-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GA/Z/uAud5hPbKsto2xos7D6dw4qjUhc7Vm8Pt1GVx5jlG8sF3lzKJZ0zrkp2vOD ejVW3UHl9xobljN1jFIs7A== 0000950005-05-000750.txt : 20051114 0000950005-05-000750.hdr.sgml : 20051111 20051114162527 ACCESSION NUMBER: 0000950005-05-000750 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20051030 FILED AS OF DATE: 20051114 DATE AS OF CHANGE: 20051114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENOVA SYSTEMS INC CENTRAL INDEX KEY: 0000922237 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 953056150 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25184 FILM NUMBER: 051201901 BUSINESS ADDRESS: STREET 1: 19850 SOUTH MAGELLAN DR STREET 2: SUITE 305 CITY: TORRANCE STATE: CA ZIP: 90502 BUSINESS PHONE: 3105272800 MAIL ADDRESS: STREET 1: 19850 SOUTH MAGELLAN DR STREET 2: SUITE 305 CITY: TORRANCE STATE: CA ZIP: 90502 FORMER COMPANY: FORMER CONFORMED NAME: US ELECTRICAR INC DATE OF NAME CHANGE: 19940425 10-Q 1 p19576_10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (_x_) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2005 or (___) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ______________ To __________________. 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 (IRS employer incorporation or organization) identification number) 19850 South Magellan Drive Torrance, CA 90502 (Address of Principal Executive Offices and Zip Code) Registrant's telephone number, including area code (310) 527-2800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (_X_) No (___) Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] As of November 14, 2005, there were 14,786,000 shares, post-split, of Common Stock, no par value, 2,714,000 shares of Series A Preferred Stock, no par value, and 1,217,000 shares of Series B Preferred Stock, no par value, outstanding. 1
INDEX ENOVA SYSTEMS, INC. Page No. -------- PART 1. FINANCIAL INFORMATION Item 1. Financial Statements.....................................................3 Balance Sheets: September 30, 2005 (unaudited) and December 31, 2004.....................3 Statements of Operations (unaudited): Three and nine months ended September 30, 2005 and 2004..................4 Statements of Cash Flows (unaudited): Nine months ended September 30, 2005 and 2004............................5 Notes to Financial Statements (unaudited):...............................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................13 Item 3. Quantitative and Qualitative Disclosure about Market Risk...............24 Item 4. Control and Procedures..................................................24 PART II. OTHER INFORMATION Item 1. Legal Proceedings ......................................................25 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.............25 Item 3. Defaults upon Senior Securities.........................................25 Item 4. Submission of Matters to a Vote of Security Holders.....................25 Item 5. Other Information.......................................................25 Item 6. Exhibits................................................................26 SIGNATURE ........................................................................27 CERTIFICATIONS ........................................................................97
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ENOVA SYSTEMS, INC. BALANCE SHEETS - ------------------------------------------------------------------------------------------------------------ ASSETS As of As of September 30, 2005 December 31, 2004 ------------------ ----------------- (unaudited) Current assets Cash and cash equivalents $ 17,665,000 $ 1,575,000 Accounts receivable, net 879,000 522,000 Inventories and supplies, net 1,271,000 1,036,000 Prepaid expenses and other current assets 340,000 304,000 ------------- ------------- Total Current Assets 20,155,000 3,437,000 Property and equipment, net 543,000 387,000 Equity method investment 1,695,000 1,768,000 Other assets 217,000 296,000 ------------- ------------- Total assets $ 22,610,000 $ 5,888,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 576,000 $ 66,000 Deferred revenues 127,000 392,000 Line of credit -- 229,000 Accrued payroll and related expense 172,000 194,000 Other accrued expenses 50,000 13,000 Current portion of notes payable 166,000 166,000 Current portion of capital lease obligations -- 6,000 ------------- ------------- Total current liabilities 1,091,000 1,066,000 Accrued interest payable 1,609,000 1,378,000 Notes payable, net of current portion 3,332,000 3,341,000 ------------- ------------- Total liabilities $ 6,032,000 $ 5,785,000 ------------- ------------- Commitments and contingencies Stockholders' equity Series A convertible preferred stock - no par value 30,000,000 shares authorized 2,714,000 and 2,748,000 shares issued and outstanding Liquidating preference at $0.60 per share, aggregating $1,628,000 and $1,649,000 $ 1,734,000 $ 1,774,000 Series B convertible preferred stock - no par value 5,000,000 shares authorized 1,217,000 and 1,217,000 shares issued and outstanding Liquidating preference at $2 per share aggregating $2,434,000 2,434,000 2,434,000 Common Stock, no par value 750,000,000 shares authorized 14,786,000 and 415,265,000 shares issued and outstanding (Note 4) 109,268,000 90,465,000 Common stock subscribed -- 165,000 Stock notes receivable (1,176,000) (1,176,000) Additional paid-in capital 6,900,000 6,900,000 Accumulated deficit (102,582,000) (100,459,000) ------------- ------------- Total stockholders' equity 16,578,000 103,000 ------------- ------------- Total liabilities and stockholders' equity $ 22,610,000 $ 5,888,000 ============= ============= The accompanying notes are an integral part of these financial statements
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ENOVA SYSTEMS, INC. STATEMENTS OF OPERATIONS (Unaudited) For the Three and Nine Months Ended September 30, - ------------------------------------------------------------------------------------------------------------------------- Three Months Nine Months 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Net revenues Research and development contracts $ 455,000 $ 217,000 $ 1,160,000 $ 915,000 Production 402,000 189,000 1,711,000 1,317,000 ------------ ------------ ------------ ------------ Total net revenues 857,000 406,000 2,871,000 2,232,000 ------------ ------------ ------------ ------------ Cost of revenues Research and development contracts 393,000 113,000 813,000 606,000 Production 336,000 244,000 1,509,000 928,000 ------------ ------------ ------------ ------------ Total cost of revenues 729,000 357,000 2,322,000 1,534,000 ------------ ------------ ------------ ------------ Gross profit 128,000 49,000 549,000 698,000 ------------ ------------ ------------ ------------ Other costs and expenses Research & development 197,000 198,000 592,000 507,000 Selling, general & administrative 765,000 844,000 1,924,000 1,823,000 Interest and other income/expense, net (59,000) 61,000 83,000 98,000 Equity in losses of equity method investee 7,000 47,000 73,000 134,000 ------------ ------------ ------------ ------------ Total other costs and expenses 910,000 1,150,000 2,672,000 2,562,000 ------------ ------------ ------------ ------------ Net loss $ (782,000) $ (1,101,000) $ (2,123,000) $ (1,864,000) ============ ============ ============ ============ Basic and diluted loss per common share $ (0.06) $ (0.01) $ (0.20) $ (0.01) ============ ============ ============ ============ Weighted-average number of shares outstanding 13,372,529 8,664,978 10,628,011 8,664,978 ============ ============ ============ ============ The accompanying notes are an integral part of these financial statements
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ENOVA SYSTEMS, INC. STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months Ended September 30, - -------------------------------------------------------------------------------------- ------------------------------ 2005 2004 ------------ ------------ Cash flows from operating activities Net loss $ (2,123,000) $ (1,864,000) Adjustments to reconcile net loss to net cash used by operating activities Depreciation and amortization 79,000 268,000 Equity in losses of equity method investee 73,000 135,000 Issuance of common stock for services 237,000 66,000 (Increase) decrease in Accounts receivable (357,000) 303,000 Inventory and supplies (235,000) 292,000 Prepaid expenses and other current assets (36,000) (244,000) Increase (decrease) in Accounts payable 511,000 (431,000) Accrued expenses 15,000 (10,000) Deferred revenues (265,000) 262,000 Accrued interest payable 231,000 189,000 ------------ ------------ Net cash used by operating activities (1,870,000) (1,034,000) ------------ ------------ Cash flows from investing activities Purchases of property and equipment $ (155,000) $ (138,000) ------------ ------------ Net cash used in investing activities (155,000) (138,000) ------------ ------------ Cash flows from financing activities Borrowings (repayments) on line of credit $ (229,000) $ 109,000 Proceeds (repayment) on notes payable and capital lease obligations (17,000) 16,000 Net proceeds from sale of common stock 18,361,000 2,760,000 ------------ ------------ Net cash provided by (used in) financing activities 18,115,000 2,885,000 ------------ ------------ Net increase (decrease) in cash and cash equivalents 16,090,000 1,713,000 Cash and cash equivalents, beginning of period 1,575,000 530,000 ------------ ------------ Cash and cash equivalents, end of period $ 17,665,000 $ 2,243,000 ============ ============ The accompanying notes are an integral part of these financial statements
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ENOVA SYSTEMS, INC. STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months Ended September 30, - -------------------------------------------------------------------------------------- ------------------------------ 2005 2004 ------------ ------------ Supplemental disclosure of cash flow information Interest paid $ 5,000 $ 4,000 ============ ============ Income taxes paid $ -- $ -- ============ ============ Supplemental schedule of non- cash investing and financing activities Conversion of preferred stock to common stock $ 40,000 $ 64,000 ============ ============ The accompanying notes are an integral part of these financial statements
6 ENOVA SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) NOTE 1 - Basis of Presentation The accompanying unaudited financial statements have been prepared from the records of our company without audit and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position at September 30, 2005 and the interim results of operations for the three and nine months ended September 30, 2005 and cash flows for the nine months ended September 30, 2005 have been included. The balance sheet at December 31, 2004, presented herein, has been prepared from the audited financial statements of our company for the year then ended. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. The September 30, 2005 and December 31, 2004 inventories are reported at market value. Inventories have been valued on the basis that they would be used, converted and sold in the normal course of business. Certain reclassifications have been made to the prior period's financial statements to conform to the current period's presentation. The amounts estimated for the above, in addition to other estimates not specifically addressed, could differ from actual results; and the difference could have a significant impact on the financial statements. Accounting policies followed by us are described in Note 1 to the audited financial statements for the fiscal year ended December 31, 2004. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted for purposes of the interim financial statements. The financial statements should be read in conjunction with the audited financial statements, including the notes thereto, for the year ended December 31, 2004, which are included in our Form 10-K and Form 10-K/A Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 as filed with the Securities and Exchange Commission. Basic and diluted net loss per common share is computed using the weighted average number of common shares outstanding. Since a loss from operations exists, diluted earnings per share number is not presented because the inclusion of common stock equivalents, consisting of Series A and B preferred stock, unexercised stock options and warrants, would be anti-dilutive. The results of operations for the three and nine months ended September 30, 2005 presented herein are not necessarily indicative of the results to be expected for the full year. Revenue Recognition From time to time, the Company enters into arrangements with its customers where there are multiple deliverables. In accordance with Emerging Issues Task Force Issue No. 00-21 "Revenue Arrangements with Multiple Deliverables", when a company enters into these types of arrangements, the contract is divided into separate units of accounting based on relative fair values, and revenue recognition criteria are assessed separately for each separate unit of accounting. These elements will include product sales, service elements, and fixed-price development elements. 7 NOTE 1 - Basis of Presentation (continued) Revenues from Component Sales Revenues from sales of components are recognized when shipped and title passes to the customer. Service Revenue Services revenues are billed and recognized in the period the services are rendered and earned and the collection of the related receivable is probable. Method of Accounting for Long-Term Contracts In accordance with the American Institute of Certified Public Accountant's Statement of Position 81-1, "Accounting for Performance of Certain Construction-Type and Certain Product Type Contracts," the Company records its revenues on long-term, fixed price contracts on the basis of the percentage-of-completion method applied to individual contracts, commencing when progress reaches a point where experience is sufficient to estimate final results with reasonable accuracy and collection of the related receivable is probable. That portion of the total contract price is accrued which is allocable, on the basis of the Company's estimates of the percentage-of-completion, to contract expenditures and work performed. Operating expenses, including indirect costs and administrative expenses, are charged to income as incurred and are not allocated to contract costs. As these long-term contracts are performed, revisions in cost and profit estimates during the course of the work are recognized in the accounting period in which the facts which require the revision become known. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss on both short- and long-term contracts is accrued. Stock-Based Compensation SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and encourages the use of the fair value based method of accounting for stock-based compensation arrangements under which compensation cost is determined using the fair value of stock-based compensation determined as of the date of grant and is recognized over the periods in which the related services are rendered. The statement also permits companies to elect to continue using the current implicit value accounting method specified in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," to account for stock-based compensation. SFAS No. 148 "Accounting for Stock-Based Compensation--Transition and Disclosure" amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has elected to use the intrinsic value based method and has disclosed the pro forma effect of using the fair value based method to account for its stock-based compensation. The Company has adopted only the disclosure provisions of SFAS No. 123. It applies APB Opinion No. 25 and related interpretations in accounting for its plans and does not recognize compensation expense for its stock-based compensation plans other than for restricted stock and options issued to outside third parties. 8 NOTE 1 - Basis of Presentation (continued) Stock-Based Compensation (continued) During the 3rd Quarter the Company adopted an executive compensation plan by granting to the Company's executives options under our 1996 Stock Option Plan to purchase a total of 244,000 shares of common stock at an exercise price of $4.35 per share. These options will vest based on the Company achieving certain revenue milestones for the years ended December 31, 2005 and 2006. If such milestones are not met, the options with respect to those milestones will terminate. All of the granted options will remain in effect for a period of 10 years or until 90 days after the employment of the optionee terminates. For purposes of adjusted pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period. As the measurement date for these option issuances have been deemed the respective vesting dates, which have not yet been reached, the Company evaluated the impact of these stock option issuances using the grant date in the application of APB Opinion No. 25. As of the grant date and at September 30, 2005, there was no intrinsic value attributable to these option issuance. Furthermore, the Board granted other employees options to purchase a total of 66,000 shares of common stock at an exercise price of $4.35 which will vest in equal installments over 36 months. All of the granted options will remain in effect for a period of 10 years or until the employment of the optionee terminates. If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under this plan consistent with the methodology prescribed by SFAS No. 123, the Company's net loss and loss per share would be reduced to the pro forma amounts indicated below for the three months and nine months ended September 30, 2005 and 2004:
Three Months Nine Months Three Months Nine Months ended ended ended ended Sept 30 2005 Sept 30 2005 Sept 30 2004 Sept 30 2004 ------------ ------------ ------------ ------------ Loss applicable to common stockholders $ (782,000) $(2,123,000) $(1,101,000) $(1,864,000) Stock-based employee compensation expense determined under fair value presentation for all options $ (39,000) $ (39,000) $ -- $ -- Pro forma net loss $ (821,000) $(2,162,000) $(1,101,000) $(1,864,000) Basic and diluted loss per common share As reported $ (0.06) $ (0.20) $ (0.01) $ (0.01) Pro forma $ (0.06) $ (0.20) $ (0.01) $ (0.01)
For purposes of computing the pro forma disclosures required by SFAS No. 123, the fair value of each option granted to employees and directors is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the three months and nine months ended September 30, 2005 and 2004: dividend yields of 0% and 0%; expected volatility of 75% and 75%; risk-free interest rates of 4% and 2.5%, and expected lives of five years. The weighted-average fair value of options granted during the quarter ended September 30, 2005 for which the exercise price equals the market price on the grant date was $4.30, and the weighted-average exercise price was $4.35. No options were granted during the quarter ended September 30, 2004. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 9 NOTE 1 - Basis of Presentation (continued) Recently Issued Pronouncements In March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset Retirement Obligations - an Interpretation of FASB Statement No. 143, Accounting for Asset Retirement Obligations." This interpretation addresses the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and/or method of settlement of the obligation are conditional on a future event. The interpretation requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. The adoption of this interpretation did not have any impact on our financial statements In May 2005, the FASB issued Statement of Accounting Standards (SFAS) No. 154, "Accounting Changes and Error Corrections" an amendment to Accounting Principles Bulletin (APB) Opinion No. 20, "Accounting Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements" though SFAS No. 154 carries forward the guidance in APB No. 20 and SFAS No. 3 with respect to accounting for changes in estimates, changes in reporting entity, and the correction of errors. SFAS No. 154 establishes new standards on accounting for changes in accounting principles, whereby all such changes must be accounted for by retrospective application to the financial statements of prior periods unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005, with early adoption permitted for changes and corrections made in years beginning after May 2005. The adoption of this interpretation did not have any impact on our financial statements NOTE 2 - Notes Payable Notes payable is comprised of the following:
September 30, December 31, 2005 2004 ---- ---- (unaudited) ----------- Secured note payable to Credit Managers Association of California, bearing interest at 6% per annum during 2003 and at prime plus 3% per annum in 2004 and through maturity. Principal and unpaid interest due in April 2016. A sinking fund escrow is required to be funded with 10% of future equity financing, as defined in the agreement. 3,332,000 3,332,000 Unsecured note payable, bearing interest at 10% per annum. This note payable is in default. 120,000 120,000 Secured note payable to a Coca Cola Enterprises in the original amount of $40,000, bearing interest at 5% per annum. Principal and unpaid interest due in July 2005. This settlement of this note payable is currently in negotiation. 40,000 40,000 Secured note payable to a financial institution in the original amount of $33,000, bearing interest at 8% per annum, payable in 36 equal monthly installments. 6,000 15,000 ---------- ---------- 3,498,000 3,507,000 Less current maturities 166,000 166,000 ---------- ---------- Total $3,332,000 $3,341,000 ========== ==========
10 NOTE 3 - Tomoe LTA Long-Term Contract Enova has entered into a development and production contract with Tomoe Electro-Mechanical Engineering and Manufacturing, Inc. for eight battery-electric locomotives for the Singapore Land Transport Authority for service vehicles for the Singapore Mass Rapid Transit Circle Line system for maintenance, repair, shunting and recovery of passenger trains. Completion of the contract will take approximately 15-18 months and is valued at approximately $3,100,000. We are recording revenues for this long-term, fixed price contract on the basis of the percentage-of-completion method. The contract contains several deliverables over its life and therefore we will divide these deliverables into separate units of accounting based on relative fair values. Revenue recognition criteria will be assessed separately for each separate unit of accounting. As of September 30, 2005, we recorded revenues of $398,000 related to the development portion of this contract. NOTE 4 - Shareholders' Equity On July 19, 2005, we entered into an agreement with a placement agent relating to the sale of up to 5,350,000 new shares of our common stock. Pursuant to the agreement, we sold all such shares of common stock at a price of $3.78 per share to certain eligible investors located outside the United States. The gross proceeds from the sale are approximately $20,000,000, before fees to Investec Investment Bank and other costs associated with the listing and placement of approximately $2,000,000. We received approximately $18,000,000 of net proceeds from the offering. We listed our common stock for trading on the AIM Market of the London Stock Exchange on July 25, 2005. The sale of common stock described above was conducted pursuant to the requirements of Regulation S under the Securities Act of 1933. Among other things, each investor that purchased shares of our common stock in the offering represented that he or she was not a "U.S. Person" as defined in Rule 902 of Regulation S. In addition, neither the Company nor the placement agent conducted any selling effort directed at the United States in connection with the offering. All shares of common stock issued in the offering were endorsed with a restrictive legend indicating that the shares were issued pursuant to Regulation S under the Securities Act and are deemed to be "restricted securities." As a result, the purchasers of such shares will not be able to resell the shares in the United States for at least one year following their purchase without registration under the Securities Act or an applicable exemption from the registration requirements of the Securities Act. On September 22, 2005, the Board of Directors authorized the issuance of 25,000 shares of common stock to the executive officers of the Company at a price of $4.35 per share as bonus compensation for a total expense of $108,750. We relied on Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended, for the exemption from registration of the sale of such shares. During the three months ended September 30, 2005, we recorded 15,114 shares, post-split; of restricted common stock issued to the Board of Directors at an average price of $4.34 per share for in-person and telephonic board meetings and committee meetings during the third quarter of 2005. We relied on Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended, for the exemption from registration of the sale of such shares. 11 NOTE 4 - Shareholders' Equity (continued) Additionally, on July 20, 2005 (the "Effective Date"), we filed an Amendment to our Amended and Restated Articles of Incorporation, effecting a reverse 1-for-45 split of our common stock. The number of authorized shares was unchanged. At the close of business on the Effective Date, each share of the our Common Stock issued and outstanding immediately prior to the Effective Date was automatically and without any action on the part of the holder thereof reclassified as and changed, pursuant to a reverse stock split (the "Reverse Stock Split"), into a fraction thereof of 1/45th of a share of our outstanding Common Stock, subject to the treatment of fractional share interests as described below. No certificates or scrip representing fractional share interests in the new common stock were issued, and no such fractional share interest will entitle the holder thereof to vote, or to any rights of a shareholder of the Company. In lieu of any fractional 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 share prices 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 held by such holder that would otherwise have been exchanged for such fractional share interest. As such, the number of issued and outstanding shares of common stock as of September 30, 2005 reflects the effects of the reverse-split. The number of shares of common stock authorized remains at 750,000,000. These are reflected in the financial statements as of September 30, 2005. NOTE 5 - Related Party Transactions During the first nine months of 2005, we purchased from HHI approximately $512,000 in components, materials and services for manufacture of our drive systems and power management systems. These purchases were made on terms and conditions equal to or better than our standard commercial terms with other vendors. At quarter ended September 30, 2005, our outstanding payables balance due HHI was approximately $382,000. These payables will be paid during the fourth quarter of 2005 per our terms with HHI. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following information should be read in conjunction with the interim financial statements and the notes thereto in Part I, Item I of this Quarterly Report and with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual report on Forms 10-K and 10-K/A for the year ended December 31, 2004. The matters addressed in this Management's Discussion and Analysis of Financial Condition and Results of Operations, with the exception of the historical information presented contains certain forward-looking statements involving risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks discussed in this Item 2 and specifically discussed in this report under the heading "Certain Factors That May Affect Future Results" following this Management's Discussion and Analysis section, and elsewhere in this report. In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the necessary estimates inherent in the preparation of financial statements. Estimates and assumptions include, but are not limited to, customer receivables, inventories, equity investments, fixed asset lives, contingencies and litigation. The Company has also chosen certain accounting policies when options were available, including: o Inventories are priced at the lower of cost or market using standard costs, which approximate actual costs on a first-in, first-out (FIFO) basis. We maintain a perpetual inventory system and continuously record the quantity on-hand and standard cost for each product, including purchased components, subassemblies and finished goods. We maintain the integrity of perpetual inventory records through periodic physical counts of quantities on hand. Finished goods are reported as inventories until the point of transfer to the customer. Generally, title transfer is documented in the terms of sale. Standard costs are generally re-assessed at least annually and reflect achievable acquisition costs, generally the most recent vendor contract prices for purchased parts, currently obtainable assembly and test labor, and overhead for internally manufactured products. Manufacturing labor and overhead costs are attributed to individual product standard costs at a level planned to absorb spending at average utilization volumes. We maintain an allowance against inventory for the potential future obsolescence or excess inventory that is based on our estimate of future sales. A substantial decrease in expected demand for our products, or decreases in our selling prices could lead to excess or overvalued inventories and could require us to substantially increase our allowance for excess inventory. If future customer demand or market conditions are less favorable than our projections, additional inventory write-downs may be required, and would be reflected in cost of revenues in the period the revision is made. o Stock Based Compensation - we periodically issue common stock or stock options to employees and non-employees for services rendered. For common stock issuances, the cost of these services is recorded based upon the fair value of our common stock on the date of issuance. SFAS 13 No. 123, "Accounting for Stock-Based Compensation," establishes and encourages the use of the fair value based method of accounting for stock-based compensation arrangements under which compensation cost is determined using the fair value of stock-based compensation determined as of the date of grant and is recognized over the periods in which the related services are rendered. The statement also permits companies to elect to continue using the current implicit value accounting method specified in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," to account for stock-based compensation. We have elected to use the intrinsic value based method and has disclosed the pro forma effect of using the fair value based method to account for its stock-based compensation. For issuances of stock options to employees and directors we measure compensation costs using the intrinsic value method, or APB Opinion No. 25. Stock options granted to non-employees are accounted for under the fair value method. The fair value of stock options granted is calculated using the Black Scholes option pricing model based on the weighted average assumptions. o Allowance for Doubtful Accounts - we maintain allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. A considerable amount of judgment is required in assessing the ultimate realization of accounts receivable including the current credit-worthiness of each customer. