Rental expense under these leases totaled approximately $136,959 and $138,219 for the quarter ended September 30, 2002 and 2001, respectively, and $273,372 and $280,057 for six months ended September 30, 2002 and 2001, respectively.

 

(12) Comprehensive Income

The Company's comprehensive loss for the quarter ended September 30, 2002 and 2001 was equal to its net loss.

Accumulated comprehensive loss as of September 30, 2002 and March 31, 2002 consists entirely of foreign currency translation adjustments. Relating to Taiwan UQM Electric Co., Ltd. when the Company disposes of its ownership interests in Taiwan UQM the Company will charge the amount in accumulated comprehensive loss to operations as part of a realized gain or loss.

 

 

 

 

 

 

 

 

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Financial Condition

Cash and cash equivalents at September 30, 2002 was $2,110,010 and working capital (the excess of current assets over current liabilities) was $4,990,887 compared with $1,411,509 and $3,184,735, respectively, at March 31, 2002. The increase in cash and cash equivalents and working capital is primarily attributable to proceeds from the sale of common stock during the first quarter, net of subsequent repayments of debt.

Accounts receivable declined $468,020 to $2,194,534 at September 30, 2002 from $2,662,554 at March 31, 2002. The decrease is primarily attributable to lower revenue levels.

Costs and estimated earnings on uncompleted contracts decreased $208,632 to $233,581 at September 30, 2002 from the fiscal 2002 year-end level of $442,213. The decrease was due to receipt of the final payment upon completion of a large development project near the end of the quarter. Estimated earnings on contracts in process declined to $762,146 or 25.7 percent of contracts in process of $2,969,902 compared to estimated earnings on contracts in process of $1,025,313 or 29.2 percent of contracts in process of $3,511,911 at March 31, 2002. The decrease in estimated margins on contracts in process is attributable to anticipated cost overruns on certain engineering projects.

Inventories declined $781,045 to $3,855,267 principally due to a decline in raw material and work-in-process inventories, which declined $469,023 and $472,034, respectively. The decline in raw materials inventories is attributable to reduced stocking levels and increased utilization of slow moving inventory in the electronic products segment. The decline in work-in-process inventories is attributable to lower production volumes in the electronic products segment.

Prepaid expenses increased to $300,951 at September 30, 2002 from $220,528 at March 31, 2002 reflecting the prepayment of insurance premium costs on the Company's commercial insurance coverage.

Equipment of discontinued operations held for sale, net declined to zero at September 30, 2002 compared to $1,253,432 at March 31, 2002 reflecting completion of the divestiture of the assets of the discontinued gear business.

Other current assets declined $120,999 at September 30, 2002 primarily due to the application of deferred offering costs upon completion of a secondary stock offering during the first quarter.

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The Company invested $241,833 for the acquisition of property and equipment during the first half compared to $413,173 for the comparable period last year. The decrease in capital expenditures is primarily attributable to higher level of expenditures for manufacturing equipment at the Company's electronic products segment during the prior year's first half. In addition, the Company invested $979,664 during the first half for the expansion of its facility in Frederick, Colorado to accommodate the relocation of the Company's corporate headquarters and engineering staff from Golden, Colorado.

Accounts payable declined to $2,266,309 at September 30, 2002 from $2,693,312 at March 31, 2002, primarily due to a decline in raw material inventory purchases during the first half.

Other current liabilities increased $568,553 to $1,137,107 at the end of the first half from $568,554 at March 31, 2002. The increase is primarily attributable to the accrual of committed raw material inventory purchases not yet invoiced, increased accrued personal property and real estate taxes and accrued building expansion costs arising from the Company's relocation to Frederick, Colorado.

In fiscal year 2001, a limited partnership in which the Company was a 50 percent owner sold its principal asset, the Company's headquarters building in Golden, Colorado, and was subsequently liquidated. As a result of this transaction, the Company recorded a deferred gain that is being recognized ratably over the remaining term on the Company's facility lease that expired in September 2002. As a result the current portion of deferred gain on sale of real estate decreased to zero at September 30, 2002 from $322,139 at March 31, 2002.

