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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2003 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 Commission File No. 000-31332   LIQUIDMETAL TECHNOLOGIES, INC. ( Exact name of Registrant as specified in its charter )
 Delaware
    
    20-0121262(State or other jurisdiction of incorporation or
    
    (I.R.S. Employerorganization)
    
    Identification No.)
 25800 Commercentre Drive, Suite 100
Lake Forest, California 92630(address of principal executive office, zip code)
Registrants telephone number, including area code: (949) 206-8000
Securities registered pursuant to Section 12(b) of the Act:NoneSecurities registered pursuant to Section 12(g) of the Act:
Title of each Class
Common Stock, .001 par value Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.
Yes o
 No x
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K  o
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).Yes x No o
The aggregate market value of the registrants Common Stock held by
non-affiliates of the registrant as of June 30, 2004 was approximately
$34,793,699. For purposes of this calculation only, (i) shares of Common Stock
are deemed to have a market value of $1.42 per share, the closing price of the
Common Stock as reported on the Nasdaq National Market on June 30, 2004, and
(ii) each of the executive officers, directors and persons holding more than
10% of the outstanding Common Stock as of June 30, 2004 is deemed to be an
affiliate.




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TABLE OF CONTENTS PART IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market For Registrants Common Equity and Related Stockholder MattersItem 6. Selected Consolidated Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RisksItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresPART IIIItem 10. Directors and Executive Officers of the RegistrantItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accounting Fees and ServicesPART IVItem 15. Exhibits, Financial Statement Schedules and Reports on Form 8-KEx-10-13: Employment Agreement dated October 1, 2001Ex-10-14: Employment Agreement dated November 3, 2003Ex-10-17: Employment Agreement dated Decemebr 31, 2003Ex-10.18: Letter Agreement dated December 1, 2002Ex-10.19: Employment Agreement dated December 1, 2002Ex-10.20: Employment Separation Agreement dated November 6, 2003Ex-10.28: Share Transfer Agreement dated February 28, 2004Ex-10.29: Settlement Agreement dated January 10, 2004Ex-21: Subsidiaries of the RegistrantEx-23.1: Consent of Stonefield JosephsonEx-31.1: CertificationEx-31.2: CertificationEx-32.1: CertificationEx-32.2: Certification
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PART I Forward-Looking Statements This annual report on Form 10-K of Liquidmetal Technologies, Inc. contains
forward-looking statements that may state our managements current
expectations, estimates, forecasts, and projections about the company and its
business. Any statement in this report that is not a statement of historical
fact is a forward-looking statement, and in some cases, words such as
believe, estimate, project, expect, intend, may, anticipate,
plans, seeks, and similar expressions identify forward-looking statements.
Forward-looking statements involve risks and uncertainties that could cause
actual outcomes and results to differ materially from the anticipated outcomes
or result. These statements are not guarantees of future performance, and undue
reliance should not be placed on these statements. It is important to note
that Liquidmetal Technologies, Inc.s actual results could differ materially
from what is expressed in our forward-looking statements due to the risk
factors described in the section of this report entitled Factors Affecting
Future Results, as well as the following risks and uncertainties:  
    
    Our history of losses and uncertainty surrounding our ability to achieve profitability;
    
    Our limited history of manufacturing products from bulk amorphous alloys;
    
    Lengthy customer adoption cycles and unpredictable customer adoption practices;
    
    Our ability to identify, develop, and commercialize new product applications;
    
    Competition from other materials;
    
    Our ability to consummate strategic partnerships in the future;
    
    The potential for manufacturing problems or delays;
    
    Potential difficulties associated with protecting or expanding our intellectual property position; and
    
    Pending shareholder litigation against the Company Liquidmetal Technologies, Inc. undertakes no obligation to update publicly
any forward-looking statements, whether as a result of new information, future
events or otherwise. 
 Item 1. Business Overview We are a materials technology company that develops and commercializes
products made from amorphous alloys. Our Liquidmetal® family of alloys
consists of a variety of proprietary coatings, powders, bulk alloys, and
composites that utilize the advantages offered by amorphous alloy technology.
We develop, manufacture, and sell products and components from bulk amorphous
alloys to customers in various industries, and we also partner with third-party
licensees and distributors to develop and commercialize bulk Liquidmetal alloy
products. We believe that our proprietary bulk alloys are the only commercially
viable bulk amorphous alloys currently available in the marketplace. In
addition to our bulk alloys, we market and sell a line of proprietary amorphous
alloy-based industrial coatings under the Liquidmetal®
ArmacorTM Coatings
brand. Amorphous alloys are unique materials that are distinguished by their
ability to retain a random atomic structure when they solidify, in contrast to
the crystalline atomic structure that forms in other metals and alloys when
they solidify. Liquidmetal alloys possess a combination of performance,
processing, and potential cost advantages that we believe will make them
preferable to other materials in a variety of applications. The amorphous
atomic structure of our alloys enables them to overcome certain performance
limitations caused by inherent weaknesses in crystalline atomic structures,
thus facilitating performance and processing characteristics superior in many
ways to those of their crystalline counterparts. For example, our
zirconium-titanium Liquidmetal alloys are approximately 250% stronger than
commonly used titanium alloys such as Ti-6Al-4V, but they also have some of the
beneficial processing characteristics more commonly associated with plastics.
We believe these advantages could result in Liquidmetal alloys supplanting
high-performance alloys, such as titanium and stainless steel, and other
incumbent materials in a wide variety of applications. Moreover, we believe
these advantages could enable the introduction of entirely new products and
applications that are not possible or commercially viable with other materials. General Corporate Information We were originally incorporated in California in 1987, and we
reincorporated in Delaware in May 2003. Our principal executive offices are
located at 25800 Commercentre Dr., Suite 100, Lake Forest, California 92630.
Our telephone number at that address is (949) 206-8000. Previously, our
principal executive offices were located in Tampa, Florida. In December 2003,
we consolidated all corporate functions into our Lake Forest facility, which
had previously 3




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served as our principal research and development office. Our Internet website
address is www.liquidmetal.com and all of our filings with the Securities and
Exchange Commission are available free of charge on our website. Our Technology The performance, processing, and potential cost advantages of Liquidmetal
alloys are a function of their unique atomic structure and their proprietary
material composition. Unique Atomic Structure The atomic structure of Liquidmetal alloys is the fundamental feature that
differentiates them from other alloys and metals. In the molten state, the
atomic particles of all alloys and metals have an amorphous atomic structure,
which means that the atomic particles appear in a completely random structure
with no discernible patterns. However, when non-amorphous alloys and metals are
cooled to a solid state, their atoms bond together in a repeating pattern of
regular and predictable shapes, or crystalline grains. This process is
analogous to the way ice forms when water freezes and crystallizes. In
non-amorphous metals and alloys, the individual crystalline grains contain
naturally occurring structural defects that limit the potential strength and
performance characteristics of the material. These defects, known as
dislocations, consist of discontinuities or inconsistencies in the patterned
atomic structure of each grain. Unlike other alloys and metals, bulk
Liquidmetal alloys can retain their amorphous atomic structure throughout the
solidification process and therefore do not develop crystalline grains and the
associated dislocations. Consequently, bulk Liquidmetal alloys exhibit superior
strength and other superior performance characteristics compared to their
crystalline counterparts. Our Liquidmetal alloy coatings, in contrast to our
bulk alloys, have a crystalline atomic structure when initially applied, but
their atomic structure becomes amorphous as the coatings rub against surfaces
under force, thus improving their performance over time. (Depiction of Crystalline atomic Structure)
    

(Depicition of amorphous atomic Structure)
 Prior to 1993, commercially viable amorphous alloys could be created only
in thin forms, such as coatings, films, or ribbons. However, in 1993,
researchers at the California Institute of Technology (Caltech) developed the
first commercially viable amorphous alloy in a bulk form. Today, bulk
Liquidmetal alloys can be formed into objects that are up to one inch thick,
and we are not aware of any other commercially available amorphous alloys that
can achieve this thickness. We have the exclusive right to commercialize bulk
amorphous alloy technology through a license agreement with Caltech and other
patents that we own. Proprietary Material Composition The constituent elements and percentage composition of Liquidmetal alloys
are critical to their ability to solidify into an amorphous atomic structure.
We have several different alloy compositions that have different constituent
elements in varying percentages. These compositions are protected by various
patents that we own or exclusively license from third parties, including
Caltech. The raw materials that we use in Liquidmetal alloys are readily
available and can be purchased from multiple suppliers. Advantages of Liquidmetal Alloys Liquidmetal alloys possess a unique combination of performance, processing
and cost advantages that we believe makes them superior in many ways to other
commercially available materials for a variety of existing and potential future
product applications. 4




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Performance Advantages Our bulk Liquidmetal alloys provide several distinct performance
advantages over other materials, and we believe that these advantages make the
alloys desirable in applications that require high strength, strength-to-weight
ratio, elasticity and hardness. The following graphs compare the strength,
strength-to-weight ratio, elasticity and hardness properties of our
zirconium-titanium bulk alloy composition (as measured in laboratory tests)
against those of several other alloys that are widely used today in commercial
applications. Strength (BAR GRAPH) The strength of a material is frequently measured in terms of yield
strength, which is the stress at which definite damage or deformation occurs to
the material with little or no increase in load. Yield strength is an important
performance measure in many structural applications where the potential cost of
damage is high, such as orthopedic devices. Strength-to-Weight Ratio (BAR GRAPH) A materials strength-to-weight ratio, or specific strength, can be
defined as its yield strength divided by its specific gravity. A high
strength-to-weight ratio is particularly important in applications in which the
damage costs are high and weight is a consideration, such as protective casings
for electronic devices. Elasticity (BAR GRAPH) Elasticity is a measure of a materials ability to return to its original
shape after being stretched or forced out of shape. The elastic strain limit,
or elastic limit, of a material is the point at which permanent damage or
deformation starts. Elasticity is an important performance measurement in
applications that need to resist permanent damage from impact to protect
aesthetics or in applications where energy transfer is important, such as golf
club heads. 5




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Hardness (BAR GRAPH) Hardness measures a materials ability to resist penetration and wear by
another material. In the widely used Vickers hardness test, a diamond point is
pressed slowly against the surface of the material with a prescribed force. The
area of the dent is measured to yield the Vickers hardness number. Hardness is
important in applications that are subject to wear and cosmetic durability,
such as cell phone casings. Data Source: http://www.matweb.com (other than data relating to bulk
Liquidmetal alloys). This online database contains comprehensive information
regarding the properties of various materials. Data relating to bulk
Liquidmetal alloy comes from Scripta Metallurgica,Vol. 30, pp. 431 and 433,
1994, and Applied Physics Letters,Vol. 71, p. 476, 1997, both of which
describe laboratory tests performed by the California Institute of Technology.  (1)
    
    The aluminum alloy being compared here is 7075-T6, a widely used
high-strength aluminum alloy. This alloy is used in aerospace,
automotive, defense, and other applications.(2)
    
    The titanium alloy being compared here is a type of Ti-6Al-4V, a
widely used titanium alloy particularly known for its high strength.
This alloy is commonly used in structural, aircraft, biomedical, and
other applications. The properties being shown here are the properties
exhibited by the cast form of the material.(3)
    
    The alloy being compared here is a type of corrosion-resistant cast
steel heat-treated to 5528 C, similar to the alloy known in the steel
industry as 17-4 stainless, a widely used premium stainless steel.
This alloy is utilized in industrial, aerospace, aircraft, and other
applications. The high yield strength of bulk Liquidmetal alloys means that a high
amount of stress must be exerted to create permanent deformation. However,
because the yield strength is so high, the yield strength of many of our bulk
Liquidmetal alloy compositions is very near their ultimate strength, which is
the measure of stress at which total breakage occurs. Therefore, very little
additional stress may be required to break an object made of bulk Liquidmetal
alloys once the yield strength is exceeded. Although we believe that the yield
strength of many of our bulk alloys exceeds the ultimate strength of most other
commonly used alloys and metals, our bulk alloys may not be suitable for
certain applications, such as pressurized tanks, in which the ability of the
material to yield significantly before it breaks is more important than its
strength advantage. Additionally, although our bulk alloys show a high
resistance to crack initiation because of their very high strength and
hardness, certain of our bulk alloys are sensitive to crack propagation under
certain long-term, cyclical loading conditions. Crack propagation is the
tendency of a crack to grow after it forms. We are currently developing new
alloy compositions that have improved material properties to overcome these
limitations. Processing Advantages The processing of a material generally refers to how a material is shaped,
formed, or combined with other materials to create a finished product. Bulk
Liquidmetal alloys possess processing characteristics that we believe make them
preferable to other materials in a wide variety of applications. In particular,
our alloys are amenable to processing options that are similar in many respects
to those associated with plastics. For example, we believe that bulk
Liquidmetal alloys have superior net-shape casting capabilities as compared to
high-strength crystalline metals and alloys. Net-shape casting is a type of
casting that permits the creation of near-to-net shaped products that do not
require much costly post-cast processing or machining. Additionally, unlike
most metals and alloys, our bulk Liquidmetal alloys are capable of being
thermoplastically molded in bulk form. Thermoplastic molding consists of 6




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heating a solid piece of material until it is transformed into a moldable
state, although at temperatures much lower than the melting temperature, and
then introducing it into a mold to form near-to-net shaped products.
Accordingly, thermoplastic molding can be beneficial and economical for net
shape fabrication of high-strength products. Bulk Liquidmetal alloys also permit the creation of composite materials
that cannot be created with most non-amorphous metals and alloys. A composite
is a material that is made from two or more different types of materials. In
general, the ability to create composites is beneficial because constituent
materials can be combined with one another to optimize the composites
performance characteristics for different applications. In other metals and
alloys, the high temperatures required for processing could damage some of the
composites constituent materials and therefore limit their utility. However,
the relatively low melting temperatures of bulk Liquidmetal alloys allow mild
processing conditions that eliminate or limit damage to the constituent
materials when creating composites. In addition to composites, we believe that
the processing advantages of Liquidmetal alloys will ultimately allow for a
variety of other finished forms, including a coating or a spray. Most
high-strength metals and alloys cannot be processed into these forms. Notwithstanding the foregoing advantages, our bulk Liquidmetal alloys
possess certain limitations relative to processing. The beneficial processing
features of our bulk alloys are made possible in part by the alloys relatively
low melting temperatures. Although a lower melting temperature is a beneficial
characteristic for processing purposes, it renders certain bulk alloy
compositions unsuitable for certain high-temperature applications, such as jet
engine exhaust components. Additionally, the current one-inch thickness
limitation of our zirconium-titanium bulk alloy renders our alloys currently
unsuitable for use as structural materials in large-scale applications, such as
load-bearing beams in building construction. We are currently engaged in
research and development with the goal of developing processing technology and
new alloy compositions that will enable our bulk alloys to be formed into
thicker objects. Cost Advantages Liquidmetal alloys have the potential to provide cost advantages over
other high-strength metals and alloys in certain applications. Because bulk
Liquidmetal alloys have processing characteristics similar in some respects to
plastics, which lends itself to near-to-net shape casting and molding,
Liquidmetal alloys can in many cases be shaped efficiently into intricate,
engineered products. This capability can eliminate or reduce certain
post-casting steps, such as machining and re-forming, and therefore has the
potential to significantly reduce processing costs associated with making parts
in high volume. Additionally, because the near-to-net shape processing of Liquidmetal
alloys reduces the need for capital-intensive heavy industrial equipment such
as that found in foundry and forging operations, Liquidmetal alloys can be
processed with a smaller machinery footprint, which allows for more efficient
development of facilities and reduced permitting
and regulatory costs. We believe that these advantages may allow our customers
an opportunity to maintain or improve the performance of their products without
a commensurate increase in cost. Our Strategy As a result of the experience and knowledge that we have gained through
our manufacturing activities to date, and recognizing that developing and
commercializing a revolutionary new technology is an evolutionary process, we
are continually modifying our business strategy to enable us to better
capitalize on our evolving core strengths and more effectively pursue revenue
growth and profitability. The key elements of our strategy include:  
    
    Identifying and Developing New Applications for Our Liquidmetal Alloy
Technology.We intend to continue to identify and develop new
applications that will benefit from the performance, processing, and
cost advantages of Liquidmetal alloys.  
    
    Focusing Our Marketing and Internal Manufacturing Activities on Select
Products with Expected Higher Gross-Margins. We intend to focus our
marketing and internal manufacturing activities on select products
with anticipated higher gross margins, as compared to products with
high unit volumes and thin or unpredictable gross margins. This
strategy is designed to align our product development initiatives with
our still-developing manufacturing processes and manufacturing cost
structure, and to reduce our exposure to more commodity-type product
applications that are prone to unpredictable demand and fluctuating
pricing. Our focus is primarily on higher-margin products that
possess design features that take optimal advantage of our existing
and developing manufacturing technology and that command a premium
price commensurate with the performance advantages of our alloys. In
addition to our focus on products with higher gross margins, we will
continue to engage in prototype manufacturing, both for internally
manufactured products and for products that will ultimately be
licensed to or manufactured by third parties. 7




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
    
    Further Developing Our Manufacturing Processes, Capabilities, and
Efficiencies for Bulk Liquidmetal Alloys.We intend to improve and
enhance our internal manufacturing processes, capabilities, and
efficiencies in order to maintain quality control over products made
from bulk Liquidmetal alloys, to focus on improvements to the
processing of our alloys, and to protect our intellectual property. As
our alloys become more pervasive, however, we expect to enter into
additional strategic relationships that would involve the licensing of
Liquidmetal technology to third parties for certain market segments.
    
    Pursuing Strategic Partnerships In Order to More Rapidly Develop and
Commercialize Products.We intend to actively pursue and support
strategic partnerships that will enable us to leverage the resources,
strength, and technologies of other companies in order to more rapidly
develop and commercialize products. These partnerships may include
licensing transactions in which we license full commercial rights to
our technology in a specific application area, or they may include
transactions of a more limited scope in which, for example, we
outsource manufacturing activities or grant distribution rights. We
believe that utilizing such a partnering strategy will enable us to
reduce our working capital burden, better fund product development
efforts, better understand customer adoption practices, leverage the
technical and financial resources of our partners, and more
effectively handle product design and process challenges. As this
partnering strategy evolves, a growing portion of our revenue mix may
be comprised of revenue from the provision of product development
services, technical support, and engineering services, as well as
revenues from royalties on the sale of Liquidmetal alloy products by
our partners.
    
    Advancing the Liquidmetal® Brand.We believe that building our
corporate brand will foster continued adoption of our technology. Our
goal is to position Liquidmetal alloys as a superior substitute for
materials currently used in a variety of products across a range of
industries. Furthermore, we seek to establish Liquidmetal alloys as an
enabling technology that will facilitate the creation of a broad range
of commercially viable new products. To enhance industry awareness of
our Company and increase demand for Liquidmetal alloys, we are
reviewing various brand development strategies that could include
collaborative advertising and promotional campaigns with select
customers, industry conference and trade show appearances, public
relations, and other means. Initial Applications We have focused our commercialization efforts for Liquidmetal alloys on
five identified product areas. We believe that these areas are consistent with
our strategy in terms of market size, building brand recognition, and providing
an opportunity to develop and refine our processing capabilities. Although we
believe that strategic partnering transactions could create valuable
opportunities beyond the parameters of these target markets, we anticipate
continuing to pursue these markets both internally and in conjunction with
partners. Casings for Electronic Products We produce casing components for electronic devices using our bulk
Liquidmetal alloys and believe that our alloys offer enhanced performance and
design benefits for these casings in certain applications. Bulk Liquidmetal
alloys can be used for various structural components of a cellular phone,
including the shield, faceplate, hinge, hinge housings, back plate, side
plates, and the clamshell on so-called flip-phones. We initially targeted the
electronic casings market because of its potential for high product volumes and
branding opportunities; however, unpredictable customer adoption practices,
short product model lives, processing limitations, and intense pricing
pressures make it very challenging to compete in this high-volume market.
Accordingly, we are currently limiting our focus in this market to
higher-margin applications that have the potential to benefit from the unique
performance characteristics of bulk Liquidmetal alloys. We continue to believe
that the high strength-to-weight ratio and elastic limit of bulk Liquidmetal
alloys enable the production of stronger and thinner electronic devices as
compared to plastic, zinc, and magnesium, and we intend to limit our casings
focus on products in which our customers are willing to pay a premium for these
design and performance benefits. Through our shipments to date, we have demonstrated that bulk Liquidmetal
alloys can be used for structural components of cellular phones and other
electronic devices. During 2003, we shipped production quantities of cell
phone components to Samsung Electronics Company and KTFT (Korea Telecom) for
inclusion in various cellular phone models, and more recently have begun
manufacturing production units of cellular phone casing components for Vertu
Limited, the luxury communication products subsidiary of Nokia. 8




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Sporting Goods and Leisure Products We are developing a variety of applications for Liquidmetal alloys in the
sporting goods and leisure products area. In the sporting goods industry, we believe that the high strength,
hardness, and elasticity of our bulk alloys have the potential to enhance
performance in a variety of products, and we further believe that many sporting
goods products are conducive to our internal manufacturing strategy of focusing
on high-margin products that meet our design criteria. Substantial
opportunities also exist for our amorphous alloy coatings, powders and
composites. In 2003, Rawlings Sporting Goods Company launched a new line of
baseball and softball bats that utilize a Liquidmetal alloy coating, and HEAD
NV Sport launched a new line of HEAD® Liquidmetal® tennis racquets that
incorporates Liquidmetal alloy in composite form in their racquet design. We
are continuing to work with golf companies for the development of golf club
components made from bulk Liquidmetal alloys. Other potential applications for
our alloys in this industry include eyewear, fishing, hunting, diving, bicycle,
skate and snow skiing products. In the leisure products category, we believe that bulk Liquidmetal alloys
can be used to efficiently produce intricately engineered designs with
high-quality finishes, such as premium watchcases, and we further believe that
Liquidmetal alloy technology can be used to make high-quality, high-strength
jewelry from precious metals. We have successfully produced prototype rings
made from an amorphous Liquidmetal platinum alloy that is harder (and hence
more scratch resistant) than conventional platinum jewelry. In 2003, a
special-edition concept chronograph timepiece featuring our titanium-zirconium
Liquidmetal alloy was showcased by luxury watchmaker TAG Heuer at the renowned
Basel Watch and Jewelry Show in Basel, Switzerland. In order to accelerate the commercialization of Liquidmetal alloys in the
jewelry and high-end luxury products market, in June 2003 we entered into a
strategic licensing transaction with LLPG, Inc., a corporation headed by a
former director of our company with ties to the Swiss jewelry and luxury goods
market. Under this agreement, LLPG was granted a 10-year exclusive worldwide
license to manufacture and sell a variety of luxury goods, including watchcases
and precious-metal jewelry, utilizing Liquidmetal alloys. Under the agreement,
we are entitled to royalties over the life of the contract on all products
produced and sold by LLPG. The transaction with LLPG is indicative of our
secondary strategy to license our technology in select markets where it is
advantageous to leverage the financial resources of qualified outside partners. Medical Devices We are engaged in product development efforts relating to various medical
devices that could be made from Liquidmetal alloys. We believe that the unique
properties of bulk Liquidmetal alloys provide a combination of performance and
cost benefits that could make them a desirable replacement to incumbent
materials, such as stainless steel and titanium, currently used in various
medical device applications. Our greatest emphasis in 2003 and ongoing in 2004
has been on surgical instrument applications for Liquidmetal alloys. These
include, but are not limited to, specialized blades, orthopedic instruments
utilized for implant surgery procedures, ultrasonic devices, dental devices,
external fixation devices and general surgery devices. The potential value
offered by our alloys is high performance in some cases and cost reduction in
others, the latter stemming from the ability of Liquidmetal alloys to be net
shape cast into components, thus reducing costs of secondary processing. The
status of most components in the prototyping phase is subject to non-disclosure
agreements with our customers; however, certain products in the aforementioned
categories are expected to move into production by the end of 2004 or early
2005. We believe that our future success in the medical device market will be
driven largely by strategically aligning ourselves with well-established
companies that are uniquely positioned to facilitate the introduction of
Liquidmetal alloys into this market, especially as it relates to the unique
processing challenges and stringent material qualification requirements that
are prevalent in this industry. We also believe that our prospects for success
in this market will be enhanced through our focus on optimizing existing alloy
compositions and developing new alloy compositions to satisfy the industrys
rigorous material qualification standards. For example, we are currently
working with DePuy Orthopaedics, Inc., a Johnson & Johnson company, to develop
an alloy for orthopedic implants and instruments in the knee replacement device
market. Our agreement with DePuy gives them the exclusive worldwide right and
license to market and sell knee replacement devices that incorporate
Liquidmetal alloys. We are also in the early stages of working with other
orthopedic companies to identify surgical instrument or device applications
that would benefit from utilizing Liquidmetal alloys. 9




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Industrial Coatings and Powders We continue to market and sell amorphous alloy industrial coatings and
powders under the Liquidmetal® ArmacorTM Coatings brand name. Liquidmetal alloy
coatings are used primarily as a protective coating for industrial machinery
and equipment. Since the inception of this business in the late 1980s, our
proprietary coatings have demonstrated a high degree of hardness and low
coefficient of friction which, when combined with their strong adhesion
properties, reduce the wear and consequent failure of the machinery and
equipment on which they are used. In contrast to our bulk alloys, we sell
Liquidmetal coatings primarily in the form of a wire or powder feedstock that
is melted and applied to machinery or equipment through welding or thermal
spray processes. Our Liquidmetal coatings are widely used in the oil drilling industry as a
protective coating on drill pipe and casings, and we estimate that our coatings
represent a dominant share of annual worldwide sales of hard band coatings for
new oil drill pipe. Drilling often places tremendous stress on pipes and
casings, especially whenever the drill changes direction. Both the drill pipe
and casing experience excessive wear, which leads to higher replacement costs
and greater failure rates. Liquidmetal coatings are used to provide a
protective coating, or hard band, around the outside of the drill pipe and the
inside of casings to reduce wear and failure rates and accordingly reduce
operating costs. Our principal coatings customers currently include Grant
Prideco, Inc., and TAFA, Inc. among other distributors and applicators. Liquidmetal coatings have also been sold into the power generation
industry specifically for the purpose of coating boiler tubes in coal-burning
power plants in order to extend the lives of these boilers. Boiler tubes are
subject to high heat, erosion, and corrosion and often require costly
replacement, both in terms of replacement parts and length of downtime for
installation. Additionally, residue build-up in boiler tubes of coal burning
power plants creates operating inefficiencies. Historic performance and testing
of Liquidmetal coatings have demonstrated that our coatings extend the life of
these boiler tubes meaningfully beyond their current average life depending on
the specific environment. In addition, our coatings have demonstrated the
ability to reduce build-up of residue on boiler tubes, helping to improve the
efficiencies of the boilers. Historically, we have not concentrated sales
efforts on the boiler tube market in a substantial way. However, given the size
of the market and potential opportunities for our coatings, we have recently
dedicated greater effort to this area by, among other initial steps,
establishing a team of independent industrial sales representatives who are now
including our coatings in their product portfolios. In addition to boiler
tubes, these sales representatives are soliciting other OEM product
applications for Liquidmetal coatings. Defense Applications We are working with the U.S. Department of Defense, as well as a variety
of defense-related research and development agencies and large defense
contractors, to develop various defense-related applications for Liquidmetal
alloys. For example, we are currently developing prototype kinetic energy
penetrator rods for use in armor-piercing ammunition systems. Kinetic energy
penetrators, or KEPs, are armor piercing munitions that are currently made
primarily from depleted uranium or tungsten. Initial live-fire ballistic tests
under the Liquidmetal KEP program have demonstrated that tungsten KEPs perform
better whenever Liquidmetal alloy is combined with the tungsten to create a
composite material. In August 2003, we signed a new $3.0 million research and
development contract with the U.S. Army for the development of KEPs. Our
strategy is to orient the KEP program toward future systems such as the Joint
Strike Fighter program and the Armys Future Combat System. In addition to funding the Army KEP program in 2005, the Department of
Defense Spending Bill for 2005 contains money to support the development of an
advanced Liquidmetal alloy for use in aerospace applications. Lockheed Martin
has joined Liquidmetal Technologies for this new program that will be managed
by the U.S. Navy.
Liquidmetal is also working with NASA to conduct an experiment to use
Liquidmetal alloys as the optical surface for spaced-based telescopes. We also continue to work with a number of defense-related research and
development agencies and large defense companies to identify additional
military applications that may benefit from using Liquidmetal alloys. We
believe that our alloys are well-positioned to capitalize on the trend toward
lighter but stronger weapon systems in the U.S. military, and our strategy is
to align ourselves with the largest and most significant players in this
industry. Product development programs for defense applications are currently
underway with several leading defense contractors, including Alliant
Techsystems, General Dynamics and Lockheed Martin. Liquidmetal Golf From 1997 until September 2001, we engaged in the retail marketing and
sale of golf clubs through a majority owned subsidiary, Liquidmetal Golf. The
retail business of Liquidmetal Golf was discontinued in September 2001 and 10




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is
now treated as a discontinued operation in our consolidated financial
statements. Although the retail golf club business has been discontinued,
Liquidmetal Golf will be engaged in the business of manufacturing and selling
golf club components to golf original equipment manufacturers that will
integrate these components into their own clubs and then sell them under their
respective brand names. Liquidmetal Technologies owns 79% of the outstanding
common equity in Liquidmetal Golf. Our Liquidmetal Golf subsidiary has the exclusive right and license to
utilize our Liquidmetal alloy technology for purposes of golf equipment
applications. This right and license is set forth in an intercompany license
agreement between Liquidmetal Technologies and Liquidmetal Golf. This license
agreement provides that Liquidmetal Golf has a perpetual and exclusive license
to use Liquidmetal alloy technology for the purpose of manufacturing,
marketing, and selling golf club components and other products used in the
sport of golf. In consideration of this license, Liquidmetal Golf has issued
4,500,000 shares of Liquidmetal Golf common stock to Liquidmetal Technologies. Our Intellectual Property Our intellectual property consists of patents, trade secrets, know-how,
and trademarks. Protection of our intellectual property is a strategic priority
for our business, and we intend to vigorously protect our patents and other
intellectual property. Our intellectual property portfolio includes 24 owned or
licensed U.S. patents and numerous patent applications relating to the
composition, processing, and application of our alloys, as well as various
foreign counterpart patents and patent applications. Our initial bulk amorphous alloy technology was developed by researchers
at the California Institute of Technology (Caltech). We have purchased patent
rights that provide us with the exclusive right to commercialize the amorphous
alloy and other amorphous alloy technology acquired from Caltech through a
license agreement (Caltech License Agreement) with Caltech. Under the Caltech
license agreement, we have the exclusive worldwide right to make, use, and sell
products from all of Caltechs inventions, proprietary information, know-how,
and other technology relating to amorphous alloys existing as of September 1,
2001. We also have an exclusive worldwide license to nine issued patents and
four patent applications held by Caltech relating to amorphous alloy
technology, as well as all related foreign counterpart patents and patent
applications. Of the patents currently issued to Caltech and licensed by the
Company, the earliest expiration date is 2013 and the latest expiration date is
2021. Furthermore, the license agreement gives us the exclusive right to make,
use, and sell products from substantially all amorphous alloy technology that
is developed in Professor William Johnsons Caltech laboratory during the
period September 1, 2001 through August 31, 2005. All fees and other amounts
payable by us for these rights and licenses have been paid in full, and no
further royalties, license fees, or other amounts will be payable in the future
under this license agreement. Our rights under the license agreement are perpetual in duration. However,
Caltech has the right to convert the license to a non-exclusive license if we
fail to utilize the licensed technology for a period of 18 or more consecutive
months, provided that Caltech must give us 180-days advance written notice of
the conversion and we may cure the failure at any time during the 180-day
notice period. If we cure the failure, then the license will not be converted
into a non-exclusive license. Under the license agreement, we have the right to sublicense any of the
licensed technology or patents. The license agreement also provides that
Caltech reserves the right to use the licensed technology and patents for
noncommercial educational and research purposes. The patents and patent
applications that we license from Caltech relate primarily to the composition
and processing of our alloys. The currently issued U.S. patents covered by the
license agreement will expire between 2013 and 2021. Under the Caltech license agreement, the parties are obligated to provide
reasonable cooperation to each other in connection with any threatened or
actual infringement of the licensed technology by third parties. We have the
right to commence an action for infringement of any of the licensed technology,
and although Caltech is not obligated to bring suit or take action against
infringers, Caltech is obligated to join in any such lawsuit upon our request. In addition to the patents and patent applications that we license from
Caltech, we are building a portfolio of our own patents to expand and enhance
our technology position. These patents and patent applications primarily relate
to
various applications of our bulk amorphous alloys, the composition of our
coatings and powders, and the processing of our alloys. The patents relating to
our coatings expire on various dates between 2005 and 2017, and the patents
relating to our bulk amorphous alloys expire on various dates between 2013 and
2021. Our policy is to seek patent protection for all technology, inventions,
and improvements that are of commercial importance to the development of our
business, except to the extent that we believe it is advisable to maintain such
technology or invention as a trade secret. In order to protect the confidentiality of our technology, including trade
secrets, know-how, and other proprietary technical and business information, we
require that all of our employees, consultants, advisors and collaborators
enter into confidentiality agreements that prohibit the use or disclosure of
information that is deemed confidential. The 11




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agreements also obligate our
employees, consultants, advisors and collaborators to assign to us
developments, discoveries and inventions made by such persons in connection
with their work with us. Research and Development We are engaged in ongoing research and development programs that are
driven by the following key objectives:  
    
    Enhance Material Processing and Manufacturing Efficiencies.We plan to
continue research and development of processes and compositions that
will decrease our cost of making products from Liquidmetal alloys.
    
    Optimize Existing Alloys and Develop New Compositions. We believe
that the primary technology driver of our business will continue to be
our proprietary alloy compositions. We plan to continue research and
development on new alloy compositions to generate a broader class of
amorphous alloys with a wider range of specialized performance
characteristics. During 2003 and continuing into 2004, we have
successfully expanded our portfolio of bulk amorphous alloys to
include additional zirconium-titanium alloys, as well as alloys based
on other metals, such as iron and platinum. Although these various
compositions are at different stages of development and only a few are
currently suitable for commercial use, we believe that a larger alloy
portfolio will enable us to increase the attractiveness of our alloys
as an alternative to incumbent materials and, in certain cases, drive
down product costs. We also believe that our ability to optimize our
existing alloy compositions will enable us to better tailor our alloys
to our customers specific application requirements.
    
