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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For Annual and Transition Reports
Pursuant to Sections 13 or 15(d) of the
Securities and Exchange Act of 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
Commission File No. 0-25184
ENOVA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California 95-3056150
(State or other jurisdiction of (I.R.S.Employer Identification Number)
incorporation or organization)
19850 South Magellan Drive, Torrance, California 90502
(Address of principal executive offices, including zip code)
(310) 527-2800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value NASDAQ OTC Bulletin Board
(Title of class) (Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act. Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 28, 2002 was $18,237,995. For
purposes of this calculation only, (i) shares of Series A and Series B Preferred
Stock have been included in the calculation, (ii) shares of Common Stock and
Series A Preferred Stock are deemed to have a market value of $0.135 per share,
and the Series B Preferred Stock is deemed to have a market value of $0.27 per
share, based on the average of the bid and ask prices of the Common Stock on
June 28, 2002 (the last business day of the registrant's more recently completed
second quarter), and (iii) each of the executive officers, directors and persons
holding 5% or more of the outstanding Common Stock (including Series A and B
Preferred Stock on an as-converted basis) is deemed to be an affiliate.
The number of shares of Common Stock outstanding as of March 25, 2003 was
345,443,820.
ENOVA SYSTEMS, INC.
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1. Business...................................................................................3
Item 2. Properties................................................................................11
Item 3. Legal Proceedings.........................................................................12
Item 4. Submission of Matters to a Vote of Security Holders.......................................12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.....................14
Item 6. Selected Financial Data...................................................................15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.....16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................23
Item 8. Financial Statements and Supplementary Data...............................................23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......23
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................24
Item 11. Executive Compensation...................................................................26
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters......................................................................29
Item 13. Certain Relationships and Related Transactions...........................................31
Item 14. Controls and Procedures..................................................................31
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.........................32
SIGNATURES.........................................................................................35
2
PART I
The matters addressed in this report on Form 10-K, with the exception of
the historical information presented, may contain certain forward-looking
statements involving risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under the heading "Certain
Factors That May Affect Future Results" in the Management's Discussion and
Analysis section and elsewhere in this report.
Item 1. Business
General
In July 2000, we changed our name to Enova Systems, Inc. Our Company,
previously known as U.S. Electricar, Inc., a California corporation (the
"Company"), was incorporated on July 30, 1976.
Enova believes it is a leader in the development and production of
commercial digital power management systems. Power management systems control
and monitor electric power in an automotive or commercial application such as an
automobile or a stand-alone power generator. Drive systems are comprised of an
electric motor, an electronics control unit and a gear unit which power an
electric vehicle. Hybrid systems, which are similar to pure electric drive
systems, contain an internal combustion engine in addition to the electric
motor, eliminating external recharging of the battery system. A fuel cell based
system is similar to a hybrid system, except that instead of an internal
combustion engine, a fuel cell is utilized as the power source. A fuel cell is a
system which combines hydrogen and oxygen in a chemical process to produce
electricity. Stationary power systems utilize similar components to those which
are in a mobile drive system in addition to other elements. These stationary
systems are effective as power-assist or back-up systems, alternative power, for
residential, commercial and industrial applications.
Enova develops and produces advanced software, firmware and hardware for
applications in these alternative power markets. Our focus is digital power
conversion, power management, and system integration, for two broad market
applications - vehicle power generation and stationary power generation.
Specifically, we develop; design and produce drive systems and related
components for electric, hybrid-electric, fuel cell and microturbine-powered
vehicles. We also develop, design and produce power management and power
conversion components for stationary distributed power generation systems. These
stationary applications can employ fuel cells, microturbines, or advanced
batteries for power storage and generation. Additionally, we perform research
and development to augment and support others' and our own related product
development efforts.
Our product development strategy is to design and introduce to market
successively advanced products, each based on our core technical competencies.
In each of our product / market segments, we provide products and services to
leverage our core competencies in digital power management, power conversion and
system integration. We believe that the underlying technical requirements shared
among the market segments will allow us to more quickly transition from one
emerging market to the next, with the goal of capturing early market share.
During the year ended December 31, 2002, we continued to develop and
produce electric and hybrid electric drive systems and components for Ford Motor
Company (Ford), Hyundai Motor Company (HMC) and several domestic and
international vehicle and bus manufacturers, including Advanced Vehicle Systems
(AVS) of Tennessee, Eco Power Technology of Italy and Wright Bus of the United
Kingdom. Our various electric and hybrid-electric drive systems, power
management and power conversion systems are being used in applications including
Class 8 trucks, monorail systems, transit buses and industrial vehicles. Enova
has furthered its development and production of systems for both mobile and
stationary fuel cell powered systems with major companies such as Ford,
ChevronTexaco and UTC Fuel Cells, a division of United Technologies. We also are
continuing on our current research and development programs with ChevronTexaco,
HMC and the U.S. Department of Transportation (DOT) as well as developing new
programs with Hyundai Heavy Industries (HHI), the federal government and other
private sector companies. Finally, we entered into a joint venture agreement
with HHI, in early 2003, subject to certain final documentation, to create a
separate research and development corporation, domiciled in the U.S., which will
develop new technologies for mobile and stationary applications for both
developing markets for Enova and HHI.
Ford Motor Company
The High Voltage Energy Converter (HVEC) development program with Ford
Motor Company for their fuel cell vehicle continues to advance on schedule. This
converter is a key component in Ford's Focus Fuel Cell Vehicle, which was
featured at the New York International Auto Show in February 2002. It converts
high voltage power from the fuel cell into a lower voltage for use by the drive
system and electronic accessories. The system is performing to our expectations
and is entering
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the advanced testing and final prototype phase prior to production. These
prototypes are being delivered to Ford in the first quarter of 2003. We
anticipate receiving an order for limited production in mid 2003, however, we
can give no assurance at this time that such sales will occur. For the year
ended December 31, 2002, we billed approximately $536,000 from this Ford
program.
Ballard Power Systems
Our development and production program with Ballard Power Systems for low
voltage 30kW electric drive system components for use in Ford's Global Th!nk
City was terminated by Ford and Th!nk Nordic in early 2003. Ford Motor Company
announced that they have sold the program and its assets to Kamkorp, Ltd, a
United Kingdom company. At this time, we do not anticipate working with Kamkorp
for the development or manufacture of components for this program. Currently,
approximately $450,000 of current inventory is materials purchased for the
initial production of the drive system component. Additionally, there are other
additional material, tooling and engineering costs that may become due to our
suppliers as a result of the termination of this program. These additional costs
are approximately $500,000, of which $200,000 were expensed in 2002. Under the
terms of our agreement with Ballard and Ford, we believe full reimbursement for
these costs is warranted at termination. Ford and Ballard have commenced making
payments against these claims in 2003 of approximately $140,000; however no
final determination on the total reimbursement has been made. During 2002, we
had revenues of $1,008,000 from Ballard.
Hyundai Motor Company Programs
Hyundai procured several of our High Energy Converter modules for use in
their hybrid fuel cell programs during 2002. These systems are also being
analyzed for application in their mobile fuel cell programs. We have also
delivered advanced control components for two other Hyundai Motor Company fuel
cell programs which are currently in the test and evaluation phase.
In regards to the parallel hybrid program, Hyundai has completed its
evaluation of the prototype system and is reviewing other programs to which the
system could be applicable.
Development programs with Hyundai generated approximately $631,000 in sales
for the twelve months ended December 31, 2002.
Light-Duty Drive Systems
We also produce and market our proprietary Panther 90kW drive systems. This
90kW controller, motor and gear unit is utilized in light duty vehicles such as
midsize automobiles and delivery vehicles. As part of our corporate strategy to
outsource manufacturing, Hyundai Heavy Industries produces the Panther 90kW
drive system for Enova.
Advanced Vehicle Systems (AVS), a leading U.S. manufacturer of electric and
hybrid-electric buses, is purchasing our Panther 90kW drive system, in several
configurations, for their 22-foot bus for several New York City and other
customers. Enova has modified the Panther 90kW to be used in a dual wheel motor
configuration, expanding its potential market penetration with AVS and other
vehicle manufacturers. These drive systems are performing above specifications
and have been introduced in several markets throughout the U.S. Our Panther 90kW
in its dual mode configuration is capable of providing a mid-range heavy-duty
solution at 180kW of peak power for our current and prospective customers.
The City of Honolulu Hawaii has contracted with Enova to upgrade several
S-10 trucks in its electric vehicle fleet. Initially, we will upgrade 3 trucks
to our Panther 90kW drive system. This program is expected to generate
approximately $100,000 for Enova and will be completed by mid 2003.
We have also received a purchase order for Panther 90kW drive systems for
delivery in 2002 and 2003 from Phoenix Motor Cars of California, an integrator
of specialty vehicles. We began initial delivery of these systems in 2002;
however, we can give no assurance at this time that any further sales for 2003
will occur.
We continue to cross-sell our systems to new and current customers in the
light and medium duty vehicle markets both domestically and globally.
Heavy-Duty Drive Systems
A major focus of Enova's is the heavy-duty vehicle, buses and trucks, for
urban operators. Our PantherTM 120kW and PantherTM 240kW drive systems are in
production and operating above performance expectations in global markets. Sales
of our PantherTM 120kW and 240kW drive systems continue to provide increased
revenues for our company. We have entered into supplier agreements with OEMs in
Europe and Japan, as well as domestically, for sales of our heavy-duty drive
systems. Hyundai
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Heavy Industries has been selected as our outsource manufacturer for the Panther
120kW controller, as well as the manufacturer of the motor and controller for
our Panther 240kW drive systems. This is a specific strategy of Enova's to
minimize capital outlays and maximize efficiencies by utilizing proven
manufacturing partners.
Eco Power Technology of Italy purchased and received 27 Panther 120kW
electric and hybrid electric drive systems in 2002. The hybrid electric drive
systems include the Capstone 30kW microturbine as their power source. Eco Power
is one of the largest integrators of medium size transit buses for the European
shuttle bus market, with key customers in Turin and Genoa, Italy. We anticipate
additional orders for both electric and hybrid-electric 120kW drive systems
during 2003. At this time, however, there are no assurances that such additional
orders will be forthcoming. Total sales for the year ended December 31, 2002
from Eco Power were $1,042,000.
Wrights Environment, a division of Wrights Bus, one of the largest
low-floor bus manufacturers in the United Kingdom, has integrated into one of
its buses our hybrid electric PantherTM 120kW drive system, which utilizes a
30kW Capstone microturbine as its power source. The bus is currently in field
service and is performing to specifications. Wrights has integrated our hybrid
electric 120kW system into a second midsize bus which is currently completing
its evaluation phase. Further, we are in negotiations with Wrights to purchase
our 240kW drive system. Although we anticipate additional orders for both
electric and hybrid-electric 120kW drive systems during 2003, at this time there
are no assurances that such additional orders will be forthcoming.
Tomoe Electro-Mechanical Engineering and Manufacturing, Inc. of Japan has
purchased several of our 120kW drive systems for integration into their
industrial vehicle platforms. The vehicles are performing above specification
and Tomoe is reviewing additional applications for our drive system
configurations. Although we anticipate that they will purchase additional
systems during 2003, there are no assurances that any such purchases will occur.
The development of a utility vehicle for Southern California Edison, in
partnership with the South Coast Air Quality Management District, utilizing our
120kW drive system and a Capstone Turbine Corporation 30kW microturbine
continues to progress. Our system is intended to power the vehicle as well as
the auxiliary utility accessories eliminating the need for a separate diesel
generator normally trailered behind the vehicle. The systems are integrated into
the vehicle. The system development has entered an evaluation phase.
In the high performance heavy-duty drive system area, Enova's proprietary
240kW drive system has been successfully integrated into a heavy-duty
application. Its performance is exceeding our expectations. We are in production
of these systems. Our initial delivery, to AVS, of six electric 240kW systems
for their 38 foot buses has been completed. We are anticipating additional
orders in 2003 although no such orders are guaranteed. AVS has also integrated
one of our 240kW systems into a Class 8 urban delivery truck which was displayed
at the Electric Drive Transportation Association Symposium in Hollywood Florida
in December 2002. The truck is currently is field service evaluation and, if
successful, may provide additional sales for the 240kW drive system. This 240kW
drive system is capable of providing 3,000 ft-lbs of torque at the drive shaft.
Product sales to AVS for the year ended December 31, 2002 total approximately
$370,000.
Additionally, we are in discussions with other bus manufacturers,
industrial, commercial and military vehicle manufacturers regarding the purchase
of our heavy-duty, high performance, 240kW drive systems in 2003. There are no
assurances, however that these discussions will result in any sales of the
Panther 240kW or 120kW drive systems.
Research and Development Programs
We completed a majority of our contracts with the Department of
Transportation and the State of Hawaii for electric and hybrid electric vehicle
applications in 2002. Programs, including the Wiki-Wiki Tram, the 120kW Trolley,
the HMC Santa Fe vehicle upgrade, the first Hickam Bus 120kW drive system
upgrade and the 240kW drive system development, were finalized and submitted in
2002. Each of these programs has been invaluable to Enova in terms of knowledge
attained and products developed.
Enova and the State of Hawaii continue to seek out and contract with the
Federal government for new and ground-breaking projects in the alternative fuel
power industry.
Due to the success of our first Hickam bus program, the U.S. Air Force and
the State of Hawaii have contracted with Enova to integrate a fuel cell powered
hybrid drive system into a second 30-foot bus for the Hickman Air Force base.
Our Hawaii team is integrating the Panther 120kW drive system with the fuel cell
components to be added in 2003.
In conjunction with the State of Hawaii, the all-electric Hyundai Santa Fe
SUV demonstration project has completed its second year of testing and
evaluation. The vehicles are meeting specifications with the results of the
project, thus far, meeting the
5
expectations of the State of Hawaii, Hyundai and Enova. All three partners are
discussing extending the program for an additional two years, however there can
be no assurance that such an extension will be granted.
All of these programs are funded in conjunction with the Hawaii Electric
Vehicle Development Project, the U.S. DOT and the State of Hawaii. Development
programs with these agencies have generated revenues of $349,000 for the year
ended December 31, 2002.
We intend to establish new development programs with the Hawaii High
Technology Development Corporation in mobile and marine applications as well as
other state and federal government agencies as funding becomes available.
Stationary Power Applications
Enova continues to attract new partners and customers from both fuel cell
manufacturers and petroleum companies. It is our belief that utilizing our power
management systems for stationary applications for fuel cells will open new
markets for our Company. There are no assurances however that we will
successfully develop such applications or that any such applications will find
acceptance in the marketplace.
In that regard, we recently entered into a development contract with Texaco
Energy Systems, Inc., a subsidiary of ChevronTexaco Technology Ventures (CTTV),
to design a process controller for their fuel reformer for a stationary fuel
cell application. Initial review and analysis has commenced with the majority of
the development to be completed in 2003. Anticipated initial revenue from this
specific contract is not anticipated to exceed $500,000 during 2003. Due to the
milestones met and technologies developed thus far in the initial development on
this contract, we are in discussions with CTTV regarding developing other
components for this application in the areas of power management and power
processing; however, we can make no assurances that these discussions will lead
to future contracts at this time.
Our Fuel Cell Care (FCU) units are being delivered to UTC Fuel Cells, a
division of United Technologies Corp., for use in their stationary fuel cell
systems. To date, UTC Fuel Cells and Hamilton Sundstrand, an aerospace division
of United Technologies, have ordered approximately 30 fuel cell care units.
The Hyundai companies have also expressed interest in working with us on
the development of advanced fuel cell management technologies.
We believe the stationary power market will play a key role in our future.
We continue to pursue alliances with leading manufacturers in this area. There
are, however, no assurances that this market will develop as anticipated or that
such alliances will occur.
Environmental Initiatives and Legislation
Because vehicles powered by internal combustion engines cause pollution,
there has been significant public pressure in Europe and Asia, and enacted or
pending legislation in the United States at the federal level and in certain
states, to promote or mandate the use of vehicles with no tailpipe emissions
("zero emission vehicles") or reduced tailpipe emissions ("low emission
vehicles"). Legislation requiring or promoting zero or low emission vehicles is
necessary to create a significant market for electric vehicles. The California
Air Resources Board (CARB) is continually modifying its limits for zero emission
and low emission vehicles. Recently, CARB proposed additional amendments to the
regulation order. Furthermore, several car manufacturers have challenged these
mandates in court and have obtained injunctions to delay these mandates. There
can be no assurance, however, that further legislation will be enacted or that
current legislation or state mandates will not be repealed or amended, or that a
different form of zero emission or low emission vehicle will not be invented,
developed and produced, and achieve greater market acceptance than electric
vehicles. Extensions, modifications or reductions of current federal and state
legislation, mandates and potential tax incentives could adversely affect the
Company's business prospects if implemented.
Our products are subject to federal, state, local and foreign laws and
regulations, governing, among other things, emissions as well as laws relating
to occupational health and safety. Regulatory agencies may impose special
requirements for implementation and operation of our products or may
significantly impact or even eliminate some of our target markets. We may incur
material costs or liabilities in complying with government regulations. In
addition, potentially significant expenditures could be required in order to
comply with evolving environmental and health and safety laws, regulations and
requirements that may be adopted or imposed in the future.
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Strategic Alliances, Partnering and Technology Developments
Our strategy is to adapt ourselves to the ever-changing environment of
alternative power markets for both stationary and mobile applications.
