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MAXWELL TECHNOLOGIES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q (this "Quarterly Report") to "Maxwell," "the Company," "we," "us," and "our" refer to Maxwell Technologies, Inc. and its subsidiaries; all references to "Maxwell SA" refer to our Swiss subsidiary, Maxwell Technologies, SA. FORWARD-LOOKING STATEMENTS Some of the statements contained in this document and incorporated herein by reference discuss our plans and strategies for our business or make other forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act. The words "anticipates," "believes," "estimates," "expects," "plans," "intends," "may," "could," "will," "continue," "seek," "should," "would" and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. These forward-looking statements reflect the current views and beliefs of our management; however, various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, our statements. Such risks, uncertainties and contingencies include, but are not limited to, the following: • risks related to our international operations including, but not limited to, our ability to adequately comply with the changing rules and regulations in countries where our business is conducted, our ability to oversee and control our foreign subsidiaries and their operations, our ability to effectively manage foreign currency exchange rate fluctuations arising from our international operations, and our ability to continue to comply with the U.S. Foreign Corrupt Practices Act as well as the anti-bribery laws of foreign jurisdictions and the terms and conditions of our settlement agreements with the Securities and Exchange Commission and the Department of Justice. • our ability to remain competitive and stimulate customer demand through successful introduction of new products, and to match our production capacity to customer demand; • dependence upon the sale of products to a small number of customers and vertical markets, some of which are heavily dependent on government funding or government subsidies which may or may not continue in the future; • successful acquisition, development and retention of key personnel; • our ability to effectively manage our reliance upon certain suppliers of key component parts and specialty equipment; • our ability to manage product quality problems; • our ability to protect our intellectual property rights and to defend claims against us; • our ability to effectively identify, enter into, manage and benefit from strategic alliances; • occurrence of a catastrophic event at any of our facilities; and, • our ability to obtain sufficient capital to meet our operating or other needs. Many of these factors are beyond our control. Additionally, there can be no assurance that we will not incur new or additional unforeseen costs in connection with the ongoing conduct of our business. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. For a discussion of important risks associated with an investment in our securities, including factors that could cause actual results to differ materially from expectations referred to in the forward-looking statements, see Risk Factors in Part II, Item 1A, of this document and Part I, Item 1A, of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010. We do not have any obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Overview Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in the following sections: • Executive Overview • Highlights of the Six Months Ended June 30, 2011 • Results of Operations • Liquidity and Capital Resources • Critical Accounting Estimates 16 -------------------------------------------------------------------------------- Table of Contents • Off Balance Sheet Arrangements Executive Overview Maxwell is a global leader in developing, manufacturing and marketing advanced energy storage and power delivery products for transportation, industrial, telecommunications and other applications, and microelectronic products for space and satellite applications. Our strategy is to establish a compelling value proposition for our products by designing and manufacturing them to perform reliably with minimal maintenance for the life of the applications into which they are integrated. We have three product lines: ultracapacitors with applications in multiple industries, including transportation, automotive, telecommunications, energy and consumer and industrial electronics; high-voltage capacitors primarily applied in electrical utility infrastructure; and radiation-hardened microelectronic products for space and satellite applications. Our primary objective is to grow revenue and profit margins by creating and satisfying demand for our ultracapacitor-based energy storage and power delivery solutions. We are focusing on establishing and expanding market opportunities for ultracapacitors and being the preferred supplier for ultracapacitor products worldwide. We