    Develop New Applications.We will continue research and development of
new applications for Liquidmetal alloys. We believe the range of
potential applications will broaden by expanding the forms,
compositions, and methods of processing of our alloys. We conduct our research and development programs internally and also
through strategic relationships that we enter into with third parties. Our
internal research and development efforts are currently focused on product and
process development. Our internal research and development efforts are
conducted by a team of 21 scientists, engineers and researchers whom we either
employ directly or engage as consultants. Included among this team are
Professor William Johnson, who discovered our initial bulk amorphous alloy at
Caltech in 1993, and his graduate student at the time, Atakan Peker, who is
employed as our Vice President of Technology. Professor Johnson was an
employee of our company from October 2001 through December 2003 and then became
a consultant to the Company. Professor Johnson continues to be a member of our
board of directors. In addition to our internal research and development efforts, we enter
into cooperative research and development relationships with leading academic
institutions. Professor Johnson continues to supervise a laboratory at Caltech,
and through our license agreement with Caltech, we have a continuing
relationship with the other researchers in Professor Johnsons Caltech
laboratory. We have also entered into research relationships with several other
academic institutions for the conduct of research relating to the properties
and characteristics of our alloys. We also enter into development relationships with other companies for the
purpose of identifying new applications for our alloys and establishing
customer relationships with such companies. Some of our product development
programs are partially funded by our customers. We are also engaged in
negotiations with other potential customers regarding possible product
development relationships. Our research and development expenses for the years
ended December 31, 2003, 2002, and 2001 were $8.9 million, $11.8 million, and
$1.7 million, respectively. Manufacturing We currently own and operate a 166,000 square foot manufacturing facility
in Pyongtaek, South Korea, which became operational in the third quarter of
2002. We believe that this facility will meet our anticipated manufacturing
needs for the foreseeable future, although these needs may change depending
upon the actual and forecasted orders we receive for our products. We currently
intend to develop supplemental research and development, prototyping and
manufacturing capabilities elsewhere, including the United States, for purposes
of meeting our long-term manufacturing needs and our customers requirements.
In December 2003, we entered into a license agreement with Florida Custom Mold,
Inc., a Clearwater, Florida-based company that specializes in high-quality mold
design and injection molding services, under which Florida Custom Mold is
currently acting as a contract manufacturer to our company for purposes of
producing prototypes of certain defense and medical products. 12




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Raw Materials Liquidmetal alloy compositions are comprised of many elements, all of
which are available commodity products. We believe that each of these raw
materials is readily available in sufficient quantities from multiple sources
on commercially acceptable terms. However, any substantial increase in the
price or interruption in the supply of these materials could have an adverse
effect on our profitability. Customers During 2003, three customers accounted for 10% or more of our revenue from
continuing operations. After giving effect to the restatement described in Note
2 to the consolidated financial statements included in this annual report on
Form 10-K, revenue from Samsung represented 10% of revenue, revenue from LLPG,
Inc. represented 12% and defense-related contracts with three departments of
the United States of America represented 16% of revenue from continuing
operations for the year ended December 31, 2003. During the year ended December
31, 2002, revenue from Samsung represented 15% of revenue while revenue earned
on contracts with the government represented 16% of revenue from continuing
operations. During the year ended December 31, 2001, revenue earned on
contracts with the United States of America represented 7% of revenue. We
expect that a significant portion of our revenue may continue to be
concentrated in a limited number of customers, even as our bulk Liquidmetal
alloy business grows. Competition We are not aware of any other company or business that manufactures,
markets, distributes, or sells bulk amorphous alloys or products made from bulk
amorphous alloys. We believe it would be difficult to develop a competitive
bulk amorphous alloy without infringing our patents. However, we expect that
our bulk Liquidmetal alloys will face competition from other materials,
including metals, alloys, plastics and composites, which are currently used in
the commercial applications that we pursue. Our alloys could also face
competition from new materials that may be developed in the future, including
new materials that could render our alloys obsolete. Our Liquidmetal alloy coatings face competition from industrial coatings
currently manufactured or sold by other companies. At present, the primary
competitors of our coatings business are Varco International, Inc. and Arnco
Technology Trust, Limited. Although we believe, based on market data gathered
by us, that our coatings compete favorably with these companies products and
that we continue to maintain the dominant market share with respect to
protective coatings for oil drill pipe and casings, these competitors are
larger well-established businesses that have substantially greater financial,
marketing, and other resources than we do. We will also experience indirect competition from the competitors of our
customers. Because we will rely on our customers to market and sell finished
goods that incorporate our components or products, our success will depend in
part on the ability of our customers to effectively market and sell their own
products and compete in their respective markets. Backlog In our bulk alloy segment, because of the minimal lead-time associated
with orders of bulk alloy parts, we generally do not carry a significant
backlog. In our coatings segment, we typically ship our coating products
shortly after receipt of an order, and our coatings backlog is therefore also
insignificant. In both our bulk alloy segment and coatings segment, the backlog
as of any particular date gives no indication of actual sales for any
succeeding period. Sales and Marketing We direct our marketing efforts towards customers that will incorporate
our components and products into their finished goods. To that end, we will
continue to hire business development personnel who, in conjunction with
engineers and scientists, will actively identify potential customers that may
be able to benefit from the introduction of Liquidmetal alloys to their
products. In some cases, we will develop applications in conjunction with
existing or potential customers. By adopting this strategy, we intend to take
advantage of the sales and marketing forces and distribution channels of our
customers to facilitate the commercialization of our alloys. We also direct
business development efforts toward companies who we believe could be viable
candidates for potential partnering transactions, such as licensing
relationships, distribution arrangements, joint ventures, and the like. 13




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Employees As of September 1, 2004, we had 103 full-time employees and 17 part-time
employees. As of September 1, 2004, 59 of our Korean operation employees were
represented by a labor union. We have not experienced any work stoppages and
we consider our employee relations to be favorable. Governmental Regulation Medical instruments incorporating our Liquidmetal alloys, such as scalpel
blades and phacoemulsification tips, will be subject to regulation in the
United States by the FDA and corresponding state and foreign regulatory
agencies. Any orthopedic devices that we develop will be regulated in a similar
manner. Medical device manufacturers to whom we intend to sell our products may
need to obtain FDA approval before marketing their medical devices that
incorporate our products. Medical device manufacturers may need to obtain
similar approvals before marketing these medical device products in foreign
countries. Because we intend to sell our medical device products to medical device
manufacturers, we do not believe that we will need to obtain FDA approval or
similar foreign approvals before selling products to medical device
manufacturers.
Nonetheless, as a manufacturer of medical device components, we would be
subject to quality control and record keeping requirements of FDA and other
federal and state statutes and regulations, as well as similar regulations in
foreign countries. The process of obtaining and maintaining required FDA and foreign
regulatory approvals for medical devices that incorporate our products could be
lengthy, expensive, and uncertain for our customers. Additionally, regulatory
agencies can delay or prevent product introductions. Generally, before a
medical device manufacturer can market a product incorporating one of our
products, our customer must obtain for their finished product marketing
clearance through a 510(k) premarket notification or approval of a pre-market
approval application, or PMA. The FDA will typically grant a 510(k) clearance
if the applicant can establish that the device is substantially equivalent to a
predicate device. It generally takes a number of months from the date of a
510(k) submission to obtain clearance, but it may take longer, particularly if
a clinical trial is required. The FDA may find that a 510(k) is not appropriate for a medical device
that incorporates our product or that substantial equivalence has not been
shown and as a result will require a PMA. A PMA application must be submitted
if a proposed medical device does not qualify for a 510(k) pre-market clearance
procedure. PMA applications must be supported by valid scientific evidence to
demonstrate the safety and effectiveness of the device, typically including the
results of clinical trials, bench tests, and laboratory and animal studies. The
PMA process can be expensive, uncertain and lengthy, requires detailed and
comprehensive data, and generally takes significantly longer than the 510(k)
process. Additionally, the FDA may never approve the PMA. Similar regulations in foreign countries vary significantly from country
to country and with respect to the nature of the particular medical device. The
time required to obtain these foreign approvals to market our products may be
longer or shorter than that required in the United States, and requirements for
such approval may differ from FDA requirements. Factors Affecting Future Results This report contains forward-looking statements (within the meaning of the
Private Securities Litigation Reform Act of 1995) that are based on
managements current expectations, estimates, forecasts, and projections about
the Company and its business. In addition, other written or oral statements
which constitute forward-looking statements may be made from time to time by or
on behalf of Liquidmetal Technologies, Inc. Any statement in this report that
is not a statement of historical fact is a forward-looking statement, and in
some cases, words such as believe, estimate, project, expect, intend,
may, anticipate, plans, seeks, and similar expressions identify
forward-looking statements.
Forward-looking statements involve risks and uncertainties that could cause
actual outcomes and results to differ materially from the anticipated outcomes
or result. These statements are not guarantees of future performance, and undue
reliance should not be placed on these statements. Liquidmetal Technologies,
Inc. undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise. Factors that could cause actual results to differ materially from what is
expressed or forecasted in our forward-looking statements include, but are not
limited to, the following: 14




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We have not sustained profitability and may incur losses in the future. We had an accumulated deficit of approximately $112.6 million at December
31, 2003. Of this accumulated deficit, $42.7 million was attributable to losses
generated by our discontinued retail golf business through December 31, 2003.
After giving effect to the restatement described in Note 2 to our consolidated
financial statements included in this annual report on Form 10-K, we realized a
net loss of $33.6 million for the year ended December 31, 2003, $19.5 million
for the year ended December 31, 2002 and $24.0 million for the year ended
December 31, 2001, excluding the results of our discontinued retail golf
business. We may incur additional operating losses in the future. Consequently,
it is possible that we may not achieve positive earnings and, if we do achieve
positive earnings, we may not be able to achieve them on a sustainable basis. We have a limited history of developing, manufacturing, and selling
products made from our bulk amorphous alloys. We have marketed and sold industrial coatings to distributors in the
coatings industry since 1987. Prior to the third quarter of 2002, our
experience selling products made from bulk amorphous alloys has been limited to
our discontinued retail golf business, which had a different marketing strategy
than the one we are currently employing. Therefore, we have a relatively
limited history of producing bulk amorphous alloy components and products on a
mass-production basis. Many of our relationships with potential customers for
bulk alloy products are at an early stage, and there can be no assurance that
these customers will enter into purchase commitments with us. We rely on assumptions about the markets for our products and components
that, if incorrect, may adversely affect our profitability. We have a relatively short history producing bulk amorphous alloy
components on a mass-production basis. We have made assumptions regarding the
market size for, and the manufacturing requirements of, our products and
components based in part on information we received from third parties and also
from our limited history. If these assumptions prove to be incorrect, we may
not achieve anticipated revenue targets or profitability. If we cannot establish and maintain relationships with customers that
incorporate our components and products into their finished goods, we will not
be able to increase our revenue and commercialize our products. To increase our revenue, we must establish and maintain relationships with
customers that will incorporate our components and products into their finished
goods. We expect to rely on the marketing, distribution, and, in some cases,
the manufacturing, research, and development abilities of our customers to
assist us in developing, commercializing, and marketing our products in
different markets. Our future growth and success will depend in large part on
our ability to enter into these relationships and the subsequent success of
these relationships. If our products are selected for use in a customers
products, we still may not realize significant revenue from that customer if
that customers products are not commercially successful. It may take significant time and cost for us to develop new customer
relationships, which may delay our ability to generate additional revenue or
achieve profitability. Our ability to generate revenue from new customers will be affected by the
amount of time it takes for us to, among other things:  
    
    identify a potential customer and introduce the customer to Liquidmetal alloys;
    
    work with the customer to select and design the parts to be fabricated from Liquidmetal alloys;
    
    make the molds and tooling to be used to produce the selected part;
    
    make prototypes and samples for customer testing;
    
    work with our customers to test and analyze prototypes and samples; and
    
    with respect to some types of products, such as medical devices, to obtain regulatory approval. 15




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We currently do not have a sufficient history of selling products made
from our bulk amorphous alloys to predict accurately the length of our average
sales cycle. We believe that our average sales cycle from the time we deliver
an active proposal to a customer until the time our customer fully integrates
our bulk amorphous alloys into its product could be a significant period of
time. Our history to date has demonstrated that the sales cycle could extend
significantly longer than we anticipate. The time it takes to transition a
customer from limited production to full-scale production runs will depend upon
the nature of the processes and products into which our alloys are integrated.
Moreover, we have found that customers often proceed very cautiously and slowly
before incorporating a fundamentally new and unique type of material into their
products. After we develop a customer relationship, it may take a significant amount
of time for that customer to develop, manufacture, and sell finished goods that
incorporate our components and products. Our experience has shown that our customers will perform numerous tests
and extensively evaluate our components and products before incorporating them
into their finished products. The time required for testing, evaluating, and
designing our components and products into a customers products, and in some
cases, obtaining regulatory approval, can take a significant amount of time,
with an additional period of time before a customer commences volume production
of products incorporating our components and products, if ever. Moreover,
because of this lengthy development cycle, we may experience a delay between
the time we accrue expenses for research and development and sales and
marketing efforts and the time when we generate revenue, if any. We may incur
substantial costs in an attempt to transition a customer from initial testing
to prototype and from prototype to final product. If we are unable to minimize
these transition costs, or to recover the costs of these transitions from our
customers, our operating results will be adversely affected. A limited number of our customers generate a significant portion of our
revenue. For the near future, we expect that a significant portion of our revenue
will be concentrated in a limited number of customers. For example, for the
year ended December 31, 2003, revenue from two customers represented
approximately 26% of total revenue from continuing operations and for the year
ended December 31, 2002, revenue from two customers represented approximately
31% of total revenue from continuing operations. A reduction, delay, or
cancellation of orders from one or more of these customers or the loss of one
or more customer relationships could significantly reduce our revenue. Unless
we establish long-term sales arrangements with these customers, they will have
the ability to reduce or discontinue their purchases of our products on short
notice. We expect to rely on our customers to market and sell finished goods that
incorporate our products and components, a process over which we will have
little control. Our future revenue growth and ultimate profitability will depend in part
on the ability of our customers to successfully market and sell their finished
goods that incorporate our products. We will have little control over our
customers marketing and sales efforts. These marketing and sales efforts may
be unsuccessful for various reasons, any of which could hinder our ability to
increase revenue or achieve profitability. For example, our customers may not
have or devote sufficient resources to develop, market, and sell their finished
goods that incorporate our products. Because we typically will not have
exclusive sales arrangements with our customers, they will not be precluded
from exploring and adopting competing technologies. Also, products
incorporating competing technologies may be more successful for reasons
unrelated to the performance of our customers products or the marketing
efforts of our customers. Our growth depends on our ability to identify, develop, and commercialize
new applications for our technology. Our future growth and success will depend in part on our ability to
identify, develop, and commercialize, either alone or in conjunction with our
customers, new applications and uses for Liquidmetal alloys. If we are unable
to
identify and develop new applications, we may be unable to develop new products
or generate additional revenue. Successful development of new applications for
our products may require additional investment, including costs associated with
research and development and the identification of new customers. In addition,
difficulties in developing and achieving market acceptance of new products
would harm our business. We may not be able to effectively compete with current suppliers of
incumbent materials or producers of competing products. 16




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The future growth and success of our bulk amorphous alloy business will
depend in part on our ability to establish and retain a technological advantage
over other materials for our targeted applications. For many of our targeted
applications, we will compete with manufacturers of similar products that use
different materials. For example, we have targeted the cellular phone casing
market as an application for bulk Liquidmetal alloys. In this market, we
believe we will compete with other manufacturers of cellular phone casings who
use plastics or metal to construct their casings. In other markets, we will
compete directly with suppliers of the incumbent material. In addition, in
each of our targeted markets, our success will depend in part on the ability of
our customers to compete successfully in their respective markets. Thus, even
if we are successful in replacing an incumbent material in a finished product,
we will remain subject to the risk that our customer will not compete
successfully in its own market. Future advances in materials science could render Liquidmetal alloys
obsolete. Academic institutions and business enterprises frequently engage in the
research and testing of new materials, including alloys and plastics. Advances
in materials science could lead to new materials that have a more favorable
combination of performance, processing, and cost characteristics than our
alloys. The future development of any such new materials could render our
alloys obsolete and unmarketable or may impair our ability to compete
effectively. Our growth depends upon our ability to retain and attract a sufficient
number of qualified employees. Our future growth and success will depend in part on our ability to retain
key members of our management and scientific staff, particularly John Kang, our
President and Chief Executive Officer, Professor William Johnson, a member of
our board of directors and a professor at Caltech, and Dr. Atakan Peker, our
Vice President of Technology. We do not have key man or similar insurance on
either of these individuals. If we lose either their services or the services
of other key personnel, our financial results or business prospects may be
harmed. Additionally, our future growth and success will depend in part on our
ability to attract, train, and retain scientific engineering, manufacturing,
sales, marketing, and management personnel. We cannot be certain that we will
be able to attract and retain the personnel necessary to manage our operations
effectively. Competition for experienced executives and scientists from
numerous companies and academic and other research institutions may limit our
ability to hire or retain personnel on acceptable terms. In addition, many of
the companies with which we compete for experienced personnel have greater
financial and other resources than we do. Moreover, the employment of
non-citizens may be restricted by applicable immigration laws. We may not be able to successfully identify, consummate, or integrate
strategic partnerships. As a part of our business strategy, we intend to pursue strategic
partnering transactions that provide access to new technologies, products,
markets, and manufacturing capabilities. These transactions could include
licensing agreements, joint ventures, or even business combinations. For
example, we may pursue transactions that will give us access to new
technologies that are useful in connection with the composition, processing, or
application of Liquidmetal alloys. We may not be able to successfully identify
any potential strategic partnerships. Even if we do identify one or more
potentially beneficial strategic partnering, we may not be able to consummate
these transactions on favorable terms or obtain the benefits we anticipate from
such a transaction. We may encounter manufacturing problems or delays or may be unable to
produce high-quality products at acceptable costs. We have relatively limited experience in manufacturing our products and
may be required to manufacture a range of products in high volumes while
ensuring high quality and consistency. Although we currently own and operate a
166,000 square foot manufacturing facility in South Korea, we cannot guarantee
that this facility will be able to produce its intended products with
production yields, quality controls, and production costs that provide us with
acceptable margins or profitability or satisfy the requirements of our
customers. We expect to derive a substantial portion of our revenue from sales
outside the United States, and problems associated with international business
operations could affect our ability to manufacture and sell our products. We expect that we will continue to manufacture a substantial portion of
our initial bulk Liquidmetal alloy products in our South Korean facility. As a
result, our manufacturing operations are subject to risks of political
instability, including the risk of conflict between North Korea and South Korea
and tensions between the United States and North Korea. In addition, we
anticipate that sales to customers located outside of the United States will
account for a significant portion of our revenue in future periods and that the
trend of foreign customers accounting for an increasing 17




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portion of our total
sales may continue. Specifically, we expect to continue to derive a significant
amount of revenue from sales to customers located in Asia. A downturn in the
economies of Asian countries where our products will be sold, particularly
South Koreas economy, could materially harm our business. Consequently, our operations and revenue likely will be subject to a
number of risks associated with foreign commerce, including:  
    
    staffing and managing our manufacturing facility located in South Korea;
    
    product or material transportation delays or disruption, including the availability and costs of air and other
transportation between our South Korean facilities and the United States;
    
    political and economic instability, including instability involving North Korea;
    
    potentially adverse tax consequences;
    
    burden of complying with complex foreign laws and treaties; and
    
    trade protection laws, policies, and measures and other regulatory requirements affecting trade and investment, including
loss or modification of exemptions for taxes and tariffs. Moreover, customers
may sell finished goods that incorporate our components and products
outside of the United States, which exposes us indirectly to additional
foreign commerce risks. Our business is subject to the potential adverse consequences of exchange
rate fluctuations. We expect to conduct business in various foreign currencies and will be
exposed to market risk from changes in foreign currency exchange rates and
interest rates. Fluctuations in exchange rates between the U.S. dollar and such
foreign currencies may have a material adverse effect on our business, results
of operations, and financial condition and could specifically result in foreign
exchange gains and losses. The impact of future exchange rate fluctuations on
our operations cannot be accurately predicted. To the extent that the
percentage of our non-U.S. dollar revenue derived from international sales
increases in the future, our exposure to risks associated with fluctuations in
foreign exchange rates will increase further. Moreover, as a result of
operating a manufacturing facility in South Korea, a substantial portion of our
costs are and will continue to be denominated in the South Korean won. Adverse
changes in the exchange rates of the South Korean won to the U.S. dollar will
affect our costs of goods sold and operating margins and could result in
exchange losses. Our inability to protect our licenses, patents, and proprietary rights in
the United States and foreign countries could harm our business because third
parties may take advantage of our research and development efforts. We have an exclusive license from Caltech to several patents and patent
applications relating to amorphous alloy technology, and we have obtained
several of our own patents. We also have the exclusive right to Caltechs
inventions, proprietary information, know-how, and other technology relating to
bulk amorphous alloys existing as of September 1, 2001. Our success depends in
part on our ability to obtain and maintain patent and other proprietary right
protection for our technologies and products in the United States and other
countries. If we are unable to obtain or maintain these protections, we may not
be able to prevent third parties from using our proprietary rights.
Specifically, we must:  
    
    protect and enforce our license agreement with Caltech and our own patents and intellectual property;
    
    exploit our license of the patented technology under our license agreement with Caltech as well as our own patents; and
    
    operate our business without infringing on the intellectual property rights of third parties. Caltech owns several issued United States patents covering the composition
and method of manufacturing of the family of Liquidmetal alloys. We also hold
several United States and corresponding foreign patents covering the
manufacturing processes of Liquidmetal alloys and their use. The patents
relating to our coatings expire on various dates between 2005 and 2017, and
those relating to our bulk amorphous alloys between 2013 and 2021. If we are
unable to protect our proprietary rights prior to the expiration of these
patents, we may lose the advantage we have established as being the first to
market bulk amorphous alloy products. In addition, the laws of some foreign
countries 18




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do not protect proprietary rights to the same extent as the laws of
the United States, and we may encounter significant problems and costs in
protecting our proprietary rights in these foreign countries. Patent law is still evolving relative to the scope and enforceability of
claims in the fields in which we operate. Our patent protection involves
complex legal and technical questions. Our patents and those patents for which
we have license rights may be challenged, narrowed, invalidated, or
circumvented. We may be able to protect our proprietary rights from
infringement by third parties only to the extent that our proprietary
technologies are covered by valid and enforceable patents or are effectively
maintained as trade secrets. Furthermore, others may independently develop
similar or alternative technologies or design around our patented technologies.
Litigation or other proceedings to defend or enforce our intellectual property
rights could require us to spend significant time and money and could otherwise
adversely affect our business. Other companies may claim that we infringe their intellectual property
rights, which could cause us to incur significant expenses or prevent us from
selling our products. Our success depends, in part, on our ability to operate without infringing
on valid, enforceable patents or proprietary rights of third parties and not
breaching any licenses that may relate to our technology and products. Future
patents issued to third parties may contain claims that conflict with our
patents and that compete with our products and technologies, and third parties
could assert infringement claims against us. Any litigation or interference
proceedings, regardless of their outcome, may be costly and may require
significant time and attention of our management and technical personnel.
Litigation or interference proceedings could also force us to:  
    
    stop or delay using our technology;
    
    stop or delay our customers from selling, manufacturing or using products that incorporate the challenged intellectual
property;
    
    pay damages; or
    
    enter into licensing or royalty agreements that may be unavailable on acceptable terms. The time and cost associated with complying with government regulations to
which we could become subject could have a material adverse effect on our
business. Some of the applications that we have identified or may identify in the
future may be subject to government regulations. For example, any medical
devices such as precision ophthalmic instruments and orthopedic devices made
from our alloys likely will be subject to extensive government regulation in
the United States by the Food and Drug Administration, or FDA. Any medical
device manufacturers to whom we sell Liquidmetal alloy products may need to
comply with FDA requirements, including premarket approval or clearance under
Section 510(k) of the Food Drug and Cosmetic Act before marketing in the United
States Liquidmetal alloy medical device products. These medical device
manufacturers may be required to obtain similar approvals before marketing
these medical devices in foreign countries. Any medical device manufacturers
with which we jointly develop and sell medical device products may not provide
significant assistance to us in obtaining required regulatory approvals. The
process of obtaining and maintaining required FDA and foreign regulatory
approvals could be lengthy, expensive, and uncertain. Additionally, regulatory
agencies can delay or prevent product introductions. The failure to comply with
applicable regulatory requirements can result in substantial fines, civil and
criminal penalties, stop sale orders, loss or denial of approvals, recalls of
products, and product seizures. In addition, the processing of beryllium, a minor constituent element of
some of our alloys, can result in the release of beryllium into the workplace
and the environment and in the creation of beryllium oxide as a by-product.
Beryllium is classified as a hazardous air pollutant, a toxic substance, a
hazardous substance, and a probable human carcinogen under environmental,
safety, and health laws, and various acute and chronic health effects may
result from exposure to beryllium. We are required to comply with certain
regulatory requirements and to obtain a permit from the U.S.
Environmental Protection Agency or other government agencies to process
beryllium. Our failure to comply with present or future governmental
regulations related to the processing of beryllium could result in suspension
of manufacturing operations and substantial fines or criminal penalties. To the extent that our products have the potential for dual use, such as
military and non-military applications, they may be subject to import and
export restrictions of the U.S. government, as well as other countries. The
process of obtaining any required U.S. or foreign licenses or approvals could
be time-consuming, costly, and uncertain. Failure to comply with import and
export regulatory requirements can lead to substantial fines, civil and
criminal penalties, and the loss of government contracting and export
privileges. 19




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We may require additional funding, which may not be available on favorable
terms or at all. Our future capital requirements will depend on the amount of cash
generated by our operations. Our projections of cash flows from operations and,
consequently, future cash needs are subject to substantial uncertainty. If our
available funds and cash generated from operations are insufficient to satisfy
our liquidity requirements, we may need additional funds in the future to
support our working capital requirements and for other purposes, and we may
seek to raise additional funds through public or private equity financing, bank
debt financing, or from other sources. Adequate funds may not be available when
needed or may not be available on favorable terms. If we raise additional funds
by issuing equity securities, existing shareholders may be diluted. If funding
is insufficient at any time in the future, we may not be able to develop or
enhance our products or services, take advantage of business opportunities, or
respond to competitive pressures, any of which could harm our business. Antitakeover provisions of our certificate of incorporation and bylaws and
provisions of applicable corporate law could delay or prevent a change of
control that you may favor. Provisions in our certificate of incorporation, our bylaws, and Delaware
law could make it more difficult for a third party to acquire us, even if doing
so would be beneficial to our shareholders. These provisions could discourage
potential takeover attempts and could adversely affect the market price of our
shares. Because of these provisions, you might not be able to receive a premium
on your investment. These provisions:  
    
    authorize our board of directors, without shareholder approval, to issue up to 10,000,000 shares of blank check preferred
stock that could be issued by our board of directors to increase the number of outstanding shares and prevent a takeover
attempt;
    
    limit shareholders ability to call a special meeting of our shareholders;
    
    provide for a classified board of directors; and
    
    establish advance notice requirements to nominate directors for election to our board of directors or to propose matters
that can be acted on by shareholders at shareholder meetings.
    
    the provisions described above could delay or make more difficult
transactions involving a change in control of us or our management. Our bulk amorphous alloy technology is still at an early stage of
commercialization relative to many other materials. Our bulk amorphous alloy technology is a relatively new technology as
compared to many other material technologies, such as plastics and widely-used
high-performance crystalline alloys. Historically, the successful
commercialization of a new materials technology has required the persistent
improvement and refining of the technology over a sometimes lengthy period of
time. Accordingly, we believe that our Companys future success will be
dependent on our ability to continue expanding and improving our technology
platform by, among other things, constantly refining and improving our
manufacturing processes, optimizing our existing amorphous alloy compositions
for various applications, and developing and improving new bulk amorphous alloy
compositions. Our failure to further expand our technology base could limit
our growth opportunities and hamper our commercialization efforts. Our stock price may experience volatility. The trading price of our common stock could fluctuate widely due to:  
    
    quarter-to-quarter variations in results of operations;
    
    loss of a major customer;
    
    announcements of technological innovations by us or our potential competitors;
    
    changes in, or our failure to meet, the expectations of securities analysts;
    
    new products offered by us or our competitors;
    
    announcements of strategic relationships or strategic partnerships; or 20




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##### Table of Contents




    
    other events or factors that may be beyond our control. In addition, the securities markets in general have experienced extreme
price and trading volume volatility in the past. The trading prices of
securities of many companies at our stage of growth have fluctuated broadly,
often for reasons unrelated to the operating performance of the specific
companies. These general market and industry factors may adversely affect the
trading price of our common stock, regardless of our actual operating
performance. If our stock price is volatile, we could face securities class
action litigation, which could result in substantial costs and a diversion of
managements attention and resources and could cause our stock price to fall. 
 Item 2. Properties Our principal executive offices and principal research and development
offices are located in Lake Forest, California and consist of approximately
30,000 square feet. This facility is occupied pursuant to a lease agreement
that expires in June 2007. Prior to December 31, 2003, our principal executive
offices were located in Tampa, Florida; however, as an outgrowth of various
cost reduction measures in the fourth quarter of 2003, activities of the Tampa
office were transferred to and consolidated with the Lake Forest office. In
Conroe, Texas, we lease an office and warehouse for our coatings business
segment. This facility, which is approximately 10,000 square feet, is leased
through September 2006. Our principal prototyping and manufacturing facility is in Pyongtaek,
South Korea, and consists of approximately 166,000 square feet. We lease the
land on which this facility is located, although we own the buildings,
fixtures, and all personal property located on the land. The parcel of land
consists of approximately four acres and is leased through 2022. We currently
expect that this facility will meet our anticipated internal manufacturing
needs for the foreseeable future. Until June 2004 we also leased a facility in
Incheon, South Korea, where an equipment manufacturing division of the Company
assembled die casting equipment. This facility is approximately 22,430 square
feet, and its lease expired in February 2005; however, that die casting
equipment division was divested as of June 14, 2004 and the lease was
terminated. 
 Item 3. Legal Proceedings Liquidmetal Technologies and certain of its present and former officers
and directors were named as defendants in nine purported class action
complaints filed in the United States District Courts for the Middle District
of Florida, Tampa Division, and the Central District of California, Southern
Division, alleging violations of Sections 11 and 15 of the Securities Act of
1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder. The actions were originally brought on
behalf of those who purchased Liquidmetal Technologies common stock between
May 22, 2002, and March 30, 2004, inclusive. The complaints contain varying
allegations, but generally allege that the defendants engaged in improper
revenue recognition with respect to the Companys transactions with Growell
Metal Co., Ltd. and that the defendants issued false and misleading statements
concerning the Companys business and operations, including unrealistic but
favorable information about market demand for Liquidmetal products, with the
result of artificially inflating the Companys share price. The complaints seek
unspecified compensatory damages and other relief. In August 2004, four
complaints were consolidated in the United States District Court for the Middle
District of Florida under the caption Primavera Investors v. Liquidmetal
Technologies, Inc., et al., Case No. 8:04-CV-919-T-23EAJ. John Lee, Chris
Cowley, Dwight Mamanteo, Scott Purcell and Mark Rabold, were appointed co-lead
plaintiffs (the Lead Plaintiffs). Subsequently, in September 2004, the five
complaints filed in the Central District of California were transferred to the
Middle District of Florida for consolidation with the Primavera Investors
action. The Consolidated Amended Class Action Complaint is presently due on or
before November 1, 2004, but the Lead Plaintiffs have requested an enlargement
of time until 30 days after this Form 10-K is filed. Liquidmetal Technologies
and the other defendants will have 45 days from the service date to move to
dismiss or otherwise respond to the Consolidated Amended Class Action
Complaint. We intend to vigorously defend against the class action. We cannot
currently predict the impact or resolution of this litigation or reasonably
estimate a range of possible loss, which could be material. The resolution of
this lawsuit may harm our business and have a material adverse impact on our
financial condition. In addition, certain present and former officers and directors of
Liquidmetal Technologies, as well as Liquidmetal Technologies as a nominal

defendant, have been named in three shareholder derivative actions. Two
shareholder derivative complaints were filed in California state court styled
Brian Clair, Derivatively on Behalf of Liquidmetal Technologies, Inc. v. John
Kang, et al., Case No. 04CC00551, and Joseph Durgin Derivatively on Behalf of
Liquidmetal Technologies, Inc. v. John Kang, et al.,Case No. 04CC00553, both
commenced in the Superior Court of Orange County, California. A third
shareholder derivative complaint was filed in Florida federal court styled
Robert Story v. John Kang, et al., Case No. 8:04-CV-1587-T23TBM, commenced in
the Middle District of Florida, Tampa
Division. These shareholder derivative lawsuits allege that the defendants
breached various fiduciary duties and 21




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otherwise violated state law based
primarily upon the same underlying facts and circumstances as the federal
shareholder class action lawsuits. The plaintiffs seek unspecified compensatory
damages, restitution and disgorgement of profits, equitable and/or injunctive
relief as permitted by law and other relief. The two shareholder derivative
complaints in California state court have been consolidated. Plaintiffs served
a Consolidated Shareholder Derivative Complaint on October 12, 2004. The
defendants have 40 days, or until November 22, 2004, to file a response to the
Consolidated Shareholder Derivative Complaint. The defendants have filed a
Motion to Stay the California derivative action and are awaiting a ruling on
that Motion. The Companys response to the Florida derivative complaint is due
on October 25, 2004. We intend to vigorously defend against the derivative
actions. We cannot currently predict the impact or resolution of this
litigation or reasonably estimate a range of possible loss, which could be
material. The resolution of these lawsuits may harm our business and have a
material adverse impact on our financial condition. Two separate lawsuits were filed in July and September 2004 by two former
employees of our Pyongtaek manufacturing facility in South Korea. The suits
are based on a claim of wrongful termination and breach of employment contract.
The Company believes that the ultimate outcome of these matters will not have
a material adverse effect on the consolidated financial position, results of
operations or liquidity of the Company. 
 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of our security holders during the
fourth quarter of 2003. 
 PART II 
 Item 5. Market For Registrants Common Equity and Related Stockholder Matters Prior to July 16, 2004, our common stock was quoted on the Nasdaq National
Market under the symbol LQMT. On July 14, 2004, the Company was notified by
the Nasdaq Listing Qualifications Panel that the Companys common stock would
be delisted from the Nasdaq National Market effective with the open of business
on Friday, July 16, 2004. The Company was delisted for its failure to comply
with Marketplace Rule 4310(c)(14) due to the Companys inability to file its
Form 10-K for the fiscal year 2003 and Form 10-Q for the first quarter of 2004.
As of July 19, 2004, the shares of Liquidmetal Technologies, Inc. common stock
commenced trading in the Over the Counter (OTC) Pink Sheets Market under the
symbol LQMT.PK. The following table sets forth, for the periods indicated, the high and
low sale prices for our common stock as reported by The Nasdaq National Market: Fiscal 2003High
    
    LowFirst Quarter
    
    $
    10.41
    
    
    $
    5.00Second Quarter
    
    $
    7.20
    
    
    $
    4.11Third Quarter
    
    $
    6.50
    
    
    $
    3.03Fourth Quarter
    
    $
    3.29
    
    
    $
    1.95
 The closing price of our common stock as reported on The OTC Pink Sheets
Market on October 1, 2004 was $1.88 per share. As of October 1, 2004, there
were 238 holders of record of our common stock. We have never paid a cash dividend on our common stock. We do not
anticipate paying any cash dividends on our common stock in the foreseeable
future, and we plan to retain our earnings to finance future growth. Pursuant to our Registration Statement on Form S-1 (Registration No.
333-73716), as amended, initially filed with the Securities and Exchange
Commission on November 20, 2001 and declared effective May 21, 2002, we closed
an initial public offering of 5,000,000 shares of common stock on May 28, 2002,
plus an additional 229,000 shares on June 10, 2002 pursuant to an overallotment
option, at a price of $15.00 per share (which sale is referred to herein as the
Offering). The Offering generated aggregate cash proceeds during the second
quarter 2002 of $78.4 million. The net proceeds were $70.7 million after
deducting underwriting commissions of $5.5 million and other transaction fees
of $2.2 million. The managing underwriters for the Offering were Merrill Lynch
& Co., UBS Warburg, and Robert W. Baird & Co. As of December 31, 2003, we had used the $70.7 million of net proceeds
from the Offering. In 2002, we used approximately $7.8 million of the net
proceeds from the Offering to repay all outstanding promissory notes and
accrued 22




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##### Table of Contents



interest, $11.1 million to fund the construction of our manufacturing
facility in South Korea, $14.3 million to purchase equipment used to
manufacture Liquidmetal parts, $0.4 million to purchase assets related to
production and sale of equipment used in the production process of Liquidmetal
alloy products, and $0.3 million to purchase the 51% interest in our majority
owned Dongyang subsidiary. During the third quarter of 2002, we used $2.0
million to invest in the common stock of Growell Metal, which supplied a
portion of the Liquidmetal alloy ingots used in our manufacturing operations in
Korea. We have since sold such stock. We used the remaining proceeds of $32.7
million for working capital in 2002 and 2003, excluding $2.1 million paid to
Paul Azinger in 2002 and 2003 for amounts due under the terms of his terminated
endorsement agreement with our discontinued retail golf operations. 
 Item 6. Selected Consolidated Financial Data We derived the selected consolidated financial data below as of and for
each of the three years in the period ended December 31, 2003 from our audited
consolidated financial statements and related notes thereto included elsewhere
in this annual report on Form 10-K. The selected consolidated financial data
for the years ended December 31, 2000 and 1999 and as of December 31, 2000 and
1999 have been derived from our unaudited consolidated financial statements not
included in this Form 10-K. The following selected consolidated financial data
should be read in conjunction with Liquidmetal Technologies, Inc.s
consolidated financial statements and the related notes thereto, and
Managements Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this annual report on Form 10-K In
addition, readers should note the following information regarding the selected
historical consolidated financial data presented below. We have restated our previously reported consolidated financial statements
for the fiscal years ended December 31, 2002 and 2001. The restatement
adjustments resulted in a cumulative net reduction to shareholders equity of
$2.0 million as of December 31, 2002 and an increase in previously reported net
loss of $1.1 million and $0.9 million for the years ended December 31, 2002 and
2001, respectively. The selected consolidated financial data presented below
includes all such restatements. See Note 2 in the notes to consolidated
financial statements, which reflects the restatements of prior year
transactions. 23




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##### Table of Contents



For the Years Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(restated)
    
    (restated)
    
    (unaudited)
    
    (unaudited)(in thousands, except per share data)Consolidated Statement of Operations Data:Revenue
    
    $
    16,854
    
    
    $
    11,235
    
    
    $
    3,882
    
    
    $
    4,200
    
    
    $
    2,012Cost of sales
    
    
    22,188
    
    
    
    7,174
    
    
    
    1,924
    
    
    
    1,983
    
    
    
    805Gross Profit
    
    
    (5,334
    )
    
    
    4,061
    
    
    
    1,958
    
    
    
    2,217
    
    
    
    1,207Operating expenses:Selling, general and administrative
    
    
    17,784
    
    
    
    13,472
    
    
    
    5,239
    
    
    
    1,449
    
    
    
    847Research and development
    
    
    8,853
    
    
    
    11,825
    
    
    
    1,726
    
    
    
    455
    
    
    
    333Impairment of goodwill
    
    
    184
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impairment of long lived assets
    
    
    2,684
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    29,505
    
    
    
    25,297
    
    
    
    6,965
    
    
    
    1,904
    
    
    
    1,180Income (loss) before interest, other income, income
taxes, minority interest and discontinued operations
    
    
    (34,839
    )
    
    
    (21,236
    )
    
    
    (5,007
    )
    
    
    313
    
    
    
    27Interest expense, net
    
    
    (84
    )
    
    
    (603
    )
    
    
    (1,095
    )
    
    
    (188
    )
    
    
    (190
    )Gain on sale of marketable securities held-for-sale
    
    
    1,178
    
    
    
    832
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) before income taxes, minority interest and
discontinued operations
    
    
    (33,745
    )
    
    
    (21,007
    )
    
    
    (6,102
    )
    
    
    125
    
    
    
    (163
    )Income taxes
    
    
    (8
    )
    
    
    (123
    )
    
    
    
    
    
    
    
    
    
    
    Minority interest in loss of consolidated subsidiary
    
    
    21
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) from continuing operations
    
    
    (33,732
    )
    
    
    (21,012
    )
    
    
    (6,102
    )
    
    
    125
    
    
    
    (163
    )Loss from operations of discontinued retail golf
segment, net
    
    
    
    
    
    
    
    
    
    
    (5,973
    )
    
    
    (8,938
    )
    
    
    (7,977
    )Gain (loss) from disposal of discontinued retail
golf segment, net
    
    
    127
    
    
    
    1,556
    
    
    
    (11,949
    )
    
    
    
    
    
    
    Net loss
    
    $
    (33,605
    )
    
    $
    (19,456
    )
    
    $
    (24,024
    )
    
    $
    (8,813
    )
    
    $
    (8,140
    )Income (loss) per share from continuing
operations  basic and diluted
    
    $
    (0.81
    )
    
    $
    (0.54
    )
    
    $
    (0.18
    )
    
    $
    0.00
    
    
    $
    (0.01
    )Weighted average common shares used to
compute income (loss) per share from
continuing operations  basic and diluted
    
    
    41,505
    
    
    
    38,714
    
    
    
    33,323
    
    
    
    30,884
    
    
    
    26,788
 24




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##### Table of Contents



As of December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(restated)
    
    (restated)
    
    (unaudited)
    
    (unaudited)(in thousands, except per share data)Consolidated Balance Sheet Data:Cash and cash equivalents
    
    $
    3,129
    
    
    $
    26,003
    
    
    $
    2,230
    
    
    $
    124
    
    
    $
    314Marketable securities held-for-sale
    
    
    
    
    
    
    3,068
    
    
    
    
    
    
    
    
    
    
    
    Working capital (deficiency)
    
    
    629
    
    
    
    25,812
    
    
    
    (9,573
    )
    
    
    (1,960
    )
    
    
    218Total assets
    
    
    33,026
    
    
    
    66,016
    
    
    
    6,680
    
    
    
    1,945
    
    
    
    2,043Long-term debt and capital leases, including
current portion
    
    
    4,360
    
    
    
    93
    
    
    
    2,988
    
    
    
    2,506
    
    
    
    2,194Shareholders equity (deficiency)
    
    
    16,163
    
    
    
    50,599
    
    
    
    (7,504
    )
    
    
    (3,680
    )
    
