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Proc-Type: 2001,MIC-CLEAR
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ACCESSION NUMBER: 0000912057-01-008001
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 9
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010323
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: MAXWELL TECHNOLOGIES INC
CENTRAL INDEX KEY: 0000319815
STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571]
IRS NUMBER: 952390133
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-15477
FILM NUMBER: 1576886
BUSINESS ADDRESS:
STREET 1: 9275 SKYPARK COURT
STREET 2: SUITE 400
CITY: SAN DIEGO
STATE: CA
ZIP: 92123
BUSINESS PHONE: 8582795100
MAIL ADDRESS:
STREET 1: 9244 BALBOA AVENUE
STREET 2: .
CITY: SAN DIEGO
STATE: CA
ZIP: 92123
FORMER COMPANY:
FORMER CONFORMED NAME: MAXWELL LABORATORIES INC /DE/
DATE OF NAME CHANGE: 19920703
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<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-10964
MAXWELL TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-2390133
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9244 BALBOA AVENUE
SAN DIEGO, CALIFORNIA 92123
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 279-5100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK,
PAR VALUE $.10 PER SHARE
NAME OF EACH EXCHANGE ON WHICH REGISTERED: NASDAQ
NATIONAL MARKET ("NASDAQ") SECURITIES REGISTERED PURSUANT TO
SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on February 28, 2001, based on the closing
price at which the Common Stock was sold on Nasdaq as of February 28, 2001, was
$164,822,786.
The number of shares of the Registrant's Common Stock outstanding as of
February 28, 2001 was 9,935,122 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 2001 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A (including the Appendix thereto) are incorporated by
reference in Part III of this Report.
================================================================================
<PAGE>
MAXWELL TECHNOLOGIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
<TABLE>
<CAPTION>
PAGE
--------
PART I
<S> <C> <C>
Item 1. Business................................................................................. 1
Item 2. Properties............................................................................... 25
Item 3. Legal Proceedings........................................................................ 25
Item 4. Submission of Matters to a Vote of Security Holders...................................... 25
Item 4.1 Executive Officers of the Registrant .................................................... 26
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................... 27
Item 6. Selected Financial Data.................................................................. 28
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 29
Item 7a. Quantitative and Qualitative Disclosures about Market Risk............................... 44
Item 8. Financial Statements..................................................................... 45
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 70
PART III
Item 10. Directors and Executive Officers of the Registrant....................................... 70
Item 11. Executive Compensation................................................................... 70
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 70
Item 13. Certain Relationships and Related Transactions........................................... 70
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 70
</TABLE>
<PAGE>
PART I
UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES IN THIS ANNUAL REPORT
ON FORM 10-K TO "MAXWELL," THE "COMPANY," "WE," "US," AND "OUR" REFER TO MAXWELL
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES; ALL REFERENCES TO "ELECTRONIC
COMPONENTS GROUP" REFER TO OUR SUBSIDIARY, MAXWELL ELECTRONIC COMPONENTS GROUP,
INC.; ALL REFERENCES TO "I-BUS/PHOENIX" REFER TO OUR SUBSIDIARY, I-BUS/PHOENIX,
INC., AND ITS SUBSIDIARIES; AND ALL REFERENCES TO "PUREPULSE" REFER TO OUR
SUBSIDIARY, PUREPULSE TECHNOLOGIES, INC. THIS FORM 10-K MAY CONTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN ANY
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" HEREIN. DISCUSSIONS
CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE MATERIAL SET
FORTH UNDER "ITEM 1. BUSINESS," AND "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AS WELL AS WITHIN
THIS FORM 10-K GENERALLY.
ITEM 1. BUSINESS
OVERVIEW
Maxwell develops, manufactures and markets high reliability electronic
components and power and computing systems for use in the transportation,
telecommunications, consumer and industrial electronics, medical and
aerospace industries. Products include PowerCache-Registered Trademark-
ultracapacitors, electromagnetic interference filters for implantable medical
devices, radiation-shielded microelectronics and custom power and computing
systems for original equipment manufacturers, or OEMs.
INDUSTRY
We have focused our business on the following areas:
- power delivery components;
- high reliability specialized electronic components for medical, space
and military applications; and
- high availability, customized, applied computing and power systems.
POWER DELIVERY
New power hungry electronic products such as digital cameras and wireless
communications devices, and increasing demand for electric power in motor
vehicles to assist vehicle acceleration and to operate on-board electronic
systems, are creating significant markets for energy storage and high power
delivery. In many applications, power demand varies widely from moment to
moment. Typically, peak power demand is much greater than the average power
requirement. For example, automobiles require much more power to accelerate from
a stop than to maintain a constant speed. In other applications, such as in a
digital camera, more power is needed to operate the flash than to store images
in memory.
Engineers generally address peak power needs by designing the primary
energy source, such as an engine or a battery system, to the size needed to
provide for peak demands, even if those demands occur for only a few seconds.
Building an entire system based on peak power needs, rather than designing for
the average power requirement, is costly and inefficient. Such systems can be
significantly improved by storing electrical energy generated from a primary
energy source such as an engine or battery and then delivering that energy in
controlled high power bursts only when high power is required. Such high power
delivery provides electrical systems with dynamic power range to meet peak power
demands for periods of time ranging from fractions of a second to several
minutes. This enables new system functions, reduces system size and cost and
improves performance.
1
<PAGE>
Many markets and applications can benefit from high power delivery
components that:
- store large amounts of electrical energy;
- are in a small, lightweight package;
- operate reliably at extreme temperatures;
- can discharge and recharge in less than a second or provide power as
required for up to several minutes;
- deliver high power;
- require low maintenance; and
- have minimal environmental issues associated with disposal.
Following are some of the currently identified markets and applications for
high power delivery components:
<TABLE>
<CAPTION>
MARKET APPLICATIONS
-------------------------------------------- ---------------------------------------------------------------
<S> <C>
Automotive/transportation - Energy storage and peak power to assist acceleration and to
recapture energy from braking in hybrid internal
combustion/electric buses, trucks and automobiles; energy
storage and on demand power for on-board electrical systems.
- Peak power, energy storage and braking energy recapture for
new electric braking systems for locomotives and railroad
cars.
Battery enhancement - Energy storage and on-demand peak power for consumer
electronic devices such as digital cameras, toys, wireless
communications devices, scanners and remote transmitters.
Alternative energy generation - Starting power, peak load buffering and energy storage to
optimize performance of alternative energy generation
systems, such as fuel cells and microturbines.
Uninterruptible power supply systems power. - Supplement or replace battery
Industrial electronics - Low cost, low maintenance replacement for mechanical drives
in actuators and hydraulic devices.
</TABLE>
Any other application that requires the storage of energy and the discharge
of highly variable amounts of power is a potential market for power delivery
components. We expect that components designed to meet these power delivery
requirements will capture an increasingly larger and more important segment of
the energy storage market.
EMI FILTERING OF IMPLANTABLE MEDICAL DEVICES
Electromagnetic interference, or EMI, generated by cellular phones,
security systems, microwave ovens, embedded computing systems and other
electronic devices can disrupt the safe operation of pacemakers and other
implantable medical devices. EMI can enter implantable devices via wire
feedthrough sensors that carry signals from the body into the device, causing
malfunctions.
2
<PAGE>
In 2000, safety issues associated with EMI from cellular telephones
prompted the Association for the Advancement of Medical Instrumentation, or
AAMI, and the United States Food and Drug Administration, or FDA, to adopt
standards requiring manufacturers of cardiac pacemakers and implantable
defibrillators to demonstrate that their products are immune to EMI. Devices
that do not demonstrate immunity to strong electromagnetic fields must carry a
warning related to the use of cellular telephones. Similar standards are being
considered by regulatory authorities in Europe and other jurisdictions.
Manufacturers of implantable devices need small, high reliability
components that block EMI from entering implantable devices via feedthrough
sensors without interfering with signals from the body. Expertise in power
electronics, EMI filtering and materials science, particularly in ceramics, is
necessary to produce filters that provide the required immunity to EMI from
cellular telephones and other frequently encountered devices, allowing
implantable device manufacturers to comply with the new standards.
Current North American sales of filtered and unfiltered feedthroughs are
estimated at $50 million annually, with a historic yearly growth rate of
approximately 20 percent. We expect this market to expand significantly as the
medical implantable device industry introduces new products such as congestive
heart failure devices, devices to control tremors associated with neurological
disorders such as Parkinson's disease and epilepsy, and hearing augmentation
devices. We believe that the portion of this market represented by filtered
feedthrough sales will increase as a result of recent regulatory developments in
the U.S. and other jurisdictions.
RADIATION-SHIELDED MICROELECTRONICS
Manufacturers of satellites and other spacecraft and military vehicles
require on-board microelectronics that meet specific functional requirements and
will operate reliably in environments in which they may encounter radiation. In
the past, microelectronics for these special applications used
radiation-hardened silicon. The supply of radiation-hardened silicon is
diminishing because there are fewer fabricators of specialty silicon. As a
result, demand for off-the-shelf silicon, protected in radiation-shielded
packages, is growing. Radiation-shielded off-the-shelf silicon provides higher
functionality at lower costs than radiation-hardened silicon. The ability to
provide radiation-shielded silicon requires expertise in power electronics,
custom integrated circuit design, silicon selection, radiation shielding and
high quality assurance testing.
Current worldwide sales of radiation-shielded microelectronics for the
satellite market are estimated at more than $500 million annually, with a
historic yearly growth rate of approximately nine percent. An additional large
market is emerging for the replacement of radiation-hardened microelectronics in
military vehicles with commercial off-the-shelf microelectronics protected in
radiation-shielded packages. This market is emerging as the service life of
military vehicles, such as armored vehicles, ships and aircraft, extends beyond
the operational life of on-board electronics. The market is driven by the lack
of availability of radiation-hardened silicon and the desire to upgrade on-board
electronics with modern microprocessors produced with commercial silicon, which
is not radiation-hardened.
APPLIED COMPUTING AND POWER QUALITY SYSTEMS
High reliability applied computing systems and power quality systems are
required to support larger systems for telecommunications, Internet
infrastructure, broadcasting and industrial automation. Many such systems are
responsible for mission critical applications that require "five nines", or
99.999% availability. This high availability equates to approximately five
minutes of down time per year for a system operating 24 hours a day, seven days
a week.
Applied computing systems provide a platform to perform specific functions
within a larger system made by an OEM. OEMs generally focus their efforts on
overall system design and integration, including application-specific software
and network support and service. OEMs frequently outsource the design and
manufacture of the applied computing and power products that will be part of the
larger system being supplied by the OEM to the end customer.
3
<PAGE>
To satisfy both functional and high availability requirements, power and
computing solutions generally require customization. Also, as time-to-market is
critical for many such applications, rapid design and production capabilities
are required of suppliers providing these systems. Therefore, the proliferation
of complex electronics applications has created attractive markets for
specialized applied computer manufacturers and power product manufacturers who
possess the engineering and manufacturing know-how and experience to provide
design intensive, custom solutions.
In 2000, the market for applied computing systems incorporating ISA/PCI
(industry standard architecture/peripheral components interconnect) and cPCI
(compact peripheral components interconnect) architectures is estimated to have
been approximately $1 billion. The market for such systems is estimated to grow
to approximately $2.5 billion by 2004, with cPCI being the fastest growing
industry standard architecture. In 2000, the market for uninterruptible power
supplies, or UPS, and power protection and power quality products of three
kilovolts and lower, which is the power range most appropriate to support
applied computing requirements, is estimated to have been approximately $2.8
billion, growing to approximately $4.5 billion by 2004.
MAXWELL'S SOLUTIONS
Our solutions apply our expertise and proprietary technology in power and
computing at both the component level and the systems level for specialized,
high value applications where high reliability and high availability are
required by the customer. We intend to be a leading supplier of power and
computing components and systems for such specialized, high-value applications.
ULTRACAPACITORS
We are a leader in commercialized ultracapacitor technology.
Ultracapacitors are ideally suited for applications that require repeated bursts
of electric power for fractions of a second up to several minutes. With no
moving parts, ultracapacitors provide a simple, highly reliable solution to
buffer short term mismatches between power available and power required.
Unlike batteries, capacitors can be recharged from any power source as
quickly as they are discharged, and they operate reliably for up to 10 years
through hundreds of thousands of discharge/recharge cycles with minimal
degradation of performance. Traditional capacitors discharge power too rapidly
to be suitable for many power delivery applications. Ultracapacitors have
greater energy storage capability than traditional capacitors and can discharge
power over time periods ranging from fractions of a second to several minutes.
Used in tandem with batteries, ultracapacitors can provide bursts of power to
meet power demand peaks, enhance performance and significantly extend battery
life. When alternative sources of recharge energy are available, ultracapacitors
can replace batteries entirely.
We offer our proprietary PowerCache ultracapacitors in several form
factors, ranging from five-farad postage stamp size cells to 2,500-farad large
cells that measure 2" x 2" x 6". We are able to supply these cells in volumes
and at price points that are opening numerous market opportunities for
ultracapacitors to satisfy power delivery requirements. For example, in December
2000 we entered into a supply agreement with General Motors Corporation to
supply our large cell ultracapacitors for incorporation into the power trains of
hybrid diesel electric buses and trucks produced by GM's Allison Transmission
division.
We are redesigning our large cell ultracapacitors to double power density
and dramatically reduce cost. The new design incorporates proprietary technology
in a form factor suitable for high speed automated manufacturing. The goal of
this initiative is to penetrate cost sensitive applications in high volume
markets (millions of cells per year by 2004).
EMI FILTERED FEEDTHROUGHS
We design, manufacture and market proprietary ceramic filter capacitors
that protect implantable medical devices such as cardiac pacemakers and
implantable defibrillators from EMI. We integrate our filters with wire
feedthrough sensors to make filtered feedthroughs. Our EMI filtered feedthroughs
permit manufacturers of implantable medical devices to satisfy new FDA test
standards for EMI. Our EMI filter technology and its use to block EMI from
interfering with implantable medical devices are protected extensively by
patents in the U.S. and in many foreign jurisdictions.
4
<PAGE>
We currently supply EMI filtered feedthroughs for pacemakers and
defibrillators to manufacturers of implantable medical devices, including
Guidant Corporation and the Pacesetter division of St. Jude Medical, Inc. In the
future, we expect to supply filtered feedthroughs for new types of implantable
devices to control conditions such as congestive heart failure, tremors
associated with neurological disorders such as Parkinson's disease and epilepsy,
and to augment hearing.
RADIATION-SHIELDED MICROELECTRONICS
We design, manufacture and market radiation-shielded microelectronics,
including integrated circuits, power modules and single board computers,
primarily for the satellite and spacecraft market. We engineer customized
microelectronics together with highly adaptable, proprietary packaging and
shielding techniques to allow OEMs to use powerful, low cost, commercial
off-the-shelf components protected with the required level of radiation
shielding for the environment in which they are to be deployed.
We are a supplier of radiation-shielded microelectronics in volumes that
have opened market opportunities in the satellite and spacecraft market. We also
are seeking to penetrate the military electronics replacement market.
APPLIED COMPUTING AND POWER QUALITY SYSTEMS
We design, manufacture and market a diverse line of application-ready
computing platforms and single board computers based on advanced, industry
standard electromechanical architectures. OEMs integrate our products into
larger systems for telecommunications, Internet infrastructure, broadcasting and
industrial automation.
Our engineering and design capabilities allow quick-turn customization of
boards, systems, and enclosures for customer specific applications. In 2001, we
are introducing several new computing products that support multiple operating
systems such as Windows, Windows NT, Windows 2000, Solaris VX Works and Linux
and provide redundant, high availability computing for mission critical
applications requiring 99.999% availability.
We believe that power technology, such as uninterruptible power, is a
requirement for providing high reliability applied computing systems. In
addition to the discrete power quality products we now offer, we have computing
products in development and scheduled for introduction by year end that will
incorporate power protection capabilities within the computer chassis. These
built-in power protection features will include up to 10 seconds of
"ride-through" protection for brief power fluctuations in some designs and up to
10 minutes of backup power in other designs. These products will incorporate our
PowerCache ultracapacitors, either alone or in combination with batteries. We
recently introduced rack-mount UPS products, and we are developing redundant DC
to AC power inverters as part of high reliability integrated power and computing
solutions for our applied computing OEM customers.
Our extensive design and integration experience and capabilities shorten
time-to-market for OEMs and allow them to outsource these functions to us. This
permits them to concentrate on differentiating, value-added capabilities they
bring to an overall system or network application.
STRATEGY
Our strategy is to apply our expertise and proprietary technology in power
and computing at both the component level and the systems level to develop,
manufacture and market products with specialized, high value applications where
high reliability and high availability are necessary for customer value.
BE A RELIABLE, LOW-COST, HIGH-VOLUME SUPPLIER OF TECHNOLOGICALLY ADVANCED,
PROPRIETARY PRODUCTS
We have expanded and now are automating some of our manufacturing
capabilities to meet anticipated demand and reduce per unit manufacturing costs.
We invested more than $11 million in 2000 to build and outfit state-of-the-art
production facilities, including information technology infrastructure, and
implement new manufacturing and business processes and systems to increase
production capacity and improve efficiency and product quality. We are now able
to produce commercial quantities of all of our products.
5
<PAGE>
EXPAND ADDRESSABLE MARKET FOR ULTRACAPACITORS
We will pursue new applications for our PowerCache ultracapacitors. We will
use our new low-cost, high-volume manufacturing capabilities to increase volumes
and achieve competitive price points for our components. We believe this will
open new market opportunities for our ultracapacitors to become industry
standard components for power delivery, displacing competing component products.
REFINE AND IMPROVE OUR PROPRIETARY TECHNOLOGIES
We will continue our 35-year history of developing proprietary
technologies. Our product development efforts will focus both on enhancing
existing products and developing technologically advanced products to meet
customer demands. New products will be designed to meet our identified market
opportunities, capitalizing on existing design-in wins and targeting OEMs' next
generation products. We also will continue to enhance our existing proprietary
technologies to make our products more reliable, more functional and less
expensive to manufacture in order to meet the performance, form factor and
pricing demands of our customers.
CONTINUE TO DEVELOP LEADING EDGE POWER AND COMPUTING SYSTEMS
We are positioned to capitalize on increasing demand for high availability
power and computing products across a range of applications, and from growing
acceptance of the cPCI architecture. We will provide enhanced solutions for our
customers by integrating our proprietary power quality technologies into our
computing systems. We provide customers with quick turn, customized solutions
and we will continue to develop stylized modular components to increase
efficiency and allow faster response time to meet customer application
requirements.
EXPAND AND IMPROVE INTERNATIONAL OPERATIONS TO MARKET AND SELL OUR PRODUCTS
We intend to pursue international markets as key avenues for growth and
increase the percentage of our sales generated in international markets. In
2000, our international sales accounted for 25.2% of total sales, as compared to
24.7% of total sales in 1999. As part of our plan to pursue international
markets, we will expand and improve our manufacturing, assembly, distribution,
marketing and sales operations in England, France and Germany to increase our
sales penetration in Europe. We believe we are in a position to capitalize on
market opportunities and enhance brand recognition in local markets through our
local presence in Europe. Increased local assembly and marketing will allow us
to avoid import tariffs and access local private or public sector financing if
opportunities to expand our operations arise. We also intend to develop
distribution, marketing and sales operations in Asia to increase sales in the
Asia-Pacific region.
PRODUCTS AND CUSTOMERS
We sell our electronic components products to OEMs serving numerous
markets, including transportation, consumer and industrial electronics, medical
and aerospace. We sell our applied computing products primarily to OEMs serving
the telecommunications and Internet infrastructure, broadcast and industrial
automation markets. We sell power distribution and power quality products mainly
to OEMs serving the medical and industrial markets. Following are descriptions
of our key products and the markets they address.
ELECTRONIC COMPONENTS GROUP
ULTRACAPACITORS
Our Electronic Components Group designs, manufactures and markets
PowerCache ultracapacitors. Capacitors are passive electronic components that
store and discharge electricity. Our PowerCache ultracapacitors store high
quantities of electrical energy in a high density electric field through a
proprietary carbon-based material that has large surface area (more than three
thousand square meters per gram of carbon) to permit high electrical storage
density in a small package. As a result, our products have two to four times
greater power density than competing ultracapacitors or supercapacitors.
6
<PAGE>
PowerCache ultracapacitors provide peak and dynamic power for applications
that require periodic bursts of power, whether for an internal
combustion/electric hybrid drive train, a fuel cell system or a battery pack for
industrial or consumer electronics. Ultracapacitors can be charged from any
primary energy source, such as a battery, engine, fuel cell or electrical
outlet, and deliver high power on demand. Virtually any device with peak power
demands greater than its average power requirement is a candidate for our
ultracapacitors as part of its power delivery system.
ULTRACAPACITOR APPLICATION MODEL
[GRAPHIC]
Although batteries currently are the prevailing energy storage device,
ultracapacitors have significant performance advantages over batteries,
including:
- delivery of up to 10 times the power;
- lower weight for storage of comparable electrical energy;
- deeper discharge and faster recharge;
- more reliable operation in extreme temperatures (-40 degrees C to +75
degrees C); and
- up to 10 times the useful life.
Our PowerCache ultracapacitors can be linked together in modules or banks
to meet the energy storage and peak power requirements of applications ranging
from hybrid internal combustion/electric buses, trucks and automobiles to fuel
cells, actuators, toys and hand-held consumer electronic devices.
We are pursuing opportunities to incorporate our ultracapacitors into
hybrid diesel/electric and gasoline/electric power trains that either are being
commercialized now for buses and large trucks or are in development for sport
utility vehicles, light trucks and automobiles. The hybrid internal
combustion/electric power train depicted below shows how electrical energy will
be generated and stored in vehicles and supplied to the power train.
The hybrid power train has a large alternator connected to the crankshaft
that generates electricity when the alternator engages the crank shaft to help
brake the vehicle or when the engine is running. The electricity produced by the
alternator is stored in a power pack containing approximately 300 to 500
PowerCache ultracapacitors for buses or large trucks and 18 to 20
ultracapacitors for automobiles, light trucks or sport utility vehicles. The
electrical energy stored in the ultracapacitors is then sent back through the
alternator to turn the crankshaft to accelerate the vehicle. The power pack also
powers on-board electrical systems, such as power steering, braking, locks,
seats, air conditioning, mobile communications and audio systems.
7
<PAGE>
HYBRID INTERNAL COMBUSTION/ELECTRIC POWER TRAIN
[GRAPHIC]
- power pack drives crankshaft motor to assist initial acceleration;
- power pack starts internal combustion engine to provide cruising
power;
- crankshaft alternator charges the power pack;
- control electronics manage power storage and usage;
- power pack powers electrical system, operating steering, braking,
heating, air conditioning, mobile communications, stereo, etc.; and
- alternator engages the crankshaft to assist braking, generate energy
and store it in the power pack.
Hybrid power train designs such as the one depicted above are part of the
future plans of all of the major automotive companies as the industry seeks to
improve fuel economy, reduce emissions and graduate from 12-volt electrical
systems to 42-volt systems. The dramatic increase in electrical demand in modern
automobiles for features such as power steering, air conditioning, global
positioning and audio systems has initiated the redesign of electrical systems
to 42 volts. All of the major automotive companies have announced plans to
introduce 42-volt systems and hybrid power trains in automobiles beginning in
2004 or 2005.
All of the 42-volt hybrid power train systems require an energy storage
system that can recapture energy from braking, satisfy peak power requirements,
operate reliably in extreme temperatures, last the life of the vehicle and
require low maintenance. We believe that ultracapacitors uniquely satisfy all of
these requirements and have the opportunity to become an industry standard
energy storage and power delivery device for such systems.
In December 2000, we entered into a supply agreement with General Motors
Corporation to supply our large cell ultracapacitors for incorporation into the
power trains of hybrid diesel/electric buses and trucks produced by GM's Allison
Transmission division. Allison has reported that by supplementing the primary
diesel engine with an ultracapacitor-powered electric motor that assists initial
acceleration and recaptures and reuses braking energy, fuel efficiency of buses
and trucks can be increased by more than 50 percent, particulate emissions
reduced by approximately 90 percent and nitrogen oxide emissions reduced by more
than 50 percent, as compared to conventional diesel power trains.
8
<PAGE>
Allison selected our PowerCache ultracapacitors over conventional and
advanced batteries because our ultracapacitors:
- last up to 10 times as long;
- weigh up to 2000 pounds less per vehicle;
- operate reliably at extreme temperatures (-40 degrees C to +75 degrees
C);
- recapture more energy from vehicle braking systems;
- deliver up to 10 times the power;
- require lower maintenance; and
- reduce environmental issues associated with disposal.
Our small cell ultracapacitors have been designed into, or are being
considered for, consumer electronics such as toys and digital cameras,
industrial electronics such as actuators, remote transmitting devices and bar
code scanners, and transportation electronics such as electric brakes for trains
and safety features for automobiles. We anticipate that several of the end
products into which our ultracapacitors have been designed will go into
production in 2001. We currently are installing an automated production line for
small cell ultracapacitors to position us to meet anticipated demand in 2001.
EMI FILTERED FEEDTHROUGHS
Our Electronic Components Group also integrates our proprietary ceramic
capacitor filters with wire feedthroughs that we source from third party
suppliers to make filtered feedthroughs that protect implantable medical
devices, such as cardiac pacemakers and implantable defibrillators, from EMI.
EMI produced by cellular telephones, microwave ovens and other electronic
equipment can enter implantable devices via wire feedthrough sensors that carry
signals from the body, causing the devices to malfunction. We design and produce
integrated filtered feedthrough components that meet implantable device
manufacturers' specifications for various types of implantable devices.
As diagramed below, our EMI filters prevent EMI from entering the pacemaker
or other implantable device via feedthrough wires.
FILTERED FEEDTHROUGH PACEMAKER
[GRAPHIC] [GRAPHIC]
We are a leading manufacturer of EMI filtered feedthroughs that permit
manufacturers of implantable medical devices to satisfy AAMI and FDA testing
standards for immunity to EMI. Our current OEM customers for filtered
feedthroughs include Guidant Corporation and the Pacesetter division of St. Jude
Medical, Inc.
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Our EMI filter technology and its use to block EMI from interfering with
implantable medical devices are protected extensively by patents, and additional
patent applications are pending in the U.S. and in many foreign jurisdictions.
RADIATION-SHIELDED MICROELECTRONICS
Our Electronic Components Group also designs, manufactures and markets
radiation-shielded microelectronics, including integrated circuits, power
modules and single board computers, primarily for the satellite and spacecraft
market. We engineer customized microelectronics together with highly adaptable
proprietary packaging and shielding techniques to allow OEMs to use powerful,
low cost, commercial off-the-shelf components, protected with the required level
of radiation shielding for the orbit or environment in which they are to be
used.
We supply microelectronics to multiple satellite and space vehicle
manufacturers, including Lockheed Martin Corporation and The Boeing Corporation.
We also are pursuing opportunities for the replacement of original
microelectronics in military battlefield vehicles, aircraft and ships, which
represents a large potential market for our radiation-shielded microelectronics.
I-BUS/PHOENIX POWER AND COMPUTING SYSTEMS
I-Bus/Phoenix designs, develops and manufactures high availability custom
computing systems and power quality products. Combining our computing systems
and power quality and reliability expertise allows us to offer superior high
availability computing products and innovative power quality solutions. Our
current product offerings include applied computing systems, power distribution
systems and power conditioning units. We sell our products mainly to OEMs
serving the telecommunications and Internet infrastructure, industrial
automation, broadcasting and medical imaging markets.
As part of our restructuring in 2000, we expanded I-Bus/Phoenix's
engineering and product development capabilities. We also acquired Gateworks
Corporation, a CPU engineering and board design company. As a result of adding
these board design capabilities and increasing our investment in engineering and
product development, we are scheduled to introduce several new products this
year. Incorporating our competencies in the latest system architecture,
including cPCI, our computing systems will offer additional flexibility and
reliability to end users. For example, to promote high availability, these new
systems are designed to allow key components to be "hot-swapped," meaning that
they can be replaced without shutting down the system.
We view power reliability as an enabling technology for high availability
computing. Accordingly, we have computing products in development and scheduled
for introduction in late 2001 that will incorporate power protection features
built into the computer chassis itself to provide up to 10 seconds of
ride-through power with certain designs and up to 10 minutes of backup power
with other designs. Such embedded power solutions will incorporate our
PowerCache ultracapacitors, either alone or in combination with hot-swappable
batteries. We recently introduced UPS products designed to fit into computer
server racks to facilitate integration of power reliability features to support
high availability computing systems for our OEM customers. We also are
developing redundant DC to AC power inverters to bring additional power
reliability features to integrated applied computing system solutions. Our
extensive design and integration experience and resources can shorten
time-to-market for OEMs and allow them to outsource these functions entirely to
us so that they can concentrate on the differentiating value-added capabilities
they bring to the overall system application.
I-Bus/Phoenix also designs, develops and manufactures power conditioning
and power distribution units for medical imaging equipment and power protection
and power conditioning systems for other industrial applications. At present,
many of our power quality products are based on our customers' designs. We are
developing improved power quality products based on our own designs that intend
to improve performance and reduce cost for our customers while also permitting
us to expand sales and improve product line gross margins.
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The following table describes new power and computing products scheduled
for introduction in 2001.
<TABLE>
<CAPTION>
NEW PRODUCTS/KEY FEATURES MARKET APPLICATIONS
------------------------------------------ -----------------------------------------------
<S> <C>
cPCI systems - hot-swappable and/or Telecommunications
redundant cluster systems Central office
ISA/PCI systems Application service providers
- Windows/Pentium base Voice over Internet protocols
- Solaris/Sparc base Internet service providers
- Redundant power input module for Computer telephony
cPCI Broadcast
DC to DC converter with ride-through power Embedded computers
- Embedded in the CPU board High availability servers
- 10 second ride-through via board- Medical equipment
mounted PowerCache ultracapacitors Digital signal processing systems
- Power fail output Alarm modules
- Regulated DC output
Embedded UPS Embedded computers
- Embedded in the server chassis High availability servers
- Hot-swappable battery backup Ride-through to system quiescence
Ride-through/bridge to alternate power source
High frequency power conditioner Industrial equipment
- AC to AC operation Broadcast industry equipment
- Transient surge suppression Medical equipment
- Rack-mountable Semiconductor fabrication
- Electrical frequency conversion
- AC voltage regulation
Rack-mount UPS High availability servers
- Thin chassis design Industrial process equipment
- Standard and extended backup times Telecom equipment
- Power management software Emergency ride-through power
</TABLE>
We supply applied computing systems or power systems to many leading OEMs,
including Motorola, Inc., Compagnie Finciere Alcatel, Deutsche Telekom AG,
Rockwell International Corporation, the GE Medical Systems division of the
General Electric Company, Toshiba Corporation and Siemens AG.
MANUFACTURING
We manufacture our electronic components products principally at facilities
located in San Diego, California, and Carson City, Nevada. Our power and
computing systems are produced at facilities in San Diego, California, Havant
and Uckfield, England, Sophia, France and Munich, Germany.
During the year ended December 31, 2000, we restructured our operations,
divesting certain non-core businesses and consolidating our core businesses into
the commercial business units described above. We also invested more than $11
million in 2000 to build and outfit state-of-the-art production facilities,
including information technology infrastructure, and implement new manufacturing
and business processes and systems to increase our production capacity and
improve efficiency and product quality. We completed this restructuring in
October 2000. We believe that Maxwell now has ample production capacity to meet
current demand for our products and any near term increase in demand.
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We consolidated our ultracapacitor and radiation-shielded microelectronics
manufacturing operations into a new 46,000 square foot facility in San Diego in
September 2000. New manufacturing lines for our EMI filtered feedthrough
manufacturing operations were completed at our 25,000 square foot facility in
Carson City, Nevada, in October 2000. Our power and computing systems
manufacturing operations moved into an expanded and refurbished 84,000 square
foot facility in San Diego in October 2000. A new 20,000 square foot production
and warehousing facility planned in Tangmere, England, will replace our existing
Havant facility and provide a distribution center for products and materials for
the I-Bus/Phoenix operations in France and Germany.
All of our new production facilities have been designed with flexible
overhead power grids and modular manufacturing cells and equipment that allow
factory operations to be reconfigured rapidly at minimal expense. We believe
that our manufacturing facilities and resources give us sufficient capacity to
meet near term demand for all of our products.
ULTRACAPACITORS
We currently are installing automated production machinery to make our
small cell ultracapacitors. Together with Ismeca, Inc., a leading manufacturer
of high speed automated manufacturing equipment, we designed, built, integrated
and tested this equipment over the course of the past year. This automated
production line is expected to give us production capacity of approximately
50,000 small cells per day. In 1999, we could produce only approximately 50
small cells per day. In 2000, with some mechanized assistance, we were able to
increase production of small cells to up to 5,000 cells per day. We have also
increased the production capacity for our large cell ultracapacitors from
approximately 100 cells per day in early 2000, to more than 400 cells per day
currently, with improved yield. We are currently redesigning our large cells to
incorporate lower cost materials and facilitate high-speed automated
manufacturing. In addition to significantly reducing material cost, the new
design will reduce the number of components required to make a finished cell and
reduce the number of manufacturing process steps to a fraction of those required
for our current design. Our objective with all of our ultracapacitor products is
to be the most reliable supplier of these products for customer applications
that require high power density in small packages for burst mode power delivery.
In 1998, we entered into a collaborative agreement with EPCOS AG, formerly
Siemens Matsushita Components GmbH, a joint venture of Siemens AG and Matsushita
Electrical Industries. The agreement provides for the sharing of PowerCache
ultracapacitor technology and ongoing manufacturing developments by both parties
and the nonexclusive licensing right for EPCOS to manufacture products based on
PowerCache ultracapacitor technology and sell them worldwide except in the
United States, Canada and Mexico. We received initial license fees and are
entitled to ongoing royalties under the agreement.
EMI FILTERED FEEDTHROUGHS
In 2000, we redesigned a major portion of our facility in Carson City,
Nevada to manufacture EMI filtered feedthroughs for the implantable medical
device market. Our production capacity for EMI filtered feedthroughs has
increased from approximately 500 per week at the beginning of 2000 to our
current weekly capacity of approximately 2,000. Our factory design will allow us
to continue to increase capacity to match demand and position us to be the
largest, most reliable supplier of EMI filtered feedthroughs for the implantable
medical device market.
RADIATION-SHIELDED MICROELECTRONICS
In 2000, we reengineered our production processes for radiation-shielded
microelectronics, resulting in dramatic improvement in cycle time to produce and
test microelectronics and a significant increase in yield of components that
comply with customer-required quality and performance standards. We believe we
now have top tier manufacturing capabilities for highly reliable,
radiation-shielded power and computing microelectronics for the space and
military electronics replacement markets.
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POWER AND COMPUTING SYSTEMS
We assemble applied computing products at our San Diego, California,
Havant, England, Sophia, France, and Munich, Germany facilities. We manufacture
sheet metal enclosures for the systems we sell in Europe and some that we sell
in the U.S. at our Uckfield, England facility. We rely on third party suppliers
for the fabrication and assembly of printed circuit boards and major
subassemblies. We assemble and test power quality products at our San Diego
production facility. We manufacture harnesses and transformers for power quality
products and contract with third party suppliers for sheet metal and printed
circuit boards.
SUPPLIERS
We generally purchase components and materials, such as electronic
components, dielectric materials and enclosures of metal and plastic, from a
number of suppliers. For certain products, we rely on a limited number of
suppliers or a single supplier. Our applied computing business relies on single
qualified suppliers for some of its critical components, primarily CPU boards
and some power supplies. The EMI filtered feedthroughs we produce rely primarily
on one domestic source for wire feedthrough casings to which we attach our EMI
filters. Although we believe there are alternative sources for components and
materials currently obtained from a single source, there can be no assurance
that we will be able to identify and qualify alternative suppliers in a timely
manner. We seek to reduce our dependence on sole and limited source suppliers.
MARKETING AND SALES
Across all our product lines, we market and sell components and systems for
integration by OEMs into larger systems and other end products through both
direct and indirect sales organizations in North America, Europe and Asia. As
the introduction of emerging technologies requires customer acceptance of new
and different technical approaches, and many of our OEM customers have rigorous
vendor qualification processes, the initial sale for our products can take weeks
or months.
Our principal marketing strategy is to cultivate long-term customer
relationships by becoming a preferred supplier with an opportunity to compete
for multiple supply agreements and follow-on contracts with our key OEM
customers. As these design-in sales tend to be technical and engineering
intensive, we organize customer specific teams composed of sales, engineering,
research and development and other technical personnel to work closely with our
customers across multiple disciplines to satisfy their requirements for form,
fit, function, environment and mechanics. As time-to-market often is the primary
consideration in our customers' decisions to outsource components or systems and
in their selection of a vendor, the initial sale and design-in process
frequently evolves into ongoing account management to ensure on time delivery
and responsive technical support and problem solving.
Our business units conduct marketing programs intended to position and
promote their products, including trade shows, seminars, advertising, public
relations, distribution of product literature and websites on the Internet. We
maintain a central marketing communications group to support our marketing
programs. The group designs and develops marketing materials, negotiates
advertising media purchases, writes and places product news releases and manages
our marketing websites.
COMPETITION
Each of our business operations has competitors, many of whom have longer
operating histories, significantly greater financial, technical, marketing and
other resources, greater name recognition, and a larger installed base of
customers. In some of the target markets for our emerging technologies, we face
competition from products utilizing alternative technologies.
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<PAGE>
ULTRACAPACITORS
Although a number of companies are developing capacitor technology, we have
two principal competitors in ultracapacitor or supercapacitor products:
Panasonic, a division of Matsushita Electric Industries, Ltd.; and Ness
Corporation, a privately held company. The key competitive factors are price,
performance (energy stored and power delivered per unit volume), form factor,
operational lifetime and breadth of product offerings. Our PowerCache
ultracapacitors have two to four times greater power density and longer
operational life than competing, commercially available ultracapacitors and
supercapacitors. We believe that we also compete favorably with respect to the
other competitive factors identified above. Ultracapacitors also compete with
other technologies, including high power batteries, in power quality and
automobile load-leveling applications, with flywheels in power quality and
automotive applications (including as a power source for electric vehicles) and
with superconducting magnetic energy storage in power quality.
EMI FILTERED FEEDTHROUGHS
Our primary competitor in the EMI filter capacitor business is AVX Filter,
a subsidiary of Kyocera Corporation. Competitive factors in this market include
price, consistent availability, breadth of electromagnetic spectrum filtered and
component reliability. We believe that we compete favorably with respect to each
of these factors. Our EMI filter technology and its use to block EMI from
interfering with implantable medical devices are protected extensively by
patents, including additional patent applications, in the U.S. and in many
foreign jurisdictions.
RADIATION-SHIELDED MICROELECTRONICS
Our radiation-shielded monolithic integrated circuits (ICs), application
specific integrated circuits (ASICs), processors and single board computers
compete with the products of traditional radiation-hardened IC suppliers such as
Honeywell Corporation and Lockheed Martin Corporation. We also have competition
from commercial suppliers with product lines that have favorable radiation
tolerance characteristics, such as Temic Instruments B.V. in Europe and National
Semiconductor and Analog Devices Inc. Our proprietary radiation shielding
technology enables us to provide flexible, low cost radiation protection
solutions utilizing the most advanced commercial off-the-shelf electronic
circuits. In that market segment, we compete with high reliability packaging
houses such as Austin Semiconductor, Inc., White Microelectronics, Inc. and
Teledyne Microelectronics, a unit of Teledyne Technologies, Inc. for monolithic
and multichip modules.
POWER AND COMPUTING SYSTEMS
Our primary competitors in the applied computing markets include RadiSys
Corporation, SBS Technologies, Inc., Diversified Technology, Inc., American
Advantech Corp., ICS Advent, Teknor Applicom, a Kontron company, and Trenton
Technology, Inc., among others, resulting in a highly fragmented market in which
no one entrant is dominant. Motorola Inc. and the Force Computer division of
Solectron Corporation have entered the cPCI market, and represent strong
competition in the applied computing market based on cPCI architecture.
Competitive factors in this market include price, custom design expertise,
functionality, fault tolerance and time-to-market. We believe we compete
favorably with respect to each of these factors.
The markets for our power quality products are highly fragmented, with no
single dominant participant. In the medical and industrial markets in which our
product offerings are concentrated, we compete with several participants,
including Liebert Corporation, OnLine Power, Inc., Teal Electronics Corporation
and Controlled Power Corporation. We believe we compete favorably in these
markets on price, quality and functionality.
RESEARCH AND DEVELOPMENT
We maintain active research and development programs to improve existing
products and to develop new products. For the year ended December 31, 2000,
research and development expenditures totaled approximately $8.7 million, as
compared to $6.4 million, $6.8 million and $5.8 million in the year ended
December 31, 1999, and in the fiscal years ended July 31, 1999 and 1998,
respectively. We intend to increase our investment in research and development
in calendar year 2001 over prior years.
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<PAGE>
In general, our product development focuses on:
- enhancing existing products and developing technologically advanced
products;
- developing new products to meet identified market opportunities; and
- making our products more reliable, more compact and less expensive to
manufacture to meet the performance, form factor and pricing demands
of our customers.
Most of the current research, development and engineering activity of the
Electronic Components Group is focused on material sciences, including
electrically conducting and dielectric materials, ceramics and radiation
tolerant silicon and ceramic composites, to improve performance, reliability,
ease of manufacture and cost of our electronic components. Efforts also are
focused on product design for high volume manufacturing.
We currently are reengineering our large cell ultracapacitors to double
power density and dramatically reduce cost. The new design consists of
proprietary technology in a low cost, high capacity package. The new large cell
design also incorporates a form factor and assembly process suited for
high-speed automated manufacturing. The goal of this initiative is to penetrate
cost sensitive applications at very high volumes (millions of cells per year
beginning in 2004). The initiative involves product design, reduced material
cost and automated manufacturing.
I-Bus/Phoenix's research, development and engineering efforts are focused
on joint projects with OEM customers, resulting in customer computing and power
system level products tailored to customer requirements. We invest our resources
in the research and development of technology building blocks such as:
- CPU board design and applied modules and platforms;
- power conditioning, storage and distribution platforms;
- Design processes and tools; and
- high availability, application-ready systems integration capabilities,
including software operating systems.
Our engineering staff works closely with customers to operate as a "virtual
division" interacting with the customer's internal organization to develop
computing and power systems that satisfy specific customer requirements. We
typically retain the rights to any technology developed as part of joint design
programs.
INTELLECTUAL PROPERTY
As our commercial businesses expand, we are placing increased emphasis on
patents to provide protection for certain key technologies and products. Our
success will depend in part on our ability to maintain our patents, add to them
where appropriate, and to develop new products and applications without
infringing the patent and other proprietary rights of third parties, and without
breaching or otherwise losing rights in technology licenses we have obtained.
We have well established patent portfolios covering the various
technologies associated with our electronic components businesses, consisting of
22 issued patents and 18 patent applications in the United States. We also
routinely secure corresponding foreign patents in principal countries of Europe,
Asia and in Canada. Our power and computing systems business involves designs
based largely on industry standard architecture and patents have not been an
important competitive factor. This may change, however, as the designs to meet
high availability requirements become more complex and proprietary. We have
filed one patent application in this area and are pursuing others.
Establishing and maintaining proprietary products and technologies is a key
element of our success. Although we attempt to protect our intellectual property
rights through patents, copyrights, trade secrets and other measures, there can
be no assurance that these steps will be adequate to prevent misappropriation by
third parties, or will be adequate under the laws of some foreign countries,
which may not protect our proprietary rights to the same extent as do the laws
of the United States.