believe that the transportation industry represents the largest market opportunity for ultracapacitors, primarily for applications related to electrical system augmentation, and braking energy recuperation and hybrid electric drive systems for transit buses, trucks and autos, and electric rail vehicles. Various backup power applications, including instantly available power for wind turbine blade pitch systems, also represent a significant and rapidly growing market opportunity. We also seek to expand market opportunities for our high-voltage capacitor and radiation-hardened microelectronic products. The market for high-voltage capacitors consists mainly of expansion, upgrading and maintenance of existing electrical utility infrastructure and new infrastructure installations in developing countries. Such installations are capital-intensive and frequently are subject to regulation, availability of government funding and general economic conditions. Although the market for microelectronics products for space and satellite applications is relatively small, the specialized nature of these products and the requirement for failure-free reliability allows us the opportunity to generate profit margins significantly higher than those for commodity electronic components. In Q2 2011, revenues were $38.5 million, representing an increase of 30% compared with the same period one year ago. This revenue growth is primarily attributable to increased ultracapacitor product sales, which grew in Q2 2011 by 54% compared with Q2 2010. Ultracapacitor cells and modules for wind turbine blade pitch systems, and for hybrid and electric drive systems for public transit vehicles continue to be the main drivers of ultracapacitor sales growth, along with increasing contributions from a stop-start idle elimination system for autos in Europe and various backup power applications. Sales of microelectronics and high-voltage capacitor products were $14.0 million for Q2 2011, up 2% from Q2 2010, and both of these mature product lines continued to make significant contributions to the bottom line. Overall gross profit in Q2 2011 was 40%, which is in line with our target for gross profit. Long-term improvements in gross profit have been driven mainly by significantly improved profitability for our ultracapacitor products related to increased sales volume and reduced manufacturing costs. In 2010, we generated positive cash flow from operations of $8.7 million, reflecting our efforts to expand revenues while better managing manufacturing costs and operating expenses. As of June 30, 2011, we had cash and cash equivalents of $29.8 million, which we believe will be sufficient to fund operations for at least the next twelve months. In addition, in July 2011, we entered into a memorandum of understanding with a financial institution to obtain a line of credit to borrow up to $27.5 million. In the future, we may decide to supplement these sources of cash by issuing debt or equity. Going forward, we will continue to focus on growing our business and strengthening our market leadership and brand recognition through further penetration of existing markets, entry into new markets and development of new products. Our primary focus will be to grow our ultracapacitor business through continued market penetration in primary applications, including automotive, transportation and wind energy. In order to achieve our growth objectives, we will need to overcome risks and challenges facing our business. Significant risks and challenges we face include the ability to achieve and maintain profitability; the ability to develop our management team, product development infrastructure and manufacturing capacity to facilitate growth; competing technologies that may capture market share and interfere with our planned growth; and hiring, developing, training and retaining key personnel critical to the execution of our strategy. We will be attentive to these risks and will focus on achieving higher profit margins and managing operating costs, and on developing new products and promoting the value proposition of our products over competing technologies. In addition, we are in the process of augmenting current manufacturing capacity and infrastructure in order to accommodate our planned growth. We believe that the Company is well positioned to continue to accelerate the financial and operational progress exhibited by our recent results of operations. 