UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarter Ended March 31, 2002 |
|
o |
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 (State or other jurisdiction of Identification No.) |
95-2390133 (I.R.S. Employer incorporation or organization) |
8888 Balboa Avenue, San Diego, CA 92123
(Address of principal executive office)
(Zip Code)
Registrant's telephone number, including area code: (858) 279-5100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
As of July 29, 2002, Registrant had only one class of common stock, of which there were 13,998,325 shares outstanding.
This amendment to our quarterly report on form 10-Q for the fiscal quarter ended March 31, 2002 is filed for the purpose of amending and restating Part I (Items 1 and 2).
Our restatement is the result of a determination that a shipment to a European customer, which left the Maxwell factory at the end of March 2002 and arrived in Europe on April 3, should have been recognized in our second fiscal quarter. Although Maxwell's standard terms are "Free On Board Origin", which provide that a sale is completed when the goods leave Maxwell's facilities, the terms to this particular customer were "Delivered Duties Unpaid", which provided that title passed and thus the sale was complete when the goods arrived at the destination.
This error was noted during the review of our second quarter results. A shipment to the same customer occurred at the end of June with delivery at the beginning of July. Upon review of this transaction and the specific terms of sale, it was determined that this transaction would be recorded in the third quarter. As the sales terms to this customer were not in accordance with standard terms, we reviewed prior shipments to this customer. The first shipments occurred during our quarter ended September 30, 2001. Based on this review, we determined that the only shipment requiring a change in the period in which revenue is recorded was the March 2002 shipment that should have been recorded in April 2002.
The dollar value of this shipment was $1.5 million and was comprised of several batches of electronic components. These components are pre-inspected and approved by a contract representative of the customer prior to shipment. As an accommodation to a request by the customer to save on the cost associated with multiple inspections and shipments, we agreed to have all of the batches inspected with the final batch, which was completed at quarter end. All of the batches were shipped together and arrived at the destination on April 3rd and the payment from the customer on this shipment has been received. Because of the materiality of the revenue and profit associated with this shipment, we are obligated to restate our first quarter results. You are referred to Note 2 to our Condensed Consolidated Financial Statements for additional information on the financial statements effect of this restatement.
No attempt has been made in this form 10-Q/A to modify or update other disclosures as presented in the original form 10-Q except as required to reflect the effects of the restatement.
MAXWELL TECHNOLOGIES, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the quarter ended March 31, 2002
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Page |
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PART I | |||
Item 1. |
Condensed Consolidated Financial Statements |
1 |
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Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 10 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 17 | |
PART II |
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Item 1. |
Legal Proceedings |
18 |
|
Item 2. | Changes in Securities and Use of Proceeds | 18 | |
Item 3. | Defaults Upon Senior Securities | 18 | |
Item 4. | Submission of Matters to a Vote of Security Holders | 18 | |
Item 5. | Other Information | 18 | |
Item 6. | Exhibits and Reports on Form 8-K | 18 |
Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q 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-Q 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" included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Discussions containing such forward-looking statements may be found in the material set forth under "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as within this Form 10-Q generally.
Item 1. Condensed Consolidated Financial Statements
MAXWELL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
|
March 31, 2002 |
December 31, 2001 |
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(unaudited) (restated) |
(audited) |
|||||||
Assets | |||||||||
Current assets: | |||||||||
Cash and cash equivalents | $ | 12,148 | $ | 13,673 | |||||
Short-term investments | 9,159 | 11,886 | |||||||
Accounts receivable, net | 10,644 | 13,984 | |||||||
Inventories | 17,087 | 16,605 | |||||||
Prepaid expenses and other current assets | 1,260 | 1,031 | |||||||
Income tax receivable | 278 | | |||||||
Total current assets | 50,576 | 57,179 | |||||||
Property, plant and equipment, net | 21,120 | 21,741 | |||||||
Goodwill and other non-current assets | 10,788 | 6,784 | |||||||
$ | 82,484 | $ | 85,704 | ||||||
Liabilities and Stockholders' Equity |
|||||||||
Current liabilities: | |||||||||
Accounts payable and accrued liabilities | $ | 9,148 | $ | 12,159 | |||||
