SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended January 31, 1996 Commission File Number 0-10964
MAXWELL LABORATORIES, INC.
Delaware IRS ID#95-2390133
8888 Balboa Avenue
San Diego, California 92123
Telephone (619) 279-5100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of February 29, 1996 Registrant had only one class of common stock of which
there were 2,737,346 shares outstanding.
PART I - FINANCIAL STATEMENTS
Maxwell Laboratories, Inc.
Consolidated Condensed Balance Sheet
(in thousands)
Assets
------
January 31, July 31,
1996 1995
--------- ---------
(Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 1,799 $ 4,053
Accounts receivable - net 16,446 16,030
Inventories:
Finished products 1,073 1,181
Work in process 1,840 2,292
Parts and raw materials 4,049 3,766
--------- ---------
6,962 7,239
Recoverable income taxes 929 861
Prepaid expenses 596 572
Deferred income taxes 145 2,090
--------- ---------
Total current assets 26,877 30,845
Property, plant and equipment - net 15,586 20,315
Deposits and other assets 787 1,210
--------- ---------
$ 43,250 $ 52,370
========= =========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Bank checks outstanding $ 902 $ --
Accounts payable 9,147 9,400
Accrued employee compensation 2,530 2,681
Current portion of long-term debt
and short-term borrowings 2,909 909
--------- ---------
Total current liabilities 15,488 12,990
Long-term debt 1,474 1,928
Deferred income taxes -- 805
Minority interest and additional amounts contributed 1,048 1,283
Shareholders' equity:
Common stock 274 269
Additional paid-in capital 19,266 18,889
Retained earnings 5,700 16,206
--------- ---------
25,240 35,364
--------- ---------
$ 43,250 $ 52,370
========= =========
<FN>
Note: The Balance Sheet at July 31, 1995 has been derived from the audited
financial statements at that date.
See notes to consolidated condensed financial statements.
PART I - FINANCIAL STATEMENTS, continued
Maxwell Laboratories, Inc.
Consolidated Condensed Statement of Income - (Unaudited)
(in thousands except per share data)
Three Months
Ended January 31,
-----------------------
1996 1995
--------- ---------
Sales $ 19,340 $ 17,630
Costs and expenses:
Cost of sales 17,997 13,046
Research and development expenses 1,335 936
Selling, administrative and general expenses 4,569 3,371
Sierra division restructure and asset
impairment losses 2,568 --
Other - net (129) (98)
--------- ---------
26,340 17,255
--------- ---------
Income (loss) before income taxes
and minority interest (7,000) 375
Income taxes 1,172 121
--------- ---------
(8,172) 254
Minority interest in net income of subsidiary 7 17
--------- ---------
Net income (loss) $ (8,179) $ 237
========= =========
Earnings (loss) per share $ (3.01) $ .09
========= =========
Weighted average number of shares 2,721,000 2,677,000
========= =========
<FN>
Note: Earnings (loss) per share is based upon weighted average number of shares
of common stock outstanding and all dilutive stock options. Per share
amounts are unchanged on a fully dilutive basis.
See notes to consolidated condensed financial statements.
PART I - FINANCIAL STATEMENTS, continued
Maxwell Laboratories, Inc.
Consolidated Condensed Statement of Income - (Unaudited)
(in thousands except per share data)
Six Months
Ended January 31,
-----------------------
1996 1995
--------- ---------
Sales $ 38,512 $ 35,548
Costs and expenses:
Cost of sales 32,861 25,992
Research and development expenses 2,318 2,290
Selling, administrative and general expenses 7,702 6,560
Sierra division restructure and asset
impairment losses 2,568 --
Other - net (219) (183)
--------- ---------
45,230 34,659
--------- ---------
Income (loss) before income taxes,
minority interest and cumulative
effect of change in accounting method (6,718) 889
Income taxes 1,200 284
--------- ---------
(7,918) 605
Minority interest in net income of subsidiary 19 45
--------- ---------
Income (loss) before cumulative
effect of change in accounting method (7,937) 560
Cumulative effect of change in accounting method (2,569) --
--------- ---------
Net income (loss) $ (10,506) $ 560
========= =========
Earnings (loss) per share before cumulative
effect of change in accounting method $ (2.93) $ .21
========= =========
Earnings (loss) per share $ (3.88) $ .21
========= =========
Weighted average number of shares 2,706,000 2,678,000
========= =========
Note: Earnings (loss) per share is based upon weighted average number of
shares of common stock outstanding and all dilutive stock options. Per
share amounts are unchanged on a fully dilutive basis.
