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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 000-22221
KONTRON MOBILE COMPUTING, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1731723
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
7631 Anagram Drive
Eden Prairie, Minnesota 55344
(Address of principal executive offices)
(Zip Code)
(952) 974-7000
(Registrant's telephone number, including area code)
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 the past 90 days.
Yes [X] No [ ]
The number of shares of the registrant's Common Stock, $.001 par value,
outstanding as of November 7, 2002 was 14,952,926.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KONTRON MOBILE COMPUTING, INC.
BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 30,
2002 2001
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................................... $ 1,375,440 $ 2,073,970
Accounts receivable, net of allowance for doubtful accounts of $187,000 and $317,200.......... 1,324,153 2,834,150
Accounts receivable, related parties.......................................................... 120,689 118,472
Inventories................................................................................... 1,312,312 1,191,276
Prepaid expenses and other.................................................................... 69,509 334,156
----------- -----------
Total current assets............................................................... 4,202,103 6,552,024
----------- -----------
Property and equipment:
Computers and equipment.................................................................... 1,142,624 1,114,125
Furniture and fixtures..................................................................... 800,706 795,387
Leasehold improvements..................................................................... 346,099 346,099
Less: Accumulated depreciation and amortization............................................ (2,090,609) (1,911,244)
Property and equipment, net............................................................ 198,820 344,367
Deposits and Other Assets, net................................................................ 34,769 19,764
----------- -----------
TOTAL ASSETS.................................................................................. $ 4,435,692 $ 6,916,155
===========- ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.............................................................................. $ 46,753 $ 1,118,581
Accounts payable, related parties............................................................. 302,673 210,054
Accrued warranty expenses..................................................................... 353,168 332,169
Accrued compensation and benefits............................................................. 108,836 257,398
Other accrued liabilities..................................................................... 84,040 771,502
Deferred revenue.............................................................................. 1,082,604 1,306,563
Notes payable to Kontron Embedded Computers AG................................................ -- 6,937,700
----------- -----------
Total current liabilities.......................................................... 1,978,074 10,933,967
----------- -----------
LONG TERM LIABILITIES:
Notes payable to Kontron Embedded Computers AG................................................ 7,060,417 --
----------- -----------
Total long term liabilities........................................................ 7,060,417 --
----------- -----------
TOTAL LIABILITIES............................................................................. 9,038,491 10,933,967
----------- -----------
SHAREHOLDERS' EQUITY (DEFICIT):
Series B Convertible Preferred Stock, $.001 par value, 4,250,000 shares authorized;
4,250,000 issued and outstanding at September 30, 2002..................................... 4,250 4,250
Series C Convertible Preferred Stock, $.001 par value, 500,000 shares authorized;
500,000 issued and outstanding at September 30, 2002....................................... 500 500
Common stock, $.001 par value, 30,000,000 shares authorized;
14,952,926 issued and outstanding for both periods......................................... 14,953 14,953
Additional paid-in capital.................................................................... 32,551,972 32,551,972
Accumulated deficit........................................................................... (37,174,474) (36,589,487)
----------- -----------
Total shareholders' equity (deficit)............................................... (4,602,799) (4,017,812)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT).......................................... $ 4,435,692 $ 6,916,155
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
KONTRON MOBILE COMPUTING, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
--------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net Sales ................................................ $ 2,357,025 $ 3,248,416 $ 7,858,085 $13,119,656
Cost of Sales............................................. 1,421,803 1,688,787 4,502,196 7,108,346
----------- ----------- ----------- -----------
Gross profit ........................................ 935,222 1,559,629 3,355,889 6,011,310
----------- ----------- ----------- -----------
Operating Expenses:
Sales and marketing.................................. 613,344 667,573 1,686,800 2,098,829
General and administrative........................... 402,723 405,111 856,690 1,289,095
Research and development............................. 275,944 236,892 752,478 902,287
----------- ----------- ----------- -----------
Total operating expenses........................ 1,292,011 1,309,576 3,295,968 4,290,211
----------- ----------- ----------- -----------
Operating income (loss) ........................ (356,789) 250,053 59,921 1,721,099
Gain (loss) on foreign currency .......................... (19,523) (60,302) (124,702) 190,154
Interest expense, net..................................... (171,136) (374,606) (520,206) (1,080,948)