Originally focusing on pure electric drive systems, we believe we are now
positioned as a global supplier of drive systems for electric, hybrid and fuel
cell applications. Enova is now entering stationary power markets with its power
management systems and intends to develop other systems to monitor and control
the complex fuel cell and ancillary device systems being developed for
distributed generation and mobile applications.
Enova continues to seek and establish alliances with major players in the
automotive, stationary power and fuel cell fields. For instance, the Hyundai
Group of Korea and Enova are partnering in the development of advanced
drive-train technology and related systems. Our recent joint venture alliance
with HHI is a prime example of our partnering strategy to maximize the
utilization of Enova's knowledge and expertise in power management and control.
Teaming with HHI may lead to other additive technologies and products which
Enova can market to current and prospective customers. The joint venture
agreement was finalized in March 2003 and we anticipate commencing operations in
the second quarter of 2003. The advanced technology center will focus on
leading-edge technologies in power management and power conversion for
industrial, commercial, residential and vehicle applications.
Additionally, Enova has begun to partner with Ford and AVS on other
automotive and transit programs and is looking to further develop these
relationships. We continue our strategy as a "systems integrator" by
establishing relationships to utilize other independently developed technologies
such as those provided by HHI, UTC Fuel Cells and national universities. We have
implemented our plans to outsource manufacturing of our components to companies
such as Hyundai Heavy Industries, Ricardo, Hyundai Autonet and other Asian
manufacturers. We believe that one of our competitive advantages is our ability
to identify, attract and integrate the latest technology available to produce
state of the art products at competitive prices.
Our products are "production-engineered," meaning they are designed so they
can be commercially produced: all formats and files are designed with
manufacturability in mind, from the start. For the automotive market, Enova
designs its products to QS9000 manufacturing and quality standards. We believe
that our redundancy of systems, robustness of design, and rigorous quality
standards result in higher performance and reduced risk. For every component and
piece of hardware, there are detailed performance specifications. Each piece is
tested and evaluated against these specifications, which enhances the value of
the systems to OEM customers.
Enova performs low-volume production in-house and assembly and out-sources
manufacturing for mass production. Outsourcing enables us to keep our capital
investment to a minimum, reducing expenditures for hardware, installation and
training, to avoid the problems of manufacturing equipment obsolescence.
Outsourcing also enables Enova to search out and work with a number of the best
QS 9000-certified manufacturers worldwide. We believe our strategy ensures that
our OEM customers have confidence in our products and receive quality products.
Products
Enova's focus is digital power management, power conversion, and system
integration. Our software, firmware and hardware manage and control the power
that drives a vehicle or device. They convert the power into the appropriate
forms required by the vehicle or device, whether DC to AC, AC to DC or DC to DC,
and they manage the flow of this energy to protect the battery, the vehicle or
device, and the driver or operator. Enova's systems work "from drive train to
drive wheel" for both vehicle and stationary applications.
The latest state-of-the-art technologies, such as hybrid vehicles, fuel
cell and micro turbine based systems, and stationary power generation, all
require some type of power management and conversion mechanism. Enova, utilizing
our enabling technologies, supplies these essential components. We believe our
drive train systems will work with any kind of fuel/power source, from electric
to hybrid to fuel cell to turbine. They are essential components for any
vehicle, system or device that uses power.
Enova is moving to expand its product base into new markets outside of the
traditional electric and hybrid-electric automotive fields. Key areas which
Enova has begun to penetrate include energy management in distributed generation
in the utility industry, and stand-by/backup power generation in the commercial
electronics industry. Both of these markets can be served with our existing
energy management and power control products. Enova has entered into agreements
or begun discussions with various alternative power generation manufacturers
such as Capstone Turbine and UTC Fuel Cells, as well as others. We believe our
enabling technologies will prove beneficial to these types of companies in their
strategies to bring these new power systems to commercialization.
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Enova has embraced fuel cell technology and has begun to develop various
power management and control systems to enable fuel cell manufacturers and their
ancillary industries to achieve greater efficiencies from their systems. These
systems are also designed to provide added reliability and safety by monitoring,
adjusting and reporting on operation of the unit.
PantherTM Electric and Hybrid-Electric Drive Systems
Enova's Panther electric drive system provides all the functionality one
would find under the hood of an internal combustion engine powered vehicle. The
Panther system consists of an enhanced electric motor and the electronic
controls that regulate the flow of electricity to and from the batteries at
various voltages and power to propel the vehicle. In addition to the motor and
controller, the system includes a gear reduction/differential unit. The system
is designed to be installed in a "drop in," fully integrated turnkey fashion, or
on a modular, "as-needed" basis for OEMs.
Enova's family of light-duty drive systems includes 30kW, 60kW, 90kW
all-electric drives, 90kW fuel cell powered series-hybrid drive and combinations
of these systems based on customer requirements. Our family of heavy-duty
electric drive systems includes a 120kW all-electric drive, a 120kW turbine or
diesel genset powered series-hybrid drive, and a new 240kW turbine powered
series-hybrid drive system with our 240kW diesel genset powered series-hybrid
drive system anticipated to be introduced in mid 2003.
Electric Drive Motors
The electric drive unit is essentially an electric motor with additional
features and functionality. The motor is liquid-cooled, environmentally sealed,
designed to handle automotive shock and vibration, and includes parking pawl,
which stops the vehicle when the driver parks the car. It also permits
regenerative braking to provide power recovery, in which the mechanical energy
of momentum is converted into electrical energy as the motor slows during
braking or deceleration. The optional gear reduction unit takes the electric
motor's high rpm and gears it down to the lower rpm required by the vehicle's
conventional drive shaft. As the rpm goes down, the torque of the electric motor
increases.
The Panther drive systems exclusively utilize induction AC motors for their
high performance, power density, robustness and low cost. The AC drive system is
scaleable and can be customized for different applications. Due to the large
operating range that these propulsion systems offer, all parameters can be
optimized; the user will not have to choose between acceleration, torque or
vehicle speed.
Electric Motor Controllers
The controller houses all the components necessary to control the powering
of a vehicle, in one easy-to-install package. Our main component is an inverter,
which converts DC electricity to AC electricity. Enova also offers optional
controllers for the air conditioning, power steering and heat pump, 12VDC/24VDC
DC-to-DC converter for vehicle auxiliary loads such as cell phones, radio,
lights, and a 6.6kW AC-to-DC on-board conductive charger which allows for direct
110 VAC or 220 VAC battery charging. These are located in the same housing as
the controller, thus extra interconnects are not required. This approach
simplifies the vehicle wiring harness and increases system reliability.
Using our proprietary Windows(TM) based software package, vehicle
interfaces and control parameters can be programmed in-vehicle. Real-time
vehicle performance parameters can be monitored and collected.
Hybrid Drive Systems
The Enova Panther hybrid-electric drive systems are based on the component
building blocks of the electric drive family, including the motor, controller
and optional components. As an example, the 120/30 kW series hybrid system uses
the 120kW electric drive components to propel the vehicle, and uses a 30kW
Capstone micro-turbine to generate power while the vehicle is in operation. This
synergy of design reduces the development cost of Enova's hybrid systems by
taking advantage of existing designs. Accessories for these drives include
battery management, chargers and 12-volt power supplies for the electric drive
family.
Enova's hybrid systems are designed to work with a variety of hybrid power
generation technologies. In our 120/60kW hybrid system, an internal combustion
engine connected to a motor and motor controller performs the power generation.
Other power options include liquid fueled turbines, such as the Capstone system,
fuel cells, such as the UTC Fuel Cell system, and many others. In all of these
examples, Enova's battery management system provides the power management to
allow for proper power control.
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Battery Care Unit
We place a great amount of focus on our power management systems. Enova's
Battery Care Unit "BCU" monitors, manages, protects, and reports. It controls
and manages battery performance, temperature, voltage and current to avoid harm
to the batteries, to the entire system, and to the driver, operator and
passengers. It also allows for monitoring for service to the battery and drive
system. This battery management system is capable of providing communication to
both inductive and conductive chargers simultaneously and managing the on-board
and off-board charging systems with multiple technologies. The versatility of
this system allows us to adapt the hardware and software for a variety of power
sources such as batteries, turbines and fuel cells.
The BCU monitors the battery pack voltage and 28 additional individual
voltages with a range of 0 to 18vDC. Optional expansion modules allow 28
additional inputs per module, with up to 16 modules permitted. The BCU has eight
user-programmable outputs and four user-programmable inputs to allow full
integration into the vehicle. These can be used to customize input and output
parameters, and to provide for other custom monitoring and battery pack control.
The BCU directly interfaces with the Panther family of drive systems as
well as others, and controls the Safety Disconnect Unit (see description below).
It is capable of supporting any battery technology, and provides each type with
optimized charging and protection algorithms. An internal real-time clock allows
the BCU to wake up at user-specified times to initiate battery charging or pack
monitoring. A precision shunt allows it to offer a wide dynamic range for
monitoring charging and motoring current, without errors commonly associated
with other types of sensors.
The on-board memory allows the BCU to update, store and report key battery
pack parameters such as amp hours, kilowatt-hours and state of change. Using
Enova's proprietary Windows(TM)-based diagnostic software, the BCU control
parameters can be programmed in-vehicle. Additionally, battery performance can
be monitored in real-time. Reports can be output to a laptop computer.
Hybrid Control Unit
We have reconfigured our BCU to perform the critical role of hybrid
controller. The Hybrid Control Unit "HCU" continuously monitors the condition of
the battery pack through communications with the BCU, monitors the driver
commands through communications with the motor controller, and the state of the
hybrid generator. Based upon the data received, the HCU provides continuous
updates to the hybrid generator with instructions on mode of operation and power
level. The purpose of this innovative control loop is to ensure that the entire
system is optimized to provide quick response to driver commands while providing
the best possible system efficiency.
Safety Disconnect Unit
The Safety Disconnect Unit "SDU" is under the control of the BCU, and
allows vehicle systems to seamlessly connect and disconnect from the battery
pack when necessary to prevent damage or harm. It also disconnects the battery
pack during charging, protects it from surges, and constantly verifies that the
battery pack is isolated from the vehicle chassis. In the event a ground
isolation fault is detected, the BCU commands the SDU to break the battery
connection. The SDU is available in two configurations to match the requirements
of the drive systems.
Fuel Cell Power Conditioning Unit
Enova has developed and is now producing a 30kW bi-directional Fuel Cell
Power Conditioning System. This system has been designed to meet the demands of
an automotive Fuel Cell propulsion system. This unique unit, not much larger
than a conventional briefcase, provides a transparent interface between the Fuel
Cell or Turbine, the battery pack, accessory loads, and the output load. Fast
response time allows the output load to be serviced without interruption while
the Fuel Cell or Turbine ramps up.
This unit is designed to interface directly with the master controller of
the vehicle over a CAN bus. Other communications protocols supported are SAE
J-1850, RS-232, and RS-485. This proprietary package allows all key parameters
of the Power Conditioner to be monitored and control boundaries to be adjusted.
50kW ICE Generator Unit
Enova provides a complete 50kW Internal Combustion Engine Generator Set.
This unit is powered by a 4-cylinder direct injection diesel engine and is
controlled over the common CAN bus shared with the rest of the Panther product
line. The same HCU that controls the Capstone micro-turbine in other Enova
series hybrid configurations provides power command, start command, and stop
commands.
9
Fuel Cell Management Unit
Enova has added a Fuel Cell Control Unit "FCU" to broaden our market in the
power management field. The FCU is designed to manage fuel cell powered systems
whether stationary or mobile, such as automobiles. The FCU can be adapted to
regulate the input and output to and from the fuel cell as well as regulate
temperature and communications. We continue to develop our current systems for
new products and markets.
Enova has reconfigured its Battery Management Unit to perform the functions
required to monitor, manage, and report on the status of a Fuel Cell Stack. This
new unit, the FCU, is currently being used by UTC Fuel Cells as a Fuel Stack
Management System.
An internal real-time clock allows the FCU to wake up at user-specified
times to initiate battery charging or pack monitoring. A precision shunt allows
it to offer a wide dynamic range for monitoring charging and motoring current,
without errors commonly associated with other types of sensors. The built-in
memory allows the FCU to update, store and report key battery pack parameters
such as amp hours, kilowatt-hours and state of change. Using Enova's proprietary
Windows(TM)-based diagnostic software, the FCU control parameters can be
programmed in-system. Additionally, fuel cell performance can be monitored in
real-time. Reports can be output to a laptop computer.
Distributed Power Generation for Industrial / Commercial / Residential
Applications
Enova's distributed generation products are virtually identical in system
configuration to that of a series hybrid vehicle, including a controller and
battery management. For this market segment, we intend to provide DC-DC and
DC-AC power conversion components to convert power supplied by batteries, fuel
cells, generators and turbines to AC power that will be used by the end
customer. Additionally, our BCU will provide power management functions to
control the entire system. The main difference is that the 3-phase AC power
typically supplied to the motor for propulsion power is, in this case, sent to
the customer to supply power for their household or business.
Competitive Conditions
The competition to develop and market electric, hybrid and fuel cell
powered vehicles has increased during the last year and we expect this trend to
continue. The competition consists of development stage companies as well as
major U.S. and international companies. Our future prospects are highly
dependent upon the successful development and introduction of new products that
are responsive to market needs and can be manufactured and sold at a profit.
There can be no assurance that we will be able to successfully develop or market
any such products.
The development of hybrid-electric and alternative fuel vehicles, such as
compressed natural gas, fuel cells and hybrid cars poses a competitive threat to
our markets for low emission vehicles or LEVs but not in markets where
government mandates call for zero emission vehicles or ZEVs. Enova is involved
in the development of hybrid vehicles and fuel cell systems in order to meet
future requirements and applications.
Various providers of electric vehicles have proposed products or offer
products for sale in this emerging market. These products encompass a wide
variety of technologies aimed at both consumer and commercial markets. The
critical role of technology in this market is demonstrated through several
product offerings. As the industry matures, key technologies and capabilities
are expected to play critical competitive roles. Our goal is to position
ourselves as a long term competitor in this industry by focusing on electric,
hybrid and fuel cell powered drive systems and related sub systems, component
integration, technology application and strategic alliances. The addition of new
strategies to penetrate stationary power markets with current technologies will
assist in creating a more diversified product mix. We believe that this strategy
will enhance our position as a power management and conversion components
supplier to both the mobile and stationary power markets.
Research and Development
Enova believes that timely development and introduction of new technology
and products are essential to maintaining a competitive advantage. We are
currently focusing our development efforts primarily in the following areas:
*Power Control and Drive Systems and related technologies for vehicle
applications;
*Stationary Power Management and Conversion and related technologies;
*Heavy Duty Drive System development for Buses; Trucks, Industrial,
Military and Marine applications
*Fuel Cell Generation system power management and process control
*Systems Integration of these technologies;
*Technical and product development under DARPA/DOT and Hyundai Group
Contracts
*OEM Technical and Product development.
10
For the year ended December 31, 2002, 2001 and 2000, we spent $1,152,000,
$879,000 and $626,000, respectively, on internal research and development
activities. Enova is continually evaluating and updating the technology and
equipment used in developing each of its products. The power management and
conversion industry utilizes rapidly changing technology and we will endeavor to
modernize our current products as well as continue to develop new leading edge
technologies to maintain our competitive edge in the market.
Intellectual Property
Enova currently holds two U.S. patents and has two patents pending, in
power management and control, with an additional patent in crash management
safety, which was originally issued in 1997. We also have several trademarks or
service marks in the United States and have been filing for international
patents as well. We continually review and append our protection of proprietary
technology. We maintain an internal review and compensation process to encourage
our employees to create new patentable technologies. The status of patents
involves complex legal and factual questions, and the breadth of claims allowed
is uncertain. Accordingly, there can be no assurance that patent applications
filed by us will result in patents being issued. Moreover, there can be no
assurance that third parties will not assert claims against us with respect to
existing and future products. Although we intend to vigorously protect our
rights, there can be no assurance that these measures will be successful. In the
event of litigation to determine the validity of any third party claims, such
litigation could result in significant expense to Enova. Additionally, the laws
of certain countries in which our products are or may be developed, manufactured
or sold may not protect our products and intellectual property rights to the
same extent as the laws of the United States.
Enova's success depends in part on its ability to protect its proprietary
technologies. Enova's pending or future patent applications may not be approved
and the claims covered by such applications may be reduced. If allowed, patents
may not be of sufficient scope or strength, others may independently develop
similar technologies or products, duplicate any of Enova's products or design
around its patents, and the patents may not provide Enova with competitive
advantages. Further, patents held by third parties may prevent the
commercialization of products incorporating Enova's technologies or third
parties may challenge or seek to narrow, invalidate or circumvent any of Enova's
pending or future patents. Enova also believes that foreign patents, if
obtained, and the protection afforded by such foreign patents and foreign
intellectual property laws, may be more limited than that provided under United
States patents and intellectual property laws. Litigation, which could result in
substantial costs and diversion of effort by Enova, may also be necessary to
enforce any patents issued or licensed to Enova or to determine the scope and
validity of third-party proprietary rights. Any such litigation, regardless of
outcome, could be expensive and time-consuming, and adverse determinations in
any such litigation could seriously harm Enova's business.