15
<PAGE>
We use employee and third party confidentiality and nondisclosure
agreements to protect our trade secrets and unpatented know-how. We require each
of our employees to enter into a proprietary rights and nondisclosure agreement
in which the employee agrees to maintain the confidentiality of all proprietary
Company information and, subject to certain exceptions, to assign to the Company
all rights in any proprietary information or technology made or contributed by
the employee during his or her employment. In addition, we regularly enter into
nondisclosure agreements with third parties, such as potential joint venture
partners and customers.
BACKLOG
Our backlog for continuing operations as of December 31, 2000 and 1999
amounted to approximately $36 million, and $34 million, respectively. Backlog
consists of firm orders for products not yet delivered. We expect to deliver
substantially all of our current backlog within 12 months.
GOVERNMENT REGULATION
Clinical and commercial application of our EMI filtered feedthroughs for
the implantable medical device market is subject to regulation by the FDA. The
FDA regulates pre-clinical and clinical testing, manufacture, labeling, storage,
distribution and promotion of food and medical products and processes. Our EMI
filters have been approved for use in cardiac pacemakers and implantable
defibrillators manufactured by certain medical device OEMs, and our filtered
feedthroughs are a component of new products being developed by our OEM
customers that are now undergoing clinical trials as part of the FDA approval
process.
Required testing and the preparation and processing of FDA applications may
take several years to complete. There is no assurance that the FDA will act
favorably, and we, or our customers may encounter significant difficulties or
costs in obtaining FDA approvals. Those costs or delays may preclude us from
marketing regulated products or may furnish an advantage to our competitors. The
FDA may also require post marketing testing and surveillance to monitor the
effects of approved products or place conditions on any approvals that could
restrict the commercial applications of our products. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing.
The testing, sale and application of our computing and power systems
require compliance and certification with a number of U.S. and foreign standards
for electromechanical systems, such as Underwriters Laboratories (UL), Canadian
Standards Association (CSA) and Committee European (CE). We incorporate
compliance with such standards into the quality assurance protocols in building
and testing our computing and power products.
Because of the nature of our operations and the use of hazardous substances
in some of our ongoing manufacturing and research and development activities, we
are subject to stringent federal, state and local laws, rules, regulations and
policies governing the use, generation, manufacturing, storage, air emission,
effluent discharge, handling and disposal of certain materials and wastes.
FOREIGN SALES
Our revenue from customers outside of the United States was $25.8 million
and $25.3 million in the years ended December 31, 2000 and 1999, respectively,
and $10.7 million, $24.0 million, and $14.8 million in the five months ended
December 31, 1999 and in the fiscal years ended July 31, 1999 and 1998,
respectively. Of the total foreign sales in the year ended December 31, 2000,
the five months ended December 31, 1999 and the fiscal years ended July 31, 1999
and 1998, $12.4 million, $5.6 million, $12.2 million and $7.8 million,
respectively, were attributable to sales to customers located in the United
Kingdom.
EMPLOYEES
At December 31, 2000, our continuing operations had 702 full-time
employees, including 293 employees within the Electronic Components Group, 377
within I-Bus/Phoenix and 32 at the corporate level. None of our employees is
represented by a labor union. We consider our relations with our employees to be
good.
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DISCONTINUED OPERATIONS - PUREPULSE TECHNOLOGIES
OVERVIEW - PUREBRIGHT PATHOGEN INACTIVATION
We are exploring strategic alternatives for our PurePulse subsidiary, which
we expect will result in the sale of all or a majority interest in the business
in 2001. PurePulse has been classified as a discontinued operation for financial
reporting purposes.
PurePulse is developing PureBright sterilization and purification systems
to inactivate viruses and other pathogens that contaminate products sourced from
human or animal tissues, such as plasma derivatives, transfusion blood
components, and biopharmaceuticals, and in the production of vaccines.
PureBright systems employ pulsed power technology to produce broad spectrum
pulsed light (BSPL) 90,000 times more intense than sunlight at sea level to
inactivate viruses and other pathogens while preserving the efficacy of
beneficial proteins and other therapeutic compounds.
Base material passes through a BSPL chamber and receives one or more
flashes to inactivate all viruses and other microbial contaminants in the
material. Each BSPL flash, lasting a fraction of a second, inactivates pathogens
in base materials without generating heat or other undesirable residual effects
in the sterilization process. PurePulse has developed PureBright systems that
are used commercially to sterilize medical products and packaging. Prototype
PureBright systems also have been developed to purify water.
PUREBRIGHT SYSTEM VS. CURRENT METHODOLOGIES
Producers of blood products, vaccines, biopharmaceuticals and other medical
products currently rely on screening tests to avoid the use of contaminated
starting materials and on manufacturing processes that inactivate pathogens.
Pathogen inactivation processes currently in use include heat, solvent
detergent, and gamma radiation. None of these processes is entirely
satisfactory. Chemical solvents added to base materials to inactivate viruses
must later be removed, which often results in a loss of valuable base material.
Heat treatment for virus activation, in addition to causing damage to beneficial
proteins and some loss of base material, takes up to 72 hours. Additionally,
some pathogens, such as human parvovirus and hepatitis A, are resistant to
currently approved inactivation methods.
By contrast, extensive pre-clinical testing of our PureBright systems by
multiple strategic partners in the blood fractionation, vaccine and
biopharmaceutical industries has shown BSPL treatments of only a few seconds'
duration to be effective in inactivating viruses by breaking down the nucleic
acids required for viral reproduction. And, because therapeutic protein base
materials are made up of amino acids that are not damaged by BSPL at levels
required for virus inactivation, recovery of PureBright treated protein base
materials is in the range of 95-100 percent. PureBright is of interest for
vaccine production because BSPL treatments break down genetic material required
for viral reproduction and leave intact viral protein structures that are used
as antigenic material. We believe that this may allow development of more potent
vaccines, reduce the risk of adverse reactions and eliminate the need for harsh
chemical additives.
MARKET SIZE AND BUSINESS FOCUS
Blood fractionation companies and producers of vaccines and certain
biopharmaceuticals pay royalties for pathogen inactivation with respect to
estimated annual end product sales of $15 billion. PureBright technology has
also been applied successfully to medical devices and solutions that represent a
global market of $8 billion. Other potential applications for PureBright include
point of use systems for purifying drinking water, as well as purification of
bottled water. Sales of such systems and bottled water exceed $10 billion
annually.
At the beginning of 2000, we restructured PurePulse to focus on
inactivation of pathogens that contaminate high value products sourced from
human or animal tissues. Prior to that time, PurePulse had developed
sterilization systems and opportunities for food processing, high volume water
purification and surgical and medical instrument sterilization.
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STRATEGIC COLLABORATIONS
Since the beginning of 2000, we have entered into collaboration agreements
with five global market leaders in the plasma derivative and vaccine markets to
participate in the development of inflow PUREBRIGHT systems for incorporation
and evaluation in their pharmaceutical product manufacturing lines for multiple
products per collaborator. These development programs require us to deliver
advanced design PUREBRIGHT systems in 2001 for testing and evaluation, and for
each collaborator to begin clinical and regulatory work in late 2001 or in 2002.
We also have developed BSPL based prototype water purification systems that
inactivate microbial contaminants in water, including cryptosporidium, which is
not affected by many other water treatment processes. Our prototype purification
systems vary in capacity from 4 gallons of water per minute to 250 gallons per
minute. Such systems can be installed at the point of entry into a food service,
grocery or manufacturing facility. PUREBRIGHT also can be used to purify bottled
water after it has been packaged and sealed with a compatible translucent
packaging material. While market data suggest that a significant market exists
for water applications, we believe that penetration of this market will require
assistance from one or more marketing partners, which we are pursuing.
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND THE OTHER INFORMATION
INCLUDED IN THIS FORM 10-K BEFORE INVESTING IN OUR COMMON STOCK. OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE SERIOUSLY HARMED IF ANY
OF THE FOLLOWING RISKS OCCUR. IN ANY SUCH CASE, THE MARKET PRICE OF OUR COMMON
STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF THE MONEY YOU PAID TO BUY
OUR COMMON STOCK.
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE.
ADDITIONAL RISKS AND UNCERTAINTIES, INCLUDING THOSE NOT PRESENTLY KNOWN TO US OR
THAT WE CURRENTLY DEEM IMMATERIAL, MAY ALSO RESULT IN DECREASED REVENUES,
INCREASED EXPENSES OR OTHER EVENTS WHICH COULD RESULT IN A DECLINE IN THE PRICE
OF OUR COMMON STOCK.
WE MAY NOT BE ABLE TO DEVELOP OR MARKET COMMERCIAL PRODUCTS SUCCESSFULLY WHICH
WOULD PREVENT US FROM ACHIEVING OR MAINTAINING PROFITABILITY IN THE FUTURE.
Historically, we have relied in part upon government contracts to fund our
research and development, and we have derived a significant portion of our
revenues from the government sector. We have signed letters of intent and are
scheduled to close the sale of our defense contracting business by the end of
March 2001. After the sale of that business, we will generate revenue solely
from developing, manufacturing and marketing commercial products. If we are
unable to successfully develop or market commercial products, we may not achieve
or maintain profitability in the future.
We have recently introduced many of our products into commercial markets
and, upon such introductions, we also must introduce our capabilities as a
reliable supplier of these products. Some of our products are alternatives to
established products or provide capabilities that do not presently exist in the
marketplace. Our products are sold in highly competitive and rapidly changing
markets. The success of our products is significantly affected by their cost,
technology standards and end user preferences. In addition, the success of our
products depends on a number of factors, including our ability to:
- maintain an engineering and marketing staff sufficiently skilled to
identify and design new products;
- overcome technical, financial and other risks involved in introducing
new products and technologies;
- identify and develop a market for our new products and technologies
and accurately anticipate demand;
- develop appropriate commercial sales and distribution channels;
- develop and manufacture new products at competitive prices;
- increase our manufacturing capacity and improve manufacturing
efficiency;
- respond to technological changes by improving our existing products
and technologies;
18
<PAGE>
- demonstrate that our products have technological and/or economic
advantages over the products of our competitors; and
- respond to competitors that are more experienced, have significantly
greater resources, and have a larger base of customers.
WE MAY EXPERIENCE DIFFICULTY MANUFACTURING OUR PRODUCTS, WHICH WOULD PREVENT US
FROM ACHIEVING INCREASED SALES AND MARKET SHARE.
We may experience difficulty in manufacturing our products in increased
quantities, outsourcing the manufacturing of our products and improving our
manufacturing process. If we are unable to manufacture our products in increased
quantities, or if we are unable to outsource the manufacture of our products or
improve the manufacturing process, we may be unable to increase sales and market
share for our products. We have limited experience in manufacturing our products
in high volume. It may be difficult for us to achieve the following results:
- increase the quantity of the new products we manufacture, especially
those products that contain new technologies;
- reduce our manufacturing costs to a level needed to produce adequate
profit margins; and
- design and procure automated manufacturing equipment.
It may also be difficult for us to solve management, technological,
engineering and other problems related to our manufacturing processes. These
problems include production yields, quality assurance, component supply and
shortages of qualified management and other personnel. In addition, we may elect
to have some of our products manufactured by third parties. If we outsource the
manufacture of our products, we will face risks with respect to quality
assurance, cost and the absence of close engineering support.
WE MAY BE UNABLE TO PRODUCE OUR ULTRACAPACITORS IN COMMERCIAL QUANTITIES OR
REDUCE THE COST OF PRODUCTION ENOUGH TO BE COMMERCIALLY VIABLE FOR WIDESPREAD
APPLICATION.
If we are not able to produce large quantities of our ultracapacitors in
the near future at a dramatically reduced per unit cost, our ultracapacitors may
not be a commercially viable alternative to traditional or other alternative
power delivery devices. Although we have already begun selling a new type of
PowerCache ultracapacitor designed for automotive and transportation
applications, we have only produced this ultracapacitor in limited quantities
and at a relatively high cost as compared with traditional power delivery
devices. We are currently investing significant resources in automating and
scaling up our manufacturing capacity to permit us to produce this product in
large, commercial quantities sufficient to meet the needs of our potential
customers. In particular, because these products are very complex to
manufacture, we cannot be certain that we will be able to maintain quality
standards at high production levels. Furthermore, we believe based on
discussions with potential customers in the automotive and transportation
industry that our ultracapacitors will not provide a commercially viable
solution for our customers' needs unless we are able to reduce the per unit cost
dramatically below our current per unit cost. If we are not successful in
producing large quantities of ultracapacitors in the near future, we may not be
able to generate sufficient revenue from this product to recapture our
significant investment in the development and manufacturing scale-up of this
product and our overall business prospects will be significantly impaired.
19
<PAGE>
OUR ULTRACAPACITORS DESIGNED FOR AUTOMOTIVE AND TRANSPORTATION APPLICATIONS MAY
NOT GAIN WIDESPREAD COMMERCIAL ACCEPTANCE.
We have designed one of our PowerCache ultracapacitor products primarily
for use in automotive and transportation applications. Currently, most of the
major automotive companies are pursuing large initiatives to develop alternative
power sources for cars and trucks and to replace the traditional 12-volt
electrical system with a 42-volt system. We believe our ultracapacitor provides
an innovative, alternative power solution for both of these applications and are
currently in discussions with several major automotive companies and their
suppliers with regard to designing our ultracapacitor into their future
products. However, there are many competing technologies such as nickel metal
hydride batteries, combustion engines using alternative fuels and competing
ultracapacitors. In particular, although we are currently working with the
Allison Transmission division of General Motors Corporation in the early stages
of incorporating our ultracapacitors into its first generation of hybrid drive
trains, GM is under no obligation to ultimately use our ultracapacitors in their
products or purchase any minimum quantity of our ultracapacitors. We believe
that the long-term success of our ultracapacitors will be determined by our
ability to outperform the competing technologies and to have our ultracapacitors
widely designed into the next generation of the power drive trains in hybrid
powered cars and trucks and the first generation of 42-volt electrical systems.
If our ultracapacitors fail to achieve widespread commercial acceptance in this
next generation of automotive products, our revenues will be adversely impacted
in future periods and our overall business prospects will be significantly
impaired.
WE HAVE A HISTORY OF LOSSES AND WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY IN
THE FUTURE, WHICH MAY DECREASE THE MARKET VALUE OF OUR STOCK.
We have incurred net losses in our most recent fiscal year and in three of
our past five fiscal periods. In the future, we may experience significant
fluctuations in our revenues and we may incur net losses from period to period
as a result of a number of factors, including the following:
- the amounts invested in developing and marketing our products in any
period as compared to the volume of sales of those products in the
same period;
- fluctuations in demand for our products by OEMs;
- the prices at which we sell our products and services as compared to
the prices of our competitors;
- the timing of our product introductions as compared to those of our
competitors;
- the profit margins on our mix of product sales; and
- the dilution, debt, expenses, and/or charges we incur as part of our
acquisition strategy.
In addition, we incur significant costs developing and marketing products
based on new technologies. For example, we expect our investment in PurePulse to
significantly exceed the revenues achieved by that operation, and operating
losses due to this investment will continue until such time as we complete a
strategic transaction for the business.
We anticipate that, in order to increase our market share, we may sell our
products and services at profit margins below those we ultimately expect to
achieve and/or significantly reduce the prices of our products and services in a
particular quarter or quarters. The impact of the foregoing may cause our
operating results to be below the expectations of public market analysts and
investors, which may decrease the market value of our stock.
20
<PAGE>
IF OUR OEM CUSTOMERS FAIL TO SELL A SUFFICIENT QUANTITY OF PRODUCTS
INCORPORATING OUR COMPONENTS, OR IF THE OEM'S SALES TIMING AND VOLUME
FLUCTUATES, IT WOULD PREVENT US FROM ACHIEVING INCREASED SALES AND MARKET SHARE.
Sales to a relatively small number of OEMs, as opposed to direct retail
sales to customers, make up a significant percentage of our revenues. The timing
and volume of these sales depend upon the sales levels and shipping schedules
for the products of our OEM customers. Thus, even if we develop a successful
component, our sales will not increase unless the product into which our
component is incorporated is successful. If our OEM customers fail to sell a
sufficient quantity of products incorporating our components, or if the OEM's
sales timing and volume fluctuates, it could prevent us from achieving sales.
Our OEM customers typically require a long development and engineering process
before incorporating our products and services into their systems and products.
This period of time is in addition to the time we spend on basic research and
product development. As a result, we are vulnerable to changes in technology or
end user preferences.
Our opportunity to sell our products to our OEM customers typically occurs
at infrequent intervals, depending on when the OEM customer designs a new
product or enhances an existing one. If we are not aware of an OEM's product
development schedule, or if we cannot provide components or technologies when
they develop their products, we may miss an opportunity that may not reappear
for some time.
OUR ABILITY TO INCREASE MARKET SHARE AND SALES DEPENDS ON OUR ABILITY TO
SUCCESSFULLY HIRE AND TRAIN MARKETING AND SALES PERSONNEL.
We have limited experience marketing and selling our products. To sell our
products, we need to train marketing and sales personnel to effectively
demonstrate the advantages of our products over the products offered by our
competitors. The highly technical nature of the products we offer requires that
we retain and attract adequate marketing and sales personnel, and we may have
difficulty doing that in a highly competitive employment market. Also, as part
of our sales and marketing strategy, we enter into arrangements with
distributors and sales representatives and depend upon their efforts to sell our
products. Our arrangements with outside distributors and sales representatives
may not be successful.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY ADEQUATELY, WE COULD LOSE
OUR COMPETITIVE ADVANTAGE IN EACH OF THE INDUSTRY SEGMENTS IN WHICH WE DO
BUSINESS.
Our success depends on establishing and maintaining our intellectual
property rights. If we are unable to protect our intellectual property
adequately, we could lose our competitive advantage in each of the industry
segments in which we do business. Although we try to protect our intellectual
property rights through patents, trademarks, copyrights, trade secrets and other
measures, these steps may not prevent misappropriation by third parties. We have
taken steps to protect our intellectual property rights under the laws of
certain foreign countries, but our efforts may not be effective to the extent
that foreign laws are not as protective as United States laws. In addition, we
face the possibility that third parties might "reverse engineer" our products in
order to determine their method of operation and produce and introduce competing
products.
As our business has expanded, we have emphasized protecting our
technologies and products through patents. Our success depends on maintaining
our patents, adding to them where appropriate, and developing products and
applications without infringing on the patent and proprietary rights of others.
The following risks are involved in protecting our patents:
- our patents may be circumvented or challenged and held unenforceable
or invalid;
- our pending or future patent applications, if any, may not be issued
in a timely manner and may not provide the protections we seek; and
- others may claim rights in the patented and other proprietary
technology that we own or license.
If our patents are invalidated or if it is determined that we, or the
licensor of the patent, does not hold sole rights to the patent, we could lose
our competitive advantage in each of the industry segments in which we do
business.
21
<PAGE>
Competing research and patent activity in our product areas is substantial.
Conflicting patent and other proprietary rights claims may result in disputes or
litigation. Although we do not believe that our products or proprietary rights
infringe third party rights, infringement claims could be asserted against us in
the future. Also, we may not be able to stop a third party product from
infringing our proprietary rights without litigation. If we are subject to such
claims, or if we are forced to bring such claims, we could endure
time-consuming, costly litigation resulting in product shipment delays and
possible damage payments or injunctions which prevent us from making, using or
selling the infringing product. We may also be required to enter into royalty or
licensing agreements as part of a judgment or settlement which could have a
negative impact on the amount of revenue derived from our products or
proprietary rights.
WE FACE RISKS ASSOCIATED WITH THE MARKETING, DISTRIBUTION AND SALE OF OUR
PRODUCTS INTERNATIONALLY, AND IF WE ARE UNABLE TO EFFECTIVELY MANAGE THESE
RISKS, IT COULD IMPAIR OUR ABILITY TO GROW OUR BUSINESS ABROAD.
We derive a significant portion of our revenues from sales to customers
located outside the United States. We expect our international sales to continue
to represent a significant and increasing portion of our future revenues. As a
result, our business will continue to be subject to certain risks, such as
foreign government regulations, export controls, changes in tax laws, tax
treaties, tariffs and freight rates. If we are unable to effectively manage
these risks, it could impair our ability to grow our business abroad.
We have only recently established or acquired operations in foreign
countries. Since we are relatively inexperienced in managing our international
operations, we may be unable to focus on the operation and expansion of our
worldwide business and to manage cultural, language and legal differences
inherent in international operations. In addition, to the extent we are unable
to effectively respond to political, economic and other conditions in these
countries, our business, results of operations and financial condition could be
materially adversely affected. Moreover, changes in the mix of income from our
foreign subsidiaries, expiration of tax holidays and changes in tax laws and
regulations could increase our tax rates.
As a result of our international operations, the United States dollar
amount of our revenue and expenses is impacted by changes in foreign currency
exchange rates.
WE MAY FACE DIFFICULTIES IN OBTAINING FOOD AND DRUG ADMINISTRATION APPROVAL FOR
CERTAIN OF OUR PRODUCTS, WHICH COULD PREVENT US FROM MARKETING SUCH PRODUCTS.
Some of our products, such as EMI filters, are subject to the approval
process of the Food and Drug Administration because they are used in or with
medical devices or processes. There are many aspects of the FDA approval process
that could impact our ability to bring our products to market, including the
following:
- the FDA testing and application process is expensive and lengthy, and
varies based on the type of product;
- our products may not ultimately receive FDA approval or clearance;
- the FDA may restrict a product's intended use as a condition to
approving or clearing such product, or place conditions on any
approval that restrict commercial applications of such products;
- the FDA may require post-marketing testing and surveillance to monitor
the effects of products it initially approves; and
- the FDA may withdraw its approval or clearance of any product if
compliance with regulatory standards is not maintained, or if problems
occur following initial marketing.
If we fail to comply with existing or future regulatory requirements we may
face, among other things, fines, injunctions, civil penalties, recall or seizure
of products, total or partial suspension of production, failure of the United
States government to grant pre-market clearance or pre-market approval for
products, withdrawal of marketing clearances or approvals and criminal
prosecution.
22
<PAGE>
Although several pacemaker manufacturers have included our EMI filters in
their new pacemaker designs, these products have not yet been approved by the
FDA. We are unable to predict when, if ever, the FDA will approve these products
for commercial sale. We will not generate any significant revenue from these
products until and unless the pacemakers or other products into which they are
incorporated are available for commercial sale.
IF WE ARE UNABLE TO RETAIN KEY PERSONNEL, WE COULD LOSE OUR TECHNOLOGICAL AND
COMPETITIVE ADVANTAGE IN SOME PRODUCT AREAS AND BUSINESS SEGMENTS.
Since we primarily focus on emerging technologies, our success depends upon
the continued service of our key technical and senior management personnel. Some
of our engineers are the key developers of our products and technologies and are
recognized as leaders in their area of expertise. The loss of such engineers to
our competitors could threaten our technological and competitive advantage in
some product areas and business segments.
Our performance also depends on our ability to identify, hire, train,
retain and motivate high quality personnel, especially key operations executives
and highly skilled engineers. The industries in which we compete are
characterized by a high level of employee mobility and aggressive recruiting of
skilled personnel. Our employees may terminate their employment with us at any
time.
IF WE ARE UNABLE TO SECURE QUALIFIED AND ADEQUATE SOURCES FOR OUR MATERIALS,
COMPONENTS AND SUB-ASSEMBLIES WE MAY NOT BE ABLE TO MAKE OUR PRODUCTS AT
COMPETITIVE COSTS AND WE MAY HAVE DIFFICULTY MEETING CUSTOMER DEMAND WHICH COULD
DAMAGE OUR RELATIONSHIPS WITH OUR CUSTOMERS.
Our ability to manufacture products depends in part on our ability to
secure qualified and adequate sources of materials, components and
sub-assemblies at prices that enable us to make our products at competitive
costs. Some of our suppliers are currently the sole source of one or more items
that we need to manufacture our products. Although we seek to reduce our
dependence on sole and limited source suppliers, the partial or complete loss of
these sources could have at least a temporary material effect on our business
and results of operations, and damage customer relationships. On occasion, we
have experienced difficulty in obtaining timely delivery of supplies from
outside suppliers. This has adversely impacted our delivery time to our
customers and there can be no assurance that such supply problems will not
recur.
WE MAY NOT BE ABLE TO OBTAIN A SUFFICIENT AMOUNT OF CAPITAL NEEDED TO GROW OUR
BUSINESS WHICH COULD REQUIRE US TO CHANGE OUR BUSINESS STRATEGY AND RESULT IN
DECREASED PROFITABILITY AND CAUSE A LOSS OF CUSTOMERS.
We believe that in the future we will need a substantial amount of capital
for a number of purposes including the following:
- to meet anticipated volume production requirements for several of our
product lines, in particular our ultracapacitors, which require
high-speed automated production lines to achieve targeted customer
volume and price requirements;
- to expand our manufacturing capabilities and establish viable
production alternatives;
- to fund our continuing expansion into commercial markets;
- to achieve our long-term strategic objectives;
- to maintain and enhance our competitive position; and
- to acquire new or complementary businesses, product lines and
technologies.
There can be no assurance that the necessary additional financing will be
available to us on acceptable terms or at all. If adequate funds are not
available, we may be required to change or delay our planned product
commercialization strategy or our anticipated facilities expenditures which
could result in decreased profitability and cause a loss of customers.
23
<PAGE>
WE COULD INCUR SIGNIFICANT LIABILITIES IF WE DO NOT COMPLY WITH THE
ENVIRONMENTAL REGULATIONS APPLICABLE TO OUR OPERATIONS.
We are subject to a variety of environmental regulations relating to the
use, storage, discharge, handling, emission, generation, manufacture and
disposal of toxic or other hazardous substances. If we fail to comply with
current or future regulations, substantial fines could be imposed against us,
our production could be suspended or stopped, or our manufacturing process could
be altered. Such regulations could require us to acquire expensive remediation
or abatement equipment or to incur substantial expenses to comply with
environmental regulations. If we fail to adequately control the use, discharge,
disposal or storage of hazardous or toxic substances, we could incur significant
liabilities.
OUR FINANCIAL CONDITION COULD BE NEGATIVELY AFFECTED IF WE ISSUE ADDITIONAL
STOCK OF OUR SUBSIDIARIES.
We operate our businesses through separate subsidiaries. In the future, we
could engage in public offerings or other sales of the common stock of our
subsidiaries, sales of entire subsidiaries or make strategic acquisitions using
subsidiary stock. For example, our September 2000 acquisition of Gateworks
Corporation was accomplished with a combination of cash and I-Bus/Phoenix stock.
We may use subsidiary stock for future acquisitions if our board of directors
determines that it is in the best interests of our stockholders to do so.
Issuance of additional subsidiary stock could adversely affect our financial
condition and results of operations. For example, any public offering or other
sale of a minority portion of a subsidiary's stock would reduce that
subsidiary's contribution to our net income and earnings per share, and could
reduce our net proceeds if we were to sell that subsidiary.
ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BYLAWS COULD
PREVENT TRANSACTIONS WHICH ARE IN THE BEST INTEREST OF OUR STOCKHOLDERS.
Some provisions in our certificate of incorporation could make it more
difficult for a third party to acquire control of Maxwell, even if such change
in control would be beneficial to our stockholders. We have a staggered board of
directors, which means that our directors are divided into three classes. The
directors in each class are elected to serve three-year terms. Since the
three-year terms of each class overlap the terms of the other classes of
directors, the entire board of directors cannot be replaced in any one year.
Furthermore, our certificate of incorporation contains a "fair price provision"
which may require a potential acquirer to obtain the consent of our board to any
business combination involving Maxwell. Our certificate of incorporation and
bylaws do not permit stockholder action by written consent or the calling by
stockholders of a special meeting.
We have adopted a program under which our stockholders have rights to
purchase our stock directly from us at a below-market price if a company or
person attempts to buy us without negotiating with the Board. This program is
intended to encourage a buyer to negotiate with us, but may have the effect of
discouraging offers from possible buyers.
The provisions of our certificate of incorporation and bylaws could delay,
deter or prevent a merger, tender offer, or other business combination or change
in control involving us that some, or a majority, of our stockholders might
consider to be in their best interests. This includes offers or attempted
takeovers that could result in our stockholders receiving a premium over the
market price for their shares of our common stock.
OUR COMMON STOCK EXPERIENCES LIMITED TRADING VOLUME AND OUR STOCK PRICE HAS BEEN
VOLATILE.
Our common stock is traded on the Nasdaq National Market. The trading
volume of our common stock each day is relatively low. This means that sales or
purchases of relatively small blocks of stock can have a significant impact on
the price at which our stock is traded. We believe that factors such as
quarterly fluctuations in financial results, announcements of new technologies
impacting our products, announcements by competitors or changes in securities
analysts' recommendations could cause the price of our stock to fluctuate
substantially. These fluctuations, as well as general economic conditions such
as recessions or higher interest rates, may adversely affect the market price of
our common stock.
24
<PAGE>
ITEM 2. PROPERTIES
We conduct our operations in the following major facilities:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET USES LEASED/OWNED
- ---------------------------------------------------- ----------- ------------------------- ------------
<S> <C> <C> <C>
MAXWELL ELECTRONIC COMPONENTS GROUP, INC.
San Diego, California(1) 45,500 Manufacturing; R&D; Leased
sales and administration
Carson City, Nevada 25,000 Manufacturing; R&D; Owned
sales and administration
I-BUS/PHOENIX, INC.
San Diego, California 84,500 Manufacturing and Owned
assembly and test; R&D;
sales and administration
Havant, Hampshire, England 12,000 Manufacturing and Leased
assembly and test; R&D;
sales and administration
Uckfield East Sussex, England 11,000 Manufacturing Leased
Munich, Germany 8,900 Assembly and test; sales Leased
and administration
Sophia, France 3,100 Assembly and test; sales Leased
and administration
PUREPULSE TECHNOLOGIES, INC.
San Diego, California 20,000 Administration; R&D Leased
</TABLE>
- ---------------
(1) Our corporate offices are also located in this facility.
In addition, we occupy other small sales and research facilities in the
United States and Europe. We also sublease certain other leased facilities to
third parties.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this Form 10-K, we are not engaged in any legal
proceedings that we expect will have a material adverse effect on our business,
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 15, 2000, the Company mailed a Consent Solicitation Statement
to its shareholders seeking the approval of the shareholders by written consent
in lieu of a meeting of a proposed amendment to the Company's 1995 Stock Option
Plan to increase the number of shares authorized for issuance by 950,000.
Approval was obtained on November 21, 2000 with holders of a total of 6,181,940
shares (or 62.7% of the total outstanding on the record date of September 24,
2000) casting votes. Of the shares voted, 4,941,147 shares, or 50.1% of the
total outstanding on the record date, were voted in favor of the amendment;
1,167,933 shares, or 11.8% of the total outstanding on the record date, were
voted against the amendment; and 72,860 shares, or 0.7% of the total outstanding
on the record date, were cast to abstain.
25
<PAGE>
ITEM 4.1 EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive officers of the Company are set forth below. The Company's
officers serve at the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------- ---- ----------------------------------------------------------------------
<S> <C> <C>
Carlton J. Eibl 40 President, Chief Executive Officer and Director. Mr. Eibl was
appointed a director in July 1998 and named chief executive officer
and president in November 1999. From February 1999 until he formally
joined us on December 1, 1999, Mr. Eibl served as president and chief
operating officer of Stratagene Corporation, a privately-held
biotechnology company. Mr. Eibl previously held various executive
positions with Mycogen Corporation, a publicly-held diversified
agribusiness and biotechnology company. Mr. Eibl joined Mycogen in
1993 as executive vice president and general counsel. In 1995, he
was appointed president and chief operating officer of Mycogen and in
1997 he became chief executive officer. The Dow Chemical Company
acquired Mycogen at the end of 1998.
Richard D. Balanson 51 Vice President, President of Maxwell Electronic Components Group,
Inc. Mr. Balanson is corporate vice president and president of
Maxwell Electronic Components Group, Inc. From 1996 until joining
Maxwell in August 1999, Mr. Balanson was the president and chief
operating officer for 3D Systems, a California-based manufacturer of
rapid prototyping equipment. From 1994 to 1996, Mr. Balanson was the
general manager and executive vice president of Maxtor Corporation,
and before that was president and chief operating officer of Applied
Magnetics Corporation.
Vickie L. Capps 39 Vice President, Finance and Administration, Treasurer and Chief
Financial Officer. Ms. Capps served Wavetek Wandel Golterman, Inc.
as group controller from 1992 through 1994, vice president, corporate
finance from 1994 through 1996 and then chief financial officer from
1996 through 1999, prior to joining Maxwell in July 1999.
Previously, she spent 10 years with the firm of Ernst & Young LLP.
Donald M. Roberts 52 Vice President, General Counsel and Secretary. Mr. Roberts has
served as general counsel since joining us in April 1994, and was
appointed secretary in June 1996 and vice president in January 1999.
For more than five years prior to that, Mr. Roberts was a shareholder
of the law firm of Parker, Milliken, Clark, O'Hara & Samuelian, a
Professional Corporation, and a partner of the predecessor law
partnership, and in that capacity had served as our outside legal
advisor for more than ten years.
Ted Toch 52 Vice President, President of PurePulse Technologies, Inc. Mr. Toch
joined us in June 1998 as corporate vice president and president of
PurePulse Technologies, Inc. Prior to joining PurePulse Technologies
he was vice president of marketing and sales for Johnson & Johnson's
Advanced Sterilization Products Division from 1993 to 1998 with
earlier experience as vice-president and general manager of the
Instruments Division of Nellcor, Inc.
</TABLE>
26
<PAGE>
<TABLE>
<S> <C> <C>
John D. Werderman 54 Vice President, President of I-Bus/Phoenix, Inc. Mr. Werderman was
named corporate vice president and president of I-Bus/Phoenix, Inc.
in July 1997. Previously, Mr. Werderman served as chief operating
officer of Maxwell Technologies Systems Division, Inc. Prior to
joining Maxwell in October 1996, Mr. Werderman worked for M/A.COM,
Inc. for over 15 years, most recently as President and General
Manager of their Baltimore, Maryland operation, M/A.COM Government
Products, Inc.
</TABLE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock has been quoted on the Nasdaq National Market under the
symbol "MXWL" since 1983. The following table sets forth the high and low sale
prices per share of our common stock as reported on the Nasdaq National Market
for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C> <C>
CALENDAR YEAR ENDED DECEMBER 31, 1999 (1) First Quarter............. $39.625 $22.000
Second Quarter............ 24.250 18.188
Third Quarter............. 30.688 11.750
Fourth Quarter............ 12.875 7.875
CALENDAR YEAR ENDED DECEMBER 31, 2000 First Quarter............. $17.000 $10.250
Second Quarter............ 16.922 10.563
Third Quarter............. 19.063 13.875
Fourth Quarter............ 17.500 13.813
</TABLE>
(1) We changed our fiscal year to a calendar year effective January 1, 2000. We
previously reported results on a fiscal year of August 1 through July 31.
The last reported sale price of common stock on the Nasdaq National market
on March 15, 2001, was $19.43 per share. As of December 31, 2000, there were 513
holders of record of the Company's Common Stock.
We currently anticipate that any earnings will be retained for the
development and expansion of our business and, therefore, we do not anticipate
paying dividends on our Common Stock in the foreseeable future. In addition,
under our bank credit agreement, neither we nor any of our subsidiaries may,
directly or indirectly, pay any cash dividends to our stockholders.
27
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated statement of operations data for the
fiscal years ended July 31, 1996 and 1997 and consolidated balance sheet data as
of July 31, 1996, 1997, 1998 and 1999 are derived from audited consolidated
financial statements of the Company not included in this Form 10-K. The
following selected consolidated statement of operations data for the fiscal
years ended July 31, 1998 and 1999, the five months ended December 31, 1999 and
the fiscal year ended December 31, 2000, and consolidated balance sheet data as
of December 31, 1999 and December 31, 2000 are derived from the Consolidated
Financial Statements of the Company and Notes thereto included herein, which
have been audited by Ernst & Young LLP, independent auditors. All selected
consolidated financial data presented has been restated to reflect certain
businesses divested and to be divested by the Company as discontinued
operations. The following selected data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Consolidated Financial Statements" appearing elsewhere in this
Form 10-K.
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
------------------------------------------------
1996 1997 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Continuing Operations:
Sales ...................................................... $ 42,565 $ 63,736 $ 78,014 $ 102,878
Cost of sales .............................................. 30,150 36,734 48,570 70,044
--------- --------- --------- ---------
Gross profit ............................................... 12,415 27,002 29,444 32,834
Operating expenses:
Selling, general and administrative .................... 14,421 14,608 18,901 26,070
Research and development ............................... 1,913 3,014 5,823 6,779
Restructuring, acquisition and other charges ........... 1,202 -- 3,889 2,620
--------- --------- --------- ---------
Total operating expenses .......................... 17,536 17,622 28,613 35,469
--------- --------- --------- ---------
Operating income (loss) .................................... (5,121) 9,380 831 (2,635)
Interest expense ........................................... (368) (220) (338) (404)
Interest income and other, net ............................. 44 194 1,343 565
--------- --------- --------- ---------
Income (loss) from continuing operations before income
taxes, minority interest and cumulative effect of change
in accounting principle ................................ (5,445) 9,354 1,836 (2,474)
Provision (credit) for income taxes ........................ 1,738 1,473 413 (6,417)
Minority interest in net income (loss) of subsidiaries ..... -- -- -- 4
--------- --------- --------- ---------
Income (loss) from continuing operations ................... (7,183) 7,881 1,423 3,939
Discontinued operations, net of tax:
Income (loss) from operations .............................. (6,239) (1,374) (3,130) 7,129
Gain (provision for estimated loss) on disposal ............ -- -- -- --
--------- --------- --------- ---------
(6,239) (1,374) (3,130) 7,129
Cumulative effect of change in accounting principle ............. 564 -- -- --
--------- --------- --------- ---------
Net income (loss) ............................................... $ (13,986) $ 6,507 $ (1,707) $ 11,068
========= ========= ========= =========
Basic net income (loss) per share:
Income (loss) from continuing operations ................... $ (1.13) $ 1.16 $ 0.17 $ 0.42
Income (loss) from discontinued operations ................. (0.98) (0.20) (0.37) 0.76
Cumulative effect of change in accounting principle ........ (0.09) -- -- --
--------- --------- --------- ---------
Basic net income (loss) per share ............................... $ (2.20) $ 0.96 $ (0.20) $ 1.18
========= ========= ========= =========
Diluted net income (loss) per share:
Income (loss) from continuing operations ................... $ (1.13) $ 1.06 $ 0.16 $ 0.40
Income (loss) from discontinued operations ................. (0.98) (0.19) (0.35) 0.72
Cumulative effect of change in accounting principle ........ (0.09) -- -- --
--------- --------- --------- ---------
Diluted net income (loss) per share ............................. $ (2.20) $ 0.87 $ (0.19) $ 1.12
========= ========= ========= =========
<CAPTION>
FIVE MONTHS
ENDED YEARS ENDED DECEMBER 31,
DECEMBER 31, ------------------------
1999 1999 2000
------------ --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Continuing Operations:
Sales ...................................................... $ 36,863 $ 103,611 $ 102,347
Cost of sales .............................................. 28,322 74,525 79,472
--------- --------- ---------
Gross profit ............................................... 8,541 29,086 22,875
Operating expenses:
Selling, general and administrative .................... 12,204 27,501 26,260
Research and development ............................... 2,618 6,363 8,713
Restructuring, acquisition and other charges ........... 2,801 5,267 9,220
--------- --------- ---------
Total operating expenses .......................... 17,623 39,131 44,193
--------- --------- ---------
Operating income (loss) .................................... (9,082) (10,045) (21,318)
Interest expense ........................................... (112) (331) (1,430)
Interest income and other, net ............................. (29) 501 9
--------- --------- ---------
Income (loss) from continuing operations before income
taxes, minority interest and cumulative effect of change
in accounting principle ................................ (9,223) (9,875) (22,739)
Provision (credit) for income taxes ........................ (3,408) (9,925) (6,267)
Minority interest in net income (loss) of subsidiaries ..... -- 4 (181)
--------- --------- ---------
Income (loss) from continuing operations ................... (5,815) 46 (16,291)
Discontinued operations, net of tax:
Income (loss) from operations .............................. (5,211) 1,766 (2,880)
Gain (provision for estimated loss) on disposal ............ (2,065) (2,065) 2,854
--------- --------- ---------
(7,276) (299) (26)
Cumulative effect of change in accounting principle ............. -- -- --
--------- --------- ---------
Net income (loss) ............................................... $ (13,091) $ (253) $ (16,317)
========= ========= =========
Basic net income (loss) per share:
Income (loss) from continuing operations ................... $ (0.61) $ -- $ (1.66)
Income (loss) from discontinued operations ................. (0.76) (0.03) --
Cumulative effect of change in accounting principle ........ -- -- --
--------- --------- ---------
Basic net income (loss) per share ............................... $ (1.37) $ (0.03) $ (1.66)
========= ========= =========
Diluted net income (loss) per share:
Income (loss) from continuing operations ................... $ (0.61) $ -- $ (1.66)
Income (loss) from discontinued operations ................. (0.76) (0.03) (0.01)
Cumulative effect of change in accounting principle ........ -- -- --
--------- --------- ---------
Diluted net income (loss) per share ............................. $ (1.37) $ (0.03) $ (1.67)
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31,
----------------------------------------- -------------------
1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS)
Total assets ................... $ 40,295 $ 47,315 $100,200 $113,486 $ 98,151 $122,109
Cash and cash equivalents ...... 1,015 1,326 20,934 7,948 2,885 2,686
Short-term debt ................ -- -- -- -- -- 22,754
Long-term debt, including
current portion ............. 2,193 1,762 2,462 3,688 474 --
Stockholders' equity at year-end 23,243 32,617 80,153 97,168 84,416 69,754
Shares outstanding at year-end . 6,513 6,969 9,210 9,557 9,564 9,877
</TABLE>
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We apply industry-leading capabilities in power and computing to develop
and commercialize electronic components and power and computing systems for OEM
customers in multiple industries, including transportation, telecommunications,
consumer and industrial electronics, medical and aerospace.
In December 1999, we adopted a plan to restructure our operations. This
restructuring plan:
- consolidated certain commercial business operations and improved their
manufacturing and other operational capabilities;
- focused our defense contracting business on pulsed power systems and
computer-based analysis for government and national laboratories;
- focused the application of PureBright broad-spectrum pulsed light
technology on bioprocessing, medical and consumer water markets; and
- provided for the sale of certain non-strategic business operations.
The goal of the restructuring plan was to create a product-driven,
high-growth company and to improve operating results by the fourth quarter of
calendar year 2000. Since January 2000, we have recruited more than 50 key
managers with extensive commercial experience in engineering, manufacturing,
material procurement, supply chain management, information technology, financial
controls and sales and marketing. We have also invested over $11 million to
build and outfit state-of-the-art production facilities, including information
technology infrastructure, and implement new manufacturing and business
processes and systems to increase our production capacity and improve efficiency
and product quality. We experienced significant change in the early part of 2000
as part of our efforts to achieve the objectives of the restructuring plan on
schedule. We made significant progress and essentially completed our facilities
and organizational consolidation program in October 2000.
