | | | | | | | | | | | | |
| Maturing within 1 year | | | | 102 | | | | | — | | | | | — | | | | | 102 | | |
| Maturing between 1 and 5 years | | | | 27 | | | | | — | | | | | — | | | | | 27 | | |
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
| | | $ | 2,449 | | | | $ | 6 | | | | $ | — | | | | $ | 2,455 | | |
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
| | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2002: | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government and Agencies: | | | | | | | | | | | | | | | | | | | | | |
| Maturing within 1 year | | | $ | 2,747 | | | | $ | 31 | | | | $ | — | | | | $ | 2,778 | | |
| Maturing between 1 and 5 years | | | | 2,815 | | | | | 57 | | | | | — | | | | | 2,872 | | |
| Corporate Debt Securities: | | | | | | | | | | | | | | | | | | | | | |
| Maturing within 1 year | | | | 761 | | | | | 16 | | | | | — | | | | | 777 | | |
| Certificates of Deposit | | | | | | | | | | | | | | | | | | | | | |
| Maturing within 1 year | | | | 452 | | | | | — | | | | | — | | | | | 452 | | |
| Asset-Backed Securities | | | | | | | | | | | | | | | | | | | | | |
| Maturing within 1 year | | | | 662 | | | | | 5 | | | | | — | | | | | 667 | | |
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
| | | $ | 7,437 | | | | $ | 109 | | | | $ | — | | | | $ | 7,546 | | |
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
| | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Doubtful Accounts
The allowance for doubtful accounts reflects management’s best estimate of probable losses inherent in the accounts receivable balance. Management determines the allowance based on known troubled accounts, historical experience, and other currently available evidence.
Inventories
�� Inventories are stated at the lower of cost or market. Inventory values are based on standard costs, which approximate average costs (first-in first-out method).
Property, Plant and Equipment
Property, plant and equipment are carried at cost and are depreciated using the straight-line method. Depreciation and amortization is provided over the estimated useful lives of the related assets (three to ten years).
F-9
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Long-Lived Assets
Long-lived assets such as property, plant and equipment are reviewed for impairment whenever events and changes in business circumstances indicate the carrying value of the long-lived asset may not be recoverable. If the Company determines that the carrying value of the long-lived asset may not be recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.
Goodwill and Intangible Assets
Goodwill, which represents the excess of the cost of an acquired business over the net of the fair value assigned to its assets acquired and liabilities assumed, is not amortized. Instead, goodwill is assessed for impairment under SFAS No. 142, “Goodwill and Other Intangible Assets” (Note 8). Intangible assets with finite lives continue to be amortized on a straight-line basis over their useful lives of 10 to 12 years and are evaluated for impairment whenever events, or changes in circumstances, indicate that their carrying value may not be recoverable under SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.”
Warranty Obligation
The Company provides a warranty to its customers for one year in the normal course of business. The Company accrues for the estimated warranty at the time of sale based on historical warranty expenses. The estimated warranty liability is calculated based on historical warranty expenses plus any known warranty exposure.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes,” which requires the use of the liability method of accounting for deferred income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.
Concentration of Credit Risk
Financial instruments, which subject the Company to potential concentrations of credit risk, consist principally of the Company’s accounts receivable. The Company’s accounts receivable result from product sales to customers in various industries and in various geographical areas, both domestic and foreign. The Company performs ongoing credit evaluations of its customers and generally requires no collateral. One customer, ABB Ltd., provided 13% of revenue in 2003 and comprised 17% of accounts receivable balances at December 31, 2003.
Revenue Recognition
The Company derives substantially all of its revenue from the sale of manufactured products. Product revenue is recognized as products are shipped and title passes to the customer. Revenues from licensing arrangements became significant during 2003 as a result of the Company’s strategic alliance with YEC, which paid it for the right to manufacture its proprietary BOOSTCAP® Ultracapacitors. License fee revenue is recognized when the performance requirements have been met, the fee is fixed or determinable and collection of fees is probable. In general, the Company does not offer discounts and there is no right of return. The Company does not provide installation services or incur post sale obligations other than product warranty, which is accrued for at the time of the sale.
In prior years, certain continuing and discontinued segments recorded revenue from both long-term and short-term fixed price contracts and cost plus contracts with the U.S. Government directly or through a prime contractor. Those revenues, including estimated profits, were recognized as costs were incurred and included provisions for any anticipated losses.
F-10
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Foreign Currencies
The Company’s primary foreign currency exposure is related to its subsidiary in Switzerland. Maxwell Technologies SA has Euro and local currency (Swiss Franc) revenue and operating expenses. Changes in these currency exchange rates impact the U.S. dollar amount of revenue and expenses. Assets and liabilities of Maxwell’s Swiss subsidiary are translated at year-end exchange rates, and revenues, expenses, gains and losses are translated at rates of exchange that approximate the rate in effect at the time of the transaction. The Company does not hedge its currency exposures.
Other Comprehensive Income (Loss)
Comprehensive income (loss), as defined, includes all changes in equity during a period from non-owner sources. Net loss and other comprehensive loss, including foreign currency translation adjustments, and unrealized gains and losses on short-term investments are reported, net of their related tax effect, to arrive at comprehensive loss. As of December 31, 2003, accumulated other comprehensive income consisted of $3.3 million of unrealized gain on foreign currency translation and $6,000 in unrealized gain on short-term investments.
Income (Loss) Per Share
Income (loss) per share is calculated using the weighted average number of common shares outstanding. Diluted income loss per share is calculated on the basis of the weighted average number of common shares outstanding plus the dilutive effect of outstanding stock options of the Company and certain of its subsidiaries, assuming their exercise using the “treasury stock” method. The following table sets forth the computation of basic and diluted income (loss) per share (in thousands, except per share data):
| | Years Ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
Numerator | | | | | | | | | | |
| Basic: | | | | | | | | | | |
| Loss from continuing operations | | $ | (7,167 | ) | $ | (35,324 | ) | $ | (8,221 | ) |
| Loss from discontinued operations | | | (6 | ) | | (4,832 | ) | | (4,696 | ) |
| Cumulative effect of accounting change, net of tax | | | 878 | | | — | | | — | |
| |
|
| |
|
| |
|
| |
| Net loss | | $ | (6,295 | ) | $ | (40,156 | ) | $ | (12,917 | ) |
| |
|
| |
|
| |
|
| |
Denominator | | | | | | | | | | |
| Basic: | | | | | | | | | | |
| Weighted average shares outstanding | | | 13,939 | | | 12,264 | | | 10,040 | |
| Diluted: | | | | | | | | | | |
| Effect of dilutive securities: | | | | | | | | | | |
| Common stock options | | | — | | | — | | | — | |
| |
|
| |
|
| |
|
| |
| Total weighted average common and potential common
shares outstanding | | | 13,939 | | | 12,264 | | | 10,040 | |
| |
|
| |
|
| |
|
| |
| Basic and diluted net loss per share: | | | | | | | | | | |
| Loss from continuing operations | | $ | (0.51 | ) | $ | (2.88 | ) | $ | (0.82 | ) |
| Loss from discontinued operations | | | — | | | (0.39 | ) | | (0.47 | ) |
| Cumulative effect of accounting change, net of tax | | | 0.06 | | | — | | | — | |
| |
|
| |
|
| |
|
| |
| Diluted net loss per share | | $ | (0.45 | ) | $ | (3.27 | ) | $ | (1.29 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
For fiscal years 2003, 2002, and 2001, common stock options of 143,560, 87,955, and 410,514 respectively, were not included in the computation of diluted earnings per share as their impact would have been anti-dilutive.
F-11
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock Compensation
The Company has adopted the disclosure only provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation (“Statement No. 123”) as amended by SFAS No. 148 Accounting for Stock Based Compensation – Transitions and Disclosure. 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 to employees in the years ended December 31, 2003, 2002 and 2001, as the stock options have been granted to employees with exercise prices equal to the fair value of the underlying common stock at the time of grant. If the Company had elected to recognize compensation cost based on the fair value method prescribed by Statement No. 123, the Company’s net loss per share would have been adjusted to the pro forma amounts indicated below (in thousands, except per share amounts):
| | Years Ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
Net loss as reported | | $ | (6,295 | ) | $ | (40,156 | ) | $ | (12,917 | ) |
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects | | | (3,684 | ) | | (6,528 | ) | | (6,910 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Pro forma net loss | | $ | (9,979 | ) | $ | (46,684 | ) | $ | (19,827 | ) |
| |
|
| |
|
| |
|
| |
Net loss per share: | | | | | | | | | | |
| | | | | | | | | | |
Basic-as reported | | $ | (0.45 | ) | $ | (3.27 | ) | $ | (1.29 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Basic-pro forma | | $ | (0.72 | ) | $ | (3.81 | ) | $ | (1.97 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Diluted-as reported | | $ | (0.45 | ) | $ | (3.27 | ) | $ | (1.29 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Diluted-pro forma | | $ | (0.72 | ) | $ | (3.81 | ) | $ | (1.97 | ) |
| |
|
| |
|
| |
|
| |
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:
Years Ended | | Risk-Free
Interest Rates | | Dividend
Yields | | Volatility
Factors | | Weighted-
Average
Expected
Terms | |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | |
December 31, 2003 | | | 3.3 | % | | | – | | | | 59.5 | % | | | 5 Years | | |
December 31, 2002 | | | 3.3 | % | | | – | | | | 68.4 | % | | | 5 Years | | |
December 31, 2001 | | | 5.5 | % | | | – | | | | 80.3 | % | | | 5 Years | | |
F-12
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities (VIEs) that either: (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) the equity investors lack an essential characteristic of a controlling financial interest. This interpretation applies immediately to VIEs created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to VIEs in which an enterprise holds a variable interest that it acquired before February 1, 2003. The application of this interpretation is not expected to have a material effect on its consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123” (SFAS No. 148). This statement amends SFAS No. 123 “Accounting for Stock Based Compensation” (SFAS No. 123) to provide alternative methods of voluntarily transitioning to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require disclosure of the method used to account for stock-based employee compensation and the effects of the method on reported results in both annual and interim financial statements. The disclosure provisions will be effective for the Company’s year ended December 31, 2002. The application of this interpretation did not have a material effect on the Company’s consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). FIN 45 requires that a liability be recorded for the fair value of the obligation in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires certain disclosures about each of the entity’s guarantees. The Company’s adoption of FIN 45 did not have a material impact on its operations.