Other expense, net........................................ -- (119,448) -- (119,700)
----------- ----------- ---------- -----------
Net income (loss) applicable to common shareholders....... $ (547,448) $ (304,303) $ (584,987) $ 710,605
=========== =========== =========== ===========
Basic and Diluted Income (Loss) Per Common Share:
Net income (loss) per common share........................ $ (.04) $ (.02) $ (.04) $ .05
----------- ----------- ----------- -----------
Basic weighted average common shares outstanding.......... 14,952,926 14,952,926 14,952,926 14,942,748
=========== =========== =========== ===========
Diluted weighted average common shares outstanding........ 14,952,926 14,952,926 14,952,926 15,028,311
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
3
KONTRON MOBILE COMPUTING, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
---------------------------
SEPTEMBER 30,
2002 2001
----------- -----------
OPERATING ACTIVITIES:
Net income (loss) .......................................................... $ (584,987) $ 710,605
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities --
Depreciation and amortization........................................... 179,365 428,977
Loss (gain) on foreign currency......................................... 124,702 (190,154)
Non-cash financing expense.............................................. -- 330,750
Loss on disposal of property and equipment.............................. -- 30,144
Changes in operating items:
Accounts receivable................................................ 1,507,780 612,722
Inventories........................................................ (121,036) 803,555
Prepaid expenses and other......................................... 249,642 142,308
Accounts payable................................................... (979,209) (1,595,600)
Accrued expenses................................................... (815,025) (1,215,877)
Deferred revenue................................................... (223,959) 522,592
----------- -----------
Net cash provided by (used for) operating activities.................... (662,727) 580,022
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment...................................... (33,818) (17,963)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from (repayments of) notes to Kontron.......................... (410,108) 4,152,379
Net proceeds from forward contracts..................................... 408,123 --
Payment of subordinated note............................................ -- (3,000,000)
Proceeds from issuance of common stock.................................. -- 27,120
Payment of capitalized lease obligations................................ -- (28,373)
----------- -----------
Net cash provided by (used for) financing activities.................... (1,985) 1,151,126
----------- -----------
CHANGE IN CASH AND CASH EQUIVALENTS.......................................... (698,530) 1,713,185
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................... 2,073,970 552,887
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................................... $ 1,375,440 $ 2,266,072
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest....................................................... $ 546,191 $ 1,137,605
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited financial statements of Kontron Mobile
Computing, Inc. ("Kontron Mobile Computing" or "the Company") should be read in
conjunction with the financial statements and notes thereto filed with the
Securities and Exchange Commission in the Company's Annual Report on Form 10-K,
for the fiscal year ended December 30, 2001. In the opinion of management, the
accompanying financial statements reflect all adjustments (consisting only of
normal recurring adjustments) considered necessary to present fairly the
financial results for the interim periods presented. The results of operations
for the interim periods are not necessarily indicative of the results to be
expected for the entire fiscal year.
2. INVENTORIES:
Inventories are stated at the lower of cost or market value, as
determined by the first-in, first-out cost method.
The components of inventories were:
SEPTEMBER 30, DECEMBER 30,
2002 2001
------------- ------------
Raw materials....................................................... $ 733,293 $ 556,823
Work in process..................................................... 107,553 140,899
Finished goods...................................................... 471,466 493,554
------------- ------------
Total.......................................................... $ 1,312,312 $ 1,191,276
============= ============
3. FINANCING:
On January 29, 2002, Kontron Embedded Computers AG (Kontron) agreed to
provide financial support to enable the Company to meet its cash flow needs and
obligations as and when they become due through December 31, 2002. As of
September 30, 2002, Kontron controlled approximately 65% of the Company. The
Company has a line of credit agreement with Kontron which allows for borrowings
of up to 8.5 million Euros for operations ($8.3 million based on September 30,
2002 exchange rate.) As of September 30, 2002, borrowings under this agreement
bear interest at 10% per annum (payable monthly). Prior to third quarter 2002,
the note had no stated maturity date. Effective in third quarter 2002, the note
was amended to establish a maturity date of July 1, 2011. Because of this
amendment, the note was reclassified from current to long-term in the September
30, 2002 balance sheet. Outstanding borrowings under this line of credit were
$7.1 million at September 30, 2002. In the third quarter of 2002, the Company
repaid $200,000 to Kontron, consisting of $178,000 in accrued interest and
$22,000 in principal.
The Company has also finalized a $750,000 line of credit with a
commercial bank and if necessary, intends to use this line of credit to fund
potential cash requirements in excess of its current cash flow projection. There
were no borrowings outstanding on this line of credit at September 30, 2002.