Enova also relies on unpatented trade secrets and know-how and proprietary
technological innovation and expertise which are protected in part by
confidentiality and invention assignment agreements with its employees, advisors
and consultants and non-disclosure agreements with certain of its suppliers and
distributors. These agreements may be breached, Enova may not have adequate
remedies for any breach or Enova's unpatented proprietary intellectual property
may otherwise become known or independently discovered by competitors. Further,
the laws of certain foreign countries may not protect Enova's products or
intellectual property rights to the same extent as do the laws of the United
States.
Employees
As of December 31, 2002, we had 44 full time employees. Additionally, we
employ three individuals as independent contractors, engaged on an hourly basis,
one of whom is domiciled in South Korea. The departmental breakdown of these
individuals includes 4 in administration, 3 in sales, 29 in engineering and
research and development, and 11 in production.
Item 2. Properties
Enova's corporate offices are located in Torrance, California, in leased
office space of approximately 20,000 square feet. This facility houses our
various departments, including engineering, operations, executive, finance,
planning, purchasing, investor relations and human resources. This lease
terminates in February, 2008. The monthly lease expense is $13,500. Enova also
has a leased office in Hawaii which is rented on a month to month basis at
$1,500 per month and an office in South Korea which is also rented on a month to
month basis at $500 per month.
11
Item 3. Legal Proceedings
We may from time to time become a party to various legal proceedings
arising in the ordinary course of business. However, we are not currently a
party to any material legal proceedings.
We settled a lawsuit brought against us by Fontal International, Ltd. in
June 2000, which was filed in the United States District Court, Central District
of California as previously disclosed in our March 31, 2000 Form 10-Q. The suit
alleged breach of contract with respect to certain warrants to purchase
10,833,332 shares of our common stock. The conditions subsequent to the
settlement agreement which required us to issue 6,000,000 shares of common stock
to be registered and freely tradable on, or before, March 31, 2002 were
satisfied on June 14, 2002. We entered into an agreement with Fontal granting
them additional shares of our common stock based upon the date upon which the
Form S-1 covering the sales of such shares was declared effective on June 14,
2002. As a result of that agreement, we issued Fontal an additional 300,000
shares of common stock in 2002.
Item 4. Submission of Matters to a Vote of Security Holders.
We held our annual meeting of stockholders on December 5, 2002, at which the
following matters were voted upon:
1. Our stockholders voted upon and approved a proposal to approve an amendment
to our Articles of Incorporation to affect a reverse stock split of our
Common Stock in a ratio of one-for-twenty, at the election of our Board of
Directors at any time until the next Annual Meeting of Shareholders. The
results of the voting were as follows:
Number of Shares voted FOR: 295,196,804
Number of Shares voted AGAINST: 4,505,571
Number of Shares ABSTAINING: 196,659
Number of Broker NON-VOTES: 0
2. Our stockholders voted upon and approved a proposal to approve an amendment
to our Articles of Incorporation to affect a reverse stock split of our
Common Stock in a ratio of one-for-fifteen, at the election of our Board of
Directors at any time until the next Annual Meeting of Shareholders. The
results of the voting were as follows:
Number of Shares voted FOR: 294,553,175
Number of Shares voted AGAINST: 5,071,555
Number of Shares ABSTAINING: 274,304
Number of Broker NON-VOTES: 0
3. Our stockholders voted upon and approved a proposal to approve an amendment
to our Articles of Incorporation to affect a reverse stock split of our
Common Stock in a ratio of one-for-ten, at the election of our Board of
Directors at any time until the next Annual Meeting of Shareholders. The
results of the voting were as follows:
Number of Shares voted FOR: 295,848,977
Number of Shares voted AGAINST: 3,785,158
Number of Shares ABSTAINING: 263,899
Number of Broker NON-VOTES: 0
4. Our stockholders voted upon and approved a proposal to approve an amendment
to our Articles of Incorporation to affect a reverse stock split of our
Common Stock in a ratio of one-for-five, at the election of our Board of
Directors at any time until the next Annual Meeting of Shareholders. The
results of the voting were as follows:
Number of Shares voted FOR: 296,086,555
Number of Shares voted AGAINST: 3,527,302
Number of Shares ABSTAINING: 285,177
Number of Broker NON-VOTES: 0
5. Our stockholders voted upon and approved a proposal to approve an amendment
to Article III, Section 2 of the Company's Bylaws to change the variable
authorized number of directors from a range of four (4) to seven (7) to a
range of six (6) to nine (9) and to fix the exact number of Board members
at eight (8) until changed by our Board of Directors within such range;
Number of Shares voted FOR: 297,544,308
Number of Shares voted AGAINST: 1,831,226
Number of Shares ABSTAINING: 523,500
Number of Broker NON-VOTES: 0
12
6. Our stockholders voted upon and elected eight (8) individuals to the Board
of Directors. The following Directors will serve until the next Annual
Meeting of Shareholders or until their respective successors are elected
and qualified:
Elected and Re-elected Directors: FOR WITHHELD
-------------------------------- --- --------
Anthony N. Rawlinson 272,934,164 25,644,120 a
Carl D. Perry 288,565,784 10,336,190 b
Edwin O. Riddell 298,256,994 321,290
Malcolm R. Currie 298,231,994 333,790
James M. Strock 298,246,994 331,290
John R. Wallace 298,256,994 321,290
John J. Micek, III (Preferred B) 660,375 0
Donald H. Dreyer (Preferred B) 660,375 0
a - 25,243,939 shares held by Anthony N. Rawlinson and ineligible for
voting.
b - 10,000,000 shares held by Carl D. Perry and ineligible for voting.
7. Our stockholders voted upon and approved a proposal to ratify the action of
the Board of Directors appointing Moss Adams LLP as the independent
auditors for Enova for the year ended December 31, 2002. The results of the
voting were as follows:
Number of Shares voted FOR: 247,788,267
Number of Shares voted AGAINST: 758,356
Number of Shares ABSTAINING: 725,262
Number of Broker NON-VOTES: 0
13
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Our Common Stock is presently traded in the over-the-counter market and
quoted on the National Association of Securities Dealers (NASD) "Bulletin Board"
under the symbol "ENVA." The following table sets forth the high and low bid
prices of the Common Stock as reported on the NASD Bulletin Board by the
National Quote Bureau for the fiscal quarters indicated. The following
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, markdown or commission, and may not necessarily represent actual
transactions.
Common Stock Average Daily
High Price Low Price Volume
---------- --------- ------
Calendar 2001
-------------
First Quarter........................ $0.31 $0.17 237,760
Second Quarter....................... $0.31 $0.15 245,504
Third Quarter........................ $0.26 $0.13 116,110
Fourth Quarter....................... $0.31 $0.13 197,554
Calendar 2002
-------------
First Quarter........................ $0.23 $0.14 265,875
Second Quarter....................... $0.19 $0.10 111,600
Third Quarter........................ $0.15 $0.09 38,861
Fourth Quarter....................... $0.13 $0.07 146,977
On March 25, 2003, the last reported high bid price of the Common Stock was
$0.09 and the last reported low asking price was $0.09. As of March 25, 2003,
there were approximately 8,304 holders of record of our Common Stock. As of
March 25, 2003, approximately 112 shareholders, many of who are also Common
Stock shareholders, held our Series A Preferred Stock. Approximately 34
shareholders as of March 25, 2003 held our Series B Preferred Stock. The number
of holders of record excludes beneficial holders whose shares are held in the
name of nominees or trustees.
Stock Issuances
During 2002, we issued an aggregate of 570,083 shares of Common Stock to
our directors in consideration for attendance at Board meetings and Board
committee meetings during fiscal 2002. We relied on Rule 506 of Regulation D and
Section 4(2) of the Securities Act of 1933, as amended, for the exemption from
registration of the sales of such shares. See Item 10, "Compensation of
Directors."
Dividend Policy
To date, we have neither declared nor paid any cash dividends on shares of
our Common Stock or Series A or B Preferred Stock. We presently intend to retain
all future earnings for our business and do not anticipate paying cash dividends
on our Common Stock or Series A or B Preferred Stock in the foreseeable future.
We are required to pay dividends on our Series A and B Preferred Stock before
dividends may be paid on any shares of Common Stock. At December 31, 2002, Enova
had an accumulated deficit of approximately $93,890,000 and, until this deficit
is eliminated, will be prohibited from paying dividends on any class of stock
except out of net profits, unless it meets certain asset and other tests under
Section 500 et. seq. of the California Corporations Code.
14
Item 6. Selected Financial Data.
The following selected financial data tables set forth selected financial
data for the year ended December 31, 2002, 2001 and 2000, the five month period
ended December 31, 1999 and the fiscal years ended July 31, 1999 and 1998. The
five-month period is related to a change in the fiscal year end which was
effective December 31, 1999. The statement of income data and balance sheet data
for and as of the end of the year ended December 31, 2002, 2001 and 2000, the
five month period ended December 31, 1999 and the two years ended July 31, 1999
are derived from the audited Financial Statements of Enova. The following
selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements, including the notes thereto, appearing elsewhere in
this 10K.
As of and for the year ended Five Months Fiscal Years
December 31, (in thousands, ended ending
except per share data) Dec 31 July 31,
2002 2001 2000 1999 1999 1998
---- ---- ---- ---- ---- ----
NET SALES $ 4,455 $ 3,780 $ 2,883 $ 629 $ 2,774 $ 1,938
COST OF SALES 3,784 2,783 2,013 377 1,460 2,765
---------------------------------------------------------------------
GROSS MARGIN 671 997 870 252 1,314 (827)
---------------------------------------------------------------------
OTHER COSTS AND EXPENSES
Research and Development 1,152 879 626 262 499 445
Selling, general and
administrative 2,918 2,894 1,999 796 1,141 1,697
Interest and financing fees 199 113 174 244 724 665
Other expense (income) (7) 6 (41) (67)
Acquisition of research and
development
Gain on Warranty Reevaluations (474)
Legal Settlements 900 755 125
---------------------------------------------------------------------
Total other costs and expenses 4,269 4,779 2,880 1,427 1,849 2,740
---------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (3,598) (3,782) (2,010) (1,175) (535) (3,567)
GAIN ON DEBT RESTRUCTURING 354 1,551 214 140 42
---------------------------------------------------------------------
NET LOSS $(3,598) $(3,428) $ (459) $ (961) $ (395) $ (3,525)
=====================================================================
PER COMMON SHARE:
Loss from continuing operations $ (0.01) $ (0.01) $ (0.01) $ (0.01) $ (0.02)
Gain on debt restructuring 0.01
---------------------------------------------------------------------
Net loss per common share $ (0.01) $ (0.01) $ 0.00 $ (0.01) $ (0.01) $ (0.02)
=====================================================================
WEIGHTED AVERAGE NUMBER
COMMON SHARES OUTSTANDING 326,390 275,189 235,199 251,994 152,077 151,265
=====================================================================
Total Assets $ 6,224 $ 4,340 $ 3,094 $ 2,697 $ 3,940 $ 1,658
=====================================================================
Long-term debt $ 3,332 $ 3,332 $ 3,332 $ 3,332 $ 3,332 $ 3,332
=====================================================================
Shareholders' equity (deficit) $ 287 $ (232) $(1,648) $(5,015) $(7,316) $(12,615)
=====================================================================
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
You should read this Management's Discussion and Analysis of Financial
Condition and Results of Operations in conjunction with our 2002 Financial
Statements and Notes thereto. The matters addressed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations, with
the exception of the historical information presented contains certain
forward-looking statements involving risks and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under the
heading "Certain Factors That May Affect Future Results" and elsewhere in this
report.
Cautionary Note on Forward-looking Statements
Some of the matters discussed under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business" and
elsewhere in this Form 10-K include forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "predicts," "potential," "continue,"
"expects," "anticipates," "future," "intends," "plans," "believes," "estimates"
and similar expressions. These statements are based on our current beliefs,
expectations and assumptions and are subject to a number of risks and
uncertainties. Actual results, levels of activity, performance, achievements and
events may vary significantly from those implied by the forward-looking
statements. These forward-looking statements are made as of the date of this
Form 10-K, and, except as required under applicable securities law, we assume no
obligation to update them or to explain the reasons why actual results may
differ.
OVERVIEW
Enova Systems develops and produces advanced software, firmware and
hardware for applications in the growing alternative power industry. Our focus
is digital power conversion, power management, and system integration, for two
broad market applications - vehicle power generation and stationary power
generation.
Enova's products and systems are the enabling technologies for power
systems. Without them, power cannot be converted into the appropriate form
required by the vehicle or device; and without them, power is not properly
managed to protect the battery, vehicle or device, and user.
Specifically, we develop, design and produce drive systems and related
components for electric, hybrid-electric, fuel cell and microturbine-powered
vehicles. We also develop, design and produce power management and power
conversion components for stationary power generation - both on-site distributed
power and on-site telecommunications back-up power applications. These
stationary applications also employ fuel cells, microturbines and advanced
batteries for power storage and generation. Additionally, Enova performs
significant research and development to augment and support others' and our
internal related product development efforts.
The financial statements present the financial position of Enova Systems,
Inc. as of December 31, 2002 and 2001 and the results of operations and cash
flows for the year ended December 31, 2002, 2001 and 2000.
Critical Accounting Policies
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 of the notes to the financial statements includes a
summary of the significant accounting policies and methods used in the
preparation of our financial statements. The following is a brief discussion of
the more significant accounting policies and methods that we use.
Our discussion and analysis of our financial condition and result of
operations are based on our financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United States of
America. Our preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. We based our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the
circumstances. The most significant estimates and assumptions relate to revenue
recognition and potential allowances for doubtful accounts. Actual amounts may
differ from such estimates under different assumptions or conditions. The
following summarizes our critical accounting policies and significant estimates
used in preparing our consolidated financial statements:
16
o The first-in, first-out (FIFO) method to value our inventories;
o The intrinsic value method, or APB Opinion No. 25, to account for our
stock options;
o Review of customers' receivable to determine the need for an allowance
for credit losses based on estimates of customers' ability to pay. If
the financial condition of our customers were to deteriorate, an
allowance may be required.
These accounting policies are applied consistently for all years presented.
Our operating results would be affected if other alternatives were used.
Information about the impact on our operating results is included in the
footnotes to our financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Enova has experienced cash flow shortages due to operating losses primarily
attributable to research, development, marketing and other costs associated with
our strategic plan to become an international manufacturer and supplier of
electric propulsion and power management systems and components. Due to
increased research and development spending, cash flows from operations have not
been sufficient. We therefore have to raise funds through private financial
transactions. At least until we reach breakeven volume in sales and develop
and/or acquire the capability to manufacture and sell our products profitably,
we will need to continue to rely on cash from external financing. We anticipate
that we will require additional outside financing for at least the next twelve
months.
Enova is seeking new investment capital to fund research and development
and create new market opportunities. In order to fuel our growth in the
stationary power market, we will need additional capital to further these
development programs and augment our intellectual properties. In July 2002,
several private accredited investors purchased 42,100,000 shares of common stock
at $0.10 per share.
During 2002, we expanded our sales and development efforts to capture
additional global market share for our product line and our technical expertise.
Enova expanded into European and Asian markets with our heavy duty drive systems
and continued to progress on our development programs with Ford, AVS, Hyundai
and the U.S. Department of Transportation. Our balance sheet strengthened, we
are now focusing on building our product line, increasing our market share and
developing the next generation of advanced power management and conversion
systems.
Our operations during the year ended December 31, 2002 were financed by
development contracts and product sales, as well as an additional equity
infusion of an aggregate of $4,210,000 from a private placement for the purchase
of 42,100,000 shares of common stock, as previously reported.
It is our intention to continue to seek additional financing through
private placements and other means to increase research and development
spending, procure inventory and seek additional alliances to market our
products. As of March 25, 2003, we have no firm commitments for additional
financing unless we consummate our joint venture with HHI as previously
reported.
During the year ended December 31, 2002, our operations required $2,700,000
more in cash then was generated. Enova continues to increase research and
development spending, as well as increased sales, marketing and administrative
expenses necessary for expansion to meet customer demand. Accounts receivable
increased by $19,000 from $1,237,000, or less than 1% from the balance at
December 31, 2001. We continually monitor our receivables and have had
immaterial charge-offs during the years due to this policy. Inventory increased
by $727,000 from $926,000 or 79% from December 31, 2001 balances. During 2002,
products sales increased resulting in a requirement to stock additional
inventory for customer requirements. Based on past sales and anticipated
customer requirements, we have increased finished goods inventory to meet
demand. Additionally, included in this increase is approximately $450,000 in raw
materials inventory on hand for the Ballard Th!nk city program which has been
terminated. We anticipate receiving full reimbursement for these inventories,
however; during 2002, we additionally charged-off approximately $150,000 in
obsolete or other inventory related to the Ballard program.
Fixed assets increased by $613,000 or 61% before depreciation for the year
ended December 31, 2002 from the prior year balance of $1,003,000 due to several
factors. The three-car tram which was developed and produced, in conjunction
with a DOT/State of Hawaii program, was transferred to demonstration vehicles
from inventory during 2002. Additionally, we purchased test equipment,
production machinery, software and tooling for programs and products developed
during the year.
17
Other assets decreased by $76,000 during 2002 from $574,000 in 2001 as we
amortized the asset relating to the Ford Value Participation Agreement.
Intellectual property assets, including patents and trademarks, increased by
$28,554 in 2002 from $48,986 at December 31, 2001 as we continued to capitalize
new patents on our technology.
The future unavailability or inadequacy of financing to meet future needs
could force us to delay, modify, suspend or cease some or all aspects of our
planned operations.