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. o Contract Services Revenue and Cost Recognition - The Company is required to make judgments based on historical experience and future expectations, as to the reliability of shipments made to its customers. These judgments are required to assess the propriety of the recognition of revenue based on Staff Accounting Bulletin ("SAB") No. 101 and 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 Company manufactures proprietary products and other products based on design specifications provided by its customers. Revenue from sales of products are generally recognized at the time title to the goods and the benefits and risks of ownership passes to the customer which is typically when products are shipped based on the terms of the customer purchase agreement. Revenue relating to long-term fixed price contracts is recognized using the percentage of completion method. Under the percentage of completion method, contract revenues and related costs are recognized based on the percentage that costs incurred to date bear to total estimated costs. Changes in job performance, estimated profitability and final contract settlements may result in revisions to cost and revenue, and are recognized in the period in which the revisions are determined. Contract costs include all direct materials, subcontract and labor costs and other indirect costs. General and administrative costs are charged to expense as incurred. At the time a loss on a contract becomes known, the entire amount of the estimated loss is accrued. The aggregate of costs incurred and estimated earnings recognized on uncompleted contracts in excess of related billings is shown as a current asset, and billings on uncompleted contracts in excess of costs incurred and estimated earnings is shown as a current liability. These accounting policies were applied consistently for all periods presented. Our operating results would be affected if other alternatives were used. Information about the impact on our operating results is included in the footnotes to our financial statements. 14 Recently Issued Accounting Standard - ----------------------------------- In March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset Retirement Obligations - an Interpretation of FASB Statement No. 143, Accounting for Asset Retirement Obligations." This interpretation addresses the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and/or method of settlement of the obligation are conditional on a future event. The interpretation requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. The adoption of this interpretation did not have any impact on our financial statements. In May 2005, the FASB issued Statement of Accounting Standards (SFAS) No. 154, "Accounting Changes and Error Corrections" an amendment to Accounting Principles Bulletin (APB) Opinion No. 20, "Accounting Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements" though SFAS No. 154 carries forward the guidance in APB No. 20 and SFAS No. 3 with respect to accounting for changes in estimates, changes in reporting entity, and the correction of errors. SFAS No. 154 establishes new standards on accounting for changes in accounting principles, whereby all such changes must be accounted for by retrospective application to the financial statements of prior periods unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005, with early adoption permitted for changes and corrections made in years beginning after May 2005. The adoption of this interpretation did not have any impact on our financial statements. GENERAL Enova Systems, Inc., a California Corporation ("Enova" or the "Company"), was incorporated on July 30, 1976. The Company's fiscal year ends December 31. Enova believes it is a leader in the development and production of proprietary, commercial digital power management systems for transportation vehicles and stationary power generation systems. Power management systems control and monitor electric power in an automotive or commercial application such as an automobile or a stand-alone power generator. Drive systems are comprised of an electric motor, an electronics control unit and a gear unit which power an electric vehicle. Hybrid systems, which are similar to pure electric drive systems, contain an internal combustion engine in addition to the electric motor, eliminating external recharging of the battery system. A hydrogen fuel cell based system is similar to a hybrid system, except that instead of an internal combustion engine, a fuel cell is utilized as the power source. A fuel cell is a system which combines hydrogen and oxygen in a chemical process to produce electricity. Stationary power systems utilize similar components to those which are in a mobile drive system in addition to other elements. These stationary systems are effective as power-assist or back-up systems, alternative power, for residential, commercial and industrial applications. A fundamental element of Enova's strategy is to develop and produce advanced proprietary software, firmware and hardware for applications in these alternative power markets. Our focus is digital power conversion, power management, and system integration, for two broad market applications - vehicle power generation and stationary power generation. Specifically, we develop; design and produce drive systems and related components for electric, hybrid-electric, fuel cell and microturbine-powered vehicles. We also develop, design and produce power management and power conversion components for stationary distributed power generation systems. These stationary applications can employ hydrogen fuel cells, microturbines, or advanced batteries for power storage and generation. Additionally, we perform research and development to augment and support others' and our own related product development efforts. 15 Our product development strategy is to design and introduce to market successively advanced products, each based on our core technical competencies. In each of our product / market segments, we provide products and services to leverage our core competencies in digital power management, power conversion and system integration. We believe that the underlying technical requirements shared among the market segments will allow us to more quickly transition from one emerging market to the next, with the goal of capturing early market share. Enova's primary market focus centers on both series and parallel heavy-duty drive systems for multiple vehicle and marine applications. We believe series-hybrid and parallel hybrid heavy-duty drive system sales offer Enova the greatest potential return on investment in both the short and long term. Additionally, Enova's management believes that this area will see significant growth over the next several years. As we penetrate more market areas, we are continually refining and optimizing both our market strategy and our product line to maintain our expertise in power management and conversion systems for mobile applications. Management's strategy is to provide a dual path approach in offering both a series and parallel hybrid drive systems solution. We have developed or are developing a variety of heavy-duty drive system solutions, including our series hybrid drive system featuring our diesel generator set; a post-transmission parallel hybrid system and two variations of a pre-transmission parallel hybrid drive system. Many of these systems are currently being utilized in our customer's trucks and buses such as the Mack R-11 refueler vehicle which utilizes our post-transmission parallel hybrid, First Auto Group of China's buses which utilize our pre-transmission hybrid solution and WrightBus of the United Kingdom's 10m bus which utilizes our series hybrid drive system. Additionally, we continue to pursue private and government funded development programs. These programs allow us to enhance our ability to increase our revenue base, form new alliances with major OEMs and participate in the latest trends in alternative fuel technologies. Research and development revenues in the third quarter of 2005 are a result of engineering services for the Hyundai Motor Company for their fuel cell bus, Ford Motor Company for their fuel cell vehicle, Tomoe's hybrid train programs and various Hawaii Center for Advanced Transportation Technologies (HCATT) programs. In the quarter ended September 30, 2005, we continued with our development efforts with both new and existing customers. Enova, teaming with Concurrent Technologies Corporation (CTC), continues to supply product and assist in the integration of a fuel cell hybrid drive system for a MB4 tow tractor for the U.S. Air Force. Additionally, we have completed a parallel hybrid drive system study for HCATT in conjunction with the U.S. Air Force. We are now in discussions with HCATT for the next phase which will be to develop and fabricate a parallel hybrid step van based on the results of the study. We continue to receive greater recognition from both governmental and private industry with regards to both commercial and military application of our hybrid drive systems and fuel cell power management technologies. We are also negotiating with the U.S. Air Force to develop and produce series hybrid. Although we believe that current negotiations with several parties may result in development and production contracts during 2005 and beyond, there are no assurances that such additional agreements will be realized. During the quarter ended September 30, 2005, we continued to develop and produce electric and hybrid electric drive systems and components for FAW China, Wright Bus and Eneco of the United Kingdom, EcoPower Technology (EPT) of Italy, Tsinghua University of China, MTrans of Malaysia, Tomoe Electro-Mechanical Engineering and Manufacturing, Inc. of Japan and several other domestic and international vehicle and bus manufacturers. Our various electric and hybrid-electric drive systems, power management and power conversion systems are being used in applications, including Class 8 trucks, train locomotives, transit buses and industrial vehicles as well as in non-transportation applications such as fuel-cell management and power management systems, including the EDO minesweeper. We have furthered our development and production of systems for both mobile and stationary fuel cell powered systems with major companies such as Ford and Hydrogenics, a fuel cell developer in Canada. 16 Heavy-Duty Drive Systems - Buses, Trucks, Vans and Other Industrial Vehicle - -------------------------------------------------------------------------------- Applications - ------------ In the third quarter of 2005, we continued to market our latest hybrids, the HybridPower Series Hybrid and Parallel Hybrid, to customers in Europe and Asia. Enova's new diesel generator set, the power component within the hybrid drive system, delivers 60 kilowatts volts of continuous power, enabling it to integrate seamlessly with Enova's 240kW or 120kW drive motors and other digital power management components. The series hybrid genset consists of a 60kW electric motor, a motor controller and a diesel engine meeting stringent Euro 3 or Euro 4 emission specifications. The genset is distinctively designed to allow end users to choose the engine best suited for their commercial needs, permitting a wide variety of engine choices. The parallel hybrid drive system comes in a post-transmission and two pre-transmission configurations. Parallel hybrids are better suited for vehicles which do not have exclusively stop and go drive cycles as the parallel hybrid system optimizes fuel economy over a greater range of driving cycles. During the third quarter of 2005, we received an order from FAW for five additional pre-transmission parallel hybrid drive systems for their buses to be delivery in the fourth quarter. The first three vehicles were successfully integrated and tested. FAW has commenced integrating additional buses with our drive system. Enova's parallel hybrid drive system solution outperformed the Chinese competitor's system. Our system is now replacing these Chinese systems. Management believes that these development and initial production programs will result in additional production contracts during 2005 and beyond; however at this time; there are no assurances that such additional contracts will be consummated. Our eight drive system contract with Tomoe for Singapore Land Transport Authority's eight battery-electric locomotives continues on schedule. Over the last several years, Enova successfully integrated its HybridPowerTM drive systems into Tomoe's heavy-duty Isuzu dump truck application, three passenger trams and a mine tunnel crawler. It is anticipated that the hybrid drive train components will be delivered in December 2005 to Tomoe's Japan-based facilities. This latest market penetration in Asia enhances not only Enova's alliances with both Tomoe and HHI, but also advances Enova's hybrid-electric technologies in high voltage power management components. As part of this contract, Enova will develop a high voltage charging system to enable the locomotive to receive a direct battery charge from the high voltage rail. Tomoe and Enova continue to develop other commercial and industrial applications for our drive systems, including potential light rail applications. Although we anticipate additional orders for these systems in 2005 and beyond, there are no assurances that such additional orders will be forthcoming. WrightBus, one of the largest low-floor bus manufacturers in the United Kingdom, is currently integrating our diesel genset-powered, series hybrid drive systems in their medium and large bus applications. WrightBus will unveil their new hybrid bus in London in the fourth quarter of 2005 on the 360 route. In late 2004, we entered into an exclusive three-year letter of intent with WrightBus for the potential sale of certain Enova products for specific vehicles in the United Kingdom, subject to WrightBus' completing various service and marketing milestones. WrightBus has notified us of potential additional orders for 2006 through 2007. At this time, however, there are no assurances that such additional orders will be forthcoming. We continued to deliver the sixteen 120kW electric drive systems to Eneco of the United Kingdom, a vehicle integrator which utilizes Enova's HybridPower 120kW drive systems in its hybrid bus applications. During the 3rd quarter of 2005, we billed Eneco for approximately $393,000 for these drive systems. The production system deliveries under this purchase order will continue into the fourth quarter of 2005. Eneco has notified us of its plans to order additional 120kw systems for its bus programs. At this time, however, there are no assurances that such additional orders will be forthcoming. Additionally, we are in discussions with other bus manufacturers and industrial, commercial and military vehicle manufacturers regarding the purchase of our heavy-duty, high performance, parallel and series hybrid drive systems in 2005. There are no assurances, however, that these discussions will result in any sales of the HybridPower parallel or series hybrid drive systems. 17 Light-Duty Drive Systems - Automobiles and Delivery vehicles - ------------------------------------------------------------ Our 90kW controller, motor and gear unit is utilized in light duty vehicles such as midsize automobiles and delivery vehicles. The topology of this system is being adapted to also be utilized as a parallel hybrid motor and controller system. We are beginning to receive more interest in our light-duty systems from both European and Asian customers. Our 90kW motor controller is utilized in the parallel hybrid drive system designed for FAW. In conjunction with the 90kW motor, FAW and Enova are evaluating this latest usage of our hybrid technologies. As noted earlier, we anticipate additional demand for these systems. At this time, however, there are no assurances that such additional orders will be forthcoming. For the foreseeable future, we will also continue our efforts to cross-sell our systems to new and current customers in the light and medium duty vehicle markets, both domestically and globally. Fuel Cell Technologies - ---------------------- Due to the success of the 20kW High Voltage Energy Converter (HVEC) development program with Ford Motor Company for their fuel cell vehicle, Ford has entered into another development contract with Enova for a 30kW converter. Ford continues to utilize our new 30kW HVEC systems in their development efforts as they seek to use the HVEC in traditional hybrid vehicle applications which do not utilize fuel cells. In the third quarter of 2005, Ford extended the development contract to modify the HVEC for further study. The 20kW HVEC is a key component in Ford's Focus Fuel Cell Vehicle (FCV) which utilizes the Ballard fuel cell system. It converts high voltage power from the fuel cell into a lower voltage for use by the drive system and electronic accessories. There is a potential for additional production orders for HVEC units from Ford in 2005 and beyond; however, at this time, there are no assurances that such additional orders will be forthcoming. Furthermore, we are applying the technology and components derived from this program to other applications. The HVEC is a critical component of our Fuel Cell bus programs and other fuel cell powered systems such as the Hyundai fuel cell vehicle. Both of these projects are further detailed in the research and development programs section set forth below. Our projects with both CTC and HCATT for a fuel cell powered MB-4 tow tractor and a step-van, respectively, utilize our HVEC units to control and adapt power between the fuel cells, the batteries and the power electronics of the drive system. In heavy-duty mobile applications such as these, Enova has developed firmware to run our HVEC units in parallel for greater power capacity. Enova's fuel cell enabling components are part of the proposed fleets of fuel cell vehicles being utilized by both Ford Motor Company (the Ford Focus FCV) and Hyundai Motor Company (the Hyundai Tucson fuel cell hybrid electric vehicle) in response to the U.S. Department of Energy's solicitation, entitled "Controlled Hydrogen Fleet and Infrastructure Demonstration and Validation Project." This government-funded project, which commenced in late 2004, will last over five years and evaluate the economic and performance feasibility of fuel cell vehicles and infrastructure across the U.S. The Company intends to continue to explore new applications for this versatile technology in both mobile and stationary systems. Research and Development Programs - --------------------------------- We continue to pursue government and commercially sponsored development programs for both ground and marine heavy-duty drive system applications. 18 We commenced a development program with Hyundai Motor Company of Korea for a heavy-duty fuel cell bus in 2005 and delivered the first of our new high voltage 240kW series hybrid drive systems in the third quarter of 2005. The drive system integrates with a UTC Fuel Cell unit for Hyundai's newest bus. The contract is valued at over $750,000 for delivery of three 240kW drive systems in 2005. As of September 30, 2005, we have billed approximately $368,000 for this program. We have entered into a joint development program with a major North American Truck Manufacturer in the third quarter of 2005. This validation project will feature Enova's new post and pre-transmission 120kW Hybrid Drive Systems. The drive systems will be integrated into several medium to heavy-duty vehicles for delivery in the fourth quarter of 2005, with the purpose of leading to production in mid to late 2006. Although we believe there is potential for production programs in 2006 and beyond, there can be no assurances at this time that such orders will be realized. Our program with Mack Truck, Inc., Powertrain division - a unit of The Volvo Group, Sweden, for the development and manufacture of a motor controller, electric motor and battery management systems for a new parallel hybrid drive system is nearing completion. The new parallel hybrid vehicle program is part of the Air Force's efforts to improve efficiency, reduce fuel and maintenance costs, provide re-generative brake energy and reduce emissions. Utilizing this drive system configuration, Enova is in the final stages to integrate this same system into refuse trucks for the New York City Transit Authority commencing in the fourth quarter of 2005. This program will convert a minimum of four to six trucks to parallel hybrid systems. Although we believe there is potential for such programs in 2005 and 2006, there can be no assurances at this time that such orders will be realized. We received additional orders for our fuel cell power management and conversion components for Hyundai Motor Company's (HMC) latest fuel cell hybrid electric vehicle, the Tucson, which was unveiled at the Geneva Auto Show in March 2004. During the third quarter of 2005, Enova received an order for 2 additional systems, for a total of 7, for delivery in the fourth quarter 2005. HMC has notified Enova of its intent to order up to 35 more motors and controllers for additional vehicles for 2006. Although we believe there is potential for such production in 2006, there can be no assurances at this time that such orders will be realized. Our HCATT fuel cell powered step-van was completed in the third quarter of 2005 now entering an evaluation phase. This vehicle is almost identical to the Purolator step-van and utilizes the same fuel cell powered drive systems and components. We are experiencing a notable increase in interest from both government and military organizations for our products and integration services. The first of these being the project with CTC for the fuel cell powered MB-4 tow tractor. For the quarter ended September 30, 2005, we billed approximately $236,000 for all of our HCATT programs. Additionally, during the third quarter of 2005, we completed a parallel hybrid study project with HCATT which may lead to a contract for the development of a pre-transmission parallel hybrid step-van for the U.S. Air Force in 2006. Although we believe there is potential for production of this type of drive system and other development programs in 2005, there can be no assurances at this time that such contracts will be realized. We intend to establish new development programs with the Hawaii Center for Advanced Transportation Technologies in mobile and marine applications as well as other state and federal government agencies as funding becomes available. LIQUIDITY AND CAPITAL RESOURCES We have experienced cash flow shortages due to operating losses primarily attributable to research, development, marketing and other costs associated with our strategic plan as an international developer and supplier of electric propulsion and power management systems and components. Cash flows from operations have not been sufficient to meet our obligations. Therefore, we have had to raise funds through several financing transactions. At least until we reach breakeven volume in sales and develop and/or acquire the capability to manufacture and sell our products profitably, we will need to continue to rely on cash from working capital reserves. 19 On July 19, 2005, we entered into an agreement with a placement agent relating to the sale of up to 5,350,000 new shares of its common stock. Pursuant to the agreement, we sold all such shares of common stock on July 17, 2005, at a price of $3.78 per share (post reverse split) to certain eligible investors located outside the United States (the "AIM Financing"). The gross proceeds from the sale are approximately $20,000,000, before fees to Investec Investment Bank and other costs associated with the listing and placement of approximately $2,000,000. We received approximately $18,000,000 of net proceeds from the offering. The sale of this common stock was conducted pursuant to the requirements of Regulation S under the Securities Act of 1933. Among other things, each investor purchasing shares of our common stock in the offering has represented that he or she is not a "U.S. Person" as defined in Rule 902 of Regulation S. In addition, neither the Company nor the placement agent has conducted any selling effort directed at the United States in connection with the offering. All shares of common stock issued in the offering were endorsed with a restrictive legend indicating that the shares were issued pursuant to Regulation S under the Securities Act and were deemed to be "restricted securities." As a result, the purchasers of such shares are not be able to resell the shares in the United States for at least one year after their purchase without registration under the Securities Act or an applicable exemption from the registration requirements of the Securities Act. Our operations during the quarter ended September 30, 2005 were financed by development contracts and product sales, as well as from working capital reserves obtained from the AIM financing. During the nine months ended September 30, 2005, our operations required $1,870,000 more in cash than was generated. Enova continues to increase marketing and development spending as well as administrative expenses necessary for expansion to meet customer demand. Accounts receivable increased by $357,000 to $879,000 from $522,000, or approximately 68% from the balance at December 31, 2004 (net of write-offs). The increase results from additional product sales in the third quarter as well as continued progress on our development contracts with HCATT and HMC. Inventory increased by $235,000 to $1,271,000 from $1,036,000 or 14% from December 31, 2004 balances during the nine months ended September 30, 2005. The increase was due to increased materials purchases for orders to be fulfilled in the fourth quarter of 2005 and early 2006. Prepaid expenses increased by net $36,000 to $340,000 at September 30, 2005 from the December 31, 2004 balance of $304,000 or 12% due to the renewal of our various insurance policies and deposits placed for several inventory purchases. Fixed assets increased by $155,000 or 9%, before depreciation, for the quarter ended September 30, 2005 from the prior year balance of $1,754,000 on December 31, 2004 due to the purchase of both computer and production equipment. Investments decreased by $73,000 for the nine months ended September 30, 2005 from $1,768,000 at December 31, 2004, which reflects our pro-rata share of losses attributable to our forty percent investment interest in the Hyundai-Enova Innovative Technology Center (ITC). For the nine months ended September 30, 2005, the ITC generated a net loss of approximately $183,000, resulting in a charge to Enova of $73,000 utilizing the equity method of accounting for our interest in the ITC. During the third quarter of 2005, the ITC began to reduce its losses as it has begun to generate revenues through royalties and development services. Other assets decreased by $79,000 over the nine months ended September 30, 2005 from $296,000 at December 31, 2004 as we continued to amortize the asset relating to the Ford Value Participation Agreement and our other intellectual property assets. Intellectual property assets, including patents and trademarks remained relatively unchanged at $93,000 at September 30, 2005. 