As filed with the Securities and Exchange Commission on August 5, 2004
Registration Statement No. 333-117321
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------------------------------------------------
AMENDMENT NO. 1 to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------------------------------------------------------------
ENOVA SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
California 3711
--------------------------------------------------------
(State or Other Jurisdiction of (Primary Standard Industrial
Incorporation or Organization) Classification Code Number)
95-3056150
(I.R.S. Employer
Identification Number)
--------------------------------------------------
19850 South Magellan Drive
Torrance, California 90502
(310) 527-2800
(Address, Including Zip Code, and Telephone Number
Including Area Code, of Registrant's Principal Executive Offices)
--------------------------------------------------
Carl D. Perry
Chief Executive Officer
Enova Systems, Inc.
19850 South Magellan Drive
Torrance, California 90502
(310) 527-2800
(Name, Address, Including Zip Code, and Telephone Number
Including Area Code, of Agent for Service)
--------------------------------------------------
Copies to:
Donald C. Reinke, Esq.
Reed Smith LLP
1999 Harrison Street, Suite 2200
Oakland, California 94612
(510) 763-2000
Deborah L. Gunny, Esq.
Reed Smith LLP
1901 Avenue of the Stars, Suite 700
Los Angeles, CA 90067
(310) 734-5200
--------------------------------------------------------------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant under Rule 415 of the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Title of Each Class Proposed Maximum Proposed Maximum
of Securities To Be Amount to be Offering Price Per Aggregate Offering Amount of
Registered Registered (1) Share(2) Price Registration Fee
----------------------- ------------------- -------------------- -------------------- ------------------
Common Stock, no
par value 16,250,001 $0.15 $2,437,500 $309.15
------------------
(1) Includes an indeterminate number of additional shares of common stock as
may from time to time become issuable by reason of stock splits, stock
dividends and other similar transactions, which shares are registered
hereunder pursuant to Rule 416 under the Securities Act.
(2) The price of $0.15 per share, which was the average of the bid and asked
prices for the common stock on June 22, 2004, is set forth solely for the
purpose of calculating the registration fee in accordance with Rule 457(c)
of the Securities Act of 1933, as amended.
--------------------------------------------------------------------------------
-1-
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
-2-
As filed with the Securities and Exchange Commission on August 5, 2004
Prospectus
16,250,001 Shares
Common Stock
This is a public offering of up to 16,250,001 shares of common stock of Enova
Systems, Inc. and an indeterminate number of shares that may become available by
reason of stock splits, stock dividends and other similar transactions. All of
these shares are being offered by the selling shareholders in this prospectus.
We will not receive any of the proceeds from the sale of shares. The selling
shareholders may sell the shares offered by this prospectus from time to time in
the national over-the-counter market at their prevailing prices, or in
negotiated transactions.
Our common stock is traded on the National Association of Securities Dealers,
Inc. Electronic Bulletin Board ("OTC Bulletin Board") under the symbol "ENVA".
On June 22, 2004, the OTC Bulletin Board reported that the bid price per share
was $0.15 and the asked price per share was $0.16.
---------------------------------------------------
Investing in the common stock involves risks.
See "Risk Factors" beginning on page 6.
---------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of common stock offered by this prospectus have not been registered
under the blue sky or securities laws of any jurisdiction, and any broker or
dealer should assure itself of the existence of an exemption from registration
or the effect of such registration in connection with the offer and sale of such
shares.
The date of this prospectus is August 5, 2004
-3-
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. This
summary is not complete and does not contain all the information you should
consider before buying shares in this offering. You should read the entire
prospectus carefully, including the risk factors and consolidated financial
statements and related notes appearing elsewhere in this prospectus. The
prospectus contains forward-looking statements, which involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including
those described under "Risk Factors" and elsewhere in this prospectus. See
"Cautionary Note on Forward-Looking Statements."
Our Company
We develop and produce 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.
Our 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, we perform significant
research and development to augment and support others' and our internal related
product development efforts.
We were incorporated in California on July 30, 1976 under the name Clover Solar
Corporation, Inc. which was changed to Solar Electric Engineering, Inc. in June
1979. In January 1994 our name was changed to U.S. Electricar, Inc. In July
2000, we changed our name to Enova Systems, Inc. The Company's principal
executive office is located at 19850 South Magellan Drive, Torrance California
90502 and our telephone number is (310) 527-2800
The Offering
Common stock offered by
the selling shareholders: 16,250,001 shares
Securities to be outstanding
after this offering (1): 401,853,232 shares of common stock
2,790,000 shares of Series A
Convertible Preferred Stock
(convertible into an aggregate of
2,790,000 shares of Common Stock)
("Series A Stock")
1,217,196 shares of Series B
Convertible Preferred Stock
(convertible into an aggregate of
2,434,392 shares of Common Stock)
("Series B Stock")
Voting Rights:
Common Stock: 401,895,856 votes
Series A Stock: 2,74790,000 votes
Series B Stock: 2,434,392 votes
Use of proceeds from this offering: We will not receive any of the
proceeds from the shares of common
stock sold by the selling
shareholders. See "Selling
Shareholder".
OTC Bulletin Board symbol: "ENVA"
-----------------
(1) Securities outstanding on June 22, 2004 shares reserved for issuance under
our stock option plans, (B) approximately 10,000,000 shares of Common Stock
issuable under a contractual commitment with Hyundai Heavy Industries, and
(C) 2,500,000 shares issuable upon exercise of outstanding warrants.
-4-
Summary Financial Data
Three Five
Months Months Fiscal Year
Ended As of and for the year ended December 31 Ended Ended
Mar. 31, (in thousands, except per share data), Dec. 31, July 31,
2004 2003 2002 2001 2000 1999 1999
--------- --------- --------- --------- --------- --------- ---------
unaudited
--------- --------- --------- --------- --------- --------- ---------
NET SALES $ 1,108 $ 4,310 $ 4,455 $ 3,780 $ 2,883 $ 629 $ 2,774
--------- --------- --------- --------- --------- --------- ---------
COST OF SALES 658 3,304 3,784 2,783 2,013 377 1,460
--------- --------- --------- --------- --------- --------- ---------
GROSS MARGIN 450 1,006 671 997 870 252 1,314
--------- --------- --------- --------- --------- --------- ---------
OTHER COSTS AND EXPENSES
Research and Development 128 799 1,152 879 626 262 499
Selling, general and administrative 394 2,919 2,837 2,894 1,999 796 1,141
Interest and financing fees 64 234 199 113 174 244 724
Other expenses (income) (19) 200 -- (7) 6 -- (41)
Gain on Warranty
Reevaluations -- -- -- -- -- -- (474)
Equity in losses 44 40 -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Legal Settlements
-- -- 81 900 75 125 --
--------- --------- --------- --------- --------- --------- ---------
Total other costs and expenses 611 4,192 4,269 4,779 2,880 1,427 1,849
--------- --------- --------- --------- --------- --------- ---------
LOSS FROM CONTINUING OPERATIONS (161) (3,186) (3,598) (3,782) (2,010) (1,175) (535)
GAIN ON DEBT RESTRUCTURING -- -- -- 354 1,551 214 140
--------- --------- --------- --------- --------- --------- ---------
NET LOSS
(161) (3,186) (3,598) (3,428) (459) (961) (395)
PER COMMON SHARE:
Loss from continuing operations (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01)
Gain on debt restructuring -- -- -- -- 0.01 -- --
--------- --------- --------- --------- --------- --------- ---------
Net loss per common
share (0.01) (0.01) (0.01) (0.01) -- (0.01) (0.01)
========= ========= ========= ========= ========= ========= =========
WEIGHTED AVERAGE NUMBER COMMON
SHARES OUTSTANDING 374,644 334,840 326,390 275,189 235,199 251,994 152,077
========= ========= ========= ========= ========= ========= =========
Total Assets 4,864 4,870 6,224 4,340 3,094 2,697 3,940
========= ========= ========= ========= ========= ========= =========
Long-term debt 3,355 3,347 3,332 3,332 3,332 3,332 3,332
========= ========= ========= ========= ========= ========= =========
Shareholder's equity (deficit) (821) (864) 287 (232) (1,648) (5,015) (7,316)
========= ========= ========= ========= ========= ========= =========
-5-
RISK FACTORS
You should carefully consider the following risks and all other information
contained in this prospectus before you decide to buy our common stock. We have
included a discussion of each material risk that we have identified as of the
date of this prospectus. If any of the following risks actually occur, our
business, financial condition or operating results could suffer. If this occurs,
the trading price of our common stock could decline, and you could lose all or
part of the money you paid to buy our common stock.
Risks Relating to this Offering
Economic conditions beyond our control may keep the price of our stock low.
Numerous factors, many of which are beyond our control, may cause the market
price of our common stock to fluctuate significantly. These factors include, but
are not limited to, the following:
o continued losses;
o announcements concerning us, our competitors or our customers;
o market conditions in the electric vehicle and the hybrid electric
vehicle industry and the general state of the securities markets.
General economic, political and market conditions, including recession,
international instability or military tension or conflicts may adversely affect
the market price of our common stock. If we are named as a defendant in any
securities-related litigation as a result of decreases in the market price of
our shares, we may incur substantial costs, and our management's attention may
be diverted, for lengthy periods of time. The market price of our common stock
may not increase above the offering price or maintain its price at or above any
particular level.
Securities traded on the OTC Bulletin Board are generally thinly traded and an
active market may never develop.
Our common stock trades on the OTC Bulletin Board. Shares traded in the OTC
market are generally bought and sold in small amounts, highly volatile and not
usually followed by analysts. You may therefore have difficulty selling your
shares in the resale market.
"Penny stock" regulations may impose restrictions on marketability of our stock.
The Securities and Exchange Commission has adopted regulations which generally
define "penny stock" to be any equity security that is not traded on a national
securities exchange or NASDAQ and that has a market price of less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain
exceptions. Since our securities that are currently included on the OTC Bulletin
Board are trading at less than $5.00 per share at any time, our stock may become
subject to rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors. Accredited investors generally include
investors that have assets in excess of $1,000,000 or an individual annual
income exceeding $200,000, or together with the investor's spouse, a joint
income of $300,000. For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of the securities
and must receive the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving penny stock, unless
exempt, the rules require, among other things, the delivery, prior to the
transaction, of a risk disclosure document mandated by the SEC relating to the
penny stock market and the risks associated therewith. The broker-dealer must
also disclose the commission payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market maker, the broker dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the penny stock rules may restrict the ability of broker-dealers
to sell our securities and may affect your ability to sell your shares in the
secondary market.
We do not expect to pay dividends in the foreseeable future.
We have not declared or paid any cash dividends in the past and do not expect to
pay cash dividends in the foreseeable future. We intend to retain our future
earnings, if any, to finance the development of our business. We are required to
pay dividends on our Series A Stock and our Series B Stock before we may pay
-6-
dividends on our common stock. At March 31, 2004, we had an accumulated deficit
of approximately $97,238,000 and, until this deficit is eliminated, we are
prohibited from paying dividends on any class of our stock except out of net
profits unless we can meet certain assets and other tests under Sections 500
through 511 of the California Corporations Code. Our board of directors will
determine any future dividend policy in light of the all of the foregoing
information and then existing conditions, including our earnings, financial
condition and financial requirements. You may never receive dividend payments
from us.
The market price of our Common Stock could be adversely affected by sales of a
substantial number of shares of our Common Stock
As of the date of this prospectus, we have outstanding 401,853,232 shares of
common stock, 2,790,136 shares of Series A Stock, each of which is convertible
into one share of common stock, and 1,217,196 shares of Series B Stock, each of
which is convertible into two shares of common stock. Sales of a substantial
number of shares of our common stock in the public market following this
offering could cause our stock price to decline. All the shares sold in this
offering will be freely tradable. Currently 154,180,500 shares of common stock
are freely tradable and an additional 5,224,500 shares of Series A Stock or
Series B Stock would be freely tradable upon conversion to common stock.
Approximately an additional 247,672,700 shares of common stock are eligible for
sale in the public market subject to volume restrictions of Rule 144 and
15,594,288 shares of common stock issuable upon exercise of outstanding options
will become freely tradable upon issuance. In addition, the sale of these shares
could cause our stock price to decline and impair our ability to raise capital
through the sale of additional stock. See "Shares Eligible for Future Sale."
Our principal shareholders, executive officers and directors have substantial
control over most matters submitted to a vote of the shareholders, thereby
limiting your power to influence corporate action.
Our officers, directors and principal shareholders beneficially own
approximately 60% of our common stock (including in that percentage shares of
our Series A Stock and Series B Stock). As a result, these shareholders have the
power to control the outcome of most matters submitted to a vote of
shareholders, including the election of members of our board, and the approval
of significant corporate transactions. The shareholders purchasing shares in
this offering will have little influence on these matters. This concentration of
ownership may also have the effect of making it more difficult to obtain the
needed approval for some types of transactions that these shareholders oppose,
and may result in delaying, deferring or preventing a change in control of our
company.
The effects of anti-takeover provisions in our charter and bylaws could inhibit
the acquisition of us by others.
Several provisions of our articles of incorporation and bylaws could discourage
potential acquisition proposals and could delay or prevent a change in control
of our company.
Risks Related to Our Business
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.
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.
-7-
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 2003 and 2002 we spent
$799,000 and $1,152,000 respectively 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 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.
We have continued losses.
We have experienced recurring losses from operations and have been profitable in
only one year, fiscal 1986. For the three months ended March 31, 2004, we had a
net loss of $161,000 on sales of $1,108,000 and an accumulated deficit of
$97,238,000. For the twelve months ended December 31, 2003, we had a net loss of
$3,186,000 on sales of $4,310,000. For the twelve months ended December 31,
2002, we had a net loss of $3,598,000 on sales of $4,455,000. For the twelve
months ended December 31, 2001, we had a net loss of $3,428,000 on sales of
$3,780,000. There can be no assurance that we will achieve profitability in the
near or foreseeable future or that any net operating losses will be available to
us in the future as an offset against future profits for income tax purposes.
If we do not raise significant additional capital, we will be unable to fund
continuing operations and will likely be forced to reduce or even cease
operations.
We need substantial working capital to fund our operations. As of March 31,
2004, we had cash, cash equivalents and short-term investment balances of
approximately $587,000. Our internal projections show that cash on hand as of
March 31, 2004, together with anticipated revenues should be sufficient to fund
operations at the current level for at least the next 12 months December 2004.
We are currently negotiating to correct a payment default with respect to a
$120,000 unsecured note to Jeann Schulz. Unless we are successful in our efforts
to raise additional funds, our cash resources will be used to satisfy our
existing liabilities, such as that of Ms. Schulz, and we will be unable to fund
our current operations, which may result in the reduction of operations. Even if
we are successful in these efforts to raise funds, such funds may not be
adequate to fund our operations on a long-term basis.
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
-8-
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. We
are relatively new in focusing our efforts on electric systems, hybrid systems
and fuel cell managed systems. The likelihood of our success must be considered
in light of the problems, expenses, difficulties, complications, and delays
frequently encountered in connection 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 covering
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, Larry
Lombard, our Acting Chief Financial Officer, Edward Moore, our Chief Operating
Officer and Don Kang, our Vice President of Engineering, the loss of one or more
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 a limited amount of 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.
-9-
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.
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
Some of the matters discussed under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus 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. A description of risks that could cause our results to vary appears
under the caption "Risk Factors" and elsewhere in this prospectus. These
forward-looking statements are made as of the date of this prospectus, 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.
-10-
USE OF PROCEEDS
All proceeds from any sale of shares of common stock offered by the selling
shareholders will be received by the selling shareholders and not by us.
PRICE RANGE OF COMMON STOCK
Our common stock is traded in the National Association of Securities Dealers,
Inc. Electronic Bulletin Board ("OTC Bulletin Board") under the symbol "ENVA".
The following table sets forth, for the fiscal quarters indicated, the high and
low bid prices for our common stock as reported on the OTC Bulletin Board by the
National Quote Bureau. 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
------------------------
High Low Average Daily
Price Price Volume
--------- --------- -------------
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
Calendar 2003
First Quarter..................... $0.09 $0.06 172,237
Second Quarter.................... $0.09 $0.06 119,057
Third Quarter..................... $0.10 $0.05 465,683
Fourth Quarter.................... $0.14 $0.07 463,240
Calendar 2004
First Quarter..................... $0.18 $0.12 1,513,231
Second Quarter (through June 22).. $0.19 $0.14 495,024
As of June 22, 2004, we had approximately 9,750 holders of our Common Stock, 110
holders of our Series A Preferred Stock and 34 holders of our Series B Preferred
Stock.
-11-
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
retain any future earnings to fund our business. Additionally, we are required
to pay dividends on our Series A Stock and our Series B Stock before we may pay
dividends on our common stock. Therefore, we do not anticipate paying cash
dividends on our common stock in the foreseeable future. At March 31, 2004, we
had an accumulated deficit of approximately $97,238,000. Until this deficit is
eliminated, we are prohibited from paying dividends on any class of our stock
except out of net profits unless we can meet certain assets and other tests
under Sections 500 through 511 of the California Corporations Code. Our board of
directors will determine any future dividend policy in light of the all of the
foregoing information and then existing conditions, including our earnings,
financial condition and financial requirements.
CAPITALIZATION
The following table summarizes our balance sheet data as of March 31, 2004,
December 31, 2003 and December 31, 2002:
SHAREHOLDERS' DEFICIT (in thousands): As of
03/31/2004 As of As of
unaudited 12/31/2003 12/31/2002
---------------------------- -------------
Series A convertible preferred stock - No par value;
30,000,000 shares authorized; 2,800,000;
2,820,000 and 2,824,000 shares issued and
outstanding at 03/31/04,
12/31/03 and 12/31/02, respectively 1,812 1,837 1,842
Series B convertible preferred stock - No par value;
5,000,000 shares authorized; 1,217,196 shares
issued and outstanding at 03/31/04, 12/31/03
and 12/31/02, respectively 2,434 2,434 2,434
Stock notes receivable (1,203) (1,203) (1,203)
Common Stock - No par value; 500,000,000 shares
authorized; 380,144,000, 378,341,000 and
345,194,000 shares issued and outstanding at
03/31/04, 12/31/03 and 12/31/02,
respectively 86,167 86,054 84,026
Common stock subscribed 176 60 130
Additional paid-in capital 7,031 7,031 6,949
Accumulated deficit (97,238) (97,077) (93,891)
---------------------------- -------------
Total Shareholders' Equity (Deficit) (821) (864) 287
============================ =============
This information should be read together with our Financial Statements and the
related Notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this prospectus.
-12-
SELECTED FINANCIAL DATA
The following selected financial data tables set forth selected financial data
for the three months ended March 31, 2004 and the years ended December 31, 2003,
2002, 2001 and 2000, the five month period ended December 31, 1999 and the
fiscal year ended July 31, 1999. 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 the three months ended March 31, 2004 are
unaudited. The statement of income data and balance sheet data for and as of the
end of the years ended December 31, 2003, 2002, 2001 and 2000, the five month
period ended December 31, 1999 and the year ended July 31, 1999 are derived from
our audited Financial Statements. The following selected financial data should
be read in conjunction with, and are qualified in their entirety by, our
financial statements, including the notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in the
following pages of this prospectus.
