Ocean Power Technologies Inc 17 October 2005 NEWS RELEASE For Immediate Release Ocean Power Technologies, Inc. 1590 Reed Road Pennington, New Jersey 08534 USA OCEAN POWER TECHNOLOGIES ANNOUNCES RESULTS FOR THE YEAR ENDED 30 APRIL 2005 Pennington, NJ, USA, 17 October 2005 - Ocean Power Technologies, Inc ("OPT", or "the Company") (London Stock Exchange: AIM-OPT), a leading renewable energy technology company that is commercialising its "intelligent" and scaleable off-shore wave-powered electrical generation systems, is pleased to announce its results for the year ended 30 April 2005 (exchange rate of £1=$1.85). HIGHLIGHTS • Contract revenues of $5.4 million (£2.9 million), up 14% from the previous year. • Net loss of $429,000 (£232,000), compared to loss of $2,849,000 (£1,540,000) in the previous year. • Cash, cash equivalents and short term investments balance of $38.8 million (£21.0 million) at 30 April 2005 (2004: $39.6 million). • Additional contracts and funding: - Hawaii contract awarded $2.0 million additional funding from US Navy - Lockheed Martin contracts awarded totaling $2.0 million - Joint venture formed with Iberdrola S.A. for a multi-phased project for a 1.25 MW OPT wave power station on the northern coast of Spain • PowerBuoys deployed in ocean: - First Hawaii PowerBuoyTM initially tested in ocean - PowerBuoy installed off coast of Washington State under Lockheed contract for powering underwater sensing systems • Formation of European subsidiary Ocean Power Technologies Limited. Mark R. Draper named as Chief Executive, and office opened in Warwick, UK. • Operating results reflect planned investment in capital assets, additional professional staff, opening the European operation and product development effort. Commenting on these results Dr. George W. Taylor, Chief Executive Officer of OPT, said: "OPT has made significant progress, with the conclusion of its first full financial year subsequent to its IPO in October 2003. The hallmarks for this period have been significant investments made in our proprietary wave power technology, in hiring highly capable individuals with international engineering and business experience, and broadening the Company's revenue base with new, world-class strategic partners. We believe that OPT's success in getting PowerBuoys in the water will continue, as we focus resources on the long-term issues of performance in the dynamic ocean environment, and of increasing power efficiencies per PowerBuoy unit. With these accomplishments, and the expansion of our presence in Europe, OPT believes it is establishing the right foundation for significant growth that is sustainable in the international marketplace. This is increasingly important, given the heightened awareness of the dangers of global warming and the accelerating cost of fossil fuel." For further information, please contact: Dr. George W. Taylor, Charles F. Dunleavy, Chief Executive Officer Chief Financial Officer Telephone: (609) 730-0400 Telephone: (609) 730-0400 E-mail: gtaylor@oceanpowertech.com E-mail: cdunleavy@oceanpowertech.com Michael Brennan, Ken Cronin, Evolution Securities Ltd. Gavin Anderson & Company Telephone: +44 207 071 4300 Telephone: +44 207 554 1400 RESULTS STATEMENT Results Revenues for the year ended 30 April 2005 were $5,365,235, compared to $4,713,202 for the previous year. This 14% increase was attributable primarily to new contracts with Lockheed Martin Corp and Iberdrola S.A. Gross profit for the year was $194,714, compared to $393,352 in the previous year. OPT's net loss for the year ended 30 April 2005 was $428,634, versus a loss for the previous year of $2,849,476. The financial year 2005 results reflected a significant increase in product development; selling, general and administrative costs; plus non-operational items that included foreign exchange gains and interest earned (see Financial Review below). Business Review As demand for renewable energy continues to expand in markets throughout the world, OPT is ideally positioned to achieve significant growth. OPT's unique technology, coupled with proven ocean survivable systems, is the key to viable wave power stations. These ocean survivable systems which OPT utilises include the conventional ocean-going buoy, marine-grade structures and sub-systems used in the offshore oil and gas industry, and marine construction/deployment techniques utilised by OPT's strategic partner, the US Navy. OPT's fundamental business plan is to make, sell and service large quantities of its PowerBuoy units, under contracts which provide for rapid scale-up. Sale of the Company's products and services are strategically focused on "green" utility power markets and premium-priced remote power. OPT Limited Ocean Power Technologies Limited has been formed as a wholly-owned subsidiary of OPT. Based in the UK, OPT Limited will establish the Company's presence within European markets. OPT Limited's operations will comprise engineering and sales and marketing in Europe. Mark R. Draper has been appointed to the position of Chief Executive of OPT Limited. Mr. Draper was previously the managing director of the UK Generation Business of E.ON (formerly Powergen), with direct responsibility for both renewable and conventional power generation. The hiring of additional key staff has commenced, and OPT Limited has projects underway in Europe. OPT Limited is expected to benefit from participation