Accrued employee compensation | 2,010 | 1,586 | |||||||
Short-term borrowings | 300 | 300 | |||||||
Net liabilities of discontinued operations | 3,362 | 1,642 | |||||||
Total current liabilities | 14,820 | 15,687 | |||||||
Long-term debt | 5,650 | 5,700 | |||||||
Minority interest | 3,913 | 4,586 | |||||||
Stockholders' equity: | |||||||||
Common stock | 1,075 | 1,017 | |||||||
Additional paid-in capital | 89,366 | 84,283 | |||||||
Notes receivable from executives for stock purchases | (972 | ) | (897 | ) | |||||
Accumulated deficit | (30,570 | ) | (23,859 | ) | |||||
Accumulated other comprehensive loss | (798 | ) | (813 | ) | |||||
58,101 | 59,731 | ||||||||
$ | 82,484 | $ | 85,704 | ||||||
1
MAXWELL TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
Three Months Ended March 31, |
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2002 |
2001 |
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(restated) |
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Sales | $ | 12,789 | $ | 27,000 | |||||
Cost of sales | 11,842 | 20,851 | |||||||
Gross profit | 947 | 6,149 | |||||||
Operating expenses: | |||||||||
Selling, general and administrative | 4,691 | 6,267 | |||||||
Research and development | 2,667 | 3,199 | |||||||
Total operating expenses | 7,358 | 9,466 | |||||||
Operating loss | (6,411 | ) | (3,317 | ) | |||||
Interest expense | (88 | ) | (878 | ) | |||||
Interest income and other, net | 61 | 47 | |||||||
Loss before income taxes and minority interest | (6,438 | ) | (4,148 | ) | |||||
Credit for income taxes | (291 | ) | (1,440 | ) | |||||
Minority interest in net loss of subsidiaries | (241 | ) | (48 | ) | |||||
Loss from continuing operations | (5,906 | ) | (2,660 | ) | |||||
Discontinued operations, net of taxes | (805 | ) | 3,234 | ||||||
Net income (loss) | $ | (6,711 | ) | $ | 574 | ||||
Basic net income (loss) per share: |
|||||||||
Loss from continuing operations | (0.57 | ) | (0.27 | ) | |||||
Income (loss) from discontinued operations | (0.08 | ) | 0.33 | ||||||
$ | (0.65 | ) | $ | 0.06 | |||||
Diluted net income (loss) per share: |
|||||||||
Loss from continuing operations | (0.57 | ) | (0.27 | ) | |||||
Income (loss) from discontinued operations | (0.08 | ) | 0.33 | ||||||
$ | (0.65 | ) | $ | 0.06 | |||||
Shares used in computing: |
|||||||||
Basic net income (loss) per share | 10,395 | 9,939 | |||||||
Diluted net income (loss) per share | 10,395 | 9,939 | |||||||
See notes to unaudited condensed consolidated financial statements.
2
MAXWELL TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
Three Months Ended March 31, |
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2002 |
2001 |
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(restated) |
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Operating activities: | |||||||||
Loss from continuing operations | $ | (5,906 | ) | $ | (2,660 | ) | |||
Adjustments to reconcile loss from continuing operations to net cash used in operating activities: | |||||||||
Depreciation and amortization | 1,069 | 1,307 | |||||||
Deferred compensation | | 12 | |||||||
Minority interest in net loss of subsidiaries | (241 | ) | (48 | ) | |||||
Changes in operating assets and liabilities, net | 40 | (5,079 | ) | ||||||
Net cash used in operating activities | (5,038 | ) | (6,468 | ) | |||||
Investing activities: |
|||||||||
Purchases of property and equipment | (468 | ) | (1,769 | ) | |||||
Proceeds from sale of short-term investments | 7,739 | | |||||||
Purchases of short-term investments | (5,067 | ) | | ||||||
Proceeds from sales of businesses | | 9,537 | |||||||
Proceeds from collection of notes receivable | | 2,000 | |||||||
Net cash provided by investing activities | 2,204 | 9,768 | |||||||
Financing activities: |
|||||||||
Proceeds from short-term borrowings | | 27,264 | |||||||
Principal payments on long-term debt and short-term borrowings | (50 | ) | (32,213 | ) | |||||
Proceeds from issuance of Company and subsidiary stock | 446 | 810 | |||||||
Net cash provided by (used in) financing activities | 396 | (4,139 | ) | ||||||
Net cash provided by discontinued operations |
915 |
1,598 |
|||||||
Effect of exchange rate changes on cash and cash equivalents |
(2 |
) |
(15 |
) |
|||||
Increase (decrease) in cash and cash equivalents | (1,525 | ) | 744 | ||||||
Cash and cash equivalents at beginning of period | 13,673 | 2,686 | |||||||
Cash and cash equivalents at end of period | $ | 12,148 | $ | 3,430 | |||||
See notes to unaudited condensed consolidated financial statements.
3
MAXWELL TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1Basis of Presentation
The information contained herein has been prepared by Maxwell in accordance with the rules of the Securities and Exchange Commission. The information at March 31, 2002 and for the three-month periods ended March 31, 2002 and 2001 is unaudited. The consolidated financial statements reflect all adjustments, consisting of only normal recurring accruals, which are, in the opinion of management, necessary for a fair statement of the results of the interim periods presented. These consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2001. The results of the operations for the interim periods are not necessarily indicative of results to be expected for any other period or for the year as a whole.