As part of the restructuring plan, we combined our high reliability
electronic components businesses, including our PowerCache ultracapacitors, EMI
filtered feedthroughs and other ceramic capacitor products, and
radiation-shielded microelectronics, into a single commercial, high reliability
electronic components group. We also combined our applied computing systems
business and our power quality systems business. We focused our defense
contracting business on pulsed power systems and computer-based analysis for
government and national laboratories and expect to sell this part of our
business by the end of March 2001. We focused PurePulse on significant
opportunities in the application of our PureBright technology to pathogen
inactivation in medical and bioprocessing markets and to consumer water
applications. We are now exploring strategic alternatives for PurePulse, which
we expect will result in the sale of all or a majority interest in the business
in 2001. Finally, in calendar year 2000, we sold our businesses involving high
voltage wound film capacitors, high voltage power supplies and time card and job
cost accounting software. All financial information contained in this Form 10-K
has been restated for all periods presented to reflect our defense contracting
and PurePulse businesses, as well as the businesses divested in 2000, as
discontinued operations.
Our Electronic Components Group and I-Bus/Phoenix power and computing
systems business generate all of our revenues from continuing operations. We are
currently investing in our PurePulse operations to develop broad-spectrum pulsed
light pathogen inactivation systems. This investment will continue until such
time as we complete a strategic transaction for the business.
29
<PAGE>
We generate substantially all of our revenue from continuing operations
from the sale of commercial products. From time to time, we also generate
revenue from licensing technology and other rights to strategic partners. Sales
and marketing for our products in the United States, Europe and Asia are
conducted through both direct and indirect sales channels. We conduct marketing
programs intended to position and promote our products, including trade shows,
seminars, advertising, public relations, distribution of product literature and
websites on the Internet. Our ability to maintain and grow our sales depends on
a variety of factors including our ability to maintain our competitive position
in areas such as technology, performance, price, brand identity, quality,
reliability, distribution, customer service and support. Our sales growth also
depends on our ability to continue to introduce new products that respond to
technological change, competitive pricing pressure and market demand in a timely
manner.
Our operating expenses are impacted by research and product development and
selling, general and administrative activities. Selling expenses are primarily
driven by:
- sales volume, with respect to sales force expenses and commission
expenses;
- the extent of market research activities for new product design
efforts;
- advertising and trade show activities; and
- the number of new products launched in the period.
General and administrative expenses primarily include costs associated with
our administrative employees, facilities and functions.
We incur expenses in foreign countries primarily in the functional
currencies of such locations. As a result of our international operations,
changes in foreign currency exchange rates impact the United States dollar
amount of our revenue and expenses.
In 1999, we changed our fiscal year to a calendar year effective January 1,
2000. We previously reported results on a fiscal year of August 1 through July
31.
BUSINESS SEGMENTS
Our continuing operations are comprised of the following two business
segments.
ELECTRONIC COMPONENTS GROUP
As part of the restructuring plan, we organized the Electronic Components
Group by combining numerous business units and product lines including our
PowerCache ultracapacitors, EMI filtered feedthroughs, ceramic capacitors and
our radiation-shielded microelectronics. In October 2000, we integrated the
PowerCache ultracapacitor operations and the radiation-shielded microelectronics
operations into one new manufacturing site in San Diego. Our EMI filters and
ceramic capacitors are manufactured at our facility in Carson City, Nevada,
which was redesigned in 2000. Both facilities were designed for highly efficient
manufacturing, with improved processes, improved personnel training and more
disciplined cost control practices.
The Electronic Components Group consists primarily of the following power
delivery and other high reliability devices product lines:
- ultracapacitors for electrical energy storage and delivery of peak
power for a variety of applications;
- EMI filtered feedthroughs for cardiac pacemakers, defibrillators and
other implantable medical devices and high temperature ceramic
capacitors and filters used in oil exploration; and
- radiation-shielded microelectronics, including integrated circuits,
power modules and single board computers for space and military
markets.
30
<PAGE>
I-BUS/PHOENIX POWER AND COMPUTING SYSTEMS
As part of our restructuring plan, we integrated our I-Bus, Inc. and
Phoenix Power Systems, Inc. subsidiaries. The I-Bus/Phoenix organization has
operations in the U.S., Europe and Asia. The new I-Bus/Phoenix operation is
focused on providing high availability custom computing systems and power
quality products. As part of the restructuring plan, we combined the San Diego
operations of these two businesses into a single facility in October 2000. The
new facility has been designed for highly efficient manufacturing, with improved
processes, improved personnel training and more disciplined cost control
practices.
Our current I-Bus/Phoenix product offerings include applied computing
systems, power distribution systems and power conditioning units. We sell our
products mainly to OEMs serving the telecommunications and Internet
infrastructure, industrial automation, broadcasting and medical imaging markets.
We have classified the following business segment as a discontinued
operation for financial reporting purposes.
PUREPULSE
PurePulse designs and develops systems that generate extremely intense,
broad-spectrum, pulsed light to inactivate viruses and other pathogens that
contaminate products sourced from human or animal tissues, such as plasma
derivatives, transfusion blood components and biopharmaceuticals, and in the
production of vaccines. PurePulse also is developing systems to purify water. We
are exploring strategic alternatives for PurePulse, which we expect will result
in the sale of all or a majority interest in the business in 2001.
RESULTS OF OPERATIONS
COMPARISON AND DISCUSSION OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
DECEMBER 31, 2000 AND THE THREE MONTHS ENDED SEPTEMBER 30, 2000.
The following table sets forth our selected data, expressed as a percentage
of sales, for the three months ended December 31, 2000, compared to the three
months ended September 30, 2000. The three months ended December 31, 2000 was
the first quarter of operations in our new facilities following the completion
of the restructuring plan.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
SEPTEMBER 30, 2000 DECEMBER 31, 2000
------------------ -----------------
<S> <C> <C>
Continuing Operations:
Sales........................................................ 100.0% 100.0%
Cost of sales................................................ 95.2 75.6
------------------ -----------------
Gross profit................................................. 4.8 24.4
Operating expenses:
Selling, general and administrative........................ 31.4 18.2
Research and development................................... 10.8 9.6
Restructuring, acquisition and other charges............... 34.8 --
------------------ -----------------
Total operating expenses................................. 77.0 27.8
------------------ -----------------
Operating loss............................................... (72.2) (3.4)
Interest expense............................................. (1.7) (3.2)
Interest income and other, net............................... (0.5) 0.3
------------------ -----------------
Loss from continuing operations before income taxes and
minority interest.......................................... (74.4) (6.3)
Credit for income taxes...................................... (17.5) (2.4)
Minority interest in net loss of subsidiaries................ -- (0.7)
------------------ -----------------
Loss from continuing operations.............................. (56.9) (3.2)
Discontinued operations, net of tax:
Loss from operations......................................... (3.0) (1.9)
Gain on disposal............................................. -- 5.1
------------------ -----------------
Net income (loss)............................................... (59.9)% --%
================== =====================
</TABLE>
31
<PAGE>
The following table sets forth sales, gross profit (loss) and gross profit
as a percentage of sales for each of our business segments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
SEPTEMBER 30, 2000 DECEMBER 31, 2000
--------------------- -------------------
(dollar amounts in thousands)
<S> <C> <C>
Electronic Components Group:
Sales............................................... $ 8,525 $12,234
Gross profit........................................ 1,634 4,157
Gross profit as a percentage of sales............... 19.2% 34.0%
I-Bus/Phoenix Power and Computing Systems:
Sales............................................... $ 13,146 $15,208
Gross profit (loss)................................. (594) 2,535
Gross profit as a percentage of sales............... N/A 16.7%
Consolidated (from continuing operations):
Sales............................................... $ 21,671 $27,442
Gross profit........................................ 1,040 6,692
Gross profit as a percentage of sales............... 4.8% 24.4%
</TABLE>
Following the completion of the restructuring plan, we achieved
significantly higher sales from continuing operations and improved operating
results in the three months ended December 31, 2000, or the fourth quarter, as
compared to the three months ended September 30, 2000, or the third quarter. A
discussion of these improved quarterly results from continuing operations
follows.
SALES
Sales for the fourth quarter were $27.4 million, reflecting a $5.7 million,
or 26.6%, increase from sales of $21.7 million for the third quarter. Sales in
the fourth quarter in the I-Bus/Phoenix power and computing systems segment
increased by $2.1 million, or 15.7%, from sales in the third quarter, driven
primarily by increased sales of power quality products made possible by the
increased manufacturing capacity available in the new facility. We expect sales
in this segment to continue to increase in 2001, reflecting the contribution of
sales of products acquired in connection with the acquisition of Gateworks
Corporation, as well as the contribution of sales from new applied computing
products, the first of which were introduced in the first quarter of 2001. We
expect to introduce additional applied computing products in 2001.
Sales in the fourth quarter in the Electronic Components Group segment
increased by $3.7 million, or 43.5%, from sales in the third quarter,
representing increased sales in all product lines of the Electronic Components
Group segment. The increase in sales was largely attributable to increased
production capacity in these business areas in their new or redesigned
facilities. Sales of PowerCache ultracapacitors also increased due to shipments
made during the fourth quarter in connection with our supply agreement with the
Allison Transmission division of General Motors Corporation.
GROSS PROFIT
In the fourth quarter, our gross profit was $6.7 million, or 24.4% of
sales, compared to $1.0 million, or 4.8% of sales, in the third quarter. The
improvement in gross profit is attributable partly to increased sales volume in
the fourth quarter and partly to the fact that $2.1 million of valuation
adjustments to inventories and other costs of goods sold variances in the power
quality product lines of I-Bus/Phoenix were recorded to cost of sales in the
third quarter, which did not recur in the fourth quarter. In addition, we wrote
off certain inventories in the third quarter related to decisions made to
discontinue certain product lines. We also had a higher margin mix of product
sales in the fourth quarter in the microelectronics product lines of our
Electronic Components Group segment. We began to realize the gross margin
benefits of reduced overhead expenses in the fourth quarter of 2000 when we
began to occupy our new and redesigned manufacturing facilities.
32
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In the fourth quarter, our selling, general and administrative expenses
decreased $1.8 million, or 26.6%, to $5.0 million from $6.8 million in the third
quarter. As a percentage of total sales these expenses decreased to 18.2% in the
fourth quarter, from 31.4% in the third quarter, primarily due to the increase
in sales volume. These expenses in the fourth quarter reflect certain year-end
adjustments to accrued expenses, which reduced total selling, general and
administrative expenses. While we are continuing to focus on opportunities to
decrease our selling, general and administrative expenses, we expect the level
of such expenses in future quarters to more closely approximate the amount of
such expenses in the third quarter.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses reflect internally funded research
and development programs. Research and development expenses were $2.6 million,
or 9.6% of sales, for the fourth quarter, as compared to $2.3 million, or 10.8%
of sales, for the third quarter. We have increased the level of spending in
research and development to accelerate new product introductions and we expect
our level of spending to remain at increased levels, as a percentage of sales,
in future periods.
RESTRUCTURING, ACQUISITION AND OTHER CHARGES
In connection with our restructuring plan, we undertook various actions to
improve our cost structure. As a result, we recorded restructuring and other
related charges of $2.3 million during the third quarter. These charges included
severance costs related to reductions in headcount, costs associated with the
closure and combination of certain facilities and the write-off of
non-performing operating assets. In the third quarter, we also recorded a charge
of $4.8 million to reduce the carrying value of goodwill related to our 1998
acquisition of Phoenix Power Systems, Inc. to an amount representative of the
current appraised value of that asset. Also, in the third quarter, we recorded a
charge of $0.5 million related to in-process technology acquired in connection
with our acquisition of Gateworks Corporation in September 2000. We have
completed the facilities and organizational consolidation program started as
part of our restructuring plan, and therefore, we did not record any additional
charges related to the restructuring plan in the fourth quarter and we do not
expect to incur any such additional charges in the future.
OPERATING LOSS
As a result of the factors mentioned above, the operating loss was $0.9
million for the fourth quarter as compared to an operating loss of $15.6 million
for the third quarter. Excluding restructuring, acquisition and other charges,
operating loss was $0.9 million for the fourth quarter as compared to $8.1
million for the third quarter.
33
<PAGE>
COMPARISON AND DISCUSSION OF RESULTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2000 AND 1999, THE FIVE MONTHS ENDED DECEMBER 31, 1999, AND THE
FISCAL YEARS ENDED JULY 31, 1999 AND 1998
The following table sets forth, for the periods indicated, our selected
operating data, expressed as a percentage of sales.
<TABLE>
<CAPTION>
YEARS ENDED FIVE MONTHS YEARS ENDED
JULY 31, ENDED DECEMBER 31,
--------------------------- DECEMBER 31, ---------------------------
1998 1999 1999 1999 2000
----------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Continuing Operations:
Sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................. 62.2 68.1 76.8 71.9 77.7
----------- ----------- ----------- ---------- ------------
Gross profit................................... 37.8 31.9 23.2 28.1 22.3
Operating expenses:
Selling, general and administrative.......... 24.2 25.3 33.1 26.5 25.7
Research and development..................... 7.5 6.6 7.1 6.2 8.5
Restructuring, acquisition and other charges. 5.0 2.6 7.6 5.1 8.9
----------- ----------- ----------- ---------- ------------
Total operating expenses................... 36.7 34.5 47.8 37.8 43.1
----------- ----------- ----------- ---------- ------------
Operating income (loss)........................ 1.1 (2.6) (24.6) (9.7) (20.8)
Interest expense............................... (0.5) (0.4) (0.3) (0.3) (1.4)
Interest income and other, net................. 1.7 0.6 (0.1) 0.5 --
----------- ----------- ----------- ---------- ------------
Income (loss) from continuing operations before
income taxes and minority interest........... 2.3 (2.4) (25.0) (9.5) (22.2)
Provision (credit) for income taxes............ 0.5 (6.3) (9.2) (9.6) (6.1)
Minority interest in net loss of subsidiaries.. -- -- -- -- (0.2)
----------- ----------- ----------- ---------- ------------
Income (loss) from continuing operations....... 1.8 3.9 (15.8) 0.1 (15.9)
Discontinued operations, net of tax:
Income (loss) from operations.................. (4.0) 6.9 (14.1) 1.7 (2.8)
Gain (provision for estimated loss) on disposal -- -- (5.6) (2.0) 2.8
----------- ----------- ----------- ---------- ------------
Net income (loss)................................. (2.2)% 10.8% (35.5)% (0.2)% (15.9)%
=========== =========== =========== ========== ============
</TABLE>
The following table sets forth sales, gross profit and gross profit as a
percentage of sales for each of our continuing business segments.
<TABLE>
<CAPTION>
YEARS ENDED FIVE MONTHS YEARS ENDED
JULY 31, ENDED DECEMBER 31,
---------------------------- DECEMBER 31, ---------------------------
1998 1999 1999 1999 2000
------------ ----------- ---------- ------------ -----------
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Electronic Components Group:
Sales....................................... $35,166 $ 37,783 $ 9,143 $ 29,336 $ 39,139
Gross profit................................ 14,884 12,415 543 6,238 11,146
Gross profit as a percentage of sales....... 42.3% 32.9% 5.9% 21.3% 28.5%
I-Bus/Phoenix Power and Computing Systems:
Sales....................................... $42,848 $ 65,095 $ 27,720 $ 74,275 $ 63,208
Gross profit................................ 14,560 20,419 7,998 22,848 11,729
Gross profit as a percentage of sales....... 34.0% 31.4% 28.9% 30.8% 18.6%
Consolidated (from continuing operations):
Sales....................................... $78,014 $ 102,878 $ 36,863 $103,611 $102,347
Gross profit................................ 29,444 32,834 8,541 29,086 22,875
Gross profit as a percentage of sales....... 37.7% 31.9% 23.2% 28.1% 22.3%
</TABLE>
34
<PAGE>
SALES
Sales from continuing operations for the year ended December 31, 2000 were
$102.3 million, reflecting a $1.3 million, or 1.2%, decrease from sales of
$103.6 million for the year ended December 31, 1999. The decrease in sales from
the prior year is primarily the result of the conclusion of a major
I-Bus/Phoenix supply agreement during the current year, as well as the
elimination of revenue from licensing and strategic transactions, which made a
contribution to revenue in the prior year, offset by increases in sales in the
current year in our Electronic Components Group segment. The major supply
agreement contributed sales of $8.6 million in the year ended December 31, 2000,
compared to sales of $19.3 million in 1999. Sales in the year ended December 31,
1999 included contributions from licensing and strategic transactions of $1.0
million, which contributed no sales revenue in the current year. Excluding sales
from the major supply agreement and from licensing and strategic transactions,
sales in the year ended December 31, 2000 were $93.7 million, a $10.4 million,
or 12.5%, increase over sales of $83.3 million for the year ended December 31,
1999.
In the five months ended December 31, 1999, sales totaled $36.9 million. In
the fiscal year ended July 31, 1999, total sales were $102.9 million, an
increase of $24.9 million, or 31.9%, from $78.0 million in fiscal year 1998.
Sales in the five months ended December 31, 1999 were negatively impacted by
reduced revenues from licensing and strategic transactions and by economic
issues facing certain customers in the commercial satellite and oil markets.
Sales in the fiscal year ended July 31, 1999 increased over the fiscal year
ended July 31, 1998 in each of our business segments.
Sales to customers outside of the United States totaled $25.8 million and
$25.3 million in the calendar years ended December 31, 2000 and 1999,
respectively, and $10.7 million, $24.0 million and $14.8 million in the five
months ended December 31, 1999 and in the fiscal years ended July 31, 1999 and
1998, respectively. Expansion of our applied computing business in Germany and
France and the contribution of sales from our United Kingdom applied computing
operation, which was acquired in fiscal year 1998, are the primary drivers for
the increased foreign sales beginning in the fiscal year ended July 31, 1999.
Sales within each of our continuing business segments is as follows:
ELECTRONIC COMPONENTS GROUP. For the year ended December 31, 2000, sales in
the Electronic Components Group segment increased $9.8 million, or 33.4%, to
$39.1 million from $29.3 million for the year ended December 31, 1999. Sales
increased in all product lines of the Electronic Components Group segment during
2000, including a $6.9 million increase in sales in our microelectronics product
lines to customers in the commercial satellite market. Sales in our PowerCache
ultracapacitor product lines also increased in 2000, despite a $1.0 million
decrease in revenue received from technology license agreements, due primarily
to shipments made during the fourth quarter in connection with our supply
agreement with the Allison Transmission division of General Motors Corporation.
In the five months ended December 31, 1999, Electronic Components Group
sales totaled $9.1 million, representing lower average monthly sales volumes
than those achieved in the fiscal year ended July 31, 1999. The decrease in
sales in the five months ended December 31, 1999 is partly attributable to the
fact that no revenue was received in the five months ended December 31, 1999
from technology licenses and other collaborative agreements, while $3.7 million
of such revenue was received in the fiscal year ended July 31, 1999 in the
PowerCache ultracapacitor product lines. In addition, revenues from customers of
our microelectronic components product lines in the commercial satellite market
decreased in the five months ended December 31, 1999 due to economic issues
affecting such customers. Also, over-stock issues at our primary filtered
feedthrough customer and weakness in oil and space markets resulted in decreased
sales of our filtered feedthroughs and ceramic capacitors late in 1999. In the
fiscal year ended July 31, 1999, Electronic Components Group sales increased
$2.6 million, to $37.8 million from $35.2 million in the fiscal year ended
July 31, 1998. Sales of our filtered feedthroughs and ceramic capacitors
contributed to this sales increase due partly to the acquisition of a small
manufacturer of ceramic capacitors used in a variety of high-voltage
applications, including commercial space, defense and medical equipment,
which was combined with the ceramic capacitor product lines in our Carson
City, Nevada facility. Partially offsetting the increased product sales,
revenue from licenses and collaborative agreements decreased to $3.7 million
in the fiscal year ended July 31, 1999 from $7.3 million in the fiscal year
ended July 31, 1998.
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I-BUS/PHOENIX POWER AND COMPUTING SYSTEMS. For the year ended December 31,
2000, I-Bus/Phoenix sales decreased $11.1 million, or 14.9%, to $63.2 million
from sales of $74.3 million for the year ended December 31, 1999. For the year
ended December 31, 2000, foreign sales represented 34% of our total sales in
this segment compared to 32% for the year ended December 31, 1999. Domestic
sales in this segment are made principally to OEM customers and are primarily
derived from the shipment of power and computing systems that are "designed-in"
to the OEMs' products. Beginning in 1998, we strengthened the international
presence of this segment through the acquisition of applied computing businesses
in England and Germany and through the inception of operations in France. To
date, these European businesses have focused primarily on lower-priced standard
products.
The decrease in sales for the year ended December 31, 2000 is primarily
attributable to a decline in revenues from our OEM supply agreement with Siemens
ElectroCom L.P. and the United States Postal Service, which concluded in the
third quarter of 2000 and was winding down during 2000. This supply agreement
contributed sales of $8.6 million in the year ended December 31, 2000, compared
to sales of $19.3 million in 1999. Excluding sales from this supply agreement,
sales for this segment in 2000 were $54.6 million, or approximately the same as
sales of $55.0 million for 1999. Excluding the major supply agreement, sales
decreased in the applied computing product lines of this segment during the
current year due primarily to the phase-out of certain marginal older technology
product lines without a comparable contribution in the current year from new
products, which were introduced beginning in the first quarter of 2001.
Offsetting reduced applied computing sales, sales within the power quality
product lines of this segment increased during the current year.
In the five months ended December 31, 1999, sales in this segment totaled
$27.7 million. In the fiscal year ended July 31, 1999, I-Bus/Phoenix sales
increased $22.3 million, or 51.9%, to $65.1 million from $42.8 million in the
fiscal year ended July 31, 1998. The increase in sales in the fiscal year ended
July 31, 1999, was partly attributable to an increase in European sales due to
the expansion of our applied computing businesses in Germany and France and the
contribution of sales from our United Kingdom applied computing operation, which
was acquired in the fiscal year ended July 31, 1998. In addition, sales
increased in the fiscal year ended July 31, 1999 in both the segment's power
quality product lines, following the February 1998 acquisition of Phoenix Power
Systems, Inc., and its applied computing product lines due to new design-in wins
for customized OEM products, including the major supply agreement with Siemens
ElectroCom L.P. and the United States Postal Service. Partially offsetting these
increases was the completion in the second quarter of the fiscal year ended July
31, 1998 of sales to a single, long-standing OEM customer under a multi-year
program and the curtailment at the end of the fiscal year ended July 31, 1998 of
a program with Digital Equipment Corporation due to its acquisition by Compaq
Computers.
While this segment does market certain standard products, and the segment
continues to expand its presence in Europe, sales under large OEM programs
remain a critical element of this business. As a current enhancement of our
marketing strategy, we have engaged a network of independent sales
representatives in the United States and certain territories outside of the
United States with the dual aim of generating direct sales, as well as leads for
additional OEM design-in opportunities. In addition, the recent integration of
our applied computing and power quality businesses should improve the
international sales of the power quality products and services by providing
access to the segment's existing international sales channels to those product
lines. If sales of OEM products do not achieve the levels projected by the OEM,
or if OEM projects are curtailed due to consolidations or other market
conditions, we may be unable to offset such loss of sales.
GROSS PROFIT
In the year ended December 31, 2000, our gross profit was $22.9 million, or
22.3% of sales, compared to $29.1 million, or 28.1% of sales, in the year ended
December 31, 1999. Gross profit and gross profit as a percentage of sales were
negatively impacted in the year ended December 31, 2000 by reduced sales volume
in the year, primarily during the third quarter of 2000, which was inadequate to
fully absorb fixed manufacturing costs. In addition, the reduced gross profit in
the current year reflects costs incurred in the current year in connection with
training personnel in improved manufacturing processes and certain write-offs of
inventories related to discontinued product lines or deemed excess or obsolete.
In the five months ended December 31, 1999, our gross profit was $8.5
million, or 23.2% of sales, a substantial decrease from prior years. Reduced
sales volumes, decreases in high margin revenues from licenses and other
collaborative agreements, and certain write-offs of inventories determined to be
excess or obsolete were the primary reasons for the reduced gross margins during
the five months ended December 31, 1999.
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In the fiscal year ended July 31, 1999, our gross profit increased $3.4
million, or 11.5%, to $32.8 million as compared to $29.4 million in the fiscal
year ended July 31, 1998. As a percentage of sales, gross profit was 31.9% in
the fiscal year ended July 31, 1999 compared to 37.7% in the fiscal year ended
July 31, 1998. Reductions in gross margins as a percentage of sales from the
fiscal year ended July 31, 1998 to the fiscal year ended July 31, 1999 resulted
from a combination of factors, including an increase in revenues from sales of
applied computing systems with significant third party content, upon which lower
overall gross profit margins are realized; a decrease in high margin development
funding and technology license fees; and changes in the mix of products and
services sold.
We believe that our improved manufacturing and other operational
capabilities obtained through the completion of the restructuring plan in
October 2000, will result in improved gross margins in future periods.
Gross profit within each of our continuing business segments is as follows:
ELECTRONIC COMPONENTS GROUP. In the year ended December 31, 2000, gross
profit in the Electronic Components Group segment increased by $4.9 million, or
78.7%, to $11.1 million from $6.2 million in the year ended December 31, 1999.
As a percentage of sales, gross profit improved to 28.5% in the current year
from 21.3% in the prior year. The increase in gross profit for the current year
is the result of increased sales volume and an improved cost structure,
primarily in our microelectronics and PowerCache product lines, offset by a
reduction in gross margins associated with revenue from licenses and other
collaborative agreements and by costs incurred in connection with training
personnel in improved manufacturing processes and certain write-offs of
inventories related to discontinued product lines or deemed excess or obsolete.
The increase in gross profit as a percentage of sales also reflects the
increased sales volume and the impact of the process and cost improvements in
this business segment. In our PowerCache ultracapacitor product line, we
continue to make required infrastructure and other investments which negatively
impact gross profit at current sales volumes. Although gross margins have
improved in the PowerCache business, such margins continue to reduce the overall
gross margins for the Electronic Components Group segment.
Gross profit for the Electronic Components Group segment was $0.5 million
in the five months ended December 31, 1999, or 5.9% of sales. Gross profit in
this segment was significantly impacted in the five months ended December 31,
1999 by unabsorbed overhead and other production costs in the PowerCache
ultracapacitor business area, which was in the start-up phase of volume
production, resulting in negative gross margins. In addition, this business area
received no contribution in the five months ended December 31, 1999 from high
margin revenue from licenses and other collaborative agreements. Low sales
volumes in the other Electronic Components Group business areas also contributed
to reduced gross margins in the five months ended December 31, 1999. In
addition, charges were recorded in our filtered feedthrough, ceramic capacitors
and microelectronics product lines in the five months ended December 31, 1999 to
write-off certain inventories deemed excess or obsolete, also impacting gross
margins.
In the fiscal year ended July 31, 1999, Electronic Components Group gross
profit decreased $2.5 million to $12.4 million from $14.9 million in the fiscal
year ended July 31, 1998. As a percentage of sales, gross profit decreased to
32.9% in fiscal year 1999 from 42.3% in fiscal year 1998. The decrease in gross
profit primarily reflected a decrease in high margin development funding and
technology license fees of $3.7 million, and also reflected a lower margin mix
of products and services. This decrease also reflected changes in our pricing
strategies in response to competitive pressures, as we continued to improve our
penetration in various markets.
I-BUS/PHOENIX POWER AND COMPUTING SYSTEMS. In the year ended December 31,
2000, I-Bus/Phoenix gross profit decreased by $11.1 million, or 48.7%, to $11.7
million from $22.8 million in the year ended December 31, 1999. As a percentage
of sales, gross profit decreased to 18.6% in the current year, as compared to
30.8% in the year ended December 31, 1999. The decrease in gross profit is
primarily attributable to the impact of reduced sales volume for this segment in
the current year. In addition, this segment has experienced a change in product
mix to include a higher proportion of lower-margin power quality products, as
compared to higher margin applied computing solutions. The reduced gross profit
in the current year also reflects costs incurred in the current year in
connection with training personnel in improved manufacturing processes and
certain write-offs of inventories related to discontinued product lines or
deemed excess or obsolete.
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In the five months ended December 31, 1999, I-Bus/Phoenix gross profit
totaled $8.0 million, or 28.9% of sales, representing a decrease in gross margin
as a percentage of sales from prior periods. This decrease was primarily
attributable to a lower margin mix of product sales in the five months ended
December 31, 1999 and certain write-offs of excess and obsolete inventories.
In the fiscal year ended July 31, 1999, I-Bus/Phoenix gross profit
increased $5.8 million, or 40.2%, to $20.4 million from $14.6 million in the
fiscal year ended July 31, 1998. As a percentage of sales, gross profit
decreased to 31.4% in the fiscal year ended July 31, 1999 from 34.0% in the
fiscal year ended July 31, 1998. This decrease was primarily due to a change in
sales mix which, in the fiscal year ended July 31, 1998, included certain higher
margin products that were near the end of their life cycle, with no such sales
in the fiscal year ended July 31, 1999. In addition, a higher proportion of our
revenues in the fiscal year ended July 31, 1999, were derived from contracts
which include applied computing systems with greater third party content, upon
which lower overall gross profit margins were realized.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In the year ended December 31, 2000, our selling, general and
administrative expenses decreased $1.2 million, or 4.7%, to $26.3 million from
$27.5 million in the year ended December 31, 1999. As a percentage of total
sales, these expenses decreased to 25.7% in the year ended December 31, 2000,
from 26.5% in the year ended December 31, 1999. We are continuing to focus on
opportunities to decrease our selling, general and administrative expenses.
In the five months ended December 31, 1999, selling, general and
administrative expenses were approximately $12.2 million, or 33.1% of sales. The
increase in these expenses was primarily in support of our continuing growth and
the continuing expansion into Europe by I-Bus/Phoenix. The five months ended
December 31, 1999 also included $750,000 of severance costs related to our
former CEO.
In the fiscal year ended July 31, 1999, our selling, general and
administrative expenses increased $7.2 million, or 37.9%, to $26.1 million from
$18.9 million in the fiscal year ended July 31, 1998. As a percentage of total
sales, selling, general and administrative expenses increased to 25.3% in the
fiscal year ended July 31, 1999 from 24.2% in the fiscal year ended July 31,
1998. The increase in these expenses was primarily in support of our sales
growth, including the businesses acquired in the fiscal years ended 1999 and
1998. In addition, we made certain investments related to administrative
infrastructure and in administrative and sales support which increased the
expenses as a percentage of sales.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses reflect internally funded research
and development programs. Research and development expenses were $8.7 million,
or 8.5% of sales, for the first three years ended December 31, 2000, as compared
to $6.4 million, or 6.2% of sales, for the year ended December 31, 1999. We have
increased our level of spending in research and development to accelerate new
product introductions and we expect this level of spending to remain at
increased levels in future periods.
Research and development expenses were $2.6 million, $6.8 million and $5.8
million for the five months ended December 31, 1999 and the fiscal years ended
July 31, 1999 and 1998, respectively. As a percentage of sales, research and
development expenses were 7.1% in the five months ended December 31, 1999, 6.6%
in the fiscal year ended July 31, 1999, and 7.5% in the fiscal year ended July
31, 1998.
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RESTRUCTURING, ACQUISITION AND OTHER CHARGES
In connection with the restructuring plan, we undertook various actions to
improve our cost structure. As a result, we recorded restructuring and other
related charges of $3.9 million during the first three quarters of the year
ended December 31, 2000. These charges included severance costs related to
reductions in personnel, costs associated with the closure and combination of
certain facilities and the write-off of non-performing operating assets. We
completed the facilities and organizational consolidation program started as
part of our restructuring plan and do not expect to record any additional
charges related to the restructuring plan. In the three months ended September
30, 2000, we also recorded a charge of $4.8 million to reduce the carrying value
of goodwill related to our 1998 acquisition of Phoenix Power Systems, Inc. to an
amount representative of the current appraised value of that asset. Also, in the
three months ended September 30, 2000, we recorded a charge of $0.5 million
related to in-process technology acquired in connection with our acquisition of
Gateworks Corporation in September 2000.
We also recorded restructuring and other related charges in connection with
the restructuring plan in the five months ended December 31, 1999 totaling
approximately $2.8 million.
During the fiscal year ended July 31, 1999, we recorded restructuring,
acquisition and other charges of approximately $2.6 million. Of these charges,
approximately $1.6 million consisted of direct acquisition costs for business
combinations accounted for using the pooling-of-interests method. The remaining
$1.0 million charge consisted primarily of amounts provided for revised
estimates of costs to resolve certain environmental and legal contingencies
which occurred in prior years, as well as other restructuring provisions,
including employee and facility expenses, related to decisions made in July 1999
to reduce certain administrative infrastructure in Europe and the United States.
We recorded a $3.9 million charge in the fiscal year ended July 31, 1998
related to the acquisition of two businesses, including transaction costs for a
business combination accounted for as a pooling-of-interest, and the appraised
amount of acquired in-process research and development for the business
combination accounted for as a purchase.
INTEREST EXPENSE
Interest expense increased to $1.4 million in the year ended December 31,
2000 from $0.3 million in the prior year. The increased interest expense relates
to higher borrowing levels in the current year compared to the prior year. At
December 31, 2000, we had $22.7 million outstanding under our bank
line-of-credit. We expect borrowings and related interest expense to decrease in
the second quarter of 2001, following the sale of our defense contracting
business by the end of March 2001, the proceeds of which will be used to repay
debt.
Interest expense was $112,000, $404,000 and $338,000 in the five months
ended December 31, 1999 and in the fiscal years ended July 31, 1999 and 1998,
respectively.
INTEREST INCOME AND OTHER, NET
Interest income and other, net, consisting primarily of interest income,
foreign currency transaction gains and losses and gains and losses on
dispositions of fixed assets, was $9,000 in the year ended December 31, 2000 and
$501,000 in the year ended December 31, 1999. Interest income has decreased
reflecting lower average cash balances in the year ended December 31, 2000.
Interest income and other, net, was $(29,000), $565,000 and $1.3 million in
the five months ended December 31, 1999 and in the fiscal years ended July 31,
1999 and 1998, respectively. The decrease in interest income reflects lower
average cash balances in both the five months ended December 31, 1999 and in the
fiscal year ended July 31, 1999. During the fiscal year ended July 31, 1998, we
received proceeds of approximately $47 million from a follow-on offering of our
common stock. Such cash proceeds were used to fund growth in operations and
acquisitions through December 31, 1999.
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PROVISION (CREDIT) FOR INCOME TAXES
The credit for income taxes for the year ended December 31, 2000 reflects
our expected world-wide tax rate for the current fiscal year. Our effective tax
rate was reduced by the fact that no tax credit was provided for the $4.8
million charge recorded to reduce the carrying value of goodwill since that
amount will never be deductible for tax purposes. In future years, we will
continue to provide income taxes approximating applicable statutory rates,
although cash payments for taxes will be substantially lower in the near-term as
tax loss carryforwards are utilized. We have net deferred tax assets of
approximately $24.6 million at December 31, 2000, which relate primarily to net
operating loss carryforwards that we expect to use as a result of expected gains
on dispositions of discontinued operations and future income from operations.
For the year ended December 31, 1999, our credit for income taxes included a
credit of $4.3 million, representing the reversal of a valuation allowance
provided in previous years against certain deferred tax benefits. The valuation
allowance was reversed based on our determination that it had become more likely
than not that such deferred tax benefits will be realized in the future. The
deferred income tax credit was partially offset by certain foreign and state
income tax expense.
The credit for income taxes in the five months ended December 31, 1999
reflected our expected world-wide tax rate for that period. The credit for
income taxes for the fiscal year ended July 31, 1999 includes the credit of $4.3
million, discussed above, representing the reversal of a valuation allowance
provided in previous years against certain deferred tax benefits. Our provision
for income taxes for the fiscal year ended July 31, 1998 related primarily to
taxes of the businesses acquired in the fiscal year ended July 31, 1999 using
the pooling-of-interests method.
MINORITY INTEREST IN NET INCOME (LOSS) OF SUBSIDIARIES
Minority interest in net income (loss) of subsidiaries was $(181,000) for
the year ended December 31, 2000 and $4,000 for the year ended December 31,
1999. The reduction in our net loss results from losses incurred by our
minority-owned subsidiaries.
Minority interest in net income (loss) of subsidiaries was not material in
the five months ended December 31, 1999 or in the fiscal years ended July 31,
1999 and 1998.
INCOME (LOSS) FROM CONTINUING OPERATIONS
As a result of the factors mentioned above, income (loss) from continuing
operations was $(16.3) million and $46,000 for the years ended December 31, 2000
and 1999, respectively.
As a result of the factors mentioned above, the income (loss) from
continuing operations was $(5.8) million for the five months ended December 31,
1999, compared to $3.9 million and $1.4 million in the fiscal years ended July
31, 1999 and 1998, respectively.
DISCONTINUED OPERATIONS
In connection with the restructuring plan, we divested three of our
businesses in 2000:
- our high voltage wound film capacitors;
- high voltage power supplies; and
- time card and job cost accounting software businesses.
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In February 2000, we sold the high voltage wound film capacitors and high
voltage power supplies businesses for cash of $3.5 million, approximately the
book value of the net assets sold as of that date. In addition, the buyer
assumed certain liabilities of the businesses, including a long-term lease for
the facility the businesses occupied, which extended through 2006 with annual
rent of approximately $0.5 million. In November 2000, we sold our time card and
job cost accounting software business for cash of $2.5 million and shares of
common stock of the buyer with an immaterial value. In the fourth quarter of
2000, we also received cash of approximately $0.7 million related to our equity
investment in an unconsolidated entity, which was classified as a discontinued
operation. In December 1999, we recorded provisions of approximately $2.1
million, net of tax, for estimated losses on the sale of these discontinued
businesses. Based on the actual proceeds received and the net assets of the
discontinued businesses at their respective dates of sale, we reversed the
provisions we estimated in December 1999 and recorded an aggregate gain on these
sales of $2.9 million, net of tax, including the reversal.
In late 2000, we decided to focus on our Electronic Components Group and
I-Bus/Phoenix businesses. Accordingly, in late 2000, we offered for sale our
defense contracting business and signed letters of intent to sell the business
in separate transactions with two buyers. Both transactions are expected to be
completed by March 31, 2001. Also, we are now seeking strategic alternatives for
our PurePulse business, which we expect will result in the sale of all or a
majority of the business in 2001. Accordingly, both the defense contracting
business and PurePulse have been classified as discontinued operations for
financial reporting purposes. See Note 10 to the "Consolidated Financial
Statements" included elsewhere in this Form 10-K.
Income (loss) from operations of these discontinued businesses was $(2.9)
million in the year ended December 31, 2000, compared to $1.8 million for the
year ended December 31, 1999 and $(5.2) million, $7.1 million and $(3.1) million
for the five months ended December 31, 1999 and the fiscal years ended July 31,
1999 and 1998, respectively. The income from operations of the discontinued
businesses for the year ended December 31, 1999 and the fiscal year ended July
31, 1999 includes a $1.7 million tax credit representing the reversal of an
income tax valuation allowance provided in previous years against certain
deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
We have historically relied on a combination of cash on hand, internally
generated funds, proceeds from sales of stock and bank borrowings to finance our
working capital requirements and capital expenditures. In the fiscal year ended
July 31, 1998, we received cash of $47.1 million in connection with a public
offering of our stock. In addition, in the fiscal years ended July 31, 1999 and
December 31, 2000, we received approximately $1.7 million and $2.9 million,
respectively, from the exercise of stock options and purchases under employee
stock purchase plans.
Cash used by continuing operations in the year ended December 31, 2000 was
approximately $15.3 million, as compared to $13.0 million in the year ended
December 31, 1999. In the current year, the use of cash was primarily
attributable to operating losses, cash expenditures in connection with
completing our restructuring plan and certain increases in working capital.
Capital expenditures in the years ended December 31, 2000 and 1999 were $11.8
million and $5.2 million, respectively. The capital expenditures in 2000 include
approximately $8.9 million related to the design, construction, remodeling and
outfitting of our manufacturing facilities. The remaining expenditures relate
primarily to other capital assets needed to support growth. We have ordered
additional equipment for volume manufacturing of ultracapacitors and for the
manufacture of EMI filter capacitors. We may also consider leasing facilities or
manufacturing equipment, or both, or may satisfy high-volume manufacturing
requirements through outsourcing or under licensing arrangements with third
parties. If we decide to construct additional facilities or purchase high-volume
manufacturing equipment, a significant amount of capital may be required. In the
year ended December 31, 2000, we also received cash of $6.0 million in
connection with sales of businesses and used cash of $4.5 million in connection
with the payment of an earn-out obligation related to a 1998 acquisition, and
$500,000 of cash was paid in connection with the September 2000 acquisition of
Gateworks Corporation.
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Cash used by continuing operations in the five months ended December 31,
1999 was approximately $3.5 million, as compared to $13.4 million and $1.8
million in fiscal years 1999 and 1998, respectively. In the five months ended
December 31, 1999, the operating losses were partially offset by decreases in
operating assets, primarily accounts receivable. In the fiscal years ended July
31, 1999 and 1998, the use of cash was primarily attributable to increases in
accounts receivable and inventories, due both to acquired businesses and in
support of increased sales. Our capital expenditures in the five months ended
December 31, 1999 and in the fiscal years ended July 31, 1999 and 1998 were $1.6
million, $5.5 million and $4.6 million, respectively, and related primarily to
production and other capital assets needed to support growth in all of our
business units.
We believe that funds on hand, together with cash generated from
operations, cash expected to be received from the divestiture of certain
businesses and funds available under our bank credit agreement, will be
sufficient to finance our operations and our capital expenditures for 2001, as
well as finance remaining payments required in connection with the restructuring
plan. In addition to addressing manufacturing requirements, we may also, from
time-to-time, consider acquisitions of complementary businesses, products or
technologies, which may require additional funding. Sources of additional
funding for these purposes could include cash and cash equivalents, cash flow
from operations, borrowings under the existing bank credit agreement, and
additional debt or equity financings. There can be no assurance that we will be
able to obtain additional sources of financing on favorable terms, if at all, at
such time or times as we may require such capital.
We had borrowings of $22.7 million outstanding under a bank credit
agreement as of December 31, 2000. The bank was repaid in full with proceeds of
our new bank credit agreement and the old agreement was terminated effective
February 26, 2001. Our bank debt will be reduced following the sale of our
defense contracting business, which is expected to be completed by March 31,
2001.
NEW BANK CREDIT AGREEMENT
In February 2001, we and all of our U.S. subsidiaries entered into a Loan
and Security Agreement with Comerica Bank - California. The agreement consists
of a $15.0 million term loan and a revolving credit facility. The term loan is
due on the earlier of June 15, 2001, or the date we complete the sale of our
defense contracting business. If we sell only part of this business for proceeds
less than that necessary to repay the term loan, we must make a partial payment
on the term loan. The term loan bears interest at the bank's reference rate,
plus 1.50%. If we fail to repay the term loan by June 15, 2001, we must grant
Comerica Bank a security interest in our real property, and we will need to
negotiate with the bank a new due date, payment schedule and other terms. There
can be no assurance that we will be able to negotiate such terms on a favorable
basis.
The current borrowing availability under the revolving credit facility is
determined from a borrowing base, consisting of a portion of our accounts
receivable and inventory, but the total availability will not exceed $15.0
million. After we sell our defense contracting business, repay the term loan and
have a profit for one fiscal quarter, the availability under the revolving
credit facility will be $15.0 million and will no longer be determined from a
borrowing base. Amounts borrowed as revolving loans bear interest, at our
option, at either the bank's reference rate plus 1.0%, or the LIBOR rate plus
3.0%. We may prepay revolving loans at any time, and all amounts borrowed are
due on May 30, 2002. On March 15, 2001, $15.0 million was outstanding under the
Term Loan and $10.0 million was outstanding under the revolving facility.