in various European initiatives now in place to foster growth in marine renewables. For example, the marine deployment fund in the UK has certain incentives with respect to capital expenditures and production tariffs which OPT Limited believes will be of benefit to its construction of a demonstration power station, with a utility partner. In this connection, OPT Limited has held continued dialogue with the UK Energy minister and key officials of the Department of Trade and Industry. Further, OPT Limited has identified potential utility partners for the building of a demonstration power station, and analysing potential sites. Iberdrola S.A. In July 2004 OPT signed a Joint Venture Agreement with Iberdrola S.A., IDEA, the energy agency of the Government of Spain, and Sodercan, the industrial development agency of the Spanish region of Cantabria. To receive the support of these regional and federal European government agencies, following from the sponsorship which OPT is receiving from the US federal government and the New Jersey state government, marks an important milestone for OPT. Iberdrola is one of the largest renewable energy companies worldwide with more than 2,400 Megawatts (MW) of renewable energy generation assets, and plans to increase that capacity to 4,500 MW by 2008. It is also one of the largest electric power utilities in Europe. The Joint Venture is for the phased development, construction and operation of a 1.25 Megawatt OPT wave power station off the coast of the Cantabria region in northern Spain, to be connected into the Spanish national power grid. Following the successful completion of the initial 1.25 MW OPT wave power station, Iberdrola has stated it expects over the following several years to install hundreds of megawatts of OPT wave power stations along Spain's northern coast. OPT has invested in this Joint Venture and retains a 10% interest, with Iberdrola retaining a 60% interest. In addition, Total S.A., the major French energy company, has acquired a 10% interest in the venture. As part of the initial phase of the Spanish wave power project, OPT and Iberdrola are working on the development of the site, permitting and the identification of local vendors and sub-contractors for building and installing portions of the OPT system. US Navy OPT has continued to make progress on its contract with the US Navy for delivery of PowerBuoy systems at a US Marine Corps base on the island of Oahu, in Hawaii. The project is to provide up to 1MW of power to the Hawaiian power grid. With the active participation and support of the US Navy, the project is focused on survivability, deployment, methodology, grid connection and multiple-buoy integration. The first PowerBuoy unit was installed in June 2004 near Kaneohe Bay, having been towed to the site by a standard commercial tugboat. Once on site, the deployment was successfully accomplished within three hours and the straightforward process is expected to facilitate the building of future OPT wave power stations. This first Hawaii PowerBuoy unit is initially rated for production of 40-50 kilowatts of electrical power. Full-scale testing of the first buoy was conducted in the ocean over four months. The initial system has now been modified and enhanced and will be redeployed. As an indication of the US Navy's continuing partnership in this project, $2.0 million was added to contract value during the year. New Jersey Board of Public Utilities OPT will shortly deploy the PowerBuoy to be delivered under its contract with the New Jersey Board of Public Utilities ("NJBPU"). Under the contract, OPT is installing and will operate one of its PowerBuoy systems off the coast of New Jersey. To date, system designs have been prepared, system performance simulations have been conducted, extensive wave tank testing has been completed successfully, and mooring systems have been deployed in the ocean. The system will be used to perform ocean testing of certain technology innovations, and for marketing purposes to prospective partners for a scale-up to a multi-megawatt power station off the New Jersey coast. The contract award to OPT was made under the New Jersey Renewable Energy and Economic Development programme. New Jersey is one of the leading US states to foster the wide-scale deployment of renewable energy systems. New Jersey has mandated that 4% of all power produced in the state must be from renewable generating sources by 2008, and 20% by 2020. With a population that consumes about 5,000 MW of power, a 4% mandate translates to 200 MW of renewable power requirement. OPT looks forward to building on its contract with NJBPU to obtain a strategic partner, and coupled with additional support from the state, to construct a commercial OPT wave power station. Lockheed Martin In May 2004, the Company announced its receipt of an award from Lockheed Martin Corp. of a contract worth an initial $0.5 million to provide a wave energy generating system to power remote underwater sensing equipment and associated data link, for oceanographic data sampling. Under this contract, OPT developed a small-scale wave energy conversion system designed to provide continuous, renewable power to Lockheed Martin's systems under its contract from the US Navy. OPT's technology is expected to improve those systems' performance and greatly enhance operating life, with a resultant major economic savings to the