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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 June 30, 2003
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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares of the registrant's Common Stock, $.001 par value,
outstanding as of August 7, 2003 was 14,952,926.
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1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KONTRON MOBILE COMPUTING, INC.
BALANCE SHEETS
JUNE 30, DECEMBER 31,
2003 2002
(UNAUDITED) ----
-----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................................ $ 1,281,949 $ 2,031,285
Accounts receivable, net of allowance for doubtful accounts of $156,500 and $127,200............. 1,750,148 3,015,258
Accounts receivable, related parties............................................................. 28,703 119,919
Inventories...................................................................................... 1,406,001 975,263
Prepaid expenses and other....................................................................... 108,393 54,269
------------- -------------
Total current assets.............................................................. 4,575,194 6,195,994
------------- -------------
Property and Equipment:
Computers and equipment...................................................................... 1,172,885 1,163,624
Furniture and fixtures....................................................................... 800,706 800,706
Leasehold improvements....................................................................... 346,099 346,099
Less: Accumulated depreciation and amortization.............................................. (2,185,401) (2,129,623)
------------- -------------
Property and equipment, net............................................................. 134,289 180,806
Deposits and Other Assets, net................................................................... 6,557 39,398
------------- -------------
TOTAL ASSETS..................................................................................... $ 4,716,040 $ 6,416,198
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................................................................................. $ 252,873 $ 401,845
Accounts payable, related parties................................................................ 489,201 412,425
Accrued warranty ................................................................................ 283,000 332,169
Accrued compensation and benefits................................................................ 112,549 272,312
Other accrued liabilities........................................................................ 233,473 340,174
Deferred revenue, short-term..................................................................... 783,306 797,658
------------- -------------
Total current liabilities............................................................... 2,154,402 2,556,583
------------- -------------
LONG TERM LIABILITIES:
Notes payable to Kontron AG...................................................................... 6,562,410 7,462,071
Deferred revenue, long-term...................................................................... 82,046 266,634
------------- -------------
Total long term liabilities............................................................. 6,644,456 7,728,705
------------- -------------
Total Liabilities................................................................................ 8,798,858 10,285,288
------------- -------------
SHAREHOLDERS' EQUITY (DEFICIT):
Series B Convertible Preferred Stock, $.001 par value, 4,250,000 shares authorized;
4,250,000 issued and outstanding for both periods ........................................... 4,250 4,250
Series C Convertible Preferred Stock, $.001 par value, 500,000 shares authorized;
500,000 issued and outstanding for both periods.............................................. 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.............................................................................. (36,654,493) (36,440,765)
------------- -------------
Total shareholders' equity (deficit).............................................. (4,082,818) (3,869,090)
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)............................................. $ 4,716,040 $ 6,416,198
============= =============
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
----- ----- ----- -----
Net Sales ............................................ $ 2,863,672 $ 2,344,689 $ 4,990,382 $ 5,501,060
Cost of Sales ........................................ 1,497,541 1,415,547 2,700,217 3,080,393
----------- ----------- ----------- -----------
Gross profit .................................. 1,366,131 929,142 2,290,165 2,420,667
----------- ----------- ----------- -----------
Operating Expenses:
Sales and marketing ........................... 517,371 490,834 959,280 1,073,456
General and administrative .................... 350,829 148,933 631,151 453,967
Research and development ...................... 265,656 256,207 556,493 476,534
----------- ----------- ----------- -----------
Total operating expenses ............... 1,133,856 895,974 2,146,924 2,003,957
----------- ----------- ----------- -----------
Operating income ....................... 232,275 33,168 143,241 416,710
Loss on foreign currency ............................. (25,324) (78,553) (79,329) (105,179)
Interest expense, net ................................ (119,676) (165,759) (277,640) (349,070)
----------- ----------- ----------- -----------
Net income (loss) applicable to common shareholders .. $ 87,275 $ (211,144) $ (213,728) $ (37,539)
=========== =========== =========== ===========
Basic and Diluted Income (Loss) Per Common Share:
