30th Jun 2006 07:00
Enova Systems, Inc.29 June 2006 PART 1 OF 2 Below is the Enova Systems, Inc.'s full Annual Report (10K) for the year ended 31 December 2005.Physical copies can be provided by contacting Corinne Bertrand at +1 310 527 2800 extension 103or by e-mail at
[email protected] SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K For Annual and Transition Reports Pursuant to Sections 13 or 15(d) of the Securities and Exchange Act of 1934 (x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2005 Commission File No. 0-25184 ENOVA SYSTEMS, INC. (Exact name of registrant as specified in its charter) California 95-3056150 ---------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 19850 South Magellan Drive, Torrance, California 90502 (Address of principal executive offices, including zip code) (310) 527-2800 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes (X) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405of Regulation S-K is not contained herein, and will not be contained, to thebest of the registrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ( ) Indicate by check mark whether the registrant is an accelerated filer (asdefined in Rule 12b-2 of the Act). Yes ( ) No (X) The aggregate market value of the voting and non-voting common equity held bynon-affiliates of the registrant as of June 30, 2005 (the last business day ofthe registrant's more recently completed second quarter) was $15,568,662. Forpurposes of this calculation only, (i) shares of Series A and Series B PreferredStock have been included in the calculation, (ii) shares of Common Stock andSeries A Preferred Stock are deemed to have a market value of $2.03 per share,and the Series B Preferred Stock is deemed to have a market value of $4.05 pershare, based on the closing price of the Common Stock on June 30, 2005, and(iii) each of the executive officers, directors and persons holding 5% or moreof the outstanding Common Stock (including Series A and B Preferred Stock on anas-converted basis) is deemed to be an affiliate. The number of shares of Common Stock outstanding as of March 22, 2006 was14,786,000. ENOVA SYSTEMS, INC. 2004 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I
Item 1 Business.................................................................................... 4 Item 2. Properties..................................................................................16 Item 3. Legal Proceedings...........................................................................16 Item 4. Submission of Matters to a Vote of Security Holders.........................................16 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ...........................................................16 Item 6 Selected Financial Data.....................................................................18 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.......19 Item 7A Quantitative and Qualitative Disclosures about Market Risk..................................25 Item 8 Financial Statements and Supplementary Data.................................................25 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ Item 9A Controls and Procedures.....................................................................26 PART III Item 10. Directors and Executive Officers of the Registrant.........................................28 Item 11. Executive Compensation.....................................................................29 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ............................................................. Item 13. Certain Relationships and Related Transactions.............................................35 Item 14. Principal Accountant Fees and Services.....................................................35 PART IV Item 15. Exhibits and Financial Statement Schedules................................................36 SIGNATURES...........................................................................................39
2 Disclosure Regarding Forward-Looking Statements----------------------------------------------- This annual report on Form 10-K, including the documents that weincorporate by reference, contains statements indicating expectations aboutfuture performance and other forward-looking statements that involve risks anduncertainties. We usually use words such as "may," "will," "should," "expect,""plan," "anticipate," "believe," "estimate," "predict," "future," "intend,""potential," or "continue" or the negative of these terms or similar expressionsto identify forward-looking statements. These statements appear throughout theForm 10-K and are statements regarding our current intent, belief, orexpectation, primarily with respect to our operations and related industrydevelopments. Examples of these statements include, but are not limited to,statements regarding the following: our expansion plans, our future operatingexpenses, our future losses, our future expenditures for research anddevelopment and the sufficiency of our cash resources. You should not placeundue reliance on these forward-looking statements, which apply only as of thedate of this annual report. Our actual results could differ materially fromthose anticipated in these forward-looking statements for many reasons,including the risks faced by us and described in the section of Item 1A.entitled "Risk Factors," and elsewhere in this annual report. Anyforward-looking statement speaks only as of the date on which it is made, and weundertake no obligation to update any forward-looking statement to reflectevents or circumstances after the date on which the statement is made or toreflect the occurrence of unanticipated events. Enova Systems is a trademark of Enova Systems, Inc . All other brand namesor trademarks appearing in this annual report are the property of theirrespective holders. PART I The matters addressed in this report on Form 10-K, with the exception ofthe historical information presented, may contain certain forward-lookingstatements involving risks and uncertainties. Our actual results could differmaterially from those anticipated in these forward-looking statements as aresult of certain factors, including those set forth under the heading "CertainFactors That May Affect Future Results" in the Management's Discussion andAnalysis section and elsewhere in this report. Item 1. Business General In July 2000, we changed our name to Enova Systems, Inc. Our company,previously known as U.S. Electricar, Inc., a California corporation (the"Company"), was incorporated on July 30, 1976. Enova believes it is a leader in the development and production ofproprietary, commercial digital power management systems for transportationvehicles and stationary power generation systems. Power management systemscontrol and monitor electric power in an automotive or commercial applicationsuch as an automobile or a stand-alone power generator. Drive systems arecomprised of an electric motor, an electronics control unit and a gear unitwhich power an electric vehicle. Hybrid systems, which are similar to pureelectric drive systems, contain an internal combustion engine in addition to theelectric motor, eliminating external recharging of the battery system. Ahydrogen fuel cell based system is similar to a hybrid system, except thatinstead of an internal combustion engine, a fuel cell is utilized as the powersource. A fuel cell is a system which combines hydrogen and oxygen in a chemicalprocess to produce electricity. Stationary power systems utilize similarcomponents to those which are in a mobile drive system in addition to otherelements. These stationary systems are effective as power-assist or back-upsystems, alternative power, for residential, commercial and industrialapplications. A fundamental element of Enova's strategy is to develop and produceadvanced proprietary software, firmware and hardware for applications in thesealternative power markets. Our focus is digital power conversion, powermanagement, and system integration, for two broad market applications - vehiclepower generation and stationary power generation. Specifically, we develop, design and produce drive systems and relatedcomponents for electric, hybrid-electric, fuel cell and microturbine-poweredvehicles. We also develop, design and produce power management and powerconversion components for stationary distributed power generation systems. Thesestationary applications can employ hydrogen fuel cells, microturbines, oradvanced batteries for power storage and generation. Additionally, we performresearch and development to augment and support others' and our own relatedproduct development efforts. Our product development strategy is to design and introduce to marketsuccessively advanced products, each based on our core technical competencies.In each of our product / market segments, we provide products and services toleverage our core competencies in digital power management, power conversion andsystem integration. We believe that the underlying technical requirements sharedamong the market segments will allow us to more quickly transition from oneemerging market to the next, with the goal of capturing early market share. 3 Enova's primary market focus centers on both series and parallel heavy-dutydrive systems for multiple vehicle and marine applications. We believeseries-hybrid and parallel hybrid medium and heavy-duty drive system sales offerEnova the greatest return on investment in both the short and long term. Webelieve the medium and heavy-duty hybrid market's best chances of significantgrowth lie in identifying and pooling the largest possible numbers of earlyadopters in high-volume applications. Enova will attempt to utilize itscompetitive advantages, including customer alliances, to gain greater marketshare. By aligning ourselves with key customers in our target market(s), Enovabelieves that the alliance will result in the latest technology beingimplemented and customer requirements being met, with a minimal level ofadditional time or expense. Additionally, Enova management believes that thisarea will see significant growth over the next several years. As the Companypenetrates more market areas, we are continually refining and optimizing bothour market strategy and our product line to maintain our leading edge in powermanagement and conversion systems for mobile applications. Our website, www.enovasystems.com, contains up-to-date information on theCompany, its products, programs and current events. Enova is implementing anaggressive strategy to utilize its website and the internet as a prime focalpoint for current and prospective customers, investors and other affiliatedparties seeking data on the Company. During 2005, our recapitalization initiatives were successful. We enteredinto an agreement with a placement agent relating to the sale of 5,300,000 newshares of our common stock, after the 1 for 45 reverse stock split described inItem 5 below. We received approximately $18,000,000 of net proceeds from theoffering. The Company believes that we have the operating resources to continueour market penetration efforts. The reorganization of senior management continued in 2005. During thefourth quarter of 2005, both our Chief Financial Officer, Larry Lombard, and ourChief Operating Officer, Edward Moore, resigned to seek other opportunities.Their resignations were not the results of any disagreements with the Company.In the first quarter of 2006, we appointed John Dexter as our new Director ofOperations and Planning. In the absence of a financial executive at the end of2005, and to facilitate the year end financial reporting process, we have reliedon increased involvement from Edwin Riddell, Chief Executive Officer, as well asthe services of qualified Certified Public Accountants as managementconsultants. During 2005, the Company experienced an increase in production revenues. Webelieve our development and market penetration initiatives are provingsuccessful. By defining our market focus, the Company has been able to betteridentify potential opportunities. We continue to pursue privately and governmental funded developmentprograms. This allows us to increase our revenue base, form new alliances withmajor OEMs and participate in the latest trends in alternative fueltechnologies. The increase in R&D revenues for the year ended December 31, 2005is primarily due to renewed customer requirements after a slow year in 2004. The Company continues to receive greater recognition from both governmentaland private industry with regards to both commercial and military application ofits hybrid drive systems and fuel cell power management technologies. Althoughthe Company believes that current negotiations with several parties may resultin development and production contracts during 2006 and beyond, there are noassurances that such additional agreements will be realized. During 2005, the Company continued to advance its technologies and productsfor greater market penetration for 2006 and beyond. We continue to developindependently and in conjunction with the Hyundai-Enova Innovative TechnologyCenter (ITC) progress on several fronts to produce commercially availableheavy-duty, series and parallel hybrid drive systems. During the year ended December 31, 2005, we continued to develop andproduce electric and hybrid electric drive systems and components for First AutoWorks of China, Ford Motor Company (Ford), Hyundai Motor Car, US Military,Wright Bus and Eneco of the United Kingdom, and Tomoe of Japan and several otherdomestic and international vehicle and bus manufacturers. We also weresuccessful in introducing our technology to companies such as ConcurrentTechnology Corporation (CTC), PUES (Tokyo Research and Development), Volvo/Mackand Navistar (International Truck and Engine, IC Corporation). The continuedrelationships, in addition to our newest customers helped Enova surpass, sinceEnova's inception, the manufacturing of its 900th system. Our various electricand hybrid-electric drive systems, power management and power conversion systemsare being used in applications including Class 8 trucks, train locomotives,transit buses and industrial vehicles as well as in non-transportationapplications such as fuel-cell management and power management systems,including the EDO minesweeper. Enova has furthered its development andproduction of systems for both mobile and stationary fuel cell powered systemswith major companies such as Ford and Hydrogenics, a fuel cell developer inCanada. 4 For the year ended December 31, 2005, the following customers eachaccounted for more than ten percent (10%) of the Company's total revenues: Customer Percent ------------------------------------------------------- Tomoe Electro Mechanical Engineering & Mfg. 49.3% Hyundai Motor Company 12.5% Medium and Heavy-Duty Drive Systems - Buses, Trucks, Vans and Other IndustrialVehicle Applications Enova's primary market focus centers on both series and parallel medium andheavy-duty drive systems for multiple vehicle and marine applications. Webelieve series-hybrid and parallel hybrid medium and heavy-duty drive systemsales offer Enova the greatest return on investment in both the short and longterm. Although this market sector has developed more slowly than anticipated,management believes that this area will see significant growth over the nextseveral years. As the Company penetrates more market areas, we are continuallyrefining and optimizing both our market strategy and our product line tomaintain our leading edge in power management and conversion systems for mobileapplications. In Japan, Tomoe Electro-Mechanical Engineering and Manufacturing, Inc. hasentered into a development and production contract with Enova for eightbattery-electric locomotives for the Singapore Land Transport Authority (LTA)for service vehicles for the Seoul Mass Rapid Transit (SMRT) Circle Line systemfor maintenance, repair, shunting and recovery of passenger trains. Over thelast several years, Enova successfully integrated its HybridPowerTM drivesystems into Tomoe's heavy-duty Isuzu dump truck application, three passengertrams and a mine tunnel crawler. The hybrid drive train components weredelivered in late 2005 at Tomoe's Japan-based facilities. Enova anticipates thetotal contract to exceed US$3 million over the life of the contract. This latestmarket penetration in Asia enhances not only Enova's alliances with both Tomoeand HHI, but also advances Enova's hybrid-electric technologies in high voltagepower management components. As part of this contract, Enova will develop a highvoltage charging system to enable the locomotive to receive a direct batterycharge from the high voltage rail. Tomoe and Enova continue to develop othercommercial and industrial applications for our drive systems including potentiallight rail applications. During the first quarter of 2005, Tomoe issued apurchase order for three post transmission parallel hybrid drive systems foranother train project in South Korea. In 2005, Enova Systems delivered a Post Transmission 80Kw Hybrid Drive 4200series truck to International Truck and Engine (International). This is inaddition to the delivery of the , as represented by IC Corporation, Hation's 1stfunctional Hybrid Drive school bus that was delivered to International inJanuary of 2006. Both the truck and bus are currently being evaluated atInternational's Fort Wayne Technical Center. International and IC Corporationclaims to be a leading manufacturer of medium duty trucks and school buses, withapproximately 40% of the medium duty truck build and approximately 60% of theschool bus build in North America. Additionally in 2005, Enova's Post Transmission system was also integratedinto a US Air Force "refueler" vehicle built by Volvo/Mack Truck Corporation.Enova, via Concurrent Technologies Corporation (CTC), also supplied its 120kWhybrid drive system to the US Air Force for a Fuel Cell Hybrid "TUG" vehicle In2005, First Auto Works (FAW) of China ordered an additional five HybridPower120kW drive systems. These units have been delivered. Additionally, FAWintroduced its Hybrid City Bus, which is powered by Enova's 80kW Parallel HybridDrive System. FAW is China's largest vehicle manufacturer, producing in excessof 900,000 vehicles annually. In 2005, we continued our work with Tsinghua University of China, and their fuelcell bus development program. China intends to use hybrid-electric buses toshuttle athletes and guests at the 2008 Beijing Summer Olympics and the 2010World's Expo in Shanghai. China is seeking up to 1,000 full-size hybrid-electricbuses to support these global events. WrightBus, one of the largest low-floor bus manufacturers in the UnitedKingdom, continues to purchase our diesel genset-powered, series hybrid drivesystems for their medium and large bus applications. WrightBus ordered twoadditional 120kW drive systems in 2005. Six of Enova's systems provided toWrightbus, have been integrated into six Hybrid Buses, which are currently beingevaluated in London's public bus fleet. Eneco of the United Kingdom, a vehicle integrator which utilizes Enova'sHybridPower 120kW drive systems in its hybrid bus applications, purchased 21120kW systems in 2005. EcoPower Technology of Italy continues to purchase components for itshybrid electric drive systems during 2005 for service and maintenance parts forits fleet of buses powered by HybridPowerTM 120kw drive systems. Since ourteaming with EcoPower, we have sold 47 drive systems forming one of the largestfleets of hybrid buses in the world. EcoPower is one of the largest integratorsof medium size transit buses for the European shuttle bus market, with keycustomers in five Italian cities namely Turin, Genoa, Brescia, Ferrara andVicenza. MTrans of Malaysia has integrated two of our standard HybridPower 120kWdrive system into a hybrid 10-meter bus with a Capstone microturbine as itspower source. This drive system is currently on demonstration in Hong Kong, PRC. Additionally, we are in discussions with other bus manufacturers andindustrial, commercial and military vehicle manufacturers regarding the purchaseof our heavy-duty, high performance, 120kW and 240kW drive systems in 2005.There are no assurances, however, that these discussions will result in anysales of the HyrbidPower 240kW or 120kW drive systems. 