Three Five
Months Months Fiscal
Ended As of and for the year ended December 31 Ended Year Ended
Mar. 31, (in thousands, except per share data), Dec. 31, July 31,
2004 2003 2002 2001 2000 1999 1999
--------- --------- --------- --------- --------- --------- ---------
unaudited
--------- --------- --------- --------- --------- --------- ---------
NET SALES $ 1,108 $ 4,310 $ 4,455 $ 3,780 $ 2,883 $ 629 $ 2,774
COST OF SALES 658 3,304 3,784 2,783 2,013 377 1,460
--------- --------- --------- --------- --------- --------- ---------
GROSS MARGIN 450 1,006 671 997 870 252 1,314
--------- --------- --------- --------- --------- --------- ---------
OTHER COSTS AND EXPENSES
Research and Development 128 799 1,152 879 626 262 499
Selling, general and administrative 394 2,919 2,837 2,894 1,999 796 1,141
Interest and financing fees 64 234 199 113 174 244 724
Other expenses (income) (19) 200 -- (7) 6 -- (41)
Gain on Warranty
Reevaluations -- -- -- -- -- -- (474)
Equity in losses 44 40 -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Legal Settlements -- -- 81 900 75 125 --
--------- --------- --------- --------- --------- --------- ---------
Total other costs and expenses 611 4,192 4,269 4,779 2,880 1,427 1,849
--------- --------- --------- --------- --------- --------- ---------
LOSS FROM CONTINUING OPERATIONS (161) (3,186) (3,598) (3,782) (2,010) (1,175) (535)
GAIN ON DEBT RESTRUCTURING -- -- -- 354 1,551 214 140
--------- --------- --------- --------- --------- --------- ---------
NET LOSS
(161) (3,186) (3,598) (3,428) (459) (961) (395)
PER COMMON SHARE:
Loss from continuing operations (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01)
Gain on debt restructuring -- -- -- -- 0.01 -- --
--------- --------- --------- --------- --------- --------- ---------
Net loss per common share (0.01) (0.01) (0.01) (0.01) -- (0.01) (0.01)
========= ========= ========= ========= ========= ========= =========
EIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 374,644 334,840 326,390 275,189 235,199 251,994 152,077
========= ========= ========= ========= ========= ========= =========
Total Assets 4,864 4,870 6,224 4,340 3,094 2,697 3,940
========= ========= ========= ========= ========= ========= =========
Long-term debt 3,355 3,347 3,332 3,332 3,332 3,332 3,332
========= ========= ========= ========= ========= ========= =========
Shareholder's equity (deficit) (821) (864) 287 (232) (1,648) (5,015) (7,316)
========= ========= ========= ========= ========= ========= =========
-13-
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 2003 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 Prospectus 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
Prospectus, 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 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.
The financial statements present the financial position of Enova Systems, Inc.
as of March 31, 2004, December 31, 2003 and 2002 and the results of operations
and cash flows for the three months ended March 31, 2004 and the years ended
December 31, 2003, 2002 and 2001.
-14-
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:
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.
o Revenue recognition - The Company is required to make judgments based
on historical experience and future expectations, as to the
reliability of shipments made to its customers. These judgments are
required to assess the propriety of the recognition of revenue based
on Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition,"
and related guidance. The Company makes these assessments based on the
following factors: i) customer-specific information, ii) return
policies, and iii) historical experience for issues not yet
identified.
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
We have experienced cash flow shortages due to operating losses primarily
attributable to research, development, marketing and other costs associated with
our strategic plan as an international developer and supplier of electric
propulsion and power management systems and components. Cash flows from
operations have not been sufficient to meet our obligations. Therefore, we have
had to raise funds through several financing 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 sources. We are 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. We believe that for at least the next 12 months, assuming there are
no unanticipated material adverse developments and no material decrease in
revenues, our cash flows from operations and through credit facilities should be
sufficient to enable us to pay our debts and obligations as they mature. We will
continue to benefit in fiscal 2004 from expense reductions through reduced
number of employees and other expenses undertaken in fiscal 2003. However, our
current sources of funds are not sufficient to provide the working capital for
material growth, and we need to obtain additional debt or equity financing to
support such growth.
Three Months ended March 31, 2004
In the first quarter of 2004, Enova entered into several stock purchase
agreements to issue 16,250,000 shares of our common stock through a private
placement offering at $0.12 per share for a total cash purchase of $1,950,000.
The funds were received and the shares were issued in April 2004. These
investors represented that they were accredited investors. 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 sale of such shares. Enova continues to
seek additional investment capital to fund its operations, development and
-15-
expansion plans. As of June 22, 2004, there were no other firm commitments.
Enova also has a commitment from Hyundai Heavy Industries to invest, in June
2004, an additional $1,500,000 in Enova under the same terms as the initial
investment, subject to stock price adjustments, in accordance with the terms of
the Joint Venture Agreement.
Current liabilities decreased by a net of $38,000 from December 31, 2003 to
March 31, 2004, due primarily to reductions of outstanding vendor payables
primarily due Hyundai Heavy Industries in connection with additional power
management and conversion component inventory and Hyundai Autonet for materials
associated with the terminated Ballard/Ford Th!nk city program.
Capital lease obligations decreased by $8,000 during the three months ended
March 31, 2004, from December 31, 2003, also due to scheduled payments of these
liabilities.
Interest accruing on notes payable increased by $62,000 for the three months
ended March 31, 2004.
The operations of we during the first quarter of fiscal 2004 were financed
primarily by the funds received on engineering contracts and sales of drive
system components as well as cash reserves provided by equity financings. It is
management's intention to continue to support current operations through sales
of products and engineering contracts, as well as to seek additional financing
through private placements and other means to increase inventory reserves and to
continue internal research and development.
Contractual Obligations
The following table outlines payments due under our significant contractual
obligations over the next five years, exclusive of interest:
Payments Due by Period
Contractual Obligations Less than 1 1-3 4-5 After 5
At December 31, 2003 Year Years Years Years
------------------------ ---------- ---------- ---------- ----------
Total
Long Term Debt $3,478,000 $ 131,000 $ 15,000 $ -- $3,332,000
Capital Lease Obligations 28,000 20,000 8,000 -- --
Operating Leases 614,000 97,000 489,000 28,000 --
Unconditional Purchase
Obligations -- -- -- -- --
Total Contractual Cash
Obligations $4,120,000 $ 248,000 $ 512,000 $ 28,000 $3,332,000
The above table outlines our obligations as of December 31, 2003 and does not
reflect the changes in our obligations that occurred after that date.
Year ended December 31, 2003
Throughout 2003, our management reassessed our current resource allocations and
overhead costs. Due to the loss of the Advanced Vehicle Systems (AVS) programs
(refer to "Legal Proceedings" below) and an overall slowdown in heavy-duty drive
system purchases, our management analyzed current processes and budgets for
potential targets for cost reduction. As a result of this analysis, our
management implemented several cost reduction programs, including personnel
reductions, workweek modifications and other cost restraint endeavors to achieve
these goals. Personnel levels were reduced to 28 employees at December 31, 2003
-16-
from 45 at December 31, 2002. Because of the workforce reductions and other cost
containment policies, we continue to realize a reduction in monthly cash outlays
of approximately $120,000 via these cost reductions compared with the monthly
average for the first six months of 2003 without impact to our current
operations.
In 2003, we expanded our sales and development efforts to capture additional
global market share for our product line and our technical expertise. We
expanded further into U.S., European and Asian markets with our heavy duty drive
systems and added to our development programs with Ford, Hyundai and the U.S.
Department of Transportation with major customers such as Mack Truck / Volvo,
EDO Corporation, MTrans of Malaysia, the U.S. Navy and others. We continue to
focus 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, 2003 were financed by
development contracts and product sales, as well as from working capital
reserves.
During the year ended December 31, 2003, our operations required $1,378,000 more
in cash than was generated. We continue 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 $142,000 from $1,256,000, or approximately 11% from the balance at December
31, 2002 (net of write-offs). Accounts receivable were $803,000 (which includes
$595,000 of accounts receivable of AVS that were written off) at December 31,
2003 or 36% lower than comparable balances at December 31, 2002. To a large
extent, the decrease is due to the $595,000 write-off caused by the bankruptcy
of AVS, as noted below, and the overall slowdown in new business in the third
and fourth quarters of 2003. We began several new development contracts in the
fourth quarter of 2003, which we anticipate will increase receivables in future
quarters. During the twelve months ended December 31, 2003, we charged off
approximately $595,000 primarily for sales made to AVS in 2002 and 2003. We
continually monitor our receivables and have had immaterial charge-offs during
the years, other than AVS, due to this policy. Inventory decreased slightly by
$46,000 from $1,652,000 or less than 3% from December 31, 2002 balances. During
late 2002, we increased our inventory stock to meet forecasted customer demand
from AVS and other heavy-duty drive systems customers. In 2003, several of these
customers experienced slower demand than anticipated which resulted in fewer
purchases from Enova. We sold these systems throughout 2003 and anticipate
additional sales of these systems in 2004. Additionally, included in our
inventory are raw materials and equipment related to the Ballard/Ford Th!nk city
program, as noted below under Ballard Power Systems, which have a book value of
approximately $180,000 based on our negotiated settlement with Ballard. These
materials have an original cost value of over $700,000. It is our intention to
resell these materials during 2004.
Fixed assets increased by $112,000 or 7%, before depreciation and a write-down
of $200,000 for our Hawaii demonstration tram, for the year ended December 31,
2003 from the prior year balance of $1,668,000 primarily due purchases of test
equipment, production machinery, software and tooling for programs and products
developed during the year. The Hawaii tram was originally booked as an asset at
a value of $350,000 based on then applicable market conditions for such pure
electric vehicles. We determined that, after allowing for depreciation of
$100,000, the tram has a net realizable value in the range between $50,000 and
$100,000. It is our intent to sell the tram in 2004.
Investments increased by $960,000 during 2003, net of our pro-rata share of
losses attributable to the investment, which reflect our forty percent (40%)
interest in the Hyundai-Enova Innovative Technology Center as noted elsewhere in
this Prospectus. For the year ended December 31, 2003, the ITC generated a net
loss of approximately $100,000, resulting in a charge to Enova of $40,000
utilizing the equity method of accounting for our interest in the ITC. Based on
contractual obligations of our Joint Venture Agreement with Hyundai Heavy
Industries Co., such investment is anticipated to increase by $1,000,000 in
2004.
Other assets decreased by $94,000 during 2003 from $498,000 in 2002 as we
continued to amortize the asset relating to the Ford Value Participation
Agreement. Intellectual property assets, including patents and trademarks,
increased by $11,000 in 2003 from $78,000 at December 31, 2002 as we continued
to capitalize new intellectual property rights on our technology.
-17-
RESULTS OF OPERATIONS
Three Months Ended March 31, 2004
Net revenues for the three months ending March 31, 2004 were $1,108,000 as
compared to $1,339,000 for the corresponding period in 2003. Net production
sales for the quarter ended March 31, 2004 decreased to $672,000 from $1,016,000
in the same period in 2003. The decrease in production revenues is a result of
the overall slowdown in heavy-duty alternative fuel drive system sales as
manufacturers assess the various new types of systems on the market. There has
been a greater shift to parallel hybrid type systems, however, as yet, no
particular type of system has gained a major foothold. Management's strategy, in
this regard, is to provide a dual path approach in offering both a series and
parallel hybrid drive systems solution commencing in 2004. To offset this
temporary decline in production sales, we are aggressively pursuing privately
and governmental funded development programs. This allows we to increase its
revenue base, form new alliances with major OEMs and participate in the latest
trends in alternative fuel technologies. Research and development revenues
increased to $436,000 from $323,000 during the same period in 2003. Research and
development revenues are a result of engineering services for the Mack/Volvo
hybrid drive system, the EDO minesweeper project and the HEVDP Hickam fuel cell
bus program.
Cost of revenues for the three months ended March 31, 2004 decreased to $658,000
compared to cost of revenues of $977,000 for the same three-month period in
2003. The decrease in cost of sales is directly attributable to lower sales
volumes for the quarter.
Internal research, development and engineering expenses decreased in the three
months ended March 31, 2004 to $128,000 as compared with $488,000 in the same
period in 2003. Due to an increase in externally funded development programs and
the decrease in the our workforce, Enova has allocated less of its own funds to
new product development. Enova continues to allocate increased resources to the
development of its diesel generation motor, upgraded proprietary control
software, enhanced DC-DC converters and advanced digital inverters and other
power management firmware. We are utilizing external funding, however, for a
greater percentage of these development costs.
Selling, general and administrative expenses decreased $132,000 to $353,000 for
the three months ended March 31, 2004 from the previous year's comparable
period. The decrease is a direct result of management's cost reduction
strategies which we will strive to maintain in 2004 in its efforts to achieve
profitability, although management cannot assure that profitability will be
achieved.
Interest and financing fees remained relatively constant at approximately
$64,000 for the first quarter of 2004, up slightly from the same period in 2003
due to an increase in the interest rate charged per the terms of our long term
note.
We incurred a loss from continuing operations of $161,000 in the first quarter
of 2004 compared to a loss of $743,000 in the first quarter of 2003, which
represents a 78% reduction in loss. As noted above, this decrease was primarily
due to cost reduction strategies implemented by management and workforce
restructurings. By increasing sales revenues while maintaining these cost
management strategies, we believes it will be able to reduce its annual loss
from operations as compared with prior years results; however, management cannot
assure that these results will be achieved.
Years Ended December 31, 2003 and 2002
Net sales of $4,310,000 for the twelve months ended December 31, 2003 decreased
$145,000 or 3% from $4,455,000 during the same period in 2002. Our sources of
revenue for 2003 came primarily from product sales. Product sales as a
percentage of total revenues of 56% in 2003 were consistent to the 2002 product
sales to total revenues percentage of 59%. Sales of our Panther 120kW drive
systems accounted for a majority of our product sales in 2003. We believe this
trend will continue over the next several years. However we will continue to
seek out and contract for new development programs with both our current
partners such as Ford, Mack/Volvo, UTC, Hyundai and our other U.S., Asian and
European alliance partners, as well as with new alliances with other vehicle
manufacturers and energy companies.
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 2003, we continued our trend of
establishing new customers and strengthening current alliances with customers,
such as Tomoe and MTrans in the heavy-duty drive system market. Because the
market is relatively nascent, our customers require additional integration and
-18-
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 with respect to new customers as we gain additional
market share. Cost of sales for the year ended December 31, 2003 decreased
$438,000, or 12%, from $3,784,000 for the year ended December 31, 2002. This
decrease is attributable to follow-on orders from existing customers such as EPT
and MTrans, which no longer require as much integration support, and from
decreased pricing from our contract manufacturers as our order quantities rise.
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 decreased in 2003 to $799,000 from $1,152,000 for the same
period in 2002, a decrease of $352,000, or 31%. During 2003, we reduced
non-essential expenses for internal research and development without sacrificing
that development necessary to maintain our competitive edge in our markets. We
supplemented this reduction by teaming with other companies in our sector such
as Mack/Volvo, Hyundai, and the U.S. Government to offset the costs of
development for new products in the areas of mobile and stationary power
management and conversion. Programs included our advanced power management
systems for fuel cells, our diesel generation engine/motor system for our
heavy-duty drive systems, a dual 8kW inverter, and upgrades and improvements to
our current power conversion and management components. Additionally, we
continue to enhance 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.
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.
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 expenses were further reduced in 2003 from 2002 levels continuing
a trend from prior years. Net of the $595,000 AVS bad debt write-off, our
selling, general and administrative expenses decreased $515,000 in the year
ended December 31, 2003, to $2,322,000 from $2,837,000 for the similar period in
2002. This represents an 18% reduction in these expenses as a result of
management's cost reduction programs implemented throughout 2003 including
workforce cutbacks, elimination of non-essential expenses and exercising tighter
constraint over overhead costs in general. We are continually reviewing
operations to lower overhead costs and increase operational efficiencies
For the year ended December 31, 2003, interest and financing fees increased by
$22,000 to $242,000, an increase of 10%. The increase was due solely to an
increase in 2003 in the interest rate on the note due the Credit Managers
Association of California for $3.2 million per the terms of that note.
Our $3,186,000 net loss for the year ended December 31, 2003 is $411,000 less
than the loss incurred in 2002 of $3,598,000, a decrease of 11%. Excluding the
bad debt charge of $595,000 for the AVS bankruptcy and the write-down of the
Hawaii tram of $200,000, our loss for the year would be $1,206,000 less, or
$2,392,000 for the year ended December 31, 2003, over 34% lower than that
incurred in 2002. This decrease is a significant milestone in our goal to
break-even in the near future. Management will continue to seek operational
efficiencies and methods to reduce manufacturing and overhead costs as well as
increase revenues to achieve this goal of profitability.
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. Under the terms of
the contract, Ballard is liable for all costs we incurred which are normally
associated with production, including inventory and other development or
production costs. We invoiced Ballard for approximately $952,000 for
work-in-process inventory and other additional material, tooling and engineering
costs for the initial production of the drive system component. Of this amount,
Ballard remitted $580,400 during the second quarter of 2003. In October 2003, we
reached a settlement with Ballard on all remaining balances due wherein we will
receive $198,125 in cash and title to all inventory, raw materials, tooling and
equipment in our possession that is associated with the program. We are in the
process of selling such inventory, raw materials, tooling and equipment in the
resale markets. We believe that the resale market value of such inventory and
-19-
equipment will be at least equal to the value of the remaining balance of the
receivable, or approximately $173,000.
Hyundai-Enova Innovative Technology Center
In September 2003, we funded, with Hyundai Heavy Industries, Co. Ltd. (HHI), the
Hyundai-Enova Innovative Technology Center (HEITC) to be located at our Torrance
headquarters. In connection with the Joint Venture Agreement entered into
between HHI and us in March 2003, HHI purchased $1,500,000 of our common stock,
for an aggregate of 23,076,923 shares representing a 6.2% ownership in Enova.
Enova used $1,000,000 of such funds to invest in HEITC for a forty percent (40%)
equity ownership interest. HHI invested an additional $1,500,000 in HEITC for a
sixty percent (60%) equity ownership interest in HEITC. In July 2004, HHI will
invest an additional $1,500,000 in Enova and $1,500,000 in HEITC under the same
terms as the initial investment, subject to stock price adjustments, in
accordance with the Joint Venture Agreement. The joint venture company
officially opened in November 2003 to pursue advanced research and development
in hybrid automotive and stationary applications for fuel cell technologies
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. 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.
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. 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.. 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.
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. During 2002, we expended
additional resources toward these types of programs and therefore modified our
allocation of engineering costs to reflect this shift. 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 $2,837,000 from
$2,894,000 for the similar period in 2001. 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..
For the year ended December 31, 2002, interest and financing fees increased by
$86,000 to $199,000, 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.
-20-
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. Certain factors, such as the Ballard
program cancellation, could not be anticipated and did contribute substantially
to the net loss from operations
In 2001, we entered into several supplier agreements and commenced new
development programs with automotive and transit manufacturers both domestically
and internationally. Additionally, we completed various research and development
programs sponsored by the U.S. Government and private corporations.
Ford Motor Company Programs
---------------------------
In July 2001, we entered into a strategic relationship with Ford Motor Company
under which we were selected by Ford's Th!nk brand to develop and manufacture a
high power, high voltage conversion module for their upcoming fuel cell vehicle.
The high voltage conversion module will convert high voltage power from the fuel
cell into a lower voltage.
Hyundai Motor Company Programs
------------------------------
We continue to develop hybrid and fuel cell based systems with Hyundai Motor
Company, the world's seventh largest automobile manufacturer. Having
successfully completed our hybrid drive system and fuel cell electric vehicle
program, we are working with Hyundai on advanced hybrid and fuel cell
applications. We delivered four series-hybrid drive systems for use in Hyundai's
county bus at the World Cup Soccer in Seoul, Korea in June 2002.
Hyundai continues to contract with our company for the development of advanced
hybrid and fuel cell powered drive systems. In regards to passenger vehicle
programs, we continue in our efforts to develop a commercially viable parallel
hybrid motor and controller for Hyundai's new hybrid vehicle to be introduced in
2004. The prototype drive system for this program was delivered to Hyundai in
February 2002. Development programs with Hyundai generated approximately
$450,000 in sales in the year ended December 31, 2002.