    
    (1,461
    )
 25




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations This managements discussion and analysis should be read in the
conjunction with the condensed consolidated financial statements and notes
included elsewhere in this report onForm 10-K. This managements discussion and analysis, as well as other sections of
this report onForm 10-K, may contain forward-looking statements that involve
risks and uncertainties, including statements regarding our plans, future
events, objectives, expectations, forecasts, or assumptions. Any statement that
is not a statement of historical fact is a forward-looking statement, and in
some cases, words such as believe, estimate,  project, expect,
intend, may, anticipate, plans, seeks, and similar expressions
identify forward-looking statements. These statements involve risks and
uncertainties that could cause actual outcomes and results to differ materially
from the anticipated outcomes or results, and undue reliance should not be
placed on these statements. These risks and uncertainties include, but are not
limited to, the matters discussed under the caption Factors Affecting Future
Results in Item 1 of this report and other risks and uncertainties discussed
in filings made with the Securities and Exchange Commission (including risks
described in subsequent reports onForm 10-Q,Form 10-K,Form 8-K, and other
filings). Liquidmetal Technologies, Inc. disclaims any intention or obligation
to update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise. OVERVIEW We are a materials technology company that develops and commercializes
products made from amorphous alloys. Our Liquidmetal® family of alloys consists
of a variety of coatings, powders, bulk alloys, and composites that utilize the
advantages offered by amorphous alloy technology. We develop, manufacture, and
sell products and components from bulk amorphous alloys that are incorporated
into the finished goods of our customers, and we also market and sell amorphous
alloy industrial coatings. We also partner with third-party licensees and
distributors to develop and commercialize Liquidmetal alloy products. We have
the exclusive right to develop, manufacture, and sell what we believe are the
only commercially viable bulk amorphous alloys. Amorphous alloys are unique materials that are distinguished by their
ability to retain a random atomic structure when they solidify, in contrast to
the crystalline atomic structure that forms in ordinary metals and alloys when
they solidify. Liquidmetal alloys possess a combination of performance,
processing, and cost advantages that we believe makes them preferable to other
materials in a variety of applications. The amorphous atomic structure of our
alloys enables them to overcome certain performance limitations caused by
inherent weaknesses in crystalline atomic structures, thus facilitating
performance and processing characteristics superior in many ways to those of
their crystalline counterparts. For example, our zirconium-titanium Liquidmetal
alloys are approximately 250% stronger than commonly used titanium alloys, such
as Ti-6Al-4V, but they have processing characteristics similar in many respects
to plastics. We believe these advantages could result in Liquidmetal alloys
supplanting other incumbent materials in a wide variety of applications.
Moreover, we believe these advantages will enable the introduction of entirely
new products and applications that are not possible or commercially viable with
other materials. Our revenues are derived from two principal operating segments:
Liquidmetal alloy industrial coatings and bulk Liquidmetal alloy products.
Liquidmetal alloy industrial coatings are used primarily as a protective
coating for industrial machinery and equipment, such as drill pipe used by the
oil drilling industry and boiler tubes used in coal-burning power plants. The
Companys historical operating information for fiscal year 2001 is based
substantially on sales of Liquidmetal alloy coatings. In the second half of
2002, we began producing bulk Liquidmetal alloy components and products for
incorporation into our customers finished goods. Bulk Liquidmetal alloy
segment revenue includes sales of parts or components of electronic devices,
medical products, and sports and leisure goods; tooling and prototype parts
(including demonstration parts and test samples) for customers with products in
development; metal processing equipment; and research and development revenue
relating primarily to defense and medical applications. We expect that these
sources of revenue will continue to significantly change the character of our
revenue mix. The cost of sales for our Liquidmetal coatings segment consists primarily
of the costs of outsourcing our manufacturing to third parties. Consistent with
our expectations, our cost of sales has been increasing over historical results
as we further build our bulk Liquidmetal alloy business. Although we plan to
continue outsourcing the manufacturing of our coatings, we will internally
manufacture many products derived from our bulk Liquidmetal alloys. Selling, general, and administrative expenses currently consist primarily
of salaries and related benefits, severance costs, travel, consulting and
professional fees, depreciation and amortization, insurance, office and
administrative expenses, and other expenses related to our operations. Research and development expenses represent salaries, related benefits
expense, stock-based compensation, depreciation of research equipment,
consulting and contract services, expenses incurred for the design and testing
of 26




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##### Table of Contents



new processing methods, expenses for the development of sample and prototype
products, and other expenses related to the research and development of
Liquidmetal alloys. Costs associated with research and development activities
are expensed as incurred. We plan to enhance our competitive position by
improving our existing technologies and developing advances in amorphous alloy
technologies. We believe that our research and development efforts will focus
on the discovery of new alloy compositions, the development of improved
processing technology, and the identification of new applications for our
alloys. Impairment of goodwill represents the write-down of the goodwill balance
of Dongyang Yudoro (Dongyang), our 51% owned subsidiary in South Korea.
During 2003, Dongyang experienced net losses as a result of a continuing
economic downturn in markets for its machinery products. These events, along
with Dongyangs operating cash flow losses and uncertainty surrounding its
future cash flows, led us to evaluate our investment for recoverability as of
December 31, 2003. As a result, we determined that the carrying value of our
investment in Dongyang exceeded its fair value as of December 31, 2003 in the
amount of $184. In March 2004, we sold our 51% investment in Dongyang to the
49% minority shareholder. No gain or loss was recorded for this transaction as
of December 31, 2003, as the selling price of $80 was equal to our net carrying
value for our 51% ownership held. Impairment of Long-Lived Assets consists of a write-down of the building
of our manufacturing facility in South Korea on the basis that the fair value
of this building was determined to be less than the book value as of December
31, 2003. Our significant operational difficulties in 2003 along with our
history of operating or cash flow losses and uncertainty surrounding our future
cash flows, led us to evaluate our long-lived assets for recoverability as of
December 31, 2003. As a result, we determined that the carrying value of our
manufacturing plant in Pyongtaek, South Korea exceeded its fair value as of
December 31, 2003 in the amount of $2,684. The fair value of the building was
based on the average of two independent appraisals of the building obtained in
the first quarter of 2004. Our historical operations, prior to 2002, included our coatings business
and our retail golf operation conducted through our majority owned Liquidmetal
Golf subsidiary. On September 29, 2001, our board of directors and the board of
directors of Liquidmetal Golf voted to discontinue the retail golf operations
of Liquidmetal Golf in order to conform our operations to our broader corporate
business strategy, although Liquidmetal Golf continues to develop golf club
components for other golf club manufacturers. Pursuant to Accounting Principles
Board Opinion No. 30, Reporting the Results of Operations  Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions,we reclassified our
consolidated financial statements to reflect the discontinuation of Liquidmetal
Golfs retail golf operations. The revenue, costs and expenses, assets and
liabilities, and cash flows of the retail golf business were segregated in our
Consolidated Balance Sheets, Consolidated Statements of Operations and
Comprehensive Loss, and Consolidated Statements of Cash Flows. The net
operating results, net assets, and net cash flows of the retail golf business
were reported as discontinued operations in our annual consolidated financial
statements and in the condensed consolidated financial statements included in
this report on Form 10-K. On April 30, 2002, management terminated the
operations of the retail golf segment by completing the liquidation of the
retail golf assets and liabilities. On May 21, 2003, we completed a reincorporation by transitioning from a
California corporation to a Delaware corporation. The reincorporation was
effected through the merger of the former California entity into a newly
created wholly owned Delaware subsidiary. The reincorporation changed the legal
domicile of our company but did not result in any change to our business,
management, employees, fiscal year, assets or liabilities, or location of
facilities. As part of the reincorporation, each share of the California
corporation was automatically converted into one share of the Delaware
corporation. In addition, total authorized shares decreased from 200,000,000
shares to 100,000,000 shares. The following discussion and analysis of our financial condition and
results of operations focuses on the historical results of our continuing
operations and reflects the effect of restating our 2001, 2002 and 2003 (2002
quarterly filings) financial statements for equipment sales made to Growell
Metal Co., Ltd. (Growell), stock compensation restatements, the AM Corp
revenue restatement, the JS Technologies allowance for bad debt restatement,
and the Samsung revenue restatement as disclosed in Note 2 in the notes to the
consolidated financial statements section of this document. As a part of the accompanying consolidated financial statements and the
notes thereto, the Company has restated certain previously issued financial
statements due to the fact that revenues from equipment sales made to Growell
Metal Co., Ltd., a South Korean metals processing company (Growell), in the
third and fourth quarters of 2002 and the first quarter of 2003 should not have
been recognized in those periods. Revenues of $873 and $681 from the sales of
alloying equipment to Growell were previously recorded in the quarters ended
September 30, 2002 and December 31, 2002, respectively, and revenue of $2,543
from the sale of die casting machines to Growell was previously recorded in the
quarter ended March 31, 2003. The 2002 Growell sale of $1,554 had an
associated cost of sales of $1,478, resulting in a profit of $78 during 2002.
The 2003 Growell sales of $2,543 had an associated cost of sales of $840,
resulting in profit of $1,703. The effect of the restatement is to eliminate
the recognition of revenue on the alloying equipment sales and to defer the
recognition of revenue on the die casting equipment in 2003 until the quarter
ended March 31, 2004. 27




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The Company has reclassified the $757 and $720 of alloying equipment
subject to the contingency as Machines held by customer at September 30, 2002
and December 31, 2002, respectively. The Company has reclassified the die
casting equipment at March 31, 2003 and for subsequent quarterly periods as
Machines held by customer, which are included in inventory. Under terms of a January 10, 2004 settlement of the dispute between
Liquidmetal Korea and Growell, Liquidmetal Korea agreed to pay Growell $4,895
to purchase Growells investment in alloy inventories, proprietary alloying
equipment purchased from Liquidmetal Korea, and supporting equipment purchased
from other suppliers. Also as part of the settlement, Growell satisfied in
full a balance of $2,058 owed to Liquidmetal Korea for the die casting machines
Growell purchased from Liquidmetal Korea in the first quarter of 2003 as part
of a license agreement to manufacture Liquidmetal alloy parts for the South
Korean automotive industry. The remaining settlement payable of $2,873 and
trade accounts payable of $14 will be paid to Growell (in cash or stock at the
Companys discretion) by December 31, 2004. The Company recorded a loss on the
settlement at December 31, 2003 of $2,765 which is included in Cost of Sales
in the December 31, 2003 Consolidated Statements of Operations and
Comprehensive Loss. The loss on settlement reflects the write down of the
assets received in the settlement to their fair market value. The loss is
accrued for in the Accounts payable and accrued expenses section in the
December 31, 2003, Consolidated Balance Sheet. The sale of the die casting
machines to Growell will be reflected in the first quarter of 2004. Under the
settlement agreement between the parties, the Company and Growell granted to
the other party (and the other partys affiliates) a release of all known and
unknown claims of any nature arising between the parties through the date of
settlement, as well as a release against future claims under agreements between
the parties that were terminated as a part of the settlement. The settlement
agreement provided that all agreements of any nature between the parties and
their respective affiliates were terminated as of the date of settlement, with
the exception of certain confidentiality agreements, a Liquidmetal coatings
distribution agreement, and future rights under the die casting agreement
pursuant to which Growell purchased the die casting machines and obtained a
license to make auto parts from Liquidmetal alloys. The settlement agreement
also includes, as an accommodation to Growell, if the Company becomes aware of
any prospective customer that desires to purchase a proprietary Company casting
machine at a time when Growell desires to sell any of its Liquidmetal die
casting machines, then the Company will not sell such die casting machine to
the prospective customer unless the Company first directs the prospective
customer to Growell and encourages the prospective customer to purchase the
machine from Growell. These and other transactions with Growell have been
disclosed as related party transactions in our notes to the financials
statements. Stock Compensation Restatement As a part of the accompanying consolidated financial statements and the
notes thereto, the Company has restated certain previously issued financial
statements due to the fact that stock option grants were not calculated in
accordance with guidelines under APB Opinion No. 25, SFAS No. 123, and EITF
00-23. The Company recalculated stock compensation expense considering these
corrections and increased unamortized stock-based compensation by $577 and
increased stock compensation expense by $937 as of and for the year ended
December 31, 2001. The Company also decreased unamortized stock-based
compensation by $797 and increased stock compensation expense by $533 as of and
for the year ended December 31, 2002. Samsung Restatement In 2002, the Company was engaged by Samsung to provide liquidmetal alloy
parts for cell phones. The Company recognized approximately $315 of mold
revenue in December 2002, which was subsequently written off in March 2003 as
bad debt expense. It was determined that the revenue of $315 recognized in
2002 did not meet the requirement of revenue recognition under SAB 101 and
accordingly the Company has restated its revenue and accounts receivable for
2002 by $315. JS Technologies Restatement In September 2002, the Company was engaged by JS Technologies to provide
molds and MP3 player compact disc cases and recognized approximately $782 of
revenue. JS Technologies did not pay the remaining balance due of $172 because
the MP3 player compact disc cases never launched into full production. The
Company decided to write off this balance in January 2003. Consequently, the
Company restated its selling, general and administrative expenses and the
allowance for doubtful accounts as of and for the year ended 2002 by
recognizing bad debt expense of $169 in 2002. AM Corporation Restatement In December 2002, the Company was engaged by AM Corporation to develop
knife prototypes for distribution of knives in Europe and recognized $250 of
revenue in 2002 and $250 in 2003. The Company received payment on the revenue
recognized in 2002; however, AM Corporation determined it would not continue
with development and consequently did not pay the 2003 receivable of $250 and
the Company recorded the $250 as bad debt expense in 2003. 28




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It was determined that the $250 recorded as revenue in 2003 did not meet the
requirement of revenue recognition per SAB 101 and, accordingly, the sale and
bad debt expense were reversed Results of Operations Comparison of the years ended December 31, 2003 and 2002 Revenue. Revenue increased $5.7 million to $16.9 million in the twelve
months ended December 31, 2003 from $11.2 million in the twelve months ended
December 31, 2002. The increase was due to a $7.3 million increase in revenue
earned by our bulk Liquidmetal alloy segment in the twelve months ended
December 31, 2003. This increase in our bulk Liquidmetal alloy segment revenue
consisted of a revenue increase of $5.0 million from the sale of metal
processing equipment, an increase of $0.1 million from the sale and prototyping
of parts manufactured from bulk Liquidmetal alloys, and an increase of $2.2
million from research and development services related primarily to defense and
medical applications. The increase in revenue earned by our bulk Liquidmetal
alloy segment was offset by a decrease of $1.6 million in the revenue earned by
our coatings business as compared to the twelve months ended December 31, 2002
due to a slowdown in demand for drill pipe coatings. Cost of Sales. Cost of sales increased to $22.2 million, or 132% of
revenue, during the twelve months ended December 31, 2003 from $7.2 million, or
64% of revenue, in the twelve months ended December 31, 2002. The cost of sales
as a percentage of revenue increased due to three primary factors: first, a
higher percentage of plant operating costs allocated to manufacturing in the
current period, as opposed to the same twelve month period in 2002 when our
manufacturing facility was in the final stages of construction and significant
in-plant spending was directed to research and development to support the
ramp-up of manufacturing operations; second, the impact of unprofitable
electronic casing components and prototypes moving through our manufacturing
mix; and third, the impact of the write-down of excess raw material in the
amount of $1.0 million and the write-down of raw material and equipment
inventory in the amount of $2.8 million in connection with a settlement of a
dispute with Growell which was finalized in January 2004. Although the cost to manufacture parts from our bulk Liquidmetal alloys is
variable and differs based on the unique design of each product, we expect
gross margin to improve as we limit production and prototyping to select
products that require the high-performance qualities of Liquidmetal alloys and
can be priced accordingly. Furthermore, we believe that strategic licensing
agreements and other relationships to advance the development of our technology
and processes that we will pursue could also contribute to improved gross
margins. The cost of sales for the products sold by the coatings business is
expected to remain generally consistent because Liquidmetal coatings products
are produced by third parties and sold wholesale to various industries. Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased to $17.8 million, or 106% of revenue, in the
twelve months ended December 31, 2003 from $13.5 million, or 120% of revenue,
in the twelve months ended December 31, 2002. This increase was primarily a
result of costs incurred for closing our Tampa, Florida offices, which
included: an increase in severance costs of $2.2 million for releasing a
substantial number of these employees as well as our expense and accrual of
$0.8 million for terminating our office lease, due to the determination that we
will be unable to sublease this space over the remaining term; an increase in
professional fees, consultant fees, and contract services of $0.8 million; an
increase in insurance expense of $0.5 million; an increase in data
communications expense of $0.2 million; an increase in depreciation expense of
$0.3 million; an increase of warranty expense of $0.5 million; and a $0.3
million increase in expenses associated with the disposition of certain assets
in the twelve months ended December 31, 2003. The increase in selling, general
and administrative expenses are associated with the aforementioned cost
reduction measures, including the consolidation of offices, the staff
reductions, and a corresponding shift in strategy for the continued development
of our bulk Liquidmetal alloy business. This was partially offset by a
decrease in advertising expense of $0.1 million; a decrease in bad debt expense
of $0.9 million; and a $0.7 million decrease in stock compensation expense. Research and Development Expenses. Research and development expenses
decreased to $8.9 million, or 53% of revenue, in the twelve months ended
December 31, 2003 from $11.8 million, or 105% of revenue, in the twelve months
ended December 31, 2002. This decrease was partially a result of the maturing
of our manufacturing process and related processing capabilities, the
consolidation of our facilities into our California Technology Center, and the
discontinuation of certain prototyping and developmental activities that
occurred extensively while the Company was identifying our current technology
capabilities and limitations. These decreases were partially offset by
increases in providing research grants to various institutions to advance the
development of Liquidmetal alloys. In the category of research and development
expenses: travel decreased by $0.2 million; professional fees, consultant fees,
and contract services decreased by $1.6 million; laboratory and prototyping
expenses decreased by $0.9 million; and stock compensation expense decreased by
$1.4 million. These expenses were partially offset by increases in
depreciation of research equipment of $0.4 million, increased research grants
to educational institutions of $0.1 million, and increase to salaries, wages
and severance net of $0.5 million. 29




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##### Table of Contents



Impairment of Goodwill. Impairment of goodwill represents the write-down
of the goodwill balance of Dongyang Yudoro (Dongyang), our 51% owned
subsidiary in South Korea. During 2003, Dongyang experienced net losses as a
result of a continuing economic downturn in the market for its machinery
products. These events along with Dongyangs operating, and cash flow losses,
and uncertainty surrounding its future cash flows, led us to evaluate our
investment for recoverability as of December 31, 2003. As a result, we
determined that the carrying value of our investment in Dongyang exceeded its
fair value as of December 31, 2003 in the amount of $184. In March 2004, we
sold our 51% investment in Dongyang to the 49% minority shareholder. No gain
or loss was recorded for this transaction as of December 31, 2003, as the
selling price of $80 was equal to our net carrying value for our 51% ownership
held. Impairment of Long Lived Assets. Impairment expense represents a
write-down of the building of our manufacturing facility in South Korea. Due
to the decreased production and usage of our Pyongtaek manufacturing operation,
we decided to obtain independent appraisals as to the fair value of this
building. Accordingly, the fair value of the building as determined by the
average of the two independent appraisal was less than the carrying value of
the building as of December 31, 2003. Interest Expense. Interest expense was $0.4 million, or 2% of revenue, in
the twelve months ended December 31, 2003 and was $1.1 million, or 10% of
revenue, in the twelve months ended December 31, 2002. During the twelve months
ended December 31, 2003, interest expense was primarily due to interest accrued
on the Kookmin Bank loan to our South Korean subsidiary made on February 4,
2003. During the twelve months ended December 31, 2002, interest expense was
primarily due to the amortization of the fair value of warrants granted in
connection with subordinated promissory notes we issued in February 2001. Interest Income.Interest income was $0.3 million, or 2% of revenue, in
the twelve months ended December 31, 2003 due to interest earned on short-term,
investment grade, interest-bearing securities. During the twelve months ended
December 31, 2002, interest income was $0.5 million, or 5% of revenue, which
was interest earned from the proceeds of our May 22, 2002 initial public
offering. Gain from Sale of Investment.In April 2003 we sold our remaining shares
of Growell Metal Co., Ltd. that were purchased in July 2002. We recognized a
$1.2 million gain on the sale of these shares. Comparison of the years ended December 31, 2002 and 2001 Revenue.Revenue increased to $11.2 million in the twelve months ended
December 31, 2002 from $3.9 million in the twelve months ended December 31,
2001. This increase was primarily due to increased revenues in our bulk
Liquidmetal alloys segment. Included in sales related to our bulk Liquidmetal
alloys were revenue derived from sales of parts and prototypes made from our
alloys, equipment sales, revenue recognized from research and development
contracts with the U.S. Department of Defense related to our bulk Liquidmetal
alloys, and revenue recognized from the delivery of our first production
products manufactured from our bulk Liquidmetal alloys. Additionally, revenue
was derived from sales of our Liquidmetal coatings. Revenue from the sales and
prototyping of parts manufactured from our bulk Liquidmetal alloys increased by
$4.0 million over 2001. Revenue from the sales of Liquidmetal coatings products
increased by $1.0 million. Additionally, revenue of furnace equipment increased
by $0.2 million as a result of the purchase of a 51% interest in Dongyang
Yudoro (Dongyang), a South Korean furnace equipment company, and revenue from
our research and development contracts, including contracts with the Department
of Defense, increased $2.1 million. Cost of Sales. Cost of sales increased to $7.2 million, or 64% of revenue,
in the twelve months ended December 31, 2002 from $1.9 million, or 50% of
revenue, in the twelve months ended December 31, 2001. This increase was
primarily a result of costs to manufacture products made from our bulk
Liquidmetal alloys and the cost of furnace equipment sold in the twelve months
ended December 31, 2002. The increase in cost of sales as a percentage of
revenue was also the result of increased costs required to manufacture products
made from our bulk Liquidmetal alloys and costs to manufacture the furnace
equipment sold in the twelve months ended December 31, 2002. Our Liquidmetal
coatings products are produced by third parties and sold wholesale to various
industries. The cost of sales for these coating products is generally fixed.
However, the cost to manufacture parts from our bulk Liquidmetal alloys is
variable and differs based on the part design. As expected, cost of sales as a
percentage of revenue has continued to increase as our revenue mix has shifted
more toward the bulk alloy business. Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased to $13.5 million, or 120% of revenue, in the
twelve months ended December 31, 2002 from $5.2 million, or 135% of revenue, in
the twelve months ended December 31, 2001. This increase was primarily a result
of: an increase in wages of $3.2 million; an increase in professional fees,
consultant fees, and contract services of $1.2 million; an increase in travel
expenses of $0.7 million; an increase in property rent of $0.6 million; an
increase in insurance expenses of $0.5 million; an increase in product warranty
expense of $0.2 million; and an increase in bad debt expense of $0.9 million
incurred in the twelve months ended December 31, 2002. These and other
increases in selling, general and 30




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administrative expenses represent the continued additions to our corporate
infrastructure required to prepare for and support the anticipated growth of
our bulk Liquidmetal alloy business. Research and Development Expenses. Research and development expenses
increased to $11.8 million, or 105% of revenue, in the twelve months ended
December 31, 2002 from $1.7 million, or 44% of revenue, in the twelve months
ended December 31, 2001. This increase was partially a result of expenses
related to the continued research and development of new Liquidmetal alloys and
related processing capabilities, including the hiring of additional research
employees, developing new manufacturing techniques, and contracting with
consultants to advance the development of Liquidmetal alloys. Salaries and
wages increased by $2.8 million, professional fees, consultant fees, and
contract services increased by $2.0 million, laboratory and prototyping
expenses increased by $2.8 million, and travel related expenses increased by
$0.4 million. The increase in research and development expenses in the twelve
months ended December 31, 2002 also included $0.2 million in accelerated
depreciation attributable to the acceleration of the estimated useful lives of
certain capitalized research and development equipment and an increase in
stock-based compensation expense of $1.0 million, primarily triggered by
modifications made to accelerate the remaining vesting periods of stock options
in connection with the hiring of certain consultants as employees in March
2002. Interest (Expense) Income, Net. Interest expense, net was at ($0.6)
million, or 5.0% of revenue, in the twelve months ended December 31, 2002 and
was ($1.1) million, or 28% of revenue, in the twelve months ended December 31,
2001. The interest expense, net was primarily due to the amortization of the
fair value of warrants granted in connection with subordinated promissory notes
we issued in February 2001. In the twelve months ended December 31, 2002, these
subordinated promissory notes were paid, requiring the unamortized fair value
of the warrants granted in connection with these subordinated promissory notes
to be expensed fully in the twelve months ended December 31, 2002 in an amount
totaling $0.5 million. Also in the twelve months ended December 31, 2002, we
earned $0.5 million in interest income from the investment of the net proceeds
of our initial public offering. Gain from Sale of Investment.In December of 2002 we sold 30% of the
shares of Growell Metal Co., Ltd. that were purchased in July 2002. We
recognized a $0.8 million gain on the sale of these shares. QUARTERLY RESULTS The following information presents our audited quarterly operating results
for 2003 and 2002. The data has been prepared by Liquidmetal Technologies, Inc.
on a basis consistent with the Consolidated Financial Statements included
elsewhere in this Form 10-K, and includes all adjustments, consisting of normal
recurring accruals, that we consider necessary for a fair presentation thereof.
Included in our 2003 fourth quarter results are costs charged to our cost of
sales for the write-down of raw materials of $1.0 million and a $2.8 million
write-down of inventory and equipment recorded in connection with a dispute
settlement with Growell. In addition, as a result of the Companys cost
reduction measures taken in the fourth quarter, our selling, general, and
administrative expenses include severance costs of $2.4 million and office
relocation costs of $0.8 million. These operating results are not necessarily
indicative of our future performance. These statements should be read in conjunction with restatement footnote 2
which is in the accompanying notes to the consolidated financial statements.
The Company is restating its 2001 financial results due to a stock compensation
transaction. The Company is restating its 2002 and 2003 financial results due
to the restating of revenue of machine sales to Growell Metal, the restatement
of revenue from transactions with AM Corp and Samsung, the restatement of
allowance for doubtful accounts and general & administrative expense for
outstanding receivables from JS Technologies, and additional transactions
associated with stock compensation expense. The quarterly results for the three
months ended 12/31/03 and 9/30/03 did
not require restatement. A summary of
the significant effects of the
restatement is as follows: 31




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For the Three Months Ended9/30/03No restatementConsolidated Statements of Operations Data:
    
    12/31/03
    
    Required-as filed(In thousands, except per share data)Revenue
    
    $
    3,315
    
    
    $
    3,524Cost of sales
    
    
    8,162
    
    
    
    4,882Gross profit
    
    
    (4,847
    )
    
    
    (1,358
    )Operating expense:Selling, general, and administrative
    
    
    5,243
    
    
    
    3,732Research and development
    
    
    1,025
    
    
    
    981Impairment of goodwill
    
    
    184
    
    
    
    Impairment of long lived assets
    
    
    2,684
    
    
    
    Total operating expenses
    
    
    9,136
    
    
    
    4,713Loss before interest, other income, income
taxes, minority interest and discontinued
operations
    
    
    (13,983
    )
    
    
    (6,071
    )Interest expense, net
    
    
    (86
    )
    
    
    (53
    )Loss before income taxes, minority
interest and discontinued operations
    
    
    (14,069
    )
    
    
    (6,124
    )Income taxes
    
    
    
    
    
    
    Minority interest in gain (loss) income
of consolidated subsidiary
    
    
    (5
    )
    
    
    23Loss from continuing operations
    
    
    (14,074
    )
    
    
    (6,101
    )Gain from disposal of discontinued
retail golf segment, net
    
    
    127
    
    
    
    Net loss
    
    $
    (13,947
    )
    
    $
    (6,101
    )Loss per share from continuing operations
 basic and diluted
    
    $
    (0.34
    )
    
    $
    (0.15
    )Weighted average common shares used to
compute loss per share from continuing
operations  basic and diluted
    
    
    41,610
    
    
    
    41,610
 32




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For the Three Months Ended6/30/03
    
    
    
    
    
    3/31/03Previously
    
    6/30/03
    
    Previously
    
    3/31/03Consolidated Statements of Operations Data:
    
    Reported
    
    Restated
    
    Reported
    
    Restated(In thousands, except per share data)Revenue
    
    $
    6,409
    
    
    $
    6,409
    
    
    $
    6,559
    
    
    $
    3,606Cost of sales
    
    
    6,389
    
    
    
    6,124
    
    
    
    3,883
    
    
    
    3,020Gross profit
    
    
    20
    
    
    
    285
    
    
    
    2,676
    
    
    
    586Operating expense:Selling, general, and administrative
    
    
    4,704
    
    
    
    4,704
    
    
    
    4,507
    
    
    
    4,105Research and development
    
    
    2,809
    
    
    
    2,809
    
    
    
    4,038
    
    
    
    4,038Total operating expenses
    
    
    7,513
    
    
    
    7,513
    
    
    
    8,545
    
    
    
    8,143Loss before interest, other income,
income taxes, minority interest and
discontinued operations
    
    
    (7,493
    )
    
    
    (7,228
    )
    
    
    (5,869
    )
    
    
    (7,557
    )Interest income (expense), net
    
    
    (13
    )
    
    
    (13
    )
    
    
    68
    
    
    
    68Gain on sale of marketable
securities held-for-sale
    
    
    1,178
    
    
    
    1,178
    
    
    
    
    
    
    
    Loss before income taxes, minority
interest and discontinued operations
    
    
    (6,328
    )
    
    
    (6,063
    )
    
    
    (5,801
    )
    
    
    (7,489
    )Income taxes
    
    
    (8
    )
    
    
    (8
    )
    
    
    
    
    
    
    Minority interest in (loss) income
of consolidated subsidiary
    
    
    10
    
    
    
    10
    
    
    
    (7
    )
    
    
    (7
    )Loss from continuing operations
    
    
    (6,326
    )
    
    
    (6,061
    )
    
    
    (5,808
    )
    
    
    (7,496
    )Net loss
    
    $
    (6,326
    )
    
    $
    (6,061
    )
    
    $
    (5,808
    )
    
    $
    (7,496
    )Loss per share from continuing
operations  basic and diluted
    
    $
    (0.15
    )
    
    $
    (0.15
    )
    
    $
    (0.14
    )
    
    $
    (0.18
    )Weighted average common shares used to
compute loss per share from continuing
operations  basic and diluted
    
    
    41,587
    
    
    
    41,597
    
    
    
    41,229
    
    
    
    41,390
 33




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For the Three Months Ended12/31/02
    
    
    
    
    
    9/30/02Previously
    
    12/31/02
    
    Previously
    
    9/30/02Consolidated Statements of Operations Data:
    
    Reported
    
    Restated
    
    Reported
    
    Restated(In thousands, except per share data)Revenue
    
    $
    5,877
    
    
    $
    4,852
    
    
    $
    3,655
    
    
    $
    2,776Cost of sales
    
    
    4,286
    
    
    
    3,660
    
    
    
    2,524
    
    
    
    1,645Gross profit
    
    
    1,591
    
    
    
    1,192
    
    
    
    1,131
    
    
    
    1,131Operating expense:Selling, general, and administrative
    
    
    3,726
    
    
    
    3,898
    
    
    
    3,912
    
    
    
    3,912Research and development
    
    
    4,817
    
    
    
    4,817
    
    
    
    2,652
    
    
    
    2,652Total operating expenses
    
    
    8,543
    
    
    
    8,715
    
    
    
    6,564
    
    
    
    6,564Loss before interest, other income,
income taxes, minority interest and
discontinued operations
    
    
    (6,952
    )
    
    
    (7,523
    )
    
    
    (5,433
    )
    
    
    (5,433
    )Interest income, net
    
    
    113
    
    
    
    113
    
    
    
    291
    
    
    
    291Gain on sale of marketable
securities held-for-sale
    
    
    832
    
    
    
    832
    
    
    
    
    
    
    
    Loss before income taxes, minority
interest and discontinued operations
    
    
    (6,007
    )
    
    
    (6,578
    )
    
    
    (5,142
    )
    
    
    (5,142
    )Income taxes
    
    
    (123
    )
    
    
    (123
    )
    
    
    
    
    
    
    Minority interest in (loss) income
of consolidated subsidiary
    
    
    204
    
    
    
    204
    
    
    
    (76
    )
    
    
    (76
    )Loss from continuing operations
    
    
    (5,926
    )
    
    
    (6,497
    )
    
    
    (5,218
    )
    
    
    (5,218
    )Gain (loss) from disposal of
discontinued retail golf segment,
net
    
    
    (418
    )
    
    
    (418
    )
    
    
    1,466
    
    
    
    1,466Net loss
    
    $
    (6,344
    )
    
    $
    (6,915
    )
    
    $
    (3,752
    )
    
    $
    (3,752
    )Loss per share from continuing
operations  basic and diluted
    
    $
    (0.14
    )
    
    $
    (0.16
    )
    
    $
    (0.013
    )
    
    $
    (0.13
    )Weighted average common shares used to
compute loss per share from continuing
operations  basic and diluted
    
    
    40,995
    
    
    
    40,995
    
    
    
    40,993
    
    
    
    40,993
 34




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For the Three Months Ended6/30/02
    
    
    
    
    
    3/31/02Previously
    
    6/30/02
    
    Previously
    
    3/31/02Consolidated Statements of Operations Data:
    
    Reported
    
    Restated
    
    Reported
    
    Restated(In thousands, except per share data)Revenue
    
    $
    2,144
    
    
    $
    2,144
    
    
    $
    1,463
    
    
    $
    1,463Cost of sales
    
    
    1,187
    
    
    
    1,187
    
    
    
    682
    
    
    
    682Gross profit
    
    
    957
    
    
    
    957
    
    
    
    781
    
    
    
    781Operating expense:Selling, general, and administrative
    
    
    2,860
    
    
    
    2,926
    
    
    
    2,269
    
    
    
    2,736Research and development
    
    
    1,660
    
    
    
    1,660
    
    
    
    2,696
    
    
    
    2,696Total operating expenses
    
    
    4,520
    
    
    
    4,586
    
    
    
    4,965
    
    
    
    5,432Loss before interest, other income,
income taxes, minority interest and
discontinued operations
    
    
    (3,563
    )
    
    
    (3,629
    )
    
    
    (4,184
    )
    
    
    (4,651
    )Interest expense, net
    
    
    (695
    )
    
    
    (695
    )
    
    
    (312
    )
    
    
    (312
    )Loss before income taxes, minority
interest and discontinued operations
    
    
    (4,258
    )
    
    
    (4,324
    )
    
    
    (4,496
    )
    
    
    (4,963
    )Minority interest in loss of
consolidated subsidiary
    
    
    (10
    )
    
    
    (10
    )
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (4,268
    )
    
    
    (4,334
    )
    
    
    (4,496
    )
    
    
    (4,963
    )Gain (loss) from disposal of
discontinued retail golf segment,
net
    
    
    1,038
    
    
    
    1,038
    
    
    
    (530
    )
    
    
    (530
    )Net loss
    
    $
    (3,230
    )
    
    $
    (3,296
    )
    
    $
    (5,026
    )
    
    $
    (5,493
    )Loss per share from continuing
operations  basic and diluted
    
    $
    (0.11
    )
    
    $
    (0.11
    )
    
    $
    (0.13
    )
    
    $
    (0.14
    )Weighted average common shares used to
compute loss per share from continuing
operations  basic and diluted
    
    
    37,697
    
    
    
    37,697
    
    
    
    35,080
    
    
    
    35,080
 35




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For the Twelve Months Ended12/31/01Previously
    
    12/31/01Consolidated Statements of Operations Data:
    
    Filed
    
    Restated(In thousands, except per share data)Revenue
    
    $
    3,882
    
    
    $
    3,882Cost of sales
    
    
    1,924
    
    
    
    1,924Gross profit
    
    
    1,958
    
    
    
    1,958Operating expense:Selling, general, and administrative
    
    
    4,301
    
    
    
    5,239Research and development
    
    
    1,726
    
    
    
    1,726Total operating expenses
    
    
    6,027
    
    
    
    6,965Loss before interest, other income, income
taxes, minority interest and discontinued
operations
    
    
    (4,069
    )
    
    
    (5,007
    )Interest expense, net
    
    
    (1,095
    )
    
    
    (1,095
    )Loss from continuing operations
    
    
    (5,164
    )
    
    
    (6,102
    )Loss from operations of discontinued
retail golf segment, net
    
    
    (5,973
    )
    
    
    (5,973
    )Loss from disposal of discontinued
retail golf segment, net
    
    
    (11,949
    )
    
    
    (11,949
    )Net loss
    
    $
    (23,086
    )
    
    $
    (24,024
    )Loss per share from continuing operations
 basic and diluted
    
    $
    (0.15
    )
    
    $
    (0.18
    )Weighted average common shares used to
compute loss per share from continuing
operations  basic and diluted
    
    
    33,323
    
    
    
    33,323
 36




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LIQUIDITY AND CAPITAL RESOURCES Our operating activities, including our discontinued retail golf
operations, used cash of $27.4 million for the twelve months ended December 31,
2003 and $19.3 million for the twelve months ended December 31, 2002. Cash used
in operating activities for the twelve months ended December 31, 2003 resulted
from net cash used by discontinued operations of $1.0 million and net cash used
by continuing operations of $26.4 million. Cash used in operating activities
for the twelve months ended December 31, 2002 resulted from net cash used by
discontinued operations of $2.5 million and net cash used by continuing
operations of $16.9 million. Our working capital was $.6 million as of December
31, 2003. Cash used by continuing operations, excluding discontinued retail
golf operations, in the twelve months ended December 31, 2003 resulted
primarily from operating losses from continuing operations of $33.7 million. Our investing activities used cash of $0.2 million for the twelve months
ended December 31, 2003 for the acquisition of property and equipment of $2.5
million and investment in patents and trademarks of $0.3 million. These
expenditures were offset by the net proceeds from the sale of marketable
securities of $2.6 million. Our financing activities provided $4.9 million in cash for the twelve
months ended December 31, 2003, which consists primarily of $5.5 million in
proceeds from borrowings from Kookmin Bank and $0.9 million in proceeds from
exercised stock options. On February 4, 2003, our Korean subsidiary received
6,500,000 in South Korean Won, or approximately $5,488, under a loan from
Kookmin Bank of South Korea. The loan bears interest at an annual rate of
7.1%. In the event of delayed repayment, the interest increases to a maximum
of 21%, depending on the length of time the repayment is delayed. As reflected
in Footnote 13 to the accompanying financial statements, the balance of the
Kookmin loan as of December 31, 2003 was $4,047. We currently anticipate substantially lower capital expenditures for at
least the next twelve months. We anticipate that our capital expenditures will
be approximately less than $0.5 million for the full year 2004 for the
acquisition of furniture, fixtures, and other business equipment. This amount
is subject to change, however, depending upon the nature and the amount of the
product orders that we actually receive from customers. Our capital requirements during the next twelve months will depend on
numerous factors, including the success of existing products either in
manufacturing or development, the development of new applications for
Liquidmetal alloys, the resources we devote to develop and support our
Liquidmetal alloy products, and the success of pursuing strategic licensing and
funded product development relationships with external partners. During the
next twelve months, based on our current business plan, we expect to have
sufficient resources to continue to devote limited capital to our research and
development activities, to further develop and strengthen our manufacturing
technology, and to provide for working capital and other general corporate
purposes. However, based on our historical operating results and the continued
development of our manufacturing capabilities and alloy compositions, there
exists the possibility that these resources will not be adequate to operate at
the proposed business plan levels. These expenses and capital expenditures
could consume a material amount of our cash resources, but the amount of these
requirements will depend on the nature and amount of orders we receive for the
purchase of our bulk Liquidmetal alloy products. Our business is based on commercializing an entirely new and unique
technology, and our current business plan contains a variety of assumptions and
expectations that are subject to uncertainty, including assumptions and
expectations about order flow, unit volumes, manufacturing efficiencies,
product cost and pricing, continuing technology improvements, customer adoption
practices, strategic licensing relationships and other relevant matters. These
assumptions take into account recent significant cost reductions, as well as
recent improvements to our manufacturing processes. We have experienced losses
from continuing operations during the last two fiscal years and have an
accumulated deficit of $112.6 million as of December 31, 2003. Cash used in
continuing operations for the years ended December 31, 2003 and December 31,
2002 was $26.4 million and $16.9 million, respectively, and cash flow from
continuing operations was negative throughout the first and second quarters of
2004. At December 31, 2003, our principal source of liquidity was $3.1 million
of cash and cash equivalents and trade accounts receivables of $4.2 million.
Such conditions raise substantial doubt that our Company will be able to
continue as a going concern for a reasonable period of time without receiving
additional funding. These operating results occurred while we were
developing and attempting to commercialize and manufacture products from an
entirely new and unique technology. This business plan required significant
spending related to start-up costs and capital expenditures. These factors have
placed a significant strain on our financial resources. The ultimate success of
the Company depends on our ability to continue to reduce operating costs,
generate higher revenue, achieve positive cash flow from continuing operations
and achieve profitability. On March 3, 2004, we sold $9.4 million of 6.0% senior convertible notes
due 2007 (the March Notes) to investor groups in a transaction led by
Michigan Venture Capital Co., Ltd, a South Korea-based institutional investment
firm, and IndiGo Ventures LLC, a New York-based investment firm that served as
a financial advisor to the Company for the 37