5 Light-Duty Drive Systems and Fuel Cell Technologies - Automobiles and Deliveryvehicles The High Voltage Energy Converter (HVEC) development program with FordMotor 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) whichutilizes the Ballard fuel cell system. It converts high voltage power from thefuel cell into a lower voltage for use by the drive system and electronicaccessories. Ford currently is evaluating thirty vehicles utilizing Enova'stechnology, throughout the United States, Canada, and Germany. Enova's fuel cellenabling components continue to be part of the proposed fleets of fuel cellvehicles being utilized by both Ford Motor Company - the Ford Focus FCV- andHyundai 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 ValidationProject." This government-funded project will last over five years, evaluatingthe economic and performance feasibility of fuel cell vehicles andinfrastructure across the U.S. In 2005, we delivered sixteen additionalconverters to Hyundai. Furthermore, an additional 16 units are scheduled fordelivery in 2006. The Company will continue to explore new applications for this versatiletechnology in both mobile and stationary systems. Research and Development Programs--------------------------------- We continue to aggressively pursue government and commercially sponsoreddevelopment programs for both ground and marine heavy-duty drive systemapplications. Our development contract with EDO Corporation of New York for the designand fabrication of a high voltage DC-DC power conversion system utilizing aCapstone microturbine as the primary power source for the U.S. Navy unmannedminesweeper project also continues to progress during 2005. The electronicspackage will include Enova's advanced power components including a new, enhanced50V, 700A DC-DC power converter, our Battery Care Unit and Hybrid Control Unitwhich will power the minesweeper's electromagnetic detection system. Our powermanagement and conversion system will be used to provide on-board power to otheraccessories on the platform. The all-electric Hyundai Santa Fe SUV demonstration project in HonoluluHawaii was completed in 2005. Fast-charging capabilities and performance will bethe primary focus of this continued evaluation. This is a continuation of theState of Hawaii and Hyundai Motor Company's program for pure electric vehicleperformance. In the fourth quarter of 2004, Enova completed the design and integrationof its 120kw drive system with a Capstone microturbine into a MB4 tow tractorfor the U.S. Air Force through a contract with the Volpe National TransportationSystems Center. The objectives of this program include the integration ofmicroturbine technology into the hybrid electric tow tractor, field testing andevaluation of the benefits of microturbine technology in a hybrid electricvehicle, integration of grid-charging technology, DC-DC converter, and a dataacquisition system into an electric tow tractor, and validation of thetechnology effect on the original system and performance. During 2004, theprogram generated $165,000 in revenues for Enova. There is a potential for otherupgrades of this type and we anticipate entering into more of these contracts in2005 with the U.S. Air Force. There can be no assurances at this time, however,that such contracts will be realized. We also commenced a program with Hydrogenics to integrate a HybridPower120kW hybrid drive system into a step-van for Purolator as a hydrogen fuel cellhybrid vehicle. In integrating this new system, we utilized several new powermanagement systems including our dual 8kW inverter and our Mobile Fuel CellGenerator that utilizes our High Voltage Converters. This fuel cell vehicleapplication utilized a Hydrogenics 20kW fuel cell power generation moduleunderscoring our technologies ability to optimize fuel cell performance across arange of fuel cell products. The program is in its final stage of evaluation. Asa result of this program, we have also commenced a similar fuel cell step vanconversion program for HCATT and the U.S. Air Force. In 2005, we commenced integration of a fuel cell powered step-van similarto the aforementioned Hydrogenics program for HCATT and the U.S. Air Force. We intend to establish new development programs with the Hawaii Center forAdvanced Transportation Technologies in mobile and marine applications as wellas other state and federal government agencies as funding becomes available. 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 orpending legislation in the United States at the federal level and in certainstates, to promote or mandate the use of vehicles with no tailpipe emissions("zero emission vehicles") or reduced tailpipe emissions ("low emissionvehicles"). We believe legislation requiring or promoting zero or low emissionvehicles is necessary to create a significant market for electric vehicles. TheCalifornia Air Resources Board (CARB) is continually modifying its limits forlow emission vehicles. Recently, CARB proposed additional amendments to theregulations. Furthermore, several car manufacturers have challenged thesemandates in court and have obtained injunctions to delay these mandates. There 6 can be no assurance that further legislation will be enacted or that currentlegislation or state mandates will not be repealed or amended, or that adifferent form of zero emission or low emission vehicle will not be invented,developed and produced, and achieve greater market acceptance than electricvehicles. Extensions, modifications or reductions of current federal and statelegislation, mandates and potential tax incentives could adversely affect theCompany's business prospects if implemented. Our products are subject to federal, state, local and foreign laws andregulations, governing, among other things, emissions as well as laws relatingto occupational health and safety. Regulatory agencies may impose specialrequirements for implementation and operation of our products or maysignificantly impact or even eliminate some of our target markets. We may incurmaterial costs or liabilities in complying with government regulations. Inaddition, potentially significant expenditures could be required in order tocomply with evolving environmental and health and safety laws, regulations andrequirements 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-changingenvironment of alternative power markets for both stationary and mobileapplications. Originally focusing on pure electric drive systems, we believe weare now positioned as a global supplier of drive systems for electric, hybridand fuel cell applications. Enova is now entering stationary power markets withits power management systems and intends to develop other systems to monitor andcontrol the complex fuel cell and ancillary device systems being developed fordistributed generation and mobile applications. Enova continues to seek and establish alliances with major players in theautomotive, stationary power and fuel cell fields. 2005 allowed Enova to furtherits penetration into the European and Asian markets, as well as allow them tobegin relationships with significant North American companies. We believe themedium and heavy-duty hybrid market's best chances of significant growth lie inidentifying and pooling the largest possible numbers of early adopters inhigh-volume applications. Enova will utilize its competitive advantages,including customer alliances, to gain greater market share. By aligningourselves with key customers in our target market(s), Enova believes that thealliance will result in the latest technology being implemented and customerrequirements being met, with a minimal level of additional time or expense. Enova's alliances with other major OEMs in the automotive, transit,commercial and energy sectors continue to expand. In 2005, Enova continued ourendeavors related to the Chinese hybrid vehicle market, and with alliances withFirst Auto Works and Tsinghua University for heavy-duty hybrid drive systems andtechnologies. Additionally, we expanded on our alliances with, Tomoe, HyundaiMotor Company (HMC), MTrans of Malaysia, Eneco, Hydrogenics of Canada, theSouthwest Research Institute, the U.S. Air Force and other commercial andindustrial intermediaries and OEMs to find new markets and applications for ourproducts and technologies. We continue our strategy as a "systems integrator" byestablishing relationships to utilize other independently developed technologiessuch as those provided by HHI, UTC Fuel Cells, Hydrogenics and nationaluniversities. We have implemented our plans to outsource manufacturing of ourcomponents to companies such as HHI, Ricardo, and other Asian manufacturers. Webelieve that one of our competitive advantages is our ability to identify,attract and integrate the latest technology available to produce state of theart products at competitive prices. Our joint venture alliance with Hyundai Heavy Industries (HHI) is a primeexample of our partnering strategy to maximize the utilization of Enova'sknowledge and expertise in power management and control. Teaming with HHI maylead to other additive technologies and products which Enova can market tocurrent and prospective customers. The joint venture corporation, Hyundai-EnovaInnovative Technology Center (ITC), commenced operations in the second quarterof 2003. The advanced technology center focuses on leading-edge technologies inpower management and power conversion for industrial, commercial, residentialand vehicle applications. The ITC has been instrumental in bringing our dieselgenset system into commercialization. Other projects slated for development forthe ITC include commercial inverters and other power management systems whichbuild on Enova's and HHI's technology base. It is our intent to utilize theresources provided through the ITC to optimize Enova's current product line forgreater performance and production cost efficiencies, while we continue newresearch and development for the next generation of digital power managementsystems for mobile and stationary applications. For instance, the Hyundai Groupof Korea and Enova are partnering in the development of advanced hybrid andhydrogen fuel cell drive-train technology and related systems. Products Enova's focus is digital power management, power conversion, and systemintegration. Our proprietary software, firmware and hardware manage and controlthe power that drives a vehicle or device. They convert the power into theappropriate forms required by the vehicle or device, whether DC to AC, AC to DCor DC to DC, and they manage the flow of this energy to protect the battery, thevehicle or device, and the driver or operator. Enova's systems work "from drivetrain to drive wheel" for both vehicle and stationary applications. The latest state-of-the-art technologies, such as hybrid vehicles, fuelcell and micro turbine based systems, and stationary power generation, allrequire some type of power management and conversion mechanism. Enova, utilizingour enabling technologies, supplies these essential components. We believe ourdrive train systems will work with any kind of fuel/power source, from electricto hybrid to fuel cell to turbine. They are essential components for anyvehicle, system or device that uses power. Enova is moving to expand its product base into new markets outside of thetraditional electric and hybrid-electric automotive fields. Key areas whichEnova has begun to penetrate include energy management in distributed generationin the utility industry, and stand-by/backup power generation in the commercialelectronics industry. Both of these markets can be served with our existingenergy management and power control products. Enova has entered into agreements, 7 or commenced negotiations, with various alternative power generationmanufacturers such as Hydrogenics, Capstone Turbine and Ballard Power as well asothers. We believe our enabling technologies will prove beneficial to thesetypes of companies in their strategies to bring these new power systems tocommercialization. Enova has embraced fuel cell technology and has begun to develop variouspower management and control systems to enable fuel cell manufacturers and theirancillary industries to achieve greater efficiencies from their systems. Thesesystems are also designed to provide added reliability and safety by monitoring,adjusting and reporting on operation of the unit. HybridPowerTM Electric and Hybrid-Electric Drive Systems Enova's HybridPower drive system family, along with its drive systemaccessories are designed to provide our customers with a complete solution totheir drive system needs for both light-duty through heavy-duty vehicle markets.Enova's HybridPower hybrid electric drive system provides all the functionalityone would find under the hood of an internal combustion engine powered vehicle.The HybridPower system consists of an enhanced electric motor and the electroniccontrols that regulate the flow of electricity to and from the batteries atvarious voltages and power to propel the vehicle. In addition to the motor andcontroller, the system includes a gear reduction/differential unit which ensuresthe desired propulsion and performance. The system is designed to be installedas a "drop in," fully integrated turnkey fashion, or on a modular, "as-needed"basis. Regardless of power source (battery, fuel cell, diesel generator orturbine) the HybridPower electric motor is designed to meet the customer's drivecycle requirements. The HybridPower drive system family is targeted to meet the demands oflight-duty through heavy-duty vehicle markets. Enova's family of light-dutydrive systems includes: o 30kW, 60kW, 90kW all-electric drives o 90kW series-hybrid drive o combinations of these systems based on customer requirements. Our family of heavy-duty electric drive systems includes: o 120kW all-electric drive o 120/60kW peak series hybrid system o 240/60kW peak series hybrid system o 90kW peak mild, pre-transmission parallel hybrid system o 100kW peak post-transmission parallel hybrid systems o 100kW peak pre-transmission parallel hybrid system. Enova's drive systems, in conjunction with, internal combustion engines,microturbines, fuel cells, flywheels, and generators sets provide state of theart hybrid-electric propulsion systems. Hybrid vehicles are those that utilize an electric motor and batteries inconjunction with an internal combustion engine (ICE), whether piston or turbine.With a hybrid system, a small piston or turbine engine - fueled by gasoline ordiesel, CNG, methane, etc., in a tank - supplements the electric motor andbattery. These systems are self-charging, in that the operating ICE rechargesthe battery. There are two types of hybrid systems: series and parallel. A series hybridsystem is one where only the electric motor connects to the drive shaft; aparallel hybrid system is one where both the internal combustion engine and theelectric motor are connected to the drive shaft. In a series hybrid system, theICE turns the generator, which charges the battery, which -- through a controlunit - powers the electric motor, which turns the wheels. In a parallel hybridsystem, both the electric motor and the ICE can operate simultaneously to drivethe wheels. (See diagrams below.) In both hybrid systems and in pure electricsystems, regenerative braking occurs, which assists in the charging of thebatteries. The parallel hybrid system is ideally suited for conditions where most ofthe driving is done at constant speed cruising, with a smaller amount of thedriving involving random acceleration, such as "up hill" or with "stop and go" 8 conditions. For acceleration, the controller causes the electric motor to kickin to assist the ICE, both running simultaneously. When speed is steady or theground is flat, only the ICE runs. Additionally, when the batteries are low, thecontroller causes the ICE and motor to charge the batteries. As a result, theseries hybrid system is best suited for starts and stops, and is ideal forapplications such as urban transit buses and urban garbage trucks. The design ofthe series hybrid system is based on a driving cycle with a high percentage ofrandom acceleration conditions.