The bank credit facility contains financial and other covenants and certain
restrictions on our ability to sell assets, engage in mergers or acquisitions,
incur additional indebtedness or pay dividends on our common stock. As of the
date of this Form 10-K, we are in compliance with all required covenants. The
bank credit facility is secured by all of our assets in the United States,
except for our real property, and the pledge of two-thirds of the stock of
certain of our foreign subsidiaries.
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MINORITY EQUITY INTERESTS IN SUBSIDIARIES AND SUBSIDIARY OPTION PROGRAMS
Each of the Electronic Components Group, I-Bus/Phoenix and PurePulse have
minority equity investors. These investors are former strategic partners
associated with relationships established in the past, former shareholders of
companies acquired using our subsidiaries' stock and former and current
employees who have exercised stock options in those entities. As of December 31,
2000, minority investors owned, of the outstanding shares, approximately 5.1% of
the Electronic Components Group, 6.3% of I-Bus/Phoenix and 19.3% percent of
PurePulse. In addition, each such subsidiary has an employee stock option plan
that permits the issuance of incentive and nonqualified stock options to
purchase subsidiary common stock. The option programs at I-Bus/Phoenix and at
PurePulse are active and the Electronic Components Group program is not active,
although options issued previously remain outstanding. As of mid-2000, key
employees of I-Bus/Phoenix and PurePulse are eligible for option grants in their
respective subsidiary plans and are not eligible for grants at the parent
company level. Key parent company and Electronic Components Group employees are
eligible for option grants at the parent company level, but not in any
subsidiaries.
The option plans are intended to encourage an entrepreneurial atmosphere in
each business segment, providing focused incentives to appreciate the equity
value of each business. Options that are "in-the-money" at the subsidiary level
will have a negative impact on our earnings per share. We expect to report
diluted earnings per share in future quarters due to in-the-money subsidiary
options. Except to the extent exercised, however, such subsidiary options will
not affect our consolidated net income as reported in our consolidated statement
of operations. Such options, when and if exercised, will dilute our actual
ownership interest in our subsidiaries, thus reducing our share of the net
income, potential dividends or distributions and proceeds of any sale or other
disposition of such subsidiary. The equity interest upon exercise of stock
options in the subsidiaries is accounted for as a minority interest. At December
31, 2000, the potential percentage ownership interest attributable to
exercisable subsidiary options was, on a diluted basis, approximately 3% of the
Electronic Components Group, 3% percent of I-Bus/Phoenix and 5% of PurePulse.
INFLATION AND CHANGES IN PRICES
Generally, we have been able to increase prices to offset inflation-related
increased costs in our commercial businesses.
CONVERSION TO THE EURO CURRENCY
On January 1, 1999, certain member countries of the European Union
established fixed conversion rates between their existing currencies and the
European Union's common currency (euro). The transition period for the
introduction of the euro ends June 30, 2002. Issues we face as a result of the
introduction of the euro include converting information technology systems,
reassessing currency risk, negotiating and amending licensing agreements and
contracts, and processing tax and accounting records. We are addressing these
issues and we do not expect the conversion to the euro to have a material effect
on our financial condition or results of operations.
FORWARD-LOOKING STATEMENTS
To the extent that the above discussion goes beyond historical information
and indicates results or developments which we plan or expect to achieve, these
forward-looking statements are identified by the use of terms such as
"expected," "anticipates," "believes," "plans" and the like. Readers are
cautioned that such future results are uncertain and could be affected by a
variety of factors that could cause actual results to differ from those
expected, and such differences could be material. We undertake no obligation to
revise these forward-looking statements to reflect future events or
circumstances. You are referred to the "Risk Factors" section of this Form 10-K
for a further and more detailed discussion of certain of those factors.
43
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities (later amended
by Statement Nos. 137 and 138), which we are required to adopt beginning January
1, 2001. Statement No. 133 requires us to recognize all derivatives as either
assets or liabilities measured at fair value. The accounting for changes in the
fair value of a derivative depends on the use of the derivative. Because we make
minimal use of derivatives and hedges, we do not anticipate that the adoption of
Statement No. 133 will have a significant effect on the results of operations or
our financial position.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements. SAB 101 provides guidance in applying
generally accepted accounting principles to revenue recognition in financial
statements. The adoption of SAB 101 in the current fiscal year did not have a
material effect on our financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation. FIN 44 clarifies certain
issues in the application of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. FIN 44 is effective July 1, 2000, but
certain provisions cover specific events that occur after either December 15,
1998 or January 12, 2000. The adoption of FIN 44 did not have a material impact
on our financial statements.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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.
Our primary foreign currency exposure has been related to local currency
revenue and operating expenses in Europe. As a result of our international
operations, changes in foreign currency exchange rates impact the United States
dollar amount of our revenue and expenses. Historically, we have not hedged
specific currency exposures as gains and losses on foreign currency transactions
have not been material to date.
At December 31, 2000, we had $22.7 million outstanding related to variable
rate U.S dollar denominated short-term debt. The carrying value of these
short-term borrowings approximates fair value due to the short maturities of
these instruments. Assuming a hypothetical 10% adverse change in the interest
rate, annual interest expense on our short-term borrowings, if the amount
outstanding remained unchanged, would increase by approximately $220,000.
44
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................................................46
Consolidated Balance Sheets as of December 31, 1999 and December 31, 2000................................47
Consolidated Statements of Operations for the Fiscal Years Ended July 31, 1998 and 1999, the
Five Months Ended December 31, 1999 and the Calendar Years Ended December 31, 1999 (unaudited)
and 2000.................................................................................................48
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended July 31, 1998 and
1999, the Five Months Ended December 31, 1999 and the Calendar Year Ended December 31, 2000..............49
Consolidated Statements of Cash Flows for the Fiscal Years Ended July 31, 1998 and 1999, the
Five Months Ended December 31, 1999 and the Calendar Years Ended December 31, 1999 (unaudited)
and 2000.................................................................................................50
Notes to Consolidated Financial Statements...............................................................51
</TABLE>
45
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Maxwell Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Maxwell
Technologies, Inc. and subsidiaries, as of December 31, 1999 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended July 31, 1999, for the five
months ended December 31, 1999 and for the year ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Maxwell
Technologies, Inc. and subsidiaries at December 31, 1999 and 2000, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended July 31, 1999, for the five months ended December
31, 1999 and for the year ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
San Diego, California
February 9, 2001, except for Note 4, as to which the date is
February 26, 2001 and Note 12, as to which the date is
March 16, 2001.
46
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1999 2000
--------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 2,885 $ 2,686
Trade and other accounts receivable, less allowance for doubtful accounts
of $811 and $826 at December 31, 1999 and 2000, respectively............. 15,836 24,652
Inventories................................................................ 21,641 24,769
Prepaid expenses........................................................... 443 1,133
Deferred income taxes...................................................... 12,095 13,031
Net assets of discontinued operations...................................... 23,821 13,963
--------------- -------------
Total current assets..................................................... 76,721 80,234
Property, plant and equipment, net............................................ 14,751 22,567
Goodwill and other non-current assets......................................... 6,679 19,308
--------------- -------------
$ 98,151 $ 122,109
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities................................... $ 8,762 $ 21,711
Accrued employee compensation.............................................. 3,347 2,825
Current portion of long-term debt and short-term borrowings................ 288 22,754
--------------- -------------
Total current liabilities................................................ 12,397 47,290
Long-term debt, excluding current portion..................................... 186 --
Minority interest............................................................. 1,152 5,065
Commitments and contingencies
Stockholders' equity:
Common stock, $0.10 par value per share, 40,000 shares authorized; 9,564 and
9,877 shares issued and outstanding at December 31,
1999 and 2000, respectively.............................................. 957 988
Additional paid-in capital................................................. 78,378 81,204
Notes receivable from executives for stock purchases....................... -- (900)
Deferred compensation...................................................... (117) (15)
Retained earnings (deficit)................................................ 5,375 (10,942)
Accumulated other comprehensive loss - foreign currency translation
adjustments.............................................................. (177) (581)
--------------- -------------
Total stockholders' equity............................................... 84,416 69,754
--------------- -------------
$ 98,151 $ 122,109
=============== =============
See accompanying notes.
</TABLE>
47
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIVE MONTHS YEARS ENDED
YEARS ENDED JULY 31, ENDED DECEMBER 31,
---------------------- DECEMBER 31, ----------------------
1998 1999 1999 1999 2000
--------- --------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Continuing Operations:
Sales .................................. $ 78,014 $ 102,878 $ 36,863 $ 103,611 $ 102,347
Cost of sales .......................... 48,570 70,044 28,322 74,525 79,472
--------- --------- --------- --------- ---------
Gross profit ........................... 29,444 32,834 8,541 29,086 22,875
Operating expenses:
Selling, general and administrative .. 18,901 26,070 12,204 27,501 26,260
Research and development ............. 5,823 6,779 2,618 6,363 8,713
Restructuring, acquisition and other
charges ............................ 3,889 2,620 2,801 5,267 9,220
--------- --------- --------- --------- ---------
Total operating expenses ........... 28,613 35,469 17,623 39,131 44,193
--------- --------- --------- --------- ---------
Operating income (loss) ................ 831 (2,635) (9,082) (10,045) (21,318)
Interest expense ....................... (338) (404) (112) (331) (1,430)
Interest income and other, net ......... 1,343 565 (29) 501 9
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes and minority
interest ..... 1,836 (2,474) (9,223) (9,875) (22,739)
Provision (credit) for income taxes .... 413 (6,417) (3,408) (9,925) (6,267)
Minority interest in net income (loss)
of subsidiaries ...................... -- 4 -- 4 (181)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations 1,423 3,939 (5,815) 46 (16,291)
Discontinued operations, net of tax:
Income (loss) from operations .......... (3,130) 7,129 (5,211) 1,766 (2,880)
Gain (provision for estimated loss) on
disposal ............................. -- -- (2,065) (2,065) 2,854
--------- --------- --------- --------- ---------
(3,130) 7,129 (7,276) (299) (26)
--------- --------- --------- --------- ---------
Net income (loss) ......................... $ (1,707) $ 11,068 $ (13,091) $ (253) $ (16,317)
========= ========= ========= ========= =========
Basic net income (loss) per share:
Income (loss) from continuing operations $ 0.17 $ 0.42 $ (0.61) $ -- $ (1.66)
Income (loss) from discontinued
operations ........................... (0.37) 0.76 (0.76) (0.03) --
--------- --------- --------- --------- ---------
$ (0.20) $ 1.18 $ (1.37) $ (0.03) $ (1.66)
========= ========= ========= ========= =========
Diluted net income (loss) per share:
Income (loss) from continuing operations $ 0.16 $ 0.40 $ (0.61) $ -- $ (1.66)
Income (loss) from discontinued
operations ........................... (0.35) 0.72 (0.76) (0.03) (0.01)
--------- --------- --------- --------- ---------
$ (0.19) $ 1.12 $ (1.37) $ (0.03) $ (1.67)
========= ========= ========= ========= =========
Shares used in computing:
Basic net income (loss) per share ...... 8,503 9,414 9,562 9,537 9,801
========= ========= ========= ========= =========
Diluted net income (loss) per share .... 9,111 9,801 9,562 9,830 9,801
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
48
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TWO YEARS ENDED JULY 31, 1999,
FIVE MONTHS ENDED DECEMBER 31, 1999 AND YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DEFERRED
COMPENSATION
AND NOTES ACCUMULATED
ADDITIONAL RECEIVABLE RETAINED OTHER TOTAL
COMMON PAID-IN FROM EARNINGS COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL EXECUTIVES (DEFICIT) LOSS EQUITY
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1997 ................. $ 696 $ 23,246 $ (622) $ 9,297 $ -- $ 32,617
Issuance of 1,500,000 shares in a
public stock offering, net of
offering costs of $3.9 million ...... 150 46,967 -- -- -- 47,117
Issuance of 356,240 shares under stock
purchase and option plans ........... 36 2,348 -- -- -- 2,384
Issuance of 544,785 shares in
connection with acquisitions ........ 54 3,270 -- 609 -- 3,933
Repurchase of 162,073 shares for cash
under repurchase program ............ (16) (3,586) -- (391) -- (3,993)
Amortization of deferred compensation . -- -- 209 -- -- 209
Dividends paid to shareholders of
acquired company prior to acquisition -- -- -- (407) -- (407)
Comprehensive loss - net loss ......... -- -- -- (1,707) -- (1,707)
---------- ---------- ---------- ---------- ---------- ----------
Balance at July 31, 1998 ................. 920 72,245 (413) 7,401 -- 80,153
Issuance of 296,451 shares under stock
purchase and option plans, including
related income tax benefit of $4,623 30 7,498 -- -- -- 7,528
Repurchase of 62,316 shares for cash
under repurchase program ............ (6) (1,679) -- (41) -- (1,726)
Issuance of 113,514 shares in
connection with acquisition ......... 12 18 -- 184 -- 214
Amortization of deferred compensation . -- -- 209 -- -- 209
Dividends paid to shareholder of
acquired company prior to acquisition -- -- -- (146) -- (146)
Comprehensive income (loss):
Net income .......................... -- -- -- 11,068 -- 11,068
Other comprehensive loss - foreign
currency translation adjustments .. -- -- -- -- (132) (132)
---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive income ............ -- -- -- 11,068 (132) 10,936
---------- ---------- ---------- ---------- ---------- ----------
Balance at July 31, 1999 ................. 956 78,082 (204) 18,466 (132) 97,168
Issuance of 6,680 shares under stock
option plans, including related
income tax benefit of $220 .......... 1 296 -- -- -- 297
Amortization of deferred compensation . -- -- 87 -- -- 87
Comprehensive loss:
Net loss ............................ -- -- -- (13,091) -- (13,091)
Other comprehensive loss - foreign
currency translation adjustments .. -- -- -- -- (45) (45)
---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive loss .............. -- -- -- (13,091) (45) (13,136)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 ............. 957 78,378 (117) 5,375 (177) 84,416
Issuance of 267,084 shares under stock
purchase and option plans, including
related income tax benefit of $219 .. 27 2,330 (900) -- -- 1,457
Issuance of 45,506 shares in
connection with acquisition ......... 4 496 -- -- -- 500
Amortization of deferred compensation . -- -- 102 -- -- 102
Comprehensive loss:
Net loss ............................ -- -- -- (16,317) -- (16,317)
Other comprehensive loss - foreign
currency translation adjustments .. -- -- -- -- (404) (404)
---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive loss .............. -- -- -- (16,317) (404) (16,721)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 ............. $ 988 $ 81,204 $ (915) $ (10,942) $ (581) $ 69,754
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes
49
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIVE MONTHS YEARS ENDED
YEARS ENDED JULY 31, ENDED DECEMBER 31,
--------------------- DECEMBER 31, --------------------
1998 1999 1999 1999 2000
-------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating activities: (Unaudited)
Income (loss) from continuing operations .... $ 1,423 $ 3,939 $ (5,815) $ 46 $(16,291)
Adjustments to reconcile income (loss) from
continuing operations to net
cash used in operating activities:
Depreciation and amortization ........... 2,105 3,161 1,534 3,716 3,678
Non-cash restructuring, acquisition
and other charges ..................... 3,000 1,405 2,381 4,292 6,997
Provision for losses on accounts
receivable ............................ 714 291 223 514 194
Loss (gain) on sales of property and
equipment ............................. 72 76 52 (1) (3)
Deferred income taxes ................... 37 (2,674) (4,268) (6,302) (9,312)
Minority interest in net income
(loss) of subsidiaries ................ -- 4 -- 4 (181)
Amortization of deferred compensation ... 209 209 87 196 102
Changes in operating assets and
liabilities:
Trade and other accounts receivable ... (7,798) (7,435) 7,079 (817) (9,229)
Inventories ........................... (4,588) (2,640) (3,277) (3,933) (2,904)
Prepaid expenses and other ............ (1,404) (4,117) (242) 375 2,586
Accounts payable and accrued
liabilities.......................... 3,898 (2,892) (1,149) (8,807) 9,631
Accrued employee compensation ......... 555 (242) 42 274 (573)
Income taxes payable and
refundable, net ..................... (45) (2,468) (104) (2,572) --
-------- -------- ----------- -------- --------
Net cash used in operating ............ (1,822) (13,383) (3,457) (13,015) (15,305)
activities
Investing activities:
Purchases of property and equipment ......... (4,607) (5,484) (1,599) (5,236) (11,790)
Purchases of businesses, net of cash
acquired .................................. (1,308) -- -- -- (5,524)
Proceeds from sales of property and
equipment ................................. 70 43 3,244 3,225 119
Proceeds from sales of businesses ........... -- -- -- -- 6,000
-------- -------- ----------- -------- --------
Net cash provided by (used in)
investing activities ................ (5,845) (5,441) 1,645 (2,011) (11,195)
Financing activities:
Principal payments on long-term debt and
short-term borrowings ..................... (2,339) (2,531) (3,214) (3,012) (4,976)
Proceeds from long-term debt and
short-term borrowings ..................... 1,197 3,575 -- 1,657 27,256
Proceeds from issuance of Company and
subsidiary stock .......................... 50,567 2,946 332 2,055 1,678
Repurchase of Company and subsidiary
stock ..................................... (4,000) (1,726) -- (354) --
Dividends paid to shareholders of
acquired companies prior to acquisition ... (407) (146) -- -- --
-------- -------- ----------- -------- --------
Net cash provided by (used in)
financing activities ................ 45,018 2,118 (2,882) 346 23,958
Net cash provided by (used in) discontinued
operations .................................. (17,743) 3,852 (324) 5,229 2,355
Effect of exchange rate changes on cash and
cash equivalents ............................ -- (132) (45) (202) (12)
-------- -------- ----------- -------- --------
Increase (decrease) in cash and cash
equivalents .................................. 19,608 (12,986) (5,063) (9,653) (199)
Cash and cash equivalents at beginning of
period ....................................... 1,326 20,934 7,948 12,538 2,885
-------- -------- ----------- -------- --------
Cash and cash equivalents at end of period ..... $ 20,934 $ 7,948 $ 2,885 $ 2,885 $ 2,686
======== ======== =========== ======== ========
Cash (paid) received for:
Interest ..................................... $ 1,287 $ 379 $ 86 $ (331) $ (875)
Income taxes ................................. $ (577) $ (633) $ (168) $ (801) $ (566)
</TABLE>
See accompanying notes.
50
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED)
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Maxwell Technologies, Inc. ("Maxwell" or the "Company") applies
industry-leading capabilities in power and computing to develop and
commercialize electronic components and power and computing systems for original
equipment manufacturer ("OEM") customers in multiple industries, including
transportation, telecommunications, consumer and industrial electronics, medical
and aerospace.
In December 1999, the Company adopted a plan to restructure its operations
(the "Restructuring Plan"). This Restructuring Plan (i) consolidated certain
commercial business operations and improved their manufacturing and other
operational capabilities, (ii) focused the defense contracting business on
pulsed power systems and computer-based analysis for government and national
laboratories, (iii) focused the application of PUREBRIGHT broad-spectrum pulsed
light technology on bioprocessing, medical and consumer water markets, and (iv)
provided for the sale of certain non-strategic business operations. The Company
also changed its fiscal year to a calendar year effective January 1, 2000. The
Company previously reported results on a fiscal year of August 1 through July
31.
The Restructuring Plan intended to make Maxwell a product-driven,
high-growth company with improving operating results beginning with the fourth
quarter of calendar year 2000. Since January 2000, the Company recruited more
than 50 key managers with extensive commercial experience in engineering,
manufacturing, material procurement, supply chain management, information
technology, financial controls and sales and marketing. The Company also
invested over $11 million to build and outfit state-of-the-art production
facilities, including information technology infrastructure, and implement new
manufacturing and business processes and systems to increase its production
capacity and improve efficiency and product quality. The Company has experienced
a high level of change and has made significant progress since the beginning of
2000 to achieve the objectives of the Restructuring Plan on schedule. In October
2000, the Company completed its facilities and organizational consolidation
program, which essentially completed the Company's Restructuring Plan.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Maxwell
Technologies, Inc. and its subsidiaries. All significant intercompany
transactions and account balances are eliminated in consolidation. The
accompanying consolidated financial statements have been reclassified to present
the financial position and results of operations of the continuing businesses of
the Company. Businesses which the Company intends to sell or discontinue, and
certain businesses sold or discontinued by the Company in the current and prior
periods, have been classified as discontinued operations in the accompanying
consolidated financial statements (Note 10).
CASH EQUIVALENTS
The Company classifies all highly liquid investments with a maturity of
three months or less when purchased as cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Inventory cost is
determined principally using the average cost (first-in first-out) method.
51
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED)
NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost and are generally
depreciated using the straight-line method. Depreciation and amortization is
provided over the estimated useful lives of the related assets (three to thirty
years). Depreciation and amortization of property, plant and equipment amounted
to $2.1 million, $3.1 million, $1.5 million and $3.1 million in the fiscal years
ended July 31, 1998 and 1999, the five months ended December 31, 1999 and the
year ended December 31, 2000, respectively.
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.
REVENUE RECOGNITION
The Company derives substantially all of its revenue from the sale of
manufactured products. Such revenue is typically recognized upon shipment of the
products.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, REVENUE
RECOGNITION IN FINANCIAL STATEMENTS ("SAB 101"). SAB 101 provides guidance in
applying generally accepted accounting principles to revenue recognition in
financial statements. The adoption of SAB 101 in the current fiscal year did not
have a material effect on the Company's financial statements.
FOREIGN CURRENCIES
The Company has foreign subsidiaries which conduct manufacturing and sales
activities in foreign countries, specifically the United Kingdom, France and
Germany. As a result, the Company's financial results could be significantly
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the European markets that the Company serves. The
operating results of the Company are exposed to changes in exchange rates
between the United States dollar and the euro, British pound, French franc, and
German mark. The Company does not currently hedge its foreign exchange risk,
which is not significant at this time. The assets and liabilities of the
Company's foreign subsidiaries are translated from their functional currencies
into United States dollars at exchange rates in effect on the balance sheet
date, and revenues and expenses are translated at weighted-average rates
prevailing during the period.
INCOME (LOSS) PER SHARE
The Company reports basic and diluted income (loss) per share in accordance
with Financial Accounting Standards Board Statement No. 128, EARNINGS PER SHARE
("Statement No. 128"). Basic 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, and convertible preferred shares outstanding at certain
subsidiaries of the Company, assuming their conversion from the original dates
of issuance.
52
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED)
NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The following table sets forth the computation of basic and diluted income
(loss) per share (in thousands, except per share amounts).
<TABLE>
<CAPTION>
FIVE MONTHS YEARS ENDED
YEARS ENDED JULY 31, ENDED DECEMBER 31,
--------------------- DECEMBER 31, --------------------
1998 1999 1999 1999 2000
-------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
(unaudited)
Basic:
Income (loss) from continuing operations .... $ 1,423 $ 3,939 $ (5,815) $ 46 $(16,291)
Income (loss) from discontinued
operations ................................ (3,130) 7,129 (7,276) (299) (26)
-------- -------- ----------- -------- --------
Net income (loss) ........................... $ (1,707) $ 11,068 $ (13,091) $ (253) $(16,317)
======== ======== =========== ======== ========
Weighted average shares ........................ 8,503 9,414 9,562 9,537 9,801
======== ======== =========== ======== ========
Basic net income (loss) per share:
Income (loss) from continuing operations .... $ 0.17 $ 0.42 $ (0.61) $ -- $ (1.66)
Income (loss) from discontinued
operations ................................ (0.37) 0.76 (0.76) (0.03) --
-------- -------- ----------- -------- --------
Basic net income (loss) per share ........... $ (0.20) $ 1.18 $ (1.37) $ (0.03) $ (1.66)
======== ======== =========== ======== ========
Diluted:
Income (loss) from continuing operations .... $ 1,423 $ 3,939 $ (5,815) $ 46 $(16,291)
Effect of majority-owned subsidiaries'
dilutive securities ....................... -- -- -- -- --
-------- -------- ----------- -------- --------
Income (loss) from continuing operations
available to common stockholders, as
adjusted ................................ 1,423 3,939 (5,815) 46 (16,291)
Income (loss) from discontinued
operations ................................ (3,130) 7,129 (7,276) (299) (26)
Effect of majority-owned subsidiaries'
dilutive securities ....................... (24) (78) -- -- (116)
-------- -------- ----------- -------- --------
Income (loss) from discontinued
operations, as adjusted ................... (3,154) 7,051 (7,276) (299) (142)
-------- -------- ----------- -------- --------
Net income (loss), as adjusted .............. $ (1,731) $ 10,990 $ (13,091) $ (253) $(16,433)
======== ======== =========== ======== ========
Weighted average shares ........................ 8,503 9,414 9,562 9,537 9,801
Effect of dilutive stock options and
other securities .......................... 608 387 -- 293 --
-------- -------- ----------- -------- --------
Weighted average shares, as adjusted ........ 9,111 9,801 9,562 9,830 9,801
======== ======== =========== ======== ========
Diluted net income (loss) per share:
Income (loss) from continuing operations .... $ 0.16 $ 0.40 $ (0.61) $ -- $ (1.66)
Income (loss) from discontinued
operations ................................ (0.35) 0.72 (0.76) (0.03) (0.01)
-------- -------- ----------- -------- --------
Diluted net income (loss) per share ......... $ (0.19) $ 1.12 $ (1.37) $ (0.03) $ (1.67)
======== ======== =========== ======== ========
</TABLE>
53
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED)
NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
(later amended by Statement Nos. 137 and 138) ("Statement No. 133"), which is
required to be adopted by the Company beginning January 1, 2001. Statement No.
133 requires the Company to recognize all derivatives as either assets or
liabilities measured at fair value. The accounting for changes in the fair value
of a derivative depends on the use of the derivative. The Company adopted
Statement No. 133 on January 1, 2001. Because of the Company's minimal use of
derivatives and hedges, management does not anticipate that the adoption of
Statement No. 133 will have a significant effect on the results of operations or
the financial position of the Company.
In March 2000, the FASB issued FASB Interpretation No. 44, ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION ("FIN 44"). FIN 44 clarifies
certain issues in the application of Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. FIN 44 is effective July 1, 2000, but
certain provisions cover specific events that occur after either December 15,
1998 or January 12, 2000. The adoption of FIN 44 did not have a material impact
on the Company's financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Several of the industries in which the Company
operates are characterized by rapid technological change and short product life
cycles. As a result, estimates are required to provide for product returns and
product obsolescence as well as other matters. Historically, actual amounts
recorded have not varied significantly from estimated amounts.
NOTE 2 -- BUSINESS COMBINATIONS
In 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. Additional purchase
consideration may be due in the future based upon the sales revenue of Gateworks
in calendar year 2001. In connection with this acquisition, I-Bus-Phoenix, Inc.
granted certain rights to the selling Gateworks shareholders that permit such
shareholders, in January 2002, to require I-Bus/Phoenix, Inc. to repurchase
certain of the I-Bus/Phoenix, Inc. shares issued to the shareholders on the
closing date for cash not to exceed $2.9 million. The total number of
I-Bus/Phoenix, Inc. shares issued to the selling Gateworks shareholders will be
adjusted in the first quarter of 2002 to reflect the final purchase price based
upon actual Gateworks and I-Bus/Phoenix, Inc. 2001 revenue. For purchase
accounting purposes, the closing date payment was valued at approximately $4.4
million, of which $(0.1) million was allocated to the net liabilities acquired
and $4.0 million was allocated to goodwill and other identifiable intangible
assets, which are being amortized over a period of five years. 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.
54
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED)
NOTE 2 -- BUSINESS COMBINATIONS (CONTINUED)
In January 1999, the Company acquired Space Electronics, Inc. ("SEi"), a
closely held company that specialized in the manufacture of radiation-shielded
microelectronics for the commercial space market. Under the terms of this
agreement, which was accounted for as a pooling-of-interests, Maxwell purchased
all of the outstanding stock of SEi in exchange for approximately 681,000 shares
of Maxwell common stock valued at approximately $25 million on the closing date.
The Company incurred direct acquisition costs of approximately $1.1 million,
which were charged to operations in the fiscal year ended July 31, 1999.
Also in January 1999, the Company purchased a German company, which was
formerly a distributor for the Company's applied computing business. The
acquisition was accounted for as a pooling-of-interests and consisted of the
purchase of all the outstanding stock of the German company in exchange for
approximately 114,000 shares of Maxwell common stock valued at approximately $5
million on the closing date. The Company incurred direct acquisition costs of
approximately $75,000, which were charged to operations in the fiscal year ended
July 31, 1999. The historical results of operations of the acquired company were
not material in relation to those of Maxwell and financial information for prior
periods was not restated to reflect the merger. During the fiscal year ended
July 31, 1999, the Company's retained earnings were restated to reflect the
retained earnings of the acquired company as of the acquisition date of
approximately $184,000.
In December 1998, the Company acquired KD Components, Inc. ("KD"), a
privately held company that developed and manufactured high-voltage multilayer
ceramic capacitors and switch mode power supply capacitors for military,
aerospace, medical and other applications. Under the terms of the agreement,
which was accounted for as a pooling-of-interests, Maxwell purchased all of the
outstanding stock of KD in exchange for approximately 145,000 shares of Maxwell
common stock valued at approximately $5.5 million on the closing date. The
Company incurred direct acquisition costs of approximately $120,000, which were
charged to operations in the fiscal year ended July 31, 1999.
In March 1998, the Company acquired Tri-MAP International, Ltd.
("Tri-MAP"), a privately held, United Kingdom-based manufacturer of
industrial-grade PC-compatible computer systems. Tri-MAP was acquired in a
stock-for-stock exchange accounted for as a pooling-of-interests for an
aggregate of 290,000 shares of Maxwell common stock valued at approximately $7.0
million. The Company incurred direct transaction costs of approximately $0.6
million, which were charged to operations during the fiscal year ended July 31,
1998.
Also in March 1998, the Company acquired Phoenix Power Systems, Inc.
("Phoenix Power"), a privately held manufacturer of power quality protection
products. Under the terms of this agreement, Maxwell purchased all of the
outstanding stock of Phoenix Power for approximately $4 million ($1.3 million in
cash and 100,679 shares of Maxwell common stock valued at approximately $2.7
million). The acquisition was accounted for as a purchase. Direct acquisition
costs were approximately $95,000. The purchase price was allocated to the
estimated fair values of the net tangible and intangible assets acquired,
approximately $3 million of which was charged to acquired in-process technology
in the fiscal year ended July 31, 1998. The value assigned to other intangible
assets was $1.6 million, and is being amortized on a straight-line basis over
the estimated economic lives. The terms of the agreement provided for additional
contingent purchase price based upon the financial performance of Phoenix Power
following the acquisition. In January 2000, the Company agreed to pay $5.0
million of such additional purchase price which was paid in the form of 45,506
shares of the Company's common stock issued in January 2000 and valued at an
aggregate of $500,000 and $4.5 million cash, paid in July 2000. The additional
purchase price was initially assigned to intangible assets. The book value of
such intangible assets was reduced by $4.8 million in the third quarter of 2000,
to an amount representing the current appraised value of such assets as of that
date (Note 9).
55
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED)
NOTE 3 -- BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
Trade and other accounts receivable consists of the following (in thousands):
DECEMBER 31,
------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Amounts billed........................................................ $ 14,415 $ 21,556
Amounts unbilled under long-term contracts............................ 1,421 1,096
Note receivable from related party (Note 12).......................... -- 2,000
------------- -------------
$ 15,836 $ 24,652
============= =============
Inventories consist of the following (in thousands):
<CAPTION>
DECEMBER 31,
------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Finished goods........................................................ $ 2,003 $ 4,927
Work-in-process....................................................... 4,090 5,850
Raw materials and purchased parts..................................... 15,548 13,992
------------- -------------
$ 21,641 $ 24,769
============= =============
Property, plant and equipment consists of the following (in thousands):
<CAPTION>
DECEMBER 31,
------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Land and land improvements............................................ $ 2,738 $ 2,810
Building and building improvements.................................... 6,537 6,748
Machinery, furniture and office equipment............................. 21,684 21,901
Leasehold improvements................................................ 563 1,936
------------- -------------
31,522 33,395
Less accumulated depreciation and amortization........................ (17,151) (13,667)
------------- -------------
14,371 19,728
Construction-in-progress.............................................. 380 2,839
------------- -------------
$ 14,751 $ 22,567
============= =============
Goodwill and other non-current assets consists of the following (in thousands):
<CAPTION>
DECEMBER 31,
------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Goodwill and other intangible assets, net of accumulated amortization
of $194 and $701 at December 31, 1999 and 2000, respectively....... $ 1,596 $ 6,276
Note receivable from related party, including accrued interest
(Note 12).......................................................... 2,092 --
Equity investments in unconsolidated companies........................ 566 666
Deposits and other.................................................... 2,574 757
Long-term deferred income taxes....................................... (149) 11,609
------------- -------------
$ 6,679 $ 19,308
============= =============
Accounts payable and accrued liabilities consists of the following (in thousands):
<CAPTION>
DECEMBER 31,
------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Accounts payable and accrued liabilities.............................. $ 7,205 $19,722
Accrued restructuring costs........................................... 978 1,127
Customer deposits..................................................... 579 862
------------- -------------
$ 8,762 $21,711
============= =============
</TABLE>
56
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED)
NOTE 4 -- CREDIT AGREEMENT
Outstanding borrowings under the Company's bank credit agreement were $22.7
million at December 31, 2000, at a weighted average interest rate of 11.0%. On
February 26, 2001, the agreement was terminated and repaid in full with the
proceeds of a new bank credit agreement (the "Credit Agreement"). The Credit
Agreement provides for (i) revolving borrowings of up to $15.0 million, subject
to a borrowing base computation, through May 2002, bearing interest at LIBOR
plus 3% or the bank's reference rate plus 1%, and (ii) a term loan of an
additional $15.0 million through June 15, 2001, bearing interest at the bank's
reference rate plus 1.5% (the "Term Loan"). Borrowings under the Credit
Agreement are secured by the Company's assets in the United States, except for
real property, and a pledge of two-thirds of the stock of certain foreign
subsidiaries. The Company will be required to comply with certain financial
covenants effective March 31, 2001. The Company intends to repay the Term Loan
with proceeds from the sale of its defense contracting business, which is
expected to be completed by March 31, 2001 (Note 10). If this sale is not
completed by June 15, 2001, or the proceeds are inadequate to repay the Term
Loan in full, the Company and the bank will negotiate terms on which the Term
Loan may be extended. Such terms are expected to include a pledge of the
Company's real property.
NOTE 5 -- 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 new President and Chief Executive Officer, outside of the Company's
other 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 Director Option Plan are exercisable in full one year after
date of grant. The options have terms of five to ten years. As of December 31,
2000, the Company has 693,726 shares available for future grant under its stock
option plans.
57
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED)
NOTE 5 -- STOCK ACTIVITY AND STOCK PLANS (CONTINUED)
The following table summarizes total aggregate stock option activity for
the period July 31, 1997 through December 31, 2000:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
------------- --------------------
<S> <C> <C>
Balance at July 31, 1997...................... 1,054,680 $ 8.60
Granted..................................... 591,500 $25.23
Exercised................................... (324,825) $ 5.49
Expired or forfeited........................ (56,200) $18.57
-------------
Balance at July 31, 1998...................... 1,265,155 $16.73
Granted..................................... 684,140 $23.87
Exercised................................... (285,400) $ 9.65
Expired or forfeited........................ (41,340) $19.96
-------------
Balance at July 31, 1999...................... 1,622,555 $20.90
Granted..................................... 647,602 $10.42
Exercised................................... (6,680) $ 3.63
Expired or forfeited........................ (106,580) $21.41
-------------
Balance at December 31, 1999.................. 2,156,897 $17.78
Granted..................................... 1,028,092 $12.92
Exercised................................... (81,105) $ 5.74
Expired or forfeited........................ (427,710) $21.44
-------------
Outstanding at December 31, 2000.............. 2,676,174 $15.70
=============
</TABLE>
The following table summarizes information concerning outstanding and
exercisable Company common stock options at December 31, 2000:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF EXERCISE OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISE
PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE
------------------- -------------- ------------ ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.01 - 6.55 127,897 $ 4.37 3.3 years 127,897 $ 4.37
$ 6.56 - 9.82 520,614 $ 8.79 8.7 years 152,164 $ 8.63
$ 9.83 - 13.10 396,092 $ 11.58 8.7 years 23,650 $ 10.80
$ 13.11 - 16.37 616,000 $ 13.85 9.8 years 15,600 $ 13.13
$ 16.38 - 19.65 125,281 $ 18.93 2.8 years 100,529 $ 18.93
$ 19.66 - 22.92 259,750 $ 21.12 8.0 years 93,450 $ 21.08
$ 22.93 - 24.99 242,200 $ 23.88 7.7 years 130,800 $ 23.92
$ 25.00 - 25.00 227,890 $ 25.00 0.3 years 94,954 $ 25.00
$ 25.01 - 32.75 160,450 $ 27.51 7.0 years 121,645 $ 27.76
-------------- -----------
2,676,174 860,689
============== ===========
</TABLE>
Each of the Company's subsidiaries has minority equity investors. These
investors are former strategic partners, former stockholders of businesses
acquired using subsidiary stock and former and current employees who have
exercised stock options in those entities. As of December 31, 2000, minority
investors owned, of the outstanding shares, approximately 5.1% of Maxwell
Electronic Components Group, Inc., 6.3% of I-Bus/Phoenix, Inc. and 19.3% percent
of PurePulse Technologies, Inc. In addition, each such subsidiary has an
employee stock option plan providing for the issuance of incentive and
nonqualified stock options to purchase subsidiary common stock. Only the option
programs at I-Bus/Phoenix, Inc. and at PurePulse Technologies, Inc. are active
with respect to current grants of options. As of mid-2000, certain employees of
I-Bus/Phoenix, Inc. and PurePulse Technologies, Inc. are eligible for option
grants in their respective subsidiary plans and are not eligible for grants at
the Maxwell level. Certain corporate and Maxwell Electronic Components Group,
Inc. employees are eligible for option grants at the Maxwell level, but not in
any subsidiaries.
58
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED)
NOTE 5 -- STOCK ACTIVITY AND STOCK PLANS (CONTINUED)
The subsidiary option plans intend to encourage an entrepreneurial
atmosphere in each business segment, providing focused incentives to appreciate
the equity value of each business. Options that are "in-the-money" at the
subsidiary level have a negative impact on Maxwell's earnings per share. The
Company expects to report diluted earnings per share in future periods due to
in-the-money subsidiary options. Except to the extent exercised, however, such
subsidiary options will not affect Maxwell's consolidated net income as reported
in its consolidated statement of operations. Such options, when and if
exercised, will dilute Maxwell's actual ownership interest in its subsidiaries,
thus reducing Maxwell's share of the net income (loss), potential dividends or
distributions and proceeds of any sale or other disposition of such subsidiary.
The equity interest upon exercise of stock options in the subsidiaries is
accounted for as a minority interest. Based on current programs, the potential
percentage ownership interest attributable to exercisable subsidiary options as
of December 31, 2000 is, on a diluted basis, approximately 3% of Maxwell
Electronic Components Group, Inc., 3% percent of I-Bus/Phoenix, Inc. and 5% of
PurePulse Technologies, Inc.
The Company has adopted the disclosure only provisions of FASB Statement
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement No. 123"). In
accordance with the provisions of Statement No. 123, the Company applies
Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for its stock option plans, and accordingly, no compensation expense
has been recognized for stock options granted in the fiscal years ended July 31,
1998 or 1999, the five months ended December 31, 1999 or the year ended December
31, 2000, as the stock options have been granted at their current fair market
value. If the Company had elected to recognize compensation based on the fair
value method prescribed by Statement No. 123, the Company's net income (loss)
from continuing operations and diluted income (loss) from continuing operations
per share would have been adjusted to the pro forma amounts indicated below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
FIVE MONTHS YEARS ENDED
YEARS ENDED JULY 31, ENDED DECEMBER 31,
--------------------- DECEMBER 31, --------------------
1998 1999 1999 1999 2000
-------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
(unaudited)
Income (loss) from continuing operations,
as reported ................................. $ 1,423 $ 3,939 $ (5,815) $ 46 $(16,291)
Pro forma income (loss) from continuing
operations .................................. $ (2,083) $ (1,643) $ (8,290) $ (5,685) $(24,668)
Diluted income (loss) from continuing
operations per share, as reported ........... $ 0.16 $ 0.40 $ (0.61) $ -- $ (1.66)
Pro forma diluted income (loss) from
continuing operations per share ............. $ (0.24) $ (0.17) $ (0.87) $ (0.58) $ (2.52)
</TABLE>
The impact of outstanding non-vested stock options granted prior to 1997
has been excluded from the pro forma calculations; accordingly, the pro forma
adjustments shown above are not indicative of future period pro forma
adjustments when the calculation will reflect all applicable stock options. The
fair value of Company options at the date of grant was estimated using the
Black-Scholes option-pricing model with assumptions as follows:
<TABLE>
<CAPTION>
RISK-FREE DIVIDEND VOLATILITY WEIGHTED-AVERAGE
YEARS ENDED INTEREST RATES YIELDS FACTORS EXPECTED TERMS
- -------------------------- ----------------- ------------------ ------------------ -----------------------
<S> <C> <C> <C> <C>
July 31, 1998 5.5% -- 54.0% 4 Years
July 31, 1999 5.0% -- 66.0% 5 Years
December 31, 1999 5.0% -- 106.0% 5 Years
December 31, 2000 5.0% -- 74.0% 5 Years
</TABLE>
59
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED)
NOTE 5 -- STOCK ACTIVITY AND STOCK PLANS (CONTINUED)
Based on these assumptions, the estimated weighted average fair value at
grant date for Company options granted during the fiscal years ended July 31,
1998 and 1999, the five months ended December 31, 1999, and the year ended
December 31, 2000 was $12.00, $12.53, $9.13 and $10.01 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 fiscal years ended July 31, 1998 and
1999, and in the year ended December 31, 2000, aggregate shares of 40,795,
48,388 and 118,666, respectively, were issued under the two plans for aggregate
proceeds to the Company of $759,000, $970,000 and $997,000 respectively. No
shares were issued under the plans in the five months ended December 31, 1999.
At December 31, 2000, 131,486 shares are reserved for future issuance under
these plans.
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 are offered full-recourse
loans from the Company to be used to purchase stock of the Company. The loans
bear interest and must be repaid in annual installments of principal and
interest over a four-year period. Repayment of the loans is secured by the
shares purchased with the loan proceeds. On February 1, 2000, loans in the
aggregate amount of $900,000, bearing interest at 6.56%, were made in connection
with the aggregate purchase of 74,995 newly issued shares of the Company's
common stock at $12.00 per share, the closing market price on the date of
purchase.
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 balance sheets and consolidated statements of stockholders' equity.
The deferred compensation is being amortized to expense over the four-year
vesting periods, and such amortization totaled $209,000, $209,000, $87,000 and
$102,000 in the fiscal years ended July 31, 1998 and 1999, in the five months
ended December 31, 1999 and the year ended December 31, 2000, respectively.