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 amounts reported in the consolidated financials and related notes. Changes in those estimates may affect amounts reported in future periods.
Note 2Restatement
Our restatement is the result of a determination that a shipment to a European customer, which left the Maxwell factory at the end of March 2002 and arrived in Europe on April 3, should have been recognized in our second fiscal quarter. Although Maxwell's standard terms are "Free On Board Origin", which provide that a sale is completed when the goods leave Maxwell's facilities, the terms to this particular customer were "Delivered Duties Unpaid", which provided that title passed and thus the sale was complete when the goods arrived at the destination.
This error was noted during the review of our second quarter results. A shipment to the same customer occurred at the end of June with delivery at the beginning of July. Upon review of this transaction and the specific terms of sale, it was determined that this transaction would be recorded in the third quarter. As the sales terms to this customer were not in accordance with standard terms, we reviewed prior shipments to this customer. The first shipments occurred during our quarter ended September 30, 2001. Based on this review, we determined that the only shipment requiring a change in the period in which revenue is recorded was the March 2002 shipment that should have been recorded in April 2002.
The dollar value of this shipment was $1.5 million and was comprised of several batches of electronic components. These components are pre-inspected and approved by a contract representative of the customer prior to shipment. As an accommodation to a request by the customer to save on the cost associated with multiple inspections and shipments, we agreed to have all of the batches inspected with the final batch, which was completed at quarter end. All of the batches were shipped together and arrived at the destination on April 3rd and the payment from the customer on this shipment has been received. Because of the materiality of the revenue and profit associated with this shipment, we are obligated to restate our first quarter results.
4
As a result of the adjustments described above, the impact on the Consolidated Balance Sheet and Consolidated Statement of Operations is as follows (in thousands except per share amounts):
Consolidated Balance Sheet:
|
March 31, 2002 |
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As Previously Reported |
As Restated |
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Accounts receivable, net | $ | 12,189 | $ | 10,644 | |||
Inventories | 16,852 | 17,087 | |||||
Total assets | 83,794 | 82,484 | |||||
Accounts payable and accrued liabilities | 9,279 | 9,148 | |||||
Accrued employee compensation | 2,022 | 2,010 | |||||
Total current liabilities | 14,963 | 14,820 | |||||
Accumulated deficit | (29,403 | ) | (30,570 | ) | |||
Total stockholders' equity | $ | 59,268 | $ | 58,101 |
Consolidated Statement of Operations:
|
Three Months Ended March 31, 2002, |
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As Previously Reported |
As Restated |
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Sales | $ | 14,334 | $ | 12,789 | ||||
Cost of sales | 12,077 | 11,842 | ||||||
Gross profit | 2,257 | 947 | ||||||
Operating expenses |
7,501 |
7,358 |
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Net loss | $ | (5,544 | ) | $ | (6,711 | ) | ||
Basic net loss per share: |
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Loss from continuing operations | $ | (0.45 | ) | $ | (0.57 | ) | ||
Loss from discontinued operations | (0.08 | ) | (0.08 | ) | ||||
Net loss | $ | (0.53 | ) | $ | (0.65 | ) | ||
Diluted net loss per share: |
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Loss from continuing operations | $ | (0.45 | ) | $ | (0.57 | ) | ||
Loss from discontinued operations | (0.08 | ) | (0.08 | ) | ||||
Net loss | $ | (0.53 | ) | $ | (0.65 | ) | ||
Note 3General
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® ultracapacitors, radiation- shielded microelectronics and custom power and computing systems for original equipment manufacturers, or OEMs.
The Company has focused its business on the following areas:
5
The Company's strategy is to apply its 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.
The Company's electronic components and I-Bus/Phoenix power and computing systems businesses generate all of the Company's sales from continuing operations. The Company sold its defense contracting business in March 2001 and its EMI filtered feed throughs and ceramic capacitors business in June 2001 to focus its operations exclusively on product driven, commercial opportunities in the areas of power and computing. The Company's PurePulse business is focused on opportunities in the application of PureBright® technology to pathogen inactivation in medical and bioprocessing markets and to consumer drinking water applications. The Company committed to pursuing alternatives for PurePulse, which will result in the sale of all or the majority interest in the business or a spin-off to the Company's shareholders in 2002.