---------------------------- -------------------------- ----------------------------------------- ----------------------System Applications Advantages Disadvantages---------------------------- -------------------------- ----------------------------------------- ---------------------- Series Driving with high Optimally-sized IC engine Full size electricHybrid percentage stop and go Advanced engine/turbine may be used drive system required and/or hilly terrain Simplified transmission Generator and Independent control converter required---------------------------- -------------------------- ----------------------------------------- ----------------------Parallel Driving with high No generator and converter needed Complex transmissionHybrid percentage constant The drive system may be smaller and clutch system speed cruising Complex control Limited to low speed engines---------------------------- -------------------------- ----------------------------------------- ----------------------
Hybrid Drive Configurations Enova has identified three primary configurations based upon how well theymeet market needs economic requirements. The company has developed all of therelevant technology required to produce these drive systems and is currentlyintroducing the Hybrid Power product line worldwide. All of our innovativehybrid drive systems are compatible with wide range of fuel sources and engineconfigurations. Hybrid Drive Motors The electric drive unit is essentially an electric motor with additionalfeatures 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 permitsregenerative braking to provide power recovery, in which the mechanical energyof momentum is converted into electrical energy as the motor slows duringbraking or deceleration. The optional gear reduction unit takes the electricmotor's high rpm and gears it down to the lower rpm required by the vehicle'sconventional drive shaft. As the revolutions per minute (rpm) go down, thetorque of the electric motor increases. The HybridPower drive systems exclusively utilize induction AC motors fortheir high performance, power density, and low cost. The AC drive system isscaleable and can be customized for different applications. Due to the largeoperating range that these propulsion systems offer, all parameters can beoptimized; the user will not have to choose between acceleration, torque orvehicle speed. Hybrid Motor Controllers The controller houses all the components necessary to control the poweringof a vehicle, in one easy-to-install package. Our main component is an inverter,which converts DC electricity to AC electricity. Enova also offers optionalcontrollers for the air conditioning, power steering and heat pump, 12VDC/24VDCDC-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 direct110 VAC or 220 VAC battery charging. These are located in the same housing asthe controller, thus extra interconnects are not required. This approachsimplifies the vehicle wiring harness and increases system reliability. Using our proprietary Windows based software package, vehicle interfacesand control parameters can be programmed in-vehicle. Real-time vehicleperformance parameters can be monitored and collected. Hybrid Drive Systems The Enova hybrid drive family currently includes a 120/60kW peak serieshybrid system, a 240/60kW peak series hybrid system, a 90kW peak mild,pre-transmission parallel hybrid system, a 100kW peak post-transmission parallelhybrid systems and our 100kW peak pre-transmission parallel hybrid system to beintroduced later this year. The Enova HybridPower hybrid-electric drive systems are based on thecomponent building blocks of the electric drive family, including the motor,controller and optional components. As an example, the 120/60 kW series hybridsystem uses the 120kW electric drive components to propel the vehicle, and usesa 60kW diesel generator (genset)to generate power while the vehicle is inoperation. This synergy of design reduces the development cost of the Company'shybrid systems by taking advantage of existing designs. The diesel genset hasbeen designed to take advantage of many different models of internal combustionengines for greater penetration into the burgeoning heavy-duty hybrid vehiclemarkets. Enova's genset will accept any engine with an industry standard bellhousing and flywheel. Enova's control protocols are designed to easily interfacewith any standard engine controller with analog throttle inputs. Accessories forthese drives include battery management, chargers and 12-volt power supplies. The Company's hybrid systems are designed to work with a variety of hybridpower generation technologies. In the Company's 120/60kW hybrid system, aninternal combustion engine connected to a motor and motor controller performsthe power generation. Other power options include liquid fueled turbines, such 9 as the Capstone system, fuel cells, such as the Hydrogenics or Ballard system,or many others. In all of these examples, Enova's battery management systemprovides the power management to allow for proper power control. Drive System Accessories Enova's drive system accessories range from battery management systems tohybrid controllers, to rapid charging systems. These critical components aredesigned to complement the HybridPower drive system family by providing theelements necessary to create a complete technical solution for alternativeenergy drive systems. Enova's drive system accessories are not only integral, but are also theperfect complement to our drive systems and are designed to provide ourcustomers with a complete solution to their drive system needs. Battery Care Unit Enova's Battery Care Unit (BCU) monitors, manages, protects, and reports onthe condition of the vehicles battery pack. It controls and manages batteryperformance, temperature, voltage and current to avoid harm to the batteries, tothe entire system, and to the driver, operator and passengers. It also allowsfor monitoring for service to the battery and drive system. The BCU reportsstate-of-charge, amp hours and kilowatt-hours. The BCU monitors the battery pack voltage and 28 additional individualvoltages with a range of 0 to 18vDC. Optional expansion modules allow 28additional inputs per module, with up to 16 modules permitted. The BCU has eightuser-programmable outputs and four user-programmable inputs to allow fullintegration into the vehicle. These can be used to customize input and outputparameters, and to provide for other custom monitoring and battery pack control.The device is approximately 7.1 inches by 4.3 inches by 1.6 inches. The BCU directly interfaces with the HybridPower and other drive systems,and controls the Safety Disconnect Unit (SDU). It is capable of supporting anybattery technology, and provides each type with optimized charging andprotection algorithms. An internal real-time clock allows the BCU to wake up atuser-specified times to initiate battery charging or pack monitoring. Aprecision shunt allows it to offer a wide dynamic range for monitoring chargingand motoring current, without the errors commonly associated with other types ofsensors. The non-volatile RAM allows the BCU to update, store and report key batterypack parameters such as amp hours, kilowatt-hours and state of change. UsingEnova's proprietary Windows -based diagnostic software, the BCU controlparameters can be programmed "live" in-vehicle. Additionally, batteryperformance can be monitored in real-time. Reports can be output to a laptopcomputer for precise results and "customer friendly" usage. Hybrid Control Unit Enova's Hybrid Control Unit (HCU) continuously monitors the condition ofthe battery pack through communications with the BCU, monitors the drivercommands through communications with the motor controller, and the state of thehybrid generator. Based upon the data received, the HCU provides continuousupdates to the hybrid generator with instructions on mode of operation and powerlevel. This innovative control loop ensures that the entire system is optimizedto provide quick response to driver commands while providing the best possiblesystem efficiency. Safety Disconnect Unit The Safety Disconnect Unit (SDU) is under the control of the BCU, andallows vehicle systems to easily connect and disconnect from the battery pack,when necessary, to prevent damage or harm. It also disconnects the battery packduring charging, protects it from surges, and constantly verifies that thebattery pack is isolated from the vehicle chassis. In the event a groundisolation fault is detected, the BCU commands the SDU to break the batteryconnection, thus ensuring a safe environment for the vehicle and operator. TheSDU is available in two configurations to match the requirements of the drivesystems. High Voltage Disconnect Unit The High Voltage Disconnect Unit (HVDU) is a reduced feature version of theSafety Disconnect Unit. The pre-charge board has been eliminated in order toprovide a lower cost method of safely switching high voltage systems on thevehicle that do not require the soft start feature. 10 Wiring Harness Connector Kits Enova provides complete mating connector kits to help the vehicle OEM withtheir production process. By using the Enova supplied kit the vehiclemanufacturer is ensuring that they will have all of the necessary connectors tocomplete the vehicle build. Distributed Power Generation for Industrial / Commercial / ResidentialApplications Enova's distributed generation products are virtually identical in systemconfiguration to that of a series hybrid vehicle, including a controller andbattery management. For this market segment, we intend to provide DC-DC andDC-AC power conversion components to convert power supplied by batteries, fuelcells, generators and turbines to AC power that will be used by the endcustomer. Additionally, our BCU will provide power management functions tocontrol the entire system. The main difference is that the 3-phase AC powertypically supplied to the motor for propulsion power is, in this case, sent tothe customer to supply power for their household or business. 20kW bi-directional Fuel Cell Power Conditioning System Enova's 20kW bi-directional Fuel Cell Power Conditioning System, originallydesigned to meet the demands of an automotive Fuel Cell propulsion system, isnow being applied to the stationary market for distributed generationapplications. This unique unit, not much larger than a conventional briefcase, provides atransparent interface between the Fuel Cell or Turbine, the battery pack,accessory loads, and the output load. Fast response time allows the output loadto be serviced without interruption while the Fuel Cell or Turbine ramps up. This unit is designed to interface directly with the Master Controller ofthe Stationary Generation System over a CAN bus. Other communications protocolssupported are SAE J-1850, RS-232, and RS-485. Our proprietary package diagnosticsoftware allows all key parameters of the Power Conditioner to be monitored andcontrol boundaries to be adjusted. Fuel Cell Management Unit Enova has reconfigured its Battery Management Unit to perform the functionsrequired to monitor, manage, and report on the status of a Fuel Cell Stack. TheFCU monitors the fuel cell voltage and 28 additional individual voltages with arange of 0 to 18vDC. Optional expansion modules allow 28 additional inputs permodule, with up to 16 modules permitted. The FCU has eight (8) user-programmableoutputs and four (4) user-programmable inputs to allow full integration into thedistributed generation system. These can be used to customize input and outputparameters, and to provide for other custom monitoring and battery pack control. Research and Development Strategy Enova maintains a strategy of continual enhancement of its current productline and development of more efficient and reliable products for theever-changing alternative energy sectors. Management believes R&D must becontinued in order to remain competitive, minimize production cost and meet ourcustomers' specifications. Because microprocessors and other components continueto advance in speed, miniaturization and reduction of cost, Enova mustre-examine its designs to take advantage of such developments. Enova endeavorsto fund its R&D through customer contracts where applicable, however it willprovide internal funding where technology developed is critical to its future. Enova's commitment to advancing technological superiority is evidenced by itsinternal efforts as well as its joint venture with HHI for future technologies. Manufacturing Strategy Our products are "production-engineered," meaning they are designed so theycan be commercially produced without additional development. All formats andfiles are designed with manufacturability in mind from the start. For theautomotive market, Enova designs its products to ISO 900X manufacturing andquality standards. We believe that our redundancy of systems, robustness ofdesign, and rigorous quality standards result in higher performance and reducedrisk. For every component and piece of hardware, there are detailed performancespecifications. Each piece is tested and evaluated against these specifications,which enhances the value of the systems to OEM customers. We have developed a multi-tiered manufacturing strategy that allows thecompany to meet the market's demand for high quality production goods whileoptimizing cost of goods sold across the spectrum of low to high volumes. At thecore of this strategy is a strong reliance on pre-selected highly qualifiedoutside manufacturing houses that specialize in various aspects of themanufacturing process. It is through this closely managed outsourcing strategythat Enova is able to achieve improved gross margins while minimizing fixedcosts within the organization. All tiers of manufacturing of electronic components begin with a completeengineering design package that includes a drawing tree, bill of material,electrical and mechanical drawings, and control software where appropriate. The 11 control software and the design package are internally reviewed, validated, andreleased through our configuration management process. For low volume manufacturing, where volumes are less than 10 to 20 units,the process is similar to that for prototyping. Low volume manufacturing andtesting is performed in-house. For higher volume manufacturing, Enova has established strategic allianceswith ISO-900X certified manufacturers that can take on all aspects of theprocess from component sourcing, to circuit card assembly, to componentassembly, to final unit assembly and test. These completed components and unitsare shipped to our facility where complete drive systems that meet thecustomer's unique requirements are packaged and shipped. As our market continues to grow and individual customers begin to orderhigher quantities of fixed drive system configurations, we will transition to asystem where the final assembly is drop shipped directly to the end customer.This critical concept has already been discussed with our strategicmanufacturing partners. Competitive Conditions Competition within the mobile and stationary hybrid power sector is stillsomewhat fragmented, although there are indications of some consolidation atthis time. The market is still divided into very large players such as Allison,Siemens, BAE and Eaton; or smaller competitors such as ISE Research, AzureDynamics/Solectria; PEI, Unique Mobility and others. The larger companies tendto still focus on single solutions but maintain the capital and wherewithal toaggressively market such. The smaller competitors offer a more diversifiedproduct line, but do not have the market presence to generate significantpenetration at this juncture. Our research and experience has indicated that our target market segmentscertainly focus on price, but would buy based on reliability, performance andquality support when presented the life-cycle business model for hybridtechnologies for their application. Enova has good indications that many wouldpay a 10-20% premium for hybrids from a secure vendor providing warrantiedperformance, quality service and support. The competition to develop and market electric, hybrid and fuel cellpowered vehicles has increased during the last year and we expect this trend tocontinue. The competition consists of development stage companies as well asmajor U.S. and international companies. Our future prospects are highlydependent upon the successful development and introduction of new products thatare 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 marketany such products. The development of hybrid-electric and alternative fuel vehicles, such ascompressed natural gas, fuel cells and hybrid cars poses a competitive threat toour markets for low emission vehicles or LEVs but not in markets wheregovernment mandates call for zero emission vehicles or ZEVs. Enova is involvedin the development of hybrid vehicles and fuel cell systems in order to meetfuture requirements and applications. Various providers of electric vehicles have proposed products or offerproducts for sale in this emerging market. These products encompass a widevariety of technologies aimed at both consumer and commercial markets. Thecritical role of technology in this market is demonstrated through severalproduct offerings. As the industry matures, key technologies and capabilitiesare expected to play critical competitive roles. Our goal is to positionourselves as a long term competitor in this industry by focusing on electric,hybrid and fuel cell powered drive systems and related sub systems, componentintegration, technology application and strategic alliances. The addition of newstrategies to penetrate stationary power markets with current technologies willassist in creating a more diversified product mix. We believe that this strategywill enhance our position as a power management and conversion componentssupplier to both the mobile and stationary power markets. Research and Development Enova believes that timely development and introduction of new technologyand products are essential to maintaining a competitive advantage. We arecurrently focusing our development efforts primarily in the following areas: *Power Control and Drive Systems and related technologies for vehicle applications; *Stationary Power Management and Conversion and related technologies; *Heavy Duty Drive System development for Buses; Trucks, Industrial, Military and Marine applications *Fuel Cell Generation system power management and process control *Systems Integration of these technologies; \* Technical and product development under DOE/DOT/DOD and Hyundai Group Contracts *OEM Technical and Product development. For the years ended December 31, 2005, 2004, 2003 and 2002, we spent$804,000, $925,000, $799,000, and $1,152,000, respectively, on internal researchand development activities. Enova is continually evaluating and updating the 12 technology and equipment used in developing each of its products. The powermanagement and conversion industry utilizes rapidly changing technology and wewill endeavor to modernize our current products as well as continue to developnew leading edge technologies to maintain our competitive edge in the market. Intellectual Property Enova currently holds four U.S. patents and has one patent pending,relating to power management and control, with an additional patent relating tocrash management safety, which was originally issued in 1997. We also havetrademarks or service marks in the United States and have been filing forinternational patents as well. We continually review and append our protectionof proprietary technology. We continue to place emphasis on the development andacquisition of patentable technology, however, a majority of our intellectualproperty is contained within our software which we believe is best protectedunder trade secret provision of U.S. patent law. Under such provisions, Enovadoes not have to publish its proprietary code in order to maintain protection. We maintain an internal review and compensation process to encourage ouremployees to create new patentable technologies. The status of patents involvescomplex legal and factual questions, and the breadth of claims allowed isuncertain. Accordingly, there can be no assurance that patent applications filedby us will result in patents being issued. Moreover, there can be no assurancethat third parties will not assert claims against us with respect to existingand future products. Although we intend to vigorously protect our rights, therecan be no assurance that these measures will be successful. In the event oflitigation to determine the validity of any third party claims, such litigationcould result in significant expense to Enova. Additionally, the laws of certaincountries in which our products are or may be developed, manufactured or soldmay not protect our products and intellectual property rights to the same extentas the laws of the United States. Enova's success depends in part on its ability to protect its proprietarytechnologies. Enova's pending or future patent applications may not be approvedand the claims covered by such applications may be reduced. If allowed, patentsmay not be of sufficient scope or strength, others may independently developsimilar technologies or products, duplicate any of Enova's products or designaround its patents, and the patents may not provide Enova with competitiveadvantages. Further, patents held by third parties may prevent thecommercialization of products incorporating Enova's technologies or thirdparties may challenge or seek to narrow, invalidate or circumvent any of Enova'spending or future patents. Enova also believes that foreign patents, ifobtained, and the protection afforded by such foreign patents and foreignintellectual property laws, may be more limited than that provided under UnitedStates patents and intellectual property laws. Litigation, which could result insubstantial costs and diversion of effort by Enova, may also be necessary toenforce any patents issued or licensed to Enova or to determine the scope andvalidity of third-party proprietary rights. Any such litigation, regardless ofoutcome, could be expensive and time-consuming, and adverse determinations inany such litigation could seriously harm Enova's business. Enova relies on unpatented trade secrets and know-how and proprietarytechnological innovation and expertise which are protected in part byconfidentiality and invention assignment agreements with its employees, advisorsand consultants and non-disclosure agreements with certain of its suppliers anddistributors. These agreements may be breached, Enova may not have adequateremedies for any breach or Enova's unpatented proprietary intellectual propertymay otherwise become known or independently discovered by competitors. Further,the laws of certain foreign countries may not protect Enova's products orintellectual property rights to the same extent as do the laws of the UnitedStates. Employees As of December 31, 2005, we had 29 full time employees. Additionally, weemploy 4 individuals as independent contractors, engaged on an hourly basis, oneof whom is domiciled in South Korea. The departmental breakdown of theseindividuals includes 4 in administration, 1 in sales, 12 in engineering andresearch and development, and 12 in production. Available Information Our website address is www.enovasystems.com; however, information found on,or that can be accessed through, our website is not incorporated by referenceinto this annual report. We file electronically with the SEC our annual report,quarterly reports on Form 10-Q, current reports on Form 8-K and amendments tothose reports filed or furnished pursuant to Section 13(a) or 15(d) of theSecurities Exchange Act of 1934. We make available free of charge on or throughour website copies of these reports as soon as reasonably practicable after weelectronically file such material with, or furnish it to, the SEC. The SECmaintains an internet site that contains reports, proxy and informationstatements and other information regarding our filings at www.sec.gov. You mayalso read and copy any of our materials filed with the SEC at the SEC's PublicReference Room at 100 F Street, NE, Washington, DC 20549. Information regardingthe operation of the Public Reference Room can be obtained by calling the SEC at1-800-SEC-0330. 