Light-Duty Drive Systems
------------------------
In addition to the 30kW motor controller, charger and DC-DC converter which we,
in alliance with Hyundai Autonet, are manufacturing for Ballard Power, we are
also marketing our PantherTM 90kW drive systems. Our 90kW controller, motor and
gear unit provide outstanding performance for light duty vehicles such as
midsize automobiles and delivery vehicles.
Heavy-Duty Drive Systems
------------------------
Sales of our PantherTM 120kW drive systems continue to provide increased
revenues for our company. We have entered into supplier agreements with
manufacturers in Europe and Japan as well as domestically. Hyundai Heavy
Industries is also our outsource manufacturer for the Panther 120kW as well as
the motor and controller for our Panther 240kW drive systems.
Eco Power Technology of Italy purchased 15 PantherTM 120kW electric drive
systems, which were delivered during 2001, as well as three of our Fast
Chargers. Eco Power is one of the largest integrators of medium size transit
buses for the European shuttle bus market with key customers in Rome and Genoa.
Total sales for the year ended December 31, 2001 from Eco Power were $360,000.
Wrights Environment, a division of Wrights Bus, one of the largest low-floor bus
manufacturers in the United Kingdom, has integrated our hybrid electric
PantherTM 120kW drive system, which utilizes a microturbine from Capstone
Turbine Corporation as its power source. Wrights purchased additional pure
electric drive systems for their midsize buses for sale in the United Kingdom
and the European Continent..
We entered the Japanese bus market with two new customers, Tomoe
Electro-Mechanical Engineering and Manufacturing, Inc. and Moriah Corporation in
2001. Both of these companies entered into supplier agreements with us and we
delivered our first Panther 120kW system to Tomoe in 2001.
In the high performance heavy-duty drive system area, we completed the first
prototype of our PantherTM 240kW drive system in 2001. In conjunction with
Hyundai Heavy Industries and Ricardo, Inc, of Michigan, a developer and
-21-
manufacturer of advanced transmissions, we produced a drive system for
heavy-duty applications including transit buses, heavy-duty trucks and other
applications.
Research and Development Programs
---------------------------------
Our development and integration contracts with the DOT and the State of Hawaii
continue to create new opportunities for our drive systems.
During 2001, Enova, Hyundai and the State of Hawaii introduced 15 Hyundai Santa
Fe electric vehicles in Honolulu, Hawaii for test and evaluation prior to their
entry into the U.S. markets. The contract has two elements, one for integration
of our BCU II battery care unit, which allows the vehicles to accept fast
charging, and a second contract for maintenance of the vehicles over the
two-year program. The participants in the program include state and local
offices as well as Hickam Air Force base.
Our contract with the DOT to design and test a three-car tram utilizing the
PantherTM 120kW drive system was completed and delivered to the High Technology
Development Corporation's facility in Honolulu in 2001. This tram, capable of
carrying 100 passengers, was delivered to the Honolulu International Airport for
further test and evaluation in 2001.
We completed the integration of our drive systems into several State of Hawaii
and DOT vehicles. We upgraded eight Chevrolet S-10 trucks owned by the City of
Honolulu to our PantherTM 60kW drive system, including our BCU-II battery care
unit for fast-charge capability in 2001.
Also, we e converted an Eldorado 30-foot bus utilizing our PantherTM 120kW drive
system for the Hickam Air Force base in 2001. All of these programs were funded
in conjunction with the Hawaii Electric Vehicle Development Project, the DOT and
the State of Hawaii.
Development programs with the Department of Transportation and the State of
Hawaii accounted for approximately $1,180,000 of total revenues for the year
ended December 31, 2001.
Stationary Power Applications
-----------------------------
Our stationary power programs continue to attract new potential 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. We are also developing
applications for these products in the telecommunications and distributed
generation markets. We can make no assurance that we will successfully develop
such applications or that any such applications will find acceptance in the
marketplace.
We view stationary power applications of our power management systems as an
important new area of product development. In the stationary power management
field, we are developing applications for our products in the telecommunications
and distributed generation markets. We believe our approach of providing the
enabling technology in power management and conversion to power generation
companies is key to early access to these markets. Our joint marketing and
development efforts with Capstone Turbine Corporation, UTC Fuel Cells and
Hydrogenics of Canada have the potential to assist us in penetrating these
markets.
Investment Funding
------------------
We are 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 in order to create additional
intellectual property.
In June 2002, several accredited investors purchased 42,100,000 shares common
stock through a private placement offering at $0.10 per share for a total cash
purchase of $4,210,000. These investors represented that they were accredited
investors. 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
sale of such shares.
A finder's fee of $205,500 was paid in conjunction with this private placement
funding to The Global Value Investment Portfolio Management Pte Ltd, a Singapore
Company which is substantially owned by two affiliated parties; Anthony
-22-
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.
In May 2001, Jagen Pty, Ltd exercised warrants to purchase 41,666,666 shares of
common stock at $0.06 per share for a total of $2,500,000. In July 2001, Anthony
Rawlinson, our chairman, exercised warrants to purchase 8,333,334 shares of
common stock at $0.06 per share for a total of $500,000. Jagen and Mr. Rawlinson
represented that they were accredited investors. 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 sale of such shares.
In June 2001, we issued warrants to purchase 15,000,000 shares of common stock
of Enova Systems to Ford Motor Company with respect to a participation program.
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 sale of such
shares.
In early 2001, we retained Merrill Lynch as our investment advisor to pursue
equity financing options and other strategic alternatives.
During the year ended December 31, 2001, our operations required $3,023,000 more
in cash then was generated. We continue 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 $233,000 from $1,004,000, or 23% from the balance at December 31, 2000, as we
continued to expand our customer base and increased sales. Inventory increased
by $520,000 from $406,000 or 128% from December 31, 2000 balances. As we
continue to enter into additional production contracts with companies such as
Eco Power, Ford, Ballard and others, we will continue to require additional raw
materials and finished goods to meet demand.
Fixed assets increased by $219,000 or 28% before depreciation for the year ended
December 31, 2001 from the prior year balance of $784,220 as we increased both
the number of engineers and the complexity of our programs. Increases in test
equipment, production machinery and both technical hardware and software
attributed to the increase.
Other assets increased by $668,000 during 2001 from $68,000 in 2000 primarily
due to the booking of an asset in relation to the Ford Value Participation
Agreement. We determined, utilizing the Black Scholes method, the value of the
initial tranche of the vested warrants under this program is $577,000. As
additional warrants become vested in the coming years, they will be valued under
the same methodology and booked as an expense and into stockholders equity.
Additionally, increases were due to intellectual property expenses being applied
as they relate to several new patents on our technology.
As of December 31, 2001, we completed our restructuring of the remainder of our
antecedent payables, reducing those accounts to zero from $210,000 in 2000.
Long term debt includes a secured promissory note to Credit Managers Association
of California in the amount of $3,332,000, 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. The
note is secured with a UCC-1 filing for all the assets of our Company.
Due to the nature of our industry and the amount of research and development
which has been necessary to begin to produce commercially viable products, we
have experienced the need for cash for operations from outside sources. We
changed our business strategy in 1997 to focus on the development of drive
systems and components for electric, hybrid-electric and fuel cell mobile and
stationary applications. Invested capital from 1997 to the present has been used
for the development and advancement of these systems which are now being sold as
discussed elsewhere in this prospectus. We may, from time to time, require
additional invested capital to fund development of new or advanced technologies
for our products.
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.
-23-
Recent accounting pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities"
which addresses the consolidation of business enterprises (variable interest
entities) to which the usual condition (ownership of a majority voting interest)
of consolidation does not apply. The interpretation focuses on financial
interests that indicate control. It concludes that in the absence of clear
control through voting interests, a company's exposure (variable interest) to
the economic risks and potential rewards from the variable interest entity's
assets and activities are the best evidence of control. Variable interests are
rights and obligations that convey economic gains or losses from changes in the
values of the variable interest entity's assets and liabilities. Variable
interests may arise from financial instruments, service contracts, nonvoting
ownership interests and other arrangements. If an enterprise holds a majority of
the variable interests of an entity, it would be considered the primary
beneficiary. The primary beneficiary would be required to include the assets,
liabilities and the results of operations of the variable interest entity in its
financial statements. In December 2003, the FASB issued a revision to FIN 46 to
address certain implementation issues. This statement is not applicable to us.
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting and reporting for derivative instruments and hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 149 is effective for derivative instruments and
hedging activities entered into or modified after September 30, 2003, except for
certain forward purchase and sale securities. For these forward purchase and
sale securities, SFAS No. 149 is effective for both new and existing securities
after September 30, 2003. This statement is not applicable to us.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. SFAS No. 150 will be effective for financial instruments entered
into or modified after May 31, 2003 and otherwise will be effective at the
beginning of the first interim period beginning after June 15, 2003. This
statement is not applicable to us.
-24-
BUSINESS
General
Enova Systems, Inc., a California Corporation ("Enova" or the "Company"), was
incorporated on July 30, 1976. The Company's fiscal year ends December 31. All
year references refer to fiscal years.
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.
We continue to receive much greater recognition from both governmental and
private industry with regards to U.S. military applications of our hybrid drive
systems and fuel cell power management technologies. During the first quarter of
2004, Enova expanded its market reach into China, capturing new customers
Shenzhen Minghua Environmental Protection Vehicle Co., Ltd. and Tsinghua
University of China and entering into negotiations with several other bus
manufacturers for sales of Panther 120kW and advanced parallel hybrid drive
systems for implementation for the 2008 Beijing Summer Olympics. Management
believes that current negotiations with these Chinese companies as well as other
will result in development and production contracts during 2004 and beyond;
however, at this time; there are no assurances that such additional contracts
will be consummated.
During the quarter ended March 31, 2004, we continued to develop and produce
electric and hybrid electric drive systems and components for Mack/Volvo, Ford
Motor Company (Ford), Wright Bus and Eneco of the United Kingdom, EcoPower
Technology of Italy, Tomoe of Japan and several other domestic and international
vehicle and bus manufacturers. 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 Hydrogenics, a fuel cell developer in
Canada.
Heavy-Duty Drive Systems - Buses, Trucks, Vans and Other Industrial Vehicle
--------------------------------------------------------------------------------
Applications
------------
Enova's primary market focus continues to center around the heavy-duty drive
systems sector for multiple vehicle and marine applications. We believe
series-hybrid and parallel hybrid heavy-duty drive system sales offer Enova the
greatest return on investment in both the short and long term. Although this
market sector has developed more slowly than anticipated, management believes
that this area will see significant growth over the next several years.
-25-
Our PantherTM 120kW and PantherTM 240kW drive systems were developed completely
in-house and are in production and operating in global markets giving Enova a
potential edge on other competitors in this sector. As the Company penetrates
more market areas, we are continually refining and optimizing both our market
strategy and our product line to maintain our expertise in power management and
conversion systems for mobile applications.
During the first quarter of 2004, we sold six PantherTM 120kW drive systems to
two new customers in China, Shenzhen Minghua Environmental Protection Vehicle
Co., Ltd. for diesel-hybrid buses and Tsinghua University for fuel cell hybrid
bus development. China intends to use hybrid-electric buses to shuttle athletes
and guests at the 2008 Beijing Summer Olympics and the 2010 World's Expo in
Shanghai. Tsinghua is the premier research university in China, its automotive
engineering department selecting Enova's drive systems for its government funded
hybrid fuel cell bus development. Additionally, we are in negotiations to sell
our PantherTM 120kW drive systems and other hybrid-electric components to other
potential China-based bus manufacturers in 2004 and beyond. At this time,
however, there are no assurances that such additional orders will be
forthcoming.
In Japan, Tomoe Electro-Mechanical Engineering and Manufacturing, Inc. is
developing many new applications for our electric and hybrid-electric drive
systems. During the first quarter of 2004, Tomoe integrated our PantherTM 120kw
drive system into another of its industrial applications, a mine tunnel crawler.
This crawler is an ideal employment of Enova's technology, benefiting from its
high torque, low emissions and increased fuel efficiency. In the past few years,
Enova successfully integrated its PantherTM drive systems into Tomoe's
heavy-duty Isuzu dump truck application, three passenger trams and the mine
tunnel crawler. Three Tomoe passenger trams are currently in service in Okinawa.
Tomoe and Enova continue to develop other commercial and industrial applications
for our drive systems, including potential light rail applications. For the year
ended December 31, 2003, we billed approximately $146,000 for these various
systems. Although we anticipate additional orders for these systems in 2004 and
beyond, there are no assurances that such additional orders will be forthcoming.
Wrights Environment, a division of Wrights Bus, one of the largest low-floor bus
manufacturers in the United Kingdom, increased its volume of hybrid electric
PantherTM 120kW drive systems, ordering an additional four drive systems in the
first quarter of 2004 as well as one of our PantherTM 240kW drive systems.
Additionally, Wright Bus has agreed to partially fund development of our diesel
generator system for diesel engines compatible with their driveline. Such
development is scheduled to commence in the second half of 2004.
EcoPower Technology of Italy continues to purchase components for its hybrid
electric drive systems during the first quarter of 2004 for service and
maintenance parts for its fleet of buses powered by PantherTM 120kw drive
systems. To date, we have sold 42 drive systems to EcoPower for approximately
$1,262,000, forming one of the largest fleets of hybrid buses in the world.
EcoPower is one of the largest integrators of medium size transit buses for the
European shuttle bus market, with key customers in five Italian cities namely
Turin, Genoa, Brescia, Ferrara and Vicenza. For the year ended December 31,
2003, we billed approximately $213,000 for these systems.
MTrans of Malaysia, that country's leading monorail provider, has procured and
integrated our high voltage Panther 120kW systems into its monorail trains for
service on new monorail systems. Each monorail train requires four drive
systems, which may be modified to operate as pure hybrids or connected to a
power rail system. Additionally, MTrans has integrated a standard Panther 120kW
drive system into a hybrid 10-meter bus with a Capstone microturbine as its
power source. For the year ended December 31, 2003, we billed approximately
$184,000 for these various systems. MTrans has discussed the potential of
utilizing Enova drive systems for all of its hybrid and monorail requirements in
2004 and beyond. At this time, however, there are no assurances that such
additional orders will be forthcoming.
Although Advanced Vehicle Systems no longer exists, we gained immeasurable
experience and recognition from the programs and vehicles into which we
integrated them. Enova delivered drive systems and integrated these into both 30
and 38-foot transit buses as well as a Class 8 urban delivery truck. The
integration of these systems into this wide variety of vehicles assisted Enova
in developing more efficient and cost beneficial integration and maintenance
programs for use with other customers. Additionally, the fleet and transit
operators of these vehicles are beginning to provide Enova with a new customer
base for upgrades and service of the installed systems.
Hyundai Heavy Industries has been selected as a major partner for our outsource
manufacturer for the Panther 120kW controller, the motor and controller for our
Panther 240kW drive systems and many other Enova digital power management
components. Enova's strategy is to minimize capital outlays and maximize
efficiencies by utilizing proven manufacturing partners.
-26-
Light-Duty Drive Systems - Automobiles and Delivery vehicles
------------------------------------------------------------
Our 90kW controller, motor and gear unit is utilized in light duty vehicles such
as midsize automobiles and delivery vehicles. The topology of this system is
being adapted to also be utilized as a parallel hybrid motor and controller
system. We are beginning to receive more interest in our light-duty systems from
both European and Asian customers.
Eneco of the United Kingdom, a vehicle integrator which utilizes Enova's
PantherTM 120kW drive systems in its hybrid bus applications, purchased two
PantherTM 90kW drive systems for integration into delivery vans for $45,000.
The City of Honolulu contracted with us to upgrade several S-10 trucks in its
electric vehicle fleet. During the third quarter of 2003, we completed the
upgrade of 3 trucks to our Panther 90kW drive system and two additional vehicles
were upgraded in March 2004. Through March 2004, this program generated $139,000
in revenues.
Fuel Cell Technologies
----------------------
The High Voltage Energy Converter (HVEC) development program with Ford Motor
Company for their fuel cell vehicle was essentially completed in 2003. This
converter is a key component in Ford's Focus Fuel Cell Vehicle (FCV) which
utilizes the Ballard fuel cell system. It converts high voltage power from the
fuel cell into a lower voltage for use by the drive system and electronic
accessories. Enova delivered 36 HVEC production systems to Ford in the first
quarter of 2004 valued at approximately $410,000. These systems will be
integrated into the Ford Focus FCV which will be part of an evaluation program
into be implemented by Ford later in 2004. There is a potential for additional
production orders from Ford in 2004; however at this time, there are no
assurances that such additional orders will be forthcoming.
Furthermore, we are applying the technology and components derived from this
program to other applications. The HVEC is a critical component of our Fuel Cell
bus programs, noted below in development programs, and other fuel cell powered
systems such as the Hyundai fuel cell vehicle noted below under research and
development programs.
Enova's fuel cell enabling components are part of the proposed fleets of fuel
cell vehicles being utilized by both Ford Motor Company - the Ford Focus FCV-
and Hyundai Motor Company - the Hyundai Tucson fuel cell hybrid electric vehicle
- in response to the U.S. Department of Energy's solicitation, entitled
"Controlled Hydrogen Fleet and Infrastructure Demonstration and Validation
Project." This government-funded project will last over five years, commencing
in late 2004, evaluating the economic and performance feasibility of fuel cell
vehicles and infrastructure across the U.S.
Our fuel cell management and control systems work with a variety of fuel cells
provided by such manufacturers as Hydrogenics of Canada, UTC Fuel Cells, part of
the UTC Power unit of United Technologies Corporation and Ballard Power Systems
of Canada. Our strategy is to provide power components that are impartial to the
type of power source, therefore allowing our systems to work efficiently with
any alternative source available such as fuel cells, diesel generators, advanced
batteries, microturbines, in-line power and other advanced energy sources.
During 2003, UTC Fuel Cells purchased 32 Fuel Cell Care units from us over the
course of the year for approximately $67,000. We intend to work with both UTC
Fuel Cells directly and as a partner in our alliance development programs for
fuel cell applications in the future.
Research and Development Programs
---------------------------------
We are pursuing several government and commercially sponsored development
programs for both ground and marine heavy-duty drive system applications.
Our program with Mack Truck, Inc., Powertrain division - a unit of The Volvo
Group, Sweden, is for the development and manufacture of a motor controller,
electric motor and battery management systems for a new parallel hybrid drive
system continues on schedule. The new parallel hybrid vehicle program is part of
the Air Force's efforts to improve efficiency, reduce fuel and maintenance
costs, provide re-generative brake energy and reduce emissions. The refueler
fleet consists of approximately 300 vehicles and, upon successful completion and
evaluation of the refueler vehicle, there is the potential for additional
upgrades to the parallel hybrid drive system. As part of the program, Mack
-27-
Trucks will also evaluate the applicability of the drive system to commercial
vehicles commencing with its Class 8 Refuse Hauler. Mack Trucks currently
produces approximately 3,000 refuse vehicles per annum for major customers such
as Waste Management. We anticipate completing this program in late 2004 followed
by an evaluation period of approximately three to six months. The program
generated $75,000 in revenues for us in the first quarter of 2004. This program
has opened several avenues within Mack and Volvo for Enova to develop and
manufacture advanced drive system components. However, at this time, there are
no assurances that such additional orders will be forthcoming.
Our development contract with EDO Corporation of New York for the design and
fabrication of a high voltage DC-DC power conversion system utilizing a Capstone
microturbine as the primary power source for the U.S. Navy unmanned minesweeper
project, also continues to progress during the first quarter of 2004. The
electronics package will include Enova's advanced power components including a
new, enhanced 50V, 700A DC-DC power converter, our Battery Care Unit and Hybrid
Control Unit which will power the minesweeper's electromagnetic detection
system. Our power management and conversion system will be used to provide
on-board power to other accessories on the platform. We believe that the
aggregate value of the program will be approximately $420,000, of which $188,000
was billed in the first quarter of 2004. Although this program also has the
potential for additional system sales following the demonstration phase, there
are no assurances that such additional orders will be forthcoming.