20 Accounts payable increased over the nine months ended September 30, 2005 by $510,000 to $576,000 from $66,000 at December 31, 2004. The increase in accounts payable is due to additional purchases of materials and goods primarily from Hyundai Heavy Industries (HHI). These payables are routinely incurred and paid during the ordinary course of business. The balance due HHI is being paid off in the fourth quarter of 2005 per the terms of our agreement. Deferred revenue decreased from $392,000 as of December 31, 2005 to $127,000 in the nine months ended September 30, 2005 as we recognized $328,000 in revenues for the nine months ended September 30, 2005 on the Tomoe Singapore project based on the percentage of completion method of revenue recognition and the MTrans drive system sale. The deferred revenues for the current portion of this contract have been fully recognized and we will commence billing as we progress on the development and production phases of that contract in 2005 and 2006. Other accrued expenses, including accrued payroll, increased by a net of $15,000 for the nine months ended September 30, 2005 from the balance of $207,000 at December 31, 2004, from a combination of factors including increases in insurance contracts payable associated with our liability insurance policies and quarter-end payroll accruals. During the quarter ended September 30, 2005, we also paid off our Line of Credit for a total reduction of $229,000 from the December 31, 2004 balance. Accrued interest increased by $231,000 for the nine months ended September 30, 2005, an increase of 17% from the balance of $1,378,000 at December 31, 2004. The increase was due to interest on the Note due the Credit Managers Association of California for $3.2 million per the terms of the Note as well as the Schulz note payable as discussed in Note 2 of the financial statements. We have begun to negotiate settlement terms with each creditor underlying this Note to pay them off prior to the due date. RESULTS OF OPERATIONS Net revenues for the three and nine month periods ending September 30, 2005 were $857,000 and $2,871,000, respectively, as compared with $406,000 and $2,232,000 for the corresponding periods in 2004, an increase of 111% and 29% respectively. Net production revenues for the quarter ended September 30, 2005 increased 113% to $402,000 from $189,000 for the same period in 2004. Net R&D revenues for the quarter ended September 30, 2005 increased 110% to $455,000 from $217,000 for the quarter ended September 30, 2004. The increase in production revenues is primarily the result of delivery of drive systems to our customers as discussed earlier. Our sources of revenue for the third quarter of 2005 came equally from product sales and development contracts, however for the nine months ended September 30, 2005 product sales continue to account for a majority of revenues. Product sales as a percentage of total revenues were 47% for the three months ended September 30, 2005, and 60% of total revenues for the nine months ended therein, with sales of our HybridPower 120kW drive systems accounting for a majority of our product sales. We believe this trend will continue to accelerate for the foreseeable future as more current and prospective customers purchase additional drive systems for their production vehicles. We will continue to seek out and contract for new development programs with both our current partners such as WrightBus, Eneco, EPT, FAW, Tomoe, Hyundai and our other U.S., Asian and European alliance partners, as well as with new alliances with other vehicle manufacturers and energy companies to enhance our technology and our product offerings. Research and development revenues for the third quarter of 2005 are a result of development programs and engineering services for the HMC fuel cell bus and various HCATT programs. Cost of revenues consists of component and material costs, direct labor costs, integration costs and overhead related to manufacturing our products. Product development costs incurred in the performance of engineering development contracts for the U.S. Government and private companies are charged to cost of sales for this contract revenue. Cost of revenues for the quarter ended September 30, 2005 increased $372,000 to $729,000 from $357,000 for the same period in 2004. For the nine months ending September 30, 2005, there was an increase in cost of revenues to $2,322,000 from $1,534,000 for the same nine-month period in 2004. These increases are primarily attributable to the increase in sales for the quarter and nine-months, as well as additional support costs for some of our new product lines. We anticipate there may be additional increases in cost of sales for products in 2005 due to foreign exchange rate fluctuations of the U.S. dollar versus those currencies of our primary manufacturer, Hyundai Heavy Industries. We anticipate this to be offset by a reduction in costs associated with manufacturing these products due to increasing purchases, thereby improving our gross margins. 21 Internal research, development and engineering expenses remained constant for the three months ended September 30, 2005 at $197,000 as compared with $198,000 in the same period in 2004. For the nine months ended September 30, 2005, such expenses increased 17% to $592,000 from $507,000 in 2004. As the market for heavy-duty hybrid vehicles continues to evolve and grow, we have increased allocating engineering resources to the development and enhancement of our new parallel hybrid drive systems, our series hybrid system, upgrading proprietary control software, higher power DC-DC converters and advancing our digital inverters and other power management firmware. Selling, general and administrative expenses decreased to $765,000 from $844,000, or 9%, for the three months ended September 30, 2005, from the previous year's comparable period. For the nine months ended September 30, 2005, these expenses increased from $1,823,000 to $1,924,000 or 6%. The decrease for the quarter ended September 30, 2005 was due to lesser professional fees as such were primarily for the U.K. offering and AIM listing and were charged directly against equity rather than expensed. The increase for the nine months is attributable to additional marketing, engineering and technical staff employed in the first half of 2005 as well as increased expense due to stricter regulatory oversight in conjunction with the Sarbanes-Oxley Act of 2002 and our efforts to attract additional capital funding. Management continues to implement cost reduction strategies in 2005 in its efforts to achieve profitability, although management cannot assure that profitability will be achieved. Net interest and other income/expense increased by approximately 200% from a net expense of $61,000 in the third quarter of 2004 to a net income of $59,000 in the third quarter of 2005 as interest income from the U.K. offering capital raise began to be realized. For the nine months ended September 30, 2005, net interest and other income/expense was $83,000 compared to $98,000 for the same period in 2004. We incurred a loss from continuing operations of $782,000 in the third quarter of 2005 compared to a loss of $1,101,000 in the third quarter of 2004, which represents a 29% reduction in loss. For the nine months ending September 30, 2005, the loss increased from $1,864,000 to $2,123,000 or a 14% increase. The increase was attributable to several factors, including higher comparative costs of revenue due to the type of products sold in the first half of 2005 as compared to 2004, higher support costs in the third quarter of 2005, increased internal development efforts and higher general operating costs due to factors noted above. By increasing sales revenues while maintaining cost management strategies currently in effect, we believe we will be able to reduce our annual loss from operations as compared with prior years' results; however, management cannot assure that these results will be achieved. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS This Form 10-Q contains forward-looking statements concerning our existing and future products, markets, expenses, revenues, liquidity, performance and cash needs as well as our plans and strategies. Forward-looking statements may be identified by the use of terminology such as "may," "anticipate," "estimate," "plans," "expects," "believes," "will," "potential" and by other comparable terminology or the negative of any of the foregoing. These forward-looking statements involve risks and uncertainties and are based on current management's expectations and we are not obligated to update this information. Many factors could cause actual results and events to differ significantly from the results anticipated by us and described in these forward looking statements including, but not limited to, the following risk factors. Net Operating Losses. We experienced recurring losses from operations and had an accumulated deficit of $102,582,000 at September 30, 2005. There is no assurance, however, that any net operating losses will be available to us in the future as an offset against future profits for income tax purposes. 22 Continued Losses. For the three months ended September 30, 2005 and 2004, we had net losses of $782,000 and $1,101,000 respectively on sales of $857,000 and $406,000, respectively. For the nine months ended September 30, 2005 and 2004, we had net losses of $2,123,000 and $1,864,000 respectively on sales of $2,871,000 and $2,232,000, respectively. Our independent auditors' opinion on our audited financial statements includes a going concern qualification. Our independent auditors have included an explanatory paragraph in their audit report issued in connection with our financial statements for the year ended December 31, 2004 which states that our recurring operating losses raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on its success at obtaining additional capital sufficient to meet its obligations on a timely basis, and to ultimately attain profitability. In July 2005, we raised approximately $20,000,000 with net proceeds to the Company of approximately $18,000,000 in conjunction with a placement of 5,350,000 shares of common stock on the London Stock Exchanges AIM Market as detailed in Note 4 of our financial statements included in the Form 10-Q. Nature of Industry. The mobile and stationary power markets, including electric vehicle and hybrid electric vehicles, continue to be subject to rapid technological change. Most of the major domestic and foreign vehicle manufacturers and vehicle component manufacturers: (1) have already produced electric and hybrid vehicles, and/or (2) have developed improved electric storage, propulsion and control systems, and/or (3) are now entering or have entered into production, while continuing to improve technology or incorporate newer technology. In addition, the stationary power market is still in its infancy. A number of established energy companies are developing new technologies. Cost-effective methods to reduce price per kilowatt have yet to be established and the stationary power market is not yet viable. Our current products are designed for use with, and are dependent upon, existing technology. As technologies change, and subject to our limited available resources, we plan to upgrade or adapt our products in order to continue to provide products with the latest technology. We cannot assure you, however, that we will be able to avoid technological obsolescence, that the market for our products will not ultimately be dominated by technologies other than ours, or that we will be able to adapt to changes in or create "leading-edge" technology. In addition, further proprietary technological development by others could prohibit us from using our own technology. Our industry is affected by political and legislative changes. In recent years there has been significant public pressure to enact legislation in the United States and abroad to reduce or eliminate automobile pollution. Although states such as California have enacted such legislation, we cannot assure you that there will not be further legislation enacted changing current requirements or that current legislation or state mandates will not be repealed or amended, or that a different form of zero emission or low emission vehicle will not be invented, developed and produced, and achieve greater market acceptance than electric or hybrid electric vehicles. Extensions, modifications or reductions of current federal and state legislation, mandates and potential tax incentives could also adversely affect our business prospects if implemented. Changed legislative climate. Because vehicles powered by internal combustion engines cause pollution, there has been significant public pressure in Europe and Asia, and enacted or pending legislation in the United States at the federal level and in certain states, to promote or mandate the use of vehicles with no tailpipe emissions ("zero emission vehicles") or reduced tailpipe emissions ("low emission vehicles"). Legislation requiring or promoting zero or low emission vehicles is necessary to create a significant market for electric vehicles. The California Air Resources Board (CARB) is continuing to modify its regulations regarding its mandatory limits for zero emission and low emission vehicles. 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. ITEM 4. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures. In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), an evaluation was carried out by the Company's Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the Exchange Act) as of the end of the quarter ended September 30, 2005. Based upon that evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the quarter ended September 30, 2005 to ensure that material information relating to the Company was made known to him particularly during the period in which this quarterly report on Form 10-Q was being prepared. Changes in internal controls over financial reporting. There was not any change in the Company's internal control over financial reporting that occurred during the quarter ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 24 PART II. OTHER INFORMATION Item 1. Legal Proceedings We may from time to time become a party to various legal proceedings arising in the ordinary course of business. As of November 14, 2005, the Company was not involved in any legal proceedings. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. California law prohibits the payment of dividends unless the Company has sufficient retained earnings or meets certain asset to liability ratios. During the three months ended September 30, 2005, the Company issued common stock of Enova to the non-executive board directors in accordance with the September 1999 Board of Directors compensation package for outside directors. During the three months ended September 30, 2005, we recorded 15,114 post-split shares of restricted common stock as common stock subscribed to the Board of Directors at an average price of $4.34 per share for full and telephonic board meetings and committee meetings during the third quarter of 2005. We relied on Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended, for the exemption from registration of the sale of such shares. As of September 30, 2005, 108,372 shares, post-split, had been issued under the above compensation plan for Directors. Item 3. Defaults upon Senior Securities: None. Item 4. Submission of Matters to a Vote of Securities Holders: None. Item 5. Other Information: On July 14, 2005, the Company entered into indemnification agreements with each of its directors (each an "Indemnitee"). The agreements govern each Indemnitee's right to indemnification in accordance with the Company's Articles of Incorporation and applicable law. Pursuant to the agreements, the Company will maintain Director and Officer Insurance for each Indemnitee. In addition, the Company will indemnify the Indemnitee against expenses incurred in connection with any threatened, pending or completed action, suit or other proceeding to which the Indemnitee is a party by reason of the fact that the Indemnitee is or was an agent of the Company. The Company is obligated to advance all expenses incurred by the Indemnitee in connection with a qualifying proceeding within 20 days following a written request by the Indemnitee. The Indemnitee is obligated to repay such amounts advanced if it is ultimately determined, pursuant to the terms of the agreement, that the Indemnitee is not entitled to indemnification. On June 1, 1999, Jagen Pty, Ltd. ("Jagen") and Anthony Rawlinson ("Rawlinson" and together with Jagen, the "Purchasers"), Carl D. Perry ("Perry") and Enova Systems., Inc. (formerly U.S. Electricar, Inc.), a California corporation (the "Company") entered into a Shareholders' Agreement (the "Shareholders' Agreement") which provided for, among other matters, the granting of certain preemptive and corporate governance rights to the Purchasers. Effective as of July 19, 2005 (the "Effective Date"), A Waiver and Termination of Shareholders' Agreement (the "Shareholders' Termination Agreement") was entered into by and among the Purchasers, Perry and the Company. Pursuant to the Shareholders' Termination Agreement, the Purchasers (x) waived their preemptive rights set forth in Article III of the Shareholders' Agreement effective as of the Effective Date with respect to the securities to be sold by the Company pursuant to that certain Placing Agreement by and among Investec Bank (UK) Limited, the Company and the Directors of the Company (the "Placing Agreement") and (y) along with Perry and the Company ,agreed to terminate the Shareholders' Agreement (the "Termination") effective immediately prior to the "Admission" (as defined in the Placing Agreement). The Termination, which was effective on July 25, 2005, terminated the Purchasers' rights, among other matters, to submit one designee for election to the Company's Board of Directors and to have such designee included in any proxy statement submitted on behalf of the Company. The Termination also terminated the voting obligation's of both Perry and the 25 Purchasers to vote their shares in favor of such designee and the remaining Board designees nominated by the Board of Directors. The Termination also terminated (A) Perry's obligation to vote his shares in favor of Anthony Rawlinson as the Chairman of the Company's Board of Directors; (B)the Company's inability to increase the size of the board of directors of the Company above seven (7) members without the consent of a majority in interest of the Purchasers; and (C) each Purchaser's restrictions on voting their shares in favor of and their obligation to vote such shares against any (i) sale, transfer or other assignment or hypothecation of the Company's assets or merger, reorganization or similar sale of the Company or (ii) amendment, modification, change or termination to any provision of this Company's Charter Documents unless such action was recommended or approved by a majority of the Board of Directors then in office or pursuant to a unanimous written consent of the Board of Directors. The Termination also terminated certain registration rights of the Purchasers. Upon the request and recommendation of the Company's investment bankers, Investec, and the Company's desire and need to attract and retain qualified Directors, for the quarter ending on December 31, 2005 and for each calendar quarter thereafter, the Company has agreed to pay each non-employee Director of the Company an annual Director's fee of $40,000, comprised of $16,000 in cash and $24,000 in restricted Common Stock of the Company vesting and payable as follows: Each Director who is a Director of the Company on the last business day of each calendar quarter of the Company shall be entitled to be paid for each such calendar quarter $4,000 and issued Common Stock of the Company in the amount of $6,000 valued as of the last business day of such calendar quarter. The first such Directors' fees payment shall vest and be owed effective as of December 30, 2005. During the 3rd Quarter the Company also adopted an executive compensation plan by granting to the Company's executives options under our 1996 Stock Option Plan to purchase a total of 244,000 shares of common stock at an exercise price of $4.35 per share. These options will vest based on the Company achieving certain revenue milestones for the years ended December 31, 2005 and 2006. If such milestones are not met, the options with respect to those milestones will terminate. All of the granted options will remain in effect for a period of 10 years or until 90 days after the employment of the optionee terminates. Item 6. Exhibits: 10.27* Waiver and Termination of Shareholders Agreement dated July 19, 2005 between Registrant and Jagen Pty, Ltd., Anthony Rawlinson and Carl D. Perry. 10.28* Placing Agreement in connection with an application to join AIM, dated July 19, 2005 between Registrant; each of its directors and Investec Bank (UK) Limited. 10.29* AIM Nominated Adviser Broker Agreement dated July 19, 2005 between Registrant; each of its directors and Investec Bank (UK) Limited. 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 26 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 14, 2005 ENOVA SYSTEMS, INC. (Registrant) /s/ Larry B. Lombard - --------------------------------------------- By: Larry B. Lombard, Chief Financial Officer 27 EX-10 2 p19576_ex10-27.txt EXHIBIT 10.27 WAIVER AND TERMINATION ---------------------- OF -- SHAREHOLDERS' AGREEMENT ----------------------- THIS WAIVER AND TERMINATION OF SHAREHOLDERS' AGREEMENT (the "Agreement") is entered into effective as of July 16, 2005 (the "Effective Date"), by and among Jagen Pty, Ltd. ("Jagen") and Anthony Rawlinson ("Rawlinson" and together with Jagen, the "Purchasers"), Carl D. Perry ("Perry") and Enova Systems., Inc. (formerly U.S. Electricar, Inc.), a California corporation (the "Company"). Any Capitalized terms not otherwise defined herein shall have the meanings set forth in that certain Placing Agreement by and among Investec Bank (UK) Limited, the Company and the Directors of the Company (including but not limited to Rawlinson as a Director) attached hereto as Exhibit A and incorporated herein by reference (the "Placing Agreement") or as set forth in the Shareholders' Agreement (as defined below). R E C I T A L S: ---------------- A. On June 1, 1999 the Purchasers, Perry and the Company entered into a Shareholders' Agreement (the "Shareholders' Agreement") which provided for, among other matters, the granting of certain preemptive and corporate governance rights to the Purchasers which the parties now desire to waive and/or terminate. B. The Company has engaged Investec Bank (UK) Limited to act as its agent for the Company in respect of the Company proposing to sell up to 5,350,000 new Common Shares of the Company (the "Placing Shares") pursuant to Regulation S under the Securities Act of 1933, as amended, to persons subscribing for Placing Shares pursuant to the Placing Agreement; C. In connection with the Placing, among other matters set forth below, the Company desires that the Purchasers waive their preemptive rights set forth in Article III of the Shareholders' Agreement effective as of the Effective Date and terminate the Shareholders' Agreement effective immediately prior to the "Admission". NOW THEREFORE, the parties hereto agree as follows: ARTICLE I. TERMINATION So long as the Admission becomes effective on, or prior to, August 31, 2005, the Shareholders' Agreement is hereby terminated and of no further force or effect with all rights and obligations of the parties thereto cancelled and void, effective immediately prior to the Admission. ARTICLE II. ACKNOWLEDGMENT OF REFUSAL TO FUND SINKING FUND The Purchasers acknowledged and confirm that with respect to any financing which they have provided to the Company at any time, they have affirmatively required that all of the proceeds from their investment be retained by the Company and that no such financing in any amount was to have been placed into a sinking fund escrow account in connection with that certain Credit Managers Association April 22, 1996 Promissory Note. ARTICLE III. PREEMPTIVE RIGHTS Effective as of the Effective Date, each Purchaser hereby waives his or its right under Article III of the Shareholders' Agreement to purchase the Placing Shares as contemplated in the Placing Agreement at such price as shall be determined pursuant to the Placing Agreement and in such amounts in the aggregate not to exceed 15 million pounds. Such waiver shall expire if the Admission has not been consummated on, or prior to, August 31, 2005. ARTICLE IV. CORPORATE GOVERNANCE AND VOTING Each Purchaser acknowledges and confirms that since June 1, 1999, Anthony Rawlinson has been the Purchasers' Board member designee as contemplated in Article IV of the Shareholders' Agreement. Each Purchaser further acknowledges and confirms that he or it has approved any increase in the Company's authorized number of Board members since June 1, 1999 as such increases have been disclosed in the Company's SEC filings from time to time, including but not limited to an increase to eight authorized directors in 2004 and the election of Bjorn Ahlstrom at the last Annual Shareholders Meeting as the most recently elected new Director. ARTICLE V. REGISTRATION RIGHTS Each of the Purchasers acknowledges and confirms that since June 1, 1999 it has waived its rights to cause its Registrable Securities to be registered under the Securities Act of 1933, as amended, pursuant to Section 5.2 of the Shareholders' Agreement to the extent such Registrable Securities were not included in any S-1 Registration Statement filed by the Company with the SEC since June 1, 1999. ARTICLE VI. ADDITIONAL CONFIRMATION Each Purchaser acknowledges and confirms that it has not assigned, transferred or otherwise encumbered its rights under the Shareholders' Agreement to or with any third party. ARTICLE VII. MISCELLANEOUS Section 7.1 No Inconsistent Agreements. Except as set forth in the Shareholders' Agreement until terminated herein, each party hereto hereby consents to the termination of any other prior written or oral agreement or understanding restricting, conditioning or limiting the ability of any party to transfer or vote Shares. Each Purchaser represents and agrees that, as of the Effective Date, there is no (and from and after the Effective Date it will not, and will cause its Affiliates not to, enter into any) agreement with respect to any securities of the Company or any of its Affiliates (and from and after the Effective Date Purchaser shall not take, or permit any of its Affiliates to take, any action) that is inconsistent in any material respect with the provisions in this Agreement. Section 7.2 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, and their respective successors and permitted assigns; provided that (i) neither this Agreement nor any rights or obligations hereunder may be transferred or assigned by the Company (except by operation of law in any merger or Qualified Reorganization); and (ii) neither this Agreement nor any rights or obligations hereunder or under the Shareholders' Agreement may be transferred or assigned by a Purchaser or Perry prior to September 1, 2005. Section 7.3 No Waivers; Amendments. (a) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. (b) This Agreement may not be amended or modified, nor may any provision hereof be waived, other than by a written instrument signed by (i) the Company, (ii) the holders of 66% of the Shares held by Purchasers and (iii) Perry. Section 7.4 Notices. Any notice, request or other communication required or permitted hereunder will be in writing and shall be deemed to have been duly given if personally delivered or if telecopied or mailed by registered or certified mail, postage prepaid, at the respective addresses of the parties set forth on the Company's records. Any party hereto may by notice so given change its address for future notice hereunder. Notice will be deemed to have been given when personally delivered or when deposited in the mail or telecopied in the manner set forth above and will be deemed to have been received when delivered. Section 7.5 Consistency. In the event of a conflict between this Agreement on the one hand and the Shareholders' Agreement or any other agreement relating to the subject matter of this Agreement on the other hand, the terms and provisions of this Agreement shall be deemed to set forth the true intentions of the parties (to the extent permitted by applicable law) and shall supersede the terms of any other agreement. Section 7.6 Confidentiality The Purchasers shall not at any time (a) disclose the Company's business plans and objectives, financial projections, marketing plans, technical data, patentable and unpatentable designs, concepts, ideas, inventions, know-how and other trade secrets of the Company (the Confidential Information") to any Person whatsoever, (b) examine or make copies of any reports or other documents, papers, memoranda, or extracts containing Confidential Information, nor (c) utilize for their own benefit or for the benefit of any other party other than the Company any such Confidential Information except: (i) Information which such party can show was rightfully in its possession at the time of disclosure by the Company. (ii) Information which such party can show was received from a third party who lawfully developed the information independently of the Company or obtained such information from the Company under conditions which did not require that it be held in confidence. (iii) Information which, at the time of disclosure, is in the public domain. Section 7.7 Applicable Law. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. Section 7.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. This Agreement may be executed by facsimile. Section 7.9 Title and Subtitles. The titles of the Sections and subsections of this Agreement are for the convenience of reference only and are not to be considered in construing this Agreement. Section 7.10 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith to achieve the closest comparable terms as is possible. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms. SIGNATURE PAGE TO WAIVER AND TERMINATION OF SHAREHOLDERS' AGREEMENT PURCHASER U.S. ELECTRICAR, INC. JAGEN PTY, LTD. By: /s/ Boris Liberman By: /s/ Carl Perry --------------------------- ----------------------------- (Signature) (Signature) PURCHASER ANTHONY N. RAWLINSON /s/ Anthony N. Rawlinson - ------------------------ (Signature) /s/ Carl Perry - -------------- CARL PERRY EX-10 3 p19576_ex10-28.txt EXHIBIT 10.28 DATED 19 July 2005 ------------------ (1) INVESTEC BANK (UK) LIMITED (2) ENOVA SYSTEMS, INC. (3) THE DIRECTORS OF ENOVA SYSTEMS, INC. PLACING AGREEMENT in connection with an application to join AIM Lawrence Graham LLP 190 Strand London WC2R 1JN Tel: 020 7379 0000 Fax: 020 7379 6854 (JGE/I24/6)
CONTENTS Clause Page 1. Definitions 1 2. Conditions 6 3. Placing and Underwriting obligations 7 4. Authorisations and capacity of Investec 7 5. Obligations prior to Admission 8 6. Undertakings prior to Admission 9 7. Completion of the Placing 10 8. Undertakings following Admission 11 9. Commissions, fees and expenses 14 10. Warranties 14 11. Disclaimer and indemnities 15 12. Termination 17 13. General and interpretation 18 14. Status of the Company 19 15. Notices 19 16. Counterparts 20 17. Governing Law 20 Schedule 1 - The Directors 22 Schedule 2 23 Part A - Warranties 23 Part B - Warranty confirmation letter 31 Part C - Deed of Adherence 32 Schedule 3 33 Part A - Documents to be delivered to Investec 33 Part B - Documents to be filed with the London Stock Exchange 35 Part C - Documents in the agreed form 35