STOCKHOLDER RIGHTS PLAN
In October 1999, the Company adopted a new Stockholder Rights Plan as a
successor to its previous plan, which expired in June 1999. In accordance with
the new plan, the Company distributed one non-voting common stock purchase right
("Right") for each outstanding share of common stock. The Rights are not
exercisable and will not trade separately from the common stock unless a person
or group acquires, or makes a tender offer for, 15% or more of the Company's
common stock. Initially, each Right entitles the registered holder to purchase
one share of Company common stock at a price of $75 per share, subject to
certain anti-dilution adjustments. If the Rights become exercisable and certain
conditions are met, then each Right not owned by the acquiring person or group
will entitle its holder to receive, upon exercise, Company common stock having a
market value of twice the exercise price of the Right. In addition, the Company
may redeem the Rights at a price of $0.01 per Right, subject to certain
restrictions. The new Stockholder Rights Plan expires on October 21, 2009.
60
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED)
NOTE 6 -- INCOME TAXES
The provision (credit) for income taxes based on income (losses) from
continuing operations is as follows (in thousands):
<TABLE>
<CAPTION>
FIVE MONTHS YEARS ENDED
YEARS ENDED JULY 31, ENDED DECEMBER 31,
--------------------- DECEMBER 31, --------------------
1998 1999 1999 1999 2000
-------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
(unaudited)
Federal:
Current ...................................... $ 127 $ -- $ -- $ -- $ --
Deferred ..................................... 16 (4,903) (3,207) (8,110) (6,134)
-------- -------- ----------- -------- --------
143 (4,903) (3,207) (8,110) (6,134)
State:
Current ...................................... 25 82 399 565 122
Deferred ..................................... 19 (1,964) (920) (2,884) (751)
-------- -------- ----------- -------- --------
44 (1,882) (521) (2,319) (629)
Foreign:
Current ...................................... 200 394 320 504 496
Deferred ..................................... 26 (26) -- -- --
-------- -------- ----------- -------- --------
226 368 320 504 496
-------- -------- ----------- -------- --------
$ 413 $ (6,417) $ (3,408) $ (9,925) $ (6,267)
======== ======== =========== ======== ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The primary components of
the Company's deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Deferred tax assets:
Tax loss carryforwards.............................................. $ 4,000 $20,300
Research and development and other tax credit carryforwards......... 2,900 2,900
Uniform capitalization, contract and inventory-related reserves..... 2,538 1,319
Environmental and restructuring provisions.......................... 2,000 408
Asset write-downs under FASB Statement No. 121...................... 349 343
Accrued vacation.................................................... 401 430
Allowance for doubtful accounts..................................... 285 301
Other............................................................... 207 145
------------- -------------
Total deferred tax assets................................... 12,680 26,146
Deferred tax liabilities:
Book investment basis in excess of tax basis........................ -- (1,166)
Tax basis depreciation in excess of book depreciation............... (734) (340)
------------- -------------
Total deferred tax liabilities.............................. (734) (1,506)
------------- -------------
Net deferred tax assets............................................... $ 11,946 $24,640
============= =============
</TABLE>
61
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED)
NOTE 6 -- INCOME TAXES (CONTINUED)
The Company cannot carry losses back to prior years. Through the fiscal
year ended July 31, 1998, the Company had provided a valuation allowance against
the future tax benefits of its net operating loss carryforwards and net deferred
income tax assets as realization of such future benefits was deemed to be
uncertain. Based on the Company's earnings from continuing operations in the
fiscal years ended July 31, 1998 and 1999, management determined in July 1999
that it was more likely than not that the Company would receive the future
benefits from its net deferred income tax assets, including tax credits and
remaining net operating loss carryforwards. Accordingly, in fiscal year 1999,
the Company reversed the valuation allowance and recorded net deferred income
tax assets of approximately $8.9 million, of which $4.6 million was recorded as
a credit to additional paid-in capital for tax benefits relating to employee
stock option and stock purchase plan activity in the current and prior years.
Management believes that realization of the Company's deferred tax assets, which
are primarily comprised of net operating loss carryforwards and tax credits, is
more likely than not, based on the expected gains on the disposition of
discontinued operations and future taxable income.
As of December 31, 2000, the Company had net operating loss carryforwards
for federal and state income tax of approximately $51.8 million and $30.5
million, respectively. The federal loss carryforward begins to expire in
calendar year 2011, while the state loss carryforwards begin to expire in 2001
and expire through 2010. In addition, the Company has research and development
and other tax credit carryforwards for federal and state income tax purposes of
$2.0 million and $0.9 million, which begin to expire in 2004.
The provision (credit) for income taxes in the accompanying consolidated
statements of operations differs from the amount calculated by applying the
statutory income tax rate of 35% to income (loss) from continuing operations
before income taxes and minority interest. The primary components of such
difference are as follows (in thousands):
<TABLE>
<CAPTION>
FIVE MONTHS YEARS ENDED
YEARS ENDED JULY 31, ENDED DECEMBER 31,
--------------------- DECEMBER 31, --------------------
1998 1999 1999 1999 2000
-------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
(unaudited)
Tax at federal statutory rate .................. $ 848 $ (865) $ (3,228) $ (3,456) $ (7,959)
State taxes, net of federal benefit ............ 167 (221) (374) (1,072) (637)
Effect of tax rate differential for foreign
subsidiary .................................. (47) 84 141 142 125
Impact of asset basis difference in
acquisitions ................................ 1,237 (793) -- (970) 2,191
Utilization of net operating loss
carryforwards ............................... (500) (400) -- (400) --
Valuation allowance, including tax benefits
of stock activity ........................... (1,119) (4,280) -- (4,280) --
Other items not reflected in consolidated
statement of operations ..................... (173) 58 53 111 13
-------- -------- ----------- -------- --------
$ 413 $ (6,417) $ (3,408) $ (9,925) $ (6,267)
======== ======== =========== ======== ========
</TABLE>
62
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED)
NOTE 7 -- LEASES
Rental expense amounted to $1.7 million, $2.4 million, $1.0 million and
$2.6 million in fiscal years ended July 31, 1998 and 1999, the five months ended
December 31, 1999, and the year ended December 31, 2000, respectively, and was
incurred primarily for facility rental. Future annual minimum rental commitments
as of December 31, 2000, are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
- ------------
<S> <C>
2001.......................................................... $2,017
2002.......................................................... 1,603
2003.......................................................... 858
2004.......................................................... 766
2005.......................................................... 787
Thereafter.................................................... 1,308
--------
$7,339
========
</TABLE>
Certain leases include renewal options for periods ranging from one to ten
years and are subject to rental adjustment based on consumer price indices.
Substantially all leases provide that the Company pay for property taxes,
insurance, and repairs and maintenance. The Company also subleases certain of
its leased facilities under non-cancelable subleases through 2003. Future annual
amounts due to the Company under such subleases, aggregating $2,001,000, are as
follows: calendar year 2001 - $1,044,000; 2002 - $863,000; and 2003 - $94,000.
NOTE 8 -- EMPLOYEE BENEFIT PLANS
Substantially all United States employees are eligible to elect coverage
under contributory employee savings plans which provide for Company matching
contributions based on one-half of employee contributions up to certain plan
limits. The Company's matching contributions under these plans totaled $345,000,
$446,000, $269,000 and $387,000 in the fiscal years ended July 31, 1998 and
1999, the five months ended December 31, 1999, and the year ended December 31,
2000, respectively.
NOTE 9 -- RESTRUCTURING, ACQUISITION AND OTHER CHARGES
In connection with the Restructuring Plan, the Company has undertaken
various actions to consolidate its facilities and reduce the cost structure of
the Company. As a result, the Company recorded restructuring and other related
charges in the year ended December 31, 2000 of approximately $8.7 million. Such
charges were determined in accordance with Staff Accounting Bulletin No. 100,
RESTRUCTURING AND IMPAIRMENT CHARGES, and Emerging Issues Task Force No. 94-3,
LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS
TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). These
charges include severance costs related to a reduction in workforce, the closure
and combination of certain facilities, and the write-off of certain
non-performing operating assets, including goodwill balances of $4.8 million
related to a previous acquisition based on a current appraisal of the acquired
business. The Company completed its Restructuring Plan in October 2000 and has
finalized the consolidation and integration of its operations and related
facilities. Accordingly, the Company does not expect to record additional
restructuring related charges.
In September 2000, the Company also recorded a charge of $0.5 million
related to the write-off of in-process technology acquired in connection with
the acquisition of Gateworks (Note 2).
63
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED)
NOTE 9 -- RESTRUCTURING, ACQUISITION AND OTHER CHARGES (CONTINUED)
The following table summarizes the restructuring, acquisition and other
charges recorded, and the activity related to such charges, in the five months
ended December 1999 and the year ended December 31, 2000 (in thousands):
<TABLE>
<CAPTION>
WRITE-DOWN OF
ABANDONED SEVERANCE COSTS TO MOVING AND
OPERATING COSTS FOR EXIT CERTAIN OTHER COSTS WRITE-OFF
ASSETS AND INVOLUNTARY CONTRACTUAL RELATED TO OF
IMPAIRED EMPLOYEE AND LEASE CONSOLIDATION IN-PROCESS
ASSETS TERMINATIONS OBLIGATIONS OF FACILITIES TECHNOLOGY TOTAL
--------------- ------------- ------------ -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Five Months Ended December 31, 1999:
Reserves Established ...... $ 1,813 $ 831 $ 127 $ 30 $ -- $ 2,801
Utilization of Reserves:
Cash .................... -- -- (10) -- -- (10)
Non-Cash ................ (1,813) ` -- -- -- -- (1,813)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, -- 831 117 30 -- 978
1999
Year Ended December 31, 2000:
Reserves Established ...... 6,433 740 907 640 500 9,220
Utilization of Reserves:
Cash .................... -- (951) (828) (359) -- (2,138)
Non-Cash ................ (6,433) -- -- -- (500) (6,933)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31,
2000 ................... $ -- $ 620 $ 196 $ 311 $ -- $ 1,127
============ ============ ============ ============ ============ ============
</TABLE>
During the fiscal year ended July 31, 1999, the Company recorded
restructuring, acquisition and other charges of approximately $2.6 million. Of
these charges, approximately $1.6 million consisted of direct acquisition costs
for business combinations accounted for using the pooling-of-interests method.
The remaining $1.0 million charge consists primarily of amounts provided for
revised estimates of costs to resolve certain environmental and legal
contingencies which occurred in prior years, as well as other restructuring
provisions, including employee and facility expenses, related to decisions made
in July 1999 to reduce certain administrative infrastructure of the Company in
Europe and the United States.
The Company recorded a $3.9 million charge in the fiscal year ended July
31, 1998 related to the acquisition of two businesses, including $0.9 million of
transaction costs for a business combination accounted for as a
pooling-of-interests, and $3.0 million related to the appraised amount of
acquired in-process technology for a business combination accounted for as a
purchase.
NOTE 10 -- DISCONTINUED OPERATIONS
In connection with its Restructuring Plan, the Company divested its high
voltage wound film capacitors, high voltage power supplies and time card and job
cost accounting software businesses in 2000. In February 2000, the Company sold
the high voltage wound film capacitors and high voltage power supplies
businesses for cash of $3.5 million, approximately the book value of the net
assets sold as of that date. In addition, the buyer assumed certain liabilities
of the businesses, including a long-term lease for the facility the businesses
occupied, which extended through 2006 with annual rent of approximately $0.5
million. In November 2000, the Company sold its time card and job cost
accounting software business for cash of $2.5 million and certain minority
shares of common stock of the buyer with an immaterial value. In the fourth
quarter of 2000, the Company also received cash of approximately $0.7 million
related to its equity investment in an unconsolidated entity, which was
classified as a discontinued operation. In December 1999, the Company recorded
provisions of approximately $2.1 million, net of tax, for estimated losses on
the sale of these discontinued businesses. Based on the actual proceeds received
and the net assets of the discontinued businesses at their respective dates of
sale, the Company reversed the provisions recorded in December 1999 and recorded
an aggregate gain on these sales of $2.9 million, net of tax, in the year ended
December 31, 2000, including such reversal.
64
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED)
NOTE 10 -- DISCONTINUED OPERATIONS (CONTINUED)
In late 2000, the Company decided to focus on its Electronic Components
Group and I-Bus/Phoenix segments (Note 11). Accordingly, in late 2000, the
Company offered for sale its defense contracting business and signed letters of
intent to sell the business in separate transactions with two buyers. Both
transactions are expected to be completed by March 31, 2001. The Company is also
seeking strategic alternatives for its PurePulse business, which the Company
expects will result in the sale of all or a majority of the Company's interest
in the business in 2001. Accordingly, both the defense contracting business and
PurePulse, each of which was previously classified as a separate segment, have
been classified as discontinued operations for financial reporting purposes.
Operating results of the discontinued operations are shown separately, net
of tax, in the accompanying consolidated statements of operations. The provision
(credit) for income taxes related to the discontinued operations was $0.6
million and $4.2 million in the fiscal year ended July 31, 1999 and the five
months ended December 31, 1999, respectively. For the fiscal year ended July 31,
1999, the provision for income taxes was net of a credit of $1.7 million
representing the reversal of a valuation allowance provided in previous years
against certain deferred tax assets of the discontinued operations. No provision
for income taxes was provided for discontinued operations for the fiscal year
ended July 31, 1998 or the calendar year ended December 31, 2000. The businesses
included in discontinued operations had sales aggregating $62.6 million, $76.8
million, $24.7 million and $47.2 million in the fiscal years ended July 31, 1998
and 1999, the five months ended December 31, 1999, and the year ended December
31, 2000, respectively. These amounts are not included in net sales in the
accompanying consolidated statements of operations.
Assets and liabilities of the discontinued operations consisted of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1999 2000
------------------- ------------------
Assets:
<S> <C> <C>
Cash............................................................... $ 1,162 $ --
Accounts receivable................................................ 18,998 10,442
Inventories........................................................ 3,443 1,083
Prepaid expenses and other current assets.......................... 7,020 189
Property and equipment, net........................................ 6,678 3,484
Goodwill and other non-current assets.............................. 5,204 5,725
------------------- ------------------
42,505 20,923
Liabilities:
Accounts payable and other current liabilities, including
provisions for estimated losses upon disposal.................... 18,684 6,960
------------------- ------------------
$ 23,821 $ 13,963
=================== ==================
</TABLE>
Net assets of the discontinued operations have been separately classified
in the accompanying consolidated balance sheets as of December 31, 1999 and
2000. Prior year consolidated financial statements have been restated to conform
to the current year presentation.
65
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED)
NOTE 11 -- BUSINESS SEGMENTS
In accordance with the requirements and guidelines of Statement of
Financial Accounting Standards No. 131, DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, Maxwell's operations have been classified
into two business segments as follows:
- - Electronic Components Group
As part of its Restructuring Plan, the Company organized the
Electronic Components Group by combining numerous business units and
product lines: its POWERCACHE ultracapacitors, EMI filtered
feedthroughs, ceramic capacitors and radiation-shielded
microelectronics. In October 2000, the Company integrated the
POWERCACHE ultracapacitor operations and the radiation-shielded
microelectronics operations into one new manufacturing site in San
Diego, while the EMI filters and ceramic capacitors are manufactured
at the Company's facility in Carson City, Nevada, which was redesigned
in 2000. Both facilities were designed for highly efficient
manufacturing, with improved processes, improved personnel training
and more disciplined cost control practices.
The Electronic Components Group consists primarily of the following
power delivery and other high reliability devices product lines:
- ultracapacitors for electrical energy storage and delivery of
peak power for a variety of applications;
- EMI filtered feedthroughs for cardiac pacemakers, defibrillators
and other implantable medical devices and high temperature
ceramic capacitors and filters used in oil exploration; and
- radiation-shielded microelectronics, including integrated
circuits, power modules and single board computers for space and
military markets.
- I-Bus/Phoenix Power and Computing Systems
As part of its Restructuring Plan, the Company integrated its
I-Bus, Inc. and Phoenix Power Systems, Inc. subsidiaries. The
I-Bus/Phoenix organization has operations in the U.S., Europe and
Asia. The new I-Bus/Phoenix operation is focused on providing
high availability custom computing systems and power quality
products. As part of the Restructuring Plan, the Company combined
the San Diego operations of these two businesses into a single
facility in October 2000. The new facility has been designed for
highly efficient manufacturing, with improved processes, improved
personnel training and more disciplined cost control practices.
The Company's I-Bus/Phoenix product offerings include applied
computing systems, power distribution systems and power
conditioning units. These products are sold mainly to OEMs
serving the telecommunications and Internet infrastructure,
industrial automation, broadcasting and medical imaging markets.
Maxwell's management evaluates performance and allocates resources based on
a measure of segment operating profit (loss), excluding restructuring,
acquisition and other charges. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies. Maxwell does not evaluate segment performance on amounts
provided for restructuring, acquisition and other charges, or on items of income
or expense below operating income (loss). Accordingly, such items are not
segregated by operating segment.
66
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED)
NOTE 11 -- BUSINESS SEGMENTS (CONTINUED)
Business segment financial data is as follows (in thousands):
<TABLE>
<CAPTION>
FIVE MONTHS YEARS ENDED
YEARS ENDED JULY 31, ENDED DECEMBER 31,
--------------------- DECEMBER 31, --------------------
1998 1999 1999 1999 2000
-------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
(unaudited)
Sales:
Electronic Components Group ................. $ 35,166 $ 37,783 $ 9,143 $ 29,336 $ 39,139
I-Bus/Phoenix Power and Computing Systems ... 42,848 65,095 27,720 74,275 63,208
-------- -------- ----------- -------- --------
Consolidated total ........................ $ 78,014 $102,878 $ 36,863 $103,611 $102,347
======== ======== =========== ======== ========
Operating income (loss):
Electronic Components Group ................. $ 3,053 $ (2,275) $ (5,138) $ (7,878) $ (3,001)
I-Bus/Phoenix Power and Computing Systems ... 3,297 3,444 128 4,403 (3,782)
-------- -------- ----------- -------- --------
Total operating income (loss) ............. 6,350 1,169 (5,010) (3,475) (6,783)
Corporate expenses, including total
restructuring, acquisition and other charges (5,519) (3,804) (4,072) (6,570) (14,535)
Interest and other, net ..................... 1,005 161 (141) 170 (1,421)
-------- -------- ----------- -------- --------
Income (loss) from continuing operations before
income taxes, and minority interest ......... $ 1,836 $ (2,474) $ (9,223) $ (9,875) $(22,739)
======== ======== =========== ======== ========
Depreciation and amortization:
Electronic Components Group ................. $ 1,025 $ 1,409 $ 688 $ 1,832 $ 1,530
I-Bus/Phoenix Power and Computing Systems ... 754 1,357 612 1,409 1,545
Corporate ................................... 326 395 234 475 603
-------- -------- ----------- -------- --------
Consolidated total ........................ $ 2,105 $ 3,161 $ 1,534 $ 3,716 $ 3,678
======== ======== =========== ======== ========
Capital expenditures:
Electronic Components Group ................. $ 2,797 $ 3,698 $ 807 $ 3,504 $ 1,233
I-Bus/Phoenix Power and Computing Systems ... 861 1,223 587 1,240 3,982
Corporate ................................... 949 563 205 492 6,575
-------- -------- ----------- -------- --------
Consolidated total ........................ $ 4,607 $ 5,484 $ 1,599 $ 5,236 $ 11,790
======== ======== =========== ======== ========
<CAPTION>
JULY 31, DECEMBER 31,
------------------------ ---------------------
1998 1999 1999 2000
------------ --------- ----------- ---------
<S> <C> <C> <C> <C>
Identifiable Assets:
Electronic Components Group................. $ 23,648 $ 27,834 $ 27,147 $ 35,169
I-Bus/Phoenix Power and Computing Systems... 23,700 33,163 29,517 33,199
Corporate................................... 28,481 24,884 17,666 39,778
Net assets of discontinued operations....... 24,371 27,605 23,821 13,963
------------ --------- ----------- ---------
Consolidated total........................ $100,200 $113,486 $ 98,151 $122,109
============ ========= =========== =========
</TABLE>
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, deferred tax assets and credits,
and the centralized telecommunications, networking and other information
technology equipment of the Company.
International sales amounted to $14.8 million, $24.0 million, $10.7 million
and $25.8 million in the fiscal years ended July 31, 1998 and 1999, in the five
months ended December 31, 1999, and in the year ended December 31, 2000,
respectively, and were made principally to customers in the United Kingdom,
Europe and the Pacific Rim. Company assets located outside the United States
totaled approximately $8.9 million and $10.5 million at December 31, 1999 and
2000, respectively.
67
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED)
NOTE 11 -- BUSINESS SEGMENTS (CONTINUED)
The Company made sales to one major customer of its I-Bus/Phoenix Power and
Computing Systems segment which aggregated 13.1%, 16.7%, 18.6% and 8.4% of total
Company sales for the fiscal year ended July 31, 1999, the five months ended
December 31, 1999 and the years ended December 31, 1999 and 2000, respectively.
In addition, one other major customer of the I-Bus/Phoenix Power and Computing
Systems segment accounted for 10.2% of total Company sales for the fiscal year
ended July 31, 1998.
NOTE 12 - RELATED PARTY TRANSACTIONS
In February 1999, the Company loaned $2.0 million to its Chairman and
former CEO under a full recourse promissory note agreement, bearing interest at
5% per year and secured in part by a pledge of Company stock owned by the
Chairman. Principal and accumulated interest was paid in full in January 2001.
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.
68
<PAGE>
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE FULL YEAR ENDED DECEMBER 31, 1999 IS UNAUDITED)
NOTE 13 - UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 1999 and 2000, respectively. The unaudited
financial information reflects all normal recurring adjustments, which are in
the opinion of management, necessary for the fair statement of the results of
the interim periods (in thousands, except per share amounts).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1999:
Continuing operations:
Sales .................................... $ 24,398 $ 28,663 $ 29,074 $ 21,476
Cost of sales ............................ 16,366 19,934 21,333 16,892
------------ ------------ ------------ ------------
Gross profit ............................. 8,032 8,729 7,741 4,584
Total operating expenses ................. 8,409 8,088 10,137 12,497
------------ ------------ ------------ ------------
Operating income (loss) .................. (377) 641 (2,396) (7,913)
Income (loss) from continuing operations . (241) 440 4,607 (4,760)
Discontinued operations, net of tax ........ 2,177 4,227 (82) (6,621)
------------ ------------ ------------ ------------
Net income (loss) .......................... $ 1,936 $ 4,667 $ 4,525 $ (11,381)
============ ============ ============ ============
Basic net income (loss) per share:
Income (loss) from continuing operations . $ (0.03) $ (0.05) $ 0.48 $ (0.50)
Income (loss) from discontinued operations 0.23 (0.44) (0.01) (0.69)
------------ ------------ ------------ ------------
$ 0.20 $ (0.49) $ 0.47 $ (1.19)
============ ============ ============ ============
Diluted net income (loss) per share:
Income (loss) from continuing operations . $ (0.03) $ (0.04) $ 0.47 $ (0.50)
Income (loss) from discontinued operations 0.23 (0.43) (0.01) (0.69)
------------ ------------ ------------ ------------
$ 0.20 $ (0.47) $ 0.46 $ (1.19)
============ ============ ============ ============
Year Ended December 31, 2000:
Continuing operations:
Sales .................................... $ 26,149 $ 27,085 $ 21,671 $ 27,442
Cost of sales ............................ 18,645 19,446 20,631 20,750
------------ ------------ ------------ ------------
Gross profit ............................. 7,504 7,639 1,040 6,692
Total operating expenses ................. 9,654 10,226 16,685 7,628
------------ ------------ ------------ ------------
Operating loss ........................... (2,150) (2,587) (15,645) (936)
Loss from continuing operations .......... (1,384) (1,692) (12,331) (884)
Discontinued operations, net of tax ........ (107) (167) (644) 892
------------ ------------ ------------ ------------
Net income (loss) .......................... $ (1,491) $ (1,859) $ (12,975) $ 8
============ ============ ============ ============
Basic net income (loss) per share:
Loss from continuing operations .......... $ (0.14) $ (0.18) $ (1.25) $ (0.09)
Income (loss) from discontinued operations (0.04) (0.14) (0.07) 0.09
------------ ------------ ------------ ------------
$ (0.18) $ (0.32) $ (1.32) $ --
============ ============ ============ ============
Diluted net income (loss) per shares:
Loss from continuing operations .......... $ (0.14) $ (0.18) $ (1.25) $ (0.09)
Income (loss) from discontinued operations (0.04) (0.14) (0.07) 0.09
------------ ------------ ------------ ------------
$ (0.18) $ (0.32) $ (1.32) $ --
============ ============ ============ ============
</TABLE>
Per share amounts for the quarters and full years have each been calculated
separately. Accordingly, quarterly amounts may not add to the annual amounts
presented elsewhere in this report because of differences in the average common
shares outstanding during each period, and with regard to diluted per share
amounts only, because of the inclusion of the effect of potentially dilutive
securities only in the periods in which such effect would have been dilutive.
69
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10 THROUGH 13.
The information required under Item 10 (Directors and Executive Officers of
the Registrant), Item 11, (Executive Compensation), Item 12 (Security Ownership
of Certain Beneficial Owners and Management) and Item 13 (Certain Relationships
and Related Transactions) will be reported in the Company's Proxy Statement for
the 2001 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A as follows and is incorporated
herein by reference:
<TABLE>
<CAPTION>
ITEM NUMBER HEADING IN PROXY STATEMENT
- ----------- --------------------------
<S> <C>
10-------- "ELECTION OF DIRECTORS"
11-------- "EXECUTIVE COMPENSATION"
12-------- "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT"
13-------- "EXECUTIVE COMPENSATION"
</TABLE>
(See also Item 4.1 - "Executive Officers of the Registrant," Part I, SUPRA)
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
See Item 6, Item 7 and Item 8.
(a)(2) FINANCIAL STATEMENT SCHEDULES
Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are omitted because they
are inapplicable or not required under the related instructions.
(a)(3) LIST OF EXHIBITS
3.1 Restated Certificate of Incorporation of the Registrant -- Exhibit
3.1 to the Registrant's Form 10-K Annual Report for the year ended
July 31, 1987 ("1987 Form 10-K") is incorporated by reference.
3.2 Certificate of Amendment of Restated Certificate of Incorporation
of the Registrant increasing the number of authorized shares to 20
million, dated November 22, 1996 -- Exhibit 3.2 to the
Registrant's Form 10-K Annual Report for the year ended July 31,
1997 ("1997 Form 10-K") is incorporated by reference.
3.3 Certificate of Amendment of Restated Certificate of Incorporation
of the Registrant increasing the number of authorized shares to 40
million, dated February 9, 1998 -- Exhibit 3.3 to the Registrant's
Form 10-K Annual Report for the year ended July 31, 1999 ("1999
Form 10-K") is incorporated by reference.
3.4 Bylaws of the Registrant as amended to date-- Exhibit 3.2 to the
1987 Form 10-K is incorporated by reference.
3.5 Revised Article IV of the Bylaws of the Registrant-- Exhibit 3.4
to the 1997 Form 10-K is incorporated by reference.
70
<PAGE>
4.1 Rights Agreement dated November 5, 1999 between Registrant and
ChaseMellon Shareholders Services, LLC, as Rights Agent - Exhibit
1 to the Registrant's Form 8-A filed November 18, 1999 is hereby
incorporated by reference.
10.1 Maxwell Laboratories, Inc. 1995 Stock Option Plan-- Exhibit 10.3
to the Registrant's Form 10-K Annual Report for the year ended
July 31, 1995 ("1995 Form 10-K") is incorporated by reference.
10.2 Amendment Number One to Maxwell Laboratories, Inc. 1995 Stock
Option Plan, dated March 19, 1997-- Exhibit 10.6 to the 1997 Form
10-K is incorporated by reference.
10.3 Amendment Number Two to Maxwell Technologies, Inc. 1995 Stock
Option Plan, dated January 28, 1998-- Exhibit 10.6 to the 1998
Form 10-K is incorporated by reference.
10.4 Amendment Number Three to Maxwell Technologies, Inc. 1995 Stock
Option Plan, dated January 28, 1999 -- Exhibit 10.8 to the 1999
Form 10-K is incorporated by reference.
10.5 Amendment Number Four to Maxwell Technologies, Inc. 1995 Stock
Option Plan, dated January 28, 2000-- Exhibit 10.9 to the
Registrant's December 31, 1999 Form 10-K is incorporated by
reference.
10.6* Amendment Number Five to Maxwell Technologies, Inc. 1995 Stock
Option Plan, dated August 14, 2000.
10.7 Maxwell Laboratories, Inc. Director Stock Option Plan-- Exhibit
10.23 to the Registrant's Form 10-K Annual Report for the year
ended July 31, 1989 ("1989 Form 10-K") is incorporated by
reference.
10.8 Amendment Number One to Maxwell Laboratories, Inc. Director Stock
Option Plan, dated February 7, 1997-- Exhibit 10.2 to the 1997
Form 10-K is incorporated by reference.
10.9 Amendment Number Two to Maxwell Laboratories, Inc. Director Stock
Option Plan, dated January 28, 1999-- Exhibit 10.3 to the 1999
Form 10-K is incorporated by reference.
10.10 Maxwell Technologies, Inc. 1999 Director Stock Option Plan, dated
January 28, 2000-- Exhibit 10.12 to the Registrant's December 31,
1999 Form 10-K is incorporated by reference.
10.11 Maxwell Laboratories, Inc. 1994 Employee Stock Purchase Plan--
Exhibit 10.4 to the 1995 Form 10-K is incorporated by reference.
10.12 Amendment Number One to the Maxwell Laboratories, Inc. 1994
Employee Stock Purchase Plan, effective as of April 30, 1997--
Exhibit 10.38 to the 1997 Form 10-K is incorporated by reference.
10.13 Maxwell Technologies, Inc. 1999 Management Equity Ownership
Program dated January 28, 2000-- Exhibit 10.45 to the Registrant's
December 31, 1999 Form 10-K is incorporated by reference.
10.14 Maxwell Laboratories, Inc. 1994 Director Stock Purchase Plan--
Exhibit 10.5 to the 1995 Form 10-K is incorporated by reference.
10.15 Maxwell Energy Products, Inc. 1996 Stock Option Plan-- Exhibit
10.35 to the 1997 Form 10-K is incorporated by reference.
10.16* Maxwell Electronic Components Group, Inc. 2000 Stock Option Plan.
10.17 I-Bus, Inc. 1996 Stock Option Plan-- Exhibit 10.36 to the 1997
Form 10-K is incorporated by reference.
10.18 I-Bus/Phoenix, Inc. 2000 Stock Option Plan-- Exhibit 10.3 to the
Registrant's September 30, 2000 Form 10-Q is incorporated by
reference.
10.19 PurePulse Technologies, Inc. 1994 Stock Option Plan-- Exhibit
10.26 to the 1996 Form 10-K is incorporated by reference.
10.20 PurePulse Technologies, Inc. 2000 Stock Option Plan-- Exhibit 10.2
to the September 30, 2000 Form 10-Q is incorporated by reference.
71
<PAGE>
10.21 Maxwell Federal Division, Inc. 1996 Stock Option Plan-- Exhibit
10.34 to the 1997 Form 10-K is incorporated by reference.
10.22 Maxwell Technologies, Inc. Employment Agreement dated November 9,
1999 between the Registrant and Carlton J. Eibl-- Exhibit 10.19 to
the Registrant's December 31, 1999 Form 10-K is incorporated by
reference.
10.23 Maxwell Technologies, Inc. Employment Agreement dated April 30,
1999 between the Registrant and Thomas L. Horgan-- Exhibit 10.19
to the 1999 Form 10-K is incorporated by reference.
10.24 Restricted Stock Agreement dated July 25, 1996, between the
Registrant and Kenneth F. Potashner -- Exhibit 10.17 to the
Registrant's Form 10-K Annual Report for the year ended July 31,
1996 is incorporated by reference.
10.25 Amendment Number One to Restricted Stock Agreement, dated June 24,
1997, between the Registrant and Kenneth F. Potashner -- Exhibit
10.23 to the 1997 Form 10-K is incorporated by reference.
10.26 Secured Promissory Note dated February 2, 1999 and Stock Pledge
Agreement dated February 2, 1999 between Registrant and Kenneth F.
Potashner -- Exhibit 10.24 to the 1999 Form 10-K is incorporated
by reference.
10.27 Stock Pledge Agreement dated February 2, 1999 between Registrant
and Kenneth F. Potashner -- Exhibit 10.25 to the 1999 Form 10-K is
incorporated by reference.
10.28* Subordinated Promissory Note dated January 17, 2001, between
Maxwell Technologies, Inc. and Carl Eibl.
10.29* Executive Bonus Plan for Calendar Year 2001
10.30 Stock Purchase Agreement among Maxwell Technologies, Inc., Maxwell
Energy Products, Inc., and PacifiCorp Energy Ventures, Inc., dated
October 30, 1997-- Exhibit 10 to the Registrant's October 31, 1997
Form 10-Q is incorporated by reference.
10.31 Shareholder Agreement among Maxwell Technologies, Inc., PurePulse
Technologies, Inc., Sanyo E&E Corporation and Three Oceans Inc.,
dated January 28, 1999-- Exhibit 10.44 to the 1999 Form 10-K is
incorporated by reference.
10.32 Agreement and Plan of Reorganization among Gateworks Corporation,
The Shareholders of Gateworks Corporation, I-Bus/Phoenix, Inc. and
Maxwell Technologies, Inc. as of September 13, 2000.-- Exhibit
10.1 to the Registrant's September 30, 2000 Form 10-Q is
incorporated by reference.
10.33* Loan and Security Agreement dated February 26, 2001, between
Maxwell Technologies, Inc., Maxwell Electronic Components Group,
Inc., I-Bus/Phoenix, Inc., PurePulse Technologies, Inc., Maxwell
Technologies Systems Division, Inc., MML Acquisition Corporation
and Comerica Bank - California.
10.34* Lease dated March 28, 2000 by and between Balboa Boulevard
Building, G.P., as Lessor, and the Registrant, as Lessee.
10.35 Lease dated November 1, 1996, by and between Ponderosa Pines
Partnership, as Lessor, and PurePulse Technologies, Inc., as
Lessee -- Exhibit 10.25 to the 1997 Form 10-K is incorporated by
reference.
21.1* List of subsidiaries of the Registrant.
23.1* Consent of Ernst & Young, LLP, Independent Auditors.
(b) REPORTS ON FORM 8-K
None.
- ----------
* Filed herewith.
72
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Diego, State of California, on this 19th day of March, 2001.
MAXWELL TECHNOLOGIES, INC.
By: /s/ Carlton J. Eibl
-------------------------------------
Carlton J. Eibl
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Carlton J. Eibl Chief Executive Officer, President and March 19, 2001
- --------------------------- Director
Carlton J. Eibl
s/ Kenneth F. Potashner Chairman of the Board, Director March 19, 2001
- ---------------------------
Kenneth F. Potashner
/s/ Vickie L. Capps Vice President, Finance and March 19, 2001
- --------------------------- Administration, Treasurer
Vickie L. Capps and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Mark Rossi Director March 19, 2001
- ---------------------------
Mark Rossi
/s/ Jean Lavigne Director March 19, 2001
- ---------------------------
Jean Lavigne
/s/ Robert Guyett Director March 19, 2001
- ---------------------------
Robert Guyett
</TABLE>
73
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.6
<SEQUENCE>2
<FILENAME>a2042380zex-10_6.txt
<DESCRIPTION>EXHIBIT 10.6
<TEXT>
<PAGE>
Exhibit 10.6
AMENDMENT NUMBER FIVE TO
MAXWELL TECHNOLOGIES, INC.
1995 STOCK OPTION PLAN
The Maxwell Technologies, Inc. 1995 Stock Option Plan (the "Plan") is
hereby amended in the following respects:
1. COMMON STOCK SUBJECT TO OPTIONS.
The maximum number of shares authorized under the Plan for grant of
options as set forth in paragraph 4 of the Plan entitled "Common Stock
Subject to Options", consisting of 2,390,000 shares of the Company's
Common Stock as previously amended, is hereby adjusted to a maximum of
3,340,000 shares of the Company's Common Stock.
2. EFFECT OF AMENDMENTS.
This amendment to the Plan shall be effective as of August 14, 2000,
subject to the approval of the majority shareholders of Maxwell
Technologies, Inc. Except to the extent specifically modified herein,
the Plan shall remain in full force and effect.
MAXWELL TECHNOLOGIES, INC.
By:_____________________________
Donald M. Roberts, Secretary
Date: August 14, 2000
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.16
<SEQUENCE>3
<FILENAME>a2042380zex-10_16.txt
<DESCRIPTION>EXHIBIT 10.16
<TEXT>
<PAGE>
Exhibit 10.16
MAXWELL ELECTRONIC COMPONENTS GROUP INC.
2000 STOCK OPTION PLAN
1. PURPOSE. The 2000 Stock Option Plan (the "Plan") is intended
to advance the interests of Maxwell Electronic Components Group Inc. (the
"Company"), and its stockholders by encouraging and enabling selected "key
employees" (as defined below) to acquire and retain a proprietary interest in
the Company by ownership of its stock. For purposes of this Plan, the term "key
employee" shall include employees of the Company, including employees who also
serve as officers or directors of the Company, upon whose judgment, initiative
and effort the Company is dependent for success in the conduct of its business.
It is intended that the Plan provide the flexibility for the issuance of options
which qualify as incentive stock options ("incentive stock options") within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and options which do not so qualify ("non-qualified stock options").
2. DEFINITIONS.
(a) "Affiliate" means Maxwell Technologies, Inc. and each
corporation in which such entity owns, directly or indirectly, more than 50% of
the voting equity interests.
(b) "Agreement" means the agreement between the Company and
the Optionee under which an option is granted, and setting forth the terms and
conditions of the option and the Optionee's rights thereunder.
(c) "Board" means the Board of Directors of the Company.
(d) "Committee" means the Stock Option Committee (the members
of which shall be appointed by the Board from among the directors of the
Company) of the Board. If no such committee has been appointed by the Board,
then the term "Committee" shall refer to the entire Board.
(e) "Common Stock" means the Company's common stock.
(f) "Date of Grant" means the date on which an option under
the Plan is approved by the Committee.
(g) "Option" means an option granted under the Plan.
(h) "Optionee" means a person to whom an option, which has not
expired, has been granted under the Plan.
<PAGE>
(i) "Successor" means the legal representative of the estate
of the deceased Optionee or the person or persons who acquire the right to
exercise an option by bequest or inheritance or by reason of the death of any
Optionee.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by
the Committee which shall report all action taken by it to the Board. The
Committee shall have full and final authority in its discretion, subject to the
provisions of the Plan, to determine the number of shares and purchase price of
Common Stock covered by each option, the individuals to whom and the time or
times at which options shall be granted and the nature of each option granted
under the Plan, i.e., whether the option will be an incentive stock option or a
non-qualified stock option; to construe and interpret the Plan; to determine the
terms and provisions of the respective Agreements, which need not be identical,
including, but without limitation, terms covering the payment of the option
price, and to make all other determinations and take all other actions deemed
necessary or advisable for the proper administration of the Plan. All such
actions and determinations of the Committee shall be conclusively binding for
all purposes and upon all persons.
4. COMMON STOCK SUBJECT TO OPTIONS. Unless amended in accordance
with the provisions of Paragraph 11, and subject to adjustment under the
provisions of Paragraph 7, the aggregate number of shares of the Company's
Common Stock which may be issued upon the exercise of options granted under the
Plan shall not exceed 350,000. The shares of Common Stock to be issued upon the
exercise of options may be authorized but unissued shares, shares issued and
reacquired by the Company or shares bought on the market for the purposes of the
Plan. In the event any option shall, for any reason, terminate or expire or be
surrendered without having been exercised in full, the shares subject to such
option but not purchased thereunder shall again be available for options to be
granted under the Plan.
5. PARTICIPANTS. Options may be granted under the Plan to any
person who, in the opinion of the Committee, is a key employee of the Company.
6. TERMS AND CONDITIONS OF OPTIONS. Any option granted under the
Plan shall be evidenced by an Agreement executed by the Company and the Optionee
and shall contain such terms and be in such form as the Committee may from time
to time approve, subject to the following limitations and conditions:
(a) OPTION PRICE. The option price per share with respect to
each option shall be determined by the Committee but shall in no
instance be less than 100% of the fair market value of a share of the
Common Stock on the Date of Grant; provided that with respect to an
option granted to an individual who, on the grant date, is the holder
of stock representing more than 10% of the voting equity of the Company
or any Affiliate (hereinafter a "10% Holder"), the option price for
such option shall be no less than 110% of such fair market value. For
the purposes hereof, fair market value shall be as determined by the
Committee and such determination shall be binding upon the Company
2
<PAGE>
and upon the Optionee. The Committee may make such determination upon
any factors which the Committee shall deem appropriate.
(b) PERIOD OF OPTION. Except for earlier termination as
provided in Subparagraphs (g) and (h) of this Paragraph 6, and in
Subparagraph (b) of Paragraph 7, the expiration date of each option
shall be fixed by the Committee, but, notwithstanding any provision of
the Plan to the contrary, such expiration date shall not be more than
ten years from the Date of Grant or, with respect to a 10% Holder, five
years from the Date of Grant.
(c) VESTING OF STOCKHOLDER RIGHTS. Neither an Optionee nor any
Successor shall have any of the rights of a stockholder of the Company
until the option with respect to the applicable shares shall have been
duly exercised and the certificate evidencing such shares delivered to
such Optionee or any Successor.
(d) EXERCISE OF OPTION. Each option shall be exercisable in
such amounts and at such respective dates prior to the expiration of
the option as provided in the Agreement; provided that for Optionees
other than officers, directors or consultants of the Company options
will become exercisable at a rate of no less than 20% per year over
five (5) years from the date the Option is granted. An Option may not
be exercised for a fraction of a share.
(e) PAYMENT OF OPTION PRICE. Upon exercise of an option, the
Optionee or Successor shall pay the option price by delivering to the
Company cash or a check payable to the Company in an amount equal to
the option price. The Committee may, at its discretion exercised at the
time of the exercise of an option, permit the payment of the option in
the following ways:
(i) delivery by the Optionee or Successor of a stock
certificate or certificates, duly endorsed for transfer to the
Company, representing shares of Common Stock of the Company
owned by the Optionee or Successor which have a fair market
value on the date of exercise equal to the option price; or
(ii) delivery by the Optionee or Successor cash or a
check payable to the Company and a stock certificate or
certificates, duly endorsed for transfer to the Company,
representing shares of Common Stock owned by the Optionee or
Successor, which, when added to the amount of the cash or
check, have a fair market value on the date of exercise equal
to the option price.
For the purposes hereof, fair market value shall be determined
by the Committee and such determination shall be binding upon the Company and
upon the Optionee or Successor. The Committee may make such determination in
accordance, with Paragraph 6(a) hereof by substituting "date of exercise" for
"Date of Grant" each time the latter appears therein and upon any other factors
which the Committee shall deem appropriate.
3
<PAGE>
(f) NON-TRANSFERABILITY OF OPTION. No option shall be
transferable or assignable by an Optionee, otherwise than by will or
the laws of descent and distribution and each option shall be
exercisable during the Optionee's lifetime only by the Optionee. No
option shall be pledged or hypothecated in any way and no option shall
be subject to execution, attachment or similar process.
(g) TERMINATION OF EMPLOYMENT. Upon termination of an
Optionee's employment with the Company and all Affiliates other than by
reason of the death of the Optionee, the option privileges of such
Optionee shall be limited to the shares which were immediately
purchasable by Optionee at the date of such termination and such option
privilege shall expire unless exercised by Optionee within sixty (60)
days after the date of such termination. The granting of an option to
any person shall not alter in any way the Company's right to terminate
such person's employment at any time for any reason, nor shall it
confer upon the Optionee any rights or privileges except as
specifically provided for in the Plan.