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transaction. The notes were convertible at any time into our common stock at a
price of $3.00 per share. Investors in the private placement received warrants
to purchase an aggregate amount of up to approximately 1.1 million shares of
common stock, exercisable at $3.00 per share for varying periods but no later
than 100 days following the effectiveness of a registration statement covering
the resale of shares issuable upon exercise of the warrants. In addition, the
investors had the right to call for repayment of the notes prior to maturity at
any time after the second anniversary of the closing of the transaction. (see
note 13 to the Consolidated Financial Statements), On August 19, 2004, we completed a private exchange offer for our March
Notes. Under terms of the exchange offer, approximately $5.5 million in
aggregate principal amount of the March Notes pursuant to a Note Exchange
Agreement with the holders of the March Notes have been exchanged for an
aggregate of (i) $2.75 million of 6% Senior Secured Notes Due 2007 (the
Long-Term Notes) and (ii) $2.75 million of 10% Senior Secured Notes Due 2005
(the Short-Term Notes). In addition, we voluntarily redeemed approximately
$4.5 million of the March Notes, in cash. The Short-Term Notes have a
maturity date of July 29, 2005, and a conversion price of $2.00 per share
(compared to a conversion price of $3.00 per share under the March Notes). The
Long-Term Notes have a maturity date of July 29, 2007, and a conversion price
of $1.00 per share. Holders of the Long-Term Notes will also have the right
to call for repayment of the Long-Term Notes prior to maturity at any time
after the second anniversary of the closing of the exchange offer. In addition,
holders of both the Long-Term Notes and Short-Term Notes will have the right to
call for repayment of the notes if we do not, within 180 days of the issuance
of the notes, become compliant with our SEC reporting obligations and become
listed or quoted on the OTC Bulletin Board, the Nasdaq Stock Market, or other
national securities exchange. A total of 562,151 warrants to purchase our
common stock at an exercise price of $3.00 per shareall of which were
previously issued in connection with the purchase of the March Noteshave been
amended to provide for an extended expiration date of March 1, 2006. As of
October 27, 2004, we were in breach of a covenant in the Note Exchange
Agreement requiring us to become current in our SEC filings, as well as file a
registration statement with the SEC for the shares into which the notes are
convertible, within 90 days of the issue date of the new notes. If written
notice of default is delivered to us for breach of this covenant, then we will
have a period of 30 days to cure the breach before it becomes an event of
default under the notes, and if the breach is not cured during such time
period, the holders of the notes will become entitled to accelerate the
remaining balance of their respective notes and declare them immediately due
and payable. As of the date of the filing of this Form 10-K, we have not
received a notice of default with respect to this matter. Our future success depends on our ability to continue reducing operating
costs and ultimately to generate higher revenue and attain profitability. We
cannot be certain that additional capital, whether through selling additional
debt or equity securities or obtaining a line of credit or other loan, will be
available to us or, if available, will be on terms acceptable to us. If we
issue additional securities to raise funds, these securities may have rights,
preferences, or privileges senior to those of our common stock, and our current
stockholders may experience dilution. In March 1996, we entered into a distribution agreement whereby we granted
to a third party exclusive rights to market and sell golf products
incorporating Liquidmetal technology to certain Japanese sporting equipment
companies. The third party paid us a $1.0 million distribution fee as part of
this agreement, of which a portion was refundable according to a formula based
on the gross profit earned by the third party. The remaining unearned
distribution fee of $0.8 million has not been refunded as of March 31, 2004,
and we do not believe the third party is entitled to a refund. On March 28,
2003, the distribution agreement was terminated and we entered into a new
agreement to pay to the same third party a commission on the net sales price of
all Liquidmetal golf equipment that is shipped by our Company or its affiliates
to Japanese golf companies for sale into the Japanese end-market. This
commission will apply to golf equipment shipped by our Company or its
affiliates during the period beginning on March 28, 2003 and ending on March
28, 2006. If, by March 28, 2006, we have not paid $0.4 million in commission
payments, the balance between commissions paid and $0.4 million will be paid by
April 30, 2006, thereby guaranteeing the third party a $0.4 million minimum
payment during the term of the agreement. We will recognize the unearned
distribution fee of $0.8 million as revenue proportionately with the payment of
commissions under the letter agreement. USE OF PROCEEDS Pursuant to our Registration Statement on Form S-1 (Registration No.
333-73716), as amended, initially filed with the Securities and Exchange
Commission on November 20, 2001 and declared effective May 21, 2002, we closed
an initial public offering of 5,000,000 shares of common stock on May 28, 2002,
plus an additional 229,000 shares on June 10, 2002 pursuant to an overallotment
option, at a price of $15.00 per share (which sale is referred to herein as the
Offering). The Offering generated aggregate cash proceeds during the second
quarter 2002 of $78.4 million. The net proceeds were $70.7 million after
deducting underwriting commissions of $5.5 million and other transaction fees
of $2.2 million. The managing underwriters for the Offering were Merrill Lynch
& Co., UBS Warburg, and Robert W. Baird & Co. As of December 31, 2003, we have used the $70.7 million of net proceeds
from the Offering. In 2002, we used approximately $7.8 million of the net
proceeds from the Offering to repay all outstanding promissory notes and
accrued 38




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interest, $11.1 million to fund the construction of our manufacturing facility
in South Korea, $14.3 million to purchase equipment used to manufacture
Liquidmetal parts, $0.4 million to purchase assets related to production and
sale of equipment used in the production process of Liquidmetal alloy products,
and $0.3 million to purchase the 51% interest in our majority owned Dongyang
subsidiary. During the third quarter of 2002, we used $2.0 million to invest in
the common stock of Growell Metal, which supplied a portion of the Liquidmetal
alloy ingots used in our manufacturing operations in Korea. We have since sold
such stock, realizing a gain on the sale. We used the remaining proceeds of
$32.7 million for working capital in 2002 and 2003, excluding $2.1 million paid
to Paul Azinger in 2002 and 2003 for amounts due under the terms of his
terminated endorsement agreement with our discontinued retail golf operations. OFF-BALANCE SHEET ARRANGEMENTS An off-balance sheet arrangement is any transaction, agreement or other
contractual arrangement involving an unconsolidated entity under which a
company has (1) made guarantees, (2) a retained or a contingent interest in
transferred assets, (3) an obligation under derivative instruments classified
as equity, or (4) any obligation arising out of a material variable interest in
an unconsolidated entity that provides financing, liquidity, market risk or
credit risk support to the company, or that engages in leasing, hedging, or
research and development arrangements with the company. We have made no arrangements of the types described in any of the
categories that may have a material current or future effect on our financial
condition, liquidity or results of operations. See Note 11 to the Consolidated
Financial Statements contained in this Annual Report on Form 10-K. 39




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CONTRACTUAL OBLIGATIONS The following table of material debt and lease commitments at December 31,
2003, summarizes the effect these obligations are expected to have on our cash
flow in the future periods set forth below (in thousands): Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 years(in thousands, except per share data)Contractual ObligationsLong-term debt
    
    $
    4,047
    
    
    $
    1,032
    
    
    $
    3,015
    
    
    $
    
    
    
    $
    Capital lease obligation
    
    
    348
    
    
    
    135
    
    
    
    206
    
    
    
    7
    
    
    
    Operating leases and rents
    
    
    2,478
    
    
    
    886
    
    
    
    1,426
    
    
    
    166
    
    
    
    Purchase obligations
    
    
    2,500
    
    
    
    
    
    
    
    2,500
    
    
    
    
    
    
    
    Total
    
    $
    9,373
    
    
    $
    2,053
    
    
    $
    7,147
    
    
    $
    173
    
    
    $
    
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and assumptions that affect 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. These estimates and assumptions are based on
historical experience and various other factors that are believed to be
reasonable under the circumstances. Actual results could differ materially from
these estimates under different assumptions or conditions. We believe that the following accounting policies are the most critical to
our consolidated financial statements since these policies require significant
judgment or involve complex estimates that are important to the portrayal of
our financial condition and operating results:  
    
    Our earnings and cash flows are subject to fluctuations due to changes
in non-U.S. currency exchange rates. We are exposed to non-U.S.
exchange rate fluctuations as the financial results of non-U.S.
subsidiaries are translated into U.S. dollars. As exchange rates vary,
those results, when translated, may vary from expectations and
adversely impact overall expected profitability. The cumulative
translation effects for subsidiaries using functional currencies other
than the U.S. dollar are included in accumulated foreign exchange
translation in shareholders equity. Movements in non-U.S. currency
exchange rates may affect our competitive position, as exchange rate
changes may affect business practices and/or pricing strategies of
non-U.S. based competitors.
    
    We record an accrual for potential product warranty costs. Due to the
lack of historical information for warranty expense related to bulk
alloy products, management estimates product warranties as a
percentage of bulk alloy product sales earned during the period. In
the event in future periods the actual product warranty costs
consistently exceed the estimate for product warranty costs, an
adjustment would be made and income would decrease in the period of
such determination. Likewise, in the event we determine that actual
product warranty costs are consistently lower than the estimate for
product warranty costs, an adjustment would be made and income would
increase in the period of such determination.
    
    We record an allowance for doubtful accounts as a contra-asset to our
trade receivables for estimated uncollectible accounts. Management
estimates the amount of potentially uncollectible accounts by
reviewing significantly past due customer balances relative to
historical information available for those customers. In the event, in
future periods, actual uncollectible accounts exceed the estimate for
uncollectible accounts, an adjustment would be made and income would
decrease in the period of such determination. Likewise, in the event,
in future periods, actual uncollectible accounts are lower than the
estimate for uncollectible accounts, an adjustment would be made and
income would increase in the period of such determination.
    
    We value inventories at lower of cost or net realizable value.
Management has determined net realizable value to be equal to the
selling price of the products to be produced and sold less the cost of
disposal. In the event, in future periods, the actual selling prices
exceed the estimate for selling prices less cost to sell, an
adjustment would be made and income would increase in the period of
such determination. Likewise, in the event, in future periods, actual
selling prices are lower than the estimate for selling prices, an
adjustment would be made and income would decrease in the period of
such determination. During 2003 we reduced 40




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the carrying value of raw
materials held by its subsidiary, Liquidmetal Korea, by the amounts
considered to be obsolete. During 2003 we reduced the carrying value
of our inventories by $1,004 as we determined that certain raw
material and inventories exceeded their net realizable value as of
December 31, 2003. Additionally, we recorded a write-down of $2,765
of raw material and machine inventory associated with the settlement
of a dispute with a customer, Growell, in December 2003. Such
write-down adjustments are included within Cost of Sales. (see
footnote 2)
    
    We record valuation allowances to reduce the deferred tax assets to
the amounts estimated to be realized. While we consider taxable income
in assessing the need for a valuation allowance, in the event we
determine we would be able to realize our deferred tax assets in the
future in excess of the net recorded amount, an adjustment would be
made and income increased in the period of such determination.
Likewise, in the event we determine we would not be able to realize
all or part of our deferred tax assets in the future, an adjustment
would be made and charged to income in the period of such
determination. RECENT ACCOUNTING PRONOUNCEMENTS In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinds SFAS No. 44, Accounting for Intangible Assets of Motor
Carriers. SFAS No. 145 amends SFAS No. 13, Accounting for Leases, to eliminate
an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The provisions of this Statement
related to the rescission of Statement 4 are required to be applied in fiscal
years beginning after May 15, 2002. The provisions in paragraphs 8 and 9(c) of
this Statement related to Statement 13 are required to be applied to
transactions occurring after May 15, 2002. Any gain or loss on extinguishment
of debt that was classified as an extraordinary item in prior periods presented
that does not meet the criteria in APB No. 30 for classification as an
extraordinary item is required to be reclassified. All other provisions of this
Statement are effective for financial statements issued on or after May 15,
2002. We elected to early adopt SFAS No. 145 during the second quarter of 2002.
The effect of adopting SFAS No. 145 was to increase interest expense by $0.5
million, increase net loss from continuing operations by $0.5 million, and to
increase basic and diluted loss from continuing operations per share by $0.01. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated With Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146
requires costs associated with exit or disposal activities to be recognized
when the costs are incurred, rather than at a date of commitment to an exit or
disposal plan. SFAS No. 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The adoption of SFAS No. 146 did not
have a material impact on our financial position or results of operations. In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others(Interpretation 45). Interpretation 45
changes the accounting for and the disclosure of guarantees. Interpretation 45
requires that guarantees meeting the characteristics described in the
Interpretation be initially recorded at fair value in contrast to SFAS No. 5,
which requires recording a liability when a loss is probable and reasonably
estimable. The disclosure requirements of Interpretation 45 are effective for
financial statements of annual periods ending after December 31, 2002. The
initial recognition and initial measurement provisions of Interpretation 45 are
effective on a prospective basis to guarantees issued or modified after
December 31, 2002. The adoption of Interpretation 45 did not have a material
impact on our financial position or results of operations. In December 2002, SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure,was issued by the FASB. This standard
amends SFAS No. 123 to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this standard amends the disclosure
requirements of SFAS No. 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.
SFAS No. 148 is effective for financial statements for fiscal years ending
after December 15, 2002. We implemented SFAS No. 148 effective January 1, 2003
regarding disclosure requirements for condensed financial statements for
interim periods. We have elected not to change to the fair value based method
of accounting for stock-based employee compensation. 41




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In January 2003, the FASB issued FASB Interpretation No. 46 Consolidation
of Variable Interest Entities, an interpretation of Accounting Research
Bulletin (ARB) No. 51, Consolidated Financial Statements (FIN 46)and a
revised interpretation of FIN 46 (FIN 46-R) in December 2003 in an effort to
expand upon existing accounting guidance that addresses when a company should
consolidate the financial results of another entity.FIN 46 requires variable
interest entities, as defined to be consolidated by a company if that company
is subject to a majority of expected losses of the entity or is entitled to
receive a majority of expected residual returns of the entity, or both. A
company that is required to consolidate a variable interest entity is referred
to as the entitys primary beneficiary. The interpretation also requires
certain disclosures about variable interest entities that a company is not
required to consolidate, but in which it has significant variable interest.
The consolidation and disclosure requirements apply immediately to variable
interest entities created after January 31, 2003. The Company is not the
primary beneficiary of any variable interest entity created after January 31,
2003 nor does the Company have a significant variable interest in a variable
interest entity created after January 31, 2003. For variable interest entities
that existed before February 1, 2003, the consolidation requires for FIN 46-R
are effective as of March 31, 2004. The adoption of FIN 46-R will not have a
material impact on the financial position, results of operations or cash flows
of the Company. In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 is intended to
result in more consistent reporting of contracts as either freestanding
derivative instruments subject to Statement 133 in its entirely, or as hybrid
instruments with debt host contracts and embedded derivative features. SFAS No.
149 is effective for contracts entered into or modified after June 30, 2003.
The adoption of SFAS No. 149 did not have a material impact on the Companys
financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS
No. 150 requires certain financial instruments that embody obligations of the
issuer and have characteristics of both liabilities and equity to be classified
as liabilities. Many of these instruments previously were classified as equity
or temporary equity and as such, SFAS No. 150 represents a significant change
in practice in the accounting for a number of mandatorily redeemable equity
instruments and certain equity derivatives that frequently are used in
connection with share repurchase programs. SFAS No. 150 is effective for all
financial instruments created or modified after May 31, 2003, and to other
instruments at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 did not have a material impact on the
Companys financial position or results of operations. 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risks We are exposed to various market risks in conducting the business of the
company, and we anticipate that this exposure will increase as a result of our
planned growth. In an effort to mitigate losses associated with these risks, we
may at times enter into derivative financial instruments, although we have not
historically done so. These may take the form of forward sales contracts,
option contracts, foreign currency exchange contracts, and interest rate swaps.
We have not, and do not intend to, engage in the practice of trading derivative
securities for profit. Interest Rates.We are exposed to market risks relating to changes in
interest rates. Some of the proceeds from our initial public offering have been
invested in short-term, interest-bearing, investment grade securities. The
value of these securities will be subject to interest rate risk and could fall
in value if interest rates rise. Commodity Prices.We are exposed to price risk related to anticipated
purchases of certain commodities used as raw materials by our businesses,
including titanium and zirconium. Although we do not currently enter into
commodity future, forward, and option contracts to manage the fluctuations in
prices of anticipated purchases, we may enter into such contacts in the future
as our business grows and as our purchases of these raw materials increases. Foreign Exchange Rates.As a result of our manufacturing presence in South
Korea, a substantial portion of our costs will be denominated in South Korean
won. Consequently, fluctuations in the exchange rates of the South Korean won
to the U.S. dollar will affect our costs of goods sold and operating margins
and could result in exchange losses. Although we do not currently enter into
foreign exchange hedge transactions, we may do so in the future as our business
grows. 
 Item 8. Financial Statements and Supplementary Data The financial statements required by this item are located beginning on
page 70 of this report. The supplementary financial information required by
this item is located under the caption QUARTERLY RESULTS in Item 7 of this
report. 42




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Item 9. Changes in and Disagreements with Accountants on Accounting and
financial Disclosures Information required by this Item may be found in our Form 8-K filed May
6, 2004 in connection with the resignation of Deloitte & Touche LLP as our
independent auditors and our Form 8-K filed on May 21, 2004, in connection with
our appointment of Stonefield Josephson Inc. as our independent auditors.
Following is Item 4 of the respective Form 8-Ks: May 6, 2004 On May 6, 2004, Deloitte & Touche LLP (Deloitte), the Registrants
independent auditors, notified the Registrant that they were resigning from the
client-auditor relationship with the Registrant effective as of that date. Deloitte was engaged by Registrant to serve as the Registrants
independent auditors for the fiscal year ended December 31, 2003, although
Deloitte has not issued a report on the financial statements of the Registrant
and its
subsidiaries for the 2003 fiscal year. The reports of Deloitte with respect to
the Registrants financial statements for the fiscal years ended December 31,
2002 and 2001 contained no adverse opinion or disclaimer of opinion and were
not
qualified or modified as to uncertainty, audit scope or accounting principles.
During the fiscal years ended December 31, 2003 and 2002 and the period from
December 31, 2003 through the date of Deloittes resignation, there were no
disagreements between the Registrant and Deloitte on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of
Deloitte, would have caused Deloitte to make reference to the subject matter of
the disagreements in connection with its report on the Registrants financial
statements for such year. The Registrant previously announced that it expects to restate revenues
and results of operations for the third and fourth quarters of 2002 and the
first quarter of 2003 in connection with the Registrants sales of alloy
melting and casting equipment during such quarters to Growell Metal Co., Ltd.,
a South Korea metals processing company (Growell). The Registrants Audit
Committee conducted an internal inquiry at the request of Deloitte into the
Registrants transactions with Growell and found that the original revenue
recognition on the Growell equipment sales did not take into account all
relevant documentation relating to the transactions. The Registrant announced
in January 2004 that it entered into a dispute settlement agreement with
Growell to resolve various outstanding claims between the parties relating to
the Registrants transactions with Growell. In connection with the Audit Committees inquiry into the Growell
equipment sales and dispute settlement, the Audit Committee also reviewed the
facts and circumstances relating to a personal stock transaction between the
Registrants CEO and Growell. In this transaction, as reported by the CEO, the
CEO undertook a private sale of personal shares of Registrant common stock to
Growell in February 2002, prior to the Registrants initial public offering. As
part of the inquiry, the CEO reported that this sale included a previously
undisclosed personal agreement to ensure that the purchase price of the stock
purchased by Growell would be at a thirty percent discount to the Registrants
initial public offering price, and he also provided information regarding his
fulfillment of this personal agreement. As of May 6, 2004, certain details of the foregoing transactions had not
been resolved to Deloittes satisfaction, and the audit for the 2003 fiscal
year has therefore not been completed. As a result of the expected restatements
and these unresolved issues, the Registrants previously issued financial
statements for the year ended December 31, 2002 and Deloittes audit report
thereon, as well as the Registrants quarterly financial statements for the
third quarter of 2002 and the first, second, and third quarters of 2003 (and
Deloittes related review reports thereon), should no longer be relied upon. Deloitte has communicated to the Registrant that it is unwilling to
continue to rely on the representations of the Registrants CEO. Deloitte has
also previously communicated to the Registrant that, in light of the facts and
circumstances surrounding the expected restatement, there were material
weaknesses in the Registrants internal accounting controls relating to the
execution, administration, and accounting for contracts, particularly in the
Registrants South Korean operations. The Registrant has taken and is
continuing to take steps to improve these internal controls. Other than the foregoing, none of the reportable events described under
Item 304(a)(1)(v) of Regulation S-K occurred within the two most recent fiscal
years of the Registrant ended December 31, 2003 and 2002 or within the
subsequent interim period through the date of Deloittes resignation. The Registrants Audit Committee has discussed with Deloitte the matters
disclosed above. The Registrant has authorized Deloitte to respond fully to the
inquiries of the Registrants successor accountant concerning the matters
disclosed above. The Registrant has provided Deloitte with a copy of the foregoing
disclosure and has requested that Deloitte furnish 43




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it with a letter addressed to the SEC stating whether or not it agrees with the
above statements. A copy of that letter will be filed with the SEC promptly
upon receipt. The Registrants Audit Committee has begun the process of
selecting new independent certified public accountants and will file a Form 8-K
upon the engagement of a new auditing firm. May 21, 2004 On May 21, 2004, the Audit Committee of Liquidmetal Technologies, Inc.
(the Registrant) appointed Stonefield Josephson, Inc. (Stonefield
Josephson) as the Registrants independent auditors. A copy of the press
release announcing the engagement of Stonefield Josephson is filed as Exhibit
99.1 to this Current Report on Form 8-K. During the two most recent fiscal years and through the date of this
Current Report on Form 8-K, the Registrant did not consult Stonefield Josephson
regarding (i) the application of accounting principles to a specific
transaction, either completed or proposed, or the type of audit opinion that
may be rendered on the Registrants financial statements, and neither a written
report nor oral advice was provided to the Registrant that Stonefield Josephson
concluded was an important factor considered by the Registrant in reaching a
decision as to any accounting, auditing or financial reporting issue; or (ii)
any matter that was either the subject of a disagreement (as defined in Item
304(a)(1)(iv) of Regulation S-K and the related instructions thereto) or a
reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K). 
 Item 9A. Controls and Procedures (a) Evaluation of disclosure controls and procedures. During the
course of the audit of our financial statements for the fiscal years ended
December 31, 2001, 2002, and 2003, it was determined that revenues from certain
equipment sales made by the Company to Growell Metal Co., Ltd. in the third and
fourth quarters of 2002 and the first quarter of 2003 should not have been
recognized in those periods. It was also determined that certain amounts
relating to sales made to Samsung in December 2002, to JS Technologies in
September 2002, and AM Corporation in December 2002 should not have been
recognized. And lastly, it was determined that certain stock options granted
in 2001 and 2002 were not calculated in accordance with guidelines under APB
Opinion No. 25, SFAS No. 123, and EITF 00-23. These determinations and the
associated restatement of previously issued financial statements, as described
more fully elsewhere in this Form 10-K, suggest that, at the time of the
subject transactions and the preparation of our financial statements for the
relevant periods, the Companys disclosure controls and procedures (as defined
in Rule 13a-15 under the Securities Exchange Act of 1934) were ineffective as of the period covered by this Form 10-K for
purposes of ensuring that
all information required to be disclosed by the Company was adequately
accumulated and communicated to the Companys management at such time. However, since that time, the
Company has made various improvements to enhance the reliability of its
disclosure controls and procedures and the Companys principal executive officer
and principal financial officer believe that these improvements will ensure that our disclosure
controls and procedures will be effective
pursuant to Rule 13a-15 under the Securities and Exchange Act of 1934. (b) Changes in internal controls. There were no changes in the
Companys internal controls over financial reporting that occurred during the
quarter ended December 31, 2003 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting. 44




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PART III 
 Item 10. Directors and Executive Officers of the Registrant Set forth below is a table identifying our current directors and executive
officers: Name
    
    Age
    
    PositionJohn Kang
    
    
    41
    
    
    Chairman of the Board, Chief
Executive Officer, and PresidentJames Kang
    
    
    44
    
    
    Director and FounderWilliam Johnson, Ph.D.
    
    
    56
    
    
    DirectorTjoa Thian Song
    
    
    39
    
    
    DirectorDean Tanella
    
    
    44
    
    
    DirectorVincent Addonisio
    
    
    49
    
    
    Director (Audit Committee Chairman)David Binnie
    
    
    55
    
    
    Senior Vice President of
Administration and SecretaryTony Chung
    
    
    34
    
    
    Vice President of Finance
 John Kanghas been our Chief Executive Officer and President since June
2001 and was re-elected as Chairman of our board of directors in August 2003.
He has been a director of our Company since 1994. From December 1994 to
December 2000, he served as Chairman of our board of directors in a
non-employee capacity, and from December 2000 to June 2001 he served as
Chairman of our board of directors in an employee capacity. From July 1996 to
September 2000, Mr. Kang served variously as Chief Executive Officer,
President, and a director of Medical Manager Corporation, a public company
traded on the Nasdaq National Market until its sale in September 2000 to WebMD
Corporation. From 1988 to 1995, he was Chairman of the board of directors of
Clayton Group, Inc., a private company engaged in the distribution of
waterworks equipment. Mr. Kang received a B.A. degree in Economics from
Harvard College in 1985. Mr. Kang is the brother of James Kang, the former
Chairman of our board of directors. James Kanghas served as a director since December 1994 and as executive
Founder of our company since August 2003. From December 1994 to August, he
served variously as our Chief Executive Officer, President, and Chairman. Mr.
Kang received a B.A. degree in Marketing from the University of Illinois in
1983, and an M.B.A. degree from the Kellogg School of Management at
Northwestern University in 1985. Mr. Kang is the brother of John Kang, our
Chairman of the Board of Directors, Chief Executive Officer and President. William Johnson, Ph.D.,has served as a director since June 2000. From
October 2001 to September 2003, he was employed as our executive Vice Chairman
of Technology. Since 1997, Professor Johnson has been the Mettler Professor of
Engineering and Applied Physics at Caltech. He held a Visiting Professor
appointment at the Metal Physics Institute in Gottingen, Germany (1983) and
received a Von Humbolt Distinguished Scientist Fellowship in Gottingen (1988).
He is the 1995 recipient of the TMS/AIME Hume Rothery Award for his
experimental work. He received a B.A. degree in Physics from Hamilton College
and a Ph.D. degree in Applied Physics from Caltech. He spent two years at
IBMs Research Center (1975-1977). At Caltech, Professor Johnson directed the
research that led to the discovery of our bulk Liquidmetal alloy. Professor
Johnson is currently a consultant to the Company. Tjoa Thian Songhas served as a director since 1996. Since 1995, Mr. Tjoa
has been the Executive Director of Greatland Company Pte. Ltd., a
Singapore-based distributor and manufacturer of tobacco products. Since 1972,
Greatland Company has been the international distributor for P.T.Gudang Garam,
an Indonesian cigarette manufacturer listed on the Jakarta Stock Exchange. Mr.
Tjoa received his B.S. degree in Electrical Engineering from the University of
Texas at Austin in 1986 and also received an M.B.A. degree from the National
University of Singapore. Dean G. Tanellawas elected as a director in February 2004. Mr. Tanella
is a 20-year veteran of the institutional investment business and has worked
for such leading firms as Raymond James & Associates, CS First Boston Corp.,
Adams Harkness & Hill, Drexel Burnham Lanbert, Inc., Kidder Peabody & Co. and
the Vanguard Group. Since 1999, Mr. Tanella has served as President of Safe
Harbor Capital, LLC and HarborLight Capital, LLC, both of which are private
investment 45




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firms. Mr. Tanella received his bachelors degree from Princeton University and
his MBA from the Harvard Graduate School of Business Administration. Vincent Addonisiowas elected as a director in May 2004. Mr. Addonisio is
President and CEO of Regency Strategic Advisors, Inc., a firm he founded to
advise select corporate clients on strategy, business development, and mergers
and acquisitions. Previously, he served as a director, executive vice president
and chief administrative officer for IMRglobal Corp., a public company that was
subsequently acquired in 2001. Prior to joining IMRglobal, he was a director,
executive vice president and chief financial officer for ABR Information
Services, Inc., a public company which he also helped lead through initial and
secondary public offerings and strategic acquisitions. A CPA, Addonisio began
his career with an international accounting firm and subsequently joined W.R.
Grace, where he held positions of progressive management responsibility. He
holds a BS degree in accounting from Binghamton University and earned an MSM
from Georgia Institute of Technology in Atlanta. David Binniehas been Senior Vice President-Administration and Corporate
Secretary since December 2003. Previously, he served as Senior Vice President
for Human Resources, a position he had held since October 2001. Prior to
joining Liquidmetal Technologies, Binnie was a senior official with the School
District of Hillsborough County, Florida, where he served as the Assistant
Superintendent for Human Resources. Hillsborough County is currently the 10th
largest school system in the United States with over 191,000 students and over
32,000 employees. Binnie earned degrees at the Bachelors (Education 1971),
Masters (Education, 1973) and Doctorate (Education Leadership, 1985) levels at
the University of South Florida. Tony Chunghas been our Vice President of Finance since October 2004,
prior to which he served as our Director of Finance upon joining the Company in
May 2004. From September 1992 to May 2004, Mr. Chung served in a variety of
senior finance capacities at various companies including Everdream Corporation,
a startup venture specializing in IT outsourcing, and MAI Systems Corporation,
a publicly traded company that develops and licenses hotel management software.
Mr. Chung is a Certified Public Accountant and served eight years at KPMG as
an Audit and Consulting Manager for several large multinational companies. He
received his B.S. degree from The Haas School of Business specializing in
accounting and finance from the University of California at Berkeley in 1992. Change in Principal Financial Officer On November 3, 2004, David Nail resigned as our Vice President of Finance and
ceased to be our principal financial officer. On the same day, our board
elected Tony Chung to serve as our Vice President of Finance and become our
companys principal financial officer. Additional information regarding Mr.
Chung is set forth above in this Item 10. BOARD OF DIRECTORS Terms of Directors Our board of directors is divided into three classes (designated CLASS
I, CLASS II, and CLASS III), as nearly equal in number as possible, with
each class serving three-year terms expiring at the third annual meeting of
stockholders after their elections or until their respective successors have
been elected and qualified. CLASS I currently consist of the following three
directors whose term is scheduled to expire at the 2005 annual meeting of
stockholders: John Kang, William Johnson, and Tjoa Thian Song. CLASS II
currently consists of the following director whose term is scheduled to expire
at the 2006 annual meeting of stockholders: Dean Tanella. CLASS III currently
consists of the following two directors whose term will expire at the 2004
annual meeting of stockholders: James Kang and Vincent Addonisio. Vincent
Addonisio replaced David Browne who resigned in May 2004 upon the originally
scheduled expiration of his term. Audit Committee Our board of directors has an Audit Committee that is currently comprised
of Messrs. Addonisio and Tanella. The Audit Committee is responsible for
reviewing the independence, qualifications, and activities of our independent
certified accountants and our financial policies, control procedures, and
accounting staff. The Audit Committee is also responsible for the review of
transactions between us and any officer, director, or entity in which an
officer or director of Liquidmetal has a material interest. Our board of
directors has determined that Messrs. Addonisio and Tanella each qualify as
audit committee financial experts as defined by the regulations of the
Securities and Exchange Commission. The Audit Committee is governed by a
written charter approved by the board of directors. Compensation Committee The Compensation Committee is comprised of Messrs. Song and Addonisio. All
of the members of the Compensation Committee are independent directors, as
defined by the rules applicable to members of the Compensation Committee. The
Compensation Committee is responsible for establishing the compensation of our
senior management, 46




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including salaries, bonuses, termination arrangements, and other executive
officer benefits. The Compensation Committee also administers our equity
incentive plans. Corporate Governance and Nominating Committee A Corporate Governance and Nominating Committee (the Committee) was
formed on February 18, 2003, and is comprised of Messrs. Song and Tanella. All
members of the Committee are independent directors, as defined by the rules
applicable to members of the Committee. The Committee is generally responsible
for adopting policies, procedures, and practices designed to help ensure that
our corporate governance policies, procedures, and practices continue to assist
the board and our management in effectively and efficiently promoting the best
interests of our shareholders. The Committee is also responsible for selecting
and recommending for approval by the Board and the Companys shareholders a
slate of director nominees for election at each of the Companys annual
meetings of shareholders, and otherwise for determining the Board committee
members and chairmen, subject to Board ratification, as well as recommending to
the Board director nominees to fill vacancies or new positions on the Board or
its committees that may occur or be created from time to time, all in
accordance with the Companys Bylaws and applicable law. The Corporate Governance Committees principal functions include:  
    
    developing and maintaining our corporate governance policy guidelines;
    
    developing and maintaining our codes of conduct and ethics;
    
    overseeing the interpretation and enforcement of our Code of Conduct and our Code of Ethics for
Chief Executive Officer and Senior Financial and Accounting Officers; and
    
    evaluating the performance of our board, its committees, and committee chairmen and our directors.
    
    selecting and recommending a slate of director nominees for election at each of the Companys
annual meeting of the shareholders and recommending to the Board director nominees to fill
vacancies or new positions on the Board or its committees that may occur from time to time. Code of Ethics Our board of directors has adopted a Code of Ethics that is applicable to
its principal executive officer, principal financial officer, principal
accounting officer or controller, and persons performing similar functions. The
Code of Ethics is attached as Exhibit 14 to this Annual Report on Form 10-K. BENEFICIAL OWNERSHIP REPORTING REQUIREMENTS During the year ended December 31, 2003, our executive officers and
directors filed with the Securities and Exchange Commission on a timely basis
all required reports relating to transactions involving shares of our common
stock beneficially owned by them, except that David Browne, Henri Tchen, Tjoa
Thian Song, Jeffrey Oster (a former director), Betsy Atkins (a former
director), Ricardo Salas (a former director), and Jack Chitayat (a former
director) each received an automatic option grant of 10,000 shares on January
1, 2003 that was not reported until they filed their respective Form 5s on
February 14, 2003. We have relied solely on the written representation of its
executive officers and directors and copies of the reports they have filed with
the Securities and Exchange Commission in providing this information. On November 2004, we entered into an agreement with John Kang, our
Chairman, President, and Chief Executive Officer, in which Mr. Kang agreed that
certain stock transactions by him in the year 2002 involving our common stock
should have resulted in a liability under Section 16(b) of the Securities
Exchange Act of 1934, as amended (Section 16(b)). These transactions include
Mr. Kangs private sale of 285,715 shares of his personal Liquidmetal
Technologies common stock to Growell Metal Co., Ltd. in February 2002, prior to
our initial public offering. They also include Mr. Kangs subsequent indirect
purchase and disposition of Liquidmetal Technologies common stock in order to
satisfy a personal agreement Mr. Kang made to Growell Metal in February 2002
regarding the guaranteed minimum value of the stock purchased by Growell Metal
in February 2002 (the purchases and dispositions incident to this agreement
occurred in August and November 2002, respectively). Lastly, the transactions
include open-market purchases of an aggregate of 89,300 shares of our common
stock made by Mr. Kang in August 2002. The Audit Committee of our Board of Directors conducted an independent
inquiry into the above-described transactions with the aid of independent legal
counsel and, as a result of such inquiry, the Audit Committee concluded that
the transactions should have resulted in a liability to the Company under
Section 16(b) in the amount of $301,944.73. Mr. Kang has acknowledged this
liability, and in an agreement negotiated between Mr. Kang and the Audit
Committee and approved by the full Board, Mr. Kang will pay this liability in
24 equal monthly installments beginning in January 2005. The above- 47




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described transactions involving Growell Metal will be reported on a new
Form 4 filed by Mr. Kang on or about the date of the filing of this Form 10-K,
and the open-market purchases were previously reported on a timely basis in
August 2002. 
 Item 11. Executive Compensation The following table describes the compensation paid to our Chief Executive
Officer and our four other most highly compensated executive officers during
the last fiscal year. SUMMARY COMPENSATION TABLE Long-TermAnnual Compensation
    
    CompensationSharesOther
    
    UnderlyingAnnual
    
    Options
    
    All OtherName and Positions
    
    Year
    
    Salary
    
    Bonus
    
    Compensation
    
    Granted
    
    CompensationJohn Kang (1)
    
    
    2003
    
    
    $
    186,674
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chief Executive Officer,
    
    
    2002
    
    
    $
    300,007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    President, and Chairman
    
    
    2001
    
    
    $
    116,671
    
    
    
    
    
    
    
    
    
    
    
    1,612,904
    
    
    
    James Kang (2)
    
    
    2003
    
    
    $
    280,011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Founder and Director
    
    
    2002
    
    
    $
    373,334
    
    
    
    
    
    
    
    
    
    
    
    2,877,420
    
    
    
    2001
    
    
    $
    193,338
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Brian McDougall (3)
    
    
    2003
    
    
    $
    168,832
    
    
    
    
    
    
    
    
    
    
    
    500,000
    
    
    
    Chief Operating and
    
    
    2002
    
    
    $
    175,000
    
    
    
    
    
    
    
    
    
    
    
    161,291
    
    
    
    Financial Officer
and
Executive Vice President
    
    
    2001
    
    
    $
    102,087
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Scott Wiggins (4)
    
    
    2003
    
    
    $
    175,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Executive Vice President
    
    
    2002
    
    
    $
    175,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2001
    
    
    $
    93,753
    
    
    
    
    
    
    
    
    
    
    
    161,291
    
    
    
    Tom Trotter (5)
    
    
    2003
    
    
    $
    200,000
    
    
    
    
    
    
    $
    12,991
    
    
    
    150,000
    
    
    
    Senior Vice
President of Manufacturing
    
    
    2002
    
    
    $
    16,668
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    William Johnson, Ph.D.
    