PAGE 1 THIS AGREEMENT is made the 19th day of July 2005 BETWEEN: (1) INVESTEC BANK (UK) LIMITED (incorporated in England and Wales with registered no. 489604) whose registered office is at 2 Gresham Street, London EC2V 7QP, acting through its divisions Investec Investment Banking and Investec Securities ("Investec"); (2) ENOVA SYSTEMS, INC. (a corporation incorporated in California, USA with corporation no. C0775424) whose principal offices are at 19850 South Magellan Drive, Torrance, California 90502, USA (the "Company"); and (3) THE SEVERAL PERSONS whose names and addresses are set out in Schedule 1 (the "Directors"). BACKGROUND: (A) The Company has an authorised and issued share capital as set out in paragraph 2 of Part 6 of the Admission Document. (B) The existing issued shares of Common Stock are traded on the OTC Bulletin Board in the US under the symbol `ENVA'. (C) The Company wishes to obtain the Admission of its issued and to be issued shares of common stock, no par value, to AIM, and wishes to raise (pound)11.5 million pursuant to the Placing. (D) The Board of Directors of the Company has approved a 1 for 45 stock consolidation of the Common Shares of the Company due to become effective prior to such Admission to AIM. (E) Investec has agreed, on the terms and subject to the conditions of this Agreement, to act as agent for the Company in respect of the Placing Shares, to use its reasonable endeavours to procure Placees for an aggregate of 5,350,000 Common Shares at the Placing Price, and to the extent that it is in default thereof, itself to subscribe as principal for such Placing Shares. IT IS HEREBY AGREED as follows: 1. DEFINITIONS 1.1 In this Agreement, the following words and expressions have the following meanings, unless the context requires otherwise:- "'A' Preferred Stock" shares of series A convertible preferred stock, no par value, in the capital of the Company; "Accounts" the audited balance sheet and the audited profit and loss account of the Company for the financial year ended on the Balance Sheet Date; "Accountants Report" the short form report on the results of the Company for the three (3) years ended on the Balance Sheet Date prepared by the Reporting Accountants and addressed to the Company and to Investec in the form set out in Section A of Part 3 of the Admission Document; "Admission" the admission to AIM of all the issued and to be issued Common Shares (including the Placing Shares) becoming effective as provided for in Rule 6 of the AIM Rules; "Admission Document" the document in the agreed form to be published by the Company pursuant to the AIM PAGE 2 Rules in connection with the Placing and Admission and which comprises an `admission document' under the AIM Rules; "Admission Application" the application by the Company to the London Stock Exchange for Admission in the form required by the AIM Rules; "Affiliate" any holding company of Investec or any subsidiary of any such holding company and the current and former directors, officers and employees of each of such persons and of Investec as the case may be; "AIM" the market of that name operated by the London Stock Exchange; "AIM company" a company whose securities are admitted to trading on AIM; "AIM Rules" the `AIM Rules for Companies' (including the guidance notes thereto) published by the London Stock Exchange governing, inter alia, admission to AIM and the continuing obligations of AIM companies (in force with effect from 1 July 2005, as may be amended from time to time); "'B' Preferred Stock" shares of series B convertible preferred stock, no par value, in the capital of the Company; "Balance Sheet Date" 31 December 2004; "Board" the Board of Directors of the Company from time to time or a duly authorised committee of the Board; "Board Resolutions" the resolutions of the Board in the agreed form approving, inter alia, the Placing, authorising the Admission Application and approving the Issue Documents; "Business Day" any day on which banks in the City of London are open for business (excluding Saturdays); "California Corporations the California Corporations Code; Code" "Combined Code" the principles of good governance and code of best practice appended to, but not forming part of, the Listing Rules; "Common Shares" shares of common stock, no par value, in the capital of the Company; "Company's UK Solicitors" Field Fisher Waterhouse of 35 Vine Street, London EC3N 2AA; "Company's US Lawyers" Reed Smith LLP of Two Embarcadero Center, Suite 2000, San Francisco CA 94111, USA; "Conditions" the conditions set out in clause 2.1; "Executive Directors" Edwin Riddell and Larry Lombard; "FSMA" the Financial Services and Markets Act 2000, as amended (including pursuant to the Market Abuse Regulations) and including any regulations made pursuant thereto; "Indemnified Person" Investec and/or any of its Affiliates; PAGE 3 "IRS" the Internal Revenue Service of the Department of the Treasury in the US; "Issue Documents" the Press Announcement, the Admission Document, the Presentation and the Placing Letter; "Lapse Date" 9 August 2005, if any of the Conditions has not been fulfilled (or, where appropriate, waived by Investec) by 5.00 pm on that date; "Legal Due Diligence Report" the report in the agreed form on the Company and its business, assets and liabilities prepared by the Company's US Lawyers and addressed to the Company and to Investec; "Listing Rules" the Listing Rules from time to time of the UK Listing Authority made by it under Part VI of FSMA; "Lock-In Deed" the deeds in the agreed form to be entered into by Jagen Pty Limited in favour of the Company and Investec in respect of its holding of Common Shares; "London Stock Exchange" London Stock Exchange plc; "Long Form Report" the long form accountants report on the Company prepared by the Reporting Accountants in connection with the Placing and addressed to Investec and to the Directors; "Market Abuse Regulations" the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2005; "NASD" National Association of Securities Dealers in the US; "NASDAQ" the National Association of Securities Dealers Automated Quotation System, a national securities exchange in the US which is owned and operated by National Stock Markets, Inc.; "Nominated Adviser and the agreement dated the date of this Broker Agreement" Agreement between the Company (1) the Directors (2) and Investec (3) relating to the appointment of Investec as the Company's Nominated Adviser and Broker; "Non-Executive Directors" Anthony Rawlinson, Bjorn Ahlstrom, Dr Malcolm Currie, Donald Dreyer and John Wallace; "OTC Bulletin Board" the Over The Counter Bulletin Board quotation medium that securities dealers may use to enter, update and retrieve quotation information for securities trading over the counter that are neither listed on NASDAQ or on a primary national securities exchange; "OTC Bulletin Board Rules" the rules and regulations (including of the NASD and the SEC) applicable to a company whose shares are traded on the OTC Bulletin Board in the US; "'P' Proof" the placing proof dated 19 July 2005 of the Admission Document in the agreed form sent by Investec to prospective Placees with the Placing Letter in connection with the Placing; PAGE 4 "Pathfinder Admission the pathfinder admission document in the Document" agreed form used to market the Placing Shares to Placees; "Placees" persons who subscribe for Placing Shares pursuant to this Agreement; "Placing" the placing of the Placing Shares pursuant to this Agreement; "Placing Letter" the letter in the agreed form sent by Investec to prospective Placees in connection with the Placing; "Placing List" has the meaning in clause 7.2.1; "Placing Price" 215p per Placing Share; "Placing Shares" 5,350,000 new Common Shares proposed to be issued by the Company to Placees pursuant to the Placing; "Presentation" the Company's marketing presentation given to certain potential institutional investors in the Company; "Press Announcement" the press announcement in the agreed form containing details of the Placing; "Registrars" Computershare Investor Services plc of 66 Upper Thames Street, London EC4V 3BJ; "Regulation S" Regulation S of the US Securities Act; "Regulatory Information any channel recognised as a channel for the Service" or "RIS" dissemination of information as defined in the glossary of terms in the AIM Rules; "Reporting Accountants" Baker Tilly of 2 Bloomsbury Street, London WC1 3ST; "RestrictedShares" Common Shares or any interest in any Common Shares which are (a) beneficially owned by each Director at the date of this Agreement; (b) derived from such shares; (c) purchased by each Director; and (d) issued to each Director on the exercise of share options or other rights to subscribe; "SEC" US Securities and Exchange Commission; "SEC Regulations" the rules and regulations of the SEC in so far as they apply to the Company; "Specified Event" an event occurring or matter arising on or after the date of this Agreement and before Admission which if it had occurred before the date of this Agreement would have rendered any of the Warranties untrue or incorrect in any material respect; "Stock Consolidation" the 1 for 45 stock consolidation of the Common Shares of the Company approved by the Directors on 2 June 2005 and due to become effective on or before 26 July 2005; "tax" or" taxation" any form of taxation whenever created or imposed and whether of the US (or any individual State of the US), the United Kingdom or elsewhere and, without prejudice PAGE 5 to the generality of the foregoing, includes income tax, corporation tax, capital gains tax, value added tax, inheritance tax, stamp duty, stamp duty reserve tax, withholding tax, rates, customs and excise duties, national insurance and any other taxes, levies, duties or imposts similar to, replaced by or replacing any of them and all penalties, fines and interest included in or relating to any tax assessment therefor, regardless of whether such taxes, penalties, charges and interest are directly or primarily chargeable against or attributable to the Company or any other person, firm or company; "Termination Date" the date (if any) on which Investec terminates its obligations under this Agreement pursuant to clause 12; "VAT" United Kingdom value added tax; "US" the United States of America; "US Person" has the meaning given to it in Part 5 of the Admission Document; "US Securities Act" the US Securities Act of 1933 (as amended); "Verification Notes" the verification notes in the agreed form prepared by the Company's UK Solicitors comprising questions and the answers to such questions for the purpose of confirming the accuracy of the information contained in the Presentation, the Pathfinder Admission Document and the Admission Document; "Warranties" the warranties contained or referred to in clauses 10.1 and 10.2, and Part A of Schedule 2; "Working Capital Report" the report, in the agreed form, by the Reporting Accountants addressed to the Company and Investec on the cash flow and working capital projections of the Company for the period ending 31 December 2006. 1.2 Any reference to a document being "in the agreed form" means in the form of the draft or proof thereof signed for the purpose of identification by Lawrence Graham LLP (on behalf of Investec) and the Company's UK Solicitors (on behalf of the Company and the Directors) with such alterations (if any) as may be agreed by or on behalf of Investec and the Company. A list of documents in the agreed form is set out in Part C of Schedule 3. 1.3 The Interpretation Act 1978 shall apply to this Agreement in the same way as it applies to an enactment. 1.4 In this Agreement, the expressions "subsidiary undertaking", "subsidiary" and "holding company" shall in relation to Investec have the meanings given thereto in section 736 of the Companies Act 1985. 1.5 References in this Agreement to Recitals, clauses and Schedules are to Recitals and clauses of and Schedules to this Agreement. 1.6 Headings are included in this Agreement for convenience only and shall be disregarded in its interpretation. 1.7 A reference to a statute or statutory provision includes a reference:- 1.7.1 to that statute or provision as from time to time modified or re-enacted (but in the case of a modification or re-enactment effected after the date of Admission, only so far as it applies in relation to a period before Admission); PAGE 6 1.7.2 to any repealed statute or statutory provision which it re-enacts (with or without modification); and 1.7.3 to any subordinate legislation made under the relevant statute. 1.8 All commissions, fees and other expenses payable under or pursuant to this Agreement are stated exclusive of VAT, if any, payable thereon. 2. CONDITIONS 2.1 The obligations of Investec under this Agreement are conditional upon:- 2.1.1 the execution and delivery by the parties thereto of the Nominated Adviser and Broker Agreement; 2.1.2 the execution and delivery by the parties thereto of the Lock-In Deed; 2.1.3 the Admission Document having been published in accordance with Rule 3 of the AIM Rules on the date of this Agreement; 2.1.4 the Stock Consolidation having become effective; 2.1.5 the fulfilment by the Company and the Directors of their obligations under clauses 5.1 and 6; 2.1.6 the passing without any amendment not approved by Investec of the Board Resolutions; 2.1.7 the authorities given in clause 4 remaining in full force and effect; 2.1.8 any supplementary admission document which may be required pursuant to the AIM Rules having been approved by Investec and published before Admission; 2.1.9 none of the Warranties or undertakings provided by this Agreement being or having become untrue, inaccurate or misleading in any material respect at any time before Admission, and no fact or circumstance having arisen which would constitute a material breach of any of the Warranties or undertakings provided by this Agreement or constitute a Specified Event; 2.1.10 this Agreement not having been terminated by Investec prior to Admission pursuant to clause 12; 2.1.11 the delivery to Investec by no later than 5.00 pm on the Business Day immediately preceding the date upon which Admission is to occur of the duly signed warranty confirmation letter set out in Part B of Schedule 2; and 2.1.12 Admission occurring by not later than 8.30 am on 26 July 2005; provided that each of the parties to this Agreement shall perform its obligations hereunder until such time (if any) as any of such conditions shall have become incapable of being satisfied (or waived by Investec). 2.2 The Company and (so far as it is within their powers) the Directors will use all reasonable endeavours to procure the fulfilment of the Conditions by the times and dates stated therein and in particular, will provide such information and documents, pay such fees, give such undertakings and do all such acts and things as may be reasonably required to enable Admission to take place. 2.3 If any of the Conditions is not fulfilled (or, where appropriate, waived by Investec) by 5.00 pm on the Lapse Date, this Agreement shall cease and determine and:- PAGE 7 2.3.1 Investec shall return to prospective Placees in accordance with the Issue Documents any monies received from them; 2.3.2 no party to this Agreement will have any claim against any other party for costs, damages, compensation or otherwise except that:- (a) such termination shall be without prejudice to any accrued rights or obligations under this Agreement; and (b) the provisions of clauses 2.3, 11, 13, 14, 15, 16 and 17 and shall remain in full force and effect; 2.3.3 the Company shall pay to Investec the fee for its corporate finance advice in connection with the Placing as stated in clause 9.1.1; 2.3.4 the Company shall reimburse to Investec all the costs and expenses referred to in clause 9.2 below. 3. PLACING AND UNDERWRITING OBLIGATIONS 3.1 Subject to the terms and conditions of this Agreement, Investec shall:- 3.1.1 on behalf of and as agent for the Company (which appointment the Company hereby confirms) use its reasonable endeavours to procure Placees to subscribe for the Placing Shares at the Placing Price and subject to the terms and conditions of, and on the basis of the information contained in, the Issue Documents; and 3.1.2 subscribe as principal at the Placing Price, on the terms and conditions and on the basis of the information contained in, the Issue Documents for any Placing Shares which are not subscribed for by Placees. 3.2 Investec shall effect the Placing by sending Placing Letters to all Placees for completion and counter-signature by such Placees by way of confirmation of the commitments of such Placees to subscribe for Placing Shares on the basis set out therein. 3.3 The parties to this Agreement agree and acknowledge that the Placing Shares have not been and will not be registered under the US Securities Act, and may not be offered or sold within the US or to, or for the account or benefit of, US Persons except in accordance with Regulation S or pursuant to an exemption from the registration requirements of the US Securities Act. Investec confirms that (except pursuant to an effective registration statement or pursuant to an available exemption from the registration requirement of the US Securities Act) it has not offered and sold and will not offer and sell the Placing Shares, within the US or to, or for the account or benefit of, US Persons.(i) as part of its distribution at any time and (ii) otherwise until one (1) year after the later of the date of commencement of the Placing and the closing date of the Placing. It is acknowledged that the Placing Letters will contain a confirmation from Placees (and share certificates for the Placing Shares will bear a legend to the similar effect) to the following effect: "The securities covered hereby have not been registered under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time and (ii) otherwise until one (1) year after the later of the commencement of the Placing or the closing date of the Placing, in either case except in accordance with Regulation S under the Securities Act. Terms used above have the meanings given to them by Regulation S under the Securities Act." 4. AUTHORISATIONS AND CAPACITY OF INVESTEC 4.1 The Company hereby irrevocably appoints Investec on the terms of this Agreement as its agent in connection with the Placing and the application for Admission, and to do all things on behalf of the Company which may be reasonably necessary or desirable in connection with the Placing and PAGE 8 Admission, including the power to appoint agents to act on its behalf in connection with its obligations under with this Agreement, and:- 4.1.1 confirms that the foregoing appointment confers on Investec all powers, authorities and discretions on behalf of the Company which are necessary for or reasonably incidental to the making of the Placing on the basis set out in this Agreement and in the Issue Documents; 4.1.2 as security for its obligations under this Agreement, the Company hereby irrevocably appoints any director of Investec as its attorney to sign, seal, execute and deliver, acknowledge and register any document and do any act or thing which may be necessary for or reasonably incidental to the Placing, provided that such appointment as attorney shall terminate on the termination of this Agreement or on such later date as may be agreed in writing between the Company and Investec; and 4.1.3 hereby agrees to ratify and confirm everything that Investec shall lawfully and properly do in the exercise of, and in accordance with, such appointment as agent, appointment as attorney, powers, authorities and discretions. 4.2 The Company and the Directors acknowledge that neither Investec nor any of its Affiliates or advisers is responsible to the Company or to any Directors for verifying the accuracy and/or fairness of any information published in the Issue Documents or otherwise published by the Company, unless it or any of its advisers has accepted specific responsibility in writing for such verification. 4.3 Any transaction carried out by Investec pursuant to this Agreement will be carried out at the request of the Company and as agent of the Company and not in respect of Investec's own account (save pursuant to clause 3.1.2). Investec shall be entitled to receive and/or retain and/or allow its agents to retain any commission or brokerages paid to it or its agents in connection with the implementation of any such transactions and shall not be under any liability to account for any benefit or advantage derived from such transaction by it or any company connected with it. Neither Investec nor any of its Affiliates shall be responsible for any loss or damage to any person arising from any such transaction or for any insufficiency or alleged insufficiency of the terms on which any of the Placing Shares may be procured to be subscribed by Investec or for the timing of any such subscription unless such loss or damage was attributable to (i) the fraud, bad faith, negligence or wilful default of Investec, (ii) the material breach by Investec of its obligations under this Agreement or (iii) breach by Investec of the FSMA, the AIM Rules or the conduct of business provisions of the FSMA. 5. OBLIGATIONS PRIOR TO ADMISSION 5.1 The Company shall prior to publication of the Issue Documents:- 5.1.1 hold a meeting of the Board at which the Board Resolutions shall be passed; and 5.1.2 deliver or cause to be delivered to Investec (to the extent that Investec has not already received the same) or as it shall direct the documents listed in Part A of Schedule 3, save that Investec may, in its absolute discretion and subject to such conditions as it may determine, extend the time for delivery or waive the requirement for delivery of any of the documents listed in Part A of Schedule 3. 5.2 The Company agrees to offer the Placing Shares on and subject to the terms and conditions and on the basis of the information set out in the Admission Document (or the 'P' Proof of the Admission Document) and the Placing Letters. 5.3 The Company will procure that:- 5.3.1 the Admission Document is published as required by the AIM Rules; PAGE 9 5.3.2 sufficient copies of the Admission Document are made available at the registered office of the Company and at the other locations and for the period(s) required by the London Stock Exchange; and 5.3.3 the Press Announcement is published via an RIS. 5.4 Subject to Investec receiving confirmation of fulfilment of the obligations of the Company pursuant to clauses 5.1 and 5.3, Investec shall use its reasonable endeavours to effect the Placing by procuring and seeking to procure subscribers for the Placing Shares. 5.5 The Company hereby confirms its instructions to Investec to apply on behalf of the Company to the London Stock Exchange for Admission, and in connection with the Admission Application:- 5.5.1 the Company and each of the Directors will use its or his reasonable endeavours to obtain Admission on or before 26 July 2005 (and in any event not later than the Lapse Date) and will, at the Company's expense, supply or procure the supply of all such information, give or procure the giving of all such undertakings by the Company, and execute or procure the supply of all such documents by the Company and do or procure to be done by the Company, all such things as may be reasonably required to obtain Admission, and comply with the requirements of the London Stock Exchange, the AIM Rules and any requirements of law; and 5.5.2 Investec will use its reasonable endeavours to assist the Company in connection with the Admission Application and in obtaining Admission. 5.6 The Directors and the Company hereby authorise Investec to instruct the Registrars in connection with the Placing. 6. UNDERTAKINGS PRIOR TO ADMISSION 6.1 The Company and the Directors hereby undertake that any publicity issued by or on behalf of the Company in connection with the Placing and/or Admission, including any statement to or interview with the media, shall be consistent with the Issue Documents and shall be agreed with Investec in advance (to the maximum practicable extent and subject to such conditions as Investec may reasonably impose in the case of interviews or conferences with journalists or other representatives of the media). 6.2 Save as expressly required hereunder by law or by the London Stock Exchange, no public announcement or communication concerning the Company, the Placing or this Agreement which is or may be material in relation to the Placing or the issue of the Placing Shares may be made or despatched between the date of this Agreement and Admission (both days inclusive) or at any time in relation to the termination of this Agreement without the consent of Investec as to the content, timing and manner of making or despatch thereof. 6.3 The Company and the Directors hereby undertake that they will not prior to Admission:- 6.3.1 enter into or terminate any commitment or agreement; or 6.3.2 put the Company in a position where it is obliged to announce that any commitment or agreement may be entered into or terminated; which, in either case, is material in the context of the Company or the Placing or the issue of the Placing Shares, without the prior written consent of Investec. 6.4 The Company hereby undertakes that, if following publication of the Admission Document and prior to Admission any significant change occurs affecting any matter contained in the Admission Document whose inclusion was required by the AIM Rules, or a significant new matter arises which would have been required to have been included, in the Admission Document or there is a significant inaccuracy in the Admission Document (in each case as referred to or, in the case of `significant' as defined in, section PAGE 10 87G(4) FSMA as if the Admission Document was a 'prospectus' within the meaning of the FSMA and the Placing Shares were being offered to the public in the United Kingdom, whether or not there is a breach of a Warranty), then without prejudice to clauses 10 and 12:- 6.4.1 the Company shall notify Investec as soon as reasonably practicable and shall, in conjunction with Investec, deal with such change, new matter or inaccuracy as if the Admission Document was a 'prospectus' within the meaning of the FSMA and the Placing Shares were being offered to the public in the United Kingdom; and 6.4.2 the Company shall, in conjunction with Investec, take all such steps and make all such announcements and publish all such documents (including, if required, a supplementary admission document) as may be required by law, by the AIM Rules or by the London Stock Exchange in the circumstances (any such steps or documents to be in a manner or form approved by Investec). 6.5 The Company and each of the Directors severally undertakes in so far as it/he is able not to cause and to use all reasonable endeavours not to permit any Specified Event to occur before the earlier of Admission or termination of this Agreement. 6.6 The Company and each of the Directors agrees that it or he (as the case may be) shall notify Investec forthwith if it comes to its or his knowledge that, at any time prior to Admission, any of the Warranties is or has become untrue or inaccurate or misleading in any material respect, or would have been untrue or inaccurate or misleading in any material respect by reference to the facts and circumstances then existing, and/or that there has been any material breach of any of the Warranties. 7. COMPLETION OF THE PLACING 7.1 Investec shall (following consultation with the Company) determine all matters in respect of the Placing, including without limitation:- 7.1.1 the identity of Placees; 7.1.2 the validity of acceptances received for Placing Shares; and 7.1.3 the allocation of Placing Shares amongst Placees. 7.2 Subject to this Agreement having become unconditional (save as to Admission) and not having been terminated pursuant to clause 12, the Company shall not later than 5.00 p.m. on the day before Admission is due to occur hold a meeting of the Board at which:- 7.2.1 Investec shall deliver a list of Placees for Placing Shares, with the relevant registration details and numbers of shares subscribed by each Placee ("Placing List"); 7.2.2 the Company shall allot and issue the Placing Shares to Placees in accordance with the Placing List subject to the bye-laws and restated articles of incorporation of the Company, free from liens, charges and encumbrances and ranking in full for all dividends or other distributions declared, made or paid on the ordinary share capital of the Company after the date of this Agreement, and ranking pari passu in all other respects with the existing issued Common Shares (immediately upon the Stock Consolidation); and 7.2.3 the Company shall approve the registration (without registration fee) of the Placees in the register of stockholders of the Company, and the issue of definitive share certificates (in each case bearing the legend set out in Part 5 of the Admission Document) to the Placees, in accordance with the timetable for such matters set out in the Admission Document. PAGE 11 7.3 The Company shall:- 7.3.1 by no later than 25 July 2005, deliver to Investec a certified copy of the resolutions of the Board referred to in clause 7.2; and 7.3.2 provide all necessary instructions to the Registrars to enable them to perform their duties as registrars as contemplated by this Agreement and the Admission Document. 7.4 By no later than 3.00 pm on the second Business Day following the date of Admission, Investec shall (to the extent that it has received the same) transfer from the sums received from Placees in respect of their subscription of Placing Shares to the Company an amount equal to the aggregate value of the Placing Shares at the Placing Price less an amount equal to the sums payable to Investec and any other fees relating to the Placing payable by the Company pursuant to clause 9 together with any VAT thereon (insofar as known at that date) by telegraphic transfer to account no 6804-592442 routing no. 1210-0024-8 at Wells Fargo Bank, Los Angeles Main Office, 333 S. Grand Avenue, Los Angeles, CA 90017. Payment in full of such sums shall fully discharge Investec's payment obligations to the Company. 7.5 The Company undertakes that following Admission it will not register any transfer of Placing Shares in the register of stockholders of the Company not made in accordance with the provisions of Regulation S, pursuant to registration under the US Securities Act or pursuant to an available exemption from the registration requirements under the US Securities Act. 8. UNDERTAKINGS FOLLOWING ADMISSION 8.1 The Company hereby undertakes that it will, and each of the Directors hereby severally undertakes that he will use reasonable endeavours to ensure that the Company will, apply the net proceeds of the Placing received by the Company only for the purposes described in the Admission Document and the Working Capital Report. 8.2 The Company will comply with all relevant obligations of the AIM Rules and in particular (but without limitation) will ensure that each of its Directors (including any future appointee) accepts responsibility for the Company's compliance with the AIM Rules, seeks advice from Investec (while it remains the Company's nominated adviser) regarding such compliance whenever appropriate and takes that advice into account. 