Note 4Inventories
Inventories consist of the following (in thousands):
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March 31, 2002 |
December 31, 2001 |
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Finished products | $ | 3,721 | $ | 3,289 | |||
Work-in-process | 1,271 | 878 | |||||
Parts and raw materials | 16,082 | 16,334 | |||||
Inventory Reserve | (3,987 | ) | (3,896 | ) | |||
$ | 17,087 | $ | 16,605 | ||||
Note 5Comprehensive Income (Loss)
The Company reports and displays comprehensive income (loss) in accordance with Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. The components of comprehensive income (loss) for the three months ended March 31, 2002 and 2001 were as follows (in thousands):
|
Three Months Ended March 31, |
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2002 |
2001 |
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Net income (loss) | $ | (6,711 | ) | $ | 574 | ||
Foreign currency translation adjustments | (15 | ) | (326 | ) | |||
Unrealized loss on securities | (55 | ) | | ||||
Comprehensive income (loss) | $ | (6,781 | ) | $ | 248 | ||
Note 6Income (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. 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
6
their exercise using the "treasury stock" method, and convertible preferred shares outstanding at certain subsidiaries of the Company, assuming their conversion.
The following table sets forth the computation of basic and diluted income (loss) per share (in thousands, except per share amounts).
|
Three Months Ended March 31, |
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2002 |
2001 |
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Basic: | |||||||||
Loss from continuing operations | $ | (5,906 | ) | $ | (2,660 | ) | |||
Income (loss) from discontinued operations | (805 | ) | 3,234 | ||||||
Net income (loss) | $ | (6,711 | ) | $ | 574 | ||||
Weighted average shares |
10,395 |
9,939 |
|||||||
Basic net income (loss) per share: |
|||||||||
Loss from continuing operations | $ | (0.57 | ) | $ | (0.27 | ) | |||
Income (loss) from discontinued operations | (0.08 | ) | 0.33 | ||||||
Basic net income (loss) per share | $ | (0.65 | ) | $ | 0.06 | ||||
Diluted: |
|||||||||
Loss from continuing operations | $ | (6,147 | ) | $ | (2,660 | ) | |||
Loss allocated to minority interest in majority-owned subsidiaries | (241 | ) | | ||||||
Loss from continuing operations available to common shareholders, as adjusted | (5,906 | ) | (2,660 | ) | |||||
Income (loss) from discontinued operations | (1,062 | ) | 3,234 | ||||||
Effect of dilutive securities of majority-owned subsidiaries | 257 | | |||||||
Income (loss) from discontinued operations, as adjusted | (805 | ) | 3,234 | ||||||
Net income (loss), as adjusted | $ | (6,711 | ) | $ | 574 | ||||
Weighted average shares |
10,395 |
9,939 |
|||||||
Effect of dilutive stock options and other securities | | | |||||||
Weighted average shares, as adjusted | 10,395 | 9,939 | |||||||
Diluted net income (loss) per share: |
|||||||||
Loss from continuing operations | $ | (0.57 | ) | $ | (0.27 | ) | |||
Income (loss) from discontinued operations | (0.08 | ) | 0.33 | ||||||
Diluted net income (loss) per share | $ | (0.65 | ) | $ | 0.06 | ||||
Note 7Business Segments
Maxwell evaluates the performance of its business segments and allocates resources based on a measure of segment operating loss, excluding restructuring, acquisition and other charges. Maxwell does not evaluate segment performance on amounts provided for restructuring, acquisition and other charges, or on items of income or expense below operating loss. Accordingly, such items are not segregated by operating segment.
7
The following table sets forth sales and operating loss data for each of the Company's business segments as defined by the Company under the guidelines of Financial Accounting Standards Board Statement No. 131, Disclosures About Segments of an Enterprise and Related Information (in thousands).
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Three Months Ended March 31, |
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2002 |
2001 |
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Sales: | |||||||||
Electronic Components Group | $ | 3,511 | $ | 10,710 | |||||
I-Bus/Phoenix Power and Computing Systems | 9,278 | 16,290 | |||||||
Consolidated total | $ | 12,789 | $ | 27,000 | |||||
Operating loss: |
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Electronic Components Group | $ | (2,568 | ) | $ | (1,463 | ) | |||
I-Bus/Phoenix Power and Computing Systems | (2,909 | ) | (836 | ) | |||||
Total segment operating loss | (5,477 | ) | (2,299 | ) | |||||
Corporate expenses | (934 | ) | (1,018 | ) | |||||
Consolidated total | $ | (6,411 | ) | $ | (3,317 | ) | |||
Note 8Discontinued Operations
In connection with the Company's decision in 2000 to focus the future of the Company on the electronic components group and I-Bus/Phoenix, the Company sold its high voltage wound film capacitors and high voltage power supplies business, its time card and job cost accounting software business and its defense contracting business. In addition, the Company committed to strategic alternatives for PurePulse, which will result in the sale of all or a majority interest in the business or a spin-off to the Company's shareholders in 2002. 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 purposes.