17 -------------------------------------------------------------------------------- Table of Contents Highlights of the Six Months Ended June 30, 2011 During the six months ended June 30, 2011, we continued to focus on developing strategic alliances, introducing new products, increasing production capacity to meet anticipated future demand, reducing product costs, making capital investments to facilitate growth, and improving production processes. Some of these efforts are described below: • In June, we introduced a 12-volt ultracapacitor module that ensures reliable engine starting for commercial trucks and other heavy vehicles. • In May, we announced that we were selected to supply ultracapacitors to Flextronics Automotive, a segment of Flextronics and a leading global automotive supplier, for the energy storage module of a recuperation system that Flextronics Automotive will produce to reduce fuel consumption and emissions in commercial vehicles. • In April, we announced that ShinMaywa Industries, Ltd., a leading Japanese producer of special purpose trucks, designed Maxwell's BOOSTCAP ® ultracapacitors into an all-electric loading mechanism for garbage trucks that eliminates fuel consumption, CO2 emissions and noise during loading and unloading. • In March, we announced that the North American office of United Kingdom's Vehicle Certification Agency has granted European Economic Community -Type Approval and Conformity of Production clearance to Maxwell's 125-volt Heavy Transportation Module. • In March, we announced that we were awarded a $7 million cost-shared technology development contract by the United States Advanced Battery Consortium LLC to develop an advanced energy storage system for power-assist hybrid electric vehicles. • In February, we announced that a leading producer of instrument transformers for the Russian utility grid selected CONDIS ®capacitive voltage dividers produced by Maxwell's Swiss subsidiary for integration into thousands of capacitive voltage transformers that will be installed over the next several years as part of a multi-billion dollar renovation of Russia's utility infrastructure. • In February, we introduced a 56-volt ultracapacitor module designed specifically to address the short-term ride-through and bridge power requirements of uninterruptible power supply systems for mission-critical installations such as data centers, hospitals, factories and telecommunication facilities. 18 -------------------------------------------------------------------------------- Table of Contents Results of Operations The Second Quarter of 2011 Compared with the Second Quarter of 2010 The following table presents certain unaudited statement of operations data expressed as a percentage of revenue for the periods indicated: Quarter Ended June 30, 2011 2010 Revenue 100 % 100 % Cost of revenue 60 % 60 % Gross profit 40 % 40 % Operating expenses: Selling, general and administrative 30 % 38 % Research and development 14 % 13 % Total operating expenses 44 % 51 % Loss from operations (4 )% (11 )% Other income, net - 4 % Loss from operations before income taxes (4 )% (7 )% Income tax provision (benefit) (1 )% 2 % Net loss (3 )% (9 )% Net loss reported for the three months ended June 30, 2011 was $1.2 million, or $0.04 per diluted share, compared with a net loss of $2.6 million, or $0.10 per diluted share, in the same quarter one year ago. During the three months ended June 30, 2011 and 2010, we recorded accruals for settlements of legal matters of $2.6 million and $3.4 million, respectively. Further, during the three months ended June 30, 2010, we recorded a gain on embedded derivatives and warrants of $1.2 million. During the current period, we continued to achieve improved operating results due to revenue growth combined with a reduction in operating expenses as a percent of revenue. Revenue and Gross Profit The following table presents a comparison of revenue, cost of revenue and gross profit for the quarters ended June 30, 2011 and 2010 (in thousands, except percentages): Quarter Ended Quarter Ended June 30, 2011 June 30, 2010 % of % of Net Net % Amount Revenue Amount Revenue Increase Change Revenue $ 38,463 100 % $ 29,579 100 % $ 8,884 30 % Cost of revenue 22,987 60 % 17,742 60 % 5,245 30 % Gross profit $ 15,476 40 % $ 11,837 40 % $ 3,639 31 % Revenue. In the second quarter of 2011, revenue increased 30% to $38.5 million, compared with $29.6 million in the same quarter one year ago. The increase in revenue was influenced primarily by higher volume in our ultracapacitor product line associated with continuing strong demand for energy storage and power delivery systems for wind energy, hybrid energy and electric transit vehicles, and micro hybrid automotive systems. A substantial amount of our revenue is generated through our Swiss subsidiary which has a functional currency of the Swiss Franc. As such, reported revenue can be materially impacted by the changes in exchange rates between the Swiss Franc and the U.S. Dollar, our reporting currency. Due to the weakening of the U.S. Dollar against the Swiss Franc during the quarter ended June 30, 2011 compared with the same period one year ago, revenue was positively impacted by $2.4 million. Gross Profit. In the second quarter of 2011, gross profit increased $3.6 million or 31% compared with the same quarter one year ago. As a percentage of revenue, gross profit was 40%, consistent with the same period one year ago. Of the increase in gross profit in absolute dollars, $3.6 million related to an increase in the volume of sales, and $268,000 was due to net reductions in product costs. 