RESULTS OF OPERATIONS
Years Ended December 31, 2002 and 2001
Net sales of $4,455,000 for the twelve months ended December 31, 2002
increased $675,000 or 18% from $3,780,000 during the same period in 2001. Our
revenue base is shifting to higher concentration in product sales as we expand
our market penetration in these areas. Accordingly, we have added this
delineation in our financial statement representation for sales and costs of
sales. Product sales as a percentage of total revenues increased to 59% in 2002
as compared with 26% of total revenues in 2001. Sales of our Panther 240kW,
120kW and 90kW drive systems accounted for a majority of our product sales. We
believe this trend will continue over the next several years. We continue to
seek out and contract for new development programs with both our current
partners such as Ford, the DOT and Hyundai, as well as creating new alliances
with other vehicle manufacturers and energy companies. Furthermore, we believe
that markets are developing for our stationary process and power control and
conversion systems in which we intend to gain market share.
Cost of sales consists of component and material costs, direct labor costs,
integration costs and overhead related to manufacturing our products. Product
development costs incurred in the performance of engineering development
contracts for the U.S. Government and private companies are charged to cost of
sales for this contract revenue. During 2002, we established several new
customers, such as AVS, Tomoe and MMT, in the heavy-duty drive system market
which required additional integration and support services to customize,
integrate and evaluate our products. We believe these costs to be initial,
one-time costs for these customers and anticipate similar costs to be incurred
as we gain additional market share. During the year ended December 31, 2002, we
charged off approximately $200,000 in obsolete inventory and other engineering
costs related to the cancellation of the Ballard/Ford Th!nk program. A portion
of these costs may be recoverable in 2003 from Ballard, however, we can give no
assurance at this time that such reimbursement will occur. Due to the increase
in net sales, the aforementioned costs, the Ballard program cancellation and
other inventory adjustments, cost of sales of $3,784,000 for the year ended
December 31, 2002 reflect an increase of $1,001,000, or 36%, from $2,783,000 for
the year ended December 31, 2001. Our product line is well established. As we
increase our sales volume, we believe the costs associated with manufacturing
and integrating these products should continue to decrease, improving our gross
margins.
Research and development expenses consist primarily of personnel,
facilities, equipment and supplies for our research and development activities.
Non-funded development costs are reported as research and development expense.
Research and development expense increased in 2002 to $1,152,000 from $879,000
for the same period in 2001, an increase of $273,000, or 31%. During 2002, we
continued to expend funds for research and development for new technologies to
enhance existing products as well as develop new products in the areas of mobile
and stationary power management and conversion. Programs included our 240kW
drive system, advanced power management systems for fuel cells, a Panther 90kW
Dual Motor drive system, a diesel generation engine/motor system for our
heavy-duty drive systems, a 18kW on-board charger system and upgrades and
improvements to our current power conversion and management components.
Additionally, we are enhancing our technologies to be more universally adaptable
to the requirements of our current and prospective customers. By modifying our
software and firmware, we believe we should be able to provide a more
comprehensive, adaptive and effective solution to a larger base of customers and
applications. During 2002, we expended additional resources toward these types
of programs and therefore modified our allocation of engineering costs to
reflect this shift. We will continue to research and develop new technologies
and products, both internally and in conjunction with our alliance partners and
other manufacturers as we deem beneficial to our global growth strategy. Our
joint venture advanced technology center with HHI, as previously reported, is a
specific example of this strategy.
Selling, general and administrative expenses consist primarily of personnel
and related costs of sales and marketing employees, consulting fees and expenses
for travel, trade shows and promotional activities and personnel and related
costs for general corporate functions, including finance, accounting, strategic
and business development, human resources and legal. Selling, general and
administrative expense decreased in the year ended December 31, 2002 to
$2,918,000 from $2,894,000 for the similar period in 2001. We are continually
reviewing operations to lower over head costs and increase operational
efficiencies. During 2002, legal and accounting fees of approximately $318,000
in conjunction with two Form S-1 Registration Statements, required quarterly,
annual and other periodic SEC filings, as well as compliance with the
Sarbanes-Oxley Act of 2002 and other legal matters, accounted for the majority
of these expenses. We believe these professional fees should not increase
significantly in 2003, however due to the increased regulatory oversight of
public
18
companies and additional legal and accounting obligations mandated by
Sarbanes-Oxley, we can make no assurance that increases will not occur.
For the year ended December 31, 2002, interest and financing fees increased
by $86,000 to $220,000, an increase of 76%. The increase was due primarily to an
increase in the rate on the Note due the Credit Managers Association of
California for $3.2 million per its terms and additional lease financings for
equipment during 2002.
Our net loss for the year ended December 31, 2002 of $3,598,000 is
comparable to the loss incurred in 2001 of $3,428,000, however we believe the
components of the 2002 net loss should provide much greater near and long-term
benefits to Enova. Certain factors, such as the Ballard program cancellation,
could not be anticipated and did contribute substantially to the net loss from
operations. Other elements however, such as the increased funding levels for
development of new systems and enhancement of current systems, we believe, will
provide opportunities for increased sales and market share capture in 2003 and
beyond. Depending on the level of externally funded engineering programs,
additional internal funds may be expended to maintain or improve our
technologies to remain competitive in the market.
Our basic strategy continues toward increased research and development and
increased marketing and administrative operations relating to further
establishing ourselves as one of the key players in the mobile power conversion
and management markets and to develop new systems for the stationary markets.
During 2002, we experienced increased demand and recognition of our products and
expertise in theses markets, thus increasing our revenue base, and we shall
continue to increase engineering, production, and support personnel as we deem
necessary to meet our current and prospective customer needs.
Years Ended December 31, 2001 and 2000
Net sales of $3,780,000 for the twelve months ended December 31, 2001
increased $897,000 or 31% from $2,883,000 during the same period in 2000. Our
further expansion into production programs of our PantherTM 120kw systems as
well as new contracts with Ford and the DOT accounted for the increase in sales.
Cost of sales of $2,783,000 for the year ended December 31, 2001 reflect an
increase of $770,000, or 38%, from $2,013,000 for the year ended December 31,
2000.
Cost of sales as a percentage of sales remained at approximately 70% in
2001 which is consistent with 2000. As our sales mix changes from primarily
development contract revenues to more product sales, we believe this gross
margin will remain the same or improve on a year-to-year basis.
Product development costs incurred in the performance of engineering
development contracts for the U.S. Government and private companies are charged
to cost of sales for this contract revenue. Non-funded development costs are
reported as research and development expense. Research and development expense
increased in 2001 to $879,000 from $626,000 for the same period in 2000, an
increase of $253,000, or 40%. As part of our long-term strategic plan, we will
continue to expend funds for research and development for new technologies to
enhance existing products as well as develop new products in the areas of mobile
and stationary power management and conversion. Examples of these internally
funded development programs include the 240kW drive system and our advanced
power management systems for fuel cells and turbines.
Selling, general and administrative expense increased in the year ended
December 31, 2001 to $2,894,000 from $1,999,000 for the similar period in 2000.
Increased legal and accounting fees for the Fontal matter of approximately
$400,000, as well as increased regulatory requirements, accounted for the
majority of the rise in expense. Additionally, we continue to increase sales,
marketing and travel expenses in relation to acquiring new business, creating
alliances and servicing current customers, which has resulted in additional
sales for 2001 and we believe will facilitate increasing sales for 2002. During
2001 and 2000, we continued to add employees to accommodate our increased sales
and customer services.
For the year ended December 31, 2001, interest and financing fees decreased
by $61,000 to $113,000, a decrease of 35%. The reduction was due to
restructuring of our long-term debt by forgiveness or conversion into equity.
In 2001, we completed our restructuring of the remainder of our antecedent
payables, reducing those accounts to zero from $210,000 in 2000, which resulted
in contributing to an extraordinary gain of $354,000 for the year. Our
liabilities and long-term debt are now current. During the year ended December
31, 2000, several unsecured creditors agreed to settle their trade debt claims
for amounts less than the original debt owed to them. Additionally, other trade
debt, which has had no activity for over four years and has now become
uncollectible pursuant to state statute of limitations, was recaptured. The
reductions from the original amounts owed and the settlement amounts resulted in
a gain on debt restructuring of $1,551,000 during the year ended December 31,
2000.
19
During 2001, we settled a lawsuit brought against us by Fontal
International Ltd. The settlement required us to issue, and register by March
31, 2002, 6,000,000 shares of common stock at a cost of $900,000, non-cash,
exclusive of our legal fees. This expense is recorded as legal settlements for
2001. Legal settlements for 2000 were $75,000. In the first half of 2002, we
issued an additional 300,000 shares of common stock to Fontal based on the
timing of the effectiveness of our Form S-1 Registration Statement filed with
the Securities and Exchange Commission.
During 2001, we incurred several non-recurring professional expenses of
$400,000 and the legal settlement of $900,000 with respect to the Fontal
International lawsuit for an increase in operating expense of approximately
$1,300,000. Without these charges, our net loss from operations would be
$2,382,000, an increase of $372,000 or 18% from our $2,010,000 loss from
operations for the same period in 2000. We do not believe these types of
expenses will occur in 2002. The increase in net loss is attributable to a
number of factors, as discussed previously, including the increased legal and
accounting fees, the legal settlement with respect to Fontal matter, increased
research and development expenses and increased marketing and administrative
expenses relating to further establishing ourselves as a key player in the
mobile power conversion and management markets and to develop new systems for
the stationary markets. We anticipate continued increases in engineering,
production, and support personnel as we deem necessary to meet our current and
prospective customer needs.
Recent accounting pronouncements - The Financial Accounting Standards Board
(FASB) has issued the following accounting pronouncements:
SFAS No.145. Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections. This Statement rescinds FASB
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB
Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This
Statement amends FASB Statement 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. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The adoption of SFAS No. 145 is not expected to have a material
effect on the Company's consolidated financial statements.
SFAS No.146, Accounting for Costs Associated with Exit or Disposal Activities.
This Statement addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged. The adoption of SFAS No. 146 is not expected to have a
material effect on the Company's consolidated financial statements.
SFAS No.147, Accounting for Certain Acquisitions of Banking or Thrift
Institutions and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17
When a Savings and Loan Association or a Similar Institution is Acquired in a
Business Combination Accounted for by the Purchase Method. This Statement
provides guidance on the application of the purchase method to acquisitions of
financial institutions. Except for transactions between two or more mutual
enterprises, this Statement removes acquisitions of financial institutions from
the scope of both Statement 72 and Interpretation 9 and requires that those
transactions be accounted for in accordance with FASB Statements No. 141,
Business Combinations and No. 142, Goodwill and Other Intangible Assets. This
Statement is effective for acquisitions made on or after October 1, 2002. The
adoption of SFAS No. 147 is not expected to have a material effect on the
Company's consolidated financial statements.
SFAS No.148, Accounting for Stock-Based Compensation. This Statement addresses
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. This statement
permits two additional transition methods that avoid the ramp-up effect arising
from prospective application of the fair value based method addresses
alternative. In addition, it amends the disclosure requirements of Statement 123
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. As of December 31, 2002, the
Company has adopted the disclosure requirements of the Statement and continues
to follow the intrinsic value method to account for stock-based employee
compensation.
Financial Accounting Standards Board Interpretation (FASBI) No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The Interpretation clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. It
also significantly expands the disclosures guarantors must include in their
financial statements. While the Interpretation's accounting provisions are
effective prospectively to guarantees issued or modified after December 31,
2002,
20
its disclosure requirements generally apply to all guarantees and must be
included in financial statements of interim and annual periods ending after
December 15, 2002. The adoption of Interpretation No. 45 is not expected to have
a material effect on the Company's consolidated financial statements.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-K contains forward looking statements concerning our existing
and future products, markets, expenses, revenues, liquidity, performance and
cash needs as well as our plans and strategies. These forward-looking statements
involve risks and uncertainties and are based on current management's
expectations and we are not obligated to update this information. Many factors
could cause actual results and events to differ significantly from the results
anticipated by us and described in these forward looking statements including,
but not limited to, the following risk factors.
Net Operating Losses. We have experienced recurring losses from operations and
had an accumulated deficit of $93,890,000 at December 31, 2002. There is no
assurance, however, that any net operating losses will be available to us in the
future as an offset against future profits for income tax purposes.
Continued Losses. For the year ended December 31, 2002 2001 and 2000, we had net
losses of $3,598,000, $3,428,000 and $459,000, respectively, on sales of
$4,455,000, $3,780,000 and $2,883,000, respectively.
Nature of Industry. The mobile and stationary power markets, including electric
vehicle and hybrid electric vehicles, continue to be subject to rapid
technological change. Most of the major domestic and foreign automobile
manufacturers: (1) have already produced electric and hybrid vehicles, and/or
(2) have developed improved electric storage, propulsion and control systems,
and/or (3) are now entering or have entered into production, while continuing to
improve technology or incorporate newer technology. Various companies are also
developing improved electric storage, propulsion and control systems. In
addition, the stationary power market is still in its infancy. A number of
established energy companies are developing new technologies. Cost-effective
methods to reduce price per kilowatt have yet to be established and the
stationary power market is not yet viable.
Our current products are designed for use with, and are dependent upon, existing
technology. As technologies change, and subject to our limited available
resources, we plan to upgrade or adapt our products in order to continue to
provide products with the latest technology. We cannot assure you, however, that
we will be able to avoid technological obsolescence, that the market for our
products will not ultimately be dominated by technologies other than ours, or
that we will be able to adapt to changes in or create "leading-edge" technology.
In addition, further proprietary technological development by others could
prohibit us from using our own technology.
Our industry is affected by political and legislative changes. In recent years
there has been significant public pressure to enact legislation in the United
States and abroad to reduce or eliminate automobile pollution. Although states
such as California have enacted such legislation, we cannot assure you that
there will not be further legislation enacted changing current requirements or
that current legislation or state mandates will not be repealed or amended, or
that a different form of zero emission or low emission vehicle will not be
invented, developed and produced, and achieve greater market acceptance than
electric or hybrid electric vehicles. Extensions, modifications or reductions of
current federal and state legislation, mandates and potential tax incentives
could also adversely affect our business prospects if implemented.
Changed legislative climate. Because vehicles powered by internal combustion
engines cause pollution, there has been significant public pressure in Europe
and Asia, and enacted or pending legislation in the United States at the federal
level and in certain states, to promote or mandate the use of vehicles with no
tailpipe emissions ("zero emission vehicles") or reduced tailpipe emissions
("low emission vehicles"). Legislation requiring or promoting zero or low
emission vehicles is necessary to create a significant market for electric
vehicles. The California Air Resources Board (CARB) is continuing to modify its
regulations regarding its mandatory limits for zero emission and low emission
vehicles. Furthermore, several car manufacturers have challenged these mandates
in court and have obtained injunctions to delay these mandates.
Our industry is new and is subject to technological changes. The mobile and
stationary power markets, including electric vehicle and hybrid electric
vehicles, continue to be subject to rapid technological change. Most of the
major domestic and foreign automobile manufacturers: (1) have already produced
electric and hybrid vehicles, and/or (2) have developed improved electric
storage, propulsion and control systems, and/or (3) are now entering or have
entered into production, while continuing to improve technology or incorporate
newer technology. Various companies are also developing improved electric
storage, propulsion and control systems. In addition, the stationary power
market is still in its infancy. A number of established energy companies are
developing new technologies. Cost-effective methods to reduce price per kilowatt
have yet to be established and the stationary power market is not yet viable.
21
Our current products are designed for use with, and are dependent upon, existing
technology. As technologies change, and subject to our limited available
resources, we plan to upgrade or adapt our products in order to continue to
provide products with the latest technology. We cannot assure you, however, that
we will be able to avoid technological obsolescence, that the market for our
products will not ultimately be dominated by technologies other than ours, or
that we will be able to adapt to changes in or create "leading-edge" technology.
In addition, further proprietary technological development by others could
prohibit us from using our own technology.
There are substantial risks involved in the development of unproven products. In
order to remain competitive, we must adapt existing products as well as develop
new products and technologies. In fiscal years 2001 and 2002 we spent in excess
of $2.0 million on research and development of new products and technology.
Despite our best efforts a new product or technology may prove to be unworkable,
not cost effective, or otherwise unmarketable. We can give you no assurance that
any new product or technology we may develop will be successful or that an
adequate market for such product or technology will ever develop.
We may be unable to effectively compete with other companies who have
significantly greater resources than we have. Many of our competitors, in the
automotive, electronic and other industries, are larger, more established
companies that have substantially greater financial, personnel, and other
resources than we do. These companies may be actively engaged in the research
and development of power management and conversion systems. Because of their
greater resources, some of our competitors may be able to adapt more quickly to
new or emerging technologies and changes in customer requirements, or to devote
greater resources to the promotion and sales of their products than we can. We
believe that developing and maintaining a competitive advantage will require
continued investment in product development, manufacturing capability and sales
and marketing. We cannot assure you however that we will have sufficient
resources to make the necessary investments to do so. In addition, current and
potential competitors may establish collaborative relationships among themselves
or with third parties, including third parties with whom we have relationships.
Accordingly, new competitors or alliances may emerge and rapidly acquire
significant market share.