customer. During the year ended 30 April 2005, OPT successfully completed ocean deployment, testing and operation of this system for Lockheed Martin, and has successfully demonstrated in-ocean performance 20 nautical miles off the coast of Seattle, Washington, in accord with design specifications. Total time to design, build and complete testing in the ocean was accomplished within nine months, and the project was completed on a profitable basis. Furthermore, following the successful ocean testing of the prototype Lockheed Martin system, OPT was awarded a $1.5 million contract from Lockheed Martin for the second phase of the programme. This contract was for the preliminary design and planning for the system development and the demonstration of initial production quantities of OPT's small scale PowerBuoy system. Both of the first two contracts from Lockheed were successfully completed, and OPT received a letter from Lockheed commending the Company for its satisfactory completion of the contracts within schedule and budget. The expected next phase, for systems development and initial production quantities, is part of a much larger programme which would include Lockheed and other major defense contractors. OPT's portion, while material to its trading, is a relatively small part of the total programme, and it is dependent on the determination and timing of work to be performed by Lockheed and the major subcontractors. In addition to the programme with Lockheed Martin, there is extensive commercial potential for OPT's system as a renewable power source for a range of offshore equipment including meteorological and oceanographic data buoys, fishing and navigational aids, mariculture, and other data sampling applications. Each of the aforementioned contracts, individually, carries the high prospect of increased future business with the respective global customers. OPT believes that it is well positioned to grow its business in an ever-expanding international renewable energy marketplace. Cornerstones of this effort are alliances with significant strategic partners on both the demand and supply side, standardised production techniques and volume production of PowerBuoy units. OPT's strategy for establishing its baseline PowerBuoy brand includes a focus on ocean survivability, successful installation procedures, and consistent, predictable performance. With that focus on execution, the Company believes it will successfully expand the global sales of its PowerBuoy system. Product Development The Company continues to direct significant resources to certain new product development initiatives. The focus of these initiatives is on enhancing survivability and power conversion efficiencies of the PowerBuoy system, with the expected result of increasing power output capacity per PowerBuoy. This effort to date has served as the basis for several new patent applications. As of 31 August 2005, the Company has 27 patents issued and 11 patents filed and pending. The Company will allocate increased resources to product development, and views this as an important investment that will leverage the existing technology. OPT believes that the path to achieving lower cost per kilowatt hour produced by the PowerBuoy system includes (a) power conversion efficiency improvements through technical innovations, (b) manufacturing economies of scale, (c) utilising modular, marine-proven systems such as ocean-going buoys, and (d) effective, quality-controlled sourcing of components on an international basis. Board Changes Following the Annual General Meeting of Shareholders held on 22 November 2004, the Board of Directors of OPT, consisting of Sir Eric A. Ash, Charles F. Dunleavy, Seymour S. Preston III, and Dr. George W. Taylor, elected Seymour S. Preston III as Chairman of the Board of Directors, Sir Eric A. Ash, as Chairman of the Compensation and Nominating Committees, and Seymour S. Preston III as Chairman of the Audit Committee. In addition, Sir Eric A. Ash was elected Chairman of the Board of Directors of Ocean Power Technologies Limited. The other OPT Limited Board Members are Mark R. Draper, Charles F. Dunleavy and Dr. George W. Taylor. Personnel The Company has added several key personnel in both the UK and the US during 2005 in the areas of senior management, engineering and project management. These professional employees have all had experience in delivering systems and services, and strengthen OPT's execution capability. In order to incentivise employees' performance and teamwork, all employees participate in the Company's stock option plans. Financial Review Revenues for the year ended 30 April 2005 were $5,365,235, compared with $4,713,202 during the previous year. This represents a 14% increase. The increase in revenues compared with the previous year is attributable to OPT's contracts with Lockheed Martin, Iberdrola and New Jersey Board of Public Utilities, net of a decrease in revenues recognized in connection with the Hawaii contract. Gross profit from contracts was $194,714 in the year ended 30 April 2005, compared to $393,352 in the previous year. Company-funded product development costs were $904,618 in the year ended 30 April 2005, compared to $255,958 in the previous year. These costs related to engineering efforts focused on increasing power capacity per PowerBuoy, enhanced power take-off, and system survivability. Selling, general and administrative