Our program with the U.S. Air Force and the State of Hawaii to integrate a
Panther 120kW hybrid drive system into a second 30-foot bus for the Hickman Air
Force base was amended to develop this propulsion system as a hydrogen fuel cell
hybrid vehicle teaming with Hydrogenics of Canada. In integrating this new
system for Enova, our engineers developed several new power management systems,
including our dual 8kW inverter, 380V DC/DC converter and our Mobile Fuel Cell
Generator that utilizes our HVEC from our Ford development program. This latest
fuel cell vehicle application utilized a Hydrogenics 20kW fuel cell power
generation module underscoring our technologies ability to optimize fuel cell
performance across a range of fuel cell products. The program was completed in
the fourth quarter of 2003 and the bus has met all performance requirements..
For the year ended December 31, 2003, we billed approximately $550,000 for this
program.
The all-electric Hyundai Santa Fe SUV demonstration project in Honolulu Hawaii
has been extended for another two years for three of the vehicles. Fast-charging
capabilities and performance will be the primary focus of this continued
evaluation. This is a continuation of the State of Hawaii and Hyundai Motor
Company's program for pure electric vehicle performance.
Enova continues its development for Hyundai Motor Company of the fuel cell power
management and conversion components for Hyundai's latest fuel cell hybrid
electric vehicle, the Tucson, which was unveiled at the Geneva Auto Show in
March 2004. Enova is developing the next generation hybrid-electric drive-train,
motor and control unit based on its prior development work on both light and
heavy-duty power-trains for both electric and hybrid-electric vehicle platforms.
Enova is working in conjunction with UTC Fuel Cells, part of the UTC Power unit
of United Technologies Corporation, to develop the power electronics for this
vehicle. This program will continue through the second quarter of 2004. For the
year ended December 31, 2003, we billed approximately $271,000 for this program.
This program will continue through the second quarter of 2004 and is estimated
to generate approximately $400,000 in revenues for us. Although we believe there
is potential for further production of these drive system components in late
2004, there can be no assurances at this time that such orders will be realized.
Stationary Power Applications
-----------------------------
It is our belief that utilizing our power management systems for stationary
applications for fuel cells will open new markets for our Company.
Our process controller for ChevronTexaco Technology Ventures (CTTV) for their
fuel reformer for a stationary fuel cell application is currently in test and
evaluation as it is integrated into CTTV's overall systems. The first prototype
of the controller board for this system performed to customer requirements. The
process controller is now in final integration and test phases at CTTV which
will last through the first half of 2004. For the year ended December 31, 2003,
Enova has billed CTTV $492,000 for this program.
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.
-28-
During the year ended December 31, 2003, we completed development on several new
power management and drive systems such as our High Voltage version of our 120kW
drive system, Dual 8kW inverter, 380V DC/DC converter, Mobile Fuel Cell
Generator, a multi-functional processor, as well as upgrades to our Battery Care
Management system, Fuel Cell Management system and our High Voltage Power
Converter.
For the year ended December 31, 2003, the following customers accounted for more
than ten percent (10%) of the Company's total revenues:
Customer Percent
------------ ------------
Advanced Vehicle Systems 18.5%
Ballard Power Systems 16.9%
Hawaii Electric Vehicle Development Project 13.4%
ChevronTexaco 11.2%
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"). We
believe legislation requiring or promoting zero or low emission vehicles is
necessary to create a significant market for hybrid-electric vehicles. The
California Air Resources Board (CARB) is continually modifying its limits for
low emission vehicles. Recently, CARB proposed additional amendments to the
regulations. Furthermore, several car manufacturers have challenged these
mandates in court and have obtained injunctions to delay these mandates. There
can be no assurance 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.
Strategic Alliances, Partnering and Technology Developments
Our continuing 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. We are 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.
We continue to seek and establish alliances with major players in the
automotive, stationary power and fuel cell fields. For instance, we are
partnering with the Hyundai Group of Korea in the development of advanced hybrid
and hydrogen fuel cell drive-train technology and related systems.
Our recent joint venture alliance with Hyundai Heavy Industries (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 corporation, Hyundai-Enova
Innovative Technology Center (ITC), commenced operations in the second quarter
of 2003. The advanced technology center focuses on leading-edge technologies in
power management and power conversion for industrial, commercial, residential
and vehicle applications. The ITC's first development program focuses on an
-29-
advanced parallel hybrid drive system for Hyundai Motor Company which is
currently in the initial evaluation phases. Another major project for the ITC is
the commercialization of our diesel genset. Other projects slated for
development for the ITC include commercial inverters and other power management
systems which build on Enova's and HHI's technology base. We intend to utilize
the resources provided through the ITC to optimize our current product line for
greater performance and production cost efficiencies, while we continue new
research and development for the next generation of digital power management
systems for mobile and stationary applications.
Our alliances with other major OEMs in the automotive, transit, commercial and
energy sectors continue to expand. During 2003, we formed new alliances with
Mack/Volvo, EDO, MTrans of Malaysia, CARTA (Chattanooga Area Rapid Transit
Agency), Eneco, Hydrogenics of Canada and other commercial and industrial
intermediaries and OEMS to find new markets and applications for our products
and technologies. 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, Hydrogenics and national
universities. We have implemented our plans to outsource manufacturing of our
components to companies such as HHI, Ricardo, 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 in all formats and files are designed with
manufacturability in mind from the start. For the automotive market, we design
our products to QS 9000 manufacturing and quality standards. We believe that our
redundancy of systems 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.
We perform 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
Our focus is digital power management, power conversion, and system integration.
Our proprietary 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.
We are moving to expand our product base into new markets outside of the
traditional electric and hybrid-electric automotive fields. Key areas which we
have 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. We have entered into agreements or
begun discussions with various alternative power generation manufacturers such
as Capstone Turbine, UTC Fuel Cells and Hydrogenics 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.
We have embraced fuel cell technology and have 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.
-30-
PantherTM Electric and Hybrid-Electric Drive Systems
Our 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.
Our 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 120kW and 240kW diesel genset powered series-hybrid drive
systems anticipated to be introduced in the third quarter of 2004.
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 revolutions per minute (rpm) go 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. We also offer 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
Our 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 our 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.
Our 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, Ballard or Hydrogenics system, and many
others. In all of these examples, our battery management system provides the
power management to allow for proper power control.
-31-
Battery Care Unit
We place a great amount of focus on our power management systems. Our 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 our
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
We have developed and are 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.
-32-
50kW ICE Generator Unit
We provide 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.
Fuel Cell Management Unit
We have 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.
We have reconfigured our 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 our 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
Our 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. We are 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.
-33-
Research and Development
We believe 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:
o Power Control and Drive Systems and related technologies for vehicle
applications;
o Stationary Power Management and Conversion and related technologies;
o Heavy Duty Drive System development for Buses; Trucks, Industrial,
Military and Marine application
o Fuel Cell Generation system power management and process control
o Systems Integration of these technologies;
o Technical and product development under DOE/DOT/DOD and Hyundai Group
Contracts
o OEM Technical and Product development.
For the years ended December 31, 2003, 2002 and 2001, we spent $799,000,
$1,152,000 and $879,000, respectively, on internal research and development
activities. We are continually evaluating and updating the technology and
equipment used in developing each of our 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
We currently hold four U.S. patents and have one patent pending, in power
management and control, with an additional patent in crash management safety,
which was originally issued in 1997. We also have trademarks or service marks in
the United States and are reviewing international patent protection as well. We
continually review and append our protection of proprietary technology. We have
placed renewed emphasis on the development and acquisition of patentable
technology in 2003 and will continue to do so in future years. 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 us. 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.
Our success depends in part on our ability to protect our proprietary
technologies. Our 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 our products or design around its
patents, and the patents may not provide us with competitive advantages.
Further, patents held by third parties may prevent the commercialization of
products incorporating our technologies or third parties may challenge or seek
to narrow, invalidate or circumvent any of our pending or future patents. We
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
us, may also be necessary to enforce any patents issued or licensed to us 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 our business.
We also rely 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, we may not have adequate
remedies for any breach of our unpatented proprietary intellectual property may
otherwise become known or independently discovered by competitors. Further, the
laws of certain foreign countries may not protect our products or intellectual
property rights to the same extent as do the laws of the United States.
-34-
Employees
As of March 31, 2004, we had 28 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 3 in administration, 1 in sales, 20 in engineering and
research and development, and 7 in production.
Facilities
Our 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. Our monthly lease expense is $13,500. We also lease an office in
Hawaii on a month-to-month basis at $1,500 per month and an office in South
Korea on a month-to-month basis at $500 per month. We believe that these offices
are suitable and adequate for our current and readily foreseeable needs.
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.
-35-
MANAGEMENT
The following table sets forth certain information regarding our directors and
executive officers as of June 22, 2004.
Name Age Position
---- --- --------
Anthony N. Rawlinson 48 Chairman of the Board
Carl D. Perry 71 Chief Executive Officer, President and Director
Malcolm R. Currie, Ph.D. (2) 77 Director
Donald H. Dreyer (1) 66 Director
John J. Micek III (1) 51 Director
Edwin O. Riddell (2) 61 Director
John R. Wallace 55 Director
Bjorn Ahlstrom 70 Director
Larry B. Lombard 43 Acting Chief Financial Officer
Edward M. Moore 42 Chief Operating Officer
------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Anthony N. Rawlinson, Chairman of the Board. Mr. Rawlinson was appointed
non-executive 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 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 Rawlinson to become Chairman. He served as Acting
Chief Financial Officer of the Company from November 1997 to March 2004. 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., 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.
Bjorn Ahlstrom, Proposed Director. Mr. Ahlstrom currently is a consultant in the
heavy-duty vehicle industry. Mr. Ahlstrom retired as Chairman of Volvo Group
North America, Inc. on April 1, 2004. Prior to that, Mr. Ahlstrom was President
and Chief Executive Officer of Volvo North America Corporation from 1971 until
1994. During this term, Volvo North America Corporation owned and operated
Volvo's businesses in the United States and Canada. Under Mr. Ahlstrom's
leadership, VNAC grew from a $50 million car importer in the early 1970s to a $6
billion company with manufacturing and marketing operations for cars, trucks,
marine engines, and financial services. In 1981, Mr. Ahlstrom received the Royal
Order of the North Star from King Carl XVI Gustaf of Sweden. The United States
Government awarded him the Medal of Peace and Commerce in 1983. He received the
Ellis Island Medal of Honor in 1990. Mr. Ahlstrom has been awarded honorary
Doctor of Law degree from St John's University, NY, and Ramapo College of New
Jersey.
-36-
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. 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 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.
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 Sboof 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.
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.
John R. Wallace, Director. Mr. Wallace was elected as a Director of the Company
in December 2002. He 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, Colorado. 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.
There are no family relationships among any of the directors or executive
officers of our company.
Board of Directors, Committees and Compensation
Each of the directors is elected to serve a one-year term and until his
successor is duly elected and qualified. The authorized number of directors is
currently fixed at eight. The holders of the Series B Stock, voting as a
separate class, are entitled to elect two directors. The holders of the Series A
Stock and the Common Stock, voting together as a single class, are entitled to
elect the balance of the directors. See "Description of Capital Stock."
-37-
The Board currently has two committees: the Compensation Committee and the Audit
Committee. The Compensation Committee currently consists of Mr. Edwin Riddell
and Dr. Malcolm Currie. Its functions are to establish and apply our
compensation policies with respect to our executive officers, and to administer
our stock option plans. The Audit Committee currently consists of Messrs. Donald
Dreyer and John Micek. The Audit Committee recommends engagement of the
independent auditors and is primarily responsible for approving the services
performed by the independent auditors and for reviewing and evaluating the our
accounting principles and system of internal accounting controls.
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. In May 2004, the Company's Board of Directors
unanimously approved an increase in compensation for outside directors which
doubled the amount of cash and stock paid for the various directors' meetings.
For and with respect to fiscal 2003, 754,167 shares of the Company's Common
Stock were issued under the above described compensation plan for outside
directors. As of June 22, 2004, an aggregate of 2,841,476 shares have been
issued under the compensation plan for Directors since its inception in
September 1999.
Consulting Agreements
James M. Strock
We had entered into a consulting agreement with James Strock & Company, a
corporation wholly owned by James M. Strock. Mr. Strock served as a Director of
Enova from July 2000 until his resignation in March 2004. Under the terms of
that consulting agreement, we retained Mr. Strock's services for a minimum
monthly retainer of $3,000 plus reasonable expenses. This consulting agreement
was terminated in April 2003. During 2003, the Company paid Mr. Strock $17,000
in cash for consulting services and expenses and $12,000 for directors fees
(which latter amount includes the cash paid and the value of the stock issued to
him pursuant to the outside directors' compensation package described above).
John R. Wallace
We entered into a consulting agreement with John R. Wallace whereby we
compensate Mr. Wallace at the rate of $1,500 per day plus reasonable expenses
for consulting services rendered. Mr. Wallace is not compensated per this
agreement when acting in the capacity of a Director. During 2003, we paid Mr.
Wallace $6,000 in cash for consulting services and expenses and $12,000 for
directors fees (which latter amount includes the cash paid and the value of the
stock issued to him pursuant to the outside directors' compensation package
described above).
Donald H. Dreyer
We also utilize the consulting service of Donald Dreyer and we compensate him at
the rate of $150 per hour plus reasonable expenses for consulting services
rendered. Mr. Dreyer is not compensated when acting in the capacity of a
Director other than the fees noted above. During 2003, we paid Mr. Dreyer $6,500
in cash for consulting services and $12,000 for directors fees (which latter
amount includes the cash paid and the value of the stock issued to him pursuant
to the outside directors' compensation package described above).
Executive Compensation
Summary Compensation Table
The following table sets forth all compensation earned by the Company's Chief
Executive Officer and each of the other most highly compensated executive
officers of the Company whose annual salary and bonus exceeded $100,000 for the
years ended December 31, 2003, 2002 and 2001 (collectively, the "Named Executive
-38-
Officers"). Mr. Carl D. Perry was the sole executive officer of the Company
whose salary exceeded $100,000 as of December 31, 2003.
Summary Compensation Table
Name and Principal Position Annual Compensation
------------------------------- ------------------------
Year Salary Bonus
($) ($)
---------- ------------ -----------
Carl D. Perry (1) 2003 139,615 --
Chief Executive Officer and President 2002 150,000 --
2001 160,989 30,000
(earned
in 2000)
------------------
(1) Mr. Perry was elected as Chief Executive Officer in November 1997. Mr.
Perry's current salary is $120,000 per year, a 20% voluntary reduction from
the prior year's salary. Mr. Perry served as Acting Chief Financial Officer
during the periods reflected in the above chart and through March 6, 2004.
Option/SAR Grants
No grants of stock options or stock appreciation rights ("SARs") were made
during fiscal 2003 to the Named Executive Officer.
Option Exercises and Option Values
The Named Executive Officer did not exercise any options during the year ended
December 31, 2003. All options of the Named Executive Officer expired prior to
December 31, 2003 without exercise.
Stock Option Plans
A general description of the principal terms of the 1996 Employee and Consultant
Stock Option Plan (the "1996 Plan") are set forth below. This description is
qualified in its entirety by the terms of the 1996 Plan. A copy of the actual
1996 Plan document has been previously filed with the Securities and Exchange
Commission.
Our board of directors adopted the 1996 Employee and Consultant Stock Option
Plan in October 1996 which was subsequently approved by our shareholders in May
1997. A total of 15,000,000 shares were initially 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 the
1996 Plan assured that a sufficient reserve of common stock shares 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 was previously
filed with the Securities and Exchange Commission.
Options granted under the amended 1996 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, 2003, the Company had reserved but unissued 23,844,000 common shares for
future grants under the 1996 Plan, as amended. Options to purchase 9,998,000
shares of Enova common stock were granted to employees in 2003.
With respect to the grant of options to directors or employees who are also
officers or directors, the 1996 Plan is administered by (i) our board of
directors, or (ii) a committee designated by the board and constituted in such a
manner as to comply with applicable laws to permit such grants and related
transactions to be exempt from Section 16(b) of the Exchange Act in accordance
with Rule 16b-3. With respect to grants to employees or consultants who are
-39-
neither officers nor directors, the 1996 Plan is administered by the board or by
a committee of the board.
The administrators of the 1996 Plan have full power to select, from among our
employees, directors and consultants eligible for grants, the individuals to
whom options will be granted, to determine the specific terms and conditions of
each grant, including the number of shares subject to each option, to amend the
terms of outstanding options granted under the 1996 Plan (except that any
amendments that would adversely affect an optionee's rights under an outstanding
option may not be made without the optionee's written consent), and to interpret
and construe the terms of the 1996 Plan and options granted thereunder, all
subject to the provisions of the 1996 Plan. The interpretation and construction
of any provision of the 1996 Plan by the administrators shall be final and
conclusive. Members of the board receive no additional compensation for their
services in connection with the administration of the 1996 Plan.
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.
Each option granted under the 1996 Plan is to be evidenced by a written stock
option agreement between us and the optionee and is subject to the following
additional terms and conditions:
The board or its committee determines on the date of grant when options will
become exercisable. An option is exercised by giving written notice of exercise,
specifying the number of full shares of common stock to be purchased and
tendering payment of the purchase price.
The exercise price of options granted under the 1996 Plan is determined on the
date of grant. The exercise price of incentive stock options must be at least
100% of the fair market value per share of the common stock at the time of
grant. In the case of incentive stock options granted to an employee who at the
time of grant owns more than 10% of the voting power of all classes of stock or
any parent or subsidiary, the exercise price must be at least 110% of the fair
market value per share of the common stock at the time of grant. The exercise
price of nonstatutory stock options must be at least 85% of the fair market
value per share of the common stock at the time of grant. The exercise price of
nonstatutory stock options granted to an employee who at the time of grant owns
more than 10% of the voting power of all classes of our stock including stock of
any parent or subsidiary, the exercise price must be at least 110% of the fair
market value per share of the common stock at the time of grant. In the event of
the grant of a nonstatutory option with an exercise price below the then fair
market value of the common stock, the difference between fair market value on
the date of grant and the exercise price would be treated as a compensation
expense for accounting purposes and would therefore affect the our earnings. For
purposes of the 1996 Plan, fair market value is defined as the closing sale
price of the common stock as reported on the OTC Bulletin Board on last market
trading day prior to the time of grant.
If the optionee's employment, directorship or consulting relationship with us is
terminated for any reason (other than death or disability), options may be
exercised within such period as is determined by the board or its committee (up
to three months in the case of incentive stock options) after such termination
as to all or part of the shares as to which the optionee was entitled to
exercise at the date of such termination, provided that the option is exercised
no later than its expiration date.
At the time an option is granted, the board or its committee determines the
period within which the option may be exercised. In no event may the term of an
incentive stock option be longer than ten (10) years. No option may be exercised
by any person after the expiration of its term. An incentive stock option
granted to an optionee who, at the time such option is granted, owns stock
possessing more than 10% of the voting power of all classes of our stock, may
not have a term of more than five (5) years.
An incentive stock option is not transferable by the optionee, other than by
will or the laws of descent and distribution, and is exercisable during the
optionee's lifetime only by the optionee. A nonstatutory option shall be
transferable to the extent determined by the administrator and as provided in an
optionee's option agreement.
The option agreement may contain such other terms, provisions and conditions not
inconsistent with the 1996 Plan as may be determined by the board or its
committee.