In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS No. 146). This statement supercedes Emerging Issues Task Force (EITF) issue No. 94-3 “Liabilities Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. SFAS No. 146 requires that a liability for cost associated with an exit or disposal activity be recognized at the date an entity commits to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The provisions of SFAS No. 146 were effective or any exit and disposal activities initiated after December 31, 2002. Adoption of SFAS No. 146 as of January 1, 2003, did not have a material impact on the Company’s financial position and results of operations.
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121 but retains SFAS No. 121’s fundamental provisions for recognition and measurement of impairment of long-lived assets to be held and used and measurement of long-lived assets to be disposed of by sale. SFAS No. 144 also supersedes the accounting and reporting provisions of Accounting Principles Board (“APB”) Opinion No. 30 for segments of a business to be disposed of but retains APB Opinion No. 30’s requirement to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. SFAS No. 144 became effective for the Company beginning January 1, 2002. Adoption of SFAS No. 144 as of January 1, 2002 did not have a material impact on the Company’s financial position or results of operations.
F-13
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Accounting Change
Effective January 1, 2003, the Company adopted SFAS No. 87, “Employers’ Accounting for Pensions,” as amended, in accordance with Emerging Issues Task Force 03-4, “Determining the Classification and Benefit Attribution Method for a “Cash Balance” Pension Plan” related to its Swiss pension plan. This statement required a standardization method for measuring net periodic pension cost and recognizing the compensation cost of an employee’s pension over the employee’s approximate service period by relating the cost more directly to the terms of the plan. This statement requires immediate recognition of a liability (the minimum liability) when the accumulated benefit obligation exceeds the fair value of plan assets. This statement also requires expanded disclosures about pension plan assets, obligations, benefits payments, contributions and net benefit cost.
The adoption of SFAS No. 87 on January 1, 2003, resulted in a cumulative effect of an accounting change, net of tax, of $878,000 (Note 11).
Note 2 — Business Combinations
On July 5, 2002, the Company acquired Montena Components Ltd., or Montena, a Swiss corporation, with its principal facility in Rossens, Switzerland. In the transaction, the Company acquired all of the outstanding shares of capital stock of Montena from its parent company, Montena SA, a Swiss corporation, in exchange for (i) 2,250,000 shares of Maxwell common stock issued directly to Montena SA, (ii) an additional 300,000 shares of Maxwell common stock originally held by the Company as collateral for a $3 million loan to Montena SA and (iii) an additional 464,927 shares of Maxwell common stock issued based on Montena achieving revenues of at least $20 million for the four quarters ended June 30, 2003.
The calculation of the third and final common stock issuance to Montena SA was calculated using the following formula: To the extent that each share of Maxwell stock issued as part of the purchase price and held by Montena SA on September 1, 2003 has a market value based on the average 30-day trading closing price ending on September 1, 2003 (the “30 Day Measurement Price”) of less than $9 per share, then the Company will provide to Montena SA additional consideration equal, in total value, to (i) the difference between $9 and the 30-Day Measurement Price multiplied by (ii) such number of shares held by Montena SA on September 1, 2003;provided,however, that such additional consideration will in no event be greater than 500,000 shares of Maxwell common stock (based on the 30-Day Measurement Price) or cash equal in value to 500,000 shares of Maxwell common stock valued at the 30-Day Measurement Price according to that formula. In September 2003, 464,927 shares of common stock were issued to Montena SA. As a result of the purchase transaction, Montena SA held approximately 18% of Maxwell common stock as of December 31, 2003.
The results of operations of Montena have been included in the consolidated statement of operations from July 5, 2002, the date of the acquisition.
The purchase price was allocated as follows (in thousands):
| Total acquisition cost: | | | | |
| | Cash and stock paid at acquisition | | $ | 20,949 | |
| | Acquisition related expenses | | | 340 | |
| | | |
|
| |
| | | $ | 21,289 | |
| | |
|
| |
| Allocation to assets and liabilities as follows: | | | | |
| | Tangible assets | | $ | 14,936 | |
| | Assumed liabilities | | | (10,153 | ) |
| | Acquired backlog | | | 464 | |
| | Developed core technology | | | 1,100 | |
| | Goodwill | | | 14,942 | |
| | | |
|
| |
| | | $ | 21,289 | |
| | |
|
| |
F-14
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pro Forma Results:
The following unaudited pro forma information assumes that the acquisition of Montena occurred on January 1, 2001. These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have actually resulted had the combination been in effect on January 1, 2001 or of future results of operations. The unaudited pro forma results for the years ended December 31, 2002 and 2001 are as follows (in thousands, except per share amounts):
| | | Years Ended December 31, | |
| | |
| |
| | | 2002 | | 2001 | |
| | |
| |
| |
| Pro Forma Results: | | | | | | | |
| | Revenue | | $ | 67,974 | | | 99,986 | |
| | Loss from continuing operations | | $ | (34,045 | ) | | (8,669 | ) |
| | Loss from continuing operations per share | | $ | (2.78 | ) | | (0.71 | ) |
| | |
|
| | |
| |
In September 2000, the Company’s subsidiary, I-Bus/Phoenix, Inc., acquired Gateworks Corporation (“Gateworks”), which designs and supplies embedded computer boards, in a transaction accounted for as a purchase. On the closing date, I-Bus/Phoenix, Inc. paid $500,000 in cash and issued 855,153 new shares of I-Bus/Phoenix, Inc. common stock to the selling shareholders of Gateworks in exchange for all outstanding shares of Gateworks. The total number of I-Bus/Phoenix, Inc. shares issued to the selling Gateworks shareholders was adjusted by an additional 342,450 newly issued shares of I-Bus/Phoenix, Inc. in the first quarter of 2002 to reflect the final purchase price based upon actual Gateworks and I-Bus/Phoenix, Inc. 2001 revenues. The value of these additional shares was accrued for in December 2001. In connection with this acquisition, I-Bus/Phoenix, Inc. granted certain rights to the selling Gateworks shareholders that permitted such shareholders, in January 2002, to require I-Bus/Phoenix, Inc. to repurchase 193,624 of the I-Bus/Phoenix, Inc. shares issued to the shareholders on the closing date for $1.2 million. For purchase accounting purposes, the closing date payment was valued at approximately $4.4 million and the final payment was valued at $1.4 million of which $(0.1) million was allocated to the net liabilities acquired and $5.9 million was allocated to goodwill, which was being amortized over a period of five years, prior to the adoption of SFAS 141. The remaining $0.5 million related to acquired technologies, which had not achieved technological or commercial feasibility as of the closing date and was charged to operations as of the closing date. The pro forma results of operations of the Company and Gateworks, assuming Gateworks was acquired January 1, 2000, would not be materially different than reported results.
Note 3 — Divestitures and Assets Held-for-Sale
In June 2003, the Company decided to discontinue marketing and supporting a product line of electronic components testers and recorded charges in cost of sales of $444,000 primarily related to excess inventory and equipment, $393,000 primarily related to warranty buy-outs, and $259,000 related to expected future warranty returns in the quarters ended June 30, 2003 and September 30, 2003 and December 31, 2003, respectively. Sales for accelerated life testers product line were immaterial in all periods presented.
In December 2003, the Company’s Maxwell Technologies, SA subsidiary sold all fixed assets, substantially all inventory except work in process inventory, and all warranty and employee agreement obligations of its Metar Winding Equipment business segment, located in Matran, Switzerland to Metar SA, a new company, whose principal shareholder is a former CEO of Montena SA. The Company received $324,000 cash and recognized a loss on sale of $538,000, which is reflected in (gain) loss on sale of businesses. The new Metar Company will complete certain work in progress related to customer orders received by Maxwell Technologies, SA before the date of sale. Metar SA will complete the machines in work in progress and deliver them according to the delivery schedule, which will be between January and June of 2004. Metar SA will be paid for its services based on an agreed payment schedule. The Company has reported the results of operations of its Winding Equipment business segment as continuing operations because of its continued involvement therewith.
In December 2003, the Company sold the manufacturing and administrative facility in San Diego that contained the
I-Bus/Phoenix operations. The facility was previously classified as Assets Held-for-Sale at its net book value of $7.4 million. Proceeds from the sale of the facility were $9.0 million and closing expenses were $387,000, resulting in a net gain from the sale of the facility of $1.2 million. Net cash proceeds from the sale of the facility were $5.9 million after the payment of closing expenses and repayment of the $2.7 million term loan secured by deed of trust on the facility.