See notes to consolidated condensed financial statements.
PART I - FINANCIAL STATEMENTS, continued
Maxwell Laboratories, Inc.
Consolidated Condensed Statement of Cash Flows - (Unaudited)
(in thousands)
Six Months
Ended January 31,
-----------------------
1996 1995
--------- ---------
OPERATING ACTIVITIES
Net income (loss) $ (10,506) $ 560
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 1,075 1,433
Sierra division restructure and asset
impairments and losses 2,825 --
Cumulative effect of change in accounting
method 2,569 --
Minority interest in net income of subsidiary 19 45
Changes in operating assets and
liabilities - net 830 (2,974)
--------- ---------
NET CASH USED IN
OPERATING ACTIVITIES (3,188) (936)
--------- ---------
INVESTING ACTIVITIES
Purchases of property and equipment (994) (1,402)
--------- ---------
NET CASH USED IN
INVESTING ACTIVITIES (994) (1,402)
--------- ---------
FINANCING ACTIVITIES
Principal payments on long-term debt (454) (517)
Proceeds from short-term borrowings 2,000 --
Proceeds from issuance of Company stock 382 --
--------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,928 (517)
--------- ---------
DECREASE IN CASH AND
CASH EQUIVALENTS (2,254) (2,855)
Cash and cash equivalents at beginning of period 4,053 4,579
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 1,799 $ 1,724
========= =========
See notes to consolidated condensed financial statements.
PART I - continued
NOTES TO FINANCIAL STATEMENTS
The preceding interim consolidated condensed financial statements
contain all adjustments (consisting of normal recurring accruals) which are,
in the opinion of management, necessary for a fair and accurate presentation
of financial position at January 31, 1996 and the results of operations for
the three and six month periods then ended. These interim financial
statements should be read in conjunction with the Company's July 31, 1995
audited financial statements included in its Proxy Statement for the 1995
Annual Meeting of Shareholders. Interim results are not necessarily
indicative of those to be expected for the full year.
The consolidated financial statements include the accounts of Maxwell
Laboratories, Inc., and its majority-owned subsidiary, PurePulse Technologies,
Inc. All significant intercompany transactions and account balances are
eliminated in consolidation.
In the current year the Company recorded one-time charges totaling
approximately $9.5 million. About $7 million of the charges are included in
second quarter results, and the remainder is recorded in restated first
quarter results as the cumulative effect of a change in accounting method due
to the Company's early adoption of Financial Accounting Standards Board (FASB)
Statement No. 121. Approximately $8 million of the charges do not require
current or future cash outlays.
The overall $9.5 million charge consists of the following: $4.1 million
for write-downs of existing property, plant and equipment due to the
implementation of Statement No. 121, which requires that the carrying amount
of certain long-lived assets be written down if an impairment in value is
determined to exist; the assets were evaluated on the basis of adequate
anticipated future cash flows, as defined by the FASB, and assessments of
fair market value were primarily based on estimated resale values; a $1.1
million charge to fully reserve the existing net deferred income tax assets
of Maxwell (excluding its PurePulse Technologies subsidiary), as required
under current financial accounting rules for income taxes; $0.9 million
associated with surplus military and space-related inventory due to the
restructuring of the Sierra division; and $3.4 million of other asset
write-downs and reserves taken on the basis of current information on risk
areas for the Company, of which $1.2 million is included in selling,
administrative and general expenses and the remainder is charged to cost of
sales; these other charges include contract reserves at the S-Cubed division,
inventory reserves at the I-Bus and Balboa divisions, write-down
of Business Systems division software, and certain charges at the Corporate
level, including expenses related to the search for a new Chief Executive
Officer of the Company and environmental and other reserves.