    
    2003
    
    
    $
    242,509
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vice
Chairman of the Board
    
    
    2002
    
    
    $
    300,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2001
    
    
    $
    87,503
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   (1)
    
    As of August 22, 2003, John Kang was named Chairman of our board of
directors, in addition to already serving as Chief Executive Officer and
President.(2)
    
    As of August 22, 2003, James Kang became the executive Founder of the
Company and ceased to be the Chairman of our board of directors.(3)
    
    Mr. McDougall ceased to be an employee of our Company as of February 28,
2004. Prior to Brian McDougalls separation from the Company, Mr.
McDougall was granted a total of 500,000 options in 2003. 200,000 were
granted as compensation for his promotion, and 300,000 were granted as a
part of a retention program.(4)
    
    Mr. Wiggins ceased to be an employee of our Company as of December 31,
2003.(5)
    
    Mr. Trotter commenced employment with us on December 2, 2002, and ceased
to be an employee of our Company as of December 31, 2003. $12,991
represents relocation reimbursements for 2003. The following table sets forth information with respect to the aggregate
stock option exercises by the executive officers named in the Summary
Compensation Table during 2003 and the year-end value of unexercised options
held by such executive officers. 48




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##### Table of Contents



Aggregate Option Exercises in Last Year and Year-End Values Value of UnexercisedShares
    
    
    
    Number of Unexercised
    
    in-the-Money OptionsAcquiredon
    
    ValueRealized
    
    Options at Year End
    
    at Year-End (2)Exercise
    
    (1)
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableJohn Kang
    
    
    
    
    
    
    
    
    
    
    1,612,904
    
    
    
    
    
    
    
    
    
    
    
    James Kang
    
    
    
    
    
    
    
    
    
    
    1,984,947
    
    
    
    892,473
    
    
    $
    535,696
    
    
    
    Brian McDougall
    
    
    
    
    
    
    
    
    
    
    64,516
    
    
    
    596,775
    
    
    
    
    
    
    
    Scott Wiggins
    
    
    
    
    
    
    
    
    
    
    161,291
    
    
    
    
    
    
    
    
    
    
    
    Tom Trotter
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    120,000
    
    
    
    
    
    
    
    William Johnson, Ph.D.
    
    
    161,291
    
    
    $
    831,939
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 (1) Represents the difference between the fair market value of the underlying
shares at the time of exercise and the exercise price of the options exercised. (2) Based upon a value of $2.84 per share as of December 31, 2003. EMPLOYMENT AGREEMENTS We have entered into employment agreements with the individuals identified
in the Summary Compensation Table above, as follows: John Kang.On December 31, 2000, we entered into an employment agreement
with John Kang that, as amended, provides for his employment as our Chief
Executive Officer and President, and on August 22, 2003, Mr. Kang was named
Chairman of our Board of Directors. Mr. Kangs employment agreement expires on
December 31, 2005. Mr. Kang receives an annual base salary equal to $200,000
per year, and his employment will terminate upon the earlier of his death,
resignation, disability, or termination by the board of directors for any
reason. If we terminate Mr. Kangs employment without cause, or if Mr. Kang
terminates his own employment upon a change of control of our company or for
other good reason, as defined in the agreement, we are responsible for paying
Mr. Kang a lump-sum cash payment equal to 200% of Mr. Kangs annual base salary
plus the average cash bonus during the two full fiscal years immediately
preceding the termination. Pursuant to the agreement, Mr. Kang was issued
options to purchase 1,612,904 shares of our common stock at an exercise price
of $4.65 per share. The options expire on December 31, 2010 and vested
immediately upon grant. In addition, Mr. Kang is prohibited, during his
employment with us and for one year after he is no longer employed by us, from
soliciting any of our employees or competing with us in any manner. Starting
in May 2003, Mr. Kang and other members of senior management took a 10%
voluntary decrease in their base salary and returned to full salary in June
2004. James Kang.On May 1, 2001, we entered into an employment agreement with
James Kang that, as amended, provides for his employment as the named executive
Founder of our company. Mr. Kangs employment agreement expires on May 1,
2006. Mr. Kang receives an annual base salary equal to $300,000 per year, and
his employment will terminate upon the earlier of his death, resignation,
disability, or termination by the board of directors for any reason. If we
terminate Mr. Kangs employment without cause, or if Mr. Kang terminates his
own employment upon a change of control of our company or for other good
reason, as defined in the agreement, we are responsible for paying Mr. Kang a
severance benefit equal to a lump-sum cash payment equal to 200% of Mr. Kangs
annual base salary plus the average cash bonus during the two full fiscal years
immediately preceding the termination. Pursuant to the agreement, Mr. Kang was
issued options to purchase 2,580,646 shares of our common stock at an exercise
price of $6.20 per share. The options expire on April 30, 2011 and vest at a
rate of 33% per year for three years, with the first 33% vesting on May 21,
2002 and an additional 33% on May 21, 2003 and 2004. In addition, Mr. Kang is
prohibited, during his employment with us and for two years after he is no
longer employed by us, from soliciting any of our employees or customers.
Starting in May 2003, Mr. Kang and other members of senior management took a
10% voluntary decrease in their base salary and returned to full salary in June
2004. Scott Wiggins.On December 31, 2000, we entered into an employment
agreement with Scott Wiggins that provided for his employment as an Executive
Vice President of our company. Under this employment agreement, Mr. Wiggins
was entitled to an annual base salary of $175,000 per year. Mr. Wiggins
employment with the company ceased as of December 31, 2003, and pursuant to his
employment agreement, we paid him severance compensation in January 2004 in 49




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the form of lump-sum payment equal to one years annual base salary. Under Mr.
Wiggins employment agreement, Mr. Wiggins is prohibited, for one year after he
is no longer employed by us, from soliciting any of our employees or competing
with us in any manner. Brian McDougall.On May 21, 2001, we entered into an employment agreement
with Brian McDougall that provided for his employment as our Chief Financial
Officer and an Executive Vice President, and in March 2003, Mr. McDougall was
named our Chief Financial and Operating Officer. Mr. McDougall ceased to be an
employee of the Company as of February 28, 2004, and under the terms of a
separation agreement entered into between Mr. McDougall and the Company, Mr.
McDougall is entitled to severance compensation in the form of salary
continuation for a period of two years. At the time of Mr. McDougalls
separation from the Company, his base salary was $190,000 per year. In
addition, Mr. McDougall will continue to have the right to exercise up to
409,032 of his previously granted stock options through February 28, 2006.
Under Mr. McDougalls employment agreement and separation agreement, Mr.
McDougall is prohibited, for two years after he is no longer employed by us,
from soliciting any of our employees or competing with us in any manner. Thomas Trotter. On December 1, 2002, we entered into an employment
agreement with Thomas Trotter that provided for his employment as our Senior
Vice President of Manufacturing. Mr. Trotter ceased to be an employee of the
Company as of December 31, 2003, and under the terms of a separation agreement
between Mr. Trotter and the Company, Mr. Trotter is entitled to severance
compensation in the form of salary continuation for a period of one year after
termination, and he was also paid one lump-sum payment of $70,000 in January
2004. At the time of Mr. Trotters separation from the Company, his annual
base salary was $200,000. Under Mr. Trotters employment agreement and
separation agreement, Mr. Trotter is prohibited, for two years after he is no
longer employed by us, from soliciting any of our employees or competing with
us in any manner. William Johnson.On October 1, 2001, we entered into an employment
agreement with Professor Johnson that provided for his employment as our Vice
Chairman of Technology. Professor Johnsons employment agreement expired on
September 30, 2003, at which time Professor Johnsons employment continued on
an at-will basis through January 1, 2004. Professor Johnsons employment
agreement provided for a base salary of $300,000 per year. Professor Johnson
continues to serve as a director of our Company and beginning on April 1, 2004
also serves as a paid consultant to us at a rate of $10,000 per month.
Professor Johnson is prohibited, for two years after he is no longer employed
by us, from soliciting any of our employees or competing with us in any manner. REPORT ON EXECUTIVE COMPENSATION General The Compensation Committee of our board of directors was established in
2002 and currently consists of Tjoa Thian Song and Vincent Addonisio. The
Compensation Committee is comprised entirely of non-employee directors and is
responsible for establishing the compensation of our senior management,
including salaries, bonuses, termination arrangements, and other executive
officer benefits. The Compensation Committee also administers our equity
incentive plans. The Compensation Committee also annually reviews and approves
the compensation of John Kang, our Chief Executive Officer. Compensation Philosophy The Compensation Committees goal is to establish and maintain
compensation policies that will enable us to attract, motivate, and retain
high-quality executives and to ensure that their individual interests are
aligned with our long-term interests and our stockholders. The committee
places heavy emphasis on paying for performance and believes that a significant
portion of an executives total compensation opportunity should be at risk and
tied to company performance. Our compensation package consists of three
principal components:  
    
    Base salaries, subject to minimums set forth in individual employment
agreements;  
    
    Annual incentive bonus eligibility; and  
    
    Stock option grants and other forms of equity-based compensation. Base Salary.Base salary is the largest portion of the cash compensation
package received by each of our executive officers. The base salary of each of
our executive officers is governed by employment agreements that were entered
into during 2000 through 2002. Subject to the minimum amounts set forth in
their respective employment agreements, we generally establish the base salary
of each executive officer based, among other factors, on the Compensation
Committees assessment of that executive officers position, responsibilities,
experience, and performance. Our philosophy is to pay base salaries sufficient
to attract and retain highly qualified executives. An executive officers
level 50




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of responsibility is the primary factor used in determining base salary.
Individual performance also is considered in determining any salary adjustment. The Compensation Committee reviews and approves all executive officer
salary adjustments as recommended by the Chief Executive Officer and determines
whether to increase the base salary above the amount set forth in their
employment agreements. The Compensation Committee reviews annually the
performance of the Chief Executive Officer and establishes his base salary,
subject to the minimum $200,000 base salary set forth in his employment
agreement. In 2002 and 2003, the Compensation Committee did not increase the
base salary of any of the executive officers. Annual Bonus.Our executive officers are eligible for an annual cash
bonus under our Performance Bonus Plan.
The plan is designed to:  
    
    put a significant portion of an executive officers total cash
compensation opportunity at risk based on the performance of the
Company;  
    
    be aligned with our mission, values and culture;  
    
    be cost-effective and appropriately budgeted to allow for growth of
our revenue as well as growth of individual compensation plans;  
    
    be externally competitive by matching or leading competitors; and  
    
    be internally equitable through alignment with level of
contribution, performance-based rewards, and administrative
capabilities. Awards of incentive bonuses generally are based on achieving corporate
goals and a subjective evaluation of the contributions of individual executives
toward the achievement of our business goals. Eligibility for the bonus will
be contingent upon the Company meeting or exceeding company-wide financial
goals and successful attainment of individual goals for the position. Both
elements must be successfully met in order to be eligible for the bonus. None
of our executive officers received bonuses for 2003 because the company-wide
financial goals were not satisfied. Equity-Based Compensation. Our equity-based awards to our executive officers consist principally of
stock options granted from time to time under our 2002 Equity Incentive Plan
and our 1996 Stock Option Plan. Stock option grants are based on various
factors, including the executive officers position, responsibility and tenure,
each executive officers ability to contribute to our future success, and the
other elements of such executive officers compensation. Generally, we use
equity-based compensation to better align the interests of our executive
officers with those of our stockholders. For 2003, the Compensation Committee
approved awards of options to executive officers and certain members of senior
management, with the sizes of the awards determined with reference to the scope
of the position and the employees relative contributions to the Company. In
addition, three of our executive officers, John Kang, our Chief Executive
Officer, James Kang, our executive Founder, and William Johnson, our Vice
Chairman, own a significant amount of our common stock. CEO Compensation John Kangs base salary for 2003, as our President and Chief Executive
Officer, was originally set at $200,000, although Mr. Kang and other members of
senior management took a 10% voluntary decrease in their base salary starting
in May 2003, at which time Mr. Kangs base salary was reduced to $180,000 per
year. This represents a decrease over Mr. Kangs 2002 salary of $200,000. Mr.
Kangs compensation reflects his status as a significant stockholder of the
Company. Accordingly, his base salary is lower than the base salary of CEOs of
comparable companies. Mr. Kang voluntarily waived his base salary from January
2004 through May 2004 in support of the Companys strategic cash objectives.
In June 2004, Mr. Kang returned to his base salary of $200,000 and will receive
his differential retroactive pay in equal installments over the remaining
months of 2004. As a significant stockholder in the Company, his overall
compensation is tied directly to sustained increases in the Companys value. No bonus payments were made to Mr. Kang for 2003 because the Compensation
Committee determined not to pay any bonuses to any of our executive officers
due to the Company missing its financial goals. In addition, no options were
granted to Mr. Kang in 2003. As of October 1, 2004, Mr. Kang held options to
purchase 1,935,485 shares of our common stock, all of which were fully vested. The Internal Revenue Code imposes a limitation on the deduction under
Section 162(m) for certain executive officers compensation unless certain
requirements are met. Our policy is to have all compensation fully deductible;
however, we reserve the right to pay compensation that is not deductible if it
is in our best interests. 51




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Compensation Committee of the Board of Directors Tjoa Thian Song
Vincent Addonisio October 6, 2004 The report of the Compensation Committee shall not be deemed incorporated
by reference by any general statement incorporating by reference this Annual
Report on Form 10-K into any filing under the Securities Act of 1933 or under
the Securities Exchange Act of 1934, except to the extent that we specifically
incorporate this information by reference, and shall not otherwise be deemed
filed under such acts. DIRECTOR COMPENSATION Our non-employee directors receive an annual fee of $10,000 for their
service to our board and are reimbursed for expenses incurred in attending
board and committee meetings. Non-employee directors are also entitled to
receive a $10,000 annual cash stipend for each standing board committee
(excluding the Audit Committee) on which the director serves. For Audit
Committee service, the Audit Committee chairman is entitled to a $35,000 annual
stipend, and the other members of the Audit Committee are entitled to a $27,500
annual stipend. In addition to the annual stipends, each non-employee director
is entitled to receive a per-meeting fee of $1,000 for each meeting of the
board of directors or any board committee attended in person. Effective May
2004, Vincent Addonisio was elected as the lead independent director of the
Company. The lead independent director is entitled to a $30,000 annual
stipend. We also have a 2002 Non-employee Director Stock Option Plan pursuant to
which our non-employee directors are entitled to receive stock options. Under
this plan, when a director is first elected or appointed to our board of
directors, the non-employee director is entitled to receive an initial stock
option grant to purchase 50,000 shares of our common stock. Thereafter, on the
first business day of January of each year in which the director continues to
serve as a member of our board, the director is entitled to an annual stock
option grant to purchase 10,000 shares of our common stock. All options
granted under the plan have an exercise price equal to the fair market value of
our common stock on the date of the grant. These stock options have a 10-year
term, vest, and are exercisable pursuant to an equal 5-year vesting schedule,
and remain exercisable for certain periods of time after a person is no longer
a director. No director who is an employee will receive separate compensation for
services rendered as a director. However, our employee directors are eligible
to participate in our 2002 Equity Incentive Plan. 52




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##### Table of Contents



STOCK PRICE PERFORMANCE GRAPH The following graph presents a comparison of the cumulative total
stockholder return since our initial public offering on May 21, 2002 and
through December 31, 2003, on our common stock with the cumulative stockholder
return on the Russell 2000® Index and the Russell 3000® Materials and
Processing Index. This graph assumes that $100 was invested on May 21, 2002, in
each specified group with reinvestment of dividends, if any. Historical stock
performance during this period may not be indicative of future stock
performance. (PERFORMANCE GRAPH) 5/21/2002
    
    12/31/03Liquidmetal Technologies, Inc.
    
    
    100
    %
    
    
    18.90
    %Russell 2000® Index
    
    
    100
    %
    
    
    115.28
    %Russell 3000® Materials and Processing Index
    
    
    100
    %
    
    
    110.02
    %
 The stock price performance graph shall not be deemed incorporated by
reference by any general statement incorporating by reference this Annual
Report on Form 10-K into any filing under the Securities Act of 1933 or under
the Securities Exchange Act of 1934, except to the extent that we specifically
incorporate this information by reference, and shall not otherwise be deemed
filed under such acts. 53




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##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters The following table sets forth certain information regarding the beneficial
ownership of our common stock as of October 1, 2004 by:  
    
    each of our directors and the executive officers identified
in the Summary Compensation Table in Item 11
above;  
    
    all directors and executive officers as a group, and  
    
    each person known by us to own beneficially more than 5% of the common
stock. Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Unless otherwise indicated, each of the stockholders
has sole voting and investment power with respect to the shares beneficially
owned, subject to applicable community property laws. As of October 1, 2004,
there were 238 holders of record of our common stock. For purposes of
calculating amounts beneficially owned by a stockholder, the number of shares
deemed outstanding includes 41,609,652 shares of common stock outstanding as of
October 1, 2004. In addition, shares of common stock subject to options or
warrants that are currently exercisable or exercisable within 60 days of
October 1, 2004 are deemed to be outstanding and to be beneficially owned by
the person holding the options or warrants for the purpose of computing the
beneficial ownership of that person but are not treated as outstanding for the
purpose of computing the beneficial ownership of any other person. Beneficially OwnedName
    
    Shares
    
    PercentJohn Kang (1)
    
    
    5,701,750
    
    
    
    14
    %James Kang (2)
    
    
    7,072,193
    
    
    
    17
    %William Johnson
    
    
    1,225,650
    
    
    
    3
    %Scott Wiggins
    
    
    32,278
    
    
    
    *Brian McDougall (3)
    
    
    269,003
    
    
    
    1
    %Thomas Trotter (4)
    
    
    0
    
    
    
    *David Binnie (5)
    
    
    74,355
    
    
    
    *David Nail (6)
    
    
    17,280
    
    
    
    *Tjoa Thian Song (7)
    
    
    4,333,104
    
    
    
    10
    %Dean Tanella (8)
    
    
    9,990
    
    
    
    *Vincent Addonisio (9)
    
    
    0
    
    
    
    *All directors and executive officers as a group - 11 persons
    
    
    
    
    
    
    45
    %
 * Less than 1.0%   (1)
    
    Includes: (a) 1,612,904 shares that are issuable pursuant to outstanding stock options
that are exercisable currently or within 60 days of October 1, 2004; (b) 322,581 shares issuable pursuant to a warrant held jointly by John Kang
and Ricardo Salas (a former director of the company) that is currently
exercisable; and (c) 32,240 shares held by Mr. Kangs minor children.  (2)
    
    Includes 2,845,162 shares issuable pursuant to outstanding stock options
that are exercisable currently or within 60 days of October 1, 2004. Also
includes 969 shares held by James Kangs minor children. Does not include
32,258 shares that are issuable pursuant to outstanding stock options that
are not exercisable within 60 days.(3)
    
    Includes 236,744 shares issuable pursuant to outstanding stock options
that are exercisable currently or within 60 days. Does not include 424,516
shares that are issuable pursuant to outstanding stock options that are
not exercisable within 60 days. 54




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##### Table of Contents



(4)
    
    Includes 30,000 shares issuable pursuant to outstanding stock options
that are exercisable currently or within 60 days. Does not include 120.000
shares that are issuable pursuant to outstanding stock options that are
not exercisable within 60 days.(5)
    
    Includes 69,655 shares issuable pursuant to outstanding stock options
that are exercisable currently or within 60 days. Does not include 120,934
shares that are issuable pursuant to outstanding stock options that are
not exercisable within 60 days.(6)
    
    Includes 17,280 shares issuable pursuant to outstanding stock options
that are exercisable currently or within 60 days. Does not include 35,786
shares that are issuable pursuant to outstanding stock options that are
not exercisable within 60 days.(7)
    
    3,874,585 of these shares are held of record by a revocable grantor trust
established by Mr. Tjoa for himself and his family members. Mr. Tjoa
continues to beneficially own all such shares. Includes 322,581 shares
issuable pursuant to a currently exercisable warrant and 2,000 shares
issuable pursuant to outstanding stock options that are exercisable
currently or within 60 days. Does not include 68,000 shares that are
issuable pursuant to outstanding stock options that are not exercisable
within 60 days.(8)
    
    Includes 1,390 shares held by Mr. Tanellas minor children. Does not
include 50,000 shares that are issuable pursuant to outstanding stock
options that are not exercisable within 60 days.(9)
    
    Does not include 50,000 shares that are issuable pursuant to outstanding
stock options that are not exercisable within 60 days 55




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##### Table of Contents



Equity Compensation Plan Information The following table sets forth certain information regarding the
securities authorized for issuance under our equity compensation plans as of
December 31, 2003. Number of Securities
    
    Weighted AverageTo be
    
    ExerciseIssued upon Exercise of
    
    Price of Outstanding
    
    Number of SecuritiesOutstanding Options,
    
    Options,
    
    Remaining Available forPlan Category
    
    Warrants, and Rights
    
    Warrants, and Rights
    
    Future IssuanceEquity compensation
plans approved by
security holders:
    
    
    8,171,461
    
    
    $
    5.11
    
    
    
    8,959,704Equity compensation
plans not approved
by security
holders:
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    8,171,461
    
    
    $
    5.11
    
    
    
    8,959,704
 
 Item 13. Certain Relationships and Related Transactions We are a party to an amended and restated licensed agreement with the
California Institute of Technology (Caltech) under which we exclusively license
from Caltech certain inventions and technology relating to amorphous alloys.
Professor William Johnson, a member of our board of directors and beginning
April 1, 2004 became a paid consultant of our Company, is a professor at
Caltech, and substantially all of the amorphous alloy technology licensed to us
under the Caltech license agreement was developed in Professor Johnsons
Caltech laboratory. Under the Caltech license agreement, we have a fully
paid, exclusive license to make, use, and sell products from inventions,
proprietary information, know-how, and other rights relating to amorphous
alloys owned by Caltech and existing as of September 1, 2001. The license
agreement also gives us the exclusive right to make, use, and sell products
derived from substantially all amorphous alloy technology developed in
Professor Johnsons Caltech laboratory during the period September 1, 2001
through August 31, 2005. During 2003, we paid Caltech aggregate fees of
$50,000 under the license agreement which is the final one-third payment of the
$150,000 aggregate fee under the license agreement, although no royalties were
paid under the license agreement during 2003, and no additional license fees or
royalties are payable in the future to Caltech under the agreement. In addition to the Caltech license agreement, we occasionally assist in
the funding of Caltech research programs that are aimed at facilitating the
further development of amorphous alloy technology. Although this funding
assistance is not required by the Caltech license agreement, the purpose of the
funding is to help facilitate the more rapid development of amorphous alloy
technology to which we will ultimately acquire rights under the Caltech license
agreement. During 2003, we did not pay Caltech for such programs. Also,
during 2003, Professor Johnson was an employee of our Company and was
individually paid aggregate compensation of $242,509 for the year. In June 2003, we entered into an exclusive ten-year license agreement with
LLPG, Inc., a company founded and owned by Jack Chitayat, a former director of
Liquidmetal Technologies, Inc. Under the terms of the license agreement, LLPG
has the exclusive right to commercialize Liquidmetal alloys, particularly
precious-metal based compositions, in the jewelry and high-end luxury products
market for a ten year term. In conjunction with this license agreement, LLPG
purchased from us two proprietary Liquidmetal alloy melting machines and three
proprietary Liquidmetal alloy casting machines for a total purchase price of $2
million, which was paid to the Company in installments during 2003 and 2004. We are a party to a consulting agreement with Chitnis Consulting, Inc.,
which is owned 100% by Shekhar Chitnis, a former director and executive officer
of our Company. Under this agreement, we have engaged Chitnis Consulting to
provide consulting services on an as-needed basis through December 31, 2005.
During 2003, we incurred $50,000 in consulting fees from Chitnis Consulting. During 2003, Soo Buchanan, the sister of John Kang and James Kang, was
employed by our Company and was paid aggregate compensation of $76,003 during
the year. Additionally, Otis Buchanan, the husband of Ms. Buchanan, was
employed by the Company during 2003 and was paid aggregate compensation of
$89,615 during the year. 56




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##### Table of Contents



Item 14. Principal Accounting Fees and Services Prior to May 2004, Deloitte & Touche LLP was our independent public
accountant; however, effective May 2004, Deloitte & Touche LLP resigned as our
independent accountant. Liquidmetal Technologies subsequently engaged
Stonefield Josephson, Inc. Item 14 includes the principal accounting fees and
services for both Deloitte & Touche LLP and Stonefield Josephson, Inc. Stonefield Josephson, Inc. Stonefield Josephson, Inc. was engaged in May 2004 and has served as our
independent public accountants during the year ended December 31, 2003. In
connection with the fiscal years ended December 31, 2003, 2002, and 2001
Stonefield Josephson provided audit services to us and billed us for these
services as follows: The following table summarizes the aggregate fees billed to the Company by
Stonefield for professional services: Fees
    
    2003, 2002, and 2001Audit Fees (1)
    
    $
    760,000
   1.
    
    Audit Fees.Fees for audit services billed in 2004 consisted of:  
    
    Audit of the Companys annual financial statements for
2003, 2002, and 2001; Deloitte & Touche LLP The following table summarizes the aggregate fees billed to the Company by
Deloitte & Touche LLP for professional services performed in 2003 and 2002: Fees
    
    2003
    
    2002Audit Fees (1)
    
    $
    296,021
    
    
    $
    108,746Tax Fees (2)
    
    
    68,435
    
    
    
    81,605Total
    
    $
    364,456
    
    
    $
    190,351
 1. Audit Fees.  Fees for audit services billed in 2003 consisted of:  
    
    Audit of the Companys annual financial statements;  
    
    Reviews of the Companys quarterly financial statements;  
    
    Comfort letters, statutory and regulatory audits,
consents and other services related to Securities and Exchange
Commission matters;  
    
    Consultations about accounting for settlement and fund
raising; and  
    
    Reviews of Securities and Exchange Commission documents
associated with financing and restructuring. Fees for audit services billed in 2002 consisted of:  
    
    Audit of the Companys annual financial statements;  
    
    Reviews of the Companys quarterly financial statements; and  
    
    Comfort letters, statutory and regulatory audits,
consents and other services related to Securities and Exchange
Commission matters.  2.
    
    Tax Fees.Fees for tax services billed in 2003 and 2002 consisted
of tax compliance and tax planning/advice 57




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##### Table of Contents



The Audit Committee pre-approves all audit and permissible non-audit
services provided by the independent directors on a case-by-case basis. The
Audit Committee approved 100% of the services performed by Deloitte & Touche
LLP and Stonefield Josephson, Inc. in 2004, 2003, and 2002 as identified above. 
 PART IV 
 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K  (a)
    
    The following documents are filed as a part of this report:  1.
    
    Financial Statements. The Index to our Consolidated Financial
Statements is set forth on page 68 of this report.  2.
    
    Financial Statement Schedules. See the last page of Consolidated
Financial Statements.  3.
    
    Exhibits. See Item 15(c) below.  (b)
    
    Reports on Form 8-K. The following reports on Form 8-K were filed
during the quarter ended December 31, 2003: Date Filed
    
    Date of Report
    
    ItemOctober 9, 2003
    
    October 9, 2003
    
    The Company filed a news release
under Items 9 and 12 of Form 8-K
announcing the Companys revenue
estimate for the third quarter
ended September 30, 2003.October 30, 2003
    
    October 30, 2003
    
    The Company filed a news release
under Items 9 and 12 of Form 8-K
announcing the Companys financial
results for the third quarter ended
September 30, 2003.
  (c)
    
    Exhibits. The exhibits listed on the Exhibit Index, which appears at
the end of this Item 15, are filed as part of, or incorporated by
reference into, this report.(d)
    
    Financial Statement Schedules. See Item 15(a)(2) above. 58




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##### Table of Contents



EXHIBIT INDEX ExhibitNumber
    
    
    
    Description of Document2.1
    
    
    
    Agreement and Plan of Merger, dated May 21, 2003, between Liquidmetal Technologies, Inc. and Liquidmetal Technologies (incorporated by
reference to Exhibit 2.1 to the Form 10-Q filed on August 14, 2003).3.1
    
    
    
    Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Form 10-Q filed on August 14, 2003)3.2
    
    
    
    Bylaws (incorporated by reference to Exhibit 3.2 to the Form 10-Q on August 14, 2003)4.1
    
    
    
    Reference is made to Exhibits 3.1 and 3.2.4.2
    
    
    
    Form of Common Stock Certificate (incorporated by reference to Exhibit 4.2 to the Form 10-Q filed on August 14, 2003)10.1
    
    
    
    Amended and Restated License Agreement, dated September 1, 2001, between Liquidmetal Technologies, Inc. and California Institute of
Technology (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-1 filed on November 20, 2001
(Registration No. 333-73716)).10.2
    
    
    
    Improved Property Commercial Lease, dated September 11, 2002, between Liquidmetal Technologies, Inc. and P & S Properties (incorporated
by reference to Exhibit 10.2 of Form 10-K filed on March 31, 2003).10.3
    
    
    
    Lease, dated October 4, 2001, between Plaza IV Associates, Ltd. and Liquidmetal Technologies, Inc. (incorporated by reference to
Exhibit 10.1 to the Registration Statement on Form S-1 filed on November 20, 2001 (Registration No. 333-73716)).10.4
    
    
    
    Second Amendment of Lease, dated October 3, 2003, between Liquidmetal Technologies, Inc. and Plaza Associates IV, Ltd. (incorporated by
reference to Exhibit 10.1 of Form 10-Q filed on November 14, 2003).10.5
    
    
    
    Standard Lease, dated May 27, 2001, between Investors Equity Fund, Inc. and Amorphous Technologies International (now known as
Liquidmetal Technologies, Inc.) (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-1 on November 20,
2001 (Registration No. 333-73716)).10.6*
    
    
    
    1996 Stock Option Plan, as amended, together with form of Stock Option Agreement (incorporated by reference to Exhibit 10.7 to the
Registration Statement on Form S-1 filed on November 20, 2001 (Registration No. 333-73716)).10.7*
    
    
    
    2002 Equity Incentive Plan (incorporated by reference to Exhibit 10.23 to the Registration Statement on Form S-1 (Amendment No. 2)
filed on April 5, 2002 (Registration No. 333-73716)).10.8*
    
    
    
    2002 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.24 to the Registration Statement on Form S-1
(Amendment No. 2) filed on April 5, 2002 (Registration No. 333-73716)).10.9*
    
    
    
    Employment Agreement, dated
December 31, 2000, between Liquidmetal Technologies, Inc. and John Kang, as amended by Amendment No. 1 to Employment Agreement, dated June 28, 2001 (incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1 filed on
November 20, 2001 (Registration No. 333-73716)).10.10*
    
    
    
    Employment Agreement, dated May 1, 2001, between Liquidmetal Technologies, Inc. and James Kang, as amended by Amendment No. 1 to
Employment Agreement, dated June 28, 2001 (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-1
(Amendment No. 2) filed on April 5, 2002 (Registration No. 333-73716)).10.11*
    
    
    
    Amendment No. 2 to Employment Agreement, dated September 1, 2003, between James Kang and Liquidmetal Technologies, Inc. (incorporated
by reference to Exhibit 10.2 of Form 10-Q filed on November 14, 2003).10.12*
    
    
    
    Employment Agreement, dated October 1, 2001, between Liquidmetal Technologies, Inc. and William Johnson, Ph.D. (incorporated by
reference to Exhibit 10.10 to the Registration Statement on Form S-1 filed on November 20, 2001 (Registration No. 333-73716))10.13*
    
    
    
    Employment Agreement, dated October 1, 2001, between Liquidmetal Technologies, Inc., and David Binnie.10.14*
    
    
    
    Employment Agreement, dated November 3, 2004, between Liquidmetal Technologies, Inc. and Tony Chung.10.15*
    
    
    
    Employment Agreement, dated December 31, 2000, between Liquidmetal Technologies, Inc. and T. Scott Wiggins (incorporated by reference
to Exhibit 10.11 to the Registration Statement on Form S-1 filed on November 20, 2001 (Registration No. 333-73716)).
 59




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##### Table of Contents



ExhibitNumber
    
    
    
    Description of Document10.16*
    
    
    
    Employment Agreement, dated May 21, 2001, between Liquidmetal Technologies, Inc. and Brian McDougall (incorporated by reference to
Exhibit 10.12 to the Registration Statement on Form S-1 filed on November 20, 2001 (Registration No. 333-73716)).10.17*
    
    
    
    Employment Separation Agreement, dated December 31, 2003, between Liquidmetal Technologies, Inc. and Brian McDougall.10.18*
    
    
    
    Letter Agreement, dated February 26, 2004, between Brian McDougall and Liquidmetal Technologies, Inc.10.19*
    
    
    
    Employment Agreement, December 1, 2002, between Liquidmetal Technologies, Inc. and
Thomas Trotter.10.20*
    
    
    
    Employment Separation Agreement, dated November 6, 2003, between Liquidmetal
Technologies, Inc. and Thomas Trotter.10.21*
    
    
    
    Separation and Consulting Agreement, dated November 15, 2001, between Liquidmetal
Technologies, Inc. and Shekhar Chitnis, together with Consulting Agreement attached as
Exhibit A (incorporated by reference to Exhibit 10.14 to the Registration Statement on
Form S-1 (Amendment No. 2) filed on April 5, 2002 (Registration No. 333-73716)).10.22
    
    
    
    Warrant for Purchase of Shares of Common Stock, dated February 21, 2001, granted by
Liquidmetal Technologies, Inc. to John Kang and Ricardo Salas (incorporated by
reference to Exhibit 10.18 to the Registration Statement on Form S-1 filed by on
November 20, 2001 (Registration No. 333-73716)).10.23
    
    
    
    Warrant for Purchase of Shares of Common Stock, dated February 21, 2001, granted by
Liquidmetal Technologies, Inc. to Tjoa Thian Song (incorporated by reference to
Exhibit 10.19 to the Registration Statement on Form S-1 filed on November 20, 2001
(Registration No. 333-73716)).10.24
    
    
    
    Non-Qualified Stock Option Agreement, dated January 1, 2001, between Liquidmetal
Technologies, Inc. and Paul Azinger (incorporated by reference to Exhibit 10.19 to the
Registration Statement on Form S-1 filed on November 20, 2001 (Registration No.
333-73716)).10.25
    
    
    
    Foreign Corporation Lease Zone Occupancy (Lease) Agreement, dated March 5, 2002,
between Kyonggi Local Corporation and Liquidmetal Korea Co., Ltd. (incorporated by
reference to Exhibit 10.22 to the Registration Statement on Form S-1 (Amendment No. 2)
filed by Liquidmetal Technologies on April 5, 2002 (Registration No. 333-73716)).10.26
    
    
    
    Credit Service Agreement, dated February 2003, between Liquidmetal Korea Co., Ltd. and
Kookmin Bank (incorporated by reference to Exhibit 10.20 to the Form 10-K filed on
March 31, 2003).10.27
    
    
    
    Agreement for Rent dated February, 2003, between Liquidmetal Korea Co., Ltd. and Dong
Myung Seo Bank (incorporated by reference to Exhibit 10.21 to the Form 10-K filed on
March 31, 2003).10.28
    
    
    
    Share Transfer Agreement, dated February 28, 2004, among Liquidmetal Korea Co. Ltd.,
Sun Joo Ho, and Dongyang Induction Co. Ltd.10.29
    
    
    
    Settlement Agreement, dated January 10, 2004, between Liquidmetal Korea Co., Ltd. and
Growell Metal Co., Ltd.10.30
    
    
    
    Amended and Restated Securities Purchase Agreement, dated March 1, 2004, among
Liquidmetal Technologies, Inc., Michigan Venture Capital Co., Ltd., and the investors
identified as Purchasers therein Bank (incorporated by reference to Exhibit 10.1 to
the Form 8-K filed on July 2, 2004).10.31
    
    
    
    Form of 6% Senior Convertible Note issued under Amended and Restated Securities
Purchase Agreement (incorporated by reference to Exhibit 10.2 to the Form 8-K filed on
July 2, 2004).10.32
    
    
    
    Registration Rights Agreement, dated March 1, 2004, among Liquidmetal Technologies,
Inc. and the purchasers under Amended and Restated Securities Purchase Agreement
(incorporated by reference to Exhibit 10.3 to the Form 8-K filed on July 2, 2004).10.33
    
    
    
    Common Stock Purchase Warrant, dated March 1, 2004, granted by Liquidmetal
Technologies, Inc. to Michigan Venture Capital Co., Ltd. (incorporated by reference to
Exhibit 10.4 to the Form 8-K filed on July 2, 2004).10.34
    
    
    
    Factory Mortgage Agreement, dated March 1, 2004, among Liquidmetal Korea Co., Ltd.,
Michigan Venture Capital Co., Ltd., and the other parties identified therein
(incorporated by reference to Exhibit 10.5 to the Form 8-K filed on July 2, 2004).10.35
    
    
    
    Securities Purchase Agreement, dated March 1, 2004, among Liquidmetal Technologies,
Inc. and the investors identified as Purchasers therein (incorporated by reference
to Exhibit 10.6 to the Form 8-K filed on July 2, 2004).
 60




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##### Table of Contents



ExhibitNumber
    
    
    
    Description of Document10.36
    
    
    
    Form of 6% Senior Convertible Note issued under Securities Purchase Agreement
(incorporated by reference to Exhibit 10.7 to the Form 8-K filed on July 2, 2004).10.37
    
    
    
    Registration Rights Agreement, dated March 1, 2004, among Liquidmetal Technologies,
Inc. and the purchasers under Securities Purchase Agreement (incorporated by reference
to Exhibit 10.8 to the Form 8-K filed on July 2, 2004).10.38
    
    
    
    Form of Common Stock Purchase Warrant granted to purchasers under Securities Purchase
Agreement (incorporated by reference to Exhibit 10.9 to the Form 8-K filed on July 2,
2004).10.39
    
    
    
    Form of Placement Agent Common Stock Purchase Warrant, dated March 1, 2004
(incorporated by reference to Exhibit 10.10 to the Form 8-K filed on July 2, 2004).10.40
    
    
    
    Security Agreement, dated March 1, 2004, between Liquidmetal Technologies, Inc. and
Middlebury Capital LLC, as agent (incorporated by reference to Exhibit 10.11 to the
Form 8-K filed on July 2, 2004).10.41
    
    
    
    Note Exchange Agreement, dated July 29, 2004, among Liquidmetal Technologies, Inc. and
certain individuals identified as Noteholders therein (incorporated by reference to
Exhibit 10.1 to the Form 8-K filed on August 20, 2004).10.42
    
    
    
    Form of 10% Senior Secured Notes Due 2005 of Liquidmetal Technologies, Inc. issued
pursuant to Note Exchange Agreement filed as Exhibit 10.2 hereto (incorporated by
reference to Exhibit 10. to the Form 8-K filed on August 20, 2004).10.43
    
    
    
    Form of 6% Senior Security Note Due 2007 of Liquidmetal Technologies, Inc. issued
pursuant to Note Exchange Agreement filed as Exhibit 10.3 hereto (incorporated by
reference to Exhibit 10. to the Form 8-K filed on August 20, 2004).10.44
    
    
    
    Note Exchange Agreement, dated July 29, 2004, among Liquidmetal Technologies, Inc and
Winvest Venture Partners Inc. (incorporated by reference to Exhibit 10.4 to the Form
8-K filed on August 20, 2004).10.45
    
    
    
    10% Senior Secured Notes Due 2005 of Liquidmetal Technologies, Inc. issued to Winvest
Venture Partners Inc. (incorporated by reference to Exhibit 10.5 to the Form 8-K filed
on August 20, 2004).10.46
    
    
    
    Form of 6% Senior Security Note Due 2007 of Liquidmetal Technologies, Inc. issued to
Winvest Venture Partners Inc. (incorporated by reference to Exhibit 10.6 to the Form
8-K filed on August 20, 2004).14
    
    
    
    Code of Ethics for Chief Executive Officer and Senior Financial and Accounting Officers21
    
    
    
    Subsidiaries of the Registrant.23.1
    
    
    
    Consent of Stonefield Josephson24.1
    
    
    
    Power of Attorney relating to subsequent amendments (included on the signature page(s)
of this report).31.1
    
    
    
    Certification of Principal Executive Officer pursuant to Rule 13a-15(e) or 15d-15(e)
of the Securities Exchange Act of 1934, as amended.31.2
    