8.3 The Company hereby undertakes that, for a period of three (3) months following Admission, it will not, without the prior written consent of Investec (such consent not to be unreasonably withheld or delayed):- 8.3.1 enter into any agreement, commitment or arrangement or put itself into a position where it is obliged to make any announcement concerning any agreement, commitment or arrangement which might be material in the context of the Placing or Admission; or 8.3.2 issue any shares or options to subscribe for any shares (other than options granted pursuant to the stock option plan referred to in the Admission Document) or securities convertible or exchangeable into shares or enter into any agreement or undertaking to do so. 8.4 The Company hereby undertakes that, for the period expiring on the date of the preliminary announcement of the results of the Company for the financial year ending 31 December 2005, it will notify Investec in advance of and discuss with Investec:- 8.4.1 any proposed public statement or announcement in relation to the financial position or affairs of the Company; 8.4.2 any proposed agreement or arrangement relating to a corporate transaction requiring disclosure under the AIM Rules, the SEC Regulations or the OTC Bulletin Board Rules; 8.4.3 any documents proposed to be sent to all shareholders of the Company; and PAGE 12 8.4.4 any information which is likely to affect the character or value of the business of the Company or which may be necessary to be made known to the public to enable the public to appraise the position of the Company and to avoid the establishment of a false market in the Common Shares. PAGE 13 8.5 Each of the Directors hereby undertakes to each of the Company and Investec that without the prior written approval of Investec:- 8.5.1 he will not at any time prior to the first anniversary of Admission (the "Restricted Period"), transfer or dispose (or permit the transfer or disposal) of, directly or indirectly, any of his Restricted Shares; 8.5.2 he will use his reasonable endeavours to procure that any person who is a connected person of his shall adhere to the provisions of clause 8.5.1. 8.6 The provisions of clause 8.5 shall not apply:- 8.6.1 in the case of Anthony Rawlinson only, to the disposal (not earlier than the date of the preliminary announcement of the results of the Company for the financial year ending 31 December 2005) of such number of Restricted Shares as is necessary to produce net sale proceeds of US$500,000; 8.6.2 in the case of Larry Lombard only, to a disposal of such number of Restricted Shares which are issued to such Director on the exercise of share options granted to him (and which would otherwise lapse during the Restricted Period) as is necessary to produce net sale proceeds sufficient to pay the exercise price payable by such Director in respect of such exercise and any taxation liability of such Director in respect of such sale; or 8.6.3 to a disposal by the personal representatives of the Director if he shall die (provided that the sale of any shares in the Company by such personal representatives pursuant to this sub-clause shall be effected in accordance with the reasonable requirements of the Company so as to ensure an orderly market for the issued share capital of the Company); or 8.6.4 to transfers or disposals of Restricted Shares pursuant to acceptance of an offer to acquire all the shares, or all the shares of any class or classes, in the Company (other than shares which at the date of the offer are already held by the offeror), being an offer on terms which are the same in relation to all the shares to which the offer relates or, where those shares include shares of different classes, in relation to all the shares of each class and execution of an irrevocable commitment to accept such an offer shall be deemed to be an acceptance of an offer for the purposes of this clause 8.6.4; or 8.6.5 to transfers or disposals of Restricted Shares pursuant to any sale or transfer required by an order made by a court with competent jurisdiction; 8.6.6 to transfers or disposals of Restricted Shares by any Director to any trust created for the benefit of that Director and his immediate family, provided that such transferee, before registration of any transfer of such shares to such transferee, executes an undertaking in relation to such shares in the form of the deed of adherence set out in Part C of Schedule 2 and provided further that Investec has first given its written consent to such a transfer or disposal (such consent not to be unreasonably withheld or delayed). 8.7 Each of the Executive Directors severally undertakes to Investec in the terms set out in the provisions of their respective service agreements dealing with post termination obligations as if such provisions were set out herein and repeated mutatis mutandis. 8.8 Each of the Executive Directors acknowledges and agrees with Investec that the duration, extent and application of the restrictions contained in clause 8.7 are no greater than is necessary for the protection of the goodwill and trade connections of the business of the Company and value of the Placing Shares. PAGE 14 9. COMMISSIONS, FEES AND EXPENSES 9.1 In consideration of Investec's services under this Agreement, the Company shall pay (together with VAT where applicable) to Investec:- 9.1.1 a fee of (pound)210,000 for its corporate finance advice in connection with the Placing; and 9.1.2 conditional on Admission, a commission equal to five per cent. (5%) of the aggregate value at the Placing Price of all the Placing Shares. 9.2 The Company will bear all expenses of or incidental to the Placing, the issue of the Placing Shares and Admission including, without limitation, the fees of its accountancy, legal and other professional advisers, the cost of printing and distribution of all the Issue Documents, Registrars' fees, London Stock Exchange fees, the fees of the legal advisers of Investec (not exceeding (pound)65,000 plus VAT and disbursements), the amount of any expenses which Investec may have paid on behalf of the Company and (where applicable) VAT. 9.3 The amounts payable pursuant to clauses 9.1 and 9.2 together with any other amounts outstanding from the Company to Investec may, subject to receipt by the Company of appropriate invoices therefor, be withheld by Investec from any payment to be made by Investec to the Company pursuant to clause 7.4. Any amounts payable pursuant to clauses 9.1 and 9.2 not so withheld by Investec shall be paid within three (3) Business Days after receipt by the Company of the relevant invoices for such amounts. 10. WARRANTIES 10.1 The Company and each of the Directors jointly and severally warrant to Investec (in each case for itself and, on the basis that Investec shall enjoy an absolute discretion as to the enforcement of any claim for breach of Warranty, for the benefit of each Placee) in the terms of the Warranties, but so that in the case of the Non-Executive Directors, the Warranties are given to the best of their knowledge and belief. 10.2 Each of the Directors hereby severally (and not jointly) warrants to Investec that he has taken all reasonable care to ensure that the information in the Issue Documents is in accordance with the facts and does not omit anything likely to affect the import of such information, and that he is not aware of any matters which are inconsistent with the Issue Documents. 10.3 Each of the Directors hereby severally (and not jointly) warrants and undertakes to Investec that all information in respect of himself (including, where applicable any information relating to his past employment and past or present activities or business interests) and any person connected with him with which Investec has been furnished in writing and the contents of any directors' questionnaire, are true and accurate in all material respects and not misleading in any material respect and do not omit anything likely to affect the import of such information. 10.4 Where any Warranty is expressed to be qualified by reference to the awareness and/or knowledge and belief of the Company or of the Directors, that Warranty shall be deemed to include an additional statement that it has been made after all reasonable enquiry and, for the avoidance of doubt, the awareness, knowledge and/or belief of the Directors in the context of any Warranty shall mean their collective awareness (so that the Directors shall be deemed to have the relevant awareness, knowledge and/or belief if any of the Directors has/have the relevant awareness, knowledge and/or belief). 10.5 The Warranties shall be deemed to be repeated, on the basis set out in clause 10.1, at the time of the publication of the Admission Document. 10.6 The Warranties given in this clause 10 shall remain in full force and effect notwithstanding the completion of all matters and arrangements referred to in or contemplated by this Agreement. PAGE 15 10.7 Investec shall, to the extent that it suffers any loss in respect thereof, be entitled to the same remedies and rights of action against the Company and the Directors as any person acquiring any Placing Shares on the basis of the Admission Document (or the `P' Proof of the Admission Document) and the Warranties shall be in addition to and shall not be construed as limiting or prejudicing those or any other rights or remedies available to Investec. 10.8 The Company agrees, for the benefit of each Placee, that the Company will be liable to pay compensation to any Placee for any loss which the Placee suffers in respect of any Placing Shares acquired by it under the Placing as a result of (or as a result of any circumstances which cause or give rise to or are the reason for or represent or constitute):- 10.8.1 any untrue or misleading statement included in the Admission Document (or included in the Pathfinder Admission Document or any placing proof of the Admission Document and, in either case, reproduced in the Admission Document) or in any supplementary admission document; or 10.8.2 any omission from the Admission Document (or any omission from the Pathfinder Admission Document or from any placing proof of the Admission Document that is, in either case, also an omission from the Admission Document) or from any supplementary admission document of any matter that would have been required to be included in it had it been a `prospectus' within the meaning of the FSMA and the Placing Shares were being offered to the public in the United Kingdom; and (provided that the exemptions from liability set out in Schedule 10 to the FSMA shall apply in relation to the liability of the Company under this Clause 10.8). 10.9 The maximum liability of each of the Directors for breach of the Warranties contained in clauses 10.1 and 10.2 shall be that sum set opposite his name in column (3) of Schedule 1, save where any such breach is the consequence of fraud or wilful concealment by the Director concerned. No Director shall be liable for breach of the Warranties unless notice of a claim is given by Investec to the Company (giving reasonable details of the basis of such claim) by no later than three (3) months of the date of publication of the audited accounts of the Company for the financial year ending 31 December 2005. 10.10 Each of the Directors hereby waives any right of contribution or payment they may have, whether by statute, common law or otherwise, against the Company in respect of any claim made against them under the warranties or undertakings set out herein. 11. DISCLAIMER AND INDEMNITIES 11.1 Neither the Company nor any of the Directors shall make any claim against any Indemnified Person to recover any damage, cost, charge, expense, loss or liability which the Company or any of the Directors may suffer or incur by reason of or arising out of the carrying out by any Indemnified Person on their behalf of their obligations and services hereunder or otherwise in connection with or incidental to the Placing, the distribution of the Issue Documents or the issue or transfer of the Placing Shares unless such damage, cost, charge, expense, loss or liability arises from (i) the fraud, bad faith, negligence or wilful default of an Indemnified Person; or (ii) from a material breach of the terms of this Agreement by Investec; or (iii) from a contravention by an Indemnified Person of the regulatory system (as defined in the handbook and rules of the Financial Services Authority) or breach or contravention of the provisions of the FSMA or the AIM Rules; or (iv) is of such a nature that liability may not be excluded pursuant to the FSMA. 11.2 The Company undertakes to Investec (for itself and as trustee for each Indemnified Person) that it will indemnify and hold harmless against and at all times keep each Indemnified Person fully and effectively indemnified against all losses, claims, expenses, liabilities, actions, demands, proceedings and judgements whatsoever and all reasonable costs, charges and expenses which any Indemnified Person may suffer or incur or which may be made against or incurred by any Indemnified Person in any jurisdiction by any subscriber or Placee in respect of the Placing Shares (including but without limitation all such reasonable costs, charges and expenses PAGE 16 including any value added tax thereon) as any Indemnified Person may pay or properly incur in responding to, disputing any such actual or potential actions, claims or demands or in enforcing the rights of any Indemnified Person hereunder) and which in any such case arises directly or indirectly out of or in connection with or results from or is attributable to:- 11.2.1 the preparation, approval, issue and circulation of the Pathfinder Admission Document or the `P' Proof of the Admission Document and the approval, publication and/or posting of any of the Issue Documents; 11.2.2 the Pathfinder Admission Document or the `P' Proof of the Admission Document or any of the Issue Documents (i) not containing, or being alleged not to contain, all information required to be stated therein or any statement therein (whether of fact, opinion, expectation or intention), being or being alleged to be untrue, inaccurate, incomplete, defamatory or misleading or having been made negligently or otherwise without the required standard of skill and care or reasonableness or (ii) containing or being alleged to contain any misrepresentation; or 11.2.3 the proper performance by Investec or any of its Affiliates of its or their obligations and services hereunder in accordance with this Agreement or otherwise in connection with the subject matter hereof including the issue of any material by, or after having been approved by, Investec, whether as a 'financial promotion' (as defined in section 21(1) of FSMA and the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005) or otherwise; or 11.2.4 the release of the Press Announcement, the making of the Placing and the preparation and distribution of the Issue Documents; or 11.2.5 any breach or alleged breach by the Company or the Directors of any of the Warranties, or by the Company or any of the Directors of any of the undertakings or obligations of the Company or any such Directors; or 11.2.6 the creation, allotment and issue and placing of any of the Placing Shares; or 11.2.7 any breach or alleged breach of or failure or alleged failure to comply with, the laws or regulations of any country (including, in particular, the United Kingdom and the US) or the regulations of the London Stock Exchange or NASD, the SEC Regulations or the OTC Bulletin Board Rules, resulting from either the Placing, the release of the Press Announcement or the distribution of the Issue Documents; and which does not, in any such case, arise from (i) the fraud, bad faith, negligence or wilful default of an Indemnified Person; or (ii) a material breach of the terms of this Agreement by Investec; or (iii) a contravention by an Indemnified Person of the regulatory system (as defined in the handbook and rules of the Financial Services Authority) or breach or contravention of the provisions of the FSMA, the AIM Rules or any applicable law. This indemnity shall be without prejudice to any other rights of any Indemnified Person. 11.3 Investec shall, on becoming aware of any action or claim or other matter in respect of which indemnity may be sought by any Indemnified Persons pursuant to clause 11.2, give written notice and reasonable details thereof to the Company as soon as reasonably practicable thereafter and thereafter keep the Company informed of all material matters relating thereto. 11.4 If any Indemnified Person is separately indemnified and secured to its reasonable satisfaction by the Company against all claims, actions, losses, liabilities, costs, charges and expenses, such Indemnified Person shall take or procure to be taken such action as the Company may reasonably request to avoid, dispute, resist, appeal, compromise or defend any claim which any of the Indemnified Persons have notified to the Company as arising under this clause 11 (such notice to be in the terms required by this Agreement). If the Company fails to secure any Indemnified Person to such Indemnified Person's reasonable satisfaction within 30 days of the PAGE 17 notification of the claim to the Company or to give appropriate instructions in relation to any claim within thirty (30) days of being requested to do so, the Indemnified Person may pay or settle or resist or otherwise deal with the claim as it in its absolute discretion thinks fit. No Indemnified Person shall be obliged to take any action under this clause if the action requested would adversely affect the reputation of Investec. 11.5 Subject to clause 11.7, where any claim of the kind envisaged by clause 11.2 is brought or alleged against the Company and/or one or more Indemnified Persons:- 11.5.1 the Company will provide to such Indemnified Persons all such information in its possession and reasonable assistance (including access to and the right to copy any documents or records of the Company) for the purpose of avoiding, disputing, resisting, appealing, compromising or contesting any such claim as it may reasonably request (subject to any reasonably required undertaking as to confidentiality). The Company shall keep each such Indemnified Person fully informed as to the progress of any such claim and the defence thereof; 11.5.2 Investec will provide the Company with all such information in its possession for the purpose of avoiding, disputing, resisting, appealing, compromising or contesting any such claim as it may reasonably request (subject to any reasonably required undertaking as to confidentiality); 11.5.3 in a case where an Indemnified Person wishes to dispute or appeal such a claim, it shall be entitled to require the Company also to dispute or appeal such a claim; 11.5.4 the Company shall not settle or compromise any such claim where such action would affect Investec without the prior written approval of Investec; 11.6 If any deduction or withholding is required by law to be made from any payment under this clause 11 or if any sum payable under this clause 11 is subject to taxation in respect of such payment the amount so payable shall be increased by such amount as will ensure that Investec and its affiliates are placed in the same net of tax position they would have been in had the sum payable under this clause 11 not been subject to any deduction or withholding or taxation. 11.7 No provision of this clause 11 shall take effect in a manner which would thereby result in a breach by Investec or any its Affiliates of the FSMA including, for the avoidance of doubt, any purported exclusion of liability which would be prohibited thereunder. 11.8 The indemnities set out in clause 11 shall remain in full force and effect notwithstanding the completion of all matters and arrangements referred to in or contemplated by this Agreement. 12. TERMINATION 12.1 If prior to Admission it shall come to the notice of Investec that:- 12.1.1 any of the Warranties was not true or accurate, or was misleading (i) when given or deemed given or (ii) at any time if they were to be repeated (by reference to the facts and circumstances in each case then existing) would no longer be true and accurate, or would be misleading, in each case in a respect which is material in the context of the Placing; or 12.1.2 the Company or the Directors have failed in any material respect to comply with its or their obligations under this Agreement, the California Corporations Code, the FSMA or the AIM Rules; or 12.1.3 any statement contained in the Issue Documents has become or been discovered to be untrue, inaccurate or misleading in any material respect (where such statement is not corrected pursuant to any supplementary admission document published by the Company, the form of which has been approved by Investec); or PAGE 18 12.1.4 a Specified Event has occurred; then Investec will consult (so far as such consultation is practicable) with the Company and may forthwith give notice to the Company pursuant to clause 12.3. 12.2 If prior to Admission:- 12.2.1 there shall have been, occurred, happened or come into effect any event or omission which materially and adversely affects the financial position and/or prospects of the Company, or which in the reasonable opinion of Investec is or will be or may be materially prejudicial to the Company or to the Placing or to the acquisition of the Placing Shares by Placees; or 12.2.2 there shall have occurred any change in national or international financial, monetary, economic, political or stock market conditions which in the reasonable opinion of Investec is or will or is likely to be materially prejudicial to the Company or to the Placing or to the acquisition of the Placing Shares by Placees; then Investec will forthwith consult with the Company and may, during or as soon as practicable following such consultation, give notice to the Company pursuant to clause 12.3. 12.3 Where this clause applies, Investec may in its absolute discretion:- 12.3.1 elect, by giving notice to the other parties to this Agreement prior to Admission, to terminate this Agreement whereupon the provisions of clause 2.3 shall apply as if the Conditions had not been fulfilled (but so that the fee payable by the Company to Investec for its corporate finance in connection with the Placing as stated in clause 9.1.1 shall be reduced to (pound)100,000 if Investec terminates this Agreement in the circumstances described in clause 12.2), and the provisions of clause 12.4 shall apply; or 12.3.2 allow the Placing to proceed on the basis of the Issue Documents subject, if Investec require or the Company so requests, to the publication of any supplementary admission document and to any relevant requirements of the FSMA, the London Stock Exchange and/or the AIM Rules. 12.4 If any notice is given by Investec to the Company pursuant to clause 12.3.1, Investec shall on behalf of the Company withdraw the Admission Application. 13. GENERAL AND INTERPRETATION 13.1 The parties to this Agreement will give all such assistance to each other and provide all such information as shall reasonably be required for the purposes of this Agreement and will execute and do all such documents, acts and things as may be reasonably required in order to give effect to the terms of this Agreement. 13.2 The parties shall use all reasonable endeavours to procure that any necessary third party shall do and shall themselves execute and perform all such further deeds, documents, assurances, acts and things as any of them may reasonably require by notice in writing to give effect to the terms of this Agreement. 13.3 Any time, date or period mentioned in this Agreement may be extended by mutual agreement between the parties hereto but, as regards any time, date or period originally fixed or any time, date or period so extended, time shall be of the essence. 13.4 This Agreement shall be binding upon and enure for the benefit of the personal representatives and successors of the parties as the case may be. PAGE 19 13.5 No party shall be entitled to assign his or its rights under this Agreement without the prior written consent of each of the other parties. 13.6 Except as provided in clause 13.7, this Agreement constitutes the entire and the only legally binding agreement between the parties relating to the Placing and no variations of this Agreement shall be effective unless made in writing signed by or on behalf of the parties and expressed to be such a variation. 13.7 For the avoidance of doubt, the provisions of the terms of engagement between Investec and the Company dated 16 May 2005 shall remain in full force and effect notwithstanding the entering into of this Agreement. If there is any inconsistency between the provisions of this Agreement and such terms of engagement, this Agreement shall prevail. 13.8 Each Indemnified Person shall have the rights under the Contracts (Rights of Third Parties) Act 1999 (which shall apply to this Agreement) to enforce the terms of clause 11 of this Agreement (subject to clauses 13.10 and 13.14), as amended from time to time, provided that an Indemnified Person must obtain the written consent of Investec (which Investec may give or refuse in its absolute discretion) before it may bring proceedings to enforce the terms of clause 11 and, save to the extent notified in writing by Investec to the Indemnified Person, Investec (without obligation) shall have the sole conduct of any such action on behalf of the Indemnified Person. 13.9 Save as provided in clause 13.8, no one other than the parties to this Agreement shall be entitled to directly enforce rights under this Agreement under the Contracts (Rights of Third Parties) Act 1999. Investec shall have no responsibility to any Indemnified Person under or as a result of clause 13.8. The parties to this Agreement do not require the consent of any person (other than the Company, the Directors and Investec or as otherwise provided for in this Agreement) to rescind, vary or terminate this Agreement (including, without limitation, any release or compromise in whole or in part of any liability) at any time. 13.10 The invalidity, illegality or unenforceability of any provision of this Agreement shall not affect the other provisions of this Agreement. 13.11 No failure or delay by any party in exercising any remedy, right, power or privilege under or in relation to this Agreement shall operate as a waiver thereof nor shall any single or partial exercise of any remedy, right, power or privilege preclude any further exercise thereof or the exercise of any other remedy, right, power or privilege. 13.12 No waiver by any party of any of the requirements of this Agreement or of any of their rights under this Agreement shall have effect unless given in writing. No waiver of any particular breach of the provisions of this Agreement shall operate as a waiver of any repetition of such breach. 13.13 Any release, waiver or compromise or any other arrangement of any kind whatsoever which Investec may agree to or effect as regards one or more of the Directors in connection with this Agreement shall not affect the rights and remedies of Investec as regards any other of the Directors or the liabilities of any of such Directors under this Agreement. 13.14 Any remedy or right conferred upon Investec for breach of this Agreement shall be in addition to and without prejudice to all other rights and remedies available to it. 14. STATUS OF THE COMPANY 14.1 The Company warrants to Investec that:- 14.1.1 it is a company incorporated in the State of California, USA and under the laws of the State of California and it has been in continuous existence since its incorporation; 14.1.2 it has full power and authority to enter into this Agreement and to perform its obligations under this Agreement and such obligations will be binding on it in accordance with their terms; and PAGE 20 14.1.3 no order has been made or petition presented or resolution passed for its winding-up or administration and no receiver or administrator or administrative receiver has been appointed by any person in relation to its business or assets or any part thereof. 15. NOTICES 15.1 Any notice required to be given hereunder shall be deemed to be duly served if:- 15.1.1 delivered by hand at or sent by overnight courier delivery to the registered office or principal address being that set out herein or such other address as shall have been notified by one party to the others in accordance herewith of the party to be served. Any such notice shall be deemed to be served when left at the relevant office and, if served by overnight courier delivery, on the next business day in the UK or USA (as the case may be) following the day of despatch. In proving the giving of a notice, it shall be sufficient to prove that the notice was left or that the envelope containing such notice was properly addressed; or 15.1.2 sent by fax as follows:- (a) to the Company and the Directors:- Fax No: 001 310 527 7888 For the attention of: Ed Riddell (b) to Investec:- Fax No: 020 7597 5120 For the attention of: Michael Ansell 14.2 The address or fax numbers and the name of the person for whose attention faxes are to be addressed may be changed from time to time by the relative party by written notice hereunder addressed to the others. 14.3 Any notice or other communication by fax shall be deemed to have been received immediately upon duly obtaining the print out of advice of transmission for the transmitting fax machine, indicating that the transmission has been successfully completed, subject to a copy being put in the post, or delivered or couriered, to the addressee on the same day (or if not a business day in the despatching location the next business day there). 15.4 Any notice given by Investec under clause 12 may be given by any director of Investec to any Director of the Company either personally or by telephone and shall have effect immediately. 16. COUNTERPARTS This Agreement may be entered into in any number of counterparts and by the parties to it on separate counterparts, each of which when executed and delivered shall be an original, but all the counterparts shall together constitute one and the same document. This Agreement may be validly exchanged by fax. 17. GOVERNING LAW 17.1 This Agreement shall be governed by English law and the parties hereby submit to the non-exclusive jurisdiction of the English Courts for all purposes relating to this Agreement but this Agreement may be enforced in any court of competent jurisdiction. 17.2 The Company and each of the Directors hereby irrevocably appoints the Company's UK Solicitors as its or his agent to receive on its or his behalf service of proceedings issued out of the English Courts in any action or proceedings arising out of or in connection with this Agreement. The Company and each of the Directors warrants that the Company's UK Solicitors have agreed to act as its or his agent as aforesaid and agrees that failure PAGE 21 by such agent to notify the Company or any of such Directors of such service shall not adversely affect the validity of such service or any judgement based on it. Such service shall become effective seven (7) days after despatch. Nothing contained in this Agreement shall affect the right to serve process in any other manner permitted by law. IN WITNESS WHEREOF this Agreement has been signed by or on behalf of Investec and the Company and executed as a deed by each of the Directors the day and year first above written. PAGE 22 SCHEDULE 1 THE DIRECTORS