As a result of the cumulative effect of a change in accounting method
adjustment from the early adoption of FASB Statement No. 121, the Company's
financial statements as of and for the three months ended October 31, 1995 have
been restated. The effect of the change to the reported fiscal year 1996 first
quarter results is as follows:
Three Months
Ended October 31, 1995
----------------------------------
As Previously As
Reported Adjusted
-------------- -------------
Net income (loss) $ 60,000 $ (2,327,000)
Earnings (loss) per share $ .02 $ (.86)
Retained earnings $ 16,266,000 $ 13,879,000
PART I - continued
In January 1991, the California Department of Toxic Substances
Control, or DTSC, notified the Company that it had been identified as one of
a number of "potentially responsible parties" with respect to alleged
hazardous substances released into the environment at a recycling facility
in San Diego County. Although the Company was not involved in the transport
or disposal of the substances, Maxwell remains a potentially responsible party
under California and Federal "Superfund" laws. In 1992, the Company and
approximately 40 other potentially responsible parties signed a consent order
which had been negotiated with the DTSC, agreeing to pay $4 million of the
$7.9 million response costs previously incurred by the State, and to pay for
certain future site investigations and interim response actions outlined in
the consent order. The currently estimated cost of such activities is $9.1
million, and the Company's share of the cost, as allocated by the parties to
the consent order, is currently estimated at approximately 7.0%. The eventual
cost of all removal and remediation activities, for which the Company and the
other potentially responsible parties will share in additional reimbursements
to the State, and including the $9.1 million referred to above, is currently
estimated to be in the range of $15 - $20 million. The Company has accrued
its share of such estimated costs; on the basis of amounts accrued by the
Company, it is management's opinion that any additional liability resulting
from this situation will not have a material effect on the Company's financial
statements. There have been no material developments on this matter since the
date of issuance of the Company's audited financial statements for the year
ended July 31, 1995.
Backlog of unfilled orders at January 31, 1996 was $77.6 million,
of which $40.4 million is fully funded.
PART I - continued
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
POSITION
Special Reserves and Other Charges
- ----------------------------------
First half results for fiscal year 1996 include charges of
approximately $9.5 million, about $7 million of which are included in second
quarter results, and about $2.5 million of which are recorded in restated
first quarter results as the cumulative effect of a change in accounting
method. The change in accounting method is related to the early adoption of
Financial Accounting Standards Board (FASB) Statement No. 121, as described
below. Approximately $8 million of the charges do not require current or
future cash outlays.
The overall $9.5 million charge consists of the following:
- Adoption of FASB Statement No. 121, which
addresses the recoverability of the carrying
costs of long-lived assets $ 4,100,000
New FASB Statement No. 121 requires that the
carrying amount of certain long-lived assets
be written down if an impairment in value is
determined to exist. The assets subject to
evaluation are those long-lived assets (i.e.,
primarily property, plant and equipment) not
supported by adequate anticipated future cash
flows, as defined by the FASB. Of the $4.1
million amount, about $2.5 million relates to
assets held for sale or other disposal, and
under the adoption provisions of Statement
No. 121, must be accounted for in the first
fiscal quarter as the cumulative effect of a
change in accounting method. First quarter
fiscal 1996 results have accordingly been
restated. The remainder of the Statement No.
121 loss is from assets to be retained for
use, and is recorded as a current period
charge.
- Required reserve to fully cover Maxwell's net
deferred tax assets $ 1,100,000
Absent the ability to carry losses back for
book income tax purposes, and with the current
year loss recorded to date, net deferred tax
assets of the parent company must be fully
reserved under the current accounting rules for
income taxes. The deferred income taxes of
PurePulse Technologies, Inc., a 76.5% owned
subsidiary which files separate income tax
returns, are not reserved. While this charge
is recorded in the current quarter as income tax
expense, it may be recovered if future years are
profitable as a reduction in book income tax
expense that would otherwise be required in such
a profitable year. The Company's tax situation
in the current year also requires that all of
the losses recorded, including the reserves and
other charges, be booked without a tax benefit
for financial reporting purposes. Therefore,
the losses for financial reporting purposes are
the same after-tax as they are pre-tax.
PART I - continued
- Surplus military and space-related inventory
due to the restructuring of the Sierra
Capacitor / Filter division $ 900,000
This restructuring involves a focus on new
commercial, primarily medical, product lines
and a de-emphasis of unprofitable and high-
risk military and space products.
- Other asset write-downs and reserves taken $ 3,400,000
These other write-downs and reserves include
contract reserves at the S-Cubed division
($1,000,000), inventory reserves at the I-Bus
and Balboa divisions ($500,000), write-down
of capitalized Business Systems division
software ($800,000), and certain charges at
the Corporate level ($1,100,000), including
costs and expenses related to the search for
a new Chief Executive Officer of the Company,
as announced in the first quarter of this
fiscal year, and environmental and other
reserves.
-----------
$ 9,500,000
===========
The decision to concentrate on specific business lines at Sierra,
operational losses associated with the chemical analytical services business,
and the need to reserve the Company's net deferred income tax assets, led to
the decision to early adopt Statement No. 121 in the current quarter, rather
than wait until the first quarter of next fiscal year when adoption would
otherwise have been required. The other asset write-downs and reserves taken
derive from the assessment of current information on risk areas for the
company, and reflect the impact of recent strategic decisions on the carrying
value of operating assets and liabilities. The Company retains a strong
balance sheet, as discussed in the Liquidity section below. A discussion of
sales and operating results follows.