13 Item 1A. Risk Factors This Form 10-K contains forward looking statements concerning our existingand future products, markets, expenses, revenues, liquidity, performance andcash needs as well as our plans and strategies. These forward-looking statementsinvolve risks and uncertainties and are based on current management'sexpectations and we are not obligated to update this information. Many factorscould cause actual results and events to differ significantly from the resultsanticipated by us and described in these forward looking statements including,but not limited to, the following risk factors. You should carefully considerthese risk factors as each of these risks could adversely affect our business,operating results and financial condition. In those cases, the trading of ourcommon stock could decline and you may lose all or a part of your investment. We may not have net operating losses in the future against which to offset ourfuture profits, if any. We have experienced recurring losses from operations and had an accumulateddeficit of $102,586,000 at December 31, 2005. There is no assurance, however,that any net operating losses will be available to us in the future as an offsetagainst future profits, if any, for income tax purposes. We have experienced continued losses and may never become profitable. For the years ended December 31, 2005, 2004, 2003 and 2002, we had net losses of$2,127,000, $3,382,000, $3,186,000, and $3,598,000, respectively, on sales of$6,084,000, $2,554,000, $4,310,000, and $4,455,000, respectively. We may neverbecome profitable, which may cause the market price of our common stock to drop. The nature of our industry is dependent on technological advancement and highlycompetitive. The mobile and stationary power markets, including electric vehicle and hybridelectric vehicles, continue to be subject to rapid technological change. Most ofthe major domestic and foreign automobile manufacturers: (1) have alreadyproduced electric and hybrid vehicles, and/or (2) have developed improvedelectric storage, propulsion and control systems, and/or (3) are now entering orhave entered into production, while continuing to improve technology orincorporate newer technology. Various companies are also developing improvedelectric storage, propulsion and control systems. In addition, the stationarypower market is still in its infancy. A number of established energy companiesare developing new technologies. Cost-effective methods to reduce price perkilowatt have yet to be established and the stationary power market is not yetviable. Our current products are designed for use with, and are dependent upon, existingtechnology. As technologies change, and subject to our limited availableresources, we plan to upgrade or adapt our products in order to continue toprovide products with the latest technology. We cannot assure you, however, thatwe will be able to avoid technological obsolescence, that the market for ourproducts will not ultimately be dominated by technologies other than ours, orthat we will be able to adapt to changes in or create "leading-edge" technology.In addition, further proprietary technological development by others couldprohibit us from using our own technology. Our industry is affected by political and legislative changes. In recent years there has been significant public pressure to enact legislationin the United States and abroad to reduce or eliminate automobile pollution.Although states such as California have enacted such legislation, we cannotassure you that there will not be further legislation enacted changing currentrequirements or that current legislation or state mandates will not be repealedor amended, or that a different form of zero emission or low emission vehiclewill not be invented, developed and produced, and achieve greater marketacceptance than electric or hybrid electric vehicles. Extensions, modificationsor reductions of current federal and state legislation, mandates and potentialtax incentives could also adversely affect our business prospects ifimplemented. We are subject to increasing emission regulations in a changing legislativeclimate. Because vehicles powered by internal combustion engines cause pollution, therehas been significant public pressure in Europe and Asia, and enacted or pendinglegislation in the United States at the federal level and in certain states, topromote or mandate the use of vehicles with no tailpipe emissions ("zeroemission vehicles") or reduced tailpipe emissions ("low emission vehicles").Legislation requiring or promoting zero or low emission vehicles is necessary tocreate a significant market for electric vehicles. The California Air ResourcesBoard (CARB) is continuing to modify its regulations regarding its mandatorylimits for zero emission and low emission vehicles. Furthermore, several carmanufacturers have challenged these mandates in court and have obtainedinjunctions to delay these mandates. There are substantial risks involved in the development of unproven products. In order to remain competitive, we must adapt existing products as well asdevelop new products and technologies. In fiscal years 2005, 2004 and 2003, wespent collectively in excess of $2.5 million on research and development of newproducts and technology. Despite our best efforts a new product or technologymay prove to be unworkable, not cost effective, or otherwise unmarketable. We 14 cannot assure you that any new product or technology we may develop will besuccessful or that an adequate market for such product or technology will everdevelop. We may be unable to effectively compete with other companies who havesignificantly greater resources than we have. Many of our competitors, in the automotive, electronic and other industries, arelarger, more established companies that have substantially greater financial,personnel, and other resources than we do. These companies may be activelyengaged in the research and development of power management and conversionsystems. Because of their greater resources, some of our competitors may be ableto adapt more quickly to new or emerging technologies and changes in customerrequirements, or to devote greater resources to the promotion and sales of theirproducts than we can. We believe that developing and maintaining a competitiveadvantage will require continued investment in product development,manufacturing capability and sales and marketing. We cannot assure you howeverthat we will have sufficient resources to make the necessary investments to doso. In addition, current and potential competitors may establish collaborativerelationships among themselves or with third parties, including third partieswith whom we have relationships. Accordingly, new competitors or alliances mayemerge and rapidly acquire significant market share. Future equity financings may dilute your holdings in our Company. We may need to obtain additional funding through public or private equity ordebt financing, collaborative agreements or from other sources. If we raiseadditional funds by issuing equity securities, current shareholders mayexperience significant dilution of their holdings. We may be unable to obtainadequate financing on acceptable terms, if at all. If we are unable to obtainadequate funds, we may be required to reduce significantly our spending anddelay, scale back or eliminate research, development or marketing programs, orcease operations altogether. Potential intellectual property, shareholder or other litigation could adverselyimpact our business. Because of the nature of our business, we may face litigation relating tointellectual property matters, labor matters, product liability or shareholderdisputes. Any litigation could be costly, divert management attention or resultin increased costs of doing business. Although we intend to vigorously defendany future lawsuits, we cannot assure you that we would ultimately prevail inthese efforts. An adverse judgment could negatively impact the price of ourcommon stock and our ability to obtain future financing on favorable terms or atall. 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 productliability or other tort claims. Accidents involving our products could lead topersonal injury or physical damage. Any liability for damages resulting frommalfunctions could be substantial and could materially adversely affect ourbusiness and results of operations. In addition, a well-publicized actual orperceived problem could adversely affect the market's perception of ourproducts. This could result in a decline in demand for our products, which wouldmaterially 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 generaleconomic conditions, such as inflation, unemployment, and consumer demand forour products. These changes could cause the cost of supplies, labor, and otherexpenses to rise faster than we can raise prices. Such changing conditions alsocould significantly reduce demand in the marketplace for our products. We haveno control over any of these changes. We are an early growth stage company. Although our Company was originally founded in 1976, many aspects of ourbusiness are still in the early growth stage development, and our proposedoperations are subject to all of the risks inherent in a start-up or growingbusiness enterprise, including the likelihood of continued operating losses.Enova is relatively new in focusing its efforts on electric systems, hybridsystems and fuel cell management systems. The likelihood of our success must beconsidered in light of the problems, expenses, difficulties, complications, anddelays frequently encountered in connection with the growth of an existingbusiness, the development of new products and channels of distribution, andcurrent and future development in several key technical fields, as well as thecompetitive and regulatory environment in which we operate. We operate in a highly regulated business environment and changes in regulationcould impose costs on us or make our products less economical. 15 Our products are subject to federal, state, local and foreign laws andregulations, governing, among other things, emissions as well as laws relatingto occupational health and safety. Regulatory agencies may impose specialrequirements for implementation and operation of our products or maysignificantly impact or even eliminate some of our target markets. We may incurmaterial costs or liabilities in complying with government regulations. Inaddition, potentially significant expenditures could be required in order tocomply with evolving environmental and health and safety laws, regulations andrequirements that may be adopted or imposed in the future. We are highly dependent on a few key personnel and will need to retain andattract such personnel in a labor competitive market. Our success is largely dependent on the performance of our key management andtechnical personnel, including Edwin Riddell, our Chief Executive Officer andActing Chief Financial 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 willbe dependent on our ability to hire additional qualified personnel. There can beno 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. Webelieve that our future success will depend in part upon our continued abilityto attract, retain, and motivate additional highly skilled personnel in anincreasingly competitive market. There are minimal barriers to entry in our market. We presently license or own only certain proprietary technology and, therefore,have created little or no barrier to entry for competitors other than the timeand significant expense required to assemble and develop similar production anddesign capabilities. Our competitors may enter into exclusive arrangements withour current or potential suppliers, thereby giving them a competitive edge whichwe may not be able to overcome, and which may exclude us from similarrelationships. We extend credit to our customers, which exposes us to credit risk. Most of our outstanding accounts receivable are from a limited number of largecustomers. At December 31, 2005, the five highest outstanding accountsreceivable balances totaled $2.3 million, representing 99% of our gross accountsreceivable, with one customer accounting for $1.8 million, representing 77% ofour gross accounts receivable. If we fail to monitor and manage effectively theresulting credit risk and a material portion of our accounts receivable is notpaid in a timely manner or becomes uncollectible, our business would besignificantly harmed, and we could incur a significant loss associated with anyoutstanding accounts receivable. We are exposed to risks relating to evaluations of our internal controls. In connection with the audit of our financial statements for the year endedDecember 31, 2005, Singer Lewak Greenbaum & Goldstein LLP, our independentregistered public accounting firm, notified our management and audit committeeof the existence of "significant deficiencies in internal controls," which is anaccounting term for internal controls deficiencies that, in the judgment of ourindependent registered public accounting firm, are significant and which couldadversely affect our ability to record, process, summarize and report financialinformation. Singer Lewak Greenbaum & Goldstein LLP concluded that these significantdeficiencies constituted a "material weakness" in our internal controls.Auditing literature defines "material weakness" as a particularly seriousreportable condition where the internal control does not reduce to a relativelylow level the risk that misstatements caused by error or fraud may occur inamounts that would be material in relation to the financial statements and therisk that such misstatements would not be detected within a timely period byemployees in the normal course of performing their assigned functions. A"material weakness" is a control deficiency, or combination of controldeficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not be preventedor detected. As of December 31, 2005, we did not maintain effective controls over theinventory pricing, tracking, and the reserve analysis process. This controldeficiency resulted in an audit adjustment to our 2005 financial statements andcould result in a misstatement to cost of sales that would result in a materialmisstatement to the annual and interim financial statements that would not beprevented or detected. Furthermore, our management has determined that, as ofDecember 31, 2005, we do not have sufficient segregation of duties in relationto the accounting function. This deficiency could result in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. Accordingly, our management hasdetermined that these deficiencies constitute a material weakness. Because ofthese material weaknesses, our management has concluded that we did not maintaineffective internal control over financial reporting as of December 31, 2005. Under the current SEC rules and regulations as we understand them, for the yearending on or after July 15, 2007, our management will be required to assess, andour independent registered public accounting firm will be required to attest asto our assessment regarding, the effectiveness of our internal controls in orderto satisfy the requirements of Section 404 of the Sarbanes-Oxley Act and therelated SEC rules. While we intend to address these material weaknesses and havebegun efforts to remediate these material weaknesses, including, subsequent tothe filing of this annual report on Form 10-K, the hiring of a Chief FinancialOfficer and a Controller to oversee the remedial process, there is no assurancethat this will be accomplished. These efforts may necessitate significant timeand attention of our management and additional resources. If we fail tosatisfactorily strengthen the effectiveness of our internal controls, neither wenor our independent registered public accounting firm may be able to conclude onan ongoing basis that we have effective internal control over financialreporting in accordance with Section 404 of the Sarbanes-Oxley Act. Item 2. Properties Enova's corporate offices are located in Torrance, California, in leasedoffice space of approximately 20,000 square feet. This facility houses ourvarious departments, including engineering, operations, executive, finance,planning, purchasing, investor relations and human resources. This leaseterminates in February 2008. The monthly lease expense is approximately $14,000.Enova also has a leased office in Hawaii which is rented on a month-to-monthbasis at $1,500 per month, and a sales office in Michigan that it leases on amonth-to-month basis at $500 per month. Item 3. Legal Proceedings We may from time to time become a party to various legal proceedingsarising in the ordinary course of business. At December 31, 2005, the Companyhad no known material current, pending or threatened litigation. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourthquarter of fiscal 2005. PART II Item 5. Market for Registrant's Common Equity, Related Shareholder Matters andIssuer Purchases of Equity Securities During 2005, the Company effected a reverse stock split into a fractionthereof of 1/45th of a share of our outstanding common stock. In lieu of anyfractional shares to which a holder of Common Stock would otherwise be entitled,we paid cash equal to (a) the average of the high-bid and low-asked per shareprices of the Common Stock as reported on the NASDAQ electronic "Bulletin Board"on the Effective Date multiplied by (b) the number of shares of Common Stock 16 held by such holder that would otherwise have been exchanged for such fractionalshare interest.. As such, the number of issued and outstanding shares of commonstock as of December 31, 2005 reflects the effects of the reverse-split. Thenumber of shares of common stock authorized remains at 750,000,000. These arereflected in the financial statements as of December 31, 2005. The shares of the Company's Common stock are traded on the NASDAQOver-the-Counter Bulletin Board System under the trading symbol "ENOV" and onthe London Stock Exchange AIM Market under the symbol "ENVS.L" or "ENV.L". Thefollowing table sets forth the high and low bid prices of the Common Stock asreported on the NASD Bulletin Board by the National Quote Bureau for the fiscalquarters indicated. The following over-the-counter market quotations reflectinter-dealer prices, without retail mark-up, markdown or commission, and may notnecessarily represent actual transactions. Quotations have been restated toreflect the 1-45 reverse stock split, effective July 20, 2005. Common Stock Average Daily High Price Low Price Volume ---------- --------- ------ Calendar 2004 First Quarter . . . . . . . . . . . . . $ 9.45 $ 4.05 22,237 Second Quarter . . . . . . . . . . . . $ 8.55 $ 4.05 10,663 Third Quarter. . . . . .. . . . . . . . .$ 6.75 $ 5.40 6,529 Fourth Quarter. . . . . . . . . . . . . $ 6.75 $ 4.05 6,847 Calendar 2005 First Quarter . . . . . . . . . . . . . $ 5.40 $ 4.05 5,285 Second Quarter . . . . . . . . . . . . $ 5.18 $ 3.38 4,164 Third Quarter. . . . . .. . . . . . . . .$ 5.90 $ 2.50 6,461 Fourth Quarter. . . . . . . . . . . . . $ 4.50 $ 3.25 7,976 On March 28, 2006, the last reported high bid price of the Common Stock was$5.05 and the last reported low bid price was $5.05. As of March 28, 2006, therewere approximately 1,489 holders of record of our Common Stock. As of March 28,2005, approximately 106 shareholders, many of who are also Common Stockshareholders, held our Series A Preferred Stock. Approximately 34 shareholdersas of March 28, 2006 held our Series B Preferred Stock. The number of holders ofrecord excludes beneficial holders whose shares are held in the name of nomineesor trustees. Stock Issuances On July 19, 2005, we entered into an agreement with a placement agentrelating to the sale of up to 5,350,000 new shares of our common stock, afterthe reverse 1-45 stock split as described above. Pursuant to the agreement, wesold all such shares of common stock at a price of $3.78 per share to certaineligible investors located outside the United States pursuant to therequirements of Regulation S under the Securities Act of 1933, as amended. Thegross proceeds from the sale are approximately $20,000,000, before fees toInvestec Bank, which served as our nominated advisor and broker, and other costsassociated with the listing and placement of approximately $2,000,000. Wereceived approximately $18,000,000 of net proceeds from the offering. We listed our common stock for trading on the AIM Market of the LondonStock Exchange on July 25, 2005. Dividend Policy To date, we have neither declared nor paid any cash dividends on shares ofour Common Stock or Series A or B Preferred Stock. We presently intend to retainall future earnings for our business and do not anticipate paying cash dividendson our Common Stock or Series A or B Preferred Stock in the foreseeable future.We are required to pay dividends on our Series A and B Preferred Stock beforedividends may be paid on any shares of Common Stock. At December 31, 2005, Enovahad an accumulated deficit of approximately $102,586,000 and, until this deficitis eliminated, will be prohibited from paying dividends on any class of stockexcept out of net profits, unless it meets certain asset and other tests underSection 500 et. seq. of the California Corporations Code. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 17 Item 6. Selected Financial Data The following selected financial data tables set forth selected financialdata for the years ended December 31, 2005, 2004, 2003, 2002 and 2001. Thestatement of operations data and balance sheet data for and as of the end of theyears ended December 31, 2005, 2004, 2003, 2002 and 2001 are derived from theaudited financial statements of Enova. The following selected financial datashould be read in conjunction with "Management's Discussion and Analysis ofFinancial Condition and Results of Operations" and the Financial Statements,including the notes thereto, appearing elsewhere in this Form 10K.