Net income (loss) per common share ................... $ .01 $ (.01) $ (.01) $ --
----------- ----------- ----------- -----------
Basic and diluted weighted average
common shares outstanding ............................ 14,952,926 14,952,926 14,952,926 14,952,926
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
3
KONTRON MOBILE COMPUTING, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
2003 2002
---- ----
OPERATING ACTIVITIES:
Net loss........................................................................ $ (213,728) $ (37,539)
Adjustments to reconcile net loss to net cash provided by
operating activities--
Depreciation and amortization............................................ 55,778 129,040
Provision for losses on accounts receivable.............................. 29,346 (180,980)
Change in accrued inventory reserve...................................... (337,552) (430,355)
Loss on foreign currency................................................. 79,329 105,179
Changes in operating items:
Accounts receivable............................................... 1,326,980 2,000,931
Inventories....................................................... (93,186) 80,493
Prepaid expenses and other........................................ (21,283) 259,258
Accounts payable.................................................. (72,196) (713,566)
Accrued expenses.................................................. (341,150) (830,741)
Deferred revenue.................................................. (198,940) (103,034)
----------- -----------
Net cash provided by operating activities................................ 213,398 278,686
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment....................................... (9,261) (33,818)
----------- -----------
FINANCING ACTIVITIES:
Repayments of notes to Kontron AG........................................ (1,655,349) (387,614)
Net proceeds from forward contracts...................................... 701,876 478,411
----------- -----------
Net cash provided by (used for) financing activities..................... (953,473) 90,797
----------- -----------
CHANGE IN CASH AND CASH EQUIVALENTS............................................. (749,336) 335,665
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................. 2,031,285 2,073,970
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................ $ 1,281,949 $ 2,409,635
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest.......................................................... $ 344,651 $ 368,273
=========== ===========
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 31, 2002. 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, as determined by the
first-in, first-out cost method, or market value.
The components of inventories were:
JUNE 30, DECEMBER 31,
2003 2002
---- ----
Raw materials.................................................. $ 952,721 $ 626,560
Work in process................................................ 101,912 59,962
Finished goods................................................. 351,368 288,741
----------- ---------
Total................................................... $ 1,406,001 $ 975,263
=========== =========
3. FINANCING:
Kontron AG ("Kontron") has provided the Company with a written agreement
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, 2003, if
necessary. The Company has a line of credit agreement with Kontron which allows
for borrowings of up to 8.5 million Euros for operations ($9.8 million based on
June 30, 2003 exchange rate.) As June 30, 2003, borrowings under this agreement
bear interest at 8% per annum (payable monthly). Outstanding borrowings under
this line of credit were approximately $6.6 million at June 30, 2003. In the
first quarter of 2003, the Company repaid $2.0 million to Kontron, consisting of
approximately $1,655,000 in principal and $345,000 in accrued interest.
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 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 market under SFAS No. 52, "Foreign Currency Translation." For the quarter
ended June 30, 2003, the Company recorded a loss of $25,324. As of June 30,
2003, the Company entered into a new forward contract whereby the Company can
hedge up to 5.8 million Euros.
The Company currently has no other balances or transactions conducted in
a foreign currency.
5
5. ACCOUNTING PRONOUNCEMENTS:
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 establishes accounting
and disclosure requirements for a company's obligations under certain guarantees
that it has issued. A guarantor is required to recognize a liability for the
obligation it has undertaken in issuing a guarantee, including the ongoing
obligation to stand ready to perform over the term of the guarantee in the event
that the specified triggering events or conditions occur. The objective of the
initial measurement of that liability is the fair value of the guarantee at its
inception. The initial recognition and measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. FIN 45 also requires expanded disclosure of
information related to product warranty amounts recorded in the financial
statements. The disclosure provisions are effective for interim and annual
periods ending after December 15, 2002.
The Company warrants its products against defects in materials and
workmanship under normal use and service for one year from the date of purchase
with the exception of the ReVolution which has a three-year limited warranty on
some components and a one-year warranty on some devices and accessories.
Warranty costs for existing products, including parts and labor, are estimated
based on actual historical experience. Management uses that historical data to
accrue reserves to cover estimated costs based on units in the field. Management
reviews the estimated warranty liability on a quarterly basis to determine its
adequacy.