19 -------------------------------------------------------------------------------- Table of Contents Offsetting these increases was a decrease in gross profit in absolute dollars of $184,000 related to decreased net foreign exchange gains recorded in the three months ended June 30, 2011 compared with the same quarter one year ago. We hedge intercompany and third-party asset and liability balances denominated in currencies other than the local currency. The net foreign exchange gains or losses recognized are the transaction gains and losses incurred on the hedged assets and liabilities, net of the gains and losses realized on the hedge contracts. Selling, General and Administrative Expense The following table presents selling, general and administrative expense for the second quarter of 2011 and 2010 (in thousands, except percentages): Quarter Ended Quarter Ended June 30, 2011 June 30, 2010 % of % of Net Net % Amount Revenue Amount Revenue Increase Change Selling, general and administrative $ 11,747 30 % $ 11,164 38 % $ 583 5 % Selling, general and administrative expenses were 30% of revenue for second quarter of 2011, down from 38% in the same quarter one year ago. The increase in absolute dollars in selling, general and administrative expense in the second quarter of 2011 compared with the same quarter one year ago was $583,000, or 5%. This increase was driven primarily by an increase of $978,000 in labor costs primarily due to increased bonus compensation as well as headcount growth in our sales and marketing operations, and an increase of $285,000 in fees associated with legal and other external service providers. These increases were offset by a decrease in net foreign exchange losses of $1.1 million. In the second quarter of 2011, we recorded net foreign exchange losses of $131,000 compared with $1.2 million in net foreign exchange losses in the same quarter one year ago. The remainder of the increase in selling, general and administrative expenses is due to increases in various expense categories driven primarily by the ongoing growth of the Company. Increased legal fees during the quarter ended June 30, 2011 compared to the same quarter one year ago relate to ongoing legal matters, including indemnification of certain past officers concerning the FCPA matter, efforts related to protection of our intellectual property, and other corporate matters. Due to the ongoing nature of these matters, we anticipate incurring legal fees in excess of historical levels for the remainder of 2011. Research and Development Expense The following table presents research and development expense for the second quarter of 2011 and 2010 (in thousands, except percentages): Quarter Ended Quarter Ended June 30, 2011 June 30, 2010 % of % of Net Net % Amount Revenue Amount Revenue Increase Change Research and development $ 5,297 14 % $ 3,954 13 % $ 1,343 34 % Research and development expenses were 14% of revenue for the second quarter of 2011, up from 13% in the same quarter one year ago, while total expenses increased by $1.3 million, or 34%. The increase in absolute dollars was driven primarily by an increase of $774,000 in labor expense due to headcount additions and sub-contractor costs, and an increase of $496,000 related to materials used for product development. Provision for Income Taxes The effective tax rate differs from the statutory U.S. federal income tax rate of 34% primarily due to foreign income tax and the valuation allowance against the Company's domestic deferred tax assets. We recorded an income tax benefit of $427,000 for the second quarter of 2011 compared with an income tax provision of $410,000 for the same quarter in 2010. During the second quarter of 2011, we recorded a tax benefit of $565,000 related to an accrual for the anticipated settlement of a legal matter by our Swiss subsidiary. Excluding this impact, we recorded a tax provision of $138,000 related to income generated by our Swiss subsidiary for the second quarter of 2011, compared with a tax provision of $410,000 for the same quarter in 2010. Unremitted earnings of foreign subsidiaries have been included in the consolidated financial statements without giving effect to the United States taxes that may be payable as it is not anticipated such earnings will be remitted to the United States. 