    
    
    Certification of Principal Financial Officer pursuant to Rule 13a-15(e) or 15d-15(e)
of the Securities Exchange Act of 1934, as amended.32.1
    
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350.32.2
    
    
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350.
  *
    
    Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit this Form 10-K. 61




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized. Liquidmetal Technologies, Inc.By:
    
    /s/ John KangJohn KangPresident and Chief Executive Officer
 Date: October 29, 2004 62




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##### Table of Contents



POWER OF ATTORNEY KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John Kang and Tony Chung and each of
them, jointly and severally, his attorneys-in-fact, each with full power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each said
attorneys-in-fact or his substitute or substitutes, may do or cause to be done
by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated: Signature
    
    Title
    
    Date/s/ John Kang
John Kang
    
    Chairman of the Board
Chief Executive Officer
President and Director
(Principal Executive Officer)
    
    October 6, 2004/s/ James Kang
James Kang
    
    Founder and Director
    
    October 6, 2004/s/ William Johnson
William Johnson
    
    Director
    
    October 6, 2004/s/ Tjoa Thian Song
Tjoa Thian Song
    
    Director
    
    October 6, 2004/s/ Vincent Addonisio
    
    Director
    
    October 6, 2004Vincent Addonisio/s/ Dean Tanella
Dean Tanella
    
    Director
    
    October 6, 2004
 Certifications provided as Exhibits. 63




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm
    
    
    65Consolidated Financial Statements:Consolidated Balance Sheet
    
    
    66Consolidated Statements of Operations and Comprehensive Loss
    
    
    67Consolidated Statements of Shareholders Equity (Deficiency)
    
    
    68Consolidated Statements of Cash Flows
    
    
    69Notes to Consolidated Financial Statements
    
    
    71
 64




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of

Liquidmetal Technologies, Inc. We have audited the accompanying consolidated balance sheets of Liquidmetal
Technologies, Inc. and subsidiaries (the Company) as of December 31, 2003 and
2002, and the related consolidated statements of
operations and comprehensive loss, shareholders equity (deficiency), and cash
flows for each of the three years in the period ended December 31, 2003. Our
audits also included the financial statement schedule listed in the Index
at Item 15(a)(2) and the Schedule II information. These financial statements and financial statement schedule
are the responsibility of the Companys management. Our responsibility is to
express an opinion on the financial statements and financial statement schedule
based on our audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Liquidmetal Technologies, Inc. and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein. As discussed in Note 2, the accompanying 2002 and 2001 consolidated financial
statements have been restated. The accompanying financial statements for the year ended December 31, 2003 have
been prepared assuming that the Company will continue as a going concern. As
discussed in Note 3 to the financial statements, the Companys recurring losses
from operations and recurring negative operating cash flows raise substantial
doubt about its ability to continue as a going concern. Managements plans
concerning these matters are also described in Note 3. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. Irvine, California

Certified Public Accountants October 22, 2004 65




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##### Table of Contents



LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) December 31,2003
    
    2002(restated)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    3,129
    
    
    $
    26,003Marketable securities held-for-sale
    
    
    
    
    
    
    3,068Trade accounts receivable, net of allowance for doubtful accounts of $155 and $450
    
    
    4,185
    
    
    
    5,910Inventories
    
    
    5,780
    
    
    
    4,011Prepaid expenses and other current assets
    
    
    564
    
    
    
    2,142Total current assets
    
    
    13,658
    
    
    
    41,134PROPERTY, PLANT AND EQUIPMENT, NET
    
    
    17,958
    
    
    
    23,505OTHER INTANGIBLE ASSETS, NET
    
    
    984
    
    
    
    785GOODWILL
    
    
    
    
    
    
    184OTHER ASSETS
    
    
    426
    
    
    
    408Total assets
    
    $
    33,026
    
    
    $
    66,016LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable and accrued expenses
    
    $
    4,274
    
    
    $
    11,175Net liabilities of discontinued operations
    
    
    
    
    
    
    1,148Deferred revenue
    
    
    3,018
    
    
    
    2,980Long-term debt, current portion
    
    
    1,032
    
    
    
    Other current liabilities
    
    
    4,705
    
    
    
    19Total current liabilities
    
    
    13,029
    
    
    
    15,322LONG-TERM DEBT, NET OF CURRENT PORTION
    
    
    3,015
    
    
    
    OTHER LIABILITIES
    
    
    814
    
    
    
    74Total liabilities
    
    
    16,858
    
    
    
    15,396COMMITMENTS AND CONTINGENCIESMINORITY INTEREST
    
    
    5
    
    
    
    21SHAREHOLDERS EQUITY:Common stock, $0.001 par value per share, 100,000,000 shares authorized;
41,609,652 shares issued and outstanding at December 31, 2003 and
200,000,000 shares authorized and 41,009,245 issued and outstanding at
December 31, 2002
    
    
    42
    
    
    
    106,554Additional paid in capital
    
    
    128,581
    
    
    
    21,575Unamortized stock-based compensation
    
    
    (128
    )
    
    
    (260
    )Accumulated deficit
    
    
    (112,587
    )
    
    
    (78,982
    )Accumulated other comprehensive income
    
    
    255
    
    
    
    1,712Total shareholders equity
    
    
    16,163
    
    
    
    50,599Total liabilities and shareholders equity
    
    $
    33,026
    
    
    $
    66,016
 The accompanying notes are an integral part of the consolidated financial statements. 66




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##### Table of Contents



LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share data) Years Ended December 31,2003
    
    2002
    
    2001(restated)
    
    (restated)REVENUE, Net
    
    $
    16,854
    
    
    $
    11,235
    
    
    $
    3,882COST OF SALES
    
    
    22,188
    
    
    
    7,174
    
    
    
    1,924Gross (loss) profit
    
    
    (5,334
    )
    
    
    4,061
    
    
    
    1,958OPERATING EXPENSES:Selling, general and administrative
    
    
    17,784
    
    
    
    13,472
    
    
    
    5,239Research and development
    
    
    8,853
    
    
    
    11,825
    
    
    
    1,726Impairment of goodwill
    
    
    184
    
    
    
    
    
    
    
    Impairment of long lived assets
    
    
    2,684
    
    
    
    
    
    
    
    Total operating expenses
    
    
    29,505
    
    
    
    25,297
    
    
    
    6,965LOSS BEFORE INTEREST, OTHER INCOME, INCOME TAXES
MINORITY INTEREST AND DISCONTINUED OPERATIONS
    
    
    (34,839
    )
    
    
    (21,236
    )
    
    
    (5,007
    )Interest expense
    
    
    (393
    )
    
    
    (1,113
    )
    
    
    (1,103
    )Interest income
    
    
    309
    
    
    
    510
    
    
    
    8Gain on sale of marketable securities held-for-sale
    
    
    1,178
    
    
    
    832
    
    
    
    LOSS BEFORE INCOME TAXES, MINORITY INTEREST AND
DISCONTINUED OPERATIONS
    
    
    (33,745
    )
    
    
    (21,007
    )
    
    
    (6,102
    )Income taxes
    
    
    (8
    )
    
    
    (123
    )
    
    
    LOSS BEFORE MINORITY INTEREST AND DISCONTINUED
OPERATIONS
    
    
    (33,753
    )
    
    
    (21,130
    )
    
    
    (6,102
    )Minority interest in loss of consolidated subsidiary
    
    
    21
    
    
    
    118
    
    
    
    LOSS FROM CONTINUING OPERATIONS
    
    
    (33,732
    )
    
    
    (21,012
    )
    
    
    (6,102
    )DISCONTINUED OPERATIONS:Loss from operations of discontinued retail golf segment, net
    
    
    
    
    
    
    
    
    
    
    (5,973
    )Gain (loss) from disposal of discontinued retail golf segment, net
    
    
    127
    
    
    
    1,556
    
    
    
    (11,949
    )NET LOSS
    
    
    (33,605
    )
    
    
    (19,456
    )
    
    
    (24,024
    )OTHER COMPREHENSIVE GAIN (LOSS):Foreign exchange translation gain (loss) during the period
    
    
    211
    
    
    
    (28
    )
    
    
    (24
    )Net unrealized gain (loss) on marketable securities available-for-sale
    
    
    (1,668
    )
    
    
    1,668
    
    
    
    COMPREHENSIVE LOSS
    
    $
    (35,062
    )
    
    $
    (17,816
    )
    
    $
    (24,048
    )PER COMMON SHARE BASIC and DILUTED:Loss from continuing operations
    
    $
    (0.81
    )
    
    $
    (0.54
    )
    
    $
    (0.18
    )Gain (Loss) from discontinued operations
    
    $
    0.00
    
    
    $
    0.04
    
    
    $
    (0.54
    )Net loss
    
    $
    (0.81
    )
    
    $
    (0.50
    )
    
    $
    (0.72
    )
 The accompanying notes are an integral part of the consolidated financial statements. 67




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LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(in thousands, except share data) Unamortized
    
    
    
    
    
    AccumulatedAdditional
    
    Stock-based
    
    Accumu-
    
    OtherPreferred
    
    Preferred
    
    Common
    
    Common
    
    Paid in
    
    Compen-
    
    lated
    
    ComprehensiveShares
    
    Stock
    
    Shares
    
    Stock
    
    Capital
    
    sation
    
    Deficit
    
    Income (Loss)
    
    Total(restated)
    
    (restated)
    
    (restated)Balance, December 31, 2000
    
    
    
    
    
    $
    
    
    
    
    30,884,042
    
    
    $
    19,305
    
    
    $
    12,421
    
    
    $
    
    
    
    $
    (35,502
    )
    
    $
    96
    
    
    $
    (3,680
    )Preferred stock issued
    
    
    456,857
    
    
    
    5,665
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,665Commission expense on sale of
preferred stock
    
    
    
    
    
    
    (88
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (88
    )Common stock issued
    
    
    
    
    
    
    
    
    
    
    977,034
    
    
    
    5,477
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,477Stock options exercised
    
    
    
    
    
    
    
    
    
    
    1,822,581
    
    
    
    2,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,400Conversion of notes payable
    
    
    
    
    
    
    
    
    
    
    1,339,858
    
    
    
    2,570
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,570Discounts on notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,692
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,692Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,521
    
    
    
    
    
    
    
    
    
    
    
    2,521Unamortized stock option
based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,815
    
    
    
    (9,815
    )
    
    
    
    
    
    
    
    
    
    
    Dilution gain on common stock
issued by subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37Purchase of common stock of
subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50
    )Foreign exchange translation
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    (24
    )Net loss (as restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,024
    )
    
    
    
    
    
    
    (24,024
    )Balance, December 31, 2001 (as restated)
    
    
    456,857
    
    
    $
    5,577
    
    
    
    35,023,515
    
    
    $
    29,752
    
    
    $
    23,915
    
    
    $
    (7,294
    )
    
    $
    (59,526
    )
    
    $
    72
    
    
    $
    (7,504
    )Common stock issued
    
    
    
    
    
    
    
    
    
    
    5,229,000
    
    
    
    78,435
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,435Transaction expenses of
initial public offering
including commissions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,714
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,714
    )Stock options exercised
    
    
    
    
    
    
    
    
    
    
    299,873
    
    
    
    504
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    504Conversion of preferred stock
to common stock
    
    
    (456,857
    )
    
    
    (5,577
    )
    
    
    456,857
    
    
    
    5,577
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,694
    
    
    
    
    
    
    
    
    
    
    
    4,694Unamortized stock option
based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,340
    )
    
    
    2,340
    
    
    
    
    
    
    
    
    
    
    
    Foreign exchange translation
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    (28
    )Net unrealized gain on marketable
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,668
    
    
    
    1,668Net loss (as restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,456
    )
    
    
    
    
    
    
    (19,456
    )Balance, December 31, 2002 (as restated)
    
    
    
    
    
    $
    
    
    
    
    41,009,245
    
    
    $
    106,554
    
    
    $
    21,575
    
    
    $
    (260
    )
    
    $
    (78,982
    )
    
    $
    1,712
    
    
    $
    50,599Stock options exercised
    
    
    
    
    
    
    
    
    
    
    684,165
    
    
    
    1,149
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,149Repurchase of shares
    
    
    
    
    
    
    
    
    
    
    (93,758
    )
    
    
    (653
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (653
    )Change in par value due to
Reincorporation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (107,008
    )
    
    
    107,008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    
    
    
    
    100
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    125Unamortized stock
option based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (107
    )
    
    
    107
    
    
    
    
    
    
    
    
    
    
    
    Purchase of common stock of
subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Foreign exchange translation
gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    211
    
    
    
    211Reclassification for net realized
gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,668
    )
    
    
    (1,668
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,605
    )
    
    
    
    
    
    
    (33,605
    )Balance, December 31, 2003
    
    
    
    
    
    $
    
    
    
    
    41,609,652
    
    
    $
    42
    
    
    $
    128,581
    
    
    $
    (128
    )
    
    $
    (112,587
    )
    
    $
    255
    
    
    $
    16,163
 The accompanying notes are an integral part of the consolidated financial statements. 68




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LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data) Years Ended December 31,2003
    
    2002
    
    2001(restated)
    
    (restated)OPERATING ACTIVITIES:Net loss
    
    $
    (33,605
    )
    
    $
    (19,456
    )
    
    $
    (24,024
    )Add (gain) loss from operations and loss on disposition of discontinued operations
    
    
    (127
    )
    
    
    (1,556
    )
    
    
    17,922Loss from continuing operations
    
    
    (33,732
    )
    
    
    (21,012
    )
    
    
    (6,102
    )Adjustments to reconcile net loss to net cash used by operating activities:Impairment of long lived assets
    
    
    2,684
    
    
    
    
    
    
    
    Impairment of goodwill
    
    
    184
    
    
    
    
    
    
    
    Loss from Growell settlement
    
    
    2,765
    
    
    
    
    
    
    
    Gain on sale of marketable securities held-for-sale
    
    
    (1,178
    )
    
    
    (832
    )
    
    
    Minority interest
    
    
    (21
    )
    
    
    (118
    )
    
    
    Bad debt expense
    
    
    (28
    )
    
    
    921
    
    
    
    25Warranty expense
    
    
    (297
    )
    
    
    237
    
    
    
    Depreciation and amortization
    
    
    4,416
    
    
    
    1,513
    
    
    
    132Amortization of debt discount
    
    
    
    
    
    
    912
    
    
    
    780Stock-based compensation
    
    
    123
    
    
    
    2,203
    
    
    
    1,330Changes in operating assets and liabilities:Trade accounts receivable
    
    
    1,598
    
    
    
    (5,849
    )
    
    
    (151
    )Inventories
    
    
    (273
    )
    
    
    (3,308
    )
    
    
    (311
    )Prepaid expenses and other current assets
    
    
    1,578
    
    
    
    (1,048
    )
    
    
    (273
    )Other assets
    
    
    (18
    )
    
    
    (217
    )
    
    
    Accounts payable and accrued expenses
    
    
    (9,615
    )
    
    
    7,612
    
    
    
    1,304Deferred revenue
    
    
    38
    
    
    
    2,150
    
    
    
    Other liabilities
    
    
    5,426
    
    
    
    
    
    
    
    80Net cash used by continuing operations
    
    
    (26,350
    )
    
    
    (16,837
    )
    
    
    (3,186
    )Net cash used by discontinued operations
    
    
    (1,020
    )
    
    
    (2,456
    )
    
    
    (8,866
    )Net cash used by operating activities
    
    
    (27,370
    )
    
    
    (19,293
    )
    
    
    (12,052
    )INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (2,450
    )
    
    
    (23,677
    )
    
    
    (1,070
    )Purchase of marketable securities held-for-sale
    
    
    
    
    
    
    (2,000
    )
    
    
    Proceeds from sale of marketable securities held-for-sale
    
    
    2,578
    
    
    
    1,432
    
    
    
    Acquisition of subsidiary, net of cash received
    
    
    
    
    
    
    74
    
    
    
    Investment in patents and trademarks
    
    
    (298
    )
    
    
    (144
    )
    
    
    (89
    )Net cash used by investing activities
    
    
    (170
    )
    
    
    (24,315
    )
    
    
    (1,159
    )FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    5,488
    
    
    
    3,500
    
    
    
    4,000Repayment of borrowings
    
    
    (1,441
    )
    
    
    (7,400
    )
    
    
    (100
    )Repayment of other liabilities
    
    
    (72
    )
    
    
    (14
    )
    
    
    Proceeds from issuance of common stock, net of offering costs
    
    
    
    
    
    
    70,721
    
    
    
    3,477Proceeds from issuance of preferred stock, net of offering costs
    
    
    
    
    
    
    
    
    
    
    5,577Stock options exercised
    
    
    899
    
    
    
    504
    
    
    
    2,400Proceeds from issuance (repurchase) of common stock by subsidiaries, net
    
    
    5
    
    
    
    
    
    
    
    (13
    )Net cash provided by financing activities
    
    
    4,879
    
    
    
    67,311
    
    
    
    15,341EFFECT OF FOREIGN EXCHANGE TRANSLATION
    
    
    (213
    )
    
    
    70
    
    
    
    (24
    )NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (22,874
    )
    
    
    23,773
    
    
    
    2,106CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    26,003
    
    
    
    2,230
    
    
    
    124CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    3,129
    
    
    $
    26,003
    
    
    $
    2,230SUPPLEMENTAL CASH FLOW INFORMATIONInterest paid
    
    $
    368
    
    
    $
    443
    
    
    $
    52Taxes paid
    
    $
    132
    
    
    $
    
    
    
    $
    
 The accompanying notes are an integral part of the consolidated financial statements. 69




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##### Table of Contents



LIQUIDMETAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS  (Continued)
(in thousands, except share data) In 2003, an option holder surrendered 93,758 shares of the Companys
common stock in lieu of cash payment for the option exercise price of $250 and
income taxes payable by the option holder of $403. The Company immediately
canceled the common shares received in lieu of cash payment upon receipt of the
shares. As of 2003, the change in the foreign exchange rate between the U.S.
Dollar and the South Korean Won resulted in a $47 gain related to the note
payable and a $433 gain related to property, plant and equipment. In 2003 the Company reclassified $1,477 of machines from property, plant
and equipment to Machines held by customer. In 2003, the Company entered into a lease agreement for $291 of laboratory
equipment that was recorded as a capital lease obligation. In 2002 and 2001, $2,570 and $108 in notes payable and accrued interest
were converted to the Companys common stock. In 2001, Liquidmetal Golf
transferred and assigned to the Company two subordinated promissory notes in
exchange for the Companys common stock in the amount of $2,000. In 2002 and 2001, respectively, the Company recorded a net addition to
shareholders equity of, $2,492 and $1,191 comprised of stock compensation and
discounts on convertible notes payable in the discontinued retail golf
operations. In 2002, there was a $98 foreign exchange loss effect in the
discontinued retail golf operations. In 2002, the Company entered into a lease agreement for $107 of office
furniture that was recorded as a capital lease obligation. In 2001, the Company accrued $100 for payments to be made to Caltech in
exchange for rights to certain patents (see Note 9). In 2001, the Company incurred $792 of costs related to the initial public
offering that had not been paid as of December 31, 2001. In 2001, the Company recorded paid in capital of $1,692 comprised of
discounts on notes payable. The accompanying notes are an integral part of the consolidated financial statements. 70




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##### Table of Contents



LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) 1. Description of Business Liquidmetal Technologies, Inc. (Liquidmetal Technologies) and its
subsidiaries (collectively the Company) are in the business of developing,
manufacturing, and marketing products made from amorphous alloys. Liquidmetal
Technologies markets and sells Liquidmetal® alloy industrial coatings and also
manufactures, markets and sells products and components from bulk Liquidmetal
alloys that can be incorporated into the finished goods of its customers across
a variety of industries. The Company also partners with third-party licensees
and distributors to develop and commercialize Liquidmetal alloy products. The Company classifies operations into two reportable segments:
Liquidmetal alloy industrial coatings and bulk Liquidmetal alloys. Liquidmetal
alloy industrial coatings are used primarily as a protective coating for
industrial machinery and equipment, such as drill pipe used by the oil drilling
industry and boiler tubes used by coal-burning power plants. Bulk Liquidmetal
alloys include potential market opportunities to manufacture and sell products
and components for electronic devices, medical devices, defense applications,
and sporting goods. In addition, the bulk Liquidmetal alloys segment includes
tooling and prototype sampling, and the manufacture and sale of die casting
equipment. In addition, such alloys are used to generate research and
development services revenue for developing uses related primarily to defense
and medical applications as well as potential license fees, royalties, and
other compensation from strategic partnering transactions. In the twelve months
ended December 31, 2001, the Company derived a majority of its revenue from the
operation of its retail golf segment, which was discontinued on September 30,
2001 and is now accounted for as a discontinued operation. The retail golf
segment marketed golf clubs made of the Companys bulk Liquidmetal alloys.
Beginning in 2002 the Company outsourced the manufacturing of the golf clubs. 2. Restatement Growell Restatement As a part of the accompanying consolidated financial statements and the
notes thereto, the Company has restated certain previously issued financial
statements due to the fact that revenues from equipment sales made to Growell
Metal Co., Ltd., a South Korean metals processing company (Growell), in the
third and fourth quarters of 2002 and the first quarter of 2003 should not have
been recognized in those periods. Revenues of $873 and $681 from the sales of
alloying equipment to Growell were previously recorded in the quarters ended
September 30, 2002 and December 31, 2002, respectively, and revenue of $2,543
from the sale of die casting machines to Growell was previously recorded in the
quarter ended March 31, 2003. The 2002 Growell sale of $1,554 had an
associated cost of sales of $1,478 resulting in a profit of $78 during 2002.
The 2003 Growell sale of $2,543 had an associated cost of sales of $840
resulting in profit of $1,703. The effect of the restatement is to eliminate
the recognition of revenue on the alloying equipment sales in 2002 and to defer
the recognition of revenue on the die casting equipment in 2003 until the
quarter ending March 31, 2004. The alloying and die casting equipment were the subject of a previously
reported dispute between the Companys South Korean subsidiary, Liquidmetal
Korea Co., Ltd. (Liquidmetal Korea), and Growell, which was a former supplier
of alloy ingots to Liquidmetal Koreas Pyongtaek, South Korea manufacturing
plant and also a die casting licensee of the Company. The restatement of
revenues from the equipment sales is a result of an analysis initiated by the
Company based upon the settlement of this dispute in January 2004 and a
determination that the original revenue recognition decision did not include
consideration of all agreements relating to the subject matter of the
transactions. The Company concluded that the equipment sales were contingent
upon Liquidmetal Koreas continued performance under its agreements with
Growell, and consequently revenue recognition is deferred until the contingency
was ended. The Company has reclassified the $757 and $720 of alloying equipment
subject to the contingency as Machines held by customer at September 30, 2002
and December 31, 2002, respectively. The Company has reclassified the die
casting equipment at March 31, 2003 and for subsequent quarterly periods as
Machines held by customer, which are included in inventory. Under terms of a January 10, 2004 settlement of the dispute between
Liquidmetal Korea and Growell, Liquidmetal Korea agreed to pay Growell $4,895
to purchase Growells investment in alloy inventories, proprietary alloying
equipment purchased from Liquidmetal Korea, and supporting equipment purchased
from other suppliers. Also as part of the settlement, Growell satisfied in
full a balance of $2,058 owed to Liquidmetal Korea for the die casting machines
Growell purchased from Liquidmetal Korea in the first quarter of 2003 as part
of a license agreement to manufacture Liquidmetal alloy parts for the South
Korean automotive industry. The remaining settlement payable of $2,837 and
trade accounts payable of $14 will be paid to Growell (in cash or stock at the
Companys discretion) by December 31, 2004. The Company recorded a loss on the
settlement at December 31, 2003 of $2,765 which is included in Cost of Sales
in the December 31, 2003 Consolidated Statements of Operations and
Comprehensive Loss. The loss on settlement reflects the write-down of the
assets received in the settlement to their fair market value. The loss is
accrued for in the Accounts payable and accrued expenses section in the
December 31, 2003, Consolidated Balance Sheet. The sale of the die casting
machines to Growell will be reflected in the first quarter of 2004. Under the
settlement agreement between the parties, the Company and Growell granted to
the other party (and the other partys affiliates) a release of all known and
unknown claims of any nature arising between the parties through the date of
settlement, as well as a release against future claims under agreements between
the parties that were terminated as a part of the settlement. The settlement
agreement provided that all agreements of any nature between the parties and
their respective affiliates 71




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##### Table of Contents



LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) were terminated as of the date of settlement, with the exception of certain
confidentiality agreements, a Liquidmetal coatings distribution agreement, and
future rights under the die casting agreement pursuant to which Growell
purchased the die casting machines and obtained a license to make auto parts
from Liquidmetal alloys. The settlement agreement also includes, as an
accommodation to Growell, if the Company becomes aware of any prospective
customer that desires to purchase a proprietary Company casting machine at a
time when Growell desires to sell any of its Liquidmetal die casting machines,
then the Company will not sell such die casting machine to the prospective
customer unless the Company first directs the prospective customer to Growell
and encourages the prospective customer to purchase the machine from Growell. Stock Compensation Restatement As a part of the accompanying consolidated financial statements and the
notes thereto, the Company has restated certain previously issued financial
statements due to the fact that stock option grants were not calculated in
accordance with guidelines under APB Opinion No. 25, SFAS No. 123, and EITF
00-23. On May 1, 2000, a member of our Board of Directors was awarded 516,130
incentive stock options (ISO) at the current fair market value of $2.79. At
the time of the grant, he was a full-time Liquidmetal employee and therefore,
APB opinion 25s application to this grant required no compensation expense to
be recorded at the time as the options were issued at current fair market
value. On November 15, 2001, based on his separation agreement, he forfeited
113,548 of these options in exchange for accelerated vesting of 15,484 options,
which were originally set to vest on May 1, 2003. These options (noted as the
surviving shares) were granted accelerated vesting to vest on May 1, 2002, one
year earlier than originally scheduled. No other changes were made to his
option award, other than to note that these options would change in status from
ISOs to non-qualified options due to his employment status change from an
employee to a consultant and he continued as a Director of the Company. He
served as a member of our Board of Directors until May 20, 2003 and continues
to serve in a consulting role under a consulting agreement that will expire on
December 31, 2005. At the time of the separation, the Company originally
booked stock compensation expense relating to the modified award only for the
15,484 option shares that were deemed surviving shares and amortized as
compensation expense over the remaining vesting period, under APB opinion 25.
However, the Company was required to re-measure all of the unvested shares that
were permitted to vest after the separation date under FAS 123; thus, the
Company has restated the stock compensation expense for the accelerated vesting
shares or the surviving shares and a pro-rated expense for the 129,032 options
that were to vest as scheduled on May 1, 2002. The pro-rata calculation
provided for 6.5 months of the 12-month vesting period for the 129,032 options
as being excluded for the remaining vesting period and subsequent stock
compensation expense calculation. Thus, only the remaining vesting period of
5.5 months was allocated to the 129,032 shares, representing a total stock
compensation expense for 59,140 options that are pro-rated and the surviving
shares of 15,484 which were permitted accelerated vesting. The total of 74,624
options under this award were re-measured as of November 15, 2001 and expensed
over the remaining vesting period of 5.5 months per the guidance of FAS 123. On July 1, 2001 the Company awarded 14,517 options to a consultant. The
Company accounted for these consultant option awards under FAS 123 and
amortized the stock compensation expense over their 3-year vesting period.
However, the Company cancelled the option agreements on March 31, 2002 but did
not properly reflect these cancellations in the amortization expense or the
outstanding option schedule. Furthermore, the Company recorded the stock
compensation expense for one of the consultants over a 3-year vesting period
instead of the correct vesting period of 1-year. Accordingly, the Company has
restated the stock compensation expense to reflect the 1-year vesting schedule
and the cancellation of the consultant agreement according to FAS 123. On July 31, 2001, the Company awarded 16,129 options to a consultant to
purchase the Companys common stock at $9.30 on July 31, 2001, with a five year
vesting schedule with 20% vesting per year. The Company recorded a stock
compensation expense for this award according to FAS 123. However, this
consultant became an employee on February 15, 2002, and due to this change in
employment status, the Company re-measured the award as of the date of
employment and expensed the pro-rated options over the remaining vesting period
as required in APB opinion 25. However, the Company erroneously calculated the
pro-rated portion of this award as though the award was for 50,000 options
instead of the 16,129 options that were granted. As such, the Company has
restated the stock compensation expense for this award to accurately reflect
the grant. The Company recalculated stock compensation expense as a result of these
changes and increased unamortized stock-based compensation by $577 and
increased stock compensation expense by $937 as of and for the year ended
December 31, 2001. The Company also decreased unamortized stock-based
compensation by $797 and increased stock compensation expense by $533 as of and
for the year ended December 31, 2002. Samsung Restatement In 2002, the Company was engaged by Samsung to provide Liquidmetal alloy
parts for cell phones. The Company recognized approximately $315 of mold
revenue in December 2002, which was subsequently written off in March 2003 as
bad debt expense. It was determined that the revenue of $315 recognized in
2002 did not meet the requirement of revenue recognition under SAB 101 and
accordingly the Company has restated its revenue and accounts receivable for
2002 by $315. 72




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) JS Technologies Restatement In September 2002, the Company was engaged by JS Technologies to provide
molds and MP3 player compact disc cases and recognized approximately $782 of
revenue. JS Technologies did not pay the remaining balance due of $172 because
the MP3 player compact disc cases never launched into full production, for
which the Company recorded a bad debt expense in January 2003. Consequently,
the Company restated its selling, general and administrative expenses and the
allowance for doubtful accounts as of and for the year ended 2002 by
recognizing bad debt expense of $169 in 2002. AM Corporation Restatement In December 2002, the Company was engaged by AM Corporation to develop
knife prototypes for distribution of knives in Europe and recognized $250 of
revenue in 2002 and $250 in 2003. The Company received payment on the revenue
recognized in 2002; however, AM Corporation determined it would not continue
with development and consequently did not pay the 2003 receivable of $250 and
the Company recorded the $250 as bad debt expense in 2003. It was determined
that the $250 recorded as revenue in 2003 did not meet the requirement of
revenue recognition per SAB 101 and, accordingly, the sale and bad debt expense
were reversed. 73




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) A summary of the significant effects of the restatement is as follows: Year To Date Ended12/31/02
    
    
    
    12/31/01Consolidated Statements of
    
    Previously
    
    12/31/02
    
    Previously
    
    12/31/01Operations Data:
    
    Reported
    
    Restated
    
    Reported
    
    RestatedRevenue
    
    $
    13,139
    
    
    $
    11,235
    
    
    $
    3,882
    
    
    $
    3,882Cost of sales
    
    
    8,679
    
    
    
    7,174
    
    
    
    1,924
    
    
    
    1,924Gross profit
    
    
    4,460
    
    
    
    4,061
    
    
    
    1,958
    
    
    
    1,958Operating expense:Selling, general, and administrative
    
    
    12,767
    
    
    
    13,472
    
    
    
    4,301
    
    
    
    5,239Research and development
    
    
    11,825
    
    
    
    11,825
    
    
    
    1,726
    
    
    
    1,726Total operating expenses
    
    
    24,592
    
    
    
    25,297
    
    
    
    6,027
    
    
    
    6,965Loss before interest, other income,
income taxes, minority interest and
discontinued operations
    
    
    (20,132
    )
    
    
    (21,236
    )
    
    
    (4,069
    )
    
    
    (5,007
    )Interest expense, net
    
    
    (603
    )
    
    
    (603
    )
    
    
    (1,095
    )
    
    
    (1,095
    )Gain on sale of marketable
securities held-for-sale
    
    
    832
    
    
    
    832
    
    
    
    
    
    
    
    Loss before income taxes, minority
interest and discontinued
operations
    
    
    (19,903
    )
    
    
    (21,007
    )
    
    
    (5,164
    )
    
    
    (6,102
    )Income taxes
    
    
    (123
    )
    
    
    (123
    )
    
    
    
    
    
    
    Minority interest in income of
consolidated subsidiary
    
    
    118
    
    
    
    118
    
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (19,908
    )
    
    
    (21,012
    )
    
    
    (5,164
    )
    
    
    (6,102
    )Loss from operations of
discontinued retail golf segment,
net
    
    
    
    
    
    
    
    
    
    
    (5,973
    )
    
    
    (5,973
    )Gain (loss) from disposal of
discontinued retail golf segment,
net
    
    
    1,556
    
    
    
    1,556
    
    
    
    (11,949
    )
    
    
    (11,949
    )Net loss
    
    $
    (18,352
    )
    
    $
    (19,456
    )
    
    $
    (23,086
    )
    
    $
    (24,024
    )Loss per share from continuing
operations  basic and diluted
    
    $
    (0.51
    )
    
    $
    (0.54
    )
    
    $
    (0.15
    )
    
    $
    (0.18
    )Weighted average common shares used
to compute loss per share from
continuing operations  basic and
diluted
    
    
    38,714
    
    
    
    38,714
    
    
    
    33,323
    
    
    
    33,323
 74




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) As of December 31,2002
    
    2002
    
    2001
    
    2001Previously
    
    
    
    PreviouslyReported
    
    Restated
    
    Reported
    
    RestatedConsolidated Balance Sheet Data:ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    26,003
    
    
    $
    26,003
    
    
    $
    2,230
    
    
    $
    2,230Marketable securities held-for-sale
    
    
    3,068
    
    
    
    3,068
    
    
    
    
    
    
    
    Trade Accounts Receivable, net
    
    
    6,404
    
    
    
    5,910
    
    
    
    911
    
    
    
    911Inventories
    
    
    2,506
    
    
    
    4,011
    
    
    
    503
    
    
    
    503Prepaid expenses and other current assets
    
    
    2,142
    
    
    
    2,142
    
    
    
    967
    
    
    
    967Total current Assets
    
    
    40,123
    
    
    
    41,134
    
    
    
    4,611
    
    
    
    4.611PROPERTY, PLANT AND EQUIPMENT, NET
    
    
    23,505
    
    
    
    23,505
    
    
    
    1,163
    
    
    
    1,163OTHER INTANGIBLE ASSETS, NET
    
    
    785
    
    
    
    785
    
    
    
    723
    
    
    
    723GOODWILL
    
    
    184
    
    
    
    184
    
    
    
    
    
    
    
    OTHER ASSETS
    
    
    408
    
    
    
    408
    
    
    
    183
    
    
    
    183Total Assets
    
    
    65,005
    
    
    
    66,016
    
    
    
    6,680
    
    
    
    6,680LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable and accrued expenses
    
    $
    11,174
    
    
    $
    11,175
    
    
    $
    2,706
    
    
    $
    2,873Net liabilities of discontinued operations
    
    
    1,148
    
    
    
    1,148
    
    
    
    7,492
    
    
    
    7,492Deferred revenue
    
    
    1,397
    
    
    
    2,980
    
    
    
    830
    
    
    
    830Other current liabilities
    
    
    19
    
    
    
    19
    
    
    
    167
    
    
    
    Current portion of notes payable to shareholders
    
    
    
    
    
    
    
    
    
    
    2,988
    
    
    
    2,988Total current liabilities
    
    
    13,738
    
    
    
    15,322
    
    
    
    14,183
    
    
    
    14,183LONG-TERM DEBT, NET OF CURRENT PORTION
    
    
    74
    
    
    
    74
    
    
    
    
    
    
    
    Total Liabilities
    
    
    13,812
    
    
    
    15,396
    
    
    
    14,183
    
    
    
    14,183COMMITMENTS AND CONTINGENCIESMINORITY INTEREST
    
    
    21
    
    
    
    21
    
    
    
    
    
    
    
    SHAREHOLDERS EQUITY:Preferred stock, no par value, 10,000,000 shares authorized and
none outstanding at December 31, 2002 and 456,857
outstanding at December 31, 2001
    
    
    
    
    
    
    
    
    
    
    5,577
    
    
    
    5,577Common stock, $0.001 par value per share, 100,000,000 shares authorized;
41,609,652 share issued and outstanding at December 31, 2003 and
200,000,000 shares authorized and 41,009,245 issued and outstanding at
December 31, 2002
    
    
    106,554
    
    
    
    106,554
    
    
    
    29,752
    
    
    
    29,752Additional Paid in capital
    
    
    20,326
    
    
    
    21,575
    
    
    
    22,401
    
    
    
    23,915Unamortized Stock-based compensation
    
    
    (480
    )
    
    
    (260
    )
    
    
    (6,717
    )
    
    
    (7,294
    )Accumulated Deficit
    
    
    (76,940
    )
    
    
    (78,982
    )
    
    
    (58,588
    )
    
    
    (59,526
    )Accumulated other comprehensive income
    
    
    1,712
    
    
    
    1,712
    
    
    
    72
    
    
    
    72Total Shareholders Equity (Deficiency)
    
    
    51,172
    
    
    
    50,599
    
    
    
    (7,503
    )
    
    
    (7,504
    )Total Liabilities and shareholders equity
    
    $
    65,005
    
    
    $
    66,016
    
    
    $
    6,680
    
    
    $
    6,680
 75




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) 3. Liquidity The Company has experienced losses from continuing operations during the
last three fiscal years and has an accumulated deficit of $112,587 as of
December 31, 2003. Cash used in continuing operations for the fiscal year
ended December 31, 2003 was $26,350, and it is likely that cash flow from
continuing operations will be negative throughout the fiscal year 2004. At
December 31, 2003, the Companys principal source of liquidity is $3,129 of
cash and cash equivalents and trade accounts receivables of $4,185 . Such
conditions raise substantial doubt that the Company will be able to continue as
a going concern for a reasonable period of time without receiving additional
funding. However, in March 2004, the Company received $9.4 million in private
equity funding (see Note 13). These operating results occurred while the Company was developing and
attempting to commercialize and manufacture products from an entirely new and
unique technology. This business plan required significant spending related to
start-up costs and capital expenditures. These factors have placed a
significant strain on the financial resources of the Company. The ultimate
success of the Company depends on its ability to continue to reduce operating
costs, generate higher revenue, achieve positive cash flow from continuing
operations and achieve profitability. The consolidated financial statements do
not include any adjustments that might result from the outcome of the
uncertainty. 4. Summary of Significant Accounting Policies Principles of Consolidation.The consolidated financial statements include
the accounts of Liquidmetal Technologies, Inc. and its wholly-owned
subsidiaries, Liquidmetal Korea Co., Ltd. (LMT Korea), located in South
Korea, and Amorphous Technologies International (Asia) PTE LTD (LMT
Singapore), located in Singapore and its majority-owned subsidiaries, Chusik
Hoesa Dongyang Yudoro (Dongyang) and Liquidmetal Golf and its subsidiaries,
which included the retail golf segment, now accounted for as a discontinued
operation. The Company acquired its 51% interest in Dongyang in 2002;
accordingly, the results of Dongyangs operations have been included in the
consolidated financial statements from the acquisition date (see Note 10). The
aggregate purchase price was $333 in cash. As of March 2004, the Company
divested of its 51% ownership in Dongyang to the minority shareholder.
Effective in 2001, management closed the Singapore operations, which did not
result in a significant impact on the financial statements for any of the
periods presented. All intercompany balances and transactions have been
eliminated. A minority interest in Liquidmetal Golf is included in the
consolidated financial statements as a component of the loss from operations of
the discontinued retail golf segment (see Note 16). Effective in 2003,
management closed the Japan operations and the Seoul office, which did not
result in a significant impact on the financial position or results of
operations for any of the periods presented. Also, effective in December
2003, management closed the Tampa office which did have a material effect (see
Note 11). Sales of Stock by Subsidiaries.Gains on sales of stock by Liquidmetal
Golf are recognized as components of the Companys shareholders equity
(deficiency). Revenue Recognition.Revenue is recognized pursuant to applicable
accounting standards including Securities and Exchange Commission (SEC) Staff
Accounting Bulletin (SAB) No. 101 (SAB 101), Revenue Recognition in
Financial Statements, and SAB 104, Revenue Recognition. SAB 101 as amended and
SAB 104 summarize certain points of the SEC staffs views in applying generally
accepted accounting principles to revenue recognition in financial statements
and provides guidance on revenue recognition issues in the absence of
authoritative literature addressing a specific arrangement or a specific
industry. The Companys revenue recognition policy complies with the
requirements of SAB 101 and SAB 104. Revenue is recognized at the time the
Company ships its products, as this is when title passes to the customer and
all other incidences of a sale have occurred. Revenue is deferred and included
in liabilities when the Company receives cash in advance for services not yet
performed or goods not yet delivered. Revenue from research and development
contracts is recognized under the percentage of completion method. Cash and Cash Equivalents.The Company considers all highly liquid
investments with maturity dates of three months or less when purchased to be
cash equivalents. The Company limits the amount of credit exposure to each
individual financial institution and places its temporary cash into investments
of high credit quality. There are no significant concentrations of credit risk
to the Company associated with cash and cash equivalents. Marketable Securities.The Company follows Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in
Debt and Equity Securities, and classifies all of its investment securities as
available -for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported in Shareholders Equity
(Deficiency) under the caption Accumulated Other Comprehensive Income. Realized gains and losses on held-for-sale securities are included in
other income. The cost of securities sold is based on the specific
identification method. 76