In April, the Company completed a secondary offering of 1,160,095 shares of common stock together with two year warrants to purchase 232,019 shares of common stock at an exercise price of $5.73 per share. Cash proceeds, net of offering expenses, were $4,431,254. Immediately following completion of the offering the Company applied $3,182,947 of the proceeds to the reduction of debt. Principally as a result of this transaction, current portion of long-term debt decreased $495,827 to $66,216, long-term debt decreased $654,130 to $453,893 and revolving line-of-credit declined $2,254,000 to zero at September 30, 2002.

Term debt and accrued future losses of discontinued operations decreased $789,960 to zero at September 30, 2002 due to the repayment of the equipment term loans and the completion of the divestiture of the discontinued gear manufacturing operations.

Billings in excess of costs and estimated earnings on uncompleted contracts declined $138,980 to $243,759 at September 30, 2002 from $382,739 at March 31, 2002 reflecting billings on engineering contracts at a rate greater than the performance of the associated work during the first half.

Common stock and additional paid-in capital increased to $188,432 and $55,877,462 at September 30, 2002, respectively, compared to $176,798 and $51,444,359 at March 31, 2002. The increases were primarily attributable to completion of a secondary offering of common stock during the first quarter.

Results of Continuing Operations

Continuing operations for the quarter ended September 30, 2002 resulted in a loss of $887,784 or $0.05 per common share on total revenue of $4,072,950 compared to a loss from continuing operations of $785,661 or $0.05 per common share for the comparable quarter last year. EBITDA from continuing operations for the quarter was $(526,376) or $(0.03) per common share

compared to $(310,669) or $(0.02) per common share for the comparable quarter last year. Net loss for the quarter was

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$887,784 or $0.05 per common share compared to a net loss of $2,788,755 or $0.16 per common share for the same quarter last year. EBITDA for the quarter was $(526,376) or $(0.03) per common share compared to EBITDA of $(2,045,579) or $(0.12) per common share for the comparable quarter last year.

EBITDA is a broadly used financial term that many investment professionals use as an approximation of the operating cash flow generated by a business. Management believes that this information may be useful to investors in the Company due to the amount of non-cash depreciation and amortization charges reported by the Company. Investors are cautioned, however, that EBITDA is not a replacement or substitute for net earnings or loss determined by the application of generally accepted accounting principles and our calculation of EBITDA may not be comparable to similarly titled disclosures made by other companies.

Revenue from contract services declined $24,154 or 3.8 percent to $616,890 compared to $641,044 for the comparable quarter last year. The decrease in contract services revenue is attributable to reduced productivity during the quarter due to the relocation of the Company's engineering group to Frederick, Colorado. Technology segment backlog increased during the quarter and we expect contract revenue levels to improve beginning next quarter.

Product sales for the quarter declined 24.6 percent to $3,456,060 compared to $4,580,443 for the comparable quarter last year. Mechanical products segment revenue increased $68,029 or 6.1 percent to $1,184,868 compared to $1,116,839 for the comparable quarter last year due to increased shipments of wheelchair motors. Electronic products segment sales revenue for the quarter declined by $1,017,414 or 31.2 percent to $2,248,703 from $3,266,117 for the second quarter last year due to a permanent reduction in the level of production for Tyco International to approximately one-third of the pre-reduction volumes during the quarter and reduced order flow from substantially all customers due to weak economic conditions. The potentially adverse effect of the reduction in revenue from Tyco International on the Company's results of operations was partially mitigated by negotiated price increases on the remaining business with this customer. Technology product sales declined to $22,489 for the quarter ended September 30, 2002 compared to $197,487 for the prior year quarter due to reduced demand for propulsion systems.