(1) (2) (3) Name and address Position Maximum individual liability ANTHONY NEIL RAWLINSON Chairman US$50,000 EDWIN ORRIN RIDDELL Chief Executive Officer, US$416,000 President & Director BJORN AHLSTROM Director US$50,000 DR. MALCOLM RODERICK CURRIE Director US$50,000 DONALD H DREYER Director US$50,000 JOHN ROBERT WALLACE Director US$50,000 LAWRENCE (LARRY) BRIAN LOMBARD Chief Financial Officer & US$290,000 Director
all of 19850 South Magellan Drive, Torrance, California 90502, USA PAGE 23 SCHEDULE 2 PART A WARRANTIES All references in this Schedule to the "Admission Document" shall include the 'P' Proof of the Admission Document. The Warranties referred to in clause 10.1 of the foregoing Agreement are that:- 1. INFORMATION IN THE ADMISSION DOCUMENT 1.1 The Admission Document contains all the information required to be set out therein under the AIM Rules 1.2 The Admission Document contains all such information as investors would reasonably require and reasonably expect to find there, for the purpose of forming a full understanding of:- 1.2.1 the assets and liabilities, financial position, profits and losses and prospects of the Company; and 1.2.2 the Common Shares and the rights attaching to the Common Shares; and 1.2.3 any other matter contained in the Admission Document; consideration of the Company and the Directors having been given to the relevance of any information specified in paragraph (b) of Schedule Two of the AIM Rules. 1.3 The information contained in the Admission Document is in accordance with the facts and does not omit anything likely to affect the import of such information. 1.4 All statements of fact in the Admission Document are true and accurate in all material respects and are not misleading in any material respect to a prospective purchaser or subscriber of the Placing Shares and all forecasts, estimates, expressions of opinion, intention and expectation in the Admission Document are truly and honestly held and either fairly based upon facts within the knowledge of the Directors or made on reasonable grounds after due and careful consideration and to the extent that they are based on assumptions, have regard to the facts which are known to the Company and to the Directors. 1.5 There are no facts known or which would on reasonable enquiry have been known to the Directors or to the Company which are not disclosed in the Admission Document and which either by their omission would make any statement in the Admission Document false or misleading in any material respect or are material for disclosure to a prospective subscriber of shares in the Company or which should be taken into account by Investec in deciding whether or not to act as nominated adviser to the Company and in considering the suitability of the Common Shares for listing on AIM. 1.6 Save for the Presentation, neither the Company nor any of its agents has distributed any `financial promotion' (as defined in section 21 FSMA) in connection with or in anticipation of the Placing. 2. VERIFICATION, LONG FORM REPORT AND DUE DILIGENCE REPORT 2.1 The replies to the Verification Notes have been prepared or approved by persons reasonably believed by the Directors to have appropriate knowledge and responsibility to enable them properly to provide such replies. 2.2 The statements of fact contained in the replies to the Verification Notes are true and accurate in all material respects and the statements of opinion contained in the replies to the Verification Notes are fair and reasonable. PAGE 24 2.3 All information requested from the Company by the Reporting Accountants for the purpose of the preparation of the Long Form Report was, when provided, true and accurate, no further information has been withheld the absence of which would make misleading the information so provided, and the opinions attributed to the Directors in the Long Form Report are honestly held and are fairly based upon facts within the knowledge of the Directors. 2.4 All statements of fact and financial information contained in the Long Form Report are true, complete and accurate and are not misleading and the Company and the Directors do not disagree with any of the Company's statements of intention or expectation or with any of the comments, conclusions and recommendations of the Reporting Accountants contained in the Long Form Report. 2.5 All information requested from the Company for the purposes of the Legal Due Diligence Report was, when provided, true and accurate in all material respects and no further information has been withheld the absence of which would make misleading in any material respect the information so provided. All statements of fact contained in the Legal Due Diligence Report are true and accurate and are not misleading, and the Directors do not disagree with any aspect of the Legal Due Diligence Report. 3. DIRECTORS 3.1 The Directors have had explained to them the nature of their responsibilities and obligations as directors of an AIM company. 3.2 None of the Directors has (save to the extent set out in the Admission Document):- 3.2.1 at any time been adjudged bankrupt or entered into an individual voluntary arrangement in the United Kingdom or elsewhere; 3.2.2 at any time been party to a deed of arrangement or made any other form of composition with his creditors, or suffered a receivership of any asset in which he had any interest; 3.2.3 any unsatisfied judgement outstanding against him; 3.2.4 been a director of any company or other body corporate which went into receivership, compulsory liquidation, creditors' voluntary liquidation, administration, company voluntary arrangement or any composition or arrangement with its creditors generally or any class of its creditors while he was a director or within 12 months after he ceased to be one; 3.2.5 been a partner of any partnership which went into compulsory liquidation, administration or partnership voluntary arrangement or suffered a receivership of any asset while he was a partner or within 12 months after he ceased to be one; 3.2.6 ever been publicly censured or criticised by or refused admission by any professional, statutory or regulatory authority (including recognised professional bodies); or 3.2.7 any unspent convictions for any indictable criminal offence. 3.3 The information provided to Investec by each Director in response to the Directors' questionnaire and declaration of business activities is true and accurate in all respects and no information has been withheld which would make such answers misleading. 3.4 The Admission Document contains true and accurate information at the date of this Agreement and immediately following Admission concerning:- 3.4.1 the interests of each Director in any contracts entered into by the Company; 3.4.2 the interests of each Director in the share capital of the Company; and PAGE 25 3.4.3 the respective business interests, qualifications and experience of each Director. 3.5 The Admission Document contains all information concerning any actual or potential conflicts of interest between the Company and any Director or any company of which any Director is a director or in which he has a material interest and all statements contained in the Admission Document concerning such conflict or concerning the future relationship between such Director or any of such companies are truly and honestly made and are not misleading and there are no other facts concerning the same the omission of which makes any statement therein false or misleading in any respect. 4. WORKING CAPITAL 4.1 The cash flow and working capital projections of the Company for the period ending 31 December 2006 and the statement as to the adequacy of the Company's working capital included in the Admission Document have, in each case, been accurately compiled on the basis of the assumptions stated therein, after due and careful enquiry and on a reasonable basis, and there are no facts known to the Company or any of the Directors which have not been taken into account in the preparation or making of such projections or statement and which would reasonably be expected to have a material impact thereon. 4.2 The Working Capital Report has been approved by the Board and the Directors do not disagree with any aspect of such report. 4.3 The Company will, after the issue of the Placing Shares, have sufficient working capital for its present requirements, namely for at least 12 months after Admission; and each Director confirms that the statement regarding working capital set out in paragraph 11 of Part 6 of the Admission Document represents the true and honest belief of the Directors, arrived at after due and careful consideration. 5. FINANCIAL INFORMATION 5.1 The audited balance sheet and profit and loss account and the statements of cash flow (including the notes thereon) of the Company for the three (3) year period ended on the Balance Sheet Date as set out in the Accountants' Report (the "2002, 2003 and 2004 Financial Statements") have (except as therein disclosed) been prepared in accordance with the Statements of Investment Circular Reporting Standards issued by the Auditing Practices Board of the United Kingdom, and within the terms of such Statements, give a true and fair view of the financial position at the end of, and profits and cash flow of the Company for such periods. 5.2 The unaudited results of the Company for the three months ended 31 March 2005 (the "2005 First Quarter Results") have been compiled by the Company with all due care and attention and on the accounting bases and assumptions consistent with or not materially different from those adopted in the preparation of the 2002, 2003 and 2004 Financial Statements. 5.3 The Company did not at the Balance Sheet Date or at 31 March 2005 have any material liability (whether actual, deferred, contingent or disputed) or commitment which, in accordance with generally accepted accounting principles and practice (on the basis on which the 2002, 2003 and 2004 Financial Statements have been prepared), should have been disclosed or provided for in the Accountants Report or the First Quarter Results and which has not been so treated therein or in the Admission Document. 5.4 Adequate provision or, as appropriate, disclosure in accordance with generally accepted accounting principles and practice (on the basis on which the 2002, 2003 and 2004 Financial Statements have been prepared) has been made in the Accountants Report and in the 2005 First Quarter Results for taxation payable by the Company. 5.5 The Directors have established procedures that provide a reasonable basis for them to make proper judgements as to the financial position and prospects of the Company. PAGE 26 5.6 Gross revenue of the Company for the six month period ended 30 June 2005 was at least $1.8 million. 6. TAXATION 6.1 Since the Balance Sheet Date, the Company has not incurred any liability in respect of any taxation which is material in the context of the Placing, other than any such liabilities arising in the ordinary course of the business of the Company since that date and any such liabilities arising since that date as a result of any transactions entered into by or affecting the Company which are disclosed in the Admission Document. 6.2 All corporation tax returns made by the Company since the Balance Sheet Date have been made correctly in all material respects and, except as provided for or, as the case may be, disclosed in the Accountants' Report, there are no material questions of taxation which are or are, so far as the Directors are aware, likely to become the subject of dispute with the IRS or other taxing authorities. 6.3 All tax that has become due and payable from the Company or for which the Company has become obliged to account has been paid or accounted for in full. 6.4 No claim or dispute involving the Company has been made by or arisen with the IRS or any other tax authority (in the US or elsewhere) which could reasonably be considered material in the context of the Placing; and so far as the Company and each of the Directors is aware, there is no significant risk that such a claim will be made or that such a dispute will arise. 7. INDEBTEDNESS 7.1 No circumstances have arisen or, so far as the Directors are aware (having made reasonable enquiries), are reasonably expected to arise, such that any person is, or would with the giving of notice and/or lapse of time become entitled to require payment of any material indebtedness (other than indebtedness which it is proposed should be repaid out of the proceeds of the placing of the Placing Shares) (including for the avoidance of doubt, pursuant to finance leases) of the Company before its stated maturity and the Company has not received any notice from any person to whom any material indebtedness (other than indebtedness which is to be repaid out of the proceeds of the placing of the Placing Shares) of the Company is payable on demand that such person now proposes to demand repayment. 7.2 No event has occurred or is subsisting or, so far as the Directors are aware, is reasonably expected to occur, which constitutes or results in, or would with the giving of notice and/or lapse of time, would be reasonably expected to constitute or result in, a default or the acceleration or breach of any material obligation under any agreement, instrument or arrangement to which the Company is a party or by which it or any of its properties, revenues or assets are bound and which would, in any such case, have a material adverse effect on the business, assets or prospects of the Company. 8. TRADING POSITION 8.1 Since the Balance Sheet Date (and save as disclosed in 2005 First Quarter Results and in the Admission Document):- 8.1.1 the Company has carried on its business in the ordinary and usual course; 8.1.2 there has been no significant change in the financial or trading position of the Company; 8.1.3 the Company has not entered into or assumed or incurred any contract, commitment, borrowings, indebtedness in the nature of borrowing, guarantee, liability (including contingent liability) or other obligation which, in any such case, has not been discharged at the date of this Agreement or will not be discharged prior to Admission and the disclosure of which to a potential subscriber of Placing Shares is required in order to prevent the Admission Document being inaccurate or misleading in any material respect; PAGE 27 8.1.4 the Company has not declared, made or paid any dividend or other distribution; 8.1.5 no agreement or commitment has been entered into by the Company which is of a long term or unusual nature which involves or could involve an obligation of a material nature; and 8.1.6 no agreement or commitment has been entered into by the Company for the acquisition or disposal of any business or material asset or any material liabilities (including contingent liabilities) otherwise than in the ordinary course of business. 9. BUSINESS 9.1 All material licences, consents and other permissions and approvals required for carrying on the business now carried on by the Company have been obtained and are in full force and effect and, so far as the Directors are aware, there is no circumstance which indicates that any such licence, consent, permission or approval is likely to be revoked or incapable of renewal. 9.2 The Company is not in breach of any laws, regulations, orders, directives, guidelines and codes which relate to the Company, the ownership and use of the assets of the Company and all business operations undertaken by the Company which is material in the context of the Placing. 9.3 The Company is not a party to, nor affected by, any contract or arrangement which is of material importance to the business of the Company otherwise than on arm's length terms. 9.4 So far as the Directors are aware, there is no agreement, arrangement or transaction material to the business and/or financial position and/or prospects of the Company which is invalid or which may be rescinded, avoided or repudiated, and the Company has not received written notice of any intention to terminate, repudiate or disclaim any such agreement, arrangement or transaction, in each case which is material in the context of the Placing. 10. INSURANCE The Company carries insurance cover at the levels and for the risks normally insured against by persons carrying on the same or similar business as that carried on by the Company and all such insurances are in full force and effect and not voidable and there is no material insurance claim made by or against the Company pending or outstanding or, so far as the Directors are aware, threatened and all premiums due and payable in respect of all insurances have been duly paid and the Company reasonably considers such cover to be adequate. 11. INTELLECTUAL PROPERTY 11.1 For the purposes of this paragraph 11, "Intellectual Property Rights" means any and all trade marks, service marks, patents, registered designs, unregistered design rights, copyright, rights in confidential information and any other similar intellectual property rights of any nature whatsoever, whether or not registered or capable of registration, and all applications and rights to apply for the same, together with all goodwill relating or attached thereto. 11.2 No activities of the Company infringe or, so far as the Directors are aware, are likely to infringe any Intellectual Property Rights of any third party, and no claim has been made against the Company in respect of any such infringement in the three years prior to the date of this Agreement. PAGE 28 11.3 The Company has disclosed to Investec all Intellectual Property Rights material to the business activities of the Company, all reasonable steps have been taken to protect such Intellectual Property Rights by registration, patent application or otherwise in all jurisdictions in which the Company operates or intends to operate; and all such Intellectual Property Rights as are owned by the Company are owned free of all encumbrances and there are no proceedings, actions or claims pending or, so far as the Directors are aware, threatened which impugn the title, validity or subsistence of any Intellectual Property Rights owned by the Company. 11.4 The know how comprised in the Intellectual Property Rights has been adequately documented and to the extent that it is of a confidential nature or the confidentiality of such information is of material importance to the Company, no part of such confidential information has been disclosed to any third party except subject to arrangements to protect such confidentiality. 11.5 As far as the Directors are aware:- 11.5.1 nothing has been done or omitted to be done by the Company which would jeopardise the validity or subsistence of any Intellectual Property Rights owned by the Company; and 11.5.2 there has been no unauthorised use by any person of any Intellectual Property Rights or confidential information of the Company; in both instances which are material in the context of the Placing. 12. LITIGATION 12.1 Neither the Company nor any person for whom it or they may be liable, vicariously or otherwise, is engaged in any litigation or legal or arbitration proceedings which, individually or collectively, are material and may have or have had during the last twelve (12) months a significant adverse effect on the financial position of the Company and, so far as the Directors are aware, no such litigation or legal or arbitration proceedings are threatened or pending and (so far as aforesaid) there are no circumstances which may reasonably be expected to give rise to any such litigation or legal or arbitration proceedings. 12.2 The Company has not taken any action nor have any other steps been taken or legal proceedings started or, so far as the Directors are aware, threatened against the Company for the winding-up or dissolution of it or for it to enter into any arrangement or composition for the benefit of creditors, or for the appointment of a receiver, trustee or similar officer of its properties, revenues, undertakings or assets. 13. SHARE CAPITAL 13.1 Save as disclosed in the Admission Document and/or pursuant to the Company's stock option plan, there are not in force any options or other agreements which call for the issue of, or accord to any person the right to call for the issue of, any Common Shares or shares in the capital or other securities of the Company; and the Company has no current intention to grant options or rights to subscribe for shares in the Company. 13.2 The creation, issue and allotment of the Placing Shares in the manner proposed:- 13.2.1 will comply with the AIM Rules, the California Corporations Code, the FSMA, the SEC Regulations, the OTC Bulletin Board Rules and all other statutes and governmental and regulatory authorities and regulations applicable to the Placing; and 13.2.2 will not infringe any borrowing limits, powers or restrictions of, or the terms of any agreement, security, commitment or arrangement binding on the Company, or will result in the imposition or variation of any rights or obligations of the Company. PAGE 29 13.3 The Company has power under its bye-laws and restated articles of incorporation to create, allot and issue the Placing Shares and to effect the Placing in the manner proposed and to enter into and perform this Agreement without any further sanction or consent by members of the Company or any class of them and, subject as aforesaid, there is no consent required by the Company for the issue of the Placing Shares and to effect the Placing which has not been unconditionally and irrevocably obtained. 13.4 The creation, allotment and issue of the Placing Shares and the Admission will not exceed or infringe any restrictions or the terms of any contract, obligation or commitment by or binding upon the Company or result in the imposition or variation of any rights or obligations of the Company. 13.5 There have been given to Investec (or its advisers) details of all current agreements (whether written or unwritten) between the Company and any one or more of the shareholders in the Company relating to any rights of pre-emption over or rights to require a sale or purchase of any shares in the capital of the Company and, so far as the Directors are aware, there have been given to Investec (or its advisers) details of all current agreements (whether written or unwritten) between any one or more of the shareholders in the Company relating to any rights of pre-emption over or rights to require a sale or purchase of any shares in the capital of the Company. 13.6 The Placing Shares will be allotted and issued free from all claims, charges, liens, encumbrances, equities and third party rights and will rank pari passu in all respects with the existing issued Common Shares including the right to receive all dividends declared, made or paid after the date of this Agreement. 14. SUBSIDIARIES The Company has no subsidiaries or subsidiary undertakings within the meaning of the UK Companies Act 1985 (as amended). 15. RELATIONSHIPS WITH SHAREHOLDERS AND DIRECTORS 15.1 The Company is independent of its shareholders. 15.2 None of the shareholders of the Company has any rights, in their capacity as such, in relation to the Company other than at law or as set out in the bye-laws and restated articles of incorporation of the Company in force at the date of this Agreement or contained in the agreements referred to in the Admission Document. 15.3 Save as disclosed in the Admission Document, there are no agreements, arrangements or understandings (whether legally binding or not) between the Company and any person who is a shareholder, or the beneficial owner of any interest, in the Company or in any company in which the Company is interested, or any person connected with any such person relating to the management of the business of the Company or the appointment or removal of any directors of the Company or the ownership or transfer of ownership of any of their respective assets or which concerns the provision of any finance, goods, services or facilities to or by the Company. 15.4 The Admission Document contains the name of any person (other than professional advisers disclosed in the Admission Document and trade suppliers) who has received, directly or indirectly, from the Company within the twelve (12) months preceding the date of this Agreement, or entered into any contractual arrangements to receive, directly or indirectly, from the Company on or after Admission fees totalling (pound)10,000 or more, securities in the Company with a value of (pound)10,000 or more calculated by reference to the Placing Price or any other benefit with a value of (pound)10,000 or more at the date of Admission and the Admission Document gives all material details of the relationship of such person with the Company and of the fees, securities or other benefit received or to be received. PAGE 30 16. CORPORATE GOVERNANCE The Directors have given due consideration to and intend to observe the requirements of the Combined Code to the extent they consider appropriate having regard to the Company's size, stage of development and resources. 17. US SECURITIES LEGISLATION 17.1 None of the Company, its affiliates or any persons acting on its or their behalf have engaged or will engage in any 'directed selling efforts', as defined in Regulation S, with respect to the Placing Shares. 17.2 None of the Company, its affiliates or any persons acting on its or their behalf, directly or indirectly, (a) has made or will make offers or sales of any of the Placing Shares, (b) has solicited or will solicit offers to buy any of the Placing Shares or (c) otherwise has negotiated or will negotiate in respect of any of the Placing Shares, in any case, under circumstances that would require the registration of the Placing Shares under the US Securities Act. 17.3 The Company, its affiliates and any persons acting on its or their behalf have and will comply with the offering restrictions requirement of Regulation S. 17.4 The offering of the Placing Shares to Placees pursuant to the Placing in the manner contemplated in this Agreement and in the Admission Document will not cause the Company or any of the Directors to be in violation or breach of any provision of the US Securities Act or of the SEC Regulations or the OTC Bulletin Board Rules. PAGE 31 SCHEDULE 2 PART B WARRANTY CONFIRMATION LETTER The Directors Investec Bank (UK) Limited 2 Gresham Street London EC2V 7QP 19 July 2005 Dear Sirs Enova Systems, Inc. (the "Company") Placing of 5,350,000 Common Shares and application for Admission We refer to the Placing, and to the Placing Agreement dated 19 July 2005 between Investec Bank (UK) Limited (1) the Company (2) and the Directors of the Company (3) (the "Placing Agreement"). Words and expressions defined in the Placing Agreement have the same meanings in this letter. We confirm that:- 1. we have complied with all our obligations under the Placing Agreement which we have been required to perform to date; 2. [save as previously notified pursuant to clause 6.4.1 and/or 6.6 of the Placing Agreement,] none of the warranties and undertakings contained in the Placing Agreement has been breached or is unfulfilled or was untrue or inaccurate or misleading when made, and none of such warranties or undertakings would be breached or unfulfilled or be untrue or inaccurate or misleading in any respect were it to be repeated by reference to the facts subsisting at the date of this letter, and no Specified Event has come to the knowledge of the Company or of any Director which in any such case is material in the context of the Placing; 3. neither the Company nor any of the Directors is aware of any circumstances which could give rise to Investec having the right to terminate the Placing Agreement pursuant to clause 12 of the Placing Agreement. Yours faithfully Director for and on behalf of Enova Systems, Inc. PAGE 32 SCHEDULE 2 PART C DEED OF ADHERENCE THIS DEED OF ADHERENCE is made on 2005 by o of o (the "Covenantor") in favour of Enova Systems, Inc. whose principal offices are at 19850 South Magellan Drive, Torrance, CA 90502, USA (the "Company") and Investec Bank (UK) Limited whose registered office is at 2 Gresham Street, London EC2V 7QP ("Investec") and is supplemental to the Placing Agreement dated 19 July 2005 and made between Investec, the Company and the Directors of the Company (the "Placing Agreement"), a copy of which is attached to this Deed. NOW THIS DEED WITNESSES as follows:- The Covenantor hereby covenants with each of the Company and Investec to observe, perform and be bound by the provisions of clauses 8.5 to 8.6 of the Placing Agreement as if he were a party to the Placing Agreement and named therein in place of a Director. THIS DEED has been executed as a Deed by the Covenantor and delivered on the date stated at the beginning of this Deed PAGE 33 SCHEDULE 3 Part A DOCUMENTS TO BE DELIVERED TO INVESTEC 1. The Admission Application duly signed on behalf of the Company together with such other letters or documents as may be required by the AIM Rules to support the application and a cheque made payable to the London Stock Exchange in respect of the London Stock Exchange charges. 2. Two copies of the Admission Document. 3. One original of the responsibility letters signed by each of the Directors. 4. A certified copy of the powers of attorney executed by each of the Directors. 5. The Verification Notes duly signed by or on behalf of each of the Directors together with a copy of the annexures referred to therein. 6. A certified copy of the Board Resolutions. 7. An original signed copy of the Accountants' Report, together with any related statement of adjustments and letters of consent. 8. A letter from the Reporting Accountants addressed to Investec and to the Company confirming the accuracy of the financial information relating to the Company set out in the Admission Document. 9. A letter from the Reporting Accountants addressed to Investec and to the Company confirming the accuracy of the taxation sections set out in the Admission Document. 10. An original signed copy of the Working Capital Report. 11. One original signed copy of the Long Form Report. 12. One original signed copy of the Legal Due Diligence Report. 13. A letter, in the agreed form, from the Directors addressed to Investec confirming that the Directors understand the nature of their responsibilities and obligations as directors of an AIM company and that, having made due and careful enquiry, the Directors have established procedures which provide a reasonable basis for the Directors to make proper judgements as to the financial position and prospects of the Company and that the Directors have been advised accordingly by the Reporting Accountants. 