F-15
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On September 29, 2002, the Company’s I-Bus/Phoenix subsidiary sold substantially all of the assets, liabilities and business operations of its applied computing business, located principally in San Diego, California and Tangmere, United Kingdom, to I-Bus Corporation, a new company, whose principal shareholders are former I-Bus/Phoenix senior managers. The applied computing business designs, manufactures and sells applied computing systems mainly to original equipment manufacturers serving the telecommunications, broadcasting and industrial automation markets. The business was sold for (i) an 8% Senior Subordinated Note in the aggregate principal amount of $7.0 million, under the terms of which $1.0 million is payable (plus 50% of all accrued interest) on March 30, 2004 and $3 million is payable (plus 100% of all accrued interest) on each of March 30, 2005 and March 30, 2006; (ii) a warrant to purchase up to 19.9% of the common stock of the new I-Bus Corporation exercisable any time after June 30, 2004 at the fair market value per share at the time of exercise; and (iii) an additional contingent purchase price payment of $1.0 million if the new I-Bus Corporation sells the computing business prior to the full payment of the 8% Senior Subordinated Note referred to above. I-Bus/Phoenix also agreed to reimburse I-Bus Corporation for certain shutdown and restructuring costs and to provide a back up working capital credit facility in the amount of $300,000 until September 2003. The Company had assigned no value to the subordinated debt as its collectability was uncertain and will record any collections on such note as a gain on the date of such collection. The table below details the loss recognized by the Company related to the sale. In addition, the Company incurred related restructuring charges discussed in Note 12 and impairment charges discussed in Note 13.
| Disposition of I-Bus computing systems assets (in thousands): | | | | |
| | Subordinated note receivable | | $ | 7,000 | |
| | Less reserve for note | | | (7,000 | ) |
| | Assets sold, net of liabilities assumed by buyer | | | (6,252 | ) |
| | Shutdown costs assumed by Maxwell | | | (762 | ) |
| | |
|
| |
| Net loss on disposition of I-Bus computing systems | | $ | (7,014 | ) |
| | |
|
| |
During 2003, the Company received payments of $475,000 from the new I-Bus Corporation, which was a partial recovery of the $7.0 million subordinated note that was fully reserved for in 2002. This recovery is reflected in (gain) loss on sale of business.
On September 30, 2002, the Company sold substantially all of the assets, liabilities and business operations of its TeknaSeal glass-to-metal seals division in Minneapolis, Minnesota, to a group of private investors. TeknaSeal designs, manufactures and sells hermetic glass-to-metal seals for vacuum components, battery headers, implantable medical devices and other specialty applications. The aggregate selling price was $5.5 million in cash, of which $1.0 million was held in an escrow account as of December 31, 2002.
| Disposition TeknaSeal assets (in thousands): | | | | |
| | Cash Received | | $ | 5,500 | |
| | Less amount held in escrow | | | (1,000 | ) |
| | Receivable due from escrow | | | 253 | |
| | Assets sold net of liabilities assumed by buyer | | | (1,338 | ) |
| | Goodwill associated with TeknaSeal | | | (2,839 | ) |
| | Expenses related to sale | | | (340 | ) |
| | |
|
| |
| Net gain on disposition of TeknaSeal | | $ | 236 | |
| | |
|
| |
The Company’s involvement with TeknaSeal ended during the year ended December 31, 2003. During 2003, the Company recognized a gain of $695,000, which is included in (gain) loss on sale of businesses in the accompanying consolidated statement of operations, upon the receipt of funds released through escrow. All amounts held in escrow were released to the Company as of December 31, 2003.
On June 18, 2001 (“Closing Date”), the Company’s former majority-owned subsidiary, Maxwell Electronic Components Group, Inc. (“ECG”), sold substantially all of the assets (except for accounts receivable), liabilities and business operations of its Sierra KD Components Division in Carson City, Nevada (“Sierra”) to GB Acquisition Co., Inc., a wholly-owned subsidiary of Wilson Greatbatch Technologies, Inc (“WGT”). Sierra manufactured and commercialized ceramic filter capacitors with wire feedthroughs for implantable medical devices and ceramic capacitors for aerospace and commercial applications. The aggregate purchase price was $46.9 million, which was received in cash at closing. EGC retained the accounts receivable of Sierra as of the Closing Date, which amounted to $2.5 million. The net assets sold had a net book value of $6.4 million as of the Closing Date. The Company recorded a pre-tax gain from the sale of these assets of $39.1 million,
F-16
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
net of accrued transaction costs of $1.4 million including certain sale bonuses and amounts paid to cancel certain ECG employee stock options held by employees transferring to WGT. The Company used $15.7 million of the aggregate proceeds to repay all amounts outstanding on the Closing Date under its credit facility with Comerica Bank.
Note 4 — Balance Sheet Details, (in thousands):
| | December 31, | |
| |
| |
| | 2003 | | 2002 | |
| |
| |
| |
Trade and other accounts receivable, net: | | | | | | | |
| Accounts receivable | | $ | 6,115 | | $ | 9,214 | |
| Allowance for doubtful accounts | | | (179 | ) | | (684 | ) |
| |
|
| |
|
| |
| | $ | 5,936 | | $ | 8,530 | |
| |
|
| |
|
| |
Inventory: | | | | | | | |
| Raw material and purchased parts | | $ | 5,631 | | $ | 7,234 | |
| Work-in-process | | | 1,584 | | | 2,130 | |
| Finished goods | | | 3,248 | | | 4,495 | |
| Inventory reserve | | | (3,154 | ) | | (2,026 | ) |
| |
|
| |
|
| |
| | $ | 7,309 | | $ | 11,833 | |
| |
|
| |
|
| |
Property, plant and equipment: | | | | | | | |
| Machinery, furniture and office equipment | | $ | 16,453 | | $ | 15,955 | |
| Computer hardware and software | | | 7,183 | | | 5,416 | |
| Leasehold improvements | | | 2,524 | | | 2,166 | |
| |
|
| |
|
| |
| | | 26,160 | | | 23,537 | |
| Less accumulated depreciation and amortization | | | (15,391 | ) | | (11,979 | ) |
| Construction-in-progress | | | — | | | 95 | |
| |
|
| |
|
| |
| | $ | 10,769 | | $ | 11,653 | |
| |
|
| |
|
| |
Other non-current assets: | | | | | | | |
| Equity investments in unconsolidated companies | | $ | — | | $ | 26 | |
| Notes receivable and other | | | 175 | | | 268 | |
| |
|
| |
|
| |
| | $ | 175 | | $ | 294 | |
| |
|
| |
|
| |
Accounts payable and accrued liabilities | | | | | | | |
| Accounts payable | | $ | 3,555 | | $ | 6,577 | |
| Other accrued liabilities | | | 3,204 | | | 3,426 | |
| Advance payments | | | 891 | | | — | |
| Accrued restructuring costs | | | — | | | 351 | |
| |
|
| |
|
| |
| | $ | 7,650 | | $ | 10,354 | |
| |
|
| |
|
| |
Warranty Reserve Analysis
| | December 31, 2003 | | December 31, 2002 | |
| |
| |
| |
Accrued Warranty: | | | | | | | | | | | |
| Beginning Balance | | | $ | 1,154 | | | | $ | 268 | | |
| New product warranties | | | | 827 | | | | | 731 | | |
| Settlement of warranties | | | | (776 | ) | | | | (424 | ) | |
| Other changes/adjustments to warranties | | | | 57 | | | | | 579 | | |
| | |
|
| | | |
|
| | |
| Ending Balance | | | $ | 1,262 | | | | $ | 1,154 | | |
| | |
|
| | | |
|
| | |
F-17
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 5 — Short-term and Long-term Borrowings
Short-term borrowings
Maxwell Technologies SA has a $1.6 million bank credit agreement with a Swiss bank. Borrowings under the credit agreement bear interest at 5.5% plus ..25% for every quarter borrowings are outstanding. Under the credit agreement, Maxwell Technologies SA is eligible to borrow fixed term loans at LIBOR plus 1.75% with repayment terms extending beyond one month from the date of funding. Borrowings under the credit agreement are secured by the assets of Maxwell Technologies SA. As of December 31, 2003, the full amount of the credit agreement was drawn. In addition, $400,000 of letters of guarantee related to customer deposits were outstanding as of December 31, 2003.
The Company entered into a new U.S. loan and security agreement in February 2004, which provides an overall credit limit of $3.0 million, subject to a one-year repayment period. Borrowings are secured by eligible accounts receivable balances, which are calculated and reported on a monthly basis. Borrowings under the credit agreement bear interest at Prime Rate plus 1.75% provided that the rate is not less than 5.75%. The agreement requires the Company to maintain a minimum tangible net worth of $15 million plus 50% of any consideration from future equity and debt transactions plus 50% of net income in each fiscal quarter after the date of the agreement.
Long-term borrowings
In January 2004, Maxwell SA obtained a $925,000 term loan for financing specific capital equipment expenditures. Borrowings under the term loan are secured by the equipment being purchased. This credit agreement bears interest at the Swiss inter-bank borrowing rate plus 2.0%. The term loan can be borrowed in quarterly advances up to the $925,000 limit and repaid in 1 to 5 year time frames.
Maxwell SA has a loan from the Montena SA pension plan for 300,000 Swiss Francs or $250,000 at December 31, 2003 and December 31, 2002. The loan from the pension plan bears interest at the variable mortgage rate of the Banque Cantonale de Fribourg plus 1%, which resulted in a 5% interest rate for 2003.