4. FOREIGN CURRENCY TRANSACTIONS:
The Company's credit agreements with Kontron allow for borrowings which
are payable in Euros. In the second quarter of 2001, the Company began utilizing
foreign currency forward contracts to protect against significant fluctuations
in net income (loss) caused by changes in Euro exchange rates. The Company's
practice is to enter into a forward contract with a commercial bank at the
beginning of each quarter and settle the contract at the end of the quarter. The
Company records gains and losses on these derivative contracts (which are not
designated as hedging instruments for accounting purposes) in net income (loss)
in accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 133, "Derivatives and Hedging Activities," and also marks
the related debt instrument to the end-of-quarter spot rate, as required by SFAS
No. 52, "Foreign Currency Translation."
5
For the quarter ended September 30, 2002, the Company recorded a loss of
$19,523. As of September 30, 2002, the Company's forward contract arrangements
allowed the Company to hedge up to 7.0 million Euros.
The Company currently has no other balances or transactions conducted
in a foreign currency.
5. RELATED PARTY TRANSACTIONS:
The Company sells certain products to Kontron and the Kontron group of
companies for further resale outside North America. These sales were
approximately $0.2 million and $0.3 million in the three-month periods ended
September 30, 2002 and 2001, and were $1.0 million and $0.9 million in the
nine-month periods then ended. The Company also buys products from these related
entities for further resale within North America. These purchases were
approximately $0.4 million and $0.3 million in the three-month periods ended
September 30, 2002 and 2001 and were $1.2 million and $0.5 million in the
nine-month periods then ended. The Company and the Kontron group of companies
are operating under agreements regarding the sales and purchases from each
other. Such transactions are in the normal course of business at negotiated
prices comparable to similar transactions with other customers and suppliers.
Management believes the transactions with Kontron and the Kontron group of
companies are at arms length and are under terms no less favorable to the
Company than those with other customers or suppliers.
Included in the financial statements is approximately $120,700 of
related party receivables and approximately $302,700 of related party payables
as of September 30, 2002.
6. INCOME (LOSS) PER COMMON SHARE:
Basic earnings (loss) per share is computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the period. Diluted earnings (loss) per share is computed under the
treasury stock method and is calculated to compute the dilutive effect of
potential common shares.
A reconciliation of these amounts is as follows:
FOR THE FOR THE
THREE MONTHS NINE MONTHS
ENDED ENDED
------------ -----------
SEPTEMBER 30, 2002
---------------------------------
Net income (loss) applicable to common shareholders................... $ (547,448) $ (584,987)
=========== ===========
Weighted average common shares outstanding............................. 14,952,926 14,952,926
Dilutive potential common shares....................................... -- --
----------- -----------
Weighted average common and dilutive shares outstanding................ 14,952,926 14,952,926
=========== ===========
Basic earnings (loss) per share........................................ $ (.04) $ (.04)
=========== ===========
Diluted earnings (loss) per share...................................... $ (.04) $ (.04)
=========== ===========
Potential common shares of 10,510,604 related to options, warrants and
convertible preferred stock were excluded from the computation of diluted loss
per share for both periods as inclusion of these shares would have been
antidilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. When used in
this Form 10-Q and in future filings by the Company with the Securities and
Exchange Commission, in the Company's press releases and in oral statements made
with the approval of an authorized executive officer, the words or phrases
"believes," "anticipates," "expects," "intends," "estimates," "should," "may" or
similar expressions are intended to identify such forward-looking statements,
but are not the exclusive means of identifying such
6
statements. These forward-looking statements involve risks and uncertainties
that may cause the Company's actual results to differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, the following: risks
associated with the development of new products, market acceptance of new
products and services, technological obsolescence, dependence on third-party
manufacturers and suppliers, risks associated with the Company's dependence on
proprietary technology and the long customer sales cycle. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The Company undertakes no
obligation to revise any forward-looking statements in order to reflect events
or circumstances after the date of such statements. Readers are urged to
carefully review and consider the various disclosures made by the Company in
this report and in the Company's other reports filed with the Securities and
Exchange Commission that attempt to advise interested parties of the risks and
factors that may affect the Company's business. The Company's forward-looking
statements are qualified in their entirety by the cautions and risk factors set
forth under the "Cautionary Statement" filed as Exhibit 99.1 to its Form 10-K
for the year ended December 30, 2001.