As of and for the year ended December 31 (in thousands, except per share data), -------------------------------------- 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- Net revenues $ 6,084 $ 2,554 $ 4,310 $ 4,455 $ 3,780Cost of revenues 6,001 2,239 3,304 3,784 2,783 -------- -------- -------- -------- --------Gross margin 83 315 1,006 671 997 -------- -------- -------- -------- --------Operating expenses Research and development 804 925 799 1,152 879 Asset impairment 200 Selling, general and administrative 2,870 2,325 2,919 2,837 2,894 -------- -------- -------- -------- -------- Total operating expense 3,674 3,250 3,918 3,989 3,773 Other income and expense Interest and financing income and 13 (255) (234) (199) (113) (fees) Equity in losses (118) (192) (40) -- -- Legal settlements -- -- -- (81) (900) Gain on debt restructuring 1,569 -- -- -- 354 -------- -------- -------- -------- -------- Total other income and (expense) 1,464 (447) (274) (280) (652) -------- -------- -------- -------- --------Net loss $ (2,127) $ (3,382) $ (3,186) $ (3,598) $ (3,428) ======== ======== ======== ======== ========Per common share: -------- -------- -------- -------- -------- Net loss per common share $ (0.18) $ (0.38) $ (0.43) $ (0.49) $ (0.56) ======== ======== ======== ======== ========Weighted average number common shares 11,644 8,832 7,441 7,253 6,115outstanding ======== ======== ======== ======== ======== Total assets $ 21,973 $ 5,888 $ 4,870 $ 6,224 $ 4,340 ======== ======== ======== ======== ======== Long-term debt $ 2,321 $ 3,341 $ 3,347 $ 3,332 $ 3,332 ======== ======== ======== ======== ======== Shareholders' equity (deficit) $ 16,604 $ 103 $ (864) $ 287 $ (232) ======== ======== ======== ======== ========
18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read this Management's Discussion and Analysis of FinancialCondition and Results of Operations in conjunction with our 2005 FinancialStatements and Notes thereto. The matters addressed in this Management'sDiscussion and Analysis of Financial Condition and Results of Operations, maycontain certain forward-looking statements involving risks and uncertainties.Our actual results, levels of activity, performance, achievements and eventscould differ materially from those anticipated in these forward-lookingstatements as a result of certain factors, including those set forth under theheading "Risk Factors" and elsewhere in this report. These forward-looking statements are made as of the date of this Form 10-K, and,except as required under applicable securities law, we assume no obligation toupdate them or to explain the reasons why actual results may differ. OVERVIEW Enova Systems believes it is a leading supplier of efficient,environmentally-friendly digital power components and systems products inconjunction with our associated engineering services. Our core competencies arefocused on the development and commercialization of power management andconversion systems for mobile and stationary applications. Enova applies unique'enabling technologies' in the areas of alternative energy propulsion systemsfor light and heavy-duty vehicles as well as power conditioning and managementsystems for distributed generation systems. The Company's products can be foundin a variety of OEM vehicles including those from Hyundai Motor Company and FordMotor Company, trucks and buses for First Auto Works of China, Mack Truck,WrightBus of the U.K. and the U.S. Military, as well as digital power systemsfor EDO, Hydrogenics and UTC Fuel Cells, a division of United Technologies. Enova's product focus is digital power management and power conversionsystems. Its software, firmware, and hardware manage and control the power thatdrives either a vehicle or stationary device(s). They convert the power into theappropriate forms required by the vehicle or device and manage the flow of thisenergy to optimize efficiency and provide protection for both the system and itsusers. Our products and systems are the enabling technologies for power systems. The latest state-of-the-art technologies, such as hybrid vehicles, fuelcell and micro turbine based systems, and stationary power generation, allrequire some type of power management and conversion mechanism. Enova Systemssupplies these essential components. Enova drive systems are 'fuel-neutral,'meaning that they have the ability to utilize any type of fuel, includingdiesel, liquid natural gas (LNG) or bio-diesel fuels. We also develop, designand produce power management and power conversion components for stationarypower generation - both on-site distributed power and on-site telecommunicationsback-up power applications. These stationary applications also employ fuelcells, microturbines and advanced batteries for power storage and generation.Additionally, Enova performs significant research and development to augment andsupport others' and our internal related product development efforts. Our products are "production-engineered." This means they are designed sothey can be commercially produced (i.e., all formats and files are designed withmanufacturability in mind, from the start). For the automotive market, Enovadesigns its products to ISO 9000X manufacturing and quality standards. Webelieve Enova's redundancy of systems and rigorous quality standards result inhigh performance and reduced risk. For every component and piece of hardware,there are detailed performance specifications. Each piece is tested andevaluated against these specifications, which enhances and confirms the value ofthe systems to OEM customers. The Company's engineering services focus on systemintegration support for product sales and custom product design. The financial statements present the financial position of Enova Systems,Inc. as of December 31, 2005 and 2004 and the results of operations and cashflows for the years ended December 31, 2005, 2004 and 2003. CRITICAL ACCOUNTING POLICIES Financial Reporting Release No. 60 requires all companies to include adiscussion of critical accounting policies or methods used in the preparation offinancial statements. Note 1 of the notes to the financial statements includes asummary of the significant accounting policies and methods used in thepreparation of our financial statements. The following is a brief discussion ofthe more significant accounting policies and methods that we use. Our discussion and analysis of our financial condition and result ofoperations are based on our financial statements, which have been prepared inconformity with accounting principles generally accepted in the United States ofAmerica. Our preparation of these financial statements requires us to makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the dates ofthe financial statements and the reported amounts of revenues and expensesduring the reporting periods. We based our estimates on historical experience 19 and on various other assumptions that we believe to be reasonable under thecircumstances. The most significant estimates and assumptions relate to revenuerecognition and potential allowances for doubtful accounts. Actual amounts maydiffer from such estimates under different assumptions or conditions. Thefollowing summarizes our critical accounting policies and significant estimatesused in preparing our 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' receivables 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 additional 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. 104, "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. Under FAS Concepts No. 5, revenues are not recognized until earned. The percentage-of-completion method can be used to recognize revenues when estimates of costs to complete and the extent of progress toward completion of contracts are reasonably dependable. If reasonably dependable estimates are not available, the percentage-of-completion method should not be used. 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 thefootnotes to our financial statements. LIQUIDITY AND CAPITAL RESOURCES We have experienced cash flow shortages due to operating losses primarilyattributable to research, development, marketing and other costs associated withour strategic plan as an international developer and supplier of electricpropulsion and power management systems and components. Cash flows fromoperations have not been sufficient to meet our obligations. Therefore, we havehad to raise funds through several financing transactions. At least until wereach breakeven volume in sales and develop and/or acquire the capability tomanufacture and sell our products profitably, we will need to continue to relyon cash from external financing sources. Our operations during the year ended December 31, 2005 were financed bydevelopment contracts and product sales, as well as from working capitalreserves. During the year ended December 31, 2005, our operations required $2,997,000more in cash than was generated, versus $2,157,000 in 2004 and $2,319,000 in2003. Enova continues to increase marketing and development spending as well asadministrative expenses necessary for expansion to meet customer demand.Accounts receivable increased by $1,651,000 from $522,000, or approximately 318%from the balance at December 31, 2004 (net of write-offs). The decrease is dueto a continued delay in acquiring new business in the third and fourth quartersof 2004. We are beginning to observe an increase in sales activity for our drivesystems, components and development services which commenced in the fourthquarter of 2004, which we anticipate will increase receivables in futurequarters. Inventory decreased slightly by $20,000 from $1,036,000 or 2% from the December31, 2004 balance. The decrease was due to utilization of inventory stock forsales as well as write-offs for obsolete and slow-moving inventory. We chargedoff approximately $376,000 of this reduction of our inventory relating toobsolete and slow moving raw materials. We believe that the relatively slightfluctuation in the inventory balances compared to the increased sales volume (asnoted in the "Results of Operations" below), illustrates Enova's continuingefforts to monitor and control inventory utilization. Prepaid expenses and other current assets decreased by net $122,000 during2005 from the December 31, 2004 balance of $304,000 or almost 40%. In 2005 werealized approximately $220,000 in deposits that Enova had made to Hyundai HeavyIndustries to assist in the production of hybrid motors for the TomoeEngineering contract. These deposits were recognized as cost of sales as thefinal drives were delivered to Tomoe. Furthermore, unbilled revenue associatedwith the Hyundai Motor Corporation fuel cell bus project, which is accounted forusing the percentage of completion milestone method, increased by $91,000 in2005. Gross fixed assets increased by $247,000 or 14%, for the year endedDecember 31, 2005 from the prior year balance of $1,754,000 primarily due to thepurchase of additional production tooling, machinery, and equipment associatedwith production. Additionally, purchased test machines that allow us to testload limits and stresses on the drives. These machines will be integral insupporting Enova's quality control initiatives as well as ISO 9000Xrequirements. 20 Investments decreased by $118,000 during 2005, net of our pro-rata share oflosses attributable to the investment, which reflects our forty percent (40%)interest in the Hyundai-Enova Innovative Technology Center (ITC) as notedelsewhere in this Form 10-K. For the year ended December 31, 2005, the ITCgenerated a net loss of approximately $296,000, resulting in a charge to Enovaof $118,000 utilizing the equity method of accounting for our interest in theITC. Based on contractual obligations of our Joint Venture Agreement withHyundai Heavy Industries Co., we made an additional investment of $1,000,000 in2004 which was funded by HHI through a stock purchase in September 2004 as notedin the Hyundai-Enova Innovative Technology Center description later in this Form10-K. Other assets decreased by $106,000 during 2005 from $296,000 in 2004 as wecontinued to amortize the asset relating to the Ford Value ParticipationAgreement. Intellectual property assets, including patents and trademarksincreased $1,000 to $93,000 at December 31, 2005. Accounts payable increased in 2005 by over 2,000% from $66,000 at December31, 2004 to $1,396,000 at December 31, 2005. At December 31, 2005, Enova has anoutstanding trade payable to Hyundai Heavy Industries for approximately$1,250,000, associated with their assistance in the production of hybrid motorsfor the Tomoe Engineering contract. Accrued interest decreased by $265,000 for the year ended December 31,2005, a decrease of 19%. The decrease is associated with the net effect ofinterest accrued on the Note due the Credit Managers Association of California(CMAC) for $3.2 million per the terms of the Note, combined with the settlementand forgiveness of certain portions of the CMAC note. See additional explanationin the RESULTS OF OPERATIONS section below. Other accrued expenses and payables increased by $289,000 during 2005 from$13,000 at December 31, 2004. The increase is attributable to additionalwarranty exposures of $116,000 in 2005. Additionally, there are received butun-invoiced parts for which the company owes Hyundai Heavy Industries ofapproximately $70,000 associated with their production assistance on the TomoeEngineering contract. Finally, we accrued an additional $18,000 associated withtelephone and network equipment purchased and delivered in the fourth quarter of2005, but invoiced in January 2006. The future unavailability or inadequacy of financing to meet future needscould force us to delay, modify, suspend or cease some or all aspects of ourplanned operations. RESULTS OF OPERATIONS Years Ended December 31, 2005 and 2004 Net sales of $6,084,000 for the twelve months ended December 31, 2005increased by $3,530,000 or 138% from $2,554,000 during the same period in 2004.The increase in sales was a result of Enova's expanding research and developmentinitiatives with Hyundai Motor Company (HMC) as well as the productionassociated with the Tomoe Machinery contract. In 2005, sales attributable to theTomoe production contract were about $3,000,000. Additionally, sales related tothe HMC development project were approximately $758,000. Cost of sales consists of component and material costs, direct labor costs,integration costs and overhead related to manufacturing our products. Productdevelopment costs incurred in the performance of engineering developmentcontracts for the U.S. Government and private companies are charged to cost ofsales for this contract revenue. During 2005, our trend of establishing newcustomers and strengthening current alliances with customers, such as Tomoe andMTrans in the heavy-duty drive system market continued. Our new customerscontinue to require additional integration and support services to customize,integrate and evaluate our products. We believe these costs to be initial,one-time costs for these customers and anticipate similar costs to be incurredwith respect to new customers as we gain additional market share. Customers whohave been using our products over one year do not incur these same type ofinitial costs. Cost of sales for the year ended December 31, 2005 increased3,762,000, or 168%, from $2,239,000 for the year ended December 31, 2004. Thisincrease is primarily attributable to the increase in sales for the year and thescrapping of $376,000 of raw materials that were no longer usable. 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 2005 to $804,000 from $925,000 forthe same period in 2004, a decrease of $121,000 or 13%. During 2005, externallyfunded research and development from partners such as FAW, Mack/Volvo, Hyundai,and the U.S. Government offset the costs of development for new products in theareas of mobile and stationary power management and conversion thereby reducingthe need for internal funding. We believe that this trend is continuing.Programs included our new parallel hybrid drive systems, our diesel generationengine/motor system for our heavy-duty drive systems, and upgrades andimprovements to our current power conversion and management components.Additionally, we continued to enhance our technologies to be more universallyadaptable to the requirements of our current and prospective customers. Bymodifying our software and firmware, we believe we should be able to provide amore comprehensive, adaptive and effective solution to a larger base ofcustomers and applications. We will continue to research and develop newtechnologies and products, both internally and in conjunction with our alliancepartners and other manufacturers as we deem beneficial to our global growthstrategy. 