As required under Financial Accounting Standards Board (FASB)
Interpretation No. 45 (FIN 45), the following table presents the changes in the
Company's warranty liability for the quarter ended June 30, 2003:
Actual Warranty Amounts Charged
Beginning Balance Costs Paid to Expense Ending Balance
----------------- ---------- ---------- --------------
$283,000 $46,032 $(46,032) $283,000
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition to the fair value method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
provisions of SFAS No. 123 to require prominent disclosures about an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
The Company has adopted the disclosure provisions of SFAS No. 148.
Accordingly, under the provisions of SFAS No. 123, the Company applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations in accounting for its stock
option plans. In accordance with APB 25, no compensation expense was recognized
as the exercise price of the Company's stock options was equal to the market
price of the underlying stock on the date of grant and the exercise price and
number of shares subject to grant were fixed. If the Company had elected to
recognize compensation expense based on the fair value of the options granted at
the date of grant and in respect to shares issuable under the Company's equity
compensation plans as prescribed by SFAS No. 123, net income and diluted
earnings per share using the Black-Scholes option-pricing model would have been
reduced to the pro forma amounts indicated in the table below:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss), as reported.............................. $ 87,275 $ (211,144) $ (213,728) $ (37,539)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards................................... (171,551) (397,924) (170,970) (397,924)
---------- ----------- ----------- -----------
Pro forma net loss.......................................... $ (84,276) $ (609,068) $ (384,698) $ (435,463)
========== =========== =========== ===========
Net income (loss) per share:
Basic and diluted -- as reported.................... $ .01 $ (.01) $ (.01) $ --
Basic and diluted -- pro forma...................... (.01) (.04) (.03) (.03)
6
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 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 31, 2002.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----
Net sales..................................................... 100% 100% 100% 100%
Cost of sales................................................. 52 61 54 56
--- --- --- ---
Gross profit........................................... 48 39 46 44
Operating expenses:
Sales and marketing.................................... 18 21 19 20
General and administrative............................. 12 6 13 8
Research and development............................... 10 11 11 9
--- --- --- ---
Total operating expenses........................ 40 38 43 37
--- --- --- ---
Operating income (loss)....................................... 8 1 3 7
Loss on currency conversion................................... (1) (3) (2) (2)
Interest expense, net......................................... (4) (7) (5) (6)
--- --- --- ---
Net income (loss) applicable to common shareholders........... 3% (9)% (4)% (1)%
=== === === ===
Net Sales. The Company's net sales increased $0.5 million, or 22%, to
$2.9 million in the second quarter of 2003 from $2.3 million in the second
quarter of 2002 and decreased 9% to $5.0 million in the first six months of 2003
from $5.5 million in the first six months of 2002. The increase in the second
quarter 2003 was due to the shipment of a large order that was delayed from the
first quarter due to a delay in receiving parts from a supplier, with no
comparable large shipments in second quarter 2002.
The Company continues to target key vertical markets including
government, military, public services, utilities and other field service
organizations. One customer, Jackson County, Michigan, Sheriff's Department,
7
accounted for 15% of net sales in the second quarter of 2003, representing $0.4
million of the Company's net sales. In the second quarter of 2002, sales to the
City of Garland, Texas represented 12%, or $0.3 million, of the Company's net
sales.
International sales decreased to $0.3 million, or 10% of net sales, for
the second quarter of 2003 from $0.8 million, or 34% of net sales, for the
comparable period in 2002. 64% of the international sales in the second quarter
of 2003 were in Europe and 54% of the international sales for the comparable
period in 2002 were in Canada. The Company believes that international sales as
a percentage of net sales for the year 2003 will be in the low- to mid-teen
range with little impact on the Company's results of operations and liquidity.
The Company records all sales in U.S. Dollars.
Gross Margin. Gross margin increased to $1.4 million, or 48% of net
sales, for the second quarter of 2003 from $0.9 million, or 39% of net sales for
the second quarter of 2002. Gross margin decreased to $2.3 million, or 46% of
net sales for the first six months of year 2003 from $2.4 million, or 44% of net
sales for the first six months of 2002. The increased gross margin percent for
second quarter 2003 is due to increased revenue on higher margin products. 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 on all products with the exception
of the ReVolution which has a three-year limited warranty on some components and
a one-year warranty on some devices and accessories. Sales and marketing
expenses remained consistent at $0.5 million for the second quarters of 2003 and
2002. As a percentage of net sales, sales and marketing expenses decreased to
18% for the second quarter of 2003 from 21% for the second quarter of 2002 due
to higher revenue over which to allocate the costs. In the first six months of
2003, sales and marketing expenses were $1.0 million and 19% of net sales as
compared to $1.1 million and 20% of net sales in the first six months of 2002.