In February 2001, the Company entered into a Loan and Security Agreement with Comerica Bank-California. The Loan and Security Agreement, as amended, consisted of a $5.0 million credit line secured by a deed on the I-Bus/Phoenix facility in San Diego, as well as certain other collateral. The term loan bore interest, at the Company’s option, at the bank’s reference rate plus .5%, or cost of funds plus 2.25%. The interest rate was 4.75% at December 31, 2002. The principal was amortized monthly over 20 years with the balance due December 31, 2004. The amount of the loan was paid in full in December 2003 with a portion of the proceeds from the sale of the I-Bus/Phoenix facility.
Note 6 — Stock Activity and Stock Plans
Stock Option Plans
In December 1995, the Company adopted the 1995 Stock Option Plan under which, as amended, 3,340,000 shares of common stock were reserved for future grant. The Company’s 1999 Director Stock Option Plan, under which 75,000 shares were reserved for future grant, was adopted in 1999 and approved by the Company’s shareholders in January 2000. The plans 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 granted 294,030 non-qualified options to the Company’s then new President and Chief Executive Officer, Mr. Eibl, outside of the Company’s other option plans. In April 2002, in conjunction with the purchase of shares of its I-Bus/Phoenix and Electronic Components Group subsidiaries not already owned (see Note 7), the Company issued approximately 520,000 options to purchase Maxwell common stock in exchange for options to purchase subsidiary common stock. This issuance of stock options was outside of the Company’s option plans. 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 1999 Director Stock Option Plan are fully exercisable one year from date of grant. The options have terms of five to ten years. As of December 31, 2003, the Company has 582,633 shares available for future grant under its stock option plans.
F-18
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In November 2002, the Board of Directors approved, and the Company established, a program to restore equity incentives for key employees and outside directors. In November 2002, 853,461 options with strike prices above $10, which were held by senior management and outside directors, were voluntarily cancelled by the option holders in exchange for the future issuance in late May 2003 of substitute stock options with a strike price equal to the then-prevailing market price of the Common Stock.
The following table summarizes total aggregate stock option activity for the period January 1, 2001 through December 31, 2003:
| | | Number of
Shares | | Weighted
Average
Exercise
Price | |
| | |
| |
| |
| Balance at January 1, 2001 | | 2,676,174 | | $ | 15.70 | |
| | Granted | | 124,250 | | $ | 12.64 | |
| | Exercised | | (243,308 | ) | $ | 9.13 | |
| | Expired or forfeited | | (513,419 | ) | $ | 19.76 | |
| | |
| | | | |
| Balance at December 31, 2001 | | 2,043,697 | | $ | 15.29 | |
| | Granted | | 1,111,557 | | $ | 8.54 | |
| | Exercised | | (220,873 | ) | $ | 3.71 | |
| | Expired or forfeited | | (1,737,941 | ) | $ | 15.72 | |
| | |
| | | | |
| Balance at December 31, 2002 | | 1,196,440 | | $ | 10.50 | |
| | Granted | | 1,860,316 | | $ | 6.73 | |
| | Exercised | | (124,455 | ) | $ | 4.78 | |
| | Expired or forfeited | | (373,928 | ) | $ | 12.09 | |
| | |
| | | | |
| Balance at December 31, 2003 | | 2,558,373 | | $ | 7.81 | |
| | |
| |
|
| |
F-19
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes information concerning outstanding and exercisable Company common stock options at December 31, 2003:
Range of
Exercise Prices | | Options
Outstanding | | Weighted
Average
Remaining
Contractual
Life | | Weighted
Average
Exercise
Price | | Options
Exercisable | | Weighted
Average
Exercise Price | |
| |
| |
| |
| |
| |
| |
$ | .01-$3.2750 | | | 47,550 | | | 3.0 | | | $ | 2.50 | | | 47,550 | | | $ | 2.50 | | |
$ | 3.2751-$6.5500 | | | 1,090,751 | | | 7.3 | | | $ | 6.18 | | | 551,909 | | | $ | 6.16 | | |
$ | 6.5501-$9.8250 | | | 1,110,520 | | | 8.4 | | | $ | 8.05 | | | 393,170 | | | $ | 8.70 | | |
$ | 9.8251-$13.1000 | | | 178,750 | | | 6.4 | | | $ | 10.91 | | | 97,000 | | | $ | 11.17 | | |
$ | 13.1001-$16.3750 | | | 101,802 | | | 6.5 | | | $ | 14.26 | | | 84,302 | | | $ | 14.28 | | |
$ | 16.3751-$19.6500 | | | 0 | | | 0.0 | | | $ | — | | | 0 | | | $ | — | | |
$ | 19.6501-$22.9250 | | | 8,000 | | | 3.1 | | | $ | 20.00 | | | 8,000 | | | $ | 20.00 | | |
$ | 22.9251-$26.2000 | | | 6,000 | | | 3.9 | | | $ | 25.88 | | | 6,000 | | | $ | 25.88 | | |
$ | 26.2001-$29.4750 | | | 8,000 | | | 4.1 | | | $ | 28.81 | | | 8,000 | | | $ | 28.81 | | |
$ | 29.4751-$32.7500 | | | 7,000 | | | 5.1 | | | $ | 32.75 | | | 7,000 | | | $ | 32.75 | | |
| | | |
| | | | | | | | | |
| | | | | | |
| | | | 2,558,373 | | | 7.6 | | | $ | 7.81 | | | 1,202,931 | | | $ | 8.31 | | |
| | | |
| | | | | | | | | |
| | | | | | |
The estimated weighted average fair value at grant date for Company options granted during the years ended December 31, 2003, 2002 and 2001 was $8.31, $6.23 and $8.59 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 the years ended December 31, 2003, 2002 and 2001, aggregate shares of 23,404, 44,660 and 56,975, respectively, were issued under the two plans for aggregate proceeds to the Company of $117,000, $353,000 and $997,000 respectively. At December 31, 2003, 256,476 shares are reserved for future issuance under these plans.
In June 2002 and as part of completing the consolidation of ownership by the Company of I-Bus/Phoenix, four employees and one consultant of I-Bus/Phoenix were granted 19,500 shares of the Company’s common stock subject to certain restrictions. The shares granted vest over the next two years and had a fair market value of $182,000 at the date of grant. As a result of the divestiture of the applied computing business operations completed in the 2002 third fiscal quarter, vesting was accelerated and the balance of the deferred compensation was fully amortized.
In January 2000, the Board adopted, and the Company’s stockholders 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 were 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 loans were 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. On January 29, 2002 loans in the aggregate amount of $75,000, bearing interest at 4.85%, were made in connection with the aggregate purchase of 9,258 newly issued shares of the Company’s common stock at $8.10 per
F-20
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
share, the closing market price on the date of purchase. On June 3, 2002 the Company determined to extinguish the program and cancelled the 74,000 shares and $970,000 loan balance outstanding under the plan. The company recorded expense of $116,000, related to the cancellation of these notes.
Deferred Compensation
In 1996 and 1997, the Chairman of the Company was granted shares of the Company’s common stock subject to certain restrictions. The shares granted vest ratably over a four-year period, and at the grant dates the shares had a fair value of approximately $645,000 and $190,000, respectively. Those values, net of accumulated amortization, are shown as deferred compensation in the accompanying consolidated statements of stockholders’ equity. The deferred compensation, which has been fully recognized as of December 31, 2001, was amortized to expense over the four-year vesting periods.
In 2003, the Company and its former Chairman of the Board entered into a services agreement whereby the former Chairman received an option to acquire 94,251 shares at the fair market value as of the date of the grant. The options are fully vested and have a fixed life of four years. Accordingly, the Company recorded compensation expense of $313,000 representing the fair value of the options pursuant to the Black-Scholes valuation model.
Stockholder Rights Plan
In November 1999, the Company adopted a Stockholder Rights Plan as a successor to its previous plan, which expired in June 1999. In accordance with the 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, 20% 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 Stockholder Rights Plan expires on October 21, 2009.
Note 7 — Consolidation of Subsidiary Ownership
In February 2002, PacifiCorp Energy Ventures, Inc., the largest minority shareholder in the Electronic Components Group, exchanged its preferred shares of the Electronic Components Group for 518,000 common shares of Maxwell pursuant to its right under the original investment agreement.
On April 15, 2002, the Company completed merger transactions with the Electronic Components Group subsidiary and the I-Bus/Phoenix subsidiary whereby all of the remaining minority shareholdings and options in such subsidiaries were converted to shares and options of Maxwell. The conversion ratio was established through the Company’s analysis of the fair market value of the subsidiaries and an average trading price of Maxwell’s stock at the time of the analysis. The Company issued 86,000 shares to Electronic Components Group minority shareholders in exchange for their ownership. The value of this stock issuance was determined to be $795,000 based on the closing price of Maxwell shares on the day of the merger. As a result of these transactions relating to the ECG Group, the Company recorded $3.8 million of excess purchase price based on the value of Maxwell common shares above the minority interest on the balance sheet, $2.8 million was allocated as goodwill related to the TeknaSeal Division which was sold in September 2002 and $987,000 was allocated to ultracapacitor intellectual property. In addition, the Company issued 479,000 shares to I-Bus/Phoenix minority shareholders in exchange for their ownership. The value of this stock issuance was determined at $4.4 million based on the closing price of Maxwell shares on the day of the merger. The Company recorded $1.1 million excess purchase price based on the value of Maxwell’s common shares above the minority interest on the balance sheet; $422,000 was allocated as goodwill associated with the I-Bus Computing Systems business and was considered impaired and written off in conjunction with its sale in September 2002. The balance was allocated as goodwill related to the Power Systems business.