21 Selling, general and administrative expenses consist primarily of personneland related costs of sales and marketing employees, consulting fees and expensesfor travel, trade shows and promotional activities and personnel and relatedcosts for general corporate functions, including finance, accounting, strategicand business development, human resources and legal. Selling, general andadministrative expenses increased by $545,000 at 2005 from 2004 levels due toincreased headcount and the associated increases in wages, health and workerscompensation insurance, and taxes of approximately $279,000 and from a $266,000increase in the allowance for doubtful accounts. For the year ended December 31,2005, these expenses totaled $2,870,000 up from $2,325,000 for the similarperiod in 2004. This represents an 23 % increase in these expenses. We arecontinually reviewing operations to control overhead costs and increaseoperational efficiencies For the year ended December 31, 2005, interest and financing fees shiftedto a net other income of $13,000 from a net expense of $255,000. The change is aresult of the Company's comparatively higher cash balance at 2005 and theassociated interest revenue as well as a $50,000 gain on a foreign currencytransaction in the United Kingdom. The comparatively higher cash balance was theresult of the equity offering that occurred in the third quarter of 2005. In 2005, we charged off approximately $376,000 of our inventory relating toobsolete and slow moving raw materials. We believe that the relatively slightfluctuation in the inventory balances compared to the increased sales volumeillustrates Enova's continuing efforts to monitor and control inventoryutilization. In December 2005, the Company was informed by the Credit ManagersAssociation of California that $1,011,000 of principal and $447,000 accruedinterest under the secured note payable had been disclaimed and extinguished bythe beneficiaries of such principal amount. The extinguishment result from theresolution of a substantially aged negotiation regarding consideration paid insettlement of the principal amount. The company has recognized a gain on theextinguishment of the principal and associated accrued interest. The Companyevaluated this transaction under the guidance set forth in SFAS 140 "Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities" and noted that the extinguishment of these liabilities wereconsistent with the guidance. In October 2005, the Company agreed to a settlement on the unsecured 10%note payable. In exchange for immediate payment of the full principal balance of$120,000, the beneficiary of the note agreed to forgive the entire accruedinterest balance of $111,000. The company has recognized a gain on theextinguishment of the associated accrued interest. The Company evaluated thistransaction under the guidance set forth in SFAS 140 "Accounting for Transfersand Servicing of Financial Assets and Extinguishments of Liabilities" and notedthat the extinguishment of these liabilities were consistent with the guidance. Years Ended December 31, 2004 and 2003 Net sales of $2,554,000 for the twelve months ended December 31, 2004decreased $1,756,000 or 41% from $4,310,000 during the same period in 2003.During 2004, we experienced a slowdown in sales due to a number of internal andexternal developments, including personnel changes, and customer delays inordering caused by continued evaluation or awaiting orders for their products. Our sources of revenue for 2004 came relatively equally from product salesand development contracts. Product sales as a percentage of total revenues of57% in 2004 were consistent with the 2003 product sales to total revenuespercentage of 56%. Sales of our HybridPower 120kW drive systems accounted for amajority of our product sales in 2004. We believe this trend will continue overthe next several years. However we continue to seek out and contract for newdevelopment programs with both our current partners such as Ford, Mack/Volvo,FAW, Tomoe, Hyundai and our other U.S., Asian and European alliance partners, aswell as with new alliances with other vehicle manufacturers and energycompanies. Cost of sales consists of component and material costs, direct labor costs,integration costs and overhead related to manufacturing our products. Productdevelopment costs incurred in the performance of engineering developmentcontracts for the U.S. Government and private companies are charged to cost ofsales for this contract revenue. During 2004, our trend of establishing newcustomers and strengthening current alliances with customers, such as Tomoe andMTrans in the heavy-duty drive system market continued. Our new customerscontinue to require additional integration and support services to customize,integrate and evaluate our products. We believe these costs to be initial,one-time costs for these customers and anticipate similar costs to be incurredwith respect to new customers as we gain additional market share. Customers whohave been using our products over one year do not incur these same type ofinitial costs. Cost of sales for the year ended December 31, 2004 decreased$1,065,000, or 32%, from $3,304,000 for the year ended December 31, 2003. Thisdecrease is primarily attributable to the decrease in sales for the year,although we are experiencing a reduction in integration support costs. Weanticipate there may be an increase in cost of sales for products in 2005 due toforeign exchange rate fluctuations of the U.S. dollar versus those currencies ofour primary manufacturers. We anticipate this to be offset by a reduction incosts associated with manufacturing these products should as quantities rise,improving our gross margins. 22 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 2004 to $925,000 from $799,000 forthe same period in 2003, an increase of $126,000, or 16%. During 2004,externally funded research and development from partners such as FAW,Mack/Volvo, Hyundai, and the U.S. Government offset the costs of development fornew products in the areas of mobile and stationary power management andconversion, thereby reducing the need for internal funding. Programs includedour new parallel hybrid drive systems, our diesel generation engine/motor systemfor our heavy-duty drive systems, and upgrades and improvements to our currentpower conversion and management components. Additionally, we continued toenhance our technologies to be more universally adaptable to the requirements ofour current and prospective customers. By modifying our software and firmware,we believe we should be able to provide a more comprehensive, adaptive andeffective solution to a larger base of customers and applications. We willcontinue to research and develop new technologies and products, both internallyand in conjunction with our alliance partners and other manufacturers as we deembeneficial to our global growth strategy. Selling, general and administrative expenses consist primarily of personneland related costs of sales and marketing employees, consulting fees and expensesfor travel, trade shows and promotional activities and personnel and relatedcosts for general corporate functions, including finance, accounting, strategicand business development, human resources and legal. Selling, general andadministrative expenses increased 2004 from 2003 levels due to increasedconsulting, legal, and accounting costs and expenses related to the annualshareholders meeting and fund raising activities. For the year ended December31, 2004, these expenses totaled $2,325,000 from $2,919,000 for the similarperiod in 2003. This represents a $594,000 decrease, or 20%, in these expenses.We are continually reviewing operations to lower overhead costs and increaseoperational efficiencies For the year ended December 31, 2004, interest and financing fees increasedby $21,000 to $255,000, an increase of 8%. The increase was due solely to anincrease in 2004 in the interest rate on the note due the Credit ManagersAssociation of California for $3.2 million per the terms of the note. In 2004, we charged off approximately $275,000 in obsolete and slow movinginventory from our books. Approximately half of this consisted of raw materialsassociated with the Ford Th!nk city program which was terminated in 2003. We donot anticipate further write downs of our inventory. Our $3,382,000 net loss for the year ended December 31, 2004 is $196,000more than the loss incurred in 2003 of $3,186,000, an increase of 6%. Theincrease is due primarily to write-offs on obsolete and slow-moving inventoryduring the year and costs associated with the annual meeting and otherregulatory compliance. Management will continue to seek operational efficienciesand methods to reduce manufacturing and overhead costs as well as increaserevenues to enhance our achieve this goal of profitability. Hyundai-Enova Innovative Technology Center------------------------------------------ In September 2003, Enova and Hyundai Heavy Industries, Co. Ltd. (HHI)funded the Hyundai-Enova Innovative Technology Center (HEITC) to be located atEnova's Torrance headquarters. In connection with the Joint Venture Agreemententered into between the two parties in March 2003, HHI purchased $1,500,000 ofcommon stock of Enova Systems, Inc. HHI purchased 23,076,923, sharesrepresenting a 6.2% ownership in Enova. Of this amount, Enova invested$1,000,000 in the HEITC for a forty percent (40%) ownership interest. HHIinvested an additional $1,500,000 for a sixty percent (60%) ownership interestin the HEITC. In September 2004, HHI invested an additional $1,500,000 in Enovaand $1,500,000 in the HEITC under the same terms as the initial investment. Inthis second tranche, HHI purchased 11,335,315 restricted shares of common stockin accordance with the Joint Venture Agreement increasing HHI's ownership to8.0% in Enova. The joint venture company officially opened in November 2003 topursue advanced research and development in hybrid automotive and stationaryapplications for fuel cell technologies. Share amounts do not include the effectof the July 2005 1 for 45 reverse stock split executed by the Company. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 23 Contractual Obligations----------------------- As of December 31, 2005, our contractual obligations for the next fiveyears, and thereafter, were as follows (in thousands): Payments Due by Period ---------------------------------------------- Less than 1-3 3-5 More than Total 1 Year Years Years 5 Years ----- ------ ----- ----- -------Long-Term Debt Obligations $2,363 $ 42 $ -- $ -- $2,321Capital Lease Obligations -- -- -- -- --Operating Lease Obligations 362 166 196 -- --Purchase Obligations -- -- -- -- --Accrued Interest 1,113 -- -- -- 1,113 ------ ------ ------ ----- ------Total $3,833 $ 208 $ 196 $ -- $3,434 ====== ====== ====== ===== ====== Recent Accounting Pronouncements-------------------------------- In November 2004, the FASB issued SFAS No. 151,"Inventory Costs". SFAS No.151 amends the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material (spoilage) under the guidance inARB No. 43, Chapter 4, "Inventory Pricing". Paragraph 5 of ARB No. 43, Chapter4, previously stated that ". . . under some circumstances, items such as idlefacility expense, excessive spoilage, double freight, and rehandling costs maybe so abnormal as to require treatment as current period charges. . . ." Thisstatement requires that those items be recognized as current-period chargesregardless of whether they meet the criterion of "so abnormal." In addition,this statement requires that allocation of fixed production overheads to thecosts of conversion be based on the normal capacity of the productionfacilities. This statement is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. Management does not expect adoptionof SFAS No. 151 to have a material impact, if any, on the Company's financialposition or results of operations. In December 2004, the FASB issued SFAS No. 153, "Exchanges of NonmonetaryAssets," an amendment to Opinion No. 29, "Accounting for NonmonetaryTransactions". SFAS No. 153 eliminates certain differences in the guidance inOpinion No. 29 as compared to the guidance contained in standards issued by theInternational Accounting Standards Board. The amendment to Opinion No. 29eliminates the fair value exception for nonmonetary exchanges of similarproductive assets and replaces it with a general exception for exchanges ofnonmonetary assets that do not have commercial substance. Such an exchange hascommercial substance if the future cash flows of the entity are expected tochange significantly as a result of the exchange. SFAS No. 153 is effective fornonmonetary asset exchanges occurring in periods beginning after June 15, 2005.Earlier application is permitted for nonmonetary asset exchanges occurring inperiods beginning after December 16, 2004. Management does not expect adoptionof SFAS No. 153 to have a material impact, if any, on the Company's financialposition or results of operations. In December 2004, the FASB issued SFAS No. 123(R),"Share-Based Payment".SFAS 123(R) amends SFAS No. 123, "Accounting for Stock-Based Compensation", andAPB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS No.123(R)requires that the cost of share-based payment transactions (including those withemployees and non-employees) be recognized in the financial statements. SFAS No.123(R) applies to all share-based payment transactions in which an entityacquires goods or services by issuing (or offering to issue) its shares, shareoptions, or other equity instruments (except for those held by an ESOP) or byincurring liabilities (1) in amounts based (even in part) on the price of thecompany's shares or other equity instruments, or (2) that require (or mayrequire) settlement by the issuance of a company's shares or other equityinstruments. In April 2005, the Securities and Exchange Commission (SEC)deferred the effective date of SFAS 123R for SEC registrants to the first fiscalyear beginning after December 15, 2005. Accordingly, we expect to implement therevised standard in the first quarter of 2006. Currently, we account forstock-based employee awards issued after December 31, 2002, using the fair valuemethod preferred by SFAS 123. We expect that the adoption of SFAS 123R will havea material effect on the financial statements. In March 2005, the FASB issued FIN 47, "Accounting for Conditional AssetRetirement Obligations - an Interpretation of FASB Statement No. 143, Accountingfor Asset Retirement Obligations." This interpretation addresses the timing ofliability recognition for legal obligations associated with the retirement of atangible long-lived asset when the timing and/or method of settlement of theobligation are conditional on a future event. The interpretation requires anentity to recognize a liability for the fair value of a conditional assetretirement obligation when incurred if the liability's fair value can bereasonably estimated. The adoption of this interpretation did not have anyimpact on our financial statements. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and ErrorCorrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3" (SFAS154). This statement changes the requirements for the accounting for andreporting of a change in accounting principle and applies to all voluntarychanges in accounting principle. It also applies to changes required by an 24 accounting pronouncement in the unusual instance that the pronouncement does notinclude specific transition provisions. APB No. 20 required that most voluntarychanges in accounting principle be recognized by including in net income of theperiod of the change the cumulative effect of changing to the new accountingprinciple. This statement requires retrospective application to prior periodfinancial statements of changes in accounting principle, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. The provisions of SFAS 154 are effective for fiscal yearsbeginning after December 15, 2005. As such we are required to adopt SFAS 154starting January 1, 2006. We do not expect the adoption of this statement tohave a material impact on our Financial Statements. In February 2006, the FASB issued SFAS No. 155, Accounting for CertainHybrid Financial Instruments--an amendment of FASB Statements No. 133 and 140("SFAS 155"). This statement amends SFAS No. 133, Accounting for DerivativeInstruments and Hedging Activities ("SFAS 133"), and SFAS No. 140, Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities and resolves issues addressed in SFAS 133 Implementation Issue No.D1, Application of Statement 133 to Beneficial Interest in Securitized FinancialAssets. The Company is required to apply SFAS 155 to all financial instrumentsacquired, issued or subject to a remeasurement event beginning January 1, 2007,although early adoption is permitted as of the beginning of an entity's fiscalyear. The provisions of SFAS 155 are not expected to have an impact recorded atadoption. Item 7A. Quantitative and Qualitative Disclosures about Market Risk None. Item 8. Financial Statements and Supplementary Data All information required by this Item is included on pages F-1 to F-18 in Item15 of Part IV of this annual report on form 10-K and is incorporated into thisItem by reference. See Item 15. 