Future equity financings may dilute your holdings in our company. We need to
obtain additional funding through public or private equity or debt financing,
collaborative agreements or from other sources. If we raise additional funds by
issuing equity securities, current shareholders may experience significant
dilution of their holdings. We may be unable to obtain adequate financing on
acceptable terms, if at all. If we are unable to obtain adequate funds, we may
be required to reduce significantly our spending and delay, scale back or
eliminate research, development or marketing programs, or cease operations
altogether.
Potential intellectual property, shareholder or other litigation could adversely
impact our business. Because of the nature of our business, we may face
litigation relating to intellectual property matters, labor matters, product
liability or shareholder disputes. Any litigation could be costly, divert
management attention or result in increased costs of doing business. Although we
intend to vigorously defend any future lawsuits, we cannot assure you that we
would ultimately prevail in these efforts. An adverse judgment could negatively
impact the price of our common stock and our ability to obtain future financing
on favorable terms or at all.
We may be exposed to product liability or tort claims if our products fail,
which could adversely impact our results of operations. A malfunction or the
inadequate design of our products could result in product liability or other
tort claims. Accidents involving our products could lead to personal injury or
physical damage. Any liability for damages resulting from malfunctions could be
substantial and could materially adversely affect our business and results of
operations. In addition, a well-publicized actual or perceived problem could
adversely affect the market's perception of our products. This could result in a
decline in demand for our products, which would materially adversely affect our
financial condition and results of operations.
We are highly subject to general economic conditions. The financial success of
our company is sensitive to adverse changes in general economic conditions, such
as inflation, unemployment, and consumer demand for our products. These changes
could cause the cost of supplies, labor, and other expenses to rise faster than
we can raise prices. Such changing conditions also could significantly reduce
demand in the marketplace for our products. We have no control over any of these
changes.
We are an early growth stage company. Although our Company was originally
founded in 1976, many aspects of our business are still in the early growth
stage development, and our proposed operations are subject to all of the risks
inherent in a start-up or growing business enterprise, including the likelihood
of continued operating losses. Enova is relatively new in focusing its efforts
on electric systems, hybrid systems and fuel cell management systems. The
likelihood of our success must be considered in light of the problems, expenses,
difficulties, complications, and delays frequently encountered in connection
22
with the growth of an existing business, the development of new products and
channels of distribution, and current and future development in several key
technical fields, as well as the competitive and regulatory environment in which
we operate.
We operate in a highly regulated business environment and changes in regulation
could impose costs on us or make our products less economical. Our products are
subject to federal, state, local and foreign laws and regulations, governing,
among other things, emissions as well as laws relating to occupational health
and safety. Regulatory agencies may impose special requirements for
implementation and operation of our products or may significantly impact or even
eliminate some of our target markets. We may incur material costs or liabilities
in complying with government regulations. In addition, potentially significant
expenditures could be required in order to comply with evolving environmental
and health and safety laws, regulations and requirements that may be adopted or
imposed in the future.
We are highly dependent on a few key personnel and will need to retain and
attract such personnel in a labor competitive market. Our success is largely
dependent on the performance of our key management and technical personnel,
including Carl Perry, our Chief Executive Officer, the loss of whom could
adversely affect our business. Additionally, in order to successfully implement
our anticipated growth, we will be dependent on our ability to hire additional
qualified personnel. There can be no assurance that we will be able to retain or
hire other necessary personnel. We do not maintain key man life insurance on any
of our key personnel. We believe that our future success will depend in part
upon our continued ability to attract, retain, and motivate additional highly
skilled personnel in an increasingly competitive market.
There are minimal barriers to entry in our market. We presently license or own
only certain proprietary technology and, therefore, have created little or no
barrier to entry for competitors other than the time and significant expense
required to assemble and develop similar production and design capabilities. Our
competitors may enter into exclusive arrangements with our current or potential
suppliers, thereby giving them a competitive edge which we may not be able to
overcome, and which may exclude us from similar relationships.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
None.
Item 8. Financial Statements and Supplementary Data.
The response to this Item is submitted as a separate section of this Form 10-K.
See Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
23
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth certain information with respect to the
Directors and executive officers of Enova as of December 31, 2002:
================================ ========== ====================================
Name Age Position
- -------------------------------- ---------- ------------------------------------
Anthony N. Rawlinson 47 Chairman of the Board
- -------------------------------- ---------- ------------------------------------
Carl D. Perry 70 Chief Executive Officer, President,
Acting CFO, and Director
- -------------------------------- ---------- ------------------------------------
Edwin O. Riddell (1) 60 Director
- -------------------------------- ---------- ------------------------------------
Dr. Malcolm Currie (1) 72 Director
- -------------------------------- ---------- ------------------------------------
John J. Micek, III (2) 49 Director
- -------------------------------- ---------- ------------------------------------
Donald H. Dreyer (2) 65 Director
- -------------------------------- ---------- ------------------------------------
James M. Strock 46 Director
- -------------------------------- ---------- ------------------------------------
John Wallace 54 Director
================================ ========== ====================================
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Anthony N. Rawlinson, Chairman of the Board. Mr. Rawlinson was appointed
Chairman of the Board in July 1999. Since 1996, Mr. Rawlinson has been Managing
Director of the Global Value Investment Portfolio Management Pte. Ltd., a
Singapore based International Fund Management Company managing discretionary
equity portfolios for institutions, pension funds and clients globally. Mr.
Rawlinson has more than twenty years experience in international fund
management. Mr. Rawlinson is a specialist in analysis and investment in high
technology companies. From 1996 to 1999, Mr. Rawlinson was Chairman of IXLA
Ltd., an Australian public company in the field of PC photography software and
its wholly-owned subsidiary, photohighway.com. Mr. Rawlinson is currently
Chairman of Matrix Oil NL, an Australian publicly listed company. Mr. Rawlinson
is also a Chairman of Cardsoft, Inc., a high technology software company with
secure java based solutions for mobile phones and handheld devices.
Carl D. Perry, Chief Executive Officer, President and Director. Mr. Perry
served as a Director and as an Executive Vice President of the Company from July
1993 until November 1997. In November 1997, Mr. Perry was elected as Chairman of
the Board and Chief Executive Officer of the Company, and was elected President
in June 1999. In July 1999, Mr. Perry resigned his position as Chairman of the
Board to allow Mr. Anthony N. Rawlinson to become Chairman. Mr. Perry continues
as Chief Executive Officer and President and as a Director. Prior to joining the
Company, he was an international aerospace and financial consultant from 1989 to
1993. Mr. Perry served as Executive Vice President of Canadair Ltd. (now known
as Bombadier), Canada's largest aerospace corporation, from 1984 to 1989, where
he conducted strategic planning, worldwide marketing, and international joint
ventures. From 1979 to 1983, Mr. Perry served as Executive Vice President of the
Howard Hughes Helicopter Company, now known as Boeing Helicopter Company, where
he was responsible for general management, worldwide business development, and
international operations.
Malcolm R. Currie, Ph.D, Director. Dr. Currie was re-elected to the Board
of Directors in 1999. Dr. Currie had served as a Director of the Company from
1995 through 1997. Since 1994, he has served as Chairman of Electric Bicycle
Co., a developer of electric bicycles. From 1986 until 1992, Dr. Currie served
as Chairman and Chief Executive Officer of Hughes Aircraft Co., and from 1985
until 1988, he was the Chief Executive Officer of Delco Electronics. His career
in electronics and management has included research with many patents and papers
in microwave and millimeter wave electronics, laser, space systems, and related
fields. He has led major programs in radar, commercial satellites, communication
systems, and defense electronics. He served as Undersecretary of Defense for
Research and Engineering, the Defense Science Board, and
24
currently serves on the Boards of Directors of LSI Logic, Inamed Corp.,
Innovative Micro Technology, Regal One and Currie Technologies. He is past
President of the American Institute of Aeronautics and Astronautics, and is a
Member of the Board of Trustees of the University of Southern California.
Edwin O. Riddell, Director. Mr. Riddell has served as a Director of the
Company since June 1995. From March 1999 to the present, Mr. Riddell has been
President of CR Transportation Services, a consultant to the electric vehicle
industry. From January 1991 to March 1999, Mr. Riddell has served as Manager of
the Transportation Business Unit in the Customer Systems Group at the Electric
Power Research Institute in Palo Alto, California, and from 1985 until November
1990, he served with the Transportation Group, Inc. as Vice President,
Engineering, working on electric public transportation systems. From 1979 to
1985, he was Vice President and General Manager of Lift U, Inc., the leading
manufacturer of handicapped wheelchair lifts for the transit industry. Mr.
Riddell has also worked with Ford, Chrysler, and General Motors in the area of
auto design (styling), and has worked as a member of senior management for a
number of public transit vehicle manufacturers. Mr. Riddell has been a member of
the American Public Transportation Association's (APTA) Member Board of
Governors for over 15 years, and has served on APTA's Board of Directors. Mr.
Riddell was also Managing Partner of the U.S. Advanced Battery Consortium.
James M. Strock, Director. Mr. Strock was elected a Director in July 2000.
From 1991-1997, Mr. Strock served in Governor Pete Wilson's cabinet as
California's first Secretary for Environmental Protection. He led an
organization with an annual budget of more than $800 million with 4,000
employees. The Agency includes many of the world's leading environmental
improvement programs relating to air and water quality, toxics and pesticide
regulation, and solid waste. From 1989 until 1991, Mr. Strock served in
President Bush's subcabinet as Assistant Administrator for Enforcement (chief
law enforcement officer) of the U.S. Environmental Protection Agency. From 1997
to the present, he has been the principal of James Strock and Co., a San
Francisco firm providing management consulting, communications and dispute
resolution services. Mr. Strock is a graduate of Harvard College and Harvard Law
School, and is a member of the Council on Foreign Relations. He is the author of
Reagan on Leadership: Executive Lessons from the Great Communicator, and
Theodore Roosevelt on Leadership: Executive Lessons from the Bully Pulpit.
John R. Wallace, Director. Mr. Wallace retired from the Ford Motor Company
in 2002, and is currently serving as a consultant to the Company for fuel cell
and hybrid electric vehicle strategy. Prior to his retirement, he was executive
director of TH!NK Group. He has been active in Ford Motor Company's alternative
fuel vehicle programs since 1990, serving first as: Director, Technology
Development Programs; then as Director, Electric Vehicle Programs; Director,
Alternative Fuel Vehicles and finally Director, Environmental Vehicles. He is
past Chairman of the Board of Directors of TH!NK Nordic; he is past chairman of
the United States Advanced Battery Consortium; Co-Chairman of the Electric
Vehicle Association of the Americas, and past Chairman of the California Fuel
Cell Partnership. He served as Director of Ford's Electronic Systems Research
Laboratory, Research Staff, from 1988 through 1990. Prior to joining Ford
Research Staff, he was president of Ford Microelectronics, Inc., in Colorado
Springs. His other experience includes work as program manager with Intel
Corporation. He also served as Director, Western Development Center, for
Perkin-Elmer Corporation and as President of Precision Microdesign, Inc.
Donald H. Dreyer, Director. Mr. Dreyer was elected a Director of the
Company in January 1997. Mr. Dreyer is President and CEO of Dreyer & Company,
Inc., a consultancy in credit, accounts receivable and insolvency services,
which he founded in 1990. Mr. Dreyer has served as Chairman of the Board of
Credit Managers Association of California during the 1994 to 1995 term and
remains a current member. Mr. Dreyer is also a member of the American Bankruptcy
Institute and the National Advisory Committee of Dun & Bradstreet, Inc.
John J. Micek III, Director. Mr. Micek was elected a Director of the
Company in April 1999. Mr. Micek served as the Company's Vice President, General
Counsel and Secretary from March 1994 to March 1997. From June 1997 to August
1998, Mr. Micek was COO of Pelion Systems, Inc. Mr Micek is currently Managing
Director of Silicon Prairie Partners, LP. He also is a practicing attorney
specializing in corporate finance and business development in Palo Alto, CA. He
is a Board Member of Universal Warranty and also sits on the boards of UTEK
Corp., Pelion Systems, Inc., Universal Assurors Agency, Inc., and Armanino
Foods.
Relationships Among Directors or Executive Officers
There are no family relationships among any of the Directors or executive
officers of Enova.
25
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our Directors, executive
officers and persons who own more than 10% of our Common Stock (collectively,
"Reporting Persons") to file reports of ownership and changes in ownership of
our Common Stock to the Securities and Exchange Commission ("SEC"). Copies of
these reports are also required to be delivered to Enova.
We believe, based solely on our review of the copies of such reports
received or written representations from certain Reporting Persons, that during
2002, there was only one inadvertent late filing, a Form 3 required to be filed
by John Wallace in conjunction with his election as a Board member at our Annual
Shareholders Meeting. This Form 3 has subsequently been filed with the SEC. Mr.
Wallace has timely filed all required form 4s in 2002.
Item 11. Executive Compensation.
Summary Compensation Table
The following table sets forth all compensation earned by our Chief
Executive Officer and each of the other most highly compensated executive
officers of Enova whose annual salary and bonus exceeded $100,000 for the years
ended December 31, 2002, 2001 and 2000 (collectively, the "Named Executive
Officers"). Mr. Carl D. Perry is the sole executive officer of Enova whose
salary currently exceeds $100,000.
Name and Principal Position SUMMARY ANNUAL COMPENSATION TABLE
- --------------------------- ---------------------------------
Carl D. Perry (1) 2002 150,000 --
Chief Executive Officer, Chief Financial 2001 160,989 $30,000
Officer and President 2000 128,170 --
(1) Mr. Perry was elected as Chief Executive Officer in November 1997. Mr.
Perry's current salary is $150,000 per year, approved by the Board of Directors
in June, 2000.
Option/SAR Grants
No grants of stock options or stock appreciation rights ("SARs") were made
during 2002 to the Named Executive Officers.
Option Exercises and Option Values
The following table sets forth information concerning option exercises
during 2002, and the aggregate value of unexercised options as of December 31,
2002, held by each of the Named Executive Officers:
Aggregated Option/SAR Exercises in 2002
and Option Values at December 31, 2002
Number of Securities
Aggregate Underlying Unexercised Value of Unexercised
Option Options at In-the-Money Options at
Exercises in 2002 December 31, 2002 (#) December 31, 2002 ($)(1)
----------------- ---------------------------- ------------------------
Shares Value
Acquired on Realized
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
------ ------------ -------- ----------- ------------- ----------- -------------
Carl D. Perry -- -- 1,200,000 -- --(1) N/A
(1) Calculated on the basis of $0.08 representing the average of the high bid
and low ask prices of the Common Stock on December 31, 2002 of $0.08 per
share, minus the exercise price.
26
Compensation of Directors
In September 1999, our Board of Directors unanimously approved a
compensation package for outside directors consisting of the following: for each
meeting attended in person, each outside director is to receive $1,000 in cash
and $2,000 of stock valued on the date of the meeting at the average of the
closing ask and bid prices; for each telephonic Board meeting, each outside
director is to receive $250 in cash and $250 of stock valued on the date of the
meeting at the average of the closing ask and bid prices; for each meeting of a
Board committee attended in person, the committee chairperson is to receive $500
in cash and $500 of stock valued on the date of the meeting at the average of
the closing ask and bid prices. As of January 2002, this package was amended to
include like compensation of $500 in cash and $500 in stock to all committee
members in attendance at each committee meeting. All Directors are also
reimbursed for out of pocket expenses incurred in connection with attending
Board and committee meetings. As of March 25 2003, 2,284,362 shares had been
issued under the above compensation plan for Directors.
James M. Strock
The Company has entered into a consulting agreement with James Strock &
Company, a corporation wholly owned by James M. Strock, wherein the Company
retains Mr. Strock's services for a minimum monthly retainer of $3,000 plus
reasonable expenses. During 2002, the Company paid Mr. Strock $58,901 in cash
and stock for consulting services, expenses and directors fees.
John R. Wallace
The Company has entered into a consulting agreement with John R. Wallace
wherein the Company will compensate Mr. Wallace at the rate of $1,500 per day
plus reasonable expenses for consulting services rendered. Mr. Wallace will not
be compensated per this agreement when acting in the capacity of a director of
the Company. During 2002, the Company paid Mr. Wallace $15,000 in cash and stock
for consulting services, expenses and directors fees.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee held two meetings in the year ended December 31,
2002. The Compensation Committee currently consists of Mr. Edwin Riddell and Dr.
Malcolm Currie, neither of whom have been officers of the Company. Its functions
are to establish and apply the Company's compensation policies with respect to
the Company's Executive Officers, and to administer the Company's stock option
plans.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
27
Stock Performance Graph
The graph below compares the cumulative total shareholder return on our
Common Stock with the cumulative total return on the Standard & Poor's Small
Capitalization 600 Index and an index of peer companies selected by us. A group
of five other electric vehicle companies comprise the peer group index.(1)
The period shown commences on December 31, 1997, and ends on December 31,
2002, the end of our last fiscal year. The graph assumes an investment of $100
on December 31, 1997 and the reinvestment of any dividends. The comparisons in
the graph below are based upon historical data and are not indicative of, nor
intended to forecast, future performance of our Common Stock.
[GRAPHIC OMITTED]
DECEMBER 31, 1997 TO DECEMBER 31, 2002
1) Companies included in the peer group index are Amerigon, Inc. (ARGN),
Electric Fuel Corp. (EFCX), Energy Conversion Devices, Inc. (ENER), Unique
Mobility (UQM), and Valence Technology, Inc. (VLNC).