Note 8 — Goodwill and Other Intangibles
The Company has implemented SFAS No. 142 and began applying the rules on accounting for goodwill and other intangible assets effective January 1, 2002. The SFAS No. 142 goodwill impairment test is a two-step process. The first step consists of estimating the fair value of each reporting unit based on a discounted cash flow model using revenue and profit forecasts and comparing those estimated fair values with the carrying values, which includes the allocated goodwill. If the
F-21
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an implied fair value of goodwill. The implied fair value of goodwill is the residual fair value derived by deducting the fair value of a reporting unit’s assets and liabilities from its estimated fair value, which was calculated in step one. The impairment charge represents the excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of their goodwill. SFAS No. 142 requires goodwill to be tested annually at the same time every year and when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. The Company selected December 31 as its annual testing date. As a result of the Company’s annual assessment as of December 31, 2003, no impairment was indicated.
In assessing the recoverability of goodwill during 2002, the Company made assumptions regarding future cash flows and other factors to determine the fair value. Goodwill associated with the I-Bus Computing Systems business was written off in conjunction with the disposition of that business. The remaining goodwill is mainly attributable to the acquisition of Montena, which was completed in July 2002. The Company’s analysis, which was completed early in the fourth quarter of 2002, was based on the determination that circumstances since the recently completed acquisition of Montena had not materially changed and the Company’s fair market value at that date was significantly in excess of the carrying value of its assets including goodwill.
The change in the carrying amount of goodwill as of December 31, 2003 is as follows (in thousands):
| | Power
Systems | | Electronic
Components
Group | | Total | |
| |
| |
| |
| |
Balance at December 31, 2002 | | | $ | 1,647 | | | | $ | 15,930 | | | $ | 17,577 | |
| Foreign currency translation adjustments | | | | — | | | | | 1,901 | | | | 1,901 | |
| | |
|
| | | |
|
| | |
|
| |
Balance at December 31, 2003 | | | $ | 1,647 | | | | $ | 17,831 | | | $ | 19,478 | |
| | |
|
| | | |
|
| | |
|
| |
| | | | | | | | | | | | | | | |
The following table presents a reconciliation of net loss and per share data to what would have been reported had the new rules been in effect during the year ended December 31, 2001(in thousands):
| | Years Ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
Net loss: | | | | | | | | | | |
| Reported net loss | | $ | (6,295 | ) | $ | (40,156 | ) | $ | (12,917 | ) |
| Add back goodwill amortization, net of tax | | | — | | | — | | | 1,196 | |
| |
|
| |
|
| |
|
| |
| Adjusted net loss | | $ | (6,295 | ) | $ | (40,156 | ) | $ | (11,721 | ) |
| |
|
| |
|
| |
|
| |
Per Share, basic: | | | | | | | | | | |
| Reported net loss | | $ | (0.45 | ) | $ | (3.27 | ) | $ | (1.29 | ) |
| Add back goodwill amortization, net of tax | | | — | | | — | | | 0.12 | |
| |
|
| |
|
| |
|
| |
| Adjusted net loss | | $ | (0.45 | ) | $ | (3.27 | ) | $ | (1.17 | ) |
| |
|
| |
|
| |
|
| |
Per Share, diluted: | | | | | | | | | | |
| Reported net loss | | $ | (0.45 | ) | $ | (3.27 | ) | $ | (1.29 | ) |
| Add back goodwill amortization, net of tax | | | — | | | — | | | 0.12 | |
| |
|
| |
|
| |
|
| |
| Adjusted net loss | | $ | (0.45 | ) | $ | (3.27 | ) | $ | (1.17 | ) |
| |
|
| |
|
| |
|
| |
F-22
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Acquired intangible assets subject to amortization at December 31, 2003, and 2002 were as follows (in thousands):
| | Useful Life | | Gross
Carrying
Value | | Accumulated
Amortization | | Foreign
Currency
Adjustment | | Net
Carrying
Value | |
| |
| |
| |
| |
| |
| |
As of December 31, 2003: | | | | | | | | | | | | | | | | | | | |
| Developed core technology | | 10 years | | $ | 1,100 | | | $ | 181 | | | | $ | 190 | | | $ | 1,109 | |
| Acquired backlog | | 6 months | | | 464 | | | | 464 | | | | | — | | | | — | |
| Patents | | 12 years | | | 988 | | | | 95 | | | | | — | | | | 893 | |
| | | |
|
| | |
|
| | | |
|
| | |
|
| |
| | | | $ | 2,552 | | | $ | 740 | | | | $ | 190 | | | $ | 2,002 | |
| | | |
|
| | |
|
| | | |
|
| | |
|
| |
As of December 31, 2002: | | | | | | | | | | | | | | | | | | | |
| Developed core technology | | 10 years | | $ | 1,100 | | | $ | 60 | | | | $ | — | | | $ | 1,040 | |
| Acquired backlog | | 6 months | | | 464 | | | | 464 | | | | | — | | | | — | |
| Patents | | 12 years | | | 988 | | | | 19 | | | | | — | | | | 969 | |
| | | |
|
| | |
|
| | | |
|
| | |
|
| |
| | | | $ | 2,552 | | | $ | 543 | | | | $ | — | | | $ | 2,009 | |
| | | |
|
| | |
|
| | | |
|
| | |
|
| |
Amortization expense for intangible assets was $197,000 and $543,000 for the years ended December 31, 2003 and 2002, respectively. The estimated amortization for each of the next five years ended December 31 is as follows:
| Fiscal Years | | | | |
| 2004 | | $ | 192 | |
| 2005 | | | 192 | |
| 2006 | | | 192 | |
| 2007 | | | 192 | |
| 2008 | | | 192 | |
| Thereafter | | | 1,042 | |
| | |
|
| |
| | | $ | 2,002 | |
| | |
|
| |
Actual amortization expense to be reported in future periods could differ from these estimates as a result of impairments and other factors.
F-23
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 9 — Income Taxes
The provision (benefit) for income taxes based on income (loss) from continuing operations is as follows (in thousands):
| | Years Ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
Federal: | | | | | | | | | | |
| Current | | $ | — | | $ | (213 | ) | $ | 569 | |
| Deferred | | | (3,315 | ) | | (10,408 | ) | | 3,877 | |
| |
|
| |
|
| |
|
| |
| | | (3,315 | ) | | (10,621 | ) | | 4,446 | |
State: | | | | | | | | | | |
| Current | | | 3 | | | 2 | | | 81 | |
| Deferred | | | 104 | | | (2,537 | ) | | (265 | ) |
| |
|
| |
|
| |
|
| |
| | | 107 | | | (2,535 | ) | | (184 | ) |
Foreign: | | | | | | | | | | |
| Current | | | (132 | ) | | (81 | ) | | (35 | ) |
| Deferred | | | (91 | ) | | 160 | | | | |
| |
|
| |
|
| |
|
| |
| | | (223 | ) | | 79 | | | (35 | ) |
Valuation allowance | | | 3,211 | | | 12,945 | | | 18,808 | |
| |
|
| |
|
| |
|
| |
| | $ | (220 | ) | $ | (132 | ) | $ | 23,035 | |
| |
|
| |
|
| |
|
| |
The provision (benefit) for income taxes in the accompanying consolidated statements of operations differs from the amount calculated by applying the statutory income tax rate to income (loss) from continuing operations before income taxes. The primary components of such difference are as follows (in thousands):
| | Years Ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
Taxes at Federal statutory rate | | $ | (2,511 | ) | $ | (12,055 | ) | $ | 4,936 | |
State taxes, net of federal benefit | | | (460 | ) | | (794 | ) | | 823 | |
Effect of tax rate differential for foreign subsidiary | | | (458 | ) | | (70 | ) | | (463 | ) |
Impact of asset basis difference in acquisitions | | | 26 | | | 2,278 | | | 419 | |
Tax credits | | | (249 | ) | | (2,081 | ) | | (1,525 | ) |
Valuation allowance, including tax benefits of stock activity | | | 3,245 | | | 12,945 | | | 18,808 | |
Other items not reflected in consolidated statement of operations. | | | 187 | | | (355 | ) | | 37 | |
| |
|
| |
|
| |
|
| |
| Tax (benefit) provision | | $ | (220 | ) | $ | (132 | ) | $ | 23,035 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
Because of cumulative losses from operations through December 31, 2003, the Company established a valuation allowance of $3.2 million. The valuation allowance was established as realizability of the deferred tax assets was no longer assessed as being more likely than not. The Company has continued to record valuation allowances for deferred tax assets generated in 2003.
Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company’s federal net operating loss and credit carryforwards may be limited due to a cumulative change in ownership of more than 50% within a three-year period.
As of December 31, 2003, the Company had net operating loss carryforwards for federal and state income tax of approximately $74.0 million and $28.8 million, respectively. The federal loss carryforward begins to expire in calendar year 2011, while the state loss carryforwards will continue to expire in 2004 through 2011. In addition, the Company has research and development and other tax credit carryforwards for federal and state income tax purposes as of December 31, 2003 of $3.3 million and $2.3 million, respectively, which begin to expire in 2004.