20-------------------------------------------------------------------------------- Table of Contents The Six Months Ended June 30, 2011 Compared with the Six Months Ended June 30, 2010 The following table presents certain unaudited statement of operations data expressed as a percentage of revenue for the periods indicated: Six Months Ended June 30, 2011 2010 Revenue 100 % 100 % Cost of revenue 60 % 61 % Gross profit 40 % 39 % Operating expenses: Selling, general and administrative 27 % 33 % Research and development 15 % 15 % Total operating expenses 42 % 48 % Loss from operations (2 )% (9 )% Other income, net 1 % 8 % Loss from operations before income taxes (1 )% (1 )% Income tax provision 1 % 1 % Net loss (2 )% (2 )% Net loss reported for the six months ended June 30, 2011 was $1.0 million, or $0.04 per diluted share, compared with a net loss of $1.3 million, or $0.05 per diluted share, in the same quarter one year ago. During the six months ended June 30, 2011 and 2010, we recorded accruals for settlements of legal matters of $2.6 million and $3.4 million, respectively. Further, during the six months ended June 30, 2011 and 2010, we recorded gains on embedded derivatives and warrants of $1.1 million and $4.5 million, respectively. During the six months ended June 30, 2011, we continued to achieve improved operating results due to revenue growth combined with improvements in gross profit and operating margins. Revenue and Gross Profit The following table presents revenue, cost of revenue and gross profit for the six months ended June 30, 2011 and 2010 (in thousands, except percentages): Six Months Ended Six Months Ended June 30, 2011 June 30, 2010 % of % of Net Net % Amount Revenue Amount Revenue Increase Change Revenue $ 73,722 100 % $ 56,202 100 % $ 17,520 31 % Cost of revenue 44,362 60 % 34,154 61 % 10,208 30 % Gross profit $ 29,360 40 % $ 22,048 39 % $ 7,312 33 % Revenue. During the six months ended June 30, 2011, revenue increased 31% to $73.7 million, compared with $56.2 million in the same period one year ago. The increase in revenue was influenced primarily by higher volume in our ultracapacitor product line associated with continuing strong demand for energy storage and power delivery systems for wind energy, hybrid energy and electric transit vehicles, and micro hybrid automotive systems. A substantial amount of our revenue is generated through our Swiss subsidiary which has a functional currency of the Swiss Franc. As such, reported revenue can be materially impacted by the changes in exchange rates between the Swiss Franc and the U.S. dollar, our reporting currency. Due to the weakening of the U.S. Dollar against the Swiss Franc during the six months ended June 30, 2011 compared with the same period one year ago, revenue was positively impacted by $2.9 million. Gross Profit. During the six months ended June 30, 2011, gross profit increased $7.3 million or 33% compared with the same period one year ago. As a percentage of revenue, gross profit increased to 40% compared with 39% in the same period one year ago. Of the increase in gross profit in absolute dollars, $6.9 million related to an increase in the volume of sales and $828,000 was due to net reductions of product costs. Offsetting these increases was a decrease in gross profit in absolute dollars of $390,000 related to net foreign exchange losses recorded in the six months ended June 30, 2011 compared with net foreign exchanges gains recorded in the 21-------------------------------------------------------------------------------- Table of Contents same period one year ago. We hedge intercompany and third-party asset and liability balances denominated in currencies other than the local currency. The net foreign exchange gains or losses recognized are the transaction gains and losses incurred on the hedged assets and liabilities, net of the gains and losses realized on the hedge contracts. Selling, General and Administrative Expense The following table presents a comparison of selling, general and administrative expense for the six months ended June 30, 2011 and 2010 (in thousands, except percentages): Six Months Ended Six Months Ended June 30, 2011 June 30, 2010 % of % of Net Net % . Amount Revenue Amount Revenue Increase Change Selling, general and administrative $ 19,681 27 % $ 18,339 33 % $ 1,342 7 % Selling, general and administrative expenses were 27% of revenue for the six months ended June 30, 2011, down from 33% in the same period one year ago, and total expenses increased $1.3 million, or 7%, from the same period one year ago. This increase was driven primarily by an increase of $1.4 million in labor costs primarily due to increased bonus compensation as well as headcount growth in our sales and marketing operations, an increase of $482,000 in fees associated with legal and other external service providers, and an increase of $202,000 in information technology expenses due to infrastructure investments, offset by a decrease in net foreign exchange losses of $1.3 million. In the six months ended June 30, 2011, we recorded net foreign exchange losses of $227,000 compared with $1.5 million in net foreign exchange losses in the same quarter one year ago. The remainder of the increase in selling, general and administrative expenses is due to increases in various expense categories driven primarily by the ongoing growth of the Company. Increased legal fees during the