28
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock as of December 31,
2002, by (i) each shareholder known to the Company to own beneficially more than
5% of the Company's Common Stock; (ii) each of the Company's Directors and
nominees for Director; (iii) the Chief Executive Officer and all other Executive
Officers of the Company; and (iv) all Executive Officers, Directors and nominees
for Director of the Company as a group. Except as indicated in the footnotes to
this table and subject to applicable community property laws, the persons named
in the table, based on information provided by such persons, have sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
Name Shares Percentage of Shares Voting
Beneficially Owned (1) Beneficially Owned (2) Percentage (3)
- -------------------------------------- ------------------------------ ----------------------------- ------------------
Jagen, Pty., Ltd. 145,000,000 36.79% 41.35%
9 Oxford Street, South Ybarra 3141
Melbourne, Victoria Australia
- -------------------------------------- ------------------------------ ----------------------------- ------------------
Carl D. Perry 11,200,500(4) 2.84% 2.85%
c/o Enova Systems, Inc.
19850 South Magellan Drive
Torrance, CA 90502
- -------------------------------------- ------------------------------ ----------------------------- ------------------
Citibank N.A. 31,405,754 7.97% 8.96%
111 Wall Street, 8th Floor
New York, NY 10043
- -------------------------------------- ------------------------------ ----------------------------- ------------------
Anthony N. Rawlinson 25,289,013 6.42% 7.21%
c/o Enova Systems, Inc.
19850 South Magellan Drive
Torrance, CA 90502
- -------------------------------------- ------------------------------ ----------------------------- ------------------
John J. Micek III 1,354,746(5) * *
- -------------------------------------- ------------------------------ ----------------------------- ------------------
Edwin O. Riddell 527,760 * *
- -------------------------------------- ------------------------------ ----------------------------- ------------------
Dr. Malcolm Currie 417,130 * *
- -------------------------------------- ------------------------------ ----------------------------- ------------------
Donald H. Dreyer 315,009 * *
- -------------------------------------- ------------------------------ ----------------------------- ------------------
James M. Strock 136,260 * *
- -------------------------------------- ------------------------------ ----------------------------- ------------------
John R. Wallace 44,444 * *
- -------------------------------------- ------------------------------ ----------------------------- ------------------
Delphi Delco Electronics 1,278,720(6) * *
- -------------------------------------- ------------------------------ ----------------------------- ------------------
Jean Schulz 1,329,111(7) * *
- -------------------------------------- ------------------------------ ----------------------------- ------------------
All directors and executive officers 38,907,084(8) 10.02% 11.02%
as a group (8 persons)
- -------------------------------------- ------------------------------ ----------------------------- ------------------
* Indicates less than 1%
(1) Number of Common Stock shares includes Series A Preferred Stock,
Series B Preferred Stock and Common Stock shares issuable pursuant to
stock options, warrants and other securities convertible into Common
Stock beneficially held by the person or class in question which may
be exercised or converted within 60 days after March 25, 2003.
(2) The percentages are based on the number of shares of Common Stock,
Series A Preferred Stock and Series B Preferred Stock owned by the
shareholder divided by the sum of: (i) the total Common Stock
outstanding, (ii) the Series A Preferred Stock owned by such
shareholder; (iii) the Series B Preferred Stock owned by such
shareholder;
29
and (iv) Common Stock issuable pursuant to warrants, options and other
convertible securities exercisable or convertible by such shareholder
within sixty (60) days after March 25, 2003.
(3) The percentages are based on the number of shares of Common Stock,
Series A Preferred Stock and/or Series B Preferred Stock owned by the
shareholder divided by the sum of: (i) the total Common Stock
outstanding, (ii) the total Series A Preferred Stock outstanding and
(iii) the total Series B Preferred Stock outstanding. This percentage
calculation has been included to show more accurately the actual
voting power of each of the shareholders, since the calculation takes
into account the fact that the outstanding Series A Preferred Stock
and Series B Preferred Stock are entitled to vote together with the
Common Stock as a single class on certain matters to be voted upon by
the shareholders.
(4) Includes 1,200,000 shares of Common Stock issuable pursuant to stock
options issued under an employee stock option plan exercisable at a
price of $0.10 per share. The option exercise price, for Mr. Perry's
and other employees under the 1996 Stock Option Plan, was reset to
$0.10 per share from $0.30 per share on August 19, 1998 at the
direction of the Board of Directors.
(5) Includes 1,000,000 shares of Common Stock issued to Silicon Prairie
Partners, LP, a limited partnership in which John J. Micek III is the
general partner.
(6) The number of shares shown represents the ownership of 639,360 shares
of Series B Preferred Stock, each of which is convertible into two
shares of Common Stock. These 639,360 shares represent more than 5% of
the outstanding shares of Series B Preferred Stock.
(7) The number of shares shown represents the ownership of 1,329,111
shares of Series A Preferred Stock, each of which is convertible into
one share of Common Stock. These 1,329,111 shares represent more than
5% of the outstanding shares of Series A Preferred Stock.
(8) Includes 1,400,000 shares of Common Stock issuable pursuant to stock
options exercisable at price of $.10 and $.11 per share and 1,000,000
shares of Common Stock issued to Silicon Prairie Partners, LP, a
limited partnership in which John J. Micek III is the general partner.
Equity Compensation Plan Information
The following table provides information regarding our equity compensation plans
as of December 31, 2002.
Equity Compensation Plan Information
=============================================================================================================
Number of securities
remaining available
for
Future issuance
Weighted-average under
Number of securities to exercise price of equity compensation
Ne issued upon exercise outstanding plans (excluding
of outstanding options, options, securities reflected in
warrants and rights warrants and rights column (a))
Plan category (a) (b) (c)
================================ ======================== ==================== =======================
Equity compensation plans
approved by security holders 28,380,256 $0.20 16,619,744
Equity compensation plans not
approved by security holders -- -- --
Total 28,380,256 $0.20 16,619,744
Our board of directors adopted the 1996 Employee Stock Option Plan in
October 1996 which was subsequently approved by our shareholders in May 1997. A
total of 15,000,000 shares were reserved for issuance under the 1996 Plan.
Options granted under the 1996 Plan may be either incentive stock options, as
defined in Section 422 of the Internal Revenue Code of 1986, or nonstatutory
stock options. The 1996 Plan provides that options may be granted to employees
(including officers and directors who are also employees), directors and
consultants. Incentive stock options may only be granted to employees. In 1999,
our board of directors and shareholders approved an amendment to the 1996 Plan
to increase the number of shares of common stock reserved for issuance
thereunder by 30,000,000 shares, bringing the total number of shares issuable
under the 1996 Plan to 45,000,000. The share increase to
30
the 1996 Plan assured that a sufficient reserve of common stock are available to
provide us with the continuing opportunity to utilize equity incentives to
attract and retain the services of employees essential to our long-term growth
and financial success. A copy of the actual 1996 Plan document has been
previously filed with the Securities and Exchange Commission.
Options granted under the amended Plan will vest over such periods as may
be determined by the board of directors and will generally have an exercise
price equal to the closing price for our stock on the NASDAQ OTC Bulletin Board
on the last trading day immediately prior to the date of grant. As of December
31, 2002, the Company had reserved 16,619,744 common shares for issuance under
the amended Plan. Options to purchase 900,000 shares of Enova common stock were
granted to employees in 2002.
Item 13. Certain Relationships and Related Transactions.
The following are certain transactions entered into between Enova and its
officers, directors and principal shareholders and their affiliates since
January 1, 2002.
Jagen Pty, Ltd. And Anthony N. Rawlinson
In June 2002, Jagen Pty, Ltd. purchased 20,000,000 shares of common stock
at $0.10 in a private placement for a total cash purchase price of $2,000,000.
Jagen represented that it was an accredited investor under the definition set
forth by the Securities and Exchange Commission. The Company relied on Rule 506
of Regulation D and Section 4(2) of the Securities Act for the exemption from
registration of the sale of such shares.
A fee of $205,500 was paid in conjunction with the funding of $4.21 million
previously disclosed to The Global Value Investment Portfolio Management Pte
Ltd, a Singapore Company which is substantially owned by two affiliated parties;
Anthony N. Rawlinson, Chairman of the Board of our Company and Borl partnership,
owned by Boris Liberman Family Trusts, which is also affiliated with Jagen Pty
Ltd., a large shareholder in Enova Systems.
John J. Micek III
In June 2002, Silicon Prairie Partners, LP, a limited partnership in which
John J. Micek III is the general partner, purchased 1,000,000 shares of common
stock at $0.10 in a private placement for a total cash purchase price of
$100,000. Silicon Prairie represented that it was an accredited investor under
the definition set forth by the Securities and Exchange Commission. The Company
relied on Rule 506 of Regulation D and Section 4(2) of the Securities Act for
the exemption from registration of the sale of such shares.
Item 14. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. Enova's Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of Enova's
disclosure controls and procedures (as such term is defined in Rules 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"). Based on such evaluation, such officers
have concluded that, as of the Evaluation Date, Enova's disclosure controls and
procedures are effective in alerting them on a timely basis to material
information relating to Enova required to be included in Enova's periodic
filings under the Exchange Act. Evaluation of Disclosure Controls and
Procedures.
(b) Changes in Internal Controls. Since the Evaluation Date, there have not been
any significant changes in Enova's internal controls or in other factors that
could significantly affect such controls.
31
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on form 8-K.
(a)1. Financial Statements
The financial statements filed as a part of this report are identified
in the Index to Financial Statements on page F-1.
(a)2. Financial Statement Schedule
No financial statement schedules are filed as a part of this report.
(a)3. Exhibits
See Item 15 (C) for Index of Exhibits.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended December 31, 2002
(c) Exhibits
Exhibit Number Description
- --------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of the Registrant
(filed as Exhibit 3.1 to the Registrant's Annual Report on Form
10K for the year ended December 31, 2000 filed on March 30, 2001
and incorporated herein by reference).
3.2 Bylaws of Registrant (filed as Exhibit 3.12 to the Registration
Statement on Form 10 filed on November 29, 1994, and incorporated
herein by reference).
4.1 Cashless Exercise Warrants dated October 25, 1996 issued to
Fontal International, Ltd. (filed as Exhibit 4.1 to the
Registrant's Annual Report on Form 10-K for the year ended July
31, 1996, as filed on November 12, 1996, and incorporated herein
by reference).
10.1 Form of Stock Option Agreement under 1993 Employee and Consultant
Stock Plan (filed as Exhibit 10.15 to the Registration Statement
on Form 10 filed on November 29, 1994, and incorporated herein by
reference).
10.2 Form of Solar Electric Engineering, Inc. 1993 Employee and
Consultant Stock Plan (filed as Exhibit 10.16 to the Registration
Statement on Form 10 filed on November 29, 1994, and incorporated
herein by reference).
10.3 Form of Confidential Private Placement Memorandum and Debt
Restructuring Disclosure Statement of U.S. Electricar, Inc.,
dated January 2, 1996, delivered by Enova to certain of its
unsecured trade creditors, including exhibits (filed as Exhibit
10.91 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1996, as filed on March 18, 1996, and
incorporated herein by reference).
10.4 Form of Stock Purchase, Note and Debt Exchange Agreement dated
January 2, 1996 between Enova and certain unsecured trade
creditors (filed as Exhibit 10.92 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1996, as
filed on March 18, 1996, and incorporated herein by reference).
10.5 Form of Indemnification Agreement (filed as Exhibit 10.63 to the
Registration Statement on Form 10 filed on November 29, 1994, and
incorporated herein by reference).
10.6 Form of Security Agreement made as of May 31, 1995, between Enova
and Credit Managers Association of California, Trustee (filed as
Exhibit 10.85 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended April 30, 1996, as filed on June 14, 1996,
and incorporated herein by reference).
32
10.7 Amended 1996 Employee and Consultant Stock Option Plan (filed as
Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for
fiscal year ended July 31, 1999, as filed on October 29, 1999,
and incorporated herein by reference).
10.8 Stock Purchase Agreement and Technology License Agreement dated
February 27, 1997, by and between Enova and Hyundai Motor Company
and Hyundai Electronics Industries Co., Ltd. (filed as Exhibit
10.98 to the Registrant's Quarterly Report on Form 10-Q for
fiscal quarter ended January 31, 1997, as filed on March 14,
1997, and incorporated herein by reference).
10.9 Loan Agreement for $400,000 convertible promissory note with
Fontal International, Ltd., dated April 30, 1997 (filed as
Exhibit 10.99 to the Registrant's Quarterly Report on Form 10-Q
for fiscal quarter ended April 30, 10997, as filed on June 13,
1997, and incorporated herein by reference).
10.10 Agreement of Debt Forgiveness by and between Carl D. Perry and
the Registrant dated July 30, 1999 (filed as Exhibit 10.10 to the
Registrant's Annual Report on Form 10-K for fiscal year ended
July 31, 1999, as filed on October 29, 1999, and incorporated
herein by reference).
10.11 Agreement of Terms by and between the Registrant and Carl D.
Perry (filed as Exhibit 10.11 to the Registrant's Annual Report
on Form 10-K for fiscal year ended July 31, 1999, as filed on
October 29, 1999, and incorporated herein by reference).
10.12 Securities Purchase Agreement dated as of June 1, 1999, by and
between the Registrant and Jagen Pty, Ltd. and Anthony N.
Rawlinson (filed as Exhibit 10.12 to the Registrant's Annual
Report on Form 10-K for fiscal year ended July 31, 1999, as filed
on October 29, 1999, and incorporated herein by reference).
10.13 Shareholders' Agreement dated as of June 1, 1999, by and among
Jagen Pty, Ltd. and Anthony N. Rawlinson, Carl D. Perry and the
Registrant (filed as Exhibit 10.13 to the Registrant's Annual
Report on Form 10-K for fiscal year ended July 31, 1999, as filed
on October 29, 1999, and incorporated herein by reference).
10.14 Loan and Security Agreement dated as of June 1, 1999, by and
among the Registrant, Jagen Pty, Ltd. and Anthony N. Rawlinson
(filed as Exhibit 10.14 to the Registrant's Annual Report on Form
10-K for fiscal year ended July 31, 1999, as filed on October 29,
1999, and incorporated herein by reference).
10.15 Convertible Secured Promissory Note dated June 1, 1999 by the
Registrant in favor of Jagen Pty, Ltd. in the principal amount of
$400,000 (filed as Exhibit 10.15 to the Registrant's Annual
Report on Form 10-K for fiscal year ended July 31, 1999, as filed
on October 29, 1999, and incorporated herein by reference).
10.16 Letter of Intent between Registrant and a domestic supplier,
dated December 9, 1999, to design, develop and manufacture low
voltage electric drive system components (filed as Exhibit 10.16
to the Registrant's Annual Report on Form 10-K for fiscal year
ended December 31, 2000 and incorporated herein by reference).
10.17 Put/Call Option to sell Itochu shares between Registrant and Carl
D. Perry dated September 1, 1999 (filed as Exhibit 10.16 to the
Registrant's Annual Report on Form 10-K for fiscal year ended
December 31, 2000 and incorporated herein by reference).
10.18 Agreement (redacted) between the Registrant and a customer dated
June 14, 2001, to develop and produce power management systems.
(filed as Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for Six Months ended June 30, 2001 and incorporated
herein by reference).
10.19 Agreement (redacted) between the Registrant and Eco Power
Technology, dated June 12, 2001, to produce and sell power drive
systems (filed as Exhibit 10.19 to Amendment No. 6 to the
Registrant's Registration Statement on Form S-1, No. 333-85308,
and incorporated herein by reference).
10.20 Agreement (redacted) between the Registrant and Tomoe
Electro-Mechanical Engineering and Manufacturing, Inc., dated
November 19, 2001, to produce and sell power drive systems (filed
as Exhibit 10.20 to Amendment No. 6 to the Registrants
Registration Statement on Form S-1, No. 333-85308, and
incorporated herein by reference).
33
10.21 Agreement (redacted) between the Registrant and Moriah
Corporation, dated January 22, 2002, to produce and sell power
drive systems (filed as Exhibit 10.21 to Amendment No. 6 to the
Registrant's Registration Statement on Form S-1, No. 333-85308,
and incorporated herein by reference).
10.22 Form of Stock Purchase Agreement dated June 7, 2002 between
Registrant and each of the selling shareholders listed in a
Prospectus dated July 26, 2002 (filed as Exhibit 10.22 to
Amendment No. 1 to the Registrant's Registration Statement on
Form S-1, No. 333-96829, and incorporated herein by reference).
10.23 Form of Registration Rights Agreement dated June 7, 2002 between
Registrant and each of the selling shareholders listed in a
Prospectus dated July 26, 2002 (filed as Exhibit 10.23 to
Amendment No. 1 to the Registrant's Registration Statement on
Form S-1, No. 333-96829, and incorporated herein by reference).
23.1* Consent of Moss Adams, LLP, Independent Auditors
24* Power of Attorney (included on signature page)
99.1* CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
- ----------------------
* Filed herewith.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf of the undersigned, thereunto duly authorized, on March 28, 2002.
ENOVA SYSTEMS, INC.
By: /s/ Carl D. Perry
- --------------------------------
Carl D. Perry, Chief Executive Officer and Acting Chief Financial Officer
Dated: March 31, 2003
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Carl D. Perry, with full power to act alone, his
true and lawful attorney-in-fact and agent, with full power of substitution for
him and in his name, place and stead, in any and all capacities, to sign any and
all amendments to the annual report on Form 10-K, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in connection as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated. Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the date
indicated.