F-24
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 within continuing operations are as follows (in thousands):
| | December 31, | |
| |
| |
| | 2003 | | 2002 | |
| |
| |
| |
Deferred tax assets: | | | | | | | |
| Tax loss carryforwards | | $ | 26,858 | | $ | 24,412 | |
| Research and development and other tax credit carryforwards | | | 5,625 | | | 4,813 | |
| Uniform capitalization, contract and inventory related reserves | | | 2,044 | | | 1,384 | |
| Environmental and restructuring provisions | | | 241 | | | 320 | |
| Asset impairment | | | 23 | | | 930 | |
| Accrued vacation | | | 215 | | | 168 | |
| Allowance for doubtful accounts | | | 40 | | | 181 | |
| Other | | | 103 | | | 200 | |
| |
|
| |
|
| |
| | | 35,149 | | | 32,408 | |
Deferred tax liabilities: | | | | | | | |
| | | | | | | |
| Tax depreciation in excess of book depreciation | | | (151 | ) | | (655 | ) |
| Foreign | | | (812 | ) | | (430 | ) |
| |
|
| |
|
| |
| | | (963 | ) | | (1,085 | ) |
| |
|
| |
|
| |
| Net deferred tax assets before valuation allowance | | | 34,186 | | | 31,323 | |
Valuation allowance | | | (34,998 | ) | | (31,753 | ) |
| |
|
| |
|
| |
Net deferred tax liabilities | | $ | (812 | ) | $ | (430 | ) |
| |
|
| |
|
| |
| | | | | | | | | |
Note 10 — Leases
Rental expense amounted to $1.5 million, $2.6 million and $1.9 million in the years ended December 31, 2003, 2002 and 2001, respectively, and was incurred primarily for facility rental. Future annual minimum rental commitments and automobile leases as of December 31, 2003, are as follows (in thousands):
| Fiscal Years | | | | |
| 2004 | | $ | 1,612 | |
| 2005 | | | 1,629 | |
| 2006 | | | 1,608 | |
| 2007 | | | 1,286 | |
| 2008 | | | 789 | |
| Thereafter | | | 394 | |
| | |
|
| |
| | | $ | 7,318 | |
| | |
|
| |
F-25
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 11 – Pension and Other Postretirement Benefit Plans
Foreign Plans
In July 2002, the Company acquired Montena, including its pension plan covering its Swiss employees (Note 2). The plan provides pension benefits to employees under the terms of the plan as required by Swiss law and regulations. The plan has characteristics of defined benefit, defined contribution and cash balance plans. For the year ended December 31, 2002, this plan was treated as a defined contribution plan; however, for the year ended December 31, 2003 in accordance with Emerging Issues Task Force (EITF) 03-4, “Determining the Classification and Benefit Attribution Method for a “Cash Balance” Pension Plan,” the plan has been classified as a defined benefit pension plan. The adoption of EITF 03-4 is being accounted for as the effect of adopting a new accounting principle as of the beginning of the year, January 1, 2003, and resulted in a cumulative effect of an accounting change, net of tax, of $878,000.
The pension benefit is based on compensation, length of service and credited investment earnings. The plan guarantees both a minimum rate of return as well as minimum annuity purchase rates. The Company’s funding policy with respect to the pension plan is to contribute the amount required by Swiss law, using the required percentage applied to the employee’s compensation. In addition, the employee is required to contribute an identical amount to the pension plan. The Company made pension contributions of $302,000 in 2003. This plan has a measurement date of December 31.
During 2003, approximately 46 former employees of Montena left the plan and were paid out their participant balances in accordance with the terms of the plan. This resulted in a settlement gain of $154,000 in 2003. This amount is shown in the development of the change in benefit obligation.
In December 2003, the Company sold its Winding Equipment business segment. As a result, approximately 50 employees have left the Company. This resulted in a curtailment gain of $2.0 million. The Company will be obligated during fiscal 2004 to pay the obligation to the employees based upon their participant balances at the date of termination plus any other amounts that may be allocable to them as a result of the plan operating results prior to the settlement. This amount is shown in the development of the change in benefit obligation.
F-26
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. Plans
The Company has other post retirement benefit plans covering substantially all of its employees in the United States. Substantially all U.S. 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 $190,000, $283,000 and $275,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
| | Pension Benefits | |
| |
| |
| | Year ended December 31, 2003 | |
| |
| |
| | (in thousands) | |
Change in benefit obligation: | | | |
Benefit obligation at beginning of year | | | $ | 18,185 | | |
Service cost | | | | 545 | | |
Interest cost | | | | 567 | | |
Plan participant contributions | | | | 302 | | |
Benefits paid | | | | (5,080 | ) | |
Curtailments | | | | (2,023 | ) | |
Special termination benefits / asset transfers in | | | | 158 | | |
Effect of foreign currency translation | | | | 1,666 | | |
| | |
|
| | |
Benefit obligation at end of year | | | | 14,320 | | |
| | |
|
| | |
| | | | | | |
Changes in plan assets: | | | | | | |
Fair value of plan assets at beginning of year | | | | 19,536 | | |
Actual return on plan assets | | | | 1,688 | | |
Special termination benefits /asset transfers in | | | | 158 | | |
Company contributions | | | | 302 | | |
Plan participant contributions | | | | 302 | | |
Benefits paid | | | | (5,080 | ) | |
Effect of currency translation | | | | 2,065 | | |
| | |
|
| | |
Fair value of plan assets at end of year | | | | 18,971 | | |
| | |
|
| | |
| | | | | | |
Funded status at end of year | | | | 4,651 | | |
Unrecognized net actuarial gain | | | | (689 | ) | |
| | |
|
| | |
Net amount recognized | | | $ | 3,962 | | |
| | |
|
| | |
| | | | | | |
Amounts recognized in the consolidated
balance sheet consist of: | | | | | | |
Prepaid benefit cost | | | $ | 3,617 | | |
Accumulated other comprehensive income | | | | 345 | | |
| | |
|
| | |
Net amount recognized | | | $ | 3,962 | | |
| | |
|
| | |
| | | | | | |
Components of net periodic benefit cost: | | | | | | |
Service cost | | | $ | 545 | | |
Interest cost | | | | 567 | | |
Expected return on plan assets | | | | (899 | ) | |
Curtailments | | | | (2,023 | ) | |
Settlements | | | | (154 | ) | |
| | |
|
| | |
Net periodic income | | | $ | (1,964 | ) | |
| | |
|
| | |
The accumulated benefit obligation was $14.3 million as of December 31, 2003.
F-27
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | Pension Benefits | |
| |
| |
| | Year Ended December 31, 2003 | |
| |
| |
Weighted-average assumptions used to determine
benefit obligations at December 31, 2003: | | | | |
Discount rate | | 3.50 | % | |
Rate of compensation increase | | 1.50 | % | |
| | | | |
Weighted-average assumptions used to determine
net periodic benefit cost for the year ended
December 31, 2003: | | | | |
Discount rate | | 3.50 | % | |
Expected long-term return on plan assets | | 5.00 | % | |
Rate of compensation increase | | 1.50 | % | |
The accumulated benefit obligation was $14.3 million as of December 31, 2003.
Note 12 — Restructuring Charges
In 2003, restructuring reserves were fully utilized and the Company paid $216,000 for severance and $42,000 for taxes. No remaining restructuring liability was outstanding at December 31, 2003.
In the first half of 2002, I-Bus/Phoenix introduced new applied computing products that had been developed in 2001. However, the market for applied computing products, particularly in telecommunications, deteriorated throughout 2002. The Company responded to the poor market conditions for computing systems and other capital goods by restructuring I-Bus/Phoenix. In June 2002, the Company began implementing the restructuring plan and recorded restructuring charges of $707,000 during the quarter ended June 30, 2002 which was comprised of i) severance payments and other employee related expenses of $269,000 and ii) impairment of assets that will no longer be used, facility lease terminations and other closure cost related to certain facilities in Europe totaling $438,000. In addition, the Company also determined that certain components in inventory had been adversely impacted. Accordingly, the Company recorded an inventory charge of $3.0 million for certain excess and obsolete raw material components and finished goods. This charge is classified in “Cost of Sales” in the accompanying Consolidated Statements of Operations.
During the third fiscal quarter of 2002, the Company decided to sell the applied computing business of I-Bus/Phoenix to a new company organized by former I-Bus/Phoenix senior managers. In preparation for the sale and to configure the I-Bus/Phoenix computing business to be self-supporting, I-Bus/Phoenix consolidated all production of the applied computing products to its facility in Tangmere, United Kingdom, and reduced worldwide personnel. As a result of this plan, the Company recorded restructuring charges of $922,000 during the quarter ended September 2002. As of the date of sale, $245,000 of restructuring reserves were disposed as part of the sale.
During 1999 and 2000, the Company had undertaken various actions to consolidate its facilities and reduce its cost structure. As a result, the Company recorded restructuring related charges in the five months ended December 31, 1999 and the year ended December 31, 2000 of $3.3 million, which included the termination of approximately 75 employees. These cutbacks impacted all segments and classes of employees.