Results of Operations
- ---------------------
Sales for the quarter ended January 31, 1996 were $19,340,000, or a 10%
increase over the $17,630,000 for the same period one year ago. Six-month
sales were $38,512,000, or an 8% increase over the $35,548,000 for last year's
first six months. These increases are due to a rise in sales of commercial,
industrial and scientific products (CIS), which increased just over 25% from
the prior year for both the second quarter and first six months, offsetting
sales decreases of slightly less than 15% in the technology programs and
services (TPS) business segment in the comparable periods. These business
segment sales are further described in the paragraphs below.
CIS sales for the second quarter were $13,073,000, an increase of
approximately $2,700,000, or 26%, compared to last year's second quarter. Six-
month CIS sales were $24,331,000, an increase of approximately $5,100,000, or
27%, compared to the same period last year. For the three and six month
periods, over half and 40% of the increase, respectively, is attributable to
the S-Cubed division's new software business area. Currently, this business
consists primarily of two long-term fixed price contracts, both of which are
scheduled for completion in calendar 1996. The other substantial increase in
CIS business segment sales is in the I-Bus division's PC-based controllers for
original equipment manufacturers. These sales account for 25% of the three
month increase, and 40% of the year-to-date increase. The balance of the CIS
sales increase is primarily due to higher sales of pulsed power components,
such as capacitors. While these are positive revenue gains for both the second
quarter and the six months, it should be noted when making such comparisons
that fluctuations upward or downward have occurred from time to time in several
of the Company's CIS groups.
PART I - continued
TPS sales for the second quarter were $6,267,000, a decrease of
approximately $1,000,000, or 14%, compared to the prior year. Six-month TPS
sales were $14,181,000, a decrease of approximately $2,200,000, or 13%,
compared to last year's six-month period. The situation in the TPS business
segment is very little changed from the first quarter report, as overall
Defense/contract R&D sales remain slightly higher than in the comparable
periods of the prior year and chemical analytical services revenues are down.
While the Defense results are encouraging, the federal budget effect on future
Defense spending, and its impact on the Company, are not predictable and,
therefore, previously reported results are not necessarily indicative of those
to be expected in the future.
The chemical analytical services laboratory at S-Cubed has historically
focused on sample analysis for the Department of Energy (DOE) and the EPA. A
significant decline in the flow of samples from these agencies is the major
factor affecting chemistry revenues in the three and six-month periods.
Laboratory management believes this curtailment of sample flow is primarily due
to federal budget delays and a current shift in emphasis at federal levels from
characterization to remediation. While future revenues are not currently
predictable, the laboratory has won several new and follow-on contract awards
in the last two months which afford the opportunity to receive federal samples
some months in the future. For the most part, however, the contracts do not
provide for any fixed amount of sample deliveries. The Company is following a
dual strategy for the laboratory of added sales and marketing efforts, and
exploring its possible sale. Although the impact of a sale transaction on
operating results is uncertain, the carrying cost of the chemical analytical
services group's long-lived assets has been adjusted in connection with the
adoption of Statement No. 121. Other laboratory assets, primarily receivables
and inventory, have a current book value of approximately $500,000.
Cost of sales for the second quarter was $17,997,000 or 93.1% of sales,
and for the six months $32,861,000 or 85.3% of sales. These amounts are a
substantial increase from the prior year as a percent of sales due in large
part to the reserves and write-offs described above. Approximately $2 million
of the January charges impacted cost of sales. This primarily includes
reserves for contracts in S-Cubed's commercial software business area and the
write-down of capitalized Business Systems division product software costs. A
smaller amount of the charges are related to inventory at the I-Bus and Balboa
divisions.
Prior to the $2 million charge, cost of sales as a percent of sales for
the three and six-month periods is 81.9% and 80.2%, respectively, compared to
74.0% and 73.1% for the same periods last year. On a percentage basis, the
increases are nearly evenly distributed between the Company's two business
segments for both the second quarter and the year-to-date. In the CIS segment,
the largest factor in the increase in pre-write-off cost of sales as a percent
of sales is the low profit margin associated with the S-Cubed division's entry
into commercial software markets. However, gross profit margins are also lower
in nearly all of the CIS business areas, reflecting, in addition to the
S-Cubed impact, a shift in the mix at the I-Bus division to products and
customers involving more competitive pricing pressures, and the re-working of
products and processes at the Sierra division prior to the restructuring of
product focus. In the TPS business segment, cost of sales as a percent of
sales increased over the prior year primarily due to the impact of the fixed
costs of the S-Cubed chemical analytical services laboratory given the large
decrease in revenues from historical levels. Delays in funding on a DOE
technology development program also contributed to the increase.