Signature Title Date
- --------- ----- ----
/s/ Carl D. Perry Chief Executive March 31, 2003
- ---------------------------------- Officer and Director
Carl D. Perry (Principal Executive Officer)
/s/ Anthony N. Rawlinson Chairman March 31, 2003
- ---------------------------------
Anthony N. Rawlinson
/s/ s Malcolm Currie Director March 31, 2003
- ---------------------------------
Malcolm Currie
/s/ Edwin O. Riddell Director March 31, 2003
- ---------------------------------
Edwin O. Riddell
/s/ John J. Micek, III Director March 31, 2003
- ---------------------------------
John J. Micek, III
/s/ Donald H. Dreyer Director March 31, 2003
- ---------------------------------
Donald H. Dreyer
/s/ James M. Strock Director March 31, 2003
- ---------------------------------
James M. Strock
/s/ John R. Wallace Director March 31, 2003
- ---------------------------------
John R. Wallace
35
CERTIFICATIONS
I, Carl D. Perry, certify that:
1. I have reviewed this annual report on Form 10-K of Enova Systems, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) 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 annual report is being prepared;
b) 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) 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 auditors any material weaknesses in internal controls; and
b) 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
annual report whether 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: March 31, 2003
/s/ Carl D. Perry
- -----------------------------------
Carl D. Perry,
Chief Executive Officer and Acting Chief Financial Officer
36
- --------------------------------------------------------------------------------
[LOGO] ENOVA SYSTEMS
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONTENTS
PAGE
INDEPENDENT AUDITOR'S REPORT.................................................F-1
FINANCIAL STATEMENTS
Balance sheets..........................................................F-2
Statements of operations................................................F-3
Statements of stockholders' equity......................................F-4
Statements of cash flows................................................F-5
Notes to financial statements...........................................F-6
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Enova Systems, Inc.
We have audited the accompanying balance sheets of Enova Systems, Inc., as of
December 31, 2002 and 2001, and the statements of operations, stockholders'
equity, and cash flows for each of the three years ended December 31, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enova Systems, Inc., as of
December 31, 2002 and 2001, and the results of its operations and cash flows for
each of the three years ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
/s/ MOSS ADAMS LLP
Santa Rosa, California
February 24, 2003
Page F-1
ENOVA SYSTEMS, INC.
BALANCE SHEETS
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
ASSETS
2002 2001
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 1,868,000 $ 1,179,000
Accounts receivable 1,256,000 1,237,000
Inventories and supplies 1,652,000 926,000
Current maturities of related party receivable 32,000 25,000
Prepaids and other current assets 107,000 87,000
------------ ------------
Total current assets 4,915,000 3,454,000
PROPERTY AND EQUIPMENT 811,000 280,000
RELATED PARTY RECEIVABLE, less current maturities -- 32,000
OTHER ASSETS 498,000 574,000
------------ ------------
Total assets $ 6,224,000 $ 4,340,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,192,000 $ 167,000
Line of credit 14,000 --
Accrued payroll and related expenses 240,000 194,000
Other accrued expenses 95,000 53,000
Current maturities of long-term debt 120,000 120,000
Current maturities of capital lease obligations 28,000 9,000
------------ ------------
Total current liabilities 1,689,000 543,000
ACCRUED INTEREST PAYABLE 889,000 677,000
CAPITAL LEASE OBLIGATIONS, less current maturities 27,000 20,000
LONG-TERM DEBT, less current maturities 3,332,000 3,332,000
------------ ------------
Total liabilities 5,937,000 4,572,000
------------ ------------
STOCKHOLDERS' EQUITY
Series A convertible preferred stock - no par value; 30,000,000 shares
authorized; 2,824,000 and 2,844,000 shares issued and outstanding;
liquidating preference at $0.60 per share aggregating $1,695,000
and $1,706,000 1,842,000 1,867,000
Series B convertible preferred stock - no par value; 5,000,000 shares
authorized; 1,217,000 shares issued and outstanding; liquidating
preference at $2.00 per share aggregating $2,434,000 2,434,000 2,434,000
Common stock - no par value; 500,000,000 shares authorized;
345,194,000 and 302,502,000 shares issued and outstanding 84,026,000 79,859,000
Common stock subscribed 130,000 160,000
Stock notes receivable (1,203,000) (1,208,000)
Additional paid-in capital 6,949,000 6,949,000
Accumulated deficit (93,891,000) (90,293,000)
------------ ------------
Total stockholders' equity 287,000 (232,000)
------------ ------------
Total liabilities and stockholders' equity $ 6,224,000 $ 4,340,000
============ ============
See accompanying notes.
- --------------------------------------------------------------------------------
Page F-2
ENOVA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 2002, 2001, and 2000
- --------------------------------------------------------------------------------
2002 2001 2000
------------- ------------- -------------
NET REVENUES
Research and development contracts $ 1,843,000 $ 2,813,000 $ 2,483,000
Production 2,612,000 967,000 400,000
------------- ------------- -------------
4,455,000 3,780,000 2,883,000
------------- ------------- -------------
COST OF REVENUES
Research and development contracts 1,288,000 2,149,000 1,653,000
Production 2,496,000 634,000 360,000
------------- ------------- -------------
3,784,000 2,783,000 2,013,000
------------- ------------- -------------
GROSS PROFIT 671,000 997,000 870,000
------------- ------------- -------------
OTHER COSTS AND EXPENSES
Research and development 1,152,000 879,000 626,000
Selling, general, and administrative 2,837,000 2,894,000 1,999,000
Interest and financing fees 199,000 113,000 174,000
(Gain) loss on disposition of fixed assets -- (7,000) 6,000
Legal settlements 81,000 900,000 75,000
------------- ------------- -------------
4,269,000 4,779,000 2,880,000
------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS (3,598,000) (3,782,000) (2,010,000)
EXTRAORDINARY ITEM - GAIN ON DEBT
RESTRUCTURING -- 354,000 1,551,000
------------- ------------- -------------
NET LOSS $ (3,598,000) $ (3,428,000) $ (459,000)
============= ============= =============
LOSS PER COMMON SHARE
Loss from continuing operations $ (0.01) $ (0.01) $ (0.01)
Gain on debt restructuring -- -- 0.01
------------- ------------- -------------
$ (0.01) $ (0.01) $ --
============= ============= =============
WEIGHTED AVERAGE OF COMMON
SHARES OUTSTANDING 326,390,422 275,188,979 235,199,406
============= ============= =============
See accompanying notes.
- --------------------------------------------------------------------------------
Page F-3
ENOVA SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2002, 2001, and 2000
- --------------------------------------------------------------------------------
Preferred Stock
--------------------------------------------- Common Stock
Series A Series B Common Stock Subscribed
---------------------- ---------------------- ------------------------- ----------------------
Shares Amount Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ----------- ------------ ------------ ---------- ----------- -
Balance, December 31, 1999 3,239,000 $2,166,000 1,242,000 $ 2,486,000 252,012,000 $ 71,526,000 5,563,000 $ 1,445,000
Common Stock Transactions
Conversion of Series A
preferred stock (395,000) (299,000) -- -- 395,000 299,000 -- --
Conversion of Series B
preferred stock -- -- (25,000) (52,000) 71,000 52,000 -- --
Stock options exercised -- -- -- -- 3,315,000 392,000 -- --
Sale of stock -- -- -- -- 6,667,000 2,000,000 -- --
Stock issued for services -- -- -- -- 5,722,000 1,497,000 (5,518,000) (1,432,000)
Conversion of debt -- -- -- -- 37,000 14,000 -- --
Repurchase of stock from
stockholder -- -- -- -- (23,970,000) (100,000) -- --
Debt forgiveness by stockholder -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
--------- ---------- --------- ----------- ----------- ------------ ---------- -----------
Balance, December 31, 2000 2,844,000 1,867,000 1,217,000 2,434,000 244,249,000 75,680,000 45,000 13,000
Common Stock Transactions
Stock issued on exercise
of warrants -- -- -- -- 50,000,000 3,000,000 -- --
Stock options exercised -- -- -- -- 1,805,000 181,000 -- --
Stock issued for services -- -- -- -- 448,000 98,000 955,000 147,000
Stock issued in legal
settlement -- -- -- -- 6,000,000 900,000 -- --
Warrants issued for value
participation agreement -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
--------- ---------- --------- ----------- ----------- ------------ ---------- -----------
Balance, December 31, 2001 2,844,000 1,867,000 1,217,000 2,434,000 302,502,000 79,859,000 1,000,000 160,000
Common Stock Transactions
Conversion of Series A
preferred stock (20,000) (25,000) -- -- 20,000 25,000 -- --
Sale of stock, net of
issuance
costs of $206,000 -- -- -- -- 41,100,000 3,904,000 1,000,000 100,000
Stock options exercised -- -- -- -- 30,000 3,000 -- --
Stock issued for services -- -- -- -- 1,242,000 190,000 (628,000) (130,000)
Stock issued in legal
settlement -- -- -- -- 300,000 45,000 -- --
Stock notes receivable -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
--------- ---------- --------- ----------- ----------- ------------ ---------- -----------
Balance, December 31, 2002 2,824,000 $1,842,000 1,217,000 $ 2,434,000 345,194,000 $ 84,026,000 1,372,000 $ 130,000
========= ========== ========= =========== =========== ============ ========== ===========
Additional Stock
Paid-In Notes Accumulated
Capital Receivable Deficit Total
----------- ----------- ------------- -----------
Balance, December 31, 1999 $4,917,000 $(1,149,000) $(86,406,000) $(5,015,000)
Common Stock Transactions
Conversion of Series A
preferred stock -- -- -- --
Conversion of Series B
preferred stock -- -- -- --
Stock options exercised -- -- -- 392,000
Sale of stock -- -- -- 2,000,000
Stock issued for services -- -- -- 65,000
Conversion of debt -- -- -- 14,000
Repurchase of stock from
stockholder -- -- -- (100,000)
Debt forgiveness by stockholder 1,455,000 -- -- 1,455,000
Net loss -- -- (459,000) (459,000)
---------- ----------- ------------ -----------
Balance, December 31, 2000 6,372,000 (1,149,000) (86,865,000)
Common Stock Transactions
Stock issued on exercise
of warrants -- -- -- 3,000,000
Stock options exercised -- (59,000) -- 122,000
Stock issued for services -- -- -- 245,000
Stock issued in legal
settlement -- -- -- 900,000
Warrants issued for value
participation agreement 577,000 -- -- 577,000
Net loss -- -- (3,428,000)
---------- ----------- ------------ -----------
Balance, December 31, 2001 6,949,000 (1,208,000) (90,293,000) (232,000)
Common Stock Transactions
Conversion of Series A
preferred stock -- -- -- --
Sale of stock, net of
issuance
costs of $206,000 -- -- -- 4,004,000
Stock options exercised -- -- -- 3,000
Stock issued for services -- -- -- 60,000
Stock issued in legal
settlement -- -- -- 45,000
Stock notes receivable -- 5,000 -- 5,000
Net loss -- -- (3,598,000) (3,598,000)
---------- ----------- ------------ -----------
Balance, December 31, 2002 $6,949,000 $(1,203,000) $(93,891,000) $ 287,000
========== =========== ============ ===========
See accompanying notes.
- --------------------------------------------------------------------------------
Page F-4
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002,2001 and 2000
- --------------------------------------------------------------------------------
2002 2001 2000
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,598,000) $(3,428,000) $ (459,000)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization 134,000 205,000 136,000
Loss on disposition of fixed assets -- -- 6,000
Gain on debt restructuring and extinguishment -- (210,000) (1,551,000)
Stock issued for services 60,000 245,000 66,000
Stock issued for legal settlement 45,000 900,000 --
Accrued interest forgiven -- -- 156,000
Change in operating assets and liabilities:
Accounts receivable (19,000) (233,000) (432,000)
Inventories (727,000) (520,000) (151,000)
Related party receivable 25,000 25,000 25,000
Prepaids and other current assets (20,000) (19,000) (7,000)
Other assets 76,000 (39,000) --
Accounts payable and accrued expenses 1,112,000 (112,000) (120,000)
Accrued interest payable 212,000 163,000 75,000
Customer deposits -- -- (102,000)
----------- ----------- -----------
Net cash from operating activities (2,700,000) (3,023,000) (2,358,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Equipment acquisitions (613,000) (219,000) (88,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change from line of credit 14,000 -- --
Payments on stock notes receivable 5,000 -- --
Proceeds from exercise of warrants and options 3,000 3,122,000 --
Proceeds from sale of stock 4,210,000 -- 2,392,000
Stock issuance costs (206,000) -- --
Purchase of common stock -- -- (100,000)
Payments on notes payable and capital lease obligations (24,000) (11,000) (1,000)
----------- ----------- -----------
Net cash from financing activities 4,002,000 3,111,000 2,291,000
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 689,000 (131,000) (155,000)
CASH AND CASH EQUIVALENTS, beginning of year 1,179,000 1,310,000 1,465,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 1,868,000 $ 1,179,000 $ 1,310,000
=========== =========== ===========
SUPPLEMENTAL CASH-FLOW INFORMATION
Cash paid during the year for interest $ 8,000 $ 5,000 $ 40,000
Non-cash investing and financing activities:
Conversion of preferred stock to common stock $ 25,000 $ -- $ 351,000
Conversion of debt and accrued interest to equity $ -- $ -- $ 1,470,000
Equipment acquired under capital lease $ 52,000 $ -- $ 41,000
See accompanying notes.
- --------------------------------------------------------------------------------
Page F-5
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Description of operations - Enova Systems, Inc., is a California corporation
that develops drive trains and related components for electric, hybrid electric,
and fuel cell systems for mobile and stationary applications. The Company
retains development and manufacturing rights to many of the technologies
created, whether such research and development is internally or externally
funded. The Company develops and sells components in the United States and Asia,
and sells components in Europe.
Cash equivalents - Highly liquid investments with an original maturity of three
months or less are considered cash equivalents.
Inventory - Inventory is comprised of materials used in the design and
development of electric, hybrid electric, and fuel cell drive systems, and other
power and ongoing management and control components for production and ongoing
development contracts, and is stated at the lower of cost (first-in, first-out)
or market.
Property and equipment - Property and equipment are stated at cost and
depreciated using the straight-line method over the estimated useful lives of
the related assets, which range from three to seven years. Long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate the
sum of expected cash flows from use of the asset is less than its carrying
value. Long-lived assets that management commits to sell or abandon are reported
at the lower of carrying amount or fair value less cost to sell.
Income taxes - Income taxes are recognized using enacted tax rates and are
composed of taxes on financial accounting income that is adjusted for
requirements of current tax law and deferred taxes. Deferred taxes are the
expected future tax consequences of temporary differences between the financial
statement carrying amounts and tax bases of existing assets and liabilities.
Revenue recognition - Revenue on engineering and research and development
contracts is recognized at the completion of specified engineering or billing
milestones, as set forth in each agreement. Revenues from sales of components
are recognized when shipped and title passes to the customer.
Loss per common share - Loss per common share is computed using the weighted
average number of common shares outstanding. Since a loss from operations
exists, a diluted earnings per share number is not presented because the
inclusion of common stock equivalents in the computation would be antidilutive.
Common stock equivalents associated with Series A and B preferred stock, stock
options, and warrants, which are exercisable into 37,230,000 shares of common
stock, could potentially dilute earnings per share in future years.
Concentrations of risk - Financial instruments potentially subjecting the
Company to concentrations of credit risk consist primarily of trade receivables
and bank demand deposits that may, from time to time, be in excess of FDIC
insurance thresholds. Two customers accounted for approximately 46% and 37% of
total revenues for the years ended December 31, 2002 and 2001, and represented
24% and 52% of total receivables at the respective year-ends. Another customer,
Hyundai, is a stockholder that holds less than 5% of the outstanding common
stock. Hyundai accounted for approximately 16%, 13%, and 56% of total revenues
for the years ended December 31, 2002, 2001, and 2000. Demand deposits are
placed with known creditable financial institutions
Accounts receivable - Receivables are reported at net realizable value and are
considered past due when payments have not been received for 90 days. In
general, receivables are charged off as uncollectible upon exhausting all
avenues of collection. Receivables older than 90 days totaled $365,200 and
$242,200 at December 31, 2002, and 2001.
Use of estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Company to make estimates and assumptions affecting the reported
amounts of assets, liabilities, revenues and expenses, and the disclosure of
contingent assets and liabilities. The amounts estimated could differ from
actual results, and the difference could have a significant impact on the
financial statements.
- --------------------------------------------------------------------------------
Page F-6
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Shipping costs - Shipping and handling costs are included in costs of goods
sold.
Fair value of financial instruments - The fair value of a financial instrument
is the amount at which the instrument could be exchanged in a current
transaction between willing parties. For certain of the Company's financial
instruments, including cash, accounts receivable, and accounts payable, the
carrying amount approximates fair value because of the short maturities. The
fair value of the Company's short-term and long-term debt may be substantially
less than the carrying value since there is no readily ascertainable market for
the debt given the financial position of the Company.
Stock-based compensation - The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees,
and complies with the disclosure provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Under APB No.