F-28
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the restructuring charges recorded, and the activity related to such charges, in the years ended December 31, 2001, 2002 and 2003 (in thousands):
| | Severance Costs
for Involuntary
Employee
Terminations | | Costs to Exit
Certain Contractual
and Lease
Obligations | | Other Costs
Related to
Consolidation of
Facilities | | Other | | Total
Restructuring
Charges | |
| |
| |
| |
| |
| |
| |
Balance at January 1, 2001 | | | $ | 620 | | | | $ | 196 | | | | $ | 311 | | | $ | — | | | $ | 1,127 | | |
Reserves established | | | | — | | | | | — | | | | | — | | | | — | | | | — | | |
Utilization of reserves: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash | | | | (395 | ) | | | | (163 | ) | | | | (311 | ) | | | — | | | | (869 | ) | |
Non-cash | | | | — | | | | | — | | | | | — | | | | — | | | | — | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange loss | | | | — | | | | | — | | | | | — | | | | — | | | | — | | |
| | |
|
| | | |
|
| | | |
|
| | |
|
| | |
|
| | |
Balance December 31, 2001 | | | | 225 | | | | | 33 | | | | | — | | | | — | | | | 258 | | |
Reserves established | | | | 1,191 | | | | | 215 | | | | | 223 | | | | — | | | | 1,629 | | |
Utilization of reserves: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash | | | | (1,068 | ) | | | | — | | | | | — | | | | — | | | | (1,068 | ) | |
Non-cash | | | | — | | | | | — | | | | | (223 | ) | | | — | | | | (223 | ) | |
I-Bus disposition | | | | (44 | ) | | | | (201 | ) | | | | — | | | | — | | | | (245 | ) | |
| | |
|
| | | |
|
| | | |
|
| | |
|
| | |
|
| | |
Balance December 31, 2002 | | | | 304 | | | | | 47 | | | | | — | | | | — | | | | 351 | | |
Reserves established | | | | — | | | | | — | | | | | — | | | | 135 | | | | 135 | | |
Utilization of reserves: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash | | | | (216 | ) | | | | — | | | | | — | | | | (42 | ) | | | (258 | ) | |
Non-cash | | | | — | | | | | — | | | | | — | | | | (93 | ) | | | (93 | ) | |
Reserves recovered | | | | (88 | ) | | | | (47 | ) | | | | — | | | | — | | | | (135 | ) | |
| | |
|
| | | |
|
| | | |
|
| | |
|
| | |
|
| | |
Balance December 31, 2003 | | | $ | — | | | | $ | — | | | | $ | — | | | $ | — | | | $ | — | | |
| | |
|
| | | |
|
| | | |
|
| | |
|
| | |
|
| | |
Note 13 — Impairment Charges
In 2002, in connection with the sale of the I-Bus Computing Systems business (Note 3), the Company recorded $7.6 million of impairment charges related to long lived-assets. The write down of impaired assets consisted of $5.3 million of goodwill associated with the computing systems business. The Company conducted an extensive review of fixed assets supporting multiple businesses including the computing systems business. As part of these reviews, the Company determined the carrying values of the related long-lived assets was in excess of fair market value and as a result, an asset impairment charge of $2.3 million was recorded.
Investment impairment of $500,000 was recorded in 2001 relating to Maxwell’s ownership of approximately 1% of a privately held company involved in support services in the areas of information technology, system and software integration and engineering and technical services under contract with various government agencies. In late 2003, Maxwell sold its stock in this company for a gain of $184,000.
Note 14 — Discontinued Operations
In March 2001, the Company sold the assets of its defense contracting business in separate transactions with two buyers, for an aggregate purchase price of approximately $20.7 million, the proceeds of which were recorded in 2001. The buyers assumed certain liabilities and ongoing contractual obligations of the business and hired most of the employees of the business. The Company retained certain leases and lease obligations expiring in 2006 and certain assets and liabilities of the business, including estimated amounts provided at closing for the expenses of the transaction and the net costs of winding up any remaining activities of the business. The Company recorded a gain, net of tax, of approximately $3.9 million in the first quarter of 2001, representing the net gain on the disposition of the assets and the net income from the operations of this discontinued business. Based on current and projected vacancies at leased facilities, the Company has revised previously estimated costs and has written off related leasehold improvements. These charges, which totaled $2.8 million, were
F-29
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
recorded in September 2001 and are included in the loss from discontinued operations. As of December 31, 2003, the net lease obligations are $1.1 million and run through 2006 of which $600,000 has been reserved.
The Company increased the reserves for net lease obligations by $720,000 in the first quarter of 2003, which covers lease payments through the first quarter of 2005. The owner of the vacant facility is actively marketing the property for sale or lease and additional reserves may be required if these marketing activities do not result in a sale or lease before the end of 2004.
In September 2002, the Company decided to suspend the operations of PurePulse. PurePulse had been designing and developing systems that generate extremely intense, broad-spectrum, pulsed light to purify water and inactivate viruses and other pathogens that contaminate vaccines and products sourced from human or animal tissues, such as plasma derivatives, transfusion blood components and biopharmaceuticals. The Company plans to preserve its intellectual property and certain other technology assets for a possible future sale of such assets.
Operating results of the discontinued operations are shown separately, net of tax, in the accompanying consolidated statements of operations. No provision for income taxes was provided for discontinued operations for the years ended December 31, 2003 and 2002. For the fiscal year ended December 31, 2001, the provision for income taxes related to discontinued operations was $4.6 million. The businesses included in discontinued operations had sales aggregating $351,000, $758,000 and $11.7 million in the years ended December 31, 2003, 2002 and 2001, respectively. These amounts are not included in net sales in the accompanying consolidated statements of operations.
Net liabilities of discontinued operations have been separately classified in the accompanying consolidated balance sheets as of December 31, 2003 and 2002 in the amounts of $1.5 million and $2.3 million respectively. The net liability balances of discontinued operations were comprised of $600,000 for lease obligations and $894,000 for minority interest as of December 31, 2003. As of December 31, 2002, net liability balances were comprised of $1.1 million for accrued liabilities lease obligations and suppliers and $1.3 million for minority interest.
Results for discontinued operations, by segment, consisted of the following (in thousands):
| | Years Ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
Discontinued operations, net of tax: | | | | | | | | | | |
Loss from operations: | | | | | | | | | | |
Government Systems | | $ | — | | $ | — | | $ | (473 | ) |
PurePulse Technologies. | | | (6 | ) | | (4,832 | ) | | (5,304 | ) |
| |
|
| |
|
| |
|
| |
| | | (6 | ) | | (4,832 | ) | | (5,777 | ) |
Gain on disposal: | | | | | | | | | | |
Government Systems | | | — | | | — | | | 1,081 | |
PurePulse Technologies | | | — | | | — | | | — | |
| |
|
| |
|
| |
|
| |
| | | — | | | — | | | 1,081 | |
| |
|
| |
|
| |
|
| |
| | $ | (6 | ) | $ | (4,832 | ) | $ | (4,696 | ) |
| |
|
| |
|
| |
|
| |
F-30
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 15 — Business Segments
Based on Maxwell’s strategy of developing, manufacturing and marketing high reliability power and microelectronic products for original equipment manufacturers (OEMs) in multiple industries, the Company has reorganized into two reportable 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,” have restated segment results to reflect the following new reporting segments.
After the acquisition of Montena and the dispositions of the I-Bus Computing Systems business and the TeknaSeal glass-to-metal seals business, which were completed during the third and fourth quarters of 2002, respectively, the Company’s businesses were organized into two segments, the High Reliability business segment and the Winding Equipment business segment. TheHigh Reliability business segment consists of:
| • | Ultracapacitors for electrical energy storage and delivery of peak power for a variety of applications; |
| | |
| • | High-voltage grading and coupling capacitors used in electric utility infrastructure, high-voltage laboratories and other applications involving transport, distribution and measurement of high-voltage electrical energy; and |
| | |
| • | Radiation-shielded microelectronics, including integrated circuits, power modules, memory modules and single board computers for aerospace and military applications. |
TheWinding Equipment business segment makes winding machines and automated assembly lines used to manufacture metalized film capacitors and lithium batteries. This segment was sold in December 2003 (Note 3). Nonetheless, the Company has reported results of operations of its Winding Equipment business segment as continuing operations because of its continuing involvement therewith.
Prior to the sale of its computing systems business at the end of the third quarter of 2002, the Company’s I-Bus/Phoenix Power and Computing Systems segment designed, manufactured and marketed applied computing systems and power distribution and power conditioning systems mainly to OEMs serving the telecommunications, industrial automation, broadcasting and medical imaging markets. The power distribution and conditioning systems now are part of the High Reliability business segment. The restated I-Bus Computing Systems segment consists solely of the computing business, which was sold in September 2002.
In June 2001, the Company sold substantially all the assets (except for accounts receivable), liabilities and business operations of Sierra. Sierra manufactured and commercialized ceramic filter capacitors with wire feedthroughs for implantable medical devices and ceramic capacitors for aerospace and commercial applications. On September 30, 2002, the Company sold its non-core TeknaSeal glass-to-metal seals business in Minneapolis, Minnesota. Both of these businesses, which were previously reported in the former Electronic Components segment, have been combined into a segment for reporting purposes called the Sierra and TeknaSeal segment.
Maxwell’s management evaluates performance and allocates resources based on a measure of segment profit (loss) excluding interest, taxes, 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.