Consolidated gross profit margins for the first quarter decreased to 3.2 percent compared to 8.6 percent for the comparable quarter last year. Gross profit margin on contract services decreased to 10.3 percent from 30.8 percent for the quarters ended September 30, 2002 and 2001, respectively. The decline in gross profit margin on contract services is attributable to changes in estimated completion costs on development programs, which were recognized during the quarter and reduced overhead absorption associated with the relocation of engineering operations. Gross profit margins on product sales during the first quarter declined to 1.9 percent compared to gross profit margins of 5.5 percent for the comparable quarter last year. The decrease in margins on product sales is primarily attributable to decreased overhead absorption due to declining revenue levels at the Company's electronic products segment.

General and administrative expense for the quarter ended September 30, 2002 rose to $1,116,886 compared to $1,113,293 for the comparable quarter last year. The increase is primarily attributable to costs associated with the relocation of the Company's headquarters and engineering operations from Golden, Colorado to Frederick, Colorado, which was partially offset by lower general and administrative expense in the Company's electronic products and mechanical products segments.

Interest income declined to $7,342 for the second quarter compared to $19,516 for the prior year second quarter. The decrease is attributable to lower levels of invested cash and lower interest rates on invested funds during the quarter versus the comparable quarter last year.

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Interest expense decreased by $79,041 to $11,670 for the second quarter versus the comparable quarter last year. The decrease is due to the repayment of equipment term loans and line-of-credit borrowings during the first quarter of the current fiscal year.

Gain on sale of real estate was $150,435 for the quarter ended September 30, 2002 compared to $22,439 for the comparable quarter last year. The gain is attributable to the recognition of deferred gain arising from the sale of real estate on a pro-rata basis over the remaining term of the Company's lease on its Golden facility which expired in September 2002. The increase in the gain recognized during the quarter ended September 30, 2002 resulted from a reduction in term of the Company's lease for purposes of determining the amount of gain recognition.

Continuing operations for the six months ended September 30, 2002 resulted in a loss of $1,300,704 or $0.07 per common share on total revenue of $8,845,563 compared to a loss from continuing operations of $955,460 or $0.06 per common share on total revenue of $11,731,281 for the comparable period last year. EBITDA from continuing operations for the first half was $(577,234) or $(0.03) per common share compared to $11,861 or nil per common share for the comparable quarter last year. Net loss for the six months ended September 30, 2002 was $1,485,675 or $0.08 per common share compared to a net loss of $3,276,560 or $0.19 per common share for the same period last year. EBITDA for the first half was $(762,205) or $(0.04) per common share compared to EBITDA of $(1,763,863) or $(0.10) per common share for the comparable period last year

Revenue from contract services for the six months ended September 30, 2002 rose $70,767 or 5.4 percent to $1,388,042 compared to $1,317,275 for the comparable period last year. The increase in contract services revenue is attributable to improved demand for product development services.

Product sales for the first half declined 28.4 percent to $7,457,521 compared to $10,414,006 for the comparable period last year. Mechanical products segment revenue for the six-month period increased $230,456 or 11.3 percent to $2,279,831 compared to $2,049,375 for the comparable period last year due to increased shipments of wheelchair motors. Electronic products segment revenue for the first half declined by $2,807,327 or 35.6 percent to $5,080,532 from $7,887,859 for the same period last year due to a permanent reduction in the level of production for Tyco International to approximately one-third of the pre-reduction volumes during the second quarter and reduced order flow from substantially all customers due to weak economic conditions. The potentially adverse effect of the reduction in revenue from Tyco International on the Company's results of operations was partially mitigated by negotiated price increases on the remaining business with this customer. Technology product sales declined to $97,158 for the six months ended September 30, 2002 compared to $476,772 for the same period last year. The decrease is attributable to higher than normal deliveries of propulsion systems to a defense contractor during the first half last year.