25 Item 9A. Controls and Procedures We conducted an evaluation of the effectiveness of the design and operationof our "disclosure controls and procedures" (Disclosure Controls) as of the endof the period covered by this Annual Report. The controls evaluation was doneunder the supervision and with the participation of management, including ourChief Executive Officer (CEO) and Acting Chief Financial Officer (CFO). Attached as exhibits to this Annual Report are certifications of the CEOand CFO, which are required in accordance with Rule 13a-15(e) of the ExchangeAct. This Controls and Procedures section includes the information concerningthe controls evaluation referred to in the certifications and it should be readin conjunction with the certifications for a more complete understanding of thetopics presented. Definition of Disclosure Controls Disclosure Controls are controls and procedures designed to reasonablyassure that information required to be disclosed in our reports filed under theExchange Act, such as this Annual Report, is recorded, processed, summarized andreported within the time periods specified in the SEC's rules and forms.Disclosure Controls are also designed to reasonably assure that such informationis accumulated and communicated to our management, including the CEO and CFO, asappropriate to allow timely decisions regarding required disclosure. OurDisclosure Controls include components of our internal control over financialreporting, which consists of control processes designed to provide reasonableassurance regarding the reliability of our financial reporting and thepreparation of financial statements in accordance with US generally acceptedaccounting principles. To the extent that components of our internal controlover financial reporting are included within our Disclosure Controls, they areincluded in the scope of our periodic controls evaluation. Limitations on the Effectiveness of Controls The Company's management, including the CEO and CFO, does not expect thatour Disclosure Controls or our internal control over financial reporting willprevent all error and all fraud. A control system, no matter how well designedand operated, can provide only reasonable, not absolute, assurance that thecontrol system's objectives will be met. Further, the design of a control systemmust reflect the fact that there are resource constraints, and the benefits ofcontrols must be considered relative to their costs. Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within the Company have been detected. These inherent limitations include therealities that judgments in decision-making can be faulty, and that breakdownscan occur because of a simple error or mistake. Controls can also becircumvented by the individual acts of some persons, by collusion of two or morepeople, or by management override of the controls. The design of any system ofcontrols is based in part upon certain assumptions about the likelihood offuture events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions. Over time,controls may become inadequate because of changes in conditions or deteriorationin the degree of compliance with policies or procedures. Because of the inherentlimitations in a cost-effective control system, misstatements due to error orfraud may occur and not be detected. 26 Scope of the Controls Evaluation The evaluation of our Disclosure Controls included a review of thecontrols' objectives and design, the Company's implementation of the controlsand the effect of the controls on the information generated for use in thisAnnual Report. In the course of the controls evaluation, we sought to identifydata errors, controls problems or acts of fraud and confirm that appropriatecorrective action, including process improvements, were being undertaken. Thistype of evaluation is performed on a quarterly basis so that the conclusions ofmanagement, including the CEO and CFO, concerning controls effectiveness can bereported in our Quarterly Reports on Form 10-Q and in our Annual Report on Form10-K. Many of the components of our Disclosure Controls are also evaluated on anongoing basis by personnel in our Finance organization, as well as ourindependent auditors who evaluate them in connection with determining theirauditing procedures related to their report on our annual financial statementsand not to provide assurance on our controls. The overall goals of these variousevaluation activities are to monitor our Disclosure Controls, and to modify themas necessary. Among other matters, we also considered whether our evaluation identifiedany "significant deficiencies" or "material weaknesses" in our internal controlover financial reporting, and whether the Company had identified any acts offraud involving personnel with a significant role in our internal control overfinancial reporting. This information was important both for the controlsevaluation generally, and because item 5 in the certifications of the CEO andCFO require that the CEO and CFO disclose that information to our Board's AuditCommittee and to our independent auditors. In the professional auditingliterature, "significant deficiencies" are referred to as "reportableconditions," which are deficiencies in the design or operation of controls thatcould adversely affect our ability to record, process, summarize and reportfinancial data in the financial statements. Auditing literature defines"material weakness" as a particularly serious reportable condition where theinternal control does not reduce to a relatively low level the risk thatmisstatements caused by error or fraud may occur in amounts that would bematerial in relation to the financial statements and the risk that suchmisstatements would not be detected within a timely period by employees in thenormal course of performing their assigned functions. Conclusions A "material weakness" is a control deficiency, or combination of controldeficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not be preventedor detected. As of December 31, 2005, we did not maintain effective controls over theinventory pricing, tracking, and the reserve analysis process. This controldeficiency resulted in an audit adjustment to our 2005 financial statements andcould result in a misstatement to cost of sales that would result in a materialmisstatement to the annual and interim financial statements that would not beprevented or detected. Furthermore, Management has determined that, as of December 31, 2005, we did nothave sufficient segregation of duties in relation to the accounting function.This deficiency could result in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not be preventedor detected. Accordingly, Management has determined that these deficiencies constitute amaterial weakness. Because of these material weaknesses, Management hasconcluded that we did not maintain effective internal control over financialreporting as of December 31, 2005. In 2006, the Company plans to hire a ChiefFinancial Officer who will oversee the implementation of controls and proceduresdesigned to remediate the Company's internal control deficiencies. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 27 PART III Item 10. Directors and Executive Officers of the Registrant The following table sets forth certain information with respect to thecurrent Directors and executive officers of Enova: Name Age Position---- --- -------- Anthony N. Rawlinson 49 Chairman of the Board Edwin O. Riddell 62 Chief Executive Officer, President and Director Bjorn Ahlstrom (1) (2) 70 Director Dr. Malcolm Currie (1) 77 Director Donald H. Dreyer (2) 68 Director John Wallace (2) (3) 56 Director (1) Member of the Compensation Committee.(2) Member of the Audit Committee.(3) Financial Expert on Audit Committee. Anthony Rawlinson, Chairman of the Board. Mr. Rawlinson was appointedChairman of the Board in July 1999. He is Managing Director of The Global ValueInvestment Portfolio Management Pte. Ltd., a Singapore-based international fundmanagement company, managing discretionary equity portfolios for institutions,pension funds and clients globally since 1996. Mr. Rawlinson is also Chairman ofCardsoft Inc., a privately-held company based in San Mateo California since2001. Cardsoft develops and markets embedded Java software solutions thatprovide security and interoperability for applications running on disparatefixed and wireless payment devices. Edwin O. Riddell, President, CEO and Director. Mr. Riddell was appointedPresident and Chief Executive Officer on August 20, 2004. Mr. Riddell has been aDirector of the Company since 1995. Since 1999, Mr. Riddell has been Presidentof CR Transportation Services, a consultant to the electric vehicle industry.From 1992 to 1999, Mr. Riddell was Product Line Manager of the TransportationBusiness Unit at the Electric Power Research Institute, and from 1985 until1992, he served with the Transportation Group, Inc. as Vice President,Engineering, working on electric public transportation systems. From 1979 to1985, he was Vice President, General Manager and COO of Lift-U, Inc., theleading manufacturer of handicapped wheelchair lifts for the transit industry.Mr. Riddell has also worked with Ford, Chrysler, and General Motors in the areaof auto design, and has worked as a member of senior management for a number ofpublic transit vehicle manufacturers. Mr. Riddell has been a member of theAmerican Public Transportation Association's (APTA) Member Board of Governorsfor over 15 years, and has served on APTA's Board of Directors. Mr. Riddell wasalso Managing Partner of the U.S. Advanced Battery Consortium. Bjorn Ahlstrom, Director. Mr. Ahlstrom was elected to the Board ofDirectors in June 2004. Mr. Ahlstrom currently is a consultant in the heavy-dutyvehicle industry. Mr. Ahlstrom retired as Chairman of Volvo Group North America,Inc. on April 1, 2004. Prior to that, Mr. Ahlstrom was President and ChiefExecutive Officer of Volvo North America Corporation from 1971 until 1994.During this term, Volvo North America Corporation owned and operated Volvo'sbusinesses 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 billioncompany with manufacturing and marketing operations for cars, trucks, marineengines, and financial services. In 1981, Mr. Ahlstrom received the Royal Orderof the North Star from King Carl XVI Gustaf of Sweden. The United StatesGovernment awarded him the Medal of Peace and Commerce in 1983. He received theEllis Island Medal of Honor in 1990. Mr. Ahlstrom has been awarded honoraryDoctor of Law degree from St John's University, NY, and Ramapo College of NewJersey. Malcolm R. Currie, Ph.D, Director. Dr. Currie was re-elected to the Boardof Directors in 1999. Dr. Currie had served as a Director of the Company from1995 through 1997. From 1986 until 1992, Dr. Currie served as Chairman and ChiefExecutive Officer of Hughes Aircraft Co., and from 1985 until 1988, he was theChief Executive Officer of Delco Electronics. His career in electronics andmanagement has included research with many patents and papers in microwave andmillimeter wave electronics, laser, space systems, and related fields. He hasled major programs in radar, commercial satellites, communication systems, anddefense electronics. He served as Undersecretary of Defense for Research andEngineering, the Defense Science Board, and currently serves on the Boards ofDirectors of LSI Logic, Inamed Corp., Innovative Micro Technology, Regal One,and Currie Technologies. He is past president of the American Institute ofAeronautics and Astronautics, and is a Member of the Board of Trustees of theUniversity of Southern California. 28 John R. Wallace, Director. Mr. Wallace was elected as a Director of theCompany in 2002. Since November of 2005, he has held the position of CEO,Xantrex Technology, Inc. in Burnaby, B.C., Canada. From 2002 to 2005, he workedindependently as a consultant in the alternative energy sector. Mr. Wallaceretired from the Ford Motor Company in 2002. Prior to his retirement, he wasexecutive director of TH!NK Group. He has been active in Ford Motor Company'salternative 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, EnvironmentalVehicles. He is past Chairman of the Board of Directors of TH!NK Nordic; he ispast chairman of the United States Advanced Battery Consortium; Co-Chairman ofthe Electric Vehicle Association of the Americas, and past Chairman of theCalifornia Fuel Cell Partnership. He served as Director of Ford's ElectronicSystems Research Laboratory, Research Staff, from 1988 through 1990. Prior tojoining Ford Research Staff, he was president of Ford Microelectronics, Inc., inColorado Springs. His other experience includes work as program manager withIntel Corporation. He also served as Director, Western Development Center, forPerkin-Elmer Corporation and as President of Precision Microdesign, Inc. Donald H. Dreyer, Director. Mr. Dreyer was elected a Director of theCompany 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 ofCredit Managers Association of California during the 1994 to 1995 term andremains a current member. Mr. Dreyer is also a member of the American BankruptcyInstitute and the National Advisory Committee of Dun & Bradstreet, Inc. Relationships Among Directors or Executive Officers There are no family relationships among any of the Directors or executiveofficers of Enova. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act requires our Directors,executive officers and persons who own more than 10% of our Common Stock(collectively, "Reporting Persons") to file reports of ownership and changes inownership of our Common Stock to the Securities and Exchange Commission ("SEC").Copies of these reports are also required to be delivered to Enova. We believe, based solely on our review of the copies of such reportsreceived or written representations from certain Reporting Persons, that each ofMessrs. Rawlinson, Riddell, Currie, Micek, Wallace and Dreyer, each of whom is aDirector of Enova, failed to file on a timely basis one Form 4, each of whichForm 4 reported one transaction, namely the issuance of shares of Common Stockin partial payment of directors' fees for August 2004. Code of Ethics Enova has adopted a code of ethics that applies to its principal executiveofficer, principal financial officer, principal accounting officer or controllerand all persons performing similar functions, if any. We will provide to anyperson without charge, upon request, a copy of such code of ethics. Requestsshould be made in writing to: Enova Systems, Inc. Edwin O. Riddell, Chief Executive Officer and Acting Chief Financial Officer 19850 S. Magellan Drive Torrance, CA 90502 Item 11. Executive Compensation Summary Compensation Table The following table sets forth all compensation earned by our ChiefExecutive Officer and each of the other most highly compensated executiveofficers of Enova whose annual salary and bonus exceeded $100,000 for the yearsended December 31, 2005, 2004 and 2003 (collectively, the "Named ExecutiveOfficers"). Mr. Carl D. Perry was the sole executive officer of Enova whosesalary currently exceeded $100,000 prior to December 31, 2003. 29 Name and Principal Position---------------------------
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION -------------------------------------------------------------------------- Year Salary Bonus ---- ------ ----- Edwin O. Riddell (1) 2005 $204,000 $43,500 (10,000 000 Common shares) Chief Executive Officer and President 2004 -- -- 2003 -- -- Larry B. Lombard (2) 2005 $148,812 $21,750 (5,000 Common shares) Chief Financial Officer 2004 $126,825 -- 2003 -- Edward M. Moore (3) 2005 $154,943 $ 21,750 (5,000 Common shares) $30,000 Chief Operating Officer 2004 $146,635 (earned in 2003) 2003 -- Carl D. Perry (4) 2005 $ 78,232 -- Former Chief Executive Officer and 2004 $120,000 -- President 2003 $139,615 $30,000 (earned in 2000)
(1) Mr. Riddell was elected Chief Executive Officer and president in August2004. Mr. Riddell commenced employment as a full-time employee in January 2005at a salary of $208,000 per year. For the period from August 2004 to December2004, Mr. Riddell was compensated for services on a contractual basis at therate of $4,000 per week. (2) Mr. Lombard was elected Chief Financial Officer in March 2004. Mr. Lombard'sannual salary was $145,000 per year. On December 9, 2005 Mr. Lombard resignedfrom the Company. Prior to 2004, Mr. Lombard was not an officer of the Company. (3) Mr. Moore was elected Chief Operating Officer in March 2004. Mr. Moore'sannual salary was $150,000 per year. On December 9, 2005 Mr. Moore resigned fromthe Company. Prior to 2004, Mr. Moore was not an officer of the Company. (4) Mr. Perry was elected Chief Executive Officer and president in November 1997and resigned those positions in August 2004. Mr. Perry's salary was $120,000 peryear which terminated per agreement at December 31, 2004. Compensation earned in2005 consisted of $2,308 of regular earnings and $75,924 of severance. Mr. Perryserved as Acting Chief Financial Officer during the periods reflected in theabove chart through March 6, 2004. Option/SAR Grants The following grants of stock options or stock appreciation rights ("SARs")were made during 2005 to the Named Executive Officers.