RESULTS OF OPERATIONS
The following table sets forth certain financial data expressed as a
percentage of net sales for the periods indicated:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---- ---- ---- ----
Net sales .................................................... 100% 100% 100% 100%
Cost of sales................................................. 60 52 57 54
---- ---- ---- ----
Gross profit............................................. 40 48 43 46
Operating expenses:
Sales and marketing...................................... 26 21 21 16
General and administrative............................... 17 12 11 10
Research and development................................. 12 7 10 7
---- ---- ---- ----
Total operating expenses............................ 55 40 42 33
---- ---- ---- ----
Operating income (loss)....................................... (15) 8 1 13
Gain (loss) on foreign currency............................... (1) (2) (2) 1
Interest expense, net......................................... (7) (11) (7) (8)
Other expense, net............................................ -- (4) -- (1)
---- ---- ---- ----
Net income (loss) applicable to common shareholders........... (23)% (9)% (8)% 5%
==== ==== ==== ====
Net Sales. The Company's net sales decreased $0.9 million, or 27%, to
$2.4 million in the third quarter of 2002 from $3.2 million in the third quarter
of 2001 and decreased 40% to $7.9 million in the first nine months of 2002 from
$13.1 million in the first nine months of 2001. The third quarter decrease is
due to a lower number of units sold and fewer large customers. The year-to-date
decrease was due to a large order from the United States Army for the 2000
Series Embedded Vehicle Server that shipped in the first two quarters of 2001
with no comparable large orders in 2002.
The Company continues to target key vertical markets including
government, military, public services and utilities. One customer, Siemens
Integrated, accounted for greater than 10% of net sales in the third quarter of
2002, representing $0.4 million of the Company's net sales. In the third quarter
of 2001, Hyundai represented $0.4 million of the Company's net sales.
International sales decreased to $40,000, or 2% of net sales, for the
third quarter of 2002 from $0.6 million, or 17% of net sales, for the comparable
period in 2001. 54% of the international sales in the third quarter of 2002 were
in Canada and 51% of the international sales for the comparable period in 2001
were in Europe. As a result of lower order volume from Kontron than originally
projected, the Company believes that international sales as a percentage of net
sales for the remainder of 2002 will be in the 5 to 10% range. The Company
records all sales in U.S. Dollars.
Gross Margin. Gross margin decreased to $0.9 million, or 40% of net
sales, for the third quarter of 2002 from $1.6 million, or 48% of net sales for
the third quarter of 2001. Gross margin decreased to $3.4 million, or 43% of
7
net sales for the first nine months of 2002 from $6.0 million, or 46% of net
sales for the first nine months of 2001. The decreased gross margin percent is
due to lower revenue over which to allocate certain fixed manufacturing
expenses. The Company's gross margin will fluctuate as a result of a number of
factors, including mix of products sold, inventory obsolescence, the proportion
of international sales, large customer contracts (with the associated volume
discounts) and other manufacturing expenses.
Sales and Marketing. Sales and marketing expenses include salaries,
incentive compensation, commissions, travel, trade shows, technical support and
professional services personnel and general advertising and promotion. These
expenses also include the labor and material costs related to maintaining the
Company's standard one-year warranty program. Sales and marketing expenses
decreased to $0.6 million for the third quarter of 2002 compared to $0.7 million
for the third quarter of 2001. As a percentage of net sales, sales and marketing
expenses increased to 26% for the third quarter of 2002 from 21% for the third
quarter of 2001. In the first nine months of 2002, sales and marketing expenses
were $1.7 million and 21% of net sales as compared to $2.1 million and 16% of
net sales in the first nine months of 2001. The decreased dollars are due to
lower sales commissions paid on lower revenue. The increased percent is due to
lower revenue over which to allocate the costs.
General and Administrative. General and administrative expenses include
the Company's executive, finance, information services and human resources
departments. These expenses remained constant at $0.4 million for the third
quarters of 2002 and 2001. As a percentage of net sales, general and
administrative expenses increased to 17% for the quarter ended September 30,
2002, from 12% for the quarter ended September 30, 2001. General and
administrative expenses were $0.9 million, or 11% of net sales for the first
nine months of 2002 as compared to $1.3 million, or 10% of net sales for the
comparable period in 2001. The decreased dollars are due to lower legal fees and
bad debt expense. The increased percent is due to lower revenue over which to
allocate the costs.