Consolidated gross profit margins for the first half decreased to 5.7 percent compared to 11.7 percent for the comparable period last year. Gross profit margin on contract services decreased to 12.7 percent from 27.0 percent for the six months ended September 30, 2002 and 2001, respectively. The decline in gross profit margin on contract services is attributable to changes in estimated completion costs on development programs, which were recognized during the period and reduced overhead absorption associated with the relocation of engineering operations during the second quarter. Gross profit margins on product sales during the first half declined to 4.4 percent compared to gross profit margins of 9.7 percent for the comparable period last year. The decrease in margins on product sales is primarily attributable to decreased overhead absorption due to declining revenue levels at the Company's electronic products segment.

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General and administrative expense for the six months ended September 30, 2002 decreased to $1,992,719 compared to $2,016,363 for the comparable period last year. The decrease is primarily attributable to lower general and administrative expense in the Company's electronic products and mechanical products segments.

Interest income declined to $15,492 for the first half compared to $44,297 for the comparable prior year period. The decrease is attributable to lower levels of invested cash and lower interest rates on invested funds during the six-month period versus the comparable period last year.

Interest expense decreased by $166,625 to $30,903 for the first half versus the comparable six-month period last year. The decrease is due to the repayment of equipment term loans and line-of-credit borrowings during the first quarter of the current fiscal year.

Gain on sale of real estate was $311,505 for the six months ended September 30, 2002 compared to $51,375 for the comparable period last year. The gain is attributable to the recognition of deferred gain arising from the sale of real estate on a pro-rata basis over the remaining term of the Company's lease on its Golden facility which expired in September 2002. The increase in the gain recognized during the six months ended September 30, 2002 resulted from a reduction in term of the Company's lease for purposes of determining the amount of gain recognition.

Results of Discontinued Operations

Loss from operations of discontinued gear division for the quarter and six months ended September 30, 2002 was zero or nil per common share and $184,971 or $0.01 per common share, respectively, compared to a loss for the comparable quarter and six months last year of $2,003,049 or $0.11 per common share and $2,321,100 or $0.13 per common share, respectively. During the first quarter of this fiscal year the Company completed the divestiture of its discontinued gearing operations.

Liquidity and Capital Resources

The Company's cash balances and liquidity throughout the six months ended September 30, 2002 were adequate to meet operating needs, although liquidity was adversely impacted by a general tightening of bank credit discussed further below. At September 30, 2002, the Company had working capital, the excess of current assets over current liabilities, of $4,990,887 compared to $3,184,735 at March 31, 2002. Working capital increased by $1,806,152, primarily due to the proceeds from the Company's secondary offering generating cash, net of offering costs, of $4,431,254. Proceeds from the stock offering were partially applied to the repayment of term debt and revolving line-of-credit borrowings.

Net cash provided by operating activities of continuing operations was $615,047 for the six months ended September 30, 2002 versus net cash provided by operating activities of $1,643,097 for the comparable period last year. The decline in cash provided by operating activities is primarily attributable to the increased losses from continuing operations and reduced working capital generated from accounts receivables and billings in excess of costs and estimated earnings on uncompleted contracts during the period versus the comparable period last year.

Cash used by investing activities of continuing operations for the six months ended September 30, 2002 was $1,229,728 compared to $445,380 for the comparable period last year. The increase is primarily attributable to expenditures arising from the expansion of the Company's Frederick, Colorado facility, partially offset by lower levels of capital expenditures for machinery and equipment during the period versus the comparable period last year.

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Cash flows provided by financing activities of continuing operations was $1,035,937 for the six months ended September 30, 2002 versus cash flow used by financing activities of $445,891 for the comparable period last year. The increase is primarily attributable to completion of a secondary offering during the first quarter of the fiscal year that resulted in net cash proceeds of $4,431,254, offset by repayments of debt and revolving line-of-credit of $3,403,957.