25, compensation expense is the excess, if any, of the fair value of the
Company's stock at a measurement date over the amount that must be paid to
acquire the stock. SFAS No. 123 requires a fair value method to be used when
determining compensation expense for stock options and similar equity
instruments. SFAS No. 123 permits a company to continue to use APB No. 25 to
account for stock-based compensation to employees, but pro forma disclosures of
net income and earnings per share must be made as if SFAS No. 123 had been
adopted in its entirety. Stock options issued to non-employees are valued under
the provisions of SFAS No. 123. Had compensation cost for the Company's options
been determined based on the methodology prescribed under SFAS No. 123, the
Company's net income and income per share would have been as follows:
2002 2001 2000
----------- ----------- -----------
Net loss for the year $(3,598,000) $(3,428,000) $ (459,000)
Compensation expense, net of tax effect 197,000 776,500 88,000
----------- ----------- -----------
Proforma net loss $(3,795,000) $(4,204,500) $ (547,000)
=========== =========== ===========
Proforma loss per common share $ (0.01) $ (0.01) $ (0.01)
=========== =========== ===========
The fair value of each option is estimated on date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
2002 2001 2000
-------- -------- --------
Dividends 0% 0% 0%
Expected volatility 83% 125% 124%
Risk-free interest rate 4% 5% 5%
Expected life 5 years 5 years 5 years
Recent accounting pronouncements - The Financial Accounting Standards Board
(FASB) has issued the following accounting pronouncements:
SFAS No.145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections. This Statement rescinds FASB
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB
Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This
Statement amends FASB Statement 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. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The adoption of SFAS No. 145 is not expected to have a material
effect on the Company's financial statements.
- --------------------------------------------------------------------------------
Page F-7
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SFAS No.146, Accounting for Costs Associated with Exit or Disposal Activities.
This Statement addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged. The adoption of SFAS No. 146 is not expected to have a
material effect on the Company's financial statements.
SFAS No.147, Accounting for Certain Acquisitions of Banking or Thrift
Institutions and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17
When a Savings and Loan Association or a Similar Institution is Acquired in a
Business Combination Accounted for by the Purchase Method. This Statement will
not have an impact on the Company's financial statements.
SFAS No.148, Accounting for Stock-Based Compensation. This Statement addresses
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. This statement
permits two additional transition methods that avoid the ramp-up effect arising
from prospective application of the fair value based method addresses
alternative. In addition, it amends the disclosure requirements of Statement 123
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. As of December 31, 2002, the
Company has adopted the disclosure requirements of the Statement and continues
to follow the intrinsic value method to account for stock-based employee
compensation.
Financial Accounting Standards Board Interpretation (FASBI) No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The Interpretation clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. It
also significantly expands the disclosures guarantors must include in their
financial statements. While the Interpretation's accounting provisions are
effective prospectively to guarantees issued or modified after December 31,
2002, its disclosure requirements generally apply to all guarantees and must be
included in financial statements of interim and annual periods ending after
December 15, 2002. The adoption of Interpretation No. 45 is not expected to have
a material effect on the Company's financial statements.
NOTE 2 - PROPERTY AND EQUIPMENT
2002 2001
---------- ----------
Computers $ 177,000 $ 154,000
Machinery and equipment 643,000 407,000
Furniture and office equipment 189,000 186,000
Demonstration vehicles and buses 497,000 147,000
Leasehold improvements 68,000 68,000
Equipment under capital lease 94,000 41,000
---------- ----------
1,668,000 1,003,000
Less accumulated depreciation and amortization 857,000 723,000
---------- ----------
$ 811,000 $ 280,000
========== ==========
- --------------------------------------------------------------------------------
Page F-8
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - RELATED-PARTY RECEIVABLE
Hyundai, a stockholder, acquired certain technology licensing rights from the
Company in 1997. Part of the consideration for these rights included periodic
installment payments of $25,000 per year for six years, with the final payment
expected in February 2003.
NOTE 4 - OTHER ASSETS
Legal costs of $78,000 that are associated with two patents have been
capitalized and will be amortized over the life of the patents, beginning in
2003.
In June 2001, a strategic relationship with Ford Motor Company was entered into
to develop and manufacture a high power, high voltage conversion module for
Ford's fuel cell vehicle. Warrants were issued to Ford Motor Company in exchange
for Ford's commitment to enter into a five-year agreement. The issuance of the
warrants was recorded as a noncurrent asset (Value Participation Agreement) at
its fair market value of $577,000, which was determined using the Black-Scholes
option pricing model, and is being amortized on a straight-line basis over the
life of the contract.
2002 2001
-------- --------
Patents $ 78,000 $ 49,000
Valuation Participation Agreement 577,000 577,000
-------- --------
655,000 626,000
Less accumulated amortization 157,000 52,000
-------- --------
$498,000 $574,000
======== ========
NOTE 5 - LINE OF CREDIT
The Company has available a bank line of credit that provides for borrowings of
up to $250,000, with interest payable monthly at 3.25%. The line matures in
October 2003 and is secured by the Company's assets.
NOTE 6 - LONG-TERM DEBT
2002 2001
------------ ------------
Secured promissory note to Credit Managers Association of
California, with interest at 3% for the first five years beginning
June 1996, 6% for years six and seven, and then at prime plus
3% through maturity; interest payments are made upon payment
of principal, which is due no later than April 2016; a sinking fund
escrow is required to be funded with 10% of future equity
financing, as defined in the agreement $ 3,332,000 $ 3,332,000
Unsecured promissory note with interest at 10%; note is past due 120,000 120,000
------------ ------------
3,452,000 3,452,000
Less current maturities 120,000 120,000
------------ ------------
$ 3,332,000 $ 3,332,000
============ ============
- --------------------------------------------------------------------------------
Page F-9
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - CAPITAL LEASE OBLIGATIONS
The Company rents manufacturing and office equipment under various capital lease
agreements that expire beginning in 2003. Future minimum lease payments under
these capital lease agreements are as follows:
Year Ending December 31,
------------------------
2003 $ 36,000
2004 27,000
2005 8,000
2006 1,000
---------
72,000
Less amounts representing interest 17,000
---------
Present value of minimum lease payments 55,000
Less current maturities 28,000
---------
$ 27,000
=========
NOTE 8 - OPERATING LEASES
The Company's lease on its Torrance, California, facility expires in February
2008. Rent expense was $206,000, $210,000, and $177,000 for the years ended
December 31, 2002, 2001, and 2000. Future minimum lease payments are as follows:
Year Ending December 31,
------------------------
2003 $111,000
2004 161,000
2005 163,000
2006 166,000
2007 168,000
Thereafter 28,000
--------
$797,000
========
NOTE 9 - STOCKHOLDERS' DEFICIT
Series A preferred stock - Series A preferred stock is currently unregistered
and convertible into common stock on a one-to-one basis at the election of the
holder or automatically upon the occurrence of certain events including: sale of
stock in an underwritten public offering; registration of the underlying
conversion stock; or the merger, consolidation, or sale of more than 50% of the
Company. Holders of Series A preferred stock have the same voting rights as
common stockholders. The stock has a liquidation preference of $0.60 per share
plus any accrued and unpaid dividends in the event of voluntary or involuntary
liquidation of the Company. Dividends are non-cumulative and payable at the
annual rate of $0.036 per share if, when, and as declared by, the Board of
Directors. No dividends have been declared on the Series A preferred stock.
Substantially all of the stock notes receivable stem from a Board of Directors
plan for the sale of shares of Series A preferred stock in 1993 to certain
officers and directors (Participants). In general, the Participants could
purchase the preferred stock for a combination of cash, promissory notes payable
to the Company, and conversion of debt and deferred compensation due to the
Participants. All shares issued under this plan were pledged to the Company as
security for the notes. The notes provided for interest at 8% per annum payable
annually, with the full principal amount and any unpaid interest due on January
31, 1997. The notes remain outstanding. The likelihood of collecting the
interest on these notes is remote; therefore, accrued interest has not been
recorded since the fiscal year ended July 31, 1997.
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Page F-10
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
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Series B preferred stock - Series B preferred stock is currently unregistered
and each share is convertible into shares of common stock on a two-for-one basis
at the election of the holder or automatically upon the occurrence of certain
events including: sale of stock in an underwritten public offering, if the
offering results in net proceeds of $10,000,000, and the per share price of
common stock is at least $2.00; and the merger, consolidation, or sale of common
stock or sale of substantially all of the Company's assets in which gross
proceeds received are at least $10,000,000. The Series B preferred stock has
certain liquidation and dividend rights prior and in preference to the rights of
the common stock and Series A preferred stock. The stock has a liquidation
preference of $2.00 per share together with an amount equal to, generally, $0.14
per share compounded annually at 7% per year from the filing date, less any
dividends paid. Dividends on the Series B preferred stock are non-cumulative and
payable at the annual rate of $0.14 per share if, when, and as declared by, the
Board of Directors. No dividends have been declared on the Series B preferred
stock.
Stock issued for legal settlement - The Company settled an outstanding lawsuit
in 2001 by agreeing to issue 6,000,000 shares of common stock, with a fair
market value on the date of issuance of $900,000. Delays in issuing the stock
resulted in the Company issuing an additional 300,000 shares of stock in 2002.
The fair market value of these additional shares was $45,000.
NOTE 10 - STOCK OPTIONS AND WARRANTS
The 1993 Employee and Consultant Stock Plan expires in 2003. Under the Plan, the
Company reserved 30,000,000 shares of common stock for incentive and
nonstatutory stock options. Options under the Plan expire over periods not to
exceed ten years from date of grant. Options that expire or are canceled may
become available for future grants under the Plan. In addition, the Company
grants other nonstatutory stock options.
Under the Director Stock Option Plan, the Company reserved 1,500,000 shares of
common stock for nonstatutory stock options for nonemployee directors. Options
under this Plan are fully vested upon the granting of the options and expire ten
years from the date of grant unless terminated sooner or upon termination of the
optionee's status as a director. Options that expire or are canceled may become
available for future grants under the Director Option Plan. No options are
outstanding under this Plan.
The 1996 Stock Option Plan reserves 45,000,000 shares for incentive and
nonstatutory stock options during the period of the Plan, which expires in 2006.
Options under the 1996 Plan expire over a period not to exceed ten years.
The following summarizes common stock option activity (shares in thousands):
1996 Plan 1993 Plan Other
--------------------------- --------------------------- --------------------------
Shares Price Shares Price Shares Price
------------- ------------- ------------- ------------- ------------ -------------
Options outstanding at December 31, 1999 20,495,000 0.10-0.30 11,111,000 0.10-0.60 1,495,000 0.60-2.80
Granted 3,600,000 0.17-0.30 -- -- -- --
Exercised (3,286,000) 0.10-0.30 -- -- -- --
Forfeited (344,000) 0.10-0.30 (1,457,000) -- -- --
------------- ------------- ------------
Options outstanding at December 31, 2000 20,465,000 0.10-0.30 9,654,000 0.10-0.60 1,495,000 0.60-2.80
Granted 7,472,000 0.11-0.18 -- -- -- --
Exercised (1,805,000) 0.06-0.11 -- -- -- --
Forfeited (5,266,000) 0.11-0.30 -- -- -- --
------------- ------------- ------------
Options outstanding at December 31, 2001 20,866,000 0.10-0.30 9,654,000 0.10-0.60 1,495,000 0.60-2.80
Granted 900,000 0.10 -- -- -- --
Exercised -- -- (35,000) 0.10 -- --
Forfeited (439,000) 0.11-0.18 (2,565,000) 0.10 -- --
------------- ------------- ------------
Options outstanding at December 31, 2002 21,327,000 0.10-0.30 7,054,000 0.10-0.60 1,495,000 0.60-2.80
============= ============= ============
Weighted average remaining
contractual life 1.9 years .5 years .5 years
============= ============= ============
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Page F-11
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
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Options exercisable were 28,304,228, 26,293,358, and 24,106,626 at December 31,
2002, 2001, and 2000.
The agreement with Ford Motor Company, as discussed in Note 4, included issuing
warrants to Ford to purchase 4.6% of the fully diluted common stock of Enova
Systems over a 66 month period. The number of shares to be acquired will be
adjusted from time to time for increases in the Company's fully diluted common
stock. The vesting of these warrants is dependent upon Ford meeting specific
purchase agreements. Initially, the exercise price of the warrants is equal to
the price of the stock on the date of issuance, with the exercise price adjusted
when the aggregate number of shares is adjusted. Warrants may not be exercised
until July 2003. The fair value of warrants granted were estimated on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions: (1) dividend yield of 0%, (2) expected volatility of 102%, (3)
risk-free interest rate of 4.76%, and (4) an expected life of the warrants of 66
months. Warrants issued and vested under this agreement totaled 2,500,000 at an
exercise price of $0.29 per share during the year ended December 31, 2001. No
warrants were vested under this program during 2002.
NOTE 11 - INCOME TAXES
The California Revenue and Taxation Code has suspended the deductibility of net
operating loss carryovers for the tax years 2002 and 2003. Federal and state
income tax regulations impose restrictions on the utilization of net operating
losses in the event of an ownership change, as defined by Section 382 of the
Internal Revenue Code of 1986. Ownership changes have occurred, with the changes
limiting the future availability of net operating loss carryforwards. The extent
of the limitation has not been determined.
A valuation allowance is required for those deferred tax assets that are not
likely to be realized. Realization is dependent upon future earnings during the
period that temporary differences and carryforwards are expected to be
available. Because of the uncertain nature of their ultimate utilization, based
upon the Company's past performance and the possible limitation on the future
availability of net operating losses, as discussed above, a full valuation
allowance is recorded against these deferred tax assets.
2002 2001
----------- -----------
Deferred tax assets
Federal tax loss carryforward $30,513,000 $25,692,000
State tax loss carryforward 404,000 674,000
Basis difference 1,610,000 1,610,000
Other, net 433,000 290,000
----------- -----------
32,960,000 28,266,000
Less valuation allowance 32,960,000 28,266,000
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
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Page F-12
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Net operating losses expire as follows:
Net Operating Loss
---------------------------
Date of Expiration Federal California
------------------ ------------ -----------
2003 $ 64,000 $ 1,541,000
2004 322,000 709,000
2005 443,000 655,000
2006 680,000 --
2007 2,552,000 --
2008 24,221,000 --
2009 33,460,000 --
2010 9,083,000 177,000
2011 5,557,000 1,770,000
2012 2,998,000 --
2013 1,418,000 --
2014 1,965,000 2,065,000
2015-2022 6,982,000 --
------------- ------------
$ 89,745,000 $ 6,917,000
============= ============
NOTE 12 - EXTRAORDINARY ITEM
In 2000, the Company negotiated repayment of long-term trade payables for less
than the amounts originally recorded. The gain from these negotiated payments is
reflected as an extraordinary item.
In consultation with legal counsel, certain payables were extinguished under a
provision of the California Code of Civil Procedure in which the statute of
limitations precluded the ability of a creditor to commence an action to recover
stale account balances. The Company determined that conditions surrounding the
application of the statute of limitations had been met; accordingly, the 2001
and 2000 extraordinary item includes the gain from these extinguishments.
NOTE 13 - GEOGRAPHIC AREA DATA
The Company operates as a single reportable segment and attributes revenues to
countries based upon the location of the entity originating the sale. Revenues
by geographic area are as follows:
2002 2001 2000
---------- ---------- ----------
United States $2,478,000 $2,854,000 $1,003,000
Korea 726,000 483,000 1,670,000
England -- 84,000 --
Malaysia 65,000 -- --
Japan 87,000 -- --
Ireland 59,000 -- --
Canada -- -- 110,000
Italy 1,040,000 359,000 100,000
---------- ---------- ----------
$4,455,000 $3,780,000 $2,883,000
========== ========== ==========
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Page F-13
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
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NOTE 14 - CONTINGENCIES
Ballard Power Systems cancelled its development and production program for low
voltage 30kw electric drive system components that were for use in Ford's Th!nk
City vehicle. Included in the 2002 inventory is approximately $450,000 of
materials related to this program. Approximately $300,000 of materials and
engineering costs have been incurred by a subcontractor for which the Company
may be liable for payment. Under the terms of the agreement with Ballard and
Ford, the Company believes full reimbursement will be made.
NOTE 15 - SUBSEQUENT EVENTS
The Company has entered into a joint venture agreement (the Agreement) with
Hyundai Heavy Industries of Korea (HHI) to create an advanced technology
corporation (the ATC) to be domiciled in Torrance, California.
In conjunction with this Agreement, HHI and the Company entered into a stock
purchase agreement in which HHI will make a $3 million investment in the Company
through the purchase of shares of the Company's authorized and unissued common
stock pursuant to Regulation D of the Securities Act of 1933. This investment
will be made in two installments of $1.5 million each. The first installment
will be made upon incorporation of the ATC and in consideration for the issuance
to HHI by the Company of 23,076,923 shares of common stock at $0.065 per share.
The second installment of $1.5 million will be made one year after the first
installment in consideration for the issuance to HHI of additional shares of the
Company's common stock at a price per share equal to the average daily volume
weighted closing price of the Company's common stock, as quoted on the NASDAQ
OTC market (or successor trading market) for the three month period preceding
the closing date of the second installment. The Company will invest $1 million
of each installment into the ATC in consideration for the issuance to the
Company of a 40% equity interest in the ATC (the balance of the installments, in
the amount of $500,000 each, will be retained by Enova). HHI will acquire a 60%
equity interest in ATC by investing $3 million in the ATC in two installments of
$1.5 million each, to be made concurrently with the two installment payments to
be paid by HHI for the Company's common stock. At the conclusion of these
transactions, HHI and the Company will have invested an aggregate of $5 million
in the ATC.
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Page F-14