six months ended June 30, 2011 compared to the same period one year ago relate to ongoing legal matters, including indemnification of certain past officers concerning the FCPA matter, efforts related to protection of our intellectual property, and other corporate matters. Due to the ongoing nature of these matters, we anticipate incurring legal fees in excess of historical levels for the remainder of 2011. Research and Development Expense The following table presents research and development expense for the six months ended June 30, 2011 and 2010 (in thousands, except percentages): Six Months Ended Six Months Ended June 30, 2011 June 30, 2010 % of % of Net Net % Amount Revenue Amount Revenue Increase Change Research and development $ 11,269 15 % $ 8,536 15 % $ 2,733 32 % Research and development expenses were 15% of revenue for the six months ended June 30, 2011, consistent with the same period one year ago, while total expenses increased by $2.7 million, or 32%. The increase in absolute dollars was driven primarily by an increase of $1.7 million in labor expense due to headcount additions and sub-contractor costs, and an increase of $1.0 million related to materials used for product development. Provision for Income Taxes The effective tax rate differs from the statutory U.S. federal income tax rate of 34% primarily due to foreign income tax and the valuation allowance against the Company's domestic deferred tax assets. We recorded an income tax provision of $299,000 for the six months ended June 30, 2011, compared with an income tax provision of $719,000 for the same period in 2010. During the second quarter of 2011, we recorded a tax benefit of $565,000 related to an accrual for the anticipated settlement of a legal matter by our Swiss subsidiary. Excluding this impact, we recorded a tax provision of $864,000 related to income generated by our Swiss subsidiary for the six months ended June 30, 2011, compared with a tax provision of $719,000 for the same period in 2010. Unremitted earnings of foreign subsidiaries have been included in the consolidated financial statements without giving effect to the United States taxes that may be payable as it is not anticipated such earnings will be remitted to the United States. Liquidity and Capital Resources Changes in Cash Flow The following table summarizes our cash flows from operating, investing and financing activities for the six months ended June 30, 2011 and 2010 (in thousands): 22 -------------------------------------------------------------------------------- Table of Contents Six Months Ended June 30, 2011 2010 Total cash provided by (used in): Operating activities $ (12,962 ) $ 2,888 Investing activities (7,291 ) (3,308 ) Financing activities 8,762 172 Effect of exchange rate changes on cash and cash equivalents 1,453 (1,133 ) Decrease in cash and cash equivalents $ (10,038 ) $ (1,381 ) Net cash used in operating activities was $13.0 million for the six months ended June 30, 2011. Although we generated $3.2 million from net loss excluding non-cash items, the usage of cash was driven primarily by an increase in accounts receivable of $7.6 million and an increase in inventories of $7.1 million. The increase in accounts receivable was due to revenue growth as well as significant sales in the last month of the quarter. The increase in inventories was related to anticipated product demand. In addition, we made settlement payments totaling $6.7 million to the SEC and DOJ during the first quarter of 2011. Excluding this impact, and the reclassification of $5.4 million from other long-term liabilities, cash flows were positively impacted by a $4.9 million increase in accounts payable and accrued liabilities, which correlates to the increase in inventory. Net cash provided by operating activities was $2.9 million for the six months ended June 30, 2010, which related primarily to an increase in accounts payable and accrued liabilities, offset by an increase in accounts receivable. Net cash used in investing activities was $7.3 million and $3.3 million for the six months ended June 30, 2011 and 2010, respectively, and related to capital expenditures. Capital expenditures in the six months ended June 30, 2011 were primarily focused on investments in a corporate research and development facility, information technology infrastructure and increased production capacity. In 2010, capital expenditures were primarily focused on increasing our production capacity to meet anticipated increases in demand. Net cash provided by financing activities was $8.8 million and $172,000 for the six months ended June 30, 2011 and 2010, respectively. Net cash provided by financing activities in the six months ended June 30, 2011 primarily resulted from proceeds from the issuance of common stock under our stock-based compensation plans of $1.1 million, as well as the release of $8.0 million in restricted cash upon the settlement of the remaining principal