Research and Development. Research and development expenses are
incurred in the design, development and testing of new or enhanced products,
services and customized computing platforms. All research and development costs
are expensed as incurred. These costs increased to 0.3 million for the third
quarter of 2002 compared to $0.2 million for the third quarter of 2001. As a
percentage of net sales, research and development costs were 12% and 7% for the
third quarter of 2002 and 2001, respectively. Research and development expenses
decreased to $0.8 million for the first nine months of 2002 from $0.9 million
for the comparable period in fiscal year 2001. As a percentage of net sales,
research and development expenses increased to 10% for the first nine months of
2002 from 7% for the first nine months of fiscal year 2001. The nearly constant
costs are due to the continued sharing of research and development costs with
Kontron and the synergy gained by the combined efforts, while the increased
percent is due to lower revenue over which to allocate the costs.
Gain (Loss) on Foreign Currency. The Company's credit agreements with
Kontron allow for borrowings which are payable in Euros. In the second quarter
of 2001, the Company began utilizing foreign currency forward contracts to
protect against significant fluctuations in net income (loss) caused by changes
in Euro exchange rates. The Company's practice is to enter into a forward
contract with a commercial bank at the beginning of each quarter and settle the
contract at the end of the quarter. The Company records gains and losses on
these derivative contracts (which are not designated as hedging instruments for
accounting purposes) in net income (loss) in accordance with the requirements of
Statement of Financial Accounting Standards (SFAS) No. 133, "Derivatives and
Hedging Activities," and also marks the related debt instrument to the
end-of-quarter spot rate, as required by SFAS No. 52, "Foreign Currency
Translation." For the quarter ended September 30, 2002, the Company recorded a
loss of $19,523. As of September 30, 2002, the Company's forward contract
arrangements allowed the Company to hedge up to 7.0 million Euros.
The Company currently has no other balances or transactions conducted
in a foreign currency.
Interest Expense, Net. Net interest expense was approximately $171,100
for the third quarter of 2002 compared to net interest expense of $374,600 for
the comparable period in 2001. Net interest expense for the first nine months of
2002 was $520,200 compared to net interest expense of $1,080,900 for the
comparable period in 2001. The decrease in interest expense is due to the
repayment of certain subordinated notes in third quarter 2001.
8
LIQUIDITY AND CAPITAL RESOURCES
The relationship with Kontron has brought new resources, products,
capital and a global sales force. During 2001, the Company began integrating
global distribution channels, augmenting go-to-market strategies and reinventing
product development and positioning plans. The Company's 2001 focus was to
stabilize and reach profitability by reducing overhead and operating costs,
increasing the average selling price on products and reducing product direct
material costs.
While the Company generated positive cash flow in 2001 and the first
six months of 2002, and generated an operating profit in 2001, there can be no
assurance that revenue levels, gross margins and working capital can continue to
be managed to achieve similar results and maintain adequate liquidity.
Circumstances that are reasonably likely to affect liquidity include changes in
technology, dependence on key customers, decrease in demand for the Company's
products and reliance on Kontron for financing and research and development
support.
The Company intends to continue funding its own cash needs in 2002
without significant assistance from Kontron. In the first quarter of 2002, the
Company repaid $1.0 million to Kontron, consisting of $620,000 in accrued
interest and $388,000 in principal. In the second quarter of 2002, the Company
repaid an additional $264,000 in accrued interest. In the third quarter of 2002,
the Company repaid $200,000 to Kontron, consisting of $178,000 in accrued
interest and $22,000 in principal. The Company has also finalized a $750,000
line of credit with a commercial bank and if necessary, intends to use this line
of credit to fund potential cash requirements in excess of its current cash flow
projection. There were no borrowings outstanding on this line of credit at
September 30, 2002.
On January 29, 2002, Kontron Embedded Computers AG (Kontron) agreed to
provide financial support to enable the Company to meet its cash flow needs and
obligations as and when they become due through December 31, 2002. As of
September 30, 2002, Kontron controlled approximately 65% of the Company. The
Company has a line of credit agreement with Kontron which allows for borrowings
of up to 8.5 million Euros for operations ($8.3 million based on September 30,
2002 exchange rate.) As of September 30, 2002, borrowings under this agreement
bear interest at 10% per annum (payable monthly). Prior to third quarter 2002,
the note had no stated maturity date. Effective in third quarter 2002, the note
was amended to establish a maturity date of July 1, 2011. Because of this
amendment, the note was reclassified from current to long-term in the September
30, 2002 balance sheet. Outstanding borrowings under this line of credit were
$7.1 million at September 30, 2002. In the third quarter of 2002, the Company
repaid $200,000 to Kontron, consisting of $178,000 in accrued interest and
$22,000 in principal.