During the six months ended September 30, 2002, the Company's liquidity was adversely impacted by a general tightening of credit in the banking industry, which was partially offset by a secondary offering of common stock. As a result of these events the Company has experienced a substantial decline in its liquidity during the six month period reflected by the application of approximately $3.2 million of cash to the repayment of these debt obligations and the elimination of then available additional borrowing availability of approximately $1.2 million. At September 30, 2002, cash and cash equivalents were $2.1 million. The Company expects to manage its operations and working capital requirements to minimize the future level of operating losses and working capital usage, however, we cannot provide assurance that we will be successful in achieving these objectives. In addition, at September 30, 2002 the Company had substantially completed an approximately $1 million expansion of its Frederick, Colorado facility and relocated its corporate headquarters and product engineering personnel from Golden, Colorado. At September 30, 2002, the Company had funded from its cash resources approximately $.4 million of the facility expansion costs. The Company has received a commitment from a commercial bank to provide long-term financing of approximately $1.25 million, of which approximately $.5 million will be used to payoff the existing mortgage loan on the facility and the remaining $.75 million will be available to fund the facility expansion. The financing commitment is subject to due diligence by the lender and certain other conditions. Although the Company believes that financing for the facility expansion will be completed in accordance with the lending commitment, we cannot assure you that such funding will be completed. If we are not successful in completing the financing for this project, our liquidity and cash reserves will be adversely impacted. In addition, some of the Company's significant customers have experienced downturns in their businesses as a result of deteriorating general economic conditions and other factors. To the extent these customers experience financial difficulties sufficient to impair their ability to honor their financial commitments or further reduce their orders for goods and services, the Company could experience a material adverse change in its financial condition, results of operations and liquidity.

The Company is actively considering possible future acquisitions at any given time and from time to time enters into non-binding letters of intent with respect to possible acquisitions. The Company expects to continue its strategy of growing its business through expanding its product line of permanent magnet motors and controllers, securing production orders from new and existing customers for electric assemblies, designing and introducing new products for manufacture, seeking strategic alliances to accelerate the commercialization of its technology and pursuing synergistic and accretive acquisitions. The Company expects to finance its operations and future growth from existing cash resources, cash flow from operations, if any, and through the issuance of equity or debt securities or a combination thereof. There can, however, be no assurance that existing cash resources will be sufficient to fund these objectives or that financing or equity capital will be available on terms acceptable to the Company. In the event existing cash resources are not sufficient to fund operations as currently configured, or financing or equity capital to fund future growth is not available, the Company will modify its strategy to align its operations with its then available financial resources.

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Critical Accounting Policies

The Company's trade accounts receivable are subject to credit risks associated with the financial condition of its customers and their liquidity. The Company evaluates all customers periodically to assess their financial condition and liquidity and sets appropriate credit limits based on this analysis. As a result, the collectibility of accounts receivable may change due to changing general economic conditions and factors associated with each customer's particular business. The Company has established a reserve for potentially uncollectible trade accounts receivable which is management's best estimate of the amount of trade accounts receivable that it believes may become uncollectible at a future date due to the foregoing factors. At September 30, 2002 the Company has recorded reserves for uncollectible trade accounts receivable of $33,054 based on its current assessment of potentially uncollectible accounts. It is possible, that future events or changes in circumstances could cause the realizable value of the Company's trade accounts receivable to decline materially, resulting in additional material losses.

The Company maintains raw material inventories of electronic components, motor parts and other materials to meet its expected manufacturing needs for proprietary products and for products manufactured to the design specifications of its customers. Some of these components may become obsolete, unusable due to design changes, or become unusable in the manufacturing activities of the Company due to customers inability to honor their obligation to purchase from the Company. Accordingly, the Company periodically assesses its raw material inventory for potential impairment of value based on then available information, expectations and estimates and establishes impairment reserves for estimated declines in the realizable value of its inventories. The actual realizable value of the Company's inventories may differ materially from these estimates based on future occurrences and any resulting change in the Company's estimates. At September 30, 2002, the Company has recorded inventory reserves of $550,994 based on its current assessment of potentially obsolete inventory. It is reasonably possible, that future events or changes in circumstances could cause the realizable value of the Company's inventories to decline materially, resulting in additional material impairment losses.