In the event any change, such as a stock split, reverse stock split, stock
dividend, or combination or reclassification of the common stock, is made in the
our capitalization without receipt of consideration, which results in an
increase or decrease in the number of outstanding shares of common stock, an
-40-
appropriate adjustment shall be made in the number of shares under the 1996 Plan
and the price per share covered by each outstanding option.
In the event we merge or consolidate with another entity and we are not the
surviving corporation, or a proposed sale, transfer or other disposition of all
or substantially all of our assets in connection with complete liquidation or
dissolution, or a reverse merger in which we are the surviving entity but in
which securities possessing more than 50% of the total combined voting power of
our outstanding securities are transferred to a person or persons different from
those who held such securities immediately prior to such merger, each
outstanding option shall automatically become fully vested and exercisable and
released from any restrictions on transfer and repurchase or forfeiture rights,
unless the option is assumed or substituted by the successor corporation or
replaced with a comparable option with respect to shares in the surviving
corporation, or the option is replaced with a comparable cash incentive program
of the successor corporation, or unless the vesting, exercisability and release
of the option is subject to other limitations imposed by the 1996 Plan
administrators at the time of granting the options.
The board may amend the 1996 Plan at any time or from time to time or may
suspend or terminate the 1996 Plan without approval of the shareholders;
provided, however, that shareholder approval is required for any amendment to
the 1996 Plan for which shareholder approval would be required under applicable
law, as in effect at the time. Any amendment, suspension or termination of the
1996 Plan shall not affect options already granted, and such options shall
remain in full force and effect, unless mutually agreed otherwise in writing
between the optionee and the Plan administrators. The board may accelerate any
option or waive any condition or restriction pertaining to such option at any
time. The board may also substitute new stock options for previously granted
stock options, including previously granted stock options having higher option
prices, and may reduce the exercise price of any option to the then current fair
market value, if the fair market value of the common stock covered by such
option shall have declined since the date the option was granted. In any event,
the 1996 Plan shall terminate in October 2006. Any options outstanding under the
1996 Plan at the time of its termination shall remain outstanding until they
expire by their terms.
We cannot now determine the number of options to be granted in the future under
the 1996 Plan, as proposed to be amended, to executive officers, directors or
employees. The Company granted options covering an aggregate of 9,998,451 shares
of Common Stock to its other employees under the 1996 Plan during fiscal 2003.
Compensation Committee Interlocks and Insider Participation
Our Compensation Committee currently consists of Mr. Edwin Riddell, as Chairman,
and Dr. Malcolm Currie. Mr. Riddell was elected Chairman in August 1998. Dr.
Currie was elected to the Compensation Committee in July 1999 and also served on
the Compensation Committee during his prior term as a director until his
resignation in 1998.
Limitation on Liabilities and Indemnification Matters
Our articles of incorporation limit the personal liability of our directors to
our shareholders to the maximum extent permitted by California law. California
law provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except with
respect to liability for:
o acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law;
o acts or omissions that a director believes to be contrary to the best
interests of the corporation or our shareholders or that involve the
absence of good faith on the part of the director;
o any transaction from which the director derived an improper personal
benefit.
o acts or omissions that show a reckless disregard for the director's
duty to the corporation or our shareholders in circumstances in which
the director was aware, or should have been aware, in the ordinary
course of performing a director's duties, of a risk of serious injury
to the corporation or our shareholders;
o acts or omissions that constitute an unexcused pattern of inattention
that amounts to an abdication of the director's duty to the
corporation or our shareholders;
o contracts or other transactions in which the director has a material
financial interest that are not approved in the manner set forth under
Section 310 of the California General Corporation Law; or
-41-
o certain distributions or the making of certain loans or guarantees
approved by (or deemed to have been approved by) directors as provided
under Section 316 of the California General Corporations Law.
This provision will have no effect on any non-monetary remedies that may be
available to us or to our shareholders, nor will it relieve us or other officers
or directors from compliance with federal or state securities laws.
Our articles of incorporation and bylaws also generally provide that we will
indemnify, to the fullest extent permitted under the California General
Corporation Law, any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit, investigation,
administrative hearing or any other proceeding by reason of the fact that he or
she is or was a director or officer of ours, or is or was serving at our request
as a director, officer, employee or agent of another entity, against expenses
incurred by him or her in connection that proceeding. An officer or director
will not be entitled to indemnification by us if:
o the officer or director did not act in good faith and in a manner
reasonably believed to be in our best interests; and
o with respect to any criminal action or proceeding, the officer or
director had no reasonable cause to believe his or her conduct was
unlawful.
At the present time there is no pending litigation or proceeding involving any
of our directors, officers, employees or agents for which indemnification will
be required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for indemnification.
-42-
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2003, Hyundai Heavy Industries, Co. purchased 23,076,923 shares
representing a 5.67% ownership in Enova, Inc. (see table below). In the third
quarter of 2004, Hyundai Heavy Industries will purchase an additional $1.5
million of Enova Systems restricted common stock at a price equal to the volume
weighted average closing price of our stock for the ninety trading days
preceding such purchase. Additionally, during 2003 and for the three months
ended March 31, 2004, we purchased from HHI approximately $599,000 in
components, materials and services for manufacture of our drive systems and
power management systems. These purchases were made on terms and conditions
equal to or better than our standard commercial terms with other vendors. At
June 22, 2004, our outstanding payables balance due HHI was approximately
$188,000.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our stock as of June 22, 2004, (i) by each person (or group of
affiliated persons) who we know to own beneficially more than 5% of any class of
our voting securities, (ii) by each of our Directors, (iii) by our Named
Executive Officer listed in the Summary Compensation Table above, and (iv) by
our directors and executive officers 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 stock
beneficially owned by them.
Shares Percentage of
Beneficially Shares Beneficially Voting
Name and Address of Beneficial Owner Owned (1) Owned (2) Percentage (2)
-------------------------------------------- -------------------- ---------------------- -----------------
Jagen, Pty., Ltd. 145,000,000 33.22% 35.62%
9 Oxford Street, South Ybarra 3141
Melbourne, Victoria Australia
Hyundai Heavy Industries, Co. 33,076,923(4) 7.58% 5.67%
1 Cheona-Dong, Dong-Ku
Ulsan, Korea
Citibank N.A. 31,405,754 7.19% 7.71%
111 Wall Street, 8th Floor
New York, NY 10043
Jean Schulz 1,329,111(5) * *
4900 Upper Ridge Road
Santa Rosa, CA 95404
Delphi Delco Electronics 1,278,720(6) * *
2151 E. Lincoln Road
Kokomo IN 46904-9005
Bjorn Ahlstrom - * *
Carl D. Perry 10,000,500 2.29% 2.46%
Anthony N. Rawlinson 25,430,759 5.83% 6.25%
John J. Micek III 1,521,691(7) * *
Edwin O. Riddell 675,756 * *
Malcolm R. Currie, Ph.D. 565,126 * *
Donald H. Dreyer 488,620 * *
John R. Wallace 159,524 * *
Larry B. Lombard 1,800,000(8) * *
Edward M. Moore 1,022,256(9) * *
All Directors and executive officers 41,664,232(10) 9.54% 9.87%
as a group (9 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
-43-
held by the person or class in question which may be exercised or converted
within 60 days after June 22, 2004.
(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; and (iv) Common Stock issuable
pursuant to warrants, options and other convertible securities exercisable
or convertible by such shareholder within sixty (60) days after June 22,
2004.
(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 10,000,000 shares of Common Stock issuable pursuant to a Stock
Purchase Agreement between Hyundai Heavy Industries, Ltd. and Enova
Systems, Inc. for $1.5M of Enova restricted common stock at an estimated
prices of $0.15 per share based on the weighted average market closing
price of Enova's common stock at June 22, 2004 for the prior ninety day
period.
(5) 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.
(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) 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.
(8) Includes 1,000,000 shares of Common Stock issuable pursuant to stock
options exercisable at a price of $.16.
(9) Includes 1,000,000 shares of Common Stock issuable pursuant to stock
options exercisable at prices from $.17 to $.20.
(10) Includes 2,000,000 shares of Common Stock issuable pursuant to stock
options exercisable at prices from $.16 to $.20 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.
-44-
SELLING SHAREHOLDERS
The following table sets forth information, as of June 22, 2004, with respect to
the selling shareholders. We issued the shares of our common stock being offered
pursuant to this prospectus by the selling shareholders in a private placement
in March, 2004. We issued and sold an aggregate of 16,250,001 shares of common
stock to the selling shareholders at a purchase price of $0.12 per share. This
prospectus covers the resale of these shares by the selling shareholders, plus,
in accordance with Rule 416 under the Securities Act of 1933, such additional
number of shares of our common stock as may be issued due to stock splits, stock
dividends or other similar transactions. The number of shares shown in the
following table as being offered by the selling shareholders does not include
such presently indeterminate number of additional shares of our common stock.
Any and all of the shares of common stock may be offered for sale by the selling
shareholders pursuant to this prospectus from time to time. Accordingly, we can
give no estimate as to the amounts of shares of our common stock that the
selling shareholders will hold upon consummation of any such sales. In addition,
the selling shareholders may have sold, transferred or otherwise disposed of all
or a portion of our shares since the date on which the information regarding the
common stock was provided in transactions exempt from the registration
requirements of the Securities Act of 1933.
The selling shareholders did not maintain any position, office or other material
relationship within the past three years with Enova.
-45-
Shares of
Shares of Common Stock Percent of
Common Stock Shares of to be owned Common Stock
owned prior to Common Stock after Owned after the
Name the Offering Offered (1) the Offering (1) Offering
--------------------------------- ----------------- ----------------- -------------------- --------------------
Eruca Limited -- 5,000,000 -- *
Tilehurst Pty Ltd. -- 6,250,000 -- *
Perla Blanca Investments, Ltd. 3,333,333 4,166,667 3,333,333 *
MTrans International Limited -- 833,334 -- *
-----------------
3,333,333 16,250,001
================= =================
* - indicates less than 1%
------------------
(1) The number of shares listed in these columns include all shares
beneficially owned and all options and warrants to purchase shares held,
whether or not deemed to be beneficially owned, by the selling
shareholders. The ownership percentage listed in these columns includes
only shares beneficially owned by the selling shareholders. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. In computing the percentage of shares beneficially
owned by the selling shareholders, shares of common stock subject to
options or warrants held by the shareholder that are exercisable now or
within 60 days hereafter are deemed outstanding, although those shares are
not deemed outstanding for the purpose of computing the percentage
ownership of any other person. The ownership percentage is calculated
assuming that 401,853,232 shares of common stock, 2,790,000 shares of
Series A Stock and 1,217,196 shares of Series B Stock were outstanding
immediately prior to this offering.
PLAN OF DISTRIBUTION
We are registering all 16,250,001 of the shares of our common stock offered by
this prospectus on behalf of the selling shareholders, and will receive no
proceeds from this offering.
The selling shareholders may transfer their shares covered by this prospectus by
gift, may pledge, hypothecate or otherwise encumber those share of may sell
those shares. The selling shareholders, or their pledgees, donees, transferees
or other successors-in-interest selling shares received from the selling
shareholders as a gift, partnership distribution or other non-sale related
transfer after the date of this prospectus are free to sell the shares from time
to time. The selling shareholders will act independently of us in making
decisions with respect to the timing, manner and size of each sale. The sales
may be made in the national over-the-counter market or otherwise, at prices and
at terms then prevailing or at prices related to the then current market price,
or in negotiated transactions. The selling shareholders may effect such
transactions by selling the shares to or through broker-dealers. The shares may
be sold in one or more transactions and by one or more of, or a combination of,
the following:
o block trade in which the broker-dealer so engaged will attempt to sell
the shares as agent, but may position and resell a portion of the
block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by such
broker-dealer for its account pursuant to this prospectus;
o an exchange distribution in accordance with the rules of such
exchange;
o a distribution or other transfer to one or more of the equity holders
of a selling shareholder;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
o in privately negotiated transactions.
-46-
In effecting sales, broker-dealers engaged by any selling shareholder may
arrange for other broker-dealers to participate in the resales.
The selling shareholders may enter into hedging transactions with broker-dealers
in connection with distributions of the shares or otherwise. In such
transactions, broker-dealers may engage in short sales of the shares in the
course of hedging the positions they assume with the selling shareholders. The
selling shareholders also may sell shares short and redeliver the shares to
close out such short positions. The selling shareholders may enter into option
or other transactions with broker-dealers that require the delivery to the
broker-dealer of the shares. The broker-dealer may then resell or otherwise
transfer such shares pursuant to this prospectus. The selling shareholders also
may loan or pledge the shares to a broker-dealer. The broker-dealer may sell the
shares so loaned or, upon a default, may effect sales of the pledged shares
pursuant to this prospectus.
Broker-dealers or agents may receive compensation in the form of commissions,
discounts or concessions from the selling shareholders. Broker-dealers or agents
may also receive compensation from the purchasers of the shares for whom they
act as agents or to whom they sell as principals, or both. Compensation as to a
particular broker-dealer might be in excess of customary commissions and will be
in amounts to be negotiated in connection with the sale. Brokers-dealers or
agents and any other participating broker-dealers or the selling shareholders
may be deemed to be underwriters within the meaning of Section 2(11) of the
Securities Act of 1933, in connection with sales of the shares. Accordingly, any
such commission, discount or concession received by them and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
discounts or commissions under the Securities Act. Because the selling
shareholders may be deemed to be an underwriter within the meaning of Section
2(11) of the Securities Act, the selling shareholders will be subject to the
prospectus delivery requirements of the Securities Act. Any securities covered
by this prospectus that qualify for sale pursuant to Rule 144 promulgated under
the Securities Act may be sold under Rule 144 rather than pursuant to this
prospectus. The selling shareholders have advised us that they have not entered
into any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of the shares; nor is any underwriter or
coordinating broker acting in connection with the proposed sale of the shares.
The shares will be sold only through registered or licensed brokers or dealers
if required under applicable state securities laws. In addition, in certain
states the shares may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirements is available and is complied with.
Under applicable rules and regulations under the Securities Exchange Act of
1934, any person engaged in the distribution of the shares may not
simultaneously engage in market-making activities with respect to our common
stock for a period of two business days prior to the commencement of such
distribution. In addition, we have advised the selling shareholders that they
will be subject to applicable provisions of the Exchange Act and the associated
rules and regulations under the Exchange Act, including the anti-manipulation
rules under Regulation M promulgated under the Exchange Act, which provisions
may limit the timing of purchases and sales of shares of our common stock by the
selling shareholders. We will make copies of this prospectus available to the
selling shareholders and we have informed the selling shareholders of the need
for delivery of copies of this prospectus to purchasers at or prior to the time
of any sale of the shares.
We will bear all costs, expenses and fees in connection with the registration of
the shares and will supplement and amend this prospectus from time to time as
may be required under the Securities Act. During any time when a supplement or
amendment is required, the selling shareholders will be required to cease sales
of the shares covered by this prospectus until this prospectus has been
supplemented or amended.
Each selling shareholder will bear all commissions and discounts, if any,
attributable to the sales of its shares. Each selling shareholder may agree to
indemnify any broker-dealer or agent that participates in transactions involving
sales of the shares against certain liabilities, including liabilities arising
under the Securities Act.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 500,000,000 shares of common stock, no
par value, and 35,000,000 shares of preferred stock. We currently have
outstanding 401,853,232 shares of common stock, 2,790,000 shares of Series A
Stock and 1,217,196 shares of Series B Stock.
-47-
Common Stock
Voting Rights. Each outstanding share of common stock is entitled to one vote on
all matters submitted to a vote of our shareholders, including the election of
directors.
Dividends. Subject to the preferential dividend rights of the Series A Stock and
Series B Stock, holders of common stock are entitled to receive dividends at the
same rate if and when dividends are declared by our board of directors out of
assets legally available for the payment of dividends.
Liquidation. In the event of a liquidation, dissolution or winding up our
affairs, whether voluntary or involuntary, after payment of our debts or other
liabilities and making provisions for the holders of the outstanding shares of
preferred stock as described below, our remaining assets will be distributed
ratably among the holders of shares of common stock.
Rights and Preferences. Our common stock has no preemptive, redemption,
conversion or subscription rights. The rights, powers, references and privileges
of holders of common stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of preferred stock that we any
designate and issue in the future.
Fully Paid and Nonassessable. All of our outstanding shares of common stock,
including the shares offered by this prospectus, are fully paid and
nonassessable.
Preferred Stock
Voting Rights. Except with respect to the election of directors and as otherwise
provided by law, the Series B Stock, the Series A Stock and the Common Stock
vote together on all matters submitted to a vote of our shareholders. Until such
time as fifty percent (50%) of the Series B Stock shares originally issued and
outstanding have been redeemed by Enova or converted into Common Stock, the
holders of the Series B Stock, voting separately as a class, are entitled to
elect two members of our board of directors. The remaining directors are elected
by the holders of the Common Stock and the Series A Stock voting together as a
single class on an as-converted basis.
Until such time as fifty percent (50%) of the Series B Stock shares originally
issued and outstanding have been redeemed by Enova or converted into Common
Stock, the authorized number of directors may not exceed eleven without the
consent of the holders of a majority of the outstanding shares of the Series B
Stock.
In addition to the voting rights described above, so long as any shares of the
Series B Stock are outstanding, the Company cannot, without first obtaining the
affirmative vote or written consent of holders of a majority of the then
outstanding shares of the Series B Stock alter or change the rights, preferences
or privileges of the Series B Stock, increase the authorized number of shares of
the Series B Stock, increase the authorized number of shares of preferred stock
or create any new class or series of shares having preference over or being on a
parity with the Series B Stock.
Dividends. In preference to any declaration or payment of dividends (other than
dividends payable in Common Stock) to the holders of the Series A Stock and the
Common Stock, the holders of Series B Stock are entitled to receive
non-cumulative cash dividends in an amount equal to 7% of $2.00 per share of
Series B Stock per annum when and if dividends are declared by our board of
directors out of assets legally available for the payment of dividends.
In preference to any declaration or payment of dividends (other than dividends
payable in Common Stock) to the holders of the Common Stock, the holders of the
Series A Stock are entitled to receive, when and if declared by our board of
directors out of assets legally available for the payment of dividends,
non-cumulative cash dividends in cash in an amount equal to 6% of $0.60 per
share of Series A Stock per annum.
If a dividend is declared on the Series A Stock and the Series B Stock, and the
amount available for payment thereof is insufficient to permit the payment in
full of the preferential amounts to those holders, then the amount available
will be distributed ratably among the holders of the Series B Stock first until
their preferential amount is paid in full. If there is any remaining amount
available for distribution, such amount would then be distributed ratably among
the holders of the Series A Stock until their preferential amount is paid in
full. Thereafter, the holders of the Common Stock are entitled to receive (when
and if declared by the board of directors) non-cumulative cash dividends in an
amount equal to the as-converted per share amount paid to the Series A Stock
holders.
-48-
After the holders of the Series B Stock, the Series A Stock and the Common Stock
have been paid the foregoing dividends in full, then the holders of the Series B
Stock, the Series A Stock and the Common Stock will share ratably in any
additional dividends during a fiscal year on an as-converted basis.
If the Company declares a distribution payable in securities of other persons,
evidences of indebtedness issued by the Company or any other persons, assets
(excluding cash dividends) or options or rights to purchase any such securities
or evidences of indebtedness, then the holders of the Series A Stock and the
holders of the Series B Stock will be entitled to a proportionate share of that
distribution on an as-converted basis.