General and Administrative. General and administrative expenses include
the Company's executive, finance, information services and human resources
departments. These expenses increased to $0.4 million for the quarter ended June
30, 2003, from $0.1 million for the quarter ended June 30, 2002. As a percentage
of net sales, general and administrative expenses increased to 12% for the
quarter ended June 30, 2003, from 6% for the quarter ended June 30, 2002.
General and administrative expenses were $0.6 million, or 13% of net sales for
the first six months of 2003 as compared to $0.5 million, or 8% of net sales for
the comparable period in 2002. The increase is primarily due to the termination
of a split-dollar agreement relating to a life insurance policy owned by our
Chairman of the Board, together with expenses incurred in connection with
payments made pursuant to a consulting agreement entered into by the Company and
our Chairman of the Board on June 2, 2003, filed as Exhibit 10.1 to this Form
10-Q. These amounts were offset by a bad debt credit adjustment done in the
second quarter 2002 with no comparable adjustments in the second quarter 2003.
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. Research and development expenses remained constant at $0.3 million
in the second quarters of 2003 and 2002. As a percentage of net sales, research
and development costs were 10% and 11% for the second quarter of 2003 and 2002,
respectively. Research and development expenses increased to $0.6 million for
the first six months of 2003 from $0.5 million for the comparable period in
2002. As a percentage of net sales, research and development expenses increased
to 11% for the first six months of 2003 from 9% for the first six months of
2002. The year-to-date increased costs are due to an engineering adjustment that
occurred in first quarter 2002. The increased percentage is due to lower revenue
over which to allocate the costs.
Loss on Currency Conversion. 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 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
8
of Financial Accounting Standards (SFAS) No. 133, "Derivatives and Hedging
Activities," and also marks the related debt instrument to market under SFAS No.
52, "Foreign Currency Translation." For the quarter ended June 30, 2003, the
Company recorded a loss on currency conversion of $25,324. As of June 30, 2003,
the Company entered into a new forward contract whereby the Company can hedge up
to 5.8 million Euros.
The Company currently has no other balances or transactions conducted in
a foreign currency.
Interest Expense, Net. Net interest expense was approximately $119,700
for the second quarter of 2003 compared to net interest expense of $165,800 for
the comparable period in 2002. Net interest expense for the first six months of
2003 was $277,600 compared to net interest expense of $349,100 for the
comparable period in 2002. The decrease in interest expense is due to the
reduction of the interest rate of the Kontron note payable from 10% to 8%,
effective March 1, 2003, in addition to a reduction of the principal balance,
due to a $1,655,000 repayment made in February 2003.
LIQUIDITY AND CAPITAL RESOURCES
In 2003, one of the Company's focus areas is long-term growth by
introducing new products that will further penetrate existing markets as well as
new and growing markets. In the first quarter of 2003, the Company began
shipping the ReVolution, marking the re-entry of the Company into the rugged
notebook market. The Company continues to be focused on further cost reductions
through on-going product re-design initiatives by Kontron worldwide mobile
design teams. The Company realizes that continuous management of sales, gross
margin and cash is necessary to improve liquidity. There can be no assurance
that the Company will be successful in achieving these measures. 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.
As in 2002, the Company intends to continue funding its own cash needs in
2003 without assistance from Kontron. To be successful, the Company will focus
on increased sales and profitability, in addition to working capital management.
The Company intends to reduce interest expense in 2003 by making partial
repayments of the note payable to Kontron as funds are available, in addition to
the reduction of the interest rate of the Kontron note payable from 10% to 8%,
effective March 1, 2003. During the first quarter of 2003, the Company repaid
$2.0 million to Kontron, consisting of approximately $1,655,000 in principal and
$345,000 in accrued interest. However, there can be no assurance that additional
repayments will be possible.