Percentage of Completion Revenue Recognition on Long-term Contracts: Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts

The Company recognizes revenue on the development projects funded by its customers using the percentage-of-completion method. Under this method, contract services revenue is based on the percentage that costs incurred to date bear to management's best estimate of the total costs to be incurred to complete the project at the end of each reporting period. Many of these contracts involve the application of the Company's technology to customers' products and other applications to demanding specifications. Accordingly, management's best estimates could be adversely impacted by unexpected technical difficulties requiring additional analysis and redesign, failure of electronic components to operate in accordance with manufacturers published performance specifications, unexpected prototype failures requiring the purchase of additional parts and a variety of other factors that could cause unforeseen delays and additional costs. Accordingly, it is reasonably possible that total costs to be incurred on any of the projects in process at September 30, 2002 could be materially different from management's estimates, and any modification of management's estimate of total project costs to be incurred could result in material changes in the profitability of affected projects or result in material losses.

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New Accounting Pronouncements

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, and Amendment of FASB Statement No. 13, and Technical Corrections. This Statement, among other things, amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Certain provisions of SFAS No.145 are effective for fiscal years beginning after May 15, 2002, and other provisions related to specific transactions are effective for those transactions occurring after May 15, 2002. The Company expects that the adoption of SFAS No. 145 will not have a material impact on its financial condition or results of operations.

In July 2002, the Financial Accounting Standards Board also issued SFAS No.146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No.146 applies to costs associated with (1) an exit activity that does not involve an entity newly acquired in a business combination or (2) a disposal activity within the scope of FASB Statement No.144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Those costs include (a) certain termination benefits (so-called one-time termination benefits), (b) costs to terminate a contract that is not a capital lease, and (c) other associated costs including costs to consolidate facilities or relocate employees. The Statement is effective for exit or disposal activities that are initiated after December 31, 2002, however earlier application is encouraged. Management has not yet assessed the impact of this statement.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. The Company does not use financial instruments to any degree to manage these risks and does not hold or issue financial instruments for trading purposes. Substantially all of the Company's product sales and related receivables are payable in U.S. dollars. The Company is subject to interest rate risk on its debt obligations. The long-term debt obligation has fixed interest rates. Interest rates on these instruments approximate current market rates as of September 30, 2002.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In response to recent legislation and resulting regulatory rulemaking, the Company established a disclosure control policy which is designed to ensure that information required to be disclosed in its filings with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and communicated to the Chief Executive Officer and Chief Financial Officer, as required, to allow for the filing of required reports within the time periods specified by the Securities and Exchange Commission. Pursuant to this policy, the Company has established a Disclosure Control Committee to review potentially reportable items or events and make recommendations to the Chief Executive Officer and Chief Financial Officer as to the appropriate disposition.

The Company's Chief Executive Officer and Chief Financial Officer have, within the 90-day period preceding the filing of this report, evaluated the Company's disclosure controls and procedures and believe them to be operating effectively in alerting them on a timely basis to reportable items or events required to be included in the Company's periodic filings with the Securities and Exchange Commission.

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Changes in Internal Control

Internal control is a process, effected by the Company's board of directors, management and other personnel, designed to provide management with reasonable, but not absolute, assurance regarding the achievement of objectives in the following categories: 1) reliability of financial reporting; 2) effectiveness and efficiency of operations; and 3) compliance with applicable laws and regulations. A system of internal controls will generally have the objective of ensuring that; 1) transactions are executed in accordance with management's general or specific authorization; 2) transactions are properly recorded to permit the preparation of financial statements in accordance with generally accepted accounting principles and other regulatory requirements applicable to such statements and maintain accountability for assets; 3) access to assets is permitted only in accordance with management's authorization; and 4) recorded assets are compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. In addition, the preparation of financial statements requires the use of estimates and judgments which are subjective and relate largely to future conditions and events. Accordingly, internal controls relating to estimates and judgments are limited to procedures designed to provide reasonable assurance that individuals at appropriate levels in the organization review and consider sufficient, reliable information in making estimates and judgments.