Operating results of the Company's discontinued operations are shown separately, net of tax, in the accompanying condensed consolidated statements of operations. The businesses included in discontinued operations had sales aggregating $228,000 and $11.4 million for the three months ended March 31, 2002 and 2001, respectively. These amounts are not included in sales in the accompanying unaudited condensed consolidated statements of operations.
Note 9Preferred Stock Conversion
In February 2002, PacifiCorp Energy Ventures, Inc., the largest minority shareholder in the Electronic Components Group, exchanged its preferred shares of the Electronic Components Group for 518,000 common shares of Maxwell Technologies pursuant to its right under the original investment agreement.
Note 10Change in Accounting
In June 2001, the Financial Accounting Standards board issued Statements of Financial Accounting Standards No. 141 (SFAS 141), Business Combinations and No. 142 (SFAS 142), Goodwill and other Intangible Assets, effective for the fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements.
8
The Company has implemented SFAS 141 and SFAS142 and began applying the new rules on accounting for goodwill and other intangible assets effective January 1, 2002. The following table presents a reconciliation of net loss and per share data to what would have been reported had the new rules been in effect during the three month period ended March 31, 2001 (in thousands, except per share data):
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Three Months Ended March 31, |
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|
2002 |
2001 |
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Reported net loss from continuing operations | $ | (5,906 | ) | $ | (2,660 | ) | ||
Add back goodwill amortization, net of tax | | 210 | ||||||
Adjusted net loss from continuing operations | $ | (5,906 | ) | $ | (2,450 | ) | ||
Basic and diluted net loss from continuing operations per share: |
||||||||
Reported net loss from continuing operations | $ | (0.57 | ) | $ | (0.27 | ) | ||
Goodwill amortization, net of tax | | 0.02 | ||||||
Adjusted net loss from continuing operations | $ | (0.57 | ) | $ | (0.25 | ) |
The Company is in the process of assessing goodwill for impairment and expects to complete the process during the second quarter of 2002.
Note 11Subsequent Events
In January 2002, the Company adopted a plan to complete merger transactions with the Electronic Components Group subsidiary and the I-Bus/Phoenix subsidiary whereby all of the minority shareholdings and options would be converted to shares and options of Maxwell Technologies. On April 15, 2002, these mergers resulted in the issuance of 565,000 common shares of Maxwell Technologies and 520,000 options to purchase common shares of Maxwell Technologies.
9
Item 2. 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. The goal of the restructuring plan was to create a focused, product-driven, high-growth company. Since then, we have hired key managers with extensive commercial experience in engineering, manufacturing, material procurement, supply chain management, information technology, financial controls and sales and marketing and we have invested over $18 million to build and outfit state-of-the-art production facilities and implement new manufacturing and business processes and systems, including information technology infrastructure and an ERP system.
In addition to rebuilding the industrial capabilities and infrastructure of Maxwell, we increased in 2000 and 2001 the investment in research and development to change and expand dramatically the Company's products toward proprietary higher-margin power and computing products. We began introducing the new products at the end of 2001 and currently are focused on our marketing and sales initiatives around the new products.
As part of the restructuring plan, during 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. We also decided to sell our defense contracting business and to seek strategic alternatives for the PurePulse business. The defense contracting business was sold in March 2001 and the Company plans to sell or spin-off its PurePulse business during 2002. These entities have been reflected as discontinued operations in the financial statements.
Our continuing operations are comprised of two business segments, electronic components and I-Bus/Phoenix power and computing systems. We generate substantially all of our revenue from continuing operations from the sale of commercial products.
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 which has been designed for highly efficient manufacturing, with improved processes, improved personnel training and more disciplined cost control practices. Our EMI filtered feedthroughs and ceramic capacitors business (Sierra KD or Sierra), which was located in Carson City, Nevada, was sold in June 2001.
The Electronic Components Group currently includes the following power delivery and other high reliability devices product lines:
10
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. and Europe. I-Bus/Phoenix 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. In December 2001, our operations in Great Britain were moved to a new facility and we have initiated plans to consolidate standard product assembly for Europe in this facility.
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.
PurePulse
We have classified the PurePulse business segment as a discontinued operation for financial reporting purposes. 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.
In December 2000, management identified its Government Systems and PurePulse operations as not being part of the Company's strategic focus for the future. We adopted a plan, which was subsequently approved by the Board of Directors in January of 2001, to be completed by the end of 2001 to sell the Government Systems Division and to either sell all or a majority of PurePulse.
We first sold the Government Systems division in two transactions in March and April of 2001 and then turned our attention to selling PurePulse. The timing of this effort coincided with the economy going into recession, a dramatic downturn of the public and private equity markets, and the further negative impact on the economy and the financial markets as a result of terrorist attacks of September 11, 2001.