expenses were $2,553,911 in the year ended 30 April 2005, up 46% from $1,745,955 in the previous year. The increase was due primarily to growing the Company's European operations, expanded marketing efforts, higher personnel-related costs and costs related to the Company being publicly held. The increased level of personnel-related costs reflects the Company's investment in its professional staff in the areas of project management, engineering and business development. OPT's net loss for the year ended 30 April 2005 was $428,634, versus a net loss of $2,849,476 the previous year. Results for the twelve-month period ended 30 April 2004 included a one-time charge of $3.5 million to Tyco Electronics Corporation ("Tyco") related to a 1999 agreement between Tyco and OPT. This was a non-recurring item included in Other income (expense) in financial year 2004. As of 30 April 2005 the Company had cash, cash equivalents and certificates of deposit totaling $38,787,176, as compared to $39,565,574 at 30 April 2004. The Company had total interest income of $1,297,156 for year-ended 30 April 2005, as compared to $555,717 in the previous year. The increase in interest income from the prior year reflected a full year's invested balances in fiscal 2005, versus comparable principal amounts invested for only a half-year in fiscal 2004. Purchases of equipment and patent costs were $560,902 in the year ended 30 April 2005, compared to $159,860 in the previous year. The Company increased its engineering, test and production facilities in 2005, reflecting planned use of proceeds from its initial public offering and listing on the AIM market of the London Stock Exchange in October 2003. Current Trading and Outlook During financial year ending 30 April 2006, OPT will continue to invest in those areas which position the Company for significant growth. These include the hiring of experienced personnel, leveraging its existing contracts by committing increased resources to product development, adding more world-class strategic partners, and getting more PowerBuoys in the ocean. OPT has recently announced a new relationship with Total S.A., a leading international energy company. Initiatives are under way in the UK with respect to establishing the market presence of OPT Limited. Paul Jordan, a former official of the Carbon Trust, joined OPT Limited in October 2005 as Business Development Manager. With the recent passing of the US Energy Bill, the United States Government has for the first time included specific language to provide financial incentives for wave energy. OPT has been involved directly with the effort that has culminated in this accomplishment. The Company is already well-positioned in the United States with its contract to build a grid-connected wave power station in Hawaii for the US Navy and a contract with the New Jersey Board of Public Utilities to build a demonstration wave power system. The Company expects the new Energy Bill incentives of the US Government to result in additional business for OPT with US utilities and others. The Company continues to assert careful stewardship of the funds raised in connection with its IPO. The planned use of those proceeds has not fundamentally changed course since the IPO and OPT is making the investments noted previously including a strong emphasis on product development. We are pleased with the continuing support of our customers under existing contracts. Based on the size of our Company, the timing of new contract awards, especially within the context of large government programmes, may create delays in year to year revenues. However, the Company has strong confidence that its strategy focused on getting systems in the ocean and increasing power output of the PowerBuoy is consistent with long-term accelerated growth, which will lead to OPT becoming a major international company. Seymour S. Preston III Dr. George W. Taylor Chairman Chief Executive Officer Consolidated Balance Sheets as of April 30, 2004 and 2005 ASSETS 2004 2005 $ $ CURRENT ASSETS: Cash and cash equivalents 38,840,245 13,584,814 Certificates of deposit 725,329 25,202,362 Accounts receivable 46,925 668,424 Unbilled receivables 553,821 822,037 Other current assets 225,308 464,582 Total current assets 40,391,628 40,742,219 EQUIPMENT, Net of accumulated depreciation of $302,377 and $414,447 respectively 104,195 427,613 PATENTS, Net of accumulated amortization of $108,779 and $137,693 respectively 238,309 334,809 OTHER ASSETS 13,347 91,746 TOTAL ASSETS 40,747,479 41,596,387 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable 472,477 876,968 Accrued expenses 1,179,305 1,891,483 Unearned revenues 263,678 16,788 Amounts due to related parties 53,773 53,773 Total current liabilities 1,969,233 2,839,012 LONG-TERM DEBT 250,000 245,844 DEFERRED CREDITS 675,000 675,000 Total liabilities 2,894,233 3,759,856 COMMITMENTS STOCKHOLDERS' EQUITY: Preferred stock, $0.001 par value; 5,000,000 shares, issued or outstanding none as of April 30, 2004 and 2005 - - Common stock, $0.001 par value; authorized 105,000,000 shares, issued and outstanding 51,165,758 and 51,512,953 shares as of April 30, 2004 and 2005, respectively 51,166 51,513 Additional paid-in capital 58,959,616 59,377,593 Accumulated deficit (21,156,480) (21,585,114) Accumulated other comprehensive loss (1,056) (7,461) Total stockholders' equity 37,853,246 37,836,531 