Liquidation. In the event of any liquidation, dissolution or winding up of the
affairs of the Company, voluntarily or involuntarily, after payment or provision
for payment of all our debts, liabilities and obligations, the holders of Series
A Stock and the holders of the Series B Stock will simultaneously be paid, out
of the assets available for distribution to shareholders, prior to any payment
made in respect of the Common Stock, an amount equal to (a) in the case of the
holders of the Series A Stock, $0.60 per share for each share of Series A Stock,
plus all dividends declared but unpaid on such shares of Series A Stock and (b)
in the case of the holders of the Series B Stock, $2.00 per share for each share
of Series B Stock, plus the greater of (i) 7% of $2.00 compounded annually at
the rate of 7% for each year (or fraction of a year) after March 15, 1996, less
any cash dividends actually paid to the Series B Stock holders through the date
of liquidation or (ii) any dividends declared but unpaid on such shares of
Series B Stock. After payment in full to the holders of Series A Stock and the
holders of the Series B Stock their respective liquidation preferences, the
holders of Common Stock will be paid an amount per share equal to the per share
Series A Stock liquidation price paid to the holders of Series A Stock. Any
remaining assets will be distributed to the holders of shares of Common Stock,
Series A Stock and Series B Stock pro rata on an as-converted basis. If the
assets available for distribution upon liquidation are insufficient to pay in
full the liquidation preferences, then the remaining assets will be distributed
first ratably among the holders of the Series B Stock based upon their
preference amount, then ratably among the holders of the Series A Stock and
lastly among the holders of the Common Stock. Certain transactions will be
deemed to be a liquidation event for purposes of payment of the foregoing
liquidation preferences, including the sale of all or substantially all of the
assets of the Company and certain stock transactions.
Conversion Rights. The holders of the Series A Stock and the Series B Stock have
the right to convert their shares thereof at any time into shares of the
Company's Common Stock. As of the date hereof, each share of Series A Stock is
convertible into one share of Common Stock and each share of Series B Stock is
convertible into two shares of Common Stock.
Each share of Series A Stock automatically will convert into Common Stock at the
then effective conversion price for the Series A Stock upon (a) the consummation
of the sale of the Common Stock in an underwritten public offering registered
under the Securities Act; or (b) the registration of the underlying Common Stock
of the holders' Series A Stock under the Securities Act; or (c) a merger or
consolidation of the Company with or into another corporation or a sale of more
than fifty percent (50%) of the Company's outstanding voting securities or a
sale of all or substantially all of its properties and assets.
Each share of Series B Stock automatically will convert into Common Stock at the
then effective conversion price for the Series B Stock upon (a) the closing of
an underwritten public offering pursuant to an effective registration statement
under the Securities Act covering the offer and sale of shares of the Common
Stock for the Company's account (with certain exceptions) resulting in aggregate
proceeds to the Company of more than $10,000,000 and at a per share price of at
least $0.60 per share (as adjusted for subdivisions, combinations and stock
dividends), or (b) a merger or consolidation with or into another corporation or
a sale of the shares of the Common Stock or a sale of all or substantially all
of the Company's assets in which the gross cash proceeds received by the Company
are at least $10,000,000 in cash or marketable securities.
There will be appropriate adjustments made in the conversion prices for the
Series A Stock and the Series B Stock in the event of stock splits, reverse
stock splits, and certain stock dividends or distributions.
Except upon the automatic conversion of the Series A Stock or Series B Stock, as
the case may be, if, at any time, there occurs any dividend or distribution of
securities of the Company other than shares of Common Stock (or rights or
options to purchase Common Stock), any reclassification, or exchange of
securities (other than those described above), any capital reorganization (other
than a recapitalization, division of shares, combination of shares, or other
similar transactions described above) or a merger or consolidation or sale of
all or substantially all of the assets of the Company, then, as part of that
transaction, the Company will make such provision as is necessary so that the
holders of the outstanding shares of Series A Stock and Series B Stock will
thereafter receive upon conversion of those shares the number and kind of shares
-49-
of stock or other securities or property to which a holder of the number of
shares of Common Stock into their shares of Series A Stock an/or Series B Stock
were convertible would have been entitled in connection with such transaction.
Fully Paid and Nonassessable. All of our outstanding shares of preferred stock
are fully paid and nonassessable.
Additional Preferred Stock. Our board of directors has the authority, without
action by our shareholders, to provide for the issuance of preferred stock in
one or more classes or series and to designate the rights, preferences and
privileges of each class or series, which may be greater than the rights of the
common stock. We cannot predict the effect of the issuance of any shares of
preferred stock upon the rights of holders of the common stock until the board
of directors determines the specific rights of the holders of the preferred
stock. However, the effects could include one or more of the following:
o restricting dividends on the common stock;
o diluting the voting power of the common stock;
o impairing the liquidation rights of the common stock; or
o delaying or preventing a change in control of us without further
action by the shareholders.
We have no present plans to issue any additional shares of preferred stock.
Warrants
As of June 22, 2004, there were outstanding warrants to purchase 2,500,000
shares of common stock at an average exercise price of $0.29 per share (subject
to adjustment for certain anti-dilutive issuances).
Registration Rights
The warrants described above have so called "Piggyback" registration rights. If
we at any time propose to file on our behalf or on behalf of any of our security
holders a registration statement under the Securities Act on any form and other
than a registration statement on Form S-4 or S-8 for any class that is the same
or similar to the warrants, we must give written notice of the proposed offering
to the warrant holders at least thirty (30) days before the initial filing of
such registration statement, and offer to include the warrant holders in the
proposed offering.
We have entered into a Registration Rights Agreement with the selling
shareholders. Under the terms of that Agreement, we agreed to use reasonable
efforts to register the shares covered by this prospectus within 180 days from
the sale date (or by late September 2004). Under the terms of the Registration
Rights Agreement, we agreed to indemnify the selling shareholders and their
directors, officers, partners, agents, and any person controlling any of those
persons under certain circumstances relating to the registration of the shares
covered by this prospectus and the selling shareholders agreed to indemnify us
and our controlling persons, officers who sign the registration statement of
which this prospectus forms a part and our directors under certain circumstances
relating to the registration of the shares covered by this prospectus.
Transfer Agent and Registrar
Computershare Investor Services, Inc. serves as our transfer agent and registrar
for our common stock.
Currently 154,180,500 shares of common stock are freely tradable and an
additional 5,224,500 shares of Series A Stock or Series B Stock would be freely
tradable upon conversion to common stock. Approximately an additional
247,672,700 shares of common stock are eligible for sale in the public market
subject to volume restrictions of Rule 144 and 15,594,288 shares of common stock
issuable upon exercise of outstanding options will become freely tradable upon
issuance.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of our common stock, and the availability of our common stock for
sale, may depress the market price for our common stock. Approximately
154,180,500 shares of our common stock currently are freely tradable, of which
35,500,000 shares are currently subject to the volume limitations of Rule 144
discussed below. All of the shares sold in this offering will be freely tradable
except for any shares purchased by our affiliates. In addition, approximately
-50-
263,267,000 shares of our common stock previously issued or upon issuance
pursuant to the exercise of options granted under our stock option plans may be
resold in reliance on Rule 144, as discussed below. All other shares of common
stock outstanding as of the date hereof are restricted or subject to lock-up
agreements. These other shares will be available for sale in the public market
as follows:
In general, under Rule 144, as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
o 1% of the number of shares of common stock then outstanding, which
will equal approximately shares immediately after this offering; or
o the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a notice on Form 144 with
respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been one of our affiliates
at any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, including the holding
period of any prior owner other than an affiliate, is entitled to sell the
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
We filed a Registration Statement on Form S-8 registering shares of common stock
subject to the 1996 Plan. As of June 22, 2004, options to purchase a total of
15,594,288 shares were outstanding and 8,973,000 shares were reserved for future
issuance under our stock option plans. Options to purchase 15,368,177 shares of
common stock are vested and available for immediate resale in the open market.
LEGAL MATTERS
The validity of the shares of common stock being offered will be passed upon by
Reed Smith, LLP, Oakland, California.
EXPERTS
The financial statements as of and for the years ended December 31, 2003, 2002
and 2001 included in this prospectus and in the registration statement have been
audited by Singer Lewak Greenbaum & Goldstein, LLP and by Moss Adams, LLP
independent certified public accountants, to the extent and for the periods set
forth in their reports appearing elsewhere herein and in the registration
statement.
WHERE YOU CAN GET MORE INFORMATION
We are subject to the reporting requirements of the Exchange Act of 1934 and
file reports and other information statements with the Securities and Exchange
Commission. We have filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act with respect to the
shares of common stock being offered. This prospectus does not contain all of
the information described in the registration statement and the related exhibits
and schedules. For further information with respect to us and the common stock
being offered, reference is made to the registration statement and the related
exhibits and schedule. Reports and other information filed by us, including a
copy of the registration statement and the related exhibits and schedule may be
inspected without charge at the public reference facilities maintained by the
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and 233 Broadway, New
York, New York 10279, and copies of all or any part of the registration
statement may be obtained from these offices upon the payment of the fees
prescribed by the Commission. Information on the operation of the Public
Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. The
Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
http://www.sec.gov.
We intend to provide our shareholders with annual reports containing financial
statements audited by an independent accounting firm and to file with the
Commission quarterly reports containing unaudited financial data for the first
three quarters of each year.
-51-
INDEX TO FINANCIAL STATEMENTS
Page
----
INDEPENDENT AUDITOR'S REPORT.................................................F-1
BALANCE SHEETS AT DECEMBER 31, 2003 AND 2002.................................F-3
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2003, 2002 AND 2001....................................F-6
STATEMENTS OF STOCKHOLDERS' EQUITY FOR
THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001....................F-7
STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED DECEMBER 31, 2003, 2002 AND 2001.............................F-11
NOTES TO FINANCIAL STATEMENTS .............................................F-13
BALANCE SHEET AT MARCH 31, 2004 (UNAUDITED)..................................Q-1
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 2004 AND 2003 (UNAUDITED)...........................Q-2
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS
ENDED MARCH 31, 2004 AND 2003 (UNAUDITED)...........................Q-3
NOTES TO FINANCIAL STATEMENTS ..............................................Q-5
-52-
ENOVA SYSTEMS, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2003, 2002, AND 2001
ENOVA SYSTEMS, INC.
CONTENTS
December 31, 2003
--------------------------------------------------------------------------------
Page
INDEPENDENT AUDITOR'S REPORTS F-1 to F-2
FINANCIAL STATEMENTS
Balance Sheets F-3 to F-5
Statements of Operations F-6
Statements of Stockholders' Equity F-7 to F-10
Statements of Cash Flows F-11 to F-12
Notes to Financial Statements F-13 to F-26
SUPPLEMENTAL INFORMATION
Independent Auditor's Report on Financial Statement Schedule S-2
Valuation and Qualifying Accounts - Schedule II S-3
SLGG
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Certified Public Accountants and Management Consultants
www.slgg.com Los Angeles Orange County Ontario
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Enova Systems, Inc.
We have audited the accompanying balance sheet of Enova Systems, Inc. as of
December 31, 2003, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2003 financial statements referred to above present fairly,
in all material respects, the financial position of Enova Systems, Inc. as of
December 31, 2003, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 25, 2004
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Enova Systems, Inc.
We have audited the accompanying balance sheet of Enova Systems Inc., as of
December 31, 2002, and the statements of operations, stockholders' equity, and
cash flows for the two years then ended. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 the results of its operations and cash flows for the two
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
/s/ MOSS ADAMS LLP
Santa Rosa, California
February 24, 2003
F-2
ENOVA SYSTEMS, INC.
BALANCE SHEETS
December 31,
--------------------------------------------------------------------------------
ASSETS
2003 2002
---------- ----------
Current assets
Cash and cash equivalents $ 530,000 $1,868,000
Accounts receivable 803,000 1,256,000
Inventories and supplies 1,606,000 1,652,000
Note receivable - related party 8,000 32,000
Prepaid expenses and other current assets 78,000 107,000
---------- ----------
Total current assets 3,025,000 4,915,000
Property and equipment, net 481,000 811,000
Investment 960,000 --
Other assets 404,000 498,000
---------- ----------
Total assets $4,870,000 $6,224,000
========== ==========
The accompanying notes are an integral part of these financial statements.
F-3
ENOVA SYSTEMS, INC.
BALANCE SHEETS
December 31,
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
2003 2002
---------- ----------
Current liabilities
Accounts payable $ 768,000 $1,192,000
Line of credit 120,000 14,000
Accrued payroll and related expenses 120,000 240,000
Other accrued expenses 98,000 95,000
Current portion of notes payable 131,000 120,000
Current portion of capital lease obligations 23,000 28,000
---------- ----------
Total current liabilities 1,260,000 1,689,000
Accrued interest payable 1,122,000 889,000
Capital lease obligations, net of current portion 5,000 27,000
Notes payable, net of current portion 3,347,000 3,332,000
---------- ----------
Total liabilities 5,734,000 5,937,000
---------- ----------
Commitments and contingencies
The accompanying notes are an integral part of these financial statements.
F-4
ENOVA SYSTEMS, INC.
BALANCE SHEETS
December 31,
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Continued)
2003 2002
------------ ------------
Stockholders' equity
Series A convertible preferred stock, no par value
30,000,000 shares authorized
2,820,000 and 2,824,000 shares issued and
outstanding
Liquidating preference at $0.60 per share, aggregating
$1,692,000 and $1,706,000 $ 1,837,000 1,842,000
Series B convertible preferred stock, no par value
5,000,000 shares authorized
1,217,000 shares issued and outstanding
Liquidating preference at $2 per share, aggregating
2,434,000 2,434,000 2,434,000
Common stock, no par value
500,000,000 shares authorized
378,341,000 and 345,194,000 shares issued and outstanding 86,054,000 84,026,000
Common stock subscribed 60,000 130,000
Stock notes receivable (1,203,000) (1,203,000)
Additional paid-in capital 7,031,000 6,949,000
Accumulated deficit (97,077,000) (93,891,000)
------------ ------------
Total stockholders' equity (864,000) 287,000
------------ ------------
Total liabilities and stockholders' equity $ 4,870,000 $ 6,224,000
============ ============
The accompanying notes are an integral part of these financial statements.
F-5
ENOVA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
--------------------------------------------------------------------------------
2003 2002 2001
------------- ------------- -------------
Net revenues
Research and development contracts $ 1,889,000 $ 1,843,000 $ 2,813,000
Production 2,421,000 2,612,000 967,000
------------- ------------- -------------
Total net revenues 4,310,000 4,455,000 3,780,000
------------- ------------- -------------
Cost of revenues
Research and development contracts 1,326,000 1,288,000 2,149,000
Production 1,978,000 2,496,000 634,000
------------- ------------- -------------
Total cost of revenues 3,304,000 3,784,000 2,783,000
------------- ------------- -------------
Gross profit 1,006,000 671,000 997,000
Other costs and expenses
Research and development 799,000 1,152,000 879,000
Selling, general, and administrative 2,919,000 2,837,000 2,894,000
Interest and financing fees, net 234,000 199,000 113,000
Loss on disposal of property and
equipment -- -- (7,000)
Equity in losses 40,000 -- --
Asset impairement 200,000 -- --
Legal settlements -- 81,000 900,000
------------- ------------- -------------
Total other costs and expenses 4,192,000 4,269,000 4,779,000
------------- ------------- -------------
Loss from continuing operations (3,186,000) (3,598,000) (3,782,000)
Extraordinary item
Gain on debt restructuring -- -- 354,000
------------- ------------- -------------
Net loss $ (3,186,000) $ (3,598,000) $ (3,428,000)
============= ============= =============
Basic loss and diluted per share
Loss from continuing operations $ (0.01) $ (0.01) $ (0.01)
Gain on debt restructuring -- -- --
------------- ------------- -------------
Total basic and diluted loss per share $ (0.01) $ (0.01) $ (0.01)
============= ============= =============
Weighted-average number of
shares outstanding 334,839,700 326,390,422 275,188,979
============= ============= =============
The accompanying notes are an integral part of these financial statements.
F-6
ENOVA SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------- Common Stock
Series A Series B Common Stock Subscribed
---------------------- ----------------------- ------------------------- -----------------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------- ----------- --------- ----------- ----------- ------------ ---------- ---------
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
Issuance of common
stock for
Exercise of warrants -- -- -- -- 50,000,000 3,000,000 -- --
Exercise of options -- -- -- -- 1,805,000 181,000 -- --
Services -- -- -- -- 448,000 98,000 955,000 147,000
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
Conversion of Series
A preferred stock (20,000) (25,000) -- -- 20,000 25,000
Issuance of common
stock for
Cash, net of offering
costs of $206,000 41,100,000 3,904,000 1,000,000 100,000
Exercise of options 30,000 3,000 -- --
Services 1,242,000 190,000 (628,000) (130,000)
Legal settlement 300,000 45,000 -- --
Stock notes receivable -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
--------- ----------- --------- ----------- ----------- ------------ ---------- ---------
The accompanying notes are an integral part of these financial statements.
F-7
ENOVA SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31,
----------------------------------------------------------------------------------------------
Stock Additional
Notes Paid-In Accumulated
Receivable Capital Deficit Total
------------ ----------- ------------- ------------
Balance, December 31,
2000 $ (1,149,000) $ 6,372,000 $ (86,865,000) $ (1,648,000)
============ =========== ============= ============
Issuance of common
stock for
Exercise of warrants -- -- -- 3,000,000
Exercise of options (59,000) -- -- 122,000
Services -- -- -- 245,000
Legal settlement -- -- -- 900,000
Warrants issued for
value participation
agreement -- 577,000 -- 577,000
Net loss -- -- (3,428,000) (3,428,000)
------------ ----------- ------------- ------------
Balance, December 31,
2001 (1,208,000) 6,949,000 (90,293,000) (232,000)
Conversion of Series
A preferred stock
Issuance of common
stock for
Cash, net of offering
costs of $206,000 -- -- -- 4,004,000
Exercise of options -- -- -- 3,000
Services -- -- -- 60,000
Legal settlement -- -- -- 45,000
Stock notes receivable 5,000 -- -- 5,000
Net loss -- -- (3,598,000) (3,598,000)
============ =========== ============= ============
The accompanying notes are an integral part of these financial statements.
F-8
ENOVA SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
Convertible Preferred Stock
-------------------------------------------------- Common Stock
Series A Series B Common Stock Subscribed
---------------------- ----------------------- ------------------------- -----------------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------- ----------- --------- ----------- ----------- ------------ ---------- ---------
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
========= =========== ========= =========== =========== ============ ========= =========
Conversion of Series
A preferred stock (4,000) (5,000) -- -- 4,000 5,000 -- --
Issuance of common
stock for
Cash -- -- -- -- 23,077,000 1,500,000 -- --
Issuance of subscribed
common stock -- -- -- -- 1,000,000 100,000 (1,000,000) (100,000)
Exercise of options -- -- -- -- 8,694,000 398,000 -- --
Stock option -- -- -- -- -- -- -- --
Services -- -- -- -- 372,000 34,000 754,000 30,000
Net loss -- -- -- -- -- -- -- --
--------- ----------- --------- ----------- ----------- ------------ --------- ---------
Balance, December 31,
2003 2,820,000 $ 1,837,000 1,217,000 $ 2,434,000 378,341,000 $ 86,054,000 1,126,000 $ 60,000
========= =========== ========= =========== =========== ============ ========= =========
The accompanying notes are an integral part of these financial statements.
F-9
ENOVA SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31,
----------------------------------------------------------------------------------------------
Stock Additional
Notes Paid-In Accumulated
Receivable Capital Deficit Total
------------ ----------- ------------- ------------
Balance, December 31,
2002 $ (1,203,000) $ 6,949,000 $ (93,891,000) $ 287,000
Conversion of Series
A preferred stock -- -- -- --
Issuance of common
stock for
Cash -- -- -- 1,500,000
Issuance of subscribed
common stock -- -- -- --
Exercise of options -- -- -- 389,000
Stock option -- 82,000 -- 82,000
Services -- -- -- 64,000
Net loss -- -- (3,186,000) (3,186,000)
------------ ----------- ------------- -------------
Balance, December 31,
2003 $ (1,203,000) $ 7,031,000 $ (97,077,000) $ (864,000)
============ =========== ============= =============
The accompanying notes are an integral part of these financial statements.