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) Trade Accounts Receivables.The Company grants credit to its customers
generally in the form of short-term trade accounts receivable. The
creditworthiness of customers is evaluated prior to the sale of inventory. Two
customers represent 85%, or $3,540, of total outstanding trade accounts
receivables as of December 31, 2003. As of December 31, 2002, three customers
represented 64%, or $3,802, of the total outstanding trade accounts
receivables. The allowance for doubtful accounts reflects managements best estimate of
probable losses inherent in the trade accounts receivable. Management
primarily determines the allowance based on the aging of accounts receivable
balances, historical write-off experience, customer concentrations, customer
creditworthiness and current industry and economic trends. The Companys
provisions for uncollectible receivables are included in selling, general and
administrative expense in the accompanying consolidated statements of
operations and comprehensive loss. Inventories.Inventories are accounted for using the moving average basis
and reported at the lower of cost or market. Inventories consist of raw
materials, work in process, and finished goods. The Company records write-offs
for inventory obsolescence when it is deemed that there is impairment of the
value of the inventories on hand. Property, Plant and Equipment.Property, plant and equipment are stated at
cost less accumulated depreciation and amortization. Additions and major
renewals are capitalized. Repairs and maintenance are charged to expense as
incurred. Upon disposal, the related cost and accumulated depreciation are
removed from the accounts, with the resulting gain or loss included in
operating income. Depreciation is provided principally on the straight-line
method over the estimated useful lives of the assets, which range from two to
twenty years. Lease property meeting certain criteria is capitalized and the present
value of the related lease payments is recorded as a liability. Amortization of
capitalized lease assets is provided on the straight-line method over the
estimated useful lives of the assets, which is five years. Intangible Assets.Intangible assets consist of the costs incurred to
purchase patent rights and costs incurred to internally develop patents and
trademarks. Intangible assets are reported net of accumulated amortization.
Patents and trademarks are amortized using the straight-line method over a
period based on their contractual lives ranging from eleven to seventeen years. Goodwill.Beginning January 1, 2002, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets(See New Accounting Pronouncements). According to this statement,
goodwill and other intangible assets are no longer subject to amortization, but
instead must be reviewed annually for impairment by applying a fair value-based
test. The Companys goodwill arose in 2002 as a result of its acquisition of
Dongyang (see Note 10). Impairment of Long-lived Assets.The Company reviews long-lived assets to
be held and used in operations for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may be impaired. An
impairment loss is recognized when the estimated fair value of the assets is
less than the carrying value of the assets. During 2003, the Company
recognized an impairment of long-lived assets in the amount of $2,684 (see Note
8). Fair Value of Financial Instruments.The estimated fair value of amounts
reported in the consolidated financial statements have been determined using
available market information and valuation methodologies, as applicable. The
carrying amount of cash and cash equivalents, accounts receivable, accounts
payable, and all other current assets and liabilities approximate their fair
value because of their short term maturities at December 31, 2003 and 2002,
unless otherwise stated. The fair value of non-current assets and liabilities
approximate their carrying value unless otherwise stated. The fair value of
the Companys long-term debt is based on interest rates that would be available
to Liquidmetal Korea for the issuance of debt with similar terms. Research and Development Expenses.Research and development expenses
represent salaries, related benefits expense, expenses incurred for the design
and testing of new processing methods and other expenses related to the
research and development of Liquidmetal alloys. Development costs incurred in
research and development activities are expensed as incurred. Advertising and Promotion Expenses.Advertising and promotion expenses are
expensed when incurred. Advertising and promotion expenses were $136, $127 and
$62 for the years ended December 31, 2003, 2002 and 2001, respectively. Debt Discount Amortization.Debt discounts for notes payable are amortized
to interest expense, using a method that approximates the interest method over
the term of the related debt instruments. Stock-Based Compensation.The Company applies Accounting Principles Board
(APB) Opinion No. 25 for options when the exercise price of options granted
to employees is less than the fair value of the underlying stock on the date of
grant. The Company applies Statement of Financial Accounting Standards
(SFAS) No. 123 for options granted to non-employees who perform services for
the Company. 77




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) Had the Company determined employee stock-based compensation cost based on
the fair value at the grant date for stock options consistent with the method
of SFAS No. 123, the Companys net loss and basic and diluted net loss per
share would have been as follows: For the years ended December 31,2003
    
    2002
    
    2001(restated)
    
    (restated)Net loss from Continuing Operations:As reported
    
    $
    (33,732
    )
    
    $
    (21,012
    )
    
    
    (6,102
    )Add: stock-based employee compensation expense (gain)
included in reported net loss, net of related tax effects
    
    
    123
    
    
    
    2,203
    
    
    
    1,330Deduct: total stock-based employee compensation expense
determined under the fair value based method for all awards
    
    
    (5,427
    )
    
    
    (7,664
    )
    
    
    (6,210
    )Proforma net loss from continuing operations
    
    $
    (39,036
    )
    
    $
    (26,473
    )
    
    $
    (10,982
    )Basic and diluted net loss per share:As reported
    
    $
    (0.81
    )
    
    
    (0.54
    )
    
    
    (0.18
    )Proforma
    
    
    (0.94
    )
    
    
    (0.68
    )
    
    
    (0.33
    )
 Income Taxes.Income taxes are provided under the asset and liability
method as required by SFAS No. 109, Accounting for Income Taxes. Under this
method, deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts
and the tax basis of existing assets and liabilities. The effect of a tax rate
change on deferred taxes is recognized in operations in the period that the
change in the rate is enacted. Valuation allowances are established when
necessary to reduce net deferred tax assets to the amount expected to be
realized. Translation of Foreign Currency. Upon consolidation of the Companys foreign subsidiaries into the
Companys consolidated financial statements, any balances with the subsidiaries
denominated in the foreign currency are translated at the exchange rate at year
end. The financial statements of LMT Singapore have been translated based upon
Singapore Dollars as the functional currency. The financial statements of LMT
Korea, which include the Companys 51% owned subsidiary, Dongyang, have been
translated based upon Korean Won as the functional currency. LMT Singapores
and LMT Koreas assets and liabilities were translated using the exchange rate
at year end and income and expense items were translated at the average
exchange rate for the year. The resulting translation adjustment was included
in other comprehensive income (loss). The Company applies FASB No. 52, Foreign
Currency Translation, for translating foreign currency into US dollars in our
consolidation of the financial statements. Due to our restatements of 2001 and
2002 financial statements (see Note 2), certain footnote disclosures and
previously reported financial statements were adjusted to conform to
retroactive applications of FASB No. 52. These adjustments did not have a
material impact in the financial statements. Earnings Per Share.Basic earnings per share (EPS) is computed by
dividing earnings (losses) attributable to common shareholders by the weighted
average number of common shares outstanding for the periods. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock. 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 disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reported periods. Actual results could differ
from those estimates. These management estimates are primarily
related to impairment of long-lived assets, inventory valuation,
product warranty, and the allowance for bad debt account balances. Reclassifications.Certain amounts from prior years have been reclassified
to conform to the current years presentation. New Accounting Pronouncements. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections.SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This 78




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) Statement also rescinds SFAS No. 44, Accounting for Intangible Assets of Motor
Carriers. SFAS No. 145 amends SFAS No. 13, Accounting for Leases, to eliminate
an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The provisions of this Statement
related to the rescission of Statement 4 are required to be applied in fiscal
years beginning after May 15, 2002. The provisions in paragraphs 8 and 9(c) of
this Statement related to Statement 13 are required to be applied to
transactions occurring after May 15, 2002. Any gain or loss on extinguishment
of debt that was classified as an extraordinary item in prior periods presented
that does not meet the criteria in APB No. 30 for classification as an
extraordinary item is required to be reclassified. All other provisions of this
Statement are effective for financial statements issued on or after May 15,
2002. The Company elected to early adopt SFAS No. 145 during the second quarter
of 2002. The effect of adopting SFAS No. 145 was to increase interest expense
by $532, increase net loss from continuing operations by $532, and to increase
basic and diluted loss from continuing operations per share by $0.01. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated With Exit or Disposal Activities. SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146
requires costs associated with exit or disposal activities to be recognized
when the costs are incurred, rather than at a date of commitment to an exit or
disposal plan. SFAS No. 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The adoption of SFAS No. 146 did not
have a material impact on the Companys financial position or results of
operations. In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others(Interpretation 45). Interpretation 45
changes the accounting for and the disclosure of guarantees. Interpretation 45
requires that guarantees meeting the characteristics described in the
Interpretation be initially recorded at fair value in contrast to SFAS No. 5,
which requires recording a liability when a loss is probable and reasonably
estimable. The disclosure requirements of Interpretation 45 are effective for
financial statements of annual periods ending after December 15, 2002. The
initial recognition and initial measurement provisions of Interpretation 45 are
effective on a prospective basis to guarantees issued or modified after
December 31, 2002. The adoption of Interpretation 45 did not have a material
impact on the Companys financial position or results of operations. In December 2002, SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosurewas issued by the FASB. This standard
amends SFAS No. 123 to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this standard amends the disclosure
requirements of SFAS No. 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.
SFAS No. 148 is effective for financial statements for fiscal years ending
after December 15, 2002. The Company implemented SFAS No. 148 effective January
1, 2003 regarding disclosure requirements for condensed financial statements
for interim periods. The Company did not voluntarily change to the fair value
based method of accounting for stock-based employee compensation. In January 2003, the FASB issued FASB Interpretation No. 46 Consolidation
of Variable Interest Entities, an interpretation of Accounting Research
Bulletin (ARB) No. 51, Consolidated Financial Statements (FIN 46)and a
revised interpretation of FIN 46 (FIN 46-R) in December 2003 in an effort to
expand upon existing accounting guidance that addresses when a company should
consolidate the financial results of another entity.FIN 46 requires variable
interest entities, as defined to be consolidated by a company that if that
company is subject to a majority of expected losses of the entity or is
entitled to receive a majority of expected residual returns of the entity, or
both. A company that is required to consolidate a variable interest entity is
referred to as the entitys primary beneficiary. The interpretation also
requires certain disclosures about variable interest entities that a company is
not required to consolidate, but in which it has significant variable interest.
The consolidation and disclosure requirements apply immediately to variable
interest entities created after January 31, 2003. The Company is not the
primary beneficiary of any variable interest entity created after January 31,
2003 nor does the Company have a significant variable interest in a variable
interest entity created after January 31, 2003. For variable interest entities
that existed before February 1, 2003, the consolidation requirements for FIN
46-R are effective as of March 31, 2004. The adoption of FIN 46-R will not
have a material impact on the financial position, results of operations or cash
flows of the Company. In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities.SFAS No. 149 is intended to
result in more consistent reporting of contracts as either freestanding
derivative instruments subject to
Statement 133 in its entirety, or as hybrid instruments with debt host
contracts and embedded derivative features. SFAS No 149 is effective for
contracts entered into or modified after June 30, 2003. The adoption of SFAS
No. 149 did not have a material impact on the Companys financial position or
results of operations. 79




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
SFAS No. 150 requires certain financial instruments that embody obligations of
the issuer and have characteristics of both liabilities and equity to be
classified liabilities. Many of these instruments previously were classified
as equity or temporary equity and as such, SFAS No. 150 represents a
significant change in practice in the accounting for a number of mandatory
redeemable equity instruments and certain equity derivatives that frequently
are used in connection with share repurchase programs. SFAS No. 150 is
effective for all financial instruments created or modified after May 31, 2003,
and to other instruments at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS No. 150 did not have a material
impact on the Companys financial position or results of operations. 5. Marketable Securities On July 29, 2002, the Company invested $2,000 in Growell Metal, Inc.
(Growell), a metals processing company located in South Korea and publicly
traded on South Koreas KOSDAQ stock market. The Company acquired 891,100
shares (or approximately 5%) of Growells outstanding common stock in this
transaction. During the fourth quarter of 2002, Growells spin-off of its
electronics division resulted in the creation of a new company named Growell
Electronics, Inc. (Growell Electronics). As a result of the spin-off, 30% of
the Companys 891,100 common shares of Growell were exchanged for an equal
number of shares in the common stock of Growell Electronics. During the year
ended December 31, 2002, the Company sold its shares in Growell Electronics for
approximately $1,432, which was based on the market price of the stock on the
KOSDAQ stock market on the date of sale. This sale resulted in a realized gain
of $832. At December 31, 2002, the change in fair value of the remaining
investment in Growell resulted in an unrealized gain of $1,668, which is
reported as other comprehensive income in the accompanying consolidated
financial statements. In April 2003, the Company sold the stock owned in
Growell, which resulted in a realized gain of $1,178. A reclassification
adjustment of ($1,668) for net realized gains included in net loss is included
in Other comprehensive loss on the accompanying Statement of Operations and
Comprehensive Loss for the year ended December 31, 2003. 6. Trade accounts receivables Trade accounts receivables from continuing operations were comprised of the following: December 31,2003
    
    2002Trade accounts receivable
    
    $
    4,340
    
    
    $
    6,360Less: Allowance for doubtful accounts
    
    
    (155
    )
    
    
    (450
    )Trade accounts receivable, net
    
    $
    4,185
    
    
    $
    5,910
 During the year ended December 31, 2003, the Company recorded $(28) of bad
debt expense and wrote off $94 of customer account balances deemed to be
uncollectible. During the years ended December 31, 2002 and 2001, the Company
recorded $921 and $25 of bad debt expense, respectively. 7. Inventories Inventories were comprised of the following: December 31,2003
    
    2002Raw materials
    
    $
    1,256
    
    
    $
    1,333Work in process
    
    
    1,373
    
    
    
    785Finished goods
    
    
    789
    
    
    
    405Machines held by customer
    
    
    2,362
    
    
    
    1,488Total inventories
    
    $
    5,780
    
    
    $
    4,011
 During 2003, the Company experienced significant operational difficulties
as a result of problems and delays encountered in manufacturing bulk amorphous
parts. These issues led the Company to begin assessing its long-term strategy.
As a result of changes made to the Companys manufacturing objectives, the
Company determined that it held excessive volumes of certain raw materials at
December 31, 2003. Accordingly, the Company reduced the carrying value of raw
materials held by its subsidiary, Liquidmetal Korea, by the amounts considered
to be obsolete. The write-downs amounted to $1,004 and are included in Cost
of Sales in the accompanying Statement of Operations and Comprehensive Loss
for the year ended December 31, 2003. 80




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) Machines held by customer represent machines conditionally sold to Growell
in 2002 and 2003 (see Note 2). These machines are subject to put options
whereby Growell has the right to require the Company to buy back the machines
if certain conditions are not met. The Company recorded a write-down of
$2,765 of raw material and machine inventory associated with the settlement of
a dispute with Growell in December 2003 (see Note 2). These amounts are
included in Cost of Sales in the accompanying Statement of Operations and
Comprehensive Loss for the years ended December 31, 2003 and 2002 respectively. 8. Property, Plant and Equipment Property, plant and equipment consisted of the following: December 31,2003
    
    2002Machinery and equipment
    
    $
    11,160
    
    
    $
    11,018Computer equipment
    
    
    1,355
    
    
    
    1,004Office equipment, furnishings and improvements
    
    
    2,102
    
    
    
    1,567Buildings
    
    
    8,503
    
    
    
    11,084Construction in process of machinery and equipment and plant
    
    
    
    
    
    
    403Total
    
    
    23,120
    
    
    
    25,076Accumulated depreciation
    
    
    (5,162
    )
    
    
    (1,571
    )Total property, plant and equipment, net
    
    $
    17,958
    
    
    $
    23,505
 Depreciation expense was classified as follows: Years ended December 31,2003
    
    2002
    
    2001Cost of sales
    
    $
    2,945
    
    
    $
    403
    
    
    $
    Selling, general and administrative
    
    
    632
    
    
    
    229
    
    
    
    69Research and development
    
    
    739
    
    
    
    799
    
    
    
    Total depreciation expense
    
    $
    4,316
    
    
    $
    1,431
    
    
    $
    69
 During 2003, the Company experienced significant operational difficulties
as a result of problems and delays encountered in manufacturing bulk amorphous
parts. These events, along with the Companys history of operating or cash flow
losses and uncertainty surrounding its future cash flows, led the Company to
evaluate its long-lived assets for recoverability as of December 31, 2003. As
a result, the Company determined that the carrying value of its manufacturing
plant in Pyongtaek, South Korea exceeded its fair value as of December 31, 2003
in the amount of $2,684. The fair value of the building was based on the
average of two independent appraisals of the building. This impairment loss is
recorded in operating expenses as Impairment of long lived assets in the
accompanying Consolidated Statement of Operations and Comprehensive Loss for
the year ended December 31, 2003. 9. Other Intangible Assets Intangible assets consist of the following: December 31,2003
    
    2002Purchased and licensed patent rights
    
    $
    517
    
    
    $
    458Internally developed patents
    
    
    824
    
    
    
    622Trademarks
    
    
    83
    
    
    
    56Total
    
    
    1,424
    
    
    
    1,136Accumulated amortization
    
    
    (440
    )
    
    
    (351
    )Total intangible assets, net
    
    $
    984
    
    
    $
    785
 81




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) Amortization expense was $100, $82, and $63, for the years ended December
31, 2003, 2002, and 2001, respectively. The estimated aggregate amortization
expense for each of the five succeeding years is as follows: December 31,
    
    Aggregate Amortization Expense2004
    
    $
    972005
    
    
    912006
    
    
    882007
    
    
    862008
    
    
    86
 Accumulated Amortization for the years ended December 31, 2003 and 2002 is as follows: December 31,2003
    
    2002Purchased and licensed patent rights
    
    $
    (126
    )
    
    $
    (83
    )Internally developed patents
    
    
    (302
    )
    
    
    (263
    )Trademarks
    
    
    (12
    )
    
    
    (5
    )Total
    
    $
    (440
    )
    
    $
    (351
    )
 The weighted average amortization periods for each of the years ended
December 31, 2003, 2002, and 2001 is as follows: December 31,2003
    
    2002
    
    2001Purchased and licensed patent right
    
    
    17.0
    
    
    
    17.0
    
    
    
    17.0Internally developed patents
    
    
    17.0
    
    
    
    17.0
    
    
    
    17.0Trademarks
    
    
    10.0
    
    
    
    10.0
    
    
    
    10.0Total weighted
    
    
    13.5
    
    
    
    13.5
    
    
    
    13.5
 Purchased patent rights represent the exclusive right to commercialize the
bulk amorphous alloy and other amorphous alloy technology acquired from
California Institute of Technology (Caltech), a shareholder, through a
license agreement with Caltech (License Agreement). Under the License
Agreement, the Company has the exclusive right to make, use, and sell products
from all of Caltechs inventions, proprietary information, know-how, and other
technology relating to amorphous alloys in existence as of September 1, 2001.
The Company also has an exclusive license to nine issued patents and four
patent applications held by Caltech relating to amorphous alloy technology, as
well as all related foreign counterpart patents and patent applications. Of the
patents currently issued to Caltech and licensed by the Company, the earliest
expiration date is 2013 and the latest expiration date is 2021. Furthermore,
the license agreement gives the Company the exclusive right to make, use, and
sell products from substantially all amorphous alloy technology that is
developed in Professor William Johnsons Caltech laboratory during the period
September 1, 2001 through August 31, 2005. All fees and other amounts payable
by the Company for these rights and licenses have been paid or accrued in full,
and no further royalties, license fees or other amounts will be payable in the
future under the License Agreements. In addition to the patents and patent applications under the License
Agreement with Caltech, the Company has internally developed patents.
Internally developed patents include legal and registration costs incurred to
obtain the respective patents. The Company currently holds various patents and
numerous pending patent applications in the United States, as well as numerous
foreign counterparts to these patents outside of the United States. 10. Goodwill On June 28, 2002, the Company acquired a 51% interest in Chusik Hoesa
Dongyang Yudoro (Dongyang). The results of Dongyangs operations have been
included in the consolidated financial statements since that date. The
aggregate purchase price was $333 in cash. 82




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) The following table summarizes the estimated fair values of the net assets
held by Dongyang as of June 28, 2002: Cash
    
    $
    407Accounts receivable
    
    
    71Inventories
    
    
    200Other current assets
    
    
    126Property, plant and equipment, net
    
    
    34Other long-term assets
    
    
    9Total assets
    
    
    847Total liabilities
    
    
    (554
    )Net assets acquired
    
    $
    293
 The difference between the purchase price of $333 and the Companys
investment in 51% of the net assets of Dongyang was assigned to Goodwill in the
amount of $184. The results of Dongyangs operations prior to June 28, 2002
were not significant. During 2002, the Company completed an impairment review and did not
recognize any impairment of goodwill. Accordingly, for 2002, the Company has
forgone all related goodwill amortization expense. During 2003, Dongyang
experienced net losses as a result of a continuing economic downturn in markets
for its machinery products. These events, along with Dongyangs operating loss,
cash flow losses and uncertainty surrounding its future cash flows, led the
Company to evaluate its investment for recoverability as of December 31, 2003.
As a result, the Company determined that the carrying value of its investment
in Dongyang exceeded its fair value as of December 31, 2003 in the amount of
$184. This impairment loss is recorded in operating expenses as Impairment of
Goodwill in the accompanying Statement of Operations and Comprehensive Loss
for the year ended December 31, 2003. In March 2004, the Company sold its 51% investment in Dongyang to the 49%
minority shareholder. No gain or loss was recorded for this transaction as of
December 31, 2003 as the selling price of $80 was equal to the Companys net
carrying value for the 51% ownership held. 11. Other Liabilities The other liabilities balance consists of accrued severance and operating
lease costs associated with the Companys cost reduction measures for the
Tampa, Florida executive offices, the accrued loss on the settlement with
Growell (see note 2), and a capital lease obligation for office furniture and
furnishings and capital lease obligations for a SEM Microscope and a JSM
Electron Microscope used in the laboratory in Lake Forest, California. December 31,2003
    
    2002Accrued severance
    
    $
    1,683
    
    
    $
    Accrued loss on Growell settlement (see footnote 2)
    
    
    2,765
    
    
    
    Accrued operating lease costs
    
    
    758
    
    
    
    Accrued capital lease costs
    
    
    348
    
    
    
    111Total
    
    
    5,554
    
    
    
    111Imputed interest
    
    
    (35
    )
    
    
    (18
    )Total
    
    
    5,519
    
    
    
    93Less current portion
    
    
    (4,705
    )
    
    
    (19
    )Other long term liabilities, less current portion
    
    $
    814
    
    
    $
    74
 During 2003, the Company initiated activities to substantially reduce the
number of employees and consolidate manufacturing and administrative facilities
to improve operational effectiveness and efficiency and reduce expenses.
During the year ended December 31, 2003, there was a total of 225 employees
terminated. The total amount of severance granted to the terminated employees
is $2,718 and is included in Cost of Sales of $199, Selling, general and
administrative of $2,253, and Research and Development of $266 in the
accompanying Consolidated Statement of Operations for the year ended December
31, 2003. The amount of severance paid as of December 31, 2003 is $1,035. The
remaining severance owed to the terminated employees as of December 31, 2003 is
$1,683. The severance granted to terminated employees of $2,718 is separated
into the following reportable segments: Coatings at $75 and Bulk alloy at
$2,643. The categories of employees that were eliminated include the
following: Product management positions at various levels, including Vice
President; entry level technicians; accounting and finance positions from entry
level 83




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) through executive; marketing mid to senior level positions; engineering mid to
senior levels positions; information technology support; administrative, legal
and executive support; senior internal legal counsel; human resources and
senior executives. Also, there are other relocation expenses associated with
relocating the Tampa, Florida office to Lake Forest, California totaling $759,
which includes the accrual of all remaining facility and telecommunication
lease payments for the Tampa, Florida office. As of December 31, 2003, there
was a total liability, including severance and lease accruals, of $2,441. The
current portion was $1,826 and the long-term portion was $615. The Company has
substantially concluded all cost reduction and restructuring activities as of
March 31, 2004. All leases with an initial term greater than one year are accounted for
under SFAS No. 13 Accounting for Leases.These leases are classified as either
capital leases or operating leases, as appropriate. Assets under capital
leases are capitalized using interest rates appropriate at the inception of
each lease. At December 31, 2003, the cost recorded for the office furniture
and furnishings, the SEM Microscope and the JSM 6360 Electron Microscope under
the capital lease was $107, $47 and $289, respectively and the accumulated
amortization was $36, $17 and $31, respectively. At December 31, 2002, the
cost recorded for the office furniture and furnishings under capital leases was
$107 and the accumulated amortization was $14. Future minimum lease payments
for the above assets under capital leases during subsequent years are as
follows. MinimumDecember 31,
    
    Payments2004
    
    
    1352005
    
    
    1352006
    
    
    712007
    
    
    7Total
    
    
    348Imputed interest
    
    
    (35
    )Total
    
    
    313Less current portion
    
    
    (114
    )Capital lease obligation, net of current portion
    
    $
    199
 12. Product Warranty Management estimates product warranties as a percentage of bulk alloy
product revenues. During the years ended December 31, 2002 and 2003, the
Companys product warranty accrual balance had the following activity: Balance, December 31, 2001
    
    $
    Expense accrual
    
    
    237Warranty charges
    
    
    Balance, December 31, 2002
    
    $
    237Expense accrual
    
    
    (297
    )Warranty charges
    
    
    363Balance, December 31, 2003
    
    $
    303
 The product warranty accrual balance was included in accounts payable and
accrued expenses at December 31, 2003 and December 31, 2002. 13. Long-Term Debt On February 4, 2003, our Korean subsidiary received 6,500,000 in South
Korean Won, or approximately $5,488, under a loan from Kookmin Bank of South
Korea. The loan bears interest at an annual rate of 7.1%. In the event of
delayed repayment, the interest increases to a maximum of 21%, depending on the
length of time the repayment is delayed. This loan is collateralized by the
plant facilities and certain equipment in South Korea. During the first
eighteen months from the origination date, interest was payable on a monthly
basis. In October 2003, the Company paid $873 of principal at the request of
Kookmin Bank due to the sale of machines that had been part of the collateral
on the loan. Subsequent to October 31, 2003, Kookmin Bank requested that the
Company pay an additional $866 of principal by February 2004 due to the
Companys current credit rating. The Company made two payments on the
requested additional loan paydown in November and December 2003 of $320 and
$205, respectively. The remaining payment of $341 was subsequently made in
February 2004. Beginning in September 2004, the Company will be required to
make equal monthly installments of principal and interest to repay the
remaining balance of the loan over a 36-month period. For 84




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) the year ended December 31, 2003, principal payments made to Kookmin Bank
totaled $1,441, which includes $47 of foreign exchange translation gain. The notes payable from Kookmin Loan as of December 31, 2003 and 2002 and
the activity for the year ended December 31, 2003 is shown in the following
table: December 31,
    
    
    
    
    
    
    
    
    
    December 31,2002
    
    Borrowings
    
    Repayments
    
    2003Kookmin Loan 7.1%, principal $5,488
    
    $
    
    $
    5,488
    
    
    $
    (1,441
    )
    
    $
    4,047
 Kookmin Repayment Schedule
    
    MinimumDecember 31,
    
    Payments2004
    
    $
    1,0322005
    
    
    1,0552006
    
    
    1,0552007
    
    
    905
 On August 23, 2003, the Company entered into a short-term credit agreement
with Shinhan Bank of South Korea in the amount of $1,000, which expired on May
30, 2004. The credit agreement is solely for the issuance of a letter of
credit to vendors when the Companys Korean subsidiary imports raw materials
and other goods into South Korea. The facility is secured by any raw material
or goods financed through the credit facility. As of December 31, 2003, there
were no borrowings outstanding under this agreement, and as of this filing the
Company has not renewed the agreement. As of December 31, 2001, the Company had several notes payable outstanding
to shareholders of varying terms and interest rates ranging from 8% to 8.5%.
The outstanding balances on all such notes were paid in full upon the Companys
completion of its initial public offering in May 2002. In conjunction with the
issuance of two of these notes, the Company issued detachable warrants for the
purchase of 322,581 common stock shares of the Company at an exercise price of
$4.65 per share (the fair value at the date of grant), as adjusted for the
stock split (see Note 14). The warrants expire on December 31, 2005. As of
December 31, 2003, none of the detachable warrants has been exercised. The
warrants are detachable from the note and therefore each warrant was allocated
a portion of the proceeds and debt discount in the amount of $846, based on the
estimated relative fair values at the time they were issued. The Company
elected to repay the notes upon the closing of the Companys initial public
offering, and accordingly amortized the remaining unamortized debt discount of
$532 in 2002. Total interest expense, including the debt discount amortization on the
notes payable to shareholders, was $393, $1,113 and $1,103 for the three years
ended December 31, 2003, 2002 and 2001, respectively. Included in the total
interest expense in 2002 is $532 of accelerated amortization of the remaining
unamortized debt discount upon the early repayment of certain promissory notes
in May 2002. Subsequent to December 31, 2003, the Company sold $9.4 million of
convertible notes and subsequently announced on August 20, 2004 that the
Company had completed a private exchange offer for these convertible notes.
(see footnote 23). 14. Shareholders Equity (Deficiency) Initial Public Offering.Pursuant to the Companys Registration Statement
(Registration No. 333-73716) on Form S-1, as amended, initially filed with the
Securities and Exchange Commission on November 20, 2001 and declared effective
May 21, 2002, the Company closed an initial public offering of 5,000,000
registered shares of common stock on May 28, 2002, plus an additional 229,000
shares on June 10, 2002 pursuant to an overallotment option, at a price of
$15.00 per share (which sale is referred to herein as the Offering). The
Offering generated net cash proceeds for the Company during the second quarter
2002 of approximately $70,721, net of underwriting commissions of $5,490 and
other transaction fees of approximately $2,224. Stock Split.On June 29, 2001 the Company declared a ten-for-one stock
split to its common shareholders of record on June 29, 2001. This stock split
was effected in the form of a stock dividend. On April 4, 2002, the Company
declared a one-for-3.1 reverse stock split to its common shareholders of record
on April 4, 2002. The consolidated financial statements and accompanying notes
have been retroactively adjusted to reflect the effects of the split and
reverse split. Reincorporation. On May 21, 2003, the Company completed a reincorporation
by transitioning from a California corporation to a Delaware corporation. The
reincorporation was effected though the merger of the former California entity
into its newly created 85




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) wholly owned Delaware subsidiary. In connection with the reincorporation, the
number of authorized common shares was reduced from 200,000,000 to 100,000,000.
Additionally, the par value of the common stock was changed from no par value
common stock to common stock with a par value of $0.001 per share. For purposes
of these notes, the term Company refers to the former California entity with
respect to periods prior to May 21, 2003. Preferred Stock.As of December 31, 2001, the Company received net
proceeds of $5,577 from the sale of the preferred stock at a per share price of
$12.40, as adjusted for the revised stock split. Upon the completion of the
Offering, each share of preferred stock was converted automatically into one
share of Class A common stock pursuant to the terms of the preferred stock
issued. 15. Stock Compensation Plan Under the Companys 1996 Stock Option Plan (1996 Company Plan) the
Company could grant to employees, directors or consultants options to purchase
up to 12,903,226 shares of common stock as adjusted for the reverse stock
split. The stock options are exercisable over a period determined by the Board
of Directors or the Compensation Committee, but no longer than 10 years. On April 4, 2002, our shareholders and board of directors adopted the 2002
Equity Incentive Plan (2002 Equity Plan). The 2002 Equity Plan provides for
the grant of stock options to officers, employees, consultants and directors of
the Company and its subsidiaries. In addition, the plan permits the granting of
stock appreciation rights with, or independently of, options, as well as stock
bonuses and rights to purchase restricted stock. A total of 10,000,000 shares
of our common stock may be granted under the 2002 Equity Plan. As of December
31, 2003, there are 1,850,296 options outstanding under the 2002 Equity Plan. Prior to the approval of the 2002 Equity Plan, options were primarily
granted under the Companys 1996 Stock Option Plan (1996 Company Plan). On
April 4, 2002, our board of directors terminated the 1996 Company Plan. The
termination will not affect any outstanding options under the 1996 Company Plan
and all such options will continue to remain outstanding and be governed by the
Plan. No additional options may be granted under the 1996 Company Plan. As of
December 31, 2003, there were 3,909,657 options outstanding under the 1996
Company Plan. On April 4, 2002, our shareholders and board of directors adopted the 2002
Non-employee Director Stock Option Plan (2002 Director Plan). Only
non-employee directors are eligible for grants under the 2002 Director Plan. A
total of 1,000,000 shares of the Companys Common Stock may be granted under
the 2002 Director Plan. There are 190,000 options outstanding under the 2002
Director Plan as of December 31, 2003. Additionally, the Company has 2,221,508 options outstanding at December
31, 2003 which were granted outside the 1996
Company Plan, 2002 Equity Plan and 2002 Director Plan. Included in these
options are 376,345 options granted to Paul Azinger who was contracted to
perform services for the retail golf segment. (see Note 16). The Company applies APB Opinion No. 25 for options when the exercise price
of options granted to employees is less than the fair value of the underlying
stock on the date of grant. The Company applies SFAS No. 123 for options
granted to non-employees who perform services for the Company. Stock-based
compensation expense was recognized as follows for the year ended December 31,
2003: 86




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) In accordance withAPB Opinion
    
    SFASNo. 25
    
    No. 123
    
    TotalGeneral and administrative
    
    $
    50
    
    
    $
    5
    
    
    $
    55Research and development
    
    
    6
    
    
    
    62
    
    
    
    68Total
    
    $
    56
    
    
    $
    67
    
    
    $
    123
 Stock-based compensation expense was recognized as follows for the year
ended December 31, 2002: In accordance withAPB Opinion
    
    SFASNo. 25
    
    No. 123
    
    TotalGeneral and administrative
    
    $
    50
    
    
    $
    655
    
    
    $
    705Research and development
    
    
    
    
    
    
    1,498
    
    
    
    1,498Total
    
    $
    50
    
    
    $
    2,153
    
    
    $
    2,203
 Stock-based compensation expense was recognized as follows for the year
ended December 31, 2001: In accordance withAPB Opinion
    
    SFASNo. 25
    
    No. 123
    
    TotalGeneral and administrative
    
    $
    33
    
    
    $
    1,028
    
    
    $
    1,061Research and development
    
    
    
    
    
    
    269
    
    
    
    269Total
    
    $
    33
    
    
    $
    1,297
    
    
    $
    1,330
 The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants for the years ended December 31,
2003, 2002, and 2001, respectively: expected volatility of 100% for all
periods; dividend yield of 0.0% for all periods; expected option life of
approximately .5 to 5 years; and a risk-free interest rate of 4.5%. The following table summarizes the Companys stock option transactions for
the three years ended December 31, 2003: WeightedAverageNumber of
    
    ExerciseShares
    
    PriceOptions outstanding at December 31, 2000
    
    
    5,761,312
    
    
    $
    2.77Granted
    
    
    4,308,623
    
    
    
    5.46Exercised
    
    
    (1,822,586
    )
    
    
    1.32Forfeited
    
    
    (194,194
    )
    
    
    2.28Options outstanding at December 31, 2001
    
    
    8,053,155
    
    
    
    4.55Granted
    
    
    643,202
    
    
    
    13.71Exercised
    
    
    (299,873
    )
    
    
    1.68Forfeited
    
    
    (79,297
    )
    
    
    8.39Options outstanding at December 31, 2002
    
    
    8,317,187
    
    
    
    5.33Granted
    
    
    1,810,920
    
    
    
    3.07Exercised
    
    
    (684,165
    )
    
    
    1.68Forfeited
    
    
    (1,272,481
    )
    
    
    5.43Options outstanding at December 31, 2003
    
    
    8,171,461
    
    
    $
    5.11
 87




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) The weighted average fair value of options granted during the years ended
December 31, 2003, 2002, and 2001 was $2.41, $10.42, and $4.70 respectively.
There were 5,080,557 options with a weighted average exercise price of $5.12
exercisable at December 31, 2003, 4,353,030 options with a weighted average
exercise price of $4.36 exercisable at December 31, 2002 and 3,158,710 options
with a weighted average exercise price of $3.84 exercisable at December 31,
2001. Included in the above tables are certain
options granted where their exercise prices were below the fair market value of the common stock at the grant
date (measurement date). Such options totaled 1,327,314 with a weighted average fair value of $4.96 were
outstanding at December 31, 2003; 1,343,444 with a weighted average fair value of $5.01 were outstanding at
December 31, 2002; and 1,343,444 with a weighted average fair value of $5.01 were outstanding at
December 31, 2001. The following table summarizes the Companys stock options outstanding and
exercisable by ranges of option prices as of December 31, 2003: Options Outstanding
    
    Options ExercisableWeighted Average
    
    Weighted
    
    Number of
    
    WeightedRange of
    
    Number of options
    
    Remaining Contractual
    
    Average
    
    Options
    
    AverageExercise Prices
    
    Outstanding
    
    Life (Years)
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$0.00 - $1.55
    
    
    376,345
    
    
    
    7.0
    
    
    $
    1.16
    
    
    
    376,345
    
    
    $
    1.161.56 - 3.10
    
    
    2,305,356
    
    
    
    8.2
    
    
    
    2.51
    
    
    
    655,356
    
    
    
    2.583.11 - 4.65
    
    
    2,138,360
    
    
    
    6.2
    
    
    
    4.65
    
    
    
    2,008,357
    
    
    
    4.654.66 - 6.20
    
    
    2,659,985
    
    
    
    7.2
    
    
    
    6.20
    
    
    
    1,753,657
    
    
    