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 40,747,479 41,596,387 See notes to consolidated financial statements. Consolidated Statements of Operations For the years ended April 30, 2004 and 2005 2004 2005 $ $ CONTRACT REVENUES 4,713,202 5,365,235 COST OF REVENUES 4,319,850 5,170,521 Gross profit 393,352 194,714 PRODUCT DEVELOPMENT COSTS 255,958 904,618 SELLING, GENERAL AND ADMINISTRATIVE COSTS 1,745,955 2,553,911 Operating loss (1,608,561) (3,263,815) INTEREST INCOME 555,717 1,297,156 OTHER INCOME (EXPENSE) (3,381,977) 30,880 FOREIGN EXCHANGE GAIN 1,585,345 1,507,145 NET LOSS (2,849,476) (428,634) See notes to consolidated financial statements. Consolidated Statements of Changes in Stockholders' Equity Years ended April 30, 2004 and 2005 Common Shares Additional Capital Shares Amount Paid-in $ $ BALANCE, APRIL 30, 2003 30,231,913 13,278,892 5,521,324 Net loss - - - Foreign currency translation adjustment - - - Total comprehensive loss Change to $0.001 par value - (13,248,660) 13,248,660 Compensation related to shares issued for services 49,791 50 92,300 Compensation related to stock option grants issued for services - - 311,024 Sale of common stock, net of issuance costs (including 178,172 shares issued as fee payment) 20,178,172 20,178 38,287,014 Shares issued under agreement with AMP Incorporated (now Tyco Electronics) 705,882 706 1,499,294 BALANCE, APRIL 30, 2004 51,165,758 51,166 58,959,616 Net loss - - - Foreign currency translation adjustment - - - Total comprehensive loss Compensation related to stock option grants issued to employees - - 131,500 Compensation related to stock option grants issued for services - - 53,174 Adjustment for shareholder reduction in shares held (13,971) (14) 14 Proceeds from exercise of stock 361,166 361 233,289 options BALANCE, APRIL 30, 2005 51,512,953 51,513 59,377,593 See notes to consolidated financial statements. Consolidated Statements of Changes in Stockholders' Equity Years ended April 30, 2004 and 2005 Accumulated other Stockholders' Accumulated Comprehensive Equity Deficit (Loss) Income $ $ $ BALANCE, APRIL 30, 2003 (18,307,004) (2,427) 490,785 Net loss (2,849,476) - (2,849,476) Foreign currency translation - 1,371 1,371 adjustment Total comprehensive loss (2,848,105) Change to $0.001 par value - - - Compensation related to shares issued for services - - 92,350 Compensation related to stock option grants issued for services - - 311,024 Sale of common stock, net of issuance costs (including 178,172 shares issued as fee payment) - - 38,307,192 Shares issued under agreement with AMP Incorporated (now Tyco Electronics) - - 1,500,000 BALANCE, APRIL 30, 2004 (21,156,480) (1,056) 37,853,246 Net loss (428,634) - (428,634) Foreign currency translation - (6,405) (6,405) adjustment Total comprehensive loss (435,039) Compensation related to stock option grants issued to employees - - 131,500 Compensation related to stock option grants issued for services - - 53,174 Adjustment for shareholder reduction in shares held - - - Proceeds from exercise of stock options - - 233,650 BALANCE, APRIL 30, 2005 (21,585,114) (7,461) 37,836,531 See notes to consolidated financial statements. Consolidated Statements of Cash Flows For the years ended April 30, 2004 and 2005 2004 2005 $ $ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss (2,849,476) (428,634) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 42,005 140,984 Compensation expense related to stock option grants and common stock issuance 403,374 184,674 Issuance of shares in connection with settlement agreement with AMP Incorporated (now Tyco Electronics) 1,500,000 - Changes in Working Capital: Accounts receivable (46,925) (621,499) Unbilled receivables (210,743) (268,216) Other current assets (173,610) (239,274) Accounts payable 213,801 404,491 Accrued expenses 116,433 708,022 Unearned revenues 263,678 (246,890) Amounts due to related parties (87,841) - Net cash used in operating activities (829,304) (366,342) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of certificates of deposit (725,329) (58,050,287) Maturities of certificates of deposit 710,000 33,573,254 Purchase of equipment and patent costs (159,860) (560,902) Investments in joint ventures and other assets - (78,399) Net cash used in investing activities (175,189) (25,116,334) CASH FLOWS FROM FINANCING ACTIVITIES: Sale of common stock, net of issuance costs 38,307,192 - Proceeds from exercise of stock options - 233,650 Net cash provided by financing 38,307,192 233,650 activities EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,371 (6,405) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 37,304,070 (25,255,431) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,536,175 38,840,245 CASH AND CASH EQUIVALENTS, END OF YEAR 38,840,245 13,584,814 SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTIONS: Issuance of shares to consultant in connection with initial public offering 178,350 - See notes to consolidated financial statements. OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 2004 AND 2005 1. ORGANIZATION Ocean Power Technologies, Inc. (the "Company") was incorporated on April 19, 1984 in the State of New Jersey and commenced active operations in 1994. The Company is engaged in the business of commercializing products for the generation of electrical energy from ocean waves. These products are sold internationally. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation - During fiscal 2001, the Company established a wholly owned subsidiary based in Australia. In July 2001, the Company sold 11.76% of the subsidiary for approximately $1,020,000 in cash, less costs of approximately $56,000. During fiscal 2005, the Company established a wholly owned subsidiary based in the United Kingdom. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company transactions have been eliminated. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition - The Company recognizes revenue on government and commercial contracts under the percentage of completion method. The percentage of completion is determined by relating the costs incurred to date to the estimated total costs. The cumulative effects resulting from revisions of estimated total contract costs and revenues are recorded in the period in which the facts requiring revision become known. When a loss is anticipated on a contract, the full amount thereof is provided currently. During fiscal 2005, the Company recorded a provision of $21,000, related to an anticipated loss on a contract. Reserves related to that and another contract of approximately $785,000 and $806,000 in aggregate are included in accrued expenses in the accompanying consolidated balance sheets as of April 30, 2004 and 2005, respectively. Unbilled receivables represent expenditures on contracts, plus profits or less losses recorded thereon, not yet billed. Unbilled receivables are billed and collected within one year. Billings made on contracts are recorded as a reduction of unbilled receivables, and to the extent that such billings exceed costs incurred plus profits or less losses recorded thereon, they are recorded as unearned revenues. Cash Equivalents - Cash equivalents consist of investments in short-term financial instruments with maturities of three months or less from the date of purchase. Equipment - Equipment is stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives (three to seven years). Expenses for maintenance and repairs are charged to operations as incurred. Depreciation expense was approximately $34,000 and $112,000 for the years ended April 30, 2004 and 2005, respectively. Foreign Exchange Gains- The Company has invested in certain certificates of deposit and cash equivalents that are denominated in British pounds sterling. Such certificates of deposit and cash equivalents had a balance of $21,788,000 as of April 30, 2005. Such positions may result in realized and unrealized foreign exchange gains or losses from exchange rate fluctuations, which are included in the consolidated results of operations. Patents - External costs related to the filing of patents, including legal and filing fees, are capitalized. Amortization is calculated using the straight-line method over the lives of the patents (17 years). Expenses for the development of technology are charged to operations as incurred. Amortization expense related to patents for the next five years is approximately $20,000 per year. Long-Lived Assets - On May 1, 2002, the Company adopted Statement of Financial Accounting Standard, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). SFAS No. 144 replaced SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and establishes accounting and reporting standards for long-lived assets to be disposed of by sale. SFAS No. 144 requires that long-lived assets be measured at the lower of carrying amount or fair value less cost to sell. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity that will be eliminated from the ongoing operations of the entity in a disposal transaction. In fiscal 2005, the Company reviewed its long-lived assets for impairment in accordance with SFAS No. 144 and determined that no impairment charge was necessary for the year ended April 30, 2005. Concentration of Credit Risk - Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash balances, bank certificates of deposit and trade receivables. However, the Company invests its excess cash in highly liquid investments (principally short-term bank deposits). In fiscal 2004 and 2005, the Company's customer base was principally comprised of agencies within the U.S. Government. The Company does not require collateral from its customers. Stock-Based Compensation - Stock-based compensation issued to employees is valued using the intrinsic value method under Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. Under this method, compensation expense is measured on the date of grant and amortized over the vesting period if the current market price of the underlying stock exceeded the exercise price on the straight-line basis. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123. Stock-based compensation issued to non-employees is valued using the fair value method. In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". SFAS No. 148 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 ("Transition Provisions"). The Transition Provisions of SFAS No. 148 are effective for financial statements for fiscal years ending after December 15, 2002. The Company continues to use the intrinsic value method of accounting for stock-based compensation. As a result, the Transition Provisions do not have an effect on the Company's financial statements. The Company has adopted the disclosure provisions of SFAS No. 148; however, the Company will continue to apply the intrinsic value method under APB Opinion No. 25. For disclosure purposes, pro forma net loss impacts are provided as if the fair market value method under SFAS No. 123 had been applied as of April 30, 2004 and 2005. 