Kontron has provided the Company with a written agreement 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, 2003, if necessary.
As of June 30, 2003, 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 ($9.8 million based on June 30, 2003
exchange rate.) As of June 30, 2003, borrowings under this agreement bear
interest at 8% per annum (payable monthly). Outstanding borrowings under this
line of credit were approximately $6.6 million at June 30, 2003.
After re-paying $2.0 million to Kontron in the first quarter, the
Company's cash balance has stayed consistent at $1.3 million at March 31, 2003
and June 30, 2003. The Company will continue to monitor its cash balance and
cash flow needs through the year. Based in part upon the Company's current
budget projections for the balance of 2003, the Company believes it will have
sufficient cash to operate through the end of fiscal 2003; however, there can be
no assurance that the Company will achieve its budgeted projections, and
additional borrowings may be necessary. The Company has 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. The line of credit expires May 15, 2004. There were no borrowings
outstanding on this line of credit at June 30, 2003.
Cash provided by operating activities was $213,398 for the first six
months of 2003, compared to $278,686 in the comparable period in 2002. Gross
accounts receivable decreased to $1.9 million at June 30, 2003 from $3.3 million
at December 31, 2002 due to collections and lower revenue levels. Inventories
increased to $1.4 million at June 30, 2003 from $1.0 million at December 31,
2002 due to increased stock of new products, in addition to lower sales in 2003.
Accounts payable decreased slightly to $0.7 million at June 30, 2003 from $0.8
9
million at December 31, 2002. Other accrued liabilities decreased to $0.2
million at June 30, 2003, from $0.3 million at December 31, 2002 due to the
first and second quarter payments of accrued interest to Kontron.
Cash used for investing activities was $9,261 relating to purchases of
property and equipment. Cash used for financing activities was $953,473 relating
to a partial repayment of the notes to Kontron of $1,655,349, offset by net
proceeds from forward contracts of $701,876.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2003 the Company had $6.6 million outstanding on its line
of credit from Kontron. This loan bears interest at 8% per annum, payable
monthly. 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 June 30, 2003, and in light of the Company's
currently effective foreign currency forward contract, 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 $1.3
million in cash and cash equivalents at June 30, 2003. Based on analysis, shifts
in money market rates would have an immaterial impact on the Company.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Under the supervision
and with the participation of our management, including the Company's Chief
Executive Officer and President, we evaluated the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Exchange Act) as of the end of the period covered by this
report. Based upon that evaluation, the Chief Executive Officer and President
concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective in timely alerting them to the
material information relating to us (or our consolidated subsidiaries) required
to be included in our periodic SEC filings.
Changes in Internal Controls. During our second fiscal quarter, there
were no significant changes made in our internal control over financial
reporting (as defined in Rule 13(a) - 15(f) under the Exchange Act) that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of Shareholders was held on May 29, 2003. The
shareholders voted to elect six directors, each of whom will serve until such
director's successor shall have been elected and shall qualify or until such
director's earlier death, resignation, removal or disqualification. Management's
entire slate of six directors was elected to serve until the next Annual Meeting
of Shareholders by the following vote tallies:
Authority
For Withheld
--- --------
David C. Malmberg 13,052,916 84,425
Pierre McMaster 13,062,916 74,425
William P. Perron 13,050,916 86,425
Richard L. Poss 13,062,916 74,425
Thomas Sparrvik 13,052,716 84,625
Rudolf Wieczorek 13,052,916 84,425
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)
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 10.1 Consulting Agreement dated June 2, 2003 between the
Company and David C. Malmberg.
Exhibit 31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of President pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 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 32.2 Certification of President pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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(b) Reports on Form 8-K:
The Company filed an 8-K dated May 13, 2003 reporting under Item 7
("Financial Statements and Exhibits") and Item 9 ("Regulation FD Disclosure"), a
press release announcing the Company's financial results for the first quarter
ended March 31, 2003.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KONTRON MOBILE COMPUTING, INC.
Date: August 14, 2003
/s/ Thomas Sparrvik
-----------------------------------------
Thomas Sparrvik, Chief Executive Officer
(principal executive officer)
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