14. A letter, in the agreed form, from the Reporting Accountants addressed to Investec reporting on the Working Capital Report and confirming that the Company has sufficient working capital for its present requirements. 15. A certified copy of the Board memorandum on financial reporting procedures. 16. A letter, in the agreed form, from the Reporting Accountants addressed to Investec confirming that in their opinion the Directors have established procedures which provide a reasonable basis for them to make proper judgements as to the financial position and prospects of the Company and that the confirmations given by the Company and referred to in paragraph 13 above has been given after due and careful enquiry. 17. A letter, in the agreed form, from the Reporting Accountants addressed to Investec confirming that there has been no significant change in the financial or trading position of the Company since 31 March 2005. PAGE 34 18. Letters, in the agreed form, addressed to Investec from the Company's UK Solicitors, the Company's US Lawyers and the Reporting Accountants confirming, for the purposes of AIM Rule 39, that they have no knowledge of any matter not included in the Admission Document which should be so included. 19. A certified copy of the written consent of the Reporting Accountants addressed to Investec and to the Company consenting to the inclusion in the Admission Document of the Accountants Report and respective references thereto in the form and context in which they appear and making the declaration required by paragraph 1.2 of Annex I to the Prospectus Rules. 20. Opinion Letter, in the agreed form, from the Company's US Lawyers. PAGE 35 SCHEDULE 3 PART B DOCUMENTS TO BE FILED WITH THE LONDON STOCK EXCHANGE 1. Admission Document, six copies. 2. Application form. PART C DOCUMENTS IN THE AGREED FORM 1. Pathfinder Admission Document 2. Board Resolutions 3. Lock-In Deed 4. Placing Letter 5. Press Announcement 6. Admission Document 7. Verification Notes 8. Working Capital Report 9. Letter from the Directors to Investec pursuant to paragraph 13 of Part A of this Schedule 3 10. Letters from the Reporting Accountants to Investec pursuant to paragraphs 8, 14, 16, 17 and 19 of Part A of this Schedule 3 11. Letters from the Company's UK Solicitors, the Company's US Lawyers and the Reporting Accountants to Investec pursuant to paragraph 18 of Part A of this Schedule 3 PAGE 36 SIGNED by duly authorised for and on behalf of INVESTEC BANK (UK) LIMITED /s/ Michael Ansell .............................................. Director SIGNED by duly authorised for and on behalf of ENOVA SYSTEMS, INC. /s/ Edwin Riddell .............................................. Director EXECUTED as a deed by ANTHONY NEIL RAWLINSON ... /s/ Edwin Riddell, attorney in fact.. In the presence of:- Witness signature .......................................... Witness name .......................................... Address .......................................... .......................................... .......................................... EXECUTED as a deed by EDWIN ORRELL RIDDELL ... /s/ Edwin Riddell, attorney in fact.. In the presence of:- Witness signature .......................................... Witness name .......................................... Address .......................................... .......................................... .......................................... PAGE 37 EXECUTED as a deed by BJORN AHLSTROM ... /s/ Edwin Riddell, attorney in fact.. In the presence of:- Witness signature .......................................... Witness name .......................................... Address .......................................... .......................................... .......................................... EXECUTED as a deed by DR MALCOLM RODERICK CURRIE ... /s/ Edwin Riddell, attorney in fact.. in the presence of:- Witness signature .......................................... Witness name .......................................... Address .......................................... .......................................... .......................................... EXECUTED as a deed by DONALD H DREYER ... /s/ Edwin Riddell, attorney in fact.. in the presence of:- Witness signature .......................................... Witness name .......................................... Address .......................................... .......................................... .......................................... EXECUTED as a deed by JOHN ROBERT WALLACE ... /s/ Edwin Riddell, attorney in fact.. in the presence of:- Witness signature .......................................... Witness name .......................................... Address .......................................... .......................................... .......................................... PAGE 38 EXECUTED as a deed by LAWRENCE BRIAN LOMBARD ... /s/ Lawrence B. Lombard ............. in the presence of:- Witness signature .......................................... Witness name .......................................... Address .......................................... .......................................... .......................................... EX-10 4 p19576_ex10-29.txt EXHIBIT 10.29 DATED 19 July 2005 (1) ENOVA SYSTEMS, INC. (2) THE DIRECTORS OF ENOVA SYSTEMS, INC. (3) INVESTEC BANK (UK) LIMITED AGREEMENT relating to the appointment of a Nominated Adviser and Broker Lawrence Graham LLP 190 Strand London WC2R 1JN Tel: 020 7379 0000 Fax: 020 7379 6854 (JGE/I24/6) CONTENTS Clause Page 1. Interpretation 1 2. Appointments 4 3. Fees 4 4. Duties of Investec 5 5. Undertakings and Authorities relating to Admission 6 6. Indemnity 7 7. AIM Rules 8 8. Announcements 9 9. Directors' dealings in securities 10 10. Termination 10 11. Change of Directors 12 12. Undertakings regarding Issues of Further Shares 12 13. Undertakings regarding US Securities and Other Legislation 12 14. Status of the Company 12 15. Notices 12 16. General 12 17. Counterparts 12 18. Governing Law 14 Schedule 1 - The Directors 16 Schedule 2 - Pre-Emption Rights 16 PAGE 1 THIS AGREEMENT is made the 19th of July 2005 BETWEEN: (1) ENOVA SYSTEMS, INC. (a corporation incorporated in California, USA with corporation no. C0775424) whose principal offices are at 19850 South Magellan Drive, Torrance, California 90502, USA (the "Company"); (2) THE SEVERAL PERSONS whose respective names and addresses are set out in Schedule 1 to this Agreement, being all the directors of the Company (the "Directors"); and (3) INVESTEC BANK (UK) LIMITED (incorporated in England and Wales with registered no. 489604) whose registered office is at 2 Gresham Street, London EC2V 7QP, acting through its divisions Investec Investment Banking and Investec Securities ("Investec"). WHEREAS: (A) The existing shares of common stock of the Company are at the date of this Agreement traded on the OTC Bulletin Board in the US (under the symbol `ENVA'). (B) Application is proposed to be made to the London Stock Exchange for all the existing and to be issued shares of common stock in the capital of the Company to be admitted to trading on AIM. (C) The Company wishes as separate appointments, to appoint Investec to be its Nominated Adviser and Broker in respect of its proposed application for Admission (as hereinafter defined) and thereafter. (D) Investec has agreed to accept such appointments and to perform the obligations and services to or for the Company described herein upon and subject to the terms and conditions herein set out. (E) The Directors have agreed to be parties to this Agreement to give, at the request of Investec, certain undertakings. (F) Investec is regulated by the FSA and is a member of the London Stock Exchange. NOW IT IS HEREBY AGREED as follows: 1. INTERPRETATION 1.1 In this Agreement (including its Recitals) the following words and expressions shall (save where the context otherwise requires) have the following meanings: "Admission" the admission of all the issued Common Shares to trading on AIM becoming effective (as described in Rule 6 of the AIM Rules); "AdmissionDocument" the document published by the Company in relation to Admission as required by and in accordance with the AIM Rules; "AIM" the market of that name operated by the London Stock Exchange; "AIMRules" the rules for AIM companies and their nominated advisers published by the London Stock Exchange from time to time; PAGE 2 "AIMSecurity" a security which the London Stock Exchange has admitted to trading on AIM pursuant to the AIM Rules; "AnnualRetainerFee" (pound)Nil for the first year following Admission, (pound)45,000 for the second year following Admission and increasing to (pound)50,000 for the third and each subsequent year following Admission; "Broker" as defined in the AIM Rules; "Business Day" any day on which banks in the City of London are open for business (excluding Saturdays); "Common Shares" shares of common stock, no par value, in the capital of the Company; "FSA" the Financial Services Authority; "FSMA" the Financial Services & Markets Act 2000 as amended (including pursuant to the Market Abuse Regulations) and including any regulations made pursuant thereto; "London Stock Exchange" London Stock Exchange plc; "Market Abuse Regulations" the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2005; "NASD" National Association of Securities Dealers in the US; "NASDAQ" the National Association of Securities Dealers Automated Quotation System, a national securities exchange in the US which is owned and operated by National Stock Markets, Inc.; "Nominated Adviser" as defined in the AIM Rules; "OTC Bulletin Board" the Over The Counter Bulletin Board quotation medium that securities dealers may use to enter, update and retrieve quotation information for securities trading over the counter that are neither listed on NASDAQ or on a primary national securities exchange; "OTC Bulletin Board Rules" the rules and regulations (including of the NASD and the SEC) applicable to a company whose shares are traded on the OTC Bulletin Board in the US; "Placing" the placing of 5,350,000 new Common Shares, more particularly described in the Admission Document; "Placing Agreement" the agreement dated 19 July 2005 entered into between Investec (1) the Company (2) and the Directors (3) under which, inter alia, Investec has (as agent for the Company) undertaken the Placing; "Regulation S" Regulation S of the US Securities Act; "Regulatory Information as defined in the AIM Rules; Service" PAGE 3 "SEC" US Securities and Exchange Commission; "SEC Regulations" the rules and regulations of the SEC in so far as they apply to the Company; "Termination Event" one of the events or circumstances mentioned in clauses 10.1 or 10.2; and "US Securities Act" the US Securities Act of 1933 (as amended). 1.2 In this Agreement unless the context requires otherwise, a reference to:- 1.2.1 "person" includes any company, unincorporated association or partnership; 1.2.2 a "subsidiary" or "holding company" shall, in relation to Investec, be construed in accordance with section 736 of the Companies Act 1985; 1.2.3 clauses and schedules is a reference to clauses of and schedules to this agreement; 1.2.4 a statutory provision shall be construed as a reference to those provisions as respectively amended or re-enacted (whether before or after the date of this agreement) from time to time and shall include any provisions of which they are re-enactments (whether with or without modification) and any subordinate legislation made from time to time under such provisions, (but not so as to produce any greater liability for any of the parties hereto than would have existed under the relevant provision in the form which it stood as at the date hereof); 1.2.5 an agreement or other document is a reference to that agreement or document as from time to time supplemented or amended; 1.2.6 "writing" shall be construed so as to include any communications effected by facsimile transmission or any comparable means ordinarily legible and non-transitory but excluding writing appearing only on the screen of a visual display unit or other similar device. 1.3 The table of contents and headings in this Agreement are for convenience only and shall not affect its construction. 1.4 Words denoting the singular shall include the plural and vice versa. Words denoting any gender include all genders. 1.5 Words and expressions defined in the Admission Document shall apply to this Agreement. 1.6 Any agreement, warranty, representation, indemnity, covenant or undertaking on the part of two or more persons shall (except where the contrary is stated) be deemed to be given or made by such persons jointly and severally and where any such provision is qualified by words such as "to the best of the belief of" the person giving the provision of "so far as a person is aware", then there shall be deemed to be included within such qualification the words "having made all reasonable enquiry". 1.7 References in this Agreement to "material" shall mean (unless otherwise stated) material in the context of Admission in the reasonable opinion of Investec. PAGE 4 2. APPOINTMENTS 2.1 The Company hereby appoints and Investec hereby agrees to act as Nominated Adviser to the Company. The Company hereby confirms that the appointment of Investec as Nominated Adviser confers on Investec all powers, authorities and discretions on behalf of the Company which are reasonably necessary for, or reasonably incidental to, its role as the Company's Nominated Adviser and the Company hereby agrees to ratify and confirm everything which Investec may lawfully and properly do in that capacity and pursuant to those powers, authorities and discretions. Such appointment shall commence on the date of this Agreement and, subject to clauses 2.3 and 10 below, shall continue until terminated by either the Company or Investec giving to the other not less than one (1) month's prior written notice, such notice to expire not earlier than the first anniversary of the date of Admission. 2.2 The Company hereby appoints and Investec hereby agrees to act as Broker to the Company. The Company hereby confirms that the appointment of Investec as Broker confers on Investec all powers, authorities and discretions on behalf of the Company which are reasonably necessary for, or reasonably incidental to, its role as Broker and the Company hereby agrees to ratify and confirm everything which Investec may lawfully and properly do in that capacity and pursuant to those powers, authorities and discretions. Such appointment shall commence on the date of this Agreement and, subject to clauses 2.3 and 10 below, shall continue until terminated by either the Company or Investec giving to the other not less than thirty (30) days prior written notice, such notice to expire not earlier than the first anniversary of the date of Admission. 2.3 In the event that Admission shall not be effected by 26 July 2005 (or such later date as Investec may agree, being not later than 9 August 2005), then this Agreement shall be of no effect and no party shall have any rights or liabilities pursuant to this Agreement. 3. FEES 3.1 In consideration of Investec agreeing to act as Nominated Adviser and Broker, the Company shall, subject to and conditional upon Admission, pay to Investec the Annual Retainer Fee in respect of its services under this Agreement (together with VAT thereon and any out-of-pocket expenses which it incurs in respect of such services). The Company shall pay the Annual Retainer Fee in two equal instalments half yearly in advance beginning on the first anniversary of Admission. Any instalment is subject to a pro-rated adjustment in respect of termination occurring pursuant to the terms of this Agreement. 3.2 Any payments due pursuant to clause 3.1 shall be in addition to any fees payable in respect of any advice which Investec may be engaged to provide on any specific transaction, event or situation on behalf of the Company, subject to prior written agreement with the Company (including, for the avoidance of doubt but without limitation, any advice on potential acquisitions, future fund raisings, the approval of any document as a `financial promotion' for the purposes of section 21 FSMA or any requirement to give a 'fair and reasonable' opinion on a related party transaction under the AIM Rules). 3.3 Unless expressly agreed to the contrary, the Company agrees to pay any fees and expenses properly due and payable to Investec pursuant to this Agreement from time to time within fourteen (14) days after the issue of the invoice in respect thereof (together with any VAT properly charged thereon upon production of an appropriate VAT invoice) and may be set off against any sums which Investec may be holding for the Company's account from time to time. PAGE 5 4. DUTIES OF INVESTEC 4.1 The responsibilities of Investec in its capacity as Nominated Adviser are owed solely to the London Stock Exchange and are set out in Rule 39 and Schedule 6 of the AIM Rules. Investec generally agrees to provide continuing advice and guidance as the Directors may reasonably and properly request in relation to their responsibilities and obligations as directors of a company whose shares are traded on AIM, and without prejudice to the generality of the foregoing:- 4.1.1 Investec shall, subject to and conditional on Admission, act as Nominated Adviser to the Company in relation to the publication of the Admission Document and shall make the declaration required by the London Stock Exchange for Admission; 4.1.2 Investec shall provide such advice and guidance to the Directors of the Company as to their responsibilities and obligations to ensure compliance by the Company on an ongoing basis with the AIM Rules and as the Company may reasonably request from time to time; 4.1.3 Investec shall liaise as required with the AIM team of the London Stock Exchange on matters relating to the continued trading of the Company's Common Shares on AIM; 4.1.4 Investec shall attend by telephone (when reasonably requested by the Directors) at meetings of the Board of directors of the Company and at general meetings of the Company; and 4.1.5 Investec shall regularly review with the Company the actual trading performance and financial condition of the Company against any profit forecast, estimate or projection included in the Admission Document or otherwise made public, in order to assist the Company in deciding whether an announcement is necessary under the AIM Rules. 4.2 Investec shall act as the Company's Broker as required by Rule 35 of the AIM Rules and perform the services appropriate and customary to that role and without prejudice to the generality of the foregoing:- 4.2.1 Investec shall provide advice and guidance and co-ordination of an appropriate investor liaison programme for the Company; 4.2.2 Investec, when requested, shall co-ordinate all transactions in Common Shares, with a view to maintaining an orderly market in the UK in Common Shares; 4.2.3 Investec shall advise the Company on investment conditions in the UK and the pricing of the Company's securities and monitor and report to the Company where appropriate on the trading of its shares and significant movements in share price; 4.2.4 Investec shall provide advice to the Company on anticipated market reactions to new corporate initiatives (including, without limitation, acquisitions, disposals and finance raising); and 4.2.5 Investec shall provide advice to the Company on a preliminary basis, where requested, relating to potential offers, acquisitions, disposals and finance raising. PAGE 6 4.3 Investec shall treat as strictly confidential, and shall procure that its officers, servants, agents and advisers (collectively, the "Investec Parties") shall treat as strictly confidential, all information received or obtained by it in relation to the Company, its subsidiaries, their respective directors and employees and the businesses and investments (both actual and prospective) of the Company and such subsidiaries (the "Confidential Information"). Investec shall use such information and shall procure that its officers, servants, agents and advisers use such information, solely for the purpose of carrying out its duties properly in accordance with this Agreement and in no event shall such Confidential Information be used directly or indirectly to trade in the Common Shares. In the event of the termination of this Agreement for any reason, Investec shall, immediately on being so requested, return any such information in its possession, or in the possession of its officers, servants and agents, to the Company, together with written confirmation signed by a director of Investec that it has not retained copies thereof. Notwithstanding the foregoing, upon termination of this Agreement, the Investec Parties shall maintain the confidentiality of the Confidential Information for a period of two (2) years after such termination. 4.4 The obligations of Investec contained in Clause 4.3 shall be without prejudice to duties and obligations imposed on Investec in its capacity as Nominated Adviser or Broker under the AIM Rules or generally by law. 4.5 Any advice rendered by Investec will, save as required by the AIM Rules, be confidential to the Company and solely for its benefit. Such advice may not be disclosed to any third party other than the Company's other professional advisers or unless the Company comes under a legal or regulatory obligation to disclose it nor may such advice be used by or relied on by any third party, without Investec's express prior written consent. 4.6 The Company and each of the Directors acknowledges that Investec is acting solely for the Company in relation to the subject matter of this Agreement and for no one else and accordingly, that Investec will not be responsible to anyone other than the Company for providing the protections afforded to customers of or providing advice in relation to or in connection with such subject matter. 4.7 The Company acknowledges that Investec is not responsible for providing any legal advice to the Company or the Directors (or any of them) in respect of any applicable laws and regulations and the Company shall (if requested) communicate to Investec any legal advice it has obtained that is relevant to carrying out Investec's services hereunder. 5. UNDERTAKINGS AND AUTHORITIES RELATING TO ADMISSION 5.1 The Company and each of the Directors undertakes to Investec for a period of one (1) year commencing on Admission to at all times comply with all statements of intent and undertakings contained in the Admission Document unless Investec agrees otherwise (such agreement not to be unreasonably withheld or delayed). 5.2 The Company and each of the Directors undertakes in favour of Investec to execute or to use all reasonable endeavours to procure the execution of all such documents and to do or procure the doing of all such things as may reasonably be required by, or be reasonably necessary to comply with the requirements of the London Stock Exchange for the purposes of or in connection with Investec's continuing roles as Nominated Adviser and Broker to the Company. 5.3 The Company and each of the Directors (in the case of each of the Directors, so far as is within his or her powers) undertakes to Investec that they will for so long as the Common Shares are AIM Securities (and insofar as the same relate thereto) use all reasonable endeavours to comply with and abide by all relevant laws and regulations including the AIM Rules, the FSMA and the Criminal Justice Act 1993. 5.4 The Company and each of the Directors undertakes promptly to provide Investec or procure (so far as he is able) that Investec is as soon as practicable following a request from Investec provided with all information, confirmations and evidence which Investec may reasonably require for the proper performance of its duties hereunder and/or as may be required by the London Stock Exchange in order to comply fully with all relevant provisions of AIM Rules, the FSMA and any other laws or PAGE 7 regulations (whether or not having the force of law). The Company and each of the Directors undertakes that all such information, confirmations and evidence provided by it to Investec will, so far as it/he is aware, be true and accurate in all material respects and not materially misleading. Furthermore, if anything occurs within a reasonable time thereafter which renders any such information, confirmation, evidence and/or statements of opinion untrue or inaccurate or misleading in any material respect, the Company will as soon as practicable notify Investec and take all reasonable steps necessary to amend the information, confirmation, evidence or statement of opinion so as to rectify the matter. 5.5 The Company undertakes to Investec not to alter, revise, amend or release or agree to any alteration, revision, amendment or release of any material terms or conditions of any service agreements of senior executives of the Company without the prior written consent of Investec (such consent not to be unreasonably withheld or delayed), provided that this clause shall not restrict any revisions to the salary or benefits payable under such service agreements which have been approved by the Board of Directors of the Company (or a duly appointed and authorised remuneration committee of the Board). 5.6 For so long as Investec shall be Nominated Adviser or Broker to the Company, the Company shall not appoint any other nominated adviser or any other broker. 6. INDEMNITY 6.1 Investec, its officers, servants, agents and advisers shall not be liable to the Company for any claim, liability, loss, damages, costs, charges or expenses made, suffered or incurred by the Company or the Directors directly or indirectly arising out of the due performance by Investec of its obligations or services hereunder unless the same shall arise from (i) a material breach of this Agreement, (ii) the fraud, negligence or wilful default of Investec, its officers, servants, agents or advisers or (iii) the breach by Investec of its duties under the FSMA, the AIM Rules or the FSA's Handbook of Rules and Guidance. 6.2 The Company undertakes with Investec (for itself and as trustee for its officers, servants, agents and advisers (the "Indemnified Persons")) that it will hold Investec, and the Indemnified Persons fully and effectively indemnified against all actions, liabilities, losses, damages and expenses arising out of any claim which may be brought or threatened against Investec or any of the Indemnified Persons (whether such claim is substantiated, dismissed, compromised or withdrawn) in each case directly or indirectly arising out of in relation to or by reason of:- 6.2.1 the due and proper performance by Investec of its role as Nominated Adviser and Broker in the manner contemplated by this Agreement and/or any breach of the warranties, representations, undertakings or other obligations undertaken or given by the Company or the Directors hereunder; or 6.2.2 any failure by the Company to comply with the FSMA, the US Securities Act, the SEC Regulations, the OTC Bulletin Board Rules or any other applicable requirement of statute or statutory regulation of the United Kingdom, the USA or any other jurisdiction and/or any relevant rules of a self-regulating organisation of which Investec is a member in relation to any document duly and properly issued or published by Investec in or towards the performance of the role as Nominated Adviser and/or Broker hereunder; or PAGE 8 6.2.3 any misrepresentation or alleged misrepresentation (by whomsoever made, except the Indemnified Persons) contained in any document issued or published by the Company; or 6.2.4 the approval by Investec for the purposes of section 21 of FSMA of any material issued or caused to be issued by the Company in connection with the issue of any financial promotion or any other document issued or published by Investec with the consent of the Company in or towards the performance of the role as Nominated Adviser hereunder arising by reason of the contents of such document or material not being accurate or being unfair or misleading or infringing any applicable statute or the rules of the FSA; or 6.2.5 any letter or report required by the AIM Rules to be given or made by Investec in connection with any document issued or published by Investec with the consent of the Company in or towards the performance of the role as Nominated Adviser hereunder being incorrect or misleading; including without limitation in any such case all proper costs, charges and expenses (including without prejudice to the generality of the foregoing, all reasonable and proper legal fees and expenses incurred on a solicitor and own client basis) which Investec or any of the Indemnified Persons may suffer or reasonably incur in disputing any such claim or in establishing any claim for indemnity under the foregoing provisions of this clause 6. 6.3 The indemnities contained in clause 6.2 shall not extend to any actions, liabilities, losses, damages or expenses to the extent that the same arise from the misrepresentation (other than as referred to in clause 6.2.4 above), fraud, negligence or wilful default of Investec or the Indemnified Persons or any material breach by Investec of the terms of this Agreement or its duties under the FSMA, the AIM Rules or the FSA's Handbook of Rules and Guidance. 6.4 As soon as reasonably practicable after Investec becomes aware of any claim made or threatened within the scope of the indemnities set out in this clause 6 (and Investec shall use its reasonable endeavours to ensure that any Indemnified Person notifies Investec of any such claim as soon as reasonably practicable) Investec will at the cost of the Company and following full consultation with the Company and/or its advisers upon such terms as Investec may require take such reasonable steps in relation to any proceedings, actions, claims and demands which become the subject of this indemnity as the Company requests in writing. 6.5 All sums payable under this indemnity shall be paid free and clear of all deductions or withholdings whatsoever save only as may be required by law. 6.6 The indemnities contained in this clause 6 shall remain in full force and effect notwithstanding Admission. 7. AIM RULES 7.1 The Company and each of the Directors hereby acknowledge that:- 7.1.1 Investec owes responsibilities to the London Stock Exchange as Nominated Adviser and Broker, and if at any time a conflict arises between the duties of Investec to the Company and to the London Stock Exchange, Investec shall (after reasonable consultation with the Company if practicable) be entitled to act so as to fulfil its obligations to the London Stock Exchange without incurring any liability to the Company arising out of such action; and PAGE 9 7.1.2 the London Stock Exchange may review Investec's registration as Nominated Adviser and/or Broker and/or impose sanctions upon Investec depending upon the conduct of the Company in relation to the AIM Rules. 