F-10
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
-----------------------------------------------------------------------------------------
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities $(3,186,000) $(3,598,000) $(3,428,000)
Net loss
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation and amortization 351,000 134,000 205,000
Bad debt expense 595,000 -- --
Provision for asset impairment 200,000 -- --
Equity in losses 40,000 -- --
Gain on debt restructuring -- -- (210,000)
Issuance of common stock for
services 34,000 60,000 245,000
Issuance of common stock for
legal settlement -- 45,000 900,000
(Increase) decrease in
Accounts receivable (138,000) (19,000) (233,000)
Inventories and supplies 48,000 (727,000) (520,000)
Related party receivable 24,000 25,000 25,000
Prepaid expenses and other
current assets 29,000 (20,000) (19,000)
Other assets (14,000) 76,000 (39,000)
Increase (decrease) in
Accounts payable and
accrued expenses (536,000) 1,112,000 (112,000)
Accrued interest payable 234,000 212,000 163,000
----------- ----------- -----------
Net cash used in operating activities (2,319,000) (2,700,000) (3,023,000)
----------- ----------- -----------
Cash flows from investing activities
Purchase of property and equipment (113,000) (613,000) (219,000)
----------- ----------- -----------
Net cash used in investing activities (113,000) (613,000) (219,000)
----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
F-11
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
-------------------------------------------------------------------------------------------------
2003 2002 2001
----------- ----------- -----------
Cash flows from financing activities
Net increase from line of credit $ 106,000 $ 14,000 $ --
Payments on notes payable and
capital lease obligations (1,000) (24,000) (11,000)
Proceeds from sale of common stock 600,000 4,210,000 --
Offering costs -- (206,000) --
Proceeds from exercise of warrants and options 389,000 3,000 3,122,000
Payments on stock notes receivable -- 5,000 --
----------- ----------- -----------
Net cash provided by financing activities 1,094,000 4,002,000 3,111,000
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (1,338,000) 689,000 (131,000)
Cash and cash equivalents, beginning of year 1,868,000 1,179,000 1,310,000
----------- ----------- -----------
Cash and cash equivalents, end of year $ 530,000 $ 1,868,000 $ 1,179,000
=========== =========== ===========
Supplemental disclosures of cash flow information
Interest paid $ 9,000 $ 8,000 $ 5,000
=========== =========== ===========
Income taxes paid $ -- $ -- $ --
=========== =========== ===========
Supplemental schedule of non-cash
investing and financing activities
Equipment acquired under capital lease agreements $ -- $ 52,000 $ --
=========== =========== ===========
Conversion of preferred stock to common stock $ 5,000 $ 25,000 $ --
=========== =========== ===========
Acquired investment under common stock purchase $ 1,000,000 $ -- $ --
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-12
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
General
-------
Enova Systems, Inc. (the "Company") 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.
Liquidity
---------
At December 31, 2003, the Company had a net working capital of
approximately $1,765,000 as compared to $3,226,000 at December 31,
2002, representing a decrease of $1,461,000. This decrease is due
mostly to losses from operations. Operating and investing activities
used approximately $2,306,000 and $113,000, respectively, while
financing activities provided $1,094,000.
During the year ended December 31, 2003, the Company reduced its
headcount and other administrative expenses. The Company anticipates
realizing the full impact of expense reductions in 2004. The Company's
business plan for 2004 provides for raising additional capital in order
to continue with the Company's operations until it becomes profitable.
The Company will also continue to search for areas in which to further
reduce expenses and increase sales.
In addition, additional payment of $500,000 is expected in June 2004
from HHI under the stock purchase agreement (Note 1), which will help
the Company to fund its operations.
See Note 15 for additional funding.
Stock Purchase Agreement
------------------------
The Company has entered into a joint venture agreement (the Agreement)
with Hyundai Heavy Industries of Korea ("HHI") to create a joint
venture corporation, Hyundai-Enova Innovative Technology Center (the
"ITC") to be domiciled in Torrance, California. In conjunction with
this Agreement, HHI and the Company entered into a stock purchase
agreement in which HHI agreed to 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 was to be made in two installments of $1.5
million each. The first installment was made upon incorporation of the
ITC and in consideration for the issuance to HHI by the Company of
23,076,923 shares of common stock at $0.065 per share.
F-13
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS (Continued)
Stock Purchase Agreement (Continued)
------------------------
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 agreed to invest $1 million of each installment into the
[VC in consideration for the issuance to the Company of a 40% equity
interest in the ITC (the balance of the installments, in the amount of
$500,000 each, is to be retained by Enova). HHI will acquire a 60%
equity interest in ITC by investing $3 million in the ITC 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 ITC.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Comprehensive Income
--------------------
The Company utilizes Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from
non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency
translation adjustments, minimum pension liability adjustments, and
unrealized gains and losses on available-for-sale securities.
Comprehensive income is not presented in the Company's financial
statements since the Company did not have any changes in equity from
non-owner sources.
Cash and Cash Equivalents
-------------------------
Highly liquid investments with an original maturity of three months or
less are considered cash equivalents.
F-14
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 $678,000
(of which $595,000 have been reserved for) and $365,000 at December 31,
2003 and 2002, respectively.
Inventories and Supplies
------------------------
Inventories and supplies are 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.
Investment
----------
Investment in joint venture (see Note 1) is accounted for by the equity
method.
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments include cash and cash equivalents,
accounts receivable and accounts payable. The book value of all other
financial instruments are representative of their fair values. The
Company's short 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
------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes
and encourages the use of the fair value based method of accounting for
stock-based compensation arrangements under which compensation cost is
determined using the fair value of stock-based compensation determined
as of the date of grant and is recognized over the periods in which the
related services are rendered. The statement also permits companies to
elect to continue using the current implicit value accounting method
specified in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-based
compensation. The Company has elected to use the intrinsic value based
method and has disclosed the pro forma effect of using the fair value
based method to account for its stock-based compensation.
F-15
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising Expense
-------------------
The Company expenses all advertising costs, including direct response
advertising, as they are incurred. Advertising expense for the years
ended December 31, 2003, 2002, and 2001 was $21,000, $20,000, and
$32,000, respectively.
Income Taxes
------------
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets md liabilities and their
financial reporting amounts at each year-end based on enacted tax laws
and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
Loss Per Share
--------------
The Company utilizes SFAS No. 128, "Earnings per Share." Basic loss per
share is computed by dividing loss available to common stockholders by
the weighted-average number of common shares outstanding. Diluted loss
per share is computed similar to basic loss per share except that the
denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive.
Common equivalent shares are excluded from the computation if their
effect is anti-dilutive. The Company's common share equivalents consist
of stock options.
Estimates
---------
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
Concentrations of Credit Risk
-----------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents and
accounts receivable. The Company places its cash and cash equivalents
with high credit, quality financial institutions. At times, such cash
and cash equivalents may be in excess of the Federal Deposit Insurance
Corporation insurance limit of $100,000. The Company has not
experienced any losses in such accounts and believes it is not exposed
to any significant credit risk on cash and cash equivalents. With
respect to accounts receivable, the Company routinely assesses the
financial strength of its customers and, as a consequence, believes
that the receivable credit risk exposure is limited.
F-16
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Major Customers
---------------
During the year ended December 31, 2003, the Company conducted business
with four customers whose sales comprised 18%, 17%, 13%, and 11% of
total revenues. As of December 31, 2003, these customers accounted for
5%, 0%, 23%, and 3%, respectively, of total accounts receivable.
During the year ended December 31, 2002, the Company conducted business
with two customers whose sales comprised 46% of total revenues. As of
December 31, 2002, these customers accounted for 24%, of total accounts
receivable.
In addition, one of the Company's stockholders accounted for 1%, 16%,
and 13% of total revenues during the years ended December 31, 2003,
2002, and 2001, respectively. This stockholder holds less than 5% of
the total issued and outstanding common stock. Demand deposits are
placed with known, creditable financial institutions.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2003 and 2002 consisted of the
following:
2003 2002
---------- ----------
Computers $ 213,000 $ 177,000
Machinery and equipment 715,000 643,000
Furniture and office equipment 192,000 189,000
Demonstration vehicles and buses 297,000 497,000
Equipment under capital lease obligations 94,000 94,000
Leasehold improvements 68,000 68,000
---------- ----------
1,579,000 1,668,000
Less accumulated depreciation and amortization 1,098,000 857,000
---------- ----------
Total $ 481,000 $ 811,000
========== ==========
Depreciation and amortization expense was $241,000, $134,000, and
$205,000 for the years ended December 31, 2003, 2002, and 2001,
respectively.
NOTE 4 - INVESTMENT
During the year ended December 31, 2003, the Company formed a joint
venture with HHI (see Note 1), whereby the Company invested $1,000,000
of the proceeds received from sale of common stock to HHI into ITC. The
Company's share of income and losses is 40% as stated in the agreement.
During the year ended December 31, 2003, the Company recorded $40,000
as its proportionate share of losses in the joint venture.
F-17
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------
NOTE 4 - INVESTMENT (Continued)
The following is the condensed financial position and results of
operations of ITC, as of and for the year ended December 31, 2003:
Financial position
Current assets $ 2,413,000
Property and equipment, net 12,000
Liabilities (27,000)
-----------
Equity $ 2,398,000
===========
Operations
Net revenues $ 6,000
Expenses (107,000)
-----------
Net loss $ (101,000)
===========
Company's proportionate share of net loss $ 40,000
===========
NOTE 5 - OTHER ASSETS
During the year ended December 31, 2002, the Company incurred legal
costs of $78,000 associated with two patents. These patents have been
capitalized and are being amortized over their estimated useful lives.
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
non-current 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.
2003 2002
-------- --------
Patents $ 92,000 $ 78,000
Valuation Participation Agreement 577,000 577,000
-------- --------
669,000 655,000
Less accumulated amortization 265,000 157,000
-------- --------
Total $404,000 $498,000
======== ========
F-18
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------
NOTE 6 - LINE OF CREDIT
The Company has available $250,000 revolving line of credit from a bank
with interest payable monthly at 3.25%. The line of credit is secured
by $250,000 Certificate of Deposit and it's maturity has been extended
until April 2004.
NOTE 7 - NOTES PAYABLE
Notes payable at December 31, 2003 consisted of the following:
2003 2002
------------ ------------
Secured note payable to Credit
Managers Association of
California, bearing interest at
6% per annum during 2003 and
2002 and at prime plus 3% per
annum through maturity.
Principal and unpaid interest
at due in 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 note payable, bearing
interest at 10% per annum. This
note payable is in default. 120,000 120,000
Secured note payable to a
financial institution in the
original amount of $33,000,
bearing interest at 8% per
annum, payable in 36 equal
monthly installments. 26,000 --
------------ ------------
3,478,000 3,452,000
Less current portion 131,000 120,000
------------ ------------
Long-term portion $ 3,347,000 $ 3,332,000
============ ============
F-19
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------
NOTE 7 - NOTES PAYABLE (Continued)
Future minimum principal payments of notes payable at December 31, 2003
consisted of the following:
Year Ending
December 31,
------------
2004 $ 131,000
2005 12,000
2006 3,000
2007 --
2008 --
Thereafter 3,332,000
-----------
$ 3,478,000
===========
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company leases its facilities under an operating lease agreement,
which requires monthly payments of $11,000 and expires in February
2008. In addition, the Company rents manufacturing and office equipment
under various capital lease agreements.
Future minimum lease payments under these non-cancelable operating and
capital lease obligations at December 31, 2003 were as follows:
Year Ending Operating Capital
December 31, Leases Leases
------------ ------ ------
2004 $ 97,000 $ 23,000
2005 155,000 8,000
2006 166,000 --
2007 168,000 --
2008 28,000 --
-------- --------
$614,000 31,000
========
Less amount representing interest -- 3,000
--------
-- 28,000
Less current portion -- 23,000
--------
Long-term portion -- $ 5,000
========
Rent expense was $150,000, $206,000, and $210,000 for the years ended
2003, 2002, and 2001, respectively.
F-20
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)
Contingency
-----------
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. At December 31, 2002, included in
inventories and supplies was 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.
In October 2003, Enova and Ballard reached a settlement on all
remaining balances due whereas Enova will receive $198,125 cash and
title to all inventory, raw materials, tooling and equipment in its
possession that is associated with the program. The Company intends to
sell this equipment and recover at least the remaining balance of the
receivable of approximately $173,000.
NOTE 9 - STOCKHOLDERS EQUITY
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.
F-21
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------
NOTE 9 - STOCKHOLDERS EQUITY (Continued)
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.
Common Stock
------------
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.
Stock Options and Warrants
--------------------------
The 1993 Employee and Consultant Stock Plan expired in 2003 and all
outstanding stock options were forfeited.
The Company grants other non-statutory stock options. Under the
Director Stock Option Plan, the Company reserved 1,500,000 shares of
common stock for non-statutory stock options for non-employee
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
non-statutory 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.
F-22
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------
NOTE 9 - STOCKHOLDERS EQUITY (Continued)
Stock Options and Warrants (Continued)
--------------------------
The following summarizes common stock option activity:
1996 Plan 1993 Plan Other
--------------------------- -------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ----------- ----------- ----------- ---------- -------------
Outstanding,
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 -- $ -- -- $ --
---------- ----------- ----------
Outstanding,
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 -- $ --
---------- ----------- ----------
Outstanding,
December
31, 2002 21,327,000 $ 0.10-0.30 7,054,000 $ 0.10-0.60 1,495,000 $0.60-2.80
Granted 9,998,000 $ 0.05 -- $ -- -- $ --
Exercised (8,638,000) $ 0.05-0.11 -- $ -- -- $ --
Forfeited (1556000) $ 0.11-0.18 (7,054,000) $ 0.10-0.60 1,495,000 $0.60-2.80
---------- ----------- ----------
Outstanding,
December
31, 2003 21,131,00 $ 0.14 -- $ -- -- $ --
========== =========== ==========
Exercisable,
December
31, 2003 20,898,000 $ 0.14 -- $ -- -- $ --
========== =========== ==========
The weighted-average remaining contractual life of the options
outstanding at December 31, 2003 was 1.8 years. The exercise prices of
the options outstanding at December 31, 2003 ranged from $0.05 to
$0.30. Options exercisable were 20,898,000, 28,304,228, and 26,293,358
at December 31, 2003, 2002 and 2001.
The Company has adopted only the disclosure provisions of SFAS No. 123.
It applies APB Opinion No. 25 and related interpretations in accounting
for its plans and does not recognize compensation expense for its
stock-based compensation plans other than for restricted stock and
options issued to outside third parties.
F-23
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------
NOTE 9 - STOCKHOLDERS EQUITY (Continued)
Stock Options and Warrants (Continued)
--------------------------
If the Company had elected to recognize compensation expense based upon
the fair value at the grant date for awards under this plan consistent
with the methodology prescribed by SFAS No. 123, the Companys net loss
and loss per share would be reduced to the pro forma amounts indicated
below for the years ended December 31, 2003, 2002, and 2001:
2003 2002 2001
------------- ------------- -------------
Net loss
As reported $ (3,186,000) $ (3,598,000) $ (3,428,000)
Pro forma $ (3,501,000) $ (3,795,000) $ (4,204,500)
Basic and diluted loss per
common share
As reported $ (0.01) $ (0.01) $ (0.01)
Pro forma $ (0.01) $ (0.01) $ (0.01)
For purposes of computing the pro forma disclosures required by SFAS
No. 123, the fair value of each option granted to employees and
directors is estimated using the BlackScholes option-pricing model with
the following weighted-average assumptions for the years ended December
31, 2003, 2002, and 2001: dividend yields of 0%, 0%, and 0%,
respectively; expected volatility of 88%, 83%, and 125%, respectively;
risk-free interest rates of 4%, 4%, and 5%, respectively; and expected
lives of three, five, and five years, respectively. The
weighted-average fair value of options granted during the year ended
December 31, 2003 for which the exercise price equals the market price
on the grant date was $0, and the weighted-average exercise price was
$0.051.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which do not have vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including
the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
The agreement with Ford Motor Company (see 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 requirements. 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.
F-24
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------
NOTE 9 - STOCKHOLDERS EQUITY (Continued)
Stock Options and Warrants (Continued)
--------------------------
The fair value of warrants granted were estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0%, expected volatility of 102%,
risk-free interest rate of 4.76% and 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 and 2003.
NOTE 10 - INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities for federal and state income taxes as of December 31, 2003
and 2002 consisted of the following:
2003 2002
----------- -----------
Deferred tax assets
Federal tax loss carry-forward $31,286,000 $30,513,000
State tax loss carry-forward 712,000 404,000
Basis difference 1,610,000 1,610,000
Other, net 555,000 433,000
----------- -----------
34,163,000 32,960,000
Less valuation allowance 34,163.000 32,960,000
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
As of December 31, 2003, the Company had net operating loss carry
forwards for federal and state income tax purposes of approximately
$92,867,000 and $8,589,000, respectively. The net operating loss carry
forwards began expiring in 2003.
NOTE 11 - RELATED PARTY TRANSACTIONS
During 2003, the Company purchased approximately $599,000 in
components, materials and services from HHI. The outstanding balance
owed to HHI at December 31, 2003 was approximately $395,000.
During 2003, the Company paid a total of $33,000 to three of its
directors in consulting fees.
F-25
ENOVA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
--------------------------------------------------------------------------------
NOTE 12 - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit sharing plan covering substantially
all employees. Eligible employees may elect to contribute a percentage
of their annual compensation, as defined, to the plan. The Company may
also elect to make discretionary contributions. For the years ended
December 31, 2003, 2002, and 2001 the Company did not make any
contributions to the plan.
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:
2003 2002 2001
---------- ---------- ----------
United States $2,672,000 $2,478,000 $2,854,000
Italy 213,000 1,040,000 359,000
Korea 297,000 726,000 483,000
Japan 146,000 87,000 --
Malaysia 184,000 65,000 --
Ireland -- 59,000 --
Canada 738,000 -- --
England 60,000 -- 84,000
---------- ---------- ----------
Total $4,310,000 $4,455,000 $3,780,000
========== ========== ==========
NOTE 14 - EXTRAORDINARY ITEM
During the year ended December 31, 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 15 - SUBSEQUENT EVENT (unaudited)
As of March 20, 2004, the Company has obtained several commitments from
investors to purchase approximately 15,000,000 shares of common stock
at $0.12 per share for a total cash purchase of approximately
$1,800,000.
F-26
SUPPLEMENTAL INFORMATION
S-1
SLGG
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Certified Public Accountants and Management Consultants
www.slgg.com Los Angeles Orange County Ontario
INDEPENDENT AUDITORS REPORT
Board of Directors and Stockholders
Enova Systems, Inc.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule II for the year
ended December 31, 2003 is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 25, 2004
S-2
ENOVA SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS -- SCHEDULE II
For the Years December 31,
--------------------------------------------------------------------------------
Balance, Additions Deductions Balance,
Beginning Charged to from End
of Year Operations Reserve of Year
---------- ---------- ----------- -----------
Allowance for doubtful
accounts
December 31, 2001 $ -- $ 595,000 $ -- $ 595,000
========== ========= ========== ==========
December 31, 2002 $ -- $ -- $ -- $ --
========== ========= ========== ==========
December 31, 2001 $ -- $ -- $ -- $ --
========== ========= ========== ==========
Reserve for obsolete
inventories
December 31, 2003 $ 80,000 $ -- $ -- $ 80,000
========== ========= ========== ==========
December 31, 2002 $ 80,000 $ -- $ -- $ 80,000
========== ========= ========== ==========
December 31, 2001 $ 80,000 $ -- $ -- $ 80,000
========== ========= ========== ==========
The accompanying notes are an integral part of these financial statements.