2004 2005 $ $ Net loss, as reported (2,849,476) (428,634) Add stock-based employee compensation expense included in 171,542 131,500 reported net loss Deduct total stock-based employee compensation expense (2,310,000) (1,367,000) determined under fair-value based method for all awards Pro forma net loss (4,987,934) (1,664,134) In accordance with SFAS No. 123, as amended by SFAS No. 148, the fair value of option grants is estimated on the date of grant using the Black-Scholes option-pricing model for pro forma footnote purposes with the following assumptions used for grants: dividend yield 0%; risk-free interest rate of 3.39% in 2004 and 4.00% in 2005, respectively; expected option life primarily of 10 years; and volatility of 85.6% and 80.8% in 2004 and 2005, respectively. Accounting for Income Taxes - The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires the use of the liability method of accounting for deferred income taxes. Under this method, deferred income taxes represent the net tax effect of temporary differences between carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Additionally, if it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is required to be recognized. Other Comprehensive Loss - The functional currency for the Company's foreign operations is the applicable local currency. The translation from the applicable foreign currencies to U.S. dollars is preformed for balance sheet accounts using the exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate during the period. The unrealized gains or losses resulting from such translation are included in shareholders' equity. Recent Accounting Pronouncements - In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its then present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Company adopted SFAS No. 143 in fiscal 2004 and it did not have a material impact on the Company's consolidated financial position or results of operations. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," ("FIN 46"), an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46 establishes accounting guidance for consolidation of variable interest entities that function to support the activities of the primary beneficiary. In December 2003, the FASB revised FIN 46 and issued FIN 46 (revised December 2003) ("FIN 46R"). In addition to conforming to previously issued FASB Staff Positions, FIN 46R deferred the implementation date for certain variable interest entities. The Company does not have any investments in or contractual relationship or other business relationship with a variable interest entity and therefore the adoption of FIN 46R did not have any impact on the Company's consolidated financial position or results of operations. In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment", which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123R is a revision to SFAS No. 123 and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees", and its related implementation guidance. SFAS No. 123R will require measurement of the cost of employee services received in exchange for stock compensation based on the grant-date fair value of the employee stock options. Incremental compensation costs arising from subsequent modification of awards after the grant date must also be recognized. The provisions of SFAS No. 123R will be effective for the Company for annual periods beginning after December 15, 2005. Management is evaluating the alternatives allowed under the standard and expects the adoption of SFAS No. 123R to result in amounts that are similar to the current pro-forma disclosures under SFAS No. 123R for all share-based payment transactions through April 30, 2005. The impact of any future share-based payment transactions on the Company's financial position or results of operations can not be determined. In December 2004, the FASB issued SFAS No. 153. "Exchange of Nonmonetary Assets," which eliminates and exception in APB Opinion No. 29 for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 will be effective for the Company for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Management is evaluating the impact from adopting SFAS No. 153, which is not expected to have an impact on the Company's consolidated financial position, results of operations or cash flows. In May, 2005 the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections". SFAS No. 154 requires retroactive application of a voluntary change in accounting principle to prior period financial statements unless it is impracticable. SFAS No. 154 also requires that a change in method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is affected by a change in accounting principle. SFAS No. 154 replaces APB Opinion 20, "Accounting Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements". SFAS No. 154 will be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Management currently believes that adoption of the provisions of SFAS No. 154 will not have a material impact on the Company's consolidated financial statements. Reclassification- Certain amounts in the prior year's financial statements have been reclassified to conform to the current year presentation. ****** This information is provided by RNS The company news service from the London Stock Exchange