The Company's Chief Executive Officer and Chief Financial Officer supervised an evaluation of the design and operation of the Company's system of internal controls within the 30 days preceding the date of filing of this report. No significant deficiencies were noted which could affect our ability to record, process, summarize and report financial data. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation.

PART II-OTHER INFORMATION

Item 1. Legal Proceedings

Litigation

The Company has filed a lawsuit against a former customer of its electronics segment seeking payment for inventory purchased on behalf of the customer. The Company is seeking damages of approximately $360,000 plus attorneys' fees and other costs. The customer has filed various counterclaims, including breach of contract. The Company believes that it has substantial and meritorious defenses against the counterclaims and intends to vigorously contest them. It is not possible to predict or determine the outcome of this legal action, or to provide an estimate of potential losses, if any, at this time, however, should the court award damages on the counterclaim it could have a material adverse effect on the Company's financial position, results of operations and liquidity.

Item 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of the Shareholders of UQM Technologies, Inc. was held on August 21,2002. The following is a summary of the matters submitted to a vote of security holders and the results of the voting thereon:

Proposal 1:          Election of Directors       

Proposal 2:      Proposal to ratify the appointment of KPMG LLP as the independent auditors of the Company.

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Proposal 3:      Proposal to ratify the adoption of the 2002 Equity Incentive Plan.

Outstanding votable shares: 18,842,888

Total voted shares represented in person and by proxy: 16,578,531

Item 5. Other Information

The following risk factors are applicable to our business:

We have incurred significant operating losses as shown in the following tables:

We have had accumulated deficits as follows:

September 30, 2002   $ 45,243,053

March 31, 2002       $ 43,757,378

In the future we plan to make additional investments in product development and commercialization, which is likely to cause us to remain unprofitable.

Our electronic products segment manufactures products to customers' design specifications as a contract manufacturer. We purchase inventory on behalf of customers for which the customer is financially obligated in the event his production order with us is cancelled or otherwise not fulfilled. Some of our customers have experienced downturns in their businesses as a result of deteriorating general economic conditions and other factors. In addition, our electronics manufacturing contracts generally do not include minimum purchase requirements and during economic downturns such as we have experienced in the current fiscal year, some of our customers have reduced and may continue to reduce their orders for our services and our electronics manufacturing revenue has declined and may continue to decline. If customers were to experience financial difficulties, reduce their orders, not honor financial obligations for the inventory we hold for them, or not pay the accounts receivable due from them we could experience a material adverse change in our financial condition, results of operations and liquidity.

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A significant portion of our total revenue has historically been concentrated among three large customers, Tyco International, Flight Safety International and Invacare Corporation. Revenue from Tyco International for the six months ended September 30, 2002 declined substantially to $2,191,458 from the comparable prior year period amount of $2,807,415. A significant reduction in orders from either of the two remaining significant customers could cause us to experience a material adverse change in our financial condition, results of operations and liquidity.

Most of our sales are to companies in the electronics industry, which is subject to rapid technological change and product obsolescence. If our customers are unable to create products that keep pace with the changing technological environment, our customers' products could become obsolete and the demand for our manufacturing services could decline significantly, causing a material adverse change in our financial condition, results of operations and liquidity.

We had a net loss of $1,485,675 during the six month period ended September 30, 2002. Cash balances stood at $2,110,010 at September 30, 2002.  If our losses continue at this level, they could consume some or all of our current cash balances. During several fiscal years prior to fiscal year 2002, we experienced substantial growth in our revenue, which increased our working capital requirements. Should future growth resume at a similar rate or an accelerated rate, the working capital requirements to fund our operations and pursue acquisition opportunities may consume our existing cash balances.