7.2 The Company hereby undertakes to Investec that it shall (and each of the Directors severally undertakes, for so long as he remains a director of the Company, to use his reasonable endeavours to procure that the Company shall), provided that the same shall not violate any US laws or regulations:- 7.2.1 upon becoming aware of the same, to comply forthwith with all reasonable directions given by Investec in relation to compliance with the AIM Rules; 7.2.2 to inform Investec forthwith upon becoming aware of any breach by the Company and/or any Director of the AIM Rules and to request the advice and guidance of Investec in relation to all material matters relevant to the Company's compliance with the AIM Rules; and 7.2.3 that arrangements will be made for transfers of the Company's shares to be registered within fourteen (14) days of receipt (save where the Directors refuse to register a transfer pursuant to the provisions of the restated articles of incorporation of the Company or where such registration would violate or fail to comply with any US securities laws or regulations) and if appropriate for certificates to be dispatched without delay. 7.3 The Company undertakes to Investec to comply on a timely basis with all obligations imposed on AIM companies from time to time by the London Stock Exchange and each Director severally undertakes that for so long as he is a director of the Company he will do everything reasonably within his power as such at the Company's cost to procure that the Company complies with such obligations (provided that the same shall not violate any US laws or regulations). 7.4 The Company undertakes to Investec that it shall (and each of the Directors severally undertakes, for so long as he remains a director of the Company, to use all reasonable endeavours to procure that the Company shall):- 7.4.1 supply to Investec forthwith upon Investec requesting the same complete and accurate copies of any document or information relating to the Company which Investec may reasonably require for the purpose of carrying out its duties hereunder and under the AIM Rules including, without prejudice to the generality of the foregoing, copies of minutes of any board meetings; 7.4.2 supply Investec with copies of the audited consolidated annual accounts of the Company and its subsidiaries, approved by the auditors for the time being of the Company, for the financial period to which they relate, together with a draft preliminary statement of such results, and to supply copies of the interim results within the timescale laid down by the AIM Rules; and 7.4.3 supply to Investec, on a timely basis so as to give Investec reasonable opportunity to comment on such, copies of all documents before their despatch to shareholders generally and announcements and other documents required to be submitted by the Company to the London Stock Exchange. 8. ANNOUNCEMENTS 8.1 The Company undertakes to Investec (and each of the Directors undertakes to Investec, for so long as he remains a director of the Company, to use his reasonable endeavours to procure) that, for so long as Investec shall continue as the Company's Nominated Adviser and/or Broker, the terms, method and timing of any publicity by or on behalf of the Company in connection with the application for Admission, including any statement to or interview with the media, shall if practicable be agreed in advance with Investec (such agreement not to be unreasonably withheld or delayed by Investec). PAGE 10 8.2 The Company shall notify Investec in advance of and discuss with Investec:- 8.2.1 any event or matter the occurrence of which will give rise directly or indirectly to a requirement under the AIM Rules, the SEC Regulations or the OTC Bulletin Board Rules for a public announcement (including without prejudice to that generality, any contractual or other commitment or agreement which may require such announcement, or the issue or creation of any shares or options or securities convertible into shares in the capital of the Company); and 8.2.2 any announcement of profits or losses or dividends of the Company or any other information which is likely to affect the assessment of the character or value of the business of the Company or which may be necessary to be made known to the public being a major new development in the Company's sphere of activities which is not public knowledge and which may, by virtue of its effect on the Company's assets and liabilities or financial position or in the general course of the Company's business, lead to any substantial movement in the price of the Common Shares. 8.3 The Company undertakes to Investec (and each of the Directors undertakes to Investec, for so long as he remains a director of the Company, to use his reasonable endeavours to procure) that, for so long as Investec shall continue as the Company's Nominated Adviser and/or Broker, any announcement made by the Company to comply with legal or regulatory requirements of NASD or any other market in the US (or otherwise outside the UK) on which the Common Shares of the Company may be traded, quoted, listed or otherwise dealt in from time to time shall be released simultaneously to a Regulatory Information Service in the UK or (if such time is prior to the start of trading in equities on the London Stock Exchange) immediately upon the commencement of trading in equities on the London Stock Exchange. 9. DIRECTORS' DEALINGS IN SECURITIES The Company undertakes to Investec (and each of the Directors undertakes to Investec, for so long as he remains a director of the Company, to use his reasonable endeavours to procure) that the Company shall ensure that the Directors comply with the AIM Rules in so far as they relate to dealings in the securities of a company whose securities have been admitted to trading on AIM (and, in particular, Rules 17 and 21 thereof). 10. TERMINATION 10.1 The Company may terminate either or both of the appointments herein contained forthwith by giving written notice to Investec (as the case may be) following:- 10.1.1 the appointment of a liquidator, receiver, administrative receiver or administrator over the whole or substantially the whole of Investec's assets (except for the purposes of a solvent reconstruction, amalgamation, reorganisation, merger or consolidation); 10.1.2 a material breach by Investec of any of the terms and conditions of this Agreement, which breach (if capable of remedy) remains unremedied within fourteen (14) days' service of a notice specifying the breach and requiring it to be remedied; 10.2 Investec may terminate either or both of its appointments forthwith by giving written notice to the Company in any one of the following events or circumstances: PAGE 11 10.2.1 the Company does not pay any sum payable under this Agreement after having received seven (7) days' written notice that it remains unpaid (and subject to there being no dispute concerning the amount of such sum); 10.2.2 either the Company or any of the Directors commits any material breach of any of the other terms and conditions of this Agreement, which breach (if capable of remedy) remains unremedied within fourteen (14) days of service of a notice specifying the breach and requiring it to be remedied; 10.2.3 any Director of the Company commits a fraudulent act, or the Company or any Director commits any material breach of the California Corporations Code, the FSMA, the AIM Rules or any other laws or regulations to which the Company and/or the Directors are subject from time to time; 10.2.4 the Company fails to comply with advice given to the Company and/or the Directors by Investec such that, in the reasonable opinion of Investec, such failure could jeopardise or damage the reputation of Investec; 10.2.5 any warranty or representation given in the Placing Agreement is found to be untrue or misleading in any respect which is material in the context of the Placing (as defined in the Placing Agreement); 10.2.6 the Company stops or suspends or threatens to stop or suspend payment of all or a material part of (or a particular type of) its debts (which failure to pay is not subject to a valid defence) or is unable to pay its debts or is deemed unable to do so under applicable law; 10.2.7 the Directors make any proposal under applicable law or the Company proposes or makes any agreement for the deferral, resettling or other readjustment (or proposes or makes a general assignment of or arrangement or composition or for the benefit of the relevant creditors) or all of (or all of a particular type) its debts, or a moratorium is agreed or declared in respect of or affecting all or a material part of (or of a particular type of) the debts of the Company; 10.2.8 the appointment of a receiver, administrative receiver, manager or similar person to enforce a security given by the Company; 10.2.9 any step is taken by the Company with a view to its winding-up or any person presents a winding-up petition (other than for frivolous or vexatious reasons) which is not dismissed within fourteen (14) days or the Company ceases or threatens to cease to carry on all or a material part of its business (except for the purposes of and followed by reconstruction, amalgamation, reorganisation, merger or consolidation on terms approved by Investec before that step is taken); 10.2.10 the Company terminates one (but not the other) appointment of Investec contained in this Agreement. 10.3 The parties shall notify the other parties promptly upon the occurrence of a Termination Event or any event or circumstance which may reasonably be expected to give rise to the occurrence of a Termination Event. 10.4 Upon the occurrence of a Termination Event, the non-defaulting parties shall be entitled to terminate this Agreement forthwith by written notice to the other party. 10.5 Subject to any earlier termination pursuant to the provisions of clauses 10.1 and 10.2, either of the appointments of Investec as the Company's Nominated Adviser and as the Company's Broker shall continue for an initial minimum period of twelve (12) months following Admission and thereafter unless and until terminated (with or without cause) by either the Company or Investec giving to the other not less than one (1) month's notice of termination expiring at any time after such minimum twelve (12) month period. PAGE 12 10.6 Upon termination of either of the appointments of Investec contained in this Agreement:- 10.6.1 the rights and obligations of the parties under this Agreement shall terminate in relation to such appointment and be of no further effect, except that clauses 1, 3.1, 3.3 (to the extent that fees have accrued at termination), 6 (for a period of one (1) year after termination), 12 and 16 (inclusive) shall remain in full force and effect in relation to such appointment; 10.6.2 any rights or obligations to which any of the parties to this Agreement may be entitled or be subject in relation to such appointment before such termination shall remain in full force and effect; 10.6.3 the termination of such appointment shall not affect or prejudice any right to damages or other remedy which the terminating party may have in respect of the Termination Event which gave rise to the termination of such appointment or any other right to damages or other remedy which any party may have in respect of any breach of this Agreement which existed at or before the date of termination; and 10.6.4 the termination of such appointment shall not affect or prejudice the other appointment of Investec pursuant to this Agreement (unless it shall also be terminated). 11. CHANGE OF DIRECTORS Following a request by Investec, the Company shall procure that each new director of the Company appointed after the date of this Agreement as a director of the Company shall enter into an Agreement by which he agrees to be bound by the terms of this Agreement which are then binding upon any of the Directors (save that he shall not be liable for any antecedent breaches by any of them). 12. UNDERTAKINGS REGARDING ISSUES OF FURTHER SHARES 12.1 The Company undertakes to Investec that it will not (and each of the Directors undertakes, so far as he is lawfully able and for so long as he remains a director of the Company, that he will procure that the Company will not) at any time during the period of five (5) years commencing on Admission (and notwithstanding whether Investec is still the Company's Nominated Adviser or not during that period):- 12.1.1 issue any further shares of series A convertible preferred stock in the Company or shares of series B convertible preferred stock in the Company, without the prior consent in writing of Investec (such consent not to be unreasonably withheld or delayed); or 12.1.2 issue any other shares or securities in the Company ranking ahead of the Common Shares for entitlement to any dividend or other distribution made by the Company, without the prior approval of the holders of the requisite majority of the Common Shares (and, if necessary, of the requisite majority of the shares of series A convertible preferred stock and of the requisite majority of the shares of series B convertible preferred stock). 12.2 Without prejudice to the provisions of clause 12.1, the Company undertakes to Investec in the terms set out in Schedule 2 to this Agreement and each of the Directors undertakes (so far as he is lawfully able and for so long as he remains a director of the Company) to Investec to use all reasonable endeavours to procure that the Company complies with the provisions of Schedule 2 strictly in accordance with its terms. PAGE 13 13. UNDERTAKINGS REGARDING US SECURITIES AND OTHER LEGISLATION 13.1 The Company and each of the Directors undertakes to Investec that it or he will at all times during the continuance of the appointment of Investec as the Company's Nominated Adviser or as the Company's Broker comply with:- 13.1.1 all US securities legislation and other US legislation (federal, state or whatsoever) applicable to the Company, its directors, its shareholders and/or its shares, including (but without limitation) the US Securities Act, the US Securities Exchange Act of 1934, the US Sarbanes-Oxley Act of 2002 and the SEC Regulations; and 13.1.2 the OTC Bulletin Board Rules and any other rules and regulations of NASD applicable to the Company, its directors, its shareholders and/or its shares. 13.2 It is understood and acknowledged by the Company and each of the Directors that Investec shall not be under any obligation or duty to advise the Company or any of the Directors in relation to any US legal, regulatory or market matters whether relating to issues of securities under any US legislation (whether federal, state or whatsoever), the SEC Regulations, the OTC Bulletin Board Rules, any other rules and regulations of NASD or otherwise howsoever. 14. STATUS OF THE COMPANY 14.1 The Company warrants to Investec that:- 14.1.1 it is a company incorporated in the State of California, USA and under the laws of the State of California and it has been in continuous existence since its incorporation; 14.1.2 it has full power and authority to enter into this Agreement and to perform its obligations under this Agreement and such obligations will be binding on it in accordance with their terms; and 14.1.3 no order has been made or petition presented or resolution passed for its winding-up or administration and no receiver or administrator or administrative receiver has been appointed by any person in relation to its business or assets or any part thereof. 15. NOTICES 15.1 Any notices or other communication requiring to be given or served under or in connection with the Agreement shall be in writing and shall be sufficiently given or served if delivered:- 15.1.1 if to the Company to the Chief Executive Officer at the address set out at the front of this document; 15.1.2 if to the Directors, their respective addresses set out in Schedule 1; 15.1.3 if to Investec, its address set out at the front of this document; (or to such other addresses as any of the parties may specify by notice in writing to each other party to this Agreement). 15.2 Any such notice shall be delivered by hand or sent by facsimile transmission or overnight courier delivery and if delivered by hand or sent by facsimile shall conclusively be deemed to have been given or served at the time of despatch and if sent by overnight courier delivery shall conclusively be deemed to have been received the next business day in the USA or the UK (as the case may be). PAGE 14 15.3 Any notice or document shall be deemed served:- 15.3.1 if delivered, at the time of delivery; 15.3.2 if sent by overnight courier delivery, the business day following such despatch; and 15.3.3 if sent by facsimile transmission, at the time of transmission if between the hours of 9.00 a.m. and 5.00 p.m. on Monday to Friday (other than statutory holidays) or otherwise at 9.00 a.m. on the next succeeding business day. 15.4 In proving service (without prejudice to any other means):- 15.4.1 by overnight courier delivery, it shall only be necessary to prove that the notice or document was contained in an envelope properly despatched as provided in this clause; 15.4.2 by facsimile transmission, it shall be necessary to prove that the notice or document was duly received by production of a copy fax bearing the addressee's automatic records of correct transmission. 16. GENERAL 16.1 Any time, date or period mentioned in this Agreement may be extended by mutual agreement between the parties in writing but, as regards any time, date or period originally fixed or any time, date or period so extended, time shall be of the essence. 16.2 This Agreement shall be binding upon and enure for the benefit of the personal representatives and successors of the parties as the case may be. 16.3 No party shall be entitled to assign his or its rights under this Agreement without the prior written consent of each of the other Parties. 16.4 The invalidity, illegality or unenforceability of any provision of this Agreement shall not affect the other provisions of this Agreement. 16.5 No failure or delay by Investec or the Company or the Directors in exercising any remedy, right, power or privilege under or in relation to this Agreement shall operate as a waiver thereof nor shall any single or partial exercise of any remedy, right, power or privilege preclude any further exercise thereof or the exercise of any other remedy, right, power or privilege. 16.6 No waiver by Investec or the Company or the Directors of any of the requirements of this Agreement or of any of their rights under this Agreement shall have effect unless given in writing signed by one of its directors. No waiver of any particular breach of the provisions of this Agreement shall operate as a waiver of any repetition of such breach. 16.7 No person who is not a party to this Agreement shall have any right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Agreement. 16.8 Any remedy or right conferred upon Investec or the Company or the Directors for breach of this Agreement shall be in addition to and without prejudice to all other rights and remedies available to it. 16.9 Each party shall provide all such assistance and supply all such information as the other parties shall reasonably require for the purposes of this Agreement. PAGE 15 17. COUNTERPARTS This Agreement may be entered into in any number of counterparts and by the parties to it on separate counterparts, each of which when executed and delivered shall be an original, but all the counterparts shall together constitute one and the same document. This Agreement may be validly exchanged by fax. 18. GOVERNING LAW 18.1 This Agreement shall be governed by English law and the parties hereby submit to the non-exclusive jurisdiction of the English Courts for all purposes relating to this Agreement, but this Agreement may be enforced in any court of competent jurisdiction. 18.2 The Company and each of the Directors hereby irrevocably appoints Field Fisher Waterhouse (Solicitors) of 35 Vine Street, London EC3N 2AA as its or his agent to receive on its or his behalf service of proceedings issued out of the English Courts in any action or proceedings arising out of or in connection with this Agreement. The Company and each of the Directors warrants that Field Fisher Waterhouse have agreed to act as its or his agent as aforesaid and agrees that failure by such agent to notify the Company or any of such Directors of such service shall not adversely affect the validity of such service or any judgement based on it. Such service shall become effective seven (7) days after despatch. Nothing contained in this Agreement shall affect the right to serve process in any other manner permitted by law. IN WITNESS WHEREOF this Agreement has been executed this day and year first above written. PAGE 16 SCHEDULE 1 THE DIRECTORS Name Position - ---- -------- Anthony Neil Rawlinson Chairman Edwin Orrin Riddell Chief Executive Officer, President & Director Bjorn Ahlstrom Director Dr. Malcolm Roderick Currie Director Donald H Dreyer Director John Robert Wallace Director Lawrence (Larry) Brian Chief Financial Officer & Director Lombard all of 19850 South Magellan Drive, Torrance, California 90502, USA PAGE 17 SCHEDULE 2 PRE-EMPTION RIGHTS 1. In this Schedule, the following additional words and expressions shall (save where the context otherwise requires) have the following meanings:- "Affiliate" any holding company of Investec or any subsidiary of any such holding company and the current and former directors, officers and employees of each of such persons and of Investec (as the case may be); "allot for cash" an allotment of securities where the consideration for the allotment is cash received by the Company, or is a cheque received by the Company in good faith which the Directors of the Company have no reason for suspecting will not be paid, or is a release of a liability of the Company for a liquidated sum, or is an undertaking to pay cash to the Company at a future date; "employees' share scheme" the Company's 1996 Stock Option Plan and any other scheme for encouraging or facilitating the holding of shares in the Company by or for the benefit of:- (a) the bona fide employees or former employees, directors or consultants of the Company; or (b) the wives, husbands, widows, widowers or children or step-children under the age of 18 of such employees or former employees, directors or consultants; "equity securities" a relevant share in the Company (other than a bonus share), or a right to subscribe for, or to convert securities into, relevant shares in the Company; "Indemnified Person" Investec and/or any of its Affiliates; "relevant shares" all shares in the Company (which shall, for the avoidance of any doubt, include the Common Shares, the shares of series A convertible preferred stock, no par value, in the Company and the shares of series B convertible preferred stock, no par value, in the Company) other than:- (a) shares (if any) which as respects dividends and capital carry a right to participate only up to a specified amount in a distribution; and (b) shares which are held by a person who acquired them in pursuance of an employees' share scheme or, in the case of shares which have not been allotted, are to be allotted in pursuance of such a scheme; and (c) shares issued to non-executive board directors in accordance with the September 1999 Board of Directors compensation package for outside directors. "related party" as defined in the AIM Rules; PAGE 18 "relevant employee shares" shares of the Company which would be relevant shares but for the fact that they are held by a person who acquired them in pursuance of an employees' share scheme; "securities" shares, stock, debentures, debenture stock, loan stock, bonds and other securities of any description; "Shareholder Majority" holders of 75% of the voting rights at the relevant time; "voting rights" all the voting rights attributable to the share capital of the Company which are exerciseable at the relevant time; and references to:- (a) the "allotment" of equity securities or of equity securities consisting of relevant shares of a particular class includes the grant of a right to subscribe for, or to convert any securities into, relevant shares in the Company or (as the case may be) relevant shares of a particular class; but such a reference does not include the allotment of any relevant shares pursuant to such a right; and (b) a "class of shares" is to shares to which the same rights are attached as to voting and as to participation, both as respects dividends and as respects capital, in a distribution; and (c) to the "holder of shares" of any description is to whoever was at the close of business on a date, to be specified in the offer and to fall in the period of twenty-eight (28) days immediately before the date of the offer, the holders of shares of that description. 2. The Company undertakes to Investec that for the period of five (5) years commencing on Admission (and notwithstanding whether Investec is still the Company's Nominated Adviser or not during that period), where the Company is proposing to allot for cash new equity securities the voting rights attaching to which would (together with any other allotment(s) for cash of equity securities within the previous twelve (12) month period following Admission (or part thereof if Admission has taken place less than twelve (12) months prior to such allotment)) exceed ten per cent. (10%) of the total voting rights attached to all the equity securities of the Company in issue, it shall not (without the prior consent in writing of Investec or the prior approval by a Shareholder Majority):- 2.1 allot any of them on any terms to a person unless it has made an offer to each person who holds relevant shares or relevant employee shares to allot to him on the same or more favourable terms a proportion of those securities which is as nearly as practicable equal to the proportion held by him of the aggregate of the issued relevant shares and relevant employee shares; and 2.2 allot any of those securities to a person unless the period during which any such offer may be accepted (as referred to in paragraph 4.3 below) has expired or the Company has received notice of the acceptance or refusal of every offer so made. 3. The undertaking in paragraph 2 does not apply to:- 3.1 a particular allotment of equity securities if these are, or are to be, wholly or partly paid up otherwise than in cash; and securities which the Company has offered to allot to a holder of relevant shares or relevant employee shares may be allotted to him, or anyone in whose favour he has renounced his right to their allotment, without contravening paragraph 2.2; or PAGE 19 3.2 the allotment of securities which would, apart from the renunciation or assignment of the right to their allotment, be held under an employee share scheme. 4. In relation to an offer for the purposes of paragraph 2.1 above, such offer:- 4.1 shall be in writing and shall be made to a holder of shares either personally or by sending it by post (that is to say, prepaying and posting a letter containing the offer) to him or to his registered address [and if sent by post, the offer shall be deemed to be made at the time at which the letter would be delivered five (5) days following posting; 4.2 where shares are held by two or more persons jointly, may be made to the joint holder first named in the Company's register of members in respect of the shares; 4.3 must state a period of not less than twenty one (21) days during which it may be accepted; and such offer may not be withdrawn before the end of that period; unless otherwise agreed in writing with Investec. 5. Neither the Company nor any of the Directors shall make any claim against Investec or any Indemnified Person to recover any damage, cost, charge, expense, loss or liability which the Company or any of the Directors may suffer or incur by reason of or arising out of the exercise by Investec of its discretion as regards the consent referred to in paragraph 2 above. 6. The Company undertakes to Investec (for itself and as trustee for each Indemnified Person) that it will indemnify and hold harmless, and at all times keep each Indemnified Person fully and effectively indemnified, against all losses, claims, expenses, liabilities, actions, demands, proceedings and judgements whatsoever and all reasonable costs, charges and expenses which Investec or any Indemnified Person may suffer or incur or which may be made against or incurred by Investec or any Indemnified Person in any jurisdiction by shareholders of the Company (or any of them) whether in their personal capacities, by way of derivative action on behalf of the Company, or otherwise (including, but without limitation, all such reasonable costs, charges and expenses including any value added tax thereon) as Investec or any Indemnified Person may pay or properly incur in responding to, disputing any such actual or potential actions, claims or demands or in enforcing the rights of Investec or any Indemnified Person under paragraph 5 above and this paragraph 6) and which in any such case arises directly or indirectly out of or in connection with or results from or is attributable to the exercise by Investec of its discretion as regards the consent referred to in paragraph 2 above. PAGE 20 SIGNED by duly authorised for and on behalf of INVESTEC BANK (UK) LIMITED /s/ Michael Ansell ............................................ Director SIGNED by duly authorised for and on behalf of ENOVA SYSTEMS, INC. /s/ Edwin RIddell ............................................ Director SIGNED by ANTHONY NEIL RAWLINSON /s/ Anthony Neil Rawlinson .............................................. (Director) SIGNED by EDWIN ORRIN RIDDELL /s/ Edwin Riddell .............................................. (Director) SIGNED by BJORN AHLSTROM /s/ Bjorn Ahlstrom .............................................. (Director) PAGE 21 SIGNED by DR MALCOLM RODERICK CURRIE /s/ Malcolm Roderick Currie .............................................. (Director) SIGNED by DONALD H DREYER /s/ Donald H Dreyer .............................................. (Director) SIGNED by JOHN ROBERT WALLACE /s/ John Robert Wallace .............................................. (Director) SIGNED by LAWRENCE BRIAN LOMBARD /s/ Lawrence Brian Lombard .............................................. (Director) -----END PRIVACY-ENHANCED MESSAGE-----