    6.206.21 - 7.75
    
    
    6,894
    
    
    
    5.5
    
    
    
    7.33
    
    
    
    707
    
    
    
    7.177.76 - 9.30
    
    
    11,507
    
    
    
    8.9
    
    
    
    8.80
    
    
    
    2,301
    
    
    
    8.809.31 - 10.85
    
    
    83,065
    
    
    
    5.8
    
    
    
    10.16
    
    
    
    30,000
    
    
    
    10.5810.86 - 12.40
    
    
    270,132
    
    
    
    6.3
    
    
    
    12.40
    
    
    
    183,996
    
    
    
    12.4013.95 - 15.50
    
    
    319,817
    
    
    
    7.5
    
    
    
    15.01
    
    
    
    69,838
    
    
    
    15.05Total
    
    
    8,171,461
    
    
    
    
    
    
    
    
    
    
    
    5,080,557
 16. Discontinued Operations On April 30, 2002, management terminated the operations of the retail golf
segment by means of liquidating substantially all of the retail golf assets and
liabilities. The disposition of the retail golf operations represents the
disposal of a business segment. Accordingly, the accompanying consolidated
financial statements reflect the retail golf segment as a discontinued
operation for all periods presented. In connection with the discontinuance of the retail golf operations, the
Company incurred an estimated loss on disposal of $11,949 for the year ended
December 31, 2001. The estimated loss on disposal was comprised of an accrual
for estimated operating losses of $1,688 during the phase-out period, $1,846
related to inventory adjustments, $4,947 of accrued stock compensation costs,
$2,438 in fees to be paid to Paul Azinger prior to the termination of the
endorsement agreement, $930 due to other asset write-downs and $100 in
severance and other disposal expenses. As of December 31, 2002, $1,000 remained
payable to Paul Azinger, representing the early termination fee on the
endorsement agreement. This amount was paid in full in January 2003. For the year ended December 31, 2002, the Company had a net gain change in
estimate of $1,556 on the disposal of the discontinued retail golf segment that
was primarily due to a change in estimated value of stock-based compensation.
The change in estimated value of the stock-based compensation was a result of
the cumulative decrease in the fair market value of the common shares
underlying the options granted to Paul Azinger of $2,129 and a decrease of $250
in the estimate of fees related to the termination of the endorsement
agreement. Additionally, there was a $98 gain due to the reversal of the
accumulated foreign exchange gains after the liquidation of Liquidmetal Golf
Europe Inc, and a decrease in the estimated warranty cost of $128. These gains
were partially offset by other changes in the estimated loss on disposal that
included $530 of additional operating expenses, a $57 increase in the allowance
for doubtful accounts and $462 primarily for the reduction of the estimated
disposal value of work-in-process inventory and equipment. For the year ended December 31, 2003, there was a net gain of $127 in the
estimate of expenses associated with the disposal of the discontinued retail
golf operations. The change resulted from reducing the net liabilities of the
discontinued operations to $0 as there are no additional expenditures
associated with the discontinued retail golf operations. There were no assets
associated with discontinued retail golf operations at December 31, 2003. 88




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) The results of operations for all periods presented have been restated for
discontinued operations. The operating results of the discontinued operations
are as follows: Years Ended December 31,2003
    
    2002
    
    2001Net sales
    
    $
    
    
    
    $
    
    
    
    $
    3,333Cost of sales
    
    
    
    
    
    
    
    
    
    
    2,185Gross profit
    
    
    
    
    
    
    
    
    
    
    1,148Operating expenses
    
    
    
    
    
    
    
    
    
    
    7,121Loss from operations
    
    
    
    
    
    
    
    
    
    
    (5,973
    )Gain (loss) on disposal
    
    
    127
    
    
    
    1,556
    
    
    
    (11,949
    )Net gain (loss)
    
    
    127
    
    
    
    1,556
    
    
    
    (17,922
    )Foreign exchange translation gain (loss) during the period
    
    
    
    
    
    
    (98
    )
    
    
    2Comprehensive gain (loss)
    
    $
    127
    
    
    $
    1,458
    
    
    $
    (17,920
    )
 Accounts Receivable.Liquidmetal Golf had a factoring agreement that
provided for the sale and transfer of a substantial portion of the accounts
receivable of the retail golf operations. Liquidmetal Golf accounted for a
portion of the factored receivable balances as a sale when the factor assumed
the risk of collection for certain approved accounts. For certain accounts that
the factor did not assume the risk of collection, Liquidmetal Golf accounted
for these factored receivables as a financing arrangement and recorded a
liability for this portion of the factored receivable balances. At December 31,
2003 and 2002, Liquidmetal Golf had a payable to the factor of $0 and $48,
respectively. At December 31, 2001, Liquidmetal Golf had an allowance for
doubtful accounts of $1,401. At December 31, 2002, the accounts receivable
balance had been written off entirely. Stock Compensation Plan.Historically, Liquidmetal Golf granted its own
options to employees, directors and consultants under a stock option plan
(1997 Golf Plan) approved by Liquidmetal Golfs Board of Directors pursuant
to which Liquidmetal Golf could have granted stock options exercisable over a
period determined by the Board of Directors to purchase up to 500,000 shares of
common stock of Liquidmetal Golf. In connection with the Companys plan to
discontinue the retail golf operations, the Company does not intend to issue
additional options under the 1997 Golf Plan. Liquidmetal Golf applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, Liquidmetal Golf recognized compensation
when the exercise price of the options was less than the fair value of the
underlying stock on the date of grant. Liquidmetal Golf recognized stock
compensation expense for options granted to employees of $81 for the year ended
December 31, 2001. The compensation expense for these options had been fully
charged to operations as of December 31, 2001. There was no compensation
expense recorded during the years ended December 31, 2003 and 2002. Additionally, Liquidmetal Technologies recorded stock option-based
compensation and a cumulative addition to paid-in capital of $5,732 related to
options issued in 2001 to Paul Azinger for shares of common stock of
Liquidmetal Technologies. As the endorsement services related to this option
grant provided a benefit to Liquidmetal Golf, the stock compensation expense
was recorded by Liquidmetal Golf. Prior to the discontinuance of the retail
golf operations, Liquidmetal Golf had recorded stock compensation expense of
$786 for services received during 2001. Additionally, the loss on disposal
during the year ended December 31, 2001 includes $4,947 of estimated stock
compensation expense to be incurred prior to the planned termination of the
endorsement agreement. During the year ended December 31, 2002, a $2,129
decrease in the estimated stock compensation was recorded due to the cumulative
decrease in the fair market value of the common shares underlying the options
granted to Paul Azinger. At December 31, 2002, the unamortized stock
compensation (a contra-equity account) balance had been fully amortized. Had compensation cost been determined based on the fair value at the grant
dates for awards under those plans consistent with the method of SFAS No. 123,
Liquidmetal Golfs net loss would have been as follows: Years ended December 31,2003
    
    2002
    
    2001As reported
    
    $
    127
    
    
    $
    1,556
    
    
    $
    (17,922
    )Pro forma
    
    $
    15
    
    
    $
    1,405
    
    
    $
    (18,082
    )
 89




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants for the fiscal years ended
December 31, 2003, 2002, and 2001: expected volatility of 100% for all periods;
dividend yield of 0.0% for all periods; expected option life of approximately 5
years; and a risk-free interest rate ranging from 5.2% to 6.2%, as appropriate. The following table summarizes Liquidmetal Golfs stock option
transactions for the three years ended December 31, 2003: WeightedNumber of
    
    AverageShares
    
    PriceOptions outstanding at December 31, 2000
    
    
    401,255
    
    
    
    3.69Granted
    
    
    
    
    
    
    Exercised
    
    
    (148,255
    )
    
    
    0.25Forfeited
    
    
    
    
    
    
    Options outstanding at December 31, 2001
    
    
    253,000
    
    
    
    5.71Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (137,500
    )
    
    
    3.53Options outstanding at December 31, 2002
    
    
    115,500
    
    
    
    8.31Granted
    
    
    
    
    
    
    Exercised
    
    
    (300
    )
    
    
    16.00Forfeited
    
    
    (16,500
    )
    
    
    5.73Options outstanding at December 31, 2003
    
    
    98,700
    
    
    $
    8.72
 There were 98,700 options with a weighted average exercise price of $8.72
exercisable at December 31, 2003. There were 115,500 options with a weighted
average exercise price of $8.31 exercisable at December 31, 2002 and 253,000
options with a weighted average exercise price of $4.58 exercisable at December
31, 2001. Included in the above tables are certain
options granted where their exercise prices were below the fair market value of the common stock at the grant
date. Such options totaled 131,250, 131,250 and 131,250 with weighted average fair values of $5.74, $5.74 and
$5.74 were outstanding at December 31, 2003, 2002, and 2001, respectively. Summarizes Liquidmetal Golfs stock options outstanding and exercisable by
the different exercise prices at December 31, 2003: Number of Options
    
    Weighted Average
    
    Number of OptionsOutstanding at
    
    Remaining Contract
    
    Exercisable atExercise Price
    
    December 31, 2003
    
    Life (Years)
    
    December 31, 2003$0.50
    
    
    10,000
    
    
    
    3.33
    
    
    
    10,000$8.00
    
    
    73000
    
    
    
    5.50
    
    
    
    73000$16.00
    
    
    13,200
    
    
    
    4.33
    
    
    
    13,200$24.00
    
    
    2,500
    
    
    
    4.58
    
    
    
    2,50098,700
    
    
    
    
    
    
    
    98,700
 Endorsement Agreements.The Company has entered into various endorsement
agreements with professional golfers to promote Liquidmetal Golfs line of golf
equipment products, whereby the Company pays the professional golfers annual
compensation and win incentives based on specific performance criteria in each
agreement. The expense associated with these contracts is recorded as a selling
expense. There was no stock option based compensation for the years ended
December 31, 2003 and 2002. The compensation incurred under these agreements
was $1,137 during the year ended December 31, 2001, excluding the stock
option-based compensation expense associated with the Paul Azinger contract of
$1,110 and additional fees to be paid under this contract prior to termination
of $2,188, which are included in the loss from disposal of the discontinued
retail golf segment. The majority of these agreements expired on December 31,
2001. The Paul Azinger agreement was due to expire on December 31, 2005;
however, the Company terminated the contract on January 1, 2003. 90




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) 17. Income Taxes For all financial statement periods presented, there was no provision for
domestic income taxes. However, there was approximately $8 and $123 of tax
expense during the twelve months ended December 31, 2003 and 2002,
respectively, related to foreign taxes incurred by Dongyang, a 51% owned
subsidiary. The significant components of deferred tax assets were as follows: Years Ended December 31,2003
    
    2002
    
    2001Non-employee stock compensation
    
    $
    51
    
    
    $
    103
    
    
    $
    2,889Allowance for bad debt
    
    
    44
    
    
    
    52
    
    
    
    567Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    1,055Loss carry forwards
    
    
    27,202
    
    
    
    24,175
    
    
    
    18,493Other
    
    
    1,569
    
    
    
    1,071
    
    
    
    792Total deferred tax asset
    
    
    28,866
    
    
    
    25,401
    
    
    
    23,796Valuation allowance
    
    
    (28,866
    )
    
    
    (25,401
    )
    
    
    (23,796
    )Total deferred tax asset, net
    
    $
    
    
    
    $
    
    
    
    $
    
 The following table accounts for the differences between the actual tax
provision and the amounts obtained by applying the statutory U.S. Federal
income tax rate of 34% to income (loss) before income taxes: Years Ended December 31,2003
    
    2002
    
    2001Federal tax expense
    
    
    (34.00
    )%
    
    
    (34.00
    )%
    
    
    (34.00
    )%State tax expense, net
    
    
    (1.62
    )%
    
    
    (3.40
    )%
    
    
    (5.58
    )%Foreign income not subject to income tax
    
    
    24.16
    %
    
    
    13.36
    %
    
    
    0.20
    %Other
    
    
    0.36
    %
    
    
    1.26
    %
    
    
    0.07
    %Increase in valuation allowance
    
    
    11.13
    %
    
    
    22.82
    %
    
    
    39.31
    %Total tax provision
    
    
    0.03
    %
    
    
    0.04
    %
    
    
    0.00
    %
 As of December 31, 2003, the Company had approximately $73,600 of net
operating loss (NOL) carryforwards for U.S. federal income tax purposes
expiring in 2004 through 2023. In addition, the Company has state NOL
carryforwards of approximately $33,400 expiring in 2004 through 2008. The
Company and Liquidmetal Golf filed on a separate company basis for federal
income tax purposes. Accordingly, the federal NOL carryforwards of one legal
entity are not available to offset federal taxable income of the other. As of
December 31, 2003, Liquidmetal Technologies, Inc. had approximately $35,900 in
federal NOL carryforwards, expiring in 2004 through 2023 and approximately
$10,100 in state NOL carryforwards, expiring in 2004 through 2008. Liquidmetal
Golf, Inc. had approximately $37,700 of federal NOL carryforwards, expiring in
2012 through 2023 and approximately $23,300 in state NOL carryforwards expiring
in 2004 through 2008. As of December 31, 2003, the Company had approximately $245 of Research &
Development (R&D) credit carryforwards for U.S. federal income tax purposes
expiring in 2016 through 2018. In addition, the Company has California R&D
credit carryforwards of approximately $203, which do not expire under current
California law. Section 382 of the Internal Revenue Code (IRC) imposes limitations on
the use of NOLs and credits following changes in ownership as defined in the
IRC. The limitation could reduce the amount of benefits that would be available
to offset future taxable income each year, starting with the year of an
ownership change. The Company has not completed the complex analysis required
by the IRC to determine if an ownership change has occurred. 91




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) The ability to realize the tax benefits associated with deferred tax
assets, which includes benefits related to NOLs, is principally dependent upon
the Companys ability to generate future taxable income from operations. The
Company has provided a full valuation allowance for its net deferred tax assets
due to the Companys net operating losses. 18. Segment Reporting and Geographic Information SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information,requires companies to provide certain information about their
operating segments. In April 2002, the Company began classifying operations
into two reportable segments: Liquidmetal alloy industrial coatings and bulk
Liquidmetal alloys. The Liquidmetal alloy industrial coatings are used
primarily as a protective coating for industrial machinery and equipment, such
as drill pipe used by the oil drilling industry and boiler tubes used by coal
burning power plants. Bulk Liquidmetal alloys include potential market
opportunities to manufacture and sell casing components for electronic devices,
medical devices, sporting goods, tooling and prototyping, and furnace
equipment. In addition, such alloys are used to generate research and
development revenue for developing uses related primarily to defense and
medical applications. Primarily, the expenses incurred by the bulk Liquidmetal
alloy segment are research and development costs and selling expenses
associated with identifying and developing potential market opportunities. Bulk
Liquidmetal alloy products can be distinguished from Liquidmetal alloy coatings
in that the bulk Liquidmetal alloys can have significant thickness, up to
approximately one inch, which allows for their use in a wider variety of
applications other than a thin protective coating applied to industrial
equipment and machinery. Summarized financial information concerning the Companys reportable
segments is shown in the following tables: SegmentCoatings
    
    Bulk Alloy
    
    Totals(restated)
    
    (restated)Year ended December 31, 2003:Revenue to external customers
    
    $
    2,997
    
    
    $
    13,857
    
    
    $
    16,854Gross profit (loss)
    
    
    1,466
    
    
    
    (6,800
    )
    
    
    (5,334
    )Income (loss) before minority interest, interest expense and discontinued operations
    
    
    369
    
    
    
    (22,087
    )
    
    
    (21,718
    )Total identifiable assets at end of period
    
    
    959
    
    
    
    26,095
    
    
    
    27,054Year ended December 31, 2002:Revenue to external customers
    
    $
    4,587
    
    
    $
    6,648
    
    
    $
    11,235Gross profit
    
    
    2,171
    
    
    
    1,890
    
    
    
    4,061Income (loss) before minority interest, interest expense and discontinued operations
    
    
    1,425
    
    
    
    (12,693
    )
    
    
    (11,268
    )Total identifiable assets at end of period
    
    
    1,969
    
    
    
    33,489
    
    
    
    35,458Year ended December 31, 2001:Revenue to external customers
    
    $
    3,593
    
    
    $
    289
    
    
    $
    3,882Gross profit
    
    
    1,714
    
    
    
    244
    
    
    
    1,958Income (loss) before minority interest, interest expense and discontinued operations
    
    
    915
    
    
    
    (1,842
    )
    
    
    (927
    )Total identifiable assets at end of period
    
    
    1,300
    
    
    
    733
    
    
    
    2,033
 92




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) Reconciling information for the statements of operations between
reportable segments and the Companys consolidated totals is shown in the
following table: For the Years ended December 31,2003
    
    2002
    
    2001(restated)
    
    (restated)Total segment loss before minority interest, interest expense
and discontinued operations
    
    $
    (21,718
    )
    
    $
    (11,268
    )
    
    $
    (927
    )General and administrative expenses, excluded
    
    
    (13,121
    )
    
    
    (9,968
    )
    
    
    (4,080
    )Consolidated loss before interest, other income, income taxes, minority interest and
discontinued operations
    
    
    (34,839
    )
    
    
    (21,236
    )
    
    
    (5,007
    )Interest expense
    
    
    (393
    )
    
    
    (1,113
    )
    
    
    (1,103
    )Interest income
    
    
    309
    
    
    
    510
    
    
    
    8Gain on sale of marketable securities held-for-sale
    
    
    1,178
    
    
    
    832
    
    
    
    Minority interest in income of consolidated subsidiary
    
    
    21
    
    
    
    118
    
    
    
    Income taxes
    
    
    (8
    )
    
    
    (123
    )
    
    
    Loss from operations of the discontinued retail golf segment, net
    
    
    
    
    
    
    
    
    
    
    (5,973
    )Gain (loss) from disposal of discontinued retail golf segment, net
    
    
    127
    
    
    
    1,556
    
    
    
    (11,949
    )Consolidated net loss
    
    $
    (33,605
    )
    
    $
    (19,456
    )
    
    $
    (24,024
    )
 Included in our bulk alloy revenue to external customers are equipment
sales from our Dongyang subsidiary and Taesung equipment division in Korea,
both of which were divested in March and June 2004 respectively. External
revenue includes $2.3 million and $3.2 million for the years ended December 31,
2002 and 2003, respectively. Excluded general and administrative expenses are attributable to the
Companys corporate headquarters. These expenses primarily include corporate
salaries, consulting, professional fees and facility costs. Research and
development expenses are included in the operating costs of the segment that
performed the research and development. Reconciling information for the balance sheets between reportable segments
and the Companys consolidated totals is shown in the following table: December 31,2003
    
    2002(restated)Total segment assets
    
    $
    27,054
    
    
    $
    35,458Cash and cash equivalents
    
    
    3,038
    
    
    
    24,597Marketable securities held-for-sale
    
    
    
    
    
    
    3,068Prepaid expenses and other current assets
    
    
    322
    
    
    
    493Other property, plant and equipment
    
    
    1,563
    
    
    
    1,536Intangibles, net
    
    
    984
    
    
    
    787Other assets
    
    
    65
    
    
    
    77Total Consolidated Assets
    
    $
    33,026
    
    
    $
    66,016
 Assets excluded from segments include assets attributable to the Companys
corporate headquarters. The largest asset represents the Companys cash
balances, primarily generated from the Companys stock offering and long-term
debt. 93




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) Certain customers accounted for more than 10% of revenues from continuing
operations as follows: Year Ended December 31,2003
    
    2002
    
    2001(restated)
    
    (restated)Samsung
    
    
    10
    %
    
    
    15
    %
    
    
    United States of America
    
    
    16
    %
    
    
    16
    %
    
    
    7
    %Grant Prideco
    
    
    4
    %
    
    
    5
    %
    
    
    23
    %Praxair/Tafa
    
    
    4
    %
    
    
    3
    %
    
    
    14
    %Smith International
    
    
    
    
    
    
    3
    %
    
    
    16
    %LLPG
    
    
    12
    %
    
    
    
    
    
    
    
 The revenue related to the United States of America was earned under three
defense-related research and development contracts. During the year ended December 31, 2003, the Company had revenue on sales
to companies outside of the United States of $7,608, of which $4,559
represented sales to companies located in South Korea. During the years ended
December 31, 2002, and 2001, the Company did not generate significant sales to
companies located outside of the United States. Long-lived assets include net property, plant, and equipment, net
intangible assets and goodwill. The Company had long-lived assets of $2,547 and
$2,322 located in the United States at December 31, 2003 and 2002,
respectively. The Company had long-lived assets of $16,395 and $21,749 located
in South Korea at December 31, 2003 and December 31, 2002, respectively. 19. Income (Loss) Per Common Share Basic EPS is computed by dividing earnings (loss) attributable to common
shareholders by the weighted average number of common shares outstanding for
the periods. Diluted EPS reflects the potential dilution of securities that
could share in the earnings. A reconciliation of the number of common shares
used in calculation of basic and diluted EPS is presented below: Years Ended December 31,2003
    
    2002
    
    2001Weighted average basic shares
    
    
    41,505,218
    
    
    
    38,713,878
    
    
    
    33,323,217Effect of dilutive securities:Stock options
    
    
    
    
    
    
    
    
    
    
    Conversion of notes payable
    
    
    
    
    
    
    
    
    
    
    Weighted average diluted shares
    
    
    41,505,218
    
    
    
    38,713,878
    
    
    
    33,323,217
 Options to purchase approximately 8,171,461 shares of common stock at
prices ranging from $1.16 to $15.50 per share were outstanding at December 31,
2003, but were not included in the computation of diluted EPS for the same
period because the inclusion would have been antidilutive. Options to purchase
approximately 8,317,187 shares of common stock at prices ranging from $0.78 to
$15.50 per share were outstanding at December 31, 2002, but were not included
in the computation of diluted EPS for the same period because the inclusion
would have been antidilutive. Options to purchase approximately 8,053,155
shares of common stock at prices ranging from $0.78 to $12.40 per share were
outstanding at December 31, 2001, but were not included in the computation of
diluted EPS for the same period because the inclusion would have been
antidilutive. Warrants to purchase 645,162 shares of common stock at $4.65 per share
were outstanding at December 31, 2003 and December 31, 2002 but were not
included in the computation of diluted EPS for the same period because the
inclusion would have been antidilutive. 20. Commitments and Contingencies In March 1996, the Company entered into a distribution agreement whereby
it granted to a third party exclusive rights to market and sell golf products
incorporating Liquidmetal Technology to certain Japanese sporting equipment
companies. The third party paid the Company a $1.0 million distribution fee as
part of this agreement, of which a portion was refundable according to a
formula 94




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) based on the gross profit earned by the third party. The remaining unearned
distribution fee of $830 has not been refunded as of December 31, 2003. On
March 28, 2003, the distribution agreement was terminated and the Company
entered into a new agreement to pay to the same third party a commission on the
net sales price of all Liquidmetal golf equipment that is shipped by the
Company or its affiliates to Japanese golf companies for sale into the Japanese
end-market. This commission will apply to golf equipment shipped by the
Company or its affiliates during the period beginning on March 28, 2003 and
ending on March 28, 2006. If, by March 28, 2006, the Company has not paid $350
in commission payments, the balance between commission paid and $350 will be
paid by April 30, 2006, thereby guaranteeing the third party a $350 minimum
payment during the term of the agreement. The Company will recognize the
unearned distribution fee of $830 as revenue proportionately with the payment
of commissions under the new agreement. The Company has employment agreements with certain key officers and
employees that provide for annual salaries and bonus compensation aggregating
approximately $1,438. Additionally, the agreements provide for various
severance payments to these key officers if the Company terminates any of the
key officers and employees without cause, or if certain of the key officers or
employees terminate their own employment upon a change of control of the
Company or for other good reason, as defined in the agreements. As result of
the relocation of the Corporate Offices to Lake Forest, California, Brian
McDougall, Chief Financial Officer, completed employment with the Company
effective February 29, 2004. The two-year severance received by Brian
McDougall is $375, which is discounted for future cash flows and is included in
Other Liabilities  Current Portion $156 and Other Liabilities  Long-term
Portion $219 on the accompanying balance sheet as of December 31, 2003. In
addition, in February 2004 the Board of Directors of the Company voted to allow
Brian McDougall to extend 409,000 of his stock options for up to two years
ending with February 27, 2006. These options range in price from $2.49 to
$4.65. The Company recorded a charge to stock expense of $257 in the first
quarter of 2004 related to these options. On December 20, 2002, the Company entered into an agreement with a
third-party supplier to purchase raw materials during 2003 for a total of
$3,488, of which the Company has purchased $845 as of July 30, 2003. On July
30, 2003 the Company and the third-party agreed to cancel this purchase
agreement. On July 22, 2003, the Company entered into another agreement with a
separate third party supplier to purchase a different type of raw materials for
a total of $2,500 within twelve months from the date of this agreement. As of
December 31, 2003, no purchases have been made under this agreement. The
Company is currently in
negotiations with the third party supplier and the Company expects to reduce
the commitment level and extend the commitment period. The Company is from time to time a party to certain legal proceedings
arising in the ordinary course of business. Although outcomes cannot be
predicted with certainty, the Company does not believe that any legal
proceeding to which it is a party will have a material adverse effect on the
Companys financial position, results of operations, and cash flows. (See
footnote 23) Operating Leases The Company leases its offices and warehouse facilities under various
lease agreements, certain of which are subject to escalations based upon
increases in specified operating expenses or increases in the Consumer Price
Index. Future minimum lease payments under non-cancelable operating leases
during subsequent years are as follows: MinimumDecember 31,
    
    Payments2004
    
    $
    8862005
    
    
    6502006
    
    
    5992007
    
    
    1772008
    
    
    11Thereafter
    
    
    155Total
    
    $
    2,478
 Rent expense was $1,419, $955, and $322 for the years ended December 31,
2003, 2002, and 2001, respectively. 95




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) 21. 401(k) Savings Plan The Company has a tax-qualified employee savings and retirement plan, or
401(k) plan, which covers all of its United States- based employees. Our Korean
employees are covered under a government sponsored pension program and do not
participate in the U.S. based 401(k) program. Under the U.S. based 401 (k) plan, participants may elect to reduce their
current compensation, on a pre-tax basis, by up to 15% of their taxable
compensation or of the statutorily prescribed annual limit, whichever is lower,
and have the amount of the reduction contributed to the 401(k) plan. The 401(k)
plan permits the Company, in its sole discretion, to make additional employer
contributions to the 401(k) plan. However, the Company did not make employer
contributions to the 401(k) plan during any of the periods presented in the
accompanying consolidated financial statements. 22. Related Party Transactions In June 2003, the Company entered into an exclusive, ten-year license
agreement with LLPG, Inc. (LLPG), a corporation headed by a former director
of the Company. Under the terms of the agreement, LLPG has the right to
commercialize Liquidmetal alloys, particularly precious-metal based
compositions, in jewelry and high-end luxury product markets. The Company, in
turn, will receive royalty payments over the life of the contract on all
Liquidmetal products produced and sold by LLPG. In conjunction with its
technology licensing contract, LLPG purchased two proprietary Liquidmetal alloy
melting machines and three proprietary Liquidmetal alloy casting machines for a
total purchase price of $2,000. At December 31, 2003, the Company had a
remaining receivable balance of $500 due from LLPG, which was subsequently paid
in full. The Company is a party to a license agreement with California Institute of
Technology (Caltech) under which the Company exclusively licenses from
Caltech certain inventions and technology relating to amorphous alloys.
Professor William Johnson, a member of the Companys Board of Directors, is a
professor at Caltech, and substantially all of the amorphous alloy technology
licensed to the Company under the Caltech license agreement was developed in
Professor Johnsons Caltech laboratory. During each of the years ended
December 31, 2003 and 2002, the Company paid $50 to Caltech representing,
respectively, the second and final installment on the $150 aggregate fees
related to this agreement. Additionally, the Company reimburses Caltech for
laboratory expenses incurred by Professor Johnsons Caltech laboratory, which
during the year ended December 31, 2003, amounted to $22 in reimbursements. While the Company was privately held, the Companys then chairman
exercised a portion of his nonqualified stock options. The Company
inadvertently did not collect the federal and state income taxes at the time of
the exercise. The former chairman has informed the Company that he has since
paid all the necessary taxes. Management believes the exposure to the Company
for penalties and interest, if any, is insignificant. A company managed and partially owned by one of our former directors
provided technical support services and computer equipment to the Company.
During the year ended December 31, 2002, the Company incurred $122 of expenses
and equipment purchases related to this arrangement. At December 31, 2002, the
Company had an outstanding payable related to these transactions of $7. Other related party transactions include subordinated promissory notes
issued to certain shareholders, the related interest incurred on the notes and
the repayment of such notes (see Note 13). Additionally, two of the holders of
the shareholder promissory notes were directors and one such note holder is an
officer of the Company. As of December 31, 2002, all notes were repaid. We are a party to a consulting agreement with Chitnis Consulting, Inc.,
which is owned 100% by Shekhar Chitnis, a former director and executive officer
of our company. Under this agreement, we have engaged Chitnis Consulting to
provide consulting services on an as-needed basis through December 31, 2005.
During 2003, we incurred $50,000 in consulting fees from Chitnis Consulting. During 2003, Soo Buchanan, the sister of John Kang and James Kang, was
employed by our company and was paid aggregate compensation of $76,003 during
the year. Additionally, Otis Buchanan, the husband of Ms. Buchanan, was
employed by the Company during 2003 and was paid aggregate compensation of
$89,615 during the year. The Company has restated certain previously issued financial statements
due to the fact that revenues from equipment sales made to Growell in the third
and fourth quarter of 2002 and the first quarter of 2003 should not have been
recognized in those periods (see Note 2). John Kang, the Companys Chairman,
President, and Chief Executive Officer sold 285,715 shares of his personal
Liquidmetal Technologies common stock to Growell in February 2002 (see Note
23). Growell owned 285,715 shares of the Companys common 96




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) stock as of December 31, 2002 and 2003. In addition, the Company
purchased 891,100 shares of Growells outstanding common stock in July 2002.
The Company ultimately sold these shares in 2002 and 2003 and recognized gains
on these transactions (see Note 5). 23. Subsequent Events On March 3, 2004, the Company sold $9.4 million of 6.0% senior convertible
notes due 2007 (the March Notes) to investor groups in a transaction led by
Michigan Venture Capital Co., Ltd, a South Korea-based institutional investment
firm, and IndiGo Ventures LLC, a New York-based investment firm that served as
a financial advisor to the Company for the transaction. The notes were
convertible at any time into our common stock at a price of $3.00 per share.
Investors in the private placement received warrants to purchase an aggregate
amount of up to approximately 1.1 million shares of common stock, exercisable
at $3.00 per share for varying periods but no later than 100 days following the
effectiveness of a registration statement covering the resale of shares
issuable upon exercise of the warrants. In addition, the investors had the
right to call for repayment of the notes prior to maturity at any time after
the second anniversary of the closing of the transaction. On August 20, 2004, the Company completed a private exchange offer for its
March Notes. Under terms of the exchange offer, approximately $5.5 million in
aggregate principal amount of the March Notes have been exchanged for an
aggregate of (i) $2.75 million of 6% Senior Secured Notes Due 2007 (the
Long-Term Notes) and (ii) $2.75 million of 10% Senior Secured Notes Due 2005
(the Short-Term Notes). In addition, the Company voluntarily redeemed
approximately $4.5 million of the March Notes, in cash. The Short-Term Notes
have a maturity date of July 29, 2005, and a conversion price of $2.00 per
share (compared to a conversion price of $3.00 per share under the March
Notes). The Long-Term Notes have a maturity date of July 29, 2007, and a
conversion price of $1.00 per share. Holders of the Long-Term Notes will also
have the right to call for repayment of the Long-Term Notes prior to maturity
at any time after the second anniversary of the closing of the exchange offer.
In addition, holders of both the Long-Term Notes and Short-Term Notes will have
the right to call for repayment of the notes if the Company does not, within
180 days of the issuance of the notes, become compliant with its SEC reporting
obligations and become listed or quoted on the OTC Bulletin Board, the Nasdaq
Stock Market, or other national securities exchange. A total of 562,151
warrants to purchase our common stock at an exercise price of $3.00 per share
 all of which were previously issued in connection with the purchase of the
Prior Notes  have been amended to provide for an extended expiration date of
March 1, 2006 Liquidmetal Technologies and certain of its present and former officers
and directors were named as defendants in nine purported class action
complaints filed in the United States District Courts for the Middle District
of Florida, Tampa Division, and the Central District of California, Southern
Division, alleging violations of Sections 11 and 15 of the Securities Act of
1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder. The actions were originally brought on
behalf of those who purchased Liquidmetal Technologies common stock between
May 22, 2002, and March 30, 2004, inclusive. The complaints contain varying
allegations, but generally allege that the defendants engaged in improper
revenue recognition with respect to the Companys transactions with Growell
Metal Co., Ltd. and that the defendants issued false and misleading statements
concerning the Companys business and operations, including unrealistic but
favorable information about market demand for Liquidmetal products, with the
result of artificially inflating the Companys share price. The complaints seek
unspecified compensatory damages and other relief. In August 2004, four
complaints were consolidated in the United States District Court for the Middle
District of Florida under the caption Primavera Investors v. Liquidmetal
Technologies, Inc., et al., Case No. 8:04-CV-919-T-23EAJ. John Lee, Chris
Cowley, Dwight Mamanteo, Scott Purcell and Mark Rabold, were appointed co-lead
plaintiffs (the Lead Plaintiffs). Subsequently, in September 2004, the five
complaints filed in the Central District of California were transferred to the
Middle District of Florida for consolidation with the Primavera Investors
action. The Consolidated Amended Class Action Complaint is presently due on or
before November 1, 2004, but the Lead Plaintiffs have requested an enlargement
of time until 30 days after this Form 10-K is filed. Liquidmetal Technologies
and the other defendants will have 45 days from the service date to move to
dismiss or otherwise respond to the Consolidated Amended Class Action
Complaint. We intend to vigorously defend against the class action. We cannot
currently predict the impact or resolution of this litigation or reasonably
estimate a range of possible loss, which could be material. The resolution of
this lawsuit may harm our business and have a material adverse impact on our
financial condition. In addition, certain present and former officers and directors of
Liquidmetal Technologies, as well as Liquidmetal Technologies as a nominal
defendant, have been named in three shareholder derivative actions. Two
shareholder derivative complaints were filed in California state court styled
Brian Clair, Derivatively on Behalf of Liquidmetal Technologies, Inc. v. John
Kang, et al., Case No. 04CC00551, and Joseph Durgin Derivatively on Behalf of
Liquidmetal Technologies, Inc. v. John Kang, et al.,Case No. 04CC00553, both
commenced in the Superior Court of Orange County, California. A third
shareholder derivative complaint was filed in Florida federal court styled
Robert Story v. John Kang, et al., Case No. 8:04-CV-1587-T23TBM, commenced in
the Middle District of Florida, Tampa Division. These shareholder derivative
lawsuits allege that the defendants breached various fiduciary duties and
otherwise violated state law based primarily upon the same underlying facts and
circumstances as the federal shareholder class action lawsuits. The plaintiffs
seek unspecified compensatory damages, restitution and disgorgement of profits,
equitable and/or 97




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) injunctive relief as permitted by law and other relief. The two shareholder
derivative complaints in California state court have been consolidated.
Plaintiffs served a Consolidated Shareholder Derivative Complaint on October
12, 2004. The defendants have 40 days, or until November 22, 2004, to file a
response to the Consolidated Shareholder Derivative Complaint. The defendants
have filed a Motion to Stay the California derivative action and are awaiting a
ruling on that Motion. The Companys response to the Florida derivative
complaint is due on October 25, 2004. We intend to vigorously defend against
the derivative actions. We cannot currently predict the impact or resolution
of this litigation or reasonably estimate a range of possible loss, which could
be material. The resolution of these lawsuits may harm our business and have a
material adverse impact on our financial condition. Two separate lawsuits were filed in July and September 2004 by two former
employees of our Pyongtaek manufacturing facility in South Korea. The suits
are based on a claim of wrongful termination and breach of employment contract.
The Company believes that the ultimate outcome of these matters will not have
a material adverse effect on the consolidated financial position, results of
operations or liquidity of the Company. On November 2004, we entered into an agreement with John Kang, our
Chairman, President, and Chief Executive Officer, in which Mr. Kang agreed that
certain stock transactions by him in the year 2002 involving our common stock
should have resulted in a liability under Section 16(b) of the Securities
Exchange Act of 1934, as amended (Section 16(b)). These transactions include
Mr. Kangs private sale of 285,715 shares of his personal Liquidmetal
Technologies common stock to Growell Metal Co., Ltd. in February 2002, prior to
our initial public offering. They also include Mr. Kangs subsequent indirect
purchase and disposition of Liquidmetal Technologies common stock in order to
satisfy a personal agreement Mr. Kang made to Growell Metal in February 2002
regarding the guaranteed minimum value of the stock purchased by Growell Metal
in February 2002 (the purchases and dispositions incident to this agreement
occurred in August and November 2002, respectively). Lastly, the transactions
include open-market purchases of an aggregate of 89,300 shares of our common
stock made by Mr. Kang in August 2002. The Audit Committee of our Board of Directors conducted an independent
inquiry into the above-described transactions with the aid of independent legal
counsel and, as a result of such inquiry, the Audit Committee concluded that
the transactions should have resulted in a liability to the Company under
Section 16(b) in the amount of $301,944.73. Mr. Kang has acknowledged this
liability, and in an agreement negotiated between Mr. Kang and the Audit
Committee and approved by the full Board, Mr. Kang will pay this liability in
24 equal monthly installments beginning in January 2005. The above-described
transactions involving Growell Metal will be reported on a new Form 4 filed by
Mr. Kang on or about the date of the filing of this Form 10-K, and the
open-market purchases were previously reported on a timely basis in August
2002. 98




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LIQUIDMETAL TECHNOLOGIES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002, and 2001
(in thousands, except share data) Schedule II  Valuation and Qualifying Accounts Balance at
    
    Additions
    
    Write-offs
    
    Balance atBeginning
    
    Charged to
    
    and
    
    End ofof Period
    
    Expenses
    
    Payments
    
    PeriodAllowance for doubtful accountsYear ended December 31, 2003
    
    $
    450
    
    
    $
    (28
    )
    
    $
    (267
    )
    
    $
    155Year ended December 31, 2002
    
    
    30
    
    
    
    921
    
    
    
    (501
    )
    
    
    450Year ended December 31, 2001
    
    
    5
    
    
    
    25
    
    
    
    
    
    
    
    30Product warranty accrualYear ended December 31, 2003
    
    $
    237
    
    
    $
    (297
    )
    
    $
    363
    
    
    $
    303Year ended December 31, 2002
    
    
    
    
    
    
    237
    
    
    
    
    
    
    
    237Year ended December 31, 2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred tax asset valuation allowance *Year ended December 31, 2003
    
    $
    25,401
    
    
    $
    3,465
    
    
    $
    
    
    
    $
    28,866Year ended December 31, 2002
    
    
    23,796
    
    
    
    1,605
    
    
    
    
    
    
    
    25,401Year ended December 31, 2001
    
    
    12,112
    
    
    
    11,684
    
    
    
    
    
    
    
    23,796
 * The deferred tax asset valuation allowance represents a 100% reserve
against the deferred tax asset accounts at December 31, 2003, 2002 and 2001,
respectively. 99