Some of our technology has been developed under government funding by the United States. In some cases, government agencies in the United States can require us to obtain or produce components for our systems from sources located in the United States rather than foreign countries. Our contracts with government agencies are also subject to the risk of termination at the convenience of the contracting agency and in some cases grant "march-in" rights to the government. March-in rights are the right of the United States government or the applicable government agency, under limited circumstances, to exercise a non-exclusive, royalty-free, irrevocable worldwide license to any technology developed under contracts funded by the government to facilitate commercialization of technology developed with government funding if we fail to commercialize the developed technology. The implementation of restrictions on our sourcing of components or the exercise of march-in rights by the government or an agency of the government could restrict our ability to commercialize our technology.

In developing electric motors for use in vehicles, wheelchairs and other applications, we face competition from very large domestic and international companies, including the world's largest automobile manufacturers. These companies have far greater resources to apply to research and development efforts than we have, and they may independently develop motors that are technologically more advanced than ours.  

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Our ability to compete effectively against other companies in our industry will depend, in part, on our ability to protect our proprietary technology. Although we have attempted to safeguard and maintain our proprietary rights, we do not know whether we have been or will be successful in doing so. We have historically pursued patent protection in a limited number of foreign countries where we believe significant markets for our products exist or where potentially significant competitors have operations. It is possible that a substantial market could develop in a country where we have not received patent protection and under such circumstances our proprietary products would not be afforded legal protection in these markets. Further, our competitors may independently develop or patent technologies that are substantially equivalent or superior to ours. We cannot assure you that additional patents will be issued to us or, if they are issued, as to the scope of their protection. Patents granted may not provide meaningful protection from competitors. Even if a competitor's products were to infringe patents owned by us, it would be costly for us to pursue our rights in an enforcement action, it would divert funds and resources which otherwise could be used in our operations and we cannot assure you that we would be successful in enforcing our intellectual property rights. In addition, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country where we may operate or sell our products in the future.

If third parties assert technology infringement claims against us, the defense of the claims could involve significant legal costs and require our management to divert time and attention from our business operations. If we are unsuccessful in defending any claims of infringement, we may be forced to obtain licenses or to pay royalties to continue to use our technology. We may not be able to obtain any necessary licenses on commercially reasonable terms or at all. If we fail to obtain necessary licenses or other rights, or if these licenses are costly, our results of operations may suffer either from reductions in revenues through our inability to serve customers or from increases in costs to license third-party technologies.

Because some of our motors are designed to be used in vehicles and wheelchairs, and because vehicle and wheelchair accidents can cause injury to persons and property, we are subject to a risk of claims for product liability. We carry product liability insurance of $1 million covering all of our products. If we were to experience a large insured loss, it might exceed our coverage limits, or our insurance carriers could decline to further cover us or raise our insurance rates to unacceptable levels, any of which could impair our financial position and results of operations.

(a) Exhibits

99.1	Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to   section 906 of the Sarbanes-Oxley Act of 2002.

 

(b) Reports on Form 8-K

Report regarding operating results for the quarter ended June 30, 2002 filed July 24, 2002.

 

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Table of Contents

SIGNATURES

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.

 UQM Technologies, Inc.

 Registrant

 

Date: October 29, 2002         By: "Donald A. French"

 Donald A. French

 Treasurer

 (Principal Financial and

 Accounting Officer)

31

I, William G. Rankin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of UQM Technologies, Inc.

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

1. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
   
   
2. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
   
   
3. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

1. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditor's any material weaknesses in internal control; and
   
   
2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
   

Date: October 29, 2002 

/s/ William G. Rankin

Chairman, President and

Chief Executive Officer

I, Donald A. French, certify that:

1. I have reviewed this quarterly report on Form 10-Q of UQM Technologies, Inc.

2. Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

1. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
2. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
3. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

1. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditor's any material weaknesses in internal control; and
2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: October 29, 2002 

/s/ Donald A. French

Treasurer, Secretary and

Chief Financial Officer