As a result of the poor market conditions of 2001, we were unable to secure a transaction under acceptable terms. However, in 2001, PurePulse improved its business prospects by developing an in-flow system utilizing its broad spectrum pulsed light technology, developing additional positive clinical data supporting the safety and efficacy of its technology, securing numerous customer relationships and entering into a strategic alliance with Culligan International Corporation to develop and commercialize systems to purify drinking water. Based on the progress in its business plus the improvements in the economy and financial markets, the Company is currently pursuing financing with strategic partners and private individuals whom we believe will provide adequate financing that will allow Maxwell Technologies to spin-off its ownership in PurePulse to the Maxwell shareholders before the end of 2002. We also continue to explore the possible sale of Maxwell's share ownership in PurePulse.
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Critical Accounting Policies
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., which requires the Company to make estimates and assumptions. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity and, as such, management assumptions and conclusions in these areas may significantly impact the results of operations of the Company.
Revenue Recognition
For the current year, substantially all of our revenue is derived from the sale of manufactured products directly to customers. In general, revenue is recognized at the time the product is shipped unless specific terms require otherwise. In general, we do not offer discounts and there is no right of return. However in prior years certain continuing and discontinued segments recorded revenue from both long-term and short-term fixed price contracts and cost plus contracts with the U.S. Government directly or through a prime contractor. Those revenues, including estimated profits, were recognized as costs were incurred and included provisions for any anticipated losses. These contracts are subject to rate audits and other audits, which could result in additional revenues or additional losses in excess of estimated provisions.
Accounts Receivable
We establish and maintain customer credit limits based on credit checks, analyses of credit-worthiness and payment history. Accounts receivable consist primarily of amounts due to us from our normal business activities. We maintain an allowance for doubtful accounts to reflect the expected bad debts based on past collection history and specific risks identified in the portfolio.
Excess and obsolete inventory
We value inventories at lower of cost or market. In assessing the ultimate realization of inventories, we make judgments as to future demand requirements and compare that with current and committed inventory levels. We have recorded significant changes in reserves in recent periods due to changes in market conditions. It is possible that changes in reserves may be required due to changing market conditions, or that judgments as to ultimate realization may be incorrect.
Impairment of Goodwill
In assessing the recoverability of goodwill, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. In addition, we periodically complete independent appraisals of the business segments and compare the fair value to the carrying value. If these estimates or their related assumptions change in the future, we may be required to record impairment charges.
Valuation allowance for deferred tax assets
A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefit, or that future deductibility is uncertain. In general, companies that have had a recent history of operating losses are faced with a difficult burden of proof on their ability to generate sufficient future income within the next two years in order to realize the benefit of the deferred tax assets. In 2001, the Company determined that it was appropriate to record a valuation allowance against its deferred tax assets based on its recent history of losses. The deferred tax assets are still available for the Company to use in the future to offset taxable income, which would result in the recognition of a tax benefit and a reduction to the Company's effective tax rate.
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Discontinued operations, estimated costs associated with sale of business
In determining the net gain on the sale of businesses included in discontinued operations, we made judgments as to our liability associated with lease obligations. In making these judgments, we assessed commercial real estate markets in several locations and made estimates as to how and when we will be able to either sub-lease, terminate or buy out lease obligations. Changes in these markets may impact our estimates.
Results of Operations
The following discussion provides a comparison of current results of operations for the three months ended March 31, 2002 to the three months ended March 31, 2001.
The following table sets forth sales, gross profit and gross profit as a percentage of sales for each of the Company's business segments.
|
Three Months Ended March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2002 |
2001 |
||||||
|
(dollars in thousands) |
|||||||
Electronic Components Group: | ||||||||
Sales | $ | 3,511 | $ | 10,710 | ||||
Gross profit | 111 | 2,657 | ||||||
Gross profit as a percentage of sales | 3.2% | 24.8% | ||||||
I-BusPhoenix Power and computing systems: |
||||||||
Sales | $ | 9,278 | $ | 16,290 | ||||
Gross profit | 836 | 3,492 | ||||||
Gross profit as a percentage of sales | 9.0% | 21.4% | ||||||
Consolidated |
||||||||
Sales | $ | 12,789 | $ | 27,000 | ||||
Gross profit | 947 | 6,149 | ||||||
Gross profit as a percentage of sales | 7.4% | 22.8% | ||||||
Operating expenses: |
||||||||
Selling, general and administrative | $ | 4,691 | $ | 6,267 | ||||
SG&A as a percentage of consolidated sales | 36.7% | 23.2% | ||||||
Research and development |
2,667 |
3,199 |
||||||
R&D as a percentage of consolidated sales | 20.9% | 11.8% | ||||||
Operating loss |
$ |
(6,411 |
) |
$ |
(3,317 |
) |
Sales
Sales for the three months ended March 31, 2002 were $12.8 million, reflecting a $14.2 million, or 52.6%, decrease from sales of $27.0 million for the three months ended March 31, 2001.