Research and development expenses were $1,335,000 for the second
quarter, compared to $936,000 for last year's second quarter. For the six
months these expenses were nearly unchanged from the prior year, at $2,318,000
as compared to $2,290,000, respectively. The increase in the second quarter is
attributable to an increased number of opportunities to respond to requests for
large proposals, primarily in the networked software, power conversion systems
and technology development areas.
PART I - continued
Selling, administrative and general expenses include $1.2 million of
the reserves and write-offs described previously. Excluding those special
charges, selling, administrative and general expenses are nearly unchanged from
the prior year for both the second quarter and year-to-date.
Income tax expense was provided at a rate of 32% in the prior year, and
as described previously, there is no income tax benefit provided on the current
year loss.
As a result of the above factors, the net loss for the three and six
months ended January 31, 1996 was $8,179,000 and $10,506,000, respectively. As
discussed earlier, the six month results include approximately $2.5 million of
Statement No. 121 loss that was required to be reported as a restatement of
1996's first fiscal quarter. Accordingly, approximately $7 million of the
special reserves and other charges impact the second quarter, and the three and
six-month losses excluding such charges are $1,094,000 and $1,034,000,
respectively. The comparable figures for the prior year are net income of
$237,000 in the second quarter, and $560,000 for the six months.
Liquidity and Capital Resources
- -------------------------------
With working capital over $11 million and most of the second quarter
charges requiring no future outlay of cash, the Company's balance sheet remains
strong. The current ratio of 1.7 to 1 at January 31, 1996, compares to 2.4 to
1 at the end of fiscal year 1995. The Company's operations used $3.2 million
in cash in the first six months, due primarily to an increase in receivables
associated with S-Cubed's commercial software projects and inventory build-up
at I-Bus. In addition, as a result of the second quarter charges, the Company
is not in compliance with the tangible net worth requirement in its bank loan
covenant. Management is holding discussions with the bank under a plan to
renegotiate the lending arrangement. Cash requirements not met with funds on
hand are currently planned to be met through the Company's bank line of credit
of $7.5 million.
PART II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
-------------------------------
As a result of the significant reserves and other charges in the three
months ending January 31, 1996, a covenant in the Registrant's $7.5 million
bank line of credit requiring a stated minimum tangible net worth was breached.
At January 31, 1996, the Registrant had borrowed $2 million under the line of
credit. The lender has given the Registrant a letter of forebearance on taking
any action as a result of the default for a period through May 1, 1996 to give
the parties time to renegotiate the lending arrangement.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Registrant's Annual Meeting of Shareholders was held on December
12, 1995. At the meeting, Alan C. Kolb, Karl M. Samuelian, and Thomas B.
Hayward were reelected as Class III directors for terms expiring at the 1998
Annual Meeting of Shareholders. In addition, directors Adolphe G. Gueymard,
John W. Weil, Lewis J. Colby, Jr., Donn A. Starry, Henry F. Owsley, and Sean
M. Maloy continue to serve as directors with terms expiring at the 1996 and
1997 Annual Meetings of Shareholders.
PART II - continued
In addition, the Registrant's shareholders approved the adoption of the
Company's 1995 Stock Option Plan. A maximum of 250,000 shares have been
authorized for issuance pursuant to the exercise of options granted under such
plan.
The following number of votes were cast "for" and to "withhold
authority to vote for" on the election of the three directors elected as Class
III directors at the meeting:
Alan C. Kolb For: 2,348,425 Withhold Authority: 68,824
========= ======
Karl M. Samuelian For: 2,324,087 Withhold Authority: 93,162
========= ======
Thomas B. Hayward For: 2,323,699 Withhold Authority: 93,550
========= ======
The vote on the approval of the Company's 1995 Stock Option Plan was as
follows:
For: 1,073,591
Against: 563,380
Abstain: 96,615
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
No exhibits are included with the Form 10-Q for the period ended
January 31, 1996.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter ended January
31, 1996.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAXWELL LABORATORIES, INC.
March 15, 1996 /s/ Gary Davidson
- ----------------------- --------------------------------------
Date Gary Davidson, Chief Financial Officer
and Authorized Officer