Cash used for operating activities was $662,727 for the first nine
months of 2002, compared to cash provided by operating activities of $580,022 in
the comparable period in 2001. The primary reason for the decrease is the
year-to-date net loss in 2002 compared to a year-to-date net income through
third quarter 2001. Accounts receivable decreased to $1.4 million at September
30, 2002 from $3.0 million at December 30, 2001 due to collections and lower
revenue levels. Prepaid expenses decreased to $0.1 million at September 30, 2002
from $0.3 million at December 30, 2001 due to the return of a deposit from a
former supplier. Accounts payable decreased to $0.3 million at September 30,
2002 from $1.3 million at December 30, 2001 due to timing of inventory purchases
and payments. Accrued liabilities decreased to $0.1 million at September 30,
2002, from $0.8 million at December 30, 2001 due to the three quarterly payments
of accrued interest to Kontron.
Cash used for investing activities was $33,818 relating to purchases of
property and equipment. Cash used for financing activities was $1,985 relating
to a partial repayment of the notes to Kontron of $410,108, offset by net
proceeds from forward contracts of $408,123.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2002 the Company had $7.1 million outstanding on
its line of credit from Kontron. As of September 30, 2002, borrowings under this
agreement bear interest at 10% per annum (payable monthly). The maturity date of
the note is July 1, 2011. Both the principal amount borrowed under the line of
credit and interest payable thereunder are payable in Euros. See the earlier
discussion under "Foreign Currency Transactions" for a description of the
foreign currency forward contract in effect. All remaining transactions of the
Company are conducted and accounts are denominated in U.S. dollars. Based on its
overall foreign currency rate exposure at
9
September 30, 2002, the Company does not believe that a hypothetical 10% change
in foreign currency rates would materially adversely affect its financial
position or results of operations.
The Company has no derivative financial instruments or derivative
commodity instruments in its cash and cash equivalents. The Company had $1.4
million in cash and cash equivalents at September 30, 2002. Based on analysis,
shifts in money market rates would have an immaterial impact on the Company.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and President have concluded,
based on their evaluation within 90 days of the filing date of this report, that
the Company's disclosure controls and procedures are adequately designed to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Securities and Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported, within the time
periods specified in applicable rules and forms. There have not been any
significant changes in the Company's internal controls or in other factors that
could significantly affect those controls, subsequent to the date of such
evaluation, including any corrective actions taken with regard to significant
deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course of its
business. Although the Company cannot predict the outcome of any such legal
actions, management believes that there is no pending legal proceeding against
or involving the Company for which the outcome is likely to have a material
adverse effect upon the Company's financial position, results of operations or
cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 3.1 Second Amended and Restated Articles of Incorporation of
the Company (incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement filed on Form S-1,
File No. 333-18335)
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Exhibit 3.2 Second Amended and Restated Bylaws of the Company
(incorporated by reference to Exhibit 3.4 to the Company's
Registration Statement filed on Form S-1, File No.
333-18335)
Exhibit 3.3 Articles of Merger amending the Company's Articles of
Incorporation effective June 4, 2001 (incorporated by
reference to the exhibit 3.1 filed with the Company's
Report on Form 8-K filed June 4, 2001)
Exhibit 4.1 Amendment to Loan Agreement between Kontron Embedded
Computers AG and the Company effective July 1, 2002 (filed
herewith)
Exhibit 99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification of President pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
The Company filed an 8-K dated July 23, 2002 reporting, under Item 4
("Changes in Registrant's Certifying Accountant"), the dismissal of Arthur
Andersen LLP as the Company's independent auditors and the engagement of
Deloitte & Touche LLP to serve as the Company's independent auditors for the
year ending December 31, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KONTRON MOBILE COMPUTING, INC.
Date: November 14, 2002
/s/ Thomas Sparrvik
----------------------------------------
Thomas Sparrvik, Chief Executive Officer
(as authorized officer)
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CERTIFICATIONS
I, Thomas Sparrvik, Chief Executive Officer of Kontron Mobile Computing, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kontron Mobile
Computing, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002 /s/ Thomas Sparrvik
----------------- -----------------------
Chief Executive Officer
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CERTIFICATIONS
I, Dale R. Szymborski, President of Kontron Mobile Computing, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Kontron Mobile
Computing, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Dale R. Szymborski
------------------ ----------------------------
President
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