Sales within each of our continuing business segments is as follows:
Electronic Components Group. Excluding sales from the Sierra-KD division, which was sold in June 2001, sales for the three months ended March 31, 2002 declined $1.9 million from prior year due mainly to a reduction in shipments of components to certain customers involved in making satellites.
I-Bus/Phoenix Power and Computing Systems. For the three months ended March 31, 2002, I-Bus/Phoenix sales decreased by $7.0 million, or 43.0% to $9.3 million from sales of $16.3 million for the
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three months ended March 31, 2001. The decrease in sales is attributable to $1.9 million lower sales of power products used in making medical imaging equipment and lower computing system sales in the United States and Europe due to poor market conditions in the telecommunications sector.
Gross Profit
In the three months ended March 31, 2002, our gross profit was $947,000, or 7.4% of sales, compared to $6.1 million, or 22.8% of sales, in the three months ended March 31, 2001. Gross profit and gross profit as a percentage of sales were negatively impacted in the three months ended March 31, 2002 by lower sales and a less profitable sales mix in the current period.
Gross profit within each of our continuing business segments is as follows:
Electronic Components Group. In the three months ended March 31, 2002, gross profit in the Electronic Components segment decreased by $2.5 million, or 95.8%, to $111,000 from $2.7 million in the three months ended March 31, 2001. The sale of Sierra accounted for $1.3 million. The remaining decrease is mainly attributable to a decrease in sales of microelectronics and ultracapacitor products. As a percentage of sales, gross profit decreased to 3.2% in the current quarter from 24.8% in the three months ended March 31, 2001. The decrease in gross profit as a percentage of sales is mainly attributable the decrease in sales of microelectronics sales, which have higher margins than the PowerCache product line.
I-Bus/Phoenix Power and Computing Systems. In the three months ended March 31, 2002, gross profit in the I-Bus/Phoenix Power and Computing Systems segment decreased by $2.7 million, or 76.1%, to $836,000 from $3.5 million in the three months ended March 31, 2001. As a percentage of sales, gross profit decreased to 9.0% in the current quarter, as compared to 21.4% in the first quarter of the prior year. The decrease in gross profit is attributable to the impact of reduced sales volume for this segment in the current period, as well as a change in product mix to include a higher proportion of lower-margin power quality products, as compared to higher margin applied computing products. Gross profit and gross profit as a percentage of sales in the current period are not reflective of the company's historical results nor are they expected to continue at that level.
Selling, General and Administrative Expenses
In the three months ended March 31, 2002, our selling, general and administrative expenses decreased $1.6 million, or 25.1%, to $4.7 million from $6.3 million in the three months ended March 31, 2001. The sale of Sierra accounted for $517,000 of this decrease. In addition, $299,000 of this decrease is attributable to goodwill amortization in 2001 not recorded in the current year due to the implementation of a new accounting pronouncement, which eliminates the requirement to amortize goodwill. As a percentage of sales, selling, general and administrative expenses increased to 36.7% from 23.2%. The increase in selling, general and administrative expenses as a percentage of sales is mainly attributable to lower than expected sales.
Research and Development Expenses
Our research and development expenses reflect internally funded research and development programs. Research and development expenses were $2.7 million, or 20.9% of sales, for the three months ended March 31, 2002, as compared to $3.2 million, or 11.8% of sales, in the three months ended March 31, 2001.
Interest Expense
Interest expense decreased to $88,000 in the three months ended March 31, 2002 from $878,000 in the prior year. The decreased interest expense relates to lower borrowing levels in the current year as
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the Company repaid its outstanding obligations under a bank line of credit from the proceeds of the sale of Sierra and Government Systems divisions.
Credit for Income Taxes
The credit for income taxes for the three months ended March 31, 2002 reflects the recording of federal tax refund for taxes paid in 2001 that are now recoverable due to a change in tax law.
Minority Interest in Net Loss of Subsidiaries
Minority interest in net loss of subsidiaries was $241,000 for the three months ended March 31, 2002 compared to $48,000 for the three months ended March 31, 2001. The increase in the current period is due primarily to an increase in net loss.
Loss from Continuing Operations
As a result of the factors mentioned above, the loss from continuing operations was $5.9 million for the three months ended March 31, 2002, compared to $2.7 million for the three months ended March 31, 2001.