Option Grants During Fiscal 2005 Number of Potential Realizable Value of Securities Percentage of Total Assumed Annual Rates of Stock Underlying Options Granted to Exercise Price Name of Individual Options Employee in Price Expiration Appreciation for the Option and Position Granted Fiscal 2005 Per Share Date Term (1) ------------ ------- ----------- --------- ---- --------- 5% 10% -- --- Edwin Riddell, 60,000 19% 4.35 9-12-15 $185,399 $483,663Chief Executive Officer Larry B. Lombard, Chief 46,000 15% 4.35 9-12-15 $139,049 $362,748Financial Officer Edward M. Moore, Chief 46,000 15% 4.35 9-12-15 $139,049 $ 362,748Operating Officer
(1) Calculated on the basis of $4.35 representing the average of the high bid and low ask prices of the Common Stock on December 31, 2005 30 Option Exercises and Option Values The following table sets forth information concerning option exercisesduring 2005, and the aggregate value of unexercised options as of December 31,2005, held by each of the Named Executive Officers:
Aggregated Option/SAR Exercises in 2005 and Option Values at December 31, 2005---------------------------- ------------------------------ ----------------------------- ----------------------------- Number of Securities Aggregate Underlying Unexercised Value of Unexercised Option Options at In-the-Money Options at Exercises in 2005 December 31, 2005 (#) December 31, 2005 ($) (1) ----------------- --------------------- ------------------------- Shares Acquired on Value Exercise RealizedName (#) ($) Exercisable Unexercisable Exercisable Unexercisable---- ---- ---- ----------- ------------- ----------- ------------- Edwin O. Riddell -- -- -- -- --(1) N/A Larry B. Lombard -- -- -- -- --(1) N/A Edward M. Moore -- -- -- -- --(1) N/A
(1) Calculated on the basis of $0.00 representing the average of the high bid and low ask prices of the Common Stock on December 31, 2005 of $3.65 per share, minus the exercise price. Compensation of Directors During 2005, we issued, or accrued for issuance, an aggregate of 81,000shares of common stock to the non-executive board directors in accordance withthe September 1999 Board of Directors compensation package for outsidedirectors, as amended to date. Prior to September, 2005, for each meetingattended in person, each outside director received $2,000 in cash and $4,000 ofstock valued on the date of the meeting at the average of the closing ask andbid prices; for each telephonic Board meeting, each outside director received$500 in cash and $500 of stock valued on the date of the meeting at the averageof the closing ask and bid prices; and for each meeting of a Board committeeattended in person, a committee member received $1,000 in cash and $1,000 ofstock valued on the date of the meeting at the average of the closing ask andbid prices. In September, 2005, the compensation structure for Directors waschanged. Effective in the fourth quarter of 2005, Directors receive quarterlycompensation at a flat rate of $4,000 in cash and $6,000 in stock valued on thedate of the meeting at the average of the closing ask and bid prices. The flatrate is not dependent on the amount or type of services performed by theDirectors. All Directors are also reimbursed for out-of-pocket expenses incurredin connection with attending Board and committee meetings. We relied on Rule 506 of Regulation D and Section 4(2) of the SecuritiesAct of 1933, as amended, for the exemption from registration of the sale of suchshares. Edwin O. Riddell In 2004, the Company entered into a consulting agreement with Edwin Riddelldoing business as CR Transportation Services wherein the Company compensated CRTransportation at the rate of $4,000 per week plus reasonable expenses forconsulting services rendered. Upon Mr. Riddell becoming an employee of Enova inJanuary 2005, this agreement was terminated. Mr. Riddell was not compensated perthis agreement when acting in the capacity of a director of the Company. During2004, the Company paid Mr. Riddell $99,000 in cash for consulting services andexpenses and $15,000 for directors fees (which latter amount includes the cashpaid and the value of the stock issued to him pursuant to the outside directors'compensation package described above). Donald Dreyer In 2004, the Company utilized the consulting service of Donald Dreyerwherein the Company compensated Mr. Dreyer at the rate of $150 per hour plusreasonable expenses for consulting services rendered. Mr. Dreyer is notcompensated when acting in the capacity of a director of the Company other thanthe fees noted above. During 2004, the Company paid Mr. Dreyer $2,000 in cashfor consulting services and expenses and $29,000 for directors fees (whichlatter amount includes the cash paid and the value of the stock issued to himpursuant to the outside directors' compensation package described above). 31 Audit Committee The Audit Committee held three meetings in the year ended December 31,2005. As of February 2006 the Audit Committee consists of Mr. Bjorn Ahlstrom,Mr. John Wallace, and Mr. Don Dreyer. Mr. Wallace is the committee's designatedfinancial expert and Mr. Dreyer serves as the committee's chairman. Compensation Committee Interlocks and Insider Participation The Compensation Committee held two meetings in the year ended December 31,2005. The Compensation Committee currently consists of Mr. Bjorn Ahlstrom andDr. Malcolm Currie, neither of who have been officers of the Company. Prior toAugust 2004, Mr. Edwin Riddell was a member of the Compensation Committee. Mr.Riddell resigned from the committee upon his appointment as Chief ExecutiveOfficer. The Compensation Committee's functions are to establish and apply theCompany's compensation policies with respect to the Company's ExecutiveOfficers, and to administer the Company's stock option plans. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 32 The following table sets forth certain information known to the Company withrespect to beneficial ownership of the Company's Common Stock as of December 31,2005, by (i) each shareholder known to the Company to own beneficially more than5% of the Company's Common Stock; (ii) each of the Company's Directors; (iii)the Named Executive Officer; and (iv) all Executive Officers and Directors as agroup. Except as indicated in the footnotes to this table and subject toapplicable community property laws, the persons named in the table, based oninformation provided by such persons, have sole voting and investment power withrespect to all shares of Common Stock shown as beneficially owned by them.
Shares Percentage of Shares Voting Name Beneficially Owned (1) Beneficially Owned (2) Percentage (3) ---- ---------------------- ---------------------- -------------- Jagen, Pty., Ltd. 3,222,222 21.16% 21.64%9 Oxford Street, South Ybarra 3141Melbourne, Victoria Australia Hyundai Heavy Industries, Co. 764,716 5.02% 5.14%1 Cheona-Dong, Dong-KuUlsan, Korea Citibank N.A. 619,676 4.07% 4.16%111 Wall Street, 8th FloorNew York, NY 10043 Anthony N. Rawlinson 572,665 3.76% 3.85%c/o Enova Systems, Inc.19850 South Magellan DriveTorrance, CA 90502 Edwin O. Riddell 108,047(4) * *c/o Enova Systems, Inc.19850 South Magellan DriveTorrance, CA 90502 Carl D. Perry 208,476 1.37% 1.40% John J. Micek III 17,872(5) * * Bjorn Ahlstrom 7,873 * * Dr. Malcolm Currie 20,555 * * Donald H. Dreyer 19,242 * * John R. Wallace 6,144 * * Delphi Delco Electronics 28,406(6) * * Jean Schulz 77,062(7) * * Larry B. Lombard 113,221(8) * * Edward M. Moore 79,333(9) * * All directors and executive officers 1,153,429(10) 7.57% 6.05%as a group (10 persons)
* Indicates less than 1% (1) Number of Common Stock shares includes Series A Preferred Stock, Series B Preferred Stock and Common Stock shares issuable pursuant to stock options, warrants and other securities convertible into Common Stock beneficially held by the person or class in question which may be exercised or converted within 60 days after December, 31 2005. 33 (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 December 31, 2005. (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 82,222 (post reverse split) shares of Common Stock issuable pursuant to stock options exercisable at a price of $4.35 to $5.18 (5) Includes 22,222 (post reverse split) shares of Common Stock issued to Silicon Prairie Partners, LP, a limited partnership in which John J. Micek III is the general partner. (6) The number of shares shown represents the ownership of 639,360 shares of Series B Preferred Stock, each of which is convertible into two shares of Common Stock. These 639,360 shares represent more than 5% of the outstanding shares of Series B Preferred Stock. (7) The number of shares shown represents the ownership of 1,329,111 shares of Series A Preferred Stock, each of which is convertible into one share of Common Stock. These 1,329,111 shares represent more than 5% of the outstanding shares of Series A Preferred Stock. (8) Includes 90,000 (post reverse split) shares of Common Stock issuable pursuant to stock options exercisable at a price from $4.35 to $5.18. (9) Includes 90,000 (post reverse split) shares of Common Stock issuable pursuant to stock options exercisable at prices from $4.35 to $5.18. (10) Includes 111,111 (post reverse split) shares of Common Stock issuable pursuant to stock options exercisable at prices from $5.18 to $9 per share and 22,222 (post reverse split) shares of Common Stock issued to Silicon Prairie Partners, LP, a limited partnership in which John J. Micek III is the general partner. Equity Compensation Plan Information The following table provides information regarding our equity compensation plansas of December 31, 2005:
Equity Compensation Plan Information Number of securities remaining available for future issuance under equity compensation Number of securities to Weighted-average plans (excluding be issued upon exercise exercise price of securities reflected of outstanding options, utstanding options, in warrants and rights warrants and rights column (a)) Plan category (a) (b) (c) ------------- ----------------------- ------------------- -------------------- Equity compensation plans approved by security holders 436,000 $4.46 64,,564,000 Equity compensation plans not approved by security holders -- -- -- Total 436,000 $4.46 64,564,000
Our board of directors adopted the 1996 Employee and Consultant StockOption Plan in October 1996 which was subsequently approved by our shareholdersin May 1997. A total of 15,000,000 shares were reserved for issuance under the1996 Plan. Options granted under the 1996 Plan may be either incentive stockoptions, as defined in Section 422 of the Internal Revenue Code of 1986, ornonstatutory stock options. The 1996 Plan provides that options may be grantedto employees (including officers and directors who are also employees), 34directors and consultants. Incentive stock options may only be granted toemployees. In 1999, our board of directors and shareholders approved anamendment to the 1996 Plan to increase the number of shares of common stockreserved for issuance thereunder by 30,000,000 shares and in 2004, our board ofdirectors and shareholders approved an amendment to the 1996 Plan to increasethe number of shares of common stock reserved for issuance thereunder by20,000,000 shares, bringing the total number of shares issuable under the 1996Plan to 65,000,000. The share increases to the 1996 Plan assured that asufficient reserve of common stock are available to provide us with thecontinuing opportunity to utilize equity incentives to attract and retain theservices of employees essential to our long-term growth and financial success. Acopy of the actual 1996 Plan document was previously filed with the Securitiesand Exchange Commission. Options granted under the amended 1996 Plan will vest over such periods asmay be determined by the board of directors and will generally have an exerciseprice equal to the closing price for our stock on the NASDAQ OTC Bulletin Boardon the last trading day immediately prior to the date of grant. Options topurchase 2,55,000 shares of Enova common stock were granted to employees in2005. Item 13. Certain Relationships and Related Transactions The following are certain transactions entered into between Enova and itsofficers, directors and principal shareholders and their affiliates sinceJanuary 1, 2004. During 2004, Hyundai Heavy Industries, Co. (HHI) purchased 11,076,923(before the effects of the reverse stock split) shares increasing theirownership in Enova Systems, Inc. to 7.98%. Additionally, during 2005, wepurchased from HHI approximately $2,516,000 in components, materials andservices for manufacture of our drive systems and power management systems.These purchases were made on terms and conditions equal to or better than ourstandard commercial terms with other vendors. At the year ended December 31,2005, our outstanding payables balance due HHI was approximately $1,317,000. Item 14. Principal Accountant Fees and Services Singer Lewak Greenbaum & Goldstein LLP were engaged on November 22, 2005 toaudit our financial statements for the fiscal year ended December 31, 2005,having previously been engaged to audit our financial statements for the yearsended December 31, 2004 and 2003. Audit Fees---------- The aggregate fees billed during the last two fiscal years for professionalservices rendered by Singer Lewak Greenbaum & Goldstein LLP for the audit ofEnova's financial statements for the fiscal year ended December 31, 2005 and forits review of financial statements included in Enova's Forms 10Q during the lasttwo fiscal years and other services that are normally provided by an accountantin connection with statutory and regulatory filings or engagements during suchfiscal years were $143,000 for fiscal 2005 and $73,970 for fiscal 2004. Audit-Related Fees------------------ Singer Lewak Greenbaum & Goldstein LLP did not perform for Enova anyassurance and related services that were reasonably related to the performanceof the audit of our financial statements for the fiscal year ended December 31,2005. Tax Fees-------- Singer Lewak Greenbaum & Goldstein LLP did not perform for Enova any taxcompliance, tax advice and tax planning services in fiscal 2004 or fiscal 2005. All Other Fees-------------- Neither Singer Lewak Greenbaum & Goldstein LLP nor Moss Adams, LLPperformed any other services for fees other than audit fees in fiscal 2005 or2004. The Audit Committee's policy is to pre-approve the annual engagement of theindependent auditors to render services to the company. These services mayinclude audit services, audit-related services, tax services, and otherservices. 35 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)1. Financial Statements The financial statements filed as a part of this report are identified in the Index to Financial Statements on page F-1. (a)2. Financial Statement Schedule No financial statement schedules are filed as a part of this report. (a)3. Exhibits See Item 15 (c) for Index of Exhibits. (b) Reports on Form 8-K On February 2, 2005, Registrant filed a Form 8-K, with date of earliest event reported of September 20, 2004, reporting under items 1 and 3. (c) Exhibits Exhibit Number Description-------------- ----------- 3.1 Amended and Restated Articles of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10K for the year ended December 31, 2000 filed on March 30, 2001 and incorporated herein by reference). 3.2 Bylaws of Registrant (filed as Exhibit 3.12 to the Registration Statement on Form 10 filed on November 29, 1994, and incorporated herein by reference). 4.1 Cashless Exercise Warrants dated October 25, 1996 issued to Fontal International, Ltd. (filed as Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the year ended July 31, 1996, as filed on November 12, 1996, and incorporated herein by reference). 10.1 Form of Stock Option Agreement under 1993 Employee and Consultant Stock Plan (filed as Exhibit 10.15 to the Registration Statement on Form 10 filed on November 29, 1994, and incorporated herein by reference). 10.2 Form of Solar Electric Engineering, Inc. 1993 Employee and Consultant Stock Plan (filed as Exhibit 10.16 to the Registration Statement on Form 10 filed on November 29, 1994, and incorporated herein by reference). 10.3 Form of Confidential Private Placement Memorandum and Debt Restructuring Disclosure Statement of U.S. Electricar, Inc., dated January 2, 1996, delivered by Enova to certain of its unsecured trade creditors, including exhibits (filed as Exhibit 10.91 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 1996, as filed on March 18, 1996, and incorporated herein by reference). 10.4 Form of Stock Purchase, Note and Debt Exchange Agreement dated January 2, 1996 between Enova and certain unsecured trade creditors (filed as Exhibit 10.92 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 1996, as filed on March 18, 1996, and incorporated herein by reference). 10.5 Form of Indemnification Agreement (filed as Exhibit 10.63 to the Registration Statement on Form 10 filed on November 29, 1994, and incorporated herein by reference). 10.6 Form of Security Agreement made as of May 31, 1995, between Enova and Credit Managers Association of California, Trustee (filed as Exhibit 10.85 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 30, 1996, as filed on June 14, 1996, and incorporated herein by reference). 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). 36 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). 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 30, 2004 between Registrant and various investors. (filed as Exhibit 10.19 to the Registrant's Quarterly Report on Form 10-Q for Three Months ended March 31, 2004 and incorporated herein by reference). 10.20 Form of Registration Rights Agreement dated March 30, 2004 between Registrant and various investors. (filed as Exhibit 10.20 to the Registrant's Quarterly Report on Form 10-Q for Three Months ended March 31, 2004 and incorporated herein by reference). 10.21 Form of Finder's Fee agreement dated April 1, 2004 between Registrant and The Global Value Investment Portfolio Management Pte Ltd as disclosed in our Form 10-Q for the quarter ended March 31, 2004. (filed as Exhibit 10.21 to the Registrant's Quarterly Report on Form 10-Q for Six Months ended June 30, 2004 and incorporated herein by reference). 23.1 Consent of Independent Registered Public Accounting Firm 24* Power of Attorney (included on signature page) 37 31.1* Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002 31.2* Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32* Certification Pursuant to 18 U.S.C. Section 1350 ----------------------* Filed herewith. 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. ENOVA SYSTEMS, INC. By: /s/ Edwin O. Riddell--------------------------------Edwin O. Riddell, Chief Executive Officer, President and Acting ChiefFinancial Officer Dated: March 31, 2006 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appearsbelow constitutes and appoints Edwin O. Riddell, with full power to act alone,his true and lawful attorney-in-fact and agent, with full power of substitutionfor him and in his name, place and stead, in any and all capacities, to sign anyand all amendments to the annual report on Form 10-K, and to file the same, withall exhibits thereto, and other documents in connection therewith, with theSecurities and Exchange Commission, granting unto said attorney-in-fact fullpower and authority to do and perform each and every act and thing requisite andnecessary to be done in connection as fully to all intents and purposes as hemight or could do in person, hereby ratifying and confirming all that saidattorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has executed this Power ofAttorney as of the date indicated. Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed by the followingpersons on behalf of the registrant and in the capacities and on the dateindicated.
Signature Title Date--------- ----- ---- /s/ Edwin O. Riddell Acting Chief Financial Officer---------------------------------------- (Principal Financial Officer) March 31, 2006Edwin O. Riddell /s/ Edwin O. Riddell Chief Executive Officer March 31, 2006------------------------------------------ and DirectorEdwin O. Riddell (Principal Executive Officer) /s/ Anthony N. Rawlinson Chairman March 31, 2006------------------------------------Anthony N. Rawlinson /s/ Malcolm Currie Director March 31, 2006----------------------------------------Malcolm Currie /s/ Bjorn Ahlstrom Director March 31, 2006-----------------------------------------Bjorn Ahlstrom /s/ Donald H. Dreyer Director March 31, 2006-----------------------------------------Donald H. Dreyer /s/ John R. Wallace Director March 31, 2006------------------------------------------John R. Wallace
39 MORE TO FOLLOW This information is provided by RNS The company news service from the London Stock Exchange
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