balance of our convertible debentures. Net cash provided by financing activities in the six months ended June 30, 2010 primarily resulted from proceeds from the issuance of common stock under our stock-based compensation plans. Liquidity As of June 30, 2011, we had approximately $29.8 million in cash and cash equivalents, and working capital of $51.4 million. As of June 30, 2011, we have accrued $7.7 million for the settlement of FCPA violations, with $5.4 million and $2.3 million payable in the first quarters of 2012 and 2013, respectively. In addition, we have accrued approximately $2.6 million for the anticipated settlement of a customer dispute, of which approximately $725,000 is anticipated to be paid in cash during the last half of 2011, with the remaining amount available to the customer as a discount on future purchases of our products in 2012 and 2013. This settlement is not yet final, and is therefore subject to change until a written agreement between the parties is executed. Management believes that cash from operating activities, combined with available cash balances, will be sufficient to fund our operations, obligations as they become due, and capital equipment expenditures for at least the next twelve months. In addition, in July 2011, we entered into a memorandum of understanding with a financial institution to obtain a line of credit to borrow up to $27.5 million. In the future, we may decide to supplement planned cash flow provided from operations and the anticipated line of credit by issuing debt or equity. In April 2011, we filed a shelf registration statement on Form S-3 with the SEC to, from time to time, sell up to an aggregate of $125 million of our common stock, warrants or debt securities. While we have no immediate plans to sell stock or issue debt, the shelf-registration statement will allow us to do so opportunistically in order to minimize dilution to current shareholders. As of June 30, 2011, the amount of cash and short-term investments held by foreign subsidiaries was $5.5 million. If these funds are needed for our operations in the U.S. in the future, we may be required to accrue and pay U.S. taxes to repatriate these funds. However, due to the Company's substantial net operating loss carryforwards, repatriation would have an immaterial impact on the Company's current tax rate and cash flows. Short-term and Long-term Borrowings Short-term borrowings Maxwell's Swiss subsidiary, Maxwell SA, has a 3.0 million Swiss Franc-denominated (approximately $3.6 million as of June 30, 2011) credit agreement with a Swiss bank, which renews semi-annually and bears interest at 2.2%. Borrowings under the short-term loan agreement are unsecured and as of June 30, 2011 and December 31, 2010, the full amount of the loan was drawn. Maxwell SA also has a 1.0 million Swiss Franc-denominated (approximately $1.2 million as of June 30, 2011) credit agreement with another Swiss bank, and the available balance of the line can be withdrawn or reduced by the bank at any time. As of June 30, 2011 and December 31, 2010, no amounts were drawn under the credit line. Interest rates applicable to any draws on the line will be determined at the time of draw. 23-------------------------------------------------------------------------------- Table of Contents Maxwell SA entered into a lending agreement for the acquisition of manufacturing equipment in an amount up to 1.5 million Swiss Francs. After the acquisition of the equipment was completed, the agreement converted to 48 monthly payments of 34,302 Swiss Francs with an interest rate of 2.22%. As of June 30, 2011 and December 31, 2010, the balance of the obligation was $0 and $210,000, respectively, with the final payment made in the second quarter of 2011. Long-term borrowings Maxwell SA has a 2.0 million Swiss Franc-denominated (approximately $2.4 million as of June 30, 2011) credit agreement with a Swiss bank, which renews every two years and bears interest at 2.5%. Borrowings under the credit agreement are unsecured and as of June 30, 2011 and December 31, 2010, the full amount available under the credit line was drawn. The Company has various financing agreements for vehicles. These agreements are for up to a five year repayment period with interest rates ranging from 4.9% to 7.0%. At June 30, 2011 and December 31, 2010, $240,000 and $177,000, respectively, was outstanding under these financing agreements. Critical Accounting Policies and Estimates We describe our significant accounting policies in Note 1, Description of Business and Summary of Significant Accounting Policies, of the notes to consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. We discuss our critical accounting estimates in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. There have been no significant changes in our significant accounting policies or critical accounting estimates since the end of fiscal 2010. Off Balance Sheet Arrangements None. |