(h) DEATH OF OPTIONEE. If an Optionee dies while in the employ
of the Company or any Affiliate, the option privileges of said Optionee
shall be limited to the shares which were immediately purchasable by
such Optionee at the date of death and such option privileges shall
expire unless exercised by said Optionee's Successor within one (1)
year after the date of death.
7. ADJUSTMENTS.
(a) In the event that the outstanding shares of Common Stock
of the Company are hereafter increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities
of the Company or of another corporation, by reason of a
recapitalization, reclassification, stock split-up, combination of
shares, dividend or other distribution payable in capital stock,
appropriate adjustment shall be made by the Board in the number, kind
and exercise price of shares for the purchase of which options have
theretofore been or may thereafter be granted under the Plan.
(b) In the event that the Company shall determine to merge,
consolidate or enter into any other reorganization with or into any
other corporation, or in the event of any dissolution or liquidation of
the Company, then in any such event, at the election of the Board, (i)
appropriate adjustment shall be made by the Board in the number, kind
and exercise price of shares for the purchase of which options have
theretofore been and/or may thereafter be granted under the Plan; or
(ii) the Plan and any options theretofore granted under the Plan shall
terminate as of the date of such merger, consolidation, reorganization,
dissolution or liquidation, provided that written notice of such event
shall have been given to each Optionee not less than 30 days prior to
the date of such event. Upon any election by the Board pursuant to the
provisions of clause (ii) of this Subparagraph (b), each Optionee shall
have the right during the period commencing on
4
<PAGE>
the date the notice referred to in said clause (ii) is given and
concluding on the date of such merger, consolidation, reorganization,
dissolution or liquidation, as the case may be, to exercise such
Optionee's outstanding and unexercised stock options, including shares
as to which such options would not otherwise have been exercisable by
reason of an insufficient lapse of time.
(c) All adjustments and determinations under this Paragraph 7
shall be made by the Board, whose decisions as to what adjustments or
determinations shall be made, and the extent thereof, shall be final,
binding and conclusive.
8. DOLLAR LIMITATION ON INCENTIVE STOCK OPTIONS. The aggregate
fair market value (determined as of the Date of Grant) of the Common Stock with
respect to which incentive stock options are exercisable for the first time by
any individual during any calendar year (under the Plan and all other stock
option plans of the Company or any Affiliate) shall not exceed $100,000.
9. RESTRICTIONS ON ISSUING SHARES. The exercise of each option
shall be subject to the condition that if at any time the Company shall
determine in its discretion that (i) the satisfaction of withholding tax or
other withholding liabilities, or (ii) the listing, registration or
qualification of any shares otherwise deliverable upon such exercise upon any
securities exchange or under any state or federal law, or (iii) the consent or
approval of any regulatory body, or (iv) the perfection of any exemption from
any such withholding, listing, registration, qualification, consent or approval
is necessary or desirable as a condition of, or in connection with, such
exercise or the issuance, delivery or purchase of shares thereunder, then in any
such event, such exercise shall not be effective unless such withholding,
listing registration, qualification, consent, approval or exemption shall have
been effected, obtained or perfected free of any conditions not acceptable to
the Company.
10. USE OF PROCEEDS. The proceeds received by the Company from the
sale of its Common Stock pursuant to the exercise of options granted under the
Plan shall be added to the Company's general funds and used for general
corporate purposes.
11. AMENDMENT, SUSPENSION AND TERMINATION OF THE PLAN. The Board
may at any time suspend or terminate the Plan or may amend it from time to time
in such respects as the Board may deem advisable in order that the options
granted thereunder may conform to any changes in the law or in any other respect
which the Board may deem to be in the best interests of the Company; PROVIDED,
HOWEVER, that without approval by the stockholders of the Company representing a
majority of the voting power, no such amendment shall (a) except pursuant to
Paragraph 7, increase the maximum number of shares for which options may be
granted under the Plan, (b) change the provisions of Subparagraph (a) of
Paragraph 6 relating to the establishment of the option price, (c) change the
provisions of Subparagraph (b) of Paragraph 6 relating to the expiration date of
each option or (d) change the provisions of the second sentence of this
Paragraph 11 relating to the term of this Plan. Unless the Plan shall
theretofore have been terminated by the Board or as provided in Paragraph 12,
the Plan shall terminate ten (10) years after the effective date of the Plan. No
option may be granted during any suspension or after the
5
<PAGE>
termination of the Plan. Except as otherwise provided in the Plan, no amendment,
suspension or termination of the Plan shall, without an Optionee's consent,
alter or impair any of the right or obligations under any option theretofore
granted to such Optionee under the Plan.
12. EFFECTIVE DATE OF THE PLAN AND STOCKHOLDER APPROVAL. The
effective date of the Plan shall be the date of its approval by the Board;
provided, however, that in the event that stockholder approval of the Plan is
not secured on or before the date which is twelve (12) months from the date of
approval by the Board, the Plan shall thereupon terminate. Any options granted
prior to the aforesaid stockholder approval being secured shall be subject to
such approval being secured.
13. INFORMATION TO OPTIONEES. The Company shall provide to each
Optionee not less frequently than annually, during the period such Optionee has
one or more Options, copies of annual financial statements. The Company shall
not be required to provide such statements to key employees whose duties in
connection with the Company assure their access to equivalent information.
MAXWELL ELECTRONIC COMPONENTS GROUP INC.
By: /s/ DONALD M. ROBERTS
--------------------------------------
Donald M. Roberts, Secretary
Date:
------------------------------------
6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.28
<SEQUENCE>4
<FILENAME>a2042380zex-10_28.txt
<DESCRIPTION>EXHIBIT 10.28
<TEXT>
<PAGE>
Exhibit 10.28
SUBORDINATED PROMISSORY NOTE
January 17, 2001
$1,500,000 San Diego, California
FOR VALUE RECEIVED, the undersigned, Maxwell Technologies, Inc., a
Delaware corporation, ("Maker") hereby promises to pay to the order of Carl
Eibl, an individual, ("Holder") at his office located at 9244 Balboa Avenue, San
Diego, California 92123, or such other place as Holder may designate in writing
from time to time, the principal sum of One Million Five Hundred Thousand
Dollars ($1,500,000), on the terms and conditions of this Subordinated
Promissory Note ("Note").
This Note reflects a short-term loan from Holder to Maker to assist
Maker in meeting its financial obligations during the remaining term of that
certain Amended and Restated Credit Agreement dated as of October 24, 2000, as
subsequently amended, (the "Credit Agreement") between Maker, as borrower, and
Sanwa Bank California, as lender ("Sanwa Bank") and is intended to be fully
subordinate to the rights of Sanwa Bank under the Credit Agreement and related
loan documents. Holder has obtained the funds representing the principal
hereunder pursuant to borrowings for which the interest rate is based on minimum
thirty (30) day periods for the borrowings to be outstanding, and the first such
30-day period commences on the date of this Note. Accordingly, the entire
principal amount of this Note shall be due and payable at the end of the first
such 30-day period that ends after Sanwa Bank has been paid all amounts owed to
it under the Credit Agreement and related loan documents. No prepayment of
principal is permitted under this Note.
Interest shall accrue on the unpaid principal of this Note at the rate
of 11% per annum. Accrued interest shall be due and payable on the last day of
each 30-day period described in the preceding paragraph but only if no event of
default has occurred and is continuing under the Credit Agreement. If such an
event of default has occurred and is continuing at the time interest is due to
be paid hereunder, such interest payment shall not be due and payable at that
time and interest shall continue to accrue hereunder until the next interest
payment date on which no such event of default has occurred and is continuing.
Maker agrees to reimburse Holder for any costs incurred by Holder in
seeking collection of amounts due hereunder, including, but not limited to,
reasonable attorneys' fees, costs and expenses. Maker waives presentment;
demand; notice of protest and non-payment; notice of costs, expenses or losses
and interest; and diligence in taking any action to collect any sums owing under
this Note.
This Note is made in the State of California, and the law of California
shall apply to the interpretation of the terms and conditions of this Note.
IN WITNESS WHEREOF, this Note is executed on the date first above
written.
Maxwell Technologies, Inc.
By /s/ Vickie L. Capps
---------------------------------
Vickie L. Capps
Chief Financial Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.29
<SEQUENCE>5
<FILENAME>a2042380zex-10_29.txt
<DESCRIPTION>EXHIBIT 10.29
<TEXT>
<PAGE>
Exhibit 10.29
EXECUTIVE BONUS PLAN FOR CALENDAR YEAR 2001
Payout guidelines for participants employed by Maxwell Technologies, Inc.,
Maxwell Electronic Components Group, Inc. and I-Bus/Phoenix, Inc.:
1. Maxwell Electronic Components Group, Inc. and I-Bus/Phoenix, Inc.
("Divisions") bonus payouts will be based upon respective Division results
only. Division payouts will not be influenced by overall Maxwell
Technologies, Inc. results. An exception relates to Division Presidents,
for whom the payouts will be determined two-thirds based on the results for
the respective Division and one-third based upon consolidated Maxwell
Technologies, Inc. results.
Bonuses for employees of Maxwell Technologies, Inc. ("Corporate") will be
paid out based on consolidated Maxwell Technologies, Inc. results,
including PurePulse.
2. If YTD results at end of first half are equal to 100% of the First Half
"Threshold" Amounts for BOTH sales and operating income, a payout equal to
25% of the full year target bonus will be paid to all bonus plan
participants, except the CEO and direct reports to the CEO ("Executive
Staff"), following the release of earnings for Q2. The Executive Staff
shall not be eligible for mid-year payouts under the bonus plan.
3. The remaining 75% of the target bonus (or the full 100% if there is no
payout at the end of the first half) will begin to be earned if the full
year results reach the Full Year "Threshold" amounts for BOTH sales and
operating income. There will be no year-end bonus payout if BOTH sales and
operating income do not meet the respective Threshold amounts.
4. Half (50%) of the full year target bonus will be earned, pro rata, on
results achieved which are greater than the Threshold amounts, up to and
including the full Plan amounts. The payout will be weighted one-third on
sales and two-thirds on operating income.
5. If 100% or more of BOTH Plan sales and Plan operating income are achieved,
year-end bonus payouts will be made at 100% of target.
6. All year-end bonus payouts will be paid following the release of Q4 results
for the Company, and will be paid net of any amounts paid out at the end of
the first half.
7. Results from acquired businesses and other transactions not in the ordinary
course and not included in the Plan will be excluded from the results for
purposes of determining bonus payouts.
8. At the discretion of the Division Presidents, Division payouts can be
further subject to the achievement of individual business unit or country
targets, within the constraints of the overall maximum payout computed
above.
9. Further, at the discretion of the Division Presidents, up to 20% of an
individual's bonus achievement can be determined by performance of
management objectives to be agreed with the individual, subject to an
overall cap on bonus payouts as computed above.
Payout for participants employed by PurePulse Technologies, Inc. will be subject
to the achievement of the Financial Plan of PurePulse as well as the achievement
of certain business operating milestones, which are expected to enhance the
enterprise value of PurePulse. PurePulse participants are not eligible for
mid-year payouts under the bonus plan.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.33
<SEQUENCE>6
<FILENAME>a2042380zex-10_33.txt
<DESCRIPTION>EXHIBIT 10.33
<TEXT>
<PAGE>
Exhibit 10.33
- --------------------------------------------------------------------------------
MAXWELL TECHNOLOGIES, INC.
MAXWELL ELECTRONIC COMPONENTS GROUP, INC.
I-BUS/PHOENIX, INC.
PUREPULSE TECHNOLOGIES, INC.
MAXWELL TECHNOLOGIES SYSTEMS DIVISION, INC.
MML ACQUISITION CORP.
LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
<PAGE>
This LOAN AND SECURITY AGREEMENT is entered into as of February 26,
2001, by and between COMERICA BANK-CALIFORNIA ("Bank") and MAXWELL TECHNOLOGIES,
INC., MAXWELL ELECTRONIC COMPONENTS GROUP, INC., I-BUS/PHOENIX, INC., PUREPULSE
TECHNOLOGIES, INC., MAXWELL TECHNOLOGIES SYSTEMS DIVISION, INC., MML ACQUISITION
CORP. (individually, a "Borrower" and collectively, the "Borrowers").
RECITALS
Borrowers wish to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrowers. This Agreement sets forth the terms on
which Bank will advance credit to Borrowers, and Borrowers will repay the
amounts owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. As used in this Agreement, the following
terms shall have the following definitions:
"Accounts" means all presently existing and hereafter
arising accounts, contract rights, and all other forms of obligations owing to
any Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by such Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by such Borrower and such Borrower's Books
relating to any of the foregoing.
"Advance" or "Advances" means a cash advance or cash
advances under the Revolving Facility.
"Affiliate" means, with respect to any Person,
without duplication, any Person that owns or controls directly or indirectly
such Person, any Person that controls or is controlled by or is under common
control with such Person, and each of such Person's senior executive officers,
directors, and partners.
"Bank Expenses" means all: reasonable costs or
expenses (including reasonable attorneys' fees and expenses) incurred in
connection with the preparation, negotiation, administration, and enforcement of
the Loan Documents; reasonable Collateral audit fees; and Bank's reasonable
attorneys' fees and expenses incurred in amending, enforcing or defending the
Loan Documents (including fees and expenses of appeal), incurred before, during
and after an Insolvency Proceeding, whether or not suit is brought.
"Bridge Advance" has the meaning set forth in Section
2.1(e).
"Bridge Loan" means a credit extension of up to
Fifteen Million Dollars ($15,000,000).
"Bridge Maturity Date" means the earliest of (i) the
sale of all or substantially all the assets of the Systems Division or (ii) June
15, 2001.
"Borrowers' Books" means all of each Borrower's books
and records including: ledgers; records concerning each Borrower's assets or
liabilities, the Collateral, business operations or financial condition; and all
computer programs, or tape files, and the equipment, containing such
information.
"Borrowing Base" means an amount equal to eighty
percent (80%) of Eligible Accounts, PLUS, through December 31, 2001, twenty
percent (20%) of Eligible Inventory, not to exceed Two Million Dollars
($2,000,000), as determined by Bank with reference to the most recent Borrowing
Base Certificate delivered by Borrowers.
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"Business Day" means any day that is not a Saturday,
Sunday, or other day on which banks in the State of California are authorized or
required to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on EXHIBIT
A attached hereto.
"Committed Revolving Line" means a credit extension
of up to Fifteen Million Dollars ($15,000,000).
"Contingent Obligation" means, as applied to any
Person, any direct or indirect liability, contingent or otherwise, of that
Person with respect to (i) any indebtedness, lease, dividend, letter of credit
or other obligation of another, including, without limitation, any such
obligation directly or indirectly guaranteed, endorsed, co-made or discounted or
sold with recourse by that Person, or in respect of which that Person is
otherwise directly or indirectly liable; (ii) any obligations with respect to
undrawn letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designed to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Copyrights" means any and all copyright rights,
copyright applications, copyright registrations and like protections in each
work or authorship and derivative work thereof, whether published or unpublished
and whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.
"Credit Extension" means each Advance, Letter of
Credit, or any other extension of credit by Bank for the benefit of Borrowers
hereunder.
"Current Assets" means, as of any applicable date,
all amounts that should, in accordance with GAAP, be included as current assets
on the consolidated balance sheet of Borrowers and their Subsidiaries as at such
date.
"Current Liabilities" means, as of any applicable
date, all amounts that should, in accordance with GAAP, be included as current
liabilities on the consolidated balance sheet of Borrowers and their
Subsidiaries, as at such date, plus, to the extent not already included therein,
all outstanding Credit Extensions made under this Agreement, including all
Indebtedness that is payable upon demand or within one year from the date of
determination thereof unless such Indebtedness is renewable or extendible at the
option of Borrowers or any Subsidiary to a date more than one year from the date
of determination.
"Daily Balance" means the amount of the Obligations
owed at the end of a given day.
"Eligible Accounts" means those Accounts that arise
in the ordinary course of Borrowers' business that comply with all of Borrowers'
representations and warranties to Bank set forth in Section 5.4; provided, that
standards of eligibility may be fixed and revised from time to time by Bank as a
consequence of any Collateral audits done pursuant to Section 6.3 in Bank's
reasonable judgment and upon notification thereof to Borrowers in accordance
with the provisions hereof. Unless otherwise agreed to by Bank, Eligible
Accounts shall not include the following:
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(a) Accounts that the account debtor has failed to
pay within ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor,
twenty-five percent (25%) of whose Accounts the account debtor has failed to pay
within ninety (90) days of invoice date;
(c) Accounts with respect to which the account debtor
is an officer, employee, or agent of any Borrower;
(d) Accounts with respect to which goods are placed
on consignment, guaranteed sale, sale or return, sale on approval, bill and
hold, or other terms by reason of which the payment by the account debtor may be
conditional;
(e) Accounts with respect to which the account debtor
is a Borrower or an Affiliate of any Borrower;
(f) Accounts with respect to which the account debtor
does not have its principal place of business in the United States, except for
Eligible Foreign Accounts;
(g) Accounts with respect to which the account debtor
is the United States or any department, agency, or instrumentality of the United
States;
(h) Accounts with respect to which any Borrower is
liable to the account debtor for goods sold or services rendered by the account
debtor to such Borrower, but only to the extent of any amounts owing to the
account debtor against amounts owed to such Borrower;
(i) Accounts with respect to an account debtor,
including subsidiaries and Affiliates thereof, whose total obligations to any
Borrower exceed twenty percent (20%) of all Accounts, to the extent such
obligations exceed the aforementioned percentage, except as approved in writing
by Bank;
(j) Accounts with respect to which the account debtor
disputes liability or makes any claim with respect thereto as to which Bank
believes, in its sole discretion, that there may be a basis for dispute (but
only to the extent of the amount subject to such dispute or claim), or is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business; and
(k) Accounts the collection of which Bank reasonably
determines to be doubtful.
"Eligible Foreign Accounts" means Accounts with
respect to which the account debtor does not have its principal place of
business in the United States and that (i) are supported by one or more letters
of credit in an amount and of a tenor, and issued by a financial institution,
acceptable to Bank, or (ii) that Bank approves on a case-by-case basis.
"Eligible Inventory" means Borrowers' raw materials
and finished goods, only.
"Equipment" means all present and future machinery,
equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and
attachments in which Borrowers have any ownership interest.
"ERISA" means the Employee Retirement Income Security
Act of 1974, as amended, and the regulations thereunder.
"Event of Default" has the meaning assigned in
Article 8.
"Foreign Subsidiary" means any Subsidiary whose
principal place of business is located outside the United States or whose assets
and business are located outside the United States.
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"GAAP" means generally accepted accounting principles
as in effect from time to time.
"Indebtedness" means (a) all indebtedness for
borrowed money or the deferred purchase price of property or services, including
without limitation reimbursement and other obligations with respect to surety
bonds and letters of credit, but excluding trade accounts payable and accrued
expenses arising in the ordinary course of business, (b) all obligations
evidenced by notes, bonds, debentures or similar instruments, (c) all capital
lease obligations, to the extent such obligations would be required to be
included in a balance sheet prepared in accordance with GAAP, and (d) all
Contingent Obligations.
"Insolvency Proceeding" means any proceeding
commenced by or against any person or entity under any provision of the United
States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency
law, including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or proceedings
seeking reorganization, arrangement, or other relief.
"Intellectual Property Collateral" means all of
Borrowers' right, title, and interest in and to the following:
(a) Copyrights, Trademarks and Patents;
(b) Any and all trade secrets, and any and all
intellectual property rights in computer software and computer software products
now or hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available
to Borrowers now or hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past,
present and future infringement of any of the rights included above, with the
right, but not the obligation, to sue for and collect such damages for said use
or infringement of the intellectual property rights identified above;
(e) All licenses or other rights to use any of the
Copyrights, Patents or Trademarks of the Borrowers, and all license fees and
royalties arising from such use to the extent permitted by such license or
rights;
(f) All amendments, renewals and extensions of any of
the Copyrights, Trademarks or Patents; and (g) All proceeds and products of the
foregoing, including without limitation all payments under insurance or any
indemnity or warranty payable in respect of any of the foregoing.
"Interest Period" means for each LIBOR Rate
Extension, a period of approximately one (1), two (2) or three (3) months as
Parent may elect, PROVIDED that the last day of an Interest Period for a LIBOR
Rate Extension shall be determined in accordance with the practices of the LIBOR
interbank market as from time to time in effect, PROVIDED, FURTHER, such period
shall expire not later than the Revolving Maturity Date.
"Inventory" means all present and future inventory in
which any Borrower has any interest, including merchandise, raw materials,
parts, supplies, packing and shipping materials, work in process and finished
products intended for sale or lease or to be furnished under a contract of
service, of every kind and description now or at any time hereafter owned by
such Borrower, including such inventory as is temporarily out of its custody or
possession or in transit and including any returns upon any accounts or other
proceeds, including insurance proceeds, resulting from the sale or disposition
of any of the foregoing and any documents of title representing any of the
above, and such Borrower's Books relating to any of the foregoing.
"Investment" means any beneficial ownership of
(including stock, partnership interest or other securities) any Person, or any
loan, advance or capital contribution to any Person.
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"IRC" means the Internal Revenue Code of 1986, as
amended, and the regulations thereunder.
"LIBOR Base Rate" means, for any Interest Period for
a LIBOR Rate Extension, the rate of interest per annum determined by Bank to be
the per annum rate of interest at which deposits in United States Dollars are
offered to Bank in the London interbank market in which Bank customarily
participates at 11:00 a.m. (local time in such interbank market) three (3)
Business Days before the first day of such Interest Period for a period
approximately equal to such Interest Period and in an amount approximately equal
to the amount of such Credit Extension.
"LIBOR Rate" shall mean, for any Interest Period for
a LIBOR Rate Extension, a rate per annum (rounded upwards, if necessary, to the
nearest 1/16 of 1%) equal to (i) the LIBOR Base Rate for such Interest Period
divided by (ii) 1 minus the Reserve Requirement for such Interest Period.
"LIBOR Rate Advances" means any Advances or a portion
thereof, on which interest is payable based on the LIBOR Rate in accordance with
the terms hereof.
"LIBOR Rate Extensions" means any LIBOR Rate Advances
or any portion thereof bearing interest at a rate based on the LIBOR Rate.
"Lien" means any mortgage, lien, deed of trust,
charge, pledge, security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement,
any note or notes executed by Borrowers, and any other agreement entered into
between Borrowers and Bank in connection with this Agreement, all as amended or
extended from time to time.
"Material Adverse Effect" means a material adverse
effect on (i) the business operations or condition (financial or otherwise) of
Borrowers and their Subsidiaries taken as a whole and (ii) the ability of
Borrowers to repay the Obligations or otherwise perform their obligations under
the Loan Documents.
"Negotiable Collateral" means all of each Borrower's
present and future letters of credit of which it is a beneficiary, notes,
drafts, instruments, securities, documents of title, and chattel paper, and
Borrowers' Books relating to any of the foregoing.
"Obligations" means all debt, principal, interest,
Bank Expenses and other amounts owed to Bank by Borrowers pursuant to the Loan
Documents or any other agreement arising under or related to the Loan Documents,
whether absolute or contingent, due or to become due, now existing or hereafter
arising, including any interest that accrues after the commencement of an
Insolvency Proceeding and including any debt, liability, or obligation owing
from Borrowers to others that Bank may have obtained by assignment or otherwise.
"Parent" means Maxwell Technologies, Inc.
"Patents" means all patents, patent applications and
like protections including without limitation improvements, divisions,
continuations, renewals, reissues, extensions and continuations-in-part of the
same. "Periodic Payments" means all installments or similar recurring payments
that Borrowers may now or hereafter become obligated to pay to Bank pursuant to
the terms and provisions of any instrument, or agreement now or hereafter in
existence between Borrowers and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrowers in favor of Bank
arising under this Agreement or any other Loan Document;
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(b) Indebtedness existing on the Closing Date and
disclosed in the Schedule;
(c) Indebtedness secured by a lien described in
clause (c) of the defined term "Permitted Liens," provided such Indebtedness
does not exceed the cost of the equipment financed with such Indebtedness;
(d) Subordinated Debt;
(e) Indebtedness between or among Borrowers;
(f) The deferred purchase price of property or
services in the ordinary course of business;
(g) Indebtedness incurred by Foreign Subsidiaries,
not to exceed Five Million Dollars ($5,000,000) (U.S.) in the aggregate
outstanding at any time, and related Borrower guarantees thereof;
(h) Borrower credit extensions to Foreign
Subsidiaries, not to exceed Two Million Dollars ($2,000,000) (U.S.);
(i) Contingent Obligations in the ordinary course of
business; and
(j) Up to Two Million Dollars ($2,000,000) (U.S.) of
other Indebtedness not otherwise permitted under subdivisions (a) - (i) of the
definition of Permitted Indebtedness.
"Permitted Investment" means:
(a) Investments existing on the Closing Date
disclosed in the Schedule;
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having rating of at least A-2 or P-2 from either
Standard & Poor's Corporation or Moody's Investors Service, (iii) certificates
of deposit maturing no more than one (1) year from the date of investment
therein issued by Bank, (iv) Bank's money market accounts and (v) any other
financial instrument agreed to by Bank in writing;
(c) Investments between or among Borrowers;
(d) Investments in Foreign Subsidiaries, not to
exceed Two Million Dollars ($2,000,000) (U.S.);
(e) Travel and expense advances to employees and
compensatory bonuses to employees in the form of forgivable loans;
(f) Loans to employees under Parent's Management
Equity Ownership Program and other compensatory stock programs;
(g) Investments made using Borrower's equity provided
that Borrowers meet all covenants contained herein as determined on a proforma
basis after the Investment;
(h) Discharge of existing obligation to former
shareholders of Gateworks Corporation; and
(i) Up to Two Million Dollars ($2,000,000) (U.S.) of
other Investments not otherwise permitted under subdivisions (a) - (h) of the
definition of Permitted Investment.
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"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and
disclosed in the Schedule or arising under this Agreement or the other Loan
Documents;
(b) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings, provided the same have no priority over any of
Bank's security interests;
(c) Liens (i) upon or in any equipment acquired or
held by Borrowers or any of its Subsidiaries to secure the purchase price of
such equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens incurred in connection with the extension,
renewal or refinancing of the indebtedness secured by Liens of the type
described in clauses (a) through (c) above, provided that any extension, renewal
or replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase;
(e) Mechanics', materialmen's, warehousemen's and
similar statutory liens created in the ordinary course of business; and
(f) Liens related to judgments pending discharge in
accordance with section 8.8.
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per
annum, most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Prime Rate Advances" means any Advances or any
portion thereof, on which interest is payable based on the Prime Rate in
accordance with the terms hereof.
"Prime Rate Extensions" means any Prime Rate Advances
or any portion thereof bearing interest at a rate based on the Prime Rate.
"Quick Assets" means, at any date as of which the
amount thereof shall be determined, the unrestricted cash and cash-equivalents,
accounts receivable and investments with maturities not to exceed 90 days, of
Borrowers determined on a consolidated basis in accordance with GAAP.
"Real Property" refers to the real property held of
record by Parent and commonly referred to as (i) 8888-8892 Balboa Boulevard, San
Diego, California 92123, and (ii) 5200 Sigstrom Drive, Carson City, Nevada.
"Reserve Requirement" means, for any Interest Period,
the average maximum rate at which reserves (including any marginal, supplemental
or emergency reserves) are required to be maintained during such Interest Period
under Regulation D against "Eurocurrency liabilities" (as such term is used in
Regulation D) by member banks of the Federal Reserve System. Without limiting
the effect of the foregoing, the Reserve Requirement shall reflect any other
reserves required to be maintained by Bank by reason of any Regulatory Change
against (i) any category of liabilities which includes deposits by reference to
which the LIBOR Rate is to be determined as provided in the definition of "LIBOR
Base Rate" or (ii) any category of extensions of credit or other assets which
include Advances.
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"Responsible Officer" means each of the Chief
Executive Officer, the Chief Financial Officer and the VP-General Counsel of
Parent.
"Revolving Facility" means the facility under which
Borrowers may request Bank to issue Advances, as specified in Section 2.1(a)
hereof.
"Revolving Maturity Date" means May 30, 2002.
"Schedule" means the schedule of exceptions attached
hereto, if any.
"Shares" means (i) sixty-six and two-thirds percent
(66-2/3%) of the issued and outstanding capital stock owned or held of record by
any Borrower in any Subsidiary of any Borrower which is not an entity organized
under the laws of the United States or any territory thereof, and (ii) one
hundred percent (100%) of the issued and outstanding capital stock owned or held
of record by any Borrower in any Subsidiary of any Borrower which is an entity
organized under the laws of the United States or any territory thereof.
"Subordinated Debt" means any debt incurred by any
Borrower that is subordinated to the debt owing by such Borrower to Bank on
terms reasonably acceptable to Bank (and identified as being such by such
Borrower and Bank). "Subsidiary" means any corporation or partnership in which
(i) any general partnership interest or (ii) more than 50% of the stock of which
by the terms thereof ordinary voting power to elect the Board of Directors,
managers or trustees of the entity shall, at the time as of which any
determination is being made, is owned by any Borrower, either directly or
through an Affiliate.
"Systems Division" means Maxwell Technologies Systems
Division, Inc.
"Tangible Net Worth" means at any date as of which
the amount thereof shall be determined, the sum of the capital stock and
additional paid-in capital plus retained earnings (or minus accumulated deficit)
of Parent minus intangible assets, debts owing from Affiliates, officers,
shareholders or directors of Borrowers, plus Subordinated Debt, all determined
on a consolidated basis in accordance with GAAP.
"Total Liabilities" means at any date as of which the
amount thereof shall be determined, all obligations that should, in accordance
with GAAP be classified as liabilities on the consolidated balance sheet of
Borrowers, including in any event all Indebtedness.
"Trademarks" means any trademark and servicemark
rights, whether registered or not, applications to register and registrations of
the same and like protections, and the entire goodwill of the business of
Borrowers connected with and symbolized by such trademarks.
1.2 ACCOUNTING TERMS. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP and all
calculations made hereunder shall be made in accordance with GAAP. When used
herein, the terms "financial statements" shall include the notes and schedules
thereto.
2. LOAN AND TERMS OF PAYMENT.
2.1 CREDIT EXTENSIONS.
Borrowers promise to pay when due to the order of
Bank, in lawful money of the United States of America, the aggregate unpaid
principal amount of all Credit Extensions made by Bank to Borrowers hereunder.
Borrowers shall also pay interest on the unpaid principal amount of such Credit
Extensions at rates in accordance with the terms hereof.
(a) REVOLVING ADVANCES.
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(i) Subject to and upon the terms and
conditions of this Agreement and as long as no default or Event of Default has
occurred and is continuing, Parent may request Advances in an aggregate
outstanding amount of (1) unless and until (x) the Borrowers reach quarterly
profitability on a consolidated basis (excluding one-time gains) and (y)
completion of the sale of all or substantially all of the assets of Systems
Division, the lesser of (i) the Committed Revolving Line, and (ii) the Borrowing
Base; and (2) thereafter, the Committed Revolving Line; in any event MINUS the
sum of (w) the then outstanding principal balance of the Advances, (x) the
aggregate face amount of any outstanding Letters of Credit (including any drawn
but unreimbursed Letters of Credit) (y) Advances under the Credit Card Sublimit
and (z) amounts outstanding under the Foreign Exchange Sublimit. Subject to the
terms and conditions of this Agreement, amounts borrowed pursuant to this
Section 2.1(a) may be repaid and reborrowed at any time prior to the Revolving
Maturity Date, at which time all Advances under this Section 2.1(a) shall be
immediately due and payable. Borrowers may prepay any Advances without penalty
or premium.
(ii) Whenever Borrowers desire an Advance,
Parent will notify Bank by facsimile transmission or telephone no later than
3:00 p.m. Pacific time, on the Business Day that a Prime Rate Advance is to be
made, and 3:00 p.m. Pacific time on the Business Day that is three (3) Business
Days prior to the Business Day on which a LIBOR Rate Advance is made. Each such
notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of EXHIBIT B hereto. Bank is authorized to make Advances
under this Agreement, based upon instructions received from a Responsible
Officer or a designee of a Responsible Officer, or without instructions if in
Bank's discretion such Advances are necessary to meet Obligations which have
become due and remain unpaid. Bank shall be entitled to rely on any telephonic
notice given by a person who Bank reasonably believes to be a Responsible
Officer or a designee thereof, and Borrowers shall indemnify and hold Bank
harmless for any damages or loss suffered by Bank as a result of such reliance.
Bank will credit the amount of Advances made under this Section 2.1(a) to
Parent's deposit account.
Each such notice shall specify:
a) the date such Advance is to be made,
which shall be a Business Day;
b) the amount of such Advance;
c) whether such Advance is to be a Prime
Rate Advance or a LIBOR Rate Advance; and
d) if the Advance is to be a LIBOR Rate
Advance, the Interest Period for such Advance.
Each written request for an Advance, and
each confirmation of a telephone request for such an Advance, shall be in
substantially the form of EXHIBIT B-1 hereto executed by Parent.
(iii) PRIME RATE ADVANCES. The outstanding
principal balance of each Prime Rate Advance shall bear interest until principal
is due (computed daily on the basis of a 360 day year and actual days elapsed),
at a floating rate per annum equal to one percent (1.0%) above the Prime Rate.
Borrowers shall pay the entire outstanding principal amount of each Prime Rate
Advance on the Revolving Maturity Date.
(iv) LIBOR RATE ADVANCES. Each LIBOR Rate
Advance shall be in an amount of not less than Five Hundred Thousand Dollars
($500,000). The outstanding principal balance of each LIBOR Rate Advance shall
bear interest until principal is due (computed daily on the basis of a 360 day
year and actual days elapsed) at a rate per annum equal to the LIBOR Rate plus
three percent (3%) for such LIBOR Rate Advance. The entire outstanding principal
amount of each LIBOR Rate Advance shall be due and payable on the earlier of (i)
the last day of the LIBOR Rate Interest Period for such LIBOR Rate Advance, and
(ii) on the Revolving Maturity Date.
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(v) PREPAYMENT OF THE ADVANCES. Borrowers
may at any time prepay any Prime Rate Advance or any LIBOR Rate Advance, in full
or in part. Each partial prepayment for a LIBOR Rate Advance shall be in an
amount not less than One Hundred Thousand Dollars ($100,000). Each prepayment
shall be made upon the irrevocable written or telephone notice of any Borrower
received by Bank not later than 10:00 a.m. Pacific time on the date of the
prepayment of a Prime Rate Advance, and not less than three (3) Business Days
prior to the date of the prepayment of a LIBOR Rate Advance. The notice of
prepayment shall specify the date of the prepayment, the amount of the
prepayment, and the Advance or Advances prepaid. Each prepayment of a LIBOR Rate
Advance shall be accompanied by the payment of accrued interest on the amount
prepaid and any amount required by Section 2.7.
(b) LETTER OF CREDIT SUBLIMIT.
(i) Subject to the terms and conditions of
this Agreement, from the Closing Date through the Revolving Maturity Date, Bank
agrees to issue or cause to be issued letters of credit (each a "Letter of
Credit," collectively, the "Letters of Credit") for the account of any Borrower
in an aggregate face amount not to exceed (A) the lesser of the Committed
Revolving Line or the Borrowing Base, MINUS the sum of (w) the then outstanding
principal balance of the Advances, (x) the aggregate face amount of any
outstanding Letters of Credit (including any drawn but unreimbursed Letters of
Credit), (y) Advances under the Credit Card Sublimit and (z) amounts outstanding
under the Foreign Exchange Sublimit, OR (B) Five Million Dollars ($5,000,000)
(the "Letter of Credit Sublimit"). Each such Letter of Credit shall be renewable
annually and shall have an expiration date no later than the Revolving Maturity
Date. Repayment of any Letter of Credit having an expiration date later than the
Revolving Maturity Date shall be secured by cash on deposit with Bank in the
full face amount of such Letter of Credit. All Letters of Credit shall be, in
form and substance, acceptable to Bank in its sole discretion and shall be
subject to the terms and conditions of Bank's form of application and letter of
credit agreement. All amounts actually paid by Bank in respect of a Letter of
Credit shall, when paid, constitute an Advance under this Agreement.
(ii) The obligation of Borrowers to
immediately reimburse Bank for drawings made under Letters of Credit shall be
absolute, unconditional and irrevocable, and shall be performed strictly in
accordance with the terms of this Agreement and such Letters of Credit, under
all circumstances whatsoever. Borrowers shall indemnify, defend, protect, and
hold Bank harmless from any loss, cost, expense or liability, including, without
limitation, reasonable attorneys' fees, arising out of or in connection with any
Letters of Credit.
(c) CREDIT CARD SUBLIMIT. Subject to the terms and
conditions of this Agreement, from the Closing Date through the Revolving
Maturity Date, Bank agrees to issue or cause to be issued corporate credit cards
for the executives of Borrowers in an aggregate credit limit not to exceed (A)
the lesser of the Committed Revolving Line or the Borrowing Base, MINUS the sum
of (w) the then outstanding principal balance of the Advances, (x) the aggregate
face amount of any outstanding Letters of Credit (including any drawn but
unreimbursed Letters of Credit), (y) Advances under the Credit Card Sublimit and
(z) amounts outstanding under the Foreign Exchange Sublimit, OR (B) One Million
Dollars ($1,000,000) (the "Credit Card Sublimit"). The terms and conditions
(including repayment and fees) of such Credit Card Sublimit shall be subject to
the terms and conditions of the Bank's standard forms of application and
agreement for corporate credit card(s), which Borrowers hereby agree to execute.
(d) FOREIGN EXCHANGE SUBLIMIT. Subject to the terms
and conditions of this Agreement, from the Closing Date through the Revolving
Maturity Date, Borrowers may enter in foreign exchange forward contracts with
the Bank under which Borrowers commit to purchase from or sell to Bank a set
amount of foreign currency more than one (1) Business Day after the contract
date (each, a "FX Forward Contract") in an aggregate amount not to exceed (A)
the lesser of the Committed Revolving Line or the Borrowing Base, MINUS the sum
of (w) the then outstanding principal balance of the Advances, (x) the aggregate
face amount of any outstanding Letters of Credit (including any drawn but
unreimbursed Letters of Credit), (y) Advances under the Credit Card Sublimit and
(z) ten percent (10%) of the face amount of the foreign exchange instrument, OR
(B) Three Million Dollars ($3,000,000) (the "Foreign Exchange Sublimit"). Bank
may terminate the FX Forward Contracts if an Event of Default occurs. The terms
and conditions (including repayment and fees) of such FX Forward Contracts shall
be subject to the terms and conditions of the Bank's standard forms of
application and agreement for FX Forward Contracts, which Borrowers hereby agree
to execute.
<PAGE>
(e) BRIDGE ADVANCE.
(i) Subject to and upon the terms and
conditions of this Agreement, upon the Closing Date, Parent may request and Bank
will provide Parent an advance (the "Bridge Advance") in an aggregate
outstanding amount not to exceed the Bridge Loan. The principal amount of and
all accrued interest on the Bridge Advance shall be immediately due and payable
on the Bridge Maturity Date. The Bridge Advance, once repaid, may not be
reborrowed. Borrowers may prepay the Bridge Advance without penalty or premium.
(ii) Whenever Parent desires the Bridge
Advance, Borrower will notify Bank by facsimile transmission or telephone no
later than 3:00 p.m. Pacific time, on the Business Day that the Bridge Advance
is to be made. Such notification shall be promptly confirmed by a
Payment/Advance Form in substantially the form of Exhibit B-3 hereto. Bank is
authorized to make the Bridge Advance under this Agreement, based upon
instructions received from a Responsible Officer or a designee of a Responsible
Officer. Bank shall be entitled to rely on any telephonic notice given by a
person who Bank reasonably believes to be a Responsible Officer or a designee
thereof, and Borrowers shall indemnify and hold Bank harmless for any damages or
loss suffered by Bank as a result of such reliance. Bank will credit the amount
of the Bridge Advance made under this Section 2.1(e) to Parent's deposit
account.
(iii) Upon the sale of all or a portion of
the assets of the Systems Division outside the ordinary course of business,
Borrower shall immediately apply the net proceeds, after payment of or provision
for retained liabilities and minority shareholders interests not to exceed Four
Million Dollars ($4,000,000) in the aggregate, received therefrom to satisfy the
corresponding amount of first, the accrued interest on and second, the principal
amount of the Bridge Loan.
(iv) If Borrower does not sell all or
substantially all of the assets of the Systems Division, and is therefore unable
to repay the Bridge Loan on or before the Bridge Maturity Date, Borrowers and
Bank will discuss the terms under which Bank may refinance the Bridge Loan.
2.2 OVERADVANCES. If at any time the availability of
Advances hereunder is subject to the Borrowing Base, the outstanding Advances
under Section 2.1(a), PLUS the Letter of Credit Sublimit, the Credit Card
Sublimit and the Foreign Exchange Sublimit, exceed the lesser of the Borrowing
Base or the Committed Revolving Line, Borrowers shall immediately pay Bank, in
cash, the amount of such excess.
2.3 INTEREST RATES, PAYMENTS, AND CALCULATIONS.
(a) INTEREST RATES. Except as set forth in Section
2.3(b), the Bridge Advance shall bear interest, on the outstanding daily balance
thereof, at a rate equal to one and one-half percent (1.50%) above the Prime
Rate.
(b) DEFAULT RATE. All Obligations shall bear
interest, from and after the occurrence and during the continuance of an Event
of Default, at a rate equal to five (5) percentage points above the interest
rate applicable immediately prior to the occurrence of an Event of Default.
(c) PAYMENTS. Interest hereunder shall be due and
payable on the last calendar day of each month during the term hereof. Bank
shall charge such interest, all Bank Expenses, and all Periodic Payments against
any of Borrowers' deposit accounts. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder. Bank shall
deliver to Parent statements of account in the ordinary course of business
reflecting charges made hereunder.
(d) COMPUTATION. In the event the Prime Rate is
changed from time to time hereafter, the applicable rate of interest hereunder
shall be increased or decreased, effective as of the day the Prime Rate is
changed, by an amount equal to such change in the Prime Rate. All interest
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.
<PAGE>
2.4 CREDITING PAYMENTS. Prior to the occurrence of an
Event of Default, Bank shall credit a wire transfer of funds, check or other
item of payment to such deposit account or Obligation as Parent specifies. After
the occurrence of an Event of Default, the receipt by Bank of any wire transfer
of funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 12:00 noon Pacific time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 FEES. Borrowers shall pay to Bank the following:
(a) FACILITY FEES. On account of the Revolving
Facility, Borrowers shall pay to Bank a fee equal to (i) $15,000, which fee
shall be due and payable and shall be fully earned and nonrefundable as of the
Closing Date; and (ii) one quarter of one percent (0.25%) per annum of the
difference between the Revolving Committed Line and the average daily
outstanding balance in any fiscal quarter under the Revolving Committed Line,
which fee shall be payable within five (5) days of the last day of such fiscal
quarter. On account of any Letter of Credit, one and one half percent (1.50%)
per annum of the face amount of each Letter of Credit, whether or not drawn. On
account of the Bridge Loan, Borrowers shall pay Bank a fee equal to Thirty Seven
Thousand Five Hundred Dollars ($37,500), which fee shall be due and payable and
shall be fully earned and nonrefundable as of the Closing Date.