S-3
PART 1. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
ENOVA SYSTEMS, INC.
BALANCE SHEETS
(In thousands, except for share and per share data)
---------------------------------------------------------------------------------------
As of As of
March 31, December 31,
2004 2003
-------- --------
ASSETS
CURRENT ASSETS
Cash $ 587 $ 530
Accounts receivable, net of allowance of $595,000 each 958 803
Inventory 1,529 1,606
Stockholder receivable 8 8
Prepaids and other current assets 66 78
-------- --------
Total Current Assets 3,148 3,025
PROPERTY, PLANT AND EQUIPMENT - NET 424 481
INVESTMENTS in JOINT VENTURE 916 960
OTHER ASSETS 376 404
-------- --------
TOTAL ASSETS $ 4,864 $ 4,870
======== ========
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 674 $ 768
Line of credit 117 120
Accrued payroll and related expenses 122 120
Other accrued expenses 90 98
Current portion of notes payable
and capital lease obligations 143 154
-------- --------
Total Current Liabilities 1,146 1,260
ACCRUED INTEREST PAYABLE 1,184 1,122
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 0 5
NOTES PAYABLE, NET OF CURRENT PORTION 3,355 3,347
-------- --------
TOTAL LIABILITIES $ 5,685 5,734
-------- --------
COMMITMENTS AND CONTINGENCIES 0 0
SHAREHOLDERS' DEFICIT
Series A convertible preferred stock - No par value;
30,000,000 shares authorized;
2,800,000 and 2,804,000 shares issued and
outstanding at 3/31/04 and 12/31/03 liquidating
preference at $0.60 per share aggregating
$1,680,000 and $1,682,400 1,812 1,837
Series B convertible preferred stock - No par value
5,000,000 shares authorized;
1,217,000 shares issued and outstanding
at 3/31/04 and 12/31/03 liquidating
preference at $2.00 per share aggregating
$2,434,000 2,434 2,434
Common Stock -- No par value
500,000,000 shares authorized;
380,144,000 and 378,591,000 shares issued and
outstanding at 3/31/04 and 12/31/03 86,167 86,054
Common stock subscribed 176 60
Stock notes receivable (1,203) (1,203)
Additional paid-in capital 7,031 7,031
Accumulated deficit (97,238) (97,077)
-------- --------
Total Shareholders' equity (821) (864)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 4,864 $ 4,870
======== ========
Note: The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date.
See notes to financial statements.
Q-1
ENOVA SYSTEMS, INC.
INCOME and EXPENSE STATEMENTS
(Unaudited)
(In thousands, except for share and per share data)
--------------------------------------------------------------------------------
Three Months Ended
March 31,
---------------------------------
2004 2003
------------- -------------
NET REVENUES
Research and development contracts $ 436 $ 323
Production $ 672 $ 1,016
------------- -------------
$ 1,108 $ 1,339
------------- -------------
COST OF REVENUES
Research and development contracts 305 212
Production 353 765
------------- -------------
658 977
------------- -------------
GROSS MARGIN 450 362
------------- -------------
OPERATING EXPENSES:
Research and development 32 208
Engineering 96 280
Selling, general and administrative 353 485
Depreciation & amortization 85 82
------------- -------------
Total operating expenses 566 1,055
------------- -------------
NET OPERATING LOSS (116) (693)
------------- -------------
OTHER COSTS AND EXPENSES:
Interest and financing fees 64 55
Other (income)/expense (19) 0
Interest income 0 (5)
------------- -------------
Total other costs and expenses 45 50
------------- -------------
NET LOSS $ (161) $ (743)
------------- -------------
BASIC AND DILUTED NET LOSS
PER COMMON SHARE: $ (0.01) $ (0.01)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 374,644,000 345,394,000
Q-2
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
--------------------------------------------------------------------------------
Three Months Ended
March 31,
--------------------
2004 2003
------- -------
OPERATIONS
Net loss $ (161) $ (743)
Adjustments to reconcile net loss to
net cash used by operating activities:
Change in allowance of uncollectible receivables 0 0
Depreciation and amortization 85 82
Equity in losses 44 0
Stock and stock options issued for services 16 0
Change in operating assets and liabilities:
Accounts receivable (155) (298)
Inventory 77 44
Stockholder receivable 0 0
Prepaids and other assets 12 3
Accounts payable and accrued expenses (38) (30)
------- -------
Net cash used by operating activities (120) (942)
------- -------
INVESTING:
Purchases of property, plant and equipment,
net of disposals 0 (23)
------- -------
Net cash used by investing activities 0 (23)
------- -------
FINANCING:
Borrowing (repayments) on leases and notes payable (8) (9)
Borrowing on line of credit (3) 0
Proceeds for issuance of common stock and
exercise of stock options 188 0
------- -------
Net cash provided (used) by
financing activities 177 (9)
------- -------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 57 (974)
CASH AND EQUIVALENTS:
Beginning of period 530 1,868
------- -------
End of period $ 587 $ 894
======= =======
Q-3
ENOVA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (Continued)
SUPPLEMENTAL CASH FLOW INFORMATION
(UNAUDITED)
(In thousands)
--------------------------------------------------------------------------------
Three Months Ended
March 31,
--------------------
2004 2003
------- -------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for services $ 16 $ 12
Conversion of Series A preferred stock to
common stock $ 25 $ --
Q-4
ENOVA SYSTEMS, INC.
-------------------
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 2004 and 2003
NOTE 1 - Basis of Presentation
The accompanying unaudited financial statements have been prepared from the
records of our company without audit and have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not contain all the information and notes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the financial position at March 31, 2004 and the interim results
of operations and cash flows for the three months ended March 31, 2004 have been
included. The balance sheet at December 31, 2003, presented herein, has been
prepared from the audited financial statements of our company for the year then
ended.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions affecting the reported amounts of assets, liabilities, revenues and
expenses, and the disclosure of contingent assets and liabilities. The March 31,
2004 and December 31, 2003 inventories are reported at market value. Inventories
have been valued on the basis that they would be used, converted and sold in the
normal course of business. Certain reclassifications have been made to the prior
periods financial statements to conform with the current periods presentation.
The amounts estimated for the above, in addition to other estimates not
specifically addressed, could differ from actual results; and the difference
could have a significant impact on the financial statements.
Accounting policies followed by us are described in Note 1 to the audited
financial statements for the fiscal year ended December 31, 2003. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted for purposes of the interim
financial statements. The financial statements should be read in conjunction
with the audited financial statements, including the notes thereto, for the year
ended December 31, 2003, which are included in our Form 10-K Annual Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 as filed
with the Securities and Exchange Commission.
Basic and diluted net loss per common share is computed using the weighted
average number of common shares outstanding. Since a loss from operations
exists, diluted earnings per share number is not presented because the inclusion
of common stock equivalents, consisting of Series A and B preferred stock,
unexercised stock options and warrants, would be anti-dilutive.
The results of operations for the three months ended March 31, 2004 presented
herein are not necessarily indicative of the results to be expected for the full
year.
Q-5
NOTE 2 - Notes Payable, Long-Term Debt and Other Financing
Notes payable and long-term debt is comprised of the following (in thousands):
March 31, December 31,
2004 2003
----------- ------------
(unaudited)
Secured subordinated promissory note -- CMAC
as exclusive agent for Non-Qualified
Creditors; interest at 3% through 2001, 6%
in 2002 and 2003, and then at prime plus 3%
thereafter through the date of maturity;
interest payments are made upon payment of
principal, with principal and interest due no
later than April 2016; with an interest in a
sinking fund escrow with a zero balance as of
December 31, 2003 and March 31, 2004. The
sinking fund escrow requires the Company to
fund the account with 10% of future equity
financing, including convertible debt
converted to equity, based upon approval of
the new investors per the terms of the note.
No additions were made to the sinking fund
with respect to the equity investment from
the accredited investors at the investors'
option 3,332 3,332
Unsecured note payable 120 120
Secured note payable 23 26
------ ------
3,475 3,478
Less current maturities 120 131
------ ------
Total $3,355 $3,347
====== ======
Q-6
You should rely only on the information contained in
this prospectus. We have not authorized anyone to
provide you with information different from that
contained in this prospectus. The selling shareholder
is offering to sell, and seeking offers to buy, shares 16,250,001 Shares
of common stock only in jurisdictions where offers and
sales are permitted. The information contained in this ENOVA SYSTEMS, INC.
prospectus is accurate only as the date of this
prospectus, regardless of the time of delivery of this COMMON STOCK
prospectus or of any sale of our common stock.
---------------------------
TABLE OF CONTENTS
Page
Prospectus Summary................................. 4
Risk Factors....................................... 6
Cautionary Note on Forward-Looking
Statements......................................... 10
Use of Proceeds.................................... 11
Price Range of Common Stock........................ 11
Dividend Policy.................................... 12
Capitalization..................................... 12
Selected Financial Data............................ 13
Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 14
Business........................................... 25
Management......................................... 36 -----------------------
Certain Relationships and Related PROSPECTUS
Transactions....................................... 43 -----------------------
Principal Shareholders............................. 43
Selling Shareholders............................... 44
Plan of Distribution............................... 46
Description of Capital Stock....................... 47 August 5, 2004
Shares Eligible for Future Sale.................... 50
Legal Matters...................................... 51
Experts............................................ 51
Where you can get more Information................. 51
Index to Financial Statements...................... 52
Until November 8, 2004, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PART II
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On November 21, 2003, Enova Systems, Inc. ("Company") dismissed Moss Adams LLP
("Moss Adams") as its independent auditors and engaged Singer, Lewak, Greenbaum
& Goldstein ("SLGG") as its independent auditors to audit its financial
statements for its year ending December 31, 2003. The Board of Directors of the
Company approved this decision. Prior to such engagement, the Company did not
consult with SLGG regarding the application of accounting principles to a
specific, completed or contemplated transaction, or the type of audit opinion
that might be rendered on the Company's financial statements.
During the fiscal years ended December 31, 2001 and 2002, and the subsequent
interim period through the date of Moss Adams dismissal, November 21, 2003,
there have been no disagreements on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Moss Adams, would have
caused it to make reference to the subject matter of the disagreements in
connection with its reports, except the following:
In connection with the audit of the Company's financial statements for the year
ended December 31, 2002, Moss Adams had a disagreement with the Company over the
valuation of inventory.
In connection with the review of the Company's financial statements for the
quarter ended September 30, 2003, Moss Adams had a disagreement with the Company
over the allowance for uncollectible receivables.
The audit committee of the Board of Directors and the management of the Company
discussed each of these disagreements with Moss Adams and resolved the matters
to each party's satisfaction prior to the filing of the Company's Form 10-K for
the year ended December 31, 2002 and Form 10-Q for the quarter ended September
30, 2003, respectively. The Company has authorized Moss Adams to respond fully
to inquiries from SLGG concerning the matters described in this section.
Item 13. Other Expenses of Issuance and Distribution.
The following table indicates the expenses to be incurred in connection with the
offering described in this Registration Statement, all of which will be paid by
us. All amounts are estimates, other than the SEC registration fee.
SEC Registration fees: $309
-------------
Accounting fees and expenses: $15,000
-------------
Legal fees and expenses: $35,000
-------------
Printing expenses: $2,500
-------------
Blue Sky fees and expenses: $1,000
-------------
Miscellaneous fees and expenses: $2,000
-------------
TOTAL: $55,809
=============
Item 14. Indemnification of Directors and Officers.
Section 317 of the California General Corporation Law (the "CGCL") provides that
a subject corporation shall have the power to indemnify any agent of the
corporation (including our directors and officers) who was or is a party to any
proceeding or threatened proceeding (other than an action by or in the right of
the corporation) against expenses, judgments, fines, settlements and other
amounts incurred if that person acted in good faith and in a manner reasonably
believed to be in the best interests of the corporation, and in the case of a
criminal proceeding, had no reasonable cause to believe the conduct of such
person was unlawful. Section 317 of the CGCL further provides that a subject
corporation shall have the power to indemnify any agent of the corporation who
was or is a party to any proceeding or threatened proceeding by or in the right
of the corporation against expenses incurred in connection with the defense or
settlement of the proceeding if the person acted in good faith and in a manner
the person believed to be in the best interests of the corporation and our
shareholders.
Under Section 317 of the CGCL, to the extent that an agent of a subject
corporation is successful on the merits in the defense of an action, the
corporation must indemnify such person for his or her actual and reasonable
expenses incurred in connection with such defense. Under Section 317 of the
CGCL, a subject corporation may advance expenses of an indemnifiable person in
defending an action; provided that such advancement of expenses may be made only
if the person provides an undertaking to reimburse the corporation if it is
ultimately determined that the person is not entitled to be indemnified against
such expenses.
The Registrant has entered into agreements to provide indemnification for our
directors and certain officers in addition to the indemnification provided for
in the Bylaws. These agreements, among other things, indemnify such parties to
the fullest extent permitted by California law for certain expenses (including
attorneys' fees), and all losses, claims, liabilities, judgments, fines and
settlement amounts incurred by such persons arising out of or in connection with
such persons' service as directors or officers of the Registrant or an affiliate
of the Registrant.
The above-described provisions relating to the indemnification of directors and
officers are sufficiently broad to permit the indemnification of such persons in
certain circumstances against liabilities (including reimbursement of expenses
incurred) arising under the Securities Act of 1993, as amended.
Item 15. Recent Sales of Unregistered Securities.
In March 2004, we issued 16,250,001 shares of common stock to the Selling
Shareholders under their Registration Statement for cash at a purchase price of
$0.12 per share. We relied on Rule 506 and Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act"), for the exemption from registration of
the sale of the shares.
In September 2003, we issued 23,076,923 shares of common stock to Hyundai Heavy
Industries Co., Ltd. in exchange for $1,500,000 in cash. $1,000,000 of the
proceeds from this issuance was used to fund Enova's $1,000,000 joint venture
II-1
interest in the Hyundai-Enova Innovative Technology Center as previously noted,
with the $500,000 balance of proceeds to be used for general operations and
working capital. We relied upon Regulation D, Rule 506 promulgated by the
Securities and Exchange Commission as the exemption from registration for the
issuance of these shares.
During 2003, we issued an aggregate of 754,167 shares of Common Stock to our
directors in consideration for attendance at Board meetings and Board committee
meetings during fiscal 2003. 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."
In December 2001, we issued 6,000,000 shares of common stock at $0.15 per share
for a total of $900,000 in settlement of litigation brought against us by Fontal
International, Ltd. In April 2001, in connection with this settlement, we issued
an additional 100,000 shares of common stock at $0.15 per share for a total of
$15,000. In May 2001, also in connection with this settlement we issued an
another 100,000 shares of common stock at $0.15 per share for a total of
$115,000. These shares are the subject of this registration statement.
In July 2001, Anthony Rawlinson exercised warrants to purchase 8,333,334 shares
of common stock at $0.06 per share for a total of $500,000. Mr. Rawlinson
represented that he was an accredited investor under the definition set forth by
the Securities and Exchange Commission. We relied on Rule 506 of Regulation D
and Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"), for the exemption from registration of the sale of the shares.
In June 2001, we issued warrants to purchase 15,000,000 shares of our common
stock to a customer. We 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.
In May 2001, Jagen Pty, Ltd exercised warrants to purchase 41,666,666 shares of
common stock at $0.06 per share for a total of $2,500,000. Jagen, an Australian
company and the majority shareholder, represented that they were accredited
investors. We 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 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
--------
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).
5.1** Opinion of Reed Smith, LLP as to the legality of the
securities being registered.
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).
II-2
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).
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 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
II-3
10.17 Joint Venture Agreement (redacted) to form advanced research
and development corporation, dated as of March 18, 2003, by
and between the Registrant and Hyundai Heavy Industries Co.
Ltd. (filed as Exhibit 10.24 to the Registrant's Quarterly
Report on Form 10-Q for Three Months ended March 31, 2003 and
incorporated herein by reference).
10.18 Securities Purchase Agreement dated as of March 18, 2003, by
and between the Registrant and Hyundai Heavy Industries Co.
Ltd. (filed as Exhibit 10.25 to the Registrant's Quarterly
Report on Form 10-Q for Three Months ended March 31, 2003 and
incorporated herein by reference).
10.19* Form of Stock Purchase Agreement dated March 31, 2004 between
Registrant and each of the selling shareholders listed in a
Prospectus dated July 12, 2004.
10.20* Form of Registration Rights Agreement dated March 31, 2004
between Registrant and each of the selling shareholders listed
in a Prospectus dated July 12, 2004.
23.1** Consent of Singer Lewak Greenbaum & Goldstein, LLP,
Independent Auditors
23.2** Consent of Moss Adams, LLP, Independent Auditors
23.3** Consent of Reed Smith, LLP (included in Exhibit 5.1 hereto).
24** Power of Attorney (included on signature page)
------------------
* Filed previously.
** File herewith.
(b) Financial Statements
Unaudited Financial Statements - Quarter ended March 31, 2004
Audited Financial Statements - Fiscal Year ended December 31, 2003
Audited Financial Statements - Fiscal Year ended December 31, 2002
Audited Financial Statements - Fiscal Year ended December 31, 2001
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
Registration Statement. and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement; provided, however, that (i) and (ii) do not apply if the
Registration Statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by
(i) and (ii) is contained in periodic reports filed with or
furnished to the Commission by the Registrant pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement.
II-4
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to the provisions described in Item 14, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against pubic policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Torrance, State of
California, on August 5, 2004.
ENOVA SYSTEMS, INC.
By: /s/ Carl D. Perry
----------------------------------------
Carl D. Perry, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Torrance, State of
California, on August 5, 2004.
ENOVA SYSTEMS, INC.
By: /s/ Larry B. Lombard
----------------------------------------
Larry B. Lombard, Acting Chief
Financial Officer
We, the undersigned directors and/or officers of Enova Systems, Inc. (the
"Registrant"), hereby severally constitutes and appoint Carl D. Perry and/or
Larry B. Lombard with full powers of substitution and resubstitution, our true
and lawful attorney, with full powers to sign for us, in our names and in the
capacities indicated below, the Registration Statement on Form S-1 filed with
the Securities and Exchange Commission, and any and all amendments to said
Registration Statement (including post-effective amendments), and any
registration statement filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended, in connection with the registration under the Securities Act
of 1933, as amended, of equity securities of the Registrant, and to file or
cause to be filed with the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney, and his substitute or substitutes, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in connection therewith, as fully to all intents and purposes as he might
or could do in person, and hereby ratifying and confirming all that said
attorney or his substitute or substitutes, shall do or cause to be done by
virtue of this Power of Attorney. This Power of Attorney may be executed in
counterparts.
S-1
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
Name Title Date
---- ----- ----
/s/ Carl D. Perry Chief Executive Officer and Director
------------------------ (Principal Executive Officer) August 5, 2004
Carl D. Perry
/s/ Larry B. Lombard Acting Chief Financial Officer (Principal
------------------------ Financial Officer) August 5, 2004
Larry B. Lombard
/s/ Anthony N. Rawlinson Chairman August 5, 2004
------------------------
Anthony N. Rawlinson
/s/ Malcolm Currie Director August 5, 2004
------------------------
Malcolm Currie
/s/ Edwin O. Riddell Director August 5, 2004
------------------------
Edwin O. Riddell
/s/ John J. Micek, III Director August 5, 2004
------------------------
John J. Micek, III
/s/ Donald H. Dreyer Director August 5, 2004
------------------------
Donald H. Dreyer
/s/ Bjorn Ahlstrom Director August 5, 2004
------------------------
Bjorn Ahlstrom
/s/ John R. Wallace Director August 5, 2004
------------------------
John R. Wallace
S-2