F-31
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Business segment financial data is as follows (in thousands):
| | Years ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| |
| |
| |
| |
Sales: | | | | | | | | | | |
Maxwell High Reliability | | $ | 35,168 | | $ | 40,106 | | $ | 39,398 | |
Winding Equipment | | | 9,856 | | | 3,571 | | | — | |
I-Bus Computing Systems | | | — | | | 11,002 | | | 24,082 | |
Sierra KD and TeknaSeal | | | — | | | 3,286 | | | 14,376 | |
| |
|
| |
|
| |
|
| |
Consolidated total | | $ | 45,024 | | $ | 57,965 | | $ | 77,856 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Operating income (loss): | | | | | | | | | | |
Maxwell High Reliability | | $ | (7,560 | ) | $ | (6,204 | ) | $ | (11,470 | ) |
Winding Equipment | | | (523 | ) | | (123 | ) | | — | |
I-Bus Computing Systems | | | 31 | | | (10,955 | ) | | (10,070 | ) |
Sierra KD and TeknaSeal | | | — | | | 940 | | | 2,021 | |
| |
|
| |
|
| |
|
| |
Total segment operating (loss) | | | (8,052 | ) | | (16,342 | ) | | (19,519 | ) |
Impairment of long lived assets | | �� | — | | | 7,628 | | | 500 | |
Restructuring | | | — | | | 1,629 | | | — | |
Corporate expenses | | | 3,524 | | | 3,818 | | | 4,421 | |
Pension curtailment and settlement gain | | | (2,177 | ) | | — | | | — | |
Gain on sale of property | | | (1,417 | ) | | — | | | — | |
(Gain) loss on sale of businesses | | | (632 | ) | | 6,542 | | | (39,142 | ) |
Minority interest | | | — | | | (241 | ) | | (710 | ) |
Interest and other, net | | | 37 | | | (262 | ) | | 598 | |
| |
|
| |
|
| |
|
| |
(Loss) income from continuing operations
before income taxes | | $ | (7,387 | ) | $ | (35,456 | ) | $ | 14,814 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Depreciation and amortization: | | | | | | | | | | |
Maxwell High Reliability | | $ | 3,770 | | $ | 2,883 | | $ | 1,926 | |
Winding Equipment | | | 35 | | | 5 | | | — | |
I-Bus Computing Systems | | | — | | | 498 | | | 1,667 | |
Sierra KD and TeknaSeal | | | — | | | 83 | | | 361 | |
Corporate | | | — | | | 1,164 | | | 1,341 | |
| |
|
| |
|
| |
|
| |
Consolidated total | | $ | 3,805 | | $ | 4,633 | | $ | 5,295 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Capital expenditures: | | | | | | | | | | |
Maxwell High Reliability | | $ | 2,434 | | $ | 1,477 | | $ | 1,260 | |
Winding Equipment | | | 5 | | | 10 | | | — | |
I-Bus Computing Systems | | | — | | | 173 | | | 1,358 | |
Sierra KD and TeknaSeal | | | — | | | — | | | 202 | |
Corporate | | | — | | | 136 | | | 3,412 | |
| |
|
| |
|
| |
|
| |
Consolidated total | | $ | 2,439 | | $ | 1,796 | | $ | 6,232 | |
| |
|
| |
|
| |
|
| |
F-32
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | December 31, | |
| |
| |
| | 2003 | | 2002 | |
| |
| |
| |
Identifiable assets: | | | | | | | |
Maxwell High Reliability | | | 52,475 | | | 40,612 | |
Winding Equipment | | | 168 | | | 3,744 | |
I-Bus Computing Systems | | | — | | | — | |
Sierra KD and TeknaSeal | | | — | | | — | |
Corporate | | | 10,370 | | | 27,024 | |
| |
|
| |
|
| |
Consolidated total | | $ | 63,013 | | $ | 71,380 | |
| |
|
| |
|
| |
Intersegment sales are insignificant. Identifiable assets by segment include the assets directly identified with those segments. Corporate assets consist primarily of cash and cash equivalents, short-term investments, deferred tax assets and liabilities, and the centralized telecommunications, networking and other information technology equipment of the Company.
International sales amounted to $26.0 million, $25.1 million and $21.8 million in the years ended December 31, 2003, 2002 and 2001, respectively, and were made principally to customers in the Pacific Rim and Europe. Company assets located outside the United States totaled approximately $33.9 million and $29.8 million at December 31, 2003 and 2002, respectively.
The Company made sales to one major customer of its High Reliability business segment, which aggregated 13%, 20% and 24% of total Company sales for the years ended December 31, 2003, 2002 and 2001, respectively.
Note 16 — Related Party Transactions
In January 2001, the Company borrowed $1.5 million from its Chief Executive Officer under an unsecured promissory note bearing interest at 11.0%. The note and accrued interest was fully repaid in March 2001.
Montena SA, the former parent company of Montena and a significant shareholder of Maxwell Technologies, Inc., is the lessor for the Company’s headquarters in Rossens, Switzerland. During the years ended December 31, 2003 and 2002, the Company paid $809,000 and $346,000, respectively, in rental fees to Montena SA. Future rental commitments as of December 31, 2003 are $4.3 million.
F-33
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 17 — Unaudited Quarterly Results of Operations (in thousands, except per share amounts)
| | Quarter Ended | |
| |
| |
| | March | | June | | September | | December | |
| |
| |
| |
| |
| |
Year Ended December 31, 2003: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Sales | | $ | 10,241 | | $ | 10,653 | | $ | 10,993 | | $ | 13,137 | (4) |
Gross profit | | | 1,311 | | | 1,357 | (2) | | 1,585 | (2) | | 4,031 | |
(Loss) income from continuing
operations | | | (3,786 | )(3) | | (3,446 | )(3) | | (2,188 | ) | | 2,253 | (5) |
Discontinued operations, net of tax | | | (575 | )(1) | | 7 | | | 115 | | | 447 | |
Cumulative effect of change in
accounting | | | — | | | — | | | — | | | 878 | |
Net (loss) income | | | (4,361 | ) | | (3,439 | ) | | (2,073 | ) | | 3,578 | |
| | | | | | | | | | | | | |
Basic and diluted net loss per share: | | | | | | | | | | | | | |
(Loss) income from continuing
operations | | $ | (0.28 | ) | $ | (0.25 | ) | $ | (0.16 | ) | $ | 0.16 | |
(Loss) income from discontinued
operations | | | (0.04 | ) | | 0.00 | | | 0.01 | | | 0.03 | |
Gain from cumulative effect of change
in accounting, net of tax | | | — | | | — | | | — | | | 0.06 | |
| |
|
| |
|
| |
|
| |
|
| |
Net (loss) income per share | | $ | (0.32 | ) | $ | (0.25 | ) | $ | (0.15 | ) | $ | 0.25 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Year Ended December 31, 2002: | | | | | | | | | | | | | |
Sales | | $ | 12,789 | | $ | 13,155 | | $ | 16,565 | | $ | 15,456 | |
Gross profit | | | 947 | | | (796 | )(6) | | 2,706 | | | 3,974 | |
Loss from continuing operations | | | (5,906 | ) | | (8,510 | )(6) | | (20,786 | )(7) | | (122 | )(8) |
Discontinued operations, net of tax | | | (805 | ) | | (879 | ) | | (2,761 | ) | | (387 | ) |
Net Loss | | | (6,711 | ) | | (9,389 | ) | | (23,547 | ) | | (509 | ) |
| | | | | | | | | | | | | |
Basic and diluted net loss per share: | | | | | | | | | | | | | |
Loss from continuing operations | | $ | (0.57 | ) | $ | (0.75 | ) | $ | (1.53 | ) | $ | (0.01 | ) |
Loss from discontinued operations | | | (0.08 | ) | | (0.08 | ) | | (0.20 | ) | | (0.03 | ) |
| |
|
| |
|
| |
|
| |
|
| |
Net loss per share | | $ | (0.65 | ) | $ | (0.83 | ) | $ | (1.73 | ) | $ | (0.04 | ) |
| |
|
| |
|
| |
|
| |
|
| |
| (1) | Includes charge of $720,000 for lease obligations related to vacant facilities of discontinued operations. |
| (2) | Includes charge of $444,000 to write off inventory and equipment in the second quarter and a charge of $393,000 in the third quarter for warranty buy-outs, both of which relate to the discontinuation of the accelerated life testers product line. |
| (3) | Includes charge of $327,000 for severance payable to the Chief Executive Officer in the first quarter, and a charge of $313,000 for compensation expense related to options provided to a former Chairman of the Board in the second quarter. |
| (4) | Includes license fees of $4 million. |
| (5) | Includes gain on sale of property of $1.2 million, loss on sale of business of $538,000 for the Winding Equipment business, gain on sale of business of $475,000 for recovery of I-Bus note receivable, gain on sale of business of $695,000 for payments received from the sale of TeknaSeal, and pension curtailment and settlement gain of $2.2 million. |
F-34
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| (6) | Includes charges of $3 million for excess and obsolete inventory and $812,000 of restructuring charges related to I-Bus/Phoenix restructuring. |
| (7) | Includes a charge of $7.6 million for impairment of assets related to the sale of I-Bus/Phoenix, a charge of $1.7 million related to the suspension of PurePulse operations and a charge of $922,000 related to the restructuring of I-Bus/Phoenix. |
| (8) | Includes gain on sale of business of $236,000 for the sale of TeknaSeal. |
F-35
MAXWELL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Schedule II
Valuation and Qualifying Accounts
(in thousands)
| | Balance at the
Beginning of
the
Year | | Charged to
Expense | | Acquisitions/
Transfers and
Other | | Write-offs
net of
Recoveries | | Balance at
the End of
the
Period | |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Doubtful Accounts: | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2001 | | | $ | 826 | | | | $ | 534 | | | | $ | 138 | | | | $ | (667 | ) | | | $ | 831 | | |
December 31, 2002 | | | | 831 | | | | | 576 | | | | | (238 | ) | | | | (485 | ) | | | | 684 | | |
December 31, 2003 | | | | 684 | | | | | 241 | | | | | 18 | | | | | (763 | ) | | | | 179 | | |
Inventory Reserve: | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2001 | | | $ | 2,534 | | | | $ | 3,250 | | | | $ | — | | | | $ | (1,888 | ) | | | $ | 3,896 | | |
December 31, 2002 | | | | 3,896 | | | | | 8,011 | | | | | 1,047 | | | | | (10,928 | ) | | | | 2,026 | | |
December 31, 2003 | | | | 2,026 | | | | | 3,070 | | | | | 75 | | | | | (2,016 | ) | | | | 3,155 | | |
F-36