(b) BANK EXPENSES. On the Closing Date, all Bank
Expenses incurred through the Closing Date, including reasonable attorneys' fees
and expenses and, after the Closing Date, all Bank Expenses, including
reasonable attorneys' fees and expenses, as and when they become due.
2.6 CONVERSION/CONTINUATION OF EXTENSIONS.
(i) Parent may from time to time submit in writing a
request that Prime Rate Extensions be converted to LIBOR Rate Extensions or that
any existing LIBOR Rate Extensions continue for an additional Interest Period.
Such request shall specify the amount of the Prime Rate Extensions which will
constitute LIBOR Rate Extensions (subject to the limits set forth below) and the
Interest Period to be applicable to such LIBOR Rate Extensions. Each written
request for a conversion to a LIBOR Rate Extension or a continuation of a LIBOR
Rate Extension shall be substantially in the form of a Libor Rate
Conversion/Continuation Certificate as set forth on EXHIBIT B-2, which shall be
duly executed by a Responsible Officer. Subject to the terms and conditions
contained herein, three (3) Business Days after Bank's receipt of such a request
from Parent, such Prime Rate Extensions shall be converted to LIBOR Rate
Extensions or such LIBOR Rate Extensions shall continue, as the case may be
provided that:
a) no Event of Default or event which with
notice or passage of time or both would constitute an Event of Default exists;
b) no party hereto shall have sent any
notice of termination of the Agreement;
c) Parent shall have complied with such
customary procedures as Bank has established from time to time for Parent's
requests for LIBOR Rate Extensions;
d) the amount of a LIBOR Rate Extension
shall be $500,000 or such greater amount which is an integral multiple of
$500,000; and
e) Bank shall have determined that the
Interest Period or LIBOR Rate is available to Bank as of the date of the request
for such LIBOR Rate Extension.
<PAGE>
Any request by Parent to convert Prime Rate Extensions to LIBOR Rate
Extensions or continue any existing LIBOR Rate Extensions shall be irrevocable.
Notwithstanding anything to the contrary contained herein, Bank shall not be
required to purchase United States Dollar deposits in the London interbank
market or other applicable LIBOR Rate market to fund any LIBOR Rate Extensions,
but the provisions hereof shall be deemed to apply as if Bank had purchased such
deposits to fund the LIBOR Rate Extensions.
(ii) Any LIBOR Rate Extensions shall automatically
convert to Prime Rate Extensions upon the last day of the applicable Interest
Period, unless Bank has received and approved a complete and proper request to
continue such LIBOR Rate Extension at least three (3) Business Days prior to
such last day in accordance with the terms hereof. Any LIBOR Rate Extensions
shall, at Bank's option, convert to Prime Rate Extensions in the event that an
Event of Default shall exist. Borrowers shall pay to Bank, upon demand by Bank
any amounts required to compensate Bank for any loss (including loss of
anticipated profits), cost or expense incurred by such person, as a result of
the conversion of LIBOR Rate Extensions to Prime Rate Extensions pursuant to any
of the foregoing.
2.7 ADDITIONAL REQUIREMENTS/PROVISIONS REGARDING LIBOR
RATE EXTENSIONS.
(i) If for any reason (including voluntary or
mandatory prepayment or acceleration), Bank receives all or part of the
principal amount of a LIBOR Rate Extension prior to the last day of the Interest
Period for such LIBOR Rate Extension, Borrowers shall on demand by Bank, pay
Bank the amount (if any) by which (i) the additional interest which would have
been payable on the amount so received had it not been received until the last
day of such Interest Period or term exceeds (ii) the interest which would have
been recoverable by Bank by placing the amount so received on deposit in the
certificate of deposit markets or the offshore currency interbank markets or
United States Treasury investment products, as the case may be, for a period
starting on the date on which it was so received and ending on the last day of
such Interest Period or term at the interest rate determined by Bank. Bank's
determination as to such amount shall be conclusive absent manifest error.
(ii) Borrowers shall pay to Bank, upon demand by
Bank, from time to time such amounts as Bank may reasonably determine to be
necessary to compensate it for any costs incurred by Bank that Bank determines
are attributable to its making or maintaining of any amount receivable by Bank
hereunder in respect of any Credit Extensions relating thereto (such increases
in costs and reductions in amounts receivable being herein called "Additional
Costs"), in each case resulting from any Regulatory Change that:
a) changes the basis of taxation of any
amounts payable to Bank under this Agreement in respect of any Credit Extensions
(other than changes which affect taxes measured by or imposed on the overall net
income of Bank by the jurisdiction in which Bank has its principal office); or
b) imposes or modifies any reserve, special
deposit or similar requirements relating to any extensions of credit or other
assets of, or any deposits with or other liabilities of Bank (including any
Credit Extensions or any deposits referred to in the definition of "LIBOR Base
Rate"); or
c) imposes any other material condition
affecting this Agreement (or any of such extensions of credit or liabilities).
Bank will notify Parent of any event occurring after the date of the Agreement
that will entitle Bank to compensation pursuant to this section as promptly as
practicable after it obtains knowledge thereof and determines to request such
compensation. Bank will furnish Parent with a statement setting forth the basis
and amount of each request by Bank for compensation under this Section 2.6.
Determinations and allocations by Bank for purposes of this Section 2.6 of the
effect of any Regulatory Change on its costs of maintaining its obligations to
make Credit Extensions or of making or maintaining Credit Extensions or on
amounts receivable by it in respect of Credit Extensions, and of the additional
amounts required to compensate Bank in respect of any Additional Costs, shall be
conclusive absent manifest error.
(iii) Borrowers shall pay to Bank, upon the request
of Bank, such amount or amounts as shall be sufficient (in the sole good faith
opinion of Bank) to compensate it for any reasonable loss, costs
<PAGE>
or expense incurred by it as a result of any failure by Borrowers to borrow a
LIBOR Rate Extension on the date for such borrowing specified in the relevant
notice of borrowing hereunder.
(iv) If Bank shall determine that the adoption or
implementation of any applicable law, rule, regulation or treaty regarding
capital adequacy, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by Bank (or its applicable lending office) with any respect or directive
regarding capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on capital of Bank or any person or entity
controlling Bank (a "Parent") as a consequence of its obligations hereunder to a
level below that which Bank (or its Parent) could have achieved but for such
adoption, change or compliance (taking into consideration its policies with
respect to capital adequacy) by an amount deemed by Bank to be material, then
from time to time, within 15 days after demand by Bank, Borrowers shall pay to
Bank such additional amount or amounts as will compensate Bank for such
reduction. A statement of Bank claiming compensation under this Section and
setting forth the additional amount or amounts to be paid to it hereunder shall
be conclusive absent manifest error.
(v) If at any time Bank, in its sole and absolute
discretion, determines that: (i) the amount of the LIBOR Rate Extensions for
periods equal to the corresponding Interest Periods or any other period are not
available to Bank in the offshore currency interbank markets, or (ii) the LIBOR
Rate does not accurately reflect the cost to Bank of lending the LIBOR Rate
Extension, then Bank shall promptly give notice thereof to Parent, and upon the
giving of such notice Bank's obligation to make the LIBOR Rate Extensions shall
terminate, unless Bank and Parent agree in writing to a different interest rate
applicable to LIBOR Rate Extensions. If it shall become unlawful for Bank to
continue to fund or maintain any Advances, or to perform its obligations
hereunder, upon demand by Bank, Borrowers shall prepay the Advances in full with
accrued interest thereon and all other amounts payable by Borrowers hereunder
(including, without limitation, any amount payable in connection with such
prepayment pursuant to Section 2.6(a)).
2.8 TERM. This Agreement shall become effective on the
Closing Date and, subject to Section 13.7, shall continue in full force and
effect for so long as any Obligations are outstanding. Notwithstanding the
foregoing, Bank shall have the right to terminate its obligation to make Credit
Extensions under this Agreement immediately and without notice upon the
occurrence and during the continuance of an Event of Default. Notwithstanding
termination, Bank's Lien on the Collateral shall remain in effect for so long as
any Obligations are outstanding.
3. CONDITIONS OF LOANS.
3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION. The
obligation of Bank to make the initial Credit Extension is subject to the
condition precedent that Bank shall have received, in form and substance
satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of each of the
Borrowers with respect to incumbency and resolutions authorizing the execution
and delivery of this Agreement;
(c) a financing statement (Form UCC-1) from each
Borrower for the state of such Borrower's formation and the location of such
Borrower's assets;
(d) termination statements from Sanwa Bank,
terminating Sanwa Bank's interests in all real and personal property assets of
Borrowers, such termination statements to be delivered concurrently with full
repayment of amounts owed to Sanwa Bank;
(e) an intellectual property security agreement from
each Borrower;
<PAGE>
(f) the certificate(s) or other evidence for the
Shares, accompanied by an instrument of assignment duly executed in blank by the
appropriate Borrower;
(g) Non-Encumbrance Agreements, for recordation with
respect to the Real Property;
(h) an opinion of counsel for the Borrowers;
(i) an agreement to provide insurance;
(j) payment of the fees and Bank Expenses then due
specified in Section 2.5 hereof;
(k) an audit of the Collateral, the results of which
shall be satisfactory to Bank; and
(l) such other documents, and completion of such
other matters, as Bank may reasonably deem necessary or appropriate.
3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS. The
obligation of Bank to make each Credit Extension, including the initial Credit
Extension, is further subject to the following conditions:
(a) timely receipt by Bank of the Payment/Advance
Form as provided in Section 2.1; and
(b) the representations and warranties contained in
Section 5 shall be true and correct in all material respects on and as of the
date of such Payment/Advance Form and on the effective date of each Credit
Extension as though made at and as of each such date, and no Event of Default
shall have occurred and be continuing, or would exist after giving effect to
such Credit Extension (provided, however, that those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date). The making of each Credit
Extension shall be deemed to be a representation and warranty by Borrowers on
the date of such Credit Extension as to the accuracy of the facts referred to in
this Section 3.2(b).
4. CREATION OF SECURITY INTEREST.
4.1 GRANT OF SECURITY INTEREST. Borrowers grant and
pledge to Bank a continuing security interest in all presently existing and
hereafter acquired or arising Collateral in order to secure prompt repayment of
any and all Obligations and in order to secure prompt performance by Borrowers
of each of their covenants and duties under the Loan Documents. Except as set
forth in the Schedule and except for Permitted Liens, such security interest
constitutes a valid, first priority security interest in the presently existing
Collateral, and will constitute a valid, first priority security interest in
Collateral acquired after the date hereof.
4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED.
Borrowers shall from time to time execute and deliver to Bank, at the request of
Bank, all Negotiable Collateral, all financing statements and other documents
that Bank may reasonably request, in form satisfactory to Bank, to perfect and
continue perfected Bank's security interests in the Collateral and in order to
fully consummate all of the transactions contemplated under the Loan Documents.
4.3 RIGHT TO INSPECT. Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice, from
time to time during Borrowers' usual business hours but no more than once a year
(unless an Event of Default has occurred and is continuing), to inspect
Borrowers' Books and to make copies thereof and to check, test, and appraise the
Collateral in order to verify Borrowers' financial condition or the amount,
condition of, or any other matter relating to, the Collateral.
4.4 PLEDGE OF COLLATERAL. Each Borrower which is the
owner of Shares hereby pledges, assigns and grants to Bank a security interest
in the Shares, together with all proceeds and substitutions thereof, all cash,
stock and other moneys and property paid thereon, all rights to subscribe for
securities declared or granted in
<PAGE>
connection therewith, and all other cash and noncash proceeds of the foregoing,
as security for the performance of the Obligations. Upon the Closing Date, the
certificate or certificates, where available, for the Shares shall be delivered
to Bank, accompanied by an instrument of assignment duly executed in blank by
the respective Borrower. Each such Borrower shall cause the books of each entity
whose shares are part of the Collateral and are not represented by certificates
to reflect the pledge of the Shares. Upon the occurrence of an Event of Default
hereunder, Bank may effect the transfer of the Shares into the name of Bank and
cause new certificates representing such Shares to be issued in the name of Bank
or its transferee. The respective Borrower will execute and deliver such
documents, and take or cause to be taken such actions, as Bank may reasonably
request to perfect or continue the perfection of Bank's security interest in the
Shares. Unless an Event of Default shall have occurred and be continuing, the
respective Borrowers shall be entitled to exercise any rights with respect to
the Shares and to give consents, waivers and ratifications in respect thereof,
provided that no vote shall be cast or consent, waiver or ratification given or
action taken which would be inconsistent with any of the terms of this Agreement
or which would constitute or create any violation of any of such terms. All such
rights to vote and give consents, waivers and ratifications shall terminate upon
the occurrence and continuance of an Event of Default.
4.5 GRANT OF SECURITY INTEREST IN REAL PROPERTY. In the
event a sale or sales of all or substantially all the assets of the Systems
Division is not closed by the Bridge Maturity Date and the Bridge Loan remains
outstanding, Parent shall execute and deliver to Bank, in form and content
satisfactory to Bank and sufficient for recordation, Deeds of Trust with respect
to the Real Property and, in such event, Parent shall grant to Bank first in
priority security interests, except for Permitted Liens, with respect to the
Real Property.
5. REPRESENTATIONS AND WARRANTIES.
Each Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each
Subsidiary is an entity duly existing under the laws of its country or state of
formation and qualified and licensed to do business in any country or state in
which the conduct of its business or its ownership of property requires that it
be so qualified, except for those countries or states where such failure to
qualify would not have a Material Adverse Effect.
5.2 DUE AUTHORIZATION; NO CONFLICT. The execution,
delivery, and performance of the Loan Documents are within Borrower's powers,
have been duly authorized, and are not in conflict with nor constitute a breach
of any provision contained in Borrower's Articles of Incorporation or Bylaws,
nor will they constitute an event of default under any material agreement to
which Borrower is a party or by which Borrower is bound. Borrower is not in
default under any agreement to which it is a party or by which it is bound,
which default could have a Material Adverse Effect.
5.3 NO PRIOR ENCUMBRANCES. To the best of its knowledge,
Borrower has good and indefeasible title to its Collateral, free and clear of
Liens, except for Permitted Liens.
5.4 BONA FIDE ELIGIBLE ACCOUNTS. The Eligible Accounts
are bona fide existing obligations. The property giving rise to such Eligible
Accounts has been shipped to the account debtor or to the account debtor's agent
for immediate shipment to and in anticipation of unconditional acceptance
(subject only to commercially available trade terms and warranties) by the
account debtor. Borrower has not received notice of actual or imminent
Insolvency Proceeding of any account debtor that is included in any Borrowing
Base Certificate as an Eligible Account.
5.5 MERCHANTABLE INVENTORY. All Inventory is in all
material respects of good and marketable quality, free from all material
defects, except for Inventory for which adequate reserves have been made.
5.6 INTELLECTUAL PROPERTY COLLATERAL. Borrower is the
owner of the Intellectual Property Collateral, except for licenses granted by
Borrower in the ordinary course of business. Each of the Patents is valid and
enforceable, and no part of the Intellectual Property Collateral has been judged
invalid or unenforceable, in whole or in part, and no claim has been made that
any part of the Intellectual Property Collateral violates the rights of any
third party. Except as set forth in the Schedule, Borrower's rights as a
licensee of intellectual property do not
<PAGE>
give rise to more than five percent (5%) of its gross revenue in any given
month, including without limitation revenue derived from the sale, licensing,
rendering or disposition of any product or service.
5.7 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as
disclosed in the Schedule, Borrower has not done business under any name within
the last five years other than that specified on the signature page hereof. The
chief executive office of Parent is located at the address indicated in Section
10 hereof.
5.8 LITIGATION. Except as set forth in the Schedule,
there are no actions or proceedings pending by or against Borrower or any
Subsidiary before any court or administrative agency in which an adverse
decision could have a Material Adverse Effect, or a material adverse effect on
Borrower's interest or Bank's security interest in the Collateral.
5.9 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS.
All consolidated financial statements related to Borrowers and any Subsidiaries
that are delivered by Borrowers to Bank fairly present in all material respects
Borrowers' consolidated financial condition as of the date thereof and
Borrowers' consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrowers since the date of the most recent of such financial statements
submitted to Bank.
5.10 SOLVENCY, PAYMENT OF DEBTS. Borrowers, on a
consolidated basis, are solvent and able to pay their debts (including trade
debts) as they mature.
5.11 REGULATORY COMPLIANCE. Borrower and each Subsidiary
have met the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. No event has occurred resulting from Borrower's
failure to comply with ERISA that is reasonably likely to result in Borrower's
incurring any liability that could have a Material Adverse Effect. Borrower is
not an "investment company" or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940. Borrower is not
engaged principally, or as one of the important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulations T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, which violations could have a Material
Adverse Effect.
5.12 ENVIRONMENTAL CONDITION. Except as disclosed in the
Schedule, none of Borrower's or any Subsidiary's properties or assets has ever
been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge,
by previous owners or operators, in the disposal of, or to produce, store,
handle, treat, release, or transport, any hazardous waste or hazardous substance
in violation of applicable law, except for such violations which would not have
a Material Adverse Effect; to the best of Borrower's knowledge, none of
Borrower's properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste
or hazardous substances into the environment, which has not been resolved to the
satisfaction of the regulatory agency.
5.13 TAXES. To the best of its knowledge, Borrower and
each Subsidiary have filed or caused to be filed all tax returns required to be
filed, and have paid, or have made adequate provision for the payment of, all
material taxes reflected therein.
5.14 SUBSIDIARIES. Borrower does not own any stock,
partnership interest or other equity securities of any Person, except for
Permitted Investments.
5.15 GOVERNMENT CONSENTS. Borrower and each Subsidiary
have obtained all consents, approvals and authorizations of, made all
declarations or filings with, and given all notices to, all governmental
<PAGE>
authorities that are necessary for the continued operation of Borrower's
business as currently conducted, the failure to obtain which could have a
Material Adverse Effect.
5.16 FULL DISCLOSURE. No representation, warranty or other
statement made by Borrower in any certificate or written statement furnished to
Bank contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained in such
certificates or statements not misleading.
5.17 SHARES. Borrower has full power and authority to
create a first lien on the Shares and no disability or contractual obligation
exists that would prohibit Borrower from pledging the Shares pursuant to this
Agreement. Except as set forth on the Schedule, there are no subscriptions,
warrants, rights of first refusal or other restrictions on, or options
exercisable with respect to the Shares. The Shares have been and will be duly
authorized and validly issued, and are fully paid and non-assessable. To the
best of Borrower's knowledge, the Shares are not the subject of any present or
threatened suit, action, arbitration, administrative or other proceeding, and
Borrower knows of no reasonable grounds for the institution of any such
proceedings.
6. AFFIRMATIVE COVENANTS.
Each Borrower covenants and agrees that, until payment in full
of all outstanding Obligations, and for so long as Bank may have any commitment
to make a Credit Extension hereunder, such Borrower (except as indicated
otherwise) shall do all of the following:
6.1 GOOD STANDING. Borrower shall maintain its and each
of its Subsidiaries' corporate existence in its jurisdiction of incorporation,
except as a result of mergers or other corporate changes permitted herein, and
maintain qualification in each jurisdiction in which the failure to so qualify
could have a Material Adverse Effect. Borrower shall maintain, and shall cause
each of its Subsidiaries to maintain, in force all licenses, approvals and
agreements, the loss of which could have a Material Adverse Effect.
6.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall
cause each Subsidiary to meet, the minimum funding requirements of ERISA with
respect to any employee benefit plans subject to ERISA. Borrower shall comply,
and shall cause each Subsidiary to comply, with all statutes, laws, ordinances
and government rules and regulations to which it is subject, except for
noncompliances with which would not have a Material Adverse Effect, or a
material adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Parent
shall deliver to Bank: (a) as soon as available, but in any event within thirty
(30) days after the end of each calendar month, a company prepared consolidated
and consolidating balance sheet and income statement covering Borrowers'
consolidated operations during such period, certified by a Responsible Officer;
(b) as soon as available, but in any event within forty-five (45) days after the
end of each calendar quarter, company prepared consolidated and consolidating
financial statements covering Borrowers' consolidated operations during such
period, certified by a Responsible Officer; (c) as soon as available, but in any
event within ninety (90) days after the end of Borrowers' fiscal year, audited
consolidated financial statements of Parent prepared in accordance with GAAP,
consistently applied, together with an unqualified opinion on such financial
statements of Ernst & Young LLP or other independent certified public accounting
firm reasonably acceptable to Bank; (d) copies of all statements, reports and
notices sent or made available generally by any Borrower to its security holders
or to any holders of Subordinated Debt and, within five (5) days of filing, all
reports on Forms 10-K and 10-Q filed with the Securities and Exchange
Commission; (e) promptly upon receipt of notice thereof, a report of any legal
actions filed against any Borrower or any Subsidiary that could result in
damages or costs to any Borrower or any Subsidiary of Two Hundred Fifty Thousand
Dollars ($250,000) or more; (f) such budgets, sales projections, operating plans
or other financial information as Bank may reasonably request from time to time
generally prepared by Borrowers in the ordinary course of business; and (g)
within thirty (30) days of February 1 and August 1 of each year in which any
Obligations are outstanding, unless an Event of Default has occurred and is
continuing, a report signed by Borrowers, in form reasonably acceptable to Bank,
listing any applications or registrations that any Borrower has made or filed in
respect of any Patents, Copyrights or Trademarks and the status of any
outstanding applications or registrations, as well as any material change in
Borrowers' intellectual property, including but not limited to any subsequent
ownership right of
<PAGE>
Borrowers in or to any Trademark, Patent or Copyright not specified in EXHIBITS
A, B, and C of the Intellectual Property Security Agreements delivered to Bank
by each Borrower in connection with this Agreement.
Within thirty (30) days after the last day of each month in which
Bank's Credit Extensions are limited by the Borrowing Base, Parent shall deliver
to Bank a Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of EXHIBIT C hereto, together with aged listings of
accounts receivable and accounts payable.
Parent shall deliver to Bank with the quarterly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the form
of EXHIBIT D hereto.
Bank shall have a right from time to time hereafter to audit Borrowers'
Accounts and appraise Collateral at Borrowers' expense, provided that such
audits will not be conducted more frequently than semi-annually unless an Event
of Default has occurred and is continuing.
6.4 INVENTORY; RETURNS. Borrower shall keep all Inventory
in good and marketable condition, free from all material defects except for
Inventory for which adequate reserves have been made. Returns and allowances, if
any, as between Borrower and its account debtors shall be on the same basis and
in accordance with the usual customary practices of Borrower, substantially as
such practices exist at the time of the execution and delivery of this
Agreement. Borrower shall promptly notify Bank of all returns and recoveries and
of all disputes and claims, where the return, recovery, dispute or claim
involves more than Five Hundred Thousand Dollars ($500,000).
6.5 TAXES. Borrower shall make, and shall cause each U.S.
Subsidiary to make, due and timely payment or deposit of all material federal,
state, and local taxes, assessments, or contributions required of it by law.
Borrower will make, and will cause each U.S. Subsidiary to make, timely payment
or deposit of all material tax payments and withholding taxes required of it by
applicable laws, including, but not limited to, those laws concerning F.I.C.A.,
F.U.T.A., state disability, and local, state, and federal income taxes, and
will, upon reasonable request, furnish Bank with proof satisfactory to Bank
indicating that Borrower or a Subsidiary has made such payments or deposits;
provided that Borrower or a Subsidiary need not make any payment if the amount
or validity of such payment is contested in good faith by appropriate
proceedings and is reserved against (to the extent required by GAAP) by
Borrower.
6.6 INSURANCE.
(a) Borrower, at its expense, shall keep the
Collateral and the Real Property insured against loss or damage by fire, theft,
explosion, sprinklers, and all other hazards and risks, and in such amounts, as
ordinarily insured against by other owners in similar businesses conducted in
the locations where Borrower's business is conducted on the date hereof.
Borrower shall also maintain insurance relating to Borrower's ownership and use
of the Collateral and the Real Property in amounts and of a type that are
customary to businesses similar to Borrower's. Bank agrees that Borrowers'
existing policies of insurance satisfy these requirements.
(b) All replacement policies of insurance shall be in
such form, with such companies, and in such amounts as reasonably satisfactory
to Bank. All policies of property insurance shall contain a lender's loss
payable endorsement, in a form satisfactory to Bank, showing Bank as an
additional loss payee thereof, and all liability insurance policies shall show
the Bank as an additional insured and shall specify that the insurer must give
at least twenty (20) days notice to Bank before canceling its policy for any
reason. Upon Bank's request, Borrower shall deliver to Bank certified copies of
such policies of insurance and evidence of the payments of all premiums
therefore. If the event giving rise to the payment of insurance proceeds could
have a Material Adverse Effect, all proceeds payable under any such policy
shall, at the option of Bank, be payable to Bank to be applied on account of the
Obligations.
6.7 PRINCIPAL DEPOSITORY. Borrower shall maintain its
principal depository and operating accounts with Bank.
<PAGE>
6.8 QUICK RATIO. Borrowers shall maintain, as of the last
day of each calendar quarter beginning with the quarter ending March 31, 2001, a
ratio of Quick Assets to Current Liabilities of at least 0.65 to 1.00.
6.9 TOTAL LIABILITIES-TANGIBLE NET WORTH. Borrowers shall
maintain, as of the last day of each calendar quarter beginning with the quarter
ending March 31, 2001, a ratio of Total Liabilities to Tangible Net Worth of not
more than 0.75 to 1.00.
6.10 TANGIBLE NET WORTH. Borrowers shall maintain, as of
the last day of each calendar quarter beginning with the quarter ending March
31, 2001, a Tangible Net Worth of not less than (i) Sixty Million Dollars
($60,000,000) prior to the sale of all or substantially all the assets of
Systems Division and, (ii) Sixty Three Million Dollars ($63,000,000) after the
sale of all or substantially all the assets of Systems Division, in each case to
increase by (x) fifty percent (50%) of net income, and (y) seventy five percent
(75%) of net proceeds received by Parent in connection with the sale or issuance
of Parent's equity securities after the Closing Date.
6.11 PROFITABILITY. Borrowers shall report a minimum
consolidated net income of One Million Dollars for the fourth quarter of 2001,
and shall not suffer a consolidated net loss in fiscal year 2001 in excess of
$1,250,000 (excluding any net gain on the sale of any discontinued operation and
any Extraordinary Items (as defined in accordance with GAAP)). Upon achieving
quarterly profitability (excluding any net gain on the sale of any discontinued
operation and any Extraordinary Items (as defined in accordance with GAAP)),
Borrowers must maintain quarterly consolidated net income thereafter.
6.12 NO MATERIAL DIFFERENCE IN FINANCIAL STATEMENTS. The
final audit of the Borrowers prepared by Ernst & Young for the fiscal year ended
December 31, 2000 shall not be materially different than the draft audit of the
Borrowers prepared by Ernst & Young for the same period.
6.13 REGISTRATION OF INTELLECTUAL PROPERTY RIGHTS.
(a) Borrower shall register or cause to be registered
on an expedited basis (to the extent not already registered) with the United
States Patent and Trademark Office or the United States Copyright Office, as
applicable: (i) those intellectual property rights listed on EXHIBITS A, B and C
to the Intellectual Property Security Agreement delivered to Bank by Borrower in
connection with this Agreement, within thirty (30) days of the date of this
Agreement, (ii) all material registerable intellectual property rights Borrower
has developed as of the date of this Agreement but heretofore failed to
register, within thirty (30) days of the date of this Agreement and (iii) those
additional intellectual property rights developed or acquired by Borrower from
time to time in connection with any product and deemed to be material with
respect to such product, prior to the sale or licensing of such product to any
third party, (including without limitation major revisions or additions to the
intellectual property rights listed on such EXHIBITS A, B and C). Borrower shall
give Bank notice of all such applications or registrations pursuant to Section
6.3 (g).
(b) Borrower shall execute and deliver such
additional instruments and documents from time to time as Bank shall reasonably
request to perfect Bank's security interest in the Intellectual Property
Collateral.
(c) With respect to those Trademarks, Patents and
Copyrights deemed to be material by Borrower, Borrower shall (i) protect, defend
and maintain the validity and enforceability of the Trademarks, Patents and
Copyrights, (ii) use its best efforts to detect infringements of the Trademarks,
Patents and Copyrights and promptly advise Bank in writing of material
infringements detected and (iii) not allow any material Trademarks, Patents or
Copyrights to be abandoned, forfeited or dedicated to the public without the
written consent of Bank, which shall not be unreasonably withheld.
(d) Bank may audit Borrower's Intellectual Property
Collateral to confirm compliance with this Section 6.13, provided such audit may
not occur more often than once per year, unless an Event of Default has occurred
and is continuing. Bank shall have the right, but not the obligation, to take,
at Borrower's sole expense, any actions that Borrower is required under this
Section 6.13 to take but which Borrower
<PAGE>
fails to take, after fifteen (15) days' notice to Borrower. Borrower shall
reimburse and indemnify Bank for all reasonable costs and reasonable expenses
incurred in the reasonable exercise of its rights under this Section 6.13.
6.14 FURTHER ASSURANCES. At any time and from time to time
Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes of
this Agreement.
7. NEGATIVE COVENANTS.
Each Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Credit
Extensions, no Borrower will do any of the following:
7.1 DISPOSITIONS. Convey, sell, lease, transfer or
otherwise dispose of (collectively, a "Transfer"), or permit any of its
Subsidiaries to Transfer, all or any part of its business or property, other
than: (i) Transfers of property in the ordinary course of business; (ii)
Transfers or grants of licenses and similar arrangements for the use of the
property of Borrower or its Subsidiaries; (iii) Transfers of surplus, worn-out
or obsolete Equipment; (iv) the sale of all or substantially all assets of
Systems Division; (v) Transfers to any Borrower; (vi) Transfers permitted by 7.9
(iv); (vii) leases of surplus real property or leasehold interests; (viii)
Transfers of real property after the Bridge Loan has been paid in full; or (ix)
other transfers to third parties not to exceed Two Million Dollars ($2,000,000)
(U.S.) in the aggregate at any time.
7.2 CHANGE IN BUSINESS. Engage in any business, or permit
any of its Subsidiaries to engage in any business, other than the businesses
currently engaged in by Borrower and any business substantially similar or
related thereto (or incidental thereto). Parent will not, without thirty (30)
days prior written notification to Bank, relocate its chief executive office.
7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or
permit any of its Subsidiaries to merge or consolidate, with or into any other
business organization, or acquire, or permit any of its Subsidiaries to acquire,
all or substantially all of the capital stock or property of another Person,
other than: (i) mergers or consolidations between or among Borrowers; (ii)
mergers or consolidations between or among Foreign Subsidiaries of Borrowers; or
(iii) mergers or consolidations permitted under subsection (g) of the defined
term Permitted Investments.
7.4 INDEBTEDNESS. Create, incur, assume or be or remain
liable with respect to any Indebtedness, or permit any Subsidiary so to do,
other than Permitted Indebtedness.
7.5 ENCUMBRANCES. Create, incur, assume or suffer to
exist any Lien with respect to any of its property, or assign or otherwise
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries so to do, except for Permitted Liens.
7.6 DISTRIBUTIONS. Other than between or among the
Borrowers, pay any dividends or make any other distribution or payment on
account of or in redemption, retirement or purchase of any capital stock, except
that (i) Borrower may repurchase the stock of current and former employees
pursuant to stock repurchase and restricted stock agreements as long as an Event
of Default does not exist prior to such repurchase or would not exist after
giving effect to such repurchase; and (ii) Borrower may discharge its obligation
to satisfy certain existing put rights of former shareholders of Gateworks
Corporation.
7.7 INVESTMENTS. Directly or indirectly acquire or own,
or make any Investment in or to any Person, or permit any of its Subsidiaries so
to do, other than Permitted Investments.
7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly
enter into any material transaction with any Affiliate of Borrower except for
transactions with any other Borrower and transactions that are in the ordinary
course of Borrower's business, upon fair and reasonable terms.
<PAGE>
7.9 TRANSACTIONS WITH FOREIGN AFFILIATES. Transfer any
assets or consideration to Foreign Subsidiaries, except for (i) Permitted
Indebtedness, (ii) Permitted Investments, and (iii) other transfers of domestic
assets not to exceed Two Million Dollars ($2,000,000) (U.S.) in the aggregate
outstanding at any time.
7.10 SUBORDINATED DEBT. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.11 INVENTORY AND EQUIPMENT. Store the Inventory or the
Equipment with a bailee, warehouseman, or similar party unless Bank has received
a pledge of the warehouse receipt covering such Inventory; provided, however,
that Borrower may store non-material inventory offsite and may deposit software
code in escrow for customers in the ordinary course of business. Except for
Inventory sold in the ordinary course of business and except for such other
locations as Bank may approve in writing, Borrower shall keep the Inventory and
Equipment only at the locations set forth in the Schedule and such other
locations of which Borrower gives Bank prior written notice and as to which
Borrower signs and files a financing statement where needed to perfect Bank's
security interest.
7.12 COMPLIANCE. Become an "investment company" or be
controlled by an "investment company," within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one of
its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Credit Extension
for such purpose. Fail to meet the minimum funding requirements of ERISA, permit
a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur,
fail to comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could have a Material Adverse Effect, or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral, or permit any of its Subsidiaries to do any of the foregoing.
7.13 INTELLECTUAL PROPERTY AGREEMENTS. Borrower shall use
best efforts not to permit the inclusion in any material contract to which it
becomes a party of any provisions that could or might in any way prevent the
creation of a security interest in Borrower's rights and interests in any
material property included within the definition of the Intellectual Property
Collateral acquired under such contracts.
7.14 NEGATIVE PLEDGE/NEGATIVE PLEDGE AGREEMENTS. Except in
the ordinary course of business, Borrower shall not sell, transfer, assign,
mortgage, pledge, lease, grant a security interest in, encumber or permit the
inclusion in any contract to which any Borrower becomes a party of any
provisions that could restrict or invalidate the creation of a security interest
in Borrower's rights and interests in the Collateral or the Real Property.
7.15 REAL PROPERTY DEEDS OF TRUST. Fail to perform its
obligations or otherwise perform its duties under any Deed of Trust granted to
Bank with respect to the Real Property.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an
Event of Default under this Agreement:
8.1 PAYMENT DEFAULT. If a Borrower fails to pay within
five (5) calendar days of the date when due, any of the Obligations;
8.2 COVENANT DEFAULT. If a Borrower fails to perform any
obligation under Article 6 or violates any of the covenants contained in Article
7 of this Agreement, or fails or neglects to perform, keep, or observe any other
material term, provision, condition, covenant, or agreement contained in this
Agreement, in any of the Loan Documents, or in any other present or future
agreement between a Borrower and Bank and as to any default under such other
term, provision, condition, covenant or agreement that can be cured, has failed
to cure such default within ten (10) days after a Borrower receives notice
thereof or any officer of a Borrower becomes aware thereof; provided, however,
that if the default cannot by its nature be cured within the ten (10) day period
or cannot
<PAGE>
after diligent attempts by a Borrower be cured within such ten (10) day period,
and such default is likely to be cured within a reasonable time, then a Borrower
shall have an additional reasonable period (which shall not in any case exceed
thirty (30) days) to attempt to cure such default, and within such reasonable
time period the failure to have cured such default shall not be deemed an Event
of Default (provided that no Credit Extensions will be required to be made
during such cure period);
8.3 MATERIAL ADVERSE CHANGE. If there occurs a Material
Adverse Effect, if Bank reasonably determines that a Borrower is likely to fail
to comply with any of the financial covenants set forth in Sections 6.8 through
6.11 as of any date of measurement, or a material impairment of the value or
priority of Bank's security interests in the Collateral;
8.4 ATTACHMENT. If any material portion of Borrowers'
assets is attached, seized, subjected to a writ or distress warrant, or is
levied upon, or comes into the possession of any trustee, receiver or person
acting in a similar capacity and such attachment, seizure, writ or distress
warrant or levy has not been removed, discharged or rescinded within ten (10)
days, or if a Borrower is enjoined, restrained, or in any way prevented by court
order from continuing to conduct all or any material part of Borrowers' business
affairs, or if a judgment or other claim becomes a lien or encumbrance upon any
material portion of Borrowers' assets, or if a notice of lien, levy, or
assessment is filed of record with respect to a material portion of Borrowers'
assets by the United States Government, or any department, agency, or
instrumentality thereof, or by any state, county, municipal, or governmental
agency, and the same is not paid within ten (10) days after a Borrower receives
notice thereof, provided that none of the foregoing shall constitute an Event of
Default where such action or event is stayed or an adequate bond has been posted
pending a good faith contest by a Borrower (provided that no Credit Extensions
will be required to be made during such cure period);
8.5 INSOLVENCY. If Borrowers, on a consolidated basis,
become insolvent, or if an Insolvency Proceeding is commenced by any Borrower,
or if an Insolvency Proceeding is commenced against any Borrower and is not
dismissed or stayed within thirty (30) days (provided that no Credit Extensions
will be made prior to the dismissal of such Insolvency Proceeding);
8.6 OTHER AGREEMENTS. If there is a default in any
agreement to which a Borrower is a party with a third party or parties resulting
in a right by such third party or parties, whether or not exercised, to
accelerate the maturity of any Indebtedness that could have a Material Adverse
Effect;
8.7 JUDGMENTS. If a judgment or judgments for the payment
of money in an amount, individually or in the aggregate, of at least Two Hundred
Fifty Thousand Dollars ($250,000) shall be rendered against a Borrower and shall
remain unsatisfied and unstayed for a period of thirty (30) days (provided that
no Credit Extensions will be made prior to the satisfaction or stay of such
judgment); or
8.8 MISREPRESENTATIONS. If any material misrepresentation
or material misstatement exists as of the closing date in any warranty or
representation set forth herein or in any certificate delivered to Bank as of
delivery date by any Responsible Officer pursuant to this Agreement.
8.9 DEEDS OF TRUST. If Parent fails to perform its
obligations or otherwise perform its duties under any Deed of Trust granted to
Bank with respect to the Real Property, following any grace or cure period
provided by such Deed of Trust.
9. BANK'S RIGHTS AND REMEDIES.
9.1 RIGHTS AND REMEDIES. Upon the occurrence and during
the continuance of an Event of Default, Bank may, at its election, without
notice of its election and without demand, do any one or more of the following,
all of which are authorized by each Borrower:
(a) Declare all Obligations, whether evidenced by
this Agreement, by any of the other Loan Documents, or otherwise, immediately
due and payable (provided that upon the occurrence of an Event
<PAGE>
of Default described in Section 8.5, all Obligations shall become immediately
due and payable without any action by Bank);
(b) Cease advancing money or extending credit to or
for the benefit of Borrowers under this Agreement or under any other agreement
between any Borrower and Bank;
(c) Settle or adjust disputes and claims directly
with account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
(d) Make such payments and do such acts as Bank
considers necessary or reasonable to protect its security interest in the
Collateral. Each Borrower agrees to assemble the Collateral if Bank so requires,
and to make the Collateral available to Bank as Bank may designate. Each
Borrower authorizes Bank to enter the premises where the Collateral is located,
to take and maintain possession of the Collateral, or any part of it, and to
pay, purchase, contest, or compromise any encumbrance, charge, or lien which in
Bank's determination appears to be prior or superior to its security interest
and to pay all expenses incurred in connection therewith. With respect to any of
a Borrower's owned premises, Borrowers hereby grant Bank a license to enter into
possession of such premises and to occupy the same, without charge, in order to
exercise any of Bank's rights or remedies provided herein, at law, in equity, or
otherwise;
(e) Set off and apply to the Obligations any and all
(i) balances and deposits of Borrowers held by Bank, or (ii) indebtedness at any
time owing to or for the credit or the account of Borrowers held by Bank;
(f) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Bank is hereby granted a license or other right,
solely pursuant to the provisions of this Section 9.1, to use, without charge,
each Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrowers'
rights under all licenses and all franchise agreements shall inure to Bank's
benefit;
(g) Sell the Collateral at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrowers' premises) as Bank
determines is commercially reasonable, and apply any proceeds to the Obligations
in whatever manner or order Bank deems appropriate;
(h) Bank may credit bid and purchase at any public
sale; and
(i) Any deficiency that exists after disposition of
the Collateral as provided above will be paid immediately by Borrowers.
9.2 POWER OF ATTORNEY. Effective only upon the occurrence
and during the continuance of an Event of Default, each Borrower hereby
irrevocably appoints Bank (and any of Bank's designated officers, or employees)
as Borrowers' true and lawful attorney to: (a) send requests for verification of
Accounts or notify account debtors of Bank's security interest in the Accounts;
(b) endorse any Borrower's name on any checks or other forms of payment or
security that may come into Bank's possession; (c) sign any Borrower's name on
any invoice or bill of lading relating to any Account, drafts against account
debtors, schedules and assignments of Accounts, verifications of Accounts, and
notices to account debtors; (d) dispose of any Collateral; (e) make, settle, and
adjust all claims under and decisions with respect to any Borrower's policies of
insurance; and (f) settle and adjust disputes and claims respecting the accounts
directly with account debtors, for amounts and upon terms which Bank determines
to be reasonable; (g) to modify, in its sole discretion, any intellectual
property security agreement entered into between any Borrower and Bank without
first obtaining such Borrower's approval of or signature to such modification by
amending EXHIBITS A, B, and C, thereof, as appropriate, to include reference to
any right, title or interest in any Copyrights, Patents or Trademarks acquired
by such Borrower after the execution hereof or to delete any reference to any
right, title or interest in any Copyrights, Patents or Trademarks in which such
Borrower
<PAGE>
no longer has or claims to have any right, title or interest; (h) to file, in
its sole discretion, one or more financing or continuation statements and
amendments thereto, relative to any of the Collateral without the signature of
any Borrower where permitted by law; and (i) to transfer the Intellectual
Property Collateral into the name of Bank or a third party to the extent
permitted under the California Uniform Commercial Code; provided Bank may
exercise such power of attorney to sign the name of any Borrower on any of the
documents described in Section 4.2 regardless of whether an Event of Default has
occurred. Bank shall provide Parent notice of any action taken with respect to
Section 4.2. The appointment of Bank as Borrowers' attorney in fact, and each
and every one of Bank's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide advances hereunder is terminated.
9.3 ACCOUNTS COLLECTION. Upon the occurrence and during
the continuance of an Event of Default, Bank may notify any Person owing funds
to any Borrower of Bank's security interest in such funds and verify the amount
of such Account. Upon the occurrence and during the continuance of an Event of
Default, Borrowers shall collect all amounts owing to any Borrower for Bank,
receive in trust all payments as Bank's trustee, and immediately deliver such
payments to Bank in their original form as received from the account debtor,
with proper endorsements for deposit.
9.4 BANK EXPENSES. If any Borrower fails to pay any
amounts or furnish any required proof of payment due to third persons or
entities, as required under the terms of this Agreement, then Bank may do any or
all of the following after reasonable notice to Borrower: (a) make payment of
the same or any part thereof; (b) set up such reserves under the Revolving
Facility as Bank deems necessary to protect Bank from the exposure created by
such failure; or (c) obtain and maintain insurance policies of the type
discussed in Section 6.6 of this Agreement, and take any action with respect to
such policies as Bank deems prudent. Any amounts so paid or deposited by Bank
shall constitute Bank Expenses, shall be immediately due and payable, and shall
bear interest at the then applicable rate hereinabove provided, and shall be
secured by the Collateral. Any payments made by Bank shall not constitute an
agreement by Bank to make similar payments in the future or a waiver by Bank of
any Event of Default under this Agreement.