Discontinued Operations
In March 2001, we sold the assets of our defense contracting business in separate transactions with two buyers, for an aggregate purchase price of approximately $20.7 million. Of the total purchase price, approximately $9.5 million was received in cash in March 2001, an additional $9.8 million was received in cash in April 2001, and the remaining $1.4 million was received in September 2001 following the expiration of holdback periods for certain indemnifications and other contingencies provided for in the sales agreements. The buyers assumed certain liabilities and all ongoing contractual obligations of the business and hired most of the employees of the business. We retained certain assets and liabilities of the business, including estimated amounts provided at closing for the expenses of the transaction and the net costs of winding up any remaining activities of the business. We recorded a gain, net of tax, of approximately $3.9 million in the three months ended March 31, 2001, representing the net gain on the disposition of the assets and the net income from the operations of this discontinued business.
Total income (loss) from discontinued operations was ($805,000) in the three months ended March 31, 2002, compared to $3.2 million for the three months ended March 31, 2001.
Liquidity and Capital Resources
Cash used by operating activities in the three months ended March 31, 2002 was approximately $5.0 million, as compared to $6.5 million in the three months ended March 31, 2001. In the current year, the use of cash was primarily attributable to operating losses. Capital expenditures in the three months ended March 31, 2002 and 2001 were $468,000 and $1.8 million, respectively. In the year ended December 31, 2001, we received $46.9 million and $20.7 million of cash in connection with the sale of Sierra and the Government Systems division, respectively. These funds were used to pay down debt and fund continuing and discontinued operations.
If the Company fails to increase revenues and/or reduce cost, it will continue to experience losses and negative cash flows from operations. Therefore, the Company may need to seek additional financing in the future. Although, we cannot predict with any certainty as to if or when we might need additional financing, we believe such financing would not be required before the end of this year. We also may consider acquisitions of complementary businesses, products or technologies, which may require additional financing. If the Company needs additional financing, there can be no assurance that such financing will be available on acceptable terms or at all.
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New Bank Credit Agreement
Our U.S. based operations had borrowings of $6 million outstanding under a bank credit agreement as of March 31, 2002. In February 2001, we and all of our United States subsidiaries entered into a Loan and Security Agreement with Comerica BankCalifornia, which was subsequently amended in December 2001. The agreement, as amended, consists of a $6 million term loan secured by a deed of trust as well as certain other collateral and a $5 million revolving credit facility. The term loan bears interest, at our option, at the bank's reference rate plus .5%, or cost of funds plus 2.25%. The principal is amortized monthly over 20 years with the balance due December 31, 2004. We may prepay the term loan or revolving loans at any time, and all amounts borrowed are due on December 31, 2004. At March 31 2002, $6 million was outstanding under the term loan and none was outstanding under the revolving facility. As of the filing date of this Form 10-Q, we are in compliance with all required covenants.
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 March 31, 2002, minority investors owned, of the outstanding shares, approximately 1.6% of the Electronic Components Group, 7.3% of I-Bus/Phoenix and 18.73% 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.
In January 2002, we adopted a plan to complete merger transactions with the Electronic Components Group subsidiary and the I-Bus/Phoenix subsidiary whereby all of the minority shareholdings and options would be converted to shares and options of Maxwell Technologies. On April 15, 2002, these mergers resulted in the issuance of 565,000 common shares of Maxwell Technologies and 520,000 options to purchase common shares of Maxwell Technologies. In February 2002, PacifiCorp Energy Ventures, Inc., the largest minority shareholder in the Electronic Components Group, exchanged its preferred shares of the Electronic Components Group for 518,000 common shares of Maxwell Technologies pursuant to its right under the original investment agreement.
At March 31, 2002, the potential percentage ownership interest attributable to exercisable subsidiary options was, on a diluted basis, approximately 3.6% of PurePulse.
Inflation and Changes in Prices
Generally, we have been able to increase prices to offset inflation-related cost increases in our commercial businesses.
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.
Some of the risks and uncertainties that could cause the forward-looking statements to be inaccurate are summarized below:
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We undertake no obligation to revise these forward-looking statements that may be made to reflect future events or circumstances. You are referred to the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2001 for a more detailed discussion of certain of those factors.
Item 3. Quantitative and Qualitative Disclosures 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 March 31, 2002, we had $6.0 million outstanding related to variable rate U.S dollar denominated -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 $30,000.
We invest excess cash in debt instruments of the U.S Government and its agencies, and in high-quality corporate issuers. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. Current policies do not allow the use of interest rate derivative instruments to manage exposure to interest rate changes. A third party manages approximately $10 million of the short-term investment portfolio under guidelines approved by the Company's Board of Directors. The remaining portfolio is invested in CD's which will mature in the first half of 2002 and money market accounts.
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None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
None.
Item 6. Exhibits and Reports on Form 8-K
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MAXWELL TECHNOLOGIES, INC. | |
July 30, 2002 Date |
/s/ CARLTON J. EIBL Carlton J. Eibl, President and Chief Executive Officer |
July 30, 2002 Date |
/s/ JAMES A. BAUMKER James A. Baumker, Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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