9.5 BANK'S LIABILITY FOR COLLATERAL. So long as Bank
complies with reasonable banking practices, Bank shall not in any way or manner
be liable or responsible for: (a) the safekeeping of the Collateral; (b) any
loss or damage thereto occurring or arising in any manner or fashion from any
cause; (c) any diminution in the value thereof; or (d) any act or default of any
carrier, warehouseman, bailee, forwarding agency, or other person whomsoever.
All risk of loss, damage or destruction of the Collateral shall be borne by
Borrowers.
9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under
this Agreement, the Loan Documents, and all other agreements shall be
cumulative. Bank shall have all other rights and remedies not inconsistent
herewith as provided under the Code, by law, or in equity. No exercise by Bank
of one right or remedy shall be deemed an election, and no waiver by Bank of any
Event of Default on Borrowers' part shall be deemed a continuing waiver. No
delay by Bank shall constitute a waiver, election, or acquiescence by it. No
waiver by Bank shall be effective unless made in a written document signed on
behalf of Bank and then shall be effective only in the specific instance and for
the specific purpose for which it was given.
9.7 DEMAND; PROTEST. Other than notices provided for or
related to this Agreement, Borrowers waive demand, protest, notice of protest,
notice of default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement, extension, or
renewal of accounts, documents, instruments, chattel paper, and guarantees at
any time held by Bank on which any Borrower may in any way be liable.
10. NOTICES.
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, certified mail, postage prepaid, return receipt
requested, or by telefacsimile to Parent or to Bank, as the case may be, at its
addresses set forth below:
<PAGE>
If to Borrowers: c/o MAXWELL TECHNOLOGIES, INC.
9244 Balboa Avenue
San Diego, California 92123
Attn: Chief Financial Officer
Fax: (858) 277-6754
If to Bank: Comerica Bank-California
600 B Street, 1st Floor
San Diego, CA 92101
Attn: Craig Nelson
FAX: (619) 687-5310
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CO-BORROWERS.
11.1 PRIMARY OBLIGATION. This Agreement is a primary and
original obligation of each Borrower and shall remain in effect notwithstanding
future changes in conditions, including any change of law or any invalidity or
irregularity in the creation or acquisition of any Obligations or in the
execution or delivery of any agreement between Bank and any Borrower. Each
Borrower shall be liable for existing and future Obligations as fully as if all
of the Advances were advanced to such Borrower. Bank may rely on any certificate
or representation made by any Borrower as made on behalf of, and binding on, all
Borrowers, including without limitation Advance Request Forms, Borrowing Base
Certificates and Compliance Certificates.
11.2 ENFORCEMENT OF RIGHTS. Borrowers are jointly and
severally liable for the Obligations and Bank may proceed against one or more of
the Borrowers to enforce the Obligations without waiving its right to proceed
against any of the other Borrowers.
11.3 BORROWERS AS AGENTS. Each Borrower appoints the other
Borrower as its agent with all necessary power and authority to give and receive
notices, certificates or demands for and on behalf of both Borrowers, to act as
disbursing agent for receipt of any Advances on behalf of each Borrower and to
apply to Bank on behalf of each Borrower for Advances, any waivers and any
consents. This authorization cannot be revoked, and Bank need not inquire as to
each Borrower's authority to act for or on behalf of Borrower.
11.4 SUBROGATION AND SIMILAR RIGHTS. Notwithstanding any
other provision of this Agreement or any other Loan Document, as long as Bank's
commitment to make Credit Extensions exists hereunder or any Obligations are or
in the future could be outstanding, each Borrower irrevocably waives all rights
that it may have at law or in equity (including, without limitation, any law
subrogating the Borrower to the rights of Bank under the Loan Documents) to seek
contribution, indemnification, or any other form of reimbursement from any other
Borrower, or any other Person now or hereafter primarily or secondarily liable
for any of the Obligations, for any payment made by the Borrower with respect to
the Obligations in connection with the Loan Documents or otherwise and all
rights that it might have to benefit from, or to participate in, any security
for the Obligations as a result of any payment made by the Borrower with respect
to the Obligations in connection with the Loan Documents or otherwise. Any
agreement providing for indemnification, reimbursement or any other arrangement
prohibited under this Section 11.4 shall be null and void. If any payment is
made to a Borrower in contravention of this Section 11.4, such Borrower shall
hold such payment in trust for Bank and such payment shall be promptly delivered
to Bank for application to the Obligations, whether matured or unmatured.
11.5 WAIVERS OF NOTICE. Each Borrower waives notice of
acceptance hereof; notice of the existence, creation or acquisition of any of
the Obligations; notice of an Event of Default; notice of the amount of the
Obligations outstanding at any time; notice of intent to accelerate; notice of
acceleration; notice of any adverse change in the financial condition of any
other Borrower or of any other fact that might increase the Borrower's risk;
presentment for payment; demand; protest and notice thereof as to any
instrument; default; and all other notices and demands to which the Borrower
would otherwise be entitled. Each Borrower waives any defense arising from any
defense of any other Borrower, or by reason of the cessation from any cause
whatsoever of the liability of any other
<PAGE>
Borrower. Bank's failure at any time to require strict performance by any
Borrower of any provision of the Loan Documents shall not waive, alter or
diminish any right of Bank thereafter to demand strict compliance and
performance therewith. Nothing contained herein shall prevent Bank from
foreclosing on the Lien of any deed of trust, mortgage or other security
instrument, or exercising any rights available thereunder, and the exercise of
any such rights shall not constitute a legal or equitable discharge of any
Borrower. Each Borrower also waives any defense arising from any act or omission
of Bank that changes the scope of the Borrower's risks hereunder. Each Borrower
hereby waives any right to assert against Bank any defense (legal or equitable),
setoff, counterclaim, or claims that such Borrower individually may now or
hereafter have against another Borrower or any other Person liable to Bank with
respect to the Obligations in any manner or whatsoever.
11.6 SUBROGATION DEFENSES. Each Borrower hereby waives any
defense based on impairment or destruction of its subrogation or other rights
against any other Borrower and waives all benefits which might otherwise be
available to it under California Civil Code Sections 2809, 2810, 2819, 2839,
2845, 2848, 2849, 2850, 2899, and 3433 and California Code of Civil Procedure
Sections 580a, 580b, 580d and 726, as those statutory provisions are now in
effect and hereafter amended, and under any other similar statutes now and
hereafter in effect.
11.7 RIGHT TO SETTLE, RELEASE.
(a) The liability of Borrowers hereunder shall not be
diminished by (i) any agreement, understanding or representation that any of the
Obligations is or was to be guaranteed by another Person or secured by other
property, or (ii) any release or unenforceability, whether partial or total, of
rights, if any, which Bank may now or hereafter have against any other Person,
including another Borrower, or property with respect to any of the Obligations.
(b) Without notice to any Borrower and without
affecting the liability of any Borrower hereunder, Bank may (i) compromise,
settle, renew, extend the time for payment, change the manner or terms of
payment, discharge the performance of, decline to enforce, or release all or any
of the Obligations with respect to a Borrower, (ii) grant other indulgences to a
Borrower in respect of the Obligations, (iii) modify in any manner any documents
relating to the Obligations with respect to a Borrower, (iv) release, surrender
or exchange any deposits or other property securing the Obligations, whether
pledged by a Borrower or any other Person, or (v) compromise, settle, renew, or
extend the time for payment, discharge the performance of, decline to enforce,
or release all or any obligations of any guarantor, endorser or other Person who
is now or may hereafter be liable with respect to any of the Obligations.
12. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of California, without regard to
principles of conflicts of law. Each of Borrowers and Bank hereby submits to the
nonexclusive jurisdiction of the state and Federal courts located in the County
of Santa Clara, State of California. BORROWERS AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
13. GENERAL PROVISIONS.
13.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and
inure to the benefit of the respective successors and permitted assigns of each
of the parties; provided, however, that neither this Agreement nor any rights
hereunder may be assigned by any Borrower without Bank's prior written consent,
which consent may be granted or withheld in Bank's sole discretion. Bank shall
have the right with the consent of or notice to any
<PAGE>
Borrower to sell, transfer, negotiate, or grant participation in all or any part
of, or any interest in, Bank's obligations, rights and benefits hereunder.
13.2 INDEMNIFICATION. Each Borrower shall defend,
indemnify and hold harmless Bank and its officers, employees, and agents
against: (a) all obligations, demands, claims, and liabilities claimed or
asserted by any other party in connection with the transactions contemplated by
this Agreement; and (b) all losses or Bank Expenses in any way suffered,
incurred, or paid by Bank as a result of or in any way arising out of,
following, or consequential to transactions between Bank and any Borrower
whether under this Agreement, or otherwise (including without limitation
reasonable attorneys fees and expenses), except for losses caused by Bank's
gross negligence or willful misconduct.
13.3 TIME OF ESSENCE. Time is of the essence for the
performance of all obligations set forth in this Agreement.
13.4 SEVERABILITY OF PROVISIONS. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
13.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement
cannot be amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
13.6 COUNTERPARTS. This Agreement may be executed in any
number of counterparts and by different parties on separate counterparts, each
of which, when executed and delivered, shall be deemed to be an original, and
all of which, when taken together, shall constitute but one and the same
Agreement.
13.7 SURVIVAL. All covenants, representations and
warranties made in this Agreement shall continue in full force and effect so
long as any Obligations remain outstanding. The obligations of Borrowers to
indemnify Bank with respect to the expenses, damages, losses, costs and
liabilities described in Section 13.2 shall survive until all applicable statute
of limitations periods with respect to actions that may be brought against Bank
have run.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
MAXWELL TECHNOLOGIES, INC.
By: /s/ Vickie L. Capps
---------------------------------
Title: Chief Financial Officer
-------------------------------
MAXWELL ELECTRONIC COMPONENTS
GROUP, INC.
By: /s/ Vickie L. Capps
---------------------------------
Title: Chief Financial Officer
-------------------------------
I-BUS/PHOENIX, INC.
By: /s/ Vickie L. Capps
---------------------------------
Title: Chief Financial Officer
-------------------------------
PUREPULSE TECHNOLOGIES, INC.
By: /s/ Vickie L. Capps
---------------------------------
Title: Vice President
-------------------------------
MAXWELL TECHNOLOGIES SYSTEMS
DIVISION, INC.
By: /s/ Vickie L. Capps
---------------------------------
Title: Chief Financial Officer
-------------------------------
MML ACQUISITION CORP.
By: /s/ Vickie L. Capps
---------------------------------
Title: Chief Financial Officer
-------------------------------
COMERICA BANK-CALIFORNIA
By: Craig Nelson
---------------------------------
Title: Vice President
-------------------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.34
<SEQUENCE>7
<FILENAME>a2042380zex-10_34.txt
<DESCRIPTION>EXHIBIT 10.34
<TEXT>
<PAGE>
Exhibit 10.34
OFFICE BUILDING LEASE
BETWEEN
BALBOA BOULEVARD BUILDING, G.P.,
LANDLORD
AND
MAXWELL TECHNOLOGIES, INC.,
TENANT
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C> <C>
1. BASIC LEASE TERMS......................................................................................1
2. PREMISES...............................................................................................3
3. TERM...................................................................................................3
4. POSSESSION.............................................................................................3
5. RENT...................................................................................................3
6. OPERATING EXPENSES.....................................................................................4
7. INTENTIONALLY OMITTED..................................................................................5
8. USE....................................................................................................5
9. NOTICES................................................................................................6
10. BROKERS................................................................................................6
11. SURRENDER; HOLDING OVER................................................................................6
12. TAXES ON TENANT'S PROPERTY.............................................................................7
13. ALTERATIONS............................................................................................7
14. REPAIRS................................................................................................9
15. LIENS.................................................................................................10
16. ENTRY BY LANDLORD.....................................................................................10
17. UTILITIES AND SERVICES................................................................................10
18. ASSUMPTION OF RISK AND INDEMNIFICATION................................................................11
19. INSURANCE.............................................................................................11
20. DAMAGE OR DESTRUCTION.................................................................................13
21. EMINENT DOMAIN........................................................................................14
22. DEFAULTS AND REMEDIES.................................................................................15
23. LANDLORD'S DEFAULT....................................................................................17
24. ASSIGNMENT AND SUBLETTING.............................................................................17
25. SUBORDINATION .......................................................................................19
26. ESTOPPEL CERTIFICATE..................................................................................19
27. INTENTIONALLY OMITTED.................................................................................19
28. RULES AND REGULATIONS.................................................................................19
29. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS.....................................19
30. DEFINITION OF LANDLORD................................................................................20
31. WAIVER................................................................................................20
32. PARKING...............................................................................................20
33. FORCE MAJEURE.........................................................................................20
34. SIGNS.................................................................................................20
35. LIMITATION ON LIABILITY...............................................................................21
36. FINANCIAL STATEMENTS..................................................................................21
37. QUIET ENJOYMENT.......................................................................................21
38. MISCELLANEOUS.........................................................................................21
39. EXECUTION OF LEASE....................................................................................22
EXHIBITS:
A-I Site Plan of Premises
A-II Legal Description
B Intentionally Omitted
C Work Letter Agreement
D Notice of Lease Term Dates
E Definition of Operating Expenses
F Intentionally Omitted
G Estoppel Certificate
H Rules and Regulations
</TABLE>
<PAGE>
OFFICE BUILDING LEASE
This OFFICE BUILDING LEASE ("Lease") is entered into as of this 28th day of
March, 2000, by and between BALBOA BOULEVARD BUILDING, G.P., a general
partnership ("Landlord"), and MAXWELL TECHNOLOGIES, INC., a Delaware corporation
("Tenant").
1. BASIC LEASE TERMS. For purposes of this Lease, the following terms have the
following definitions and meanings:
(a) LANDLORD: BALBOA BOULEVARD BUILDING, G.P., a general partnership.
(b) LANDLORD'S ADDRESS (FOR NOTICES):
c/o The Philip MacDonald Company
2925 Bristol Street
Costa Mesa, California 92626
Attention: Philip MacDonald
or such other place as Landlord may from time to time designate by notice to
Tenant.
(c) TENANT: MAXWELL TECHNOLOGIES, INC., a Delaware corporation.
(d) TENANT'S ADDRESS (FOR NOTICES):
Maxwell Technologies, Inc.
9275 Sky Park Court
San Diego, California 92123
Attention: Don Roberts
or such other place as Tenant may from time to time designate by notice to
Landlord.
(e) BUILDING: A one (1) story building located at 9244 Balboa Avenue in the City
of San Diego (the "City"), County of San Diego (the "County"), State of
California (the "State"), which Building for all purposes of this Lease the
parties agree contains 45,530 total Rentable Square Feet as shown on the site
plan attached hereto as EXHIBIT "A-I". The parties hereto stipulate and agree as
to the "Rentable Square Footage" of the Premises and there shall be no remeasure
of the Premises for purposes of adjusting any payments from time to time due
under this Lease.
(f) PREMISES: The Building, the legal parcel of land upon which the Building is
located (the "Land"), and all other improvements thereon including, without
limitation, all parking areas, landscaping and signs, as generally shown on the
site plan attached hereto as EXHIBIT "A-I". The legal description of the Land is
described in EXHIBIT "A-II" attached hereto.
(g) TERM: Seven (7) Lease Years (as defined in Paragraph 3 hereof).
(h) INTENTIONALLY OMITTED.
(i) COMMENCEMENT DATE: The date on which the Term of this Lease will commence as
determined in accordance with the provisions of EXHIBIT "C" and as stated on
EXHIBIT "D".
(j) INITIAL MONTHLY BASE RENT: $54,636.00 ($1.20/RSF/mo.), subject to adjustment
as provided in Subparagraph 1(k) below and as otherwise provided in this Lease.
(k) ADJUSTMENT TO MONTHLY BASE RENT: Monthly Base Rent will be adjusted in
accordance with the following:
<PAGE>
Effective on the first (1st) anniversary of the Commencement Date and
annually thereafter (the "CPI Adjustment Date(s)"), the Monthly Base Rent in
effect immediately before each CPI Adjustment Date shall be increased in
accordance with a percentage increase, if any, in the Index (as hereinafter
defined), to an amount which is equal to the product of (i) the Index for the
fourth (4th) month preceding the month in which the applicable CPI Adjustment
Date occurs, multiplied by (ii) the Monthly Base Rent which was in effect
immediately prior to the applicable CPI Adjustment Date, divided by (iii) the
Basic Index (as hereinafter defined); provided, however, in no event shall the
Monthly Base Rent in effect after any CPI Adjustment Date be less than the
Monthly Base Rent in effect immediately preceding the CPI Adjustment Date. The
parties intend that the foregoing equation result in a compounding of
adjustments to Monthly Base Rent. The "Index" shall mean the Consumer Price
Index, All Items, 1982-1984 = 100, All Urban Consumers, for the Los
Angeles/Anaheim/Riverside, California Area, as published by the United States
Department of Labor, Bureau of Labor Statistics, or its successor index, and the
"Basic Index" shall mean the Index published for the fourth (4th) month
preceding the month in which the Commencement Date occurs for the first
adjustment to the Monthly Base Rent, and for each succeeding adjustment, the
Basic Index will be the Index for the fourth (4th) month preceding the month in
which the most recent CPI Adjustment Date occurred. In the event the compilation
or publication of the Index shall be transferred to any other governmental
department, bureau or agency or shall be discontinued, the index most nearly the
same as the Index shall be used to make such calculation. Notwithstanding the
foregoing, in no event shall Monthly Base Rent increase annually by more than
five percent (5%) of the Monthly Base Rent in effect immediately prior to any
such increase.
(l) BASE YEAR OPERATING EXPENSES: Base Year Operating Expenses means that
portion of Operating Expenses as described in Paragraph 6 below which Landlord
has included in Monthly Base Rent, which, for purposes of this Lease, will be an
amount equal to Operating Expenses for the base year which is first Lease Year;
provided, however, the base year for Real Property Taxes and Assessments (as
defined in EXHIBIT "E" attached hereto) shall be the actual Real Property Taxes
and Assessments applicable to the Premises for the 2000/2001 fiscal tax year.
(m) TENANT IMPROVEMENTS: All tenant improvements installed or to be installed by
Tenant within the Premises to prepare the Premises for occupancy pursuant to the
terms of the Work Letter Agreement attached hereto as EXHIBIT "C".
(n) TENANT IMPROVEMENT ALLOWANCE: $1,365,900 ($30.00 per Rentable Square Foot of
the Building), to be applied as provided in the Work Letter Agreement attached
hereto as EXHIBIT "C".
(o) PERMITTED USE: General office use, research and development, light
manufacturing and associated functions to the extent permitted under the
existing M-1B zoning.
(p) BROKER(S): CB Richard Ellis representing both Tenant and Landlord.
(q) INTEREST RATE: For any event giving rise the imposition of interest pursuant
to this Lease, the interest rate will be ten percent (10%) per annum.
(r) EXHIBITS: "A-I" through "H", inclusive, exclusive of EXHIBITS "B" and "F,"
which Exhibits are attached to this Lease and incorporated herein by this
reference. As provided in Paragraph 3 below, a completed version of EXHIBIT "D"
will be delivered to Tenant after the Commencement Date. 2.
-2-
<PAGE>
PREMISES.
(a) PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord the Premises, as defined in Subparagraph 1(f), which includes but is
not limited to the Building as improved or to be improved with the Tenant
Improvements described in the Work Letter Agreement, a copy of which is attached
hereto as EXHIBIT "C".
(b) MUTUAL COVENANTS. Landlord and Tenant agree that the letting and hiring of
the Premises is upon and subject to the terms, covenants and conditions
contained in this Lease and each party covenants as a material part of the
consideration for this Lease to keep and perform their respective obligations
under this Lease.
3. TERM. The term of this Lease ("Term") will be for the period designated in
Subparagraph 1(g), commencing on the Commencement Date. Each consecutive twelve
(12) month period of the Term of this Lease, commencing on the Commencement
Date, will be referred to herein as a "Lease Year". Landlord's Notice of Lease
Term Dates ("Notice"), in the form of EXHIBIT "D" attached hereto, will set
forth the Commencement Date and the date upon which the Term of this Lease shall
end, and will be delivered to Tenant after Landlord delivers possession of the
Premises to Tenant. The Notice will be binding upon Tenant unless Tenant objects
to the Notice in writing within thirty (30) days of Tenant's receipt of the
Notice.
4. POSSESSION.
(a) DELIVERY OF POSSESSION. Landlord agrees to deliver to Tenant possession of
the Premises in accordance with the terms of the Work Letter Agreement attached
hereto as EXHIBIT "C". Notwithstanding the foregoing, Landlord will not be
obligated to deliver possession of the Premises to Tenant (but Tenant will be
liable for rent if Landlord can otherwise deliver the Premises to Tenant) until
Landlord has received from Tenant all of the following: (i) the first
installment of Monthly Base Rent; (ii) executed copies of policies of insurance
or certificates thereof as required under Paragraph 19 of this Lease; and (iii)
if Tenant is a corporation or partnership, such evidence of due formation, valid
existence and authority as Landlord may reasonably require, which may include,
without limitation, a certificate of good standing, certificate of secretary,
articles of incorporation, statement of partnership, or other similar
documentation.
(b) CONDITION OF PREMISES. Except for any express representations or warranties
of Landlord contained in this Lease, Tenant will be deemed to have accepted the
Premises in its condition on the date of delivery of possession and to have
acknowledged that there are no items needing work or repair, latent defects of
which Landlord is notified within one (1) year of the Commencement Date
excepted. Tenant acknowledges that, except as expressly contained in this Lease,
neither Landlord nor any agent of Landlord has made any representation or
warranty with respect to the Premises or any portions thereof or with respect to
the suitability of same for the conduct of Tenant's business and Tenant further
acknowledges that Landlord will have no obligation to construct or complete any
additional buildings or improvements within the Premises. As of the Commencement
Date, Landlord, at its sole cost and expense, shall be responsible for causing
the exterior of the Building and parking/drive areas located on the Land
(collectively, the "Exterior Areas") to comply with the requirements of the
Americans With Disabilities Act of 1990, as same has been and may be
subsequently amended, and all rules and regulations promulgated pursuant thereto
(the "ADA") which are in effect as of the Commencement Date. Except as provided
herein, Landlord agrees to comply with the modifications or amendments to the
ADA as to the Exterior Areas, as and when required under any amendments to the
ADA at Landlord's sole expense; provided, however, that Tenant shall be
responsible, at its sole cost and expense, for compliance with the ADA to the
extent such compliance is mandated as a result of Tenant's use, alteration or
occupancy of the Premises.
5. RENT.
(a) MONTHLY BASE RENT. Tenant agrees to pay Landlord the Monthly Base Rent for
the Premises (subject to adjustment as hereinafter provided) in advance on the
first day of each calendar month during the Term without prior notice or demand,
except that Tenant agrees to pay the Monthly Base Rent for the first month of
the Term directly to Landlord concurrently with Tenant's delivery of the
executed Lease to Landlord. If the Term of this Lease commences or ends on a day
other than the first day of a calendar month, then the rent for such period will
be prorated in the proportion that the number of days this Lease is in effect
during such period bears to the number of days in such month. All rent must be
paid to Landlord, without any deduction or offset except as set forth in this
Paragraph 5, in lawful money of the United States of America, at the address
designated by Landlord or to such other person or at such other place as
Landlord may from time to time designate in writing. Monthly Base Rent will be
adjusted during the Term of this Lease as provided in Subparagraph l(k).
-3-
<PAGE>
(b) ADDITIONAL RENT. All amounts and charges to be paid by Tenant hereunder,
including, without limitation, payments for Operating Expenses (as defined in
Paragraph 6 below), insurance and repairs will be considered additional rent for
purposes of this Lease, and the word "rent" as used in this Lease will include
all such additional rent unless the context specifically or clearly implies that
only Monthly Base Rent is intended.
(c) LATE PAYMENTS. Late payments of Monthly Base Rent and/or any item of
additional rent will be subject to interest and a late charge as provided in
Subparagraph 22(f) below. Notwithstanding anything to the contrary contained in
this Lease, wherever it is stipulated that interest is to accrue on an unpaid
amount, such accrual shall not commence until thirty (30) days after the amount
in question is due and payable.
6. OPERATING EXPENSES.
(a) OPERATING EXPENSES. In addition to Monthly Base Rent, throughout the Term of
this Lease, Tenant agrees to pay Landlord as additional rent in accordance with
the terms of this Paragraph 6, all Operating Expenses as defined in EXHIBIT "E"
attached hereto to the extent Operating Expenses exceed Base Year Operating
Expenses.
(b) DECLINE IN EXPENSES. In the event Operating Expenses for any year are less
than Base Year Operating Expenses, Tenant will not be entitled to a credit
against any rent, additional rent or Operating Expenses payable hereunder.
(c) ACTUAL STATEMENT. By the date which is 90 days after the end of each Lease
Year during the Term of this Lease, Landlord will deliver to Tenant a statement
("Actual Statement") which states the actual Operating Expenses for the
preceding year determined in accordance with generally accepted accounting
principles, consistently applied. If the Actual Statement reveals that the
actual Operating Expenses are more than the total Base Year Operating Expenses,
Tenant agrees to pay Landlord the difference in a lump sum within thirty (30)
days of receipt of the Actual Statement.
(d) MISCELLANEOUS. Any delay of less than one (1) year by Landlord in delivering
any Actual Statement pursuant to this Paragraph 6 will not constitute a waiver
of its right to require an increase in rent nor will it relieve Tenant of its
obligations pursuant to this Paragraph 6, except that (i) the foregoing time
limit shall not apply to supplemental tax bills (so long as Tenant is promptly
notified thereof), and (ii) Tenant will not be obligated to make any payments
based on such Actual Statement until thirty (30) days after receipt of such
Actual Statement. Even though the Term has expired and Tenant has vacated the
Premises, when the final determination is made of the actual Operating Expenses
for the year in which this Lease terminates, Tenant agrees to promptly pay any
excess Operating Expenses over the Base Year Operating Expenses. Such obligation
will be a continuing one which will survive the expiration or earlier
termination of this Lease.
(e) AUDIT. In the event of any dispute as to the amount of Operating Expenses,
Tenant or a "Big 6" accounting firm selected by Tenant will have the right, by
prior written notice ("Audit Notice") given within ninety (90) days ("Audit
Period") following receipt of an Actual Statement and at reasonable times during
normal business hours, to audit Landlord's accounting records with respect to
Operating Expenses relative to the year to which such Actual Statement relates
at the offices of Landlord's property manager. Tenant will be supplied with
copies of any existing records reasonably required by Tenant to perform this
audit. Tenant must pay Operating Expenses when due pursuant to the terms of this
Lease and may not withhold payment of Operating Expenses or any other rent
pending results of the audit or during a dispute regarding Operating Expenses.
The audit must be completed within sixty (60) days of the date of Tenant's Audit
Notice and the results of such audit shall be delivered to Landlord within
seventy-five (75) days of the date of Tenant's Audit Notice. If Tenant does not
comply with any of the aforementioned time frames, then such Actual Statement
will be conclusively binding on Tenant. If such audit or review correctly
reveals that Landlord has overcharged Tenant, then within thirty (30) days after
the results of such audit are made available to Landlord, Landlord agrees to
reimburse Tenant the amount of such overcharge. If Landlord disagrees with the
results of such audit, the dispute shall be resolved by arbitration in
accordance with Paragraph 45 below. If the audit reveals that Tenant was
undercharged, then within thirty (30) days after the results of the audit are
made available to Tenant, Tenant agrees to reimburse Landlord the amount of such
undercharge, less the actual, third-party costs incurred by Tenant in performing
such audit. Tenant agrees to pay the cost of such audit, provided that if the
audit reveals that Landlord's determination of Operating Expenses as set forth
in the relevant Actual Statement was in error in Landlord's favor by more than
eight percent (8%) of the amount charged by Landlord to Tenant pursuant to such
Actual Statement, then Landlord agrees to pay the reasonable, third-party costs
of such audit incurred by Tenant. To the extent Landlord must pay the cost of
such audit, such costs shall not exceed a reasonable hourly charge for a
reasonable amount of hours spent by such third party in connection with the
audit, and no event will exceed the actual amount of the error (that is, without
accounting for the 8% factor described above).
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7. INTENTIONALLY OMITTED.
8. USE.
(a) TENANT'S USE OF THE PREMISES. The Premises may be used for the use or uses
set forth in Subparagraph 1(o) only, and Tenant will not use or permit the
Premises to be used for any other purpose without the prior written consent of
Landlord, which consent Landlord may withhold in its sole and absolute
discretion.
(b) COMPLIANCE. At Tenant's sole cost and expense, Tenant agrees to procure,
maintain and hold available for Landlord's inspection, all governmental licenses
and permits required for the proper and lawful conduct of Tenant's business from
the Premises, if any. Tenant agrees not to use, alter or occupy the Premises or
allow the Premises to be used, altered or occupied in violation of, and Tenant,
at its sole cost and expense, agrees to use and occupy the Premises and cause
the Premises to be used and occupied in compliance with: (i) any and all laws,
statutes, zoning restrictions, ordinances, rules, regulations, orders and
rulings now or hereafter in force and any reasonable requirements of the insurer
of the Premises, or duly constituted public authority having jurisdiction over
the Premises or the Building now or hereafter in force, including, without
limitation, the requirements of the ADA, (ii) the requirements of the Board of
Fire Underwriters and any other similar body, (iii) the Certificate of Occupancy
issued for the Building, and (iv) any recorded covenants, conditions and
restrictions and similar regulatory agreements, if any, which affect the use,
occupation or alteration of the Premises and/or the Building. Tenant agrees to
comply with the Rules and Regulations referenced in Paragraph 28 below. Tenant
agrees not to cause, maintain or permit any nuisance or waste in, on, under or
about the Premises. Notwithstanding anything contained in this Lease to the
contrary, all transferable development rights related in any way to the Premises
are and will remain vested in Landlord, and Tenant hereby waives any rights
thereto.
(c) HAZARDOUS MATERIALS. Except for the Hazardous Materials which the original
Tenant under this Lease must use in order to operate its business in the
Premises (all of which Hazardous Materials still being subject to the remaining
terms of this Paragraph 8(c)), Tenant agrees not to cause or knowingly permit
any Hazardous Materials to be brought upon, stored, used, handled, generated,
released or disposed of on, in, under or about the Premises by Tenant, its
agents, employees, subtenants, assignees, licensees, contractors or invitees
(collectively, "Tenant's Parties"), without the prior written consent of
Landlord, which consent Landlord may withhold in its sole and absolute
discretion. In furtherance of the foregoing, (i) within one hundred twenty (120)
days following the Commencement Date, Tenant shall in writing identify to
Landlord the Hazardous Materials and quantities planned for use by Tenant in the
Premises during the then-current Lease Year, and (ii) from time to time (but not
more often than annually), upon Landlord's request, Tenant shall furnish to
Landlord a written description of the Hazardous Materials and quantities used at
the Premises during the most recent past calendar year. Upon the expiration or
earlier termination of this Lease, Tenant agrees to promptly remove from the
Premises, at its sole cost and expense, any and all Hazardous Materials,
including any equipment or systems containing Hazardous Materials which are
installed, brought upon, stored, used, generated or released upon, in, under or
about the Premises or any portion thereof by Tenant or any of Tenant's Parties,
up to the clean up standards imposed by law or governmental regulators having
jurisdiction. To the fullest extent permitted by law, Tenant agrees to promptly
indemnify, protect, defend and hold harmless Landlord and Landlord's partners,
officers, directors, employees, agents, successors and assigns (collectively,
"Landlord Indemnified Parties") from and against any and all claims, damages,
judgments, suits, causes of action, losses, liabilities, penalties, fines,
expenses and costs (including, without limitation, clean-up, removal,
remediation and restoration costs, sums paid in settlement of claims, attorneys'
fees, consultant fees and expert fees and court costs) which arise or result
from the presence of Hazardous Materials on, in, under or about the Premises and
which are caused or knowingly permitted by Tenant or any of Tenant's Parties.
Tenant agrees to promptly notify Landlord of any release of Hazardous Materials
at the Premises which Tenant becomes aware of during the Term of this Lease,
whether caused by Tenant or any other persons or entities. In the event of any
release of Hazardous Materials caused or knowingly permitted by Tenant or any of
Tenant's Parties, Landlord shall have the right, but not the obligation, to
cause Tenant to immediately take all steps Landlord deems necessary or
appropriate to remediate such release and prevent any similar future release to
the clean up standards imposed by law or governmental regulators. As used in
this Lease, the term "Hazardous Materials" shall mean and include any hazardous
or toxic materials, substances or wastes as now or hereafter designated under
any law, statute, ordinance, rule, regulation, order or ruling of any agency of
the State, the United States Government or any local governmental authority,
including, without limitation, asbestos, petroleum, petroleum hydrocarbons and
petroleum based products, urea formaldehyde foam insulation, polychlorinated
biphenyls ("PCBs"), and freon and other chlorofluorocarbons. None of the
foregoing is intended to reduce or expand Landlord's or Tenant's rights and
obligations under any prior agreements to which Landlord and Tenant are parties
concerning environmental remediation relating to Tenant's prior occupancy of the
Premises. The provisions of this Subparagraph 8(c) will survive the expiration
or earlier termination of this Lease.
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9. NOTICES. Any notice required or permitted to be given hereunder must be in
writing and may be given by personal delivery (including delivery by overnight
courier or an express mailing service) or by mail, if sent by registered or
certified mail. Notices to Tenant shall be sufficient if delivered to Tenant at
the address designated in Subparagraph 1(d) and notices to Landlord shall be
sufficient if delivered to Landlord at the address designated in Subparagraph
1(b). Either party may specify a different address for notice purposes by
written notice to the other.
10. BROKERS. The parties acknowledge that the broker(s) who negotiated this
Lease are stated in Subparagraph 1(p), who Landlord shall pay in accordance with
Landlord's separate agreements with said brokers. Each party represents and
warrants to the other, that, to its knowledge, no other broker, agent or finder
(a) negotiated or was instrumental in negotiating or consummating this Lease on
its behalf, and (b) is or might be entitled to a commission or compensation in
connection with this Lease. Landlord and Tenant each agree to promptly
indemnify, protect, defend and hold harmless the other from and against any and
all claims, damages, judgments, suits, causes of action, losses, liabilities,
penalties, fines, expenses and costs (including attorneys' fees and court costs)
resulting from any breach by the indemnifying party of the foregoing
representation, including, without limitation, any claims that may be asserted
by any broker, agent or finder undisclosed by the indemnifying party. The
foregoing mutual indemnity shall survive the expiration or earlier termination
of this Lease.
11. SURRENDER; HOLDING OVER.
(a) SURRENDER. The voluntary or other surrender of this Lease by Tenant, or a
mutual cancellation thereof, shall not constitute a merger, and shall, at the
option of Landlord, operate as an assignment to Landlord of any or all subleases
or subtenancies. Upon the expiration or earlier termination of this Lease,
Tenant agrees to peaceably surrender the Premises to Landlord broom clean and in
a state of good repair and condition, ordinary wear and tear and casualty damage
(if this Lease is terminated as a result thereof pursuant to Paragraph 20)
excepted, with all of Tenant's personal property and Alterations (as defined in
Paragraph 13) removed from the Premises to the extent required under Paragraph
13 and all damage caused by such removal repaired as required by Paragraph 13.
Prior to the date Tenant is to actually surrender the Premises to Landlord,
Tenant agrees to give Landlord reasonable prior notice of the exact date Tenant
will surrender the Premises so that Landlord and Tenant can schedule an
inspection of the Premises to review the condition of the Premises and identify
any Alterations and personal property which are to remain upon the Premises and
which items Tenant is to remove, as well as any repairs Tenant is to make upon
surrender of the Premises.
(b) HOLDING OVER. Tenant will not be permitted to hold over possession of the
Premises after the expiration or earlier termination of the Term without the
express written consent of Landlord, which consent Landlord may withhold in its
sole and absolute discretion. If Tenant holds over after the expiration or
earlier termination of the Term, Landlord may, at its option, treat Tenant as a
tenant at sufferance only, and such continued occupancy by Tenant shall be
subject to all of the terms, covenants and conditions of this Lease, so far as
applicable, except that the Monthly Base Rent for any such holdover period shall
be equal to one hundred twenty-five percent (125%) of the Monthly Base Rent in
effect under this Lease immediately prior to such holdover, prorated on a daily
basis. Notwithstanding the foregoing, by not less than one hundred (180) days
prior written notice to Landlord, Tenant, provided it is not in default under
this Lease, shall have the right to hold over for two (2) consecutive one
hundred eighty (180) day terms at one hundred five percent (105%) of the
prevailing market rate for the Premises as determined by Landlord (said 105%
figure being referred to herein as the "Prevailing Rate"). Within ten (10) days
following Landlord's receipt of Tenant's holdover notice, Landlord will advise
Tenant of Landlord's determination of the Prevailing Rate ("Landlord's
Prevailing Rate"). Tenant will then have a period of ten (10) days following
receipt of Landlord's Prevailing Rate in which to either (x) demand appraisal in
accordance with the procedures set forth below, (y) accept Landlord's Prevailing
Rate, or (z) rescind such holdover notice. Tenant's failure to timely take any
of the actions set forth in clauses (x), (y) or (z) immediately preceding shall
constitute Tenant's acceptance of Landlord's Prevailing Rate and commitment to
pay the holdover rate based thereon for the one hundred (180) day holdover term
in accordance with the foregoing. If Tenant timely demands appraisal pursuant to
the foregoing ("Tenant's Demand for Appraisal"), then the following shall apply:
(i) For a period of ten (10) days following Landlord's receipt of Tenant's
Demand for Appraisal, Landlord and Tenant will attempt in good faith to agree
upon the Prevailing Rate using their best good faith efforts. If Landlord and
Tenant fail to reach agreement on such Prevailing Rate within such ten (10) day
period of time (the "Outside Date"), then each party's determination will be
submitted to appraisal in accordance with the provisions below.
(ii) Landlord and Tenant shall each appoint one (1) independent, unaffiliated
real estate broker who has been active over the five (5) year period ending on
the date of such appointment in the leasing of comparable properties in the
Comparison Area (as defined in Paragraph 40(c) hereof). Each such broker will be
appointed within ten (10) days after the Outside Date.
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(iii) The two (2) brokers so appointed will, within ten (10) days of the date of
the appointment of the last appointed broker, agree upon and appoint a third
broker who shall be qualified under the same criteria set forth hereinabove for
qualification of the initial two (2) brokers.
(iv) The determination of the brokers shall be limited solely to the issue of
whether Landlord's or Tenant's last proposed (as of the Outside Date) Prevailing
Rate is the closest to the actual Prevailing Rate as determined by the brokers,
taking into account the meaning of "fair market rental rate" as defined in
Paragraph 40(c) hereof.
(v) The three (3) brokers shall, within ten (10) days of the appointment of the
third broker, reach a decision as to whether the parties shall use Landlord's or
Tenant's last submitted (on the Outside Date) Prevailing Rate, and shall notify
Landlord and Tenant thereof.
(vi) The decision of the majority of the three (3) brokers shall be binding upon
Landlord and Tenant and neither party will have the right to undo Tenant's
exercise of the right to remain for one hundred (180) extra days or reject the
brokers' determination. The cost of each party's broker shall be the
responsibility of the party selecting such broker, and the cost of the third
broker shall be shared equally by Landlord and Tenant.
(vii) If either Landlord or Tenant fails to appoint a broker within the time
period specified in clause (ii) above, the broker appointed by one of them shall
reach a decision, notify Landlord and Tenant thereof, and such broker's decision
shall be binding upon Landlord and Tenant and neither party will have the right
to undo Tenant's exercise of its right to stay one hundred eighty (180) extra
days or reject the broker's determination.
(viii) If the two (2) brokers fail to agree upon and appoint a third broker,
then the parties' last submitted (on the Outside Date) Prevailing Rates shall be
averaged and such figure shall be binding upon Landlord and Tenant and neither
party will have the right to undo Tenant's exercise of its right to stay one
hundred eighty (180) extra days or reject such average figure.
(ix) In the event that the Prevailing Rate is not established prior to the end
of the then-current Term, Landlord's Prevailing Rate will be used until a
determination is made in accordance with the foregoing, at which time the
parties shall settle any overpayment by Tenant on the next Monthly Base Rent
payment date following not less than thirty (30) days after such determination.
Acceptance by Landlord of rent after such expiration or earlier termination will
not result in a renewal of this Lease. The foregoing provisions of this
Paragraph 11 are in addition to and do not affect Landlord's right of re-entry
or any rights of Landlord under this Lease or as otherwise provided by law. If
Tenant fails to surrender the Premises upon the expiration of this Lease in
accordance with the terms of this Paragraph 11 despite demand to do so by
Landlord, Tenant agrees to promptly indemnify, protect, defend and hold Landlord
harmless from all claims, damages, judgments, suits, causes of action, losses,
liabilities, penalties, fines, expenses and costs (including attorneys' fees and
costs), including, without limitation, costs and expenses incurred by Landlord
in returning the Premises to the condition in which Tenant was to surrender it
and claims made by any succeeding tenant founded on or resulting from Tenant's
failure to surrender the Premises. The provisions of this Subparagraph 11(b)
will survive the expiration or earlier termination of this Lease.
12. TAXES ON TENANT'S PROPERTY. Tenant agrees to pay before delinquency, all
taxes and assessments (real and personal) levied against any personal property
or trade fixtures placed by Tenant in or about the Premises (including any
increase in the assessed value of the Premises based upon the value of any such
personal property or trade fixtures). If any such taxes or assessments are
levied against Landlord or Landlord's property, Landlord may, after written
notice to Tenant (and under proper protest if requested by Tenant) pay such
taxes and assessments, in which event Tenant agrees to reimburse Landlord all
amounts paid by Landlord within ten (10) business days after demand by Landlord;
provided, however, Tenant, at its sole cost and expense, will have the right,
with Landlord's cooperation, to bring suit in any court of competent
jurisdiction to recover the amount of any such taxes and assessments so paid to
Landlord and/or the applicable taxing authority under protest.
13. ALTERATIONS. After installation of the initial Tenant Improvements for the
Building pursuant to EXHIBIT "C", Tenant may, at its sole cost and expense, make
alterations, additions, improvements and decorations to the Building and/or the
Premises (collectively, "Alterations") subject to and upon the following terms
and conditions:
(a) PROHIBITED ALTERATIONS. Tenant may not make any Alterations which: (i)
affect any area outside the Premises; (ii) have a materially adverse affect on
the Building's structure, equipment, services or systems, or the proper
functioning thereof, or Landlord's access thereto; (iii) affect the outside
appearance, character or use of the Building; (iv) in the reasonable opinion of
Landlord, lessen the value
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of the Premises; or (v) will violate or require a change in any occupancy
certificate applicable to the Premises.
(b) LANDLORD'S APPROVAL. Before proceeding with any Alterations which are not
prohibited in Subparagraph 13(a) above, Tenant must first obtain Landlord's
written approval of the plans, specifications and working drawings for such
Alterations, which approval Landlord will not unreasonably withhold or delay;
provided, however, Landlord's prior approval will not be required for any such
Alterations which are not prohibited by Subparagraph 13(a) above and which cost
less than Twenty-Five Thousand Dollars ($25,000) as long as (i) Tenant delivers
to Landlord notice and a copy of any final plans, specifications and working
drawings for any such Alterations at least ten (10) days prior to commencement
of the work thereof, and (ii) the other conditions of this Paragraph 13 are
satisfied, including, without limitation, conforming to Landlord's rules,
regulations and insurance requirements which gove